In a political campaign, there is no more enticing target than high interest rates, and Ronald Reagan, John Anderson and Jimmy Carter have all been flailing away at them. For the first time in anyone's memory, as former Federal Reserve chairman Arthur F. Burns says, the nation is coming out of a recession with interest rates rising, and that spells trouble ahead.
It's not surprising that Carter took his frustrations out on the Fed. Everyone agress that rising interest rates are likely to abort any recovery in housing. And rising interest rates simply encourage the average person, already faciang staggering prices for Detroit's new line of cars, to try to make the old jalopy last a little longer.
But the chilling fact is that whatever one thinks of the Fed policy -- and there are solid grounds on which to be dubious -- President Carter offers no alternatives. After 3 1/2 years of vacillation, he still doesn't have a credible anti-inflation policy.
Fed Chairman Paul A. Volcker clearly would like help from both Carter and Congress (which acquiesces in a rising budget deficit). But the Fed faces an economy bouncing back from a briefer recession than had been anticipated, which raises inflationary expectations. And these expectations have led to some quick-on-the-trigger increases in commercial banks' lending rates.
A basic underlying problem is that the Fed last October -- in the wake of the massive speculation against the dollar -- enshrined the control of the money supply not only as the main policy target, but as the main symbol of whether it would be successful in controlling inflation.
Watch the money supply, Volcker would say, and don't worry so much about interest rates. In the real world, however, the money supply is not that easy to control, a fact Volcker had to admit the other day: "We have learned the spades this year."
But in the private credit markets, there has been a Pavlovian response to the money supply figures. With the religous fervor of monetarist theoreticians, the markets pore over the weekly money supply numbers.
Thus, Treasury 90-bill rates plummeted from 16-plus percent this past spring to 6.5 percent this summer, and back up to 11.5 percent a week ago when the money supply expanded rapidly, although no one, including the Fed, knows precisely why the money supply acted the way it did. There is something crazy in such a pattern, and Treasury Secretary G. William Miller was correct to complain about it.
One has to conclude that, overall, the Fed's effort to manage monetary policy exclusively by controlling the money supply is a failure. Volcker insists that in the long run, the Fed will in fact gain control over the money supply. But how long is the long run?
Defenders of the Fed will argue that it is still the only anti-inflation game in town: that without the measures put into effect last year, there might have been a total collapse of financial markets. Further, it will be said, any effort to force a moderation in the Fed's tight rein would set off a new attack on the dollar and a frenzy on Wall Street.
All of that may be so, but it's of small confort.
With the Fed's program in effect, the prospects ahead are just as discouraging. The price of adverting financial panic is continued high unemployment, slow (if any) growth -- in a word, permanent stagflation. It seems clear that the Fed is willing to accept another recession next year as the only way of whipping inflation.
The Carter administration must know that the only way to help the Fed is through some sort of government intervention to hold down wage and price increases. Privately, Volcker has been urging an incomes policy tied to any tax-cut proposal for next year.
But Carter's political advisors have vetoed this approach, fearing they will lose labor support. And Carter's economic advisers, led by Charles Schultze, see too many administrative problems with any of the schemes for using the tax system to moderate wages and prices.
Thus, we have an administration that, thankfully, is committed to be against a major recession, but also is against any useful form of wage and price controls. If it were leveling with the public, Carter would say: "We don't have any way of controlling inflation. Youl'll have to accept 10 percent or better inflation and interest rates for the foreseeable future."
But that wouldn't be politically astute. Instead, you had last week's dumping on the Fed.