Monetary Policy Report

Monetary Policy Objectives for 1983 Summary Report of the Federal Reserve Board February 16, 1983 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Monetary Policy Objectives for 1983 Summary of Report to the Congress on Monetary Policy pursuant to the Full Employment and Balanced Growth Act of 1978. With testimony presented by Paul A. Volcker, Chairman, Federal Reserve Board, February 16, 1983. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Contents Section Page Monetary Policy in 1983 2 FOMC Deliberations 2 Ranges of Monetary Growth for 1983 2 The Outlook for the Economy in 1983 4 Prospects for Economic Recovery 4 Economic Projections 5 Monetary Policy and the Performance of the Economy in 1982 6 The Growth of Money and Credit in 1982 6 Economic Performance in 1982 8 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 1983 The economy over the past year and a half has FOMC Deliberations passed through a most difficult period, one of high In setting guidelines for monetary growth consistent unemployment, depressed incomes, and severe with these goals, the Federal Open Market Commit distortions in financial markets. There is substantial tee at its February meeting recognized that the rela evidence that the recession is ending. Forces seem to tionship between growth ranges and ultimate be in place that are consistent with ·recovery in economic objectives had deviated substantially from economic activity. One positive factor is the improve past patterns during 1982. ment in financial market conditions in the past six The atypical behavior of velocity last year will like months, which is stimulating activity in major credit ly prove at least in part temporary, to be followed by sensitive sectors of the economy. A better balance is an unwinding of the exceptional liquidity demands being established between inventories and final this year; appreciable increases in M 1 velocity, in demands. Inflationary expectations, while still sen particular, are common during the early stages of sitive, have abated. There has been substantial pro economic recovery. However, velocity in 1983 may gress towards restoring price stability, and there is well follow a pattern different from that of past good reason to believe that further progress can be recoveries, and in setting targets for 1983, the achieved even as business activity picks up. An im FOMC had to take account of the experience of provement in productivity should bolster growth in 1982, past cyclical behavior, and the possible altera real income and profitability during recovery, and tion of underlying relationships between money and can be a factor in sustaining better price perfor ultimate economic objectives·. mance. Diminishing inflation and a lowering of infla The members of the FOMC also recognized that tion expectations, in turn, should promote further the introduction of new deposit instruments very declines in interest rates. recently has affected, and will continue to affect for a Against this backdrop, monetary policy has been, time, the growth rates and behavioral characteristics and will continue to be, concerned with fostering a of the various aggregates. lasting expansion in business economic activity in a framework of continuing progress against inflation. Ranges of Monetary Growth for 1983 Monetary expansion and liquidity should be ade quate to support the moderate recovery that appears These factors contributed to the complexity of setting to be starting. At the same time, although the recent target ranges for 1983, and the Committee recogniz gains that have been made against inflation are ed that an unusual degree of judgment will be highly encouraging, it is clear that the test of the suc necessary in interpreting the growth of money and cess of our anti-inflationary effort is still ahead. credit in coming months. Some flexibility in reassess Thus, the Federal Reserve remains committed to a ing the ranges could be important. The Committee course of monetary discipline that is essential to decided to continue setting target ranges for all three avoid a resurgence of inflationary pressures as measures of money, but with some departures from economic expansion proceeds. past practice to deal with the special uncertainties it faces currently. Aggregate growth ranges for 1983 are shown in the table on the next page. In the case of M2, the FOMC felt that perfor mance of this aggregate would be most appropriately measured from a base period that would be less affected by the initial, highly aggressive marketing of Money Market Deposit Accounts (MMDAs). The range for M2 makes allowance for some further 2 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis shifting of funds into MMDAs from non-M2 sources The FOMC agreed that the monetary ranges over the remainder of the year, although at a greatly should be reviewed in the spring in light of the ac reduced pace from what evidently has occurred to cumulated evidence available at that time regarding date. the behavior of the aggregates and their relationship The range for M3 is identical to that set for 1982, to other economic variables. For the time being, in but contemplates growth below the actual outcome implementing monetary policy, the Committee last year. In adopting the range, the Committee agreed that substantial weight would be placed on assumed that any net shifts of funds over the year in behavior of the broader aggregates-M2 and M3-in to the new types of deposit accounts from market in anticipation that current distortions from the initial struments would be moderate. adjustment to the new deposit accounts will abate. The range for M 1, while pointing to slower actual The behavior of Ml will be monitored, with the growth than in 1982, is both wider and higher than degree of emphasis given to that aggregate over time the range tentatively set last July. The new range dependent on evidence that velocity behavior is reflects allowance for a possible change in cyclical resuming a more predictable pattern. behavior, as well as for the evolving character of M 1 The Committee emphasized that policy implemen as a more important repository for savings, especially tation in 1983 necessarily will involve a continuing in a lower inflation, lower interest rate environment. appraisal of the relationships between each of the The comparatively wide range set for M 1 also measures of money and credit and economic activity reflects the Committee's judgment that some and prices, particularly in the aftermath of unusual allowance should be made in this fashion for the behavior of velocities of both money and credit ag uncertainties introduced by the existence of the new gregates last year. This will involve taking account of deposit accounts. patterns of saving and cash managment among An associated range for total domestic nonfinancial businesses and households, and indications of chang debt was estimated at 8 ½ to 11 ½ percent over the ing conditions in domestic and international credit four quarters of 1983. This range encompasses markets and in foreign exchange markets. growth about in line with expected growth of nominal GNP, in accordance with long-term trends; however, Committee analysis of the outlook sug gested that, in the particular circumstances of 1983, somewhat more rapid growth of credit also might be consistent with its overall objectives. Ranges of Monetary Growth 19831 1983 Projected 1982 Actual M2• 7 to 10 percent M22 9.2 percent M3 6 ½ to 9 ½ percent M32 10.1 percent Ml 4 to 8 percent Ml 8.5 percent Total Domestic Commercial Bank Nonfinancial Debt3 8½ to 11 ½ percent Credit• 7.1 percent •Measured from average of February and March of 1983 to the fourth quarter of 1983. AU other ranges measured from fourth quarter 1982 to fourth quarter 1983. 