The Outlook: Will Money Keep Economy on the Rise?
NEW YORK -- The Federal Reserve for years has been calling on Congress and the administration to get fiscal policy under control, but the agreement reached on November 20 wasn't exactly what Fed officials had in mind. The deficit accord still faces hurdles in Congress and hardly stirred enthusiasm in financial markets. The tasks of the central bank, instead of being reduced, may actually have been increased.</br></br>If the budget pact appears likely to restrain economic growth, the Fed must decide whether to offset it and, if so, how vigorously. An expansionary policy, designed to hold down interest rates, could further weaken the dollar, a prospect that worries at least some Federal Reserve officials. A deeper fall for the dollar could heighten inflation fears -- fears that still are held by some Fed officials.</br></br>Most economists so far give Fed Chairman Alan Greenspan high marks for the central bank's actions since the stock-market crash on October 19. But some worries are creeping in. The Fed, as promised, flooded the banks with liquidity immediately after the crash, but the period of extreme ease ended quickly. After the first couple of weeks the central bank seemed to seek a more even keel, occasionally pulling reserves out of the banks.</br></br>The situation is confusing the analysts. Those who focus on the money supply, such as Edward S. Hyman of the investment firm of C.J. Lawrence Inc., worry about a decline in M1, the narrowly defined money supply. "Now that the market has settled down," he says, "money may be stabilizing. Alternatively, these declines may indicate that the economy has weakened."</br></br>On the other hand, Robert J. Barbera, chief economist of E.F. Hutton & Co., is mainly concerned about the degree of pressure on bank reserves. On that basis, he feels that the Fed is maintaining "only marginal reserve restraint."