Federal Reserve Chairman Paul A. Volcker will not comply with a request from a House committee for the Fed's explicit "objectives" for economic growth, unemployment and inflation for 1983 and the next three years, Federal Reserve officials said yesterday.
Volcker is scheduled to testify before the House Banking, Finance and Urban Affairs Committee a week from today and the central bank's policymaking group, the Federal Open Market Committee, (FOMC) has set no such objectives.
Moreover, Volcker will attempt to convince the committee that requiring such figures "is a bad idea," a senior Fed official said. The official, expressing the view of many at the central bank, said he is worried that the "calculated guerrilla attack" by the Banking Committee could lead to significant curbs on traditional Federal Reserve independence.
Banking Committee Chairman Fernand J. St Germain (D-R.I.) asked yesterday in a letter to Volcker that he comply with a provision of the House version of the 1984 budget resolution calling for such a report. The action was part of an effort by some Democrats to put pressure on the Federal Reserve to follow a monetary policy geared to a rapid economic recovery, according to committee staff members.
Democrats, including St Germain, have specifically warned the Fed not to allow interest rates to rise in response to recent large increases in the money supply. However, a number of financial market analysts believe the Fed is in the process of doing just that.
Some key short-term interest rates have risen nearly a full percentage point in the last month. The federal funds rate, which is heavily influenced by Federal Reserve actions and in turn helps determine the level of other market rates, is up also. That is the rate banks charge one another on loans of reserves.
St Germain and the other Democrats believe that a public statement of Fed objectives for the gross national product, unemployment and inflation--rather than just for growth of the money supply as is now required--would make it more difficult for the Fed to adopt a monetary policy likely to produce slow economic growth or for the central bank to fail to move to a more stimulative policy if the recovery falters.
By extension, forcing the Fed to set such explicit objectives could cause some political difficulty for the Reagan administration, according to some Banking Committee staff members. If the administration forecasts for growth, unemployment and inflation were again to turn significantly more optimistic than the Fed's public objectives, it could prompt Congress to question the administration, or perhaps to force the Fed to reconcile its money targets with the Reagan forecast.
Many economists warned in 1981 and 1982 that Federal Reserve policy targets, which were backed by Reagan, were not consistent with the administration's forecast of rapid economic growth. In fact, rather than the boom predicted by the administration, the Fed's anti-inflation money policy was a primary factor in the recession of 1980 and of 1981-82 as well.
While resisting the idea that the Fed should set such objectives, senior Federal Reserve officials nevertheless remain concerned that the recovery may not be sustained beyond 1983 unless long-term interest rates drop below present levels.
If rates do not come down, "we will have an economy vulnerable to downturns in my opinion, not a healthy economy," said one official. Long-term rates, which most economists believe are in large part dependent on expected future inflation, have plenty of room to come down, he added. "If the inflation outlook is as good as I think it is, long-term rates are way too high."
At present, the central bank is required only to report its money growth targets and a general assessment of the economic outlook. When the House Budget Committee had the 1984 budget resolution under consideration, Volcker urged it to change the word "objectives" in the resolution to "assumptions."
When the FOMC agrees upon a set of money targets, it does not seek to reach a consensus on a specific economic forecast. In February, when it formally set the targets for this year, the 19 FOMC members had a wide range of forecasts, or "assumptions," in mind for what economic results would flow from the targets chosen.
Volcker and the Fed will resist pressure to set such objectives because they fear, as one official put it, "that they would become a way station to telling us what policy should be. Congress could use them as a bat to hit us over the head with."
If Congress did start to direct what economic growth rates the Fed should achieve, the official continued, "They could give us a lot of conflicting goals and we would have no way to reconcile them. Besides, monetary policy is not the only thing that matters. We have no control over the budget."
The likelihood of congressional dictation of a set of economic objectives "gets more dangerous" with the prospect of members of Congress dealing with concepts that are more easily understood, such as inflation and unemployment, than the money supply. "We would get to politically charged objectives very quickly," the Fed official warned.
Rep. Chalmers Wylie of Ohio, the ranking Republican on the committee, signalled that the minority would not cooperate with the Democrats on the issue. "It's important that the Federal Reserve System remain fairly independent of Congress," he said. "I don't think that Congress is equipped to tell the Federal Reserve what monetary policy should be, or what GNP should be"
And Wylie added, "I think Congress has made a mess of fiscal policy, which is less complicated than monetary policy."