Flexibility at the Fed

Amidst all the grim news about continuing recession and 10 percent unemployment, Americans can take some satisfaction in the sharp drop in interest rates in recent weeks. Such a reduction is essential if consumers are once again to buy the cars, houses, and other ''big ticket'' items that will help bring the nation out of its economic doldrums and put people back to work. And, of course, it is the Federal Reserve Board that deserves a cheer or two at this time for easing up slightly on its tight money policy. The Fed's decision to make more credit available not only precipitated the drop in money costs but sparked a rally on Wall Street that pushed the Dow Jones industrial average to the highest level in 18 months.

All this brings to mind the old maxim that Supreme Court justices ''read the newspapers'' to gauge public opinion when reaching their decisions. In the same vein, the governors of the Federal Reserve Board apparently read the newspapers in formulating policies - particularly three or four weeks before an election. The Fed's money gates, one recalls, edged open before the 1980 election. And now they are again creaking open just before the congressional elections.

Should one be cynical about the Fed's sudden largess? Not really. Many economists, after all, argue that the Fed helped to bring about the current recession because of its tight money policy - a policy that was rightfully undertaken precisely because double-digit inflation had gotten out of hand back in 1979 and 1980. To halt the roaring 13 percent price levels of that time the Fed announced that it would henceforth pay closer attention to the supply of money - what the technicians call the money ''aggregates'' - than to interest rates. That policy has largely worked. Whether the Fed is now deliberately backing away from that policy and looking at interest rates themselves is not certain. But what is clear is that the Fed is willing to tolerate a much larger expansion of credit than would have been the case a year ago.

The task for the Fed will be to calibrate the new money growth in a way that facilitates recovery without refueling the terrible inflation of the late 1970s. That seems possible, given the nation's high level of unused industrial capacity. It is also noteworthy that fighting inflation, according to Fed Chairman Paul Volcker, will ''be a continuing priority.''

So - a slight easing on money, along with a warning that inflation will not be allowed to get out of hand. In short, just the right policy mix. As interest rates drop - and most Americans once again feel some of the reassurance about the direction of the economy that Wall Street does - consumer spending may begin to inch upward and help bring down that unacceptable unemployment rate.