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Monetary Policy
Objectives for 1983

·?)&Wt. <f)...dA
Midyear Review of the Federal Reserve Board

July 20, 1983


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f 1d1r1I l111rw1 Bank
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Monetary Policy
Objectives for 1983
With Tentative Monetary Growth Ranges for 1984

Summary of Report to the Congress on Monetary Policy pursuant
to the Full Employment and Balanced Growth Act of 1978. With
testimony presented by Paul A. Volcker, Chairman,
Federal Reserve Board, July 20, 1983.


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Contents

Section

Page

Monetary Policy in 1983 and 1984

2

Growth in Money and Credit

2

Monitoring M 1 and Debt

2

The Outlook for the Economy

3

Testimony of Paul A. Volcker, Chairman,
Federal Reserve Board

8


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Monetary Policy in 1983 and 1984

Growth in Money and Credit

M3

During July, the Federal Reserve reviewed its 1983
target ranges for money and credit and established
tentative ranges for 1984 in light of its basic objectives of encouraging sustained economic recovery
while continuing to make progress toward price
stability. In setting these ranges, the Federal Open
Market Committee recognized that the relationships
among the money and credit aggregates and
economic activity in the period ahead are subject to
considerable uncertainty. Consequently, it was emphasized that, in implementing policy, the
significance to be attached to movements in the
various measures of money would depend on
evidence about the strength of economic recovery,
the outlook for prices and inflationary expectations,
and emerging conditions in domestic and international financial markets.
The Committee reaffirmed the 1983 ranges for the
broader monetary aggregates-M2 and M3. The
tentative ranges for next year set for these aggregates were reduced by ½ percentage point.

M2

- - - Range adopted by FOMC for

1982 Q4 to 1983 Q4
2600

6~'Jli

........
........ ........

ONDJ

1982

.,,..,,.

.,,..,,.

.lO'Jli2200

7'Jli

.,..,

FMAMJ

J

ASOND

1983

In setting these tentative ranges, it was expected
that shifts into money market deposit accounts
(MMDAs) would not significantly distort growth in
the broader aggregates, in contrast to the experience
in the early part of this year.
With greater growth in real (and nominal) GNP
than anticipated earlier-but in the context of
moderating inflation-actual growth in M2 and M3
may reasonably be higher in the ranges than
thought likely earlier .
Th~ FOMC also agreed that principal weight
would continue to be placed on the broader
monetary aggregates in the-implementation of
monetary policy, in view of the continuing uncertainties that attach to the behavior and trend of M1
over time.

- - - Range adopted by FOMC for

.,,.

........

........ 2500

2400

Billions of dollars

Feb./Mar.-1983-to Q4 1983

Billions of dollars

2150
2100
2050
2000

Monitoring Ml and Debt

1950
0

N

D

J

1982


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F

M

A

M

J.

J

A

S

O

N

Recent evidence suggests that the declines in the
velocity of Ml may be abating. The income velocity
of M 1 declined only modestly in the second quarter
of this year. The upward impact on M1 demand of
earlier interest rate declines has faded and, given the
sizable buildup in liquid balances that has taken
place, it seems probable that some pick-up in the

D

1983

2

M 1 growth would be expected to move lower in
these ranges as and if velocity strengthens.
The Committee reaffirmed the previously announced range for monitoring domestic financial
debt in 1983, and reduced the range by ½ percentage point for 1984.

velocity of M 1 will develop over the quarters ahead,
in closer conformance with cyclical and secular patterns of earlier years. Whether any rise in velocity
would be as strong as in earlier decades of the postWorld War II period remains uncertain.
Taking account of the various uncertainties, for
the purpose of monitoring Ml behavior, the Committee established the growth range shown below
(annual rate) for the period from the second quarter
to the fourth quarter of this year. The decision to
establish a new base (the second quarter) for
monitoring M 1 reflected a judgment that the rapid
growth over the past several quarters should be
treated as a one-time phenomenon, neither to be
retraced or long extended. The monitoring range for
Ml tentatively established for the period from the
fourth quarter of 1983 to the fourth quarter of 1984
is also shown below. These ranges anticipate no further decline in the velocity of M 1 during a period of
relatively strong growth in economic activity and
allow for the likelihood of some rebound in velocity.

The Outlook for the Economy
When the year began, an economic expansion was
underway, but it was widely expected that the
recovery, at least in its initial phases, would be
significantly less rapid than the average postwar
cyclical upswing.
By the second quarter, however, the recovery had
gained vigor and was following in most respects a
typical cyclical pattern. Advances in residential construction were exceptionally large during the first
half, and there were sustained increases in consumer
spending, particularly for durable goods. Businesses
continued to liquidate inventories at a rapid· pace
through the first quarter, but then apparently began
rebuilding stocks in the second quarter as final
demands strengthened. Employment gains became

Ranges of Broader Aggregates, 1983 and 1984 1
1983 Range

1983 Actual2

1984 Tentative 2

Base Levels 2

Percent

Percent

Percent

Billions of Dollars
Seasonally Adjusted

M2

7-10

9.1

6½-9½

2060.4

M3

6½-9½

9.6

6-9

2366.6

Monitoring Ranges for Mt and Debt, 1983 and 1984 1
1983 1st Half

1983 2nd Half

1983 Actua12

1984: Tentative2

Base Levds 2

Percent

Percent

Percent

Percent

Billions of Dollars
Seasonally Adjusted

Ml

4-8

5-93

13.9

4-8

473.6

Total Domestic
Nonfinancial Debt

8½-11 ½

No Change

10.6

8-11

4750.0


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3

Change from end of previous
period, annual rate, percent

Real GNP

reached in the second quarter, and with mortgage
interest rates no longer falling, outlays for residential
construction seem unlikely to continue rising at the
extraordinary pace of early 1983. The foreign sector,
too, will be exerting a restraining influence on
growth of output in the United States, owing to a
strong dollar, relatively slow growth in the other industrial nations, and financial difficulties besetting
many developing countries.
Employment is likely to continue expanding as the
recovery in output progresses, with gradual declines
in the unemployment rate. However, if past experience is any guide, the strengthening economy
will itself prompt more job-seekers to enter the labor
force, thereby reinforcing the inertia of the
unemployment rate. Consequently, unemployment
will remain high, relative to the earlier postwar
period, for some time.

