Full text of Paul A. Volcker Papers : Business Council - Hot Springs, Va. : October 9, 1982, Box 13, Item c230

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Business Council-Hot Springs, Va.
October 9, 1982

Collection: Paul A. Volcker Papers
Call Number: mcr9

Box t3

Preferred Citation: Business Council - Hot Springs, Va., 1982 October 9; Paul A. Volcker Papers,
Box 13; Public Policy Papers, Department of Rare Books and Special Collections, Princeton
University Library
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•
a.

Excerpt from Informal Talk of
Paul A. Volcker to Business Council
At Hot Springs, Va. 10/9/82

As you know, yesterday we made a further reduction in
the discount rate to 9-1/2 percent.

As is usually the case,

that change was, in an immediate sense, designed to maintain an
appropriate alignment with short-term market rates.

It was, of

course, also taken against a background of continued sluggishness
in business activity, the exceptional recent strength of the
dollar on the exchange markets, and indications of strong demands
••
for liquidity in some markets.
In the light of all the potentially confusing comment in
the press in recent days,

which seemed to be based on a combination

of partial information and reportorial speculation, it may be
desirable to reiterate what seems to me obvious; the small reduction
in the discount rate -- as in the case of the four changes of
similar magnitude in July and August -- represents no change in
the basic thrust of policy.
In assessing economic and financial developments over
recent months, I would also point out again what I have said on a
number of occasions before:

there is growing evidence that the

inflationary momentum has been broken.

Indeed, with appropriate

policies, the prospects appear good for continuing moderation of
inflation in the months and years ahead.

Continuing progress toward

restoring price stability is an essential part of building a solid
base, not just for recovery but for sustaining expansion over a
long period.

Concern about inflation, and monetary discipline,

is not something we can turn on and off; it will be a continuing
priority concern of policy.

•

DigitizedIFfor FRASER

-2-

What does inevitably change is the financial and
business environment in which we operate.

Unfortunately from

the standpoint of reporting and communication, the continuing
thrust of monetary policy cannot be adequately measured by any
single or simple symbol.

Headlines can be misleading.

I hope we have all learned that the level or direction
of interest rates is not, by itself, a reliable test of "ease"
or "restraint" -- it all depends upon the circumstances.

Lower

interest rates in an economy in recession are not unusual, and
are consistent with the need for recovery.

But lower interest

rates do not in themselves indicate a change in basic policy
approach.

Over longer periods of time, achieving and maintaining

the lower level of interest rates we would all like to see must,
in a sense, be a reward for success in dealing with inflation;
artificially forcing the process would in the end be counterproductive.

What is needed is market conviction that the funda-

mentals are consistent with lower interest rates, and I believe
that is what we have been seeing for some months.
The emphasis on monetary and credit aggregates in conducting and interpreting policy during recent years is, of course,
useful in part because of the unreliability of interest rate measures
in gauging the necessary degree of restraint.

We express policy

in terms of broad targets for the various definitions of money
on the basic thesis that, over time, the inflationary process is
related to excessive growth in money and credit.

But you have

also heard me repeatedly express caution about the validity of
any single measure, or even all the measures in the short run.

-3-

We have to be alert to the possibility that relationships may be
disturbed by technological or regulatory changes in banking, or
more broadly by shifts in liquidity preferences and velocity.
We face over the next few months, not just the possibility
but the virtual certainty of distortions -- distortions growing
out of legislation and regulation -- in the M1 number that is so
widely followed in the markets.

Right now, and over the next few

weeks, some $31 bon ofSavers Certificates" are maturing,
and in large part will not be rolled over.

As thosefunds move

to other investments, some amount will temporarily pass through
checking accounts, or be "parked" in those accounts for a time
awag new investment decisions.

We know M1 will be affected,

but we simply have no way of measuring the degree of that shifting.
And, just as that process is expected to unwind over the next month
or so, the new "money market fund-type" deposit account for banks
and thrifts will be introduced.

