WASHINGTON - One of Washington's foremost conservative economists on Tuesday challenged the Federal Reserve System's ability to influence the economy.

Bert Ely, who gained attention for his early and accurate predictions about the savings and loan debacle, stopped short of recommending the Fed's abolition. But in his address to the National Economists Club at the Library of Congress, Mr. Ely called the agency a "toothless tiger."

The Fed simply doesn't have the muscle - the financial resources - to manage inflation, Mr. Ely said. What it does have, is perception - the abiding belief among investors that the Fed can raise and lower interest rates at will.

Mr. Ely said the Fed's traditional tools have been effectively neutralized.

"The discount rate, the interest rate at which the Fed is prepared to lend money to banks and others, is totally irrelevant today," he said. Discount window lending totals about $258 million a year now, making the Fed "about as significant to the American economy as a $350 million bank in Kansas or Iowa."

Bank required reserves are also unimportant today, Mr. Ely said. Banks pass the cost along to borrowers, making them tax collectors for the government and neutralizing the impact of changes in reserve requirements.

Mr. Ely said the federal funds market was small and artificial, and should have no practical effect on short-term rates elsewhere. "The Fed is the beneficiary of the perception that it has the power to actually force a shift in short-term interest rates," he said. "Unfortunately, the markets do not yet understand that they can safely ignore the Fed's rate signaling."

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