William Poole, President Reagan's nominee for the Council of Economic Advisers, said the Federal Reserve Board should continue to aim monetary policy at fighting inflation and should not abandon its monetary targets despite recent distortions in the money numbers.
Poole, a monetarist economist from Brown University, said at his confirmation hearing before the Senate Banking Committee yesterday that he is not greatly concerned with short term deviations of the money supply from the Fed's target. The longer such deviations continued, the more reason there was to worry, he added.
Some administration officials have complained that the Fed recently has allowed the money supply to grow too rapidly. However, CEA Chairman Martin S. Feldstein has supported the Fed's decision to allow above-target growth in the key M1 measure of the money supply, which includes currency in circulation and money in checking accounts.
Feldstein was criticized at yesterday's hearing for refusing to appear before another congressional committee during the lame-duck session. Sen. Paul Sarbanes (D-Md.) said Feldstein's letter of refusal to testify before the Joint Economic Committee was an "outrageous response" to the invitation from Committee Chairman Henry Reuss (D-Wis.). Feldstein has a recess appointment and is yet to be confirmed by the Senate. "If and when [his confirmation] comes up on the floor I think this record should be and will be a matter for debate," Sarbanes said.
Banking Chairman Jake Garn (R-Utah) told reporters he still expects Feldstein to be confirmed although he thinks the CEA chairman "should have appeared" before the JEC.
Poole described the current level of unemployment as a "national tragedy" but said it was essential to keep fighting inflation. Large federal budget deficits were holding up real interest rates -- after allowing for inflation -- he added.
Poole acknowledged that "inexorable arithmetic" means that it is not possible to increase military spending, cut taxes and reduce the deficit without extremely large cuts in domestic spending programs. It is important not to attempt to bring down the deficit by taxation alone, Poole said.
There is "no question that we are in a worldwide recession," said Poole, calling the world economic slowdown the result of "coming off a period of high inflation," and indebtedness.