3 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis The Outlook for the Econoniy in 1983 Prospects for Economic Recovery widespread weakness in foreign economies and the still high value of the dollar, a quick turnaround in There are encouraging signs that the economy will export demand is unlikely. ~oon be in the early stages of an economic upturn, if Although the January employment report provided indeed the expansion has not already begun. In its encouraging signs of improved labor demand, the initial phases, the economic recovery may be less gains in coming months may be relatively moderate robust than the average postwar expansion. At the given the uncertainties still present in the business same time, the chances that the recovery can be sus e~vironment, and the unemployment rate probably tained over the long run have been considerably will be slow to retrace the increases sustained during enhanced by the significant progress against inflation the past recession. Structural changes now apparent in the past year. in the U.S. economy may compound the difficulties Indications that the economy is turning up have of bringing unemployment down quickly. been apparent in recent weeks. The housing sector Nevertheless, once the recovery is under way, appears to be well along in the expansion process, as there appears a good chance that it can be sustained. both house sales and new construction have regis-· Fiscal policy is providing significant near-term sup tered significant advances. Retail sales also picked up port for the economy through a continued rise in toward the end of 1982 and held steady in January; defense spending, counter-cyclical transfer payments auto sales in particular have been at improved levels and further tax cuts. The current monetary policy is in recent months. In the business sector, inventory also conducive to an expansion; barring some unex liquidation has apparently become less of a depres pected re-emergence of serious inflationary pressures sant on real activity, as both industrial production in 1983, the monetary growth targets established by and employment turned up in January. the FOMC should provide the liquidity needed to Because of the length of the recession and the support a recovery in real activity. stresses and uncertainties it has generated, consumers A resurgence of inflation seems unlikely in the and businesses may follow cautious economic near term. The underlying trend in labor costs ap strategies in coming quarters. In the business sector a pears to have moved down. In addition, the current high degree of unused capacity probably will supply situations in agricultural and energy markets discourage investment spending for some time. The appear conducive to continuing progress against in export sector may well continue to be a drag on U.S. flation; indeed, recent developments in the interna ~conomic activity well into 1983. Exports fell sharply tional oil market seem to portend quite favorable m the second half of last year and, given the price movements for this key commodity. There still are, however, reasons for concern about the longer-run outlook for the economy. One major source of concern is the prospect that federal deficits will continue to be massive in the years ahead, even as the economy is well along in the expansion. The prospective deficits tend to cast doubt on the commit ment of economic policy to gain control of inflation over the long run. For these reasons, the budgetary picture continues to have an unsettling influence on financial markets. Overcoming the still deep skepticism about the anti-inflation effort is crucial in other ways to the 4 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis achievement of strong and sustained economic in inflationary pressures, especially in light of the growth. It is generally recognized that periods of favorable underlying trend of unit labor costs. slowing inflation in the past two decades have proved In formulating their projections for 1983, members to be temporary, and unless the commitment to see of the FOMC and the Presidents took account of the the present effort through is made fully credible by target ranges established for the various monetary the actions of the fiscal and monetary authorities, and credit aggregates, and assumed that Congress there will be a danger that as markets improve with and the Administration will make progress in the recovery we will see a reversion to aggressive pat months ahead in reducing federal deficits for coming terns of wage and price behavior. If this came to years, thereby diminishing the threat those deficits pass, the viability of economic expansion would be would otherwise pose to long-run price stability and severely jeopardized. sustainable economic growth. No specific allowance We need, too, to deal with the strains existing in was made for a large decline in oil prices; also, the the international financial arena. Timely action to special restraining influence on prices exerted by the enhance the resources of the International Monetary appreciation of the dollar in 1982 is not expected to Fund is essential. But more generally, we must be repeated in 1983. maintain the spirit of cooperation among borrowers, The ranges of growth in money and credit lenders, and governmental authorities that has been specified by the Committee for 1983 would appear the hallmark to date of the effort to resolve the dif compatible with some further decline in market rates ficult problems confronting us. of interest as inflation abates. However, the direction of fiscal policy decisions will play a major role. Decisive action to reduce the Treasury's demands on Economic Projections the credit markets in the years ahead would be well The members of the Federal Open Market Commit received by investors and would contribute greatly to tee, together with other Federal Reserve Bank a relaxation of the continuing pressures on interest Presidents who alternate as Committee members, rates. Of critical importance to the interest rate believe that the economic expansion that now ap outlook-and one certainly not divorced from the pears to be starting will result in a solid gain in real budget picture-is the behavior of inflation and ex GNP over the four quarters of 1983. The increases pectations of inflation. expected are moderate in comparison with the first year of most past recoveries, and the consensus is that these gains can be achieved without a resurgence Economic Projections for 1983 FOMC members and other FRB Presidents Administration CBo•• Range Central Tendency Changes, fourth Nominal GNP 7¼ to 11¼ 8.0 to 9.0 8.8 8.9 quarter to fourth quarter, percent: Real GNP 3 to 5½ 3.5 to 4.5 3.1 4.0 GNP Deflator 3½ to 5½ 4.0 to 5.0 5.6 4.7 Average level Unemployment in the fourth rate• 9½ to 10½ 9.9 to 10.4 10.4 not available quarter, percent: •Percent of total labor force including persons in the Armed Forces stationed in the United States . ..C ongressional Budget Office. 5 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Monetary Policy and the Performance of the Economy in 1982 The Growth of Money and Credit in 1982 M2 Billions of dollars The Federal Reserve has been seeking to provide ---Range adopted by FOMC for enough liquidity to facilitate an early upturn in 1981 Q4 to 1982 Q4 economic activity, while maintaining the monetary discipline needed to sustain the progress toward lower rates of inflation-a crucial element in satisfac Rate of Growth 1981 Q4 to 1982 Q4 tory economic performance over the longer run. The 1900 specific monetary target ranges chosen by the Federal 9.2 Percent .,.,.,., .,., .,.,-6% Open Market Committee last February and reaffirm (Prior to redefinition, 9.8 percent) .,.,.,., ed in July, measured from the fourth quarter of 1981 .,.,.,., 1850 to the fourth quarter of 1982, are shown in the table below. 