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Transcript of
Press Conference
Paul A. Volcker, Chairman, Board of Governors of the Federal Reserve System

at the
Business Council
Hot Springs, Virginia
October 9, 1982



I might say just by way of introduction that I thought

I had a good idea a week or so ago, I had a little sense that maybe we
wouldn't put our usual emphasis on Ml as an operating target for a while
for reasons I'll explain in a minute, or explain in the statement.


realized if we were going to do that I'd have to tell the public, through
the press, so that they all understood it.

Joe Coyne suggested to me,

well, why don't you have a press conference after the open market
committee meeting.

My immediate reaction was no.

If I do that they'll

blow it up all out of proportion and I'll get completely misinterpreted.
What I'll do is, I'll go down to the Business Council and tell them, and
just explain this little technical matter.

So you can see how successful

I was in keeping it in that full sense of proportion.
I have this little excerpt that I gave you from my talk with the
Business Council and I'll just read a couple of portions of it:
"As you know, yesterday we made a further reduction in the
discount rate to 9-h percent.

As is usually the case, that change was, in

an immediate sense, designed to maintain an appropriate alignment with
short term market rates.

It was, of course, also taken against the

background of continued sluggishness in business activity, the exceptional
recent strength in the dollar on the exchange markets and indications of
strong demand for liquidity in some markets.
"In the light of all the potentially confusing comment in the
press in^recent may be desirable for me to reiterate what seems
to be obvious; the small reduction in the discount rate—as in the case
of the four changes of similar magnitude in July and August—-represents
no change in the basic thrust of policy."



Now, let me just summarize some of the points in the rest of the
paper and put them on the table for whatever questions you may have.
me say I am encouraged.


I've said it on a number of occasions that I

think the inflationary momentum that has come to grip the economy in the
60 f s and the 70's has been broken, and 1 do think the prospects are good
for some further reductions; that we can build up a momentum toward price

But I am under no illusions that that look at the future

depends upon continuing vigilance and discipline in monetary policy.


of us have any feeling that that concern of monetary policy—that continuing
concern about inflation—is something that can be turned on and off, and
it's not going to be turned on or off.
Now you people and all of us, I think, have some difficulty in
characterizing monetary policy in a headline or in a short story.


it's easing or tightening, I hope we've learned—and that's the next point
that's made—that we can't measure that by fluctuations in interest rates.
The point of policy significance is we do not think we can force interest
rates lower; we will not force interest rates lower; we welcome declines
in interest rates, obviously, but those have to be based upon the sense of
progress on the inflationary front if they're going to be sustained apart
from the cyclical elements in interest rates.
But because, in part at least, of the difficulty of measuring—
maybe the impossibility of measuring—policy by interest rates, there's
been a lot of emphasis on so-called monetary aggregates.

And our policy

is based^on the basic premise that over a period of time you've got to
keep the monetary growth under control if you're going to keep interest
rates under control.

But I'm sure all of you have on a number of occasions

heard me try to caution about the validity of any single measure, or even



all the measures, in the short run.

The problem now is precisely that one

of those contingencies we are faced with in lesser degree all the time is
here with respect to Ml.

Simply because of regulatory and legislative

change that figure is going to be distorted.

It is a fact of life.


know it's going to be distorted because of the termination of all saver's
certificates right now, and some temporary movement of funds through
demand balances or through NOW accounts.
About the time that should settle down, in a few weeks, we face
the certainty of distortions arising out of this new money-market fund type
of account that the banks will be able to offer within a matter of six
weeks or so.

We know there will be distortions.

measure those distortions.

Nobody knows how to

Nor will they be easily measurable after the

In those circumstances, all we are saying is that, as I note on page

4, the fact that for the time being underlying monetary growth in reserve
provision cannot sensibly be gauged by directly observing movements in Ml
up or down is a technical fact of life, it has no broader policy significance.

It strikes me if you want an analogy, it's like driving down the

road and finding a construction project.

Construction in this case is

reconstruction of the depository system.

You'll have to make a little

detour before you get back on the road.
Finally, the point is made as you know that our monetary
aggregates judged generally have been hovering by and large somewhat above
our targeted levels.

That is true even though the most recent movements

in M2 and M3 have clearly been toward the slowing direction.

