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Mr. Chairman, you asked me to comment this morning on two issues: current monetary policy and the coordination of monetary and fiscal policies. These topics are, of course, related to each other, since one set of questions about current monetary policy concerns the extent to which it is coordinated with fiscal policy.

The last two or three years have been an extraordinarily difficult time in which to make economic policy--whether the instruments in question were fiscal or monetary. The economy has been suffering simultaneously from an inadequate level of economic activity, reflected in high unemployment rates, and from rapidly rising prices. Both inflation and unemployment have proved remarkably persistent. Moreover, both fiscal and monetary policies aimed at reducing unemployment carried the risk of escalating inflation, while policies aimed at restraining inflation carried the risk of choking off economic recovery and increasing unemployment. The difficulties of economic policymakers have been further compounded by the fact that some policy instruments have an impact on expectations. A large budget deficit or a rapid increase in the money supply, for example, may lead to expectations of inflation and these expectations in themselves tend to be self-fulfilling.

The dilemma for fiscal policymakers lies in choosing a combination of federal revenues and expenditures that will stimulate the economy sufficiently without escalating inflation. The dilemma for monetary policymakers has been to choose rates of expansion in the monetary aggregates slow enough to restrain inflation, but not so slow as to drive up interest rates rapidly and interfere with the recovery.

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