Sizable transfers of funds into

those accounts, which will have considerable checkable and transactions capabes, are anticipated, including shifts from
regular checking and NOW accounts.

The result will probably be

to depress M1 growth for a while

assuming the new accounts are

not included in Ml.

But again we have no way of anticipating the

magnitude, or even the direction of impact should the new accounts
be tied to existing NOW accounts.

Both the "ups" and "downs" in

M1 reflecting these regulatory changes will be artificial and
virtually meaningless in gauging underlying trends in "money" and
liquidity.

The potential problems have been common knowledge in

market circles.

Digitized for
-FRASER

-4-

In the circumstances, I do not believe that, in actual
implementation of monetary policy, we have any alternative but
to attach much less than usual weight to movements in Ml, over
the period immediately ahead.

We will, of course, analyze the data

carefully to assist us in assessing underlying trends, but it is
likely to take some months before new relationships can be judged
with any degree of reliability in a world of radically new deposit
instruments with transactions capability.
Fortunately, while the M2 and M3 aggregates,may also be
affected by the new deposit instruments, the impact should be
relatively much less.

Those aggregates are not only much larger,

but most of the shifts among financial instruments are expected
to take place within those large aggregates.

For instance, shifts

by individuals among "All Savers Certificates," checking accounts,
money market certificates, money market mutual funds, and the new
account would all leave M2 unaffected because they'are all counted
within that aggregate.

If the shifts are into (or out of) market

IMP ,IMM,

up or down

is a technical fact of

life; it has no broader policy significance.
It is true that for some time (before the new distortions
that will be induced by legislation and regulation) the various
monetary aggregates have in general been somewhat above the growth

-5_

paths targeted for the year.

I would also point out, though,

that indications suggest an appreciable recent slowing in growth
of both M2 and M3, and it so happens -- perhaps fortuitously
that last week's Ml figure is very close to target.

411••

That is part

of the setting of the discount rate change.
You may recall that, when reiterating our annual targets
in July, I emphasized that "growth somewhat above the targeted
ranges would be tolerated for a time in circumstances in which
it appeared that precautionary or liquidity motivations, during
a period of economic uncertainty and turbulence, were leading
to stronger than anticipated demands for money.

We will look

to a variety of factors in reaching that judgment, including
such technical factors as the behavior of different components
in the money supply, the growth of credit, the behavior of
banking and financial markets, and more broadly, the behavior
of velocity and interest rates."

I believe reasoned assessment

In that light, the fact that some of

the aggregates have tended to run somewhat above their target
ranges has been fully acceptable to the Federal Open Market
Committee.
I believe I can speak for all members of the Committee
in saying that those judgments have been reached, and will continue
to be reached, in full recognition of the need to maintain the
heartening progress toward price stability.

Excerpt from Informal Talk of
Paul A. Volcker to Business Council
At Hot Springs, Va. 10/9/82

As you know, yesterday we made a further reduction in
the discount rate to 9-1/2 percent.

As is usually the case,

that change was, in an immediate sense, designed to maintain an
appropriate alignment with short-term market rates.

It was, of

course, also taken against a background of continued sluggishness
in business activity, the exceptional recent strength of the
dollar on the exchange markets, and indications of strong demands
for liquidity in some markets.
In the light of all the potentially confusing comment in
the press in recent days,

which seemed to be based on a combination

there is growing evidence that the

inflationary momentum has been broken.

Indeed, with appropriate

policies, the prospects appear good for continuing moderation of
inflation in the months and years ahead.

Continuing progress toward

restoring price stability is an essential part of building a solid
base, not just for recovery but for sustaining expansion over a
long period.

Concern about inflation, and monetary discipline,

ing
is not something we can turn on and off; it will be a continu
priority concern of policy.

Digitizedonfor FRASER

-2-

What does inevitably change is the financial and
business environment in which we operate.

