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Epr release on delivery
Wednesday, February 16, 1983
,9:30 A.M~ , E.S,T,
Statement by
Paul A. Volcker
Chairman, Board of Governors of the Federal Reserve System
before the
Committee on Banking, Housing, and Urban Affairs
United States Senate
February 16, 1983
I am pleased to be meeting again with this Committee
to discuss the Federal Reservefs objectives for monetary policy
and their relationship to the prospects for the economy.
You
already have received the official Monetary Policy Report to
Congress that is required under the Humphrey-Hawkins Act.
My
comments today will expand upon some of the points raised in
that report, focusing in particular on our objectives with
respect to monetary policy and the obstacles that, unless dealt
with effectivelyf could deflect the economy from the path of
sustained expansion we would all like to see.
Our economy has been going through wrenching adjustments
during the past year and a half.
With production falling into
sharp recession, the unemployment rate rose to a postwar high.
A large share of our industrial capacity is idle.
Profits are
depressed, and there have been exceptionally large numbers of
business failures.
Conditions in most other industrialized countries, in
greater or lesser degree, have paralleled those in our own
economy, and large sectors of the developing world have faced
the need for forceful measures to deal with internal and external
imbalances.
All of this has been reflected in, and accompanied
by, pressures on domestic and international banking markets.
At the same time, out of this turmoil and stress we can
see elements of change and returning strength that bode well for
the future.
In particular, striking progess has been made in
reducing inflationary pressures.
The measured rate of inflation
in 1982 was the lowest in a decade, and forces are at work
that, carefully nurtured, can continue that progress during
recovery.
Interest rates have fallen substantially from the
high levels of the past couple of years; as confidence builds
that inflation can be held in check, further declines should
be sustainable.
Business and labor have responded to the market
forces by taking measures to cut costs and improve efficiency,
and those measures should have a healthy effect long after the
recession has passed.
At the turn of the year, signs appeared that the decline
in economic activity was ending and that recovery might soon
develop.
Housing construction, auto sales, and factory orders
have all improved in recent months.
The sharp downturn in
unemployment reported in January should be interpreted cautiously
in the light of the month-to-month volatility of those estimates,
but indications of some firming in labor demand are heartening.
In sum, this has been a time of disappointment and strain
but also a period of great potential promise.
That promise lies
in the prospect that, under the pressure of events, we —
in
government, in business and labor, and in finance -«- are facing
up to what is needed to sustain recovery into long years of
healthy growth.
I know that this has also been for many a time of
frustration and doubt.
Unemployment of a willing worker is
always a threat to personal and family stability; on a wide
scale it is an affront to our sense of social justice.
To a
—
generation grown accustomed to accelerating inflation, a year
or two of progress toward price stability simply isn't enough
to quell fears that the earlier trend will resume as the economy
picks up speed.
We have been disappointed before when early
signs of recovery faded away.
Federal deficits persisting at
levels beyond any past experience are unsettling to more than
financial markets«
We have been jarred to the realization that
a serious international financial disturbance is not just something
we read about in books of economic history but could recur unless
we are alert to the dangers and deal aggressively with them.
Uncertainty and confusion are perhaps inevitable in a
period of change —
even constructive change.
But they can easily
be destructive without a clear conception of where we want to go
and how to get there.
My conviction is that much of the stage
has been set for long-lasting, non-inflationary expansion.
But
we also have to be realistic and clear-sighted about the threats
and obstacles that remain, confident that being known, they can
be cleared away.
The Prospects for Stable Growth
The unchanging goal of economic policy, embodied in the
Employment and Humphrey^Hawkins Acts, has long been growth in
employment, output and productivity at relatively stable prices.
That goal for a decade and more increasingly eluded us, not
least because of an illusion for a time that the stability side
of the equation could be subsidiary*
Once inflation gained
strong momentum, it was doubly hard to contain without transitional pain. But after several years in which the effort
against inflation has had high priority, there are today solid
grounds for believing the signs of incipient recovery can be
the harbinger of performance much more in line with our goals.
We approach our discussion on monetary policy with the
intent of fostering that result.
But, of course, monetary policy
alone cannot do the job; other instruments of policy and the
attitudes of business and labor will be crucial as well.
The latest price statistics confirm the progress against
inflation.
But the fact that all the major inflation indices
increased by 5 percent or less during the course of last year -or that the producer price index actually dropped in January —
does not mean that the battle is won.
