Fed's '83 vision: hold inflation, lift economy
Washington — Interest rates should fall further. The economy will be given a mild boost.
That's the economic outlook foreseen by money market experts following comments Tuesday by Paul A. Volcker, chairman of the Federal Reserve Board.
His testimony before a Senate subcommittee came the day after the Fed cut its discount rate - the interest charged on loans to banks and other financial institutions - from 12 to 11 1/2 percent. The tall and tough-looking Fed chairman also announced that the Fed's monetary growth target ranges for 1983 will be the same as those for 1982.
The Fed will thus attempt to keep M-1, the most-watched measure of money, growing between 2 1/2 and 5 1/2 percent annually. Volcker added that the Fed would aim for growth around the top of the range.
For the most part, analysts felt the plan contains no major changes. For the long term, they say, the Fed is still determined to stay in the inflation-fighting course.
''My overall impression is that the Fed is not moving away from its basic position,'' says Monte Gordon, director of research at the Dreyfus Corporation.
Some analysts say they nevertheless expect monetary policy to ease over the next several months. They cite the fact that money supply growth has lately been lower than anticipated. In June M-1 unexpectedly dropped $9 billion, putting it
As a result, say analysts, the Fed has plenty of room to maneuver.
''Temporarily, we see some breathing room,'' says David Jones, vice-president and chief economist of Aubrey Lanston.
As a result, says Jones, interest rates should edge downward. By September the prime should be about 15 percent, down from the current 16 percent, he says.
But Jones expects that later in the year money growth will again bump against its ceiling, causing the Fed to rein in the money supply once again.
''The overall targets for the year are still fairly tight,'' he says.
As a result, Jones predicts that there will be no economic recovery this year. The recession won't end until 1983, he predicts, though ''that's probably the best way to permanently reduce inflation.''
(That, however, is a minority view. Most economists expect a recovery this summer.)
Some economists view Volcker's announcement of monetary growth targets as a non-event. ''I continue to believe what counts is what they do, not what they say,'' says H. Erich Heinemann of Morgan Stanley.
Heinemann worries that the money supply will expand rapidly despite the Fed's reputed iron grip, with a resultant re-ignition in the inflationary spiral. He points out that bank reserves - part of the raw material that becomes money - grew an average of 11.82 percent a month over the first half of 1982. Over the first half of 1981, the monthly growth was only 0.12 percent.
The erratic nature of these figures leads Heinemann to argue that the Fed doesn't really have the money supply under control. He likens the nation's central bank to ''a man who tries to get comfortable by putting one foot in a bucket of hot water, and one in a bucket of cold, and says he likes the average.''
Heinemann suggests that the Fed target the monetary base - bank reserves plus currency in circulation - as well as money measures such as M-1. He would also move forward already scheduled changes in operating procedures, which are designed to give the Fed better control over the slippery meaures of the money supply.
Some analysts conclude that the Fed's actions this week were intended, at least partly, to project concern over the battered state of the economy. They point to the fact that the cut in the discount rate came conveniently one day before Volcker trooped to Capitol Hill to announce his monetary policy goals.
''The PR effort was in line with expectations,'' says Heinemann.
But despite Congressional calls for more control over monetary policy, most observers say the Fed's independence is not immediately threatened. Earlier this month, the US Treasury Department launched a review of the nation's monetary policy which will scrutinize the Fed's independent role.
''(The Fed) has just been serving as a convenient whipping boy,'' says Monte Gordon.