The MacNeil/Lehrer Report; Interview with Paul Volcker

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ROBERT MacNEIL [voice-over]: The man in charge of the tight-money policy - - Federal Reserve Board Chairman Paul Volcker -- talks about soaring interest rates and the sagging economy. "

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MacNEIL: Good evening. The latest round of economic statistics out of Washington shows a surprising further weakness of the nation`s economy during the April to June quarter. Yesterday the Commerce Department announced that the Gross National Product declined at an annual rate of 2.4 percent, adjusted for inflation. That`s half a percentage point greater drop than preliminary figures had shown. Corporate profits were also down. 11.3 percent in the second quarter, confirming the sag in the economy. The culprit, all the economists agree, are high interest rates that have been weighing down the economy all year. The and-inflationary campaign of the Federal Reserve Board, headed by Paul Volcker, combined with the steady demand for credit, have kept rates at a record level. Now everyone wants to know when those rates will come down. Tonight. Chairman Volcker gives his first interview since the Reagan economic program was enacted. The interview was recorded yesterday. The Chairman was with Jim Lehrer in Washington. Jim?

JIM LEHRER: Chairman Volcker, welcome. Inflation seems to be declining, but interest rates remain high. Why is that, sir?

Chairman PAUL VOLCKER: Well, we`ve seen some better news on inflation and it`s, I think, very hopeful for the future. But it`s still early in this game. And that`s come against the background, I think, of the American people having seen inflation rise for a decade or more, and they have a certain skepticism, I suppose, as to how successful the programs will be to bring inflation down. And that`s one factor: they want to be shown. They`re a little bit from Missouri at this point. And I think it`s too much to expect that with the first, still modest, signs of a change in the inflation trend, the psychology and the markets are going to be revolutionized overnight. We`d like to see that happen as soon as possible, but nobody`s going to predict precisely when it`s going to happen. Meanwhile, you`ve got very heavy credit demands continuing in the economy, not least, of course, from the U.S. government itself that is pre-empting and absorbing a good deal of the supply of savings that is available.

LEHRER: What do you see as the connection between high interest rates and the policy the Federal Reserve is following under your leadership?

Chairman VOLCKER: Well, we`re following, as you know, a policy of restraining the growth of money and credit. We think that`s absolutely fundamental to dealing with the inflation problem, and we`re going to continue to do that. Now, in the short run, when you still-- the economy is still moving at an inflated pace, despite some signs of improvement that we`re seeing, the economy by and large has been growing. Now, it didn`t grow in the last quarter. There was a small decline. But generally, it`s remained at a pretty high level, and this generates a lot of credit demands. In the short run the impact of those demands, with a lot of expectations of inflation continuing remaining, impinging upon the limited supply of credit, you see the results in the market. But let me not only suggest, let me say as strongly as I can that the way you`re going get those interest rates down is by persisting in policies that will indeed continue to bring the inflation rate down. And at some point this dam is going to break and the psychology is going to change, and the amount of credit demands will not be so inflated by inflation. And that is the only way we can really get interest rates down and expect them to stay down. when, of course, it`s important that they stay down when they-- when they go down.

MacNEIL: Mr. Chairman, looking at the pain that the high interest rates are causing some people in some parts of the economy, have you and your fellow Federal Reserve Board members had any second thoughts about your policy?

Chairman VOLCKER: No, I don`t think, at all. There is some difficulty, some pain, out there in sectors of the economy. It`s very well-known in the housing area and the automobile area. Small businesses sometimes are particularly vulnerable. Other sectors of the economy-- one of the problems we have in this connection. I might just mention, problem in a sense, is that other areas of the economy are not very much affected, really, and have been doing pretty well. So the brunt of restraint does fall on some limited sectors. And we are very conscious of that, wish it were otherwise. But you know, you can`t deal with that problem by simply saying we`re going to let inflation go ahead. And we`re trying to combat the inflation. If the inflation goes ahead, and if we try to deal with the problem by pumping up the supply of money and credit, we are almost guaranteeing a continuation of inflation and a recurrence and continuation of this kind of pain and agony indefinitely.

MacNEIL: Are things going-- from your perspective in the Fed. are they going according to plan?