1972 Dollars
8

1977

1979

1981

1983

•Data for 1983-Hl arc based partly on advance projections from the Commerce

Department.

. -

substantial as the recovery gathered speed, and the
unemployment rate in June-while still high
historically-was three-quarters of a percent below
the earlier peak.
Given the momentum of the recovery-and the
added stimulus of another reduction in personal
truces at midyear-there is a strong likelihood that
real GNP will continue growing at a healthy pace
through the second half of 1983. Gains in employment and output have generated sizable increases in
income, which in tum are laying the groundwork
for further advances in consumer spending. And,
business spending on equipment appears to be turning up. The cumulative forces of economic expansion thus appear to be well established.
• Real GNP growth in the second half as a whole
may not match the rapid second-quarter pace, which
partly reflected the sharp swing in inventory positions. In addition, given the level of housing starts


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Inflation Outlook
The near-term outlook for inflation continues to be
reasonably favorable. Wage pressures have
moderated further into 1983, productivity is improv-

Change from end of
previous period, percent

Consumer Prices
1972 Dollars

15

10

5

1977

1979

19!U

1983

•Price changes for 1983-Hl arc based on data li>r the December to May period.

4

Recently, the concerns on that score have been
heightened somewhat by several factors. Preliminary
indications are that growth in nominal GNP exceeded 11 percent in the second quarter. That high rate
of spending growth is a welcome development insofar as it has come about in the context of accelerated real output growth and moderating prices.
However, growth in some measures of money and
credit also has been relatively large recently, and
growth in nominal spending at the present rate over a
sustained period would suggest renewed inflationary
pressures.
The vigor of the private economy at midyear also
has underscored the potential problems associated
with federal budget deficits that will remain massive
in the years ahead, unless there are decisive actions
to reduce expenditures or-absent such action-to
increase revenues. Prospects for interest rates are

ing, and the continued strength of the dollar is
limiting increases in the prices of imported goods.
At the same time that the general trend of price
increase is still slowing, there are indications that
some of the cyclical influences that helped reduce inflation during the recession have waned. With
demands for goods and services strengthening, price
discounting is diminishing; and the downward
pressures on prices and wages in some markets will
lessen as orders and labor demand rise. Such
developments are to some extent inevitable. What is
of critical importance is that these cyclical influences
not impair more lasting progress toward reduction in
the underlying rate of inflation, as reflected in the
interactions of wages, productivity, and costs.

Economic Projections for 1983 and 1984
FOMC Members
Range

Central Tendency

Nominal GNP

9¼ to 10¾

9¾ to 10

Real GNP

4¾ to 6

5 to 5¾

5.5

Implicit deflator for GNP

4 to 5¼

4¼ to 4¾

4.6

Unemployment Rate

9 to 9¾

About 9½

9.6

Range

Central Tendency

Nominal GNP

7 to 10¼

9 to 10

9.7

Real GNP

3 to 5

4 to 4½

4.5

Implicit deflater for GNP

3¾ to 6½

4¼ to 5

5.0

Unemployment Rate

8¼ to 9¼

8¼ to 8¾

8.6

1983

Percent change,
fourth quarter to
fourth quarter:

Average level in
the fourth quarter,
percent:
1984

Percent change,
fourth quarter to
fourth quarter:

Average level in
the fourth quarter,
percent:


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Administration

10.4

I

5

related to a number of factors, including importantly
the actual and perceived trend in inflation. In 1982,
when the economy was mired in recession and the
inflation rate was falling, record-large government
deficits were consistent with declining interest rates.
However, should public credit demands remain at or
near record highs while private credit demands are
expanding rapidly in response to rising business activity, the outlook for interest rates would clearly be
affected.
While most members of the Federal Open Market
Committee are relatively optimistic about the prospects for maint.µning economic growth and containing inflation over the next year and a half, they also
are mindful of potential difficulties that could disrupt
the outlook and cause the nation's economic performance to be less favorable than is now expected.
There is, as already noted, the prospect that federal
budget deficits will remain extremely large into the


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indefinite future; as the private recovery lengthens,
the dangers associated with those deficits are likely
to increase, posing a threat to both the inflation
outlook and the sustainability of a balanced
expansion.
There also are some broader risks, not specifically
related to the budget, that some of the progress
against inflation could be reversed as the private
economy strengthens. The persistence of inflationary
expectations is evident both in recent surveys of
private opinion and in the behavior of financial
markets, in which borrowers remain willing to pay
high nominal rates of return on long-term debt instruments. As the recovery progresses, wage and
price developments will need to be monitored with
great care to make sure that these still-present expectations of inflation are not undergirding a new
round of acceleration in actual wage and price
increases.
More generally, the United States has become
much more integrated into the world economy than
it was a decade ago, and our economic fortunes
have become closely linked with those of other nations. Because of those close linkages, the economic
difficulties of many foreign nations, particularly the
serious financial problems still plaguing many
developing countries, could affect this nation's
economic performance in the period ahead.

