Excerpts from the interview:
Paul Volcker, who took over the Federal Reserve a generation ago at a time of soaring prices and stagnant growth, said the current central bank chief, Ben S. Bernanke, faces an even tougher challenge.Alan Greenspan said last year that oil above $60 would shave off 75 basis points of GDP growth. So what will $80 oil to the economy?
"It was easier for me," Volcker, 78, said. "While the economic situation was much worse, it was easier to act because it was clear what the enemy was."
...The U.S. economy will slow from 5.6 percent growth in the first quarter to a pace of 2.8 percent in the second half of this year, according to the median forecast in a Bloomberg News survey of economists.
Consumer prices rose at an annual pace of 4.2 percent in May, up from 3.5 percent a month earlier. Excluding food and energy, prices rose 2.4 percent, compared with 2.3 percent in April.
"I worry about people getting too relaxed" on inflation Volcker said. "I don't think it's out of hand today, but it is obviously creeping up."
Skeptical About Inflation Targets
Volcker was skeptical that inflation targeting, a device for anchoring inflation expectations embraced by Bernanke, would be helpful.
"That's a little too precise for me," he said. "The inflation rate is bound to go up and down a little bit and it should go up and down a little bit. But I would like to see stability as the target."
He suggested that Bernanke, who has championed better communication through transparency at the central bank, may be communicating too much.
"It's kind of ironic," said Volcker. "Mr. Bernanke seems to be criticized for a little too much transparency."
While he said the global economy is doing well, Volcker voiced concern that the good times can't last.
"We are skating along quite nicely," said Volcker, though "the ice is not as thick as I would like it to be."
The U.S. current-account deficit exceeded $208 billion in the first quarter. The figure, which includes trade as well as transfer payments and investment income, declined from $223 billion the previous quarter. It was still the second-largest on record and requires the U.S. to attract $2.3 billion in foreign capital each day fund the gap.
"We are consuming too much and investing too little," said Volcker, who also indicated that higher taxes may be needed to narrow the budget deficit.
This week the Bush administration cut its estimate of this year's budget deficit by 30 percent to $296 billion amid a surge in tax collections from corporations and wealthy individuals. Budget analysts say the shortfall will widen again as the aging U.S. population begins to stretch entitlement programs like Social Security and Medicare.
"Revenues have gotten too low" relative to what the government wants to spend, Volcker said.
Because of U.S. dependence on foreign capital to fund trade and budget gaps, "it is critical that we maintain confidence in our currency," said Volcker.
Caution on China
Some economists suggest the solution is a weaker dollar and stronger currencies for U.S. trade partners, especially China. Yet Volcker cautioned about pushing China to revalue its currency, which it has tightly controlled since abandoning a decade-old peg to the dollar a year ago.
China "will move and should move when they find it in their interest," Volcker said. "Pushing them to do things they don't want to do I'm not sure couldn't backfire in the end."...
A question I still have no answer for is how commodities will behave in the face of a slowing US economy. So far my take is that there will be a short-lived sell-off before Chinese demand - based on domestic consumption - will pick up any slack.
For the week ahead I would be very cautious as political markets can surprise with big volatility. Keep the leverage down and the news channels on.
Inflation figures and 2 speeches by Bernanke can provide even more fuel for turmoil in the markets.