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

(Page 2 of 2)

But Treasury officials and the Republicans on the Joint Economic Committee (JEC) are not so sure.

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''Money growth in the upper half of the range of 6 to 8 percent . . . would be appropriate if trend velocity (the ratio of nominal gross national product (GNP) to the money stock) remains lower than the postwar trend,'' states the JEC Republican report. ''It is likely that velocity growth, in fact, will remain on a lower track. The sooner the Federal Reserve anticipates and reacts to this outcome, the smaller will be the risk of an unanticipated economic slowdown.''

The issue sounds arcane; but if the Fed is right, the economy will grow at a healthy rate and the Republicans will benefit in the upcoming election. If the Treasury and JEC Republicans are correct, the economy would slip into stagnation , possibly combined with more inflation, and President Reagan would suffer at the polls.

Fed officials are aware of this dispute and the election risks involved. But they are dubious of their ability to ''fine tune'' the economy. Moreover, they regard M1 as ''on probation,'' as one central banker put it. In other words, there is some question as to whether the close relationship between M1 and GNP that has prevailed in the past continues. In determining monetary policy, Fed officials also are looking at more comprehensive measures of money, such as M2 or M3 that include various types of savings.

Both Mr. Sprinkel at the Treasury and the senior economist at the JEC, Robert R. Davis, are ''monetarists,'' believing the growth rate for money is extremely important to the business cycle and to the prospects for inflation. Both also come from Harris Bank in Chicago, Mr. Davis only six weeks ago. But Davis says there was no coordination with the Treasury in writing his report.

Both are concerned about a slowdown in the growth of the money supply that occurred in the last half of 1983.

''The difficult task before the Federal Reserve is to offset the contractionary effects of slower money growth during the second half of 1983, while avoiding any tendency toward an extended and inflationary expansion,'' writes Davis in the JEC report.

At the same time, that report cautions that ''the nation is unlikely to escape some inflationary consequence of excessive money growth between the summers of 1982 and 1983.''

In other words, Davis expects higher inflation this year. A chart accompanying Sprinkel's testimony indicates he, too, would not be surprised by more inflation as a result of earlier fast money growth.

Roberts, a supply-side economist, is less concerned about a hike in the inflation rate. He believes that with tax reforms and other changes introduced by the Reagan administration, there are enough incentives in the system now for the economy to grow faster with less inflation.

In other words, more of the new money supplied by the Fed will be used for real growth in the output of goods and services and less merely for price boosts.

By pointing to the extreme volatility of Fed monetary policy and the need for adequate money growth to keep the economy moving, GOP monetarist economists hope to shift some of the attention away from fiscal policy to the Fed and its monetary policy.