Presidential adviser Martin Feldstein added his voice yesterday to the growing number of administration officials and private economists who have warned that the money supply is growing too fast.
In a speech to the American Stock Exchange, Feldstein, chairman of the Council of Economic Advisers, expressed "serious concern" over the "rapid recent growth of M1"--the narrow measure of the money supply that includes cash and checking accounts.
Feldstein's comments came shortly before the Federal Reserve released the weekly figures showing that M1 declined by $400 million in the week ending May 25. This measure of the money supply had shot up by $13.7 billion over the three previous weeks, worrying financial markets and leading some monetarists to complain that the Federal Reserve should tighten up. "The markets would have preferred more of a washout" of the recent M1 increase than the $400 million decline just reported, according to William V. Sullivan of Dean Witter Reynolds.
Treasury Secretary Donald T. Regan already has said that the Fed should slow money growth in the coming months and bring it back within target. The Fed has downplayed the M1 measure of money for the past six or seven months, because it has been distorted heavily by banking changes such as the introduction of money market deposit accounts.
Feldstein said "it would be wrong at this time to treat the money growth rules too mechanically." He has supported Fed Chairman Paul Volcker recently, while others in the administration have criticized Fed policy.
However, Feldstein went on to say that "the money stock must not be allowed to go on expanding at its recent pace." Monetarists fear that rapid money growth will lead to a resurgence of inflation, although most forecasters predict that inflation will remain low for a long while into the economic recovery.
Sharp money growth has hurt the stock and bond markets in recent weeks, as traders fear that the Fed will move to curb money growth by restricting credit, which in turn will send short-term interest rates higher.
The May 25 total of M1 was $508.8 billion. It has risen at a 13.9 percent annual rate in the past three months over the previous three-month period