Monetary Policy Report

Monet~ Policy Objectives for 1982 Summary of Report to the Congress on Monetary Policy pursuant to the Full Employment and Balanced Growth Act of 1978. With excerpts of testimony presented by Paul A. Volcker, Chairman, Federal Reserve Board, February 10, 1982. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Contents Section Page Monetary Policy in 1982 2 The Federal Reserve'• Objectives for the Growth of Money and Credit 2 Ml Growth 3 Growth in the Other Aggregates 3 The Outlook for the Economy in 1982 4 Prospects for Economic Recovery 4 Economic Projections 5 Monetary Policy and the Performance of the Economy in 1981 6 The Growth of Money and Credit in 1981 6 Economic Performance in 1981 8 Excerpts from testimony of Paul A. Volcker, Chairman, Federal Reserve Board 12 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Monetary Policy in 1982 The Federal Reserve's Objectives for the Growth of Money and Credit The Federal Reserve remains committed to restrain economic disruption-through a combination of ed growth in money and credit to exert continuing monetary, fiscal, regulatory and other economic downward pressure on the rate of inflation. Such a policies. But it is quite clear that inflation cannot policy is essential if the groundwork is to be laid for persist over an extended period unless financed by ·s ustained economic expansion. excessive growth of money. There was a distinct slowing of inflation during Targets for money growth have therefore been set 1981, and the prospects for further progress are with the aim of slowing the expansion over time to good. Failure to persist in the effort to maintain this rates consistent with the needs of an economy grow improvement would have long-lasting and damaging ing in line with its productive potential at reasonably consequences; inflationary expectations would again stable prices. The speed with which the trend of deteriorate, with potentially adverse effects on finan money growth can be lowered without unduly distur cial markets, particularly long-term rates, and the bing effects on short-run economic performance next effort to curb inflation would be associated with depends, in part, on the credibility of anti-inflation still greater hardship. policies and their effects on price expectations, as Progress toward price stability can be achieved well as on other forces influencing interest rates and most effectively-and with the least amount of credit market demands, including importantly the fiscal position of the federal government. Given these considerations, the Federal Open Market Committee reaffirmed the ranges of monetary expansion shown in the table below for the .y ear ending in the fourth quarter of 1982. These ranges are the~ same as those tentatively set last July for 1982 and confirm the Federal Reserve's commit ment to reduce inflationary forces. Ranges of Monetary Growth1 1982 Projected 1981 Actual Mt• 2 ½ to 5 ½ percent M1B 5.0 percent M 1B (shift adjusted) 2.3 pecent2 M2 6 to 9 percent M2 9.4 percent M3 6 ½ to 9 ½ percent M3 11.4 percent Commercial Commercial Bank Credit3 6 to 9 percent Bank Credit4 8.8 percent *Formerly M1B. See footnotes page 11. 2 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Mt Growth Growth in the Other Aggregates At its meeting in February, the Committee recog The actual and potential effects on M 1 of ongoing nized that the recent rapid increases placed M 1 in changes in fmancial technology and the greater avail January well above the average level during the ability of a wide variety of money-like instruments fourth quarter of 1981, the conventional base for the strongly suggest the need to give careful attention to new target. Experience has shown that Ml growth developments in the broader money measures. The can fluctuate rather sharply over short periods and range for M2 growth is the same as in 1981, when these movements may be at least partially reversed actual growth slightly exceeded the upper bound of fairly quickly. The available analysis suggested that the range. The Committee felt that M2 growth in the recent increase reflected in part some temporary 1982 would be somewhat below the 1981 pace, al factors, rather than signalling a basic change in the though probably in the upper part of the range. amount of money needed to finance nominal GNP However, should personal savings-responding to re growth. cent changes in tax law or other influences-grow During 1981, MlB (shift adjusted) rose relatively substantially more rapidly in relation to income than slowly in relation to nominal GNP. On the assump now anticipated, or should depository institutions at tion this relationship is likely to be more normal in tract an exceptionally large inflow to IRA accounts 1982, and given the relatively low base for the MlB from sources outside M2, growth of M2 might ap range, the Committee felt that growth in Ml (for propriately reach-or even slightly exceed-the upper merly MlB)1 this year in the upper half of its range end of the range. would be acceptable. At the same time, the FOMC The 1982 ranges for M3 and bank credit are un elected to retain the 2 ½ percent lower bound for M 1 changed from those for 1981. These aggregates again growth tentatively set last July in recognition of the will be influenced importantly by the degree to which possibility that financial innovations-especially tech credit demands tend to be focused in short-term bor niques for economizing on the use of checking ac rowing and are funded at home or abroad. count balances included in Ml-could accelerate, with restraining effects on Ml growth. 