Federal Reserve Chairman Paul A. Volcker again indicated concern yesterday that the value of the U.S. dollar on foreign exchange markets could fall faster than would be good for the American economy.
So long as there is a large federal budget deficit, the Federal Reserve must "maintain a climate in the U.S. conducive to capital inflows," Volcker said. At the same time, the nation must maintain an external position that is conducive to continuing progress against inflation, he added.
Volcker's comments, made during a speech and a question-and-answer period at an American Stock Exchange conference here, were similar to statements he made last summer when he said that the value of the dollar should fall, but not too far or too fast.
However, analysts said the reiteration is significant, coming as it did after a meeting last month of finance ministers and the heads of the central banks of five major industrial nations at which it was agreed that the countries would intervene in exchange markets to bring down the dollar.
After that meeting, the dollar dropped sharply against most major currencies. When asked yesterday what the Fed might do if the dollar began to rise again, Volcker said he could not answer that question without also addressing what might happen if the dollar were to decline more.
The Fed chairman specifically rejected the notion that the central bank could ease monetary policy and reduce interest rates to lower the value of the dollar.
Volcker's comments were echoed last night by Fed Vice Chairman Preston Martin in a speech in Philadelphia, a text of which was made available here.
"Several actions have been proposed to bring down the dollar and the trade deficit," Martin said. "One is for the Federal Reserve to follow a significantly more expansionary monetary policy.
"But aggressive, inflationary growth of money and credit to bring down the dollar's exchange rate would not enhance the position of U.S. firms in world markets. A lower external value of the dollar would be offset by inflated costs at home," Martin declared.
A strong dollar keeps needed capital flowing into the United States, but at the same time creates problems for domestic companies by increasing the trade deficit, Volcker noted. The trade deficit has led to an explosion of protectionist sentiment in Congress, he said, and he praised the Reagan administration for resisting it.
Volcker stressed that, although the value of the dollar has gained in importance for several reasons, it remains only "one consideration of policy" for the central bank. Inflation, the state of the domestic economy and growth of the various measures of the money supply are also considerations, he said.
The chairman said that there is "every reason for measured confidence" that the current economic expansion in the United States can be continued.
Asked his opinion of the Senate-passed bill that would require the federal budget be balanced by 1991, Volcker said that he is "delighted to see it as an indication of intent." However, he added, there is "some difference" between intentions and passage of measures that would achieve that result.