Upturn May Be Sustained Despite Sluggish Growth In M2, Fed Official Says
LOS ANGELES - Moderate economic growth is possible, even if the money supply grows in the lower half of the Federal Reserve Board's target range, Robert Parry, president of the Federal Reserve Bank of San Francisco, told business economists this week.
"I would hope money would grow in a more traditional manner," he said, "but it's conceivable that acceptable performance of the economy could be associated with acceptable growth in M2 that is less than at the middle" of the Fed's target range of 2 1/2% to 6 1/2% growth in M2. Mr. Parry spoke to reporters after giving a speech late Monday to the National Association of Business Economists, which was holding its annual convention here.
Mr. Parry's comments came after Michael Boskin, chairman of the President's Council of Economic Advisers, again urged the Fed to get the money supply back into the middle of the central bank's targeted growth range. Treasury Secretary Nicholas Brady had issued a similar statement after the Fed cut the discount rate on Sept. 13.
Mr. Parry's comments showed he believes it may be possible to sustain the economic recovery with money growth that is less than the administration wants. He said he expects real gross national product to rise at an annual rate of around 3% in the second half of this year.
"I think it will turn out to be stronger than many people expect," said Mr. Parry, who is a member of the Federal Open Market Committee, the Fed's policy-making arm.
The Fed bank president said it is dangerous to rely on the money supply or any other single economic indicator when setting monetary policy. Industrial production and the index of leading economic indicators have been "very strong," he said, while other economic indicators, such as retail sales, have not.
The relationship between money supply and economic activity is "highly volatile," Mr. Parry said. While money supply is a "source of concern," he also said economists frequently get mixed signals at a turning point in the business cycle.
He maintained that the slowdown in the money supply reflects a move by investors into bond funds, a reduction in interest rates, and a reluctance by banks and thrifts to lend. Still, he said, a good portion of the slowdown is "largely unexplained."
Mr. Parry dismissed criticism that the Fed is "pushing on a string" in monetary policy - a reference to criticism that the Fed cannot do much to influence economic growth by lowering rates because banks that do business with the Fed account for a dwindling supply of credit.
"It seems to me the Fed can take action that'll have the desired results. Perhaps we have done that," he said.
Robert McTeer, president of the Federal Reserve Bank of Dallas, agreed, but he said tight lending practices by banks remain a concern for Fed officials.
"A credit crunch appears to be persistent," Mr. McTeer said. "Bank lending continues to decline," he said.