The Federal Reserve Board's high interest policy holds back inflation, which everybody approves of. But it also restrains business with the threat of unemployment and reduced production.
Fed Chairman Paul A. Volcker grimly told a jammed Senate committee Sept. 16 that he plans to continue that policy of austerity. And even as he spoke word came that the high interest rates may in fact be producing a business pinch.
Mr. Volcker told the committee that Wall Street and the rest of the nation's financial community are eyeing Congress suspiciously, only half convinced that it means to cut expenditures, balance the budget, and prevent inflation.
Congress pondered President Reagan's threat to vote any "budget buster" appropriation, and heard the news that the nation's industrial production fell by 0.4 percent in August, the sharpest drop since last year's recession. It dramatized the difficulties in America's present economic dilemma: whether to push high interest rates to restrain inflation, or to relax them to head off a possible recession.
Some see the fading of the Kemp-Roth "supply side" adventure in the present situation. This theory holds that, under certain conditions, cutting federal taxes will increase revenues by stimulating greater productivity, and that such tax cuts will ultimately pay for themselves. President Reagan added a program of compensatory cuts in federal expenditures to balance the tax cuts. He hoped to reduce the federal deficit to around $42.5 billion in fiscal year 1982 (which begins next month) and to balance the budget by 1984 -- all this in of big defense increases.
Now projections make the original budget estimates seem over-optimistic, however, and the administration is trimming back military schedules.
Financial markets, meanwhile, have disappointed the administration by not responding to its pledges to balance the budget. The Dow Jones industrial index of stocks has lost some 15 percent of its paper values, while the bond market is in disarray. Mr. Volcker told Congress that Wall Street's suspicions are understandable since "the federal budget has been in deficit in all but one of the past 21 years."
Soberly, Mr. Volcker told Congress that the country has "gradually come into the grip of the most prolonged and debilitating inflation in our entire economic history."
His message in brief: the quasi-independent Federal Reserve Board will continue its controversial high interest program; Congress should do its party by cutting federal expenditures; "the toughest part of the program remains ahead"; there is some improvement and there's light at the end of the tunnel.
Chairman Volcker seemed inferentially to criticize recent tax cuts. At the same time he hailed what he called "an effort unprecedented in my Washington experience to scale back the growth of federal outlays."
As chairman Volcker testified it appeared that President Reagan and the Senate were moving toward greater austerity but with potential disagreement over details.
At the White House Mr. Reagan heard GOP leaders urge to deeper cuts in so-called "entitlement" programs including social security and pensions and even some proposals for further defense retrenchment. The President, for his part, issued a firm warning that he would veto "budget-buster" appropriations bills from Congress. He repeated that he would not make more cuts in social security.
Simultaneously, supporters in the Senate beat back an effort by the powerful dairy industry to preserve their full federal subsidy and enacted a measure which, if approved by the House, would cut the support program around 25 percent , the lowest level in more than 30 years. The Senate rejected the policy proposed by its own agriculture committee. Action on the dairy issue could clear the way for enactment of a proposed four-year farm bill.
In White House and Congress the background was the same: an effort to convice Wall Street and the financial community that the government is determined to halt inflation, even if it means temporary hardship for borrowers because of high interest rates.