U.S. May Lose Control of Economic Destiny, Fed Chairman Warns
Recent wide swings in interest rates and the value of the dollar suggest that the United States is in danger of losing control over its economic destiny, Federal Reserve Board Chairman Paul A. Volcker said Monday.
“All that volatility in exchange rates and interest rates in recent weeks gives a little taste of how vulnerable our own financial markets and our economy have become to what other people think,” Volcker told graduates of Atlanta’s Emory University.
The dollar has gyrated in recent weeks as the market has reacted to intervention by Japan and West Germany, which have been trying to push the dollar higher, and a suspicion that the Reagan Administration wants it lower to help reduce the massive U.S. trade deficit.
The bond market, worried about the willingness of foreign investors to keep buying dollar-denominated securities, has mirrored the dollar’s swings, with prices of Treasury bonds up and down sharply in the past few weeks, sometimes within the same day.
“We are rather obviously in danger of losing control over our own economic destiny,” the Fed chairman said.
Volcker said that criticism of Japanese trade relations with the United States is largely misplaced as long as the United States cannot get its economic house in order.
He noted that Japan has repeatedly been the target of U.S. criticism “about its enormous trade surplus with us, about its protectionist tendencies, about its unwillingness to provide enough aid or spend enough for defense--or whatever the latest complaint is.”
But, Volcker said: “We have to remember, too, that it’s not guile or sharp trading practices that fundamentally built that (Japanese) economy and that have made its currency so strong.”
Economists have stressed that the huge U.S. trade gap is indirectly caused by the massive federal budget deficit. This has helped fuel the pace of the U.S. economy, thereby increasing the level of imports, while domestic demand remains sluggish abroad.
Also contributing to the problem is the low level of savings by Americans in comparison to European countries and Japan.