6

Footnotes

2. Base Period for Aggregates:
For Ml-Fourth Quarter 1982.
For M2-Average of February-March 1983.
For M3-Fourth Quarter 1982.
For Debt-December 1982.
Figures for "1983 Actual" are measured from base
period through June 1983. Tentative ranges for M 1, M2
and M3 1984 are measured from the fourth quarter of
1983 to the fourth quarter of 1984; debt is measured
from December 1983 to December 1984.

1. Mt is the sum of currency held by the public, plus
travelers' checks, plus demand deposits, plus other
checkable deposits (including negotiable order of
withdrawal (NOW and Super NOW) accounts, automatic
transfer service (ATS) accounts, and credit union share
draft accounts.)
M2 is M 1 plus savings and small denomination time
deposits, plus Money Market Deposit Accounts, plus
shares in money market mutual funds (other than those
restricted to institutional investors), plus overnight repurchase agreements and certain Eurodollar deposits.
M3 is M2 plus large time deposits, large denomination
term repurchase agreements, and shares in money market
mutual funds restricted to institutional investors.
Total Domestic Nonfinancial Sector Debt is outstanding debt of domestic governmental units (federal, state
and local), households and nonfinancial businesses.


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3. Base period is QII 1983.

A copy of the full report to Congress is available free of charge
from Publications Services, Federal Reserve Board, Washington,
D.C. 20551.

7

Testiniony of Paul A. Volcker,
Chairman, Federal Reserve Board
reflected a cessation of inventory liquidation-and
perhaps small accumulations-by business. That is
not unusual in the early stages of expansion, and
does not necessarily suggest continuing gains at the
same rate of speed. But it is also evident that
domestic final sales and incomes are now increasing
fairly rapidly, that the midyear tax cut has released
further purchasing power, and that consumer and
business confidence has improved. Consequently,
strong forward momentum has carried into the third
quarter, and potentially beyond.
The expansion so far has been accompanied by
remarkably good price performance. Finished producer prices were essentially unchanged over the
first half of 1983, and consumer prices were up at a
rate of only 3 percent through May and by about
3 ½ percent over the last twelve months. Perhaps
more significant for the future, the rate of nominal
wage increase-at about a 4 percent annual rate-is
now at its lowest level since the mid-1960's, while
average real wages, as in 1982, are rising. That pattern has been assisted by sizable productivity gains.
In all these respects, we are clearly "doing better." Yet, even as the economy has expanded and
the inflation record has remained good, widespread
forebodings remain evident for the future. Those
concerns are understandable and justified so long as
some major. policy issues-issues that I emphasized
in my testimony to you earlier in the year-remain
unresolved. Indeed, the very speed and vigor of the
recovery in its early stages has increased the urgency
of facing up to those problems.
I have repeatedly expressed the view that we have
come much of the way toward setting the stage for a
long-sustained period of recovery, characterized by
greater growth in productivity and real incomes and
by much greater price stability. Responsible and
prudent monetary policies must be one important
element in making that vision a reality. But it would
be an illusion to think that monetary policy alone
can do the job, and before turning to monetary
policy in detail, I want to touch again upon some
crucially important aspects of the environment in
which monetary policy must be conducted.

I welcome this opportunity to discuss
Federal Reserve monetary policy with
the Banking Committee in the context
of current and prospective economic
conditions and other policies at home
and abroad. You have before you the
Midyear Monetary Policy Report to
the Congress prepared in accordance
with the Humphrey-Hawkins Act.
This morning, I will highlight or expand upon some aspects of that Report
and deal with certain further questions
raised by your Chairman.

Course of the Recovery
We meet at a time when economic act.ivity is plainly
advancing at a rate of speed significantly faster than
we, the Administration, the Congress, and most
other observers thought likely at the start of the
year. Over the past six or seven months of expansion, output has risen about as fast as in the average
postwar recovery, more than 1 million more people
are employed, and the unemployment rate has dropped by nearly a percentage point from its peak.
The very sizable gain in the Gross National Product during the second quarter in substantial part


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8

The Budgetary Situation

the problem would not become urgent until 1985 or
beyond. That might be true in the context of a
rather slowly growing economy. But the speed of the
current· economic advance certainly brings the day of
reckoning in financial markets earlier. In the second
quarter, total nonfederal credit demands were
already increasing substantially, even though business
demands were essentially unchanged at a relatively
low level. Potential credit market pressures have
been ameloriated by a growing inflow of foreign
capital, but a net capital inflow can be maintained
only at the expense of a deep trade deficit. Banks
have been sizable buyers of government securities
during the early stages of recovery while business
demands for credit have been relatively slack. But
there has also been some tendency for overall
measures of money, liquidity, and credit to rise
recently at rates that, if long sustained, would be inconsistent with continuing or even consolidating progress toward price stability.
All of this, to my mind, points up the urgency of
further action to reduce the budgetary deficit to
~ake ro~m for the credit needed to support growth
m the private economy. Left unattended the situa.
'
t1on remains the most important single hazard
to the
sustained and balanced recovery we want.

