Mixed Economic Signs Prod Senate Money Policy Review

WATCHING THE FED

TWELVE Federal Reserve Bank presidents, lined up like birds on a telephone wire, were ready to testify to the Senate Banking Committee Wednesday, reporting in turn about the status of the economy in their districts and national monetary policy.

The event - probably the first time in the 75-year history of the Fed that the 12 were scheduled as a group to appear before Congress - reflects the concern of legislators with monetary policy.

"It is a critical economic policy," notes a Congressional source.

Some observers figure the senators are pressuring these Fed officials for even lower interest rates. A senior member of the committee, Sen. Paul Sarbanes (D) of Maryland, has proposed legislation that would remove the 12 from the monetary-policymaking Federal Open Market Committee. Many of these presidents are considered "hawks" in the battle against inflation, willing to see the country endure slow growth to bring down the rate of inflation.

If the bill were enacted - and that is considered unlikely - the FOMC would consist of only the seven governors appointed by the president and confirmed by the Senate. Presidents of the regional banks would act as an advisory committee meeting with the Board four times a year.

On the House side, Rep. Henry Gonzalez, chairman of the Banking committee, has put forward a bill that would require the 12 to face Congressional confirmation. At present, the bank presidents are proposed and appointed by the boards of the regional banks, with the Fed's Board of Governors retaining veto power.

The Fed has come under greater scrutiny in Congress because of the 1990-91 recession and a slow recovery that has created few new jobs.

The economy has picked up some steam recently, with output growing at a 4.8 percent annual rate in the last quarter of 1992 and nonfarm payrolls up a husky 365,000 in February.

Some other statistics have been less vigorous. Factory orders declined 1.3 percent in January. Retailers posted slow sales in February, perhaps due to bad weather. Car sales have been weak.

What especially disturbs some economists is the shrinkage in the broad measures of money supply for the last three months. That last happened in 1959. M-1, the narrow measure of money that includes currency and checking accounts, also likely declined in February.

"If we don't see a pickup fairly soon in the broad monetary aggregates, the economy will be weaker in the second half of 1993 if not sooner," predicts Paul Kasriel, an economist with the Northern Trust Company in Chicago.

The Clinton administration is also concerned. Roger Altman, deputy secretary of the Treasury, has called for faster money growth. A slowdown in the expansion could demolish the administration's goals for a lower budget deficit and faster job creation.

Monetary experts are divided on the importance of the money supply numbers. Both Milton Friedman, a Nobel prize-winning economist, and Paul McCracken, top economic advisor to President Nixon, say money growth is dangerously slow.

But Allan Meltzer, an economist at Carnegie-Mellon University in Pittsburgh, says the Fed's monetary policy is too loose. He chairs a a group of eight academic and business economists known as the Shadow Open Market Committee which met Sunday in Washington to review monetary policy. That group issued a statement calling for the Fed to "tighten monetary policy slightly" in 1993 to "lock in the past gains against inflation and contribute to a sustained expansion."

Dr. Meltzer looks primarily at the "monetary base" - currency plus bank reserves - in looking at monetary policy. It has been growing at a 10 percent annual rate, and the Shadow group would prefer an 8 percent rate.

Meltzer disapproves of the Sarbanes and Gonzalez bills, which he considers efforts to weaken the independence of the Fed from Congress. Rather, he would like to "improve the accountability" of the Fed by requiring the central bank to establish targets for growth in the monetary base. If these aren't met, Fed policymakers should offer their resignation to the president, Meltzer says.

Kasriel concentrates on broader money aggregates that include some savings on top of M-1. Charts for the years 1989 through 1992, he says, show that weakness in real M-2 precede weakness in industrial production.

Fed officials themselves have been downplaying the monetary aggregates. One governor, Lawrence Lindsey, said earlier this week that they are less reliable as an indicator of future national output than in the past.