Federal Reserve Chairman Paul A. Volcker yesterday opposed any speedup of next year's personal income tax cut unless it could be coupled with actions to reduce federal budget deficits in later years.
Questioned by members of the Congressional Joint Economic Committee about the plan to accelerate and increase the 1983 tax cut that President Reagan is considering, Volcker replied, "I have some concern about it. It would make life at least marginally more difficult on the monetary policy side . . . . A signal that the deficit is going to get worse is not what we need now."
Deputy White House press secretary Larry Speakes, asked to comment on Volcker's opposition to the tax plan, would only say "that's nice of him."
Volcker's concern about the impact of the tax cut on interest rates came amid signs that the stage is being set in financial markets to allow the Fed to make another cut in the discount rate. The Fed cut the rate, which it charges on loans by Federal Reserve district banks to financial institutions, from 9 1/2 percent to 9 percent effective last Monday. Following that step, most other interest rates also declined, including the prime lending rate at major commercial banks, which dropped from 12 percent to 11 1/2 percent.
Testifying before the committee, Volcker indicated that without "vigorous action" to reduce deficits in 1984 and later years, speeding up the tax cut could disturb financial markets already hit by record levels of federal borrowing and lead to higher interest rates.
On the other hand, Volcker gave his approval to a separate proposal to launch a road and bridge repair program that would be financed by a 5-cent-a-gallon increase in federal gasoline taxes because the scheme includes a way to pay for the added spending. Congress seems likely to approve the tax plan.
The Fed chairman said most Federal Reserve officials "share the general view that economic recovery will be evident throughout 1983, but at a moderate rate of speed -- probably slower than during previous post-recession years." However, he added, there is no "unambiguous evidence that the recovery is already under way," but there are encouraging signs in housing, financial markets and consumer attitude surveys.
Yesterday the Labor Department said 599,000 persons filed new claims for unemployment benefits in the week ended Nov. 6, down from 628,001 the week earlier, but still a higher level than during most of the recession.Details on B13.
On Tuesday the Commerce Department reported that new orders for durable goods, such as autos, machinery and steel, fell 4.9 percent in October, the largest drop in a year and an indication of more cuts in production.
In describing the Fed's action Friday on the discount rate, Volcker said it came in the context of continued weakness in the economy, marked progress against inflation, and declining interest rates in financial markets. "We certainly don't want to be an obstacle to lower interest rates," Volcker declared. "We could lower the discount rate in the context of lower market rates, and we did."
All of those ingredients are present again this week, financial analysts noted. Both Tuesday and yesterday, the federal funds rate--the interest rates banks charge one another for loans of reserves--stayed below 8 1/2 percent. The federal funds rate and the discount rate are linked, with the funds rate usually the higher of the two, because they represent the cost to a bank of obtaining reserves, in one case from another institution and in the other directly from the Fed.
Since July, each time the funds rate, which the Fed heavily influences by buying and selling government securities, has fallen below the discount rate, the discount rate has been cut. Analysts said the stage thus may be being set for a drop to 8 percent as early as Friday.
In his testimony, however, Volcker stressed that the Fed is still devoted to reducing inflation. "We remain convinced that lasting recovery and growth must be sought in a framework of continuing progress toward price stability -- and that the process of money and credit creation must remain appropriately restrained if we are to deal effectively with inflationary dangers," he said.
Volcker noted that all three of the usual measures of money are above the upper limits of the target ranges set by the Fed for this year, but he said that "exceptional demands for liquidity can reasonably be accommodated in a period of recession, high unemployment and excess capacity . . . "
Volcker said, "The Federal Reserve has welcomed the declines in interest rates both because of the support they offer economic activity and because they seem to reflect a sense that the inflationary trend has changed. However, we do not believe that progress toward lower interest rates should -- or for long in practice can -- be 'forced' at the expense of excessive credit and money creation."