Federal Reserve policy makers remain concerned about the slowdown in economic growth that has hit the nation in the second half of this year, but few, if any, of them seem worried that a recession is imminent.
Forecasts from the Fed's staff here and several of the district Reserve Banks all call for a pickup in economic growth next year, according to Fed officials. And a number of the system's key policy makers indicated they expect the recent substantial decline in market interest rates will be large enough to cause a resumption of growth in the money supply and, before long, a pickup in the economy as well.
However, Fed Vice Chairman Preston Martin said in an interview last week that he is not at all certain that the actions taken so far will be enough to generate the needed money growth. "I think there is room for further accommodation," he declared, adding that events might persuade him otherwise.
Martin was skeptical of the data released Friday by the Labor Department showing strong gains in employment for November as well as a moderate increase in the total number of hours worked. Taken at face value, the numbers appeared to indicate that industrial production rose at least moderately last month.
Other reports, such as those from a monthly survey of purchasing agents and early indications on retail sales, all run counter to the employment report. "I don't see any big demand upswing out there. I would be less than candid with you to say that I am not concerned" that the economy will not pick up, he said, adding, "I think the first quarter . . . will be pretty slow."
In that very-short-term forecast, Martin has plenty of company. Several of the large econometric forecasting services -- Data Resources Inc., Chase Econometrics and Shearson Lehman/American Express among them -- are looking for the gross national product, adjusted for inflation, to rise at about a 1 to 2 percent annual rate this quarter and next. Wharton Econometric Forecasting Associates is somewhat more optimistic, predicting a resumption of growth at a 4 percent rate next quarter.
Almost all of the forecasts show a resumption of growth in the 3 to 4 percent range sometime next year, and none includes an outright recession.
Only a handful of private economists are maintaining that a recession is the most likely bet for 1985. The Reagan administration continues to forecast a 4 percent rise in real GNP next year.
Federal Reserve Chairman Paul A. Volcker said in a speech at the end of last month that the central bank "has the responsibility for assuring adequate growth in money and liquidity in the economy to support orderly growth in demand over time, in line with our potential. We intend to meet that responsibility."
At the same time, Volcker went on to say that pumping more money into the nation's banking system cannot solve the problems created for financial markets by "enormous" federal budget deficits, reduce U.S. dependence on foreign capital, "nor in the circumstances . . . prevent the seepage of rising demand abroad, instead of to U.S. producers."
Volcker's final reference was to the fact that, while domestic demand for goods and services rose at a 5.7 percent rate in the third quarter after adjustment for inflation, real GNP went up at a 1.9 percent rate. The difference was accounted for by a surge in imports relative to exports. In other words, most of the increase in demand was being satisfied by foreign goods.
This is a new dilemma for monetary policy makers. With the U.S. dollar valued so highly in foreign exchange markets these days and imports therefore so cheap, there is little they feel they can do about what is happening to the trade balance.
"We have been very concerned about the difference between growth in demand and in real GNP," said another FOMC member who asked not to be named. "But this has to be read in a larger context. . . . It's hard to address the trade deficit with monetary policy."
Some of the FOMC members had been hoping for a steady, orderly decline in the dollar's value in the wake of the recent drop in interest rates. So far those hopes have not been realized.
"The international situation is just not clear," said the same official. "As interest rates have come off 250 basis points 2.5 percentage points , the dollar has not dropped." And the official is not sure what comes next.
The most troubling indicator to the FOMC members, according to interviews with several of them, is the virtual absence of growth since June in the money measure M1, which includes currency in circulation and checking deposits at financial institutions.
Until it rose strongly in the last two weeks of November, M1 growth had fallen far short of the Fed's targets for the second half of the year even though it remained within the intended range for the year as a whole.
But Martin is not sure that brief surge will continue long enough to get M1 back to the middle of its target range, as he thinks is necessary. "I haven't seen anything in the demand for funds" that is convincing evidence that M1 is back on track, he said.
As a consequence, he is considering recommending to the FOMC that, when it meets in February to set money growth targets for next year, it use as the starting point a higher base than this year's actual fourth-quarter average for M1, the figure that normally would be used.
"The fourth quarter could give us a pretty low base," Martin said. The FOMC "should seriously consider the basing" and perhaps increase it, he said. However, he added, it would be "a reasonably major step to rebase" and he has not decided yet whether to seek it.