3 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis The Outlook for the Economy in 1982 Prospects for Economic Recovery Economic activity still appeared to be contracting in pansionary impetus to the economy. At the same _e arly February: industrial production and employ time the deficit-particularly if expected to continue ment certainly declined further· in January, with the at exceptionally high levels in later years.-adversely extent of the fall worsened by exceptionally bad influences current financial market conditions. winter storms. Demand in the key sectors that had The Federal Reserve's objectives for money growth led the decline-housing and consumer spending ·i n 1982 are consistent with recovery in economic ac showed some signs of leveling off as the year began, tivity. The expansion is likely to be concentrated in and the recent cuts in production likely have helped itially in consumer spending. Given the substantial to relieve some of the remaining inventory imbal margin of excess capacity, outlays for business fixed ances. It would appear that the economy is in the investment may remain weak, particularly if long process of bottoming out and a perceptible recovery term interest rates continue to fluctuate near their in business activity should be underway by midyear. current high levels. A continuation of high levels of One element supporting final demands in the long-term rates also would inhibit the recovery in economy is the federal government. Part of the re residential housing, although demographic factors cent expansion in the deficit reflects the cushioning will continue to buttress demands in that sector. effects of reduced taxes and increased government The effort to deal with inflation is at a critical expenditures that result from declining income juncture. The upward trend in inflation clearly has growth and rising unemployment. In addition, how been halted and the process of reversal is underway. ever, the build-up in defense spending is a continu There are signs that price setting, wage bargaining, ing source of stimulus. The second phase of the tax and personal spending decisions are being made that reductions scheduled for July will provide another ex- will serve to moderate, rather than intensify, infla tionary pressures. Nonetheless, the behavior of fman cial markets and other evidence strongly suggest that there continues to be considerable skepticism that progress in reducing inflation will be maintained. Lasting improvement in fmancial markets-partic ularly for longer-term instruments-is dependent on. confidence that progress against inflation will con tinue; looming federal deficits have served to shake that confidence. Prospects for lower interest rates and for sustaining recovery over a long period-indeed for the timing of recovery-are thus tied to prospects for a more stable price level. 4 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Economic Projections Given the current circumstances and in light of the improvement in inflation during 1982 comparable monetary targets for the coming year, the individual with the Administration's, as well as a similar out members of the FOMC have projected economic per look for the labor market. The Administration's pro formance in 1982 that generally falls within the jection for real growth falls at the high end of the ranges listed in the table below. FOMC consensus. Should prices and wages respond The members of the FOMC expect inflation to more rapidly to anti-inflation policies than historical continue to moderate in 1982. At the same time, real experience suggests, or should more favorable pro activity is expected to accelerate with most of the ductivity trends develop, then the recovery could be growth coming in the second half of the year. With faster without adverse pressures developing on prices, inflation continuing to be substantial and the pro wages, and interest rates. spect that the federal budget deficit will remain large even as the recovery gathers momentum, demands for credit should intensify as the year progresses. In these circumstances, the recovery is likely to be somewhat restrained, with unemployment probably substantial at year-end 1982. The projections generally encompass those that underlie the Administration's recent budget propos als. The consensus view of the FOMC anticipates an Economic Projections for 1982 1981 Actual 1982 Projected FOMC Members Administration Changes, fourth Nominal