1800 Review of the Aggregates The FOMC contemplated last February that Ml ONDJ FMAMJ J ASOND might deviate for periods of time from expected pat 1981 1982 terns of growth if economic and financial uncertain ties fostered unusual desires for liquidity. Indeed, the behavior of the aggregates over the year diverged substantially from normal historical patterns. fact there have been very few four-quarter spans in The income velocity of various measures of which Ml velocity declined at all. In the case of M2, money-defined as the ratio of gross national product no parallels to the steep velocity decline of last year to measures of money-fell sharply in 1982. The are to be found since the 1950s. velocity of M 1 dropped 4 ¾ percent and that of M2 The recent weakness in velocity probably reflects 5½ percent, from the fourth quarter of 1981 to the strong demands for relatively safe, liquid assets on fourth quarter of 1982. For Ml, this was the largest the part of the public because of uncertainties in the four-quarter decline in the postwar period, and in business and financial outlook. Further evidence of strong precautionary demands is to be found in the particular types of monetary assets the public chose to acquire last year. The ap parent strong desire for liquidity, and the associated shifting in asset demands, had an important bearing on the FOMC's assessment of the behavior of the ag- Monetary Growth 19821 1982 Planned 1982 Actual 1982 Q4 Levels* M2 6 to 9 percent 9.2 percent2 1943.9 M3 6½ to 9½ percent 10.1 percent2 2365.9 Ml 2½ to 5½ percent 8.5 percent 473.7 Commercial Bank Credit• 6 to 9 percent 7.1 percent 1405.6 •Billions of dollars, seasonally adjusted. 6 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis gregates as the year progressed. The Committee felt Bank Credit Billions of dollars that some growth in the aggregates above the longer run target ranges could be tolerated in the prevailing ---Range adopted by FOMC for economic conditions, which appeared to be giving Dec. 1981-Jan. 1982 to 1982 Q4 9% rise to greater precautionary demands for money than might be anticipated in normal circumstances. This attitude of caution was intensified from time to Rate of Growth time· by concerns about strains on some financial in Dec. 1981-Jan. 1982 to 1982 Q4 stitutions and about the ability of private and govern 7.1 Percent mental borrowers in a number of foreign countries to meet their debt-service obligations. 1350 Institutional Changes Affecting the Aggregates It was recognized in the early fall that the behavior of M 1 during the final three months of the year ONDJ FMAMJ J ASO;',D would very likely be distorted by special factors. An 1981 1982 extremely large volume of all savers certificates matured beginning in early October, and this was expected to have sizable temporary effects on M 1. In addition, new accounts were to be introduced: the would be free from interest rate ceilings; it also Depository Institutions Deregulation Committee, authorized Super NOW accounts free of interest rate beginning December 14, authorized depository in ceilings beginning January 5. 5 stitutions to offer MMDAs that could be used to a The sizable fund shifts that might result from these limited extent for transactions purposes and that developments-even in anticipation of the availability of new accounts-seemed likely to have direct and indirect effects on M 1 that would be large in magni tude and would, particularly in the case of the new M3 Billions of dollars accounts, affect the underlying behavior of narrow money as the public realiocated transactions and sav --- Range adopted by FOMC for ings funds. As a result, the FOMC, at its October 1981 Q4 to 1982 Q4 meeting, decided that it would give considerably less :BOO weight to M 1 in implementing policy and rely more Rate of Growth on the broader aggregates, M2 and M3. It was an 1981 Q4 to 1982 Q4 ticipated that the special factors affecting M 1 growth 10.1 Percent in the fourth quarter would have a much smaller im (Prior to redefinition. 10.3 per<·ent) 2300 pact on these broader measures, since a major por -----_,,,.,,,,,,. 6½% -- tion of the shifts of funds would occur among assets -- -- contained in the broader aggregates. However, the --- 2200 ONDJ FMAMJ JASO;',() 1981 1982 7 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis advent of the MMDA might boost M2 expansion Economic Performance in 1982 late in the. year. The recession that began in mid-1981 continued In late December, M2 growth in fact was raised through 1982, bringing the cumulative decline in real by sizable inflows to MMDAs and growth continued gross national product over that period to 2 ½ per at an extraordinarly rapid pace into the early weeks cent. Unemployment reached a postwar high, while of 1983. The new accounts were heavily advertised industrial capacity utilization fell to a postwar low. by the depository institutions, and often were offered At the same time, however, inflationary pressures at interest rates that were exceptionally high relative were greatly reduced; and while some potential to prevailing rates on comparable investments. By obstacles to growth clearly need attention, an econ year-end, balances in MMDAs had risen to a level of omic environment conducive to sustainable recovery more than $87 billion, and by the end of January and expansion seemed to be emerging by year-end. 1983 were about $230 billion. Super NOW account To a considerable extent, the recession and its at growth was much slower, reaching about $18 billion tendant economic and financial stresses have reflected by the end of January. the difficulties inherent in reversing an inflationary The table below puts the performance of the ag trend that had been gaining momentum for more gregates during 1982 into a somewhat longer term than a decade. By the late 1970s, the underlying in perspective, showing two measures of annual growth. flation rate had accelerated to near double-digit level, and expectations of rising wages and prices had be come deeply embedded in the behavior of consumers, businesses, and investors. Growing financial Growth of Money and Credit6 (percentage changes) Total Domestic Mt M2 New• M20ld M3 New* M30Id Bank Credit4 Nonf"mancial Debt Fourth 1978 8.2 8.0 8.2 11.1 11.3 13.3 12.9 quarter to fourth 1979 7.4 8.1 8.4 9.6 9.8 12.6 12.1 quarter 1980 7.2 9.0 9.2 9.7 10.0 8.0 9.9 1981 5.1 (2.5) 9.4 9.5 11.7 11.4 8.1 9.9 1982P 8.5 9.2 9.8 10.1 10.3 7.1 9.5 Annual 1978 8.2 8.5 8.8 11.5 11.7 12.4 12.2 average to annual 1979 7.7 8.2 8.5 10.2 10.3 13.6 13.1 average 1980 6.2 8.0 8.3 9.0 9.3 8.6 12.3 1981 7.2 (4.8) 9.5 9.8 11.6 11.6 9.4 10.0 1982P 6.5 9.4 9.8 10.5 10.5 5.8 10.0 p-Preliminary •New M2 and M3 incorporate redefinitions announced by the Board on February I 1. See footnotes 2 and 6 on page 11. 