[Congressional Record Volume 143, Number 53 (Tuesday, April 29, 1997)]
[House]
[Pages H1911-H1912]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




       FEDERAL RESERVE RAISING OF INTEREST RATES HAS MAJOR IMPACT

  The SPEAKER pro tempore. Under the Speaker's announced policy of 
January 21, 1997 the gentleman from Massachusetts [Mr. Frank] is 
recognized during morning hour debates for 5 minutes.
  Mr. FRANK of Massachusetts. Mr. Speaker, I am about to engage in an 
exercise which is clearly second best. The Federal Reserve Open Market 
Committee a couple of weeks ago decided that we were creating too many 
jobs too rapidly in America and, fearing that this would be 
destabilizing, they raised interest rates. The Federal Reserve Open 
Market Committee will meet again in May and July, and there is a very 
real prospect that they may do this again.
  No single set of specific decisions taken, I believe, by anybody in 
the government so far this year or for the next few months, will have 
the impact on our economy that these decisions have had. Yet, they will 
be going largely undebated in this Congress because the Committee on 
Banking and Financial Services, which has under our rules jurisdiction 
over this matter, has refused to have a hearing.
  Specifically, the gentleman from Iowa [Mr. Leach], the chairman of 
the committee, has refused a request from all but one of the non-
Republican members. Twenty-four of the Democrats and the one 
Independent have written to him and said, please, this is an essential 
issue, let us have a hearing. The chairman says to have a hearing, to 
have a hearing on whether or not they should continue to raise interest 
rates to choke off growth would be second-guessing the Fed and 
tampering with its independence.
  I wish we could have that hearing, and I hope that the chairman will 
reconsider, and maybe some of the majority Members will join us. But 
until that time, we have no other option but this. I say that because I 
am about to engage in a one-sided debate with Mr. Laurance Meyer, who 
is a member of the Board of Governors of the Federal Reserve. I would 
much prefer to have Mr. Meyer in before us in a hearing room so we can 
engage in a two-sided debate. The chairman of the Committee on Banking 
and Financial Services has denied us that opportunity.
  What I want to point out, however, is what now appears to me frankly 
the equivalent of a smoking gun in our understanding of why the Federal 
Reserve System decided consciously and deliberately to increase 
unemployment in America. Remember, that was their view. Unemployment, 
they said, at 5.2 percent was too low. They believed they needed to get 
it back up. I think 5.5 is their target.
  But here is what Mr. Meyer says; he acknowledges that there was no 
evidence yet of inflation. He acknowledges that there was no excess 
utilization, there was nothing that led him now to see inflation. He 
thinks that it may appear in 6 months to a year, and that is why he 
wanted to cut it off. But

[[Page H1912]]

acknowledging that he may have acted unnecessarily, he gives this 
justification; and this I think is central to this debate, and it is 
why so many of us want a hearing. He says: This involved comparing the 
relative costs of two potential policy mistakes, tightening when such a 
move turned out to be inappropriate or failing to tighten when a 
tightening would have been appropriate.
  In other words, he says the better mistake to make, if you had to 
make a mistake, obviously you do not want to, but we all recognize 
uncertainty, better we should tighten when it is inappropriate.
  Why? And here is what bothers so many of us about this decision. We 
are not talking hard economics here. We are talking values. We are 
talking social policy, and it is not a decision the Federal Reserve 
ought to be allowed to make without full debate. He says: If the Fed 
tightens and it turns out to have been unnecessary, the result would be 
utilization rates turn out lower than desired and inflation lower than 
what otherwise would have been the case.
  In the context of the prevailing 7-year low of the unemployment rate, 
that translates into a higher, but still modest, unemployment rate, and 
further progress toward price stability, a central legislative mandate. 
He then says: This may not be the best solution. I would prefer trend 
growth and full employment. But then he says: But the alternative 
outcome just described is not a bad result. Indeed, it would be a 
preferred result for those who favor a more rapid convergence of price 
stability.
  Think about what Mr. Meyer has said. An increase in the unemployment 
rate is not a bad result, he says. It is not his preferred result, but 
it is not a bad result. That is hundreds of thousands or more 
unemployed Americans. That is a step that makes it much harder to 
absorb welfare recipients. When a Federal agency says that an increase 
in unemployment is not the preferred, but it is not a bad result, that 
is a serious problem.
  He then goes on to acknowledge that this would be a preferred result 
for those who favor a more rapid convergence to price stability. In 
other words, he is acknowledging that some of his fellow members of the 
Open Market Committee, unlike him, not only do not think this is a bad 
result, they think this is a good result. We have here an 
acknowledgment from one of the Federal Reserve Board governors in a 
speech that really was meant, I think, as the official explanation that 
he does not think an increase in unemployment is a bad result, and that 
he acknowledges that many of his colleagues in fact think this is the 
preferred result. They have decided that a little bit of inflation is 
too much and, if we can get to zero inflation with higher unemployment, 
that is not a bad result. Congress must debate this policy.

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