If top Reagan administration officials are keeping a wary eye these days on the powerful -- and politically independent -- Federal Reserve Board, the reasons are not hard to understand. The US money supply (as measured by Ml-B, the most commonly used statistic) shot up by $4.2 billion for the week ending April 22. Most economists had expected a decline. For the statistical quarter ending that week, the money supply shot up at an annual rate of 13.7 percent.
The target range for the quarter is far, far below that -- in the five to six percent range.
This is unfortunate news for an economy that has been making progress in lowering the inflation rate without having to undergo a deep economic downturn. The announcement of the huge growth in money caused bond prices to fall while interest rates shot up. Now there are concerns that further hikes in short-term rates will hit the US economy during the weeks ahead, with the prime rate shortly climbing to 19 percent or even 20 percent from the 18 percent reached last week.
What's going on here? The Fed explains the gyrations in money growth as basically "technical" in nature, in part because the Fed is currently applying seasonal adjusting methods to NOW accounts, interest-bearing checking accounts. While that may well be the case, skeptics may be permitted their bemusement, given the fact that the Fed has failed to meet its overall annual money-supply targets in three out of the past five years.
Does the Fed actually have a consistent, long-term policy for ensuring monetary restraint? That, after all, is its promised goal. Yet if that proves not to be the case, if the Fed allows the money supply to grow at too rapid a pace, the administration's entire economic plan may be endangered.
The Fed is an independent agency. But independence does not mean the right to operate without accountability. The Fed and the administration need to sit down and ensure that there will be a consistency of monetary and fiscal policy in the months ahead. The American people clearly want the inflation rate lowered, but not at the cost of soaring interest rates, recession, or turbulent swings in monetary policy. The Fed must stay within its money targets. It must ensure consistency of policy, which means a gradual rate of reduction in money growth.