8 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Change from end of dislocations and economic imbalances made it plain Consumer Prices previous period, percent that inflation was having a debilitating effect on our economic performance. Although policies to curb the CPI inflation were strengthened considerably in late 1979, the inflation rate remained quite high through 1980 15 and slowed only a little in 1981. Inflation Progress 10 In this past year, however, the progress against infla tion has been more dramatic. The rate of increase in most price measures in 1982 was only a third to half 5 the peak inflation rates of 1979 and 1980, a much faster deceleration than had generally been thought possible when the year began. The consumer price 1978 1980 1982 index rose 3.9 percent over the year, compared to a 12 ½ percent advance just two years earlier. The slowdown was attributable to temporary influences to some extent, but there also has been more fun damental progress. In particular, expectations of in flation are being scaled down, productivity is improv over the second half of the year in seven separate ing, and there are wide-spread indications of business steps, thereby accommodating the downward move and labor adapting their price and wage practices to ment in money market rates. By December short the competitive realities of a new, less inflationary term rates had fallen around 5 percentage points environment. from their average levels in June. Long-term interest rates also registered substantial Credit Markets declines in the second half of the year, responding not only to the easing in money markets, but also to Interest rates fell appreciably in 1982, primarily in the sustained moderation of inflation and weakness the second half. With market rates falling and the in economic activity. On balance, yields on bonds economy still quite sluggish, the Federal Reserve and conventional mortgages fell 3 to 4 percentage reduced its discount rate by 3 ½ percentage points points between June and December. Even with the sharp declines of 1982, interest rates, especially long-term rates, remain at high levels, relative both to their historical levels and to current inflation rates. A major factor propping up longer-term rates especially is the size of federal government deficits, which threaten to remain massive even as the economy recovers, thereby com peting with the rising demands of private borrowers 9 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Real GNP Change from Q4 to Q4, percent The external financial position of several large bor rowing countries-notably Argentina, Brazil, and 1972 Dollars 1982 Qt _5_1 Mexico-worsened in 1982. These financing pro- Q2 2.1 8 blems have placed severe strains on the banking sys- ------------------Q-3--------" tern and on international markets generally, as the need arose to refinance or reschedule existing debt. ------------------4 During the year there were repeated cooperative ef- forts among borrowers and private and official lend- ing institutions to address these problems, and the --="'---..,,,,,,=----"""""""'----.-,,..---+ debtor countries, to gain control of rising debt bur- - dens, are adopting strong policies of internal and ex- ternal adjustment. As a result, there has been a reduction in their demand for exports from major in 1978 1980 1982 dustrial countries, particularly the United States, because of its close ties to Latin America. for available savings. Moreover, although inflation moderated substantially in 1982, many potential in vestors, scarred by the experience of the 1970s, re main cautious about the longer-range outlook-and about the government's commitment to maintain Foreign Exchange Value forceful anti-inflationary policies. Trade-weighted index, of the U.S. Dollar March 1973 = 100 International Payments and Trade A movement towards deficit in the U.S. current ac count was already evident in 1982. Reflecting the ef fects of the strong dollar, as well as sluggish eco nomic growth abroad, real exports of goods and ser vices decreased 13 percent over the four quarters of 1982. The trade sector thus made an atypically larger contribution to the recession. The current account, which was in small surplus for 1981, as a whole, recorded surpluses in the first half of the year but then swung into deficit in the third quarter as exports 80 weakened. 1978 1980 1982 10 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Footnotes 4. Bank credit data are not adjusted for shifts to Interna tional Banking Facilities in 1981 and 1982. The 1982 1. M1 is the sum of currency held by the public, plus growth rate, however, is calculated from a December 1981 travelers' checks, plus demand deposits, plus other and January 1982 base to reduce distortions owing to such checkable deposits (including negotiable order of with shifts. drawal (NOW and Super NOW) accounts, automatic transfer service (ATS) accounts, and credit union share 5. As noted, MMDAs, because of their more limited draft accounts.) transactions feature, are included only in the broader M2 is M 1 plus savings and small denomination time aggregates, while Super NOWs, which have unlimited deposits, plus Money Market Deposit Accounts, plus transactions features but also include a savings element, shares in money market mutual funds ( other than those are included in Ml. These distinctions are not clear-cut, restricted to institutional investors), plus overnight repur and they illustrate the increasing fuzziness of the dividing chase agreements and Eurodollars. line between Ml and non-Ml type balances. In fact, in M3 is M2 plus large time deposits, large denomination making this definitional decision, the Federal Reserve term repurchase agreements, and shares in money market Board noted that it would be monitoring carefully the mutual funds restricted to institutional investors. behavior of the new accounts to determine whether some Commercial Bank Credit is total loans and investments alteration in their treatment might be advisable. of commercial banks. 6. Ml figures in parentheses are adjusted for shifts to Total Domestic Nonfinancial Debt is outstanding debt NOW accounts in 1981. All figures for Ml and the new of domestic governmental units (federal, state and local), M2 and M3 incorporate minor effects of benchmark and households and nonfinancial businesses. seasonal adjustment revisions. New M2 and M3 incor 2. To maintain consistency in the treatment of similar porate definitional changes as well (See footnote 2.) kinds of monetary assets, M2 and M3 now include balances in tax-exempt money market mutual funds which have attributes much like those of the highly liquid taxable money funds and exclude balances in IRA and Keogh ac counts which generally are very illiquid and closely resem ble pension funds. Without these changes, M2 and M3 growth would have been 9.8 and 10.3 percent, respectively in 1982. The table on p. 8 shows M2 and M3 growth in recent years under both old and new definitions. 3. It is expected that the commercial bank share of total debt expansion will put bank credit growth at between 6 and 9 percent this year. A copy of the full report to Congress is available free of charge from Publications Services, Federal Reserve Board, Washington, D.C. 20551. 