[Congressional Record Volume 140, Number 115 (Tuesday, August 16, 1994)]
[Senate]
[Page S]
From the Congressional Record Online through the Government Printing Office [www.gpo.gov]


[Congressional Record: August 16, 1994]
From the Congressional Record Online via GPO Access [wais.access.gpo.gov]

 
                     ACTION BY THE FEDERAL RESERVE

  Mr. HARKIN. Mr. President, I wish to depart for just, hopefully, no 
more than 5 minutes from the debate that has been ongoing about health 
care to talk about something that happened just about 2 hours ago that 
in all of the discussion and debate we are having about health care I 
think may have a more drastic impact than some of the things we are 
doing right now, with more immediate impact on Americans and their 
lives.
  Less than 2 hours ago, the Federal Reserve Board announced that there 
would be another hike in interest rates. There will be an increase in 
the Federal funds rate and the Federal discount rate by a full half 
point. I believe that is going to be very damaging to our Nation's 
economy. While that increase may be beneficial to those with 
substantial direct interest in the bond market, it is going to be 
harmful to average, ordinary Americans.
  There are three things on which I think the Federal Reserve Board is 
wrong. First, inflation is not a threat at this time.
  Second, the economy is not overheating.
  Third, increasing interest rates will without a doubt reduce economic 
activity, particularly in very sensitive sectors like housing and 
autos. Agriculture where borrowing is necessary will also be harmed.
  The Fed seems to think that inflation is likely, but the facts do not 
bear this out. Inflation is under better control now than it has been 
for decades. The Producer Price Index has only increased by six-tenths 
of a percent over the last year. The figure that came out on Thursday 
for July showed a substantial increase, .5 percent. But almost all of 
that was due to two things: Fuel, partially caused by an oil strike in 
Nigeria; and food, largely caused by a huge increase in the cost of 
coffee, which rose by 22 percent. This rise in coffee prices accounted 
for four-fifths of the increase in food inflation. But poor coffee 
crops do not mean generally higher inflation. Crude goods actually 
dropped by .9 percent in July.
  Another key indicator, the Consumer Price Index, has increased only 
2.7 percent over the past year. Wage increases, which could be the 
greatest threat to serious inflation, if it ever should occur, has 
risen a paltry .4 percent adjusted for productivity.
  In other words, inflation is under control. While we are seeing 
certain specific commodities with significant price increases--I 
mentioned coffee and oil--real inflation is lower now than it has been 
in decades.
  I think the second point that the Federal Reserve is overlooking is 
that the economy is slowing down. Cyclical industries are already 
showing serious softness because of earlier Federal Reserve actions. 
New housing starts have been moving down since the Federal Reserve 
started increasing rates in February.
  Mr. President, this is the fifth increase in interest rates by the 
Federal Reserve Board since February. And what has been happening? 
Housing starts are now 6.8 percent below their March level. Auto sales 
are soft. The unemployment rate rose to 6.1 percent last month. There 
are over 8 million people counted as being unemployed, 4.4 million 
people forced to work at part-time jobs due to unavailability of full 
employment and large numbers who have left the job market altogether 
because they have given up.
  The argument by some that we must dampen down the economy now to 
avoid the possibility of future inflation does one thing. It guarantees 
a sure loss in jobs and growth in order to assure that the smallest 
possibility of inflation is wiped out.
  But the cost to our economy is great. Some say that the bond market 
is only happy in a recession. Well, it appears to me that the chairman 
of the Federal Reserve system is happy only when the bond market is 
happy. I might be a bit too strong, but I think it is correct. What 
they are looking for is the effective elimination of all true inflation 
but to achieve that they are almost willing to have the economy in a 
continuous stall, and that is what we are coming into right now.
  So what are the economic and social results of the Federal Reserve 
policy? Well, if you are in the bond market, it is great. But if you 
are an average American working hard to try to raise your children, you 
are worried about losing your job and no growth in income. In fact, you 
are probably losing ground. Your ability to buy a house has been 
sharply reduced.
  A 30-year conventional mortgage has risen by about 1.5 percent since 
February. If you have an adjustable-rate mortgage, your monthly 
payments are going to go up $100 to $150 a month compared to the rate 
based on February's interest levels. That hurts working families. If 
you are a farmer with significant loans to cover the cost of buying 
materials you need to feed your hogs or other livestock, your interest 
rates will rise and your profits will shrink. That is the real world 
out there. That is what is happening.
  The bottom line is that the Federal Reserve has taken action which is 
clearly not in the Nation's interest. They have decided on a very 
narrow agenda, effectively captured by the narrow interests of the bond 
market rather than balancing the bond market's needs with that of the 
Nation as a whole.
  Plain and simple, Mr. President, the Federal Reserve Board is out of 
touch with ordinary Americans and what is happening in our economy. 
This is something that needs to be talked about further.
  I will close with this, Mr. President. In a recent article in the 
Washington Post, the writer, Jim Hoagland, made these points. He said:

       One man's job is another man's basis point in the brave new 
     economic world of the central bankers.
       Being unemployed may be bad for you, but cheer up. It cools 
     inflation, and should be good for the markets. That is part 
     of the unspoken and unspeakable philosophy that lies behind 
     the manipulation of interest rates in the world's leading 
     industrial economies in recent months. Because of the central 
     bankers' abiding and unbalanced fear of inflation, declining 
     unemployment rates have become a hair trigger for raising 
     interest rates.

