[Congressional Record Volume 140, Number 9 (Friday, February 4, 1994)]
[House]
[Page H]
From the Congressional Record Online through the Government Printing Office [www.gpo.gov]


[Congressional Record: February 4, 1994]
From the Congressional Record Online via GPO Access [wais.access.gpo.gov]

 
                     ACTION BY THE FEDERAL RESERVE

  Mr. SARBANES. Madam President, I wish to quote a short release today 
put out by the Federal Reserve. They have taken an action of which I am 
very strongly critical. This is the release:

       Chairman Alan Greenspan announced today that the Federal 
     Open Market Committee decided to increase slightly the degree 
     of pressure on reserve positions. The action is expected to 
     be associated with a small increase in short-term money 
     market interest rates.
       The decision was taken to move toward a less accommodative 
     stance in monetary policy in order to sustain and enhance the 
     economic expansion.
       Chairman Greenspan decided to announce this action 
     immediately so as to avoid any misunderstanding of the 
     Committee's purposes, given the fact that this is the first 
     firming of reserve market conditions by the Committee since 
     early 1989.

  Madam President, Senator Sasser joined me earlier today in 
criticizing the Federal Reserve for the announcement that they are 
moving to increase interest rates and to a less accommodating stance in 
monetary policy.
  The Fed actually pursues a very highly skewed policy. They have a 
hair-trigger response when it comes to fighting inflation. In fact, in 
the current circumstance, they are tightening up monetary policy before 
there is any substantial evidence of inflation, even before there is 
any real threat of future inflation.
  Now, in contrast, in recent years, when the Fed was faced with the 
likelihood that jobs would be lost because of an overly tight monetary 
stance, the Fed showed great reluctance to change policy.
  Now, I submit to you the Federal Open Market Committee at its meeting 
yesterday and today should have shown great reluctance to change policy 
at this particular time. We have the economy moving. We have economic 
growth. We have job restoration. We have low inflation. The low 
interest rates are important to the economy's moving. I am very frank 
to say I am very disappointed that the Fed did not stay the course.
  There, in fact, was a cartoon that appeared in USA Today earlier this 
week which pretty well sums it up. What it shows is a truck coming down 
the road that says, ``Economy,'' and the driver of the truck has his 
hands up to his face in horror and he is applying the brake. ``Brake'' 
and ``Screech'' are written off to the side of the truck. He is trying 
to bring his truck to a stop, that is, the economy that is moving 
forward, because there has come out into the middle of the street this 
man here. It says ``Greenspan'' on the man and he is saying, ``Let's 
see, we'll just pick these up.'' And he is leaning over to pick up 
these pieces of paper which say on them, ``Interest rates.''
  That tells the whole story. We have the economy moving. We are 
hopeful we are going to have real economic growth. The economy is 
moving in large part because the interest-sensitive sectors of the 
economy have been responding to the interest rates: home building, auto 
sales, consumer durables, all of which are very closely related to the 
interest rates in terms of whether people can afford to make those 
kinds of purchases. Those purchases have all been moving up in a very 
strong and solid performance, and because of that they are providing an 
impetus to the economy.
  Well, people say, the Fed is trying to bring inflation under control.
  That is a worthy objective. We are concerned about inflation. We are 
concerned about economic growth. We are concerned about job 
restoration. If there was some sort of problem on the inflation front, 
I might be more sympathetic to the action of the Fed.
  But, Mr. President, let me just show you this chart. This is a chart 
of the changes in consumer prices beginning in 1963 and coming through 
to 1993. Now, what this chart shows is that the performance in 1993 on 
the inflation front, when prices moved up 2.7 percent for the year, the 
performance on the inflation front in 1993 was the best year in terms 
of inflation for this country since 1965, with the exception of one 
year, in the 1980's, and that is when the bottom fell out of oil 
prices.
  Now, I wish to repeat that. With the exception of this one year, the 
inflation record in 1993 was the best it had been since 1965, 28 years 
ago.
  Where is this inflation problem that Mr. Greenspan is conjuring up? 
As my colleague Senator Sasser said earlier today--and I quote him:

        The most recent data show that over the past year consumer 
     prices have increased only 2.7 percent. The broader GDP price 
     index advanced only 2.5 percent, and unit labor costs have 
     risen only 1.8 percent. These figures provide no evidence of 
     either current or future inflation. In my opinion, the Fed 
     has conjured up an inflation problem.

