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Federal Reserve's First Monetary Policy S. HRG. 108–488 FEDERAL RESERVE’S FIRST MONETARY POLICY REPORT FOR 2004 HEARING BEFORE THE COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS UNITED STATES SENATE ONE HUNDRED EIGHTH CONGRESS SECOND SESSION ON OVERSIGHT ON THE MONETARY POLICY REPORT TO CONGRESS PURSU- ANT TO THE FULL EMPLOYMENT AND BALANCED GROWTH ACT OF 1978 FEBRUARY 12, 2004 Printed for the use of the Committee on Banking, Housing, and Urban Affairs ( U.S. GOVERNMENT PRINTING OFFICE 94–291 PDF WASHINGTON : 2004 For sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800 Fax: (202) 512–2250 Mail: Stop SSOP, Washington, DC 20402–0001 VerDate 11-MAY-2000 11:46 Jun 21, 2004 Jkt 000000 PO 00000 Frm 00001 Fmt 5011 Sfmt 5011 94291.TXT GEOW PsN: GEOW COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS RICHARD C. SHELBY, Alabama, Chairman ROBERT F. BENNETT, Utah PAUL S. SARBANES, Maryland WAYNE ALLARD, Colorado CHRISTOPHER J. DODD, Connecticut MICHAEL B. ENZI, Wyoming TIM JOHNSON, South Dakota CHUCK HAGEL, Nebraska JACK REED, Rhode Island RICK SANTORUM, Pennsylvania CHARLES E. SCHUMER, New York JIM BUNNING, Kentucky EVAN BAYH, Indiana MIKE CRAPO, Idaho ZELL MILLER, Georgia JOHN E. SUNUNU, New Hampshire THOMAS R. CARPER, Delaware ELIZABETH DOLE, North Carolina DEBBIE STABENOW, Michigan LINCOLN D. CHAFEE, Rhode Island JON S. CORZINE, New Jersey KATHLEEN L. CASEY, Staff Director and Counsel STEVEN B. HARRIS, Democratic Staff Director and Chief Counsel PEGGY R. KUHN, Senior Financial Economist MARTIN J. GRUENBERG, Democratic Senior Counsel JOSEPH R. KOLINSKI, Chief Clerk and Computer Systems Administrator GEORGE E. WHITTLE, Editor (II) VerDate 11-MAY-2000 11:46 Jun 21, 2004 Jkt 000000 PO 00000 Frm 00002 Fmt 0486 Sfmt 0486 94291.TXT GEOW PsN: GEOW CONTENTS THURSDAY, FEBRUARY 12, 2004 Page Opening statement of Chairman Shelby ................................................................ 1 Opening statements, comments, or prepared statements of: Senator Sarbanes .............................................................................................. 2 Senator Bennett ................................................................................................ 4 Senator Bayh .................................................................................................... 5 Senator Allard ................................................................................................... 5 Prepared statement ................................................................................... 39 Senator Stabenow ............................................................................................. 5 Senator Bunning ............................................................................................... 6 Senator Carper ................................................................................................. 7 Senator Sununu ................................................................................................ 8 Senator Schumer .............................................................................................. 8 Prepared statement ................................................................................... 39 Senator Crapo ................................................................................................... 9 Senator Reed ..................................................................................................... 10 Prepared statement ................................................................................... 40 Senator Dole ...................................................................................................... 10 Senator Miller ................................................................................................... 33 Senator Corzine ................................................................................................ 35 WITNESS Alan Greenspan, Chairman, Board of Governors of the Federal Reserve Sys- tem, Washington, DC ........................................................................................... 12 Prepared statement .......................................................................................... 41 Response to written questions of: Senator Shelby ........................................................................................... 46 Senator Schumer ....................................................................................... 49 Senator Corzine ......................................................................................... 56 Senator Hagel ............................................................................................ 58 ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD Monetary Policy Report to the Congress, February 11, 2004 .............................. 