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https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Collection: Paul A. Volcker Papers
Call Number: MC279
Box 13
Preferred Citation: Senate Budget, 1982 July 28; Paul A. Volcker Papers, Box 13; Public Policy
Papers, Department of Rare Books and Special Collections, Princeton University Library
Find it online: http://fulding iI1aids.princeton.edu/collections/MC279/c425 and
https://fraser.sdouisfed.org/archival/5297
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From the collections of the Seeley G. Mudd Manuscript 11.iii Princeton, NJ
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https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
For release on delivery
9:30 AM, E.D.T.
July 28, 1982
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Statement by
Paul A. Volcker
Chairman, Board of Governors of the Federal Reserve System
before the
Committee on the Budget
United States Senate
July 28, 1982
am pleased to have this opportunity to meet with
you again to review the monetary and budgetary situation in
the light of our economic objectives.
Just last week, I
testified at some length before the Banking Committees of the
Senate and House; instead of repeating that full statement this
morning, I have attached it to my brief remarks today.
I do want to take this occasion to recognize particularly
the leadership of members of this Committee in pressing for the
budgetary savings reflected in the First Resolution.
Given the
nature of our budgetary problems, that step cannot be the last
if we are to bring the fiscal deficit under control.
But it
does represent, in most difficult circumstances, encouraging
evidence of the willingness and determination of the Congress
to undertake the necessary effort.
In presenting our monetary and credit "targets" to the
Banking Committees last week, I noted that the basic objective
of Federal Reserve monetary policy is the fostering of an environment conducive to sustained recovery in business activity, while
maintaining the financial discipline needed to restore reasonable
price stability.
In reviewing the appropriate means to those
broad ends, the Federal Open Market Committee at its recent
meetings concluded, in effect, that the quantitative objectives
for the various Ms set forth at the beginning of the year should
not be changed at this time, but that we would find an outcome
around the top of those target ranges fully acceptable.
In reaching that conclusion, we considered carefully
and explicitly the intent of the Congress, as expressed in the
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
2
First Budget Resolution, that the Federal Reserve "reevaluate
its monetary targets in order to assure that they are fully
complementary to a new and more restrained fiscal policy."
In the light of that Resolution, as well as other factors,
we debated the appropriateness of the monetary targets for
1982.
Analysis of past experience suggested strongly that
the previously announced targets, particularly with growth
around the top of the range, should provide enough money and
liquidity to support moderate expansion over the remainder of
this year.
Pressing aggressively to reduce monetary growth well
within the ranges did not seem desirable at this stage of economic
developments, particularly in light of the evidence of a demand
for liquidity for precautionary -- as opposed to transactions -purposes.
A sizable increase in the ranges, on the other hand,
might imply a buildup of money and liquidity to the degree that
it would impair the effort needed to maintain and extend the
encouraging progress toward dis-inflation.
In reaching that judgment, we were conscious that the strong
liquidity demands evident in recent months could shift quickly as
the economy showed signs of recovery, and that raising the targets
could easily be misconstrued as a willingness to tolerate more
inflation.
At the same time, the Committee clearly recognized
that possible demands for liquidity in the current uncertain
economic circumstances would continue to require a degree of
flexibility and judgment in assessing appropriate needs for
money in the months ahead.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
4
other things, the behavior of velocity over the remainder of
this year.
Since we expect that the monetary aggregates will
be near the upper ends of their ranges at the end of 1982, the
tentative targets for 1993 would be consistent with somewhat
slower money growth next year.
With inflation declining, the
tentative targets should be compatible with continuing recovery
at a moderate pace and an improvement in employment opportunities
In approaching these policy decisions, I have been very
conscious of the fact that monetary policy, however important,
is only one instrument of economic policy.
The attainment of
our common objective of a strong and prosperous economy depends
also on appropriately complementary policies in the fiscal
sphere and in the private sector.
Relaxing dpline on money growth might seem attractive
to some as a means of alleviating stresses in financial markets.
Indeed, in circumstances in which inflationary expectations and
pressures are quiescent, the immediate effect of encouraging
faster growth in money might be to lower interest rates, particularly in short-term markets.
In time, however, an attempt to
maintain lower interest rates by excessive money growth would
founder.
The net result would be to imbed inflation even more
deeply into our economic system, and to make buyers of fixedinterest securities still more wary.
Sooner or later, public
and private demands for credit would reflect the higher price
levels, and savings likely would be discouraged.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Market pressures
-3-
We could observe that, over the first half of the year,
the desire of individuals and businesses to hold assets in
relatively liquid forms appeared to be extraordinarily strong,
apparently reflecting concerns about the business and financial
situation.
One reflection of that may be found in the large
declines in the "velocity" of money over the recession period
that is, the ratio of the gross national product to measures
of money.
That drop in velocity is particularly striking in
view of the persistence of high interest rates, suggesting a
heightened desire to hold money or liquid assets relative to
earlier trends.
While velocity often fluctuates widely over short
periods of time, trends have been much more stable over time.
Assuming that velocity rebounds in the second half -- as typically
occurs early in a period of economic recovery -- the targets
established at the beginning of the year for the monetary
aggregates should be fully consistent with economic expansion
in a context of declining inflation.
points in that direction.
Postwar experience strongly
However, the Committee explicitly
considered the possibility that relatively strong precautionary
demands for money could persist.
In that event -- and it would
inevitably involve elements of judgment -- growth of the aggregates
somewhat above the targeted ranges would be tolerated for a time
as consistent with the FOMC's general policy thrust.
In looking ahead to 1983, the Committee has decided to
retain tentatively the existing targets.
The FOMC will review
the decision at the start of next year, taking account of, among
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
•
5
would return in amped force.
Put simply, inflationary
money creation provides no escape from the pressures of demands
for credit, nor can money creation substitute for real savings.
We can, of course, affect that balance of demand and
supply in credit markets by fiscal and other policies, and that
is why I welcome the effort of the Congress to achieve greater
fiscal restraint.
I recognize -- and more importantly the markets
recognize -- sizable obstacles remain
nSnveng the intentions
expressed in the First Budget Resolution into concrete legislative
action; harmonizing the values and aims of the authorizing and
revenue committees -- indeed the values and aims of our citizens -within the constraints of budgetary dpline is always difficult,
and no more so than in today's circumstances.
Moreover, the effort this year must be put in a larger
perspective.
Even if the objectives of the Budget Resolution
are fully achieved for next year and the underlying economic
assumptions are realized, the deficit in FY 1983 would be about
as large as this year's.
Moreover, the risks seem, in my judgment,
all on the side of a still greater deficit, despite your important
efforts.
If the deficit turns out to be larger than expected
entirely because of a shortfall in economic growth or inflation -and I would point out that the members of the FOMC anpate
somewhat less real growth and inflation (and thus inflationgenerated revenues) than the Congress -- that "add on" should
nS t be a source 5f much concern.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
What is of concern is that you
6--
are working from se large a "structural" deficit -- a deficit
that would exist even in a relatively prosperous economy -and that concern would mount to the extent the targeted savings
are not achieved.
As we appraise the fiscal situation today, projected
deficits continue to carry the implicit threat of "crowding out"
business investment and housing as the economy expands -- a
process that would imply significantly higher interest rates
than would otherwise result.
Your continuing leadership in
prodding your colleagues in the Congress to deal with the
budget dilemma thus remains crucially important to the outlook
for interest rates and the credit markets.
Put more positively, significant progress in paring
the deficits will contribute importantly to lower interest
rates and reduced strains in financial markets within any
monetary framework.
That budgetary policy, as we see it, is
not fundamentally a substitute for disciplined monetary policy
but rather an essential complement.
When moretary policy alone must carry the burden of
dealing with inflation, and when fiscal deficits absorb so
large a fraction of the capacity of the economy to generate
savings, pressures tend to concentrate on financial markets and
on vulnerable credit-dependent sectors of the economy.
Con-
versely, budget restraint relieves those pressures and risks
directly, and would reinforce the growing sense of conviction
that the inflationary tide has turned.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
7
While the Open Market Committee, in responding to the
Budget Resolution, did not feel that larger growth in the money
supply over time would be desirable, let me also say that I
believe a credibly firmer budgetary posture would permit us a
degree of greater flexibility in the short-run conduct of policy.
Specifically, by damping concern about a resurgence of inflation
or credit market pressures, fiscal restraint also lessens fears
that short-run increases in the money supply might presage a
continuing inflationary monetization of the debt.
But any gains
in that respect will of course depend on firmness in implementing
the intentions set forth in your First Resolution, and encouraging
confidence among investors and borrowers that the effort will be
sustained and reinforced in coming years.
I need not dwell on the fact that we are in most difficult
economic circumstances, with unemployment far too high, with
strong pressures on financial markets, and with a sense of widespread uncertainty.
We cannot build a sound program against inflation
on a base of continuing recession.
But let us recognize, too,
that we have come a long way toward turning back the inflationary
tide that had come to grip our economy over the decade of the
1970s, and that there is promising evidence of improvements in
productivity and efficiency underway.
More recently, there are
at least some signs that the "grid-lock" in the financial markets
may be beginning to break up; interest rates, while still very
high in historical perspective, have declined to the lowest levels
for some time.
The challenge is to sustain that progress during a period
of recovery, for it is that progress that is needed to extend and
ahead.
support economic expansion over the long years
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Monetary
8
and fiscal policies alike need to be directed, and work in
concert, toward that objective.
In that context, I and my
colleagues believe a continuing dialogue with members of this
Committee is highly constructive, and I welcome your comments
and questions.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
For release on delivery
9:30 AM, E.D.T.
July 28, 1982
A
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Statement by
Paul A. Volcker
Chairman, Board of Governors of the Federal Reserve System
before the
Committee on the Budget
United States Senate
July 28, 1982
I am pleased to have this opportunity to meet with
you again to review the monetary and budgetary situation in
the light of our economic objectives.
Just last week, I
testified at some length before the Banking Committees of the
Senate and House; instead of repeating that full statement this
morning, I have attached it to my brief remarks today.
do want to take this occasion to recognize particularly
the leadership of members of this Committee in pressing for the
budgetary savings reflected in the First Resolution.
Given the
nature of our budgetary problems, that step cannot be the last
if we are to bring the fiscal deficit under control.
But it
does represent, in most difficult circumstances, encouraging
evidence of the willingness and determination of the Congress
to undertake the necessary effort.
In presenting our monetary and credit "targets" to the
Banking Committees last week, I noted that the basic objective
of Federal Reserve monetary policy is the fostering of an environment conducive to sustained recovery in business activity, while
maintaining the financial discipline needed to restore reasonable
price stability.
In reviewing the appropriate means to those
broad ends, the Federal Open Market Committee at its recent
meetings concluded, in effect, that the quantitative objectives
S
for the various Ms set forth at the beginning of the year should
not be changed at this time, but that we would find an outcome
around the top of those target ranges fully acceptable.
In reaching that conclusion, we considered carefully
and explicitly the intent of the Congress, as expressed in the
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
-2-
First Budget Resolution, that the Federal Reserve "reevaluate
its monetary targets in order to assure that they are fully
complementary to a new and more restrained fiscal policy."
In the light of that Resolution, as well as other factors,
we debated the appropriateness of the monetary targets for
1982.
Analysis of past experience suggested strongly that
the previously announced targets, particularly with growth
around the top of the range, should provide enough money and
liquidity to support moderate expansion over the remainder of
this year.
Pressing aggressively to reduce monetary growth well
within the ranges did not seem desirable at this stage of economic
developments, particularly in light of the evidence of a demand
for liquidity for precautionary -- as opposed to transactions -purposes.
A sizable increase in the ranges, on the other hand,
might imply a buildup of money and liquidity to the degree that
it would impair the effort needed to maintain and extend the
encouraging progress toward dis-inflation.
In reaching that judgment, we were conscious that the strong
liquidity demands evident in recent months could shift quickly as
the economy showed signs of recovery, and that raising the targets
could easily be misconstrued as a willingness to tolerate more
inflation.
At the same time, the Committee clearly recognized
that possible demands for liquidity in the current uncertain
economic circumstances would continue to require a degree of
flexibility and judgment in assessing appropriate needs for
money in the months ahead.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
3-
We could observe that, over the first half of the year,
the desire of individuals and businesses to hold assets in
relatively liquid forms appeared to be extraordinarily strong,
apparently reflecting concerns about the business and financial
•
situation.
One reflection of that may be found in the large
declines in the "velocity" of money over the recession period
that is, the ratio of the gross national product to measures
of money.
That drop in velocity is particularly striking in
view of the persistence of high interest rates, suggesting a
heightened desire to hold money or liquid assets relative to
earlier trends.
While velocity often fluctuates widely over short
periods of time, trends have been much more stable over time.
Assuming that velocity rebounds in the second half -- as typically
occurs early in a period of economic recovery -- the targets
established at the beginning of the year for the monetary
aggregates should be fully consistent with economic expansion
in a context of declining inflation.
points in that direction.
Postwar experience strongly
However, the Committee explicitly
considered the possibility that relatively strong precautionary
demands for money could persist.
In that event -- and it would
inevitably involve elements of judgment -- growth of the aggregates
somewhat above the targeted ranges would be tolerated for a time
as consistent with the FOMC's general policy thrust.
In looking ahead to 1983, the Committee has decided to
retain tentatively the existing targets.
The FOMC will review
the decision at the start of next year, taking account of, among
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
-4-
other things, the behavior of velocity over the remainder of
this year.
Since we expect that the monetary aggregates will
be near the upper ends of their ranges at the end of 1982, the
tentative targets for 1983 would be consistent with somewhat
slower money growth next year.
With inflation declining, the
tentative targets should be compatible with continuing recovery
at a moderate pace and an improvement in employment opportunities
In approaching these policy deons, I have been very
conscious of the fact that monetary policy, however important,
is only one instrument of economic policy.
The attainment of
our common objective of a strong and prosperous economy depends
also on appropriately complementary policies in the fiscal
sphere and in the private sector.
Relaxing discipline on money growth might seem attractive
to some as a means of alleviating stresses in financial markets.
Indeed, in circumstances in which inflationary expectations and
pressures are quiescent, the inuuediate effect of encouraging
faster growth in money might be to lower interest rates, particularly in short-term markets.
In time, however, an attempt to
maintain lower interest rates by excessive money growth would
founder.
The net result would be to imbed inflation even more
deeply into our economic system, and to make buyers of fixedinterest securities still more wary.
Sooner or later, public
and private demands for credit would reflect the higher price
levels, and savings likely would be discouraged.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Market pressures
•
5-
would return in amplified force.
Put simply, inflationary
money creation provides no escape from the pressures of demands
for credit, nor can money creation substitute for real savings.
We can, of course, affect that balance of demand and
supply in credit markets by fiscal and other policies, and that
is why I welcome the effort of the Congress to achieve greater
A
fiscal restraint.
I recognize -- and more importantly the markets
recognize -- sizable obstacles remain in converting the intentions
expressed in the First Budget Resolution into concrete legislative
action; harmonizing the values and aims of the authorizing and
revenue committees -- indeed the values and aims of our citizens -within the constraints of budgetary discipline is always difficult,
and no more so than in today's circumstances.
Moreover, the effort this year must be put in a larger
perspective.
Even if the objectives of the Budget Resolution
are fully achieved for next year and the underlying economic
assumptions are realized, the deficit in FY 1983 would be about
as large as this year's.
Moreover, the risks seem, in my judgment,
all on the side of a still greater deficit, despite your important
efforts.
If the deficit turns out to be larger than expected
entirely because of a shortfall in economic growth or inflation
and I would point out that the members of the FOMC anticipate
somewhat less real growth and inflation (and thus inflationgenerated revenues) than the Congress -- that "add on" should
not be a source of much concern.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
What is of concern is that you
-6
are working from 9.c. la-ge a "structural" deficit -- a deficit
that would exist even in a relatively prosperous economy -and that concern would mount to the extent the targeted savings
are not achieved.
As we appraise the fiscal situation today, projected
deficits continue to carry the implicit threat of "crowding out"
a
business investment and housing as the economy expands
process that would imply significantly higher interest rates
than would otherwise result.
Your continuing leadership in
prodding your colleagues in the Congress to deal with the
budget dilemma thus remains crucially important to the outlook
for interest rates and the credit markets.
Put more positively, significant progress in paring
the deficits will contribute importantly to lower interest
rates and reduced strains in financial markets within any
monetary framework.
That budgetary policy, as we see it, is
not fundamentally a substitute for disciplined monetary policy
but rather an essential complement.
When moretary policy alone must carry the burden of
dealing with inflation, and when fiscal deficits absorb so
large a fraction of the capacity of the economy to generate
savings, pressures tend to concentrate on financial markets and
on vulnerable credit-dependent sectors of the economy.
Con-
versely, budget restraint relieves those pressures and risks
directly, and would reinforce the growing sense of conviction
that the inflationary tide has turned.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
7
While the Open Market Committee, in responding to the
Budget Resolution, did not feel that larger growth in the money
supply over time would be desirable, let me also say that I
believe a credibly firmer budgetary posture would permit us a
degree of greater flexibility in the short-run conduct of policy.
Specifically, by damping concern about a resurgence of inflation
or credit market pressures, fiscal restraint also lessens fears
that short-run increases in the money supply might presage a
continuing inflationary monetization of the debt.
But any gains
in that respect will of course depend on firmness in implementing
the intentions set forth in your First Resolution, and encouraging
confidence among investors and borrowers that the effort will be
sustained and reinforced in coming years.
I need not dwell on the fact that we are in most difficult
economic circumstances, with unemployment far too high, with
strong pressures on financial markets, and with a sense of widespread uncertainty.
We cannot build a sound program against inflation
on a base of continuing recession.
But let us recognize, too,
that we have come a long way toward turning back the inflationary
tide that had come to grip our economy over the decade of the
1970s, and that there is promising evidence of improvements in
productivity and efficiency underway.
More recently, there are
at least some signs that the "grid-lock" in the financial markets
may be beginning to break up; interest rates, while still very
high in historical perspective, have declined to the lowest levels
for some time.
The challenge is to sustain that progress during a period
of recovery, for it is that progress that is needed to extend and
ahead.
support economic expansion over the long years
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Monetary
J
8-
and fiscal policies alike need to be directed, and work in
concert, toward that objective.
In that context, I and my
colleagues believe a continuing dialogue with members of this
Committee is highly constructive, and I welcome your comments
and questions.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
For release on delivery
9:30 AM, E.D.T.
July 28,*1982
Statement by
Paul A. Volcker
Chairman, Board of Governors of the Federal Reserve System
before the
Committee on the Budget
United States Senate
July 28, 1982
1
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
I am pleased to have this opportunity to meet with
you again to review the monetary and budgetary situation in
the light of our economic objectives.
Just last week, I
testified at some length before the Banking Committees of the
Senate and House; instead of repeating that full statement this
morning, I have attached it to my brief remarks today.
I do want to take this occasion to recognize particularly
the leadership of members of this Committee in pressing for the
budgetary savings reflected in the First Resolution.
Given the
nature of our budgetary problems, that step cannot be the last
if we are to bring the fiscal deficit under control.
But it
does represent, in most difficult circumstances, encouraging
evidence of the willingness and determination of the Congress
to undertake the necessary effort.
In presenting our monetary and credit "targets" to the
Banking Committees last week, I noted that the basic objective
of Federal Reserve monetary policy is the fostering of an environment conducive to sustained recovery in business activity, while
maintaining the financial discipline needed to restore reasonable
price stability.
In reviewing the appropriate means to those
broad ends, the Federal Open Market Committee at its recent
meetings concluded, in effect, that the quantitative objectives
for the various Ms set forth at the beginning of the year should
not be changed at this time, but that we would find an outcome
around the top of those target ranges fully acceptable.
In reaching that conclusion, we considered carefully
and explicitly the intent of the Congress, as expressed in the
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
2-
First Budget Resolution, that the Federal Reserve "reevaluate
its monetary targets in order to assure that they are fully
,
complementary to a new and more restrained fiscal policy.
In the light of that Resolution, as well as other factors,
we debated the appropriateness of the monetary targets for
•
1982.
•
Analysis of past experience suggested strongly that
the previously announced targets, particularly with growth
around the top of the range, should provide enough money and
liquidity to support moderate expansion over the remainder of
this year.
