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For release on delivery
12:00 Noon E.D.T.
Tuesday, May 10, 1983

Remarks by
Preston Martin
Vice Chairman, Board of Governors of the Federal Reserve System

before the
Society of American Business and Economic Writers
Washington, D.C.

May 10, 1983

I am pleased to be here this afternoon as a guest of
the Society of American Business and Economic Writers on the
event of your 20th annual meeting.
twenty years to the 1964 period;

Think back with me
recall the stability and

predictability of economic growth, the credibility of fine
tuning monetary and fiscal policies, and this nation's leader­
ship in the global economy and polity.

I lived in Rome that

year, where my best received speech to Italian bankers was
"The Secrets of American Productivity."

At the Banca d 1Italia,

Guido Carli was reminding his countrymen that Italia was no
longer primarily an agricultural society!
The U.S. today differs more from 1964's than from 1983's
European Community.

Today there beckons a rare opportunity to

achieve a measure of the stability and productivity we so took
for granted twenty years ago.

Most of us work in services, not

manufacturing nor agriculture, and service employment has risen
over the last 60 days by 200,000.

We are continuing a long trend

toward more business writers and computer programmers and less
sheet metal workers.
Employment in services is enveloping manufacturing
in the societal evolution that transformed farmhands into
production line workers at an earlier stage.

Our agriculture

remains outstanding--the task today is to regain industrial
excellence, to transform and extend manufacturing with com­
puter software and robotics.

Our position in the world

economy will depend on such factors as our return to "serious"
intellectual pursuits in education, upon techniques like


distributive informational processing, and upon organizing
the production of goods and services in small, interactive work

Of course the attitudinal aspects loom large.


satisfaction and thus motivation is still in part money motivated,
that is "real"

money wage or salary, and that is precisely where

inflationary expectations enter the productivity equation.


inflation affects the work ethic, discourages "buy now" and
stimulates saving habits.

"Buy later" may shift the demand

curve for monies and liquid assets a little.

Monetary policy's

task becomes easier if velocities (turnover) of deposits and
other liquid assets are more stable.

Disinflation lowers the

hurdle rate for business investment.
Certainly the recovery does not depend primarily upon
structural adjustments in the labor markets.
indicators are raising their hands.

The familiar

Demand in the labor

markets seems to be firming as indicated by the rise in
total employment and lengthening of the factory workweek
in April.

Last month's further trimming of inventories in

the manufacturing sector combined with a 2.5% increase in
shipments, brought the inventory-to-sales ratio in that sector
to near the pre-recession levels of early 1981, and should set
the stage for further gains in production and employment.
Perhaps the most dramatic of these portents however is
the increase in housing sector activity over the last several

Housing starts in the first quarter were 347» above


their fourth quarter 1982 level and the pace of new and existing
home sales had surpassed a 3 million unit annual rate during
the first three months of this year.

Activity in this credit-

sensitive sector provides positive evidence of the effects that
the moderation in interest rate levels and inflation expectations
has had in recent months.
Climatologists have styled April as the cruelest month,
alluding to its variability.

Looking backward from this year^-

end, economists are not likely to so characterize this month:
April's data are decidedly stronger.

Still there is the conundrum

of federal megadeficits, so let us address them.
Many had hoped that major fiscal policy decisions would
be in place by this time, decisions which would indicate lower
spending and higher revenues than were postulated by the OMB and
the Congressional Budget Office for 1985 and beyond.

While those

hopes have not yet been realized, note that the fiscal debate
continues to be responsive to spending and revenue considerations
which five years of massive deficits would entail:

we are no

longer content to plan year by year.
That is not to deny the major risk both in recovery for 1983
and in trend-to-1988 of the prospect of continued federal mega­
deficits over the next five years.

As a practical matter, mega­

deficits create the potential, as the recovery picks up, for
demands from institutional portfolio managers for continued high
interest rates:

high real rates which would impede prospects for

a renaissance in jobs, in business investment, exports and in housing.