Those gains have been achieved in the midst of recession,
with strong downward pressures on prices and costs from weak markets.
We cannot build a successful policy against inflation on continued
recession.
The question remains as to how prices will behave as
the economy recovers —
after six months or a year of rising orders,
employment, and production.
In recent weeks, increases in some highly sensitive
commodity prices have been cited as a danger sign.
Those
commodities are subject to speculative influences, but, surely,
an increase in some prices that have been severely depressed during
recession is not itself a signal of change in more basic price
trends.
-5-
One widely used index of sensitive industrial commodity
prices —
excluding oil —
declined by about 35 percent from the end
of 1980 through late 1982, carrying many of those prices to levels
that could not justify new investment or even maintenance of
existing output.
Within limits recovery in those prices would
be a natural, and probably necessary, part of any expansion
and will not dominate more general price statistics.
In fact, the single commodity of major importance to
the general price level —
oil —
is in surplus supply, and
the price in real terms has been declining.
I cannot prophesy
the degree to which the nominal price of oil might decline in
coming weeks or months, if at all.
But barring a major political
upset, prospects appear exceptionally good that stable or
falling real prices for finished petroleum products —
which
account for 8-9 percent of the GNP •— can reinforce progress
against inflation for some time ahead.
We also have large
stocks of basic food commodities, providing some assurance
against a sharp run-up of prices in that area.
It is labor costs that account for the bulk of the
value of what we produce, and our success against inflation in
the longer-run will need to be reflected in the interaction of
wages, productivity, and prices.
It is also in this area that
recent signs of progress can prove most lasting.
The upward trend of nominal wages and salaries slowed
noticeably last year, with average wages rising by about 6 percent from the fourth quarter of 1981 to the fourth quarter of
-6-
1982; total compensation (including fringes) rose just over
6-1/2 percent.
The trend during the year seemed to be declining,
and in the midst of pressures on profits, markets, and employment, could well show further declines.
inflation figures —
The sharply lower
below the rate of wage increase
—
moderate one source of upward pressures on new wage agreements.
Longer-term union agreements negotiated in earlier more
inflationary years are expiring, tending to further moderate
the wage trend.
The slower increases in nominal wages have been fully
consistent with higher real wages for the average worker precisely
because the inflation rate has been declining.
Continuation of
that benign interaction among lower inflation, lower nominal
wages, and higher real wages —
combined with recovery in profits -
must be a central part of a non-inflationary recovery —
and
thus to sustaining expansion.
Those prospects will be greatly enhanced by improved
productivity performance; over time, only an increase in
productivity can assure higher real wages and profits.
Happily,
after dwindling away to practically nothing during the 1970 f s,
the signs are that productivity is rising once again.
Tentative
evidence can be found in preliminary data suggesting productivity
rose by almost 2 percent last year in the midst of recession,
an unusual development when production is declining.
Those
statistics are consistent with reports from business that
significant progress has been made in improving efficiency and
in reducing "break-even" points.
During the early part of recovery, productivity usually
grows more rapidly
Consequently, a combination of rising cyclical
and "trend111 productivity with more moderate nominal wage gains
should reduce the increase in unit labor costs further as a
recovery takes hold*
For example, a rise in hourly compensation
of less than 6 percent this year would appear consistent with
recent trends*
Should productivity
increase by 2-2% percent —
an expectation that would appear modest in the light of recent
experience —
unit labor costs would rise by significantly less
than 4 percent, low enough to maintain and reinforce progress
on the price front.
As confidence grows that the gains against inflation
are sustainable, an expectation of further declines in interest
rates should be reinforced.
Today, short and particularly
longer-term, interest rates, despite the large declines last
year, remain historically high in nominal terms and measured
against the currc-^vt rate of inflation,
A number of factors
contribute to that, including the present and prospective
pressures from heavy Treasury borrowing.
But concerns
that recent gains against inflation may prove temporary are
checking the decline in interest rates.
vie will certainly need higher levels of investment and
housing as time passes to maintain productivity, to support
real income gains, and to keep supply in balance with demand.
Lower interest rates are certainly important to that outlook,
but what is essential is that those lower levels can be sustained
over time.
That is one reason why policies need to remain
strongly sensitive to the need to maintain the progress against
inflation ~
Digitized fordefeating
FRASER
in
uncertainty on that point will ultimately be selfterms of the interest rate environment we want.
