Measuring the Fed's mood

Figuring out the Federal Reserve's monetary policy presents a never-ending challenge for economists.

Nowadays, the central bank usually signals in advance a hike in interest rates. But economists must still determine if monetary policy is easy or so tight it will slow the economy and hit stocks.

To do that, economist Beryl Sprinkel, now retired in Florida, follows a measure of money called M-2. It includes currency, demand deposits, savings deposits, and money-market accounts and funds.

Over the past 12 months, M-2 has grown 5.7 percent - a bit too much in Mr. Sprinkel's view. He would like the Fed to take actions that would result in the M-2 rate coming down to 5 percent. That is not "a massive task," he says.

Allan Meltzer, a monetary expert at Carnegie-Mellon University in Pittsburgh, prefers the "monetary base," a measure that includes currency and bank reserves, and which the Fed can control relatively closely.

It grew rapidly last year as banks built up Y2K-related reserves. It has plunged in recent weeks as that need evaporated.

New York-based securities analyst William Helman maintains a monetary-pressure index based on relationships between various interest rates. That index has been negative since last May, possibly signalling a market correction.

(c) Copyright 2000. The Christian Science Publishing Society

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