Unfortunately from

the standpoint of reporting and communication, the continuing
thrust of monetary policy cannot be adequately measured by any
single or simple symbol.

Headlines can be misleading.

I hope we have all learned that the level or direction
of interest rates is not, by itself, a reliable test of "ease"
or "restraint" -- it all depends upon the circumstances.

Lower

interest rates in an economy in recession are not unusual, and
are consistent with the need for recovery.

But lower interest

rates do not in themselves indicate a change in basic policy
approach.

Over longer periods of time, achieving and maintaining

the lower level of interest rates we would all like to see must,
in a sense, be a reward for success in dealing with inflation;
artificially forcing the process would in the end be counterproductive.

What is needed is market conviction that the funda-

We express policy

in terms of broad targets for the various definitions of money
on the basic thesis that, over time, the inflationary process is
related to excessive growth in money and credit.

But you have

also heard me repeatedly express caution about the validity of
any single measure, or even all the measures in the short run.

-3-

Right now, and over the next few

weeks, some $31 bon ofSavers Certificates" are maturing,
and in large part will not be rolled over.

As those,funds move

to other investments, some amount will temporarily pass through
checking accounts, or be "parked" in those accounts for a time
awag new investment decisions.

We know M1 will be affected,

Sizable transfers of funds into

those accounts, which will have considerable checkable and transactions capabes, are anticipated, including shifts from
regular checking and NOW accounts.

The result will probably be

to depress M1 growth for a while -- assuming the new accounts are
not included in Ml.

But again we have no way of anticipating the

magnitude, or even the direction of impact should the new accounts
be tied to existing NOW accounts.

Both the "ups" and "downs" in

M1 reflecting these regulatory changes will be artificial and
virtually meaningless in gauging underlying trends in "money" and
liquidity.

The potential problems have been common knowledge in

market circles.

-4-

We will, of course, analyze the data

carefully to assist us in assessing underlying trends, but it is
likely to take some months before new relationships can be judged
with any degree of reliability in a world of radically new deposit
instruments with transactions capability.
Fortunately, while the M2 and M3 aggregates may also be
affected by the new deposit instruments, the impact should be
relatively much less.

Those aggregates are not only much larger,

but most of the shifts among financial instruments are expected
to take place within those large aggregates.

For instance, shifts

If the shifts are into (or out of) market

=IMP

up or down

is a technical fact of

paths targeted for the year.

I would also point out, though,

that indications suggest an appreciable recent slowing
in growth
of both M2 and M3, and it so happens -- perhaps fort
uitously
that last week's Ml figure is very close to target.

IMMO.

That is part

of the setting of the discount rate chan
ge.
You may recall that, when reiterating our annual targets
in July, I emphasized that "growth somewhat abov
e the targeted
ranges would be tolerated for a time in circumstances in
which
it appeared that precautionary or liquidity motivations,
during
a period of economic uncertainty and turbulence, were lead
ing
to stronger than anticipated demands for money.

We will look

to a variety of factors in reaching that judgment, incl
uding
such technical factors as the behavior of different componen
ts
in the money supply, the growth of credit, the behavior of
banking and financial markets, and more broadly, the beha
vior
of velocity and interest rates."

I believe reasoned assessment

of recent developments in the light of those factors
does suggest
that preferences for liquidity have generally been rela
tively
strong, reflected in part in some
abnormal pressures in parts of the
private credit markets. In that light, the fact that some of
the aggregates have tended to run somewhat above their target
ranges has been fully acceptable to the Federal Open Market
Committee.
I believe I can speak for all members of the Committee
in saying that those judgments have been reached, and will cont
inue
to be reached, in full recognition of the need to maintain the
heartening progress toward price stability.

Excerpt from Informal Talk of
Paul A. Volcker to Business Council
At Hot Springs, Va. 10/9/82

As you know, yesterday we made a further reduction in
the discount rate to 9-1/2 percent.

As is usually the case,

that change was, in an immediate sense, designed to maintain an
appropriate alignment with short-term market rates.