An improved climate for work, for saving , and for
investment —
the objective of the tax changes introduced in
1981 •— should also materialize in an economic climate of
recovery and disinflation, helping to keep the process going.
Rising real incomes will also be reflected in consumer demand —
an area of the economy already supported by the large deficits.
As living standards rise and fears of inflation fade, pressures
for excessive and "catch-up" wage demands should subside.
In sum, there are strong analytic reasons to believe
that the incipient recovery can develop into a long selfreinforcing process of growth and stability.
The challenge is
to turn that vision into reality.
Obstacles and Threats to Progress
Of course, there are obstacles to that vision; some
need to be dealt with promptly, and some will need to be guarded
against as we move ahead.
those threats —
The more firmly we move to deal with
by action now and by setting ourselves
clear guidelines for the future —
the faster we can end the
doubts and restore the confidence necessary to success.
The Federal Deficit
The most obvious obstacle that looms ahead is the
prospect of huge Federal deficits even as the economy expands.
I have spoken to the point on a number of occasions, and will
soon be testifying before the Budget Committee.
only summarize the problem in a few sentences.
Today, I will
The bulk —
but far from all —
of our present $200
billion deficit reflects high unemployment and reduced income.
At a time of recession and relatively low private credit
demands, the adverse implications of the current deficit for
interest rates and financial markets may be muted•
But the
hard fact is that the deficit, as things now stand, will
remain in the same range, or rise further, as recovery proceeds
and private credit demands rise.
In other words, the underlying
imbalance between our spending programs and the revenue-generating
capacity of the tax system at satisfactory levels of employment
("the structural deficit") promises to increase as fast as the
"cyclical" deficit declines.
That prospect, essentially without precedent in the past,
threatens a clash in the financial marketplace as huge deficits
collide with the needs of business, homebuyers and builders,
farmers, and others for credit.
The implication is higher real
interest rates than necessary or consistent with our investment
needs in the future and expectations of that future "clash"
feeds back on markets today.
The adverse consequences are
reinforced and aggravated by the widespread instinct in
financial markets and among the public at large that such large
deficits will feed inflation by creating pressures for
excessive money creation or otherwise, leading to doubts
about the success of the disinflationary effort.
That outlook and analysis is essentially agreed by the
Administration, the Congressional Budget Office, by citizen
groups that have expressed alarm about the budgetary situation,
and by independent budget analysts.
It is that broad consensus
on the nature of the problem that provides a base for the necessary
action.
What remains to be done is to take those actions,
fully realize the sensitivity and difficulties of the choices
to be made.
But I am also aware, as I am sure you are, that a
great deal depends on a successful resolution of those efforts.
The International Economic and Financial Situation
The risks and uncertainties in the present situation
are compounded by the fact that so much of the world is in
recession, and adverse trends in one country feed back on
another.
For instance, falling exports have accounted directly
for some 35 percent of the decline in our GNP during the recession;
in past recessions, in contrast, our exports have typically grown,
cushioning other factors depressing production and employment.
After earlier periods of exaggerated weakness, the great
strength of the dollar in the exchange markets over the past
-11two years contributed to the progress against inflation —
it also depressed our exports.
but
We cannot build the stability of
our economy on extreme exchange rate fluctuations.
Another dimension of the risk is the danger that nations
will try to retreat within themselves, insulating their economies
by protectionist measures.
But, as we learned in the 1930 ! s,
such policies only aggravate the mutual difficulties.
Another
aspect is instability in foreign exchange markets.
But today, we face another more immediate threat in
the international financial area.
I will reserve detailed
comment for my appearance before you tomorrow.
Suffice it to
say now that the potential for an international financial
disturbance impairing the functioning of our domestic financial
markets at a critical point in our recovery is real.
I firmly
believe the major borrowers and lenders, with the understanding
and support of Governments, central banks, and international
institutions, can face up to and deal with those problems
constructively.
But the cooperative pattern we have seen
emerge in managing these problems is absolutely dependent on
the capacity of the International Monetary Fund to continue
to play a key role at the center of the international financial
system.
Early Congressional approval of the enlargement of
IMF resources, agreed by the Interim Committee of the Fund last
week, will be essential to that effort.
-12-
Attitudes Toward Pricing and Wage Behavior
I have already described the pricing restraint and the
trend toward more moderate increases in wages that have developed
in the midst of recession.
As best as I can assess it, the
mood today is consistent with maintaining that momentum.
