Federal Reserve Chairman Paul A. Volcker, outlining monetary goals for this year, told Congress today that the central bank has halted its efforts to push interest rates lower.
But Volcker also told the Senate Banking Committee that the Fed is not trying to push rates higher, either. Financial analysts interpreted the comments as signaling a hold-the-line policy, but they predicted that interest rates will start creeping up again by this summer.
In his semiannual report to Congress, Volcker repeated past warnings about the dangers inherent in the soaring budget deficits, saying: "We are in a real sense living on borrowed money and time."
But his report also contained a generally optimistic view of the course of the economy over the next year, basically agreeing with the expectations of the Reagan Administration for moderate growth with low inflation.
The central bank tries to supply enough money to keep the economy growing at a healthy pace, but is always on guard against going too far and thus rekindling inflation. By controlling the supply of money, the Fed affects the cost of that money--interest rates.
Blamed for Slowdown
Critics blamed the Fed for a marked slowdown in economic growth from July through September last year, charging that its high-interest-rate policies would push the economy into another recession.
Fed officials began an aggressive policy of allowing higher monetary growth last August, which has led to a dramatic fall in a variety of interest rates. The prime rate, a key business lending rate, is now at 10.5%, down from a high last summer of 13%.
Economists have credited the Fed's efforts with spurring a rebound in economic activity in the final three months of 1984.
But Volcker today said the Fed last month halted its efforts to spur faster money growth and is now proceeding a "bit more cautiously."