Economist Arthur M. Okun, former chairman of the Council of Economic Advisers in the Lyndon Johnson Administration, has accused the Federal Reserve Board of attemping in "finetune" the economy, and in the process, pushing interest rates too high.
Okun's comments, an unsually sharp criticism of Federal Reserve policy, were made in a regular economic commentary for the American Security Bank of Washington.
His report, titled "Was This Trip Necessary?", argues that three times between April 1975, and April 1977, the Fed responded to a temporary "blip" in the money supply that "subsequently turned out to be insignificant."
In a telephone interview yesterday. Okun indicated that he believes a fourth such situation may be developing currently. In a response to an increase of $5.0 billion in the money supply (currency and checking accounts) reported for the week ending July 28, the Fed appears to have boosted the federal funds rate to a target of 5 3/4 per cent.
A new York expert on money markets said that the rate actually may have been boosted to 5 7/8 per cent, and that the Fed may ultimately move it to 6 per cent.
The federal funds rate is the rate at which member banks borrow from each other. It is a bellwether price for money, and affects all other short-term interest rates.
Okuns basic argument is that the Fed responds automatically to an increase in the money supply, whether or not there are indications that the increase is leading to excessive spending by business and individuals.
He cites the situation this April, when a report of a similar $5 billion bulge in the money supply caused the Fed to push up the federal funds rate by almost a full percentage point from mid-April to late May, with other short term rates being pulled up as well. Subsequent events, he says, proved that the money supply rise was technical and did not portend an [TEXT OMITTED FROM SOURCES] the Fed should have tried to counter.
"There are some lessons in this experience," Okun wrote. ". . . If the Federal Reserve reads the lessons properly, it should adopt a more patient and more skeptical attitude in response to temporary blips in the money supply rather than immediately attributing significance to them.
In testimony last Friday before the House Banking Committee, Federal Reserve Board chairman Arthur F. Barns defended the Fed's action last April.
Its vigorous and prompt response, he said, "gave clear notice that it was alert to the danger of a new wave of inflation. This reassurange to the business and financial community that the Federal Reserve would not permit the money supply to run riot was well received by credit markets."