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Senate Floor: THE FEDERAL RESERVE BOARD

  • Pete Domenici
    Person
  • Not Labeled
    Person
  • Joe Biden
    Person
Unknown

Pete Domenici

Unknown
Mr. President, during the past few days, there has been an ongoing debate and actually a national concern about the Federal Reserve Board and its adjustment of the discount and Federal fund rates. 5

Pete Domenici

Very Positive
During that time, I have had an opportunity to meet with some rather renowned economists, and today I would like to share with the Senate four or five lessons that I think I have learned in an effort to get the best possible idea as to what is going on, whether it is positive or negative, and a little bit of the history. 6

Pete Domenici

Positive
The first lesson that I have learned is that Federal Reserve policy acts with a lag, and it has worked to take us to the expansion side of the business cycle. Responding to weakening demand in the economy, beginning in mid-1990, long before the last election, the Federal Reserve shifted to a policy of increasing accommodation to growth. More credit was made available to support economic growth. The Federal fund rate -- the overnight rate commercial banks charge each other for loans -- was pushed down by the Federal Reserve from 8.3 percent in 1990 to 3 percent by the end of 1992 -- the lowest level since the 1960's. 7

Pete Domenici

Very Positive
So, obviously, during that period of very slow growth, the Federal Reserve Board set about to stimulate growth by lowering the discount rate from 8.3 to 3 percent by the end of 1992. 8

Pete Domenici

Leans Negative
The lower interest rates have had a very salutary effect. They helped by reducing the excessive debt burdens of households, businesses, and financial institutions that had accumulated, as asset values weakened leading up to the 1990 recession. This process took time, however, and in the face of these "headwinds" to economic growth -- to borrow a word from Chairman Greenspan -- the Federal Reserve maintained an accommodating policy of historically low-interest rates through all of 1993. 9

Pete Domenici

Very Positive
The interest rate reductions were eminently successful. Household debt service as a percent of disposable income -- the interest cost of maintaining debt, and for most Americans it would be interest on their house, perhaps interest on some fixed appliances, perhaps the interest on an automobile -- declined from a high of 19 percent in 1989 to nearly 16 percent by 1993. That is what we mean when we say refinancing your house lowers your payment from $982 to $726, for example. Obviously, that household has reduced the monthly cost of accommodating and accumulating those assets. 10

Pete Domenici

Very Positive
Payment delinquencies on consumer loans fell sharply in 1992 and 1993, the lowest levels in 6 years. Lower interest rates helped to strengthen ailing financial institutions and stabilized the values of excess real estate. Most noticeably, beginning in the second half of 1992, the interest rate-sensitive sectors of this economy were responding rather well: Business equipment, home sales, autos, and the like. 11

Pete Domenici

Very Positive
The Federal Reserve's policies helped but with a lag. I repeat, the Fed went from 8.3 to 3 percent between mid-1990 and 1993, and the accommodating interest rates stimulated the American economy in a very dramatic way. But it took a while. 12

Pete Domenici

Very Positive
For those who are wondering why we have current growth in the American economy, I believe it is fair to say the answer is that the Federal Reserve Board decided in mid-1990 to accommodate by dramatically lowering interest rates. For some, this new growth in the American economy has come because of other reasons. I will today and in a later series of comments show factually that the growth in the American economy is attributable primarily to Federal Reserve policy, plus a dramatic increase in the productivity of American business, including manufacturing, both industrial and service oriented. 13

Pete Domenici

Very Positive
Lesson No. 2: The low inflation competitive environment of the 1980's is paying dividends. For a period of time now, some have been wondering whether the 1980's did anything for the American economy. Some speak of it as a period we would like to not think about. The truth of the matter is that a unique productivity recovery has been adding growth and competitiveness by holding down the cost of production. And it is paying off now. During 1992, nonfarm business productivity -- the best measure of economywide worker productivity -- rose 3.6 percent, the biggest 1-year increase since the early 1960's. 14