Outyear megadeficits tend to create doubts as to the
prospects for the very success of economic policy--perhaps the
capacity of economic policy--to contain inflationary pressures
ove3^ the long run.

When doubts solidify, they constitute an un­

settling influence on financial markets.

Perhaps the greatest

of all impediments to defeating inflation and a prime reason
disinflation exacted such costs from our work force and our
businesses, has been the deep skepticism of those in the
marketplace that economic policymakers could and would keep
up the fight.
Megadeficits have a further damaging effect:
international capital flows.

they distort

Many weeks like the last one of

funding $15 billion for Treasury may in time bring upward pressure
on interest ratés.

Relatively high real rates in turn attract

capital from abroad and may influence dollar exchange rates and
eventually the competitiveness of our goods and services in
foreign markets.

To some extent a strong dollar contributes to

the loss of jobs in export industries and a worsening of the
trade deficit.
Though the continued movement to fiscal responsibility is
needed in order to reinforce the progress of economic recovery,
the prognosis is not all negative.

Cynics were confounded by

last year's election year tax increases.
to listen to counsels of despair:
process is still in an early stage.

It is still too early

the 1984 fiscal year budgetary




In spite of the presence of these real risks, there is
room for substantial optimism about maintaining the progress
against inflation and promoting a sustainable recovery.
There has

been an exceptional advance towards the restoration

of price stability and, better, there exist indications that
this progress can be sustained.

Granted, fortuitous events in

the energy markets have substantially assisted the price indica­

In this regard, I am reminded that supply surpluses are

often succeeded by future scarcities.
be entirely temporary.

But this factor need not

We have in place long-run energy econo-

mizers--smaller cars, energy-efficient furnaces and appliances,
better insulated homes and offices -- and, in the context of a
long-term success in curing inflation, basic cost trends-particularly wage increases--have moderated substantially.


is the stuff of a firm foundation for stable prices.
Another critical change favoring an environment of dis­
inflation and growth comes from the improvement in productivity.
This is an encouraging reversal of the trend over the last
several years.

Even at this stage of a recovery, the increases

in productivity have been strong, indicating a potential for
a very gradual trend of basic labor costs.

Last year's produc­

tivity advances -- which first quarter data extends--is not only
an indicator of downward pressure on costs.

It is much more than

It is only--repeat, only--from increased productivity

that we can get a real and general increase in our standard of




Monetary policy can contribute to a truly noninflationary
economic recovery, sustainable over a multi-year period, not
just a few quarters.


the opportunity before us is to con­

tinue breaking away from a cycle of accelerating inflation,
depressed business investment, declining productivity and loss
of international market share.
The early characteristics of this recovery do not indi­
cate a need to alter the direction nor the objectives of monetary

I believe there is a new awareness of both the ubiqui­

tousness of foreign competitors and the importance of jobs related
to the export of goods and services.

Management staffs are

leaner, work rules are more flexible, and the computer revolution
is reaching down into small work groups (just as you wrote might
happen four or five years ago).

Certainly the economy has

recovered rather than rebounded in comparison with other early
post WW II cycles, but that augurs well for disinflation and
for level or declining interest rates for some period.
It is vital for the longer-run prospects of the economy
that both inflation and the specter of inflation--inflationary
expectations--should continue to abate.

If this is to happen,

we must achieve the continued support of both fiscal and monetary

It is the economic events that transpire in 1984 and

1985--as the recovery gains momentum--that will be of crucial
importance in determining whether we have indeed achieved an
environment that will foster sound economic growth.




Thus it is important that the Federal Reserve continues
to pursue long-term price stability.

The current environment,

however, is not one that lends itself to policy implementation
simply by entering the data into a computer program and imple­
menting the results.

As commentators on the scene, you are

best aware of the exogenous changes and disruptions to the
financial markets and financial institutions brought about by
recent technical, international and domestic economic events.
As you know, the implementation of monetary policy is specifi­
cally through financial markets and institutions, affecting
nominal aggregates.