I am aware of the enormous effort in the Congress
over recent months to shape a responsible budgetary
resolution-indeed to preserve an orderly budgetary
process. But the concrete results of that effort to
date appear ambiguous at best, measured against
the challenge of reducing the growing structural
deficits embedded in the current budgetary outlook.
The current fiscal year is likely to see a budget
deficit-not counting Treasury or other market
financing of off-budget credit programs-of some
$200 billion, or about 6 ½ percent of the GNP.
Forecasts of future years necessarily entail judgments
about Congressional action yet to be taken as well as
economic factors. Should Congress fail to implement
the expenditure restraints as well as the revenue increases contemplated in the recent Budget
Resolution-and doubt has been expressed on that
point within the Congress itself-deficits appear likely to remain close to $200 billion for several years,
even taking account of economic growth at the
higher rates now projected. The hard fact remains
that, as economic growth generates income and
revenues to reduce the "cyclical" element in the
deficit, the "underlying" or "structural" position of
the budget will deteriorate without greater effort to
reduce spending or increase revenues from that incorporated in existing programs. We would be left
with the prospect that Federal financing would absorb through and beyond the mid-1980's a portion
of our savings potential without precedent during a
period of economic growth.
That outlook raises a fundamental question about
the consistency of the budget outlook with the kind
of economy we want. That is particularly the case
with respect t? such heavy users of credit as housing
and business mves_tment. To put the issue pointedly,
the government will be financed, but others will be
squeezed out in the process.
While that threat has been widely recognized,
there has also been a comfortable assumption that


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The International Dimension
T~e pressur~s on our capacity to finance both rising
private credit demands and a huge budgetary deficit
have, as I just noted, been one factor inducing a
growing net capital inflow. One short-term consequence_ is lower domestic interest rates than might
otherwise be necessary, and maintenance of extraor-

9

dinary strength of the dollar at a time of rising trade process-with adequate resources to do its job would
deal a devastating blow to the extraordinary
and current account deficits. But the sustainability
cooperative effort that has been marshaled to
of those trends can be questioned. The picture of
manage the situation, with potentially severe consethe largest and strongest economy in the world relyquences for the U.S. financial system as well as the
ing, in a capital-short world, on large inflows of
developing world. Early action by the House on the
funds to finance, directly or indirectly, internal
Administration's request in this matter is thus one
budget deficits is not an inviting one for the future.
key element in a program to sustain recovery.
The implication would be a persistently weak trade
position, instability in the international financial
system and exchange rates, and lack of balance in
Wage-Price Trends
our recovery.
I touched earlier on the relatively favorable wageMore immediately, the pressing debt problems of
price-productivity trends of the past year. We are
much of the developing world-centered in, but not
now approaching a new test-whether those trends
confined to, Latin America-remain a clear threat
can be extended into and through a period of
to financial stability. In the period since we last
recovery. Today, orders are rising, businesses are
discussed these issues, the strains have been suchiring, layoffs are sharply diminished, and profits
cessfully contained, but by no means resolved. To
are improving. After the inflationary experience of
be sure, there are clear signs of progress with
the 1970's, the temptation could arise to revert to
necessary economic adjustment in some instances. what some might consider "normal" behavior-to
notably in Mexico. Within the past week, Brazilwhich, along with Mexico, is the largest debtor-has anticipate inflation, to return to wage increases
taken forceful and encouraging domestic actions that characteristic of the earlier decade, to fatten profit
should provide a. base for renewed IMF support and margins as fast as possible by raising prices in a
stronger market rather than relying on volume infor added private financing. But ''normalcy'' has
creases. But pressed collectively, the irony would be
plainly not returned.
Confidence and market-oriented financing patterns that such behavior, by inciting doubts about the inflationary outlook and affecting interest rates, would
cannot be fully restored without sustained growth
impair prospects for continued growth in real wages,
among the industrialized countries, so that the debin profits, and in employment.
tors can earn their way with greater exports. Lower
We and other industrialized countries have had
interest rates will be important as well. But that prolittle. success in dealing with that threat through socess will take time. Meanwhile, failure to provide
called "incomes policies." But government policy
the IMF-which is the international institution at
can make a powerful contribution toward moderathe center of the adjustment and financing
tion through two avenues: first, by making evident
in its fiscal and monetary management that inflationary pressures will continue to be contained, and
second, by insisting upon open, competitive
markets.
In that respect, open markets internationally serve
our continuing basic interest in spurring efficiency
and competition. Virtually every country has made
compromises with protectionism during the period of
recession. With growth underway, it is time not only
to halt but to reverse that trend to help sustain expansion and the gains against inflation.


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Moreover, as the economy grows stronger, I hope
we will seriously turn more of our attention to the
many purely domestic inhibitions to competition,
and to reducing the artificial supports for prices and
costs in some industries. All too often, they work at
cross purposes to the needs of the economy as a
whole.

Monetary Policy in 1983 and Beyond
This setting of gratifying immediate progress, yet
evident looming threats, has provided the environment for decisions with respect to monetary policy.
As you are well aware, interest rates dropped sharply during the second half of 1982 as the recession
continued, and, with inflation subsiding, reserve
pressures on the banking system were relaxed.
Growth in money and credit has been, quite plainly,
adequate to support growth in economic activityindeed more growth in the first half of 1983 than
had been generally anticipated.
During much of the period after mid-1982, institutional change, as well as adjustments by liquid
asset holders to the sharp drop in interest rates, to
declining inflation, and to the uncertainties of the
recession, appeared to be affecting one or another of
the monetary aggregates. In particular, the behavior
of M 1 in relation to economic activity and the
nominal GNP has raised questions about whether
the patterns in velocity established earlier in the
postwar period might be changing, cyclically or on a
trend basis. For that reason, less emphasis has been
placed on that aggregate in policy implementation.
For a time, the enthusiastic reception of the public
to-and aggressive marketing by depositary institutions of-the new ceiling-free Money Market
Deposit Accounts plainly affected· growth in M2.
Consequently, the target base for 1983 for that aggregate was set at the February and March average,
rather than the fourth quarter of 1982, to avoid
most of those distortions. More broadly, given the


