Fed-watching in an election year
The sign on Treasury Secretary Donald T. Regan's desk says, ''The Buck Starts Here.'' It refers to the printing of currency by the Treasury and is a word play on the sign in President Truman's Oval Office, ''The Buck Stops Here.''
In fact, most of the nation's money supply does not originate at the Treasury's Bureau of Engraving and Printing. The great bulk of money consists of checking deposits, not currency, and these deposits are created through the commercial banking system, with the Federal Reserve System controlling that supply of new money.
That's why President Reagan and Secretary Regan are watching the Fed closely these days. Through its monetary actions, the Fed largely controls the future path of the current economic expansion.
In an interview, Mr. Regan commented: ''We think that if the Fed will do the job it is supposed to do - which is to supply adequate funds in a stable fashion to support the expansion in the economy that their figures call for as well as ours - and do it in a noninflationary or less inflationary way along the lines of their projections, we are satisfied.''
Regan spoke shortly after he and the President met Wednesday with Federal Reserve Board chairman Paul A. Volcker for what was described as a long-scheduled, routine discussion of monetary policy.
With an election coming up, the Reagan administration clearly does not want the Fed to cut off economic growth. Mr. Volcker also headed the Fed in 1980, when a business slowdown damaged President Carter's reelection prospects.
Regan would not spell out exactly how much money he thought Fed officials should supply. ''That's their job,'' he said. ''I don't think it is up to me to be precise to try to tell them what to do and not to do. . . . Their job is to supply enough funds to keep the expansion going.''
However, he did note that the recent revision of the money supply figures, including M1 (currency plus checking deposits), indicated there was somewhat less growth in M1 during the first half of 1983 and more in the second half than the original figures showed. ''Nevertheless,'' he said, ''there was a rapid deceleration . . . from July to December.''
Such a deceleration concerns some monetarist economists, such as the Treasury's chief economist, Beryl Sprinkel. They worry that it could prompt a slowdown or even a recession in the economy later this year.
Contrariwise, the money markets appear to be more concerned at the moment with recent rapid money expansion and the fast pace of the recovery, at least as shown by statistics for January.
The Fed reported Feb. 16 that M1 surged $2.5 billion in the week ended Feb. 6 , leaving the measure nearly at the top of the Fed's target range of 4 to 8 percent.
Lawrence A. Kudlow, chief economist at the Office of Management and Budget until last year and now an economic consultant here, complains that the money supply has been growing as fast as under President Carter, when inflation moved into the double-digit range.
''You got enough money to finance the recovery,'' he said in an interview. Indeed, he charges the Fed with ''playing with fire.'' He figures rapid money expansion will boost the inflation rate to 7 percent by the end of this year.
In another interview, Martin S. Feldstein, chairman of the President's Council of Economic Advisers, suggested that the Fed should aim for the ''midpoint'' in its monetary targets, which would be about a 6 percent annual growth rate for M1. That, he said, ''is as good a place as we know to aim for at this point, based on historical experience.'' It would, he said, provide the growth in the nominal gross national product - the output of goods and services of the nation in current dollars - that the administration has called for. (Fed GNP assumptions are close to those of the administration.)
However, Dr. Feldstein noted that to get the targeted growth in GNP, the velocity of money - how often money turns over - would have to increase ''from the current level to a more normal level.
''That process of velocity increase is clearly taking place at the present time. Lacking anything else, the best thing you can do is bet on history,'' he says.
Reportedly, some officials at the Treasury would prefer to see the Fed achieve money growth at the higher end of its 4-to-8-percent target. They fear that velocity will not increase enough. But Feldstein noted that the Fed had the difficult job of ''balancing risks'' - of too slow growth or of too much inflation.
Because of the size of the federal budget deficits, he says, ''financial markets everywhere are more jittery about monetary policy, particularly expansionary monetary policy. Everybody says, 'The danger historically when you have large deficits is you try to monetize them, try to get interest rates down artificially by excessive expansion of money.' So they (money-market participants) watch them (the Fed) carefully.''
Speaking from his academic background as a Harvard University professor, he continued: ''You might say, 'Let's try adding a little more money rather than a little less money in order to assure a certain pace of recovery.' But it is tougher to do in a psychological environment where everyone is looking at the deficit and worried that you may try to inflate your way around the problem. . . . It is more difficult to conduct monetary policy in the current environment.''
Regan also complained about the volatility of Fed monetary policy, with the money supply growing rapidly for six months and then sharply slowing for the next six months. ''We would wish for a more stable type,'' he said. ''There is, according to a study we have done at the Treasury, a volatility premium built into these rates of interest.'' The study put that premium at 1 to 2 percent. If Fed monetary policy was less volatile, the secretary said, ''it might allow rates to drop by themselves.''