GNP 9.3 8 to 10½ 10.4 quarter to fourth quarter, percent Real GNP 0.7 ½ to 3 3.0 GNP Deflator 8.6 6½ to 7¾ 7.2 Average level in Unemployment the fourth Rate 8.3 8¼ to 9½ 8.4 quarter, percent 5 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Monetary Policy and the Performance of the Economy in 1981 The Growth of Money and Credit in 1981 In its report to Congress last February, the Board of credit placed these aggregates above the upper Governors indicated that the System intended to bounds of their ranges at midyear. maintain restraint on the expansion of money and After reassessing its objectives for 1981 at midyear, credit in 1981. The specific ranges chosen by the the FOMC elected to leave unchanged the previously FOMC for the various monetary aggregates antici established ranges for the aggregates. However, in pated a deceleration in monetary growth that would light of the reduced growth in Ml-type balances over encourage further improvement in price perfor the first half of the year-with indications that this mance. Measured from the fourth quarter of 1980 to weakness might reflect a lasting change in cash the fourth quarter of 1981, the ranges adopted are management practices of individuals and businesses shown in the table below. related to the growth of alternative means of holding highly liquid funds-and given the relatively strong Review of the Aggregates growth of the broader aggregates, the FOMC an Even after accounting for shifts into NOW accounts, ticipated that growth of M1B might likely and and reflecting the rapid pace of institutional change desirably end the year near the lower bound of its in financial markets, the behavior of the aggregates annual range. At the same time, the FOMC in in 1981 was more divergent than anticipated. Aver dicated that M2 and M3 might well end the year age growth in adjusted M1B over the first half of around the upper ends of their ranges. This expecta 1981 was well below that which would have been ex tion also reflected the possibility that regulatory and pected on the basis of historical relationships among legislative actions as well as the popularity of money money, GNP, and interest rates. On the other hand, market mutual funds might intensify the public's despite the weakness in M1B, the broader aggregates preference to hold assets encompassed in the broader expanded quite rapidly in early 1981. M2 growth aggregates. over the first half was near the upper end of its an The table on the next page puts the performance nual range, while the expansion of M3 and bank of the aggregates during 1981 into a somewhat longer-term perspective, showing two measures of annual growth. In both cases, a marked deceleration in M1B is apparent since 1978. The table also clearly illustrates that growth rates for the broader aggreg ates have been maintained around a higher level Monetary Growth 1981 1981 Ranges 1981 Actual 1981 Q4 Levels• MlB 6 to 8 ½ percent 5.0 percent 436.7 MlB (shift-adjusted) 3 ½ to 6 percent 2.3 percent 425.3 M2 6 to 9 percent 9.4 percent 1806.9 M3 6 ½ to 9 ½ percent 11.4 percent 2171.0 Bank Credit 6 to 9 percent 8.8 percent4 1320.56 •Billions of dollars, seasonally adjusted. 6 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Growth of Money and Bank Credit (percentage changes) Bank Year M1B5 M2 M3 Credit Fourth quarter to 1978 8.3 8.3 11.3 13.3 fourth quarter 1979 7.5 8.4 9.8 12.6 1980 6.6 9.1 9.9 8.0 1981 2.3 9.4 11.4 8.84 Annual average to 1978 8.2 8.8 11.8 12.4 annual average 1979 7.7 8.5 10.3 13.5 1980 5.9 8.3 9.3 8.5 1981 4.7 9.8 11.6 9.44 and larger divergences have developed from M1B funds and instruments offered by depository institu growth. In considerable part, these differences can be tions that pay market-related interest rates have been explained by structural changes in financial markets. accounting for an increasing proportion of M2, as such assets have become much more competitive with Changing Financial Practices open market instruments. Indeed, the attractiveness As indicated, the growth of the narrow aggregates of small time deposits was enhanced last year by the adjusted for shifts into NOW accounts was low in liberalization of the interest rate ceilings on small 1981 compared with the other aggregates and also in savers certificates and, late in the year, by the intro relation to income and interest rates. Continued high duction of all savers certificates. Even so, two-thirds interest rates provided a substantial incentive for of the increase in the nontransactions component of businesses to pare narrow money balances and to M2 was accounted for by money market mutual make increasingly widespread use of sophisticated funds which grew 140 percent last year. cash management techniques. At the same time, ex plosive growth of money market mutual funds (MMMFs) appeared to prompt households to mini mize checking account balances; the broader avail ability of NOW accounts also may have prompted them to reconsider the way they handle cash assets. Likewise, the strong growth of M2 last year