A group of prominent monetarist economists today sharply criticized the Federal Reserve's management of monetary policy, saying its actions cast serious doubt on whether the central bank intends to meet its commitment to slow growth of money to combat inflation.
The extreme ups and downs in money growth so far this year, and the uncertain ties they have created about the Fed's resolve, will add to the ultimate economic hardships associated with controlling inflation, warned the group, which is known as the Shadow Open Market Committee.
The money supply contracted in the second quarter of this year as the economy plunged into recession, and the recent weeks it has shot up as the recovery from the recession began. These gyrations were accompanied by an unprecedented drop in interest rates in the spring and, most recently, by significant increase in rates which some economists fear could choke off the recovery, particularly in housing.
The Shadow Committee was formed seven years ago to urge the Fed to follow a monetarist approach to policy by concentrating on the growth of the money supply rather than focusing on interest rates.
Members of the Shadow Committee believe this evidence indicates the central bank had not truly made the switch to monetarism that it announced last October. At that time, the Fed said it would henceforth try to manage the growth of money by controlling reserves available to the nation's banking system rather than trying to accomplish that goal by manipulating interest rates.
Both the Federal Reserve and the Shadow Committee believe that inflation can be checked in the long run only if the rate growth of money can be reduced. c
And key Fed officials, including Chairman Paul Volcker, repeatedly have stressed that the central bank does intend to meet its goal of gradually slowing the creation of money.
But economist Allan Meltzer of Carnegie-Mellon University, co-chairman of the Shadow Committee, is not convinced.
At its semiannual meeting last February, the committee praised the Fed highly for its switch from pegged interest rates to direct control of bank reserves. It also endorsed the Fed's targests for money growth.
The crux of the disagreement between the Fed and the committee lies in the way in which the announced policy of controlling bank reserves has been implemented. The committee favors a steady -- and over time reduced -- rate of growth of reserves whatever the demand for money in the economy may be at any particular moment. The Fed apparently is unwilling to go that far.