Amid all the concern earlier this week that the Federal Reserve might raise interest rates for the third time this year, some think the central bank is actually being too lenient and risking an outbreak of inflation.

Monetary economists, who believe that the money supply is the decisive factor in controlling inflation and moderating the business cycle, insist that the nation's money supply has been growing too fast. It recently has been growing at a 9% rate on a year-over-year basis, compared with 3% in 1995-96. They argue that short-term rates ideally should be several notches higher than they are now.

Experience suggests that the costs involved in such a scenario would probably fall heaviest on the banking and housing finance sectors.

The monetarists' often stringent views have been on the back burner during this decade as the nation's economy has posted an extraordinary eight-and-a-half-year expansion and price levels have been benign. Now they are getting fresh attention amid concerns about an uptick in inflation by economists generally.

"If we are going to have inflation, we ought to get rid of it as quickly as possible at the lowest cost. Reducing the monetary base growth rate to 4% annually would be the best way to ensure steady economic growth with zero inflation," Allan H. Meltzer, professor of political economy at Carnegie Mellon University in Pittsburgh, said in an interview with American Banker.

Mr. Meltzer is chairman of the Shadow Open Market Committee, a group of academic and business economists that analyzes and often criticizes the Fed's monetary policy from a monetarist perspective.

In a statement last week, the committee warned: "There are two main questions about inflation: When will it rise and how much will it increase?"

Monetarists, with their focus on money supply growth, advocate gradual and steady growth in the nation's money supply -- almost on an automatic basis: Set a target for monetary growth and stick with it.

Economists outside the monetarist camp think other factors, such as the level of government spending, are equally important. Moreover, the money supply itself has changed shape in the past quarter of a century with the huge expansion of credit cards and other innovations not readily under the Fed's control.

The term "monetarism" was coined by the late economist Karl Brunner, who was Mr. Meltzer's academic mentor. Its best-known advocate is the economist Milton Freidman.

Monetarism was ascendant 20 years ago when inflation was high and the Federal Reserve under former Chairman Paul A. Volcker began focusing on money supply growth. The back of inflation was broken, but at the cost of record high interest rates that ravaged the housing sector and sent the savings and loan industry into a tailspin.

Since then, inflation has receded dramatically and to the surprise of most observers has remained quiet despite a drop in the unemployment rate to a three-decade low. The most recent consumer price index registered inflation at a 2.3% year-over-year rate.

Now, however, many economists think inflation may be poised for something of a comeback.

"The economy is still on a tear. The Fed probably should have raised interest rates a quarter-point on Tuesday to buy some insurance" against inflation and overheating, said economist Nicholas S. Perna of Fleet Boston Corp., who is not a monetarist.

"In retrospect, I think we are going to conclude that 1998 was the low point for inflation, when it averaged 1.6%," said Ken Ackbarali, senior economist at the Los Angeles County Economic Development Corp. and formerly of First Interstate Bancorp.

Mr. Ackbarali, also not a monetarist, estimates inflation next year will rise to 2.5% from 2% this year. "The economy needs a bit more restraint," he said, which probably means the Fed will have to increase rates "one more notch or two."

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