Both Ronald Reagan and John Anderson took an indirect poke at the Federal Reserve System during their debate Sunday night. Mr. Anderson spoke of the danger of the "printing presses" starting to roll again if the Fed must "monetize" -- that is finance -- an enlarged federal budget deficit. Mr. Reagan talked of the need for a "stable money supply."
Considering that incorrect monetary policies have probably been the greatest cause of the inflationary boombust cycle faced by the United States, the Fed escaped relatively unscathed. ut that was not the case earlier in the day when a group of 10 economists calling themselves the Shadow Open Market Committee met in New York to discuss monetary policy. They struck at the Fed with verbal feet and fists.
Allan H. Meltzer, co-chairman of the group and a professor of economics and social science at Carnegie-Mellon University, charged in a telephone interview that the rhetoric ofthe Fed has changed considerably over the last seven years but that actual monetary policies have not. In other words, the Fed continues a roller-coaster monetary policy that will lead to bad inflation in the future.
Almost a year ago the Federal Reserve announced that it would in the future pay more attention to the monetary aggregates and less to interest rate levels -- that is, it would look more at such monetary measures as the growth in the money supply and bank reserves in deciding whether credit should be tighter or looser.
But it has not done so, says Dr. Meltzer. For instance, bank reserves grew at a 4.3 percent rate in the year before the Fed acted last Oct. 6. That action was supposed to help the reserve system restrain monetary growth. Instead, bank reserves have since grown at a 7.8 percent rate.
"They haven't brought growth down, they have increased it," notes this "monetarist" economist, one who believes in the great importance of changes in the monetary aggregates for producing changes in economic growth and inflation. "The Fed is simply not doing what it says it is doing. They are still interested in controlling interest rates and foreign-exchange rates."
The Shadow Open Market Committee, named after the Federal Reserve's own 12 -member policymaking body, maintains that the Fed should practically ignore interest rates and foreign-exchange rates in determining monetary policy. Rather, it should control the monetary aggregates. If it does that for an extended period, the committee argues, there will be less fluctuation in interest rates and foreign-exchange rates, though they will still vary.
What particularly bothers the committee right now has been the recent dramatic changes in growth of the money supply -- from little growth in the spring, when interest rates soared and then collapsed along with the economy, to rapid growth more recently. The latest statistics show that the basic money supply has grown at a 12.2 percent annual clip since June. That's almost double the 6.5 percent growth target set for the current quarter by the real Federal Open Market Committee.
Interest rates have started up again recently. But this is normal when an economy recovers, Dr. Meltzer says.
What the Shadow Committee recommends is an "immediate return to a 6 percent growth rate in the so-called "monetary base" -- a measure of factors that eventually determine the growth in the money supply itself. The basic money supply is a total of cash in circulation and deamdn deposits.
There was one dissenter on the Shadow Committee. H. Erich Heinemann, an economist with Morgan Stanley, a Wall Street investment banking firm, argued that such a rapid downturn from the 8.5 percent growth rate of the monetary base over the past year would be "too abrupt." But he does agree with the basic thesis that the Fed needs to create money at a slower, steadier pace.
The group of monetarist economists also argued that the Fed should let its discount rate float, presumably at a penalty rate above the federal funds rate. This is rather technical. The discount rate is the rate of inerest charged by the Federal Reserve on loans to commercial banks. The federal funds rate is the rate commercial banks charge when lending excess reserves to one another, usually overnight.
But it all boils down to the charge that the Fed is once more letting monetary policy get out of control, and that this bodes more inflation in the future. The Shadow Committee said it was "specious" to talk of industrial revitalization if the government lacks control in the area of taxes, spending, and monetary policy.
It further urged that the Fed announced its targets for monetary growth for two or three years ahead and that these be supported by a congressional resolution. The goal would be to reduce uncertainty in the economy and thus promote real economic growth.
Some members of Congress, too, are getting fed of with Federal Reserve policy actions. Earlier this month the House Subcommittee on Domestic Monetary Policy, under the Banking Committee, voted 4 to 2 to abolish the Federal Open Market Committee and then require the seven-member Federal Reserve Board to reduce the rate of growth in the money supply to a range of 2.5 to 3.5 percent no later than 1984. That measure has no chance of passage at the moment.
The Fed is once more coming under attack. The presidential candidates have not really got into the fray, however. Perhaps they consider it politically unrewarding to tackle such a technical subject, even if it is vital to the future of the economy.