Reduce Deficit or Risk Future Harm: Volcker

Federal Reserve Board Chairman Paul Volcker today repeated warnings that Congress must take decisive action to reduce federal budget deficits or risk severe future harm to the economy.

Volcker, in an appearance before the Senate Budget Committee, said now is the time to attack the deficit problem while the economy is enjoying good growth. He said efforts to deal with the deficit would be much harder during the next recession.

“We have severe imbalances in the economy and we have got to begin dealing with them. The time is already late, but we still have time,” Volcker told the senators.

Greater Risk

The head of the nation’s central bank said, “The longer the choices are delayed, the greater the risk and the larger the task. . . . It will take action, and strong action, to get the deficit on a downward trend.”

Volcker’s warning on the huge budget deficits was similar to comments he made earlier in the week to the Joint Economic Committee of Congress. At that time, Volcker predicted that lower interest rates would accompany a significant cut in the budget. He said then that rates would be one percentage point lower than they would otherwise be if Congress goes along with the President’s suggestion to cut the deficit by about $50 billion in the fiscal year beginning Oct. 1.

Today, Volcker was not asked about his interest rate projection. However, various senators questioned whether there really was an urgency to deal with budget deficits given the fact that the U.S. economy grew at the fastest pace in three decades last year.

Significant Progress

Volcker agreed that the nation had made significant progress both in combating inflation and in promoting economic growth in the last two years.

But he warned that “there are large imbalances in our economic performance and points of severe strain here and abroad.”