I join in welcoming Alan Greenspan back before the Senate Banking Committee, and we look forward to receiving the Federal Reserve's Semi-Annual Monetary Policy Report to Congress under the legislation that we were able to pass at the end of the last Congress, legislation which gave a permanent reauthorization to this semiannual monetary report, something which I understand the Fed was supportive of, and also reauthorized a number of other reports under the jurisdiction of this Committee. I want to express my appreciation to Senator Gramm for his cooperation in that effort that enabled us to resolve that issue.
These monetary policy reports, and the public testimony before Congress by the Federal Reserve Board Chairman serve a critical oversight function. I am glad that we are able to continue them without interruption. I understand that Chairman Greenspan will testify on the report before the House Banking Committee on February 28.
Much has changed since Chairman Greenspan appeared before the Banking Committee last July 20 to testify on the Fed's previous monetary policy report.
Two months prior to that appearance, on May 16, the Fed completed the last and longest (half point) of a series of six interest rate increases that had been initiated on June 30, 1999. While many of us were searching for some visible evidence of inflation in the economy, the Fed said they were concerned about inflationary pressures developing as a result of strong consumer demand and tight labor markets.
While the Federal Reserve's Open Market Committee (FOMC) did not raise rates again after May 16, it maintained a position through November 15 of last year -- in other words, just three months ago -- that the economic risks continued to be weighted "mainly toward conditions that may generate heightened inflation pressures in the foreseeable future." It was not until the FOMC meeting on December 19, less than two months ago, that the FOMC shifted its position to the view that the economic risks were weighted "mainly toward conditions that may generate economic weakness in the foreseeable future." Thereafter, of course, the Fed lowered interest rates half a point on January 3, and lowered interest rates half a point again on January 31.
In his testimony last July 20, Chairman Greenspan also emphasized the importance
of not dissipating the budget surpluses of the federal government. He stated -- this is less than seven months ago -- : "By substantially augmenting national saving, these budget surpluses have kept real interest rates at levels lower than would have been the case otherwise. This development has helped foster the investment boom that in recent years has contributed greatly to the strengthening of U.S. productivity and economic growth. The Congress and the Administration have wisely avoided steps that would materially reduce these budget surpluses. Continued fiscal discipline will contribute to maintaining robust expansion of the American economy in the future."
Chairman Greenspan also stated: "I would say that anything, whether it's tax cuts or expenditure increases, which significantly slows the rise in surpluses or eventually eliminates them, would put the economy at greater risk than I would like to see it exposed to."
Now, as we all know, in his testimony before the Senate Budget Committee on January 25, just a few weeks ago, the Chairman changed all of this. Business Week said in their editorial in their February 19 issue, "In his Senate testimony on January 25, Federal Reserve Chairman Alan Greenspan appears to give his blessing to massive tax cuts that extend well into the decade. Despite his caution, the predictions of budget surpluses are subject to a relatively wide range of error. His benediction changed the political climate in Washington, and set off a tax cut frenzy this is now veering out of control."
And earlier, with reference to that very point in that editorial, Business Week had said "The great tax cut stampede is on, and two things will get trampled underfoot: restraint and common sense. Conservatives, liberals, the Business Roundtable, and lobbyists of all kinds are demanding their fair share. A mindless, bloated, something-for-everyone tax cut may result. Before Washington gets swept away and does something that the country regrets for years to come, it might be wise to step back and consider a few simple truths."
And some of those truths, I think, were outlined in a very pointed and succinct way by Alice Rivlin, the former Vice Chair of the Federal Reserve Board, as well as the former director of both CBO and OMB, who testified before the Senate Budget Committee, and stated, and I quote:
"I believe that the currently projected ten-year surpluses are good guesses - the best available guesses - but they are by no means guaranteed. Moreover, the ten-year horizon is too short. We need to respond now to the looming demographic pressures of the years beyond 2011. I believe committing to a massive tax cut now, especially one undertaken to counter a temporary downturn in the economy, would be shortsighted. We have time to see whether the surpluses turn out to be as large as currently projected and to debate whether public needs have priority over private spending."
Ms. Rivlin also pointed out that "Since a tax reduction that over-stimulates the economy
is almost impossible to reverse, the likely result will be that the Federal Reserve will have to raise interest rates. If we want to promote economic growth, we would be better off with lower interest rates and tighter fiscal policy than with the opposite combination."
In my view we are at a crossroads in the conduct of fiscal policy. Over the past eight years
the U.S. has maintained a remarkably disciplined fiscal policy. That fiscal policy, in turn, has given the Federal Reserve the room to run an accommodating monetary policy that allowed the economy to sustain the longest expansion in U.S. history. The economic expansion brought unemployment down to 4 percent, helped turn U.S. budget deficits into surpluses, produced an expansion in investment that has led to rising levels of productivity, which in turn has kept inflation at very low levels. It is the reason the Fed had the flexibility to move quickly and aggressively last month to lower interest rates to respond to the economic slowdown.
All of that is now being placed at risk. I hope we find it within ourselves to consider carefully the judgments we make in the coming months and act prudently to preserve the hard won economic gains we have made over the past eight years.
I look forward to hearing Chairman Greenspan's testimony this morning.