"Fed watchers" are getting nervous again. They are wondering if the Federal Reserve System once more will fumble its anti-inflation program. "It is a last shot," warns Jerry L. Jordan, top economist with Pittsburgh National Bank, speapking of the tight- money policy introduced by the Fed Oct. 6 in what is ofttimes called the "Saturday Night Massacre."
If the program doesn't soon show some impact on inflation rates in the United States, another run on the dollar could force the nation into imposing controls on foreign exchange, credit, and capital, Mr. Jordan says.
So far he is not worried over recent monetary developments. But other economists are becoming concerned. Citibank, for instance, in its Economic Week letter, says that despite reiterations by the Fed of its firm monetary policy, "the actual growth of the monetary base in January as compared to December hasn't lived up to the promise of the words, in our view. The base [one measure of monetary growth] has been growing too fast. And this is due largely to the injection of reserves by the Fed into the banking system -- a deliberate policy action."
In other words, Citibank economists are worried that the Fed has become fearful of a recession and is backing off from its determination to fight inflation. Already, they maintain, the Fed has turned in the direction of expansion.
"The consequences of this move by the Federal Reserve are already reflected in higher inflation expectations and higher interest rates. And, unless this latest turn is quickly reversed, rates will move even higher in the weeks ahead."m
H. Erich Heinemann, a money-market analyst for Morgan Stanley & Co., a major Wall Street underwriter, makes a similar observation. "If the money managers persist in pumping up the monetary base and total bank reserves as they have in the past few weeks, the likelihood is that near-term inflationary expectations will be raised sharply. This could easily lead to a sharp, if temporary, increase in both short- and long-term interest rates, coupled, most likely, with a new international financial crisis."
Mr. Jordan is somewhat more sanguine than many of his fellow Fed-watchers because of a different interpretation of the data. He maintains that the new operating procedures launched by the system last October make the current seasonal adjustments of the data somewhat obsolescent. Normally, the Federal Reserve pumps extra money into the economy in December to finance the Christmas buying season. Then it takes that money out of the economy in January and February. So it habitually adjusts the data to remove this bulge and the subsequent dip in the money supply and other monetary statistics.
Its econometric models were set up with this pattern in mind. Now, however, it is not attempting to control the growth of the money supply -- a key to developments in the business cycle -- thorugh regulating short-term interest rates. Rather, it is attempting to manage the money supply more directly through the control of bank reserves. This makes a difference in whether seasonally adjusted or nonseasonally adjusted figures are most reliable.
Mr. Jordan also notes that there has been a change in the ratio between currency and demand deposits -- both components of the money supply -- that is important. The complexity of monetary analysis has become greater. Whatever, his conclusion is that when nonseasonally adjusted data are examined, the Fed has not yet strayed off its anti-inflationary course.
Moreover, he doubts that the system would consciously risk a switch to an expansionary policy at this time.
The political implications of monetary developments are enormous just now. Say that inflation does not decline in the coming months as Mr. Jordan expects. He figures that a recession in this half of the year will slow the demand for money, reduce interest rates, and help the federal government finance its deficit with less trouble. It will also trim inflation to an 8 percent annual rate by the end of the year and help maintain the strength of the dollar.
That is a relatively favorable forecast.
Another prominent Fed-watcher, Henry Kaufman of Salomon Brothers, sees instead a rise in inflation (at least as measured by the broader measure known as the "deflator"); continued expansion of the economy until the third quarter; and higher interest rates. This is a more dangerous economic path. It is a route that could lead to another run on the dollar.
In Mr. Jordan's opinion, the Federal Reserve would have a difficult time mounting another save-the-dollar program, as it did Oct. 6 and a year earlier. Participants in the money market would be too skeptical. They would not believe in the Fed's seriousness.
Thus the government would be forced to resort to foreign-exchange, credit, and capital controls. It would be an admission of failure in an election year. It would be damaging to President Carter's hopes for re-election.