[Congressional Record Volume 142, Number 108 (Monday, July 22, 1996)]
[Extensions of Remarks]
[Page E1338]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                   IT'S THE REAL ECONOMY THAT COUNTS

                                 ______
                                 

                           HON. BARNEY FRANK

                            of massachusetts

                    in the house of representatives

                         Monday, July 22, 1996

  Mr. FRANK of Massachusetts. Mr. Speaker, one of the most infuriating 
aspects of our economic affairs to many people is the extent to which 
the bond market treats good news as bad news. This was of course most 
recently displayed when the best employment news we have had in years 
triggered serious financial downtrends. People who trade bonds have of 
course a right to do whatever they wish. But we as policymakers must 
make it very clear that we will not be driven by their short term 
gyrations and in particular that we will continue to pursue policies 
that expand employment opportunities and real incomes for working 
people without being deterred by the negative short term impact this 
may have on the bond business. James K. Galbraith, formerly of the 
staff of the Joint Economic Committee in better days, and now a teacher 
of economics at the Johnson School of Public Affairs at the University 
of Texas, recently wrote on this subject in a very instructive fashion. 
It is essential that we listen to Mr. Galbraith and not allow financial 
speculation to perform the reverse alchemy which has from time to time 
characterized their efforts.

                            What Inflation?

                        (By James K. Galbraith)

       Austin, TX.--The economic news on Friday was so good it was 
     a disaster. Unemployment has fallen to 5.3 percent, the 
     lowest it has been in six years. June payrolls increased by 
     239,000 jobs. And the average hourly wage rose by nine cents, 
     the biggest one-month jump ever recorded, a level 
     ``noticeably above the inflation rate,'' as The New York 
     Times reported.
       Pandemonium on Wall Street! The yield on the 30-year 
     Treasury bond leaped a quarter of a point, finishing at 7.18 
     percent. And stocks plummeted: the Dow Jones industrial 
     average dived 114 points.
       Amid the commotion, one could hear the bond bears roaring 
     their message that, with inflation sure to surge, the Federal 
     Reserve must raise short-term interest rates. Many of the 
     bears said that had the Fed's Open Market Committee known at 
     its meeting last Wednesday what the secretive Bureau of Labor 
     Statistics would announce two days later, it would surely 
     have raised them. Some urged the Fed to correct this 
     ``error'' immediately without waiting until the next regular 
     meeting in August.
       Nonsense. There is no cause for alarm. The evidence does 
     not portend surging inflation. To begin with, the annual rate 
     remains low: 2.9 percent in the year that ended in May. 
     Inflation is not accelerating. Instead, productivity growth 
     appears to be picking up. If this pattern continues, it will 
     permit wages to grow for some time, with little effect on 
     price inflation.
       The decline in unemployment also means little. Some 
     economists still hold to the notion of a ``natural rate of 
     unemployment'' at 6 percent or a slightly lower figure, below 
     which they believe inflation spirals out of control. But 
     joblessness has been less than 6 percent without raising 
     inflation since September 1994.
       Recent economic studies confirm their is little reason to 
     fear that prices will rise simply because of low 
     unemployment--or for that matter, rapid growth. Most 
     inflation of past decades had different causes, like oil 
     shocks and war.
       Some say to forget the facts. An official of a regional 
     Federal Reserve bank recently told Business Week 
     (anonymously, of course) that ``you have to move on anecdotal 
     data'' In other words, monetary policy should be based on 
     gossip. Mercifully, it is likely that the Federal Reserve 
     Board's governors do not share this view.
       The bears in the bond market must also know that their 
     inflation warnings are unfounded. So what are they up to? The 
     answer seems clear. We have a speculation problem, not an 
     inflation problem.
       The bears make their living by betting on the Fed's next 
     decision, not by calling the economy. The bears predict when 
     short-term rates will be raised and when they will decline. 
     By selling and buying long-term bonds in advance, they can 
     make a lot of money--if their predictions are right. So it is 
     natural that they try to affect the Fed's decisions.
       This game has been in full cry since at least October 1993, 
     when bond-market insiders correctly anticipated (and may have 
     provoked) the Fed's rate increase of February 1994. All 
     through that year, each time the Fed raised interest rates, 
     the stock and bond markets churned.
       If short-term rates are pushed up tomorrow, many ordinary 
     investors will panic and dump their bonds and stocks. Then 
     the speculators can buy cheap and ``shear the sheep''--the 
     small investors, in the speculators' lingo.
       Sell bonds, create gossip, influence policy--what a game! 
     But maybe the game has changed. News reports preceding the 
     Fed's inactivity last week suggested that the chairman, Alan 
     Greenspan, may have given up the ``pre-emptive strike'' anti-
     inflation strategy of 1994. Good. The idea that the economic 
     evidence counts for something is central to proper monetary 
     policy.
       But Mr. Greenspan's possible credibility as a pragmatist, 
     only a week old and none too sturdy, will depend on facing 
     down the bears.
       It would be an extremely good thing if the Federal Reserve 
     held the line through the summer and fall--at least as long 
     as core inflation (calculated without volatile food and 
     energy prices), measured over six months or so, remains 
     reasonable.
       In that event, the interest rates on long-term bonds will 
     finally begin to decline, and maybe short-term rates will 
     follow. Traders committed to a strategy of creating panic 
     will lose money. So what?
       The Fed did the right thing. Now it should stand firm and 
     show the speculators who is in charge.

                          ____________________