The chief spokesman for America's banking industry today strongly endorsed the Federal Reserve Board's tight money policies in what appears to be a growing conflict in Washington between the Reagan Administration's political needs and the central bank's anti-inflation platform.
American Bankers Association President Lee Gunderson, asked about Treasury Secretary Donald Regan's suggestion that the Federal Reserve should loosen its money policy and thereby help bring about reduced interest rates, said, "It is very important for the Fed to adhere to a goal of solid monetary policy."
If the central bank loosens its restraints at this time, Gunderson told reporters, "We'd have concern . . . it is easy to succumb to the idea of a quick fix," to bring interest rates down.
Gunderson, who heads a small bank in Wisconsin, was responding to comments by the Treasury secretary in an interview with The Washington Post, published in Sunday's edition. In that interview, Regan emphasized he was not calling for an "easy-money" policy, but said the Fed should assure "a sufficiency of money to enable the economy to recover nicely from its current flat period."
At a news conference here, Gunderson said he is "not pleased that we have to pass on the rates we must" to consumers, small businesses and farmers in his community. But "to ease off is not going to solve the long-range problems" that have built up over many years, he asserted.
The ABA chief, in contrast with Regan, said there is no need to shift policy now and that the Federal Reserve should continue with all programs in place to restore some predictability to the economic future.
Both Regan and Fed Chairman Paul Volcker are scheduled to speak to the bankers' annual convention here later in the week and bankers interviewed over the weekend -- most of them in an unusually pessimistic mood -- said they hope Volcker will remain unmoved. They said such a signal from the Federal Reserve would be a good sign in terms of economic health in future years even if an interim recession is the consequence.
Although short-term interest rates have dipped slightly in recent weeks, bankers and economists here predicted that no significant reduction in interest rates is possible and that recession is inevitable. For one thing, Gunderson said, the new tax law included more of a deficit burden than had been planned when the bankers supported President Reagan's overall economic recovery program.
An example is the All Savers certificate added to the tax law after successful lobbying by the depressed savings and loan industry. These tax-free certificates went on sale for the first time last week and attracted an avalanche of public interest. They are predicted to cost the Treasury $5 billion in lost revenues over the next three years -- a figure bankers said may be too low in light of the initial investing interest.
Gunderson said that bankers would oppose any extension of the 15-month period during which All Savers certificates may be offered, particularly if current requirements that 75 percent of net new savings go to housing and agricultural loans are continued. "Small business people feel like second-class citizens now . . . I get nervous when someone in Washington determines what's right," in terms of lending decisions, Gunderson added.
He also emphasized his view that no legislation providing an incentive to saving should be enacted without parallel cutbacks in federal spending.
Separately, in an extremely pessimistic forecast, economic John D. Paulus said that unless the administration's current program of cutting taxes by $280 billion and expenses by $130 billion over three years is tightened up "interest rates can be expected to remain high for a long time."
Paulus, vice president of the New York investment firm of Goldman, Sachs and Co., said that "given the evident inconsistency between presidential pronouncements on the budget and the actual outcome of budgetary actions through the years, it would take a great leap of faith to believe that any portion of the debt issued by the Treasury in the next few years will be retired eventually by a budget surplus."
This represents a serious problem for the Reagan administration, he declared, "since debt issuance associated with the Reagan deficits will be inflationary even if the Federal Reserve holds firm, so long as the public expects the Fed to cave in eventually . . . "
Also coming down on the side of Volcker, the Goldman, Sachs economist said the "public needs to be shown, not told, that the Fed finally is resolved to stop inflation."
Failure to take actions to shrink deficits projected through 1984 means that the basic inflation rate will remain high and that given a bias against savings in our tax code when inflation is high, capital formation will be retarded, Paulus predicted.
On the other hand, he cautioned, shrinking the deficit by new budget cuts or higher taxes would be politically risky, especially because the economy is weakened after a year of record high interest rates.
"Given the likely reaction of the U.S. economy to budget deficits, the alternate to shrinking the deficits projected for 1982, 1983 and 1984 may well be a continuation of the dreary performance of the U.S. economy during the last decade," Paulus asserted. "That would mean that the much ballyhooed 'Reagan revolution' will never materialize," he concluded.