Magazine article American Banker

Volcker Offers Words of Optimism, Sees Economy 'On Launching Pad.' (Paul A. Volcker)

Magazine article American Banker

Volcker Offers Words of Optimism, Sees Economy 'On Launching Pad.' (Paul A. Volcker)

Article excerpt

WASHINGTON -- Federal Reserve Chairman Paul A. Volcker showed an optimistic side Thursday after helping to spool the stock market with a grim budgetary forecast the day before.

"We're on the launching pad for a much more satisfactory [economic] period," Mr. Volcker told members of the congressional Joint Economic Committee.

Stock prices tumbled Wednesday, and many analysts attributed the downturn to the chairman's grave predictions that big federal budget deficits would push interest rates higher and eventually derail the nation's economic recovery.

His testimony Thursday wrapped up one of Mr. Volcker's most grueling weeks since he assumed the Fed chairmanship in August 1979. Over the last three days, he reeled off 11 hours of testimony and fielded countless questions from lawmakers on three congressional panels.

Despite a generally bright outlook presented Thursday, Mr. Volcker made a remark similar to the one that contributed to Wednesday's market selloff.

"Eventually you could have a recession way down the road" if the government failed to reduce its huge borrowing needs, the Fed chief said in response to a question from Sen. Steve Symms, R-Idaho.

He spoke in the same vein before the Senate Banking Committee on Wednesday, when the stock market turned decidedly bearish and the Dow Jones industrial average registered its biggest one-day loss since October 25, 1982. The key market index plunged 24.19 points Wednesday to 1,156.30.

Mr. Volcker changed his tone somewhat Thursday, offering a more upbeat assessment of the nation's economic expansion.

"I think we have made enormous progress dealing with some of the problems that arose during the 1970s," he said, citing a lower inflation rate and improved productivity.

Despite his more consoling forecast, the stock market decline continued Thursday. The Dow closed down 3.56 points, at 1,152.74. Aside from Mr. Volcker's remarks, analysts have also cited similar predictions about the budget from administration officials and fighting in Lebanon as other factors contributing to the market selloff. …

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