Federal Reserve Chairman Paul A. Volcker goes before the Senate Banking Committee this morning to disclose the Fed's official targets for the growth of money and credit during 1981, targets that are apt to get the Reagan administration's full blessing.
Volcker is expected to set money growth targets similar to the "tentative" targets the Fed announced last july for 1981 which generally call for about a one-half-percentage-point drop from 1980 levels. Some of the precise figures, however, will be strongly influenced by regulatory changes such as the nationwide advent of NOW (negotiated order of withdrawal) accounts on Jan. 1.
Last week the White House stressed the independent nature of the Federal Reserve and then proceeded to lay out the most specific set of policy instructions any administration ever has given the Fed publically.
"To achieve the goals of the administration's economic program, consistent monetary policy must be applied," the explanation of that program declared. "Thus, it is expected that the rate of money and credit growth will be brought down to levels consistent with noninflationary expansion of the economy . . . . The economic scenario assumes that the growth rates of money and credit are steadily reduced from the 1980 levels to one-half those levels by 1986."
Whatever they may think about the specificity of that statement, Volcker and the other members of the Federal Open Market Committee that sets Fed policy have no trouble with the actual target. In fact, the Fed chairman likely will endorse it today, at least implicitly.
But for all the apparent agreement with the administration on money growth targets, Federal Reserve officials are concerned about what comes next.
First, they anticipate an attempt will be made to force the Fed to change the way in which it tries to achieve its money targets, something which Treasury Secretary Donald. T. Regan broadly hinted at last week. Fed officials, including Volcker, will resist the change in operating procedures that the administration wants, which involve setting targets for a measure known as the monetary base that consists of currency in circulation plus reserves at financial institutions.
Fed officials believe such a shift would not improve control of money and credit. Today Volcker will unveil the results of a just-completed Fed staff study concluding that, under the circumstances, the present procedures are about the best that can be devised -- even though they produced very wide swings in both interest rates and money growth during the course of 1980.
Second, and more fundamentally, the officials fear that the administration's highly optimistic economic forecast -- which predicts a simultaneous increase in real output, a sharp drop in inflation and rapidly falling interest rates beginning late this year -- is setting public expectations much too high. If the central bank is successful in slowing money growth, but at the cost of higher interest rates and lower levels of economic activity than predicted, there could be a public and congressional backlash with the Federal Reserve cast as the villain.
"We are being set up," one Fed official said flatly.
The administration's proposed cuts in personal and business taxes are so large that even the accompanying extensive spending cuts won't keep federal borrowing requirements from rising this year and remaining very high in 1982. Moreover, the reductions in the deficit plotted by the administration for 1983 and 1984 are largely dependent upon cutting an additional $21 billion from the 1983 budget and $31 billion the next year.
If, as now appears likely, the tax cut for 1982 turns out to be about the size the administration wants but the spending cuts are smaller, the deficit would swell, putting new pressure on financial markets, Fed officials believe. wRegan, on the other hand, claims the tax cuts will lead to such an increase in personal and business savings that any increase in the deficit would be financed easily because more funds would be available in the markets.
The essential problem in the administration's arithmetic is that less money will be available to finance economic activity.
Rudy Penner, an economist with the American Enterprise Institute noted that the Reagan forecast has nominal GNP -- that is, gross national product expressed in current dollars rather than after adjustment for inflation -- rising 11.7 percent in the next four years, about one-half a percentage point faster than in the last four. However, if money growth slows about one-half a percentage point a year, as both the administration and the Fed intend, far less money would be available to finance that higher level of GNP.
"There just is not enough money in this plan to finance it," Penner said. "Any realist would say it will be real growth [rather than inflation] that will give . . . , and that could mean unemployment hanging in the 7 percent to 8 percent range for quite a while."
Should inflation turn out to be higher than forecast, the potential for a collision between monetary policy and the demand for credit by government and the private sector would be that much greater.
In the short run, however, no one expects any collision at all because of a weak economy. The administration and most private forecasters now predict a small decline in real output in either the second or third quarters of this year and perhaps in both.
With the money supply flat or declining in recent weeks because of the increase in interest rates late last year, the Federal Reserve is letting interest rates gradually come down. But there is not intention to let rates tumble as they did during last spring's brief recession.