Pressing aggressively to reduce monetary growth well
within the ranges did not seem desirable at this stage of economic
developments, particularly in light of the evidence of a demand
for liquidity for precautionary -- as opposed to transactions -purposes.
A sizable increase in the ranges, on the other hand,
might imply a buildup of money and liquidity to the degree that
it would impair the effort needed to maintain and extend the
encouraging progress toward dis-inflation.
In reaching that judgment, we were conscious that the strong
liquidity demands evident in recent months could shift quickly as
the economy showed signs of recovery, and that raising the targets
could easily be misconstrued as a willingness to tolerate more
inflation.
At the same time, the Committee clearly recognized
that possible demands for liquidity in the current uncertain
economic circumstances would continue to require a degree of
flexibility and judgment in assessing appropriate needs for
money in the months ahead.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
3-
We could observe that, over the first half of the year,
the desire of individuals and businesses to hold assets in
relatively liquid forms appeared to be extraordinarily strong,
apparently reflecting concerns about the business and financial
situation.
One reflection of that may be found in the large
declines in the "velocity" of money over the recession period
M•••••••
that is, the ratio of the gross national product to measures
of money.
That drop in velocity is particularly striking in
view of the persistence of high interest rates, suggesting a
heightened desire to hold money or liquid assets relative to
earlier trends.
While velocity often fluctuates widely over short
periods of time, trends have been much more stable over time.
Assuming that velocity rebounds in the second half -- as typically
occurs early in a period of economic recovery -- the targets
established at the beginning of the year for the monetary
aggregates should be fully consistent with economic expansion
in a context of declining inflation.
points in that direction.
Postwar experience strongly
However, the Committee explicitly
considered the possibility that relatively strong precautionary
demands for money could persist.
In that event -- and it would
inevitably involve elements of judgment -- growth of the aggregates
somewhat above the targeted ranges would be tolerated for a time
as consistent with the FOMC's general policy thrust.
In looking ahead to 1983, the Committee has decided to
retain tentatively the existing targets.
The FOMC will review
the decision at the start of next year, taking account of, among
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
-4-
other things, the behavior of velocity over the remainder of
this year.
Since we expect that the monetary aggregates will
be near the upper ends of their ranges at the end of 1982, the
tentative targets for 1983 would be consistent with somewhat
slower money growth next year.
With inflation declining, the
tentative targets should be compatible with continuing recovery
at a moderate pace and an improvement in employment opportunities
In approaching these policy decisions, I have been very
conscious of the fact that monetary policy, however important,
is only one instrument of economic policy.
The attainment of
our common objective of a strong and prosperous economy depends
also on appropriately complementary policies in the fiscal
sphere and in the private sector.
Relaxing discipline on money growth might seem attractive
to some as a means of alleviating stresses in financial markets.
Indeed, in circumstances in which inflationary expectations and
pressures are quiescent, the immediate effect of encouraging
faster growth in money might be to lower interest rates, particularly in short-term markets.
In time, however, an attempt to
maintain lower interest rates by excessive money growth would
founder.
The net result would be to imbed inflation even more
deeply into our economic system, and to make buyers of fixedinterest securities still more wary.
Sooner or later, public
and private demands for credit would reflect the higher price
levels, and savings likely would be discouraged.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Market pressures
-5
would return in amped force.
Put simply, inflationary
money creation provides no escape from the pressures of demands
for credit, nor can money creation substitute for real savings.
We can, of course, affect that balance of demand and
supply in credit markets by fiscal and other policies, and that
is why I welcome the effort of the Congress to achieve greater
fiscal restraint.
I recognize -- and more importantly the markets
recognize -- sizable obstacles remain in converting the intentions
expressed in the First Budget Resolution into concrete legislative
action; harmonizing the values and aims of the authorizing and
revenue committees -- indeed the values and aims of our citizens -within the constraints of budgetary dpline is always difficult,
and no more so than in today's circumstances.
Moreover, the effort this year must be put in a larger
perspective.
Even if the objectives of the Budget Resolution
are fully achieved for next year and the underlying economic
assumptions are realized, the deficit in FY 1983 would be about
as large as this year's.
Moreover, the risks seem, in my judgment,
all on the side of a still greater deficit, despite your important
efforts.
If the deficit turns out to be larger than expected
entirely because of a shortfall in economic growth or inflation
and I would point out that the members of the FOMC anticipate
somewhat less real growth and inflation (and thus inflationgenerated revenues) than the Congress -- that "add on" should
n5t be a source of much concern.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
What
sSf concern is that you
are working from sc large a "structural" deficit -- a deficit
that would exist even in a relatively prosperous economy -and that concern would mount to the extent the targeted savings
are not achieved.
As we appraise the fiscal situation today, projected
deficits continue to carry the implicit threat of "crowding out"
business investment and housing as the economy expands -- a
process that would imply significantly higher interest rates
than would otherwise result.
Your continuing leadership in
prodding your colleagues in the Congress to deal with the
budget dilemma thus remains crucially important to the outlook
for interest rates and the credit markets.
Put more positively, significant progress in paring
the deficits will contribute importantly to lower interest
rates and reduced strains in financial markets within any
monetary framework.
That budgetary policy, as we see it, is
not fundamentally a substitute for disciplined monetary policy
but rather an essential complement.
When moretary policy alone must carry the burden of
dealing with inflation, and when fiscal deficits absorb so
large a fraction of the capacity of the economy to generate
savings, pressures tend to concentrate on financial markets and
on vulnerable credit-dependent sectors of the economy.
Con-
versely, budget restraint relieves those pressures and risks
directly, and would reinforce the growing sense of conviction
that the inflationary tide has turned.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
-7
While the Open Market Committee, in responding to the
Budget Resolution, did not feel that larger growth in the money
supply over time would be desirable, let me also say that I
believe a credibly firmer budgetary posture would permit us a
degree of greater flexibility in the short-run conduct of policy.
Specifically, by damping concern about a resurgence of inflation
or credit market pressures, fiscal restraint also lessens fears
that short-run increases in the money supply might presage a
continuing inflationary monetization of the debt.
But any gains
in that respect will of course depend on firmness in implementing
the intentions set forth in your First Resolution, and encouraging
confidence among investors and borrowers that the effort will be
sustained and reinforced in coming years.
I need not dwell on the fact that we are in most difficult
economic circumstances, with unemployment far too high, with
strong pressures on financial markets, and with a sense of widespread uncertainty.
We cannot build a sound program against inflation
on a base of continuing recession.
But let us recognize, too,
that we have come a long way toward turning back the inflationary
tide that had come to grip our economy over the decade of the
1970s, and that there is promising evidence of improvements in
productivity and efficiency underway.
More recently, there are
at least some signs that the "grid-lock" in the financial markets
may be beginning to break up; interest rates, while still very
high in historical perspective, have declined to the lowest levels
for some time.
The challenge is to sustain that progress during a period
of recovery, for it is that progress that is needed to extend and
ahead.
support economic expansion over the long years
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Monetary
8
and fiscal policies alike need to be directed, and work in
concert, toward that objective.
In that context, I and my
colleagues believe a continuing dialogue with members of this
Committee is highly constructive, and I welcome your comments
and questions.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
For release on delivery
9:30 AM, E.D.T.
July 28, 1982
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Statement by
Paul A. Volcker
Chairman, Board of Governors of the Federal Reserve System
before the
Committee on the Budget
United States Senate
July 28, 1982
I am pleased to have this opportunity to meet with
you again to review the monetary and budgetary situation in
the light of our economic objectives.
Just last week, I
testified at some length before the Banking Committees of the
Senate and House; instead of repeating that full statement this
morning, I have attached it to my brief remarks today.
I do want to take this occasion to recognize particularly
the leadership of members of this Committee in pressing for the
budgetary savings reflected in the First Resolution.
Given the
nature of our budgetary problems, that step cannot be the last
if we are to bring the fiscal deficit under control.
But it
does represent, in most difficult circumstances, encouraging
evidence of the willingness and determination of the Congress
to undertake the necessary effort.
In presenting our monetary and credit "targets" to the
Banking Committees last week, I noted that the basic objective
of Federal Reserve monetary policy is the fostering of an environment conducive to sustained recovery in business activity, while
maintaining the financial discipline needed to restore reasonable
price stability.
In reviewing the appropriate means to those
broad ends, the Federal Open Market Committee at its recent
meetings concluded, in effect, that the quantitative objectives
for the various Ms set forth at the beginning of the year should
not be changed at this time, but that we would find an outcome
around the top of those target ranges fully acceptable.
In reaching that conclusion, we considered carefully
and explicitly the intent of the Congress, as expressed in the
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
2-
First Budget Resolution, that the Federal Reserve "reevaluate
its monetary targets in order to assure that they are fully
complementary to a new and more restrained fiscal policy.
In the light of that Resolution, as well as other factors,
we debated the appropriateness of the monetary targets for
1982.
Analysis of past experience suggested strongly that
the previously announced targets, particularly with growth
around the top of the range, should provide enough money and
liquidity to support moderate expansion over the remainder of
this year.
Pressing aggressively to reduce monetary growth well
within the ranges did not seem desirable at this stage of economic
developments, particularly in light of the evidence of a demand
for liquidity for precautionary -- as opposed to transactions -purposes.
A sizable increase in the ranges, on the other hand,
might imply a buildup of money and liquidity to the degree that
it would impair the effort needed to maintain and extend the
encouraging progress toward dis-inflation.
In reaching that judgment, we were conscious that the strong
liquidity demands evident in recent months could shift quickly as
the economy showed signs of recovery, and that raising the targets
could easily be misconstrued as a willingness to tolerate more
inflation.
At the same time, the Committee clearly recognized
that possible demands for liquidity in the current uncertain
economic circumstances would continue to require a degree of
flexibility and judgment in assessing appropriate needs for
money in the months ahead.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
3-
We could observe that, over the first half of the year,
the desire of individuals and businesses to hold assets in
relatively liquid forms appeared to be extraordinarily strong,
apparently reflecting concerns about the business and financial
•
situation.
One reflection of that may be found in the large
declines in the "velocity" of money over the recession period -that is, the ratio of the gross national product to measures
of money.
That drop in velocity is particularly striking in
view of the persistence of high interest rates, suggesting a
heightened desire to hold money or liquid assets relative to
earlier trends.
While velocity often fluctuates widely over short
periods of time, trends have been much more stable over time.
Assuming that velocity rebounds in the second half -- as typically
occurs early in a period of economic recovery -- the targets
established at the beginning of the year for the monetary
aggregates should be fully consistent with economic expansion
in a context of declining inflation.
points in that direction.
Postwar experience strongly
However, the Committee explicitly
considered the possibility that relatively strong precautionary
demands for money could persist.
In that event -- and it would
inevitably involve elements of judgment -- growth of the aggregates
somewhat above the targeted ranges would be tolerated for a time
as consistent with the FOMC's general policy thrust.
In looking ahead to 1983, the Committee has decided to
retain tentatively the existing targets.
The FOMC will review
the decision at the start of next year, taking account of, among
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
4
other things, the behavior of velocity over the remainder of
this year.
Since we expect that the monetary aggregates will
be near the upper ends of their ranges at the end of 1982, the
tentative targets for 1933 would be consistent with somewhat
slower money growth next year.
•
With inflation declining, the
tentative targets should be compatible with continuing recovery
at a moderate pace and an improvement in employment opportunities
In approaching these policy deons, I have been very
conscious of the fact that monetary policy, however important,
is only one instrument of economic policy.
The attainment of
our common objective of a strong and prosperous economy depends
also on appropriately complementary policies in the fiscal
sphere and in the private sector.
Relaxing discipline on money growth might seem attractive
to some as a means of alleviating stresses in financial markets.
Indeed, in circumstances in which inflationary expectations and
pressures are quiescent, the immediate effect of encouraging
faster growth in money might be to lower interest rates, particularly in short-term markets.
In time, however, an attempt to
maintain lower interest rates by excessive money growth would
founder.
The net result would be to imbed inflation even more
deeply into our economic system, and to make buyers of fixedinterest securities still more wary.
Sooner or later, public
and private demands for credit would reflect the higher price
levels, and savings likely would be discouraged.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Market pressures
-5-
would return in amplified force.
Put simply, inflationary
money creation provides no escape from the pressures of demands
for credit, nor can money creation substitute for real savings.
We can, of course, affect that balance of demand and
supply in credit markets by fiscal and other policies, and that
a
is why I welcome the effort of the Congress to achieve greater
fiscal restraint.
I recognize -- and more importantly the markets
recognize -- sizable obstacles remain in converting the intentions
expressed in the First Budget Resolution into concrete legislative
action; harmonizing the values and aims of the authorizing and
revenue committees -- indeed the values and aims of our citizens -within the constraints of budgetary discipline is always difficult,
and no more so than in today's circumstances.
Moreover, the effort this year must be put in a larger
perspective.
Even if the objectives of the Budget Resolution
are fully achieved for next year and the underlying economic
assumptions are realized, the deficit in FY 1983 would be about
as large as this year's.
Moreover, the risks seem, in my judgment,
all on the side of a still greater deficit, despite your important
efforts.
If the deficit turns out to be larger than expected
entirely because of a shortfall in economic growth or inflation
and I would point out that the members of the FOMC anticipate
somewhat less real growth and inflation (and thus inflationgenerated revenues) than the Congress -- that "add on" should
not be a source of much concern.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
What is of concern is that you
6--
are working from
large a "structural" deficit -- a deficit
that would exist even in a relatively prosperous economy -and that concern would mount to the extent the targeted savings
are not achieved.
As we appraise the fiscal situation today, projected
deficits continue to carry the implicit threat of "crowding out"
business investment and housing as the economy expands -- a
process that would imply significantly higher interest rates
than would otherwise result.
Your continuing leadership in
prodding your colleagues in the Congress to deal with the
budget dilemma thus remains crucially important to the outlook
for interest rates and the credit markets.
Put more positively, significant progress in paring
the deficits will contribute importantly to lower interest
rates and reduced strains in financial markets within any
monetary framework.
That budgetary policy, as we see it, is
not fundamentally a substitute for disciplined monetary policy
but rather an essential complement.
When moretary policy alone must carry the burden of
dealing with inflation, and when fiscal deficits absorb so
large a fraction of the capacity of the economy to generate
savings, pressures tend to concentrate on financial markets and
on vulnerable credit-dependent sectors of the economy.
Con-
versely, budget restraint relieves those pressures and risks
directly, and would reinforce the growing sense of conviction
that the inflationary tide has turned.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
a
4
1
/
-7-
While the Open Market Committee, in responding to the
in the money
Budget Resolution, did not feel that larger growth
that I
supply over time would be desirable, let me also say
t us a
believe a credibly firmer budgetary posture would permi
4
policy.
degree of greater flexibility in the short-run conduct of
tion
Specifically, by damping concern about a resurgence of infla
ns fears
or credit market pressures, fiscal restraint also lesse
a
that short-run increases in the money supply might presage
continuing inflationary monetization of the debt.
But any gains
ng
in that respect will of course depend on firmness in implementi
raging
the intentions set forth in your First Resolution, and encou
confidence among investors and borrowers that the effort will be
sustained and reinforced in coming years.
I need not dwell on the fact that we are in most difficult
economic circumstances, with unemployment far too high, with
strong pressures on financial markets, and with a sense of widespread uncertainty.
We cannot build a sound program against inflation
on a base of continuing recession.
But let us recognize, too,
that we have come a long way toward turning back the inflationary
tide that had come to grip our economy over the decade of the
in
1970s, and that there is promising evidence of improvements
productivity and efficiency underway.
More recently, there are
at least some signs that the "grid-lock" in the financial markets
may be beginning to break up; interest rates, while still very
high in historical perspective, have declined to the lowest levels
for some time.
d
The challenge is to sustain that progress during a perio
of recovery, for it is that progress that is needed to extend and
years ahead.
support economic expansion over the long
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Monetary
%
8
-
-
and fiscal policies alike need to be directed, and work in
concert, toward that objective.
In that context, I and my
colleagues believe a continuing dialogue with members of this
Committee is highly constructive, and I welcome your comments
•
and questions.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
4
,.
S.
•1
*
For release on delivery
9:30 AM, E.D.T.
July 28, 1982
•
Statement by
Paul A. Volcker
Chairman, Board of Governors of the Federal Reserve System
before the
Committee on the Budget
United States Senate
July 28, 1982
i
i
i
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
I am pleased to have this opportunity to meet with
you again to review the monetary and budgetary situation in
the light of our economic objectives.
Just last week, I
testified at some length before the Banking Committees of the
Senate and House; instead of repeating that full statement this
morning, I have attached it to my brief remarks today.
I do want to take this occasion to recognize particularly
the leadership of members of this Committee in pressing for the
budgetary savings reflected in the First Resolution.
Given the
nature of our budgetary problems, that step cannot be the last
if we are to bring the fiscal deficit under control.
But it
does represent, in most difficult circumstances, encouraging
evidence of the willingness and determination of the Congress
to undertake the necessary effort.
In presenting our monetary and credit "targets" to the
Banking Committees last week, I noted that the basic objective
of Federal Reserve monetary policy is the fostering of an environment conducive to sustained recovery in business activity, while
maintaining the financial discipline needed to restore reasonable
price stability.
In reviewing the appropriate means to those
broad ends, the Federal Open Market Committee at its recent
meetings concluded, in effect, that the quantitative objectives
for the various Ms set forth at the beginning of the year should
not be changed at this time, but that we would find an outcome
around the top of those target ranges fully acceptable.
In reaching that conclusion, we considered carefully
and explicitly the intent of the Congress, as expressed in the
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
2-
First Budget Resolution, that the Federal Reserve "reevaluate
its monetary targets in order to assure that they are fully
complementary to a new and more restrained fiscal policy."
In the light of that Resolution, as well as other factors,
we debated the appropriateness of the monetary targets for
1982.
Analysis of past experience suggested strongly that
the previously announced targets, particularly with growth
around the top of the range, should provide enough money and
liquidity to support moderate expansion over the remainder of
this year.
Pressing aggressively to reduce monetary growth well
within the ranges did not seem desirable at this stage of economic
developments, particularly in light of the evidence of a demand
for liquidity for precautionary -- as opposed to transactions -purposes.
A sizable increase in the ranges, on the other hand,
might imply a buildup of money and liquidity to the degree that
it would impair the effort needed to maintain and extend the
encouraging progress toward dis-inflation.
In reaching that judgment, we were conscious that the strong
liquidity demands evident in recent months could shift quickly as
the economy showed signs of recovery, and that raising the targets
could easily be misconstrued as a willingness to tolerate more
inflation.
At the same time, the Committee clearly recognized
that possible demands for liquidity in the current uncertain
economic circumstances would continue to require a degree of
flexibility and judgment in assessing appropriate needs for
money in the months ahead.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
•
3-
we could observe that, over the first half of the year,
the desire of individuals and businesses to hold assets in
relatively liquid forms appeared to be extraordinarily strong,
apparently reflecting concerns about the business and financial
situation.
One reflection of that may be found in the large
declines in the "velocity" of money over the recession period
that is, the ratio of the gross national product to measures
of money.
That drop in velocity is particularly striking in
view of the persistence of high interest rates, suggesting a
heightened desire to hold money or liquid assets relative to
earlier trends.
While velocity often fluctuates widely over short
periods of time, trends have been much more stable over time.
Assuming that velocity rebounds in the second half -- as typically
occurs early in a period of economic recovery -- the targets
established at the beginning of the year for the monetary
aggregates should be fully consistent with economic expansion
in a context of declining inflation.
points in that direction.
Postwar experience strongly
However, the Committee explicitly
considered the possibility that relatively strong precautionary
demands for money could persist.
In that event -- and it would
inevitably involve elements of judgment -- growth of the aggregates
somewhat above the targeted ranges would be tolerated for a time
as consistent with the FOMC's general policy thrust.
In looking ahead to 1983, the Committee has decided to
retain tentatively the existing targets.
The FOMC will review
the decision at the start of next year, taking account of, among
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
4-
other things, the behavior of velocity over the remainder of
this year.
Since we expect that the monetary aggregates will
be near the upper ends of their ranges at the end of 1982, the
tentative targets for 1983 would be consistent with somewhat
slower money growth next year.
