The Federal Reserve should try to hits its money supply targets month by month even it if means wider swings in interest rates, Murray Weidenbaum, chairman of the Council of Economic Advisers, said yesterday.
"The objectives of increased confidence and heightened expectations for the future could be served if both fiscal and monetary policies were to be perceived by savers and investors and financial markets in general as being significantly more stable and predictable than in the past," Weidenbaum told the Senate Banking Committee.
Weidenbaum and other Reagan administration economists believe month-to-month swings in the growth of the money supply are more unsettling to financial markets than the very large changes in short-term interest rates that may be needed to achieve smoothh money-supply growth. Federal Reserve officials, however, generally have not been willing to allow the unlimited changes in rates that could be needed to keep the money supply growing smoothly when economic conditions change abruptly, as they did during the 1980 recession.
"I note that the chairman of the Federal Reserve Board has announced a one-half-percentage-point reduction in the target ranges" for growth in two measures of the money supply, the CEA chairman said. "Last year, the Federal Reserve operated at the high end of the target ranges, or slightly above. If the growth of the monetary aggregates were to end the current year at or around the mid-point of the target ranges, that would represent a reduction in monetary growth consistent with the administration's program."
Weidenbaum also urged the Fed to continue to seek better procedures for control of the money supply.
Officials of any administration rarely, if ever, have given such pointed advice on management of monetary policy to the Federal Reserve.
During an appearance last week before the same committee, Fed Chairman Paul A. Volcker said the long-range money-growth targets suggested by the administration on Feb. 18 as part of its economic program were consistent with the Fed's own objective. Similarly, Volcker said the Fed intends to hit the mid-point of the target ranges this year.
But Volcker also stressed how difficult it is to hit such targets each monthh, and that it matters little to the economy if they are missed so long as the money supply is brought back on track reasonably quickly.
This different view of how smooth money growth must be could become a significant bone of contention between the administration and the Fed if month-to-month swings in money growth persist and the economy does not perform as well as the Reagan economists have forecast.
Weidenbaum reiterated the administration's expectation that "at least through mid-year" economic growth, adjusted for inflation, "will continue to be very sluggish and that inflation will continue at or near double-digit rates."
Later, David M. Jones, vice president and economist of Aubrey G. Lanston & Co., told the committee that strains in financial markets are likely to result in "a secondary recessionary phase in 1981" with real economic growth expected to fall at an annual rate of 2 percent to 3 percent in the seocnd quarter of the year and at a 1 percent to 2 percent rate in the following three months.