he national economy appears to be weakening and that indicates a further decline in interest rates, Federal Reserve Board Vice Chairman Frederick H. Schultz said today.
Addressing a meeting of members of the National Savings and Loan League here, Schultz said he doubts interest rates will fall precipitously, however, unless there are "massive cuts in government credit demands."
Interest rates have fallen in recent weeks and several economists have said they expect further declines.
The next six to nine months will be critical, Schultz said, but he professed optimism over recent progress in reducing inflation.
Schultz said finding a way to reduce government credit demands is possibly the most important way to bring down inflation. Those demands, he said, are running about one-third of the total $400 billion in credit requests.
"If you can find a way to cut down on those government credit demands, then it has a very great impact on the availability of credit to the private sector and the level of interest rates," he said.
The nation has reached "one of the most critical periods" in history, he said, but added, "I don't see a serious recession in the cards."
Schultz defended the Fed's insistence on maintaining a tight monetary policy in its fight against inflation--a course that has been questioned recently by Treasury Secretary Donald Regan.
"We don't think the Federal Reserve has the luxury or the options of changing monetary policy," he said, "because everybody in the world is waiting for the Fed to cave in."
Schultz said differences with Treasury officials last week over the Fed's conduct of monetary policy were overblown.
"I think Don Regan just made a little mistake in looking only at M1-B rather than all the monetary aggregates," Schultz said in response to a question.
M1-B is a closely watched money supply measure that includes cash and checking accounts.
Schultz said a different political system could develop within a decade "if we allowed inflation to continue unchecked."
He said the fight to control inflation over the past two years probably took longer than it should have because of some setbacks in the interim. One of those, he said, was the implementation of credit controls and the aftermath.
Schultz applauded the administration for its upbeat approach in dealing with problems.
He criticized the president, however, for failing to point out there is "no magic wand to wave and get away from inflation."