Federal Reserve Board Chairman Paul Volcker said today that Americans will have to become accustomed to record high interest rates over the next few months as the price of "coming to grips with inflation."
"In the short term, we're in a difficult situation, with or without" the program of new monetary restrictions announced late Saturday by the nation's central bank, Volcker told reporters. "We've got to get away from talking about what's good for the next two months . . . the long-term effects are clearly favorable."
Although Volcker declined to forecast when the latest interest rate spiral will end -- one initiated by the Federal Reserve itself in an attempt to halt inflation -- he emphasized repeatedly his view that by acting over the weekend, the Federal Reserve had assured that interest rates would fall sooner than what would have taken place otherwise.
If a strong inventory build-up by business in recent weeks continues for another two months, "the foreseeable results would be a much greater quicker downturn" for the whole economy, he added.
Earlier, in an address to the American Bankers Association annual convention here, Volcker said "restrictive monetary policies are never calculated to win popularity contests, yet there has been acceptance of the need for restraint even at rates of interest that are almost outside the range of our historical experience."
When money supply expansion "is clearly brought under control and expectations of inflation dissipate, interest rates will tend to decline, and our recent actions sould bring that day sooner, whatever the intitial impact on interest rates," he forecast.
As Volcker was speaking to a crowd of nearly 4,000 bankers and their spouses, major banks around the country were boosting their prime lending rates for top corporate customers to a record 14 1/2 percent. Some bankers in the audience predicted a prime rate of 16 percent before long, and there was some skepticism about how far down rates would go subsequently.
The bankers gave Volcker a warm reception but far less enthusiastic than those for Treasury Secretary G. William Miller and former secretary of state Henry Kissinger the previous day.
Volcker told reporters that the Federal Reserve did not undertake its new program without understanding that the initial impact would be higher rates. Such a development is necessary for what he called a "time of testing" for the American people -- a test of capacity to reach "coherent and intelligent policies" and to stick with them.
In his address and subsequent news conference, Volcker said:
He does not think the Federal Reserve has been placed in a "lonely position" in the fight to halt inflation. Chase Manhattan Bank President Willard Butcher told reporters here that Volcker, "while able and courageous, cannot do it alone." But the Fed chief said the Carter administration has made substantial progress in reducing deficits and spending, and he called the recent accord with organized labor a major step in a coordinated battle plan.
Housing activity has held up quite well to date with mortgage lending at levels that are high even with inflationary pressures. Over the next few months in this sector, "there are difficulties, there is pain for a period of time . . . but the thing that is worse is a continuing climb in thte rate of inflation."
If there is a cash squeeze at some financial institutions, such as savings and loan associaitons that finance most housing, "the Federal Reserve always is ready to look at a particular situation" in terms of providing assistance.