WASHINGTON -- Federal Reserve Board Chairman Alan Greenspan could come under pressure from Congress this week to further ease interest rates to counter a recent weakness in money supply growth, which some economists say could thwart the economic recovery.
Since the beginning of the year, the broad measure of the money stock known as M2 has increased at an annual rate of 3.5% -- a rate well below the Fed's target of 4.5% -- creating a shortfall in money growth of about $20 billion, said Robert Brusca, chief economist with Nikko Securities.
"As a purely arithmetic matter, if money grows around 3.5%, that means nominal growth at best could be 3.5%," explaind Jeremy Gluck, an economist with Mitsubishi Bank. Once inflation of around 3.5% is factored in, that would leave virtually no room for real growth in the economy.
While the sluggish money supply growth could be offset by some special factors that would permit a more rapid economic expansion, Mr. Gluch said, it nevertheless is a likely concern both to the Fed and to members of the House and Senate Banking Committees, which are holding their semiannual monetary policy hearings Tuesday and Wednesday.
"I'm sure it will be a point of criticism," he said. With such money supply figures, Mr. Brusca said, "You have to wonder how we can mount a decent recovery that can sustain itself." He added, "they are going to grill him [Mr. Greenspan] for getting on the weak end of the target."
The anemic money growth, coupled with Mr. Greenspan's recently voiced concerns about the continuing credit crunch and an unexpectedly weak June retail sales report on Friday, could prompt another Fed easing of interest rates, Mr. Brusca said.
The Fed last year explicitly tied a quarter point lowering of the federal funds rate to concerns about the credit crunch, which has not abated, he said, so Mr. Greenspan's comments before the House Banking Committee Thursday "open the door to further easing." Whatever the Fed's publicly stated concerns may be, "the broader policy issue is the weakness in money," Mr. Brusca said.
However, Mr. Gluck disagreed that the money supply data and worries about the credit crunch will drive the Fed toward another easing. He said the sluggishness in the money supply could be partially explained by routine quarterly transactions made by banks to reduce liabilities that are reflected in the money supply measure. He said he expects the rate of growth to pick up later this month, as the new quarter progresses.
The disappointing money supply figures are only of secondary concern to the Fed, anyway, Mr. Gluck said. The central bank focuses primarily on important indicators of economic growth and inflation such as the monthly unemployment report, and is not likely to ease again unless it sees significant deterioration in a number of those reports, he said.
Friday's 0.2% decline in retail sales, for example -- while much lower than the 0.7% increase expected by bond market participants -- does not provide sufficient ammunition to prompt Fed action, even in combination with the money supply figures, he said.
Mr. Brusca said the money supply figures, retails sales report, and other factors recently point toward the growing possibility of a "double dip" recession, where the economy heads sharply downward once again after a short, fitful recovery.
Philip Vraverman, chief economist with DKB Securities Corp. agreed, saying that Friday's weak retail sales report was "among the first signs that the spring blip in economic activity will give way to renewed recession." Together with "dramatically reduced inflation and business borrowing demands," the decline in indicators will "propel the Fed to ease" again, he said.
Mr. Gluck conceded that some evidence points to a "double dip" recession, which has worried the Fed and would prompt it to provide quick stimulative action.