There
is realization that competitors at home and abroad have large
potential capacity, and after all the efforts to cut "breakeven" points, expanding volume will itself produce satisfactory
profits as well as larger employment opportunities.
The "smoke-
stack" industries, hit so hard in the period of recession
while already faced with the need for structural change and
with particularly high wages by domestic or international
standards, have particularly strong incentives for caution.
But there is, of course, another possibility.
and labor —
Business
habituated to inflation in the 1970 f s, highly
sensitive to the failure to sustain past efforts to restore
stability, and eager to restore past price or wage "concessions" may be tempted to test their bargaining and pricing powers much
more aggressively as orders and production expand.
If they
were to do so, sensitivities of consumers and financial markets
to the possibility of reinflation would only be aggravated,
tending to keep interest rates higher and greatly increasing
the difficulty of maintaining the economy on a non-inflationary
path of growth.
This is an area where government policy can greatly
contribute, by resisting protectionist pressures externally,
and by removing or relaxing obstacles to competition in
product or labor markets.
Areas of the economy that have
seemed almost impervious to the disinflationary trend and
market pressures —
such as health care and higher education -•
seem to me to deserve special attention.
Through all those particulars, however, restraint in
price and wage setting can reasonably be expected only if
government financial policy remains plainly oriented toward
containing inflation.
Without a sense of conviction on that
score, the temptation to jump ahead of the pack —
the worst —
to anticipate
as employment and orders are restored may become
irresistible.
The fact is both labor and business have much
to gain from stability, and moderation in pricing and wages
within a framework of financial discipline will be consistent
with higher real wages, profits, and employment.
The skepticism that had been built up over many years
about the resolve to deal with inflation has been reduced but
not eliminated.
There is little or no leeway at this stage
for "mistakes" on the side of inflation.
Policies designed
with the best will in the world to "stimulate," but perceived
as inflationary, may, unfortunately, produce more inflation
than stimulus*
-14-
Monetary Policy in 1982
It is in that broad framework and context that monetary
policy has been implemented in 1982 and that we in the Federal
Reserve look ahead to 1983 and beyond.
to state in principle —
Our objective is easy
to maintain progress toward price
stability while providing the money and liquidity necessary
to support economic growth.
In practice, achieving the appro-
priate balance is difficult —
and a full measure of success
cannot be achieved by the tools of monetary policy alone.
The
year 1982 amply demonstrated some of the problems facing
monetary policy during a period of economic and financial
turbulence, and the need for judgment and a degree of flexibility
in pursuing the objectives we set for ourselves.
As you know, policy with respect to the growth of money
and credit has been rooted in the fundamental proposition that,
over time, the inflationary process can only continue with
excessive growth of money.
Conversely, success in dealing
with inflation requires appropriate restraint on growth of
money and liquidity.
Those broad propositions must, of course, be reduced to
specific policy prescriptions, and for some years the Federal
Reserve has followed the practice, now required by the HumphreyHawkins Act, of quantifying its objectives in terms of growth ranges
for certain measures of money and credit for the year ahead.
In
doing so, we have known that for significant periods of time the
relationships between money and spending may be loose, that
there are recurring cyclical patterns, and that the mix of real
growth and inflation can and will be affected by factors beyond
the control of monetary policy*
But we also count on a certain
predictability and stability in trie relationships over time
between the monetary and credit aggregates and the variables
we really care about —
output, employment and prices.
In 1982, however, those relationships deviated substantially from the patterns characteristic of the earlier postwar
period•
The simplest reflection has been in movements of
"velocity" —- the relationship between measures of money and
credit and the GNP.
As shown on Table I attached, the velocity
of Ml, which had been trending higher throughout the postwar
period, dropped at a rate of almost 4 percent over the past five
quarters.
The broader monetary aggregates (and broad credit
aggregates as well) also behaved atypically in relation to the
economy; their "velocity" dropped during the recession by
larger amounts than usual•
More sophisticated statistical
techniques, taking account of lags, interest rates, and other
variables, confirm the fact that "normal" relationships did
not hold in 1982.
In establishing its various target ranges at the start
of 1982, the Federal Open Market Committee specifically noted
that a number of factors, institutional and economic, would
affect the relationship of monetary and credit growth to the
GNP, and contemplated that Ml in particular could deviate from
expected patterns for a time in the event economic and financial
-16-
uncertainties fostered unusual desires for liquidity.