61 (III) VerDate 11-MAY-2000 11:46 Jun 21, 2004 Jkt 000000 PO 00000 Frm 00003 Fmt 5904 Sfmt 5904 94291.TXT GEOW PsN: GEOW VerDate 11-MAY-2000 11:46 Jun 21, 2004 Jkt 000000 PO 00000 Frm 00004 Fmt 5904 Sfmt 5904 94291.TXT GEOW PsN: GEOW FEDERAL RESERVE’S FIRST MONETARY POLICY REPORT FOR 2004 THURSDAY, FEBRUARY 12, 2004 U.S. SENATE, COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, Washington, DC. The Committee met at 10:02 a.m. in room SD–538 of the Dirksen Senate Office Building, Senator Richard C. Shelby (Chairman of the Committee) presiding. OPENING STATEMENT OF CHAIRMAN RICHARD C. SHELBY Chairman SHELBY. The hearing shall come to order. I am very pleased this morning to welcome Chairman Greenspan before the Committee on Banking, Housing, and Urban Affairs to testify on the Federal Reserve’s Semi-Annual Monetary Policy Re- port to the Congress. Chairman Greenspan, your testimony and your written report highlight the significant positive developments in our economy in 2003. Following a blistering 8.2 percent increase in the third quar- ter, the real GDP increased 4 percent in the fourth quarter of 2003. On an annual average basis, productivity rose 4.3 percent in the business sector and 4.2 percent in the nonfarm business sector. Our economy is much stronger now than it was a year ago, and our prospects for 2004 are even brighter. The job market is also showing signs of recovery. Payroll employ- ment increased by 112,000 jobs in January—the largest monthly gain since 2000—and the unemployment rate fell to 5.6 percent. These improvements are certainly welcome and should continue at a healthy pace. With this improved economic environment, Congress needs to do its part in achieving the appropriate fiscal policy. The continued strength of our Nation’s economy will be dependent on how the Congress goes about achieving this balance. We would certainly welcome your views, Mr. Chairman, on how to address some of these issues today. Mr. Chairman, this Committee will also have the pleasure of hearing your views on Government-sponsored enterprises in less than 2 weeks at our hearing scheduled for Tuesday, February 24, and we look forward to that meeting. I, and my colleagues on the Committee, are keenly interested in that topic and look forward to that discussion. The condition of the U.S. economy and the direc- tion of monetary policy should provide us with more than enough ground to cover in the time that we have this morning. (1) VerDate 11-MAY-2000 11:46 Jun 21, 2004 Jkt 000000 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 94291.TXT GEOW PsN: GEOW 2 Chairman Greenspan, thank you for your appearance today. We look forward to hearing your remarks. I am sure it will be a lively and an informative exchange that will follow. Senator Sarbanes. STATEMENT OF SENATOR PAUL S. SARBANES Senator SARBANES. Thank you very much, Mr. Chairman. I am pleased to join with you in welcoming Federal Reserve Board Chairman Greenspan back before the Committee on Banking, Housing, and Urban Affairs to testify on the Federal Reserve’s Semi-Annual Report to Congress on Monetary Policy. This Committee took the lead in putting that requirement into the statute for these twice-a-year reports, and I think it has worked out very well over the years as a way of, in effect, edu- cating the public, getting a timely review before the Congress, and it broke us out of the pattern of bringing the Chairman up when there seemed to be some crisis developing in the economy. I think it gives us a more orderly and consistent way of reviewing mone- tary policy. On Tuesday of this week, the Joint Economic Committee held a hearing on the release of the Economic Report of the President, prepared by the President’s Council of Economic Advisers. I will not comment at this point on the view expressed in the Economic Report which has gained so much attention over the last few days, that the outsourcing of U.S. jobs to workers overseas is good for our Nation’s economy. That is a topic, in and of itself, of some concern, but there were other aspects of the Economic Report that I want to mention because they are relevant to Chairman Greenspan’s tes- timony this morning. The first is the Administration’s continual lowering of its forecast for jobs over the past 3 years. The forecast of the number of jobs that we would have in calendar year 2004, the year in which we now find ourselves, was 138.3 million in the 2002 Economic Report. That was lowered in last year’s Economic Report to 135.2 million, and in this most recent report to 132.7 million. This is total jobs for the country. And we have now learned that, based on the lower job numbers for late 2003 and January of this year, the CEA has now lowered the
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