There's a good chance the Federal Reserve Open Market Committee, when it meets today, will respond to the Carter administration's recent decision to pare its 1978 tax cut plan by holding back on any immediate new increase in interest rates, a number of money market analysts believe.
But they add that it will be difficult for the Fed to avoid a significant new round of tightening for very long because of the outsized growth in the money supply in recent weeks and the prospect of further sharp increases in the monetary aggregates as the economy continues its quick tempo in the second quarter.
Federal Reserve Board Chairman G. William Miller over the weekend responded enthusiastically to the Carter administration's decision to reduce its proposed tax cut package from $25 billion to $19.4 billion and to delay its implementation three months until Jan. 1, thus reducing the fiscal 1979 deficit by about $10 billion.
"The more discipline we have in fiscal policy, the more pressure we take off monetary policy, said Miller, indicating this lessened pressure could lead to some easing in the Fed's posture on interest rates.
The Fed chairman also said the central bank should be "judicious" in responding to the very large nominal increase in the money supply expected in the second quarter, increases that are associated with the sharp rebound in economic activity after the weather-depressed first three months of 1978.
"What happened here is that Miller suggested in testimony and public comments that the administration hold off and reduce its tax cut, which was making the deficit worse," commented Leonard Santow, a monetary economist with J. Henry Schroder Bank & Trust Co.
"The administration came back and basically said to Miller, you're right and we'll help you in this area. Now Miller has to come back and acknowlege he's getting some help from the administration in fighting inflation," Santow added. "That means it will be very awkward for him to march up interest rates in the next several months.
The odds on a further immediate tightening move, which the money market were putting at 60-40 last week, probaly have now been reversed because of this development, Santow said.
Salomon Brothers' Chief Economist Henry Kaufman predicted that interest rates are headed even higher.