The Reagan administration, in its first major statement on monetary policy, yesterday urged the Federal Reserve Board to stop paying attention to the level of interest rates and begin concentrating on one rather than several measures of the money supply. Treasury Undersecretary Beryl Sprinkle advised the Fed to allow its discount rate to vary more freely with market rates.
Sprinkel gave detailed technical advice to Fed Chairman Paul Volcker on how to achieve the steadier, slower money growth which both Reagan officials and the Fed support. The Fed's official response yesterday was "no comment."
Sprinkel emphasised in testimony before the Joint Economic Committee that the Fed was an independent agency, and that the administration did not want to change that. Over the last few months the Fed has done a good job of conducting monetary policy he said. But he made no bones about his view that monetary policy at times in the past has been too erratic and too centered on controlling interest rates.
He said that he had spoken to Volcker about his suggestions, but he refused to tell the committee of the chairman's response. The Undersecretary's testimony had been cleared with the Council of Economic advisers, the Office of Management and Budget, and Treasury Secretary Donald T. Regan, Sprinkel said.
Although the administration does not expect significant progress towards lowering inflation this year, Sprinkel told the JEC, there could be a drop to single-digit inflation by the end of this year.
He emphasized the importance of people's expectations for the success of the administration's campaign against inflation. Unless everyone is convinced that money growth is slowing down "the burden of monetary restraint will fall on economic activity and will be working against the stimulative effects of the fiscal program," Sprinkel admitted. Many economists believe that the tight money policy advocated will lead to high interest rates and act as a brake on the economy, before inflationary expectations are changed.
The Undersecretary also commented that if inflation continues high then the tax cuts proposed by the administration will give only a temporary boost incentives.
Sprinkel, now in charge of money affairs in the Treasury, has advocated stricter monetarist medicine for many years.
Earlier, Chairman of the Council of Economic Advisers Murray Weidenbaum told reporters that this administration intends to give advice to the Fed on monetary policy, just as the Fed often comments on fiscal or budgetary policy. This implies no attempt to encroach on the central bank's independence, he said.
Past administrations have rarely urged the Fed to be tougher in its money policy, but the core of the Reagan anti-inflation policy is tight money control.
The Fed itself wants to slow money growth, and to reduce fluctuations in the money supply. Since October 1979 it has had a much wider range for the key Fed funds interest rate, as it has concentrated more attention on directly controlling money. But in the past 18 months both interest rates and the money stock have gyrated.
Some economists believe that it is just rather difficult to control money growth smoothly, and to be sure of which is the correct measure of money to monitor.
Sprinkel suggested yesterday that a single narrow money measure, bank reserves plus currency in circulation, should be the focus of policy. Technical changes in the financial system make it hard to judge how fast some of the other more usual measures should be allowed to grow, he said.
He also said that the Fed should further relax, or do away with, constraints on the key federal funds interest rate.
The discount rate, which the Fed charges to banks who borrow from its discount window, should move more flexibly with market interest rates, Sprinkel suggested. This rate tends to lag changes in other interest rates, so that when rates in general are rising it becomes attractive, rather than a penalty, for banks to borrow from the Fed.