reflected changing financial practices. Money market 7 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Economic Performance in 1981 The economy was growing rapidly as 1981 began, Gro11 Bu1ine11 continuing the sharp cyclical rebound that started in Product Prices Change from Q4 to Q4, percent mid-1980. Activity leveled out during the spring and Fixed-Weighted Index 1981 Ql 10.5 Q2 8.2 summer, however, and it fell in the final quarter of Q3 9.9 the year. As a result, the rate of production of goods Q.4 7.1 12 and services-real GNP-was only slightly higher at the end of 1981 than it had been a year earlier. With the weakening of output late in the year, the margin of unutilized plant capacity widened and the unem ployment rate rose sharply. While economic activity was disappointing last year, there were emerging signs of progress in retar ding inflationary pressures. As 1981 progressed there 1977 1978 1979 1980 1981 Real GNP Change from Q4 to Q4, percent 1972 Dollars 1981 Ql 8.6 also were indications of an easing in wage inflation, Q2 -1.6 particularly in some key pattern-setting industries. Q3 1.4 Q.4 -5.2 8 Slowing of Inflation The trend in inflation improved noticeably during 4 1981, and by year-end virtually all aggregate price indexes were advancing well below double-digit rates for the first time since 1978. The consumer price in 0 dex rose 8.9 percent over the course of 1981, down from the nearly 13 percent average rate in 1979 and 1980. Important factors in the slowing of inflation -4 were exceptionally favorable agricultural supplies and 1977 1978 1979 1980 1981 declines, after the first quarter, in world oil prices. Inflation in areas other than food and energy-par ticularly consumer commodities and capital equip ment-also began to abate, although price pressures in the consumer service sector persisted. As the year progressed, surveys of inflation expectations sug gested that the inflationary psychology, which had permeated many aspects of economic behavior in earlier years, appeared to be subsiding. Credit Markets On balance, short-term interest rates-although quite volatile and at record highs as 1981 began-moved down considerably over the course of the year. In 8 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis contrast, long-term rates rose substantially. The average family disposable income needed to service pressure on long-term rates appeared to reflect a the monthly payment on a typical new mortgage rose combination of factors. Anticipation that continued from 21 percent in 1976 to nearly 40 percent last large federal budget deficits would clash with private year. credit demands, particularly as the economy expand ed, were a continuing strong investor concern. De Labor Market spite substantial reductions in the growth of many Employment grew at a moderate rate during the first federal spending programs, federal borrowing in three quarters of 1981 and the unemployment rate calendar year 1981 siphoned off roughly a quarter of edged down. As economic activity began to contract the total funds available to domestic nonfinancial in the autumn, the demand for labor fell sharply and borrowers. Also in the background were continuing the unemployment rate climbed to 8.8 percent in doubts and skepticism that anti-inflation programs December-only fractionally below its postwar high. would be carried through. The unemployment rate of adult men jumped to a postwar record of 7.9 percent in December 1981. Housing Market Labor productivity (o utput per hour worked) rose The tensions in credit markets in 1981 had their at a 1 ¼ percent annual rate in the first three greatest impact on household capital formation. quarters of 1981. However, output fell more than Housing construction fell to its lowest level in the employment in the fourth quarter and productivity postwar period; only 1.1 million new housing units were started in 1981. The average closing rate on mortgages for new homes was 15.3 percent in the fourth quarter of 1981, up from 12.6 percent a year earlier. High prices also adversely affected the ability of those seeking new homes to afford the monthly payments. Although house prices changed little in 1981, over the preceding 5 years prices of new and existing homes had risen half again as fast as the overall rate of inflation. As a result, the share of 9 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis declined, offsetting gains earlier in the year. Averag to enable them to compete more effectively. These ing across short-run cyclical movements, productivity adjustments, coupled with the progress seen in reduc has shown little improvement in recent years and ing inflation during 1981, suggest that the nation's thus has provided virtually no offset to the impact of anti-inflation policies have set the stage for a sustain rapidly rising compensation on unit labor costs. ed unwinding of wage and price increases. Compensation and wage increases did decelerate during 1981, with steady progress throughout the year. Also, by the second half of 