[Congressional Record Volume 140, Number 63 (Thursday, May 19, 1994)]
[Senate]
[Page S]
From the Congressional Record Online through the Government Printing Office [www.gpo.gov]


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

 
                       THE FEDERAL RESERVE BOARD

  Mr. DOMENICI. Mr. President, during the past few days, there has been 
an ongoing debate and actually a national concern about the Federal 
Reserve Board and its adjustment of the discount and Federal fund 
rates.
  During that time, I have had an opportunity to meet with some rather 
renowned economists, and today I would like to share with the Senate 
four or five lessons that I think I have learned in an effort to get 
the best possible idea as to what is going on, whether it is positive 
or negative, and a little bit of the history.
  The first lesson that I have learned is that Federal Reserve policy 
acts with a lag, and it has worked to take us to the expansion side of 
the business cycle. Responding to weakening demand in the economy, 
beginning in mid-1990, long before the last election, the Federal 
Reserve shifted to a policy of increasing accommodation to growth. More 
credit was made available to support economic growth. The Federal fund 
rate--the overnight rate commercial banks charge each other for loans--
was pushed down by the Federal Reserve from 8.3 percent in 1990 to 3 
percent by the end of 1992--the lowest level since the 1960's.
  So, obviously, during that period of very slow growth, the Federal 
Reserve Board set about to stimulate growth by lowering the discount 
rate from 8.3 to 3 percent by the end of 1992.
  The lower interest rates have had a very salutary effect. They helped 
by reducing the excessive debt burdens of households, businesses, and 
financial institutions that had accumulated, as asset values weakened 
leading up to the 1990 recession. This process took time, however, and 
in the face of these ``headwinds'' to economic growth--to borrow a word 
from Chairman Greenspan--the Federal Reserve maintained an 
accommodating policy of historically low-interest rates through all of 
1993.
  The interest rate reductions were eminently successful. Household 
debt service as a percent of disposable income--the interest cost of 
maintaining debt, and for most Americans it would be interest on their 
house, perhaps interest on some fixed appliances, perhaps the interest 
on an automobile--declined from a high of 19 percent in 1989 to nearly 
16 percent by 1993. That is what we mean when we say refinancing your 
house lowers your payment from $982 to $726, for example. Obviously, 
that household has reduced the monthly cost of accommodating and 
accumulating those assets.
  Payment delinquencies on consumer loans fell sharply in 1992 and 
1993, the lowest levels in 6 years. Lower interest rates helped to 
strengthen ailing financial institutions and stabilized the values of 
excess real estate. Most noticeably, beginning in the second half of 
1992, the interest rate-sensitive sectors of this economy were 
responding rather well: Business equipment, home sales, autos, and the 
like.
  The Federal Reserve's policies helped but with a lag. I repeat, the 
Fed went from 8.3 to 3 percent between mid-1990 and 1993, and the 
accommodating interest rates stimulated the American economy in a very 
dramatic way. But it took a while.
  For those who are wondering why we have current growth in the 
American economy, I believe it is fair to say the answer is that the 
Federal Reserve Board decided in mid-1990 to accommodate by 
dramatically lowering interest rates. For some, this new growth in the 
American economy has come because of other reasons. I will today and in 
a later series of comments show factually that the growth in the 
American economy is attributable primarily to Federal Reserve policy, 
plus a dramatic increase in the productivity of American business, 
including manufacturing, both industrial and service oriented.
  Lesson No. 2: The low inflation competitive environment of the 1980's 
is paying dividends. For a period of time now, some have been wondering 
whether the 1980's did anything for the American economy. Some speak of 
it as a period we would like to not think about. The truth of the 
matter is that a unique productivity recovery has been adding growth 
and competitiveness by holding down the cost of production. And it is 
paying off now. During 1992, nonfarm business productivity--the best 
measure of economywide worker productivity--rose 3.6 percent, the 
biggest 1-year increase since the early 1960's.
  Productivity gains have accounted for 90 percent of gross domestic 
product growth in this recovery, now 12 quarters old. This far 
outstrips previous contributions by productivity gains, which on 
average were 50 percent during previous recoveries. So if the economy 
grew 4 percent--GDP grew 4 percent--2 percent, in the past, was from 
productivity gains. In this recovery, starting over 3 years ago, 90 
percent of that growth is because of productivity increases. That means 
a working hour is producing more goods and/or services than ever before 
and thus contributing to the gross domestic product increase.

