Federal Reserve Chairman Paul A. Volcker acknowledged today that the Fed had decided to place less emphasis on its main measure of money supply growth, but denied that it represents a significant change in policy.
Rather than try for strict control of fluctuations in the growth of money in circulation and in checking accounts -- the measure of money supply growth called M1 -- the Fed will put more emphasis on measures that also reflect funds in savings accounts and time deposits.
Reports of a shift by the Fed toward a less restrictive money policy helped fuel a stock and bond market rally last week. At the same time, major banks lowered their prime lending rate and the Fed cut its own rate on loans to financial institutions, which was seen as evidence of a policy change.
Here to address members of the Business Council, a group of 200 of the nation's chief corporate executives, Volcker told reporters the Fed's policy is one of "continuing to restrain the growth of money and credit to appropriate levels in the interest of encouraging and continuing a decline in inflation."
"That policy does not imply continuing pressure on interest rates," he added. The Washington Post reported Friday that the Fed's Open Market Committee voted Tuesday to ease credit and spur the economy by essentially abandoning -- at least temporarily -- its focus on the M1 measure. With M1 running above the top of the Fed's target range, the Fed either had to drop it as a policy guide or else tighten credit conditions.
But in remarks to the Business Council today, Volcker described recent press reports as "potentially confusing" and "based on a combination of partial information and reportorial speculation."
He later expressed displeasure over what he described as "partial, selected and inaccurate information" but did not refer specifically to The Post report or spell out in what way the reports were incomplete.
For the time being, Volcker explained, distortions in the M1 measure make it difficult to gauge underlying monetary growth and, as a result, the Fed will look at M2, which includes passbook savings accounts and money market funds, and M3, which includes large certificates of deposit.
"We expect those to be less distorted" by technical changes, Volcker said.
Over the next few months, he said, several distortions may occur in trying to measure cash and checking accounts.
Those distortions, Volcker said, will likely stem from the maturing of the All-Savers certificates, introduced last year, and the introduction of a money market fund-type deposit account for banks and savings and loans.
"We know M1 will be affected, but we simply have no way of measuring the degree of that shifting," Volcker said. "Both the ups and downs in M1 reflecting these regulatory changes will be artificial and virtually meaningless in gauging underlying trends in money and liquidity."
As a result, he said, the Fed has no alternative but to attach much less weight than usual to movements in M1 in the immediate future.
Volcker stressed that the decision was not an experiment "in the sense of going out and making it a deliberate experiment." But, he added, "When you have a figure that you know is going to be off base, it makes no sense to follow that figure."
Under persistent questioning by reporters, the Fed chairman said the decision had no policy content whatsoever. "It's a recognition of the reality that the M1 figure will be distorted and nobody will be able to make an intelligent judgment for some time about what an M1 figure means. It has zero policy significance."
Despite Volcker's policy disclaimer, the Fed clearly has been trying to get interest rates down. The shift in emphasis, while not an abrupt swing from a tight money policy, is a change in degree.
As Volcker noted, the Fed made a further reduction Friday in the discount rate -- the rate that financial institutions are charged for loans from the Fed -- from 10 to 9 1/2 percent.
Volcker explained, however, that lowering the discount rate was "designed to maintain an appropriate alignment with short-term market rates."
The step was taken also, he added, against a background of continued sluggishness in business activity, recent strength of the dollar on the exchange markets and indications of strong demand for liquidity in some markets.
Several Business Council members said after Volcker's remarks that they were convinced the Fed was following the proper policy for a recovery, which most expect to begin in the fourth quarter.