President Reagan yesterday criticized the Federal Reserve's money policy but refused comment when asked if he thought Fed Chairman Paul Volcker should resign.
Reagan told a news conference that "an upsurge . . . in the money supply just recently" sent "the wrong signal to the money markets" and may have contributed to a fear of higher interest rates that made business reluctant to invest. When asked if he agreed with some congressmen who have called for Volcker's resignation, the president said: "I can't respond to that, because the Federal Reserve System is autonomous. . . . There's no way that I can comment on that."
White House Deputy Press Secretary Larry Speakes later told reporters that "the president was not seeking a Volcker resignation or a change of status." A Federal Reserve spokesman declined comment.
In the past, Reagan criticized high interest rates but has usually expressed confidence in Volcker and the Federal Reserve. The president's economic recovery program supports a policy of slowing money growth, in line with the Fed targets.
In the last two months, however, there has been an unexpected and apparently unintentional jump in the money supply, which has puzzled senior Federal Reserve officials and led to administration criticism. This followed a period of extremely slow money growth, when administration officials--including Treasury Secretary Donald T. Regan and Chairman of the Council of Economic Advisers Murray Weidenbaum--called on the Fed to speed up money growth.
Top Fed officials are known to be annoyed with the way in which some members of the administration attach so much importance to hitting the targets month by month if not week by week. They say it is harder to achieve a smooth path of money growth than administration officials apparently believe.
In contrast to the public criticism of erratic money growth, a White House aide who advises Reagan on economic matters praised Volcker and the Fed in a recent interview: "With large continuing budget deficits, Jesus Christ himself would have a hard time at the Fed. It's like driving a drunken car down the road. I think they are doing an amazingly good job."
Weidenbaum said of the Fed yesterday, "I've always strongly endorsed their policy."
Many economists predict that Volcker's strict limit on the money supply will conflict with Reagan's expansionary fiscal and budget policy this year and push interest rates higher this year. Nobel prize winners James Tobin and Lawrence Klein told a congressional panel yesterday that the Federal Reserve's policy is too restrictive. But the president was complaining yesterday of too much, rather than too little, money growth.
Interest rates have been persistently high since Reagan took office, although they fell several points at the end of last year with the onset of recession. However, the drop recently halted, partly because financial markets anticipate a further tightening by the Federal Reserve in response to the unexplained money surge of recent weeks. Treasury Secretary Regan said yesterday, through a spokesman, that the "unusually high" money growth in the last 10 or 12 weeks had led interest rates "in contradiction to normal practice" to go "up in a recession."
Many economists believe high interest rates are the inevitable result of tight money policy, and are exacerbated by Reagan's expansionary fiscal policy of large tax cuts and a huge defense build-up. "Fed monetary targets just do not provide enough money to finance a fully prosperous economy" Tobin said yesterday.
A number of prominent monetarist economists, such as Allan H. Meltzer of Carneige-Mellon University and Robert H. Rasche of Michigan State University, maintain that a temporary deviation from a chosen money-supply-growth path does not matter so long as the Federal Reserve is able to bring the money supply back within the target range within six months or perhaps even longer.