Fed's M1 For 1975 --- Chapter V

BOOK 1

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Chapter V

Fed's M1 For 1975

In retrospect, the most significant economic development of 1975 probably was the Federal Reserve Board's assumption of a tight money policy in July of that year on the basis of erroneous seasonally adjusted information on the growth of the M1 money supply aggregate.

375.0

As The Fed Originally Reported Its M1 Figures
Each Week To Feed Fed Watchers A Mirage.

10 16 22 290 12 10 28 10 12 10 20 2 9 10 23 30 | 7 14 21 28|4 11 18 25|29 10 73 30 | 13 20 273 10 17 34 18 18 22 29 12 10 20 3 10 17 24 31

History records that the Fed's decision to force up interest rates as the second half of the year began, aborted a promising economic recovery that with a little help could have been nicely sustained.

As this booklet documents, this monetary policy decision was based on a mirage.

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The Pleasure Of Statistical Narcissism

JULY 1975 HAD FED STRIKE-OUT #1

As it turned out, the Fed committed the same mistake at comparable points in time and through the use of the same misleading data in the two following years 1976 and 1977 each time choking off promising economic rebounds.

--

Thus, 1975 marked the first of the Fed's three straight strike outs, over that seasonally adjusted snake.

In fairness, it was somewhat difficult to isolate the Fed's first strike out as a major blunder and determine the degree of its harm to the economy through concurrent analysis.

There were some typical dissenters who questioned the need for tight money at that juncture but practically no one except Sindlinger & Company voiced doubts about the data employed in making the decision.

However, the key factor that permitted the first Fed strike out to escape more critical review was the volatility of conditions during 1975. Major events during 1975 occurred with rapidity.

The year 1975 began with the economy nearing the trough of the worst recession since the end of World War II. When the bottom was reached in January 1975, the economy did indeed turn around. Helping pace the recovery was the Ford administration's tax rebate-reduction program and the anticipation of some $13 billion in spendable funds by consumers.

The optimism engendered by the rebate plan sparked a very
welcome and robust rise in Sindlinger's confidence para-
meters through the spring of 1975 and into July
about the time the rebates had all been received by
American households.

just

Fed's M1 For 1975 - Chapter V

1975 STARTED WITH TYPICAL V RECOVERY

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To most observers, there was little to indicate that the economy was doing nothing more than going into a typical V-shaped recovery pattern. Better looking government statistics, all of them seasonally adjusted, affirmed their thinking.

Sindlinger again was a dissenter.

We warned that the confidence rise, although welcome and promising, was rather fragile.

We said that the consumer still was shellshocked by the 1974 double whammy of recession and inflation and had yet to be satisfied that inflation was being controlled that well.

Nonetheless, the consumer did welcome the tax rebate as had been calculated channeled some of it into the spending mainstream and was generally getting his/her house in order for possible follow-up spending.

The Fed's tight money policy in July 1975 chilled that.

At the very time the Fed was putting on the brakes, confidence parameters began to fall and the recovery had been stalled.

It was no accident that the second half of the year 1975 was mystifyingly flat to orthodox observers. The consumer had interpreted the interest rise as a step toward fueling more inflation and indeed inflation did accelerate somewhat in the second half of 1975.

Fed's M1 For 1975 Chapter V

In many respects, the M1 money supply aggregate, even on a seasonally adjusted basis, mirrored the general economic situation.

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The low M1 point of 1975 was in the week ended January 29th when the aggregate seasonally adjusted was reported at $280.9 billion,

By July 16, just at the time the Fed was tightening up and the consumer was starting to depress confidence parameters the aggregate had grown by $14.3 billion to $295.2 billion --reflecting the input from the tax rebates and resulting consumer moves to spend and pay back bills. The high 1975 point of $299.1 billion was reached in the week ended December 3rd.

Thus, from the 1975 low to the high, the difference was $18.2 billion. But the vast (78.6%) bulk of that growth --or $14.3 billion came between the end of January and the middle of July, or as the recovery seemed to be proceeding in typical V-shaped fashion.

The year 1975 and its segmented economy offer an excellent demonstration of M1 as a creature of a consumerdominated economy.

In the first half of 1975, M1 surged rapidly, especially on a seasonally adjusted basis, as consumers gained confidence, tax rebates were distributed and some of the refunded money (20%) was put into the spending stream at once.

Between July and the end of 1975, the growth of M1 was relatively sluggish as the economy flattened and economists debated why the recovery had stalled.

The critical factor was the Fed's first of three tight money strike outs.