Federal Reserve Chairman Paul A. Volcker is expected to tell Congress next week that the Fed is sticking to its guns. The Federal Open Market Committee, which sets monetary policy for the central bank, met this week and basically reaffirmed its goal of holding money supply growth to a range of 2 1/2 percent to 5 1/2 percent from the fourth quarter of 1981 to the fourth quarter of 1982.
In addition, the Fed will be aiming at the midpoint of that range, Volcker is expected to announce. Treasury Secretary Donald T. Regan, speaking just on behalf of Treasury, recently urged the Fed to seek money growth in the upper third of that range.
None of this will come as any surprise to financial markets, because Volcker has been taking a particularly tough line in public statements about the need to keep a tight rein on money growth until there is more progress in reducing inflation. Other Fed officials have taken a similar stance.
Volcker and the other officials acknowledge they do not relish their role, which in the short run is putting them in the position of forcing up interest rates in the midst of a continuing recession to contain the recent surge in money growth.
Volcker's message will be delivered to the House Banking Committee only two days after President Reagan sends Congress his fiscal 1983 budget with an estimated $90 billion deficit--a deficit many analysts believe ultimately will turn out to be far larger. Moreover, with the prospect of large continuing deficits, the Fed feels it is the only anti-inflation game in town.
The money measure M1, which includes currency in circulation and checking deposits at financial institutions, grew 5 percent from the fourth quarter of 1980 to the fourth quarter of 1981. The Fed was aiming roughly for 7 percent, though it expressed it differently because of a special allowance it made last year for the rapid expansion of negotiable order of withdrawal (NOW) accounts across the country.
However, an article in the Federal Reserve Bank of New York's Quarterly Review published yesterday said that the explosive growth of money market mutual funds, many of which allow check-writing privileges, reduced the growth of M1 by about 3.9 percentage points.
The money funds' unique combination of high yields and liquidity may have provided a "resting place" for funds not needed immediately for transactions purposes, cutting the public's demand for checking deposits at financial institutions, the article said.
Such rapid changes in the way in which the public chooses to hold its money vastly complicate hitting any particular money growth target. For instance, Fed officials believe much of the surge in money in December and January was the result of an unusual combination of circumstances. The public apparently was reducing its holding of small certificates of deposit and increasing its use of NOW accounts. One theory at the Fed is that the extremely unsettled conditions in financial markets have led investors to place the funds from maturing small CDs temporarily in NOW accounts. Such CDs are not part of M1, while the NOW accounts are. Another factor in the surge may have been "window-dressing" by both banks and corporations trying to make their balance sheets look more liquid at year's end, one Fed official said.
Whatever the source of the surge, the Fed underscored its intention of keeping money tight by telling major banks this week that they should not be borrowing so frequently directly from the Fed when they need funds to meet their reserve requirements. With some of the banks forced to turn to the market to replace the Fed's loans, some short-term interest rates rose sharply.
Rising interest rates this far into a recession are hardly standard medicine, and Fed officials are aware that their actions could abort the recovery expected later this year. However, despite the unhappiness frequently expressed this week at the FOMC meeting about their dilemma, the Fed shows no sign of changing its course, even to the small degree suggested by Regan.