Newspaper article The Christian Science Monitor

Slow Economy: Bush Stagnation or Fed's?

Newspaper article The Christian Science Monitor

Slow Economy: Bush Stagnation or Fed's?

Article excerpt

WHEN Business Week magazine surveyed 20 economists in June for their views on the United States economy, Lacy Hunt was the most pessimistic of them all. He said national output would grow at a real 1.3 percent annual rate in the second quarter, well below everyone else. His forecast nearly hit the bull's-eye. The Commerce Department last week estimated a 1.4 percent growth rate in gross domestic product (GDP).

Dr. Hunt, chief economist in the US for the HongkongBank Group, remains gloomy. He predicts growth at around a 1 percent rate in this second half of the year.

"It won't do {President} Bush much good," he says.

That's probably why Treasury Secretary Nicholas Brady fired a shot across the bow of the Federal Reserve in an interview with the Wall Street Journal earlier this week. He called for a review of Congressional proposals to alter the Fed to bring its "deliberations closer to the actual circumstances in the economy."

It seems unlikely in an election year that either Congress or the administration will really want to change the Fed system. The Fed and its political independence are sacred cows to the financial community. And so Mr. Brady said he didn't want to change "the basic theory of Fed independence."

Economic studies have shown that nations with independent central banks generally have lower inflation rates than those countries with central banks controlled by the government in power.

What especially bugged Brady was that a measure of the nation's money supply known as M2 that includes currency, checking accounts, money market funds, and some certificates of deposit, has been shrinking since February. "You cannot have satisfactory growth in the economy with a negative money supply," he told the Journal.

Hunt agrees. The level of real M2 (after taking out inflation) is almost as low as seven years ago, he notes. "The problem is that the Fed continues to insist on pegging the Federal Funds rate {the interest rate commercial banks charge on overnight loans to each other} too high in relation to underlying economic equilibrium."

Hunt would rather see the Fed target growth in bank reserves.

Economists argue heatedly over monetary issues that must seem arcane to most people. …

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