The latest easing by the Federal raises, once again, the question of how effective a weapon monetary policy can be in present circumstances.
Clearly, the Fed should have eased. In retrospect -- where we all have the most perfect vision -- it also is clear that the whole easing process should have gone even faster than it has.
But that being said, we are still facing deep-rooted economic problems that are not easily resolved by monetary policy.
The nation's debt overload is one commonly cited problem that requires time to overcome and cannot be fixed by monetary policy -- except perhaps temporarily, if the monetary authorities were unwisely to pursue an inflationary policy.
Indeed, some years ago there were analysts who contended that the debt burden of corporations and government would in fact, keep the authorities from pursuing an aggressive anti-inflationary policy.
But despite high debt levels in the country, the Fed has actively pressed such a policy.
It is tempting to say that the cost has been a longer recession than is healthy. But if one looks behind the so-called debt burden, it an be seen that the Fed's ability to accelerate the economy has been much more limited than usual, largely because the spending propensities of key economic sectors were greatly reduced by earlier excesses.
In particular, all levels of government had used up much of their spending and tax-cutting potential earlier.
While federal fiscal policy has been modestly more stimulative in the current fiscal year than in the year previous, policy was scheduled to become more restrictive in the fiscal year beginning Oct. 1 -- a time when we still may be lacking adequate push from other sectors.
Meanwhile, the rate of growth in spending by state and local governments declined substantially from its pace at the end of the 1980s. In addition, many of these governments are faced with the need to raise tax rates to meet existing commitments.
With fiscal policies muted as an anticyclical weapon, monetary policy was left pretty much alone in the field. That meant economic recovery depended on how promptly and with what vigor private sectors would respond to interest rate cuts and more liquidity.
The Fed was probably a bit laggard in pumping liquidity into the economy.
As noted in earlier columns, the M2 monetary aggregate is not now a good measure of Fed efforts in that regard, because of structural changes in the role and attitude of banks and other depository institutions.
The narrow monetary aggregate, M1, is a better measure, since it is most directly connected to the reserve base of the banking system, which the Fed can control. M1 has been expanding rapidly since late 1991.
Liquidity Has Been Ample
I would say the Fed's monetary posture has been fairly aggressive since that time. The subsequent drop in money-market interest rates has been produced mainly by new liquidity, rather than just by a deterioration in the economy, as seems to have been the case earlier.
But the private sectors' response has been sluggish, for well-known reasons. Commercial realty has been overbuilt. Consumers have long since reduced their saving rate to minimal levels and thus could not be counted on as active borrowers.
And businesses have lacked expanding markets to give them incentives to increase spending on plant and equipment.
In that situation, the economy has been thirsting for and absorbing all the liquidity the Fed could provide. The very steep upward-sloping yield curve reflects -- among other things -- strong demand for short-term instruments relative to longer-term ones.
Still, longer-term interest rates have declined of late, partly because the Fed has achieved anti-inflation credibility and partly because industrial economies and credit demands around the world are weak.
Further declines in longer-term rates may be needed to bring the real cost of capital into line with diminished business prospects. But even that might not be sufficient for a good recovery today. Fiscal policies may have to be employed to ensure expanding markets.
Japan has made a move in that direction, which may ultimately help us by encouraging growth abroad. But we, too, may be forced into a temporarily more active fiscal policy, unless our economy starts responding soon to monetary incentives.
Mr. Axilrod is vice chairman of Nikko Securities Co., New York.