I note again

what I noted in July: that growth somewhat above the targeted ranges would
be tolerated for a time and circumstances in which it appeared that
precautionary or liquidity motivations during a period of economic uncertainty and turbulence were leading to stronger than anticipated demands



for money.

We will look to a variety of factors in reaching that judgement,

including such technical factors as the behavior of different components
in the money supply, the growth of credit, the behavior of banking and
financial markets and, more broadly, the behavior of velocity in interest
That is what I said in July.

I believe recent assessment of

recent developments in the light of those factors does suggest that
preferences for liquidity have generally been relatively strong.


been reflective, in part, in some abnormal pressures in parts of the
private credit markets.

As we said in July the fact that some of the

aggregates have tended to run somewhat above their target ranges has been
fully acceptable to the Open Market Committee.

I will conclude by saying

I can speak for all members of the Committee in saying that those
judgments have been reached and they're going to continue to be reached
in full recognition of the need to maintain the progress toward price
Now with that much review of the statement let's proceed.

Getting to the

emphasis perhaps the problem is the weakness

of the banks, has this been in any way a factor of perhaps seeing some
potential failure of a bank to solve the problem that requires loosening
of the



Well, not in the sense of a failure of a bank.

Or I wouldn't term it as weakening of the banks.
to some unusual pressures in credit markets.

But I do make an illusion

There isn't any question

there has been an unusual degree of concern in private credit markets
relected in unusually wide margins between government interest rates, look
at the Treasury bill rate.

You are not getting an indication of what the

rate is on short term bank instruments.

There's been quite a gap between

the deposits rates of banks and the prime rate.

There is a gap between


U.S. rates and European rates.

All those reflect to some degree the fact

that there is no simple interest-rate reading, certainly of government
security interest rates in the United States that reflect some elements
of pressure in the private market.

Is this after

those kinds of problems?

Well, I think it's a combination of a byproduct of economic

conditions, a byproduct of some cases of overly exuberant lending policies
in the past.

The international problems to which you elude all enter into

the equation.

Shift in emphasis
What shift in emphasis?
Shift in emphasis

VOLCKER: Doesn'jzmean more or less.

All we are saying is Ml, not by

choice, by events, is going to give unreliable signals.

Now there's some

sense that what we are saying is that Ml is going to go way up.
saying that at all.

I am not

The impact probably in the new instrument will be to

artificially depress Ml, but that depends upon the characteristics of the

I am assuming we don't count it within Ml.


hasn't been definely designed yet—where it's

directly attached to a NOW account.
increasing Ml.

You can imagine

That might have the effect of

But my guess at this point and time would be not that the

end result is a high Ml but a lower Ml than you would think because of
this technical change.
QUESTION^ How weak is the economy
learning prospects
VOLCKER: My sense has been and you've heard me say this before, that we
should be able to look toward some recovery.

In fact, I would have thought

that we would have seen tangible signs by this time.

They haven't devel-

Our short term forecasting ability is not impeccable on the up or


down the side.

I think everybody has spotted that problem of economic

policy; our forecasts are not infalible.

But I think there are forces out

there that should push the economy toward recovery.
to be of moderate size.

I would expect that

But I think it would be important and obviously

reassuring to see things moving in that direction.
in a sense is to sustain that recovery.

The policy objective

It is much less important in my

mind just what the numbers show for a quarter or two, than whether we have
the conditions that can maintain that for years.

And that is in part why

the concern we have about inflation has to remain at a very high level.
Even though recent data is encouraging, the trend has changed, the momentum
has been broken.

that the slowness of recovery has effected all the

decision of

of the



It had absolutely nothing to do with deemphasizing Ml.

repeat, once more, the emphasis on Ml—what shall I say.

Let me

The wind blew a

tree into the house so we had to move to an apartment while we repair the

It had nothing to do, it's got no policy content whatsoever.


is a recognition of the reality that the Ml figure will be distorted and
nobody will be able to make an intelligent judgment for some time about
what an Ml figure means.

Zero policy significance.

Have you moved toward a policy of watching short-term interest

rates and deliberately pushing them lower?


I think the implication of a deemphasis on Ml has to be

Itjs not new, except in a matter of degree.

