An internal memorandum sent last week to Treasury Secretary Donald T. Regan contained incorrect numbers that suggested the Federal Reserve's money policy in recent weeks was much tighter than it has been in fact.
Regan has argued recently that it is time for the Fed to make a technical change in policy and allow more money growth, in order to avoid a recession. Some administration officials believe that he was influenced in this view by the wrong data given to him by his undersecretary for monetary affairs, Beryl Sprinkel. However, other senior economic officials contacted have disagreed, saying they did not believe Regan based his call for more money primarily on these numbers, although he may have thought they added weight to his case.
The memorandum from Sprinkel to Regan dated Oct. 6 showed that bank reserves the Fed supplies to the credit system--which then allow banks to "create money"--had contracted at an annual rate of about 8 percent between the middle of August and the end of September.
But the true numbers show a sharp increase, at an annual rate of about 25 percent, in total and nonborrowed reserves over that period, a different administration memo shows. Sprinkel's calculations were based on a set of unadjusted numbers that the Federal Reserve said "do not provide meaningful measures" of growth rates, other officials say. The Fed provides an adjusted series for calculating how fast reserves have been growing, and it is on this that the 25 percent growth rate is based.
Sprinkel yesterday refused to comment on anything that he had sent to the Treasury Secretary.
A dispute over which was the correct series of numbers arose at a meeting of four administration economists--Lawrence Kudlow of the Office of Management and Budget, Jerry Jordan of the Council of Economic Advisers, Sprinkel, and Treasury Undersecretary Norman Ture--at which a joint statement backing the Federal Reserve's current policy was drafted.
The White House has denied there is any disagreement on money policy within the administration, and administration economists have said there is full agreement on the need for continued money restraint. But privately, officials outside the Treasury Department say they do not support Regan's public leaning on the Fed to loosen M1-B. A senior budget official said last week that in contrast to Regan, he did not believe money policy had been too tight.
Office of Management and Budget Director David Stockman told reporters last week that M1-B's low growth was technical, and faster growth would be "neither helpful nor a hindrance." He noted that other money measures have been growing faster than the Fed's targets. However, he said that there was no real debate in the administration on money policy.
Other budget officials have claimed that the White House did not back Regan's public comments that money growth had recently been too slow. Regan is confusing a technical issue with a policy issue, one administration economist said.
However, on Friday presidential adviser Ed Meese told businessmen that the president himself agreed with Regan that there should be a "gradual, careful" acceleration in money growth.
Ironically, the Federal Reserve itself has been trying for several weeks to raise M1-B growth back into the target range. To do so, it has pumped reserves into the system, hence the very sharp increases in total and in unborrowed reserves in September.
Analysts now expect that the narrow measure of the money supply will start to show sharp growth in this week's figures, to be published on Friday. One Federal Reserve official commented that the reserve growth of recent weeks has now gone far enough to raise the question of whether it was too much. Some senior administration officials fear that the recent reserve growth could be followed by an inflationary resurgence of money growth.
Regan has not referred publicly to the reserves numbers as evidence that money policy is too tight. He has concentrated on the key money measure, M1-B, which has been growing by less than the low point of the Federal Reserve's target range. Administration sources said however that the Treasury secretary had commented to one senior official that the bank reserve numbers added to the evidence that money was tight.
A Federal Reserve official commented on the Sprinkel mistake that it was "dismaying that a misspecification of that sort could be made." This official went on to say that he was "distressed by the lack of thoughtfulness in Regan's" remarks on money policy.