[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. DORGAN. Mr. President, as I was listening to the Senator from 
Delaware, I was also looking at my desk drawer. As is the custom in the 
Senate, people carve their names in desk drawers. In that drawer is not 
only the name of a distinguished former Senator from many years ago, 
Gerald Nye, from North Dakota, but Warren G. Harding, and the name of a 
Senator from the State of the Presiding Officer, La Follette, a great 
populist.
  As I was thinking about populism, I was thinking about the Federal 
Reserve Board. There has never been a clearer picture of combat between 
the little interests and big interests in this country than that which 
goes on behind closed doors at the Federal Reserve Board. I have been 
very distressed by the Fed's increasing interest rates--which is the 
same as increasing taxes on every American. I have been very vocal in 
my criticism.
  The Chairman of the Federal Reserve Board has written to me a two-
page letter on why the Federal Reserve board has raised interest rates.
  I ask unanimous consent that this letter be printed in the Record.
  There being no objection, the letter was ordered to be printed in the 
Record, as follows:

                                        Federal Reserve System

                                     Washington, DC, May 13, 1994.
     Hon. Byron L. Dorgan,
     U.S. Senate,
     Washington, DC.
       Dear Senator: Thank you for your letter of April 25 
     expressing concern about recent monetary policy actions. I 
     appreciate the opportunity to explain our policy approach in 
     some detail.
       The Federal Reserve's recent moves to increase short-term 
     interest rates are most appropriately understood in a 
     historical context. In the spring of 1989, we began to ease 
     monetary conditions in this country as we observed the 
     consequence of balance-sheet strains resulting from increased 
     debt, along with significant weakness in the collateral 
     underlying that debt. Households and businesses became much 
     more reluctant to borrow and spend, and lenders to extend 
     credit--a phenomenon often referred to as the ``credit 
     crunch.'' In an endeavor to defuse these balance-sheet 
     strains, we moved rates lower in a long series of steps 
     through the summer of 1992.
       The resulting sharp decline in debt service charges and the 
     restructuring of balance sheets eventually alleviated the 
     financial distress, enabling the economy to begin to move 
     again in a normal expansionary pattern. In recent quarters, 
     real GDP has accelerated noticeably with particular strength 
     in interest-sensitive sectors. More than two million jobs 
     have been created over the past twelve months, and the 
     unemployment rate has fallen substantially. In this more 
     robust financial and economic climate, expansion of money and 
     credit has picked up.
       With our objective of ameliorating impediments to economic 
     expansion met, there was no longer any policy purpose in 
     maintaining the level of nominal interest rates at the 
     accommodative position held throughout 1993. With balance 
     sheets in improved shape, the economic expansion apparently 
     solid and self-sustaining, and the margin of slack in 
     productive capacity dwindling, a shift away from our 
     accommodative position implemented in a measured and 
     deliberate way (so as not to unsettle financial markets) was 
     clearly called for. Maintenance of the degree of 
     accommodation that was necessary in recent years would have 
     posed a level of risk of mounting inflationary imbalances 
     that we perceived as unacceptable.
       To be sure, long-term interest rates moved up far more than 
     we would have anticipated early this year. We had originally 
     expected long-term interest rates to move a little higher 
     temporarily as we tightened. The sharp jump actually 
     experienced, in my judgment, is accounted for by a dramatic 
     rise in market expectations of economic growth and, perhaps, 
     associated concerns about future inflation. Given the sharp 
     change in market perceptions of economic conditions, longer-
     term rates eventually would have increased nearly the same--
     or perhaps even by more--had the Federal Reserve done nothing 
     so far this year.
       You are correct: There currently are few indications that 
     inflation has already begun to pick up. But our concerns are 
     for the future. It is of crucial importance that the 
     necessary monetary policy adjustments be implemented in 
     advance of the potential emergence of inflationary pressures, 
     so as to forestall their actual occurrence. Shifts in the 
     stance of monetary policy influence the economy and inflation 
     with a considerable lag, usually a year or more. The 
     challenge of monetary policy is to interpret current data in 
     a way that permits us to anticipate future inflationary or 
     contractionary forces that may evolve in the product or 
     financial markets and to counter them by taking action in 
     advance.
       If we are successful in this endeavor, we will not see any 
     buildup of inflationary pressures. Ideally, our actions will 
     promote financial conditions under which our economy can grow 
     at its greatest potential, consistent with steady, 
     noninflationary expansion of employment and incomes. In 
     reality, of course, we can't be entirely certain of the 
     results of our actions. The economy will be subject to a 
     variety of influences that can be foreseen only imperfectly 
     or not at all. We must weigh the risks and judge the most 
     likely outcomes, all the while keeping in mind the need to 
     adjust policy as unexpected developments become evident. But 
     we believe that by keeping monetary policy pointed clearly 
     toward our long-term goal of sustainable noninflationary 
     growth we will help bring about the best possible economic 
     outcome for the American people.
           Sincerely,
                                                   Alan Greenspan.

  Mr. DORGAN. I say, with great respect to the chairman of the Fed, 
that he is fundamentally wrong. They have made decisions in secret and 
without public debate that will put the brakes on this economy at 
precisely the time when we need more economic growth and jobs. This is 
pitting the big interests against the little interests. These are 
policies made when there is no credible evidence of inflation on the 
horizon, and are designed to help the money center banks. It is a 
classic conflict between the big interests and little interests--and 
the little guys always loses. In the thirties, Bob Wilson and the Texas 
Playboys had a song about it: ``The little bee sucks the blossom, but 
the big bee gets the honey; the little guy picks the cotton, and the 
big guy gets the money.''
  The Federal Reserve policies are designed to protect the large 
financial sector of this country, but will injure irreparably the 
productive sector, those who create jobs and work in jobs.
  We are told that this is a global economy. So why should we believe 
it when the Federal says we are reaching capacity to produce 
refrigerators and cars? That is not true. If it is a global economy, 
and if we are beginning to reach capacity--which we are not--companies 
will produce them somewhere else. We are not going to have additional 
price run-ups. Nowhere on the horizon is there a threat of inflation. 
The consumer price index rose only one-tenth of 1 percent. You are not 
going to battle inflation by increasing interest rates for everybody in 
this country. Where is the inflation? Where is the evidence? This has a 
lot more to do with other things: speculation on Wall Street, 
inordinate speculation in derivatives with some of the largest banks in 
this country. It has more to do with things other than inflation.
  I regret that the Federal Reserve Board has taken policy action that 
I think is wrongheaded. I think the Fed's actions will injure this 
country's productive economy.
  I yield the floor to my friend from Arizona.

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