Federal Reserve Chairman Paul A. Volcker told Congress yesterday that monetary policy will be slightly easier this year but warned of a future collision between the economic recovery and fiscal policy unless drastic cuts are made in the budget deficit.
Volcker told the House Banking Committee that the Federal Reserve will allow more money growth than occurred last year, with money targets that are "consistent with recovery in economic activity."
But he stressed that the Fed would also continue to restrain the money supply to fight inflation. He said the Fed will not accommodate a more inflationary policy.
The administration has recently blamed the Fed for high interest rates that experts fear could stall the economic recovery promised by President Reagan. But the president also says he supports the Fed's overall policy of slowing money growth and that this will help to slow inflation and boost the economy.
However, some economists believe that the administration's growth forecasts for 1983 and later years are inconsistent with tighter money policy. Asked about the administration's forecast for 5.2 percent real growth in 1983, Volcker yesterday commented that "I wouldn't want to count on growth that high next year."
While many experts believe that it is the combination of tight money and large budget deficits that has pushed up interest rates, Reagan and Treasury Secretary Donald T. Regan blame high rates on erratic movements in the money supply. Week-to-week and month-to-month fluctuations in money growth keep financial markets nervous and interest rates higher than otherwise, Regan has said.
Volcker, however, dismissed these criticisms yesterday, telling the Banking Committee, "I do not think we are going to solve our economic problems by contemporaneous reserve requirements or a floating discount rate."
These are two technical changes in money management that the Treasury Department has urged on the Fed. Volcker reeled off a string of figures showing that other countries with low inflation and interest rates have had bigger swings in the money supply than the United States.
Instead, the Fed chairman called repeatedly yesterday for smaller budget deficits to take the pressure off interest rates. After persistent questioning from congressmen concerned about high interest rates and rising unemployment, he said he wished the administration cared more about the budget deficit. "I wish they had more concern," he said. "I think it has been underplayed" in the budget, which Reagan sent to Congress on Monday.
Volcker also cast doubt on administration claims that the tax cut enacted last summer will lead to such a big increase in savings that the prospective deficits will be easily financed. "I wouldn't want to bet a whole economic program" on an extraordinarily large increase in saving, he said. Although there may be some additional savings because of the tax cut, Volcker said he did not think it would be as large as the White House predicts.
Despite the public sniping at the Federal Reserve by administration officials, there apparently is agreement between the Fed and the White House over the broad aim of money policy this year. The Treasury Secretary called last month for money growth this year in the top part of the Fed's range.
Volcker said yesterday that the Federal Open Market Committee (FOMC) last week confirmed its tentative targets for growth of 2 1/2 percent to 5 1/2 percent in the narrow M1 money measure this year with only Governor Nancy Teeters dissenting. This measure includes currency in circulation and all checking accounts at financial institutions. The target for the comparable measure last year was 3 1/2 percent to 6 percent.
And although the FOMC did not raise its tentative targets, the FOMC now feels that growth in the upper part of that range "would be acceptable," Volcker said. Normally the Fed aims for the midpoint of the target range. Volcker denied that policy would be "aimed" at the upper half of the growth range, stressing just that this outcome would be "acceptable" unless there are rapid technological changes that affect money measurement.
In recent weeks there has been a dramatic surge in money growth, sending it outside the Fed's new target range. However, Volcker told the House panel that the Fed does not intend to fight to bring money growth down into the range as quickly as possible.
The M1 measure "could acceptably remain somewhat above the implied 'growth track' during the period immediately ahead," the Fed chairman said.
He also resisted suggestions that the Fed should push up its discount rate charged to banks that borrow reserves from the Fed's discount window rather than in the market. A rise in the rate would bring it closer to other market rates and would discourage bank borrowing from the Fed and tighten credit. But "if you raise the discount rate, market rates will go up," Volcker said.