Federal Reserve Chairman Paul A. Volcker yesterday told Congress the Fed plans to stick with its present targets for money supply growth through the end of 1983 and encountered a barrage of criticism from a group of Democratic senators worried about the impact of high interest rates on the economy.
Volcker defended the targets set at the beginning of this year, saying they were intended to permit an economic recovery provided inflation declined significantly. "That remains our judgment today," he said.
The Fed chairman said a consumer-led recovery would occur in the second half of this year, but that in its early stages it would not be "very strong . . . or very balanced" because of declining investment in housing and business plants and equipment.
As for inflation, Volcker optimistically declared, "The evidence now seems to me strong that the inflationary tide has turned in a fundamental way." But rapidly easing monetary policy in an effort to lower interest rates would renew fears of inflation, he warned. "It would strike me as the cruelest blow of all to the millions who have felt the pain of recession directly to suggest, in effect, it was all in vain."
Volcker urged Congress to hold down future federal budget deficits. At the Fed, he said, there is "a strong sense that considerably more remains to be done to bring the deficit under control . . . . The fiscal situation as we appraise it continues to carry the implicit threat of 'crowding out' business investment and housing as the economy grows, a process that would involve interest rates substantially higher than would otherwise be the case."
Several members of the Senate Banking Committee, before which Volcker appeared, complained bitterly about the current level of interest rates the Fed's policy has helped produce and about the deep recession which the Fed chairman acknowledged was brought on, in part, by the high rates.
"The economy seems to be on a disastrous course," declared Sen. Donald W. Riegle Jr. (D-Mich.). "The situation is at a desperate point."
Sen. Paul S. Sarbanes (D-Md.), in a heated exchange with Volcker, labeled the Fed's policy "a failure" because it does not address the problem of high and rising unemployment. "It is my contention that we could move to lower interest rates . . . without giving up the fight against inflation," Sarbanes argued.
But none of the committee members offered any specific suggestion for changing the money-supply growth targets. And Volcker said he knows of no way to bring interest rates down and keep them down under present economic conditions without running the risk of losing control of the money supply and eventually increasing inflation.
The targets which the Fed chairman reaffirmed call for growth of M-1--the measure of money that includes currency in circulation and checking deposits at all financial institutions--of between 2 1/2 and 5 1/2 percent from the fourth quarter of 1981 to the fourth quarter of 1982. This range was extended on a preliminary basis for 1983 as well.
Similarly, the target for M-2, a broader measure which also includes savings and small time deposits, most money market mutual fund shares and some other items, was left at 6 to 9 percent for the period.
Volcker indicated the central bank regards itself as having more leeway than the unchanging target ranges imply. For one thing, the Fed will continue to aim at the upper edge of the range for this year. "Moreover, and I would emphasize this," he said, "growth somewhat above the targeted ranges would be tolerated for a time if during a period of economic uncertainty" people chose to hold more cash than usual.
The Fed did not lower next year's target range even though its long-term policy calls for steady small reductions each year. However, Volcker explained the Fed might aim at a lower point within the range next year.
"Since we expect to be around the top end of the ranges this year," he said, "those tentative targets would of course be fully consistent with somewhat slower growth in the monetary aggregates in 1983 . . . . With inflation declining, the tentative targets would appear consistent with, and should support, continuing recovery at a moderate pace."
F. Lee Hoskins, a monetarist economist at the Pittsburgh National Bank who watched the hearing, said he was "somewhat disappointed, but not a lot, that we didn't get a one-half point decline in next year's targets. But I can understand that. Volcker's in there bearding the lion in his den. The committee members all want him to raise them."
Hoskins said the 1983 targets would be consistent with 1983 economic growth of only about 3 percent. The Reagan administration in its mid-year budget and economic review, due Friday, is expected to forecast a 4.7 percent rate of expansion next year.
Volcker, as usual, would not predict future interest rates, though he did say at one point, "I would hope we could get through the months ahead with declining interest rates, if anything. Interest rates are extraordinarily high."
Asked whether Treasury borrowing to finance the budget deficit this fall can be handled without seeing rates go up, the Fed chairman did not answer directly. The economy will still be "soft" which will limit private sector credit demands.
Thus, the Treasury borrowing, which some analysts believe could reach a record $50 billion this quarter, is not "an insuperable obstacle" to declining rates, he said, adding, "But it sure doesn't help."
Volcker said the Fed's decision Monday to lower the interest rate it charges on loans to financial institutions from 12 to 11 1/2 percent was not the result of "pressure" from the Reagan administration. He acknowledged he met several weeks ago with White House aide Edwin Meese III and lunched, at the Federal Reserve, last week with White House chief of staff James A. Baker III.
The chairman said, however, that he meets regularly with administration officials and that at his meetings with Meese and Baker they offered no "particularly criticism or specific suggestions" for changing monetary policy. On the other hand, Treasury Secretary Donald T. Regan, who Volcker usually sees weekly, has criticized the way in which the Fed has implemented its policies.