Volcker sees many signposts -- and some barriers -- to recovery
The calendar may say winter, but spring has come for the American economy, according to Federal Reserve Board chairman Paul Volcker. ''I think we can see some crocuses blooming,'' he told the Congressional Joint Economic Committee Thursday.
In Mr. Volcker's view, budding areas of the US economy include home construction and big-ticket consumer purchases like major home appliances. The productivity of US workers is rising and likely to continue so. And at least for the present, the outlook for inflation is positive, he argues.
But the Fed chairman was quick to note that some areas of the economy have not felt the thaw of recovery and are unlikely to bloom in the near future: Unemployment remains extraordinarily high, and business investment in new plants and equipment is likely to remain depressed, as are US exports.
Nevertheless, ''the stage appears set for sustainable recovery in business activity, bringing with it the higher levels of employment and real income that we all desire,'' Volcker says.
In its role of managing the money supply and affecting interest rates, the Federal Reserve System plays a key role in determining the path of the nation's economy.
The Fed has been strongly criticized by members of Congress for raising interest rates and pushing the nation into recession, thereby throwing millions of Americans into unemployment lines.
''I would reject the implication that we have a button to push in monetary policy to solve the [unemployment] problem,'' Volcker says. But he adds that ''over time, interest rates can come down.''
The Fed, however, has to be ''careful not to overdo it for fear of reigniting inflationary expectations,'' he says. ''Lingering concerns about inflation'' are a key reason why long-term interest rates, after adjustment for inflation, are still at historically high levels, he says.
And interest rates could rise once again if projected federal budget deficits are not brought under control, Volcker says. ''The bigger the deficit, the more pressure there will be on interest rates.''
Volcker estimates that more than half of the budget deficit for the current fiscal year can be attributed to depressed business conditions. ''These cyclically induced deficits are not my main concern - indeed they currently help support spendable income and buoy the economy,'' he says.
''Of great concern,'' he says, are projected budget deficits in the neighborhood of $200 billion for succeeding years. ''Little improvement, if any, in the budgetary position will develop under current law and policies, even with a strong and continuing recovery.''
The result would be ''a strong potential for a clash between the need to finance the deficit and the rising financial requirements for housing and business investment that is crucial to a healthy recovery.''
Volcker refused to comment on specific elements of the economic plans President Reagan outlined in his State of the Union address. But he says he was ''encouraged'' by the President's emphasis on reducing deficits. ''A certain skepticism is justified'' about whether it would be possible to balance the budget by the 1986-87 time period.
Federal deficits aren't the only potential stumbling blocks in the path of a sustained recovery. Because there has been virtually no growth in the economies of major foreign industrial nations, and due to economic decline in developing nations, ''there has been a substantial risk . . . of countries turning toward protectionism in an attempt to insulate their own industries. That approach would, of course, be self-defeating,'' says Volcker.
With some nations having trouble paying their debts, Volcker says the US should increase its support of the International Monetary Fund (IMF), which helps developing nations finance their debt.
''Timely action by the Congress is essential to assure that IMF resources are commensurate with possible needs,'' he says. ''Failure to strengthen the international financial system could only feed back adversely on our own prospects for growth.''