With inflation declining, the
tentative targets should be compatible with continuing recovery
at a moderate pace and an improvement in employment opportunities
In approaching these policy decisions, I have been very
conscious of the fact that monetary policy, however important,
is only one instrument of economic policy.
The attainment of
our common objective of a strong and prosperous economy depends
also on appropriately complementary policies in the fiscal
sphere and in the private sector.
Relaxing discipline on money growth might seem attractive
to some as a means of alleviating stresses in financial markets.
Indeed, in circumstances in which inflationary expectations and
pressures are quiescent, the immediate effect of encouraging
faster growth in money might be to lower interest rates, particularly in short-term markets.
In time, however, an attempt to
maintain lower interest rates by excessive money growth would
founder.
The net result would be to imbed inflation even more
deeply into our economic system, and to make buyers of fixedinterest securities still more wary.
Sooner or later, public
and private demands for credit would reflect the higher price
levels, and savings likely would be discouraged.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Market pressures
-5-
would return in amplified force.
Put simply, inflationary
money creation provides no escape from the pressures of demands
for credit, nor can money creation substitute for real savings.
We can, of course, affect that balance of demand and
supply in credit markets by fiscal and other policies, and that
is why I welcome the effort of the Congress to achieve greater
fiscal restraint.
I recognize -- and more importantly the markets
recognize -- sizable obstacles remain in converting the intentions
expressed in the First Budget Resolution into concrete legislative
action; harmonizing the values and aims of the authorizing and
revenue committees -- indeed the values and aims of our citizens -within the constraints of budgetary discipline is always difficult,
and no more so than in today's circumstances.
Moreover, the effort this year must be put in a larger
perspective.
Even if the objectives of the Budget Resolution
are fully achieved for next year and the underlying economic
assumptions are realized, the deficit in FY 1983 would be about
as large as this year's.
Moreover, the risks seem, in my judgment,
all on the side of a still greater deficit, despite your important
efforts.
If the deficit turns out to be larger than expected
entirely because of a shortfall in economic growth or inflation
and I would point out that the members of the FOMC anticipate
somewhat less real growth and inflation (and thus inflationgenerated revenues) than the Congress -- that "add on" should
not be a source of much concern.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
What is of concern is that you
6--
are working from so la-ge a "structural" deficit -- a deficit
that would exist even in a relatively prosperous economy -and that concern would mount to the extent the targeted savings
are not achieved.
As we appraise the fiscal situation today, projected
deficits continue to carry the implicit threat of "crowding out"
business investment and housing as the economy expands -- a
process that would imply significantly higher interest rates
than would otherwise result.
Your continuing leadership in
prodding your colleagues in the Congress to deal with the
budget dilemma thus remains crucially important to the outlook
for interest rates and the credit markets.
Put more positively, significant progress in paring
the deficits will contribute importantly to lower interest
rates and reduced strains in financial markets within any
monetary framework.
That budgetary policy, as we see it, is
not fundamentally a substitute for disciplined monetary policy
but rather an essential complement.
When moretary policy alone must carry the burden of
dealing with inflation, and when fiscal deficits absorb so
large a fraction of the capacity of the economy to generate
savings, pressures tend to concentrate on financial markets and
on vulnerable credit-dependent sectors of the economy.
Con-
versely, budget restraint relieves those pressures and risks
directly, and would reinforce the growing sense of conviction
that the inflationary tide has turned.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
While the Open Market CommitLee.in responding to the
Budget Resolution, did not feel that larger growth in the money
supply over time would be desirable, let me also say that I
believe a credibly firmer budgetary posture would permit us a
degree of greater flexibility in the short-run conduct of policy.
Specifically, by damping concern about a resurgence of inflation
or credit market pressures, fiscal restraint also lessens fears
that short-run increases in the money supply might presage a
continuing inflationary monetization of the debt.
But any gains
in that respect will of course depend on firmness in implementing
the intentions set forth in your First Resolution, and encouraging
confidence among investors and borrowers that the effort will be
sustained and reinZorced in coming years.
I need not dwell on the fact that we are in most difficult
economic circumstances, with unemployment far too high, with
strong pressures on financial markets, and with a sense of widespread uncertainty.
We cannot build a sound program against inflation
on a base of continuing recession.
But let us recognize, too,
that we have come a long way toward turning back the inflationary
tide that had come to grip our economy over the decade of the
1970s, and that there is promising evidence of improvements in
productivity and efficiency underway.
More recently, there are
at least some signs that the "grid-lock" in the financial markets
may be beginning to break up; interest rates, while still very
high in historical perspective, have declined to the lowest levels
for some time.
The challenge is to sustain that progress during a period
of recovery, for it is that progress that is needed to extend and
support economic expansion over the long years ahead.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Monetary
-8-
and fiscal policies alike need to be directed, and work in
concert, toward that objective.
In that context, I and my
colleagues believe a continuing dialogue with members of this
Committee is highly constructive, and I welcome your comments
u
and questions.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
I
4
6
For release on delivery
9:30 AM, E.D.T.
July 28, 1982
•
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Statement by
Paul A. Volcker
Chairman, Board of Governors of the Federal Reserve System
before the
Committee on the Budget
United States Senate
July 28, 1982
I am pleased to have this opportunity to meet with
you again to review the monetary and budgetary situation in
the light of our economic objectives.
Just last week, I
testified at some length before the Banking Committees of the
Senate and House; instead of repeating that full statement this
3
morning, I have attached it to my brief remarks today.
X do want to take this occasion to recognize particularly
the leadership of members of this Committee in pressing for the
budgetary savings reflected in the First Resolution.
Given the
nature of our budgetary problems, that step cannot be the last
if we are to bring the fiscal deficit under control.
But it
does represent, in most difficult circumstances, encouraging
evidence of the willingness and determination of the Congress
to undertake the necessary effort.
In presenting our monetary and credit "targets" to the
Banking Committees last week, I noted that the basic objective
of Federal Reserve monetary policy is the fostering of an environment conducive to sustained recovery in business activity, while
maintaining the financial discipline needed to restore reasonable
price stability.
In reviewing the appropriate means to those
broad ends, the Federal Open Market Committee at its recent
meetings concluded, in effect, that the quantitative objectives
for the various Ms set forth at the beginning of the year should
not be changed at this time, but that we would find an outcome
around the top of those target ranges fully acceptable.
In reaching that conclusion, we considered carefully
and explicitly the intent of the Congress, as expressed in the
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
2-
First Budget Resolution, that the Federal Reserve "reevaluate
its monetary targets in order to assure that they are fully
complementary to a new and more restrained fiscal policy.
In the light of that Resolution, as well as other factors,
we debated the appropriateness of the monetary targets for
1982.
Analysis of past experience suggested strongly that
the previously announced targets, particularly with growth
around the top of the range, should provide enough money and
liquidity to support moderate expansion over the remainder of
this year.
Pressing aggressively to reduce monetary growth well
within the ranges did not seem desirable at this stage of economic
developments, particularly in light of the evidence of a demand
for liquidity for precautionary -- as opposed to transactions -purposes.
A sizable increase in the ranges, on the other hand,
might imply a buildup of money and liquidity to the degree that
it would impair the effort needed to maintain and extend the
encouraging progress toward dis-inflation.
In reaching that judgment, we were conscious that the strong
liquidity demands evident in recent months could shift quickly as
the economy showed signs of recovery, and that raising the targets
could easily be misconstrued as a willingness to tolerate more
inflation.
At the same time, the Committee clearly recognized
that possible demands for liquidity in the current uncertain
economic circumstances would continue to require a degree of
flexibility and judgment in assessing appropriate needs for
money in the months ahead.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
-3-
We could observe that, over the first half of the year,
the desire of individuals and businesses to hold assets in
relatively liquid forms appeared to be extraordinarily strong,
apparently reflecting concerns about the business and financial
situation.
One reflection of that may be found in the large
declines in the "velocity" of money over the recession period -that is, the ratio of the gross national product to measures
of money.
That drop in velocity is particularly striking in
view of the persistence of high interest rates, suggesting a
heightened desire to hold money or liquid assets relative to
earlier trends.
While velocity often fluctuates widely over short
periods of time, trends have been much more stable over time.
Assuming that velocity rebounds in the second half -- as typically
occurs early in a period of economic recovery -- the targets
established at the beginning of the year for the monetary
aggregates should be fully consistent with economic expansion
in a context of declining inflation.
points in that direction.
Postwar experience strongly
However, the Committee explicitly
considered the possibility that relatively strong precautionary
demands for money could persist.
In that event -- and it would
inevitably involve elements of judgment -- growth of the aggregates
somewhat above the targeted ranges would be tolerated for a time
as consistent with the FOMC's general policy thrust.
In looking ahead to 1983, the Committee has decided to
retain tentatively the existing targets.
The FOMC will review
the decision at the start of next year, taking account of, among
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
-4
other things, the behavior of velocity over the remainder of
this year.
Since we expect that the monetary aggregates will
be near the upper ends of their ranges at the end of 1982, the
tentative targets for 1933 would be consistent with somewhat
slower money growth next year.
With inflation declining, the
tentative targets should be compatible with continuing recovery
at a moderate pace and an improvement in employment opportunities
In approaching these policy decisions, I have been very
conscious of the fact that monetary policy, however important,
is only one instrument of economic policy.
The attainment of
our common objective of a strong and prosperous economy depends
also on appropriately complementary policies in the fiscal
sphere and in the private sector.
Relaxing discipline on money growth might seem attractive
to some as a means of alleviating stresses in financial markets.
Indeed, in circumstances in which inflationary expectations and
Pressures are quiescent, the immediate effect of encouraging
faster growth in money might be to lower interest rates, particularly in short-term markets.
In time, however, an attempt to
maintain lower interest rates by excessive money growth would
founder.
The net result would be to imbed inflation even more
deeply into our economic system, and to make buyers of fixedinterest securities still more wary.
Sooner or later, public
and private demands for credit would reflect the higher price
levels, and savings likely would be discouraged.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Market pressures
5
would return in amped force.
Put simply, inflationary
money creation provides no escape from the pressures of demands
for credit, nor can money creation substitute for real savings.
We can, of course, affect that balance of demand and
supply in credit markets by fiscal and other policies, and that
is why I welcome the effort of the Congress to achieve greater
fiscal restraint.
I recognize -- and more importantly the markets
recognize -- sizable obstacles remain in converting the intentions
expressed in the First Budget Resolution into concrete legislative
action; harmonizing the values and aims of the authorizing and
revenue committees -- indeed the values and aims of our citizens -within the constraints of budgetary discipline is always difficult,
and no more so than in today's circumstances.
Moreover, the effort this year must be put in a larger
perspective.
Even if the objectives of the Budget Resolution
are fully achieved for next year and the underlying economic
assumptions are realized, the deficit in FY 1983 would be about
as large as this year's.
Moreover, the risks seem, in my judgment,
all on the side of a still greater deficit, despite your important
efforts.
If the deficit turns out to be larger than expected
entirely because of a shortfall in economic growth or inflation -and I would point out that the members of the FOMC anticipate
somewhat less real growth and inflation (and thus inflationgenerated revenues) than the Congress -- that "add on" should
not be a source of much concern.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
What
sSf concern is that you
are working from so large a "structural" deficit -- a deficit
that would exist even in a relatively prosperous economy -and that concern would mount to the extent the targeted savings
are not achieved.
A
As we appraise the fiscal situation today, projected
deficits continue to carry the implicit threat of "crowding out"
business investment and housing as the economy expands -- a
process that would imply significantly higher interest rates
than would otherwise result.
Your continuing leadership in
prodding your colleagues in the Congress to deal with the
budget dilemma thus remains crucially important to the outlook
for interest rates and the credit markets.
Put more positively, significant progress in paring
the deficits will contribute importantly to lower interest
rates and reduced strains in financial markets within any
monetary framework.
That budgetary policy, as we see it, is
not fundamentally a substitute for disciplined monetary policy
but rather an essential complement.
When moretary policy alone must carry the burden of
dealing with inflation, and when fiscal deficits absorb so
large a fraction of the capacity of the economy to generate
savings, pressures tend to concentrate on financial markets and
on vulnerable credit-dependent sectors of the economy.
Con-
versely, budget restraint relieves those pressures and risks
directly, and would reinforce the growing sense of conviction
that the inflationary tide has turned.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
-7-
While the Open Market Committee. in responding to the
Budget Resolution, did not feel that larger growth in the money
supply over time would be desirable, let me also say that I
believe a credibly firmer budgetary posture would permit us a
degree of greater flexibility in the shel-t-run conduct of policy.
•
Specifically, by damping concern about a resurgence of inflation
or credit market pressures, fiscal restraint also lessens fears
that short-run increases in the money supply might presage a
continuing inflationary monetization of the debt.
But any gains
in that respect will of course depend on firmness in implementing
the intentions set forth in your First Resolution, and encouraging
confidence among investors and borrowers that the effort will be
sustained and reinforced in coming years.
I need not dwell on the fact that we are in most difficult
economic circumstances, with unemployment far too high, with
strong pressures on financial markets, and with a sense of widespread uncertainty.
We cannot build a sound program against inflation
on a base of continuing recession.
But let us recognize, too,
that we have come a long way toward turning back the inflationary
tide that had come to grip our economy over the decade of the
1970s, and that there is promising evidence of improvements in
productivity and efficiency underway.
More recently, there are
at least some signs that the "grid-lock" in the financial markets
may be beginning to break up; interest rates, while still very
high in historical perspective, have declined to the lowest levels
for some time.
The challenge is to sustain that progress during a period
of recovery, for it is that progress that is needed to extend and
support economic expansion over the long years ahead.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Monetery
-8-
and fiscal policies alike need to be directed, and work in
concert, toward that objective.
In that context, I and my
colleagues believe a continuing dialogue with members of this
Committee is highly constructive, and I welcome your comments
s
and questions.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
e
For release on delivery
9:30 AM, E.D.T.
July 28, 1982
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Statement by
Paul A. Volcker
Chairman, Board of Governors of the Federal Reserve System
before the
Committee on the Budget
United States Senate
July 28, 1982
I am pleased to have this opportunity to meet with
you again to review the monetary and budgetary situation in
the light of our economic objectives.
Just last week, I
testified at some length before the Banking Committees of the
Senate and House; instead of repeating that full statement this
morning, I have attached it to my brief remarks today.
I do want to take this occasion to recognize particularly
the leadership of members of this Committee in pressing for the
budgetary savings reflected in the First Resolution.
Given the
nature of our budgetary problems, that step cannot be the last
if we are to bring the fiscal deficit under control.
But it
does represent, in most difficult circumstances, encouraging
evidence of the willingness and determination of the Congress
to undertake the necessary effort.
In presenting our monetary and credit "targets" to the
Banking Committees last week, I noted that the basic objective
of Federal Reserve monetary policy is the fostering of an environment conducive to sustained recovery in business activity, while
maintaining the financial discipline needed to restore reasonable
price stability.
In reviewing the appropriate means to those
broad ends, the Federal Open Market Committee at its recent
meetings concluded, in effect, that the quantitative objectives
for the various Ms set forth at the beginning of the year should
not be changed at this time, but that we would find an outcome
around the top of those target ranges fully acceptable.
In reaching that conclusion, we considered carefully
and explicitly the intent of the Congress, as expressed in the
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
2-
First Budget Resolution, that the Federal Reserve "reevaluate
its monetary targets in order to assure that they are fully
complementary to a new and more restrained fiscal policy."
In the light of that Resolution, as well as other factors,
we debated the appropriateness of the monetary targets for
1982.
Analysis of past experience suggested strongly that
the previously announced targets, particularly with growth
around the top of the range, should provide enough money and
liquidity to support moderate expansion over the remainder of
this year.
Pressing aggressively to reduce monetary growth well
within the ranges did not seem desirable at this stage of economic
developments, particularly in light of the evidence of a demand
for liquidity for precautionary -- as opposed to transactions -purposes.
A sizable increase in the ranges, on the other hand,
might imply a buildup of money and liquidity to the degree that
it would impair the effort needed to maintain and extend the
encouraging progress toward dis-inflation.
In reaching that judgment, we were conscious that the strong
liquidity demands evident in recent months could shift quickly as
the economy showed signs of recovery, and that raising the targets
could easily be misconstrued as a willingness to tolerate more
•
inflation.
At the same time, the Committee clearly recognized
that possible demands for liquidity in the current uncertain
economic circumstances would continue to require a degree of
flexibility and judgment in assessing appropriate needs for
money in the months ahead.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
•
3-
We could observe that, over the first half of the year,
in
the desire of individuals and businesses to hold assets
relatively liquid forms appeared to be extraordinarily strong,
apparently reflecting concerns about the business and financial
situation.
One reflection of that may be found in the large
declines in the "velocity" of money over the recession period
that is, the ratio of the gross national product to measures
of money.
That drop in velocity is particularly striking in
view of the persistence of high interest rates, suggesting a
heightened desire to hold money or liquid assets relative to
earlier trends.
While velocity often fluctuates widely over short
periods of time, trends have been much more stable over time.
Assuming that velocity rebounds in the second half -- as typically
occurs early in a period of economic recovery -- the targets
established at the beginning of the year for the monetary
aggregates should be fully consistent with economic expansion
in a context of declining inflation.
points in that direction.
Postwar experience strongly
However, the Committee explicitly
considered the possibility that relatively strong precautionary
demands for money could persist.
In that event -- and it would
inevitably involve elements of judgment -- growth of the aggregates
somewhat above the targeted ranges would be tolerated for a time
as consistent with the FOMC's general policy thrust.
In looking ahead to 1983, the Committee has decided to
retain tentatively the existing targets.
The FOMC will review
the decision at the start of next year, taking account of, among
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
-4
other things, the behavior of velocity over the remainder of
this year.
Since we expect that the monetary aggregates will
be near the upper ends of their ranges at the end of 1982, the
tentative targets for 1933 would be consistent with somewhat
slower money growth next year.
With inflation declining, the
tentative targets should be compatible with continuing recovery
at a moderate pace and an improvement in employment opportunities
In approaching these policy decisions, I have been very
conscious of the fact that monetary policy, however important,
is only one instrument of economic policy.
The attainment of
our common objective of a strong and prosperous economy depends
also on appropriately complementary poes in the fiscal
sphere and in the private sector.
Relaxing dpline on money growth might seem attractive
to some as a means of alleviating stresses in financial markets.
Indeed, in circumstances in which inflationary expectations and
pressures are quiescent, the inunediate effect of encouraging
faster growth in money might be to lower interest rates, particularly in short-term markets.
In time, however, an attempt to
maintain lower interest rates by excessive money growth would
founder.
The net result would be to imbed inflation even more
deeply into our economic system, and to make buyers of fixedinterest securities still more wary.
Sooner or later, public
and private demands for credit would reflect the higher price
levels, and savings likely would be discouraged.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Market pressures
5-
would return in amplified force.
Put simply, inflationary
money creation provides no escape from the pressures of demands
for credit, nor can money creation substitute for real savings.
We can, of course, affect that balance of demand and
supply in credit markets by fiscal and other policies, and that
is why I welcome the effort of the Congress to achieve greater
fiscal restraint.
I recognize -- and more importantly the markets
recognize -- sizable obstacles remain in converting the intentions
expressed in the First Budget Resolution into concrete legislative
action; harmonizing the values and aims of the authorizing and
revenue committees -- indeed the values and aims of our citizens
within the constraints of budgetary discipline is always difficult,
and no more so than in today's circumstances.
Moreover, the effort this year must be put in a larger
perspective.
Even if the objectives of the Budget Resolution
are fully achieved for next year and the underlying economic
assumptions are realized, the deficit in FY 1983 would be about
as large as this year's.
Moreover, the risks seem, in my judgment,
all on the side of a still greater deficit, despite your important
efforts.
If the deficit turns out to be larger than expected
entirely because of a shortfall in economic growth or inflation -and I would point out that the members of the FOMC anticipate
somewhat less real growth and inflation (and thus inflationgenerated revenues) than the Congress -- that "add on" should
not be a source of much concern.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
What is of concern is that you
-6--
are working from so large a "structural" deficit -- a deficit
that would exist even in a relatively prosperous economy -and that concern would mount to the extent the targeted savings
are not achieved.
As we appraise the fiscal situation today, projected
deficits continue to carry the implicit threat of "crowding out"
business investment and housing as the economy expands -- a
process that would imply significantly higher interest rates
than would otherwise result.
