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For release on delivery
10:00 A.M., E.S.T.

Statement by
Paul A* Volcker
Chairman, Board of Governors of the Federal Reserve System

before the
Joint Economic Committee

February 9, 1984

I appreciate the opportunity to appear before this
Committee today.

As you know, the Federal Reserve submitted

its semi-annual monetary policy report to the Congress earlier
this week, copies of which have been distributed to you.


report describes in detail our plans for monetary policy, including the Federal Reserve's objectives for the growth of
money and credit.

I have also testified before the House and

Senate Banking Committees the last two days and have distributed
copies of my formal statement to you*

My prepared remarks this

morning, therefore, will be brief and confined to more general
considerations of monetary policy within the context of recent
and prospective economic and financial developments.
The basic policy objective of the Federal Reserve continues
to be to contribute to sustained economic expansion in a context
of greater price stability.

In setting the target ranges for

the various monetary and credit aggregates, the Federal Open
Market Committee at its meeting last week had to be alert both
to the need for economic growth and to the danger of renewed
inflationary pressures.

Consistent with these objectives and

the current economic situation, the FOMC essentially reaffirmed
the tentative ranges for the monetary and credit aggregates for
1984 established last July.

The ranges call for growth rates

that are 1/2 to 1 percentage point below those set for 1983.*
The ranges for 1984 envisage that relationships between
monetary and credit growth and economic activity and inflation

*The new target ranges are set out in Table I attached,
against the background of last year's targets.



the "velocity" of money -- will broadly follow past trends
and cyclical developments after the unusual behavior of 1982
and early 1983.

Most of the special influences that depressed

velocity in late 1982 and early 1983 appear to be behind us,
and the evidence over the past half year has become more (but
not entirely) in line with longer-run experience.

This judgment

about the fundamental relationship between money and economic
performance will, of course, be reviewed constantly in the months
ahead, and our evaluation will reflect all of the available
evidence about production, employment, prices, and domestic and
international financial markets.
Consistent with the monetary ranges established for this
year, the members of the FOMC generally felt that the economy
would grow at a more moderate —

and potentially more sustainable

pace of 4 to 4-3/4 percent during 1984 and into 1985.

The gains

in output are expected to generate a further expansion of new
job opportunities and the unemployment rate is expected to
decline to the area of 7-1/2 to 7-3/4 percent by year's end.
After remarkably good progress in 1982 and 1983, price increases
are expected to be a little larger on average, essentially as a
result of cyclical factors and special circumstances —


the effects of bad weather and the large hike in payroll taxes
earlier this year.
The prospect of further good economic gains in 1984 comes
on the heels of a far better than anticipated performance in 1983,
Real gross national product rose 6 percent over the four quarters


of the year, well above earlier projections, and the unemployment rate was cut by 2-1/2 percentage points.

At the same

time, most broad measures of prices arid wages recorded further
progress toward lower inflation.

With employment expanding,

productivity improving, and inflation moderating, the real
income of the average worker rose.
As we move into 1984, there are strong reasons for
believing the economic gains of the past year can be extended.
The latest reports on employment, income, and production,
showing further gains around the turn of the year, are consistent with that view, as are indices of consumer and business
confidence at high levels.

Much more fundamentally, the progress

against inflation, the evidence of increased productivity, the
sense of greater discipline and restraint, and a recovery in
profits all, in my opinion, go a long way toward setting the
stage for a long period of greater prosperity.
We all realize a year of strong recovery —
the heels of a severe recession —

hard on

has left unemployment still

far too high, with some 9 million still out of work.
To some degree, the rapid progress toward price stabilization
has reflected "one time" or cyclical influences.

More time

must pass before we can claim success or take satisfaction that
we have restored prosperity or assured stability.

And, we need

to recognize, and deal effectively, with some obvious hazards
and risks that jeopardize the good prospects for 1984 and beyond.

Those prospects rest in good part on whether interest
rates, and conditions in credit markets more generally, can
support the housing and investment we need, whether we can
restore better balance in our international accounts, and
whether, in the meantime, we can count on the inflows of
capital from abroad upon which we have become dependent.
Over time, success in those areas is dependent upon
the expectation and the reality that we can build on the
progress toward price stability.
tribute to that goal —

Monetary policy must con-

disciplined growth in the money supply

is a critical ingredient.

But there are also factors outside

the control of monetary policy that bear importantly on the
As you know, we are faced with two deficits:


structural deficit in our Federal budget and the deficit in
our external accounts —• both at unprecedented levels and
getting worse.

Those twin deficits have multiple causes, but

they are not unrelated.

Left unattended, each, rather than

improving, will tend to cumulate on itself.

Sooner or later,

the financing of those deficits will expose us to financial
risks that could undercut all that has been achieved in recent
years with so much effort and so much pain.
Large budget deficits, currently and prospectively,
are a burden on credit markets and absorb historically unprecedented fractions of our domestic savings.

That is one reason

interest rates today are far higher than is healthy from the

standpoint of balanced growth domestically.

Those interest

rates have been moderated as a result of a growing capital
flow from abroad, stimulated by a variety of causes; in
effect, net capital inflows have been usedf directly or
indirectly, to help meet the government's financing requirements.

But those growing capital inflows, which have tended

to appreciate the dollar relative to other currencies, are
also inextricably related to a large and growing deficit in
our trade accounts*

In both our financial and our trading

interests, we simply can't afford to become addicted to
drawing on increasing amounts of foreign savings to supplement
our limited domestic savings simply because the Federal Government is drawing so heavily on that savings pool*

The longer

they last, the more difficult it is to cope with these internal
and external deficits because interest costs compound on themselves •
I believe we now have a rare opportunity to set in
train a long period of growth and stability.

A decade that

began with accelerating inflation and prolonged recession can
end with renewed confidence and strength.

But that happy

vision will not be achieved by resting on our oars —
sitting back and drifting with the tide.


It will require a

continuing sense of discipline by business and labor, and
emphasis on competition and productivity.

It will require

the demonstration by those of us responsible for public policy
that our twin deficits can be brought under control and that
inflation will not again get the upper hand.


We can and should be gratified by the progress that
has been made, and by the many positive signs in the outlook.
We have time —

time to influence markets constructively,

time to demonstrate that we are in control of our own financial
and economic destiny.

But to wait would be to multiply the

risks, to increase the hazards to full recovery, to jeopardize
what has been achieved.
That is why I hope that you in the Congress, together
with the Administration, can find the consensus required to
begin reducing the budget deficit, and to restore confidence
that, over time, the structural deficit can be closed.


now, no other action appears so promising and so important in
terms of seizing, and capitalizing upon, the immense opportunities
before us.

Certainly, that would make it easier for monetary

policy to play its own essential role.

Table I

Federal Reserve
Objectives for Hfeney and Credit Growth in 19841

New ranges
for 1984 (%)

ranges for
1984 set
in July 1983 (%)

for 1983
in July 1983 (%)


6 to 9

6-1/2 to 9-1/2

7 to 10 2


6 to 9

6 to 9

6-1/2 to 9-1/2


4 to 8

4 to 8

5 to 9 3

Sector Debt

8 to 11

8 to 11

8-1/2 to 11-1/2

1. Ranges apply to periods from fourth quarter to fourth quarter, except
as specified.
2. Range applies to period from February-March 1983 to fourth quarter
of 1983.
3. Range applies to period from second quarter of 1983 to fourth quarter
of 1983.