Federal Reserve Board Chairman Paul A. Volcker has lined up behind the administration in the first great test of President Reagan's leadership skill: to persuade Americans to accept austerity to combat inflation.
"We now have a rare opportunity to bring inflation under control," Mr. Volcker said, and he declared "that the American people recognize that we must decisively turn the corner toward price stability and reduce the demands on the federal government for spending and regulation."
His appearance before the Joint Economic Committee of congress Feb. 5 was part of an orchestrated campaign, almost unprecedented in Washington, to explain to Americans that the time has come for disagreeable belt-tightening. President Reagan emphasized it at his first press conference, followed it by a rare trip to congress. He then followed volcker's appearance with a personal, Roosevelt-style fireside chat appeal to the nation Thursday night. He sends his detailed program to Congress next week.
Volcker's independent agency, as created by Congress, could upset the President's grand economic strategy by raising interest rates at a critical moment. In testimony to Congress and in previous appearances chairman Volcker has indicated that he will go along with the President up to his capacity, but he places emphasis on cutting back federal expenditures rather than cutting taxes, which is a main feature of the so-called Kemp-Roth "supply side" economics.
"It is critically important that tax reduction proceed in harness with spending restraint," Volcker told the congressional committee. He called "a large cutback from projected increases in spending" necessary and declared that in the aggregate many of these programs "contribute significantly to the inflationary bias in our economy."
The Volcker testimony seemed to be coordinated to support the massive Reagan campaign of molding public opinion in favor of federal retrenchment. Calling it an "enormous challenge," he said: "I do believe we may be seeing fundamental changes in public attitudes. . . . "I am confident we can capitalize on this new-found opportunity."
But, Volcker continued, the one big unstated reservation to the program is that federal tax cuts will get ahead of budget cuts and thereby continue inflation and require the intervention of the Fed with higher interest rates.
With that qualification, the Volcker testimony was a kind of prelude to the Reagan speech. He told the country there has only been one balanced budget in the past 12 years, only two in the last 20; that the federal budget and off-budget spending will approach one-quarter of the gross national product (GNP) this fiscal year. "Federal taxes will be equivalent to 21.4 percent." He warned, too, that "many people will support cutbacks in general, but not in their favorite program."
To questions, chairman Volcker made plain that he retains freedom of action if the mix of budget cuts and tax cuts is unsatisfactory.
To keep an eye on the seven-member Fed, Mr. Reagan has delegated Treasury Undersecretary-designate Beryl Sprinkel to help coordinate monetary policy. Treasury Secretary Donald Regan takes the position that tax cuts can't wait for budget cuts. There is a posibble basis for major confrontation here: The traditional Fed position is that is should slap on higher interest rates if it feels inflation is getting out of hand, stimulated by inappropriate tax cuts.
The Fed is the creature of Congress, created in 1913 with an independent status. There have been clashes in the past, such as between chairman Marriner Eccles and President Truman (which reached an accord in 1951). Two Fed chairmen , William McChesney Martin and Dr. Arthur Burns, worked out a formula which presently obtains: willingness to coordinate policies with the administrations when it suits the board, and a belief that opposition is a moral imperative under certain circumstances.