It was, of

course, also taken against a background of continued sluggishness
in business activity, the exceptional recent strength of the
dollar on the exchange markets, and indications of strong demands
••
markets.
some
in
liquidity
for
In the light of all the potentially confusing comment in
the press in recent days,

which seemed to be based on a combination

there is growing evidence that the

inflationary momentum has been broken.

Indeed, with appropriate

policies, the prospects appear good for continuing moderation of
inflation in the months and years ahead.

Continuing progress toward

restoring price stability is an essential part of building a solid
base, not just for recovery but for sustaining expansion over a
long period.

Concern about inflation, and monetary discipline,

is not something we can turn on and off; it will be a continuing
priority concern of policy.

•

DigitizedU.for FRASER

-2-

What does inevitably change is the financial and
business environment in which we operate.

Unfortunately from

the standpoint of reporting and communication, the continuing
thrust of monetary policy cannot be adequately measured by any
single or simple symbol.

Headlines can be misleading.

I hope we have all learned that the level or direction
of interest rates is not, by itself, a reliable test of "ease"
or "restraint"

it all depends upon the circumstances.

Lower

interest rates in an economy in recession are not unusual, and
are consistent with the need for recovery.

But lower interest

rates do not in themselves indicate a change in basic policy
approach.

Over longer periods of time, achieving and maintaining

the lower level of interest rates we would all like to see must,
in a sense, be a reward for success in dealing with inflation;
artificially forcing the process would in the end be counterproductive.

What is needed is market conviction that the funda-

We express policy

in terms of broad targets for the various definitions of money
on the basic thesis that, over time, the inflationary process is
related to excessive growth in money and credit.

But you have

also heard me repeatedly express caution about the validity of
any single measure, or even all the measures in the short run.

-.3-

••••

in the M1 number that is so

Right now, and over the next few

weeks, some $31 billion of "All Savers Certificates" are maturing,
and in large part will not be rolled over.

As those fundsmove

to other investments, some amount will temporarily pass through
checking accounts, or be "parked" in those accounts for a time
awaiting new investment decisions.

We know M1 will be affected,

Sizable transfers of funds into

those accounts, which will have considerable checkable and transactions capabilities, are anticipated, including shifts from
regular checking and NOW accounts.

The result will probably be

to depress M1 growth for a while

assuming the new accounts are

not included in Ml.

But again we have no way of anticipating the

magnitude, or even the direction of impact should the new accounts
be tied to existing NOW accounts.

Both the "ups" and "downs" in

M1 reflecting these regulatory changes will be artificial and
virtually meaningless in gauging underlying trends in "money" and
liquidity.

The potential problems have been common knowledge in

market circles.

-FRASER
Digitized for

-4-

We will, of course, analyze the data

carefully to assist us in assessing underlying trends, but it is
likely to take some months before new relationships can be judged
with any degree of reliability in a world of radically new deposit
instruments with transactions capability.
Fortunately, while the M2 and M3 aggregates may also be
affected by the new deposit instruments, the impact should be
relatively much less.

Those aggregates are not only much larger,

but most of the shifts among financial instruments are expected
to take place within those large aggregates.

For instance, shifts

If the shifts are into (or out of) market

IMD

up or down

1•••

is a technical fact of

-5-

paths targeted for the year.

I would also point out, though,

that indications suggest an appreciable recent slowing
in growth
of both M2 and M3, and it so happens

perhaps fortuitously

that last week's Ml figure is very close to targ
et.

MID IMO,

That is part

of the setting of the discount rate chan
ge.
You may recall that, when reiterating our annual targ
ets
in July, I emphasized that "growth somewhat above
the targeted
ranges would be tolerated for a time in circumstance
s in which
it appeared that precautionary or liquidity motivati
ons, during
a period of economic uncertainty and turbulence,
were leading
to stronger than anticipated demands for money.

