Federal Reserve Board Chairman Paul A. Volcker hinted today that West Germany should take the lead in the next round of central bank interest-rate reductions.
Neither Volcker nor any of the other four central bankers taking part in a panel discussion here rejected the notion that another round of interest-rate reductions was likely; one, Robin Leigh-Pemberton, governor of the Bank of England, suggested that it would take place within six months.
But Volcker's pointed suggestion that West Germany, which failed to join the United States and Japan in an interest-rate reduction in April, lead the way the next time was immediately rebuffed by West German central bank Chairman Karl Otto Poehl, who said, "We already have the lowest interest rates."
Poehl also firmly slammed the door on pressure from the United States, renewed yesterday by Treasury Secretary James A. Baker III and again by Volcker today, for greater economic expansion by West Germany.
"We are not prepared to accept advice [to expand] that would lead to higher budget deficits, higher inflation, higher interest rates, and, ultimately, lower growth," Poehl said. He contended that West Germany would grow at a real 3.5 percent rate this year, which he said might top the growth rate of the U.S. gross national product.
Volcker and Poehl were part of a central bankers panel at today's concluding session of a three-day international monetary conference sponsored by the American Bankers Association.
At a press briefing that followed, they were asked whether the time was ripe for another round of interest-rate reductions and which country should lead it.
When the question was put to Volcker, he did not respond directly, but his enumeration of the conditions that would prompt a new interest-rate reduction all pointed to West Germany.
"I'll be very glad to answer the question very briefly," Volcker said. "Where interest rates go depends obviously on a lot of fundamental factors, where the economies are going, what currencies are doing, what capacity you have, and, very fundamentally, over time what inflation prospects and dangers are.
"Any prospects have to be looked at in connection with all of those factors. When one looks around the world, one asks where the impetus might potentially come from. You've got to look at such characteristics as where are the surpluses, where is unemployment the highest, where is inflation the best, where are currencies appreciating. And I think that gives you a pretty good idea."
West Germany, like Japan, is enjoying large global trade and current-account surpluses and a zero rate of inflation, but has a 9 percent unemployment rate.
Federal Reserve Vice Chairman Manuel H. Johnson, in a speech in New York today, said that Japan has room to lower its discount rate. He told reporters that any reduction in the U.S. rate would depend on economic growth and inflation, Dow Jones news service reported.
Earlier in the press conference, Volcker had stressed and endorsed Baker's plea to both West Germany and Japan to boost their economic activity as a way of reducing their surpluses, thus contributing to a better alignment of exchange rates. Baker implied yesterday that, without a stronger economic thrust outside of the United States, the dollar might have to decline further, forcing the Japanese yen and West German mark to appreciate further.
All five of the central bankers, including Shijuro Ogata, deputy governor of the Bank of Japan, and Jean Godeaux, governor of the national bank of Belgium, agreed that greater exchange-rate stability is desirable after a sharp decline of the dollar in 1985 and so far this year against major European currencies and the Japanese yen.
But they also agreed that it will be difficult to achieve that stability, and unanimously rejected formal "target zones" as a method of doing so. In a "target zone" system, nations would agree to keep their exchange rates within a relatively fixed range, and then take necessary policy steps to carry through on the agreement.
Volcker spoke against a target-zone system, but then suggested that whatever agreement nations make to stabilize rates "doesn't have to be very narrow, doesn't have to be labeled a target zone, doesn't have to be fixed and doesn't have to be published."
Earlier this week, Poehl had called for stability through a "pause" for at least six months to give the world time to digest the recent realignment triggered by the dollar's decline.
Asked to evaluate Poehl's idea -- a variation of the coordination theme struck at last month's Tokyo summit -- Volcker said that when one appraises the world economic outlook, "it would be helpful to see a relatively faster rate of growth among other elements in the industrialized world, and that that would be a contribution toward stability in exchange rates."
Leigh-Pemberton said that misalignments in rates were not due to the floating-rate system as such, "but primarily to underlying economic imbalances and the speculative nature of the foreign-exchange market."
Poehl reiterated his statement here Monday calling for additional informal coordination of policy and praised the dramatic change in the American attitude since early this year, not only on international economic cooperation, but in approval of intervention. "This is a remarkable and significant change in attitude and behavior," he said.
All of the central bankers agreed that a formal target-zone system would be too rigid and too costly to defend. Both Godeaux and Leigh-Pemberton suggested that target zones would be counterproductive, triggering a speculative attack on the published zones. This would be similar, Godeaux said, to the pressures "that were at the base of the collapse of the [fixed-rate] Bretton Woods system."
Leigh-Pemberton added that no positive indications for target zones should be drawn from the experience of the European Monetary System, which he labeled a regional accord to keep European rates within a narrow band. "The idea of worldwide target zones is quite different, where you're handling massive capital flows between widely held major currency countries," he said.