1981, changes in traditional wage-setting practices were underway: management and workers alike began to reconsider planned wage adjustments; some expiring contracts were renegotiated well in advance of termination dates; and labor agreements at a nuinber of firms were modified in an effort to ease cost pressures and IO Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Footnotes 1. The objective for growth of narrowly defined money 3 . Because of the introduction of International Banking over 1982 is set in terms of Ml only. Based on a variety Facilities, the bank credit data beginning in December of evidence suggesting that the bulk of the shift to NOW 1981 are not comparable to earlier data. Thus, the targets accounts had occurred by late 1981, the Federal Reserve is for 1982 are in terms of growth from the average of publishing only a single Ml figure in 1982 with the same December 1981 and January 1982 to the average levd in coverage as the former MlB. the fourth quarter of 1982. M1 is currency held by the public, plus travder's 4. December levd used for calculating 1981 growth rates checks, plus demand deposits at commercial banks net of for bank credit incorporates an adjustment to abstract deposits due to foreign commercial banks and official in from the shifting of assets from U.S. banking offices to In stitutions less cash items in the process. of collection and ternational Banking Facilities. Federal Reserve float, plus other checkable deposits (i.e., 5. Growth rate for 1980 and 1981 adjusted for shifts to negotiable order of withdrawal accounts, accounts subject other checkable deposit accounts since the end of the to automatic transfer service, credit union share draft preceding year. balances, and demand deposits at thrift institutions). 6. Level for December 1981. Because of the introduction M2 is Ml plus savings and small denomination time of International Banking Facilities, this figure is not com deposits (including retail RPs) at all depository institu parable to earlier data. January 1982 level is not yet tions, shares in non-institutional money market mutual available. funds (MMMFs), overnight repurchase agreements (RPs) issued by commercial banks, and overnight Eurodollar deposits held by U.S. residents at Carribean branches of U.S. banks. M3 is M2 plus large time deposits at all depository in stitutions and large denomination term RPs issued by commercial banks and savings and loan associations, and shares in institution-only MMMFs. Bank. credit is total loans and investments of commer cial banks. 2. MlB vdocity, before shift adjustment, rose at a rate closer to historical experience. However, the shift of funds from saving accounts or other sources of funds not includ ed in measures of the narrow money supply temporarily depressed the velocity figure, particularly early in the year. A copy of the full Report to Congress may be obtained from Publications Services, Board of Governors, Washington, D.C. 20551. 11 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Excerpts from Testimony of Paul A. Volcker, Chairman, Federal Reseive Board I have submitted for the record the official report exposed as an illusion. I believe it is fair to say a from the Board in accordance with the Humphrey clear national consensus emerged that turning back Hawkins Act. I would like to offer some more per inflation had to be a top priority of economic sonal views on the problems-and equally important, policy-that a stable dollar is a necessary part of the the opportunities-that are before us. foundation of a strong economy. As you know, the economy has been in recession Monetary policy has a key role to play in restoring for some months. The recession has some of the that stability, and our policies are directed to that characteristics of earlier downturns. But it seems to end. But recent developments have confirmed again me plainly wrong to think of the current state of the that ending an inflation, once it has become deeply economy as simply reflecting "another" recession. seated in expectations and behavior, is not a simple Rather, we are seeing the culmination of a much and painless process. The problems can be ag longer period of unsatisfactory economic performance gravated if too much of the burden rests on one in extending well back into the 1970' s-performance strument of policy. And the effort to restore stability marked by poor productivity, growing unemploy will be more difficult to the extent policies feed skep ment, much higher interest rates, and pressures on ticism and uncertainty about whether the effort will the real earnings of the average citizen and on the be sustained-a skepticism rooted in past failures to real profits of our businesses. "carry through." Monetary, fiscal, and other public A number of factors have contributed to that policies are constantly scrutinized-in financial deterioration in our performance, not all of them markets and elsewhere-to detect any signs of completely understood. But one pervasive weakening in commitment to deal