Chairman VOLCKER: Well, we have an economy where. I think, nobody can lay out a plan month-by-month or quarter-to-quarter and expect or predict, with that degree of accuracy, what`s going to happen. But if I can put that in a little perspective. I don`t think anybody-- I don`t know of any economic forecast, really, that six, nine months ago suggested that the inflation rate would be as low now as it is. Now, there may be temporary factors in that- Indeed, those same forecasts, if you look at the overall level of economic activity now, it`s-- it`s better than those forecasters suggested. That doesn`t say that there are not these areas of the economy that have very, very real problems. But in that sense, perhaps things are going as fast on the inflation front as any realistic expectation could have suggested.

LEHRER: What about--? what about interest rates. Did you-- when you and the Fed adopted this policy of tightening the money supply, did you expect interest rules to go as high as they are now?

Chairman VOLCKER: Well, I don`t know what date you`re going back to. All the way back to October of `79? I think my answer to that would be no. but we went through some episodes of high interest rates in 1980, as you well recall.

LEHRER: Then they went down and then now they`re back up.

Chairman VOLCKER: And then they came up. Well, they went down quite a lot before for a very brief period of time. Now they`re back up. You know, it`s not a particular level of rates that I would have forecast. I don`t think anybody is terribly accurate at projecting interest rates these days. It is the interest rate that the market produces. We`re not setting the interest rule, which is the essence of--

LEHRER: A lot of people believe you are.

Chairman VOLCKER: AH right. That is, without question--

LEHRER: I mean, you`re the villain; anybody who`s mad about interest rates says Paul Volcker--

Chairman VOLCKER: There`s no question, and I always hear the question, your interest rate policy. Now. it`s not an interest rate policy, ft is a policy of restraining growth in money and credit. And there is no question about that. And as we discussed earlier, that restraint, combined with very heavy credit demands, puts pressures on credit markets. But you might think it`s a distinction without a difference, but I think it`s important to put the focus on what our real purpose is. which is to restrain the growth in credit.

LEHRER: How long -- and I know you don`t want to forecast, and forecasting is a risky business -- but can you give us any feel at all for how long you expect -- for whatever reasons, whatever combination of reasons -- you expect these interest rates to remain as high as they are?

Chairman VOLCKER: Well, the interest rates will come down and stay down, as I suggested earlier, when there is clear-cut and convincing evidence that the inflation rate is coming down and staying down.

LEHRER: Well, when do you think that might occur?

Chairman VOLCKER: It`s happened in early signs perhaps a little more rapidly than I would have thought. Now, there were some temporary factors in this situation in the first six months of this year. I think, you know, realistically, the tale`s going to be told next year. Among other things, there are a lot of-- a big cycle of wage agreements coming along. I hope they reflect better expectations about inflation, and we see a reduced rate of cost increase, and that means an economy with two-thirds of the cost wages -- a lower rate of wage increase -- and we will see along with that, and make everybody better off. obviously, a lower rate of inflation next year.

LEHRER: And you might then-- the Federal Reserve, at least, might then be tempted to maybe-- I keep wanting to say "turn the screws"-- release the screws a little bit. Is that what you`re saying?

Chairman VOLCKER: Well, let me-- no. Let me put it differently. We are going to continue -- because I think it`s going to be part of this process of keeping the supply of money and credit down -- but as the inflation rate goes down, the demands for money and credit will go down, including the inflationary demands for money and credit. That will relieve the pressures on the market. But let me just emphasize there is one terribly important ingredient in this, and that`s what`s happening to the federal budget itself, and what`s happening to the federal deficit. And I think it`s been clear from everything that`s been said; it`s been clear in some recent newspaper reports, that the administration has got a real job ahead of it in terms of cutting spending further. They`ve already, obviously, made an aggressive attack on that, but a lot more remains to be done to get that budget in shape that indeed pre-empts a lot of the available supply of money and credit in the economy.

MacNEIL: Do you-- we`ll come back to the budget in a moment, but just on the question of whether the Fed should relax. What was your reaction when Treasury Secretary Reagan recently suggested he`d like to see some easing on monetary policy because he`s worried about recession?

Chairman VOLCKER: Well. I--? I`m not sure what interpretation should be given to that particular story. I-- let me put it in my perspective, because I don`t think in any sense he was being critical. The money supply, and particularly the particular measure that he referred to. I think, of M l. has been rising at a very slow rate this year for a variety of reasons. Our own targets suggest and indicate the growth during the remainder of the year should be somewhat larger than it was up until now. And--

MacNEIL: M-l is the money in checking accounts and cash in use.

