AMONG ALL the mysteries that afflict economic policy, the behavior of the money supply is currently the most troubling. The numbers recently have been rising rapidly, although it's far from clear what--if anything--that means. In the past, under other circumstances, it would have signaled a rising danger of inflation. The Federal Reserve Board had been saying earlier this year that the present bulge is less significant because it's being generated largely by the deregulation of the banking system. The proliferation of new kinds of funds and accounts is rapidly changing the ways in which people handle their money. But the continuing rise in the money supply, however you choose to define it, seems to be a good deal more than the IRAs and the Super-NOW accounts can explain.
That gives the Federal Reserve very little room for maneuver. If the money numbers continue on the present path, public concerns about inflation will grow. When people fear inflation, they move to anticipate it by raising prices and wages; the fears become self-fulfilling. But, alternatively, if the Federal Reserve tightens the money supply--draining off bank reserves to curb lending, and forcing the interest rates up in the process--it could conceivably jeopardize the recovery from the recession. It has taken a pledge not to do that. The Federal Reserve is walking a very narrow path.
The mystery of the money supply figures is not going to be solved quickly. It's going to take more time and more experience before anyone can be sure where it's leading. That makes it crucial to give the Federal Reserve more latitude to find its way without running dangerous risks. There are things that President Reagan and Congress can do--and have to do together--to reassure everyone else that another surge of inflation is not coming.
The first has just been done. Congress has passed the Social Security bill and sent it to the president for signature. That bill is the immediate test of the government's ability to balance income and outgo in the largest of the social funds.
The second is to collaborate in passing on schedule, in May, a budget resolution that begins a serious attack on the size of the deficit. It means that:
Third, Congress will have to come to an agreement on a substantial tax increase to be enacted this summer. A successful tax bill would go far to dissipate anxiety about inflation ahead. But if a tax bill is to be enacted this year, work on it will have to begin very soon.