Federal Reserve Chairman Paul A. Volcker yesterday came under a drumfire of criticism from members of the House Banking Committee as he announced that the Fed is further tightening monetary policy by lowering a key money supply growth target.
Democrats and Republicans alike denounced the harsh impact that near-record high interest rates are having on home builders, home buyers, small businesses and the auto industry, among others.
It was by far the sharpest criticism Volcker has faced as chairman, and its bipartisan nature indicates that previously strong congressional backing for tight control of money supply growth is eroding in the face of constituent complaints. The latest Fed tightening was first reported in The Washington Post last Tuesday.
"We are destroying the small businessmen. We are destroying Middle America. We are destroying the American dream," declared conservative George Hansen (R-Idaho). Rep. Norman D. Shumway (R-Calif.) more quietly asked, "Can the country stand the cure for this [inflation] problem?"
On the other side, Rep. Frank Annunzio (D-Ill.), shouting and pounding his desk, accused the Fed of favoring big busines over American workers. An incensed Rep. Henry Gonzales (D-Texas) charged that the Fed has "legalized usury," and said he is preparing a bill of impeachment covering Volcker and a majority of the Fed's seven-member board of governors. c
Many of the members, including Chairman Fernand J. St Germain (D-R.I.), bitterly contrasted the ready availability of multi-billion-dollar lines of credit for major corporations to acquire other companies with the problems individuals and small business have in obtaining loans. About $40 billion in such lines of credit have been arranged in recent weeks, St Germain said.
Despite all the criticism, Volcker said the Fed would continue to pursue a tight money policy to combat inflation.
Specifically, the chairman said the central bank's Federal Open Market Committee decided for the remainder of this year to aim for the lower end of the 3 1/2-to-6 percent target range for growth of M1-B, instead of the midpoint of the range. As was reported last week in The Washington Post and confirmed by Volcker's testimony, the FOMC, which sets monetary policy, considered formally lowering the target but chose instead to lower its objective within the range.
For 1982, the target for growth of Ml-B, the measure of money that includes currency in circulation and checking deposits at all financial institutions, was lowered to a range of 2 1/2-to-5 1/2 percent, Volcker said.
The target for M-2 -- which includes the items in M1-B as well as savings accounts at commercial banks, shares in money market mutual funds and funds obtained by financial institutions by selling securities with overnight repurchase agreements -- was left unchanged at 6-to-9 percent both for this year and for 1982. However, Volcker said that next year the Fed would shoot for the midpoint of that range, whereas this year the central bank hopes merely to stay within its upper bound.
Recently, growth of M1-B has been below the 1981 target range, encouraging many financial market analysts to predict that the Fed soon would ease its tight money stance. M-2, on the other hand, has been at or above the 9 percent upper limit of its range.
Some monetarist economists, including Robert Weintraub of the Joint Economic Committee staff, praised the new Fed targets. Weintraub said the M1-B target, if achieved, would be "deflationary." The Fed, he declared, "is showing real toughness."
Volcker acknowledged that high interest rates were hurting the economy, particularly housing, autos, small business and thrift institutions, and that the high level of rates "also has repercusions internationally, complicating already difficult economic policy decisions of some of our major economic partners." U.S. monetary policy, for just that reason, was an issue at the economic summit meeting in Ottawa that ended yesterday.
"Amidst these difficulties, we must not lose sight of the fundamental point that so many of the accumulated distortions and pressures in the economy can be traced to our high and stubborn inflation," Volcker told the committee. "Moreover, turning back the inflationary tide, as we can see, is not a simple, painless process, free from risks and strains of its own. All I would claim is that the risks of not carrying through on the effort to restore price stability would be much greater."