Treasury Secretary Donald T. Regan warned President Reagan and his Cabinet yesterday that the economy has been slowing down and suggested that the Federal Reserve may be partly to blame, because it has been too restrictive with money and credit, administration sources said.
"There's some concern that the economic slowdown may continue," one official said. "Some people are up in arms around here" about recent slow growth in the basic measure of the money supply, he said.
"Everybody is saying the Fed has got to loosen up," he added. "There will probably be some pressure applied to the Fed" by the administration privately to get it to do so, the official said.
The warnings about growth and monetary policy came in one of a week-long string of high-level post-election budget meetings, in which Reagan and his aides have struggled to find ways to bring down estimated deficits in excess of $200 billion without raising taxes or disturbing Social Security and the president's defense buildup.
In the campaign, Reagan said continuation of his low-tax policies would be enough to reduce deficits, by spurring economic growth. Regan's presentation yesterday suggested that, if such growth is not occurring, it may be the fault of the Fed and not the administration.
Reagan once planned to make some basic guiding decisions this week on the fiscal 1986 budget he must submit to Congress next year, but there is disagreement among senior aides over possible solutions, and officials said yesterday that he would put off any major decisions until after Thanksgiving.
White House counselor Edwin Meese III and his aides presented Reagan and the Cabinet yesterday with a broad agenda of conservative policy options for the president's second term, sources said. This included possible initiatives in such areas as space, trade, world hunger, tax reform, economic growth and crime-fighting.
Meese also urged the president and Cabinet to reverse a pattern established in Reagan's first term of allowing the budget to propel policy, according to White House spokesman Larry Speakes. Meese urged that more emphasis be placed on policy first, Speakes reported.
Speakes said Meese's suggestions were referred for further study to Cabinet councils, meaning that most of them will not be part of the upcoming budget.
After the Cabinet meeting, a dozen of Reagan's top economic and White House aides met separately to continue discussions of possible budget cuts. They also were expected to begin discussions for the first time about defense spending.
Office of Management and Budget Director David A. Stockman also described for the Cabinet yesterday the kinds of deep spending cuts that may be necessary to reduce the deficit to acceptable levels by the beginning of the next decade. Stockman reported that federal spending next year may surpass 24 percent of the nation's Gross National Product and outlined measures that would be required to reduce it to 21 percent, officials said.
Such cuts will be all the deeper because Social Security and defense, which together make up more than half the budget, have been largely put off limits by the president.
Stockman provided illustrations of how specific programs in the rest of the budget, such as highway development or forestry, would have to be cut to get the deficit down to specified levels. However, the president has not chosen which of these levels will be his goal, officials said.
Despite concerns about a possible economic slowdown, officials said the president has approved, as expected, economic assumptions for the fiscal 1986 budget that envision growth of about 4 percent a year and declining inflation, interest rates and unemployment. These are approximately the same economic assumptions as those the administration published in August.
Speakes said a high-growth scenario offered by the Chamber of Commerce was rejected, as well as a slower-growth one representing forecasts by about 40 economists.
Administration officials, including Regan, had said before the election, as more economic indicators suggesting a slowdown were released, that the economy would bounce back after sluggish third-quarter growth. Regan said recently that he expected growth to rebound to about 4 percent in the fourth quarter.
An official who attended yesterday's session said Regan pointed to a series of unfavorable economic indicators recently and then to slow growth in the money supply in recent months. Many economists say there is a strong relationship between the money supply and the economy's performance.
A major economic slowdown would have serious repercussions for the federal deficit. Slower growth in the economy tends to hold down revenues and drive up government spending, widening the deficit.
In part because of the economy's slower performance in the third quarter, Stockman reported this week that the deficit outlook for the current fiscal year and next year, fiscal 1986, has worsened considerably since August. Stockman is now estimating a deficit of $210 billion this year and $206 billion next year, compared with August estimates of $172.4 billion and $174.2 billion.