Opposition continued to mount yesterday to any tightening of credit conditions by the Federal Reserve as its policymaking group, the Federal Open Market Committee, began a two-day session to consider just that.
When reports were published last week quoting Federal Reserve officials saying that the FOMC would decide at this meeting to tighten its monetary policy, the White House announced its opposition, particularly to any increase in the Fed's 8 1/2 percent discount rate--the interest that the central bank charges on loans to financial institutions.
In those reports, the Fed sources indicated that a discount rate increase likely would be one of the steps taken soon, if not initially.
Deputy White House Press Secretary Larry Speakes reiterated that opposition yesterday, declaring, "We do not want any interest rate increase." Asked whether his comments could be taken as an instruction to the Fed, Speakes said, "No, that is a viewpoint. The Fed is independent, and we respect its independence."
After a Republican congressional leadership meeting at the White House, Sen. Charles Percy, (R-Ill.) said Congress also strongly opposes higher rates and will make that clear to Federal Reserve Board Chairman Paul A. Volcker at his confirmation hearing Thursday.
"We do not want to see the interest rates go back up," Percy told reporters. "Economic recovery that is underway now must be sustained and carried forward."
A number of financial analysts predicted yesterday that this strong opposition from the White House and elsewhere could preclude any increase in the discount rate for some time. Nevertheless, the analysts noted that the Fed can tighten credit conditions without moving the discount rate, so that market interest rates rise and help slow the recent rapid growth of the money supply.
At the meeting, which concludes today, the FOMC will reaffirm or change money growth targets for this year and set tentative targets for 1984. The FOMC also will decide a policy course for the coming weeks, and that is what markets are anxiously awaiting.
One of the analysts, Alan Greenspan of Townsend-Greenspan & Co., told his clients, "Should the Fed move in the direction of increasing tightness in the short run, they will be reluctant to move too readily on a discount rate increase. Obviously, an increase in the discount rate in and of itself does nothing to slow bank reserve growth or money supply growth. The discount rate, however, is such a significant political signal that strong technical considerations would be required to move it."
Charles Lieberman of Morgan Stanley & Co. said much the same thing. "The odds against a discount rate increase have risen, but the Fed doesn't need to change it to tighten, anyway," Lieberman said.
Greenspan noted that, when the discount rate is significantly lower than the federal funds rate--the interest at which banks borrow reserves from each other rather than from the Fed--borrowing from the Fed is cheaper and therefore a more profitable source of money for the banks. In the past, members of Congress on occasion have criticized the Fed for enriching the banks by holding the discount rate too far below market rates.
If the federal funds rate, which is just above 9 percent, were to rise to, say, 9 1/2 percent, other market rates likely would rise, too, even if the discount rate were left unchanged. The 10 1/2 percent bank prime lending rate probably would go up as well.
Meanwhile, market interest rates rose and bond prices fell yesterday as market participants continued to expect a Fed tightening, and Henry Kaufman, the influential chief economist of Salomon Brothers, predicted that rates would rise slightly over the remainder of 1983.
Kaufman, one of Wall Street's most influencial economists, said he expects rates to continue to rise and the economic recovery to strengthen. However, he said he believes the Fed will tighten monetary policy only modestly because "the sharp restraining moves that would raise U.S. money rates significantly would hinder the renewal of economic growth in other nations."