Despite the interest rate roller coaster ride the economy took during 1980, the Federal Reserve still managed essentially to meet its targets for growth of the money supply, Fed Chairman Paul A. Volcker testified yesterday.
Volcker also told the Senate Banking Committee he expects swings in interest rates to be smaller in 1981 than they were in 1980.
But even coming close to the monetary growth targets required letting interest rates rise to record levels twice in a single year, and several committee members and a number of other witnesses complained strongly about the damage the currently high, albeit falling rates are inflicting on several parts of the economy, inclding autos and housing.
On the basis of preliminary figures, Volcker said that between the fourth quarter of 1979 and the fourth quarter of 1980, various measures of the money supply rose close to or slightly above the upper limit of their targets ranges. "Looking at available data for December alone, both M-1A and M-1B appear to have been within the indicated ranges," he said.
M-1A includes currency in circulation and checking account deposits at commercial banks. M1-B also includes checking deposits at thrift institutions.
Looking at the figures on an annual basis, rather than comparing fourth quarter with fourth quarter, the Fed has done even better -- despite all the concern expressed in recent months that it would badly overshoot the targets it set last year as part of its effort to reduce inflation.
Robert Weintraub a monetarist economist and consultant to the House Banking Committee, noted yesterday that in 1978 M-1B rose 8.2 percent, in 1979 by 7.7 percent and in 1980 by only 6.3 percent. This sort of steady downward progression in monetary growth rates is precisely the anti-inflationary medicine the monetarists have been recommending, Weintraub said. Nor is he much bothered by the surge of money growth in the latter half of 1980 now that the Fed has gotten the monetary aggregates back on course. That extra growth, he declared, should present only "a slight problem" in achieving another reduction in M-1B growth in 1981.
Volcker said the large deficits in the federal budget have increased pressure in credit markets and called for a major effort at expenditure control that, if successful, would make room for tax cuts for individuals and business.
In the meantime, however, the high interest rates that are the by-product of slowing money growth relative to the demand for money is still hurting. Banking Committee Chairman Sen. Jake Garn (R-Utah) said the latest round of high rates is putting out of business long extablished and generally healthy automobile dealerships and homebuilders.
While rates are now falling -- the bank prime lending rate is now down to 19 1/2 percent or 20 percent from its recent peak of 21 1/2 percent -- they may not come down rapidly enough to save some of these hard pressed businesses, he said.
Volcker acknowledged these businesses are being pinched, but another banking committee member, Sen. Donald Riegle (D-Mich.), said that high interest rates are the principal cause of the auto industry's current serious problems solved by money creation, those such as builders, thrift institutions, and small businessmen particularly vulnerable to continuing escalation of interest rates, would find their prospects worsening over time . . . if the supply of money is not restrained, the nest result would surely be acquiesece in an inflationary process that over time would result in still higher interest rates, prolonged indefinitely."
Such comments were cold comfort to most of the group of witnesses who appeared after Volcker. One of them, Merrill Butler, a builder from Irvine, Calif., who is president of the National Association of Homebuilders, warned, "The current situation in the housing industry is desperate. Exorbitant mortgage rates and prime interest rates are choking off home sales and production, and forceing people out of work and out of business."