Tongues began to wag when Federal Reserve Chairman Alan Greenspan appeared at President Clinton's State of the Union address sitting between Hillary Rodham Clinton and Tipper Gore. What on earth was the conservative, Republican, inflation-fighting chairman of the nation's central bank doing sitting next to the wife of the liberal, Democratic, growth-boosting president?

Startled financial analysts and even some Fed officials wondered why Greenspan would send such a dramatic signal that he was making common cause with Clinton. Simply by sitting there, he appeared to be sacrificing a slice of the Fed's vaunted independence.

Speculation about a Clinton-Greenspan deal ran rampant through financial markets. One rumor had Greenspan trading an endorsement of the economic plan Clinton outlined that night and promises of continued low interest rates for protection from some congressional Democrats attacking the Fed's independence. A cartoon depicted the Fed chairman as a tame tabby who had the run of the White House and came purring whenever Hillary or Bill called.

Greenspan, hardly a stranger to Washington politics, knew how his presence in the congressional gallery would be interpreted, though he did not realize until he arrived that night that he would be sitting between the first and second ladies. But his presence there was no mistake: He had been briefed in advance on the major points of the Clinton economic plan and he was willing publicly to support its basic goal of reducing future federal budget deficits.

The Fed chairman indicated in recent congressional testimony that he believes that getting control of the deficit is the nation's most urgent economic policy problem. And even though he has long been an opponent of higher taxes, his worry about the potential impact of the looming deficits on financial markets and the economy outweigh his feelings about taxes.

On the surface, Clinton and Greenspan are an odd couple -- coming from different generations, regions and political parties and holding vastly different notions of how far government should go in guiding and regulating the economy. Clinton is a gregarious politician who revels in pressing the flesh in crowds, while Greenspan is retiring and unobtrusive, almost shy at times.

Yet a friendship developed. In early December, when Clinton invited the Fed chairman to fly to Little Rock, Ark., to discuss economic policy issues, the scheduled hourlong session stretched to 2 1/2 hours and included lunch. They clearly had hit it off.

The unexpected affinity might have begun with their love of woodwinds. Clinton, of course, campaigned on and off with his saxophone. Greenspan once earned his living playing clarinet for the Henry Jerome Band.

What this odd couple really has in common, though, is probably a love of the details of economic policy -- and the numbers that explain them.

When he was an economic forecaster and consultant with his own New York firm, Greenspan based his predictions on the output of a complex set of mathematical equations modeling the way the U.S. economy works. He also included a large dose of judgment in his forecasts, based on constant probing of the economy's nitty-gritty: How much were tanker fees adding to imported crude oil prices, or how much money were homeowners spending for consumer goods when they used their rising equity to trade up to a bigger house?

Deciphering Data

Far more than his predecessors at the Fed, Greenspan receives a constant flow of data from the Fed staff that he hopes will provide clues about where the economy is headed next in these extraordinarily uncertain times. The ebb and flow of economic statistics provide him an endless flow of puzzles whose solution may offer new insights.

In short, long before the pejorative "policy wonk" label was pinned on Clinton because of a similar love of numbers and details, Greenspan was one.

There was no one with a similar intellectual bent in the Bush administration -- at least not the major economic players. The Fed chairman was a long-time friend of former president George Bush's, but as far as the economy was concerned, their minds were on different analytical planets.

Treasury Secretary Nicholas F. Brady got so frustrated with Greenspan's detailed rebuttals of why the Fed was not reducing interest rates faster that he canceled the traditional weekly breakfast meetings between the secretary and Fed chairman. Michael J. Boskin, chairman of the Council of Economic Advisers, did talk frequently with Greenspan, but Boskin's views often were rejected by other White House officials.

When Greenspan was invited to Little Rock, he must have been predisposed to get along well with Clinton -- who, unlike Bush, had spent a year campaigning without ever throwing verbal brickbats at the central bank. In fact, many Fed officials had been pleased but vastly surprised by Clinton's sophisticated defense of Fed policies during the Richmond presidential debate.

The December meeting set a new tone. Not since Arthur F. Burns used to sit in on meetings of then-President Gerald Ford's Economic Policy Board and saw Ford 48 times in a single year was there such a comfortable session between a Fed chairman and a president. The meeting continued longer than planned because Clinton wanted to keep the wide-ranging discussion going. Perhaps, like the Clintons' invitation to the family gallery last month, the purpose was partly to flatter Greenspan.