with inflation. To element-an element particularly relevant to speed the transition to lower interest rates and · monetary policy-stands out: we found ourselves in healthier capital markets, to reduce the costly the midst of the most prolonged inflation in our elements of anticipated inflation built into wage and history, and that inflationary process had come to price contracts, to permit more confident planning feed on itself. Incentives were distorted. Too much of for the future-in fact, to lay the base for sustained the energy of our citizens was directed toward seek recovery-credibility in dealing with inflation has to ing protection from future price increases and toward be earned by performance and persistence. speculative activity, and too little toward production. That, essentially, is what public policy-and Increasingly depressed and volatile capital markets monetary policy in particular-has been about for reflected the uncertainties. Effective tax rates increas some time, and there are now signs of real progress ed as inflation carried taxpayers into higher brackets. on the inflation front. That progress is reflected to But, in a sluggish economy, those revenues did not greater or lesser degree in all the widely used infla keep up with our spending plans and programs. tion indices. Consumer prices rose 8.9 percent last Against that background, the notion that we might year, 3 ½ percentage points less than the 1980 peak, comfortably live with inflation-or that we could ac and the inflation rate seemed to be trending lower cept inflation in the interest of strong growth-was still as the year ended. Finished goods producer prices have had an average increase at an annual rate of only about 4 percent for six months. Expecta tions cannot be so easily measured, but earlier fears that inflation might rapidly accelerate have plainly dissipated. Those gains, to be sure, have elements that may not be lasting. Some prices are depressed by recession-weakened markets, and some by the pressures of high interest rates on inventories and 12 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis speculative positions; exceptionally good crops last major deterrent to new car sales as the industry year have held food prices down; and surpluses have comes to grips with long developing competitive and emerged in oil markets, following the enormous price regulatory problems and the enormous ·challenge of increases of earlier years. adapting to the higher price of gasoline. But we also see evidence of potentially more In the best of circumstances, coping with deep lasting changes in the trend of costs as management seated inflation would pose difficulties. At the same and labor in key industries come to grips with ci>m time, we have had to adjust to the huge increases in petitively damaging productivity.and wage trends. I the price of energy, to meet the need for a stronger am aware that this process has just begun, and it has defense, and to deal with the drag on incentives and been centered largely in areas where competitive investment resulting from rising marginal tax rates. pressures are most intense. But as the emerging pat All of that implies massive economic adjustments, the terns spread, we will have succeeded in establishing threat of a growing fiscal imbalance, and a difficult one of the major elements for success in the fight transition period. The high level of unemployment against inflation and for reconciling, as ·we must, a generally, and particularly distressing conditions in return to greater price stability with growth, reduced some of our older industrial centers, are one symp unemployment, and higher real wages. tom. Lasting progress toward price stability-and I am acutely aware that progress on the inflation other needed adjustments-cannot be built on pro front has been accompanied by historically high longed stagnation, rising unemployment, and slow levels of interest rates and heavy attains on fmancial growth. The relevant question is not whether current markets. Those sectors of the economy particularly conditions are satisfactory or tolerable-they obvious- dependent on borrowing-especially long-term bor 1y are not. It is whether our policies, and our policy rowing-have been hard hit. mix, promise to achieve the needed results over time. It ,would be simplistic to cite high interest rates as It is against that background that I review the sole cause of the difficulties in these vulnerable monetary policy last year and discuss our intentions sectors. Part of the problem arises from ·other, and for 1982 in my official report ... longer-term, factors, themselves associated with the • • • • • • • inflationary process. In housing, for example, we have had a decade of increases in prices of homes Consolidating and extending the heartening pro almost double the rate of inflation in the economy gress on inflation will require continuing restraint on generally and well in excess of the rise in average monetary growth, and we intend to maintain the family income .. "Sticker shock" still seems to be the necessary degree of restraint. The monetary growth ranges specified are, we believe, consistent with an economic recovery later this year, although we do not anticipate, by historical standards, a sharp "snap back.'' What is more important is that the recovery have a firm foundation-that it be sustained over a long period. There will be more room for real growth-and much better prospects for sustaining that growth over many years-the greater the pro gress on inflation ... 