In
reporting to you in July of last year, I emphasized the
Committee was prepared to accept higher periods of Ml growth
for a time "in circumstances in which it appeared precautionary
or liquidity motivations, during a period of economic uncertainty
and imbalance, were leading to stronger-than-anticipated demands
for money."
In the event, Ml, after moving close to and within the
target range around mid-year, grew much more rapidly later,
ending the year with growth of about 8-1/2 percent, substantially
higher than in 1981 and above the target range.
(See Table II.)
Both M2 and M3 tended to rise through the year somewhat more
rapidly than the targets contemplated, averaging in the final
quarter about 3/4 percent above the upper end of the target
range.
(Revised "benchmark" data and some partially offsetting
definitional changes since the end of the year have reduced the
"overshoot" to about 1/4 to 1/2 percent.)
In the light of the clear indications that velocity was
declining more rapidly than in earlier recession periods, the
absence of recovery during 1982, and recurrent strains in
financial markets, "above target" growth was accommodated in
the conviction that policy, in practical effect, would otherwise
have been appreciably more restrictive than intended in setting
the targets.
The rapid declines in interest rates during the
second half of the year —
encouraged in part by some actions
to restrain the deficit and more broadly by growing realization
of the degree of progress against inflation —
were clearly
-17-
welcome.
Credit-sensitive sectors of the economyf as noted
earlier, tended to strengthen.
But after levelling off in
the second and third quarters, economic activity dropped again
in the final quarter in the face of heavy inventory liquidation.
In all these circumstances, strong efforts to confine Ml
growth to the target range seemed clearly inappropriate,
particularly with the broader aggregates running quite close
to their ranges.
An important further consideration during the final
quarter was that some of the monetary aggregates were greatly
influenced by purely institutional factors.
large volume of
The maturity of a
?8
All Savers" certificates in October temporarily
led to large flows into transaction balances counted in Ml.
Subsequently, highly aggressive marketing of new "money market
deposit accounts" by banks and thrift institutions led to
enormous inflows into the highly liquid instrument, which is
classified within the M2 aggregate.
In the first seven weeks after the introduction of that
account, which combines some characteristics of a transaction
account with savings, more than $230 billion of money has flowed
into the new instrument.
The shift of financial resources is
without precedent in amount and speed.
While the great bulk
of those funds simply reflected movements from lower interest
accounts already included in M2, a sizable fraction
estimates range to about 20 percent —
—
was derived from large
certificates of deposit or market instruments not included in
-18-
that aggregate.
The result has been a gross distortion of the
growth of M2 in December and, more importantly in January.
No statistical or survey technique available to us can
identify with precision the impact on M2 of these shifts of
funds.
The available data do suggest, however, that
(taking December and January together) the underlying growth
in M2 (that is, excluding shifts of funds formerly placed in
non-M2 sources) was not markedly different from the general range
established earlier.
In other words, the exceptionally strong
growth of M2 in January could most reasonably be treated as
having no policy significance*
Monetary Policy in 1983
In setting out our monetary and credit objectives for
1983, the Federal Reserve has had no choice but to take into
account the fact that "normal" past relationships between money
and the economy did not hold in JL982, and may be in the process
of continuing change.
Part of the problem lies in the ongoing
process of deregulation and financial innovation that has
resulted in a new array of deposit and financial instruments,
some of which lie at the very border of "transactions" and
"savings" accounts, defying clear statistical categories.
Perhaps more significant over longer periods of time,
both economic and regulatory change may affect ti-end relationships.
Both declining rates of inflation and the growing
availability of interest on transaction accounts at levels
competitive to market rates could induce more holdings of cash
-19-
relative to other assets over time.
The payment of interest
rates on transaction accounts could also affect the cyclical
pattern of Ml,
The broader aggregates, by their nature, should
be less sensitive over time to innovation since they encompass
a much broader range of assetsf but the phased elimination of
rigid ceiling interest rates has changed cyclical characteristics.
All of this has greatly complicated the job of setting
targets for 1983.
In setting the ranges, the Committee believed
that monetary growth during the year would need to be judged in
the light of developments with respect to economic activity
and prices, taking account of conditions in domestic credit
markets and internationally*
At the same time, the FOMC is well aware that past
cyclical expansions have typically been accompanied by sharp
increases in "velocity," particularly for the narrower aggregates•
We assume that, to some degree, that pattern will emerge again.
There is a strong presumption that the target ranges will not
be exceeded or changed without persuasive evidence, as in 1982,
that institutions or economic circumstances require such change
to meet our more basic objectives.
