President Reagan, who at his last news conference criticized Federal Reserve policies while at the same time declining to endorse the leadership of Fed Chairman Paul A. Volcker, will meet with Volcker next week, administration sources said yesterday.
As he was leaving yesterday for a weekend at Camp David, the president defended his economic policies and declared, "The program we have in place is aimed at bringing down interest rates, but I also think we have to have more cooperation from the Federal Reserve Board with regard to the money supply and a more consistent pattern."
Reagan is strongly resisting pressure from members of Congress to alter his fiscal 1983 budget. Volcker this week urged Congress to take steps to reduce the $91.5 billion budget deficit the president has proposed for 1983 as well as the large deficits slated for later years.
The upcoming meeting will be only the second between the two men. The first came last April and did not go well, according to presidential aides who were present. The aides said Volcker "lectured" the president about the potential conflict between his economic program and the sort of tight money policy needed to reduce inflation.
That conflict, which many economists believe contributed to the current recession, is, if anything, more pointed as a result of Reagan's latest budget.
For his part, Volcker told two congressional committees this week that any economic recovery could face a collision with fiscal policy unless drastic reductions are made in the prospective budget deficits. Such a collision could produce soaring interest rates unless the Fed abandons exactly the restrained money growth policy the administration keeps urging it to follow.
Administration officials maintain that the economy can expand rapidly for several years even if money growth is restricted, a proposition challenged by the vast majority of economists who have commented on the budget in the past week.
The precise points of disagreement between the administration and the Fed over monetary policy never have been completely clear. Most of the complaints from the president, Treasury Secretary Donald Regan and a number of other administration officials have focused on the Fed's inability to keep the money supply growing smoothly as well as slowly.
Most of the issues center on highly technical matters relating to the way in which the Fed tries to control money growth rather than on the rate of growth it is seeking. Such issues are not likely to be resolved in any meeting in the Oval Office.
As for the rate of money growth, the Federal Reserve and the administration seem to be on the same wavelength. Regan recently urged the Fed to seek money growth this year of between 5 percent and 5 1/2 percent, at the upper edge of the Fed's 1982 target range of 2 1/2 percent to 5 1/2 percent.
Volcker this week reaffirmed the target range and told Congress that money growth in the upper half of the range would be acceptable. Earlier the chairman had said the Fed would be aiming for the midpoint of the range, 4 percent.
Last year M1, the measure of money that includes currency in circulation and checking deposits at commercial banks, grew 4.9 percent. If an adjustment is made, as the Fed did for policy purposes, to separate M1 growth due to the extension of negotiable order of withdrawal (NOW) accounts on a nationwide basis, M1 growth was only 2.2 percent.
Because of the combination of a weak economy and declining inflation, the Fed now is willing to allow more money growth this year than last and more than it was planning up until a short time ago.
In the short run, the Fed has a problem with a bulge in the money supply that developed at the end of December and is persisting despite the continuing recession. The Fed reported yesterday that M1 rose $2.3 billion to a level of $449.7 billion in the week ended Feb. 3.
Bond markets were closed yesterday for Lincoln's birthday and will be closed again Monday for Washington's Birthday, so there was no immediate market reaction to the increase. However, analysts had been expecting a continuation of the declines in M1 in the previous two weeks.
Volcker testified this week that because of the weak economy, the Fed would not necessarily feel obliged to try to push down the level of the money supply even though it is well above the current upper limit of the target range.
Fed officials have told their administration counterparts they expect the level of M1 to remain high throughout this month.