Your continuing leadership in
prodding your colleagues in the Congress to deal with the
budget dilemma thus remains crucially important to the outlook
for interest rates and the credit markets.
Put more positively, significant progress in paring
the deficits will contribute importantly to lower interest
rates and reduced strains in financial markets within any
monetary framework.
That budgetary policy, as we see it, is
not fundamentally a substitute for disciplined monetary policy
but rather an essential complement.
When moretary policy alone must carry the burden of
dealing with inflation, and when fiscal deficits absorb so
large a fraction of the capacity of the economy to generate
savings, pressures tend to concentrate on financial markets and
on vulnerable credit-dependent sectors of the economy.
Con-
versely, budget restraint relieves those pressures and risks
directly, and would reinforce the growing sense of conviction
that the inflationary tide has turned.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
•
-7-
While the Open Market Committee. in responding to the
Budget Resolution, did not feel that larger growth in the money
supply over time would be desirable, let me also say that I
believe a credibly firmer budgetary posture would permit us a
degree of greater flexibility in the shc t-run conduct of policy.
Specifically, by damping concern about a resurgence of inflation
or credit market pressures, fiscal restraint also lessens fears
that short-run increases in the money supply might presage a
continuing inflationary monetization of the debt.
But any gains
in that respect will of course depend on firmness in implementing
the intentions set forth in your First Resolution, and encouraging
confidence among investors and borrowers that the effort will be
sustained and reinforced in coming years.
I need not dwell on the fact that we are in most difficult
economic circumstances, with unemployment far too high, with
strong pressures on financial markets, and with a sense of widespread uncertainty.
We cannot build a sound program against inflation
on a base of continuing recession.
But let us recognize, too,
that we have come a long way toward turning back the inflationary
tide that had come to grip our economy over the decade of the
1970s, and that there is promising evidence of improvements in
productivity and efficiency underway.
More recently, there are
at least some signs that the "grid-lock" in the financial markets
may be beginning to break up; interest rates, while still very
high in historical perspective, have declined to the lowest levels
for some time.
The challenge is to sustain that progress during a period
of recovery, for it is that progress that is needed to extend and
support economic expansion over the long years ahead.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
1
Monetery
8-
_
and fiscal policies alike need to be directed, and work in
concert, toward that objective.
In that context, I and my
colleagues believe a continuing dialogue with members of this
Committee is highly constructive, and I welcome your comments
.
and questions.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
i
For release on delivery
9:30 AM, E.D.T.
July 28, 1982
Statement by
Paul A. Volcker
Chairman, Board of Governors of the Federal Reserve System
before the
Committee on the Budget
United States Senate
July 28, 1982
1
a
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
I am pleased to have this opportunity to meet with
you again to review the monetary and budgetary situation in
the light of our economic objectives.
Just last week, I
testified at some length before the Banking Committees of the
Senate and House; instead of repeating that full statement this
morning, I have attached it to my brief remarks today.
r•
I do want to take this occasion to recognize particularly
the leadership of members of this Committee in pressing for the
budgetary savings reflected in the First Resolution.
Given the
nature of our budgetary problems, that step cannot be the last
if we are to bring the fiscal deficit under control.
But it
does represent, in most difficult circumstances, encouraging
evidence of the willingness and determination of the Congress
to undertake the necessary effort.
In presenting our monetary and credit "targets" to the
Banking Committees last week, I noted that the basic objective
of Federal Reserve monetary policy is the fostering of an environment conducive to sustained recovery in business activity, while
maintaining the financial discipline needed to restore reasonable
price stability.
In reviewing the appropriate means to those
broad ends, the Federal Open Market Committee at its recent
meetings concluded, in effect, that the quantitative objectives
for the various Ms set forth at the beginning of the year should
not be changed at this time, but that we would find an outcome
around the top of those target ranges fully acceptable.
In reaching that conclusion, we considered carefully
and explicitly the intent of the Congress, as expressed in the
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
2-
First Budget Resolution, that the Federal Reserve "reevaluate
its monetary targets in order to assure that they are fully
complementary to a new and more restrained fiscal policy.
In the light of that Resolution, as well as other factors,
we debated the appropriateness of the monetary targets for
1982.
Analysis of past experience suggested strongly that
the previously announced targets, particularly with growth
around the top of the range, should provide enough money and
liquidity to support moderate expansion over the remainder of
this year.
Pressing aggressively to reduce monetary growth well
within the ranges did not seem desirable at this stage of economic
developments, particularly in light of the evidence of a demand
for liquidity for precautionary -- as opposed to transactions -purposes.
A sizable increase in the ranges, on the other hand,
might imply a buildup of money and liquidity to the degree that
it would impair the effort needed to maintain and extend the
encouraging progress toward dis-inflation.
In reaching that judgment, we were conscious that the strong
liquidity demands evident in recent months could shift quickly as
the economy showed signs of recovery, and that raising the targets
could easily be misconstrued as a willingness to tolerate more
inflation.
At the same time, the Committee clearly recognized
that possible demands for liquidity in the current uncertain
economic circumstances would continue to require a degree of
flexibility and judgment in assessing appropriate needs for
money in the months ahead.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
•
3-
We could observe that, over the first half of the year,
the desire of individuals and businesses to hold assets in
relatively liquid forms appeared to be extraordinarily strong,
apparently reflecting concerns about the business and financial
situation.
One reflection of that may be found in the large
declines in the "velocity" of money over the recession period -that is, the ratio of the gross national product to measures
of money.
That drop in velocity is particularly striking in
view of the persistence of high interest rates, suggesting a
heightened desire to hold money or liquid assets relative to
earlier trends.
While velocity often fluctuates widely over short
periods of time, trends have been much more stable over time.
Assuming that velocity rebounds in the second half -- as typically
occurs early in a period of economic recovery -- the targets
established at the beginning of the year for the monetary
aggregates should be fully consistent with economic expansion
in a context of declining inflation.
points in that direction.
Postwar experience strongly
However, the Committee explicitly
considered the possibility that relatively strong precautionary
demands for money could persist.
In that event -- and it would
inevitably involve elements of judgment -- growth of the aggregates
somewhat above the targeted ranges would be tolerated for a time
as consistent with the FOMC's general policy thrust.
In looking ahead to 1983, the Committee has decided to
retain tentatively the existing targets.
The FOMC will review
the decision at the start of next year, taking account of, among
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
-4
other things, the behavior of velocity over the remainder of
this year.
Since we expect that the monetary aggregates will
be near the upper ends of their ranges at the end of 1982, the
tentative targets for 1993 would be consistent with somewhat
slower money growth next year.
a
With inflation declining, the
tentative targets should be compatible with continuing recovery
at a moderate pace and an improvement in employment opportunities
In approaching these policy deons, I have been very
conscious of the fact that monetary policy, however important,
is only one instrument of economic policy.
The attainment of
our common objective of a strong and prosperous economy depends
also on appropriately complementary policies in the fiscal
sphere and in the private sector.
Relaxing dpline on money growth might seem attractive
to some as a means of alleviating stresses in financial markets.
Indeed, in circumstances in which inflationary expectations and
pressures are quiescent, the immediate effect of encouraging
faster growth in money might be to lower interest rates, particularly in short-term markets.
In time, however, an attempt to
maintain lower interest rates by excessive money growth would
founder.
The net result would be to imbed inflation even more
deeply into our economic system, and to make buyers of fixed•
interest securities still more wary.
Sooner or later, public
and private demands for credit would reflect the higher price
levels, and savings likely would be discouraged.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Market pressures
-5-
would return in amplified force.
Put simply, inflationary
money creation provides no escape from the pressures of demands
for credit, nor can money creation substitute for real savings.
We can, of course, affect that balance of demand and
supply in credit markets by fiscal and other policies, and that
is why I welcome the effort of the Congress to achieve greater
fiscal restraint.
I recognize -- and more importantly the markets
recognize -- sizable obstacles remain in converting the intentions
expressed in the First Budget Resolution into concrete legislative
action; harmonizing the values and aims of the authorizing and
revenue committees -- indeed the values and aims of our citizens -within the constraints of budgetary discipline is always difficult,
and no more so than in today's circumstances.
Moreover, the effort this year must be put in a larger
perspective.
Even if the objectives of the Budget Resolution
are fully achieved for next year and the underlying economic
assumptions are realized, the deficit in FY 1983 would be about
as large as this year's.
Moreover, the risks seem, in my judgment,
all on the side of a still greater deficit, despite your important
efforts.
If the deficit turns out to be larger than expected
entirely because of a shortfall in economic growth or inflation
and I would point out that the members of the FOMC anticipate
somewhat less real growth and inflation (and thus inflationgenerated revenues) than the Congress -- that "add on" should
not be a source of much concern.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
What is of concern is that you
-6--
are working from so la,-ge a "structural" deficit -- a deft
that would exist even in a relatively prosperous economy -and that concern would mount to the extent the targeted savings
are not achieved.
As we appraise the fiscal situation today, projected
deficits continue to carry the implicit threat of "crowding out"
business investment and housing as the economy expands -- a
process that would imply significantly higher interest rates
than would otherwise result.
Your continuing leadership in
prodding your colleagues in the Congress to deal with the
budget dilemma thus remains crucially important to the outlook
for interest rates and the credit markets.
Put more positively, significant progress in paring
the deficits will contribute importantly to lower interest
rates and reduced strains in financial markets within any
monetary framework.
That budgetary policy, as we see it, is
not fundamentally a substitute for disciplined monetary policy
but rather an essential complement.
When moretary policy alone must carry the burden of
dealing with inflation, and when fiscal deficits absorb so
large a fraction of the capacity of the economy to generate
savings, prescaires tend to concentrate on financial markets and
on vulnerable credit-dependent sectors of the economy.
Con-
versely, budget restraint relieves those pressures and risks
directly, and would reinforce the growing sense of conviction
that the inflationary tide has turned.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
4
1
/
While the Open Market Committee. in responding to the
Budget Resolution, did not feel that larger growth in the money
supply over time would be desirable, let me also say that I
believe a credibly firmer budgetary posture would permit us a
•
degree of greater flexibility in the shcl-t-run conduct of policy.
Specifically, by damping concern about a resurgence of inflation
or credit market pressures, fiscal restraint also lessens fears
that short-run increases in the money supply might presage a
continuing inflationary monetization of the debt.
But any gains
in that respect will of course depend on firmness in iml?lementing
the intentions set forth in your First Resolution, and encouraging
confidence among investors and borrowers that the effort will be
sustained and reiniforced in coming years.
I need not dwell on the fact that we are in most difficult
economic circumstances, with unemployment far too high, with
strong pressures on financial markets, and with a sense of widespread uncertainty.
We cannot build a sound program against inflation
on a base of continuing recession.
But let us recognize, too,
that we have come a long way toward turning back the inflationary
tide that had come to grip our economy over the decade of the
1970s, and that there is promising evidence of improvements in
9
productivity and efficiency underway.
More recently, there are
at least some signs that the "grid-lock" in the financial markets
may be beginning to break up; interest rates, while still very
high in historical perspective, have declined to the lowest levels
for some time.
The challenge is to sustain that progress during a period
of recovery, for it is that progress that is needed to extend and
support economic expansion over the long years ahead.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
0
Monetery
-8
and fiscal policies alike need to be directed, and work in
concert, toward that objective.
In that context, I and my
colleagues believe a continuing dialogue with members of this
Committee is highly constructive, and I welcome your comments
and questions.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
•
For release on delivery
9:30 AM, E.D.T.
July 28, 1982
•
Statement by
Paul A. Volcker
Chairman, Board of Governors of the Federal Reserve System
before the
Committee on the Budget
United States Senate
July 28, 1982
•
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
I am pleased to have this opportunity to meet with
you again to review the monetary and budgetary situation in
the light of our economic objectives.
Just last week, I
testified at some length before the Banking Committees of the
Senate and House; instead of repeating that full statement this
morning, I have attached it to my brief remarks today.
do want to take this occasion to recognize particularly
the leadership of members of this Committee in pressing for the
budgetary savings reflected in the First Resolution.
Given the
nature of our budgetary problems, that step cannot be the last
if we are to bring the fiscal deficit under control.
But it
does represent, in most difficult circumstances, encouraging
evidence of the willingness and determination of the Congress
to undertake the necessary effort.
In presenting our monetary and credit "targets" to the
Banking Committees last week, I noted that the basic objective
of Federal Reserve monetary policy is the fostering of an environment conducive to sustained recovery in business activity, while
maintaining the financial discipline needed to restore reasonable
price stability.
In reviewing the appropriate means to those
broad ends, the Federal Open Market Committee at its recent
meetings concluded, in effect, that the quantitative objectives
for the various Ms set forth at the beginning of the year should
not be changed at this time, but that we would find an outcome
around the top of those target ranges fully acceptable.
In reaching that conclusion, we considered carefully
and explicitly the intent of the Congress, as expressed in the
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
2-
First Budget Resolution, that the Federal Reserve "reevaluate
its monetary targets in order to assure that they are fully
complementary to a new and more restrained fiscal policy."
In the light of that Resolution, as well as other factors,
we debated the appropriateness of the monetary targets for
1982.
Analysis of past experience suggested strongly that
the previously announced targets, particularly with growth
around the top of the range, should provide enough money and
liquidity to support moderate expansion over the remainder of
this year.
Pressing aggressively to reduce monetary growth well
within the ranges did not seem desirable at this stage of economic
developments, particularly in light of the evidence of a demand
for liquidity for precautionary -- as opposed to transactions -purposes.
A sizable increase in the ranges, on the other hand,
might imply a buildup of money and liquidity to the degree that
it would impair the effort needed to maintain and extend the
encouraging progress toward dis-inflation.
In reaching that judgment, we were conscious that the strong
liquidity demands evident in recent months could shift quickly as
the economy showed signs of recovery, and that raising the targets
could easily be misconstrued as a willingness to tolerate more
•
inflation.
At the same time, the Committee clearly recognized
that possible demands for liquidity in the current uncertain
economic circumstances would continue to require a degree of
flexibility and judgment in assessing appropriate needs for
money in the months ahead.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
3-
We could observe that, over the first half of the year,
the desire of individuals and businesses to hold assets in
,
relatively liquid forms appeared to be extraordinarily strong
ial
apparently reflecting concerns about the business and financ
situation.
•
One reflection of that may be found in the large
declines in the "velocity" of money over the recession period -that is, the ratio of the gross national product to measures
of money.
That drop in velocity is particularly striking in
view of the persistence of high interest rates, suggesting a
heightened desire to hold money or liquid assets relative to
earlier trends.
While velocity often fluctuates widely over short
periods of time, trends have been much more stable over time.
Assuming that velocity rebounds in the second half -- as typically
occurs early in a period of economic recovery -- the targets
established at the beginning of the year for the monetary
aggregates should be fully consistent with economic expansion
in a context of declining inflation.
points in that direction.
Postwar experience strongly
However, the Committee explicitly
considered the possibility that relatively strong precautionary
demands for money could persist.
•
In that event -- and it would
inevitably involve elements of judgment -- growth of the aggregates
somewhat above the targeted ranges would be tolerated for a time
as consistent with the FOMC's general policy thrust.
In looking ahead to 1983, the Committee has decided to
retain tentatively the existing targets.
The FOMC will review
the decision at the start of next year, taking account of, among
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
-4
other things, the behavior of velocity over the remainder of
this year.
Since we expect that the monetary aggregates will
be near the upper ends of their ranges at the end of 1982, the
tentative targets for 1983 would be consistent with somewhat
slower money growth next year.
With inflation declining, the
tentative targets should be compatible with continuing recovery
at a moderate pace and an improvement in employment opportunities.
In approaching these policy decisions, I have been very
conscious of the fact that monetary policy, however important,
is only one instrument of economic policy.
The attainment of
our common objective of a strong and prosperous economy depends
also on appropriately complementary policies in the fiscal
sphere and in the private sector.
Relaxing discipline on money growth might seem attractive
to some as a means of alleviating stresses in financial markets.
Indeed, in circumstances in which inflationary expectations and
pressures are quiescent, the immediate effect of encouraging
faster growth in money might be to lower interest rates, particularly in short-term markets.
In time, however, an attempt to
maintain lower interest rates by excessive money growth would
founder.
The net result would be to imbed inflation even more
deeply into our economic system, and to make buyers of fixedEli
interest securities still more wary.
Sooner or later, public
and private demands for credit would reflect the higher price
levels, and savings likely would be discouraged.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Market pressures
-5
would return in amplified force.
Put simply, inflationary
money creation provides no escape from the pressures of demands
for credit, nor can money creation substitute for real savings.
We can, of course, affect that balance of demand and
supply in credit markets by fiscal and other policies, and that
is why I welcome the effort of the Congress to achieve greater
fiscal restraint.
I recognize -- and more importantly the markets
recognize -- sizable obstacles remain in converting the intentions
expressed in the First Budget Resolution into concrete legislative
action; harmonizing the values and aims of the authorizing and
revenue committees -- indeed the values and aims of our citizens -within the constraints of budgetary discipline is always difficult,
and no more so than in today's circumstances.
Moreover, the effort this year must be put in a larger
perspective.
Even if the objectives of the Budget Resolution
are fully achieved for next year and the underlying economic
assumptions are realized, the deficit in FY 1983 would be about
as large as this year's.
Moreover, the risks seem, in my judgment,
all on the side of a still greater deficit, despite your important
efforts.
If the deficit turns out to be larger than expected
entirely because of a shortfall in economic growth or inflation -and I would point out that the members of the FOMC anticipate
somewhat less real growth and inflation (and thus inflationgenerated revenues) than the Congress -- that "add on" should
not be a source of much concern.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
What is of concern is that you
6
are working from
90
large a "structural" deficit -- a deficit
that would exist even in a relatively prosperous economy -and that concern would mount to the extent the targeted savings
are not achieved.
As we appraise the fiscal situation today, projected
deficits continue to carry the implicit threat of "crowding out"
business investment and housing as the economy expands -- a
process that would imply significantly higher interest rates
than would otherwise result.
Your continuing leadership in
prodding your colleagues in the Congress to deal with the
budget dilemma thus remains crucially important to the outlook
for interest rates and the credit markets.
Put more positively, significant progress in paring
the deficits will contribute importantly to lower interest
rates and reduced strains in financial markets within any
monetary framework.
That budgetary policy, as we see it, is
not fundamentally a substitute for disciplined monetary policy
but rather an essential complement.
When moretary policy alone must carry the burden of
dealing with inflation, and when fiscal deficits absorb so
large a fraction of the capacity of the economy to generate
savings, pressures tend to concentrate on financial markets and
on vulnerable credit-dependent sectors of the economy.
Con-
versely, budget restraint relieves those pressures and risks
directly, and would reinforce the growing sense of conviction
that the inflationary tide has turned.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
;
-7-
to the
While the Open Market Committee. in responding
h in the money
Budget Resolution, did not feel that larger growt
say that I
supply over time would be desirable, let me also
permit us a
believe a credibly firmer budgetary posture would
a
ct of policy.
degree of greater flexibility in the she t-run condu
of inflation
Specifically, by damping concern about a resurgence
lessens fears
or credit market pressures, fiscal restraint also
presage a
that short-run increases in the money supply might
continuing inflationary monetization of the debt.
But any gains
implementing
in that respect will of course depend on firmness in
encouraging
the intentions set forth in your First Resolution, and
will be
confidence among investors and borrowers that the effort
sustained and reinforced in coming years.
cult
I need not dwell on the fact that we are in most diffi
with
economic circumstances, with unemployment far too high,
widestrong pressures on financial markets, and with a sense of
spread uncertainty.
We cannot build a sound program against inflation
on a base of continuing recession.
But let us recognize, too,
that we have come a long way toward turning back the inflationary
tide that had come to grip our economy over the decade of the
ts in
1970s, and that there is promising evidence of improvemen
productivity and efficiency underway.
More recently, there are
at least some signs that the "grid-lock" in the financial markets
may be beginning to break up; interest rates, while still very
high in historical perspective, have declined to the lowest levels
for some time.
The challenge is to sustain that progress during a period
d and
of recovery, for it is that progress that is needed to exten
years ahead.
support economic expansion over the long
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Monet Ty
-8-
and fiscal policies alike need to be directed, and work in
concert, toward that objective.