As set out in the formal Humphrey-Hawkins Report, members
of the Federal Open Market Committee and other Reserve Bank
Presidents participating in our discussions generally look
toward moderate recovery in 1983 in a context of declining or
stabilized inflationary pressures.
While the individual forecasts
vary over a considerable range, the majority anticipates real
-20-
growth in the 3.5 to 4.0 percent area over the four quarters
of 1983* fractionally higher than the Administration forecast.
Nearly all expect the GNP deflator to rise less rapidly than
the 5.6 percent projected by the Administration.
Projections
of nominal growth are mostly in the 8 to 9 percent area.
In
approaching its policy judgments, I believe the Committee
recognized the desirability of achieving and maintaining a
lower level of interest rates to encourage growth, but felt
that this could only be realistic in a context of building on
the progress already made against inflation.
Efforts to force
interest rates down at the expense of excessive liquidity creation
could not be successful for long.
Against all this background, the Committee decided that,
for the time being, it would place substantial weight on the
broader aggregates, M2 and M3, in the belief that their performance relative to economic activity may be more predictable
in the period ahead.
(See Table III.)
The target range for M3, which is least affected by
institutional change, was left at 6% to 9% percent, measured
from the fourth quarter of 1982 to the fourth quarter of 1983.
The target for M2 was set at 7 to 20 percent and the
base was shifted to the February-March average of this year
to minimize the institutional distortions.
Our assumption is
the flow of funds into M2 from other savings media will have
sharply subsided in coming weeks.
However, the M2 target range
does take account of staff estimates that residual shifting will
probably raise M2 growth by 1 percent or a little more over the
-21-
remainder of the year; abstracting from such anticipated shifts,
the M2 target, in practical effect, is the same or slightly lower
than the target for 1982*
Consistent with these targets, effect!
growth (that is, abstracting from the influence of shifts into
new accounts) in both M2 and M3 is expected to be somewhat lower
in 1983 than in 1982.
The Ml target was widened and set at 4-8 percent.
Less
emphasis has been placed on the Ml target in recent months
because of institutional distortions and the apparent shift
in the behavior of velocity.
The degree of emphasis placed on
Ml as the year progresses will be dependent upon assessment of,
and the predictability of, its behavior relative to other economic
measures, and the range may subsequently be narrowed•
Over the
year, growth in the lower part of the range would be appropriate
if velocity rises strongly, as has usually been the case during
recoveries.
An outcome near the upper end would be appropriate
only if velocity does not rebound sharply from the declines
last year, and tends to stabilize close to current levels.
Only
modest allowance has been made for the new "Super NOW" accounts
drawing funds into Ml from other sources, and the target would
clearly have to be reassessed should the Depository Institutions
Deregulation Committee permit depository institutions to pay
market rates of interest on business accounts.
In addition, the Committee set forth for the first time
its expectations with respect to growth of total domestic nonfinancial debt, and felt that a range of 8% to 11% percent would
-22-
be appropriate*
Data for such a broad credit aggregate are
not yet available monthly* nor are the tools available to
influence closely total flows of credit.
While the credit range
during this experimental period does not have the status of a
"target/1 the Committee does intend to monitor developments
with respect to credit closely for what assistance it can
provide in judging appropriate responses to developments in
the other aggregates.
The range would encompass growth of
credit roughly in line with nominal GNP in accordance with past
trends; the upper part of the range would allow for growth a
bit faster than nominal GNP in recognition of some analysis
suggesting a moderate increase in the ratio of debt to GNP may
develop.
I appreciate the complexity —
for the Federal Reserve
and for those observing our operations —
of weighing performance
with respect to a number of monetary and credit targets, of taking
account of institutional change, and of assessing the possibility
of shifts in relationships established earlier in the postwar
period —
a possibility that can only be known with certainty
long after the event.
But we also can sense something of the
dangers of proceeding as if the world in those respects had not
changed•
I neither bewail nor applaud the circumstances that have
put a greater premium on judgment and less "automaticity" in our
operations; it is simply a fact of life.
In making such judgments,
the basic point remains that, over time, the growth of money and
credit will need to be reduced to encourage a return to reasonable
price stability.
intent.
The targets set out are consistent with that
-23-
I understand —
indeed to a degree, I share -— the
longing of some to encompass the objectives for monetary
policy in a simple fixed operating rule.
