The Federal Reserve should not be forced to establish and report specific "objectives" for economic growth, unemployment and inflation because it could be both misleading and counterproductive, Fed Chairman Paul A. Volcker told Congress yesterday.
"I am concerned that attempts by the Federal Reserve to express 'objectives' in precise statistical terms year by year would encourage a false belief in the controllability--certainly by monetary policy alone--of an enormously complicated economy subject to a variety of strong forces, internal and external," Volcker told the House Banking, Finance and Urban Affairs Committee.
Nevertheless, Volcker said several times that he thought the issue being raised was an important one and that he would welcome an opportunity to discuss it with the committee.
Committee Chairman Fernand J. St Germain (D-R.I.) last week asked Volcker to provide such "objectives," in line with a provision of the House version of the 1984 budget resolution now before the Senate Budget Committee.
The issue sparked some sharp exchanges among committee members, particularly between St Germain and the ranking Republican, Chalmers P. Wylie of Ohio. Wylie argued that the budget resolution was not the proper vehicle for amending laws under the jurisdiction of the Banking Committee, declaring, "I guess I am even more jealous of the jurisdiction of this committee than the chairman."
St Germain shot back that Wylie had seemed much less concerned in 1981 when House Republicans and some conservative Democrats used an omnibus reconciliation bill, part of the budget process, largely to bypass regular committees to enact many of the Reagan administration's cuts in domestic spending programs.
The Federal Reserve now must make semiannual reports to the House and Senate banking committees on the state of the economy and its specific targets for growth of various measures of the money supply. In February, it also provided an estimate for the first time of a "central tendency" among the range of economic forecasts made by the 19 members of the Fed's policymaking group, the Federal Open Market Committee.
In an opening statement yesterday, St Germain told Volcker that "the time has come for the faceless mystics who function in absolute secrecy at the Fed to be informed of the fact that their research and advice have a crucial effect on the lives and future well-being of John and Jane Q. Citizen. Employment and unemployment, as well as inflation and GNP gross national product growth objectives, are too meaningful to be ignored in this new era of our economy."
And he added, "No one expects the Federal Reserve Board to hit its objectives with complete accuracy in all cases. We all understand that it is a complicated world, and that the best we can sometimes do is to take our best estimate of what will work. Mr. Chairman, we simply want to know what your best estimates are."
However, Volcker said the budget resolution language "seems to suggest something more--that the Federal Reserve agree upon some combination of growth, inflation and unemployment as a kind of ideal path toward longer-run objectives and attempt to manipulate monetary policy to stay on that particular path.
"The possible implications of that approach need consideration," the Fed chairman argued. "I believe analysis strongly suggests that monetary policy over longer periods is particularly relevant for prices, and that, in any direct or short-term sense, the division between real and nominal GNP growth is not susceptible to monetary manipulation.
"To suggest otherwise by requiring the Federal Reserve to establish short-term 'objectives' for a variety of nominal and real variables, would be to encourage a degree of 'fine tuning' and, indeed, overreaction to current deviations from trend, that could well be counter-productive in terms of our (and your) basic continuing goals," Volcker said.
The Fed chairman repeatedly said that one reason he was resisting the idea of reporting specific objectives was that he did not know exactly what St Germain or the drafters of the budget resolution language had in mind. "Maybe we ought to sit down and discuss it at length if you want to amend the Humphrey-Hawkins Act," he said.
That is the law under which the Fed now makes its semiannual reports. The House Banking Committee will hold hearings on possible amendments to the act in July, committee staff members said.