Pete Domenici

Very Positive
Productivity gains have accounted for 90 percent of gross domestic product growth in this recovery, now 12 quarters old. This far outstrips previous contributions by productivity gains, which on average were 50 percent during previous recoveries. So if the economy grew 4 percent -- GDP grew 4 percent -- 2 percent, in the past, was from productivity gains. In this recovery, starting over 3 years ago, 90 percent of that growth is because of productivity increases. That means a working hour is producing more goods and/or services than ever before and thus contributing to the gross domestic product increase. 15

Pete Domenici

Somewhat Positive
Competitiveness through productivity gains has been what has driven this recovery along with low interest rates that the Federal Reserve initiated way back in mid-1990. And competitiveness has been helped particularly by the low inflation fostered over the last 10 years by the Federal Reserve and Republican administrations. It has allowed businesses to focus on cost cutting instead of having to constantly negotiate favorable price increases which is the primary focus in a high-inflation environment. America's response to stiff international competition during the 1980's has been to cut costs through increased productivity and raise the quality of products and our low inflation has allowed businesses to do that, making us once again the world's largest exporter. 16

Pete Domenici

Very Negative
Lesson No. 3: The goals of the Federal Reserve are compatible with extending economic growth. Some have criticized the Federal Reserve in the past for accommodating growth too long before attacking rising inflation. As a result, interest rates rise too high and hurt economic growth. This time the Federal Reserve Board is attempting to head that off in advance of a substantial acceleration in inflation, earlier than usual. This is something that has not been part of the history of our money supply and Federal Reserve Board. But, by acting in an early manner it is taking preventive steps now that will forestall the need for harsher, more disruptive action later. 17

Pete Domenici

Very Positive
The Federal Reserve Board indicates that they believe Tuesday's large half-percentage-point increase moves monetary policy from accommodative back to a neutral position. This position returns interest rates back to a more historically typical inflation-adjusted level of interest rates from the roughly zero inflation-adjusted interest rates that existed as recently as last winter. 18

Pete Domenici

Somewhat Negative
The risks are that the economy has more momentum than perceived and will require a further move from neutral to monetary restraint, forcing more dampening. I am optimistic that this will not be necessary, but there are risks. 19

Pete Domenici

Positive
Lesson No. 4: The Federal Reserve action should lead to lower, not higher long-term interest rates. For those who complained immediately after the Federal Reserve acted, long-term interest rates have come down in the United States. They did not go up. I am hopeful they will continue down. They have been inordinately high as compared to the short-term interest rates, but that was attributable, in my opinion, to what I have described here: a more than accommodating interest-rate policy by the Federal Reserve Board which was extremely stimulative and brought on concerns from those who analyze these matters that the economy might overheat. 20

Pete Domenici

Very Positive
The Federal Reserve wanting to move toward neutrality -- that is where their interest rate policies are neutral, not overly stimulative or restrictive -- is an excellent policy. Whether they get it right or not, it is hard to say. More to the point, whether the world responds to it or not is hard to say. 21

Pete Domenici

Positive
It would seem that the first results in America of this change, which they say will be their last for the time being, is for long-term interest rates to come down. But it would also seem that foreign investors around the world are responding not less well because the American dollar has gone down a little bit more vis-a-vis the yen and other major currencies, which perhaps means that their analysis is that we still do not have a neutral monetary policy. Rather we still have one that is too stimulative and it will shorten this business cycle and return us to no growth. 22

Pete Domenici

Very Positive
There are other things that we can learn from what has occurred. I believe we shouldn't be indicating to the Federal Reserve that we politicians know more than they and that they are trying to do something to hurt the economy when they are, in fact, trying to do the opposite. Rather, I believe we would be much better off if we would help foster the kind of business climate that coupled with low inflation can keep the American economy growing over the long term. I will speak to that in more detail in later days. I thank the chairman for permitting me by consent to speak, and I yield the floor. 23

Joe Biden

Unknown
Mr. President, I suggest the absence of a quorum. 25

Unknown
The PRESIDING OFFICER. The Senator from Delaware suggests the absence of a quorum. 27

Unknown
The clerk will call the roll. 28

Joe Biden

Slightly Positive
Mr. President, I ask unanimous consent that the order for the quorum call be rescinded. 32

Unknown
The PRESIDING OFFICER. Without objection, it is so ordered. 34