The Senate Banking Committee voted yesterday in favor of a second four-year term for Federal Reserve Board Chairman Paul A. Volcker, as the administration endorsed Fed actions to tighten credit conditions but warned of an imminent spurt in interest rates.
The committee voted 16 to 2 to recommend Volcker's nomination to the full Senate, which is expected to confirm him within the next two weeks.
Voting against Volcker were Sens. James Sasser (D-Tenn.) and Alan Cranston (D-Calif.). Cranston, who is seeking the Democratic nomination for president, issued a statement calling Volcker the architect of "a cold, cruel and callous economic policy."
At a news conference yesterday, President Reagan backed the Fed's policy of reining in the growth of the money supply. "We support the commitment of the Federal Reserve Board to a monetary policy that ensures stable prices," he said.
Later, Martin Feldstein, chairman of the Council of Economic Advisers, also endorsed the Fed actions but warned the committee that the prime lending rate could rise about one percentage point "at almost any time." Feldstein predicted that the prime--the interest rate banks charge their best customers--would rise from 10.5 percent to 11.5 percent because traditionally it has been 2.5 percentage points above the Treasury bill rate, which is now 9 percent.
Volcker said Wednesday that the Fed had slightly tightened credit conditions to improve the chances of a long-lasting recovery.
Feldstein said that "short-term interest rates have risen in anticipation of such a policy aimed at slowing the growth of" M1, the measure of money available for transactions, which includes currency in circulation, checking deposits and travelers checks.
Slowing the growth of M1 is intended to keep inflation down.
"The principal problem facing our economy now is the high and rising level of real interest rates," Feldstein said. "These high interest rates are hurting key sectors of the economy," such as steel and other industries sensitive to interest rate changes.
He also noted that high rates raise the value of the dollar, which makes exports more expensive relative to foreign goods.
"Further increases in interest rates may continue in the months ahead," Feldstein said. "While no one likes to see interest rates rise, an increase in interest rates over the next few months would be far better than a continuing surge of money growth that led by 1984 or 1985 to a revival of rapid inflation followed by another economic downturn."
Nevertheless, he said that real interest rates are abnormally high for this stage of the recovery, and "are a cause for serious concern."
Feldstein also warned that the record $60 billion merchandise trade deficit projected for this year could grow to $100 billion by next year because of the strength of the dollar brought on by high interest rates.
Responding to reports that the administration is quietly dropping its proposal for contingency taxes to reduce future budget deficits, Feldstein said the "administration remains firmly committed to these standby tax increases."
The proposal would have standby taxes automatically go into effect if budget deficits failed to drop below 2.5 percent of the gross national product.