A group of monetarist economists today urged the Federal Reserve to slow down growth of the money supply before it is too late to hit its targets for the year without a disruptive shift in policy.
The group, known as the Shadow Open Market Committee, said that if the rapid money growth of recent months continues for another two or three months, the Federal Reserve is likely to shift policy abruptly and so sharply that the economy would suffer and new worries about a recession could emerge.
The central bank followed such a pattern in setting policy last year and it should not do so again, members of the "shadow" committee declared. The name of the self-appointed group is a play on that of the Federal Open Market Committee, the official policy making body of the Federal Reserve, which will meet Tuesday to set a policy course for the next two months or so.
The members of the shadow group generally believe that the rate of growth of money determines future changes in current-dollar national income and the rate of inflation. They long have argued that the Fed should seek a steady reduction in money growth to stabilize prices.
The shadow committee criticized both the Fed and the Reagan administration for having "no long-term program to achieve noninflationary money growth. It is disappointing that the administration projects essentially no change in the inflation rate in the rest of the decade," the committee said in a statement.
Two members of the committee, Allan H. Meltzer of Carnegie-Mellon University and Jerry L. Jordan, a former member of the Council of Economic Advisers now with First Interstate Bancorp of Los Angeles, said they expect the Fed's policy makers to make no policy changes at Tuesday's meeting.
"I think they will decide not to change policy . . . until they see something happening to the underlying economy," Jordan said.
But he expects the economy to expand strongly in the second quarter. If money growth -- which he said will be at an annual rate of about 11 percent this quarter -- does not slow and the economy does move upward that way, the Fed will push up interest rates late during the spring as it did last year and in 1983, Jordan predicted.
In addition to trying harder to stabilize money growth, the Fed also should do all it can to reduce the uncertainty in financial markets about its future course of action, the committee said.
William Poole of Brown University, who until early this year was also a member of the CEA, said that, among other things, the Fed should specify precisely the base it plans to use in setting its money growth targets for 1986 when it announces them tentatively this summer.
"At our last meeting [in September 1984], we praised the Federal Reserve for keeping average money growth near the midpoint of the target range," the committee statement said. "We urged them to reduce the uncertainty created by erratic money growth and to announce a program to end inflation by the end of the decade.
"The Federal Reserve, instead, announced a very modest reduction of one-half of a percentage point in average money growth for 1985 and increased the short-term variability of money growth. Although they talk about reducing inflation, they have postponed or abandoned any effort to reduce inflation," the shadow committee said.
Absent a "mistake" in Fed policy, such as one the committee fears will occur, there is no reason to expect the economy to fall into a recession, Jordan said. Rather, the more rapid rate of money growth that already has occurred is likely to mean somewhat higher interest rates and more inflation in 1985 than the United States had in 1984. Except for the effect of the continued rise in the value of the dollar on foreign exchange rates, inflation would be running at about a 6 percent rate now and by the end of this year probably will be in that neighborhood, Jordan said.
The shadow group also urged Congress to go beyond President Reagan's recommendations in reducing future federal budget deficits and to leave no programs, including Social Security and defense, immune from cuts.