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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 The digitization ofthis collection was made possible by the Federal Reserve Bank of St. Louis. From the collections of the Seeley G. Mudd Manuscript 11.iii Princeton, NJ These documents can only be used for educational and research purposes ("fair use") as per United States copyright law. By accessing this file, all users agree that their use falls within fair use as defined by the copyright law of the United States. 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Policy on Digitized Collections Digitized collections are made accessible for research purposes. Princeton University has indicated what it knows about the copyrights and rights of privacy, publicity or trademark in its finding aids. Elowever, due to the nature of archival collections, it is not always possible to identify this information. Princeton University is eager to hear from any rights owners, so that it may provide accurate information. When a rights issue needs to be addressed, upon request Princeton University will remove the material from public view while it reviews the claim. Inquiries about this material can be directed to: Seeley G. Mudd Manuscript Library 65 Olden Street Princeton, NJ 08540 609-258-6345 609-258-3385 (fax) mudd@princeton.edu   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
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