The Federal Reserve has determined to keep a lid on growth in the money supply to control the potential for an inflationary outbreak, Federal Reserve Governor H. Robert Heller said Wednesday.
Speaking in Cologne, West Germany, Heller said the U.S. central bank had "leaned toward greater restraint in order to forestall any pickup in inflation" since early 1988."Short-term interest (rates) have risen over 3 percentage points since last spring, and growth in the monetary aggregates has slowed to the lower half of our monetary targets," Heller said in a speech distributed in Washington.
For the future, Heller said the Fed's goal of price stability requires "continued restraint on the expansion in money and credit."
That will mean higher interest rates for consumers and businesses and less money for economic expansion, threatening the keystone of President Bush's hopes of bringing down the huge federal budget deficit by economic growth alone.
Heller said the Fed had lowered its target ranges for growth in the money supply in 1989 by a full percentage point to a range between 3 percent and 7 percent, close to West Germany's target.
Heller also admonished the Germans, as well as the Japanese, to make every effort to reduce their massive trade surpluses with the United States and their neighbors in Europe.
"While the American trade imbalance with Germany and Europe as a whole has been considerably reduced, further adjustment in the global imbalances must entail progress in the reduction of surpluses in Germany and Japan," he said.
"Both nations continue to post ever increasing surpluses, and, as a result, new imbalances are now emerging in the world economy," he warned.
Heller said the concentration of these surpluses in Europe could "create new tensions just as Europe is ready to embark upon its historic integration effort" in 1992.