In that context, I and my
colleagues believe a continuing dialogue with members of this
Committee is highly constructive, and I welcome your comments
I
and questions.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
For release on delivery
9:30 AM, E.D.T.
July 28, 1982
4
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Statement by
Paul A. Volcker
Chairman, Board of Governors of the Federal Reserve System
before the
Committee on the Budget
United States Senate
July 28, 1982
I am pleased to have this opportunity to meet with
you again to review the monetary and budgetary situation in
the light of our economic objectives.
Just last week, I
testified at some length before the Banking Committees of the
Senate and House; instead of repeating that full statement this
•
morning, I have attached it to my brief remarks today.
I do want to take this occasion to recognize particularly
the leadership of members of this Committee in pressing for the
budgetary savings reflected in the First Resolution.
Given the
nature of our budgetary problems, that step cannot be the last
if we are to bring the fiscal deficit under control.
But it
does represent, in most difficult circumstances, encouraging
evidence of the willingness and determination of the Congress
to undertake the necessary effort.
In presenting our monetary and credit "targets" to the
Banking Committees last week, I noted that the basic objective
of Federal Reserve monetary policy is the fostering of an environment conducive to sustained recovery in business activity, while
maintaining the financial discipline needed to restore reasonable
price stability.
In reviewing the appropriate means to those
broad ends, the Federal Open Market Committee at its recent
meetings concluded, in effect, that the quantitative objectives
for the various Ms set forth at the beginning of the year should
not be changed at this time, but that we would find an outcome
around the top of those target ranges fully acceptable.
In reaching that conclusion, we considered carefully
and explicitly the intent of the Congress, as expressed in the
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
2-
First Budget Resolution, that the Federal Reserve "reevaluate
its monetary targets in order to assure that they are fully
complementary to a new and more restrained fiscal policy.
In the light of that Resolution, as well as other factors,
we debated the appropriateness of the monetary targets for
1982.
Analysis of past experience suggested strongly that
the previously announced targets, particularly with growth
around the top of the range, should provide enough money and
liquidity to support moderate expansion over the remainder of
this year.
Pressing aggressively to reduce monetary growth well
within the ranges did not seem desirable at this stage of economic
developments, particularly in light of the evidence of a demand
for liquidity for precautionary -- as opposed to transactions -purposes.
A sizable increase in the ranges, on the other hand,
might imply a buildup of money and liquidity to the degree that
it would impair the effort needed to maintain and extend the
encouraging progress toward dis-inflation.
In reaching that judgment, we were conscious that the strong
liquidity demands evident in recent months could shift quickly as
the economy showed signs of recovery, and that raising the targets
could easily be misconstrued as a willingness to tolerate more
inflation.
At the same time, the Committee clearly recognized
that possible demands for liquidity in the current uncertain
economic circumstances would continue to require a degree of
flexibility and judgment in assessing appropriate needs for
money in the months ahead.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
-3-
We could observe that, over the first half of the year,
the desire of individuals and businesses to hold assets in
relatively liquid forms appeared to be extraordinarily strong,
apparently reflecting concerns about the business and financial
situation.
One reflection of that may be found in the large
declines in the "velocity" of money over the recession period
r==,
that is, the ratio of the gross national product to measures
of money.
That drop in velocity is particularly striking in
view of the persistence of high interest rates, suggesting a
heightened desire to hold money or liquid assets relative to
earlier trends.
While velocity often fluctuates widely over short
periods of time, trends have been much more stable over time.
Assuming that velocity rebounds in the second half -- as typically
occurs early in a period of economic recovery -- the targets
established at the beginning of the year for the monetary
aggregates should be fully consistent with economic expansion
in a context of declining inflation.
points in that direction.
Postwar experience strongly
However, the Committee explicitly
considered the possibility that relatively strong precautionary
demands for money could persist.
In that event -- and it would
inevitably involve elements of judgment -- growth of the aggregates
somewhat above the targeted ranges would be tolerated for a time
as consistent with the FOMC's general policy thrust.
In looking ahead to 1983, the Committee has decided to
retain tentatively the existing targets.
The FOMC will review
the decision at the start of next year, taking account of, among
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
4-
other things, the behavior of velocity over the remainder of
this year.
Since we expect that the monetary aggregates will
be near the upper ends of their ranges at the end of 1982, the
tentative targets for 1983 would be consistent with somewhat
slower money growth next year.
With inflation declining, the
tentative targets should be compatible with continuing recovery
at a moderate pace and an improvement in employment opportunities
In approaching these policy decisions,
have been very
conscious of the fact that monetary policy, however important,
is only one instrument of economic policy.
The attainment of
our common objective of a strong and prosperous economy depends
also on appropriately complementary poes in the fiscal
sphere and in the private sector.
Relaxing discipline on money growth might seem attractive
to some as a means of alleviating stresses in financial markets.
Indeed, in circumstances in which inflationary expectations and
pressures are quiescent, the immediate effect of encouraging
faster growth in money might be to lower interest rates, particularly in short-term markets.
In time, however, an attempt to
maintain lower interest rates by excessive money growth would
founder.
The net result would be to imbed inflation even more
deeply into our economic system, and to make buyers of fixedinterest securities still more wary.
Sooner or later, public
and private demands for credit would reflect the higher price
levels, and savings likely would be discouraged.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Market pressures
-5-
would return in amplified force.
Put simply, inflationary
money creation provides no escape from the pressures of demands
for credit, nor can money creation substitute for real savings.
We can, of course, affect that balance of demand and
•
supply in credit markets by fiscal and other policies, and that
is why I welcome the effort of the Congress to achieve greater
fiscal restraint.
I recognize -- and more importantly the markets
recognize -- sizable obstacles remain in converting the intentions
expressed in the First Budget Resolution into concrete legislative
action; harmonizing the values and aims of the authorizing and
revenue committees -- indeed the values and aims of our citizens -within the constraints of budgetary discipline is always difficult,
and no more so than in today's circumstances.
Moreover, the effort this year must be put in a larger
perspective.
Even if the objectives of the Budget Resolution
are fully achieved for next year and the underlying economic
assumptions are realized, the deficit in FY 1983 would be about
as large as this year's.
Moreover, the risks seem, in my judgment,
all on the side of a still greater deficit, despite your important
efforts.
If the deficit turns out to be larger than expected
entirely because of a shortfall in economic growth or inflation -and
would IS
out that the members of the FOMC anticipate
sS mewhat less real growth and inflation (and thus inflationgenerated revenues) than the Congress -- that "add on" should
not be a source of much concern.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
What
sSf concern is that you
6--
are working from so large a "structural" deficit -- a deft
that would exist even in a relatively prosperous economy -and that concern would mount to the extent the targeted savings
are not achieved.
As we appraise the fiscal situation today, projected
deficits continue to carry the implicit threat of "crowding out"
business investment and housing as the economy expands -- a
process that would imply significantly higher interest rates
than would otherwise result.
prodding your colleagues
Your continuing leadership in
na Congress to deal with the
budget dilemma thus remains crucially important to the outlook
for interest rates and the credit markets.
Put more positively, significant progress in paring
the deficits will contribute importantly to lower interest
rates and reduced strains in financial markets within any
monetary framework.
That budgetary policy, as we see it, is
not fundamentally a substitute for disciplined monetary policy
but rather an essential complement.
When moretary policy alone must carry the burden of
dealing with inflation, and when fiscal deficits absorb so
large a fraction of the capacity of the economy to generate
savings, pressures tend to concentrate on financial markets and
on vulnerable credit-dependent sectors of the economy.
Con-
versely, budget restraint relieves those Pressures and risks
directly, and would reinforce the growing sense of conviction
that the inflationary tide has turned,
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
-7-
While the Open Market CommitLee.in responding to the
Budget Resolution, did not feel that larger growth in the money
supply over time would be desirable, let me also say that I
believe a credibly firmer budgetary posture would permit us a
degree of greater flexibility in the she t-run conduct of policy.
Specifically, by damping concern about a resurgence of inflation
or credit market pressures, fiscal restraint also lessens fears
that short-run increases in the money supply might presage a
continuing inflationary monetization of the debt.
But any gains
in that respect will of course depend on firmness in implementing
the intentions set forth in your First Resolution, and encouraging
confidence among investors and borrowers that the effort will be
sustained and reinforced in coming years.
I need not dwell on the fact that we are in most difficult
economic circumstances, with unemployment far too high, with
strong pressures on financial markets, and with a sense of widespread uncertainty.
We cannot build a sound program against inflation
on a base of continuing recession.
But let us recognize, too,
that we have come a long way toward turning back the inflationary
tide that had come to grip our economy over the decade of the
v
1970s, and that there is promising evidence of improvements in
productivity and efficiency underway.
More recently, there are
at least some signs that the "grid-lock" in the financial markets
may be beginning to break up; interest rates, while still very
high in historical perspective, have declined to the lowest levels
for some time.
The challenge is to sustain that progress during a period
of recovery, for it is that progress that is needed to extend and
support economic expansion over the long years ahead.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Monetery
8
and fiscal policies alike need to be directed, and work in
concert, toward that objective.
In that context, I and my
colleagues believe a continuing dialogue with members of this
Committee is highly constructive, and I welcome your comments
and questions.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
EI
For release on delivery
9:30 AM, E.D.T.
July 28, 1982
•
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Statement by
Paul A. Volcker
Chairman, Board of Governors of the Federal Reserve System
before the
Committee on the Budget
United States Senate
July 28, 1982
I am pleased to have this opportunity to meet with
you again to review the monetary and budgetary situation in
the light of our economic objectives.
Just last week, I
testified at some length before the Banking Committees of the
Senate and House; instead of repeating that full statement this
•
morning, I have attached it to my brief remarks today.
do want to take this occasion to recognize particularly
the leadership of members of this Committee in pressing for the
budgetary savings reflected in the First Resolution.
Given the
nature of our budgetary problems, that step cannot be the last
if we are to bring the fiscal deficit under control.
But it
does represent, in most difficult circumstances, encouraging
evidence of the willingness and determination of the Congress
to undertake the necessary effort.
In presenting our monetary and credit "targets" to the
Banking Committees last week, I noted that the basic objective
of Federal Reserve monetary policy is the fostering of an environment conducive to sustained recovery in business activity, while
maintaining the financial discipline needed to restore reasonable
price stability.
In reviewing the appropriate means to those
broad ends, the Federal Open Market Committee at its recent
meetings concluded, in effect, that the quantitative objectives
for the various Ms set forth at the beginning of the year should
not be changed at this time, but that we would find an outcome
around the top of those target ranges fully acceptable.
In reaching that conclusion, we considered carefully
and explicitly the intent of the Congress, as expressed in the
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
•
2
First Budget Resolution, that the Federal Reserve "reevaluate
its monetary targets in order to assure that they are fully
complementary to a new and more restrained fiscal policy."
In the light of that Resolution, as well as other factors,
we debated the appropriateness of the monetary targets for
1982.
Analysis of past experience suggested strongly that
the previously announced targets, particularly with growth
around the top of the range, should provide enough money and
liquidity to support moderate expansion over the remainder of
this year.
Pressing aggressively to reduce monetary growth well
within the ranges did not seem desirable at this stage of economic
developments, particularly in light of the evidence of a demand
for liquidity for precautionary -- as opposed to transactions -purposes.
A sizable increase in the ranges, on the other hand,
might imply a buildup of money and liquidity to the degree that
it would impair the effort needed to maintain and extend the
encouraging progress toward dis-inflation.
In reaching that judgment, we were conscious that the strong
liquidity demands evident in recent months could shift quickly as
the economy showed signs of recovery, and that raising the targets
could easily be misconstrued as a willingness to tolerate more
inflation.
At the same time, the Committee clearly recognized
that possible demands for liquidity in the current uncertain
economic circumstances would continue to require a degree of
flexibility and judgment in assessing appropriate needs for
money in the months ahead.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
4
3-
We could observe that, over the first half of the year,
the desire of individuals and businesses to hold assets in
relatively liquid forms appeared to be extraordinarily strong,
apparently reflecting concerns about the business and financial
situation.
•
One reflection of that may be found in the large
declines in the "velocity" of money over the recession period -that is, the ratio of the gross national product to measures
of money.
That drop in velocity is particularly striking in
view of the persistence of high interest rates, suggesting a
heightened desire to hold money or liquid assets relative to
earlier trends.
While velocity often fluctuates widely over short
periods of time, trends have been much more stable over time.
Assuming that velocity rebounds in the second half -- as typically
occurs early in a period of economic recovery -- the targets
established at the beginning of the year for the monetary
aggregates should be fully consistent with economic expansion
in a context of declining inflation.
points in that direction.
Postwar experience strongly
However, the Committee explicitly
considered the possibility that relatively strong precautionary
demands for money could persist.
In that event -- and it would
inevitably involve elements of judgment -- growth of the aggregates
I.
somewhat above the targeted ranges would be tolerated for a time
as consistent with the FOMC's general policy thrust.
In looking ahead to 1983, the Committee has decided to
retain tentatively the existing targets.
The FOMC will review
the decision at the start of next year, taking account of, among
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
-4-
other things, the behavior of velocity over the remainder of
this year.
Since we expect that the monetary aggregates will
be near the upper ends of their ranges at the end of 1982, the
tentative targets for 1933 would be consistent with somewhat
slower money growth next year.
With inflation declining, the
tentative targets should be compatible with continuing recovery
at a moderate pace and an improvement in employment opportunities
In approaching these policy decisions, T have been very
conscious of the fact that monetary policy, however important,
is only one instrument of economic policy.
The attainment of
our common objective of a strong and prosperous economy depends
also on appropriately complementary policies in the fiscal
sphere and in the private sector.
Relaxing discipline on money growth might seem attractive
to some as a means of alleviating stresses in financial markets.
Indeed, in circumstances in which inflationary expectations and
pressures are quiescent, the immediate effect of encouraging
faster growth in money might be to lower interest rates, particularly
nSr-r
markets.
In time, however, an attempt to
maintain lower interest rates by excessive money growth would
founder.
The net result would be to imbed inflation even more
deeply into our economic system, and to make buyers of fixedinterest secues still more wary.
Sooner or later, public
and private demands for credit would reflect the higher price
levels, and savings likely would be discouraged.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Market pressures
-5-
would return in amplified force.
Put simply, inflationary
money creation provides no escape from the pressures of demands
for credit, nor can money creation substitute for real savings.
We can, of course, affect that balance of demand and
supply in credit markets by fiscal and other policies, and that
is why I welcome the effort of the Congress to achieve greater
fiscal restraint.
I recognize -- and more importantly the markets
recognize -- sizable obstacles remain in converting the intentions
expressed in the First Budget Resolution into concrete legislative
action; harmonizing the values and aims of the authorizing and
revenue committees -- indeed the values and aims of our citizens -within the constraints of budgetary discipline is always difficult,
and no more so than in today's circumstances.
Moreover, the effort this year must be put in a larger
perspective.
Even if the objectives of the Budget Resolution
are fully achieved for next year and the underlying economic
assumptions are realized, the deficit in FY 1983 would be about
as large as this year's.
Moreover, the risks seem, in my judgment,
all on the side of a still greater deficit, despite your important
efforts.
If the deficit turns out to be larger than expected
entirely because of a shortfall in economic growth or inflation
and I would point out that the members of the FOMC anticipate
somewhat less real growth and inflation (and thus inflationgenerated revenues) than the Congress -- that "add on" should
not be a source of much concern.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
What is of concern is that you
-6
are working from so large a "structural" deficit -- a deficit
that would exist even in a relatively prosperous economy -and that concern would mount to the extent the targeted savings
are not achieved.
As we appraise the fiscal situation today, projected
deficits continue to carry the implicit threat of "crowding out"
business investment and housing as the economy expands -- a
process that would imply significantly higher interest rates
than would otherwise result.
Your continuing leadership in
prodding your colleagues in the Congress to deal with the
budget dilemma thus remains crucially important to the outlook
for interest rates and the credit markets.
Put more positively, significant progress in paring
the deficits will contribute importantly to lower interest
rates and reduced strains in financial markets within any
monetary framework.
That budgetary policy, as we see it, is
not fundamentally a substitute for dplined monetary policy
but rather an essential complement.
When moretary policy alone must carry the burden of
dealing with inflation, and when fiscal deficits absorb so
large a fraction of the capacity of the economy to generate
savings, presures tend to concentrate on financial markets and
on vulnerable credit-dependent sectors of the economy.
Con-
versely, budget restraint relieves those pressures and risks
directly, and would reinforce the growing sense of conviction
that the inflationary tide has turned.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
•
While the Open Market Committee. in responding to the
Budget Resolution, did not feel that larger growth in the money
supply over time would be desirable, let me also say that I
believe a credibly firmer budgetary posture would permit us a
degree of greater flexibility in the sheY-t-run conduct of policy.
•
Specifically, by damping concern about a resurgence of inflation
or credit market pressures, fiscal restraint also lessens fears
that short-run increases in the money supply might presage a
continuing inflationary monetization of the debt.
in that respect will of course depend on firmness in implementing
the intentions set forth in your First Resolution, and encouraging
confidence among investors and borrowers that the effort will be
sustained and reinforced in coming years.
I need not dwell on the fact that we are in most difficult
economic circumstances, with unemployment far too high, with
strong pressures on financial markets, and with a sense of widespread uncertainty.
We cannot build a sound program against inflation
on a base of continuing recession.
But let us recognize, too,
that we have come a long way toward turning back the inflationary
tide that had come to grip our economy over the decade of the
1970s, and that there is promising evidence of improvements in
productivity and efficiency underway.
More recently, there are
at least some signs that the "grid-lock" in the financial markets
may be beginning to break up; interest rates, while still very
high in historical perspective, have declined to the lowest levels
for some time.
The challenge is to sustain that progress during a period
of recovery, for it is that progress that is needed to extend and
support economic expansion over the long years ahead.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
•
But any gains
Monetery
8-
-
and fiscal policies alike need to be directed, and work in
concert, toward that objective.
In that context, I and my
colleagues believe a continuing dialogue with members of this
Committee is highly constructive, and I welcome your comments
and questions.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
I
i
4
r
/d
For release on delivery
9:30 AM, E.D.T.
July 28, 1982
*
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Statement by
Paul A. Volcker
Chairman, Board of Governors of the Federal Reserve System
before the
Committee on the Budget
United States Senate
July 28, 1982
I am pleased to have this opportunity to meet with
you again to review the monetary and budgetary situation in
the light of our economic objectives.
Just last week, I
testified at some length before the Banking Committees of the
Senate and House; instead of repeating that full statement this
morning, I have attached it to my brief remarks today.
do want to take this occasion to recognize particularly
the leadership of members of this Committee in pressing for the
budgetary savings reflected in the First Resolution.
Given the
nature of our budgetary problems, that step cannot be the last
if we are to bring the fiscal deficit under control.
But it
does represent, in most difficult circumstances, encouraging
evidence of the willingness and determination of the Congress
to undertake the necessary effort.
In presenting our monetary and credit "targets" to the
Banking Committees last week, I noted that the basic objective
of Federal Reserve monetary policy is the fostering of an environment conducive to sustained recovery in business activity, while
maintaining the financial discipline needed to restore reasonable
price stability.
In reviewing the appropriate means to those
broad ends, the Federal Open Market Committee at its recent
meetings concluded, in effect, that the quantitative objectives
for the various Ms set forth at the beginning of the year should
not be changed at this time, but that we would find an outcome
around the top of those target ranges fully acceptable.
In reaching that conclusion, we considered carefully
and explicitly the intent of the Congress, as expressed in the
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
•
2-
First Budget Resolution, that the Federal Reserve "reevaluate
its monetary targets in order to assure that they are fully
complementary to a new and more restrained fiscal policy."
In the light of that Resolution, as well as other factors,
we debated the appropriateness of the monetary targets for
1982.
Analysis of past experience suggested strongly that
the previously announced targets, particularly with growth
around the top of the range, should provide enough money and
liquidity to support moderate expansion over the remainder of
this year.
Pressing aggressively to reduce monetary growth well
within the ranges did not seem desirable at this stage of economic
developments, particularly in light of the evidence of a demand
for liquidity for precautionary -- as opposed to transactions -purposes.