I say in the statement:

We'll look at M2 and M3 to see what information we get from that—because
we always do look to them—but we expect those to be less distorted by
this technical change because almost all the changes I anticipate will be
within those aggregates and not outside.



Will this be considered sort of an experiment as to the possibility

of using M2 or a broader monetary base for your target for next year as
someone suggested,

We have looked into that before, this is not new.

The market,

I'm afraid, has always put a little more emphasis on Ml than we do, among
the various targets.

It's not an experiment in the sense of going out and

making a deliberate experiment.
choice in the matter.

Again, I will repeat once more, we had no

When you have a figure which you know is going to be

off base, it makes no sense to follow the figure.

Now how soon one gets

back, in a sense, depends upon, I think, when one with some sense of confidence
and reliability feels that the disturbance has settled down and you can make
a judgment about the future of

in concerns, in relationship

to what you are interested in.

When do you expect that to be?


I am sure I said the policy objective is to sustain the recovery

in precisely those words.

But I don't want to be misunderstood.

We want

a sustained recovery but, to avoid any misinterpretation I also said that
policy required concern about inflation and that's why inflation remains a
high priority of policy.

It is an objective in the broader sense.


showing that bit of sensitivity, I forget what the question was.

When will it arrive?
Well, as I say we have been expecting it right along here.


me points-out that this present forecasting situation, if you may call it
that, reminds me very much of a situation we were in in 1979 and 1980 when
all the assembled economists of the w o r l d — and the press joined in—and said:


-8"Next quarter there's going to be a recession."

There was going to be a

recession in the second quarter of 1979, and it didn't appear.

There was

going to be a recession in the third quarter of 1979 and it didn't appear.
There was going to be a recession in the fourth quarter of 1979 and it
didn't appear.

Well it eventually appeared, for a short period in 1980.

All I am pointing out is that we know a lot about the economy, I think, but
the ability to forecast precisely a quarter, and which a change in the
cyclical direction will come about, has not been remarkable for its accuracy.

But March 19, 1980 you made it clear


Well we'll have to decide that, and I made an assumption in the

analysis that it would be in M 2 , and it would probably be a minimum size
check, and not too many.

But your question illustrates the problem.

could be classified in either one.
obviously effect the Ml figure.


And the way you classify it will

I revealed a little bias but if the thing was

shaped a little bit differently or if the so-called super NOW account was
introduced I think it logically belongs in Ml.

I think the question

illustrates the point of the impossibility at this stage of saying growth
of X percent in Ml is the right growth.

What is a fair characterization of what you have done?


would you recommend to us in asking a very basic question, since you said
the Ml change has no policy
that inflation is being

but yet you say you are encouraged
demands and so forth but you take

the sum total of what you are describing to us here, how would you fairly
characterize what that is that's happening?




You want me to write your headline for you?

QUESTION: Yes, that's exactly right.

I wouldn't put it in a banner headline on page 1, number one. I

don't think it is that kind of a story.

I think we have made a continuing

kind of operational adjustment, of the kind you have to make in the conduct
of policy, within the same general framework of maintaining appropriate
restraint on the growth of money and credit. That's longer than a headline.
But I'm not going to try to condense it into two words.
QUESTION: Why do you think that the stock market blasted off the day after
you made this decision on behalf of the Board to continue
the stratosphere of the



VOLCKER: Well, the stock market has not heard an official explanation of it,
as best I know so far.

just reading the newspapers?
The newspaper reports were totally inadequate.

I mean you don't

expect me to be pleased about newspaper reports based upon partial, selective
and inaccurate information.

Can I ask you a question about your outlook for mortgage money?

Obviously the rates are coming down. At what level would you sort of expect
consumers to get back in, really think about buying homes?
VOLCKER: Well, I'm sure this is a matter of degree. My sense is that more
are thinking about doing it right now.

I talked to some builders the other

I ^€n't know if they were representative, because they surprised me

that they had a sense that that very thing was happening now and the prospects
were looking much better.

I haven't seen it in the market particularly

myself, but that was their story and it was not reflective in statistics yet,



but it is a matter of degree. There's certainly more availability of
mortgage money and at appreciably lower rates today than there were two
months ago.

