Treasury Secretary Donald Regan made it official: The Reagan administration supports the high-interest policy of the Federal Reserve System that has sent a tremor through stock and bond markets and could produce a technical recession in the economy.
Once and for all, Mr. Regan indicated to reporters at breakfast here May 6, the administration wants the business and financial community, as well as the general public, to understand that it will not tolerate inflation and that it thinks it wiser to put the brakes on now rather than later.
Regan was saying what Murray Weidenbaum, chairman of the Council of Economic Advisers, told economic writers in New York May 5 -- that the administration plans to ride out the present Wall Street turmoil and push for what it considers an overall pro-business program: lower taxes, less regulation, reduced spending, and all-out anti-inflation measures. The message goes out simultaneously with the dramatic contest in Congress over the budget and offers a rationale for it.
The Fed boosted the rate it charges banks for money to meet their reserve requirements from 13 to 14 percent May 4, setting off a chain reaction of higher rates and a fall in stocks and bonds. Regan repeated the White House official approval of this: "an essential step, necessary at this time."
Stagnation or prosperity may hang on correct administration appraisal of where the economy is headed: President Reagan took office with belief that a near-crisis impended; David A. Stockman, who became budget manager, warned of an "economic Dunkirk" and urged Mr. Reagan in December to declare a "national economic emergency." Fears have since moderated, but the administration still reads the economy as "soft and soggy" in Secretary Regan's words.
The administration has it all wrong, say some critics.
Henry Kaufman, respected Wall Street economist with Salomon Brothers, said late last month that the proposed administration three-year, 30 percent across-the-board tax cut and other proposals are "exceedingly expansionary." Basic disagreement is whether the strong economic growth of the first three months of the year shows federal expansionary programs unnecessary (Mr. Kaufman) or are only a temporary phenomenon (Regan).
Politics enters the dispute as the administration uses the economy as an argument for prompt passage in Congress of a radical budget reduction. Now comes the air pocket for stocks and bonds on Wall Street in response to the administration-backed anti-inflationary interest rate boost. The US Treasury is paying its highest rate ever for borrowing money, Regan said.
Regan fluttered Wall Street by his comments. He said interest rates are volatile and may go higher.
The technical definition of a "recession" is two quarters in succession in which there is negative economic growth (a quarter equals three months). Regan agreed that a recession by this definition might lie ahead.
Some think a big political issue is emerging.
Rep. Henry S. Reuss (D) of Wisconsin, chairman of the Joint Economic Committee, called the program "sophomoric and a disaster." He denounced the Fed for "supinely accepting" the administration's leadership.
By contrast, Beryl W. Sprinkel, undersecretary of the treasury for monetary affairs and a "monetarist," hailed the program. Economic monetarists think price changes are caused by the amount of money in circulation.
Negative elements in the controversial situation include: housing construction (drying up under high interest rates); bonds (prices have plunged for six weeks); and stocks (the Dow Jones average hit a four-year high two weeks ago but has dropped 51 points since April 27, when it reached 1,024). But many believe the worst is behind in the market