WASHINGTON - The Bush administration and the Federal Reserve openly wrangled in public yesterday over monetary policy as Treasury Secretary Nicholas Brady attacked the Fed for strangling the money supply.
The unusual dispute, which surfaced in an exchange between Mr. Brady and Federal Reserve Board Chairman Alan Greenspan at a routine hearing of the Senate Banking Committee, led Mr. Greenspan to say Fed officials are close to reaching new conclusions about the relationship between the money supply and the economy.
The clash came as the Federal Reserve Board released the so-called beige book report, which says economic conditions around the United States remain "uneven."
Mr. Brady complained that the Fed is not doing enough to expand the money supply. "I haven't been satisfied with M2 growth, and the chairman knows that," Mr. Brady said after repeated prodding from Committee Chairman Donald Riegle, D-Mich.
"It's a contraction in the economy for the money supply to go down," Mr. Brady said, referring to recent declines in M2. He said weakness in M2 caused the economy to turn back downward last year, and it could happen again.
M2 is a broad measure of the money supply that includes currency in circulation, checkable deposits, money market mutual funds, and small certificates of deposit. So far this year, M2 has grown only about 1% in nominal terms, meaning it has contracted when adjusted for inflation.
Sitting just a few feet away, Mr. Greenspan replied that the structure of the economy may have changed so that "gross domestic product will grow regardless of the behavior of normally measured M2."
Mr. Greenspan said the Fed has lost its faith in M2 as the most reliable monetary measure of future GDP growth. "We are studying this whole question," he said, adding that the Fed is very close to reaching a conclusion.
"I'm not yet fully confident in he analysis we are undertaking, but I'm more confident now than I have been," Mr. Greenspan said, but would not say what conclusion the Fed was likely to reach regarding M2's usefulness as a monetary tool.
In June, The Bond Buyer reported that members of the Federal Open Market Committee were considering redefining M2 to take into account the stampede by investors from bank deposits into stock and bond funds, which are not counted in the money supply.
Fed officials have talked about other measures of money that suggest the central bank has been providing plenty of liquidity to the banking system. One measure discussed would remove small-time deposits from M2 and add in money market mutual funds held by businesses and other institutions, which are not counted in M3, the broadest measure of money.
Mr. Brady and Mr. Greenspan appeared with other members of the Thrift Depositor Protection Oversight Board to deliver the agency's semiannual review of the Resolution Trust Corp. Several committee members, notably Sen. Riegle and Sen. Paul Sarbanes, D-Md., bitterly attacked the administration for not doing enough to spur on the economy.
Also during the hearing, Mr. Brady expressed an interest in legislation introduced by Rep. Lee Hamilton, D-Ind., which would reorganize the Fed by stripping the district bank presidents of voting power on the FOMC.
Supporters say the bank presidents should not be setting monetary policy because they are not elected or appointed to their positions. By contrast, the seven members of the Federal Reserve Board who sit on the FOMC are appointed by the president, subject to Senate confirmation.
Mr. Brady avoided telling the committee what specific changes he would like to see made to the Fed and said instead that the Treasury has not studied the issue. But, he said, "I think we ought to make that review and see if improvements can be made," adding, "The independence of the Fed is terribly important."
The beige book report concludes that "economic activity has been uneven in recent weeks across the nation," a less optimistic conclusion that the previous report of June 17, which generally described slow but steady gains in most U.S. regions.
The latest report is a survey of business conditions in the 12 Federal Reserve Bank Districts through July 27, which includes several weeks since the cut in the discount rate on July 2. It serves as a basis for discussions on monetary policy by the Federal Open Market Committee, which is scheduled to meet Aug. 18.
Retail activity "improved somewhat in recent weeks," the report said, but it went on to say that sales "varied by product and region." The New York and Kansas City districts said clothing sales were strong, and both said sales of home furnishings were up.
But Minneapolis and Atlanta said appliance sales - an important, big-ticket item that often signals consumer confidence - were depressed. And automobile sales were weak in most districts except Atlanta and Dallas.
One encouraging sector was manufacturing, where activity "continued to improve moderately in most districts," according to the Fed report. Cleveland and Chicago said manufacturing continued to lead the recovery in their regions, and Philadelphia, Richmond, Atlanta, and Chicago all said new orders were up.
Other sectors of the economy did not have much momentum, even with the latest round in interest rate reductions, the Fed report said.
Cleveland, Richmond, Kansas City, and Dallas said lower interest rates were not spurring home buying, and real estate agents in New York and Richmond said job worries among potential buyers wee dampening sales.