The Federal Reserve Board must be "judicious" in reacting to sudden bulges in the growth of the money supply, Charles Partee, a member of the board, told a House subcommittee yesterday.
Testifying before the House Banking Committee's domestic monetary policey subcommittee, Partee noted that" there is no immediate need" to restrain economic expansion since there is little evidence that "a major new boom is in the process of developing."
He said the Fed's open market committee "continues to believe that the wiser course is to limit the speed with which money market conditions are adjusted to changing monetary growth rates."
He said the reason for the Fed's caution about responding too quickly to growth in the money supply was that the monetary aggregates, particularly the narrowly defined M-1, "have proved to be inherently unstable in the short run." M-1 is the measure of cash in circulation and checking account deposits.
"Bulges of a month or two in duration are often reversed subsequently as was the case in the spring and summer of 1975 and again in 1976," he said.
"Prudence in our actions is dictated also by the fact that the relationship between the various measures of monetary growth and the performance of the economy is loose and unreliable, since it is subject to rather abrupt shifts as the result of changing financial practices and economic conditions."
He said that the Fed doesn't have a good explanation for the bulges in the growth of M-1, which were concentrated in April and July of this year.
"It may be that they reflect in part a shift in the seasonal pattern of money demand," he said. "If so, it is entirely possible that a period of adjustment in money growth could lie ahead, just as it had in the later part of other recent years."
He said the growth in the broader monetary measures - M-2 and M-3 - "though substantial, have been much closer to our explanations."
One reason for this development, he said, may be that the accelerated pace at which other forms of deposit and liquid asset instruments were being substituted for bank checking account balances has now slowed temporarily.
"The behavior of the economy this spring and summer, though generally satisfactory, doesn't suggest that a major new boom is in the process of developing," he said. "Both the growth in real activity and the pace of inflation have slowed somewhat in recent months following acceleration earlier in the year."