(9 of 10)
It is a risk that Arthur Burns would approve. Carter, a low-interest populist, probably hoped for a policy change to easier money when he appointed Miller, but he must know better by now. Both Miller's target and some of his rhetoric are so close to Burns' as to make many moneymen contend that, for all the differences in personality and style, Miller is a bred-in-the-bone central banker after all. Says Charls Walker, former Deputy Secretary of the Treasury: "I lost about $100 in bets that Burns would be reappointed. I'm thinking of asking for my money back. Arthur Burns was reappointed, only his name is now William Miller."
Miller has probably set the right money-growth target, but hitting it is about as difficult as fine-tuning a color TV set while wearing boxing gloves. The Federal Reserve controls money by the indirect method of buying or selling Government securities. When it buys, it creates money out of thin air; it pays with its own checks, which the sellers—individuals and corporations—deposit in their bank accounts. The checks become new money, available to be loaned out. When the Fed sells Government securities, it withdraws money from circulation; the buyers pay with checks that disappear into Federal Reserve vaults, never more to be seen. The less money that banks have to lend, the higher interest rates will rise. The FOMC focuses on the Fed funds rate at which banks lend to each other, targeting its buying and selling to push up or pull down that rate to a desired level. The Fed funds rate influences all other interest rates.
In theory it all sounds neat, but in practice dozens of factors can throw off Federal Reserve calculations. The necessity of creating at least enough money for the Treasury to borrow to cover budget deficits is one. The strength or weakness of loan demand is perhaps the most important consideration. The Federal Reserve may set an interest-rate target of, say, 7¼% to 7¾% for Fed funds— which is believed to have been its goal in June. But if loan demand is exceptionally strong, it may have to put out more money than it wants to in order to keep the rate from rising above the upper limit.
There are various measures of the money supply, and right now the most important two are behaving contrarily. Ml, which is currency plus checking accounts, has recently been growing at about an 11.4% annual rate, much faster than Miller wants, partly because loan demand in the year's second quarter was exceptionally strong. But M2, which is currency plus checking accounts and most time deposits in banks, grew at 8.3% in the second quarter, more slowly than Miller wants. A possible reason: investors have been switching from time deposits to higher-yielding short-term securities, like Treasury bills.
During Burns' last year, the Federal Reserve constantly overshot or undershot its targets, for reasons that no one seems fully to understand. The Ml growth rate swung crazily from almost 14% in one month to nearly zero in another, and the gyrations confused and alarmed moneymen. Miller aims for more stability by not pushing down wildly on the pedal or slamming on the brakes in one month to correct the previous month's error.