Federal Reserve Chairman Paul A. Volcker yesterday stressed again the Fed's intention to limit the availability of credit in order to fight inflation even if it means little or no economic growth next year.
The tentative targets chosen by the Federal Reserve for growth of the money supply in 1981 may not be adequate to finance an expanding economy unless inflation -- now running about 10 percent -- comes down, he said.
"The likelihood of a squeeze is apparent; we see a taste of it now," Volcker said in remarks prepared for delivery at a dinner meeting of the Tax Foundation in New York. "The essential purpose, of course, is to squeeze out inflation, not growth," Volcker added.
In recent weeks, the central bank has tried to slow money growth in the face of sharp increases in the demand for credit from the federal government and the private sector. This conflict, coupled with expectations of continued high inflation, has sent interest rates soaring. Major banks raised their prime lending rate to 18 1/2 percent this week and some analysts expect the rate to go higher, conceivably to the 20 percent peak reached last spring.
Economist Alan Greenspan, an adviser to President-elect Ronald Reagan said yesterday he believes interest rates will go a bit higher but will peak and begin to decline within weeks.
"I think they [interest rates] willl stay up for a short while, and may -- and probably will -- go a bit higher," Greenspan said in an interview on the NBC-TV Today program. Rates are already so high they are choking recovery from the recession. Once that happens, the demand for funds will soon recede.
And that is exactly the dilemma sketched by Volcker: If there is not enough money available to finance both inflation and real growth, it may be growth, not inflation, that gets cut.
Some of Reagan's economic advisers say their planned policy of tax cuts, federal spending reductions and a tight monetary policy can quickly trim inflation by reducing inflationary expectations.
Taking issue with that view, Volcker said, "Certainly, expectations, as they are reflected in wage bargaining, in pricing policies, and in financial decision-making, have in the past few years both fed the inflationary process and tended to increase pressures on financial markets . . . .
"But I don't want to encourage unrealistic hopes. Expectations grow mainly out of experience over a considerable period of time. . . . At this point, skeptical Americans are all too likely to claim Missouri residence; they will want to be shown that policies adequate to the job will not only be proposed, but they will be sustained through near-term difficulties," he declared.