When Federal Reserve Board Chairman Paul Volcker insists, as he did again this past weekend on national television, that the central bank plans to maintain tight controls on credit and the money supply, it is to be hoped that he will remain true to his word.
The problem is that in recent years the Fed, despite repeated avowals from other Fed officials not unlike those made by Mr. Volcker, has invariably backed off from its monetary course wen economic conclusions turned tough. But in each case the new round of inflation that followed began from a higher base than before. Yet, as Mr. Volcker correctly notes, the very stern steps taken by the Fed this year have already helped to lessen the overall inflation rate somewhat. "We're a long way from home," he notes, but there have been "hopeful signs" that at last progress is being made. And regarding high interest rates, Chase Manhattan Bank yesterday announced a drop in its prime rate -- the rate given its best customers -- from 20.5 percent to 20 percent.
It is absolutely vital that the Fed -- and the administration as well as the American public -- stay the course in the fight against inflation and not yield to temptations to momentarily "ease up" on interest rates to help stimulate growth. The Fed in fact has no choice but to stick to its restrictive policy. If the money gates are thrown open -- which will mean more inflation -- Wall Street will inevitably react with alarm and interest rates will again shoot skyward. On the other hand, by continuing with belt-tightening measures, the economy will, by necessity, be slowed. As that happens, interest rates should begin to come down, as many even now be starting to occur. The admittedly difficult task for the Fed will be to ensure that the money tightening does not lead to a sharp recession.
Regarding the matter of fine-tuning the nation's money supply, there is little dispute that the Fed needs to find a way to define exactly what constitutes a tight-money policy. The considerable technical issues involved need not be fully addressed here. Suffice it to note that the Fed has difficulty in gauging the various aggregates of the money supply, what it calls M1-B and M2 and M3. The unfortunate truth is that the Fed may not at this point fully know where "money" is in the vast transactional currency and savings pipeline that makes up the giant US economy. But until the Fed does have that knowledge it will to an extent be flying blind in making monetary decisions. Hopefully the central bank can figure out what are the best measures for assessing monetary policy.
The important point, however, is that, as the Fed works out its money-measurement processes, it deserves the backing of all Americans. Despite the high July consumer price figures (which some economist believe may be repeated for another month or so) the overall picture appears to be much better for the year as a whole compared to recent years. US administrations have a tendency to wobble and backtrack on economic policies. This time around the answer would seem to be in gritting the teeth and staying the course.