Stagnating Money Supply Causes Renewed Concern

Surprising slowdown in growth could hinder economy in the future

THE Clinton administration wants monetary action - not just words - from the Federal Reserve System.

In testimony before the Senate Finance Committee Friday Fed chairman Alan Greenspan described President Clinton's economic program as "serious" and "credible." The White House undoubtedly welcomed the words as it prepares to push for its $500 billion program of tax changes and spending cuts, aimed at both stimulating the economy and reducing the budget deficit.

However, the administration is concerned about a 3 1/2-month pause in the growth of the nation's money supply.

"Would we like to see money supply growth a little higher? Yes," said Roger Altman, deputy secretary of the Treasury. There is "a clear relationship," he held, between growth of the money supply and growth of the nation's output in nominal dollars.

Interviewed by Monitor editors Thursday, Mr. Altman spoke of his concern about the "sub-par recovery." The increase in the gross domestic product (GDP), he noted, is less than half that normal for a postwar recovery. "The 3 million job shortfall reflects that underperformance. We need more than 2.5 percent growth to create jobs."

Last year, GDP grew only 2.1 percent. However, the rate of growth picked up in the final quarter. Indeed there is some speculation that the fourth quarter's annual rate of growth may be revised from the 3.8 percent estimated last month to near 5 percent when fresh numbers are released Friday. Further, the Fed last week said production of the nation's factories, mines, and utilities rose 0.4 percent in January. Higher car and truck output led the way. Initial claims for unemployment benefits fell by 19,00 0, to 321,000, in the week ending Feb. 6. That usually indicates that employers are hiring.

Nonetheless, many economists say that slower money growth means a weaker economy some months ahead. If the economy were to slow down again decidedly, it would make it impossible for the Clinton administration to achieve its goals of sizable job growth and debt reduction.

One measure of money that includes currency and checking deposits, M-1, has grown at an 8.3 percent rate since the end of November, down from a 14.7 percent rate at mid-1992. A broader measure that includes some savings as well, M-2, has shrunk at a 2.5 percent annual rate in the same time span as bank customers move out of low-interest certificates of deposit and money market accounts into, they hope, better investments.

In his testimony to Congress, Mr. Greenspan said that recent developments show that less growth in the money supply is needed to produce a desired level of economic growth. The Fed, he said, will in fact reduce its targets for growth in M-2 this year to 2 to 6 percent, down from a range of 2.5 to 6.5 percent.

The Fed just missed the bottom of its target for M-2 last year.

Altman combined his plea for more money growth with modest praise of the Fed. "Pretty high marks in general," he told the Monitor. "They may have reacted too late to the recession" that lasted from July 1990 to March 1991. But in the fight against inflation, he would prefer a Fed that "errs on the right side" - the anti-inflation side.

The Treasury official indicated he would not engage in public "bullying" of the Fed because it is "a guaranteed recipe for failure" and "just plain stupid." He explained. "You make it more difficult, not less difficult, for the internal management of the Fed to work to your advantage."

Altman holds that deficit reductions outlined in the Clinton program are bringing down long-term interest rates and that this will offset any fiscal drag resulting from the tax increases in the plan. Lower rates since the election will save a homeowner who refinances a $50,000 mortgage some $30 a month, he notes. Rates on 30-year Treasury bonds fell Friday to 7 percent, the lowest since these bonds were first issued in February 1977.

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