Federal Reserve Board Chairman Paul A. Volcker said yesterday the economy will not come "roaring" back as the treasury secretary has predicted and repeated his call for a smaller 1983 deficit than President Regan has proposed.
Volcker said further spending cuts and tax increases are needed to get the 1983 budget deficit $20 billion below the $91.5 billion figure projected by the administration. A smaller deficit is needed to ensure the availability of funds for businesses and home buyers so the next economic recovery will be solid and sustained, the Fed chairman said.
Even if the deficit is not reduced from $91.5 billion, an "economic recovery is possible and can proceed," Volcker said.
But asked if he agreed with Treasury Secretary Donald T. Regan's prediction of a "roaring" economic comeback, Volcker said he did not "personally anticipate" such a rebound, and noted that the administration's official forecast does not anticipate a particularly strong recovery by historical standards.
The administration is treating deficits more lightly than it once did, although Volcker and congressional leaders of both parties have criticized next year's deficit as too big and inflationary. Most private economists and investors are concerned, too.
Senate Minority Leader Robert C. Byrd (D-W.Va.) said yesterday he would chair a task force of 18 senators that will come up with alternatives to the Reagan budget, and Senate Finance Committee Chairman Robert J. Dole (R-Kan.) predicted that Congress would cut the defense part of the budget to help bring down the 1983 deficit.
"We will cut defense . . . that's the biggest ticket of all," he said in an interview with U.S. News & World Report. The Congress, Dole said, "can't live with interest rates as they are and the recession as it is and unemployment as high as it is."
Administration officials alternately have praised and criticized Volcker and the Fed. Many critics claim the board's policies designed to limit the growth of money and credit have kept interest rates too high and in part caused the severe recession the nation is experiencing.
Volcker, appearing on "Face the Nation" (CBS, WDVM), refused to accept the blame for the current slump. He said Federal Reserve policies have contributed to the strong improvement in the rate of inflation. When inflation falls, interest rates usually follow.
Volcker said the Fed's monetary policy has been more stable than that of other leading industrial nations such as Switzerland and Japan, which recently have performed better economically than the United States.
The key to recovery, Volcker said, is getting the government "out of the way" as the economy improves so that there are funds available for housing and investment. He noted the proposed budget for fiscal 1983, which begins Oct. 1, already calls for about $55 billion of increased revenues and a lower rate of spending. But Volcker wants further measures to reduce the deficit, as a "margin of safety," to relieve pressures on the financial markets.
He said, however, that the central bank would not ease monetary policy in an attempt to reduce interest rates during a period of heavy federal borrowing. "We can't solve that problem financing big deficits by pumping up the money supply," Volcker said. Such a move would worsen inflation, he said.
He said if the spending cannot be cut further, then policy makers would have to look to taxes. He said there must be some taxes that could be increased without interfering with the president's general program of massive individual and business tax cuts designed to stimulate savings, investment and economic growth, but he did not suggest any specifics.
Volcker also said the deficit must be reduced so the fight against inflation is not left solely to the Federal Reserve. Tight money policies have kept interest rates high, which has a severe impact on industries like housing and autos that are most sensitive to the availability of credit.
Although Volcker called for steps different in some ways from those proposed by Reagan, he picked his words carefully and refused to be drawn into open criticism. He lauded the administration for seeking the $55 billion in deficit-reducing measures for fiscal 1983 and said there is broad agreement between the administration and the Federal Reserve on monetary policy.
Commerce Secretary Malcolm Baldrige, appearing on "Meet the Press" (NBC, WRC), refused to criticize Volcker, saying the Fed chairman is doing a "good job." But Baldrige ruled out the kinds of deficit-reducing steps urged by Volcker.
He said there is little room for Reagan to compromise further on the budget. Baldrige said that although the deficit appears large, it is small relative to the total economy.
"People can get hung up too much on one item," Baldrige said. "The question is, are tax increases at this time counterproductive? We think they are."
Baldrige predicted that interest rates would come down when the financial community realizes that the recent sharp decline in inflation is not a temporary situation but will continue under Reagan's policies.
"Getting inflation down is the biggest single aid toward getting interest rates down," Baldrige said.