  That is exactly what they have done. Furthermore, not only did we 
have the best performance last year since 1965, but the inflation 
performance has been improving over the last 4 years. In other words, 
we did better. It is not as though we had a good performance last year, 
but Greenspan and his cohorts on the Open Market Committee could say, 
``Well, yes, but that performance was not as good as the year before, 
and not as good as the year before that.''
  It was better last year than the year before which was better than 
the year before that. So, in effect, you have this excellent 
performance on inflation. In fact, it has been on a downward trend, not 
on an upward trend. Conceivably, if it were on an upward trend, even if 
it was still a pretty good performance, they could say, ``Well, it 
looks as though it is beginning to pick up. We want to take some 
action.''
  That is not happening here. This is on a downward trend.
  Let me turn to the unit labor costs and show the restraint that 
exists with unit labor costs which are hourly labor costs adjusted for 
labor productivity. Sometimes people will argue, ``Unit labor costs are 
picking up, and that is going to give an impetus to inflation and the 
economy.'' Here is a chart of unit labor costs. Again with one 
exception back in 1983, the last two years have brought the best 
performance in unit labor costs since back in the early 1960's.
  The Fed is doing a preemptive strike on a problem that is not there. 
It is as though you would bomb a preemptive strike on some farmhouse or 
home because you thought the villain, inflation, was inside the home 
when, in fact, the people in the home were an American family feeling 
better about the economy, realizing that with a lower interest rate, 
they might be able to build themselves a new home, move out of where 
they are, purchase an automobile, purchase consumer durables. Instead, 
they are taking the rates up.
  I am told that one of the major banks today took its prime interest 
rate up following on the action announced by the Federal Reserve 
earlier this morning.
  This is obviously going to feed into the economy. The adjustable 
rates on mortages and bankloans will move up immediately. So it is 
going to have an impact on the economy. The Federal Reserve does not 
seem to recognize that there are still close to 9 million people 
unemployed in this country.
  I am very deeply concerned about the strength of this recovery in 
1994.
  I want to point out the quarterly growth figures over the last 2 
years, because, again, I think it demonstrates that it is clearly 
premature for the Fed to have acted at this point and to start slowing 
down our economy.
  These are the growth figures for 1992 and 1993. In 1992 the last year 
of President Bush's term, We had growth that year of 3.5 percent in the 
first quarter; 2.8 in the second; 3.4 in the third quarter; a jump to 
5.7 percent in the fourth quarter of 1992. People will think back, that 
is about a year ago, a little more than a year ago. People say we had 
very strong growth. Then what happened? The economy slowed markedly to 
0.8 of a percent in the first quarter of this year. Then it started 
picking up--1.9 in the second; 2.9 in the third; and, of course, we had 
a very good fourth quarter in 1993 of 5.9 percent.
  But we do not know at this point what that growth is going to be in 
the first quarter of this year or in the second quarter of this year.
  The forecasts are that it will be about 3 percent. I hope those 
forecasts are right. In fact, I hope they are low. I hope we get better 
growth. But we do not know that. And the Fed has acted prematurely, in 
my judgment, by not awaiting further growth figures in 1994 to see how 
sustained and solid this recovery is, particularly when there is no 
evidence on the inflation front that will warrant the Fed taking 
action.
  Mr. President, this is obviously a serious proposition because we are 
very anxious for our economy to be moving. We recognize that there 
might be a time when the Fed ought to act, but that time is not now.
  Last summer we held a hearing with Henry Kaufman and Paul Samuelson, 
both of whom spoke out very strongly at the time against the prospect 
that the Fed might raise rates even then. The Fed has been playing 
around with raising these rates now for quite sometime even during 
periods of disappointing growth in the economy. They were talking 
seriously about raising rates back in the spring of last year. Of 
course, we had a 1.9 percent growth in the second quarter.
  Kaufman said last summer--it is my understanding that he has not 
departed from this position, although he recognizes that economic 
conditions are beginning to pick up. So it is not quite as clear as it 
was last summer. But he said the following:

       A more systematic analysis of the present inflationary 
     potential within the U.S. economy does not justify either 
     exaggerated inflationary expectations or a preemptive 
     tightening by the Federal Reserve. Inflation is not found in 
     the business community, and it is not revealed in speculative 
     activity in the great majority of product markets.

