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Committee on Financial Services

United States House of Representatives

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House Committee on Banking and Financial Services
Subcommittee on Domestic and International Monetary Policy
Humphrey-Hawkins Hearing with testimony from Alan Greenspan,
10:00 a.m., February 24, 1998
Room 2128 Rayburn House Office Building


Chairman Michael N. Castle's Opening Remarks:

The Subcommittee will come to order.

The Subcommittee meets today, to receive the semiannual report of the Board of Governors of the Federal Reserve System on the conduct of monetary policy and the state of the economy, as mandated in the Full Employment and Balanced Growth Act of 1978.

Chairman Greenspan, welcome back to the House Committee on Banking and Financial Services, Subcommittee on Domestic and International Monetary Policy. I understand that you are trying to shake a cold, so I hope that we do not over-strain your voice today.

Chairman Greenspan, it is clear that our nation is experiencing a remarkable, and perhaps historic, period of good economic times. This economic expansion is one of the longest since World War II. Yet, there are still important decisions facing us in the areas of monetary and fiscal policy and these decisions are tightly connected to all aspects of the foreign and domestic issues facing our nation.

Obviously, we are interested in your complete assessment of our economy and your assessment and plans for U.S. monetary policy. As part of this assessment, I have three specific questions that are very much on my mind, and I think, on the minds of many of the American people. I hope you will address these issues today.

First, our country is enjoying a low level of inflation. With the need to maintain the economic growth which is benefitting many Americans in all walks of life, will the Federal Reserve lower interest rates to help American families keep more of what they earn?

Two, regarding the federal budget, isn’t the most sensible policy for the President and Congress to make achieving and maintaining a balanced budget our top priority? Above cutting taxes or new spending programs? In addition, with the prospect of a balanced budget, can we expect to see lower interest rates accompany this success, if we adhere to sensible budget policies?

And three, what is your latest analysis of the Asian economic crisis and how it will affect our economy? How critical is it for Congress to act on additional U.S. contributions to the International Monetary Fund? I hope you will directly address these questions in the course of our discussions today.

Since we would surely be blaming the Federal Reserve if the economy was on the skids, we should accord you the credit you undoubtedly deserve for a well orchestrated monetary policy. The question is, what can the Fed do to sustain and build on this success?

In addition, the balanced budget agreement and the responsible fiscal policy agreed to by Congress and the Administration go hand in hand with successful monetary policy. Yet, some are getting giddy over the prospect of budget surpluses and are already making plans to spend this surplus. I know you do not share this view and want to discuss all the ramifications of changing our currently prudent fiscal policy.

The current Asian economic crises illustrate the dangers of superheated economies hitting the wall. Yet, the U.S. economy has, thus far, not suffered from the Asian flu. Under what circumstances could this change? I would be interested in how you view the prospects for economic growth this year, in comparison to the 4% rate of the last quarters of 1997. The contrasting impact of lower earnings for U.S. firms with heavy investment in the affected regions of Asia and the potential for even lower priced imports to keep downward pressure on inflation must make it difficult to call the economy from quarter to quarter. Other echoes of the problems in the Far East are our continuing inflows of foreign capital at a rate of 2% of gross domestic product. Is this a problem or something our economy can sustain?

The troubled Japanese economy remains a major cause for concern, but it is hard to believe that their government will permit that economy to tank. Your opinion on the steps our government should take in addressing the threat to our own economy from the problems in Asia carries great weight. What is your advice to the Congress on this issue?

From a larger perspective, we should ask: is our nation now in a New Economy that can sustain continued growth without re-igniting inflation? Should the Federal Reserve worry less about inflation and focus more on allowing more growth to create additional jobs for Americans? Those are questions that Members will want to discuss, even if they are addressed in your testimony.

I believe that this Congress acted responsibly in seeking a balanced budget; and that responsible fiscal policy must go hand in hand with monetary policy to support long-term economic growth. The marketplace first had to believe that the Federal Government was serious about balancing the budget before it could incorporate the possibility of arriving at this outcome as a factor in future planning.

The high relative value of the dollar seems to reflect both the leading position of our economy with regard to Europe and the Far East, and the flight capital that has arrived from areas suffering economic insecurity. As integration of the various world economies continues in the direction of a unitary world marketplace, the leverage exerted by the Federal Reserve grows accordingly. There are few obvious negative signals that might predict a turn of the cycle to a downward phase. What we all want to know is, how long can we continue with price stability and full employment?

As the economy continues to run ahead of what would be indicated by traditional models, we would welcome any insight you could impart about adjustments being incorporated into your model.

Again, Mr. Greenspan, inquiring minds want to know: can we expect lower interest rates to sustain the good condition of our economy? How should the federal government handle the prospect of a budget surplus? And, how do we effectively address the problems in Asia? As always, we are delighted to have you with us and look forward to a lively discussion.

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