Federal Reserve Chairman Paul A. Volcker served notice yesterday that the Fed will not ease its tight money policy soon, even though inflation is slowing and high interest rates could delay recovery from the recession.
In a tough speech delivered to a standing-room-only crowd of bitter and frustrated home builders at their national convention in Las Vegas, Volcker declared, "We can see multiplying and encouraging signs that inflation has begun to subside, that we are turning the corner." But he added, "It is far too soon to claim victory. Any slackening of our commitment to see the anti-inflation effort through could only jeopardize prospects for full success."
Meanwhile, short-term interest rates continued to rise. The average discount rate at an auction of three-month Treasury bills was 13.364 percent yesterday, up from 12.505 percent last week. In New York, U.S. Trust Co. jumped the rate it charges brokers for loans secured by stocks and bonds from 14 percent to 15 1/2 percent, raising the likelihood of an increase in the prime lending rate, now 15 3/4 percent at major commercial banks.
The federal funds rate, which is the rate banks charge for funds they lend one another, climbed to 15 percent yesterday after being below 14 percent late last week. But Volcker, in remarks to reporters before his speech, downplayed the federal funds rate increase, saying it should not be read as a signal of an upward trend in interest rates.
The speech was Volcker's first public appearance since President Reagan and Treasury Secretary Donald T. Regan last week criticized the Fed for recently allowing too fast a growth of the money supply. Regan linked the surge in money growth with the recent increase in interest rates.
Volcker told the home builders, however, that the prospect of "excessive" federal budget deficits, not just monetary policy, is responsible for high interest rates. Budget experts say the 1982 deficit will be about $100 billion, and that without spending cuts or tax increases, the 1983 and 1984 deficits will be far larger.
"The Federal Reserve has no way of offsetting the financial market pressure associated with excessive deficits," Volcker cautioned. "Pushing more money into the system simply to finance the Treasury would only serve to heighten fears about inflation and the future course of interest rates. Restraint on the money supply implies there will not be enough to finance both huge deficits and the financing needs of business during recovery."
In what amounted to a reply to the recent criticism, he declared, "The straightforward way, and ultimately the only effective way, to escape the dilemma is to reduce the size of the deficit significantly and strongly as the economy expands . . . . Such a development seems to me a key to producing the financing environment that will make recovery in the first place."
Volcker was at a loss to explain the recent unexpected jump in the money supply, saying, "Occasionally we get these blips in the money supply--though this was a pretty big blip. This one was surprising because it comes at a time of slow business activity."
The Fed will do "some looking-around" to try to figure out what was responsible for the surge in money, but the chairman stressed that the central bank has "no intention of letting the money supply get out of control on the up side . . . or the down side."
Volcker attributed much of the recent criticism of the Fed to the state of the economy. Some people want a tighter monetary policy and others a looser one, he said, noting, "You are going to get that kind of concern when we have the economic problems we have."
Volcker drew some support here yesterday from Sen. Jake Garn (R-Utah), chairman of the Senate Banking Committee. Garn told a group of credit union officials, "I am not one who joins the crowd for making the Fed a scapegoat of everything that happens in the economy . . . I don't care who's chairman of the Fed." Garn labeled "ridiculous" the insistence of some monetarists that the economy can be fine-tuned with exact control of the money supply.
National Association of Home Builders officials in Las Vegas took some comfort from Volcker's remark that "we can see multiplying an encouraging sign that inflation has begun to subside."
"For the first time in years, we are now seeing the kind of turn in inflation that can lay the base for a more hospitable financial environment and sustained recovery," he said. This trend is the result in part of the restraint being shown in critical wage negotiations this year, he added.