The complex task of wielding controlover monetary policy in an increasingly fast-moving global
economy could be aided by tying policy to commodity prices, the
newest member of the Federal Reserve Board says.
    Commodity prices are already considered by the Fed in the
making of monetary policy. But they would be given a much
greater role under an idea being floated by Governor Robert
Heller, who joined the board last August.
    He conceeds that much more study of the idea is needed, but
argues that such an arrangement, particularly if it were
adopted by other major industrial countries, could reduce the
volatility of exchange rates.
    Moreover, it could help stabilize of the prices of
commodities themselves, slowing changes in inflation.
    His idea, which many conservative economists find
appealing, has some backing among board members appointed in
recent years by President Reagan.
    It would complement the present system of opening or
closing the monetary screws based on the pattern of inflation,
key indicators such as unemployment, and the rise or fall of
the money supply. Changes in the money supply can lead to
changes in interest rates and affect economic activity
directly.
    Discussed on and off for a long time, the commodity concept
is part of a growing search for a system that anchors monetary
policy and widely-fluxtuating currency prices to a more solid
base.
    "What is needed is an anchor or reference point that can
serve as a guide for both domestic and international monetary
purposes," says Heller.
    In the past, this anchor was gold but the United States
went off the gold standard because the global economy had
vastly outstripped gold supplies.
    A return to the gold standard is generally dismissed out of
hand by most policymakers on the grounds that the largest
producers of gold are the Soviet Union and South Africa.
    The so-called fixed rate system, scuttled in the early
1970s, is still considered unworkable in the present world.
    But the current system of floating currencies in which
currencies can fluxtuate widely, adding vast pressures to the
monetary system, is also being widely questioned.
    Some have suggested that the system might benefit from a
formal approach that mandates intervention by countries when
currencies wander above or below agreed to levels but there are
major problems with this also.
    For one thing, there is justifiable concern that countries
might be relunctant to intervene if they felt it might be
detrimental to their own domestic economy.
    Moreover, some question whether concerted intervention can
make much of an inpact if the overall market does not agree
with the fundamental judgement.
    The poorest countries have called for a monetary conference
to work out a new system that, not surprisingly, helps them
cope with their overpowering debt problems.
    Treasury Secretary James Baker, the Reagan administration's
chief economic architect, has preferred to use the so-called
Group of Five industrial countries or sometimes, Seven, as a
forum to work out cooperative agreements on currency and other
economic matters.
   He appears convinced that officials from West Germany,
France, Britain, Japan, Italy and Canada talking quietly behind
closed doors can reached reasoned decisions away from public
posturing.
   The Heller approach, while extremely complex, could have a
profound impact on the system, ideally stabalizing prices and
international exchange rates.
    As envisioned by Heller, a basket of say, 30 major
commodities ranging from wheat to oil, would be put together
and prices would be measured on a regular basis.
    "In times of rising commodity prices, monetary policy might
be tightened and in times of falling commodity prices, montary
policy might be eased," he says.
    He notes that commodity prices are traded daily in auction
markets, and a commodity price index can be calculated on a
virtually continuous basis.
    Moreover, most commodity prices are produced, consumed and
traded on a world-wide basis, so "that an index has a relevance
for the entire world," he says.
    In addition, commodity prices are at the beginning of the
production chain and serve as an imput into virtually all
production processes.
    "Focusing on commodity prices as an early and sensitive
indicator of current and perhaps also future prices pressures,
the monetary authorities may take such an index into account in
making their monetary policy decisions," he says.
    However, he says that any major change in a basic commodity
such as occurred in oil during the 1970s because of action by
the OPEC cartel, would have to be discounted in such a system.
    He says the worst thing that could happen is to allow
monetary policy to spread a freakish increase in one commodity
to the rest of the system and to other commodities.
 Reuter
