The Federal Reserve Board's moves to ease monetary policy have not led to a general lowering of interest rates, board governor Henry Wallich warned today.
Fed Chairman Paul A. Volcker recently indicated his disappointment that the Dec. 13 cut in the Fed's key discount rate did not bring other rates down sharply in its wake, as had the earlier rate cuts. The federal funds rate that banks charge to each other on overnight money was above 9 percent at times today, compared with a range of 8 1/2 to 8 3/4 percent recently.
A number of economists believe that further declines in interest rates are necessary for a sustained economic recovery. Many consumer loan rates have not moved down very far, despite the declines in money market rates since summer. The prime lending rate at most major banks remains at 11 1/2 percent, far above the current inflation rate.
The Fed is faced with deciding whether to ease its policy further, in an attempt to encourage lower rates, or whether to wait and see if rates decline further with current policies. It will soon have to tell Congress whether it is going to set new monetary targets for 1983. So far, the targets have been set tentatively at the same ranges as they were for 1982. However, since the fall, the Fed has, at least temporarily, given up targeting the M1 money measure, which includes currency in circulation and checking accounts, as the measure has been distorted by banking changes. The Fed also has raised slightly its targets for the near-term growth in the broader measures of the money supply.
Wallich, speaking at the annual meeting of the American Economic Association, suggested that interest rates would not go on declining if financial markets believe the Fed has relaxed its fight against inflation. "Let us stray a little from money targets and the effect of a discount rate cut tends to be quite different from what its predecessors' were," he said.
However, there was little general agreement for that view at the economists' conference today. Speaking at the same session as Wallich, Charles Schultze, economic adviser to former president Carter, said that monetary policy should be eased still further to allow the economy to recover. He rejected Wallich's argument that easier money would not lead to lower interest rates, and said if that was the case, then why not tighten money to reduce rates?
Wallich also said that he would favor a "mild" type of incomes policy--agreed to between individual businesses and groups of workers rather than legislated--that would tie wages partly to profits, with only a small wage increase early in the year.
At a lunch honoring James Tobin, the 1981 Nobel prize winner for economics, there was something of a Keynesian revival. Tobin has been the "carrier of the torch for Keynesian" ideas while they have been under attack, Robert Solow of MIT said in his introduction. He described the heart of these ideas as the belief that government action can help to promote higher employment, and that without such action there will be long periods in capitalist societies when unemployment is high and capacity utilization is low. Tobin received two standing ovations from an audience apparently largely sympathetic to him.
Solow said the idea that large budget deficits were responsible for weakening the economy was "at best . . . all wrong." However, the notion is so popular today that telling people it is wrong, he said, is like saying as you sit down to a roast beef dinner that red meat is bad for you. Schultze had earlier argued that, while it would provide a better balanced economy if the future deficits were reduced, such cuts would not promote growth.
Others at the lunch included Nobel prize winners Wassily Leontieff, Lawrence Klein, Theodore E. Schultz and Sir Arthur Lewis, and several other economists. Gardner Ackley of the University of Michigan described the head table as a "most distinguished cast of economic stars and czars."
Tobin acknowledged that the economics profession has been widely discredited by its inability to deal with today's problems, commenting "on most prominent issues of political economy," the profession "offers counsels more divided than at any time since the 1930s."
Former Reagan adviser Murray Weidenbaum described the economic policies of the administration's first two years as "quite an eclectic blend of monetarists, supplysiders . . . and other brands of contemporary economic thinking."
Few of the economists seemed optimistic about the prospects for growth and employment, although most predicted that there would be some kind of recovery. Weidenbaum said that, provided there were further deep cuts in federal spending--he suggested defense, entitlements programs and subsidies such as farm price supports--there could be a period of sustained growth, falling unemployment and still declining inflation over the next five years.