Federal Reserve Board Chairman Paul A. Volcker said yesterday that he is concerned about recent volatility that propelled the dollar to record highs against other major currencies, only to drop sharply during the past month.
In a speech to the American-German Biennial Conference in Dallas, Volcker said the volatility in exchange rates may "challenge . . . governments and central banks to think hard about ways" to achieve greater stability if "spontaneous market forces" do not lead to it.
Volcker seemed to be staking out a position distinctly different from that of the Reagan administration. In recent days, President Reagan and Treasury Secretary James A. Baker III have turned aside pressure from European officials for studies that might lead to greater exchange-rate stability. They argue that the gap between the dollar and other currencies will narrow as economic recovery abroad catches up with that in the United States.
But Volcker said that "certainly the exchange rate today is too important an economic variable to ignore in our policy-making."
Volcker warned that "after two years of extraordinary growth," the U.S. economic expansion is slowing, in part because competition from imports has discouraged some domestic production and investment.
He said the huge U.S. trade deficit -- estimated to be running at a $140 billion annual rate -- is creating pressures for protectionist measures.
Volcker praised the administration and Congress for resisting these pressures. But he suggested that protectionist pressures may prove overwhelming unless the United States obtains help from its trading partners.
In his most direct public reference to growing trade tensions between the United States and Japan, the Federal Reserve official said, "Those in exceptionally strong trading positions, such as Japan, must find the will and the means to move toward liberalization."
Speaking to an audience interested in enhancing German-American relations, Volcker praised the West German government as being in the forefront of the trade-liberalization movement.
Nevertheless, he criticized the extent to which West Germany and the rest of Europe have depended on American economic growth in the past two years.
He said that in 1983 and 1984 the expansion of the U.S. economy accounted directly for 70 percent of the growth in the other countries that make up the Organization for Economic Cooperation and Development -- the 24 leading industrial nations of the world.
Although there have been "solid reasons" for the dollar's recovery "from the morass of the 1970s," Volcker said, "I am also more than a little skeptical of the notion that Germany, and Europe as a whole, are somehow trapped in structural rigidities that doom it to slow growth and leave little room for policy maneuver -- or that the United States can safely relax in the glow of a strong cyclical expansion."
He implied that the time has come for West Germany and perhaps Britain, having gained better control of their budgets than the United States, to stimulate fiscal expansion to boost their economies and cut unemployment. Volcker said these countries "might find themselves with more maneuvering room" because their currencies have stabilized or appreciated relative to the dollar in recent days.