I would think, as I suggested in my statement, that both.


not unusual to see interest rates decline in a recession, but I believe,
to make this absolutely solid, we've got to persist in policy.

I believe

what we are seeing here is a reflection of basic progress on inflation,
and expectations in that connection. An interesting thing in the market
reaction this past week—and I don't want to read too much into it or
going back a little further—is the sort term rates have not moved all
that much, but long term rates have moved quite a lot, which is a typical
reaction you would expect, reflecting confidence in the future interest
rate outlook which in turn employs growing confidence in the inflation

I hope that is a correct reading.

QUESTION: Mr. Chairman, do you see the Open Market Committee continuing its
policy of restraint, but will allow Ml money supply growth to go above the
target ranges?

You say Ml above the target ranges. If my guess is right about a

big impact in the new instrument depressing Ml, it could well go down. If
I may just repeat once more for the 18th time I get some flavor in reading the
comment that this is all a big deal because you want Ml to go up. The likely
impact of^the new instrument will be to depress Ml.
QUESTION: Well, the fact is that the Ml figures and others
apparently Open Market Committee


As I said in July, and I suggest you look at the statement again...

we've been deciding all along.
Federal Reserve.

It was in last month's policy record of the




That is not true. Since the last meeting we have had exceptionally

slow growth in M2 and M3. That figure hasn't been published yet for
September in the whole. We had a low Ml figure from April to early August,
mid August.

It grew more rapidly in September. The last Ml figure, the

figure published yesterday, was I think roughly was within a billion dollars
of the target. You don't come much closer than that in this world.

continuing the policy of restraint?
You have trouble characterizing, and I have trouble characterizing.

It is a policy of continuing to restrain the growth of money and credit to
appropriate levels in the interests of encouraging a continuing decline
in inflation. A little long for your headline. That policy does not imply
continuing pressures on interest rates.

But interest rates are high, somewhat to the discount rate.

What factors would you all take into account to drop the discount rate
from 9.5 to 9?

Next week, next month, or whatever?

What kinds of factors

will you be watching for?

I would refer you to the statement.



I will let that be merged with the fullness of time. I'm not

about to predict the discount rate and whether it will go up or down or


VOLCKER :~^ Well, one always looks at interest rates, in helping to explain
what's going on in the market. There was a question about the private
credit markets earlier and I answered it in terms of interest rates. That
is input. My statement in July noted that. Yes, we will be looking at M2
and M3. Obviously we've got partial information as the months progress


-12and we arrive at a judgment within this framework, which I tried to outline
in the statement.

Specifically would you gain more or less for the same amount


I would say the same. We always observe the federal fund rate

as one indicator as to what is going on.

How accurate do you think that your forecast would be in deter-

mining the targets given these distortions?

Is there a possibility

The target is irrelevant—for a short period of time we are talking—

if you think the figure is truly distorted. Now I said less emphasis, we
will be analyzing that figure as best we can to see whether we can glean
from it some sense of whether the unrelying trend is up or down.

I have

some skepticism in the next few weeks as to how accurate that kind of
judgment will be, but I assure you we will be analyzing the data that arrives
to the best of our ability. We'll try to distinguish between the froth and
the trend. What we are saying is we suspect that there is going to be a
lot of froth.

But what kind of impact could that have.
If we think it is froth, we don't pay attention to it.



On a weekly basis will you be changing the emphasis on total

nonborrowed reserves, monetary base?


We will be changing the emphasis, in a sense, in tracking the Ml

figure. —We will continue to have a reserve path for basically nonborrowed
reserves in the short run when you look at total reserves. But you will
adjust for aberations in Ml.





I think it's certainly easier to finance the deficit in a time

of recession, but that's not the way to get the deficit financed in the most
satisfactory way.

Yes, indeed, I remain concerned about the impact of

financing the deficit during the period of recovery.

I think that some of

the sharp edge has been dulled by the actions taken last summer.
clearly the problem remains.


Prospective deficits are very large and it will

be a continuing large challenge to the Congress, and the administration.


Mr. Volcker, there are those who may not

I am beginning to write your headline for you.


Federal Reserve

Policy Remains Consistent, Reward is Declining Interest Rates.

How do you

like that headline?

Does someone have one more succinct question?


