[Congressional Record Volume 141, Number 20 (Wednesday, February 1, 1995)]
[Senate]
[Pages S1863-S1865]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




            FEDERAL RESERVE WILL RAISE INTEREST RATES AGAIN

  Mr. HARKIN. Mr. President, it is widely rumored that the Federal 
Reserve will raise interest rates today for the seventh time in the 
past year. Hard-working Americans all across this country can only hope 
that the Fed will give a second thought to an unnecessary and 
destructive action. The Federal Reserve is an independent and powerful 
fourth branch of Government--a branch of Government, I might add, that 
is unelected and essentially unchecked by reasonable examination.
  While I disagree with Alan Greenspan's policies, I must give him 
credit for a superb ability to manipulate the press and many others, 
including many Members of Congress. Somehow, Mr. Greenspan has created 
an aura of naturalism, a feeling that his actions are somehow preset by 
immutable economic realities, some form of the invisible hand operating 
there that causes 
[[Page S1864]]  us to do things that we cannot change. In fact, his 
position is based on a conservative ideology that favors the long-term 
interest of bondholders and bankers but shows little sympathy for 
hardworking, middle-income families.
  In fact, his policies are specifically intended to force a 
significant number of breadwinners out of work and into the 
unemployment lines. In fact, I read in the paper the other day that Mr. 
Greenspan, in testimony, was saying that unemployment rates were coming 
down and they were approaching a 5.4- percent rate of unemployment, and 
he thought that was getting too low, that unemployment ought to be 
higher than that. That is his feeling. That is where he is coming from.
  Thus, the Federal Reserve's policies are designed to keep millions of 
Americans out of work, in spite of the fact that the law which governs 
them specifically provides that the Federal Reserve is to balance the 
goal of maximizing production and employment with the goal of keeping 
prices stable and moderating long-term interest rates.
  Mr. President, as I said earlier, the Federal Reserve has already 
raised interest rates six times over the past year. As a result, the 
prime rate increased from 6 to 8.5 percent, a 41-percent jump in 
interest rates in just 1 year. These actions by the Fed amount to a 
bill to the American taxpayers for $107 billion over 5 years--$713 per 
taxpayer.
 Why this bill? It is a bill to pay the resulting higher interest costs 
to service the Federal debt.