We will look

to a variety of factors in reaching that judgment, incl
uding
such technical factors as the behavior of different comp
onents
in the money supply, the growth of credit, the behavior
of
banking and financial markets, and more broadly, the
behavior
of velocity and interest rates."

I believe reasoned assessment

of recent developments in the light of those factors
does suggest
that preferences for liquidity have generally been
relatively
strong, reflected in part in some abno
rmal pressures in parts of the
private credit markets. In that light, the fact that some
of
the aggregates have tended to run somewhat above their targ
et
ranges has been fully acceptable to the Federal Open Market
Committee.
I believe I can speak for all members of the Committee
in saying that those judgments have been reached, and will cont
inue
to be reached, in full recognition of the need to maintain the
heartening progress toward price stability.

Excerpt from Informal Talk of
Paul A. Volcker to Business Council
At Hot Springs, Va. 10/9/82

As you know, yesterday we made a further reduction in
the discount rate to 9-1/2 percent.

As is usually the case,

that change was, in an immediate sense, designed to maintain an
appropriate alignment with short-term market rates.

It was, of

course, also taken against a background of continued sluggishness
in business activity, the exceptional recent strength of the
dollar on the exchange markets, and indications of strong demands
••
some
in
markets.
liquidity
for
In the light of all the potentially confusing comment in
the press in recent days,

which seemed to be based on a combination

there is growing evidence that the

inflationary momentum has been broken.

Indeed, with appropriate

policies, the prospects appear good for continuing moderation of
inflation in the months and years ahead.

Continuing progress toward

restoring price stability is an essential part of building a solid
base, not just for recovery but for sustaining expansion over a
long period.

Concern about inflation, and monetary discipline,

is not something we can turn on and off; it will be a continuing
priority concern of policy.

-2-

What does inevitably change is the financial and
business environment in which we operate.

Unfortunately from

the standpoint of reporting and communication, the continuing
thrust of monetary policy cannot be adequately measured by any
single or simple symbol.

Headlines can be misleading.

I hope we have all learned that the level or direction
of interest rates is not, by itself, a reliable test of "ease"
or "restraint"

M• dWr

it all depends upon the circumstances.

Lower

interest rates in an economy in recession are not unusual, and
are consistent with the need for recovery.

But lower interest

rates do not in themselves indicate a change in basic policy
approach.

Over longer periods of time, achieving and maintaining

the lower level of interest rates we would all like to see must,
in a sense, be a reward for success in dealing with inflation;
artificially forcing the process would in the end be counterproductive.

What is needed is market conviction that the funda-

We express policy

in terms of broad targets for the various definitions of money
on the basic thesis that, over time, the inflationary process is
related to excessive growth in money and credit.

But you have

also heard me repeatedly express caution about the validity of
any single measure, or even all the measures in the short run.

,
W

-.3-

Right now, and over the next few

weeks, some $31 billion of "All Savers Certificates" are maturing,
and in large part will not be rolled over.

As those fundsmove

to other investments, some amount will temporarily pass through
checking accounts, or be "parked" in those accounts for a time
awaiting new investment decisions.

We know M1 will be affected,

Sizable transfers of funds into

those accounts, which will have considerable checkable and transactions capabilities, are anticipated, including shifts from
regular checking and NOW accounts.

The result will probably be

to depress M1 growth for a while

assuming the new accounts are

not included in Ml.

But again we have no way of anticipating the

magnitude, or even the direction of impact should the new accounts
be tied to existing NOW accounts.

Both the "ups" and "downs" in

M1 reflecting these regulatory changes will be artificial and
virtually meaningless in gauging underlying trends in "money" and
liquidity.

The potential problems have been common knowledge in

market circles.

-4-

We will, of course, analyze the data

carefully to assist us in assessing underlying trends, but it is
likely to take some months before new relationships can be judged
with any degree of reliability in a world of radically new deposit
instruments with transactions capability.
Fortunately, while the M2 and M3 aggregates may also be
affected by the new deposit instruments, the impact should be
relatively much less.

