In his strongest public attack to date, Treasury Secretary Donald T. Regan yesterday blamed the Federal Reserve Board for high interest rates, and urged a somewhat easier money policy this year than the Fed plans.
However, Regan said President Reagan will not call for Fed Chairman Paul A. Volcker's resignation, saying "the man's trying" to stabilize money policy.
Regan's criticism of the Fed, during an appearance before the congressional Joint Economic Committee, followed a stern warning from Volcker Tuesday that huge federal deficits are the cause of current high interest rates.
Volcker told the same committee that, without action to close future deficits, high interest rates will remain and stall economic recovery.
Many budget experts say they believe Reagan's rejection this week of major tax increases in 1983 or 1984 ensures high federal deficits in those years. Many observers have predicted a clash between the administration and the Federal Reserve this year as Reagan's expansionary fiscal policy, with big budget deficits, runs into conflict with the Federal Reserve's tight money.
Officially, however, the White House supports the Fed's tight money policy, and the president has said it is essential to slow money growth to fight inflation.
Regan yesterday blamed "erratic" money growth for high interest rates. Big swings in the money supply have unsettled money markets and have kept interest rates up, he told the committee. "What is needed is a clear resolution of monetary policy to provide a strong base for recovery," Regan said.
Regan said he would like the Fed to aim for the upper third of their target range for money growth this year, rather than the midpoint. Later he said he was speaking for himself and the Treasury Department, not the administration.
The president's top economic advisers had urged him to propose higher excise taxes in the coming 1983 budget to help narrow the federal deficit, ease the clash between money and fiscal policy and bring down interest rates. But Reagan ignored their advice, and said in his State of the Union address Tuesday that "higher taxes would not mean lower deficits."
Testifying yesterday, Regan said that the budget deficit will come down by about $10 billion a year in 1983 and later years from a level of below $100 billion in the current year, fiscal 1982. Private forecasters have predicted much higher deficits unless there are large spending cuts or tax increases.
Many economists say they believe that it is the prospect of these large deficits, together with tight money that limits the funds available for economic expansion, that has kept interest rates high.
However, Regan now says that, while deficits are partially responsible for nervousness in financial markets, unstable money policy is the overwhelming cause of high borrowing costs.
"As long as people are unsure about money policy we are not going to get our interest rates down," Regan said. He later said a fall in interest rates is the key to bringing about an economic recovery, which he predicted would begin this spring. Volcker has said that short-term swings in money growth are impossible to avoid and do not matter too much.
Regan said that deficits do matter, but said this was because they lead to "massive, ill-designed tax increases or excessive, inflationary rates of money creation," not because of raised interest rates. In the past, Reagan argued that deficits were inflationary.
Some economists say they believe that money policy is too tight and is responsible for slowing down the economy. However, they argue for a tighter fiscal policy and lower budget deficits and easier money to help reduce interest rates.
Regan said the president has decided that it is better to borrow money to finance the federal deficits in the next few years than to narrow the deficit by raising major taxes.
Regan added that the president would still "love" to have a balanced budget. Reagan originally planned to balance the budget by fiscal 1984.
Regan yesterday said he wanted the Fed to aim for the "upper third" of its present tentative range for money growth this year, so that money would increase by 4 1/2 percent to 5 1/2 percent. Money growth at the bottom of the range of 2 1/2 percent to 5 1/2 percent would be too low, he said.
The Fed's policy-making Open Market Committee is to meet privately next week to determine its final money targets for this year, and is expected to confirm the tentative range and to aim policy to hit the middle and not the top of that band.
Regan said he did not want to advise the Fed to raise its targets, although he finally conceded that it would not be "inimical" if it did.
Allen Sinai of Data Resources Inc. commented yesterday that "The Fed would not lose any credibility as an inflation fighter by aiming at the upper third of the range, 4 1/2 to 5 1/2. I'd vote for that. If they went for 8 percent it would be a different matter."
The Treasury yesterday reported that the government has run up a deficit of more than $48 billion in the first three months of this fiscal year.