[Congressional Record Volume 140, Number 43 (Tuesday, April 19, 1994)]
[Extensions of Remarks]
[Page E]
From the Congressional Record Online through the Government Printing Office [www.gpo.gov]


[Congressional Record: April 19, 1994]
From the Congressional Record Online via GPO Access [wais.access.gpo.gov]

 
                        FED IS ACTING PRUDENTLY

                                 ______


                            HON. RICK LAZIO

                              of new york

                    in the house of representatives

                        Tuesday, April 19, 1994

  Mr. LAZIO. Mr. Speaker, yesterday, the Federal Reserve raised short-
term interest rates, for the third time this year. The action led to a 
41-point drop in the stock market. So far, the Fed has raised the 
Federal funds rate to 3.75 percent, and 3 percent, in increments of 25 
basis points.
  No one disputes the FED's motives or intentions. For reasons that 
escape many analysts and ``wannabe'' analysts, the Fed believes the 
economy must be cooled down in order to avoid future inflation. I 
believe the Fed is acting prudently.
  The evidence for the inflation argument based on conventional 
indicators is, at best, mixed and tends to argue against an 
inflationary threat. The conventional indicators--namely, the price and 
wage indices--show no upward movement inclination whatsoever. Moreover, 
capacity utilization is actually lower today than in 1989 when the 
economy was moving along a fairly good clip. Nevertheless, the capacity 
utilization indices are moving into a range which historically has 
meant future inflation. Consistent with this, industrial production for 
the first quarter grew at an unsustainable annualized rate of 5.7 
percent.
  Why, then, is the Fed so obviously concerned about inflation. 
Notwithstanding the absence of strong and consistent signals for 
impending inflation from conventional indicators, I believe the Fed has 
acted as it has because of its appropriate concern with overshooting 
our economy's noninflationary, full employment growth rate. To put it 
another way, the Fed is trying to achieve the coveted soft landing and 
not crash and burn.
  The economy is growing rapidly and the unemployment rate is now 
within about 1 percent of so-called full employment. If the economy 
were to continue to grow at a relatively rapid rate--faster than what 
economists call ``potential GDP'', about 2\1/2\ to 2\3/4\ percent--
then, inflation is indeed a very real possibility. And the Fed is well 
aware of the lag time required for monetary policy to take hold. 
Therefore, the Fed's action makes sense.
  It is much better to return to our economy's potential growth rate by 
a soft landing than it is to crash through the full employment barrier 
and set off a destructive new round of inflation. The Fed also realizes 
that it's a lot easier and safer to coax an economy to its full 
employment, low inflation, sustainable growth rate from a lower growth 
rate than from a higher one.
  Wall Street, at least as reported by the popular press, rarely thinks 
raising interest rates is a good thing. Indeed, the impression one gets 
is that lowering interest rates is always good and raising them is 
always bad. That, of course, is utter nonsense.
  The Fed does not have the luxury of omnipotence. Like all mortals and 
their institutions the Fed will have to be judged on the basis of 
future events and outcomes. Until then, I am satisfied the Fed has 
acted responsibly in the face of available evidence.

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