  The Federal Reserve's repeated interest rate hikes have also had an 
important negative effect on Americans. They have cost nearly every 
business in the country large sums in higher interest rates.
  In addition, the average buyer of a new house will pay an extra $158 
per month on a fixed rate mortgage--that is nearly $1,900 a year, more 
than enough to prevent many Americans from attaining a key component of 
the American dream, owning your own home. Millions of other American 
families are being forced to pay more on their adjustable rate home 
mortgages, more on their bank loans, and more for interest rates on 
their cars and on their credit card balances.
  Even more significantly, the six, and now probably seven, increases 
in interest rates will and are, in fact, designed to, eliminate jobs. 
Federal Reserve officials do not use those terms, although Mr. 
Greenspan came close to it in testimony the other day. But that is 
clearly their intent. Their intent is to keep unemployment high. They 
want to artificially slow the economy down and reduce the number of 
available jobs. In many cases, that will mean that people will be 
fired.
  In other cases, that will mean that a job will not be there for 
someone looking for work. It will mean that families with breadwinners 
actively looking for work will not have their basic needs met. The 
financial strain on those families will cost both economic and 
psychological damage.
  It also means an increase in the welfare roles. Some of us have been 
working hard to fix our broken welfare system. It is failing both the 
taxpayers and those who rely on it. But a key to welfare reform that 
works is the availability of good jobs. I think all of us agree that we 
want to move people from welfare to work and to self-sufficiency; that 
is, all but perhaps those on the Federal Reserve Board. Their recent 
penchant for raising interest rates in order to keep the unemployment 
rate up will make ending welfare as we know it impossible.
  Why would the Federal Reserve want to do that? Well, there is an 
economic concept called nonaccelerating inflation rate of unemployment. 
This concept says that when unemployment falls below a certain level, 
it becomes harder to find employees, then it is easier to demand higher 
wages and wages will rise. Some economists think that the natural rate 
of unemployment in the United States--the point where lower 
unemployment will cause inflation--is about 6 percent. This, obviously, 
is what Mr. Greenspan believes.
  The Fed's principal justification for its six increases in interest 
rates has been their fear of rising inflation. Well, let us take a look 
at that.
  Last year, the Consumer Price Index, the CPI, went up a meager 2.7 
percent, exactly the same rate of inflation as in 1993. If you take out 
the more volatile food and fuel costs, the rate increased by just 2.6 
percent, the lowest rate of inflation since 1965. And, on top of that, 
Mr. Greenspan believes that the CPI was actually overstating inflation, 
as he says, by anywhere from 0.5 to 1.5 percent.
  Mr. Greenspan has been talking a lot about this lately. He said it in 
testimony before a congressional committee.
  Well, if he were right about the CPI being overstated by that much--
and I have my doubts about that--then Mr. Greenspan has pushed a huge 
burden on our economy when even he believes that inflation has been 
under 2 percent a year over the last 3 years.
  So Mr. Greenspan cannot have it both ways. He cannot say, on the one 
hand, we have to raise interest rates because inflation is threatening 
and, on the other hand, come before a committee of Congress and say 
that inflation has been overstated and it is really not as high as it 
has been; it really has been lower than that. He cannot have it both 
ways.
  And yet, we now have interest rates going up for the seventh time in 
1 year. Again, an ideology that says we have to reward the long-term 
bondholders but forget about our Main Street businesses; forget about 
our farmers; forget about our homeowners and young people wanting to 
buy a house; forget about people buying a car on time; people paying 
off college students loans. All of this goes up, not to mention, again, 
the fact that these rate increases have stuck the American taxpayer 
with an additional $107 billion tab to pay increased interest costs on 
the national debt.
  For Alan Greenspan to push these further destructive increases in 
interest rates on the American people, while saying that inflation has 
been running at less than 2 percent, to me is the height of hypocrisy. 
Mr. Greenspan, as I said, cannot have it both ways.
  I also note that the Fed Chairman recently indicated in testimony 
before the Finance Committee last week that he thinks there is likely 
to be a slowdown in the economy in the coming months. But he said that, 
``I see it as crucial that we extend the recent trend of low and 
hopefully declining inflation in the years ahead.''
  Well, Mr. President, we need balance between the need to fight 
inflation and the need to keep our economy moving. The law, as I read 
it, requires a balance. But, right now, there is no balance. There is 
an imbalance.
  All of the Fed's weight is now toward the single goal of cutting any 
possibility of rising inflation in the future. That is wrong, and I 
believe it is very likely going to send our economy into a recession.
  Robert Eisner, a respected professor at Northwestern University, made 
an excellent analogy, comparing the economy with a patient with clogged 
arteries. ``The patient would have a longer and better life by 
exercising and expanding the capacity of his heart and circulation 
system,'' Eisner said. ``But what Dr. Greenspan has done, I think 
unwisely, is simply to put the patient to bed.''
  Well, Mr. Greenspan talks about the dangers of large deficits on the 
economy. And I agree with him on that point. We do need to keep our 
deficits coming down. But his push to higher interest rates is adding 
to the deficit--hugely. Higher Federal interest payments will add $107 
billion to the Federal deficit over the next 5 years. This totally 
wipes out more than 20 percent of the deficit reduction achieved by our 
economic recovery package of 1993.
  It is almost as if Mr. Greenspan does not want to see the efforts 
that we took here to reduce the deficit succeed. He is wiping out all 
of those gains that we have made to reduce the deficit.
  There is considerable reason to believe the idea that inflation will 
automatically rise because the unemployment rate has fallen below 6 
percent is wrong. Things have changed. Wages are more closely tied to 
productivity increases. And, there is a greater ability to move 
manufacturing overseas if the price of producing many items in the 
United States rises.
  There have also been large changes in the retail sector. The large 
increase in discount stores is putting greater downward price pressures 
on the entire system. There is a growing willingness of consumers to 
use non-brand-name 
[[Page S1865]]  products, also creating a real difficulty of 
manufacturers and retailers to raise prices.
  Some people also see a new culture developing in many manufacturing 
areas which places considerable pressure on suppliers to avoid cost 
increases and to develop new, lower cost methods of producing goods. To 
some extent, gains in computer designs are providing methods to 
accomplish that goal. Productivity seems to be covering a significant 
share of the wage increases that are occurring.
  I would also note, Mr. President, that wage and salary costs have 
only increased by about 3 percent in 1994. A significant part of that 
is covered, as I said, by increases in productivity.
 So, wage costs were--considering productivity--less than the inflation 
rate in 1994. I want to repeat that because it is very important to 
note this. Wage costs were, when we consider the increase in 
productivity, less than the inflation rate in 1994.

