Federal Reserve Chairman Paul A. Volcker says he believes money growth is now reasonably on track, suggesting that the Fed may not need to hold credit as tight as some analysts had feared.
M1, the narrow, closely watched measure of the money supply, has been above the Fed's target range this year. Some market participants have thought the Fed would have to keep credit very tight to bring M1--currency in circulation and checking accounts--quickly back within its target growth range.
However, Volcker said in Chicago late Wednesday that the rapid growth in M1 this year was probably due at least partly to technical factors, so that the Fed does not believe that M1 is now "out of line with our purposes." Other money measures are within their target ranges, strengthening the judgment that M1 is now inflated for technical reasons, Volcker said.
The increase in the M1 measure of the money supply this year was largely due to a build up in NOW accounts--interest bearing checking accounts. This may have been due more to a desire to build up savings for precautionary reasons than to an increase in the money that people planned to spend, Volcker said.
It means that the original M1 targets have been somewhat tighter than intended, and so overshooting the M1 target is not necessarily out of line with the Fed's intentions when it set the targets, analysts say.
"Obviously, we want to have enough financial growth to support recovery," Volcker said on Wednesday. He is known to think that, with the present weakness in the economy, there is little need to worry about being at the high end of the money supply ranges. However, he cautioned in Chicago that "to attempt to push interest rates down by excessive money creation at the expense of inflationary fears would, it seems to me, be shortsighted."
Some economists believe that the Federal Reserve's tight money policy is largely responsible for persistent high interest rates. Volcker said that present monetary targets should allow "enough money to support economic recovery, consistent with continued progress against inflation," and he called again for action to reduce the budget deficit, which he said would help to bring down interest rates.
He said money policy should be set and reviewed in the light of "the general economic environment--including conditions in the money, capital and foreign exchange markets, the federal budgetary posture and other factors," leaving the door open for some relaxation of policy if the economy fails to recover this year and inflation continues to ease.
However, Volcker is known to fear that any relaxation of money could upset financial markets, and he has said repeatedly that policy should continue to be aimed at bringing down inflation. He said again Wednesday that "restraint on money and credit growth is an essential part of bringing down inflation and keeping it down," and he held out the hope that the current slowing of inflation would gather momentum, leaving interest rates "no place to go but down."
He also told reporters "I don't know of any secret plan" of the administration to bring down interest rates. This week, presidential counselor Edwin Meese III said that, if rates do not come down with a budget compromise, the administration will take some unspecified action. White House spokesman Larry Speakes later said that the administration was not suggesting any change in monetary policy.
President Reagan said yesterday after a meeting with outside economic advisers that "a strong and lasting recovery is not far away" if there is action to bring down the deficit. Speaking to the American Retail Federation in the Rose Garden yesterday, Reagan said, "While interest rates, as you well know, remain painfully high and unemployment continues at hurtful and unacceptable levels, your industry may be beginning to inch us out of this recession."