Asserting that the battle against inflation "is far from over," Federal Reserve Board Chairman Paul A. Volcker yesterday indicated there would be no change in the Fed's basic monetary policy because of the deepening U.S. recession.
Volcker also urged consideration of future tax increases to reduce federal budget deficits if spending cannot be brought into line with revenues when the economy is healthy. President Reagan last week rejected proposals from his budget advisers that he seek tax hikes in 1983 and 1984 to reduce the size of the large projected deficits.
The Federal Reserve chairman, in a speech at the University of Nebraska, acknowledged that intense pressure in financial markets during 1980 and 1981 contributed to the present economic downturn. But he added, "I want to assure you that our commitment is firm: We need to persist in the policies of financial discipline that are now in place."
A number of economic forecasters now expect the slump to be more severe than the "mild" recession suggested by Reagan administration economists. Alan Greenspan of Townsend-Greenspan & Co., a private adviser to Reagan, said the economy will decline at a 4 percent to 5 percent annual rate this quarter, with a further drop in at least the first quarter of 1982.
Ezra Solomon of Stanford University, a member of President Nixon's Council of Economic Advisers, was even more gloomy this week. Solomon said the unemployment rate, 8 percent last month, would probably top 9 percent--setting a new post-World War II high. "The situation probably will be as bad as it got in 1975," he said, which was the worst recession since the 1930's Depression.
Even with the recession, inflation is still at the top of Volcker's problem list. "We can point to signs of progress against inflation," he said. "But we are also compelled to report that, outside the area of sensitive commodity prices, most indexes of prices and wages show rates of increase so far this year only slightly below last year's pace. Moreover, some of the progress has come in areas in which the relief may only be temporary . . . "
As the recession has worsened, private credit demand has fallen. Partly for the same reason, growth of the most closely watched measures of the money supply is running well below the Fed's target range, and the central bank recently has allowed short-term interest rates to tumble. Some of those rates are "as much as 6 percent below the peaks of the summer," Volcker noted. "That respite is welcome and should help cushion the recent decline in business."
The Federal Reserve policy generally calls for lower interest rates when money growth falls below the intended levels. However, there evidently is no intention to try to boost economic growth quickly by pumping large amounts of ready cash into the banking system, as the Fed attempted in some other recession periods.
Instead, Volcker stressed, "There will be a continuing need to restrain growth in money and credit to amounts consistent with the needs of the economy at stable prices."
Such restraint can place severe strains on financial markets, especially if the federal government is borrowing large amounts of money to cover budget deficits at the same time private credit demands are strong, the Federal Reserve chairman said. To reduce that strain, and the high interest rates that go with it, he urged that when the economy is healthy federal spending and revenues be brought into line with each other. If spending cannot be reduced sufficiently, he declared, then "we cannot shrink from considering new revenue sources."