The Outlook: The Fed May Be Getting Into a Box
NEW YORK -- The economy continues to edge higher, and the consensus forecast is that the gains will continue, at least through 1988. The stock market, which moved upward last year mainly because of lower interest rates, now seems to be focusing mainly on an expectation of better corporate earnings. Meanwhile, the dollar is showing new weakness, the budget deficit isn't sinking very much, and a revival of inflation begins to look like a realistic possibility.</br></br>That's more or less the situation the Federal Open Market Committee will confront next month as it meets to plan monetary policy for 1987. What will the committee decide to do?</br></br>It may not matter very much. Last February the FOMC decided that M1, the narrowly defined money supply, should grow at a rate between 3% and 8% in 1987. In July the committee reaffirmed that range but also said that growth in excess of 3% to 8% would be "acceptable." It's a good thing the committee left itself some leeway, since the actual growth rate was about 17%.</br></br>But the committee, whose voting members are the Federal Reserve governors and five of the regional Reserve Bank presidents, is required by law to say something. Composing the statement will be a little more difficult than usual this time, since the Fed seems to have gotten itself into a box.</br></br>Through last year the Federal Reserve was under pressure from the Reagan administration to force interest rates lower, depreciate the dollar and stimulate economic growth. Chairman Paul Volcker made occasional noises to the effect that a falling dollar could be inflationary, but by and large the Fed went along. After all, the consumer price index last year rose at an annual rate of 1.1%, so why worry about inflation?