Volcker Says Bernanke Faces Tougher Task Than When He Ran Fed July 14 (Bloomberg) -- 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.
``It was easier for me,'' Volcker, 78, said in an interview to be broadcast this weekend on ``Political Capital With Al Hunt,'' a Bloomberg television program. ``While the economic situation was much worse, it was easier to act because it was clear what the enemy was.''
Volcker, appointed by President Jimmy Carter in 1979, is credited with defeating inflation, which was 13 percent when he took the Fed's helm. Volcker raised the benchmark interest rate to a record, helping send the economy into recession.
He was succeeded by Alan Greenspan, who kept inflation in check and presided over the longest economic expansion on record. Before he left in January after almost two decades in the job, Greenspan set the Fed on a path of rate increases that Bernanke has continued. Rates have been nudged higher at every meeting of policy makers since June 2004, while core inflation over the last three months was the fastest since 1995.
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 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.''
`Skating Along'
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.''
Volcker led an investigation last year of a United Nations program that allowed former Iraqi dictator Saddam Hussein to sell oil to buy food and medicine. It found the program lacking in competence and accountability.
Volcker said this week that the probe's findings haven't resulted in much change yet at the UN.
``If they don't respond to what we found, the difficulties, including some corruption within the UN and outside the UN -- lots of it outside the UN -- and if that doesn't provoke some response, I don't know what will be the global response.''
He said the findings show the UN isn't up to running a similar program for North Korea to help resolve the standoff over the country's alleged use of nuclear technology for weapons.
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