A group of prominent monetarist economists today called for the Federal Reserve to slow sharply the recent rapid growth in the nation's money supply even though that might risk another recession some time in 1984.
The group, known as the Shadow Open Market Committee, warned that the alternative to slowing money growth would be a reacceleration of inflation, with prices rising at near-double-digit rates by early 1985.
For the short run, the committee said the spurt in money growth had ensured a strong increase in the gross national product, adjusted for inflation, this year and declining unemployment. With an assist from lower oil prices, inflation likely will be about 5 percent this year, it said.
But the rapid recovery for 1983 will have been achieved at the price of letting money supply growth get out of hand during the last half of 1982. M1--the total of currency in circulation and checkable deposits at financial institutions--has risen at a seasonally adjusted annual rate of 16.2 percent in the last 6 months, the committee said.
It urged the Federal Reserve to reduce the growth to hold M1 to a 5 1/2 percent increase between the fourth quarter of 1982 and the fourth quarter of this year. With M1 likely to be up at about a 12 percent rate this quarter, hitting a 5 1/2 percent goal would require money growth at less than a 3 percent rate for the remainder of the year. The committee acknowledged that such a sharp slowing of money growth would likely mean higher short-term interest rates.
The Fed's own targets for this year are expressed in terms of broader monetary aggregates, principally M2--which also includes savings and small time deposits, most money market mutual fund shares and some other items. However, the Fed has said that the M1 growth associated with the intended expansion of M2 is 4 percent to 8 percent.
Thus, the shadow group--formed 10 years ago to offer unofficial advice from a monetarist viewpoint to the central bank's policymaking Federal Open Market Committee--advocated a rate of monetary expansion only slightly lower than the midpoint of the Fed's own range.
But for the last six months, the Fed has chosen to use M2 as a policy guide, rather than M1, because it believes that recent regulatory changes have distorted the relationship of M1 and the economy.
The Shadow Committee specifically rejected that claim. "The debate about the measures of money is a smoke screen to hide a shift to an inflationary policy," declared Allan H. Meltzer of Carnegie-Mellon University, co-chairman of the group. He maintained that the regulatory changes have distorted the meaning of the monetary aggregates little if at all, and that the Fed cannot adequately control growth of M2.
At the moment, the Fed is "pegging" the key federal funds rate--the interest that financial institutions pay when they borrow directly from the Federal Reserve--rather than trying to control money growth, Meltzer asserted.
Committee members said that overly rapid money growth would generate more inflation within two years even if the unemployment rate remains high and industry still has large amounts of unused production capacity. Burton Zwick, an economist at Prudential Insurance Co., said that, with unemployment and money growth both high, the period ahead will provide "by far the sharpest test since the 1930s" of whether money growth or the level of unemployment is the more important determinant of inflation.
The committee acknowledged considerable uncertainty about the relationship of money growth and economic growth this year. Last year, the ratio of the money supply to current-dollar gross national product declined at an unprecedented rate, and it is not clear whether there will be a quick rebound in that ratio or whether it simply will resume growing about in line with its long-term trend of 3 percent to 3 1/2 percent a year.