AFTER the Oct. 19 stock market crash, the Federal Reserve System injected a huge slug of money into the American economy. It was crisis management. The extra liquidity restored some confidence to participants in both the money and the stock markets. In effect, it was Uncle Sam saying, ``I care.''
After that, the Fed took back some of those funds. This made economic consultant David Wyss nervous. Mr. Wyss, a Data Resources Inc. economist, wondered whether Fed policymakers were returning too early to a policy of ``leaning against the wind.'' Under this policy, if the economy shows slight signs of picking up steam and the possibility of faster inflation, they tighten credit. Or vice versa if there are any indications of a slowdown.
To Wyss's relief, last week's money supply figures again showed some growth. And commercial bank free reserves, another indicator of the Fed's monetary policy, exceeded $1 billion, a liberal number.
Wyss would like Fed officials to be somewhat more aggressive in supplying credit to the post-market-bust economy. He says: ``If they wait to see the whites of the eyes of a recession, it is going to be too late. They will be shot.''
In other words, if the Fed waits to see indications of a slowdown before easing up on monetary policy, the economy could suffer a real recession and not just somewhat slower growth.
Wyss's concern arises from the time lag between making a shift in monetary policy and its impact on the economy. The Data Resources model of the economy says that the stimulus to the economy from an injection of new money into the economy reaches a peak only 12 months afterward. When easier money lowers interest rates on bonds, however, interest rates on mortgages will fall within a couple of months. That can lead to an increase in housing starts within the next three to six months. It takes perhaps nine months to finish the house.
Despite last week's bad days on the stock market, most economists are somewhat more optimistic than they were a month ago. Economic news has been mixed. But certainly Friday's news that employment grew by 315,000 in November, putting the jobless rate back down to 5.9 percent, was ``very encouraging,'' as Wyss put it.
Before ``Black Monday,'' the Fed was conducting a relatively tight monetary policy. There had been little growth in bank reserves since spring. The Fed let interest rates rise in an effort to prevent the United States dollar from weakening on the foreign-exchange markets. The West German central bank had raised German interest rates in an attempt to slow the growth of money in that nation, against the possibility of more rapid inflation.
Wyss believes these tighter monetary policies contributed to the market crash.
``If the other central banks are not going to run monetary policy that is consistent with the economic needs of the world, doing the same along with them doesn't help matters,'' he says.
Last Thursday, European central banks moved to lower their interest rates. It was an effort to bolster the dollar, avoid further damage to their export industries, and stimulate their own economies.
This gives the Fed more leeway to ease American monetary policy. Wyss wants the Fed to err if anything on the side of monetary ease. ``I'm more scared of recession than I am of runaway inflation,'' he says.