  Then he closed with this comment:

       The time will come when the business recovery will have 
     matured. Excess capacity will have been worked off, labor 
     markets will become tauter, the economic recovery abroad will 
     have begun, commodity prices will have turned higher across 
     the board, real estate prices will have firmed, and credit 
     demands will have become conspicuously stronger. Then we will 
     want the Federal Reserve to act with dispatch, and the 
     determination to resist forcefully any buildup of 
     inflationary pressures. But none of those circumstances 
     prevail today.

  I would submit that they do not prevail now, and that the Fed acted 
in a very premature fashion in the action which it took earlier today.
  Let me simply close by again summarizing. I am deeply concerned that 
we sustain this economic growth. Raising interest rates runs directly 
counter to that. It will in fact impede and hinder economic growth. It 
will place a crimp in it.
  The argument that the Fed might use to warrant doing that would be 
that an inflation problem had emerged. It is contradicted by the 
evidence. Unit labor costs are restrained--one of the best performances 
in 30 years. Inflation of the consumer price index is low and falling.
  Where is this inflation problem against which the Fed is exercising a 
preemptive strike? It does not show up on any of this evidence. In 
effect, what the Fed said--it is interesting--the other day is that 
interest rates are abnormally low, and, therefore, we have to raise 
them.
  It boggles the mind--this kind of thinking. If there was a problem on 
the inflation front that could reasonably be argued as a basis for 
raising the interest rates, I would have to recognize it. I even then 
may not agree with the Fed at the time when it made its judgment,
  Because I would be worried about what it did to growth. But here 
there is no problem. The Fed is putting out a solution to a problem 
that is not there and, by doing so, they are creating a further problem 
with respect to the growth of the economy and the restoration of jobs. 
They are going to put a crimp in the economic activity. There is no 
question about it, they are going to slow it down.
  Mr. President, I close by coming back to where I began. And I want to 
underscore again, because this dramatizes in a very clear way exactly 
what the Fed is doing to the American economy and why I am critical of 
the action taken by the Fed Open Market Committee earlier today. To 
repeat, this cartoon shows a truck labeled ``The Economy'' moving down 
the road, moving with some momentum. We want some momentum in our 
economy because it means that we get growth, we restore jobs, 
businesses become more profitable, we are able to bring down the 
Federal budget deficit because we are getting growth taking place in 
the economy, and we address the social problems of our great urban 
areas because people start working again, start producing--all of the 
desirable things that take place.
  Then they say, what about inflation? Well, I have just shown there is 
no inflation problem. So what happens is we get this truck moving, the 
economy, and this driver is slamming on the brakes, trying to come to a 
screeching halt because Greenspan is out in the middle of the road, in 
front of the truck, bending over, reaching toward these papers that say 
``Interest Rates.'' And Chairman Greenspan is saying: ``Let's see, we 
will just pick these up''--pick up the interest rates.
  Mr. President, I very deeply regret the action of the Fed Open Market 
Committee earlier today, and I appreciate this opportunity to bring it 
to the attention of my colleagues.
  I yield the floor.
  Mrs. FEINSTEIN. Mr. President, addressing the Senator from Maryland 
before he leaves the floor, I would just like to associate myself with 
those remarks.
  The Senator might also be interested to know that over the break I 
met with a group of distinguished economists from Stanford University 
and others in California, and they spoke to this exact point.
  Not only that, Senator, you might be interested to know the respect 
with which you are held in California. They also said to me that one of 
the most knowledgeable voices in the U.S. Senate about the economy is 
yours. So I thought that might be a nice thing to say on a Friday 
afternoon.
  Mr. SARBANES. Mr. President, I thank my colleague for her very 
generous remarks. I appreciate it.
  Mr. FEINSTREIN addressed The Chair.
  The PRESIDING OFFICER. The Senator from California is recognized.
  Mrs. FEINSTEIN. I thank the Chair.
  (The remarks of Mrs. Feinstein pertaining to the introduction of S. 
1830 are located in today's Record under ``Statements on Introduced 
Bills and Joint Resolutions.'')
  The PRESIDING OFFICER. What is the will of the Senate?
  The Chair, in his capacity as a Senator from Rhode Island, suggests 
the absence of a quorum, and the clerk will call the roll.
  The legislative clerk proceeded to call the roll.
  Mr. JEFFORDS. Mr. President, I ask unanimous consent that the order 
for the quorum call be rescinded.
  The PRESIDING OFFICER. Without objection, it is so ordered.

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