A sizable increase in the ranges, on the other hand,
might imply a buildup of money and liquidity to the degree that
it would impair the effort needed to maintain and extend the
encouraging progress toward dis-inflation.
In reaching that judgment, we were conscious that the strong
liquidity demands evident in recent months could shift quickly as
the economy showed signs of recovery, and that raising the targets
could easily be misconstrued as a willingness to tolerate more
inflation.
At the same time, the Committee clearly recognized
that possible demands for liquidity in the current uncertain
economic circumstances would continue to require a degree of
flexibility and judgment in assessing appropriate needs for
money in the months ahead.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
-3-
We could observe that, over the first half of the year,
the desire of individuals and businesses to hold assets in
relatively liquid forms appeared to be extraordinarily strong,
apparently reflecting concerns about the business and financial
situation.
One reflection of that may be found in the large
declines in the "velocity" of money over the recession period
that is, the ratio of the gross national product to measures
of money.
That drop in velocity is particularly striking in
view of the persistence of high interest rates, suggesting a
heightened desire to hold money or liquid assets relative to
earlier trends.
While velocity often fluctuates widely over short
periods of time, trends have been much more stable over time.
Assuming that velocity rebounds in the second half -- as typically
occurs early in a period of economic recovery -- the targets
established at the beginning of the year for the monetary
aggregates should be fully consistent with economic expansion
in a context of declining inflation.
points in that direction.
Postwar experience strongly
However, the Committee explicitly
considered the possibility that relatively strong precautionary
•
•
demands for money could persist.
In that event -- and it would
inevitably involve elements of judgment -- growth of the aggregates
somewhat above the targeted ranges would be tolerated for a time
as consistent with the FOMC's general policy thrust.
In looking ahead to 1983, the Committee has decided to
retain tentatively the existing targets.
The FOMC will review
the decision at the start of next year, taking account of, among
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
-4-
other things, the behavior of velocity over the remainder of
this year.
Since we expect that the monetary aggregates will
be near the upper ends of their ranges at the end of 1982, the
tentative targets for 1993 would be consistent with somewhat
•
slower money growth next year.
With inflation declining, the
tentative targets should be compatible with continuing recovery
at a moderate pace and an improvement in employment opportunities
In approaching these policy decisions, I have been very
conscious of the fact that monetary policy, however important,
is only one instrument of economic policy.
The attainment of
our common objective of a strong and prosperous economy depends
also on appropriately complementary policies in the fiscal
sphere and in the private sector.
Relaxing discipline on money growth might seem attractive
to some as a means of alleviating stresses in financial markets.
Indeed, in circumstances in which inflationary expectations and
Pressures are quiescent, the immediate effect of encouraging
faster growth in money might be to lower interest rates, particularly in short-term markets.
In time, however, an attempt to
maintain lower interest rates by excessive money growth would
founder.
The net result would be to imbed inflation even more
deeply into our economic system, and to make buyers of fixedinterest securities still more wary.
Sooner or later, public
and private demands for credit would reflect the higher price
levels, and savings likely would be discouraged.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Market pressures
5
would return in amplified force.
Put simply, inflationary
money creation provides no escape from the pressures of demands
for credit, nor can money creation substitute for real savings.
We can, of course, affect that balance of demand and
supply in credit markets by fiscal and other policies, and that
is why I welcome the effort of the Congress to achieve greater
fiscal restraint.
I recognize -- and more importantly the markets
sizable obstacles remain in converting the intentions
recognize
expressed in the First Budget Resolution into concrete legislative
action; harmonizing the values and aims of the authorizing and
revenue committees -- indeed the values and aims of our citizens -within the constraints of budgetary discne is always difficult,
and no more so than in today's circumstances.
Moreover, the effort this year must be put in a larger
perspective.
Even if the objectives of the Budget Resolution
are fully achieved for next year and the underlying economic
assumptions are realized, the deficit in FY 1983 would be about
as large as this year's.
Moreover, the risks seem, in my judgment,
all on the side of a still greater deficit, despite your important
efforts.
If the deficit turns out to be larger than expected
entirely because of a shortfall in economic growth or inflation
and I would point out that the members of the FOMC anpate
somewhat less real growth and inflation (and thus inflationgenerated revenues) than the Congress -- that "add on" should
not be a source of much concern.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
What is of concern is that you
-6
are working from so la.,-ge a "structural" deficit -- a deficit
that would exist even in a relatively prosperous economy -and that concern would mount to the extent the targeted savings
are not achieved.
a
As we appraise the fiscal situation today, projected
deficits continue to carry the implicit threat of "crowding out"
business investment and housing as the economy expands -- a
process that would imply significantly higher interest rates
than would otherwise result.
Your continuing leadership in
prodding your colleagues in the Congress to deal with the
budget dilemma thus remains crucially important to the outlook
for interest rates and the credit markets.
Put more positively, significant progress in paring
the deficits will contribute importantly to lower interest
rates and reduced strains in financial markets within any
monetary framework.
That budgetary policy, as we see it, is
not fundamentally a substitute for disciplined monetary policy
but rather an essential complement.
When moretary policy alone must carry the burden of
dealing with inflation, and when fiscal deficits absorb so
large a fraction of the capacity of the economy to generate
savings, pressures tend to concentrate on financial markets and
on vulnerable credit-dependent sectors of the economy.
Con-
versely, budget restraint relieves those pressures and risks
directly, and would reinforce the growing sense of conviction
that the inflationary tide has turned.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
-7-
While the Open Market Committee,in responding to the
Budget Resolution, did not feel that larger growth in the money
supply over time would be desirable, let me also say that I
I- lieve a credibly firmer budgetary posture would permit us a
degree of greater flexibty in the short-run conduct of policy.
Specifically, by damping concern about a resurgence of inflation
or credit market pressures, fiscal restraint also lessens fears
that short-run increases in the money supply might presage a
continuing inflationary monetization of the debt.
But any gains
in that respect will of course depend on firmness in implementing
the intentions set forth in your First Resolution, and encouraging
confidence among investors and borrowers that the effort will be
sustained and reinforced in coming years.
I need not dwell on the fact that we are in most difficult
economic circumstances, with unemployment far too high, with
strong pressures on financial markets, and with a sense of widespread uncertainty.
We cannot build a sound program against inflation
on a base of continuing recession.
But let us recognize, too,
that we have come a long way toward turning back the inflationary
tiI- that had come to grip our economy over the decade of the
1970s, and that there is promising evidence of improvements in
1
productivity and efficiency underway.
More recently, there are
at least some signs that the "grid-lock" in the financial markets
may be beginning to break up; interest rates, while still very
high in historical perspective, have declined to the lowest levels
fS r some time.
The challenge is to sustain that progress during a period
of recovery, for it is that progress that is needed to extend and
support economic expansion over the long y--rs ahead.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Monetary
8-
-
and fiscal policies alike need to be directed, and work in
concert, toward that objective.
In that context, I and my
colleagues believe a continuing dialogue with members of this
Committee is highly constructive, and I welcome your comments
and questions.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
El
a
For release on delivery
9:30 AM, E.D.T.
July 28, 1982
.
1
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Statement by
Paul A. Volcker
Chairman, Board of Governors of the Federal Reserve System
before the
Committee on the Budget
United States Senate
July 28, 1982
I am pleased to have this opportunity to meet with
you again to review the monetary and budgetary situation in
the light of our economic objectives.
Just last week, I
testified at some length before the Banking Committees of the
Senate and House; instead of repeating that full statement this
morning, I have attached it to my brief remarks today.
I do want to take this occasion to recognize particularly
the leadership of members of this Committee in pressing for the
budgetary savings reflected in the First Resolution.
Given the
nature of our budgetary problems, that step cannot be the last
if we are to bring the fiscal deficit under control.
But it
does represent, in most difficult circumstances, encouraging
evidence of the willingness and determination of the Congress
to undertake the necessary effort.
In presenting our monetary and credit "targets" to the
Banking Committees last week, I noted that the basic objective
of Federal Reserve monetary policy is the fostering of an environment conducive to sustained recovery in business activity, while
maintaining the financial discipline needed to restore reasonable
price stability.
In reviewing the appropriate means to those
broad ends, the Federal Open Market Committee at its recent
meetings concluded, in effect, that the quantitative objectives
for the various Ms set forth at the beginning of the year should
not be changed at this time, but that we would find an outcome
around the top of those target ranges fully acceptable.
In reaching that conclusion, we considered carefully
and explicitly the intent of the Congress, as expressed in the
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
2-
First Budget Resolution, that the Federal Reserve "reevaluate
its monetary targets in order to assure that they are fully
complementary to a new and more restrained fiscal policy.
In the light of that Resolution, as well as other factors,
we debated the appropriateness of the monetary targets for
•
1982.
Analysis of past experience suggested strongly that
the previously announced targets, particularly with growth
around the top of the range, should provide enough money and
liquidity to support moderate expansion over the remainder of
this year.
Pressing aggressively to reduce monetary growth well
within the ranges did not seem desirable at this stage of economic
developments, particularly in light of the evidence of a demand
for liquidity for precautionary -- as opposed to transactions -purposes.
A sizable increase in the ranges, on the other hand,
might imply a buildup of money and liquidity to the degree that
it would impair the effort needed to maintain and extend the
encouraging progress toward dis-inflation.
In reaching that judgment, we were conscious that the strong
liquidity demands evident in recent months could shift quickly as
the economy showed signs of recovery, and that raising the targets
could easily be misconstrued as a willingness to tolerate more
inflation.
At the same time, the Committee clearly recognized
that possible demands for liquidity in the current uncertain
economic circumstances would continue to require a degree of
flexibility and judgment in assessing appropriate needs for
money in the months ahead.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
•
3-
We could observe that, over the first half of the year,
the desire of individuals and businesses to hold assets in
relatively liquid forms appeared to be extraordinarily strong,
apparently reflecting concerns about the business and financial
situation.
One reflection of that may be found in the large
declines in the "velocity" of money over the recession period
that is, the ratio of the gross national product to measures
of money.
That drop in velocity is particularly striking in
view of the persistence of high interest rates, suggesting a
heightened desire to hold money or liquid assets relative to
earlier trends.
While velocity often fluctuates widely over short
periods of time, trends have been much more stable over time.
Assuming that velocity rebounds in the second half -- as typically
occurs early in a period of economic recovery -- the targets
established at the beginning of the year for the monetary
aggregates should be fully consistent with economic expansion
in a context of declining inflation.
points in that direction.
Postwar experience strongly
However, the Committee explicitly
considered the possibility that relatively strong precautionary
demands for money could persist.
In that event -- and it would
inevitably involve elements of judgment -- growth of the aggregates
somewhat above the targeted ranges would be tolerated for a time
as consistent with the FOMC's general policy thrust.
In looking ahead to 1983, the Committee has decided to
retain tentatively the existing targets.
The FOMC will review
the decision at the start of next year, taking account of, among
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
-4
other things, the behavior of velocity over the remainder of
this year.
Since we expect that the monetary aggregates will
be near the upper ends of their ranges at the end of 1982, the
tentative targets for 1983 would be consistent with somewhat
slower money growth next year.
With inflation declining, the
tentative targets should be compatible with continuing recovery
at a moderate pace and an improvement in employment opportunities
In approaching these policy decisions, I have been very
conscious of the fact that monetary policy, however important,
is only one instrument of economic policy.
The attainment of
our common objective of a strong and prosperous economy depends
also on appropriately complementary policies in the fiscal
sphere and in the private sector.
Relaxing dpline on money growth might seem attractive
to some as a means of alleviating stresses in financial markets.
Indeed, in circumstances in which inflationary expectations and
pressures are quiescent, the immediate effect of encouraging
faster growth in money might be to lower interest rates, particularly in short-term markets.
In time, however, an attempt to
maintain lower interest rates by excessive money growth would
founder.
The net result would be to imbed inflation even more
deeply into our economic system, and to make buyers of fixedinterest securities still more wary.
Sooner or later, public
and private demands for credit would reflect the higher price
levels, and savings likely would be discouraged.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Market pressures
-5-
would return in amplified force.
Put simply, inflationary
money creation provides no escape from the pressures of demands
for credit, nor can money creation substitute for real savings.
We can, of course, affect that balance of demand and
supply in credit markets by fiscal and other policies, and that
is why I welcome the effort of the Congress to achieve greater
fiscal restraint.
I recognize -- and more importantly the markets
recognize -- sizable obstacles remain in converting the intentions
expressed in the First Budget Resolution into concrete legislative
action; harmonizing the values and aims of the authorizing and
revenue committees -- indeed the values and aims of our citizens -within the constraints of budgetary discipline is always difficult,
and no more so than in today's circumstances.
Moreover, the effort this year must be put in a larger
perspective.
Even if the objectives of the Budget Resolution
are fully achieved for next year and the underlying economic
assumptions are realized, the deficit in FY 1983 would be about
as large as this year's.
Moreover, the risks seem, in my judgment,
all on the side of a still greater deficit, despite your important
efforts.
If the deficit turns out to be larger than expected
entirely because of a shortfall in economic growth or inflation -and I would point out that the members of the FOMC anticipate
somewhat less real growth and inflation (and thus inflationgenerated revenues) than the Congress -- that "add on" should
not be a source of much concern.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
What is of concern is that you
6
are working from so large a "structural" deficit -- a deficit
that would exist even in a relatively prosperous economy -and that concern would mount to the extent the targeted savings
are not achieved.
As we appraise the fiscal situation today, projected
deficits continue to carry the implicit threat of "crowding out"
business investment and housing as the economy expands -- a
process that would imply significantly higher interest rates
than would otherwise result.
Your continuing leadership in
prodding your colleagues in the Congress to deal with the
budget dilemma thus remains crucially important to the outlook
for interest rates and the credit markets.
Put more positively, significant progress in paring
the deficits will contribute importantly to lower interest
rates and reduced strains in financial markets within any
monetary framework.
That budgetary policy, as we see it, is
not fundamentally a substitute for disciplined monetary policy
but rather an essential complement.
When moretary policy alone must carry the burden of
dealing with inflation, and when fiscal deficits absorb so
large a fraction of the capacity of the economy to generate
savings, pressures tend to concentrate on financial markets and
on vulnerable credit-dependent sectors of the economy.
Con-
versely, budget restraint relieves those pressures and risks
directly, and would reinforce the growing sense of conviction
that the inflationary tide has turned.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
-7-
While the Open Market Committee. in responding to the
Budget Resolution, did not feel that larger growth in the money
supply over time would be desirable, let me also say that I
believe a credibly firmer budgetary posture would permit us a
degree of greater flexibility in the sher.t-run conduct of policy.
a
Specifically, by damping concern about a resurgence of inflation
or credit market pressures, fiscal restraint also lessens fears
that short-run increases in the money supply might presage a
continuing inflationary monetization of the debt.
But any gains
in that respect will of course depend on firmness in implementing
the intentions set forth in your First Resolution, and encouraging
confidence among investors and borrowers that the effort will be
sustained and reinforced in coming years.
I need not dwell on the fact that we are in most difficult
economic circumstances, with unemployment far too high, with
strong pressures on financial markets, and with a sense of widespread uncertainty.
We cannot build a sound program against inflation
on a base of continuing recession.
But let us recognize, too,
that we have come a long way toward turning back the inflationary
tide that had come to grip our economy over the decade of the
1970s, and that there is promising evidence of improvements in
productivity and efficiency underway.
More recently, there are
at least some signs that the "grid-lock" in the financial markets
may be beginning to break up; interest rates, while still very
high in historical perspective, have declined to the lowest levels
for some time.
The challenge is to sustain that progress during a period
of recovery, for it is that progress that is needed to extend and
support economic expansion over the long years ahead.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Monetery
8-
-
and fiscal policies alike need to be directed, and work in
concert, toward that objective.
In that context, I and my
colleagues believe a continuing dialogue with members of this
Committee is highly constructive, and I welcome your comments
S
and questions.
I
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
e
For release on delivery
9:30 AM, E.D.T.
July 28, 1982
•
i
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Statement by
Paul A. Volcker
Chairman, Board of Governors of the Federal Reserve System
before the
Committee on the Budget
United States Senate
July 28, 1982
I am pleased to have this opportunity to meet with
you again to review the monetary and budgetary situation in
the light of our economic objectives.
Just last week, I
testified at some length before the Banking Committees of the
Senate and House; instead of repeating that full statement this
morning, I have attached it to my brief remarks today.
do want to take this occasion to recognize particularly
the leadership of members of this Committee in pressing for the
budgetary savings reflected in the First Resolution.
Given the
nature of our budgetary problems, that step cannot be the last
if we are to bring the fiscal deficit under control.
But it
does represent, in most difficult circumstances, encouraging
evidence of the willingness and determination of the Congress
to undertake the necessary effort.
In presenting our monetary and credit "targets" to the
Banking Committees last week, I noted that the basic objective
of Federal Reserve monetary policy is the fostering of an environment conducive to sustained recovery in business activity, while
maintaining the financial discipline needed to restore reasonable
price stability.
In reviewing the appropriate means to those
broad ends, the Federal Open Market Committee at its recent
meetings concluded, in effect, that the quantitative objectives
for the various Ms set forth at the beginning of the year should
not be changed at this time, but that we would find an outcome
around the top of those target ranges fully acceptable.
In reaching that conclusion, we considered carefully
and explicitly the intent of the Congress, as expressed in the
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
2-
First Budget Resolution, that the Federal Reserve "reevaluate
its monetary targets in order to assure that they are fully
complementary to a new and more restrained fiscal policy.
In the light of that Resolution, as well as other factors,
we debated the appropriateness of the monetary targets for
1982.
Analysis of past experience suggested strongly that
the previously announced targets, particularly with growth
around the top of the range, should provide enough money and
liquidity to support moderate expansion over the remainder of
this year.
Pressing aggressively to reduce monetary growth well
within the ranges did not seem desirable at this stage of economic
developments, particularly in light of the evidence of a demand
for liquidity for precautionary -- as opposed to transactions -purposes.
A sizable increase in the ranges, on the other hand,
might imply a buildup of money and liquidity to the degree that
it would impair the effort needed to maintain and extend the
encouraging progress toward dis-inflation.
In reaching that judgment, we were conscious that the strong
liquidity demands evident in recent months could shift quickly as
the economy showed signs of recovery, and that raising the targets
could easily be misconstrued as a willingness to tolerate more
inflation.
At the same time, the Committee clearly recognized
that possible demands for liquidity in the current uncertain
economic circumstances would continue to require a degree of
flexibility and judgment in assessing appropriate needs for
money in the months ahead.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
3-
We could observe that, over the first half of the year,
in
the desire of indduals and businesses to hold assets
strong,
relatively liquid forms appeared to be extraordinarily
financial
apparently reflecting concerns about the business and
situation.
•
One reflection of that may be found in the large
d
declines in the "velocity" of money over the recession perio
01••11M0
res
that is, the ratio of the gross national product to measu
of money.
That drop in velocity is particularly strng in
a
view of the persistence of high interest rates, suggesting
heightened desire to hold money or liquid assets relative to
earlier trends.
While velocity often fluctuates widely over short
periods of time, trends have been much more stable over time.
Assuming that velocity rebounds in the second half -- as typically
occurs early in a period of economic recovery -- the targets
established at the beginning of the year for the monetary
aggregates should be fully consistent with economic expansion
in a context of declining inflation.
points in that direction.
Postwar experience strongly
However, the Committee explicitly
considered the possibility that relatively strong precautionary
demands for money could persist.
In that event -- and it would
elements of judgment -- growth of the aggregates
targeted ranges would be tolerated for a time
the FOMC's general policy thrust.
ahead to 1983, the Committee has decided to
the existing targets.
The FOMC will review
I he decision at the start of next year, taking account of, among
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
-4-
other things, the behavior of velocity over the remainder of
this year.
Since we expect that
eSmnetar
aggregates will
be near the upper ends of their ranges at the end of 1982, the
tentative targets for 1983 would be consistent with somewhat
slower money growth next year.
With inflation declining, the
tentative targets should be compatible with continuing recovery
at a moderate pace and an improvement in employment opportunities
In approaching these policy decisions, I have been very
conscious of the fact that monetary policy, however important,
is only one instrument of economic policy.
The attainment of
our common objective of a strong and prosperous economy depends
also on appropriately complementary policies in the fiscal
sphere and in the private sector.
