WASHINGTON - Members of Congress greeted Federal Reserve Board Chairman Alan Greenspan with some hot political rhetoric when he have his Humphrey-Hawkins testimony last week, but they blew a chance to ask him a few tough questions about why the money supply is sputtering.
Democrats on the Senate Banking Committee didn't mind criticizing the Fed. Chairman Donald Riegle of Michigan, for example, said the central bank moved too timidly in cutting short-term rates. But discussion of the money supply had to wait for the next day.
That was when Mr. Greenspan testified before the House Banking domestic monetary policy subcommittee, chaired by Rep. Stephen Neal, D-N.C. He offered members the confession that Fed officials are "very puzzled" by what appears to be a breakdown in the normal relationships between money, interest rates, and the economy.
In effect, Mr. Greenspan told the subcommittee, Fed officials do not understand why the money supply is barely growing and why the Fed's repeated rate cuts have failed to do more to help the economy.
Therefore, he told Mr. Neal's panel, while the central bank's policy-makers lean toward cutting the money supply targets "another notch" some time in the future to work toward their goal of price stability, they decided not to do so next year.
Mr. Greenspan's testimony raises a question. If Fed officials are unsure of what is going on with the money supply, then why do they believe it is still important and should be targeted for less growth to fight inflation?
Some analysts on Wall Street think the Fed has been too tight with money and that Mr. Greenspan and his colleagues were let off the hook with some mumbo jumbo that even they do not believe. There is a suspicion that the Fed is allowing the economy to grind along in low gear to take inflation down another peg.
The Fed's forecast calls for consumer prices to rise between 2.75% and 3.25% in 1993, which Mr. Greenspan said will mark the lowest pace for inflation in nearly a quarter of a century, if it can be achieved.
"They didn't stand up and say, look, ~The economy is weak but this is the price which we have to pay to get inflation down to zero,'" said Robert Brusca, chief economist for Nikko Securities International Inc. "The question is, what is meant by stable prices,and how do you pursue stable prices?"
Mr. Brusca personally attended the Greenspan hearing in the Dirksen Senate Office Building, where he waited in line or two hours to get one seven seats made available to the public. He did not like what he saw, which seemed to be a lot of political grandstanding between Republicans and Democrats that let the Fed's policies escape close scrutiny.
"Greenspan was in the crossfire, but he wasn't in the crosshairs," said Mr. Brusca. "He was clearly vulnerable, and he got away with it."
"The relationship between money and the economy has not broken down," says Lacy Hunt, chief U.S. economist for HSBC Holdings. "Alan Greenspan should know better."
So far this year, M2 has increased at a scrawny annual rate of 1.1% compared with the fourth quarter of last year, and M3 is actually 0.4% lower. Both rates are in nominal terms and well below the Fed's target ranges of 2.5% to 6.5% for M2 and 1% to 5% for M3.
These figures do not exactly convey the picture of a central bank spewing out liquidity to help a sick economy.
Mr. Hunt calculates that real M2 is 3% below its 1988 peak, and real M3 is 7% below its 1988 peak. Non-financial debt has grown about 3.5% in the last year,the slowest pace since the Fed began keeping records in 1959. Outstanding commercial and industrial loans by banks in May, the latest month for which figures are available, are nearly 6% below their 1989 peak.
"Monetary policy has been overly restrictive since the spring of 1990, and the picture has not changed since then," Mr. Hunt said.
He argues that whether monetary policy is actually eased depends on what is happening on the demand side for credit. While the Fed can lower short-term rates, credit demand can fall of even more rapidly. "None of us know the true equilibrium point where demand and supply for funds intersect," he said. "Lowering the federal funds peg is not the equivalent to monetary easing."
Mr. Hunt said he does not know why Fed policymakers are being so tight. Maybe they are just bad forecasters, he suggested. But, he agreed with Mr. Brusca that members of Congress failed to prove Mr. Greenspan when they had their chance. "They should have held his feet to the fire on the money supply."
Mr. Greenspan is taking advantage of a global contraction in asset values and a pullback from the high debt levels of the 1980s that have kept long-term rates high. He sees an historic opportunity to wring inflationary fears out of the credit markets and take long rates lower.
It looks like an enterprise that, in the short run, comes at the price of jobs and economic growth.