Federal Reserve Chairman Paul A. Volcker has told Reagan administration officials that the central bank is "snugging up" its policy in response to recent rapid growth of the money supply.
By that, Volcker means that he is "taking in a little of the slack, but not really pulling on the rope," a senior administration official said.
Some short-term interest rates, such as the rate paid by banks on large certificates of deposit, have risen recently by as much as half a percentage point. In consequence, a number of financial analysts have suggested that the Federal Reserve has been slightly less accommodating in providing reserves to the banking system. Volcker's remarks to the officials seem to confirm that.
The analysts said that the increases likely would preclude any further declines in the banks' prime lending rate, which is now 10 1/2 percent.
At a meeting with reporters yesterday, Treasury Secretary Donald T. Regan said that Volcker "is trying to be accommodative to the recovery and keep money loose but not too loose. He's walking a narrow line."
Regan expressed concern about the rapid growth in money, as Volcker did recently at a congressional hearing. But the Treasury secretary also said he is confused. "I don't know what is going on," he said. "I worry that we don't have more knowledge about what is taking place and that we don't have better guidance" from the Fed.
The emergence of two new types of deposits, the Super NOW account and the money market deposit account, have created "all kinds of crosscurrents" in the monetary statistics, Regan said. "I worry that something more may be going on than meets the eye."
Regan suggested that it might be necessary once again to redefine the various measures of money, possibly removing the Super NOW accounts from M1, which is the measure of transaction balances, and does not include savings and time deposits. An unlimited number of checks can be written on a Super NOW account, but financial institutions can pay any interest rate they choose on the deposit so long as the balance is $2,500 or more. Some undefined portion of Super NOWs represent savings as opposed to transactions balances, analysts agree.
"We need a better definition and more precise figures," the Treasury secretary declared.
During Feburary, M1 grew at a 21.2 percent annual rate, while the Fed has indicated that M1 should expand between 4 percent and 8 percent between the fourth quarter of 1982 and the fourth quarter of 1983.