Treasury Secretary Donald T. Regan yesterday said that monetary policy "in the near term . . . should be accommodative to recovery" of the economy.
Such accommodation by the Federal Reserve is needed, Regan declared, "to produce "an expanding economic base" that will generate more federal revenues and reduce looming budget deficits. "Then, as the economy strengthens, money growth should be phased back slowly," he said.
Regan, speaking to a group of area businessmen at the Washington Post's annual business outlook luncheon, stressed that lower budget deficits are needed to ensure lower interest rates. "In my judgment, interest rates in the long run will move down further and stay down only if we get deficits below 2 percent of the gross national product ."
Currently, 2 percent of GNP would be about $65 billion. In 1986, the year in which Regan indicated such a target should be met, it likely will be about $80 billion, depending on the rates of inflation and real economic growth in the meantime. Without actions to increase revenues or lower spending, the 1986 deficit could be $250 billion or more, according to administration estimates.
The Treasury secretary did not define what he would consider an accommodative monetary policy. Significantly, however, Regan offered no criticism of recent Federal Reserve actions that have lowered interest rates even though the level of the most closely watched measures of money are well above the upper limits of the target ranges set for them by the Fed.
According to analysts' estimates, the central bank will report Friday that M1, the measure that includes currency in circulation and checking deposits at financial institutions, grew 8.4 percent between the fourth quarter of 1981 and the fourth quarter of 1982, outside the 2.5 percent to 5.5 percent range set last February.
Similarly, M2--which also includes small savings and time deposits, money market mutual fund shares and some other items--grew 10.3 percent compared to a 6 percent to 9 percent target range.
Since October, the Fed has not been viewing M1 as a guide to policy because of a number of regulatory changes that have distorted its meaning, including the advent of money market deposit accounts and super NOW accounts at financial institutions.
M2 is still being watched. But Fed policy, which Regan by implication was endorsing, principally has been directed at seeking lower interest rates to encourage a recovery rather than at keeping growth of the money supply within the target ranges.
Regan's remarks contrasted sharply with a statement issued yesterday by the Committee to Fight Inflation, a group of economists and former government officials. Its co-chairmen are former Treasury secretary Henry Fowler and Herbert Stein, former chairman of the Council of Economic Advisers.
The statement warned that "the battle against inflation is far from won," and in the sphere of monetary policy added, "The great risk at present is that monetary restraint will be relaxed to an undesirable degree."
In a separate speech at the National Press Club, Stein argued that "the administration and the Federal Reserve should agree upon and announce a target path for nominal GNP GNP stated in current dollars year-by-year for the next several years.
"The path should be consistent with a gradual recovery of real output and employment while the inflation rate continues to decline," Stein explained. "For 1983 the rate should be more than the 4 percent rate experienced in 1982, which was too low to prevent a big rise in unemployment. But it must be much less than the 10 percent rate experienced in the previous four years of high inflation. I think of the target as 8 percent for 1983 and declining thereafter to 5 percent."
A number of forecasters believe nominal GNP will rise about 7 percent or less this year compared to 1982, with real output rising about 1.5 percent and prices going up about 5 percent or 5.5 percent.
Unless inflation continued to fall--precisely Stein's objective--steadily lowering the target for nominal GNP would mean low levels of economic growth for years and high levels of unemployment.
Allen Sinai, an economist at Data Resources, Inc., agreed targeting nominal GNP would be "an excellent idea." But if inflation remained "sticky" as the nominal GNP target was lowered, "unemployment would hardly improve. That could be a prescription for near-stagnation," Sinai said.