Monetary growth, as shown by the narrower measures of money supply, may fall "significantly short of the midpoint" of the Federal Reserve Board's target ranges for this year, Fed Chairman Paul Volcker told the Senate Banking Committee yesterday.
Volcker said the Fed has decided to leave this year's targets unchanged but will not attempt to force money growth up to hit the middle of the range.
He then told the committee the Fed intends to tighten money policy next year by effectively reducing the targets for credit and money growth.
But because of uncertanties about the economy -- including the likely size of the budget deficit next year -- coupled with technical difficulties of measuring the money supply, the Fed did not give actual figures for its 1981 money targets in yesterday's report to Congress.
Volcker said "a primary and continuing goal of monetary policy must be to curb the accelerating inflationary cycle." He also said a tax cut this year would be premature, although he recognized "the strong conceptual case that can be made for action to reduce taxes."
Volcker refused to spell out numbers for the next year's money targets despite pressure from the Banking Committee Chairman William Proxmire (D-Wis.). The Fed chairman said there is "no need for anyone to be uncertain about the general tenor" of the Fed's policy: to reduce money growth over the long term as part of the effort to wind down the inflationary process.
For technical reasons, it is difficult to know yet what numbers will be appropriate for the next year's targets, Volcker said. The financial markets are changing so swiftly that the Fed cannot be sure of the effect on money supply measures of changes such as the introduction of NOW (negotiable orders of withdrawal) accounts and the growth of money market mutual funds.
Volcker also said "if recovery and expansion are accompanied by inflation at current rates or higher, pressures on interest rates could develop to the point" that strong economic expansion would no longer be compatible with reduced monetary growth.
Proxmire requested a written legal defense of the Fed's positon.He said he believes the Fed is required by law to provide the committee and Congress with actual figures for the money targets for next year as well as for the remainder of this year.
Volcker was presenting the Fed's midyear report to Congress on monetary policy. This procedure has only been established for a few years; but so far the Fed always has produced the actual figures for its money supply targets in this report.
The House Banking Committee will consider the Fed's report today and may make a similar request to Volcker to spell out the money numbers.
Volcker left little doubt yesterday that the Fed is determined to put the battle against infaltion first, despite the recession. He said other policymakers and those involved in wage and price setting should "think that the Fed is moving towards lower monetary targets; this is a fact of life that should be taken into account."
He emphasized the need for wage restraint and for policies to assist in the battle against inflation.
He hinted his general support of a plan to link tax cuts with wage restraint but said "I myself do not believe that thinking on that has developed to a point of making administrative as well as economic sense."
He made a strong call for tighter wage and price guidelines if these are continued by the admnistration. It is "totally inconsistent" with anti-inflation policy to have guidelines which point to higher wage and price rises, he said.
The arithmetic is such that wages must be reduced if inflation is to be overcome, Volcker said. He pointed out that the steel and auto industries, which are now in trouble, historically have had high wage rates.
Measures to improve productivity and investment also should be considered as part of the tax cut, Volcker told the committee.
The Fed's forecasts for the economy were included in the report to Congress. They were gloomier than those released by the administration on Monday, suggesting that unemployment could rise 9 1/4 percent this year and stay little changed next year.