The Reagan administration will "feel free" to advise the Federal Reserve System "on what we think is an appropriate monetary policy consistent with our overall objectives," Treasury Undersecretary-designate for Monetary Affairs Beryl Sprinkel said in an interview.
Sprinkel, an adherent of a strict monetarist interpretation of how the economy works, had been a vice president and chief economist for the Harris Bank and Trust Co. of Chicago before accepting the nomination for the key post at Treasury. Traditionally, the undersecretary for monetary affairs supervises management of the federal debt and is the key policy assistant to the Treasury secretary on international monetary matters.
Sprinkel said he also would be Treasury Secretary Donald Regan's main day-to-day negotiator with the Federal Reserve. His statement that the Reagan administration will not hesitate to advise the Fed on monetary policy came in response to questions on possible policy differences, arising out of Federal Reserve Chairman Paul Volcker's repeated insistence that the budget should be cut first to make room for tax cuts.
"That isn't our strategy," Sprinkel said, adding.
"I think the Federal Reserve has long felt free to advise the administration on what they thought was appropriate fiscal policy, and I'm sure it wasn't always ignored, and it won't be ignored this time.
"But I think the major difference is that we're going to feel free to advise them on what we think is an appropriate monetary policy consistent with our overall objectives, and I would hope that Paul [Volcker] will be supportive of the extensive effort we're going through to cut spending."
The Reagan administration's position on monetary policy is that the Fed should be able to do a better job of keeping the growth of the money supply and other monetary measures stable, while fiscal policy should be a combination of tax and spending cuts. Sprinkel predicted that the administration and the Fed will "get along reasonably well."
In testimony before the Senate Appropriations Committee on Jan. 27, Regan had said bluntly that there had to be "a clear break" with traditional policy to meet the present economic crisis. "This tax program cannot wait until budget outlays are reduced," Regan said.
He added that "inflation is primarily a monetary phenomenon," and that if the Fed allows money growth rates to outstrip real production -- "as they have done, on average, for more than a decade" -- it will be impossible to achieve stable prices.
In a wide-ranging discussion, Sprinkel also made these points:
The economy is heading into a new recession "or something very close to it. I don't think we're going to have a banner year. There's no way you can avoid pain when you go from massive stimulus to moderate stimulus."
The Treasury -- and the rest of the government -- will rely less on Keynesian econometric models and more on monetarist forecasting models. In addition, the Treasury will seek more help from "supply-side" models, which attempt to evaluate the "feedback" from tax cuts "although this particular part of the science is in its infancy."
It is unrealistic to expect that much progress can be made this year in actually reducing inflation, but "a little bit" of progress might be made in reducing inflationary expectations. "I don't expect massive changes in inflationary expectations until we see that damn inflation come down," he said. i
Continuing inflationary pressures will result from the pressure of international oil prices, food and farm prices; "and then we just decontrolled oil, and you're going to get a little kicker from that."
No decisions have been made yet on the effective date of the first year's 10 percent pesonal income tax cut to be proposed by the Reagan administration, but the president's attitude is "the sooner, the better."
The dollar will stay strong, especially when international markets "begin to believe our message."
The Reagan administration will cooperate fully with friendly nations abroad but has "some reservations" about the way in which the World Bank allocates funds: "Maybe there hasn't been as much emphasis on economically viable projects as some of us might want."
The international Monetary Fund, on the other hand, is playing an important role in helping some countries "straighten out their economies." He cited the IMF standby loan to the United Kingdom as an example of "helping the local politicians do things they know they should do but wouldn't dare do without help from the IMF."
Because of his domestic duties, Sprinkel will try to limit his travel to international financial meetings. He hasn't decided yet whether he will attend the IMF Interim Committee meeting in May in Gabon.