Federal Reserve Chairman Paul Volcker, resisting pressure to ease money policy, yesterday predicted to Congress that interest rates will fall from their present high levels--although he would not say when or by how much--and said there are signs that the recession is bottoming out.
Faced with hostile questioning from congressmen anxious about today's high interest rates and deep recession, Volcker defended the Federal Reserve's tight money policy and its present degree of independence from the administration and Congress. He told the Joint Economic Committee that it would be counterproductive for the Fed to ease money in an attempt to bring down interest rates.
Tight money can be a factor keeping short-term rates high, the Fed chairman acknowledged. But he said "it would be shortsighted for the Federal Reserve to abandon a strong sense of discipline in monetary policy in an attempt to bring down interest rates." This could exacerbate market fears of future inflation and undo some of the benefits of the recent decline in inflation, he said.
He predicted that, if Congress acts to reduce huge projected deficits and monetary policy remains on course, interest rates will start to fall in response to the slowdown in inflation from present "extraordinarily high" levels. "I don't see any place for those interest rates to go but down," Volcker said.
He would not say when he thinks that this might happen, however.
"Are you going to keep grinding the economy down?" Sen. Edward Kennedy (D-Mass.) asked as he attacked what he called the Fed's "scorched-earth policy." Kennedy said that President Reagan should take responsibility for high interest rates and the recession because he supports the Fed's money policy, and that the Fed should come under the administration's direct control.
Volcker said that a consumer-led recovery is likely some time later this year. He described this as "not an ideal kind of expansion," saying "I think that you can have an unsatisfactory kind of recovery" that does not include a pickup in business investment.
However, the consumer-led upturn could be followed in 1983 and 1984 by a healthier recovery based on an increase in investment, Volcker said. He added that, because interest rates are so high, he believes that they could fall throughout a recovery and thus help to stimulate more investment.
He also said that rates could fall in coming months despite the huge borrowing needs of the Treasury for the rest of the year.
Some members of Congress have called for an easing of money policy as a quid pro quo for congressional action to lower the budget deficit. However, Volcker has resisted any such deal. While welcoming the budget resolutions passed by the House and Senate, he said "I think we're some distance" from having a lower budget in place.
"We are all aware of how much remains to be done, not only to reach agreement on a budget resolution for fiscal 1983, but to take the action necessary to implement such a resolution in appropriation and revenue legislation," the Federal Reserve chairman said.
He held out the hope that today's painful recession may by followed by a "much more satisfactory economic performance."