f both the U.S. House and Senate from the Democrats. The new majority, led by Newt Gingrich, attacked the very foundations of FDR's New Deal welfare state, and the Federal Reserve emerged clearly as the only institutional instrument to carry out macroeconomic policy. The supremacy of the Fed: Apart from the upheaval in Congress, the year 1994 also signaled the beginning of another cycle of Federal Reserve monetary restraint. On February 4, 1994, Chairman Alan Greenspan announced a quarter-point hike in the Federal funds rate, the first such rise since 1989. Following that decision, interest rates bottomed out and climbed higher, following seven consecutive increases in the Fed funds rate from 3 percent to 6.0 percent(4); the Federal Reserve discount rate was raised from 3 to 5.25 percent. By early November 1994, thirty-year bond yields had pushed through the 8 percent level, rising from their cyclical low of 5.78 percent in the Fall of 1993; as the national economy slowed markedly in response, thirty-year yields have dropped back toward 6.5 percent by early Summer 1995. As Greenspan had explained, the 1994 restraint was a preemptive strike against the emergence of future inflation. This argument seemed unconvincing, since the economy was improving only moderately well at that time. Even though real growth was picking up, unemployment was falling, and the federal deficit was declining, accelerating inflation was, however, nowhere a visible problem. These deliberate steps to raise the entire spectrum of money and long-term capital rates, despite the fact that inflation had remained at a fairly stable and moderate rate of 3 percent, had generated widespread criticism from Wall Street analysts and bond traders, leaders of U.S. manufacturing and labor, members of Congress from both parties, and academic economists (see the Challenge Symposium, January-February 1995). The Fed's actions in 1994 and the chairman's explanations of the FOMC's...