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questions about interpreting some of the monetary
and credit aggregates, judgments as to the appropriate degree of pressure on bank reserve positions have been conditioned by available evideµce
about trends in economic and financial conditions,
prices (including sensitive commodity prices), exchange rates, and other factors.
Through most of the first half of the year, as the
economy picked up speed, the broader monetary
and credit aggregates moved consistently with the
ranges set in February. At the same time, trends in
overall price indices were relatively favorable, and
sensitive commodity prices, after an increase from
cyclically depressed levels early in the year, appeared
to be leveling off in the second quarter. The continuing exceptional strength of the dollar in foreign
exchange markets and the international financial
strains did not point in the direction of restraint. In
all these circumstances, a broadly accommodative
approach with respect to bank reserves appeared appropriate, despite much higher growth in Ml-alone
among the targeted aggregates-than anticipated.
In the latter part of the second quarter, against
the background of growing momentum in economic
activity, monetary and credit growth showed some
tendency to increase more rapidly, and M 1 growth
remained particularly high-higher, if sustained,
than seemed consistent with long-term progress
against inflation and sustained orderly recovery. In
these circumstances, the Federal Open Market Com-

11

mittee, beginning in late May, has taken a slightly
less accommodative posture toward the provision. of
bank reserves through open market operations,
leading to some increase in borrowings at the discount window. Whether viewed from a domestic or
international perspective, limited, timely and potentially reversible measures now, when the economy is
expanding strongly, are clearly pref<?rable to the
risks of permitting a situation to develop that would
require much more abrupt and forceful action later
to deal with new inflationary pressures and a longsustained pattern of excessive monetary and credit
growth.
These steps have been accompanied by increases,
ranging from ¾ to 1 percent or more, in both longand short-term market interest rates. Apart from
any monetary policy actions, these limited
changes-particularly in the intermediate and
longer-term areas of the market-appear also to
have been influenced by larger private and government credit demands currently, as well as by expectations generated by stronger economic and
monetary growth and the budgetary deficit.
Over the more distant future, balanced and sustained economic growth-with strong housing and
business investment-would appear more likely to
require lower rather than higher interest rates. That
outcome, however, can be assured only if the progress against inflation can be consolidated and extended. In considering all these factors, the FOMC
basically concluded that the prospects for sustained
growth and for lower interest rates over time would
be enhanced, rather than diminished, by modest and
timely action to restrain excessive growth in money


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and liquidity, given its inflationary potential. But I
must emphasize again that the best assurance we
could have that monetary policy can in fact do its
part by avoiding excessive monetary growth within a
framework of a growing economy and reduced interest rates over time lies not in the tools of central
banking alone, but in timely fiscal action.

Ranges for M2 and M3
Looking ahead, the Committee decided that. the
growth ranges established early in the year for M2
and M3 during 1983 (7-10 percent and 6½-9½
percent, respectively) are still appropriate. The most
recent data, while showing somewhat larger increases in June, are still within (M2), or about at
the upper end (M3), of those ranges.
As anticipated, the massive shifting of funds into
M2 as a result of the introduction of Money Market
Deposit Accounts, and to a more limited extent into
Super NOW Accounts, has abated. We assume
these new accounts, and the further deregulation of
time deposit interest rates scheduled for October 1,
will have little impact on growth trends in the period
ahead. Given the reasonably favorable trend of
prices, the ranges should be consistent with more
real growth than thought probable at the start of the
year.
The Committee also decided to continue the
associated ranges for growth in total domestic nonfinancial credit of 8 ½ to 11 ½ percent. As you
know, 1983 is the first time the Committee has set a
range for a broad credit aggregate, and it is not
given the same weight as the broader monetary aggregates, at least while we gain experience. We are
aware that, consistent with the established range,
growth in credit during 1983 could exceed nominal
GNP, although the long-term trend is for practically
no change in the ratio of credit to income (i.e.,
"credit velocity" is relatively flat). Somewhat faster
growth in credit is consistent with experience so far
this year, and may be related to the relatively rapid
expansion in Federal debt.
For 1984, the Committee tentatively looks toward
a reduction of ½ percent in each of those ranges, for
M2, M3, and non-financial domestic credit. That
small reduction appears appropriate and desirable,
taking account of the need to sustain real growth
while containing inflation. Those targets appear fully

12

looking ahead, with. the economy expanding and
with ample time for individuals and others to have
adjusted to the rapid decline in interest rates last
year, we must be alert to the possibility of a rebound in velocity along usual cyclical patterns, even
though the longer-term trend may be changing.
In monitoring Ml, the Committee felt that an appropriate approach would be to assess future growth
from a base of the second quarter of 1983, looking
toward growth close to, or below, nominal GNP.
Specifically, the range was set at 5 to 9 percent for
the remainder of this year, and at 1 percent
lower-4 to 8 percent-for 1984. Thus, the Committee, in the light of recent developments looks toward
substantially slower, but not a reversal, of Ml
growth in the future. Velocity is expected to increase, although not necessarily to the extent common in earlier recoveries.
The range specified is relatively wide, but depending on further evidence with respect to velocity,
either the upper or lower portion of the range could
be appropriate. As this implies, Ml will be
monitored closely but will not be given full weight
until a closer judgment can be made about its
velocity characteristics for the future. We are, of
course, aware that proposals to pay interest on demand deposits could, if enacted, influence velocity
trends further over time.
These targets are designed to be consistent with
continuing growth in economic activity and reduced
unemployment in a framework of sustained progress
against inflation-and indeed are designed, insofar
as monetary policy can, to contribute to those goals.
The targets, by themselves, do not necessarily imply
either further interest rate pressures or the reverse in
the period ahead-much will depend on other fac-

consistent, in the light of experience, with the
economic projections of the Committee (as well as
those of the Administration and those underlying the
Budget Resolution).
The targets are, of course, subject to review
around year end. One question that arises is
whether the somewhat more rapid growth in credit
than nominal GNP will, or should desirably, continue, consistent with progress toward price stability
and toward a more conservative pattern of private
finance than characteristic of the years of inflation.
Again, the pressures on aggregate debt expansion
stemming from the budgetary situation are a source
of concern.