  So, Mr. President, economic theories that may have proven true in the 
1950's or 1960's or 1970's may not be useful today. I believe that Mr. 
Greenspan is living in the past. Companies that have recently hired 
large numbers of employees do not seem to need to pay higher wages. 
Lands' End hired 2,200 people for the Christmas season, Sears hired 
40,000 Christmas workers, but they saw no increase in wage levels. MCI, 
which hires 10,000 to 15,000 people a year, also has not been pushed to 
raise wages.
  So where, I ask, is this inflation that the Fed has been expecting 
and warning about? Mr. Greenspan says if we do not act now, it will 
come. The Fed says it takes a long time for the pain of their interest 
rate increases to work their way through the economy to cause the 
economy to slow down; that is, to interpret that, to cause enough 
people to be laid off and fired for enough unemployed people to stay 
that way. I may agree with that. It may take from 6 to 18 months for 
that to happen.
  Is it logical, I ask, to rush forward with a seventh increase in 
interest rates when we have not even seen the impact of the earlier 
increases? Since the Fed Chairman believes inflation has been running 
at less than 2 percent, I believe we could take a very small risk of a 
slight increase in inflation in order to limit the likelihood that the 
economy will take a serious plunge into recession and far higher 
unemployment. I would think it would be far more prudent to wait to 
increase interest rates any more.
  In fact, Mr. President, I believe that from the actions taken by the 
Fed with this recent increase in interest rates, we may be seeing in 
the next year a severe downturn in the economy in 1996. We might think 
of the height of interest rates as a mountain, and as the speed of the 
rate increases, remains high, and the height grows, the cliff on the 
other side, the deep valley into which the economy may fall, will 
become more painful.
  I think it is past time for the Federal Reserve to pull back its 
bulldozer. Let the economy work through the interest rates already put 
in place. Then, after that has happened, we can consider further 
action. That is the way to get a soft landing for the economy that we 
all want, rather than having it tossed off a cliff. I believe that is 
exactly what may happen next year.
  There have already been a few signs of a slowdown in the economy. 
Total construction fell by 7.7 percent in December, the largest decline 
of the year. Construction is very sensitive to interest rates. Housing 
fell by 8 percent; again, very sensitive to interest rates. Personnel 
income rose nicely in December, by 0.7 percent, but consumer spending 
went up by only 0.2 percent.
  This morning, the leading economic indicators showed a slim 0.1 
percent gain. These are signs that economic growth is near its peak. 
This is not the time to further burden the economy with higher interest 
rates. The Federal Reserve and the Open Market Committee should be 
balanced in its views and actions. It should not be led by ideological 
zeal on one single factor, inflation, and, I might say, the veiled 
threat of inflation. There should also be a concern for the well-being 
of manufacturers and farmers and main street businesses and American 
families and homeowners and car buyers.
  So, Mr. President, I strongly urge the Federal Reserve to hold the 
line on interest rates, limit the damage they have already done to our 
economy, and give us some good news today and say they are not raising 
interest rates a seventh time.
  Mr. President, I yield the floor. I suggest the absence of a quorum.
  The PRESIDING OFFICER. The clerk will call the roll.
  The legislative clerk proceeded to call the roll.
  Mr. THOMAS. Mr. President, I ask unanimous consent that the order for 
the quorum call be rescinded.
  The PRESIDING OFFICER. Without objection, it is so ordered. The 
Senator from Wyoming is recognized for 5 minutes.

                          ____________________