The battle against inflation is "just entering the crucial stages" and will be won or lost mainly in major labor agreements next year and in continued budget-cutting efforts, Federal Reserve Board Chairman Paul A. Volcker said yesterday.
In a speech at the National Press Club, Volcker said in essence that the Fed is doing its part by staying firm in its tight monetary policy and that continued progress now is up to aggressive budget-cutters and restrained contract negotiators.
"As things stand, it is a fair point that monetary policy carries too much of the burden -- that the consequence is more strain and pressure on financial markets and credit-dependent sectors of the economy than is desirable," he said.
He vowed that the Fed will not let up on its efforts to curb the growth of money and credit in the economy, and, when asked what it would take for him to ease off on tight monetary policy, replied, "Impeachment?" He said that policy is not inconsistent with a drop in interest rates, however, if other anti-inflation efforts are successful.
On holding down labor costs, Volcker said that "1982 will be a crucial period in this respect." Unlike this year, 1982 "is a major bargaining year for pattern-setting industries, beginning with refinery workers and truckers and running through the auto industry in the fall.
"There is no escape from reality, paradoxical as it may appear, that the prospects for sustained economic growth and increases in real wages for all Americans will improve as we achieve greater productivity and moderation in the demand for nominal wage increases."
Failure to enact the president's plan for budget cuts will lead to "disappointed and skeptical financial markets," he added. "And when I say financial markets, I guess, like Pogo, I mean all of us."
To have a major impact, the president's latest package of budget cuts also will have to be perceived as being part of a continuing commitment to spending restraint, Volcker said.
He expressed "real optimism" for 1982, saying the country's inflation rate by then should be "comfortably below double-digit figures."
He placed much of the burden for future improvement on business, however, which he said so far has not made "visible and significant progress toward wage deceleration."