Monitoring Ml and Debt
Decisions concerning appropriate targets for Ml
were more difficult. As discussed further in an Appendix to this statement, the velocity of M 1,
whether measured as a contemporaneous or lagged
relationship, has varied significantly from usual
cyclical patterns, dropping more sharply and longer
during the recession and failing to "snap back" as
quickly. While a number of more temporary factors
may have contributed, a significant part of the
reason appears to be related to the fact that a major
portion of the narrow "money supply" now pays interest, and the "spread" between the return
available to individuals from holding Ml "money"
and market rates has narrowed substantially, more
than the decline in market rates itself implies. Put
another way, NOW accounts, where the growth has
been most rapid, are not only transaction balances,
but now have a "savings" or "liquid asset" component. For a time at least, uncertainty about the
financial and economic outlook, and less fear about
inflation, may also have bolstered the desire to hold
money.
Growth in Ml-in running well above our targets
for nine months-has not, however, been confined
to NOW accounts alone. Moreover, there are signs
that the period of velocity decline may be ending. In


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13

tors. In particular, progress in the budget and continued success in dealing with inflation should be
powerful factors reducing the historically high level
of interest rates over time, to the benefit of our
private economy and the world at large.

''Targeting'' Other E·conomic
Variables
The Chairman of the Committee has asked for my
views on the Federal Reserve's setting and announcing "objectives" for a variety of economic variables.
As you know, the FOMC already reports its ''projections" or "forecasts" for GNP, inflation, and
unemployment. These projections are included with
the materials I am reporting to the Committee today, as they have been at earlier hearings. I believe
the practice of reporting the full range and the
"central tendency" of FOMC members' expectations about the economy may be useful in reflecting
the general direction of our thinking, as well as suggesting the range of possible outcomes for economic
performance in the 12 or 18 months ahead, given
our monetary policy decisions and fiscal and other
developments over those periods.
There is a sense in which those projections reflect
a view as to what outcome should be both feasible
and acceptable-given other policies and factors in
the economy; otherwise monetary policy targets
would presumably be changed. But I would point
out that, like any other forecast, they are imperfect,
and actual experience has sometimes been outside
the forecast ranges.
Moreover, I believe there are strong reasons why
it would be unwise to cite "objectives" for nominal
or real GNP rather than "projections" or "assumptions" in these Reports.

Proposal to Cite a GNP "Objective"
The surface appeal of such a proposal is understandable. If a chosen path for GNP over a 6 to 18


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month period could be achieved by monetary policy,
specific objectives might appear to assist in debating
and setting the appropriate course for monetary
policy.
Unfortunately, the premise of that approach is not
valid-certainly not in the relatively short-run. The
Federal Reserve alone cannot achieve within close
limits a particular GNP objective-real or
nominal-it or anyone else would choose. The fact
of the matter is monetary policy is not the only force
determining aggregate production and income.
Large swings in the spending attitudes and behavior
of businesses and consumers can affect overall income levels. Fiscal policy plays an important role in
determining economic activity. Within the last
decade, we also have seen the effects of supply-side
shocks, such as from oil price increases, on aggregate levels of activity and prices. In the last six
months, even without such shocks, the economy has
deviated substantially from most forecasts, and from
what might have been set as an objective for the
year.
The response might well be "so what"-it's still
better to have something to "shoot at." But encouraging manipulation of the tools of monetary
policy to achieve a specified short-run numerical
goal could be counterproductive to the longer-term
effort. Indeed, we do want a clear idea of what to
"shoot at" over time-sustained, non-inflationary
growth. But the channels of influence from our
actions-the purchase or sale of securities in the
market or a change in the discount rate-to final
spending totals are complex and indirect, and
operate with lags, extending over years. The attempt
to "fine tune" over, say, a six-month or yearly
period, toward a numerically specific, but necessarily
arbitrary, short-term objective could well defeat the
longer-term purpose·.
Equally dangerous would be any implicit assumption, in specifying an "objective" for GNP, that
monetary policy is so powerful it could be relied
upon to achieve that objective whatever else happens
with respect to fiscal policy or otherwise. Such an
impression would be no service to the Congress or
to the public at large; at worst, it would work against
the hard choices necessary on the budget and other
matters, and ultimately undermine confidence in
monetary policy itself.

14

Some of the difficulties could, in principle, be met
by specifying numerical "objectives" over a longer
period of time. But, experience strongly suggests
that the focus will inevitably, in a charged political
atmosphere, tum to the short-run. The ability of the
monetary authorities to take a considered longer
view-which, after all, is a major part of the
justification for a central bank insulated from partisan and passing political pressures-would be
threatened. Indeed, in the end, the pressures might
be intense to set the short-run "objectives" directly
in the political process, with some doubt that that
result would give appropriate weight to the longerrun consequences of current policy decisions.
I would remind you that we have paid a high
price for permitting inflation to accelerate and
become embedded in our thinking and behavior,
partly because we often thought we could ''buy'' a
little more growth at the expense of a little inflation.
The consequences only became apparent over time,
and we do not want to repeat that mistake.
Put another way, decisions on monetary policy
should take account of a variety of incoming information on GNP or its components, and give weight
to the lagged. implications of its actions beyond a
short-term forecast horizon. This simply can't be incorporated into annual numerical objectives.
As a practical matter, I would despair of the ability of any Federal Reserve Chairman to obtain a
meaningful agreement on a single numerical "objective" among 12 strong-willed members of the
FOMC in the short-run-meaningful in the sense of
being taken as the anchor for immediate policy decisions. Submerging differences in the outlook in a
statistical average would, I fear, be substantially less
meaningful than the present approach.
As you know, we adopted this year the approach
of indicating the "central tendency" of Committee
thinking as well as the full range of opinion. These
"estimates" provide, it seems to me, a focus for
debate and discussion about policy that, in the end,
should be superior to an artificial process of '' objective" setting that may obscure, rather than
enlighten, the real dilemmas and choices.


