Federal Reserve Chairman Paul A. Volcker yesterday announced a reduction of one-half percentage point in some of the central bank's money growth targets for 1981 as part of its continuing attempt to slow inflation.
"Against the background of the strong inflationary momentum in the economy, the targets are frankly designed to be restrictive," Volcker told the Senate Banking Committee.
The Fed sets its targets in terms of growth of various measures of money from the fourth quarter of one year to that of the next and specifies a range rather than a single number. Money growth last year was slightly higher then the upper limit of the 1980 ranges.
Volcker said that because the Fed continues to aim at the midpoint of the ranges, which are generally about 3 percentage points wide, the new targets actually imply a considerably greater slowing of money growth this year than the one-half percentage-point reduction implies.
The targets "imply restraint on the potential growth of the nominal GNP" [gross national product], he said. "If inflation continues unabated or rises, real activity is likely to be squeezed."
Volcker was pressed repeatedly during the hearing to say whether he thinks the Reagan administration's forecast -- assuming its new tax- and spending-cut proposals are approved -- of rapidly declining inflation and interest rates and faster growth in real output is consistent with the steadily declining growth in money and credit the Federal Reserve is intended to produce. The Fed chairman was clearly unwilling to criticize any of the specifics of the Reagan program. However, he endorsed the goals of the program.
Separately, in testimony before the Joint Economic Committee, Murray Weidenbaum, chairman of the President's Council of Economic Advisers, went out of his way to "welcome the fine statement" that Volcker was simultaneously delivering to the Banking Committee. Weidenbaum said he was pleased that Volcker included "such a strong endorsement . . . of our economic program. It's good to see the independent Federal Reserve system is on the same wavelength as we are."
But Volcker was hardly on exactly the same wavelength, implying several times that the administration's forecast is too optimistic. "My concern is that the road from here to there may not be totally smooth, to put it conservatively. [But] whatever stress or pain there is is worth it. We have to get there," Volcker declared.
Asked if it is reasonable to expect a major improvement in the economy within the next year, Volcker replied, "I don't want to encourage overly optimistic expectations on the part of the public in the time frame that you are speaking of. I think we have a very difficult problem here. There is not going to be room for growth in a substantial way until we get the inflation rate moving down." And he added, "We haven't in my opinion, yet turned the corner on inflation. . . .
"We have been sitting on a boiling kettle," the Fed chairman declared, and so far policy has kept inflation from exploding. He said "there is a very substantial risk of disappointment if the hope is held out that [a major reduction in inflation or interest rates] is actually going to happen in the next six months without a lot of stress and strain in the process."
The Fed's specific 1981 target range for M-1A, which includes currency in circulation and checking account deposits at commercial banks, is 3 percent to 5 1/2 percent, down from 3 1/2 percent to 6 percent last year. Both sets of figures have been adjusted to take the extension of interest-bearing checking accounts to all parts of the nation on Jan. 1. Last year M-1A grew 6 1/4 percent.
For M-1B, which also includes checking deposits at other financial institutions, the target is 3 1/2 percent to 6 percent, compared to a range of 4 percent to 6 1/2 percent last year. M-1B growth last year was 6 3/4 percent.