Relaxing discipline on money growth might seem attractive
to some as a means of alleviating stresses in financial markets.
Indeed, in circumstances in which inflationary expectations and
pressures are quiescent, the immediate effect of encouraging
faster growth in money might be to lower interest rates, particularly in short-term markets.
In time, however, an attempt to
maintain lower interest rates by excessive money growth would
founder.
The net result would be to imbed inflation even more
deeply into our economic system, and to make buyers of fixedinterest securities still more wary.
Sooner or later, public
and private demands for credit would reflect the higher price
levels, and savings likely would be discouraged.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Market pressures
•
-5-
would return in amped force.
Put simply, inflationary
money creation provides no escape from the pressures of demands
for credit, nor can money creation substitute for real savings.
We can, of course, affect that balance of demand and
suIS ly in credit markets by fiscal and other policies, and that
is why I welcome the effort of the Congress to achieve greater
fiscal restraint.
I recognize -- and more importantly the markets
sizable obstacles remain in converting the intentions
recognize
expressed in the First Budget Resolution into concrete legislative
action; harmonizing the values and aims of the authorizing and
revenue committees -- indeed the values and aims of our citizens -within the constraints of budgetary discipline is always difficult,
and no more so than in today's circumstances.
Moreover, the effort this year must be put in a larger
perspective.
Even if the objectives of the Budget Resolution
are fully achieved for next year and the underlying economic
assumptions are realized, the deficit in FY 1983 would be about
as large as this year's.
Moreover, the risks seem, in my judgment,
all on the side of a still greater deficit, despite your important
efforts.
If the deficit turns out to be larger than expected
entirely because of a shortfall in economic growth or inflation -and I would point out that the members of the FOMC anticipate
somewhat less real growth and inflation (and thus inflationgenerated revenues) than the Congress -- that "add on" should
not be a source of much concern.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
What is of concern is that you
6--
are working from
SO
large a "structural" deficit -- a deficit
that would exist even in a relatively prosperous economy -and that concern would mount to the extent the targeted savings
are not achieved.
As we appraise the fiscal situation today, projected
deficits continue to carry the implicit threat of "crowding out"
business investment and housing as the economy expands -- a
process that would imply significantly higher interest rates
than would otherwise result.
Your continuing leadership in
prodding your colleagues in the Congress to deal with the
budget dilemma thus remains crucially important to the outlook
for interest rates and the credit markets.
Put more positively, significant progress in paring
the deficits will contribute importantly to lower interest
rates and reduced strains in financial markets within any
monetary framework.
That budgetary policy, as we see it, is
not fundamentally a substitute for disciplined monetary policy
but rather an essential complement.
When moretary policy alone must carry the burden of
dealing with inflation, and when fiscal deficits absorb so
large a fraction of the capacity of the economy to generate
savings, pressures tend to concentrate on financial markets and
on vulnerable credit-dependent sectors of the economy.
Con-
versely, budget restraint relieves those pressures and risks
directly, and would reinforce the growing sense of conviction
that the inflationary tide has turned.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
-7-
While the Open Market CommitLee.in responding to the
Budget Resolution, did not feel that larger growth in the money
supply over time would be desirable, let me also say that I
believe a credibly firmer budgetary posture would permit us a
A
degree of greater flexibility in the shot-run conduct of policy.
I
Specifically, by damping concern about a resurgence of inflation
or credit market pressures, fiscal restraint also lessens fears
that short-run increases in the money supply might presage a
continuing inflationary monetization of the debt.
But any gains
in that respect will of course depend on firmness in implementing
the intentions set forth in your First Resolution, and encouraging
confidence among investors and borrowers that the effort will be
sustained and reinforced in coming years.
I need not dwell on the fact that we are in most difficult
economic circumstances, with unemployment far too high, with
strong pressures on financial markets, and with a sense of widespread uncertainty.
We cannot build a sound program against inflation
on a base of continuing recession.
But let us recognize, too,
that we have come a long way toward turning back the inflationary
tide that had come to grip our economy over the decade of the
•
1970s, and that there is promising evidence of improvements in
productivity and efficiency underway.
More recently, there are
at least some signs that the "grid-lock" in the financial markets
may be beginning to break up; interest rates, while still very
high in historical perspective, have declined to the lowest levels
for some time.
The challenge is to sustain that progress during a period
of recovery, for it is that progress that is needed to extend and
support economic expansion over the long years ahead.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Monetery
8-
and fiscal policies alike need to be directed, and work in
concert, toward that objective.
In that context, I and my
colleagues believe a continuing dialogue with members of this
Committee is highly constructive, and I welcome your comments
and questions.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Li
For release on delivery
9:30 AM, E.D.T.
July 28, 1982
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Statement by
Paul A. Volcker
Chairman, Board of Governors of the Federal Reserve System
before the
Committee on the Budget
United States Senate
July 28, 1982
I am pleased to have this opportunity to meet with
you again to review the monetary and budgetary situation in
the light of our economic objectives.
Just last week, I
testified at some length before the Banking Committees of the
Senate and House; instead of repeating that full statement this
morning, I have attached it to my brief remarks today.
I do want to take this occasion to recognize particularly
the leadership of members of this Committee in pressing for the
budgetary savings reflected in the First Resolution.
Given the
nature of our budgetary problems, that step cannot be the last
if we are to bring the fiscal deficit under control.
But it
does represent, in most difficult circumstances, encouraging
evidence of the willingness and determination of the Congress
to undertake the necessary effort.
In presenting our monetary and credit "targets" to the
Banking Committees last week, I noted that the basic objective
of Federal Reserve monetary policy is the fostering of an environment conducive to sustained recovery in business activity, while
maintaining the financial discipline needed to restore reasonable
price stability.
In reviewing the appropriate means to those
broad ends, the Federal Open Market Committee at its recent
meetings concluded, in effect, that the quantitative objectives
for the various Ms set forth at the beginning of the year should
not be changed at this time, but that we would find an outcome
around the top of those target ranges fully acceptable.
In reaching that conclusion, we considered carefully
and explicitly the intent of the Congress, as expressed in the
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
2
First Budget Resolution, that the Federal Reserve "reevaluate
its monetary targets in order to assure that they are fully
complementary to a new and more restrained fiscal policy."
In the light of that Resolution, as well as other factors,
we debated the appropriateness of the monetary targets for
1982.
Analysis of past experience suggested strongly that
the previously announced targets, particularly with growth
around the top of the range, should provide enough money and
liquidity to support moderate expansion over the remainder of
this year.
Pressing aggressively to reduce monetary growth well
within the ranges did not seem desirable at this stage of economic
developments, particularly in light of the evidence of a demand
for liquidity for precautionary -- as opposed to transactions -purposes.
A sizable increase in the ranges, on the other hand,
might imply a buildup of money and liquidity to the degree that
it would impair the effort needed to maintain and extend the
encouraging progress toward dis-inflation.
In reaching that judgment, we were conscious that the strong
liquidity demands evident in recent months could shift quickly as
the economy showed signs of recovery, and that raising the targets
could easily be misconstrued as a willingness to tolerate more
inflation.
At the same time, the Committee clearly recognized
that possible demands for liquidity in the current uncertain
economic circumstances would continue to require a degree of
flexibility and judgment in assessing appropriate needs for
money in the months ahead.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
3-
We could observe that, over the first half of the year,
the desire of individuals and businesses to hold assets in
relatively liquid forms appeared to be extraordinarily strong,
apparently reflecting concerns about the business and financial
situation.
One reflection of that may be found in the large
declines in the "velocity" of money over the recession period
that is, the ratio of the gross national product to measures
of money.
That drop in velocity is particularly striking in
view of the persistence of high interest rates, suggesting a
heightened desire to hold money or liquid assets relative to
earlier trends.
While velocity often fluctuates widely over short
periods of time, trends have been much more stable over time.
Assuming that velocity rebounds in the second half -- as typically
occurs early in a period of economic recovery -- the targets
established at the beginning of the year for the monetary
aggregates should be fully consistent with economic expansion
in a context of declining inflation.
points in that direction.
Postwar experience strongly
However, the Committee explicitly
considered the possibility that relatively strong precautionary
demands for money could persist.
In that event -- and it would
inevitably involve elements of judgment -- growth of the aggregates
somewhat above the targeted ranges would be tolerated for a time
as consistent with the FOMC's general policy thrust.
In looking ahead to 1983, the Committee has decided to
retain tentatively the existing targets.
The FOMC will review
the decision at the start of next year, taking account of, among
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
-4-
other things, the behavior of velocity over the remainder of
this year.
Since we expect that the monetary aggregates will
be near the upper ends of their ranges at the end of 1982, the
tentative targets for
S.
would be consistent with somewhat
slower money growth next year.
With inflation declining, the
tentative targets should be compatible with continuing recovery
at a moderate pace and an improvement in employment opportunities
In approaching these policy decisions,
have been very
conscious of the fact that monetary policy, however important,
is only one instrument of economic policy.
The attainment of
our common objective of a strong and prosperous economy depends
also on appropriately complementary policies in the fiscal
sphere and in the private sector.
Relaxing discipline on money growth might seem attractive
tI some as a means of alleviating stresses in financial markets.
Indeed, in circumstances in which inflationary expectations and
Iressures are quiescent, the illuaediate effect of encouraging
faster growth in money might be to lower interest rates, particularly in short-term markets.
In time, however, an attempt to
maintain lower interest rates by excessive money growth would
founder.
The net result would be to imbed inflation even more
deeply into our economic system, and to make buyers of fixedinterest securities still more wary.
Sooner or later, public
and private demands for credit would reflect the higher price
levels, and savings likely would be discouraged.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Market pressures
5
would return in amplified force.
Put simply, inflationary
money creation provides no escape from the pressures of demands
for credit, nor can money creation substitute for real savings.
We can, of course, affect that balance of demand and
supply in credit markets by fiscal and other policies, and that
is why I welcome the effort of the Congress to achieve greater
fiscal restraint.
I recognize -- and more importantly the markets
recognize -- sizable obstacles remain in converting the intentions
expressed in the First Budget Resolution into concrete legislative
action; harmonizing the values and aims of the authorizing and
revenue committees -- indeed the values and aims of our citizens -within the constraints of budgetary discipline is always difficult,
and no more so than in today's circumstances.
Moreover, the effort this year must be put in a larger
perspective.
Even if the objectives of the Budget Resolution
are fully achieved for next year and the underlying economic
assumptions are realized, the deficit in FY 1983 would be about
as large as this year's.
Moreover, the risks seem, in my judgment,
all on the side of a still greater deficit, despite your important
efforts.
If the deficit turns out to be larger than expected
entirely because of a shortfall in economic growth or inflation -and I would point out that the members of the FOMC anticipate
somewhat less real growth and inflation (and thus inflationgenerated revenues) than the Congress -- that "add on" should
not be a source of much concern.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
What is of concern is that you
-6
are working from se large a "structural" deficit -- a deficit
that would exist even in a relatively prosperous economy -and that concern would mount to the extent the targeted savings
are not achieved.
As we appraise the fiscal situation today, projected
deficits continue to carry the implicit threat of "crowding out"
business investment and housing as the economy expands -- a
process that would imply significantly higher interest rates
than would otherwise result.
Your continuing leadership in
prodding your colleagues in the Congress to deal with the
budget dilemma thus remains crucially important to the outlook
for interest rates and the credit markets.
Put more positively, significant progress in paring
the deficits will contribute importantly to lower interest
rates and reduced strains in financial markets within any
monetary framework.
That budgetary policy, as we see it, is
not fundamentally a substitute for disciplined monetary policy
but rather an essential complement.
When moretary policy alone must carry the burden of
dealing with inflation, and when fiscal deficits absorb so
large a fraction of the capacity of the economy to generate
savings, presures tend to concentrate on financial markets and
on vulnerable credit-dependent sectors of the economy.
Con-
versely, budget restraint relieves those pressures and risks
directly, and would reinforce the growing sense of conviction
that the inflationary tide has turned.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
-7-
While the Open Market Committee. in responding to the
money
Budget Resolution, did not feel that larger growth in the
I
supply over time would be desirable, let me also say that
t us a
believe a credibly firmer budgetary posture would permi
of policy.
degree of greater flexibility in the short-run conduct
Specifically, by damping concern about a resurgence of inflation
ns fears
or credit market pressures, fiscal restraint also lesse
ge a
that short-run increases in the money supply might presa
continuing inflationary monetization of the debt.
But any gains
menting
in that respect will of course depend on firmness in imple
g
the intentions set forth in your First Resolution, and encouragin
confidence among investors and borrowers that the effort will be
sustained and reinforced in coming years.
I need not dwell on the fact that we are in most difficult
economic circumstances, with unemployment far too high, with
strong pressures on financial markets, and with a sense of widespread uncertainty.
We cannot build a sound program against inflation
on a base of continuing recession.
But let us recognize, too,
that we have come a long way toward turning back the inflationary
tide that had come to grip our economy over the decade of the
1970s, and that there is promising evidence of improvements in
productivity and efficiency underway.
More recently, there are
at least some signs that the "grid-lock" in the financial markets
may be beginning to break up; interest rates, while still very
high in historical perspective, have declined to the lowest levels
for some time.
The challenge is to sustain that progress during a period
d and
of recovery, for it is that progress that is needed to exten
years ahead.
support economic expansion over the long
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Monetery
8-
-
and fiscal policies alike need to be directed, and work in
concert, toward that objective.
In that context, I and my
colleagues believe a continuing dialogue with members of this
Committee is highly constructive, and I welcome your comments
3
and questions.
https://fraser.stlouisfed.org
Federal
I Reserve Bank of St. Louis
,
1
%
For release on delivery
9:30 AM, E.D.T.
July 28, 1982
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Statement by
Paul A. Volcker
Chairman, Board of Governors of the Federal Reserve System
before the
Committee on the Budget
United States Senate
July 28, 1982
am pleased to have this opportunity to meet with
you again to review the monetary and budgetary situation in
the light of our economic objectives.
Just last week, I
testified at some length before the Banking Committees of the
Senate and House; instead of repeating that full statement this
morning, I have attached it to my brief remarks today.
do want to take this occasion to recognize particularly
the leadership of members of this Committee in pressing for the
budgetary savings reflected in the First Resolution.
Given the
nature of our budgetary problems, that step cannot be the last
if we are to bring the fiscal deficit under control.
But it
does represent, in most difficult circumstances, encouraging
evidence of the willingness and determination of the Congress
to undertake the necessary effort.
In presenting our monetary and credit "targets" to the
Banking Committees last week, I noted that the basic objective
of Federal Reserve monetary policy is the fostering of an environment conducive to sustained recovery in business activity, while
maintaining the financial discipline needed to restore reasonable
price stability.
In reviewing the appropriate means to those
broad ends, the Federal Open Market Committee at its recent
meetings concluded, in effect, that the quantitative objectives
for the various Ms set forth at the beginning of the year should
not be changed at this time, but that we would find an outcome
around the top of those target ranges fully acceptable.
In reaching that conclusion, we considered carefully
and explicitly the intent of the Congress, as expressed in the
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
2-
First Budget Resolution, that the Federal Reserve "reevaluate
its monetary targets in order to assure that they are fully
complementary to a new and more restrained fiscal policy."
In the light of that Resolution, as well as other factors,
we debated the appropriateness of the monetary targets for
1982.
Analysis of past experience suggested strongly that
the previously announced targets, particularly with growth
around the top of the range, should provide enough money and
liquidity to support moderate expansion over the remainder of
this year.
Pressing aggressively to reduce monetary growth well
within the ranges did not seem desirable at this stage of economic
developments, particularly in light of the evidence of a demand
for liquidity for precautionary -- as opposed to transactions -purposes.
A sizable increase in the ranges, on the other hand,
might imply a buildup of money and liquidity to the degree that
it would impair the effort needed to maintain and extend the
encouraging progress toward dis-inflation.
In reaching that judgment, we were conscious that the strong
liquidity demands evident in recent months could shift quickly as
the economy showed signs of recovery, and that raising the targets
could easily be misconstrued as a willingness to tolerate more
inflation.
At the same time, the Committee clearly recognized
that possible demands for liquidity in the current uncertain
economic circumstances would continue to require a degree of
flexibility and judgment in assessing appropriate needs for
money in the months ahead.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
•
3-
We could observe that, over the first half of the year,
the desire of individuals and businesses to hold assets in
relatively liquid forms appeared to be extraordinarily strong,
apparently reflecting concerns about the business and financial
situation.
One reflection of that may be found in the large
declines in the "velocity" of money over the recession period -that is, the ratio of the gross national product to measures
of money.
That drop in velocity is particularly striking in
view of the persistence of high interest rates, suggesting a
heightened desire to hold money or liquid assets relative to
earlier trends.
While velocity often fluctuates widely over short
periods of time, trends have been much more stable over time.
Assuming that velocity rebounds in the second half -- as typically
occurs early in a period of economic recovery -- the targets
established at the beginning of the year for the monetary
aggregates should be fully consistent with economic expansion
in a context of declining inflation.
points in that direction.
Postwar experience strongly
However, the Committee explicitly
considered the possibility that relatively strong precautionary
demands for money could persist.
In that event -- and it would
inevitably involve elements of judgment -- growth of the aggregates
somewhat above the targeted ranges would be tolerated for a time
as consistent with the FOMC's general policy thrust.
In looking ahead to 1983, the Committee has decided to
retain tentatively the existing targets.
The FOMC will review
the decision at the start of next year, taking account of, among
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
-4-
other things, the behavior of velocity over the remainder of
this year.
Since we expect that the monetary aggregates will
be near the upper ends of their ranges at the end of 1982, the
tentative targets for 1983 would be consistent with somewhat
slower money growth next year.
With inflation declining, the
tentative targets should be compatible with continuing recovery
at a moderate pace and an improvement in employment opportunities.
In approaching these policy decisions, I have been very
conscious of the fact that monetary policy, however important,
is only one instrument of economic policy.
The attainment of
our common objective of a strong and prosperous economy depends
also on appropriately complementary policies in the fiscal
sphere and in the private sector.
Relaxing dpline on money growth might seem attractive
to some as a means of alleviating stresses in financial markets.
Indeed, in circumstances in which inflationary expectations and
pressures are quiescent, the immediate effect of encouraging
faster growth in money might be to lower interest rates, particularly in short-term markets.
In time, however, an attempt to
maintain lower interest rates by excessive money growth would
founder.
The net result would be to imbed inflation even more
deeply into our economic system, and to make buyers of fixedinterest securities still more wary.
Sooner or later, public
and private demands for credit would reflect the higher price
levels, and savings likely would be discouraged.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Market pressures
-5-
would return in amplified force.
Put simply, inflationary
money creation provides no escape from the pressures of demands
for credit, nor can money creation substitute for real savings.
We can, of course, affect that balance of demand and
supply in credit markets by fiscal and other policies, and that
is why I welcome the effort of the Congress to achieve greater
fiscal restraint.
I recognize -- and more importantly the markets
recognize -- sizable obstacles remain in converting the intentions
expressed in the First Budget Resolution into concrete legislative
action; harmonizing the values and aims of the authorizing and
revenue committees -- indeed the values and aims of our citizens -within the constraints of budgetary discipline is always difficult,
and no more so than in today's circumstances.
Moreover, the effort this year must be put in a larger
perspective.
Even if the objectives of the Budget Resolution
are fully achieved for next year and the underlying economic
assumptions are realized, the deficit in FY 1983 would be about
as large as this year's.
Moreover, the risks seem, in my judgment,
all on the side of a still greater deficit, despite your important
efforts.
If the deficit turns out to be larger than expected
entirely because of a shortfall in economic growth or inflation -and I would point out that the members of the FOMC anticipate
somewhat less real growth and inflation (and thus inflationgenerated revenues) than the Congress -- that "add on" should
not be a source of much concern.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
What is of concern is that you
are working from 9.0 large a "structural" deficit -- a deficit
that would exist even in a relatively prosperous economy -and that concern would mount to the extent the targeted savings
are not achieved.
As we appraise the fiscal situation today, projected
deficits continue to carry the implicit threat of "crowding out"
business investment and housing as the economy expands -- a
process that would imply significantly higher interest rates
than would otherwise result.
Your continuing leadership in
prodding your colleagues in the Congress to deal with the
budget dilemma thus remains crucially important to the outlook
for interest rates and the credit markets.
