The day-to-day activities of the Federal Reserve Open Market Committee no longer cause seismic reactions.
There was a time when a slight movement in the money supply and/or the Fed funds rate would bring Fed-watchers to the trading desks immediately to alter their portfolios. M1, M2, and the other M's were on everyone's lips.
The Fed itself once even tried to lessen the reaction to its moves by announcing the monetary numbers on Friday afternoon instead of Thursday afternoon. The idea was that professionals would be so anxious to escape for the weekend that they wouldn't react so immediately.
No luck. The Friday announcements just postponed the panic one day, and ruined the start of Fed-watchers' weekends. So back they went to Thursday.
Now the reaction is milder.
Sure, the stock market still reacts smartly to any change in interest rates. And the Fed's actions remain a top motivator for day-to-day investment decisions.
But the science of Fed-watching is less exact. Some feel that the money supply still is the be-all and end-all, while others hold that other factors are far more important in determining what the Fed's next actions will be.
At the recent annual seminar on Federal Reserve policy sponsored by Market News Service Inc., four panelists gave central attention to economic and financial indicators related to trade, production, employment, and the like, while downgrading the importance of the specific numbers on monetary growth.
As an example of the Fed's broad scope, one speaker reported that when Alan Greenspan recently addressed the Bank for International Settlements in Switzerland, he spent his hour and a half discussing not the M's but rather the significance of inventory adjustment.
The monetarist idea that money supply is the basic determinant of economic conditions doesn't hold water.
Panelist Mickey D. Levy, chief economist of NationsBanc Capital Markets Inc., gave ample evidence of this by presenting a scatter diagram showing that there is absolutely no correlation between unemployment and inflation.
This is exactly counter to the old Phillips-curve approach, which held that the only way the Fed can contain inflation is to allow rising unemployment.
In sum, Fed-watchers acknowledge that Fed monetary data are important mostly because people watch them and react to them.
By the same token, if the Fed can't turn the economy on a dime, institutional developments that alter monetary activity can't frustrate its policy decisions as much as is often feared.
One such fear has to do with the smart card, the new magnetic card that stores value and can be used to replace cash in small transactions, as a phone card can replace a bundle of quarters.
At a recent meeting sponsored by McConnell Budd & Downes Inc., the Morristown, N.J., investment banking firm, bank CEOs were asked what would impede smart card development.
Several responded that the card would take the money supply out of Fed control and frustrate Fed policy.
I disagree. All the smart card will do is speed turnover of the money supply - which the Fed can offset, just as it offsets other developments that turn over bank deposits more rapidly, like financial intermediaries.
Market News panelist David M. Jones of Aubrey G. Lanston & Co. of New York, agrees with me, as does a member of the Fed Open Market Committee with whom I discussed this recently. We think the smart card's problems, if any, will be customer acceptance, not Fed opposition.
Other forces are having more influence than Fed policies on the future of banking. And bankers at the McConnell seminar told me their worries were not about the Fed.
They worried about institutional investors who have become unhappy with their bank stock holdings and want to do something about it. One sad banker had sold his bank only months before to a larger community bank; only eight of his 57 employees still had jobs with the new organization.
These are matters to worry about, not the glitches of money supply growth.
Mr. Nadler is a contributing editor of the American Banker and professor of finance at Rutgers University Graduate School of Management.