Events that impact the financial instru­

ments, products and market structure influence our evaluation
of the trends in the reserves and monetary aggregates and to
me require perspective on the most doctrinal approaches to
monetary policy.
A case in point is the atypical behavior of money
velocities over the last year.

The drop in money velocities

has been attributed to a number of factors including the mas­
sive introduction of Ml and M2 based deposit instruments, shifts
in international credit flows and an increase in the public's
liquidity demands.

This latter trend could prove to be, at

least in part, a temporary phenomenon followed by some unwinding
of the exceptional liquidity demands with the strengthening of


the economy.

Some residual holding could be a function of lower

interest rates and persisting unemployment.

Nevertheless, money

velocities in 1983 could follow a pattern different from past
In addition to the changes occurring in financial markets,
I believe that we will witness a recovery in 1983 that is sub­
stantially different from others in the

post-war experience.

I have mentioned fundamental shifts to service industry employ­
ment over thè last decades that have contributed to economic
dislocation and distress.

These shifts, still continuing and with

far to go, will require a judgmental approach in interpreting
the recovery, not an approach simply cued by the numbers from past
The most recent movements in the growth of the monetary
and credit aggregates have been a supportive indicator of our
monetary policy goals.

The most recently released data for the

M3 and M2 aggregates show a deceleration of their growth from
the exceptional levels experienced at the beginning of the first

As you know, an associated range for the growth of

total domestic nonfinancial debt in 1983 was estimated by the

The use of this aggregate is as an informational, rather

than a target variable--its behavior is monitored to provide
assistance in judging appropriate responses to developments
in the other aggregates.

Initial data indicates that growth in


the domestic nonfinancial credit sector during the first quarter
will be well within the estimated range, and in accordance with
long-term projected trends.
Obviously, formulating generalizations from these few
weeks is not feasible, especially when considered in light of
the contribution that the above-mentioned factors have made
t o t h e complexity of interpreting the performance of the aggre­
gates .

The FOMC will continue to utilize a high degree of

judgment in evaluating the growth of money and credit and, for
the time being, will continue to place substantial weight on the
behavior of the broader aggregates in implementing monetary policy.
In summary, the economic outlook is more encouraging,
though there exist weak spots in the recovery and indications
are that the initial stages of that recovery will be less robust
than in our previous post-war experience.
The chances that this recovery can be sustained over a
period of time have been considerably enhanced by the exceptional
progress made against inflation over the last year.
there exists


a prominent risk to solid growth in the current outlook

for continued federal budget megadeficits over the next several

This risk can manifest itself in the continued upward

pressure on interest rates and dollar exchange rates, and if
not addressed constructively, could create a serious problem
in regards to the longer-run outlook for the economy.



Another area of risk to the recovery is the strain
existing in the international finance sector and the economies
of our major trading partners.

The LDC debt question is of most

immediate concern as it affects the orderly functioning of
markets and could affect the general prospects for U.S. economic growth.
In that regard, I would propose that timely and constructive
action in support of the IMF and like international agencies is
essential to a successful resolution of this problem .

In the

longer run, the prospects for renewed international economic
growth of the developed countries and the maintenance of
relatively unrestricted trade will be a key.

The international

debt burden is manageable, but it will not manage itself.
We have experienced the difficult adjustment process
of restructuring for a productive economy after a decade of
low productivity and -destructive inflation.

We cannot afford

to return to those conditions--the human and economic costs of
disinflation have been incurred and cannot be allowed to be
wasted or recur.
Monetary policy will continue to play a constructive role
in promoting sustainable recovery characterized by stable prices,
a long period of good returns on investments, high employment
and economic growth.

Success does not rest in the hands of monetary

policy alone, but will be the result of a concerted effort from
all areas--government, business, labor and others--to solidify
and promulgate the successes experienced to date.