While Federal Reserve policy-makers puzzle over persistently slow growth in a key measure of money supply, some economists are offering a solution: Change the measure.
Led by William Poole, a professor at Brown University, the economists suggest that small time deposits be excluded from the closely watched monetary aggregate known as M2.
With recent declines in interest rates, time deposits of less than $100,000 have tended to move toward other types of accounts or higher-yielding investments.
Mr. Poole's idea for a stripped-down M2 - currency in circulation, checkable deposits, and money market funds - has been carried into Fed councils by Jerry L. Jordan, president of the Federal Reserve Bank of Cleveland.
Mr. Jordan is a former member of the Shadow Open Market Committee, a group of Fed watchers that includes Mr. Poole.
M2 Below Growth Target
Without adjustment for the time-deposit changes, M2 grew an anemic 2.3% in the 12 months through May 1992, shy of the Fed's target range of 2.5% to 6.5%. M2 also has fallen short for the last seven weeks, intensifying the economists' questioning of its worth as an indicator of broader economic trends.
"It's obviously a very important issue," Mr. Poole said in a telephone interview. He cited "huge discrepancies" between M2 and the narrower M1 aggregate, a measure of the most liquid financial holdings, which has been growing at a faster-than-expected 11%.
Other experts agree that M2 has become warped by the outflows of bank certificates of deposit of $100,000 or less.
"The small-time-deposit component has been a source of instability in the supply and demand for M2, particularly in the short run," John Wenninger and John Partian, economists at the Federal Reserve Bank of New York, wrote in the bank's spring Quarterly Review.
Banks are managing these liabilities more aggressively - and are more willing to let them run off when loan demand slackens. And consumers have become more comfortable holding their funds in non-M2 vehicles, such as bond and equity mutual funds.
But the Fed economists said these factors may be short-lived. Therefore, they do not argue strongly for redefining M2 - unless small time deposits continue to disrupt the relationships among M2, interest rates, and gross domestic product.
Even Fed Chairman Alan Greenspan has gotten into the debate. At a meeting last month with bank economists who belong to the American Bankers Association's economic advisory committee, the bankers "told Chairman Greenspan that we were puzzled and troubled by the [M2] weakness," said William B. Conerly, an economist at First Interstate Bank of Oregon, Portland.
Mr. Greenspan replied that he didn't think M2 was giving good signals, Mr. Conerly said. The Fed chairman reportedly told the ABA panel that other indicators -- including gross domestic product and inflation rate - are looking about as they would if the money supply were growing in the 6% range.