ot a moment too soon, the Federal Reserve Board has switched its basic policy: it is putting aside the battle against inflation (which at the cost of high unemployment and with the aid of lower food and oil prices, it has won) and is concentrating instead on the battle against an incipient depression.
To state it as simply as possible, the Fed wants to get interest rates down further and keep them there for awhile, because the economy is so dangerously weak.
It is too much to expect Federal Reserve Board Chairman Paul Volcker to describe the new strategy in such stark terms. He must pay homage to deeply imbedded fears that easing of the repressive policy the Fed has been following since October 1979 will renew inflation. To preserve the Fed's mythical credibility, he must say that over the long term there will be no change in "the basic thrust" of Reserve Board policy.
The move has nothing to do with politics, although cynics will surely argue that the Fed's move is parallel to an easy-money switch in 1970 that is popularly supposed to have been put in effect to help President Nixon overcome a recession.
So the Fed describes what it did in the most low-key terms available. But Wall Street is able to read the signals. "It's a basic switch in policy," Salomon Brothers expert Henry Kaufman said in a phone conversation. "The Fed has veered away from a monetarist approach, but it remains to be seen how far they will take it."
A businessman at a convention here wonders whether the Fed's new policy will regenerate an inflationary cycle of prices and interest rates -- a question that reflects a genuine concern among businessmen and consumers who have seen inflation endure for so long.
The answer is that unemployment has now climbed so high, and the use of industrial capacity has drifted to such a low level, that the economy needs -- and can absorb -- a stimulus for a long period before the inflation rate turns up again.
What the Federal Reserve Board did last Tuesday when it met with the several presidents of the Federal Reserve's regional banks was to get its priorities straight. Led by Volcker, the Fed decided to expand the growth of money supply enough so that interest rates would go down, and stay down until the economy begins to show some signs of life.
Volcker's on-the-record explanation of last week's switch is that weekly money-supply figures will be distorted for a time because of the maturing of $31 billion in All Savers certificates, and by prospective changes in the law covering banks and S&Ls that will allow both to sell money-market funds at competitive rates with the mutual funds industry. Thus, a slavish attention to the low-growth money-supply targets that were set earlier could have acted as an unintended brake on the economy.
That is correct. But the Fed could have dealt with this technical problem without changing its entire policy focus. It is as clear as it can be that the Fed is now desirous of achieving easier interest rates. The downward thrust of the economy is even more decided than it was in 1970. We have seen not only a record wave of corporate bankruptcies and the highest jobless level in 42 years at 10.1 percent, but a rickety international financial structure that comes close to some of the dangers of the 1930s.
Meanwhile, President Reagan has taken to suggesting that all of the blame for the economic mess should be laid on the Democrats. Unemployment was 7.4 percent when he took over, he says, so he offers to take responsibility only for the other 2.5 points on the unemployment index.
To be sure, the Democrats must share responsibility for high unemployment: job prospects, as Sar Levitan and Clifford Johnson pointed out in a recent New Republic analysis, have been eroding since the late 1960s -- a period that includes the Carter presidency.
But Reagan doesn't understand the scope of his own confession. Each point on the unemployment index amounts to a $30 billion charge against the federal budget in lost taxes and larger unemployment compensation and related costs. So the 2.5 points of unemployment for which he admits responsibility comes to an annual budgetary cost of about $75 billion, or half of the staggering federal deficit.
The Fed's emergency easier-money rescue operation is, of course, the element feeding the boom in Wall Street. Yet, on a day that the Dow Jones blue- chip stock index punctured the 1000 barrier (essentially because the economy is sick), Reagan touted the number to a political rally as evidence that his own policies were succeeding. This is an astonishing exercise in political chicanery. The market is rallying because Reaganomics has failed and both the president and the Fed have reversed course -- the president on taxes and the Fed on its money-supply bias.