Fed to slowly pinch money growth as inflation hedge

In an effort to prevent inflation from reigniting, the Federal Reserve system is planning to keep a slightly tighter rein on the nation's money supply this year than it did in 1982.

The Fed influences the money supply by buying or selling government securities. The supply of money influences interest rates, which in turn play a key role in determining the activity of major industries like housing, retailing , and automobiles.

The Fed's targets for various measures of money-supply growth are actually about the same as the goals it set for 1982. But last year the money supply overshot those targets for a variety of reasons.

So if the Fed achieves its targets this year, money growth as measured by M2 and M3 ''is expected to be somewhat lower in 1983 than in 1982,'' Fed chairman Paul Volcker told the Senate Banking Committee Wednesday. M2 includes cash, checking accounts, and savings accounts. M3 includes the components in M2, as well as large time deposits and individual retirement accounts.

The Fed's goal is to gradually slow money growth in a bid to reduce inflationary pressures without choking off the recovery. Mr. Volcker argues that 1983 money targets ''seem fully compatible with easier (financial) market conditions and lower interest rates.''

To make sure its targets have the desired effects, the Federal Open Market Committee (FOMC), the Fed panel that sets monetary policy, took the unusual step of announcing that ''the money ranges should be reviewed in the spring in light of the accumulated evidence at that time'' regarding the behavior of the money supply.

And as a further aid to policymaking, the Fed has decided to set forth its expectations for the growth of total domestic nonfinancial debt. The FOMC intends ''to monitor developments with respect to credit closely for what assistance it can provide in judging appropriate responses to developments in money-supply measures,'' the Fed chairman said. During 1983 the Fed expects credit to grow between 81/2 and 111/2 percent.

This growth in credit would support an economic recovery that Fed officials believe will be ''moderate,'' Mr. Volcker continued. Members of the FOMC expect real economic growth in 1983 of 3.5 to 4 percent.

The Federal Reserve Bank presidents who sit on the FOMC expect inflation, as measured by the GNP deflator, to rise ''less rapidly than the 5.6 percent projected by the administration'' for 1983, he says.

Nevertheless, the Fed remains concerned about inflation. ''There is little or no leeway at this stage for mistakes on the side of inflation,'' Mr. Volcker testified. ''Policies designed with the best will in the world to 'stimulate,' but perceived as inflationary, may, unfortunately, produce more inflation than stimulus.''

Large federal budget deficits apparently constitute a major threat to the recovery, in Mr. Volcker's view. ''Federal deficits persisting at levels beyond any past experience are unsettling,'' he said.

The Fed chairman added that he would like to see some of President Reagan's plan to lower budget deficits in future years ''phased in earlier.''

In closing the budget deficit, the Fed chief says he would ''prefer to see as much as possible (done) on the spending side,'' as opposed to raising taxes. If taxes have to be raised to trim the deficit, Mr. Volcker says he would favor ''those that have the least impact on incentives for savings and investment.'' The Fed sets new targets

1982 1982 1983 Target Actual Target M-2 6-9% 9.2% 7-10% M-3 6.5-9.5% 10.1% 6.5-9.5% Source: Federal Reserve Board