Those aggregates are not only much larger,

but most of the shifts among financial instruments are expected
to take place within those large aggregates.

For instance, shifts

If the shifts are into (or out of) market

MEI =Om

up or down

is a technical fact of

_5_

paths targeted for the year.

I would also point out, though,

that indications suggest an appreciable
recent slowing in growth
of both M2 and M3, and it so happens

perhaps fortuitously

that last week's Ml figure is very close
to target.

1•••

That is part

of the setting of the discount rate
change.
You may recall that, when reiterating our annu
al targets
in July, I emphasized that "growth somewhat
above the targeted
ranges would be tolerated for a time in circumst
ances in which
it appeared that precautionary or liquidit moti
y
vations, during
a period of economic uncertainty and turbulen
ce, were leading
to stronger than anticipated demands for mon
ey.

We will look

to a variety of factors in reaching that judg
ment, including
such technical factors as the behavior of diff
erent components
in the money supply, the growth of credit,
the behavior of
banking and financial markets, and more broa
dly, the behavior
of velocity and interest rates."

I believe reasoned assessment

of recent developments in the light of thos
e factors does suggest
that preferences for liquidity have gene
rally been relatively
strong, reflected in part in some
abnormal pressures in parts of the
private credit markets. In that light, the
fact that some of
the aggregates have tended to run somewhat abov thei
e
r target
ranges has been fully acceptable to the Fede
ral Open Market
Committee.
I believe I can speak for all members of the Committee
in saying that those judgments have been reached, and will
continue
to be reached, in full recognition of the need to maintain
the
heartening progress toward price stability.

Excerpt from Informal Talk of
Paul A. Volcker to Business Council
At Hot Springs, Va. 10/9/82

As you know, yesterday we made a further reduction in
the discount rate to 9-1/2 percent.

As is usually the case,

that change was, in an immediate sense, designed to maintain an
appropriate alignment with short-term market rates.

It was, of

which seemed to be based on a combination

there is growing evidence that the

inflationary momentum has been broken.

Indeed, with appropriate

policies, the prospects appear good for continuing moderation of
inflation in the months and years ahead.

Continuing progress toward

restoring price stability is an essential part of building a solid
base, not just for recovery but for sustaining expansion over a
long period.

Concern about inflation, and monetary discipline,

is not something we can turn on and off; it will be a continuing
priority concern of policy.

-2-

What does inevitably change is the financial and
business environment in which we operate.

Unfortunately from

the standpoint of reporting and communication, the continuing
thrust of monetary policy cannot be adequately measured by any
single or simple symbol.

Headlines can be misleading.

I hope we have all learned that the level or direction
of interest rates is not, by itself, a reliable test of "ease"
or "restraint" -- it all depends upon the circumstances.

Lower

interest rates in an economy in recession are not unusual, and
are consistent with the need for recovery.

But lower interest

rates do not in themselves indicate a change in basic policy
approach.

Over longer periods of time, achieving and maintaining

the lower level of interest rates we would all like to see must,
in a sense, be a reward for success in dealing with inflation;
artificially forcing the process would in the end be counterproductive.

What is needed is market conviction that the funda-

We express policy

in terms of broad targets for the various definitions of money
on the basic thesis that, over time, the inflationary process is
related to excessive growth in money and credit.

But you have

also heard me repeatedly express caution about the validity of
any single measure, or even all the measures in the short run.

•

distortions growing

out of legislation and regulation -- in the M1 number that is so
widely followed in the markets.

Right now, and over the next few

weeks, some $31 billion of "All Savers Certificates" are maturing,
and in large part will not be rolled over.

As thosefunds move

to other investments, some amount will temporarily pass through
checking accounts, or be "parked" in those accounts for a time
awaiting new investment decisions.

We know M1 will be affected,

Sizable transfers of funds into

those accounts, which will have considerable checkable and transactions capabilities, are anticipated, including shifts from
regular checking and NOW accounts.

