Treasury Secretary Donald T. reagan, concerned that the U.S. economy may be in a recession, said in an interviews with The Washington Post that the Federal Reserve should loosen its tight-money policies.
Regan stressed that he was not calling for an "easy-money" policy. "What I'm saying is that we are coming to a time here where a change has to be made," he said, and Federal Reserved officials "have to be very sensitive . . . as to when is the proper time to change."
"In this flat period, or indeed if it is later determined that this is a recession . . ., the Fed has to go countercyclical rather than pro-cyclical," Regan explained. "What I mean by that is that at times in the past it has seemed that in recessionary periods, at least for a while, the Fed has held on too tightly to the monetary reins. . . .
"What we are trying to do this time, and I know the Fed is as snesitive to this as I am, is to anticipate that and not stay in a low [money] supply mode any longer than is necessary in the downturn."
Regan and other officials were demanding earlier this year that the Fed follow just such a tight-money course to slow inflation. But with interest rates still at levels so high that they are jeapordizing the administration's predicted economic recovery, worried administration economists want the Fed, one way of another, to get interest rates down and boost growth of the money supply.
Regan declined to say exactly how much of a change he wants in Federal Reserve policy particularly whether he believes the current bank's targets for money growth for 1982 are too low. Federal Reserve officials have told Regan and his administration colleagues that the targets, designed to combat inflation, will not provide enough money to finance the sort of booming recovery the administration wants.
"I'm not going to try to tell the Fed. since I am secretary of the Treasury and they're an independent group, exactly what mechanisms to use in order to do this," Regan said in the interview Friday in a conference room next to his office at the Treasury. But the result, he said, "would be a sufficiency of money to enable the economy to recover nicely from its current flat period."
Regan acknowledged that financial market analysts, already upset by the possibility of very large federal budget deficits for several years to come, might react adversely to an easing of Federal Reserve policy. Rather than falling, interest rates might rise in anticipation of more inflation.
"The Fed's actions could be misinterpreted and that's the danger of their easing too quickly on money, or too much," he said. "We wouldn't want that."
But he said he thought the financial market is beginning to recognize the "flat period" the economy is in, and is becoming more realistic about the possibility that the Fed will have to ease its money policies eventually.
The tight-money policy, along with expectations that inflation will begin to rise again, has kept interest rates unusually high even though the economy has been flat for the last eight months. The shortage and high cost of mortgage money have devastated the homebuilding industry. Many smaller businesses, including a significant number of automobile dealers, are going bankrupt because they cannot afford to borrow at such high rates to finance their inventories. Farmers borrowing against the sale of this year's crops have been hard hit, too.
Officially, the administration has not changed its forecast that the economy, after adjustment for inflation, will grow by 5.2 percent during 1982. And in the interview, Regan maintained that after three flat quarters in a row, including the current three months, "the recovery will start in the first quarters of 1982."
However, that forecast apparently has become conditioned upon a shift in Federal Reserve policy, in Regan's opinion.
But while calling for an easier monetary policy, the Treasury secretary suggested that continuing economic weakness could lead the Regan administration to propose an even tighter fiscal policy.
Less than two weeks ago, President Regans proposed an additional $13 billion in spending cuts for 1982 and $3 billion worth of tax increases in an attempt to reduce what would otherwise be an estimated $59 billion federal budget deficit. If a recession caused a large drop in revenues, or a significant increase in spending for unemployment benefits and similar programs, Regan said, more cuts might have to be made.
In addition, some forecasts, based on an expected weak economy, peg federal revenues for 1982 at $15 billion or more below administration estimates. Of such predictions, Regan said, "If we are going to lose that amount, we'd have to take a very close look at other things. But I don't agree with that forecast."
Regan partly disagreed with economists who argue that it is counterproductive for the government to attempt to reduce a budget deficit which is a result of a recession that is lowering personal incomes and corporate profits.