Boskin Presses Fed Over Aiding Money Supply; Fed Official Has Doubts Rate Cuts Would Help
LOS ANGELES - The Bush administration yesterday issued the Federal Reserve another warning to step up growth in the money supply, but a senior Fed official cautioned that further rate cuts might not do much good.
"If money growth does not pick up soon, the Fed will have to contemplate further actions," said Michael Boskin, chairman of the President's Council of Economic Advisers, at a meeting here of the National Association of Business Economists.
The Fed on Sept. 13 engineered a round of rate cuts - including reduction of the discount rate to 5% - in a move officials acknowledge was partly aimed at helping money supply.
Money-supply growth "has been very sluggish recently," Mr. Boskin told reporters, adding that the Fed "needs to do everything it can" to see that the broad M2 measure of the money supply moves back into the middle of the Fed's target range of 2.5% to 6.5% in annual growth.
Robert McTeer, president of the Federal Reserve Bank of Dallas, however, told the economists that Fed officials believe much of the slowdown in money reflects the move by investors to swap maturing certificates of deposit and money market funds at banks for higher-yielding bond funds. Bonds and Treasury securities are not counted in M2.
Growth in the narrower M1 measure of money, which includes checkable deposits, has been much better, said Mr. McTeer. Moreover, he said, it is possible that further cuts in short-term rates, by luring additional flows of money into bond funds, "will have a perverse effect on growth of M2."
Meanwhile, the business economists split in their outlook for bonds during the coming year despite a general agreement that inflation will remain mild as the economic recovery unfolds.
In their latest economic forecast, members project that output of U.S. goods and services will rise 2.7% in 1992. Such a growth rate, the economists said, would be "anemic" compared with previous post-War recoveries, when real gross national product grew by as much as 4% or 5% in the 12 months following a recession.
Moreover, the average estimate of the 56 professional forecasters surveyed calls for consumer prices to rise only 3.7% next year, not much higher than an estimated 3.3% in 1991 and much better than last year's increase of 4.9%.
On balance, the economists surveyed said they see little change in interest rates. They predict Treasury bill rates will move up to 5.8% while yields on the long bond creep back up to 8.3%.
But the average estimates compiled by the business forecasters' group mask wide disparities, with some warning that interest rates are headed higher and others saying rates can still move lower.
The top quarter of those surveyed said that by the end of 1992 they expect to see Treasury bill rates hitting 7.2% and long bonds fetching 9%. By contrast, the bottom quarter of the economists - the most optimistic group - predicted that by the end of next year Treasury bill rates will slide to about 5% and 30-year bonds to 7.5%.
Economists attending the meeting said the split in views reflects an ongoing debate over whether the U.S. economy can climb out of the recession while holding on to some gains in the fight against inflation or whether it will be business as usual, with renewed growth bringing greater price increases. Typically, in a rebound price pressures build as demand for wage increases and credit expands, bringing higher interest rates.
About a quarter of those surveyed said they expect to see relatively strong growth of 3.5% in 1992, while another quarter expected more modest growth of around 2%. Those differences are probably at the heart of the outlook for interest rates and the bond market, said Lynn O. Michaelis, chief economist for Weyerhaeuser Co. Mr. Michaelis said he is optimistic there is room for U.S. rates to move lower as the economies of Japan and Western Europe cool next year, easing global credit demand.
"This is a kind of watershed era," said Laurence H. Mayer, a St. Louis-based forecaster who is calling for a long bond of 7.5% by the end of next year. "We're going to view this as a low-inflation period, and we've been through a period of relatively high inflation, and that's got to be reflected in long-term rates."