The result will probably be

to depress M1 growth for a while

assuming the new accounts are

not included in Ml.

But again we have no way of anticipating the

magnitude, or even the direction of impact should the new accounts
be tied to existing NOW accounts.

Both the "ups" and "downs" in

Ml reflecting these regulatory changes will be artificial and
virtually meaningless in gauging underlying trends in "money" and
liquidity.

The potential problems have been common knowledge in

market circles.

-4-

We will, of course, analyze the data

carefully to assist us in assessing underlying trends, but it is
likely to take some months before new relationships can be judged
with any degree of reliability in a world of radically new deposit
instruments with transactions capability.
Fortunately, while the M2 and M3 aggregates may also be
affected by the new deposit instruments, the impact should be
relatively much less.

Those aggregates are not only much larger,

but most of the shifts among financial instruments are expected
to take place within those large aggregates.

For instance, shifts

If the shifts are into (or out of) market

instruments, such as tax-exempt bonds or Treasury bills, the totals
would be affected, but probably to a limited degree.
The fact that, for the time being, underlying monetary
growth and reserve provision cannot sensibly be gauged by directly
observing movements in Ml -- up or down -- is a technical fact of
life; it has no broader policy significance.
It is true that for some time (before the new distortions
that will be induced by legislation and regulation) the various
monetary aggregates have in general been somewhat above the growth

-5-

paths targeted for the year.

I would also point out, though,

that indications suggest an appreciable recent slowing
in growth
of both M2 and M3, and it so happens

perhaps fortuitously

that last week's Ml figure is very close to targ
et.

MO OOP

That is part

of the setting of the discount rate chan
ge.
You may recall that, when reiterating our annual targets
in July, I emphasized that "growth somewhat above the targ
eted
ranges would be tolerated for a time in circumstances
in which
it appeared that precautionary or liquidity motivations,
during
a period of economic uncertainty and turbulence, were lead
ing
to stronger than anticipated demands for money.

We will look

to a variety of factors in reaching that judgment, incl
uding
such technical factors as the behavior of different comp
onents
in the money supply, the growth of credit, the behavior
of
banking and financial markets, and more broadly, the beha
vior
of velocity and interest rates."

I believe reasoned assessment

of recent developments in the light of those factors does
suggest
that preferences for liquidity have generally been rela
tively
strong, reflected in part in some abno
rmal pressures in parts of the
private credit markets. In that light, the fact that some
of
the aggregates have tended to run somewhat above their target
ranges has been fully acceptable to the Federal Open Market
Committee.
I believe I can speak for all members of the Committee
in saying that those judgments have been reached, and will continue
to be reached, in full recognition of the need to maintain the
heartening progress toward price stability.

Excerpt from Informal Talk of
Paul A. Volcker to Business Council
At Hot Springs, Va. 10/9/82

As you know, yesterday we made a further reduction in
the discount rate to 9-1/2 percent.

As is usually the case,

that change was, in an immediate sense, designed to maintain an
appropriate alignment with short-term market rates.

It was, of

course, also taken against a background of continued sluggishness
in business activity, the exceptional recent strength of the
dollar on the exchange markets, and indications of strong demands
for liquidity in some markets.
In the light of all the potentially confusing comment in
the press in recent days,

which seemed to be based on a combination

represents no change in

the basic thrust of policy.
In assessing economic and financial developments over
recent months, I would also point out again what I have said on a
number of occasions before:

there is growing evidence that the

inflationary momentum has been broken.

Indeed, with appropriate

policies, the prospects appear good for continuing moderation of
inflation in the months and years ahead.

Continuing progress toward

restoring price stability is an essential part of building a solid
base, not just for recovery but for sustaining expansion over a
long period.

Concern about inflation, and monetary discipline,

is not something we can turn on and off; it will be a continuing
priority concern of policy.

