Sarbanes vs. Greenspan

February 16, 1993

Nobody ever said the Federal Reserve Board was perfect. Indeed, prize-winning economists spanning the ideological spectrum are complaining that the Fed prolonged the Bush recession by keeping interest rates too high. No doubt George Bush would agree. But do these complaints justify efforts on Capitol Hill to place tighter congressional controls on the nation's central bankers?

We think not. Having botched fiscal policy over a large number of years, Congress should be wary of trying to control monetary policy.

It is quite in order for Maryland's Sen. Paul S. Sarbanes to argue that monetary policy must take over the job of stimulating the economy that fiscal policy, with its mountainous deficits, can no longer shoulder. But the moment the bond markets ever come to believe that he and other liberals will succeed in shearing the Federal Reserve Board of its independence, watch out!

That's the moment rekindled fears of inflation push long-term interest rates through the roof. That's the moment the strong recovery sought by Senator Sarbanes is choked off by the high cost of money. In most nations, there is a constant tug of war between politicians responding to popular pressures for easy money and central bank guardians of unpopular austerity.

It is heartening that for the moment President Clinton supports the Fed's present structure. It is equally heartening that Fed chairman Alan Greenspan, a Republican appointee, has voiced tentative approval of the administration's economic policies. To the extent these two power sectors can work together, the dangers of an inflationary, populist breakout on Capitol Hill will be that much less.

Right now Senator Sarbanes, in Joint Economic Committee hearings, is arguing that the Federal Reserve kept monetary aggregates from growing fast enough to end the recession and put the recovery on a non-faltering upward track. Mr. Greenspan replies that the measures used by Senator Sarbanes are somewhat out of date and that the Fed lowered interest rates at a pace rarely seen.

There's an element of truth in both positions. But the fact remains that long-term interest rates have stayed stubbornly way in excess of what they should be over short-term rates. This reflects the fears in financial markets that Washington will not be able to contain the built-in inflationary pressures of huge deficits and the popular demand for a faster pace of recovery.

President Clinton can ease these fears, provided his assault on federal deficit financing is credible and he works harmoniously with the Fed.

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