Relations between the White House and the Federal Reserve Board have been "too distant, mistrustful, and even hostile," says Herbert Stein, chairman of the Council of Economic Advisers under President Nixon.
In a survey prepared for the conservative American Enterprise Institute, Mr. Stein argues that the Reagan administration has an "obligation to stand by the Fed if and when it is attacked."
The article, released this week but written before the current tumult over the Fed's anti-inflationary tight money policy, which has forced interest rates to 20 percent, anticipates that there will be attacks when it does "politically unpopular things." There is a need for the Fed to do such things, urges Stein, and "such need, in this time of dangerous inflation, is greater than ever."
Why hasn't the Fed dampened inflation before now? asks the top economic adviser of Richard Nixon, whose advice often was not taken. The Fed's "failure, " he says, "is its fear of the popular dissatisfaction and the congressional attacks that will ensue if the anti-inflationary process results, as is likely, in higher unemployment and higher interest rates for a time."
The Stein comment comes at a time of crisis in the Fed's high interest rate policy when the threat of continuing inflation is causing President Reagan to propose cuts in the arms budget. These cuts aren't adequate, declares Sen. Pete V. Domenici (R) of New Mexico, chairman of the Senate Budget Committee. Mr. Reagan is under pressure to try to get lower interest rates from Paul A. Volcker , chairman of the Fed's board of governors.
Stein says that "developing a more candid and intimate relation between the President and the Federal Reserve is the most critical requirement for improving the process of economic policymaking." He argues that the administration should accept the "obligation to stand by the Fed if and when it is attacked."
Congress made the Federal Reserve Board quasi-independent to safeguard it from politica pressure. Some congressmen now would end its independence.
Stein, now at the University of Virginia, says President Reagan has "accepted and asserted responsibility for bringing down inflation" but has based his policy on the accuracy of forecasts "that most economists would regard as highly uncertain."
With a critical look at the so-called "supply side" advisers at the White House, Stein says that Reagan "has chosen a rather eccentric school of economic . . . [and] has been unusually explicit in public advice and direction to the Federal Reserve."