_ 2-

What does inevitably change is the financial and
business environment in which we operate.

Unfortunately from

the standpoint of reporting and communication, the continuing
thrust of monetary policy cannot be adequately measured by any
single or simple symbol.

Headlines can be misleading.

I hope we have all learned that the level or direction
of interest rates is not, by itself, a reliable test of "ease"
or "restraint" -- it all depends upon the circumstances.

Lower

interest rates in an economy in recession are not unusual, and
are consistent with the need for recovery.

But lower interest

rates do not in themselves indicate a change in basic policy
approach.

,
I

DigitizedOrfor FRASER

Over longer periods of time, achieving and maintaining

the lower level of interest rates we would all like to see must,
in a sense, be a reward for success in dealing with inflation;
artificially forcing the process would in the end be counterproductive.

What is needed is market conviction that the funda-

We express policy

in terms of broad targets for the various definitions of money
on the basic thesis that, over time, the inflationary process is
related to excessive growth in money and credit.

But you have

also heard me repeatedly express caution about the validity of
any single measure, or even all the measures in the short run.

•

-3-

distortions growing

out of legislation and regulation -- in the M1 number that is so
widely followed in the markets.

Right now, and over the next few

weeks, some $31 billion of "All Savers Certificates" are maturing,
and in large part will not be rolled over.

As thosefunds move

to other investments, some amount will temporarily pass through
checking accounts, or be "parked" in those accounts for a time
awaiting new investment decisions.

We know M1 will be affected,

Sizable transfers of funds into

those accounts, which will have considerable checkable and transactions capabilities, are anticipated, including shifts from
regular checking and NOW accounts.

The result will probably be

to depress M1 growth for a while -- assuming the new accounts are
not included in Ml.

But again we have no way of anticipating the

magnitude, or even the direction of impact should the new accounts
be tied to existing NOW accounts.

Both the "ups" and "downs" in

M1 reflecting these regulatory changes will be artificial and
virtually meaningless in gauging underlying trends in "money" and
liquidity.

The potential problems have been common knowledge in

market circles.

We will, of course, analyze the data

carefully to assist us in assessing underlying trends, but it is
likely to take some months before new relationships can be judged
with any degree of reliability in a world of radically new deposit
instruments with transactions capability.
Fortunately, while the M2 and M3 aggregates may also be
affected by the new deposit instruments, the impact should be
relatively much less.

Those aggregates are not only much larger,

but most of the shifts among financial instruments are expected
to take place within those large aggregates.

For instance, shifts

If the shifts are into (or out of) market

is a technical fact of

paths targeted for the year.

I would also point out, though,

that indications suggest an appreciab
le recent slowing in growth
of both M2 and M3, and it so happens

perhaps fortuitously

that last week's Ml figure is very clo
se to target.

111M4111=

That is part

of the setting of the discount
rate change.
You may recall that, when reiterating
our annual targets
in July, I emphasized that "growth som
ewhat above the targeted
ranges would be tolerated for a time in
circumstances in which
it appeared that precautionary or liq
uidity motivations, during
a period of economic uncertainty and tur
bulence, were leading
to stronger than anticipated demands for
money.

We will look

to a variety of factors in reaching tha
t judgment, including
such technical factors as the behavi
or of different components
in the money supply, the growth of
credit, the behavior of
banking and financial markets, and mor
e broadly, the behavior
of velocity and interest rates."

I believe reasoned assessment

of recent developments in the lig
ht of those factors does suggest
that preferences for liquidity hav
e generally been relatively
strong, reflected in part in
some abnormal pressures in parts
of the
private credit markets. In that lig
ht, the fact that some of
the aggregates have tended to run somewhat
above their target
ranges has been fully acceptable to the Fed
eral Open Market
Committee.
I believe I can speak for all members of the Commit
tee
in saying that those judgments have bee rea
ched, and will continue
n
to be reached, in full recognition of the
need to maintain the
heartening progress toward price stability
.