Newspaper article THE JOURNAL RECORD

Will U.S. Growth in Money Supply Affect Interest Rate Setting?

Newspaper article THE JOURNAL RECORD

Will U.S. Growth in Money Supply Affect Interest Rate Setting?

Article excerpt

WASHINGTON -- The U.S. money supply is growing faster than the Federal Reserve's forecast, and while that's raising alarms with some at the central bank, there's no sign it'll have any effect on monetary policy.

The money measure most watched by Fed officials, called M2, has been growing at close to 5 percent a year since the end of 1995 -- at the top end of the Fed's target range for money growth. For the 12 months ended in March, M2 rose almost 7 percent, the fastest pace during the seven-year-old expansion.

Monetarist economic theory says inflation picks up when the money supply grows too quickly, and officials at the Federal Reserve Bank of Cleveland are warning the Fed should throttle back money growth by raising interest rates. "Excess money and credit creation are serious threats to our economy and must not go unchecked," said Mark Sniderman, the Cleveland Fed's director of research, in an analysis of money growth last month. To date, though, Fed Chairman Alan Greenspan and his fellow Fed governors haven't said they see an excess in money supply growth, or an inflation threat from fast-growing M2. The Fed has never really used money growth to make monetary policy, although from 1979-82 policymakers used a projected path for the money supply to help set interest rates, as then-Fed Chairman Paul Volcker declared war on inflation. "It provided a cover for raising interest rates," to historic levels said James Glassman, a former Fed economist now senior U.S. economist at Chase Securities in New York. Declining inflation and concern that traditional money measures were inaccurate led the Fed to abandon that strategy in the early 1980s. As recently as February, Greenspan told Congress the Fed had "ongoing uncertainty" about "the usefulness of M2 as an indicator of economic developments." Indeed, over the same three-year period that money growth was jumping, inflation as measured by the consumer price index has slowed. …

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