Fed: Now heed this
By Michael J. Bazdarich, CBS MarketWatch
Last Update: 12:53 PM ET Apr 3, 2000 Commentary
Letters to the Editor
LOS ANGELES (CBS.MW) -- Last week, I criticized the Fed for its focus on restraining the economy and the stock market rather than monitoring its own policy levers: money and interest rates. See the column. To be fair, I should provide my own diagnosis/forecast of what Fed policy is actually doing.
The economy is growing robustly now in spite of Fed restraint, not because of Fed stimulus.
I think Fed policy has been steadfastly anti-inflationary, and that is the reason that inflation is not a real threat presently. The money stock has grown very slowly throughout recent years and interest rates have been kept extraordinarily high.
The M2 monetary aggregate is the best indicator of money supply growth these days. (It includes currency, checking accounts, saving accounts, small CDs, and retail money funds as "money.")
From December 1989 through December 1999, M2 grew at an average rate of 3.9 percent per year, down from 7.9 percent in the 1980s and 9.6 percent in the 1970s. Now, the 1990s' pace is understated by a virtual no-growth period during the FIRREA banking crisis of the early-1990s. Even so, since then, the Fed has held M2 growth within a (non-inflationary) 5 percent to 6 percent range for most of the last six years since FIRREA.
Policy has "eased" up temporarily when market demands for liquidity warranted it, such as during the Asian crisis of 1997-98 and just prior to Y2K late last year. However, such periods were brief and were inevitably reversed.
I've focused so far on M2, but the other measures tell generally the same story. M1 (currency and checking accounts only) grew at an average rate of only 3.6 percent in the 1990s and has been declining since 1994. M3 (M2 plus jumbo CDs and institutional money funds) has bulged during periods of extraordinary market demand for liquidity, but its average pace across the 1990s was a very modest 4.7 percent, down from 8.5 percent in the (non-inflationary) 1980s.
Interest rates keep rising
Don't like the money stock? Interest rates tell the same story. Bill Clinton likes to brag about his administration's supposedly bringing down interest rates. The fact is that short-term interest rates are far higher now than when he took office. Three-month TBill yields were 3 percent on 1/20/93, but were 5.75 percent last week. Inflation declined steadily throughout the 1990s, but the Fed has kept short rates rising almost as steadily.
On an inflation-adjusted basis, interest rates are near their highest levels ever. To put it differently, any time in previous history that the U.S. has experienced inflation rates similar to those presently, both short- and long-term yields were far lower than their present levels.
I said last week that the Fed should be minding its own policy indicators and letting the economy do what it will. Inflation could be a threat now only if Fed policy has been inflationary at some point in the recent past. The statistics trotted out here indicate that this has not been the case.
The economy is growing robustly now in spite of Fed restraint, not because of Fed stimulus. The very high-tech sectors which are driving relatively rapid GDP growth are also slashing their product prices by more than 20 percent per year. Where is the inflation threat there?
Sorry to have dragged you through the monetary arcane here. Money growth rates and relative interest rate levels should be left to Fed policy deliberations. These days, that is probably the last place you'll hear about them. Instead of "sticking to its own knitting," the Fed is busy restraining the economy and jawboning the stock market, two "missions" outside its charter. It is also scaring the hell out of the markets, needlessly, in my opinion.
Fed tightening over the last few months may NOT be responsible for tech stocks' recent swoon. However, its policy pronouncements guarantee that it will receive the blame for the swoon, should it continue.
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