  Competitiveness through productivity gains has been what has driven 
this recovery along with low interest rates that the Federal Reserve 
initiated way back in mid-1990. And competitiveness has been helped 
particularly by the low inflation fostered over the last 10 years by 
the Federal Reserve and Republican administrations. It has allowed 
businesses to focus on cost cutting instead of having to constantly 
negotiate favorable price increases which is the primary focus in a 
high-inflation environment. America's response to stiff international 
competition during the 1980's has been to cut costs through increased 
productivity and raise the quality of products and our low inflation 
has allowed businesses to do that, making us once again the world's 
largest exporter.
  Lesson No. 3: The goals of the Federal Reserve are compatible with 
extending economic growth. Some have criticized the Federal Reserve in 
the past for accommodating growth too long before attacking rising 
inflation. As a result, interest rates rise too high and hurt economic 
growth. This time the Federal Reserve Board is attempting to head that 
off in advance of a substantial acceleration in inflation, earlier than 
usual. This is something that has not been part of the history of our 
money supply and Federal Reserve Board. But, by acting in an early 
manner it is taking preventive steps now that will forestall the need 
for harsher, more disruptive action later.
  The Federal Reserve Board indicates that they believe Tuesday's large 
half-percentage-point increase moves monetary policy from accommodative 
back to a neutral position. This position returns interest rates back 
to a more historically typical inflation-adjusted level of interest 
rates from the roughly zero inflation-adjusted interest rates that 
existed as recently as last winter.
  The risks are that the economy has more momentum than perceived and 
will require a further move from neutral to monetary restraint, forcing 
more dampening. I am optimistic that this will not be necessary, but 
there are risks.
  Lesson No. 4: The Federal Reserve action should lead to lower, not 
higher long-term interest rates. For those who complained immediately 
after the Federal Reserve acted, long-term interest rates have come 
down in the United States. They did not go up. I am hopeful they will 
continue down. They have been inordinately high as compared to the 
short-term interest rates, but that was attributable, in my opinion, to 
what I have described here: a more than accommodating interest-rate 
policy by the Federal Reserve Board which was extremely stimulative and 
brought on concerns from those who analyze these matters that the 
economy might overheat.
  The Federal Reserve wanting to move toward neutrality--that is where 
their interest rate policies are neutral, not overly stimulative or 
restrictive--is an excellent policy. Whether they get it right or not, 
it is hard to say. More to the point, whether the world responds to it 
or not is hard to say.
  It would seem that the first results in America of this change, which 
they say will be their last for the time being, is for long-term 
interest rates to come down. But it would also seem that foreign 
investors around the world are responding not less well because the 
American dollar has gone down a little bit more vis-a-vis the yen and 
other major currencies, which perhaps means that their analysis is that 
we still do not have a neutral monetary policy. Rather we still have 
one that is too stimulative and it will shorten this business cycle and 
return us to no growth.
  There are other things that we can learn from what has occurred. I 
believe we shouldn't be indicating to the Federal Reserve that we 
politicians know more than they and that they are trying to do 
something to hurt the economy when they are, in fact, trying to do the 
opposite. Rather, I believe we would be much better off if we would 
help foster the kind of business climate that coupled with low 
inflation can keep the American economy growing over the long term. I 
will speak to that in more detail in later days. I thank the chairman 
for permitting me by consent to speak, and I yield the floor.
  Mr. BIDEN. Mr. President, I suggest the absence of a quorum.
  The PRESIDING OFFICER. The Senator from Delaware suggests the absence 
of a quorum.
  The clerk will call the roll.
  The assistant legislative clerk proceeded to call the roll.
  Mr. BIDEN. 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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