A group of monetarist economists today urged the Federal Reserve to use the opportunity created by falling oil prices "to achieve a lasting reduction in the rate of inflation."
The group, the Shadow Open Market Committee, said that if the Federal Reserve stays on its current monetary policy course, the oil price drop will be translated temporarily into faster economic growth.
Once oil prices stop falling, however, inflation will bounce back and efforts to hold it down could soon lead to a recession, the committee said.
Specifically, the committee recommended that the Federal Reserve hold growth of the money supply to between 5 percent and 6 percent this year. That would fall within the Fed's own target range for expansion of the money measure M1, but it would be about 3 percentage points below what the committee expects money growth actually would be without a change in Fed policy.
The shadow committee said that the gross national product, adjusted for inflation, will increase between 4 percent and 5 percent during 1986 if policy is not changed. A number of economists, including those in the Reagan administration, are forecasting real GNP growth of 4 percent or more and are welcoming the prospect.
If money growth were held down as the shadow committee proposes, real GNP would rise between 2 percent and 4 percent, according to Jerry L. Jordan, a former member of the Council of Economic Advisers who is now an economist with First Interstate Bancorp of Los Angeles.
Allen Meltzer, cochairman of the shadow committee -- which was formed more than a decade ago to offer advice to the Fed's policy-making group, the Federal Open Market Committee -- said that by restraining economic growth and inflation now, the current expansion could continue far into the future.
"There is no reason to believe that inflation is behind us," Meltzer said.
Falling oil prices likely will mean a zero inflation rate for a few months and then consumer prices will begin rising at a 4 percent to 5 percent clip, according to the committee's estimate.
Fed policy makers, meeting about a month ago, forecast economic growth of around 3 percent to 4 percent. Their target range for growth of M1 -- which includes currency in circulation and checking deposits at financial institutions -- was set at 3 percent to 8 percent measured from the average for the fourth quarter of 1985 to the fourth quarter of this year.
Testimony by Fed Chairman Paul A. Volcker indicated that the Fed expects growth in the upper part of that range to be necessary to achieve its projections for real economic gains.
"If monetary policy were now consistent with stable prices," the shadow committee said in a statement, "it would be appropriate to maintain an unchanged rate of money growth . . . [But] monetary policy in recent years has been too expansive on average to restore price stability. Present policy runs the risk of accelerating inflation next year and a recession a year or two after that."