Speech

Excerpt from Informal Talk of Paul A. Volcker to Business Council At Hot Springs, Va. 10/9/82 As you know, yesterday we made a further reduction in the discount rate to 9-1/2 percent. As is usually the case, that change was, in an immediate sense, designed to maintain an appropriate alignment with short-term market rates. It was, of course, also taken against a background of continued sluggishnes in business activity, the exceptional recent strength of the dollar on the exchange markets, and indications of strong demand for liquidity in some markets. In the light of all the potentially confusing comment i the press in recent days, which seemed to be based on a combina of partial information and reportorial speculation, it may be desirable to reiterate what seems to me obvious? the small reduc in the discount rate ~~ as in the case of the four changes of similar magnitude in July and August — represents no change in the basic thrust of policy. In assessing economic and financial developments over recent months, I would also point out again what I have said on number of occasions before: there is growing evidence that the inflationary momentum has been broken. Indeed, with appropriat policies, the prospects appear good for continuing moderation c inflation in the months and years ahead. Continuing progress t restoring price stability is an essential part of building a sc base, not ju~£ for recovery but for sustaining expansion over i long period. Concern about inflation, and monetary discipline is not something we can turn on and off; it will be a continui priority concern of policy. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -2- What does inevitably change is the financial and business environment in which we operate. Unfortunately from the standpoint of reporting and communication, the continuing thrust of monetary policy cannot be adequately measured by any single or simple symbol. Headlines can be misleading. I hope we have all learned that the level or direction of interest rates is not, by itself, a reliable test of "ease" or "restraint" — it all depends upon the circumstances. Lower interest rates in an economy in recession are not unusual, and are consistent with the need for recovery. But lower interest rates do not in themselves indicate a change in basic policy approach. Over longer periods of time, achieving and maintaining the lower level of interest rates we would all like to see must, in a sense, be a reward for success in dealing with inflation; artificially forcing the process would in the end be counter- productive. What is needed is market conviction that the funda- mentals are consistent with lower interest rates, and I believe that is what we have been seeing for some months. The emphasis on monetary and credit aggregates in con- ducting and interpreting policy during recent years is, of cours< useful in part because of the unreliability of interest rate mea in gauging the necessary degree of restraint. We express policy in terms of broad targets for the various definitions of money on the basic thesis that, over time, the inflationary process ic related to excet^ive growth in money and credit. But you have also heard me repeatedly express caution about the validity of any single measure, or even all the measures in the short run. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis We have to be alert to the possibility that relationships may be disturbed by technological or regulatory changes in banking, or more broadly by shifts in liquidity preferences and velocity. We face over the next few months, not just the possibilJ but the virtual certainty of distortions -- distortions growing out of legislation and regulation — in the Ml number that is so widely followed in the markets. Right now, and over the next fe\ weeks, some $31 billion of "All Savers Certificates11 are maturinc and in large part will not be rolled over. As those funds move to other investments, some amount will temporarily pass through checking accounts, or be "parked" in those accounts for a time awaiting new investment decisions. We know Ml will be affected, but we simply have no way of measuring the degree of that shifti: And, just as that process is expected to unwind over the next mo: or so, the new "money market fund-type11 deposit account for bank; and thrifts will be introduced. Sizable transfers of funds into those accounts, which will have considerable checkable and trans actions capabilities, are anticipated, including shifts from regular checking and NOW accounts. The result will probably be to depress Ml growth for a while — assuming the new accounts aj not included in Ml. But again we have no way of anticipating tl magnitude, or even the direction of impact should the new accou: be tied to existing NOW accounts. Both the "ups" and "downs" i Ml reflecting these regulatory changes will be artificial and virtually meaningless in gauging underlying trends in "money" a liquidity. The potential problems have been common knowledge i market circles. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis •4- Zn the circumstances, Z do not believe that, in actual implementation of monetary policy, we have any alternative but to attach much less than usual weight to movements in Ml, over the period immediately ahead. We will, of course, analyze the d carefully to assist us in assessing underlying trends, but it is likely to take some months before new relationships can be judge with any degree of reliability in a world of radically new depos instruments with transactions capability. Fortunately, while the M2 and M3 aggregates may also be affected by the new deposit instruments, the impact should be relatively much less. Those aggregates are not only much larger but most of the shifts among financial instruments are expected to take place within those large aggregates. For instance, shif by individuals among "All Savers Certificates,99 checking account money market certificates, money market mutual funds, and the nc account would all leave M2 unaffected because they are all count within that aggregate. If the shifts are into (or out of) mark* instruments, such as tax-exempt bonds or Treasury bills, the to1 would be affected, but probably to a limited degree. The fact that, for the time being, underlying monetary growth and reserve provision cannot sensibly be gauged by direc observing movements in Ml ~~ up or down — is a technical fact life; it has no broader policy significance. It is true that for some time (before the new distort: that will be induced by legislation and regulation) the varioui monetary aggregates have in general been somewhat above the gr Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis paths targeted for the year. I would also point out, though, that indications suggest an appreciable recent slowing in growth of both M2 and M3, and it so happens •• perhaps fortuitously •*- that last week's Ml figure is very close to target. That is par of the setting of the discount rate change. You may recall that, when reiterating our annual target in July, I emphasized that "growth somewhat above the targeted ranges would be tolerated for a time in circumstances in which it appeared that precautionary or liquidity motivations, during a period of economic uncertainty and turbulence, were leading to stronger than anticipated demands for money. We will look to a variety of factors in reaching that judgment, including such technical factors as the behavior of different components in the money supply, the growth of credit, the behavior of banking and financial markets, and more broadly, the behavior of velocity and interest rates." I believe reasoned assessment of recent developments in the light of those factors does suggec that preferences for liquidity have generally been relatively strong, reflected in part in some abnormal pressures in parts o; private credit markets. In that light, the fact that some of the aggregates have tended to run somewhat above their target ranges has been fully acceptable to the Federal Open Market Committee. I believe I can speak for all members of the Committee in saying that those judgments have been r *ched, and will coni to be reached, in full recognition of the need to maintain the heartening progress toward price stability. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Paul A. Volcker (1982, October 8). Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/speech_19821009_volcker

@misc{wtfs_speech_19821009_volcker,
  author = {Paul A. Volcker},
  title = {Speech},
  year = {1982},
  month = {Oct},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/speech_19821009_volcker},
  note = {Retrieved via When the Fed Speaks corpus}
}