How well is the Fed using monetary tools to avert recession?

IT'S two weeks since ``Black Monday'' on the stock market, and many investors are still wondering if the panic will lead to another Great Depression. Relax!, says William Poole, a professor of economics at Brown University. ``It won't become a depression.''

Mr. Poole doesn't rule out a recession - an economic slowdown during which national output drops, say, 1 to 3 percent. But he's convinced that a depression, during which gross national product falls perhaps 20 percent and unemployment reaches the 25 percent level, is not going to happen.

Why? Because Federal Reserve System officials aren't stupid. They have learned something from history - at least Poole assumes so.

Another economist, Anna J. Schwartz, isn't quite so sure. She and Milton Friedman published in 1963 ``A Monetary History of the United States,'' an explanation of the depression. This famous work argued that the slump was caused by the Fed's failure to prevent widespread collapse among US banks and allowing a drastic shrinkage in the nation's money supply - the fuel for the economy.

``I would be more comfortable knowing the Fed's actions matched what [Alan] Greenspan has promised,'' says Ms. Schwartz.

A day after the market collapse, Mr. Greenspan, the new chairman of the Fed, issued a one-sentence statement affirming the central bank's ``readiness to serve as a source of liquidity to support the economic and financial system.''

Since then, short-term interest rates have declined. This probably indicates that the Fed has injected the banking system with a huge slug of money to counteract the impact of a decline in stock values of more than half a trillion. Statistics to show whether this is actually true won't be available until the stock market closes next Thursday. (The Fed statistics published in the press last Friday, showing some growth, were for the week ending Oct. 19 - the day of the collapse.)

What concerns both Poole and Schwartz is that the Fed has permitted the growth of money to stagnate this year. The Fed found that despite a very rapid increase in money in 1985 and '86, the economy did not take off into a boom. Nor did inflation burst to a much higher level.

If the Fed thus has decided that money doesn't matter to the economy, ``that is a troubling outlook,'' says Schwartz. The Fed might take the risk that this year's money slowdown won't cause a recession.

Poole doubts that's the case, especially with the plunge in the stock market. He figures the Fed restrained money growth earlier this year in order to maintain interest rates high enough that foreigners would leave their money in American markets. This helps stabilize the dollar abroad.

Now the Fed faces a dilemma. It must pump enough money into the US economy to prevent a slump. But this means lower interest rates that may not attract sufficient foreign investment to support the dollar. The danger: an even worse fall in the dollar's foreign-exchange rate than that of last week. That could create ``more worries,'' Poole figures.

Much attention has been devoted to the efforts of Congress and the administration to agree on a deficit cut of perhaps $23 billion. But that amount is so small compared with national output of $4.4 trillion as to be ``symbolic'' in economic terms, says Poole.

Eyes should be focused rather on monetary policy.