Teetering Between Two Dangers

IN its attempts to control inflation and simultaneously prevent severe recession, the Nixon Administration has used up most of its options. President Nixon has forsworn not only wage-price controls but also any "jawboning" intervention in individual pay and price decisions. Federal pay increases precipitated by the mail strike are wiping out the budget surplus that he had counted on to help restrain prices. In an election year, he can hardly call for higher taxes in order to frustrate inflation. Nor can he easily request lower taxes or much higher federal spending if recession seems the greater danger. Thus, unless he changes some of his policies, Nixon inescapably faces a hard battle to avoid a string of inflationary budget deficits.

Waiting for Arthur. This impasse confers a greater than usual power on seven secretive men who sit in a mock Grecian temple on Constitution Avenue. As governors of the Federal Reserve Board, they have always functioned as a supreme court of money. Today, the Federal Reserve's power to control the flow of new money into business and influence interest rates for lending makes it about the only arm of Government left with much room to maneuver in trying to steer the economy. As businessmen watch their profits drop, investors see stock prices sink, and housewives note other prices continuing to rise, everybody is waiting to see what Federal Reserve Chairman Arthur Burns and his fellow governors will do.

The answer is not yet clear, principally because the economy is flashing such confusing signals that the Federal Reserve governors can hardly be certain whether to concentrate more on slimming inflation or preventing recession. The Government reported last week that the consumer price index rose at a seasonally adjusted annual rate of 4.8% in March, v. 6% in February and 7.2% in January. That would seem to indicate a welcome slowing of inflation, but the Administration is plainly disappointed, having hoped to achieve a greater deceleration by now.

The stock market, which knows a bad thing when it sees it, dropped like a stone last week. The Dow-Jones industrial average tumbled 29 points to close at 747, barely above January's six-year low of 744. Many stocks seemed "oversold," but few investors as yet had the nerve or confidence to buy. The market's decline partly reflected investors' anxiety about which of several turns the economy may be taking: toward outright recession, possibly combined with continued inflation; toward moderate growth and a gradual simmering down of price rises; or toward what is coming to be called "inflationary stagnation."

Away with the Minuet. The burden of holding prices down while keeping business up falls on the Federal Reserve at a time when it is undergoing deep changes. The most apparent change was the replacement in February of William McChesney Martin Jr. by Economics Professor Burns. Chairman Burns, 66, a strong-willed administrator, has abandoned Martin's insistence on always shaping a policy consensus on the board. If he finds himself in the minority, he will not try to negotiate a compromise but will let himself be outvoted. While this practice could enable the board to move more quickly to shift policy, it could also lead to damaging splits.

The change is most noticeable at the monthly meetings of the Federal Open Market Committee (FOMC), which is composed of the seven board members and the twelve regional Federal Reserve bank presidents, only five of whom vote. The FOMC decides how much new money to pump into the banking system, which in turn lends it to businessmen and consumers. Under the consensus-seeking Martin, FOMC meetings followed a minuet-like ritual. Everyone had to make some sort of report on economic conditions, with Martin always speaking last and summing up what he thought was the majority sentiment. Under Burns, members speak only if they wish, and anyone can break in with questions. Burns himself speaks up in his

W.C. Fields voice whenever he chooses, rather than waiting for the end.

Burns is also pushing along some far more fundamental changes in Federal Reserve policy and operations, which began just before he came in. During almost all the 19-year Martin era, the Federal Reserve gave primary attention to interest rates. In January, however, at its last meeting with Martin in the chair, the FOMC voted to pay somewhat more attention than previously to what its policies were doing to the actual supply of money. That step had long been urged by Economist Milton Friedman who believes that the availability of money, rather than its cost, determines how much businessmen and consumers borrow and spend. At the same meeting, the FOMC voted to end what Wall Streeters called the "Ice Age"--the last seven months of 1969, during which money supply did not grow at all--and begin a modest expansion.

A Narrow Path. Burns and the other governors--Lawyer James L. Robertson, Banker William Sherrill, Economists George Mitchell, J. Dewey Daane, Sherman Maisel and Andrew Brimmer--seem in general agreement on broad policy. All are determined to avoid the erratic swings of the late Martin years, when the FOMC sometimes shifted within a few months from actually shrinking the nation's money supply to expanding it at an annual rate of as much as 10%. They agree that, in Burns' words, the Federal Reserve must "tread a narrow path"--dribbling out just enough money to keep the economy from falling into recession but not so much as to start a new inflationary boom.

Measuring the amount so precisely, of course, is incalculably tricky. In Burns' early weeks, when recession was Washington's big worry, the board seemed to be aiming at about a 3% annual expansion of the money supply, which some economists thought too small. Lately, the governors have be come fearful of a renewed inflationary upswing. They are worried about such inflationary forces as higher Social Security payments, huge wage increases (see following story), the end of the surtax in June and the strong possibility of a budget deficit. Result: the FOMC is likely to expand money supply still more slowly, though no one intends to go back to zero growth.

Not So Funny. Carrying out any policy will be quite as difficult as conceiving the right policy. Economists have only recently appreciated the importance of money supply, and they have not yet developed statistical tools to measure it precisely. At one FOMC meeting, Allan Holmes, an official of the New York Reserve bank, noted that one measure of money supply showed a sharp expansion, another a sharp contraction. He asked the governors how he should weigh them. One governor answered "equally"--at which everyone burst out laughing.

It was not really funny: the Federal Reserve cannot always be sure just what its actions are doing to money supply.

In the last week of March, money expanded at an annual rate of 150%, enough to produce the supernova of inflations. That was a statistical freak, reflecting the way money piled up in banks while checks were held up by the mail strike, but Federal Reserve analysts are still trying to figure out what the underlying rate of increase was. The Federal Reserve not only must tread a narrow path, but do so partly in the dark. The economic strength of the nation depends on its ability to keep its balance and avoid stumbles.

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