Federal Reserve Chairman Paul A. Volcker said here today that "there is room for a responsible U.S. tax reduction" now that President Reagan and Congress have achieved "a major change" in the direction of government spending.
Volcker also said Federal Reserve monetary policy as reflected in the "famous or infamous" monetary aggregate targets would stay unaltered, "almost irrespective of fiscal policy."
He was responding to a reporter who asked whether the Fed's job of controlling inflation would be made more difficult if Congress adopted a compromise tax bill that would cut marginal tax rates 25 percent over three years. Although such a bill would represent a Reagan compromise, judged against the full 30 percent cut included in the Kemp-Roth bil, many businessmen and bankers, supported by private opinion within the Fed, think a major tax cut at this time would feed inflationary pressures in the U.S. economy.
Volcker's cautious answer sidestepped a direct endorsement of any specific bill. His further definition of a "responsible tax reduction" was that it must "over time promise to produce lower budgetary deficits."
Fritz Leutwiler, head of the Swiss central bank, volunteered as a footnote to Volcker's comment that "the burden being placed on central banks everywhere is much too high, and the higher the burden, the higher the interest rates."
Volcker and Leutwiler made their observations following a central bankers' panel discussion at the conclusion of the American Bankers Association's international monetary conference here. Other participants included Bundesbank President Karl Otto Poehl and Gordon Richardson of the Bank of England.
The central bankers made it clear that although the high American interest rates that are pushing the dollar to record levels are weakening their currencies at home, they recognize that the rates are not "an objective" in themselves, but merely the consequence of a restrictive U.S. money policy.
Nor were the bankers -- in contrast to the politicians in some of their countries -- pushing the United States to change its policy, although Poehl admitted, "I would appreciate a different policy mix that would put less of a burden on monetary policy."
Volcker, acknowledging the burden placed on Europe by high American interest rates, told reporters that "the challenge of American policy is to make sure that the evolution of events justifies the strength of the dollar." That means American policy must be geared toward price stability, he stressed. Volcker said, "The overwhelming fact is that all currencies have been weak because we all have had inflationary problems."
There was general agreement on the panel that the world needs a strong and stable dollar. Poehl said, "This is in the interest of the whole world," to which Leutwiler added. "I'm not deploring a strong dollar, but I deplore the weakness of the Swiss franc, which doesn't help us keep up the fight against inflation."
Nevertheless, the Swiss central banker warned, "We should not overreact to the weakness of our currencies by making monetary policy more restrictive. In Switzerland, I assure you, although we will not reach our monetary targets this year, we do not intend to take any action toward a more restrictive policy."
Richardson said special factors explain the slide of the pound against the dollar. He noted that the United Kingdom has a substantial current account surplus, and that the pound is holding up well against other European currencies.
On another issue, Volcker took the opportunity to placate European concerns that the United States had adopted a "nonintervention policy" in foreign exchange markets. Earlier, Treasury Undersecretary Beryl Sprinkel had said the United States would intervene only in the case of "disorderly markets."
"I would not say that it is a noninterention policy," Volcker told a press conference. Asked later to define "conservative," he said, "You might say it's a 'show-me' policy." He said the main emphasis in the United States "is on a policy to deal with underlying inflationary conditions."
Poehl said all the central bankers agree that "heavy intervention" is not the answer to current problems. "At the same time," he added, "I must emphasize that intervention in the exchange markets is an instrument -- even a weapon -- that we would not give up."