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Fed comes under election-year pressure to ease its grip on money

By David R. FrancisStaff writer of The Christian Science Monitor / March 8, 1984


The Federal Reserve System is coming under strong pressure to ease its monetary policy in this election year. Both the Republican and Democratic members of the Joint Economic Committee of Congress, in their annual report released Monday, urged the Fed to supply money to the economy in the upper range of its official targets.

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Earlier, the White House moved to protect its economic flanks by changing its money-policy recommendation to the Fed. The change would make it more difficult politically for the Fed to refuse to speed the flow of money into the economy if growth begins to slow.

In testimony to the Senate Banking Committee Feb. 9, Beryl W. Sprinkel, undersecretary of the Treasury for monetary affairs, suggested that the midpoint of the Fed's target range for the basic money supply, known as M1, should be the goal ''unless convincing evidence emerges that institutional or other changes have altered the relation between money growth and economic activity.'' The Fed's M1 target is 4 to 8 percent, so the Treasury was calling for the Fed to aim for 6 percent money growth this year.

But several days later, Treasury Secretary Donald T. Regan refused to specify any suggested target number. He would only say that the Fed must supply enough money to meet its own 4 to 4.5 percent projection for economic growth.

As a result, even if the Fed supplies new money at a 6 percent annual rate, should the economy start to slump below a 4 to 4.5 percent growth rate, the Reagan administration could freely call on the Fed to ease monetary policy to meet the central bank's own economic growth target.

As Paul Craig Roberts, a former Treasury economist with continued ties at the White House and the Treasury, put it, the shift means that the Reagan administration will not have endorsed a monetary policy that is possibly too tight. Nor will it be subject to statements by Fed officials, should the economy go sour, that the Fed was only following the administration's advice. ''(Fed Chairman Paul A.) Volcker can't go collapse the economy and say he met his target,'' Mr. Roberts said.

The Reagan administration is highly suspicious of Mr. Volcker after the deep 1981-82 recession. It blames that slump on too tight Fed monetary policy in the last half of 1980 and early 1981.

Volcker and other Fed officials were themselves surprised by the depth of the last recession.

The administration, Roberts commented, ''has been sandbagged enough by Volcker.''

There is a fear that the Fed might ''gamble'' with too tight a monetary policy in the hope of preventing a resurgence of inflation.

Economically, the concern over the adequacy of the Fed's monetary target for M1, which consists of currency plus checking accounts, arises from an unknown - what the velocity of money will be this year after a period of bank deregulation. Velocity consists of the number of times money is turned over during the year.

During the recent recession, velocity grew much slower than expected, resulting in a deep drop in output. The Fed assumes velocity will return to its growth rate during the 1960s and 1970s of about 3.5 percent. So does Martin S. Feldstein, chairman of President Reagan's Council of Economic Advisers.