The Fed's inflation fight goes on, Volcker vows
Paul A. Volcker told an anecdote on himself Tuesday with a point. He climbed into his car and found his chauffeur reading a doomsday-type book. The title was ''How to Make Inflation Pay for You.''
Now, Mr. Volcker, the Federal Reserve Board chairman, has dedicated his time since 1979 as head of the Fed to fighting inflation, and with great success. So, he told his audience jokingly at the annual meeting of the New England Council here, he was debating whether ''to bring him up on charges.'' He asked the chauffeur why he was reading this book and was told, ''I was in a bookstore and saw it marked down from $10.95 to $1.98.'' That brought a laugh.
More recently, he noted, a friend told him of a book entitled ''How to Profit From Disinflation.'' That, Volcker suggested, may be going at a premium in Boston bookstores.
The fact is, the nation's chief economic anguish has shifted from inflation to disinflation, or recession. The Fed, too, decided to move somewhat toward easier money last month. Ever since, there has been something of a debate among money market experts as to whether ''monetarism'' is dead. Monetarism is a school of economic thinking which maintains that better control of the nation's money supply would produce a more modestly fluctuating business cycle and trim inflation.
Well, one of the major points of Volcker's talk here was that his version of monetarism, which he at one time called ''pragmatic monetarism,'' is far from dead.
''Concern about inflation is not something we can afford to turn on or off - not if we want to see that progress continue and price stability restored,'' he said. ''That concern will, in turn, require continued vigilance in keeping appropriate restraint on the growth of money and credit. . . .''
He acknowledged that the policymaking Federal Open Market Committee was willing for a time to tolerate monetary expansion at a somewhat higher annual rate than targeted. People, he explained, had ''exceptionally strong liquidity demands'' at present. In other words, because of recession worries, they were holding more money as cash or in other quickly accessible forms. This is not being spent. So it puts no inflationary pressure on prices.
That trend is shown in a decline in the ''velocity,'' or turnover, of money, rather than the upward trend that has been the pattern throughout the postwar years.
Moreover, the lanky central banker went on, rapid institutional and economic changes have made one measure of money, known as M-1, not so reliable at this time. Thus the Fed ''must be wary of highly simplified rules in the conduct of policy. That is why we have always looked to a variety of monetary and credit 'targets,' and retained elements of flexibility and judgment in pursuing those targets.''
This was a poke at orthodox monetarists who advocate that the Federal Reserve set an M-1 target and stick to it rigidly. The Fed has indicated it will be putting more emphasis on M-2 and M-3, larger monetary aggregates that include elements of savings and currency and checking accounts.
''What we do not have the flexibility to do is to abandon broad guidelines for monetary and credit growth as a means of judging policy over a period of time,'' Mr. Volcker said. ''The danger of creating excess liquidity is not so much immediate, when there is so much surplus capacity and unemployment, but rather when the economy begins to regain forward momentum.''
Citibank economists, who are monetarists, comment: ''. . . money supply growth will continue to play a crucial role in economic policy, proving once again that it's easier to write premature epitaphs for monetarism than it is to kill it.''
The reason it is so hard to clobber monetarism is the continued scientific evidence the growth of the money supply does roughly determine growth in output six to nine months out, and inflation two years or so in the future.
Bank of Montreal economists suggest: ''US monetary authorities might be well advised in the current deep recessionary period to allow some easing in monetary targets at least on a temporary basis, thus permitting the economy to pick up without prejudicing price performance.''
Paul Volcker's presence attracted a large crowd of businessmen to the New England Council's dinner. There may be debates over which monetary aggregate to follow and whether growth should be 1 or 2 percent, more or less. There may be concern as to whether the Fed's discount rate - the interest it charges commercial banks - will go down again or not. But there is no doubt that these businessmen and the nation now recognize the importance of monetary policy and money to the nation's economic future.