The Federal Reserve Board was praised today for its policy actions over the past four months by some of its most persistent critics in the past, the monetarist economists on the shadow open market committee.
"We are really pleased by these developments," Allan Meltzer of Carnegie-Mellon University, co-chairman of the committee, declared. "The chances of success against inflation are enormously improved by the changes in procedures the Fed has made."
The other co-chairman, Karl Brunner of the University of Rochester, added, "With very little 'buts' and 'ifs' . . . (Federal Reserve Chairman Paul) Volcker has been facing up to the problem in the most explicit and admirable terms."
These comments are a far cry from the torrent of criticism the shadow committee has reaped on the Federal Reserve in the past for its repeated failures to follow through on promises to gain control of the growth of the money supply and hence, in the opinion of the committee, hold down inflation.
Last Oct. 6 the Fed, in its own break with the past, essentially adopted the approach to controlling money the committee has sought: instead of pegging certain short-term interest rates, the Fed now keeps careful tabs on the level of bank reserves, which in turn limit the ability of banks to make loans and effectively create money.
In addition, the Fed received several verbal pats on the back from committee members for its intention to reduce the growth of the money supply gradually in coming years. They cited particularly several statements this year by Volcker, such as one last week to Congress' Joint Economic Committee in which he said the October changes were intended "to signal clearly and forcibly our unwillingness to finance an accelerating rate of inflation and our desire to 'wind down' inflationary pressures."
Volcker, in that testimony, also declared, "our policy, viewed in a longterm perspective, rests on a very simple premise -- that the inflationary process is ultimately related to excessive growth in money and credit." And of such comments, Meltzer said yesterday, "they might have just as well been made by our committee."
None of the shadow committee members is totally convinced, however, that the Fed will follow through this time. Brunner noted that the Fed has now embarked on ambitious money control efforts in recent years six times and "five times abandoned them within a year."
But because of the major change in the actual way in which the policy is being implemented, and because of Volcker's apparent commitment, they think this may be the time the Fed will succeed. "We have our fingers crossed," Meltzer said.