Federal Reserve Board chairman Paul A. Volcker said yesterday the Fed will keep credit tight "indefinitely," but he predicted interest rates could decline within a few months if loan demand in the economy begins to taper off.
Volcker also warned against any major changes in fiscal policy, either to slash spending or cut taxes. He said attempting to balance the federal budget next year would be too drastic a shift in the current economic situation.
Volcker made his comments at a hearing of the Senate Banking Committee -- his first appearance before Congress since the Fed announced its dramatic new credit-tightening moves October 6.
Although committee Chairman William Proxmire (D-Wis.) generally endorsed the Fed's actions as "sound and correct," several senators expressed fears that the tightening might crimp homebuyers and consumers.
Sen. Donald Stewart (D-Ala.) complained that housing officials had told him the Fed's latest action was "creating enormous difficulities for them." And Sen. Paul Sarbanes (D-MD.) raise fears that small businessmen would be squeezed.
Volcker consistently defended the Fed's action as likely to be less painful over the long run than allowing inflation pressures to intensify, and vowed the board was determined to "stay on the course. . . indefinitely."
At the same time, however, he tried repeatedly to make the distinction between a continued tight credit policy and the actual level of interest rates, which he said could begin to decline soon once the economy begins to slow.
"Nobody in the Federal Reserve likes high interest rates," Volcker told the panel. He said once loan demand abates, interest rates should decline "automatically -- and the sooner it comes, the happier I'll be."
The exchange came as, separately, Volcker sent letters to officers of the nation's largest banks yesterday asking them to cooperate in spirit as well as letter with the new credit regulations and not juggle accunts to get around the rules.
Volcker's defense of the Fed's October 6 actions was that they were all but unavoidable in the face of speculation in the markets.