WASHINGTON, D.C.

NOBODY is happy with the Fed's interest-rate hikes--not Republicans, not Democrats, not the general public. Certainly not Wall Street, which decided to pull the plug on a $20-billion loan to Orange County, California, after the usually prosperous county announced a $1.5-billion loss on highly leveraged mortgage-related investments called derivatives. A day later the county filed for bankruptcy. For consumers, about $900 billion of adjustable-rate homemortgage payments will be reset in January to reflect a whopping 2.5-point interest-rate rise. The interest rates on roughly $200 billion of creditcard debt will also be reset. In other words, rising interest rates hurt.

Meanwhile, in Congress the new Republican majority is increasingly restless about the threat of interest-rate overkill on the part of the Fed, which could lead to a pause in growth or even recession by late 1995 or early 1996. This would add at least $100 billion to the budget deficit, and it could doom GOP hopes for a zero-deficit budget package of large-scale government downsizing and growth-oriented tax cuts. Against the backdrop of recession, the public will be in no mood to accept big cuts in welfare, farm subsidies, or health-care entitlements. While tax cuts would offset the slump, deficit hysteria prompted a tax increase during the 1990 recession and would be likely to again.

So Fed Chairman Alan Greenspan sat in the hot seat when he testified on December 7 before the Joint Economic Committee (JEC), his first congressional appearance since the November 8 election. Greenspan stubbornly insists that in the short run too much economic growth fuels inflation, and so the Fed must take action to raise rates and cool off the economy. Though he has never put a number on the "right" rate of economic growth, highly placed Fed insiders have said the target is 2.5 per cent.

So far this year the economy has grown by better than 4 per cent, and the unemployment rate has dropped to 5.6 per cent. The consumer price index has risen at a 2.8 per cent annual rate. This is the best economic performance since the mid Eighties, and in a subpar recovery cycle it reflects considerable catching up. But the Fed does not like it; the central bank has raised short-term rates six times this year, most recently by three-quarters of a percentage point.

It came as no surprise when easymoney Democrats like Senator Paul Sarbanes (D., Md.) and Black Caucus Chairman Kweisi Mfume (D., Md.) attacked Greenspan during the hearing. But Greenspan realized he really had a fight on his hands when hard-money Senator Connie Mack (R., Fla.) asked, "What's wrong with growth?" Mack added, "Most Americans believe that growth and prosperity are good, not bad, and that people working productively can never cause inflation."

Mack wasn't finished. He told the Fed chairman there was little reason for the latest interest-rate hike, since gold and commodity indexes have been weakening since last June, and the growth of key money-supply measures have slowed markedly. Some industrial prices have increased, but not energy and farm prices. "So it would appear to me," the senator said, "that inflation worries are easing, not worsening, and the necessary monetary restraint was applied in the first half of this year ... we may now be moving into an overkill situation."

MACK is a rising star in the Republican Party. A former bank president from St. Petersburg, Florida, and the great-grandson of the winningest manager in baseball history (Hall of Famer Connie Mack of the Philadelphia Athletics), he served three terms in the House as a Conservative Opportunity Society colleague of Jack Kemp, Newt Gingrich, Vin Weber, and Trent Lott. First elected to the Senate in 1988 by a hair's-breadth margin of 31,000 votes (absentee ballots put him over the top), Mack won a 70 per cent landslide in 1994 over Hillary Clinton's brother. A confirmed freemarket supply-sider with a strong record favoring limited government and tax cuts, Mack is also determinedly pro-life and pro-free-speech (he once defended a Florida rap band).

The day his friend Trent Lott was elected majority whip, Mack was elected unopposed as secretary of the Republican Conference, thus putting him in a leadership position for the first time. He now hopes to use his upcoming JEC chairmanship as a platform for monetary reform as well as a beachhead for supply-side economics. After firing his initial shots across Greenspan's bow during the December hearing, he informed the Fed chairman that hearings will be convened in January to change the Humphrey-hawkins Act, removing the Fed's mandate to control the economy and fine-tune jobs. He intends to substitute a strict cost-of-living inflation target that will not exceed 2 per cent a year.

"The public has a right to know what exactly the Fed is targeting and why you continue to raise interest rates," Mack told Greenspan. And he reminded the Fed chairman that inflation targets mandated by law have succeeded in countries such as the United Kingdom, Germany, France, Australia, New Zealand, and Mexico. Indeed, Mack believes strongly that a codified target will enhance the Fed's independence, not reduce it. What's more, he wants the Fed to meet this new inflation target by abandoning the federal-funds-rate target and instead keeping a sharp eye on international gold, commodity, and financial markets, which will tell the Fed whether policy is too loose or too tight. This approach is based on the understanding that global markets are smarter than central bankers.

Greenspan seemed willing to accept an inflation target, though he is not yet ready for a specific numerical goal. But Mack's decisive statements at the hearing put the Fed on notice that Republicans will not provide support for unlimited interest-rate hikes by a government agency that has no clear game plan and virtually no public aecountability. Mack sees the Fed more as the Department of Money than the Temple of Money, and he believes it must be held to the same performance standards that the public wants applied to every other department.

Along with a complete redirection of fiscal policy, monetary policy will be part of the sea-change on Capitol Hill. This could be the first significant shift for the Fed since the early Seventies, when Arthur Burns started reporting money-supply targets. Those targets have long since been abandoned, and new Fed reform is long overdue. Meanwhile, Connie Mack has shown that at least some Republican senators expect to take part in the revolution.

COPYRIGHT 1994 National Review, Inc.
COPYRIGHT 2004 Gale Group

Save

Print

Send

Link

Subscribe