A group of prominent monetarist economists that usually is sharply at odds with the Federal Reserve over monetary policy today issued a statement here uncharacteristically praising the central bank's recent performance.
"The Federal Reserve has kept the rate of growth of M1 a money supply measure that includes currency and checkable deposits within its preannounced target range for 1984. We commend them for their performance . . . " declared the statement by the Shadow Open Market Committee.
The committee was particularly impressed by the Fed's ability to lend troubled Continental Illinois Bank and Trust Co. upwards of $7 billion for weeks on end without allowing that to send money growth skyrocketing.
Nor did the shadow group -- formed more than a decade ago to urge the Fed to seek to reduce inflation and foster economic growth through strict control of the money supply -- differ very much with the Fed's policy prescriptions for this year and next or over what those prescriptions would produce. "We expect real economic growth to continue in 1985 at about the average long-term real rate of 3 percent to 4 percent if monetary and fiscal policies do not wrench the economy in one direction or another," it said.
The central bank has announced a tentative growth target for M1 of 4 percent to 7 percent from the fourth quarter of this year to the fourth quarter of 1985. The shadow committee feels that band is too wide and that M1 growth in 1985 should not exceed 6 percent, the midpoint of this year's Fed target range.
In other words, the committee of monetarists would like the Fed to aim for 5 percent money growth next year, only a shade lower than the 5 1/2 percent midpoint of the tentative official target.
The committee said that faster money growth in the past has left the economy with a "trend rate of inflation" of about 6 to 7 percent. Actual inflation has been lower than that this year, primarily because the U.S. dollar's value has been rising on foreign exchange markets, chipping about 1 1/2 percentage points off the inflation rate by reducing the price of imports and providing more competition for American producers.
The shadow committee warned that a drop in the dollar's value could mean a one-time increase in the price level -- that is, a temporary increase in inflation above the 6 to 7 percent trend. Even if that happens -- and many economists expect that it will -- the group said that the Fed should not modify its money growth targets.
For the longer term, the group was not so pleased. At its two-day meeting here, several members, including Co-chairman Allan H. Meltzer of Carnegie-Mellon University, criticized the Fed for failing to be more explicit about its long-term goals.
"We challenge the Federal Reserve to show more concern about a return to long-term price stability. We urge them to announce a strategy for ending inflation within the decade," the committee statement said. In monetarist terms, that would mean essentially bringing money growth close to zero.
Among other recommendations in the committee statement was one that federal budgets should be reduced primarily through spending cuts, although some types of tax increases would be acceptable. The group also recommended that federal bank regulators stop guaranteeing deposits above $100,000 as they did in the rescue of Continental Illinois. "The proper response to Continental's problem was to allow Continental to fail while preventing the effects of the failure from spreading to other banks," it said.