11 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Testimony of Paul A.Volcker, Chairman, Federal Reserve Board I am pkased w be meeting again with to deal with internal and external imbalances. All of this has been reflected in, and accompanied by, this Committee w discuss the Federal, pressures on domestic and international banking Reserve 's ob_jectives for monetary policy markets. At the same time, out of this turmoil and stress we and their relationship w the prospects for can see elements of change and returning strength the economy. You a/,reody have recei,ved that bode well for the future. In particular, striking progress has been made in reducing inflationary the qffici,al Monetary Policy Reporl w pressures. The measured rate of inflation in 1982 was Congress that is required under the the lowest in a decade, and forces are at work that, carefully nurtured, can continue that progress during Humphrey-Hawki,ns Act. My comm,ents recovery. Interest rates have fallen substantially from wday will expand upon ·some of the the high levels of the past couple of years; as con fidence builds that inflation can be held in check, points raised in that reporl, focusing in further declines should be sustainable. Business and parlicular on our ob_jectives with respect labor have responded to the market forces by taking measures to cut costs and improve efficiency, and monetary policy and the obstacles that, t,o those measures should have a healthy effect long unkss dealt with effectively, could deflect after the recession has passed. At the turn of the year, signs appeared that the the economy from the path of sustained decline in economic activity was ending and that expansion we would all like w see. recovery might soon develop. Housing construction, auto sales, and factory orders have all improved in recent months. The sharp downturn in unemploy ment reported in January should be interpreted cautiously in the light of the month-to-month volatili ty of those estimates, but indications of some firming in labor demand are heartening. Economic Adjustment In sum, this has been a time of disappointment Our economy has been going through wrenching ad and strain-but also a period of great potential pro justments during the past year and a half. With pro mise. That promise lies in the prospect that, under duction falling into sharp recession, the unemploy-• the pressure of events, we-in government, in ment rate rose to a postwar high. A large share of business and labor, and in finance-are facing up to our industrial capacity is idle. Profits are depressed, what is needed to sustain recovery into long years of and there have been exceptionally large numbers of healthy growth. ' business failures. I know that this has also been for many a time of Conditions in most other industrialized countries, frustration and doubt. Unemployment of a willing in greater or lesser degree, have paralleled those in worker is always a threat to personal and family our own economy, and large sectors of the develop stability; on a wide scale it is an affront to our sense ing world have faced the need for forceful measures 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 12 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis experience are unsettling to more than financial Those gains have been achieved in the midst of markets. We have been jarred to the realization that recession, with strong downward pressures on prices a serious international financial disturbance is not and costs from weak markets. We cannot build a just something we read about in books of economic successful policy against inflation on continued reces history but could recur unless we are alert to the sion. The question remains as to how prices will dangers and deal aggressively with them. behave as the economy recovers-after six months or Uncertainty and confusion are perhaps inevitable a year of rising orders, employment, and production. in a period of change-even constructive change. But In recent weeks, increases in some highly sensitive they can easily be destructive without a clear concep commodity prices have been cited as a danger sign. tion of where we want to go and how to get there. Those commodities are subject to speculative in My conviction is that much of the stage has been set fluences, but surely an increase in some prices that for long-lasting, non-inflationary expansion. But we have been severely depressed during recession is not also have to be realistic and clear-sighted about the itself a signal of change in more basic price trends. threats and obstacles that remain, confident that be One widely used index of sensitive industrial com ing known, they can be cleared away. modity prices-excluding oil-declined by about 35 percent from the end of 1980 through late 1982, car rying many of those prices to levels that could not The Prospects for Stable Growth justify new investment or even maintenance of ex The unchanging goal of economic policy, embodied isting output. Within limits, recovery in those prices in the Employment and Humphrey-Hawkins Acts, would be a natural, and probably necessary, part of has long been growth in employment, output and any expansion and will not dominate more general productivity at relatively stable prices. That goal for price statistics. a decade and more increasingly eluded us, not least In fact, the single commodity of major importance because of an illusion for a time that the stability side to the general price level-oil-is in surplus supply, of the equation could be subsidiary. Once inflation and the price in real terms has been declining. I can gained strong momentum, it was doubly hard to con not prophesy the degree to which the nominal price tain without transitional pain. But after several years of oil might decline in coming weeks or months, if at in which the effort against inflation has had high all. But barring a major political upset, prospects ap priority, there are today solid grounds for believing pear exceptionally good that stable or falling real the signs of incipient recovery can be the harbinger prices for finished petroleum products-which ac of performance much more in line with our goals. count for 8-9 percent of the GNP-can reinforce We approach our discussion on monetary policy progress against inflation for some time ahead. We 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 infla tion 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. 13 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis also have large stocks of basic food commodities, pro increase in productivity can assure higher real wages viding some assurance against a sharp run-up of and profits. Happily, after dwindling away to prac prices in that area. tically nothing during the 1970' s, the signs are that It is labor costs that account for the bulk of the productivity is rising once again. Tentative evidence value of what we produce, and our success against can be found in preliminary data suggesting produc inflation in the longer-run will need to be reflected in tivity rose by almost 2 percent last year in the midst the interaction of wages, productivity, and prices. It of recession, an unusual development when produc is also in this area that recent signs of progress can tion is declining. Those statistics are consistent with prove most lasting. reports from business that significant progress has The upward trend of nominal wages and salaries been made in improving efficiency and in reducing slowed noticeably last year, with average wages ris "break-even" points. ing by about 6 percent from the fourth quarter of During the early part of recovery, productivity 1981 to tqe fourth quarter of 1982; total compensa usually grows more rapidly. Consequently, a com tion (including fringes) rose just over 6½ percent. bination of rising cyclical and ''trend'' productivity The trend during the year seemed to be declining, with more moderate nominal wage gains should and in the midst of pressures on profits, markets, reduce the increase in unit labor costs further as a and employment, could well show further declines. recovery takes hold. For example, a rise in hourly The sharply lower inflation figures-below the rate of compensation of less than 6 percent this year would wage increases-moderate one source of upward appear consistent with recent trends. Should produc pressures on new wage agreements. Longer-term tivity increase by 2-2 ½ percent-an expectation that union agreements negotiated in earlier more infla would appear modest in the light of recent ex tionary years are expiring, tending to further perience-unit labor costs would rise by significantly moderate the wage trend. less than 4 percent, low enough to maintain and The slower increases in nominal wages have been