Put more positively, significant progress in paring
the deficits will contribute importantly to lower interest
rates and reduced strains in financial markets within any
monetary framework.
That budgetary policy, as we see it, is
not fundamentally a substitute for disciplined monetary policy
but rather an essential complement.
When moretary policy alone must carry the burden of
dealing with inflation, and when fiscal deficits absorb so
large a fraction of the capacity of the economy to generate
savings, pressures tend to concentrate on financial markets and
on vulnerable credit-dependent sectors of the economy.
Con-
versely, budget restraint relieves those pressures and risks
directly, and would reinforce the growing sense of conviction
that the inflationary tide has turned.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
•
-7-
While the Open Market Committee. in responding to the
in the money
Budget Resolution, did not feel that larger growth
that I
supply over time would be desirable, let me also say
t us a
believe a credibly firmer budgetary posture would permi
ct of policy.
degree of greater flexibility in the shcl-t-run condu
inflation
Specifically, by damping concern about a resurgence of
lessens fears
or credit market pressures, fiscal restraint also
ge a
that short-run increases in the money supply might presa
continuing inflationary monetization of the debt.
But any gains
implementing
in that respect will of course depend on firmness in
encouraging
the intentions set forth in your First Resolution, and
be
confidence among investors and borrowers that the effort will
sustained and reinforced in coming years.
cult
I need not dwell on the fact that we are in most diffi
economic circumstances, with unemployment far too high, with
strong pressures on financial markets, and with a sense of widespread uncertainty.
We cannot build a sound program against inflation
on a base of continuing recession.
But let us recognize, too,
that we have come a long way toward turning back the inflationary
tide that had come to grip our economy over the decade of the
•
in
1970s, and that there is promising evidence of improvements
productivity and efficiency underway.
More recently, there are
I.
at least some signs that the "grid-lock" in the financial markets
may be beginning to break up; interest rates, while still very
s
high in historical perspective, have declined to the lowest level
for some time.
The challenge is to sustain that progress during a period
extend and
of recovery, for it is that progress that is needed to
years ahead.
support economic expansion over the long
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Monetery
8-
-
and fiscal policies alike need to be directed, and work in
concert, toward that objective.
In that context, I and my
colleagues believe a continuing dialogue with members of this
Committee is highly constructive, and I welcome your comments
I
and questions.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
A
For release on delivery
9:3C AM, E.D.T.
July 28, 1982
r
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Statement by
Paul A. Volcker
Chairman, Board of Governors of the Federal Reserve System
before the
Committee on the Budget
United States Senate
July 28, 1982
I am pleased to have this opportunity to meet with
you again to review the monetary and budgetary situation in
the light of our economic objectives.
Just last week, I
testified at some length before the Banking Committees of the
Senate and House; instead of repeating that full statement this
morning, I have attached it to my brief remarks today.
I do want to take this occasion to recognize particularly
the leadership of members of this Committee in pressing for the
budgetary savings reflected in the First Resolution.
Given the
nature of our budgetary problems, that step cannot be the last
if we are to bring the fiscal deficit under control.
But it
does represent, in most difficult circumstances, encouraging
evidence of the willingness and determination of the Congress
to undertake the necessary effort.
In presenting our monetary and credit "targets" to the
Banking Committees last week, I noted that the basic objective
of Federal Reserve monetary policy is the fostering of an environment conducive to sustained recovery in business activity, while
maintaining the financial discipline needed to restore reasonable
price stability.
In reviewing the appropriate means to those
broad ends, the Federal Open Market Committee at its recent
meetings concluded, in effect, that the quantitative objectives
for the various Ms set forth at the beginning of the year should
not be changed at this time, but that we would find an outcome
around the top of those target ranges fully acceptable.
In reaching that conclusion, we considered carefully
and explicitly the intent of the Congress, as expressed in the
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
2-
First Budget Resolution, that the Federal Reserve "reevaluate
its monetary targets in order to assure that they are fully
complementary to a new and more restrained fiscal policy."
In the light of that Resolution, as well as other factors,
we debated the appropriateness of the monetary targets for
1982.
Analysis of past experience suggested strongly that
the previously announced targets, particularly with growth
around the top of the range, should provide enough money and
liquidity to support moderate expansion over the remainder of
this year.
Pressing aggressively to reduce monetary growth well
within the ranges did not seem desirable at this stage of economic
developments, particularly in light of the evidence of a demand
for liquidity for precautionary -- as opposed to transactions -purposes.
A sizable increase in the ranges, on the other hand,
might imply a buildup of money and liquidity to the degree that
it would impair the effort needed to maintain and extend the
encouraging progress toward dis-inflation.
In reaching that judgment, we were conscious that the strong
liquidity demands evident in recent months could shift quickly as
the economy showed signs of recovery, and that raising the targets
could easily be misconstrued as a willingness to tolerate more
inflation.
At the same time, the Committee clearly recognized
that possible demands for liquidity in the current uncertain
economic circumstances would continue to require a degree of
flexibility and judgment in assessing appropriate needs for
money in the months ahead.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
•
3--
We could observe that, over the first half of the year,
the desire of individuals and businesses to hold assets in
relatively liquid forms appeared to be extraordinarily strong,
apparently reflecting concerns about the business and financial
•
situation.
One reflection of that may be found in the large
declines in the "velocity" of money over the recession period
that is, the ratio of the gross national product to measures
of money.
That drop in velocity is particularly striking in
view of the persistence of high interest rates, suggesting a
heightened desire to hold money or liquid assets relative to
earlier trends.
While velocity often fluctuates widely over short
periods of time, trends have been much more stable over time.
Assuming that velocity rebounds in the second half -- as typically
occurs early in a period of economic recovery -- the targets
established at the beginning of the year for the monetary
aggregates should be fully consistent with economic expansion
in a context of declining inflation.
points in that direction.
Postwar experience strongly
However, the Committee explicitly
considered the possibility that relatively strong precautionary
demands for money could persist.
In that event -- and it would
inevitably involve elements of judgment -- growth of the aggregates
somewhat above the targeted ranges would be tolerated for a time
as consistent with the FOMC's general policy thrust.
In looking ahead to 1983, the Committee has decided to
retain tentatively the existing targets.
The FOMC will review
the decision at the start of next year, taking account of, among
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
4
other things, the behavior of velocity over the remainder of
this year.
Since we expect that the monetary aggregates will
be near the upper ends of their ranges at the end of 1982, the
tentative targets for 1993 would be consistent with somewhat
•
slower money growth next year.
With inflation declining, the
tentative targets should be compatible with continuing recovery
at a moderate pace and an improvement in employment opportunities
In approaching these policy deons, I have been very
conscious of the fact that monetary policy, however important,
is only one instrument of economic policy.
The attainment of
our common objective of a strong and prosperous economy depends
also on appropriately complementary policies in the fiscal
sphere and in the private sector.
Relaxing discipline on money growth might seem attractive
to some as a means of alleviating stresses in financial markets.
Indeed, in circumstances in which inflationary expectations and
pressures are quiescent, the immediate effect of encouraging
faster growth in money might be to lower interest rates, particularly in short-term markets.
In time, however, an attempt to
maintain lower interest rates by excessive money growth would
founder.
The net result would be to imbed inflation even more
deeply into our economic system, and to make buyers of fixedinterest securities still more wary.
Sooner or later, public
and private demands for credit would reflect the higher price
levels, and savings likely would be discouraged.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Market pressures
5-
would return in amplified force.
Put simply, inflationary
money creation provides no escape from the pressures of demands
for credit, nor can money creation substitute for real savings.
We can, of course, affect that balance of demand and
pa
supply in credit markets by fiscal and other policies, and that
U
is why I welcome the effort of the Congress to achieve greater
fiscal restraint.
I recognize -- and more importantly the markets
recognize -- sizable obstacles remain in converting the intentions
expressed in the First Budget Resolution into concrete legislative
action; harmonizing the values and aims of the authorizing and
revenue committees -- indeed the values and aims of our citizens -within the constraints of budgetary discipline is always difficult,
and no more so than in today's circumstances.
Moreover, the effort this year must be put in a larger
perspective.
Even if the objectives of the Budget Resolution
are fully achieved for next year and the underlying economic
assumptions are realized, the deficit in FY 1983 would be about
as large as this year's.
Moreover, the risks seem, in my judgment,
all on the side of a still greater deficit, despite your important
efforts.
If the deficit turns out to be larger than expected
•
entirely because of a shortfall in economic growth or inflation -and I would point out that the members of the FOMC anticipate
somewhat less real growth and inflation (and thus inflationgenerated revenues) than the Congress -- that "add on" should
not be a source of much concern.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
What is of concern is that you
-6
are working from sc large a "structural" deficit -- a deficit
that would exist even in a relatively prosperous economy -and that concern would mount to the extent the targeted savings
are not achieved.
As we appraise the fiscal situation today, projected
deficits continue to carry the implicit threat of "crowding out"
business investment and housing as the economy expands -- a
process that would imply significantly higher interest rates
than would otherwise result.
Your continuing leadership in
prodding your colleagues in the Congress to deal with the
budget dilemma thus remains crucially important to the outlook
for interest rates and the credit markets.
Put more positively, significant progress in paring
the deficits will contribute importantly to lower interest
rates and reduced strains in financial markets within any
monetary framework.
That budgetary policy, as we see it, is
not fundamentally a substitute for disciplined monetary policy
but rather an essential complement.
When moretary policy alone must carry the burden of
dealing with inflation, and when fiscal deficits absorb so
large a fraction of the capacity of the economy to generate
savings, pressures tend to concentrate on financial markets and
on vulnerable credit-dependent sectors of the economy.
Con-
versely, budget restraint relieves those Pressures and risks
directly, and would reinforce the growing sense of conviction
that the inflationary tide has turned.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
While the Open Market Committee. in responding to the
Budget Resolution, did not feel that larger growth in the money
supply over time would be desirable, let me also say that I
believe a credibly firmer budgetary posture would permit us a
degree of greater flexibility in the short-run conduct of policy.
Specifically, by damping concern about a resurgence of inflation
or credit market pressures, fiscal restraint also lessens fears
that short-run increases in the money supply might presage a
continuing inflationary monetization of the debt.
But any gains
in that respect will of course depend on firmness in implementing
the intentions set forth in your First Resolution, and encouraging
confidence among investors and borrowers that the effort will be
sustained and reinforced in coming years.
I need not dwell on the fact that we are in most difficult
economic circumstances, with unemployment far too high, with
strong pressures on financial markets, and with a sense of widespread uncertainty.
We cannot build a sound program against inflation
on a base of continuing recession.
But let us recognize, too,
that we have come a long way toward turning back the inflationary
tide that had come to grip our economy over the decade of the
•
1970s, and that there is promising evidence of improvements in
productivity and efficiency underway.
More recently, there are
at least some signs that the "grid-lock" in the financial markets
may be beginning to break up; interest rates, while still very
high in historical perspective, have declined to the lowest levels
for some time.
The challenge is to sustain that progress during a period
of recovery, for it is that progress that is needed to extend and
ahead.
support economic expansion over the long years
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
0
Monetery
-8
fiscal policies alike need to be directed, and work in
I
concert, toward that objective.
In that context, I and my
colleagues believe a continuing dialogue with members of this
Committee is highly constructive, and I welcome your comments
and questions.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
•
p.
For release on delivery
9:30 AM, E.D.T.
July 28, 1982
•
4
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Statement by
Paul A. Volcker
Chairman, Board of Governors of the Federal Reserve System
before the
Committee on the Budget
United States Senate
July 28, 1982
I am pleased to have this opportunity to meet with
you again to review the monetary and budgetary situation in
the light of our economic objectives.
Just last week, I
testified at some length before the Banking Committees of the
Senate and House; instead of repeating that full statement this
morning, I have attached it to my brief remarks today.
do want to take this occasion to recognize particularly
the leadership of members of this Committee in pressing for the
budgetary savings reflected in the First Resolution.
Given the
nature of our budgetary problems, that step cannot be the last
if we are to bring the fiscal deficit under control.
But it
does represent, in most difficult circumstances, encouraging
evidence of the willingness and determination of the Congress
to undertake the necessary effort.
In presenting our monetary and credit "targets" to the
Banking Committees last week, I noted that the basic objective
of Federal Reserve monetary policy is the fostering of an environment conducive to sustained recovery in business activity, while
maintaining the financial discipline needed to restore reasonable
price stability.
In reviewing the appropriate means to those
broad ends, the Federal Open Market Committee at its recent
meetings concluded, in effect, that the quantitative objectives
for the various Ms set forth at the beginning of the year should
not be changed at this time, but that we would find an outcome
around the top of those target ranges fully acceptable.
In reaching that conclusion, we considered carefully
and explicitly the intent of the Congress, as expressed in the
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
2-
First Budget Resolution, that the Federal Reserve "reevaluate
its monetary targets in order to assure that they are fully
complementary to a new and more restrained fiscal policy."
In the light of that Resolution, as well as other factors,
we debated the appropriateness of the monetary targets for
1982.
Analysis of past experience suggested strongly that
the previously announced targets, particularly with growth
around the top of the range, should provide enough money and
liquidity to support moderate expansion over the remainder of
this year.
Pressing aggressively to reduce monetary growth well
within the ranges did not seem desirable at this stage of economic
developments, particularly in light of the evidence of a demand
for liquidity for precautionary -- as opposed to transactions -purposes.
A sizable increase in the ranges, on the other hand,
might imply a buildup of money and liquidity to the degree that
it would impair the effort needed to maintain and extend the
encouraging progress toward dis-inflation.
In reaching that judgment, we were conscious that the strong
liquidity demands evident in recent months could shift quickly as
the economy showed signs of recovery, and that raising the targets
could easily be misconstrued as a willingness to tolerate more
inflation.
At the same time, the Committee clearly recognized
that possible demands for liquidity in the current uncertain
economic circumstances would continue to require a degree of
flexibility and judgment in assessing appropriate needs for
money in the months ahead.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
3-
We could observe that, over the first half of the year,
the desire of individuals and businesses to hold assets in
relatively liquid forms appeared to be extraordinarily strong,
apparently reflecting concerns about the business and financial
situation.
One reflection of that may be found in the large
declines in the "velocity" of money over the recession period
.10.1=••
that is, the ratio of the gross national product to measures
of money.
That drop in velocity is particularly striking in
view of the persistence of high interest rates, suggesting a
heightened desire to hold money or liquid assets relative to
earlier trends.
While velocity often fluctuates widely over short
periods of time, trends have been much more stable over time.
Assuming that velocity rebounds in the second half -- as typically
occurs early in a period of economic recovery -- the targets
established at the beginning of the year for the monetary
aggregates should be fully consistent with economic expansion
in a context of declining inflation.
points in that direction.
Postwar experience strongly
However, the Committee explicitly
considered the possibility that relatively strong precautionary
demands for money could persist.
In that event -- and it would
inevitably involve elements of judgment -- growth of the aggregates
somewhat above the targeted ranges would be tolerated for a time
as consistent with the FOMC's general policy thrust.
In looking ahead to 1983, the Committee has decided to
retain tentatively the existing targets.
The FOMC will review
the decision at the start of next year, taking account of, among
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
4
other things, the behavior of velocity over the remainder of
this year.
Since we expect that the monetary aggregates will
be near the upper ends of their ranges at the end of 1982, the
tentative targets for 1933 would be consistent with somewhat
slower money growth next year.
With inflation declining, the
tentative targets should be compatible with continuing recovery
at a moderate pace and an improvement in employment opportunities
In approaching these policy deons, I have been very
conscious of the fact that monetary policy, however important,
is only one instrument of economic policy.
The attainment of
our common objective of a strong and prosperous economy depends
also on appropriately complementary poes in the fiscal
sphere and in the private sector.
Relaxing discipline on money growth might seem attractive
to some as a means of alleviating stresses in financial markets.
Indeed, in circumstances in which inflationary expectations and
pressures are quiescent, the immediate effect of encouraging
faster growth in money might be to lower interest rates, particularly in short-term markets.
In time, however, an attempt to
maintain lower interest rates by excessive money growth would
founder.
The net result would be to imbed inflation even more
deeply into our economic system, and to make buyers of fixedinterest securities still more wary.
Sooner or later, public
and private demands for credit would reflect the higher price
levels, and savings likely would be discouraged.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Market pressures
-5-
would return in amplified force.
Put simply, inflationary
money creation provides no escape from the pressures of demands
for credit, nor can money creation substitute for real savings.
We can, of course, affect that balance of demand and
supply in credit markets by fiscal and other policies, and that
is why I welcome the effort of the Congress to achieve greater
fiscal restraint.
I recognize -- and more importantly the markets
recognize -- sizable obstacles remain in converting the intentions
expressed in the First Budget Resolution into concrete legislative
action; harmonizing the values and aims of the authorizing and
revenue committees -- indeed the values and aims of our citizens -within the constraints of budgetary discipline is always difficult,
and no more so than in today's circumstances.
Moreover, the effort this year must be put in a larger
perspective.
Even if the objectives of the Budget Resolution
are fully achieved for next year and the underlying economic
assumptions are realized, the deficit in FY 1983 would be about
as large as this year's.
Moreover, the risks seem, in my judgment,
all on the side of a still greater deficit, despite your important
efforts.
If the deficit turns out to be larger than expected
entirely because of a shortfall in economic growth or inflation -and I would point out that the members of the FOMC anticipate
somewhat less real growth and inflation (and thus inflationgenerated revenues) than the Congress -- that "add on" should
not be a source of much concern.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
What is of concern is that you
6
are working from 9.0 large a "structural" deficit -- a deficit
that would exist even in a relatively prosperous economy -and that concern would mount to the extent the targeted savings
are not achieved.
•
As we appraise the fiscal situation today, projected
deficits continue to carry the implicit threat of "crowding out"
business investment and housing as the economy expands -- a
process that would imply significantly higher interest rates
than would otherwise result.
Your continuing leadership in
prodding your colleagues in the Congress to deal with the
budget dilemma thus remains crucially important to the outlook
for interest rates and the credit markets.
Put more positively, significant progress in paring
the deficits will contribute importantly to lower interest
rates and reduced strains in financial markets within any
monetary framework.
That budgetary policy, as we see it, is
not fundamentally a substitute for disciplined monetary policy
but rather an essential complement.
When moretary policy alone must carry the burden of
dealing with inflation, and when fiscal deficits absorb so
large a fraction of the capacity of the economy to generate
savings, pressures tend to concentrate on financial markets and
on vulnerable credit-dependent sectors of the economy.
Con-
versely, budget restraint relieves those Pressures and risks
directly, and would reinforce the growing sense of conviction
that the inflationary tide has turned.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
-7-
While the Open Market Committee.in responding to the
Budget Resolution, did not feel that larger growth in the money
supply over time would be desirable, let me also say that I
believe a credibly firmer budgetary posture would permit us a
degree of greater flexibility in the sher-t-run conduct of policy.
3
Specifically, by damping concern about a resurgence of inflation
or credit market pressures, fiscal restraint also lessens fears
that short-run increases in the money supply might presage a
continuing inflationary monetization of the debt.
But any gains
in that respect will of course depend on firmness in implementing
the intentions set forth in your First Resolution, and encouraging
confidence among investors and borrowers that the effort will be
sustained and reinforced in coming years.
I need not dwell on the fact that we are in most difficult
economic circumstances, with unemployment far too high, with
strong pressures on financial markets, and with a sense of widespread uncertainty.
We cannot build a sound program against inflation
on a base of continuing recession.
But let us recognize, too,
that we have come a long way toward turning back the inflationary
tide that had come to grip our economy over the decade of the
1970s, and that there is promising evidence of improvements in
productivity and efficiency underway.
More recently, there are
at least some signs that the "grid-lock" in the financial markets
may be beginning to break up; interest rates, while still very
high in historical perspective, have declined to the lowest levels
for some time.
The challenge is to sustain that progress during a period
of recovery, for it is that progress that is needed to extend and
support economic expansion over the long years ahead.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Monetery
8-
and fiscal policies alike need to be directed, and work in
concert, toward that objective.
In that context, I and my
colleagues believe a continuing dialogue with members of this
Committee is highly constructive, and I welcome your comments
r
and questions.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
t
A
@FedFRASER