  Mr. Hoagland went on to say:

       The bankers and fund managers resemble old generals 
     refighting the last war after the battlefield has changed. 
     They build an imaginary line of high, long-term interest 
     rates instead of adapting monetary policy to a world in which 
     the greater barriers to economic renewal are unemployment and 
     the lack of public investment in productive enterprises.

  Mr. Hoagland closed by saying:

       Growth is measured in jobs, as well as in stock and bond 
     prices. Low inflation rates purchased by high unemployment 
     will turn out to have been a very dubious bargain.

  Mr. President, I did not mean to interrupt this ongoing debate about 
health care, but I do believe that the action taken by the Federal 
Reserve Board earlier this afternoon is going to further stall our 
economy, further raise interest rates, and create higher unemployment 
than we would otherwise have out there. It is going to start slowing 
this economy down even more, and I do not believe the Federal Reserve 
Board really had the basis for raising those interest rates, once 
again--five times since February.
  Mr. President, I have been supportive of the independence of the 
Federal Reserve Board. But I think we have to get some people on that 
Federal Reserve Board that really understand what is happening to 
ordinary working Americans out there. Their action today is going to 
hurt people. It is going to cause working families to have a reduction 
in their income and their standard of living.
  It all may be lost in the debate on health care that is going on here 
right now. But I did not want the afternoon to pass without at least 
one Senator getting up and challenging the Federal Reserve Board on the 
actions they took today because I believe the actions they took will 
truly hurt the working Americans.
  Mr. MOYNIHAN. Will the Senator yield for one question?
  Mr. HARKIN. Yes.
  Mr. MOYNIHAN. Knowing the standards of courtesy and integrity which 
he embodies, I wondered if he would not want to modify the remark about 
the Chairman of the Federal Reserve which could be taken as personal. 
Dr. Greenspan is a person of deep, utmost integrity, of great learning, 
and a genuine concern for what he thinks is best for the American 
economy. He would not have any partiality to bondholders any more than 
to stockholders. The concern about inflation has sort of for half a 
century been a concern of the successive Chairmen of the Federal 
Reserve. No one had to deal with it more dramatically than the 
predecessor in 1982 who had to bring us into a deep recession because 
we had gotten to the point of double-digit inflation. That was a 
dramatic act. We would never want to see that repeated. So we would 
never want to see a situation where it was necessary.
  Mr. HARKIN. If the Senator will yield, I said in my remarks that ``it 
seems''--I will check the Record. But I said ``it seems'' to me that 
the Chairman of the Fed is only happy when the bond market is happy. I 
said it appears to be.
  I do not deny that Mr. Greenspan--I did not use his name. But he is 
the Fed Chairman. I do not know him personally. But I understand that 
he is a man of high character, high integrity. I accept the judgment of 
the Senator from New York.
  Mr. MOYNIHAN. He is surely that.
  Mr. HARKIN. I accept the Senator's judgment on that.
  Obviously, I do not know him personally. I am just looking at the 
record of what has happened since February. I do not believe that what 
is happening in our economy warrants five increases in the interest 
rates from, I think, if I am not mistaken, 3 to 4.75 in the Federal 
funds rate since February. I think it bodes ill for our economy. I 
think that perhaps the Federal Reserve Chairman, perhaps others on the 
Federal Reserve Board, have too narrow of an approach in looking at our 
economy.
  I think we have to understand some other things going on in our 
economy other than just the possibility of future inflation. I do not 
believe the Senator from New York means to say that the present 
situation that we have encountered over the last 18 months at least, 
perhaps even 2 years, is in any way near what we were facing in the 
late 1970's.
  Mr. MOYNIHAN. No.
  Mr. HARKIN. Or eighties. We are not anywhere close so that. I said we 
do not have serious inflation out there, to speak of, right now. Yet, 
because there is a possibility that at some future time we might see 
inflation going up--Federal Reserve action is taken to raise interest 
rates. I am just making the point that this is not something that just 
takes place in the financial pages of the Wall Street Journal. It has 
real effects on working people throughout this country.
  So I apologize, and I do so if my words cast any aspersion at all 
upon the character of or the integrity of the Chairman of the Federal 
Reserve Board. It is not my intention to do that. I do not mean to do 
that. I just meant to say that I think his focus has been somewhat too 
narrowly focused just on the bond market, and it ought to have a 
broader focus than that. But, no, I did not in any way mean to impugn 
his integrity or loyalty to his country or anything else. But I think 
the Fed needs to take a broader view of the economy.
  Mr. MOYNIHAN. I thank the Senator.
  Mr. D'AMATO addressed the Chair.
  The PRESIDING OFFICER. The Senator from New York.
  Mr. D'AMATO. Thank you, Mr. President.

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