the international economy, and NAFTA embodied the belief that trade and
competition create prosperity, and you need free markets to do that. He
and the White House staff went all out, and after a two-month struggle
they got the treaty approved.
All this convinced me that our new president was a risk taker who was
not content with the status quo. Again he'd shown a preference for dealing
in facts. And on free trade, the fact was this: The distinction between domestic
competition and cross-border competition has no economic meaning.
If you're in a Dubuque, Iowa, plant, it makes no difference whether
you're competing with someone in Santa Fe or across the border. With the
geopolitical pressure of the cold war now removed, the United States had
a historic opportunity to knit the international economy more closely together.
Clinton was often criticized for inconsistency and for a tendency to
take all sides in a debate, but that was never true about his economic policy.
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THE AGE OF TURBULENCE
A consistent, disciplined focus on long-term economic growth became a
hallmark of his presidency.
T
T
he Fed was having its own difficulties with Congress that year, and for
some of the same reasons. Our fiercest critic was Congressman Henry B.
Gonzalez of Texas, the chairman of the House Banking Committee. A hot-
tempered populist from San Antonio, Gonzalez was famous for socking in
the eye a constituent at a restaurant who called him a Communist. At vari
ous times in Congress, Gonzalez had called for the impeachment of Rea
gan, Bush, and Paul Volcker. He was deeply distrustful of what he labeled
"the tremendous power of the Fed"—I think he simply assumed that the
Board was a cabal of Republican appointees who were running monetary
policy more for the benefit of Wall Street than the workingman. In the fall
of 1993, Gonzalez really turned up the heat.
The Fed has always rubbed Congress the wrong way, and it probably
always will, even though Congress created it. There's inherent conflict be
tween the Fed's statutory long-term focus and the short-term needs of
most politicians with constituents to please.
This friction often surfaced in oversight hearings. The Fed was obli
gated to render a biannual report on its monetary-policy decisions and the
economic outlook. At times these hearings sparked substantive discussions
of major issues. But just as often they were a theater in which I was a
prop—the audience was the voters back home. During the Bush adminis
tration, Senate Banking Committee chairman Alfonse D'Amato of New
York rarely missed a chance to bash the Fed. "People are going to starve out
there, and you are going to be worried about inflation," he'd tell me. That
sort of remark I always let slide. But when he or anyone would assert that
interest rates were too high, I would answer and explain why we'd done
what we'd done. (I took care, naturally, to couch any discussion of possible
future moves in Fedspeak to keep from roiling the markets.)
Gonzalez went on a crusade to make the Fed more accountable, zeroing
in on what he saw as our excessive secrecy. He wanted the Federal
Open Market Committee, in particular, to conduct its affairs in public, and
even open its deliberations to live TV coverage. At one point he dragged
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A DEMOCRAT'S AGENDA
eighteen members of the FOMC to Capitol Hill to testify under oath and
denounced the long-standing FOMC practice of never publicly announcing
policy moves or rate changes. The only public record of each meeting was
a brief set of minutes published six weeks after the fact—for the financial
markets, a virtual eternity. As a consequence, any signals coming from the
Fed's open-market operations, or public statements by Fed officials, were
subject to avid scrutiny by Wall Street.
For its part, the Federal Reserve, in the interest of economic stability, had
long sought to foster highly liquid debt markets through the use of what we
called constructive ambiguity. The idea was that markets uncertain as to the
direction of interest rates would create a desired large buffer of both bids and
offers. By the early 1990s, however, markets were becoming sufficiently
broad and liquid without this support from the Fed. Moreover, the advantage
of market participants being able to anticipate the Federal Reserve's future
moves was seen as stabilizing the debt markets. We had begun a path toward
greater transparency in our deliberations and operations, but far short of the
policy Henry Gonzalez would have liked us to pursue.
I was opposed to the idea of throwing these meetings open. The FOMC
was our primary decision-making body. If its discussions were made public,
with the details of who said what to whom, the meetings would become a
series of bland, written presentations. The advantages to policy formulation
of unfettered debate would be lost.
My effort to convey this argument in the hearings, however, did not go
well. As Gonzalez bored in on the question of what records we kept, I
found myself in an extremely awkward position. In 1976, during the Ford
administration, Arthur Burns had directed the staff to audiotape FOMC
meetings to assist in the writing of the minutes. This practice continued,
and I knew about it, but I'd always assumed the tapes were erased once the
minutes were done. In preparing for the Banking Committee testimony, I
learned that this wasn't exactly the case: although the tapes indeed were
routinely erased, the staff kept copies of the complete unedited transcripts
in a locked file cabinet down the hall from my office. When I revealed the
transcripts' existence, Gonzalez pounced. Now more convinced than ever
that we were conspiring to hide embarrassing secrets, he threatened to
subpoena the records.
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THE AGE OF TURBULENCE
Gonzalez was especially suspicious of two conference calls the FOMC
had conducted in preparing for the hearings. We did not want to release
these tapes, for fear of creating a precedent. After a bit of negotiation,
we agreed to let lawyers for the committee—one Democrat and one
Republican—come to the Fed and listen.
The Watergate tapes had been a lot more exciting, they quickly discovered.
After listening patiently for the better part of two hours to the
FOMC's deliberations, the Democrat left without a word, and the Republican
remarked that the tape ought to be used to teach students in high
school civics classes how government meetings should work.*
All the same, my colleagues were upset—mainly with Gonzalez, but
they probably weren't too happy with me either. For one thing, most of them
hadn't even known our meetings were being taped. And the thought that
any remarks they now made might be published immediately if Gonzalez
got his way put a chill in the air. The next time the FOMC met, on November
16, people were clearly less willing to kick around ideas. "You could notice
a difference, and not for the better," a governor told a Washington Post
reporter.
