Treasury Secretary Donald T. Regan yesterday endorsed the Federal Reserve Board's recent "slight tightening" of monetary policy, but argued against any further tightening and predicted that interest rates would soon drop again after their upward "blip."
Regan admitted to the Joint Economic Committee of Congress that the administration had been "slightly ambivalent" about the Fed tightening, which he said was responsible for the rise in interest rates in past weeks. "We recognize that a slight tightening brings about a rise in interest rates . . . but we don't want interest rates to rise much," the Treasury secretary said, adding "we would not want . . . a sudden choking off" of money growth.
The White House and some congressmen have recently called on the Fed not to push up interest rates and inhibit recovery. However, the central bank did tighten its money policy in May and June and some analysts believe that the Fed's policymaking committee last week decided to go further in this direction in an attempt to slow the rapid increase in the money supply. Regan said, "I do not know what happened last Tuesday," but he told reporters after the congressional hearing that he thought that "right where they are . . . after the May, June tightening, would be enough."
The Treasury secretary gave a bullish account of the present state of the economy to the JEC and predicted that new government figures due this week will show that the economy grew faster in the second quarter than was first reported. The "flash" estimate of GNP growth for the last quarter was 6.6 percent, and Regan said the new figure due Thursday will be "higher."
He also said that faster growth this year and next would help reduce the budget deficit by generating more tax revenues. Regan told reporters that it was "entirely possible" that growth would be fast enough to eliminate the need for the contingency tax increases that President Reagan has proposed for 1985. This would depend on Congress holding down spending, he said. However, the additional revenue from the faster growth will only be $10 billion to $15 billion in fiscal 1984 and $15 billion to $20 billion the following years, he said.
Regan reiterated the White House position against tax increases and blamed Congress for spending too much and causing large budget deficits. He also stood by supply-siders, whom he said were "well respected" in Treasury. Presidential economist Martin Feldstein last week criticized the "small but vocal group of vestigial supply-side extremists" who believe cutting taxes is more important than reducing the budget deficit. Regan described Feldstein's remarks as "uncalled for."
Regan said that money growth should not continue at its recent rapid pace and suggested that the Fed "try to stick within its original targets from now until December," but without attempting to compensate for the money bulge that has already happened.
Regan predicted that long-term interest rates will come down by the end of the year and that the key prime lending rate, charged by banks to their top customers, will fall by 1 1/2 to 2 percentage points by 1985 and 1986.
He said that the economy was now in the midst of a strong recovery that he believed would be sustained and told the JEC that "this administration does not object to strong growth." Some economists, including many of Reagan's economic advisers, believe that a very rapid recovery could lead to a revival of inflation. However, White House officials have dismissed this view and said that they would like a vigorous recovery and rapid decline in unemployment.