Federal Reserve Chairman Paul A. Volcker said yesterday that financial market participants have been reading too much into some of his recent public comments, comments that sent stock and bond prices downward this week.
Volcker told a House Banking subcommittee that his remarks about possible future inflation problems were not intended as a signal that the Fed is about to tighten monetary policy.
After Volcker said that what the markets had taken as a signal of higher interest rates to come was not a signal at all, the markets reacted as if he had sent a new signal. Bond prices steadied, and the dollar fell on foreign-exchange markets, at least partly, traders said, in anticipation that interest rates might not rise after all.
Explaining his remarks on inflation, Volcker said, "There are potential problems down the road. As a central banker, I always see potential problems down the road," including more inflation once oil prices stop falling.
The Fed chairman noted that, while commodity prices have been declining, prices for services have continued to rise. When those increases no longer are being offset by falling oil prices, the inflation rate will be higher. Just how much higher is a question whose answer also "lies down the road," and it will be affected by policies in the months ahead, Volcker said.
But as far as any immediate tightening is concerned, "I have not been giving any signals in my mind on that particular question," he said.
Both short- and long-term interest rates rose Wednesday after Volcker was quoted as telling a group of bankers in Boston that he is concerned about inflation. "The real trend in prices hasn't been so bad, but we've got some real problems potentially," Volcker said there.
Financial analysts said that one reason the market reacted so negatively to the chairman's remarks was that it is highly uncertain about the Fed's next move. If economic growth speeds up later this year, as most forecasters expect, some analysts believe interest rates will rise. At the very least, faster growth likely would mean that the Fed would not seek to reduce interest rates further.
Volcker also told the House subcommittee hearing, which largely was devoted to the central bank's own budget, that in his earlier remarks he also was not giving any signals about future changes in the Fed's discount rate. "I don't want my remarks to lead to any expectation whatsoever" about the discount rate, he said.
Despite his expressed hope that market participants would stop trying to read more into his publicly reported remarks, a large group of reporters anxious to question him followed in his wake as he and other Fed officials strode rapidly down two flights of stairs and out of the Rayburn House Office Building. Sometimes Volcker will respond to reporters' questions after a hearing. This time he would not.