13 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Today, we are acutely aware of disturbed capital to raise new revenues-we would face the prospect of markets, high interest rates, economic slack, and a deficits rising to unprecedented amounts, whether . poor productivity record. But, when the economy measured in dollars, in relation to the GNP, or as a begins to expand, productivity should rise; tax and proportion of our limited· savings and the supply of other measures already in place or under way should loanable funds. We can debate among ourselves just help reinforce a better trend. Productivity growth, in what level of deficit is tolerable in coming years and tum, will permit prices to rise more slowly than what is not. We can be tempted to sit back and let a wages-more modest wage and salary increases in year pais as we discuss· what programs should be cut dollars will then be consistent with mQre growth in or where revenues can be raised. But I think we all real earnings, encouraging further moderation in know that, without action, we would be on a colli wage. demands and sustaining the disinflationary pro sion course between our need for new plant, equip cess. As confidence returns to securities markets, ment and housing and our capacity to save-and it prices of bonds and stocks should rise, and lower in would be more difficult to reconcile the requirements terest rates and more favorable capital market condi for a sound dollar with our desire to grow. tions will in tum support the continuing growth in It could be argued we have a little time. A large investment and· productivity. With appropriate deficit in the midst of recession should be budgetary and monetary discipline, the process could manageable; it indeed provides some support for the be sustained for years. economy in a time of stress. There are also large That is not an impossible vision ... From the stand potential sources of demand in the private economy. point of public policy, much of the groundwork has The latest economic indicators are not so weak as been laid. I have spoken of the key role for monetary they were. We can see we are making some progress policy, and of our record and intentions in that against inflation, perhaps. as fast as could reasonably regard.· The tax program enacted last year can, in have been anticipated. In all these circumstances, a the right context, have favorable effects on incentives degree of patience is needed-and justified. and on investment. The excessive burden of regula But delay is another matter. In my judgment, the tion is being addressed ... ! have refel'Rd on many oc• more progress we can see in restraining costs, and casions to the key importance of winding down the the more resolute your budgetary action, the earlier cost and wage pressures that tend to keep .the infla we can be assured a prompt and strong recovery. tionary momentum going. The process appears to be The course of action we have set in the Federal starting, and the faster it takes hold the better the Reserve seems to me consistent with that sense of ·o utlook for growth and reduced unemployment. But, direction and urgency. But no single instrument of clearly, prospects for early and sustained expan policy can, alone, do the job. We look forward to sion-an expansion that can be broadly shared by in working with you and your colleagues in the weeks dustries now severely depressed-is dependent on ac and months ahead to meet these challenges construc cess to capital and credit on more favorable terms. tively. Pumping up the money supply cannot be the answer • • • • • • • to that problem-excessive money and the inflation it breeds are enemies of the real savings needed to finance investment. What we can do is relieve the concerns the markets understandably have-concerns reflected so strongly in the budgetary documents before you from both the Administration and your own Budget Of fice. Without action to cut spending-or, if that fails, 14 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis

Federal Reserve (1982, February 9). Monetary Policy Report. Monetary Policy Reports, Federal Reserve. https://whenthefedspeaks.com/doc/monetary_policy_report_19820210

@misc{wtfs_monetary_policy_report_19820210,
  author = {Federal Reserve},
  title = {Monetary Policy Report},
  year = {1982},
  month = {Feb},
  howpublished = {Monetary Policy Reports, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/monetary_policy_report_19820210},
  note = {Retrieved via When the Fed Speaks corpus}
}