reinforce progress on the price front. fully consistent with higher real wages for the average As confidence grows that the gains against infla worker precisely because the inflation rate has been tion are sustainable, an expectation of further declining. Continuation of that benign interaction declines in interest rates should be reinforced. To among lower inflation, lower nominal wages, and day, short and particularly longer-term, interest higher real wages-combined with recovery in pro rates, despite the large declines last year, remain fits-must be a central part of a non-inflationary historically high in nominal terms and measured recovery-and thus to sustaining expansion. against the cu"ent rate of inflation. A number of fac Those prospects will be greatly enhanced by im tors contribute to that, including the present and pro proved productivity performance; over time, only an spective pressures from heavy Treasury borrowing. But concerns that recent gains against inflation may prove temporary are checking the decline in interest rates. We 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 rat~s are cer tainly 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 pro gress against inflation-uncertainty on that point will 14 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis ultimately be self-defeating in terms of the interest underlying imbalance between our spending pro rate environment we want. grams and the revenue-generating capacity of the tax An improved climate for work, for saving, and for system at satisfactory levels of employment (' 'the investment-the objective of the tax changes in structural deficit") promises to increase as fast as the troduced in 1981-should also materialize in an "cyclical" deficit declines. economic climate of recovery and disinflation, help That prospect, essentially without precedent in the ing to keep the process going. Rising real incomes past, threatens a clash in the financial marketplace as will also be reflected in consumer demand-an area huge deficits collide with the needs of business, of the economy already supported by the large homebuyers and builders, farmers, and others for deficits. As living standards rise and fears of inflation credit. The implication is higher real interest rates fade, pressures for excessive and "catch-up" wage than necessary or consistent with our investment demands should subside. needs in the future and expectations of that future In sum, there are strong analytic reasons to believe "clash" feed back on markets today. The adverse that the incipient recovery can develop into a long consequences are reinforced and aggravated by the self-reinforcing process of growth and stability. The widespread instinct in financial markets and among challenge is to turn that vision into reality. 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 Obstacles and Threats to Progress success of the disinflationary effort. Of course, there are obstacles to that vision; some That outlook and analysis is essentially agreed by need to be dealt with promptly, and some will need the Administration, the Congressional Budget Office, to be guarded against as we move ahead. The more by citizen groups that have expressed alarm about firmly we move to deal with those threats-by action the budgetary situation, and by indP-pendent budget now and by setting ourselves clear guidelines for the analysts. It is that broad consensus on the nature of future-the faster we can end the doubts and restore the problem that provides a base for the necessary the confidence necessary to success. action. What remains to be done is to take those ac The Federal Deficit. The most obvious obstacle that tions. I fully realize the sensitivity and difficulties of looms ahead is the prospect of huge Federal deficits the choices to be made. But I am also aware, as I am even as the economy expands. I have spoken to the sure you are, that a great deal depends on a suc point on a number of occasions, and will soon be cessful resolution of those efforts. testifying before the Budget Committee. Today, I will only summarize the problem in a few sentences. The bulk-but far from all-of our present $200 billion deficit reflects high unemployment and re duced 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 15 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis The International Economic and Financial Situation. The to continue to play a key role at the center of the in risks and uncertainties in the present situation are ternational financial system. Early Congressional ap compounded by the fact that so much of the world is proval of the enlargement of IMF resources, agreed in recession, and adverse trends in one country feed by the Interim Committee of the Fund last week, will back on another. For instance, falling exports have be essential to that effort. accounted directly for some 35 percent of the decline Attitudes Toward Pricing and Wage Behavior. I have in our GN~ during the recession; in past recessions, already described the pricing restraint and the trend in contrast, our exports have typically grown, toward more moderate increases in wages that have cushioning other factors depressing production and developed in the midst of recession. As best as I can employment. After earlier periods of exaggerated assess it, the mood today is consistent with maintain weakness, the great strength of the dollar in the ex ing that momentum. There is realization that com change markets over the past two years contributed petitors at home and abroad have large potential to the progress against inflation-but it also depress capacity, and after all the efforts to cut "break-even" ed our exports. We cannot build the stability of our points, expanding volume will itself produce satisfac economy on extreme exchange rate fluctuations. tory profits as well as larger employment oppor Another dimension of the risk is the danger that tunities. The "smokestack" industries, hit so hard in nations will try to retreat within themselves, in the period of recession while already faced with the sulating their economies by protectionist measures. need for structural change and with particularly high But, as we learned in the 1930's, such policies only wages by domestic or international standards, have aggravate the mutual difficulties. particularly strong incentives for caution. But today, we face another more immediate threat But there is, of course, another possibility. in the international financial area. I will reserve Business and labor-habituated to inflation in the detailed comment for my appearance before you 1970's, highly sensitive to the failure to sustain past tomorrow. Suffice it to say now that the potential for efforts to restore stability, and eager to restore past an international financial disturbance impairing the price or wage "concessions"-may be tempted to functioning of our domestic financial markets at a test their bargaining and pricing powers much more critical point in our recovery is real. I firmly believe aggressively as orders and production expand. If they the major borrowers and lenders, with the under were to do so, sensitivities of consumers and financial standing and support of Governments, central banks, markets to the possibility of reinflation would only be and international institutions, can face up to and aggravated, tending to keep interest rates higher and deal-with those problems constructively. But the greatly increasing the difficulty of maintaining the cooperative pattern we have seen emerge in manag economy on a non-inflationary path of growth. ing these problems is absolutely dependent on the This is an area where government policy can capacity of