He didn't quite finish his.
I was not exactly, but then people look at direction of short

term rates in the last few weeks.

How do you respond to those cynics who

say that Federal Reserve policy is sometimes


Well, let me give you one factual point and one philosophic

comment, I suppose.

This is somehow part of the American folklore.


would remind you that just about at the same time relative to the election in
1980 the discount rate was raised.
exists on this point.
election is over.
was right anyway.

I understand a certain amount of cynicism

Your tempted to go in a hole and hide until the

But I decided in the end we better do what we thought


Can you just tell us what your estimate is and how long
I think what you would expect is that the All Savers Certificate

distortion that I referred to, first, would be a matter of weeks in my
opinion. That's going on, to the extent it's going on, in full force
right now.

It should be washed out then in a couple of weeks. That would

be my expectation.

If that was the only problem you faced, you could just

say forget about a couple of weeks and see how it looks at the end of the

The trouble is—just about the time you would expect that to wash out—

the other change comes in, and that is harder to judge an impact...
Now the problem is that the change introduced immediately may be
the first in a series. Suppose we go from this limited transaction account—
three checks a month and three other transfers and a minimum account size
and a minimum check number and that's put in place, and three months later
you come along with a complete transaction oriented account, with a market
interest rate, unlimited transaction powers, with no minimums. That would
have another impact on the figure. I would remind you, too, that I alluded
in July to another kind of problem which does not affect the validity of
the aggregates over a period of time but a note of caution that the relationshj
between the economy and the aggregate may change. Without this technical
change, I would expect that in a world of declining inflation, a world of
return toward price stability and what amounts to the same thing a return
to a world of much lower interest rates, you are going to see over a long
period of time a different relationship between Ml and economic activity
than has been characteristic of the past twenty years of inflation. You have


-15to make a judgment as to that change in trend or in more technical terms
change in the trend of the velocity if it appears. I'm not sure it's
appeared and I'm now speculating.

But I say you have to make a judgment on

that matter. Among other things, if interest rates go down the way you
would like to see them, the distinction between the NOW account and the
savings account disappears.

How would the relationship be different between the Ml and the

VOLCKER: What I would expect is that this long trend we have toward higher
velocity would stabilize or perhaps reverse itself. There have been changes
before in economic history, it tends to maintain a trend and then changes.
It is important to realize when that's going on.
QUESTION: Are you not now able to control the money supply because of
these new changes?

In the short run, we can't control it anyway.

I repeat once more—

in the very short run and what goes on this week and next week we cannot
control anyway.

The point is to the extent you know that's distorted you

don't want to try to control it because you distort the economy to achieve
a statistic. The statistic doesn't mean anything in the middle of these

It does not make any sense to say I will adjust the economy to

a money supply figure, that doesn't mean what it meant yesterday when you
got a new change.

If that's all clear to you.

How do you create


How do you create a new bird. Do you think we pull these things

down out of the sky. The problem you have is that you have a bybred
instrument here. Do you put it in Ml or do you put it in M2? We could make a



faney adjustment the way we did last time if we knew, if we had a way to do
that we f d do it.

We don't feel that we have a way we have any confidence it

The young lady here has a last question,


How do you expect Joe Sixpack should react?
I don't think Joe Sixpack should be concerned in the least about

the fact that Ml is distorted by All Savers Certificates and the introduction
of a new instrument,

I thirik if you give Joe Sixpack that impression you are

doing him and the country a disservice.

But you are saying lower interest rates


I like to think of that as being consistent.

As I

say, with the progress we are making on inflation and, as I say in the
statement, as a reward for that progress.

We can't force the process.

If we force the process, it's going to be counter productive.

If that is happening know why



We can get off into a whole lot of other questions there.

There clearly are uncertainties in the economy but I think the important
thing to say is the consumer's financial position, as best we can measure,
his indebtedness is less than it has been for years, his liquid assets
position is better, his overall financial position looks stronger, the savings
rate is rising.

All those are developments that in a fundamental way,

I think, should support consumer spending and growth in consumer spending
over time.

Whether it develops this month, next month, in the Christmas

season o^what, economists aren't very good at pinning down.

But I think

we can say with some certainty that the underlying financial position of
consumers is improving.

Thank you gentlemen, and ladies.