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
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
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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