Volcker as William Tell: Is M-1 target moving?

Paul Volcker, the 6-foot, 7-inch chairman of the Federal Reserve System's Board of Governors, is walking a tightrope.

By at least two measures, the Fed is expanding the money supply faster than it had planned, triggering fears it may overstimulate the economy and reignite inflation.

But at the same time, the economy is growing sluggishly at best, so curbing money growth could force up interest rates and snuff out the recovery most economists expect to start in 1983.

For the moment, Mr. Volcker told the congressional Joint Economic Committee Nov. 24, the Fed is engaged in a delicate balancing act. It has not set new targets for money growth in 1982 or changed its tentative targets for 1983. But in coming weeks, ''discretionary judgments may be necessary more frequently'' regarding changes in the money supply, Volcker says.

The Fed would like to navigate this difficult passage with a free hand, while congressional critics are calling for greater input from lawmakers. Referring to the Fed's ability to hit its money targets, Joint Economic Committee chairman Rep. Henry S. Reuss (D) of Wisconsin notes ''it has been years . . . since the Federal Reserve has been able to throw its fast one over the plate.''

Volcker, however, told the committee that any decision by Congress to move up next year's 10 percent tax cut from July to January could make the Fed's effort to prevent the resurgence of inflation through monetary control more difficult.

Advancing the tax cut without making any moves to reduce the federal budget deficit could be a ''signal,'' Volcker says, of sharply rising budget deficits in future years.

He adds that some congressional proposals to curb the Fed's freedom would be dangerous. ''With huge budget deficits looming, a requirement that the Federal Reserve set explicit interest-rate targets could easily be interpreted as inflationary, and the rekindling of inflationary expectations will work against our objective,'' Volcker says.

In the absence of such action, Volcker contends that ''inflation is down, but not out.'' But that would not be the case, he notes, ''if excessive growth in money and credit over time came again to feed first the expectation, and then the reality, of renewed inflation.''

The improved inflation outlook will be accompanied by a tepid recovery in 1983, he says. The upturn will proceed at ''a moderate rate of speed,'' Volcker says, and it will probably be ''slower than during previous post-recession years.''

The central banker sees the massive deficits projected for fiscal year 1984 as a potential obstacle to the recovery. Such deficits carry ''the threat of either excessive liquidity creation and inflation in future years, or a crowding out of other borrowers as monetary growth is restrained in the face of Treasury financing needs, or a combination of both,'' he says. '' . . . The fact is, those looming deficits are a major hazard in sustaining recovery.''

Of course, inadequate growth of the money supply also could choke off recovery by pushing up interest rates. But recently accelerated money growth rates make that seem unlikely for now. Between July and October, M-1, or money held in cash and checking account deposits, grew at a 15 percent rate, vs. a Fed target of 2.5 to 5.5 percent growth between the fourth quarter of 1981 and the fourth quarter of 1982. M-2, which includes savings accounts, money market funds , and the elements of M-1, will come in between 0.5 and 1.0 above target, Volcker says.

One reason for the fast growth of M-1 is that All Savers accounts have been maturing and savers have moved funds into checking accounts while they decided what to do with the funds.