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February 15, 1996
"Give Clinton Credit for Fighting Inflation"
San Jose Mercury News
By Timothy Taylor
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BILL CLINTON owes Alan Greenspan a debt of gratitude. Moreover, some doubting Democrats and business groups owe him an apology.

It was two years ago in February 1994 that the Federal Reserve, led by Greenspan, started raising interest rates. The Fed raised rates six times in 1994, in February, March, April, May, August, and November. The interest rate on 3-month Treasury bills, for example, climbed from 3 percent in January 1994 to 4 percent in May and 5 percent in November, before topping out at 5.8 percent in January 1995.

The Fed admitted that the higher rates were not a response to higher inflation that had already occurred, but rather a pre-emptive strike against an inflation that it believed was about to heat up. In other words, the Fed was like a driver headed down a hill who puts on the brakes right away, rather than coasting faster and faster until it's necessary to jam the brakes harshly.

But many Democrats complained bitterly. As far as they were concerned, the economy wasn't healthy, inflation wasn't a threat, and the Fed was flatly wrong.

Business groups like the National Association of Manufacturers and the U.S. Chamber of Commerce took shots, as well. Martin Regalia, chief economist for the Chamber, said: "We are becoming increasingly concerned that Federal Reserve policy may be moving too fast and too far."

Two years later, those critics have been proven wrong. Even as interest rates rose in 1994, the unemployment rate sunk from 6.7 percent in January 1994 to 5.4 percent by the end of that year, which is roughly where it has been ever since.

The economy has slowed in recent months, but it didn't head into the tank in 1994 or 1995. Even after that surge of growth that reduced unemployment rates in 1994, inflation has stayed low and under control, totaling only 2.5 percent for 1995.

To his credit, Clinton was not one of the complainers back in 1994 as interest rates rose. He seemed to recognize that the Fed's decision to raise interest rates wasn't partisan, but was motivated by a genuine belief that inflation was lurking.

This line of thinking has turned out to be prescient. After interest rates topped out in mid-1995, they headed back down. With inflation securely under control, the Fed has cooperated by reducing rates twice, once in December and again this month.

Among economists, Democratic presidents have developed a reputation for being soft on inflation. But Bill Clinton is breaking that stereotype. He inherited a low inflation rate from George Bush, and even when the going was tough back in 1994, he supported the Federal Reserve's decisions to raise interest rates. He deserves credit as a proven inflation-fighter.

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