In some past years, monetarist economists criticized the Fed for failing to lower the base for the next year's growth of M1 when the fourth-quarter average turned out to be much higher than originally had been targeted.
Treasury Secretary Donald T. Regan and other administration officials have been complaining for some time about the slowdown in the economy, which they attribute almost entirely to the absence of money growth.
That view of a tight, immediate causality contrasts with that of many economists who focus on money growth as a determinant of the rate of expansion of current-dollar GNP.
The economists generally believe that there is a lag of a couple of quarters before a change in money growth shows up in the GNP figures in a substantial way.
While Fed officials said they don't want to argue with Regan, they question the extent to which the summer rise in interest rates was responsible for the slower economic growth. And they say that it is not all certain that the modest policy tightening the FOMC instituted in the spring, or its failure to resist the higher interest rates generated by market uncertainties in the summer, will turn out to have been errors.
"I don't think the level of rates had much to do with the economic expansion ," said one FOMC member. "Sure, the savings rate rose, but not because the stock market collapsed. Auto sales dropped, but mostly because of a shortage of cars. Consumer confidence did not collapse.
"If you ask me, 'Do you regret what you have done?' I would say, we don't know enough to keep the economy growing smoothly all the time. Remember, in the second quarter, money growth was very strong . . . and M2 growth, though not robust, has been healthy since mid-year. Since the fourth quarter of last year, M1 growth is still in the lower part of the band.. . . When I look at the expansion of credit, I still see a very high rate," the official said.
Another Fed official put it this way. "If in the first quarter, or more importantly, 1985 as a whole shows 3 percent real GNP growth, then I would say -- the third and fourth quarters notwithstanding, that the Fed's policy choice was the right thing to do.
"On the other hand, if we find in 1985 that this sluggishness continues, or a downturn takes place, should we have had an easier policy at the risk of more inflation and if it took pressure off of Congress and the president to do something about the deficit," the FOMC member argued.
"If we get 3 percent growth in 1985 , then the policy will clearly have been vindicated," the official continued. "If we do not get it, then maybe we should have taken more risks."
Vice Chairman Martin disagreed pointedly with the notion that real GNP growth of 3 percent next year would be either adequate or a vindication of this year's implementation of policy.
"Absolutely not," Martin declared. "We have lost the additions to productive capacity from fixed investment, and we have lost the additions to income from the higher unemployment. Three percent is a low figure for next year . . . I think 4 percent or 4-plus and a comeback in productivity is what we need. . . . I don't think we can afford sub-par growth."
None of the other FOMC members interviewed were as pessimistic about the outlook as Martin, though they all acknowledged that the unusual pressure on domestic production from imports was a substantial uncertainty. For some of the district Reserve bank presidents on the committee -- only five of the 12 are voting members at any one time, while the seven governors are always voting members -- their positions are influenced by the state of the economy in their areas.
In Atlanta, for instance, president Robert Forrestal is optimistic about his region and about the whole country for next year. "We have certainly had a slowing . . . but by and large, in this district there is still a lot of confidence."
Forrestal expects real GNP to rise at a 3 percent to 4 percent rate next year, but he cautions, "The real imponderable is the dollar." Part of his optimism, he adds, is because "the level of interest rates in this region has not been a deterrent to strong economic growth. Even in housing, we have had high rates and it has remained okay."
And at the Richmond Federal Reserve Bank, president Robert Black, who has stronger monetarist leanings than most members of the FOMC, said that despite the slow growth of money for several months, "My best guess is that we will bounce back. If I were betting, I would put my whole load on that guess."
As a close watcher of changes in M1, Black said that the sudden pause in the economic expansion "fooled practically everyone" because of the relatively rapid growth of M1 in the first half of the year.
However much emphasis the various members put on M1 as an intermediate target to be used since other goals, such as the rate of increase in current-dollar GNP, cannot be directly achieved, they all strongly supported this fall's move toward ease by the FOMC and the latest cut in the Fed's discount rate from 9 percent to 8 1/2 percent. Changes in the discount rate, the interest rate the central bank charges when it loans money directly to financial institutions, are made by the seven governors rather than the FOMC.
The question that the Fed watchers in financial markets are asking is whether the policymakers will wait to see whether the recent declines in interest rates will be sufficient to get money growth up again, or whether the committee might go along with Martin's view that "there is room for futher accommodation."