The initial meeting also occurred at a propitious moment. Economic growth had accelerated sharply in the second half of last year, partly because the Fed gradually had reduced short-term interest rates to their lowest levels in decades. Clinton had no need to prod Greenspan for further reductions in rates. Neither did Greenspan have to warn of the possibility of rate increases since, unlike at the beginning of the Bush term, inflation was low. Fed officials actually believe inflation could fall further, given the amount of slack remaining in the economy.

Freed from the usual worries about short-term interest rates, the odd couple has been able to concentrate on the longer-term issues of how to reduce budget deficits and increase investment to increase U.S. living standards.

The Fed's Priorities

Greenspan, in public statements over the years, has made it clear that he believes he has two goals as a central banker: First, to protect the stability of the nation's financial system so that events such as the stock market crash of October 1987 do not cause a collapse; and second, to bring inflation down, not to zero, but to a point low enough that it no longer matters in financial and investment decisions. Keeping inflation low is essential to maximizing real, long-term economic growth, he has argued repeatedly.

The rising tide of federal budget deficits, if unchecked, threatens both those goals because it means continued heavy borrowing by the U.S. Treasury that could destabilize markets, according to Greenspan's testimony. Yes, it would be better to have had more spending cuts and fewer tax increases, the chairman told Congress. But that was a matter for Congress and Clinton to settle, he added.

"As the nation's central bankers, the primary and professional concern of those of us at the Federal Reserve is having the structural deficit sharply reduced, and soon. Time is no longer on our side," Greenspan told the Senate Banking Committee last month.

"The deficit and the mounting federal debt as a percent of gross domestic product are corrosive forces slowly undermining the vitality of our free market system. ... How the deficit is reduced is very important. That it be done is crucial," the Fed chairman said.

That difference -- between a "very important" reservation about taxes and "crucial" worry about the deficit -- helps explain why Greenspan has praised the overall Clinton plan without endorsing its details.

Eased Fears

In the weeks since the State of the Union Message, analysts' worries about Greenspan's alliance with the White House have abated if not disappeared. Instead of fearing that Clinton had been given the key to the Fed's money store, some analysts now believe that the unusual rapprochement between Clinton and Greenspan may simply be good for the economy.

"Greenspan's return to the policy loop" could turn out to be a "trump card" in encouraging investors to accept lower long-term interest rates, said economist Joseph Ford of the WEFA Group, an economic forecasting firm in Bala Cynwyd, Pa.

"Many observers felt that {Greenspan's} presence next to the First Lady during Clinton's address was a tacit endorsement of the president's plan. In subsequent congressional testimony, however, his stance seemed decidedly more impartial," Ford said.

"This symbiosis between the Fed and the White House will impart a downward bias" to long-term interest rates that will push yields on 30-year U.S. Treasury bonds to 6.5 percent by midyear, he predicted. Rates recently have been running around 6.75 percent, down a full percentage point since early November.

Meanwhile, Treasury Secretary Lloyd Bentsen has said without equivocation that no deal for lower interest rates has been struck between the administration and the Fed. Officials at the central bank said the same thing privately.

"Alan would be the last person to make any commitment on behalf of the {Federal Open Market Committee} without consulting it, or make any long-term commitment on policy," said one Fed official. The FOMC is the central bank's top policy-making group.

"We are going to make our decisions as we go along, as we always do. We have not compromised our independence, which we guard jealously," the official said.

'A Pretty Smart Cookie'

Sam Kahan, chief economist at Fuji Securities Inc. in Chicago and a close observer of the Fed, observed, "I am just not sure what he is doing. Alan is a pretty smart cookie. He has been around the block a couple of times.

"I am not sure why he attended the State of the Union speech and sat where he did," Kahan continued, "but in terms of the general outline of things, my view of the Fed has not changed. They are still concerned about inflation and will remain so."

If the economy grows strongly for another three or four quarters, the Fed will begin to raise short-term interest rates again to keep growth and inflation under control, Kahan predicted.

However, if at that point a version of Clinton's plan has become law and the budget deficit is going down, that change might provide the mild dose of restraint that in recent years could have come only from the central bank -- since fiscal policy was caught in the policy gridlock between a Democratic Congress and a Republican White House.

When the inevitable moment arrives and Greenspan and other Fed officials decide it's time to push for interest rates to rise, the new, comfortable relationship between Clinton and the Fed could turn sour.

But when that time does come, it is possible that the capital's odd couple will meet, crunch some numbers and try to persuade each other of the rightness of their views. And even understand what the other is saying.