The White House, reacting to reports that the Federal Reserve will move soon to tighten credit conditions, yesterday opposed any such action and said the administration does not want to see interest rates rise.
"We believe the recovery is going to be strong," said White House spokesman Larry Speakes. "We believe the money supply, which has been running above the Fed's target range, can be brought back into line slowly, and we'd like to see it remain within the target growth areas. But we do not want to touch off inflation nor do we want to see interest rates increase."
The Washington Post reported yesterday that Federal Reserve officials believe steps must be taken to moderate the rapid pace of the economic recovery so that it doesn't gain such momentum that inflation is reignited. The Fed's policymaking group, the Federal Open Market Committee, is expected to take such steps at a meeting next week.
It would be the first policy shift for the Fed since June 18, when President Reagan nominated Federal Reserve Chairman Paul A. Volcker for another term. At that time, senior administration officials said Reagan had reached a private understanding with Volcker to pursue an anti-inflation policy but not at the expense of inhibiting the economic recovery with high interest rates.
"I don't know if this breaks the understanding," a senior White House official said yesterday of the expected Fed action. "I hope we are both working at keeping this recovery going, and that is not political. That is for the good of the country."
Volcker has declined to discuss his conversations with the president, even with colleagues at the central bank. But Fed officials stressed that their goal also is one of keeping the recovery going. The problem, they said, is that if credit conditions are not tightened now to slow money growth and the recovery, much more drastic actions could be required next year to keep the economy under control.
Those actions would carry the risk of an interest rate "spike" and much greater dangers for the recovery than more moderate moves now, the officials said.
Senior White House officials apparently fear increasing interest rates could harm Reagan's rising standing in popularity polls. Even though the Fed's tightening would be a direct consequence of the unexpectedly rapid pace of the recovery, the officials are concerned that the public would see it as a negative sign and raise doubts about whether the recovery can be sustained.
One official declared, "It would appear from published reports that it is likely that there might be a small rise in interest rates in the short term. The administration would be disappointed in this, and does not support the view that the discount rate should be raised in order to 'cool off' the economy."
Pressed by reporters to explain how money supply growth could be slowed without resorting to higher interest rates, Speakes replied, "It's our view that it can be brought back in simply by the mechanism of control. It's difficult to handle the mechanisms, it's not easy to do, but we believe it can be done . . . We don't want to see the discount rate raised."
The White House comments notwithstanding, Fed officials know of no way to manage this task that does not involve letting interest rates rise, particularly with federal budget deficits running in the neighborhood of $200 billion.
Nor do most administration economists. For instance, Martin S. Feldstein, chairman of the Council of Economic Advisers, has been urging the Fed to take steps to slow money growth--which by some measures is far above intended levels--and warning publicly that that could mean rising interest rates.