The Reagan administration, its entire economic program being jeapordized by continuing high interest rates, would like to see somewhat faster growth in the most closely watched measure of the money supply, the chairman of the President's Council of Economic Advisers said yesterday.
The chairman, Murray Weidenbaum, stressed that the administration has no quarrel with the Federal Reserve's targets for growth of the money supply. However, the level of M1-B, which includes currency in circulation and checking deposits at financial institutions, has remained below the Fed's target range for some time, Weidenbaum said, and the administration would like to see the M1-B growth rate back up to at least the lower part of that range.
"The Fed is steering a vehicle on a very rough road," Weidenbaum said in an interview. "Now it's off on the right shoulder, and we expect the next turn to put it back onto the road."
Weidenbaum said that despite the unexpectedly high level of interest rates, the administration has not revised the economic forecast it published in July, which predicted faster economic growth by year's end. Some private forecasters, including some of those who will be meeting today with the president and his economic team, believe the persistence of high rates has pushed the beginning of that faster growth well into next year. "Those are reasonable scenarios," Weidenbaum said. "They're just not our July 15 scenario."
However, the CEA chairman indicated that some recent developments, themselves constituting "good news," had combined to increase estimates of federal budget deficits for 1982 and later years. "Good news on inflation means lower revenues, good news on oil prices means lower windfall tax receipts, and goods news on food prices means higher support payments to farmers," he said.
Weidenbaum went on to imply that high interest rates would mean slower economic growth than earlier expected by noting that they already have hurt the economy generally and, by helping increase the value of the dollar, have begun to have a negative effect on the U.S. trade balance.
As for monetary policy, if the Fed can boost M1-B growth, the additional supply of money might ease credit conditions and help produce lower interest rates. But financial analysts have been interpreting any increase in M1-B as implying that the Federal Reserve will have to tighten up in the future to keep money growth within bounds. Thus almost every increase provokes another jump in interest rates.
Weidenbaum said this reaction is not justified. "It is important that financial markets understand that a move to the lower end of the range is not a move to monetary ease," he said. In urging the faster growth, he added, "I am not giving guidance to the Fed. I'm giving guidance to the public."
Recent statements by President Reagan and Treasury Secretary Donald T. Regan have included criticism of the Fed's performance and the near-record levels of interest rates and have implied a desire for an easier monetary policy. However, Weidenbaum declared, "The one thing we should not have is monetary ease."
The CEA chairman, who speaks regularly with Federal Reserve Chairman Paul A. Volcker, said that he had been getting statements from the Fed concerning its intentions "that reassure me."
Fed officials, according to published records of its policy actions and private conversations, are just as anxious as the administration to boost M1-B growth back into its target range. The Fed seeks to influence the money supply by increasing or reducing the amount of reserves -- the portion of deposits financial institutions must set aside in non-interest-bearing accounts at Federal Reserve banks. Making more reserves available enables the institutions to increase their lending activities and vice versa.
In July such reserves, other than those borrowed from the Fed, rose at a 20 percent annual rate and at about a 17.3 percent rate in August, as well. But with the economy in the doldrums, the rapid increase in reserves has not yet been translated into faster growth of the money supply.
How much relief for strained credit markets a somewhat faster growth of M1-B would provide is unclear.