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International Coordination
Yo~r questions, Mr. Chairman, went on to raise the
issue of international coordination of monetary
policy and whether or not to stabilize exchange rates
multilaterally. I can deal with these important issues
here only in a most summary way. ,
Coordination, in the broad sense of working
together toward more price stability and sustained
growth, is plainly desirable-indeed it m1;1st be the
foundation of greater exchange rate and international financial stability in the common interest. But
stated so broadly, it is clearly a goal for economic
policy as a whole, not just monetary policy.
The appropriate level of interest rates or monetary
growth in any country are dependent in part on the
posture of other policy instruments and economic
conditions specific to that country. For that reason,
explicit coordination, interpreted as trying to achieve
a common level of, for instance, interest rates or
money growth, may be neither practical nor
desirable in specific circumstances. What does seem
to me desirable-and essential-is that monetary
(and other) policies here and abroad be conducted
with full awareness of the policy posture, and possible reactions, of others, and the international consequences. In present circumstances, we work toward
that objective by informal consultations in a variety
of forums with our leading trade and financial partners, recently on some occasions with the presence
of the Managing Director of the IMF.
As this may imply, I believe a greater degree of
exchange market stability is clearly desirable, in the
interest of our own economy, but that 'must rest on
the foundation of internal stability. In recent years,
in my judgment, the priority has clearly had to lie
with measures to achieve that necessary internal
stability. In specific situations, particular actions

15

may appear to conflict with the desirability of exchange rate stability; that possibility is increased
when the "mix" of fiscal and monetary policy is far
from optimal, as I discussed earlier in my statement.
Such "conflicts" should diminish as internal stability
is more firmly established.
·
The idea of a more structured international
system of exchange rates to enforce greater stability
in the international monetary and trading system
raises issues far beyond those I can deal with here. I
do not believe it would be practical to move toward
such a system at the present time, but neither would
I dismiss such a possibility over time should we and
others maintain progress toward the necessary
domestic prerequisites.

Stability and Sustained Growth
In important ways, even more progress toward our
continuing economic objectives has been made during the past six months than we anticipated. But it
is also true-partly because economic growth has
increased-that the need to deal, promptly and effectively, with the obstacles to sustained growth and
stability have become more pressing. Those obstacles
are well known to all of you. There is, indeed, little
disagreement, conceptually, about their nature.
What has been lacking is a strong consensus
about the specifics of how, in a practical way, to
deal with them. There should be no assumption that


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monetary policy, however conducted, can itself
substitute for budgetary discipline, for open and
competitive markets, for inadequate savings, or for
·structural financial weaknesses.
The world economy offers ample illustration of the
dangers of procrastination and delay in the face of
political impasse, and in the hope that problems will
subside by themselves-only to be faced, in crisis
circumstances, with the need for still stronger action
in an atmosphere of shattered confidence. That great
intangible of confidence, once lost, can only be
rebuilt laboriously, step by step.
Here in the United States we have, with great effort, already gone a long way toward rebuilding the
foundation for growth and stability. We are not today in crisis. The American economy-for all its
difficulties-still stands as a beacon of strength and
hope for all the world.
We know something of the risks and difficulties
that could tum the outlook sour. But I also know
that the actions necessary to make the vision of
stability and sustained growth a reality are within
our grasp. We have come too far, with too much ef. fort, to fail to carry through now.

16

Appendix

Questions have been raised about the practicality of
identifying a particular concept of money that has a
stable relationship to broader economic objectives,
such as economic activity, prices, and employment,
and about the related issue of whether the recent
"breakdown" in velocity behavior relative to
historical norms is temporary or longer-lasting. Both
these questions bear directly on the role of monetary
aggregates in the formulation and implementation of
monetary policy.
No single concept or definition of money or credit
aggregates can reasonably be expected always to
provide reliable signals about economic performance,
or about the course of monetary policy and its relation to the nation's basic economic objectives of sustainable economic growth, high employment, and
stable prices. One reason is that market innovations
and regulatory changes can alter the significance of
the various aggregates at different times. Usually,
however, such changes take place gradually without
basically altering relationships over the shorter-term.
On occasion, their impact may be more sizable and
abrupt, both in terms of influence on measured
monetary aggregates and their relation to over-all
economic performance. Definitions of the monetary
aggregates can be, and have been, adapted to
significant institutional changes, although all definitions of "money" necessarily involve at the margin
a degree of arbitrariness. The various money and
near-money assets often serve a variety of functions
for their holders that cannot be precisely distinguished statistically.
Even in the absence of institutional changes in
financial markets, changes in the public's desires to
hold liquidity as compared with "normal" past patterns can, through impacts on velocity, alter growth
rates in the aggregates that may be consistent with
broader economic developments. These shifts in liquidity preference historically have occurred during
periods characterized by unusual economic uncertainties associated with such developments as protracted economic weakness, fears of inflation, or instability in the financial system.


