Federal Reserve Chairman Paul Volcker said yesterday that the United States is suffering from "a kind of oil-constrained economy" and that neither a tax cut nor lower interest rates would necessarily improve it.
Volcker acknowledged what he called the "obvious weakness" in the economy, to say that the nation is in a recession.
"Creating more money" through the Federal Reserve to deal with problems stemming from oil shortages, he told a group of reporters, "would aggravate the problem of inflation." Besides, Volcker added, "The money supply in the past few months has been going up faster than one would like to see."
Similarly, Volcker said, "It's too soon to make a judgment" on whether a tax cut to stimulate the economy is needed. But he continued, "I can't say a time won't come when tax action might not be desirable."
Federal Reserve policy is not intended "to achieve any particular slowdown in the economy," the chairman said, but to "create an economy with sustainable growth . . . That implied monetary restraint in the broadest sense."
Volcker said that he does "recognize the risk of cutting back on monetary growth when expectations (of inflation) are running the other way, but I don't know how to avoid it."
An allusion to that risk came yesterday in a report by the House Banking Committee on the Fed's conduct of monetary policy, a report required quarterly by the Humphrey-Hawkins bill passed last year.
The committee criticized what it called "the Federal Reserve's fixed interest-rate policy" that it said led to a slow expansion of the money supply from September, 1978, through last March, but a sharp acceleration since then.
". . . monetary policy should consistently promote economic stability, and not alternate between stimulus and restraint," the committee report continued.
The committee was criticizing the method by which the Fed seeks to control expansion of the money supply. Normally, commercial banks "create" money through a process of taking in deposits and lending all but a fraction, called reserves, that must be set aside to insure bank solvency. The Fed influences this process by buying and selling government securities, which either takes cash and thus reserves out of the banking system, or adds them to it.
The decision to buy or sell usually is based on movement of the federal funds rate -- the interest rate banks charge each other when they borrow reserves -- which is regarded as an indication of the banks' ability to expand the money supply by making loans.
Federal Reserve officials readily acknowledge this process does not always work well. However, the committee suggested no alternative.
In a letter sent to the committee, Volcker said that the Fed's money growth targets for 1980 were set "to encourage a reduction in the rate of inflation, without starving the economy of money needed for a resumption of real growth . . . We are very conscious of the need over time to achieve such a slowing, as expressed by your committee."
Volcker went on, however, to say in the letter that "a slowing trend may have to be interrupted from time to time because of institutional developments or because of the need to take account of short-run changes in economic conditions."
In his meeting with reporters, the Fed chairman said that getting interest rates down was dependent upon reducing inflation. "I know of no way to get those interest rates down in this environment of high inflation," he declared.
And until inflation is cut, he said, there is no way to achieve the sustainable economic growth that policy should be seeking.