Present high interest rates are the fault of past expansionist policy and not of the Federal Reserve Board's present policy, Treasury Undersecretary for Monetary Affairs Beryl Sprinkel told a House panel yesterday. Sprinkel did hint, however, that the Fed could stop some of the volatility in financial markets.
Members of the banking committee had given Fed Chairman Paul Volcker a rough ride earlier this week when he outlined a Fed plan to tighten credit despite interest rates that are near record levels. Sprinkel gave broad support to Volcker, although he did suggest some changes in money control, which he said would smooth out short-term money growth and thus dampen violent swings in interest rates.
Fed officials do not believe further refinement of money techniques would do much to get rid of the volatility in financial markets.
Sprinkel also disagreed with the contention of Volcker and others that a smaller budget deficit would greatly ease the pressure on interest rates. He said there was no technical, and no necessary, connection between budget deficits and money growth, or between deficits and inflation.
It was lax money policy leading to high inflation, and explation.
It was lax money policy leading to high inflation, and expectations of future high inflation, that made interest rates so high, the Treasury official said. Many financiers have claimed interest rates have stayed at record levels this year at least partly because of fears that the administration's proposed tax cut and huge increase in military spending will boost the budget deficit.
Sprinkel said he could not predict when rates would begin to fall, or how long the economy's present sluggish performance would last. He agreed that real rates of interest, after allowing for inflation, are unusually high now and have been for several months.
He maintained, however, that nothing could be done directly to ease this without endangering the long-term goal of bringing the long-term goal of bringing down inflation. "To eliminate inflation, a permanent reduction in money growth is absolutely necessary," the undersecretary said.