Chairman VOLCKER: And currency in your pocket.

MacNEIL: Currency in your pocket.

Chairman VOLCKER: And I had announced a week or so before that statement our targets for the year --? reiterated the targets for the year-- that imply, entirely consistently with our basic policy, that you would see somewhat more rapid growth in that particular measure in the second half of the year, consistent with the target, which we said we would aim at the low side of. Now, other measures of money have been moving in a somewhat divergent direction, and we fully recognize that they`ve been a bit on the high side, so we keep-- we`ve got-- God gave us two eyes, I guess, to look at more than one target, and we try to keep both of them in perspective.

MacNEIL: Well, will that mean that you will attempt to limit the other kind of money growth, which presumably is in credit cards and other forms of borrowing? Is that the area you`re talking about?

Chairman VOLCKER: Well, in effect, we look at the other side of the balance sheet: what`s in savings deposits, money market certificates, savings certificates, money market funds, and so forth. Yes, we do look at that. It`s-- there`s an overlap between checking account kind of money and some of this other kind of money these days, and in fact, change has been so rapid in this area -- the growth of the money market funds, which are partly used as checking accounts -- you have to make judgments as you go along how these figures are being affected by these new institutions. But we`ll look at both of them and we will arrive at a judgment as to what`s appropriate, taking account of the movements in all these measures.

MacNEIL: But your judgment already -- and independently of Secretary Regan`s remarks ?-- is that in the M-1 area there is room for a faster rate of growth for the remainder of this year. Is that correct?

Chairman VOLCKER: Yes. But. you know, I`d have to put a footnote on that. It does depend in part on what`s happening to the other measures of money because we have to evaluate it. But it would appear that that`s the case, yes.

MacNEIL: What do you-- are you getting different signals now from the administration?

Chairman VOLCKER: No. I don`t have any sense of getting different signals. I`m not sure we`re in the position of receiving signals, if I may say so. In the end we have to make our judgments about these things.

MacNEIL: Do you perceive the economy, as Murray Weidenbaum speculated recently, heading into the second recession in a couple of years, and if it is. does that worry you?

Chairman VOLCKER: Well, recessions always worry you. I think our main problem and objective has been inflation. And we`re going to have less recessions and more growth over a period of time if we deal with that problem. If we forget about that underlying problem, that priority, if you will, in my judgment we`re going to be in more trouble -- I`m not talking about the next quarter -- but more trouble over the coming quarters and years than if we retreat or move into some kind of stop-and-go policy with every variance in the short-term business breeze. Now. you know, you talk about the economy declining. We had a small decline in the second quarter, based upon figures subject to revision, and the latest news has been a little stronger again -- much to the surprise of people who keep being surprised about trying to project next month`s business picture.

LEHRER: What do you say to these congressmen-- you`ve been drawing some heat from some congressmen about the unfairness of how interest rates affect people -- that the large corporations-- witness what happened in the Conoco thing: everybody and his brother could go out and borrow billions of dollars and yet small businesses are having their problems and ordinary citizens are trying to buy cars and houses and all that sort of thing-- what do you say to them?

Chairman VOLCKER: Well, there is no question that those sectors of the economy more dependent upon credit get hit harder. And that`s been the recurrent fact and it`s true now.

LEHRER: But isn`t everybody in some way affected by credit?

Chairman VOLCKER: Well, everybody`s in some way affected by credit, but it`s a matter of degree. And you look at the energy business, which of course is expanding for very obvious reasons. The cost of money is going to make much less difference to them than it makes to the home buyer. But I think the answer to your question is, that is not a problem. It`s a very serious problem, but it is not a problem that can be dealt with through the general tools of monetary policy. It can`t be dealt with because we don`t have those kinds of tools to make that selective judgment. I think in fact they`re impossible to make. We can`t do it by just easing up and inflating the whole economy because then we`d be back in a worse problem. So you`ve got to look to other instruments. The burden on monetary policy is very strong now. We are being looked to as the bulwark against inflation.

LEHRER: "We", meaning the Fed.