the International Monetary Fund (IMF) 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-to anticipate the worst-as employment and orders are restored may become ir resistible. The fact is both labor and business have much to gain from stability, and moderation in pric- 16 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis ing and wages within a framework of financial and spending may be loose, that there are recurring discipline will be consistent with higher real wages, cyclical patterns, and that the mix of real growth and profits, and employment. inflation can and will be affected by factors beyond The skepticism that had built up over many years the control of monetary policy. But we also count on about the resolve to deal with inflation has been a certian predictability and stability in the relation reduced but not eliminated. There is little or no ships over time between the monetary and credit ag leeway at this stage for "mistakes" on the side of in gregates and the variables we really care about-out flation. Policies designed with the best will in the put, employment and prices. world to "stimulate," but perceived as inflationary, In 1982, however, those relationships deviated may, unfortunately, produce more inflation than substantially from the patterns characteristic of the stimulus. earlier postwar period. The simplest reflection has been in movements of "velocity" -the relationship between measures of money and credit and the Monetary Policy in 1982 GNP. The velocity of M 1, which had been trending It is in that broad framework and context that higher throughout the postwar period, dropped at a monetary policy has been implemented in 1982 and rate of almost 4 percent over the past five quarters. that we in the Federal Reserve look ahead to 1983 The broader monetary aggregates ( and broad credit and beyond. Our objective is easy to state in prin aggregates as well) also behaved atypically in relation ciple-to maintain progress toward price stability to the economy; their ''velocity'' dropped during the while providing the money and liquidity necessary to recession by larger amounts than usual. More sophis support economic growth. In practice, achieving the ticated statistical techniques, taking account of lags, appropriate balance is difficult-and a full measure interest rates, and other variables, confirm the fact of success cannot be achieved by the tools of that "normal" relationships did not hold in 1982. monetary policy alone. The year 1982 amply In establishing its various target ranges at the start demonstrated some of the problems facing monetary of 1982, the Federal Open Market Committee policy during a period of economic and financial tur specifically noted that a number of factors, institu bulence, and the need for judgment and a degree of tional and economic, would affect the relationship of flexibility in pursuing the objectives we set for monetary and credit growth to the GNP, and con ourselves. templated that Ml in particular could deviate from As you know, policy with respect to the growth of expected patterns for a time in the event economic money and credit has been rooted in the fundamental and financial uncertainties fostered unusual desires proposition that, over time, the inflationary process for liquidity. In reporting to you in July of last year, can only continue with excessive growth of money. I emphasized the Committee was prepared to accept Conversely, success in dealing with inflation requires higher periods of Ml growth for a time "in circum appropriate restraint on growth of money and li stances in which it appeared precautionary or liquidi quidity. ty motivations, during a period of economic uncer- 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 Humphrey-Hawkins 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 signifi cant periods of time the relationships between money 17 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis tainty and imbalance, were leading to stronger-than "All Savers" certificates in October temporarily led anticipated demands for money.'' to large flows into transaction balances counted in In the event, Ml, after moving close to and within M 1. Subsequently, highly aggressive marketing of the target range around mid-year, grew much mo;.e new "money market deposit accounts" by banks and rapidly later, ending the year with growth of about thrift institutions led to enormous inflows into the 8½ percent, substantially higher than in 1981 and highly liquid instrument, which is classified within above the target range. Both M2 and M3 tended to the M2 aggregate. rise through the year somewhat more rapidly than In the first seven weeks after the introduction of the targets contemplated, averaging in the final that account, which combines some characteristics of quarter about ¾ percent above the upper end of the a transaction account with savings, more than $230 target range. (Revised "benchmark" data and some billion of money has flowed into the new instrument. partially offsetting definitional changes since the end The shift of financial resources is without precedent of the year have reduced the "overshoot" to about in amount and speed. While the great bulk of those ¾ to ½ percent.) funds simply reflected movements from lower interest In the light of the clear indications that velocity accounts already included in M2, a sizable frac was declining more rapidly than in earlier recession tion-estimates range to about 20 percent-was periods, the absence of recovery during 1982, and derived from large certificates of deposit or market recurrent strains in financial markets, "above instruments not included in that aggregate. The target" growth was accommodated in the conviction result has been a gross distortion of the growth of that policy, in practical effect, would otherwise have M2 in December and, more importantly in January. been appreciably more restrictive than intended in No statistical or survey technique available to us setting the targets. The rapid declines in interest can identify with precision the impact on M2 of these rates during the second half of the year-encouraged shifts of funds. The available data do suggest, in part by some actions to restrain the deficit and however, that (taking December and January more broadly by growing r~alization of the degree of together) the underlying growth in M2 (that is, ex progress against inflation-were clearly welcome. cluding shifts of funds formerly placed in non-M2 Credit-sensitive sectors of the economy, as noted ear sources) was not markedly different from the general lier, tended to strengthen. But after levelling off in range established earlier. In other words, the excep the second and third quarters, economic activity tionally strong growth of M2 in January could most dropped again in the final quarter in the face of reasonably be treated as having no policy heavy inventory liquidation. In all these circum significance. stances, strong efforts to confine M 1 growth to the target range seemed clearly inappropriate, parti Monetary Policy in 1983 cularly with the broader aggregates running quite close to their ranges. In setting out our monetary and credit objectives for An important further consideration during the 1983, the Federal Reserve has had no choice but to final quarter was that some of the monetary ag take into account the fact that "normal" past rela gregates were greatly influenced by purely institu tionships between money and the economy did not tional factors. The maturity of a large volume of hold in 1982, and may be in the process of continu ing 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 af fect trend relationships. Both declining rates