A group of four prominent economists yesterday recommended that the Federal Reserve Board stop setting targets for money supply growth and focus instead on the ultimate goal of the nation's economic growth.
"In my view, a monetary policy which is narrowly based on monetary targeting is not likely to serve us well over the foreseeable future," said Stephen M. Goldfeld, a Princeton economist and member of the Council of Economic Advisers in the Carter administration. The Fed should be setting goals for growth of the gross national product, he said.
The other economists--Ralph Bryant, a senior fellow of the Brookings Institution; William Fellner of the American Enterprise Institute and a member of the Nixon administration's CEA; and Robert J. Gordon of Northwestern University--offered similar advice during a House Banking subcommittee hearing on several bills that would require the Fed to set objectives for nominal or current-dollar GNP, real GNP, inflation and employment.
Goldfeld said deregulation of financial institutions and other changes in financial markets in recent years have so altered the normal relationship between growth of various measures of money and the economy that it will take economists several years before they can determine adequately whether a new, stable relationship has been formed. As a consequence, he said, money growth targets might or might not produce the economic results sought.
Many monetarist economists disagree. They maintain that the old relationship between money and economic growth will be reestablished this year, and that since the Fed can control money growth, it should continue to try to control nominal GNP growth by setting and hitting money growth targets.
While supporting the legislation's move beyond money targets, Gordon said it goes "too far in putting growth in nominal GNP, real GNP and inflation on an equal footing. . . . The Fed cannot be expected simultaneously to control all three. . . . Its primary objective should be nominal GNP growth."
Fellner opposed the legislation because of its emphasis on achievement of objectives for real growth and employment. "Such a policy would continue to produce the inflationary stop-and-go results and the by now well-known inefficiencies associated with these," he declared.
"Desirable present and future monetary policies should be oriented not directly to 'real' objectives but to generating the appropriate flow of nominal demand to which the market participants need to adjust their cost and price-setting behavior," Fellner argued. He is concerned that long-term economic health would be undermined by the single-minded pursuit of a stated goal for real economic growth regardless of what is happening to inflation.
The fourth economist, Bryant, said that the monetary targeting procedures used by the Federal Reserve in recent years "certainly are on my list of unfortunate things" that have been done in macroeconomic policy. He said the Fed had sought to achieve its monetary targets even when those targets turned out to be inconsistent with the more fundamental objective of nominal GNP growth.
"You do not want to tilt Italy to straighten up the leaning Tower of Pisa," he said.
Brookings, coincidentally, published yesterday a book by Bryant, "Controlling Money: The Federal Reserve and Its Critics," in which he also argues that the Fed should pay less attention to its "intermediate" targets for money and more to the ultimate objectives of economic growth.
The congressional backers of the pending legislation are seeking, one way or another, to get the Federal Reserve to follow an easier monetary policy and foster economic recovery.
The four economists all rejected the requirement in one of the bills that would force the Fed to set a target for real interest rates--some measure of actual interest rates less some current or expected rate of inflation. Gordon said such a policy could make the Fed adopt policies that would be exactly the opposite to what would be needed to maintain stable growth of nominal GNP in the face of, say, a supply shock such as an oil embargo.