The trouble is, right
now, in the world in which we live, I know of no such simple
rule that will also reliably bring the results we want.
The basic rule we must observe is that the sustained
forward progress of the economy is dependent on a sense of
price and financial stability —
cut the growth we all want.
and without it, we will under-
That objective, as I have emphasized,
will require that we avoid excessive growth of money and credit
because, sooner or later, that growth will be the enemy of the
lower interest rates and stability we need.
I have given you our best judgment on the appropriate
role for monetary policy in 1983,
But, success in achieving
our objectives is not in the hands of monetary policy alone—
and we look forward to all elements of policy moving ahead in
pursuit of those common goals•
Table I
Velocity of the Monetary Aggregates
Average annual rate of change in the velocity of
Ml
M2
M3
1950 to 1982
3.2
0.2
-0.2
1950fs
4.2
1.5-'
1960fs
3.0
-0.2
-0.5
1970fs
3.3
0.3
-0.9
1.5-'
Annual rate of change in velocity
1980
2.1
0.4
-0.3
1981
4.3 (7.0)-'
0.2
-1.9
-5.4
-6.2
1982
Note:
-4.8-'
Annual changes based on years measured from QIV to QIV.
1/ Represents growth rates for the velocity of a money series measured
as the sum of currency, Ml deposits, and all savings and time deposits
at banks and thrift institutions. Data are not available to break
time deposits by size before 1959, so that there is not a basis for
distinguishing between M2 and M3 in the early period.
2/ Figure in parentheses represents velocity after abstracting from
shifts into newly authorized NOW accounts in that year.
3/ For the five quarters ended with QIV f 82, the velocity of Ml declined
by almost 4 percent at an annual rate. One has to go back nearly
30 years, to 1954, to find a year with a significant 5-quarter decline;
the five quarters ending in mid-1954 showed a 2 percent annual rate of
decrease in Ml velocity. Other 5-quarter Ml velocity declines in the
period since 1950 were extremely small—only .3 of a percent in the
five quarters ending in the QII f 58 and just .1 of a percent in the
period ending with QIV f 70.
Table II
Money and Credit Ranges and Actual
Growth, 1982
(QIV ?82 over QIV '81, except as noted)
Actual Growth
After revision
for benchmark
and definitional
Before
changes
revision
Ml
2% to 5k
M2
M3
Bank Credit^
8.5
8.3
6 to 9
9.2^
9.8
6% to 9%
10.1-'
10.3
6 to 9
7.1
7.1
1/ Base for range was the average for Dec. f 81 and Jan. f 82 to
abstract from the distorting effects on bank credit of shifts
of banks1 loans and investments to the new International
Banking Facilities, which had been authorized beginning in
early December.
2/
The definitional changes were to exclude IRA-Keogh accounts
from M2 and M3 and to include in those aggregates tax-exempt
money market funds. These changes were made to maintain consistency in the treatment of similar financial assets—with
IRA-Keogh accounts held in depository institutions, like
other IRA-Keogh1s and regular pension funds, now excluded
from monetary aggregates and with all money market funds,
tax-exempt or not, now included in the aggregates. The
exclusion of IRA-Keogh accounts lowered growth of M2 and M3
by about 1 percentage point. Inclusion of tax-exempt money
market funds raised growth of these two aggregates by about
\ percentage point.
Table III
Monetary and Credit Growth Ranges for 1983
(QIV over QIV basis, except as noted)
Ml
4 to 8-'
M2
7 to
&
M3
6k to 9k
Total Credit^/
8k to 11%
1/ This range allows for a modest amount of shifts from sources
outside Ml into super-NOW accounts. Thus far, growth in those
accounts has been relatively small. The range also assumes that
authority to pay interest on transactions accounts is not extended
beyond presently eligible accounts.
2/ Represents annual rate of growth from the average level of M2 outstanding in February-March 1983 to QIV f 83. The February-March
f
83 base was chosen, rather than QIV of '82, so that growth of M2
would be measured after the period of highly aggressive marketing
of money market deposit accounts (MMDAs) has subsided. These
accounts, introduced in mid-December, rose to over $230 billion
by early February, with a substantial amount of funds transferred
into them from sources outside M2, such as market instruments
and large CDs. The 7 to 10 percent range for M2 allows for some
residual shifting from market instruments and large CDs into
MMDAs over the balance of the year.
3/ Represents domestic nonfinancial debt.
@FedFRASER