Chairman VOLCKER: Meaning the Federal Reserve. I don`t complain about that, but you have to recognize the implications. The more help we can get on the budgetary side in particular --- get the government out of the way as much as possible in terms of their financing demands, then these other people that are at the end of the queue, so to speak, will be better off. If we can do something about that government deficit -- it takes time -- but keeping working on that, and moving in that direction. I think, is the real answer to the problem you posed.

LEHRER: Ed Meese. the president`s chief aide, said the other day that if President Reagan was confronted with a choice between a weak defense and an unbalanced budget, he would go for an unbalanced budget. Do you think that would be wise?

Chairman VOLCKER: Well. look. I`m not going to make that kind of choice. It involves questions of defense policy -- security policy -- which have to be blended with all these other policies. From my point of view, all I can say, and I think from the market`s point of view -- from the point of view of the people that you were referring to -- the faster progress can be made in reducing the budgetary problem, the better off we will be from that point of view. Now. there are other things that the president has to consider, too. But from that perspective, I think the analysis is very straightforward.

LEHRER: Robin?

MacNEIL: The administration was pretty successful in getting the budget cuts it got through Congress. What kind-- do you think there`s political support for a lot more budget cutting, from your reading?

Chairman VOLCKER: Well, I don`t pretend that I have great political expertise. But I would hope and really expect that is the case. Seems to me to a degree that was implicit, and even explicit, in the tax reduction program that was just enacted with very broad support. And I think the mood of the country has certainly changed, as reflected in his success in getting the first stage of the spending cuts through. So I-- yes, I am indeed hopeful that that momentum will continue. I don`t underestimate the difficulties.

MacNEIL: Do you agree with The New York Times that something like S70 billion is what`s needed to come out the next time around?

Chairman VOLCKER: Well, you say "next time around." I don`t have a precise figure in mind, but I saw some figures in that magnitude in the paper this morning, presumably coming from administration sources, talking about over a couple of years. So in terms of your next round, I don`t know, but that doesn`t seem to be out of line to me. looking at a little longer perspective than one year. It`s beyond what`s necessary or achievable in the space of the next 12 months, certainly.

MacNEIL: Does the size and shape of the tax cut that`s been enacted -- one has seen estimates that over five years, if continued, that the loss of revenue would be something like $750 billion and that effect of stimulating the economy -- does that concern you?

Chairman VOLCKER: It concerns me. would concern me greatly without the expenditure program -- expenditure restraint program -- that I think is the complement. Now. when you use a figure that big, you`re talking about the cumulative loss in a number of years, and you have a cumulative savings from the expenditure programs, too. If they save $35 billion in the first year, the implication is that that will continue and be enlarged in later years. But your answer is yes, it would concern me without the spending cuts, which is why I put so much emphasis on the spending cuts.

MacNEIL: Does the tax cut so far not put more pressure on you in the Fed to fight inflation yourselves?

Chairman VOLCKER: Well, again, without the spending cuts. Right now. of course, the tax cut is not effective. It may be affecting expectations; indeed, I think the market, to some extent has been affected by a concern about future budget deficits. That concern again can only be answered really effectively by the spending program. But the actual tax cut doesn`t take effect until October except for some business measures, and that`s a relatively small step. The big step comes in the middle of next year.

LEHRER: The Federal Reserve, you mentioned a moment ago is-- you didn`t put it in those words, but the Federal Reserve is independent from the administration. But there must be some kind of coordination. What is it? What`s the nature of that?

Chairman VOLCKER: Well. I think the coordination takes place through informal conversation -- consultation, in effect. We--I, in particular, try to keep them informed of what our policies are and what we see as the implications of those policies, not just in the monetary policy area, but elsewhere, and of course we look to them to do the same thing in the other direction.

LEHRER: For instance, you answered a question a moment ago Robin asked about Secretary Regan`s comments. It`s clear that you already knew-- you knew what Secretary Regan had said. Do you ever once in a while pick up a story, or read a story in some newspaper or magazine or whatever, and say. maybe Regan or maybe the president, or maybe somebody is trying to send me a signal?

Chairman VOLCKER: Oh. I think I seldom look at it just that way. You sometimes look them up with great skepticism and we`ve all had experiences, and you wonder whether that story accurately reflects the tone or manner or point they were trying to make. I have a little bit that question about the story about Secretary Regan. The other question may arise from time to time.

