Treasury Secretary Donald T. Regan, predicting that interest rates are headed higher, Friday revealed that the Reagan administration has begun a study of ways to change its economic policies if the high rates short-circuit the expected economic recovery.
"I don't think I'll talk about . . . what our specific plans are, but obviously these are questions that we have addressed to ourselves over the past three months. We are trying to come up with solutions," Regan said during an interview at The Washington Post.
"If interest rates don't come down rather quickly, and unemployment hangs high, the obvious course of action that would be demanded, at least, from us by the Congress would be, do something, don't just stand there," he continued.
"I have a study on my desk . . . of what other presidents did in similar circumstances . . . . We have to consider what our actions might be."
Another administration source described the policy reexamination as "far-reaching," but said it was "occurring within the framework of present presidential policies." However, the source added, "Some of the options are not so routine."
Regan, as he has in the past, put virtually all of the blame on the Federal Reserve for the high level of interest rates. "The Fed's policies are correct," he declared. "It's their practices that are leaving a lot to be desired."
He said Federal Reserve actions have led to conditions in financial markets in the last two or three weeks that indicate the next move in the prime lending rate at banks, now 16 1/2 percent, will be up, not down.
The recent decline in the price of gold, he said, is evidence it is not a fear of inflation that is holding up interest rates, while the lack of a rally in financial markets following Thursday night's congressional compromise on a 1983 budget resolution indicates it is not worry about the size of the budget deficit, either.
"You have to say it's monetary. What else is left," he asked.
Whatever the cause, many money market rates continued to rise Friday. The rate paid on large 90-day certificates of deposit, a major source of lendable funds for banks, reached 15 percent, up 1.3 percentage points in a week. Partly as a result of the higher rates, the stock market fell again with the Dow-Jones industrial average hitting its lowest level in more than two years.
Meanwhile, the Federal Reserve reported a $1.4 billion increase in the money supply, to a level of $454.4 billion in the week ended June 9. The money supply currently is above the level for which the Fed is aiming, and analysts attribute part of the increase in interest rates to the markets anticipation that the Fed will have to tighten credit conditions again to reduce money growth.
Erratic growth of money from month to month and quarter to quarter, Regan said, "have made for this confusion in the money market, and as a result of the confusion, the uncertainty about Fed policy is keeping real rates of interest much higher than they otherwise would be."
Regan said flatly that President Reagan's economic policies were not responsible for the recession. Rather, that the money supply grew at an annual rate of less than 1 percent for a six-month period last year.
"Under that consideration," he said, "you had to induce a recession."
As for his review of current administration policies, Regan said, "What I am trying to do is to be ready in case I'm asked to do anything. After all, that is my job as secretary of the Treasury, to be ready to change policies if we have to. Not that I'm suggesting it. But you cannot wait until someone says, you know, we are in a crisis, let's change. And you say, to what?
"You have to anticipate . . . be ready for change," he said. "You have these plans you can pull out of a file and go to work on if need be. That's what I'm doing right now. I'm not saying that we will. I'm not predicting that we will. I'm merely saying that if it happens, I have to be ready."
The Council of Economic Advisers and the Office of Management and Budget are involved in the review along with the Treasury Department. Regan said the study of the way in which past presidents responded to economic difficulties was done by Treasury.