After thorough discussion, the Board decided to resist, in court if
necessary, any subpoena or demand that might hamper the effectiveness of
the institution. But the controversy also accelerated our recent deliberations
about transparency. Eventually we decided that the FOMC would
announce its moves immediately after each meeting and that the complete
transcript would be published after a five-year lag. (People joked that this
was the Fed equivalent of glasnost.) We did these things knowing that
published transcripts made our meetings longer and a little less creative. In
the event, the sky did not fall. Not only did the changes make the process
more transparent but they also gave us new ways to communicate with the
markets.
I was grateful that President Clinton kept his distance from this whole
*Congressman Gonzalez was quoted in the New York Times (November 16, 1993) complaining
that the tapes included "disparaging remarks about one distinguished member of the House
Banking Committee and Banking Committee members in general."
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A DEMOCRAT'S AGENDA
teapot tempest. "Does anybody in his right mind think we would do anything
to change the independence of the Fed?" was all he would say afterward,
adding, "I have no criticism of the Federal Reserve since I've been
President."
I
I
n the midst of such Washington melodramas, it was sometimes easy to
forget that there was a real world out there in which real things were
happening. That summer, flooding from the Mississippi and Missouri rivers
paralyzed nine midwestern states. NASA astronauts went into orbit to repair
the Hubble Space Telescope. There was a failed coup against Boris
Yeltsin, and Nelson Mandela won the Nobel Peace Prize. There were disconcerting
outbreaks of violence in the United States: the bombing of the
World Trade Center, the siege at Waco, and the killing and maiming of scientists
and professors by the Unabomber. In corporate America, something
called business-process reengineering became the latest management fad,
and Lou Gerstner began an effort to turn around IBM. Most important
from the Fed's standpoint, the economy seemed finally to have shaken off
its early-1990s woes. Business investment, housing, and consumer spending
all rose sharply, and unemployment fell. By the end of 1993, not only had
real GDP grown 8.5 percent since the 1991 recession, but it was expanding
at a 5.5 percent annual rate.
All of which led the Fed to decide that it was time to tighten. On February
4, 1994, the FOMC voted to hike the fed funds interest rate by one-
quarter of a percentage point, to 3.25 percent. This was the first rate hike
in five years, and we imposed it for two reasons. First, the post-1980s credit
crunch had finally ended—consumers were getting the mortgages they
needed and businesses were getting loans. For many months, while credit
was tight, we'd kept the fed funds rate exceptionally low, at 3 percent. (In
fact, if you allowed for inflation, which was also nearly at a 3 percent annual
rate, the rate on fed funds was next to nothing in real terms.) Now that
the financial system had recovered, it was time to end this "overly accommodative
stance," as we called it.
The second reason was the business cycle itself. The economy was in a
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THE AGE OF TURBULENCE
growth phase, but we wanted the inevitable downturn, when it came, to be
less of a roller-coaster ride—a moderate slowing instead of a sickening
plunge into recession. The Fed had long tried to get ahead of the curve by
tightening rates at the first sign of inflation, before the economy had a
chance to seriously overheat. But raising rates in this way had never averted
a recession. This time, we opted to take advantage of the relative economic
tranquillity to try a more radical approach: moving gently and preemptively,
before inflation even appeared. It was a matter of psychology, I explained
to the Congress that February. Based on what we'd learned in recent
years about inflation expectations, I said, "if the Federal Reserve waits until
actual inflation worsens before taking countermeasures, it would have
waited too long. Modest corrective steps would no longer be enough to
contain the emerging economic imbalances.... Instead more wrenching
measures would be needed, with unavoidable adverse side effects on near-
term economic activity."
Because so much time had passed since our last rate increase, I worried
that the news would rattle the markets. So with the FOMC's consent, I
hinted strongly in advance that a policy shift was imminent. "Short-term
interest rates are abnormally low," I told Congress in late January. "At some
point, absent an unexpected and prolonged weakening of economic activity,
we will need to move them." (This may sound overly subtle to the
reader, but on the scale of Fed public statements in advance of a policy
move, it was like banging a pot.) I also visited the White House to give the
president and his advisers a heads-up. "We haven't made a final decision," I
told them, "but the choices are, we sit and wait and then likely we'll have
to raise rates more. Or we could take some small increases now." Clinton
responded, "Obviously I would prefer low rates," but he said he understood.
The rest of the world, by contrast, seemed to turn a deaf ear. The markets
did nothing to discount a rate hike (typically, in advance of an expected
increase, short-term interest rates would edge up and stocks would
edge down). So when we actually made the move, it was a jolt. In keeping
with our new openness, we decided at the February 4 FOMC meeting to
announce the rate hike as soon as we adjourned. By day's end, the Dow
Jones Industrial Average had plunged 96 points—almost 2.5 percent. Some
politicians reacted vehemently. Senator Paul Sarbanes of Maryland, a fre
154
A DEMOCRAT'S AGENDA
quent Fed critic, compared us to "a bomber coming along and striking a
farmhouse . .. because you think that the villain inflation is inside ... when
in fact what's inside ... is a happy family appreciating the restoration of
economic growth."
To me such reactions merely showed how attached Americans were
becoming to low, stable interest rates. Behind the closed doors of the Fed,
several of the bank presidents had pushed for twice as large an increase.
Fearing a panicky market reaction to too sharp a rise, I had urged my colleagues
to keep this initial move small.
We continued to apply the brakes throughout 1994, until by year end
the fed funds rate stood at 5.5 percent. Even so, the economy had a very
good year: it grew a robust 4 percent, it added 3.5 million new jobs, productivity
increased, and business profits rose. Equally important, inflation