LEHRER: What you were reading, bused on .ill the informal sources that all the folks have there at the Federal Reserve -- the people who work for you -- plus what you`ve read in the paper, or any other sources you have, what do you think the administration would like the Fed to do?

Chairman VOLCKER: Oh, I don`t think-- you don`t have to rely upon all those kind of mysterious communications for that. I think that they have said quite openly from the time they came into office that they wanted to see restraint on the growth of money and credit, and they wanted to see that progressively reduced over a period of time, and often in words that were very parallel to words that we have been using. So I don`t think there`s any basic disagreement at all in the sense of that kind of objective. And I don`t detect any now. or didn`t detect any then, and in the general contour of the necessity of working in that direction, and general speed, for that matter.

LEHRER: At the Ottawa summit, as you know, the Europeans came with some complaints to President Reagan about our interest rates, our high interest rates, and what they were doing to their economies, and the president told them, "Well, hang with us; they`re going to go down. Everything`s going to be hunky-dory." Do you think the president spoke the truth when he said that? I mean, is that an accurate reflection of what`s happening?

Chairman VOLCKER: Well. I certainly hope and expect so because that is my expectation, too. You can ask all sorts of questions about the liming and how long and how accurately one can predict the timing in the short run. But that`s the whole object of our policy, in a sense, in connection with dealing with inflation. Let me say they are very real problems posed for foreign countries by the interconnection of economies. They used to complain when they thought our policies were too easy -- created certain difficulties for them and their perceptions. Now they`ve got difficulties into he opposite direction. What I say to them, with a great deal of understanding, I might say, from my foreign central banking colleagues, that I think it`s in the interests of all of us that we do get a handle on this inflation problem -- that that is the priority. I`m sympathetic to their problems. But they`re-- it would not do anybody any good to, in any basic way. depart from the main outlines of our policy. You might ease the problem for a month or two. and then make it worse the following quarter. And that`s not in anybody`s interest.

MacNEIL: Some well-known economists, like Henry Kauffman. have said it isn`t only a question of when interest rates will go down, but how much higher they`re likely to go. Is there a chance that interest rates could go even higher?

Chairman VOLCKER: Well. I don`t think you`re going to force me into a prediction by indirection. There are all kinds of possibilities in this world. But I think the events-- they`re plenty high now, as you suggested earlier. I think the economy has shown some signs of slowing down recently, as was suggested. So I think-- and the inflation rate, fundamentally, has shown some signs of slowing down. I think the trends are consistent with the next big move being down.

MacNEIL: I see. If it doesn`t all work, and the inflation rate doesn`t go down, and there should be a recession, do you consider yourself in danger of being made a fall guy?

Chairman VOLCKER: Oh, you know, anybody who is involved in a central bank realizes that he is in a somewhat exposed position in that connection. But that is why, I think, Congress in its wisdom provided a certain degree of insulation and independence for - the central bank. I think we have to make a judgment about what the priorities are. I think those priorities are shared not only by the administration, but my sense is. fundamentally, by the American people. That involves hard policies, in a sense, or hard realities while we go through this transition period. It`s only justified by the conviction in the end the economy`s going to be better off, and the individuals in the economy are going to be better off.

MacNEIL: Well, is-- the impression is going around. I guess, from The administration that things are beginning to be in place for a real recovery in the economy, you know -- a stronger economy, lower tax rates, a balanced budget, looking ahead to 1984--

MacNEIL: Do you think that alt the pieces are in place yet for that kind of recovery?

Chairman VOLCKER: I don`t think the spending piece is entirely in place. As we`ve discussed earlier, I think that is-- it`s in the program, so to speak, but it isn`t locked into action. I think that`s the big gap. So with that reservation, I think, in a sense things are in place. But don`t expect that anybody can give a timetable from month-to-month or quarter-to-quarter how this works. There is a big American public out there; there are enormous financial markets of people forming their own opinions every day. What`s going on in interest rates, what`s going on in the economy is reflecting those collective judgments.

MacNEIL: Well, Mr. Chairman, we have to leave it there. That`s our time for this evening. Thank you very much for joining us. Good night, Jim.

LEHRER: Good night, Robin.

MacNEIL: That`s all for tonight. We will be back tomorrow night. I`m Robert MacNeil. Good night.