Advising Fed Is Administration’s Duty, Baker Says

Treasury Secretary James A. Baker III, while praising the Federal Reserve’s current monetary policy, told lawmakers Wednesday that there is no reason the independent central bank should be “totally sheltered from outside advice or, if need be, criticism.”

Baker, responding to accusations from Sen. William Proxmire (D-Wis.) that the Reagan Administration has been unduly trying to influence Fed policy during an election year, defended his approach by pointing out that the “Treasury and the Federal Reserve have got to work very, very closely together.”

Accountable for Economy

The Treasury secretary added that “the Administration is accountable for the general performance of the economy. In my view, the Administration has a right and a responsibility to advise the Federal Reserve on all elements of economic policy.” The Federal Reserve “is independent within this government and is not independent of this government,” he said.

Last month, Fed Chairman Alan S. Greenspan told Proxmire in congressional testimony that he “objected quite strongly” to a letter written by Assistant Treasury Secretary Michael Darby arguing that the central bank needed to pump more money into the banking system to help prevent an economic slump this year.

After he found out about the letter, Baker said he told Darby that he should not have sent it to Fed officials just before last month’s meeting of the Fed’s policy-making arm. But Baker said he saw no reason to discipline his subordinate for his action.

“Mr. Darby is an academic,” Baker said. “He was just setting forth some rather academic ideas and arguments in that letter.”

Pound Less Important

In testimony before Congress’ Joint Economic Committee, Baker also said Britain’s recent decision to let the pound rise in foreign exchange markets does not pose a threat to the currency stabilization agreement worked out just before Christmas by the seven leading industrial democracies.

“It doesn’t have any effect on our efforts . . . to foster exchange rate stability,” Baker said. “It’s a matter involving monetary policy considerations within the United Kingdom.”

The British pound--which is far less important in world currency markets than the U.S. dollar, the Japanese yen or the West German mark--has been surging in recent days, primarily because London has been keeping interest rates relatively high to help restrain inflationary pressures resulting from Britain’s buoyant economic growth.

Higher rates in Britain have been attracting money from abroad and driving up the pound despite Britain’s growing current account deficit and lower oil prices--factors that normally would be expected to depress its currency.

Foreign Efforts

Baker pointed out that under the Dec. 22 currency pact there is “no secret agreement respecting interest rates and countries are free to consider the requirements of monetary policy domestically.”

The Treasury secretary was questioned closely by lawmakers about whether the United States should be working harder to shift more responsibility for defense of the Western alliance to European nations and Japan, while also forcing Japan to take a greater role in resolving such global economic problems as Third World debt and trade imbalances.

Baker said he is satisfied by both Japan’s and West Germany’s efforts to stimulate their own domestic economic growth and pointed out that Japan has agreed to spend an additional $20 billion on aid to Third World debtor nations.

And he cautioned that it might be threatening to many other nations if Japan was prodded to boost its defense spending substantially and said the United States retains its role because it still has by far the world’s largest economy.

“We shouldn’t suggest that just because we are . . . running trade deficits that we should abdicate our international economic leadership,” Baker said. “The leadership will remain ours and we should not seek to avoid it.”