POWERFUL Congressmen and the Federal Reserve System are at loggerheads over monetary policy.
"The Fed will come under the most severe threats to its independence since the days of super-high interest rates under chairman Paul Volcker in 1979-81," writes Leif Olsen, a New Canaan, Conn., investment manager.
Many in Congress blame the Fed for the slowest postwar economic recovery on record and thus for the Republicans' loss of the White House.
"The Congress didn't mind what Greenspan did to the Republicans," says Sam Nakagama, a Wall Street economist. "But it does mind what the Fed does to Democrats."
When Fed chairman Alan Greenspan appeared before the Joint Economic Committee Wednesday, he ran into fire. Sen. Paul Sarbanes (D) of Maryland told Mr. Greenspan he was disappointed that the Fed was considering lowering its targets for money growth for 1983: "It would be a sad irony for the country to have voted to end the gridlock in economic policy between the Congress and the president, only to find it replaced with a new gridlock between an administration and a Congress committed to stronger growth an d a Federal Reserve determined to restrain growth by keeping its foot on the monetary brakes."
The Fed decides next week on targets. Greenspan said dropping the target was basically a "technical adjustment."
In 1992, M-2, a broad measure of money that includes currency, checking accounts, and some savings, grew 1.9 percent, well under the Fed's target of 2.5 to 6.5 percent. In inflation-adjusted terms, M-2 in December was 4 percent below its May 1988 peak.
Such monetary restraint has dramatically reduced prices. The consumer price index rose only 2.9 percent last year, compared to 6.1 percent in 1990. However, some Congressmen and some economists are concerned that the slow supply of money, the fuel that feeds economic activity, will result in such weak growth that it will not do much to reduce unemployment or the federal deficit.
National output numbers released yesterday may ease those fears a little. Real gross domestic product rose at a moderately robust 3.8-percent annual rate in the October-December quarter, up from a 3.4-percent rate in the previous quarter.
A number of bills have been introduced that touch on the Fed's independence. House Banking Committee Chairman Henry Gonzalez (D) of Texas sponsors one that would require the Fed's key policymaking committee, which meets in private, to videotape its meetings and release the tapes and a written transcript 60 days afterward. Mr. Sarbanes backs a bill that would remove the presidents of the Fed's 12 district banks from policymaking. Those presidents usually have been tougher in policy than the Fed's seven po litically appointed governors.
Some economists say the Fed is still not providing enough money to the economy. That prompts Lacy Hunt, chief economist of Carroll McEntee & McGinley Inc., to predict only a 1.2 percent growth rate in the first half of this year. "Expansions in real M-2 have historically led to improved economic activity, while decelerations have preceded poor business conditions," he notes.
In the fall, M-2 grew at a reasonable rate. But in December, growth of M-2 began to lag again. Nobody seems to know why.
"It is a warning flag," says Paul Kasriel, monetary economist for Northern Trust Company in Chicago. If that M-2 slowdown continues in February, Treasury Secretary Lloyd Bentsen should be asking Greenspan "to look into this" at their weekly get-together, Mr. Kasriel says. The federal funds rate controlled by the central bank stands at 3 percent. "If the economy weakens again, the Fed should lower it," he says.
Mr. Hunt would like to see the Clinton administration and the Fed reach a compact. If Clinton manages to persuade Congress to take steps to reduce the federal deficit sufficient to reduce long-term bond rates, then the Fed would agree to lower short-term rates enough to meet the midrange of its M-2 growth target.
Rudiger Dornbusch, a Massachusetts Institute of Technology economist, suggests the Clinton administration coordinate with Group of Seven industrial nations a world cut in interest rates after a deficit-reduction package in the United States and a wage- restraint compact in Germany have been worked out.