of infla tion and the growing availability of interest on trans- 18 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis action accounts at levels competitive to market rates gress already made against inflation. Efforts to force could induce more holdings of cash relative to other interest rates down at the expense of excessive li assets over time. The payment of interest rates on quidity creation could not be successful for long. transaction accounts could also affect the cyclical pat Against all this background, the Committee decid tern of Ml. The broader aggregates, by their nature, ed that, for the time being, it would place substantial should be less sensitive over time to innovation since weight on the broader aggregates, M2 and M3, in they encompass a much broader range of assets, but the belief that their performance relative to economic the phased elimination of rigid ceiling interest rates activity may be more predictable in the period has changed cyclical characteristics. ahead. All of this has greatly complicated the job of set The target range for M3, which is least affected by ting targets for 1983. In setting the ranges, the Com institutional change, was left at 6 ½ to 9 ½ percent, mittee believed that monetary growth during the year measured from the fourth quarter of 1982 to the would need to be judged in the light of developments fourth quarter of 1983. with respect to economic activity and prices, taking The target for M2 was set at 7 to 10 percent and account of conditions in domestic credit markets and the base was shifted to the February-March average internationally. of this year to minimize the institutional distortions. At the same time, the FOMC is well aware that Our assumption is the flow of funds into M2 from past cyclical expansions have typically been accom other savings media will have sharply subsided in panied by sharp increases in ''velocity,'' particularly coming weeks. However, the M2 target range does for the narrower aggregates. We assume that, to take account of staff estimates that residual shifting some degree, that pattern will emerge again. There is will probably raise M2 growth by 1 percent or a little a strong presumption that the target ranges will not more over the remainder of the year; abstracting be exceeded or changed without persuasive evidence, from such anticipated shifts, the M2 target, in prac- as in 1982, that institutions or economic cir , tical effect, is the same or slightly lower than the cumstances require such change to meet our more target for 1982. Consistent with these targets, effec basic objectives. tive growth (that is, abstracting from the influence of As set out in the formal Humphrey-Hawkins shifts into new accounts) in both M2 and M3 is ex Report, members of the Federal Open Market Com pected to be somewhat lower in 1983 than in 1982. mittee and other Reserve Bank Presidents partici The M 1 target was widened and set at 4-8 per pating in our discussions generally look toward cent. Less emphasis has been placed on the M 1 moderate recovery in 1983 in a context of declining target in recent months because of institutional or stabilized inflationary pressures. While the in distortions and the apparent shift in the behavior of dividual forecasts vary over a considerable range, the velocity. The degree of emphasis placed on Ml as majority anticipates real growth in the 3.5 to 4.0 per the year progresses will be dependent upon assess cent area over the four quarters of 1983, fractionally ment of, and the predictability of, its behavior higher than the Administration forecast. Nearly all relative to other economic measures, and the range expect the GNP deflator to rise less rapidly than the may subsequently be narrowed. Over the year, 5.6 percent projected by the Administration. Projec growth in the lower part of the range would be ap- tions of nominal growth are mostly in the 8 to 9 per cent 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 pro- 19 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis propriate if velocity rises ·strongly, as has usually ''Premium on Judgment'' been the case during recoveries. An outcome near I appreciate the complexity-for the Federal Reserve the upper end would be appropriate only if velocity and for those observing our operations-of weighing does not rebound sharply from the declines last year, performance with respect to a number of monetary and tends to stabilize close to current levels. Only and credit targets, of taking account of institutional modest allowance has been made for the new '' Super change, and of assessing the possibility of shifts in NOW" accounts drawing funds into Ml from other relationships established earlier in the postwar sources, and the target would clearly have to be period-a possibility that can only be known with reassessed should the Depository Institutions certainty long after the event. But we also can sense Deregulation Committee permit depository institu something of the dangers of proceeding as if the tions to pay market rates of interest on business ac world in those respects had not changed. counts. I neither bewail nor applaud the circumstances In addition, the Committee set forth for the first that have put a greater premium on judgment and time its expectations with respect to growth of total less "automaticity" in our operations; it is simply a domestic nonfinancial debt, and felt that a range of fact of life. In making such judgments, the basic 8½ to 11 ½ percent would be appropriate. Data for point remains that, over time, the growth of money such a broad credit aggregate are not yet available and credit will need to be reduced to encourage a monthly, nor are the tools available to influence return to reasonable price stability. The targets set closely total flows of credit. While the credit range out are consistent with that intent. during this experimental period does not have the I understand-indeed to a degree, I share-the status of a ''target,'' the Committee does intend to longing of some to encompass the objectives for monitor developments with respect to credit closely monetary policy in a simple fixed operating rule. The for what assistance it can provide in judging ap trouble is, right now, in the world in which we live, I propriate responses to developments in the other ag know of no such simple rule that will also reliably gregates. The range would encompass growth of bring the results we want. credit roughly in line with nominal GNP in accor The basic rule we must observe is that the sustain dance with past trends; the upper part of the range ed forward progress of the economy is dependent on would allow for growth a bit faster than nominal a sense of price and financial stability-and without GNP in recognition of some analysis suggesting a it, we will undercut the growth we all want. That ob moderate increase in the ratio of debt to GNP may jective, as I have emphasized, will require that we develop. 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 ap propriate role for monetary policy in 1983. But, suc cess 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. FRB 3-65000-0283 20 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis

Federal Reserve (1983, February 15). Monetary Policy Report. Monetary Policy Reports, Federal Reserve. https://whenthefedspeaks.com/doc/monetary_policy_report_19830216

@misc{wtfs_monetary_policy_report_19830216,
  author = {Federal Reserve},
  title = {Monetary Policy Report},
  year = {1983},
  month = {Feb},
  howpublished = {Monetary Policy Reports, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/monetary_policy_report_19830216},
  note = {Retrieved via When the Fed Speaks corpus}
}