Paul A. Volcker, making one of his last appearances before Congress as Federal Reserve chairman yesterday, warned as he has for the last eight years of the dangers of allowing inflation to accelerate.
Volcker, who is credited with taming the rampant inflation of the late 1970s, coupled his caution with a plea to Congress to keep the Fed independent from executive or congressional interference. "I don't know anything more important than that" as a way to control inflation, he said. The escalating price increases of the last few months -- which he principally attributed to the spring surge in oil prices and the decline in the value of the dollar -- could cause "serious problems" if embedded in the economy in higher wages and costs, Volcker said in his midyear economic report to a House Banking subcommittee.
Even so, he announced yesterday that the Fed's policymakers did not change their target ranges for money growth for 1987 -- 5.5 to 8.5 percent -- because they are satisfied that the increased pressure placed on bank reserves in April and May slowed money growth in the second quarter.
That slowing has prompted speculation in the markets that the Fed was easing its money policy in response, an issue Volcker seemed to address yesterday when he said: "The approach of the Federal Reserve toward the provision of reserves has not changed since May."
It appeared to be an unusually open reference to current Fed policy. Controlling the level of reserves banks must maintain against their deposits is one way the Fed influences growth of the money supply and the economy.
Volcker said the Fed has decided to reduce its money-growth targets by one-half point for 1988, so that its two principal measures of the money supply -- M2 and M3 -- should increase between 5 percent and 8 percent during the year. M2 includes currency in circulation, checking accounts, savings accounts, small time deposits at financial institutions and most money market funds. M3 includes all of those items and large time deposits.
He also released the Fed's forecast for economic growth in 1988. The central bank predicts that the economy will expand by an inflation-adjusted 2.5 percent to 3 percent from the fourth quarter of 1987 to the fourth quarter of 1988, a fairly sluggish pace.
The unemployment rate is projected to hover at 6 percent to 6.5 percent, which is no improvement from the current 6 percent rate. Inflation, as measured by the deflator of the gross national product, was forecast at between 3.75 percent and 4.25 percent.
The Fed revised its forecasts for 1987 slightly, calling for real growth of 2.5 percent to 3 percent, unemployment of 6.2 percent to 6.4 percent and an inflation rate of 3.5 percent to 4 percent (instead of the 3 percent to 3.5 percent inflation predicted in February).
Volcker noted that the economy is in its fifth consecutive year of expansion and said it has been "functioning reasonably well." But he said he worries that credit is not as sound as it should be, "which raises questions about the vulnerability of the economy when we run into less fair weather than we have had," he said.
Similarly, the world economy remains dependent on the U.S. economy and the risks of a global recession would be "appreciable" if the United States entered a recession, he said.
Volcker said the Fed wants the dollar, which has risen a bit lately against major foreign currencies after a long and steep decline, to maintain "reasonable stability." Asked about the dollar's rise on international financial markets early yesterday -- it later closed lower after heavy selling by Japanese traders -- Volcker said: "It's nice to have it go up once in a while."
"His is a record of accomplishment of historical dimensions," said subcommittee Chairman Stephen L. Neal (D-N.C.). "He is a major hero, a real hero of our time."
Volcker said his greatest disappointment during his tenure at the Fed's helm was the failure of Congress to pass legislation restructuring federal regulation of the banking industry in response to new technology and the rapidly changing financial markets.
He said he would recommend that President Reagan sign the compromise banking bill recently completed by a House-Senate conference committee and awaiting final action in both houses, even though he objected to some of its provisions.
However, White House spokesman Marlin Fitzwater said yesterday that Reagan was prepared to veto the banking bill. Volcker acknowledged that the bill included some "parts I would prefer not to see," but added that "overall, it is a constructive piece of legislation."
The need to recapitalize the federal fund that insures accounts in savings and loan institutions and to control the proliferation of so-called nonbank banks -- which offer some services traditionally provided by banks -- outweighs any negative aspects of the bill, Volcker said.
As he has on many occasions in the past, Volcker urged Congress to reduce the federal budget deficit by raising taxes if spending cannot be reduced sufficiently.
"You gotta increase taxes or whatever you euphemistically want to call them," he said. "If you want to spend 23 percent of GNP and you tell me that won't come down and you're collecting 19.5 percent of GNP, there's only one way to do that."
To reduce deficits, Volcker endorsed the idea of allowing the president to veto individual items of appropriations bills, a power Reagan says he wants but that Congress will not let him have.
Now the president must either veto or accept an entire spending bill; he cannot pick and choose. A "line-item" veto "might be important in giving the executive a better shot," Volcker said.