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Consequently, the use of monetary and credit aggregates as guides for policy and in interpreting likely economic developments requires continuing judgment about the impact of emerging institutional
developments and changing public preferences for
money and credit demands, particularly.when the
economic or financial environment has changed
drastically. In that context, the value of the aggregates for policy depends not so much on the
"stability" of their relationships to other economic
variables, but on the predictability of these relationships, taking into account structural shifts that are
known to be in process. Monetary targeting is based
on the presumption that structural changes will not
be so rapid or so unpredictable as to undermine the
usefulness of the aggregates as annual targets,
although over time they may need to be adapted to
ongoing behavioral changes.
For the past decade or so a series of institutional
changes have affected the meaning and interpretation of the several monetary aggregates. Around the
mid-1970s, various instruments and techniques
began to be developed in financial markets that
enabled depositors to economize on holdings of cash
and to earn interest on highly liquid balances that to
some extent substituted for cash. This new financial
technology, abetted by legislative and regulatory
changes that permitted depository institutions to
compete more effectively, changed the shape of
financial markets. The Federal Reserve adapted its

17

definitions of monetary aggregates to the emerging
institutional structure.
The narrowest definition of money-M 1-was
designed to measure transaction balances, and thus
could be expected to bear a closer, more predictable
relation to aggregate spending than,. the br9ader
measures, which were affected as well by attitudes
toward saving and wealth. The measure of Ml was
redefined a few years ago in light of institutional
changes to encompass transaction-type balances held
in forms other than demand deposits. In particular,
interest-bearing savings accounts subject to a
regulatory ceiling rate but with checkable features
(such as regular NOW accounts) were included in
the measure, and later such accounts ·that could pay
a market rate were also added (super-NOW accounts). However, these accounts served broader
purposes for their holders than simply facilitating
transactions. They also were an attractive repository
for longer-term savings. Thus, interpretation of Ml
was affected, and made less certain, especially over
the pasf year or more, by its changing character;
and the weight. placed on this aggregate in policy
implementation was necessarily altered during such
periods of transition.
Over the last several quarters, the income velocity
of Ml has fallen considerably and been much
weaker than experience over comparable stages of
post-war business cycles would have suggested,


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whether velocity is measured contemporaneously as
the relationship of GNP to money in the current
quarter or is measured on a lagged basis as the relationship of GNP to money one or two quarters
earlier. This occurred as the share of NOW accounts in the aggregate expanded, as financial
markets adjusted to lower rates of inflation, and as
economic uncertainties were heightened during the
recent period of economic contraction. The unusually large and sustained drop of M 1 velocity may in
the circumstances in large part reflect an enhanced
demand for M 1 that arose from the decline in inflation and the related sharp fall in market interest
rates during the second half of 1982. The availability of interest-bearing NOW accounts may have
made depositors even more willing to hold funds in
Ml-type accounts as market interest rates declined.
In addition, Ml was probably boosted by heightened savings and precautionary demands. These savings demands originally manifested themselves in the
contractionary phase of the current economic cycle,
but apparently have to a degree continued into the
expansion phase.
The "breakdown" in the pattern of the velocity of
Ml, in the sense of its unusual behavior during the
current economic cycle, may well be· abating. Its income velocity declined much less in the second
quarter of this year than it had over the previous
five quarters-which may suggest that velocity is
beginning to move back toward a more familiar and
predictable pattern of behavior. Of course, the
radical change in composition of Ml over the past
two and a half years-with interest-bearing NOW
accounts (some subject to ceiling rates and some at
market rates) presently representing about one-third
of the deposits included in Ml, a share that will
probably grow-suggests that the pattern of Ml
velocity, even after a transition period, may come to
vary from what it had been in the past.
While the relatively short experience with an Ml
measure that includes a prominent savings compo-

18

nent (NOW accounts) tends to heighten uncertainty
when predicting velocity behavior, it is by no means
clear that our understanding of emerging velocity
trends will be so limited as to preclude reasonable
estimates of the outlook for velocity. Efforts to reestimate money demand equations in light of recent
institutional developments have helped explain a
considerable part of recent velocity movements, and
can be expected to be of assistance in projecting
velocity.
Institutional changes have also affected the
broader aggregates-M2 and M3-and they have
been redefined as necessary to incorporate new instruments, such as money market funds, repurchase
agreements, Eurodollars, and money market deposit
accounts. With the definitional coverage of broad
money measures enlarged, they encompass a very
wide spectrum of liquid assets, so that these
measures would tend to be less distorted than M 1
by financial innovations and shifts of funds among
various liquidity instruments. Very large shifts of
funds, as were associated with the introduction of
MMDAs, could distort particular money measures
for a relatively short time, as was the case particularly for M2 in early 1983.
While the velocity of M2 departed from historical
norms during the past several quarters, it did so to
a lesser degree than Mt. During the recent
downturn M2 velocity declined only somewhat more
than it had in past cyclical contractions on average.
Thus far in the recovery phase of the cycle, the
velocity of M2 has turned upward on average ( after
rough allowance for the distorting influence of shifts
associated with the introduction of MMDAs) within
the range of experience of previous cyclical
expansions.


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With regard to credit, institutional developments,
the process of deregulation, and the emergence of
innovative financing techniques in bond and other
markets have contributed to reducing the special
significance of bank credit as the cutting edge of
changes in credit availability. As a result, more
weight has been placed on a broad measure of total
credit-in particular, the aggregate debt of domestic
nonfinancial sectors-for helping to track credit
needs as related to the overall economy and to guide
monetary policy in that respect.
In brief, .several money and credit measures taken
as a group, together with an updating of definitions
and measurement techniques as needed, can serve,
and have served, as a useful guide for monetary
policy; and in the light of a long sweep of history
cannot be ignored. While it is true individual aggregates from time to time may be distorted by
special developments and may not readily track the
performance of the economy, the presumption remains of a longer-term stability and predictability in
relationships.

19

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