Federal Reserve Vice Chairman Preston Martin said yesterday that the economic recovery is turning out to be stronger than had been expected, and he added, "I think it is monetary policy's job to accommodate that recovery."
In testimony before a House Banking subcommittee, Martin gave no hint that the Federal Reserve has tightened its policies in order to slow recent rapid growth of M1, the money supply measure that includes currency in circulation, checking deposits at financial institutions and travelers checks.
The level of M1 has jumped $15 billion in the four weeks ended May 18, a 39 percent annual rate. From January to April, M1 rose at an 11.9 percent rate.
Many financial market participants expect the central bank to act to slow that growth. Partly as a consequence, some interest rates have risen more than half a percentage point since early May.
Treasury Secretary Donald T. Regan has expressed concern over the rise in M1 and urged the Fed to hold its growth to a 6 percent rate for the remainder of the year.
Asked if financial markets were overreacting to the M1 figures, Martin said that regulatory changes--such as creation of so-called Super-NOW accounts and money market deposit accounts--were still affecting the monetary aggregates, including M1. "I don't mean to imply that we are ignoring it. We can't," he explained, because there is still a relationship between growth of M1 and changes in current-dollar gross national product, though that relationship has been very unstable in the last year and a half.
"Our basic consideration still is to further the recovery" while watching for any sign that inflation is coming back, Martin testified. "It seems to me that inflation is not coming back." The rapid growth of M1 is "one factor to consider but not the only one," he continued.
Martin also noted that if the Fed were to try to slow M1 growth by providing reserves to financial insitutions at a slower pace than it has recently, "there would be pressure on interest rates." And rates are already so high relative to inflation that they are "a burden on the recovery," he said.
Even a somewhat stronger recovery than is now expected would not require restraining actions by the Fed, Martin said.
Silas Keehn, president of the Federal Reserve Bank of Chicago and a voting member of the central bank's policymaking group, the Federal Open Market Committee, appeared with Martin. Keehn also emphasized the uncertain nature of M1 as a guide to policy at the moment.
"M1 is going through some significant shifts," Keehn said. "I think overall monetary policy is being conducted very effectively," the M1 figures notwithstanding, he declared.
Both Martin and Keehn cautioned against raising taxes so early in the recovery. However, both also acknowledged the "massive" borrowing needs of the federal government and large prospective budget deficits--"megadeficits," in Martin's words. "The economic case is for reducing spending where that is possible," the vice chairman asserted.