Fed Urged Not to Restrain Fall of the Dollar

The dollar should be allowed to fall without interference from the Federal Reserve, the Shadow Open Market Committee said at its biannual meeting Monday.

In a statement titled “An Open Letter to Alan Greenspan,” the group of private monetarist economists urged the Federal Reserve board chairman to avoid propping up the dollar through monetary policy and intervention.

“The Fed cannot control the real value of the dollar,” said Allan Melzer, a committee member. “The marketplace should decide the value of the dollar.”

The Federal Reserve raised the discount rate on Sept. 4 as a way of supporting the U.S. currency. The monetarist group generally favors a free-market approach in which money supply plays a key role in economic policy.

Melzer, a professor at the graduate school for Industrial Administration at Carnegie Mellon University, urged abandoning the “Volcker-Baker standard” in which the dollar was periodically supported through intervention and tightening of monetary policy.

Economy Has Survived

“Intervening to prevent a decline in the external value of the dollar will not avoid an adjustment in the real exchange rate,” the group’s statement said. “Allowing exchange rates to adjust in response to market forces is one way to adjust U.S. prices and costs of production relative to foreign prices and costs of production.”

To fail to allow exchange rates to adjust according to market forces could provoke a recession, the group said.

Mickey Levy, a member of the Shadow Open Market Committee and chief economist at Fidelity bank, said tightening monetary policy to stabilize the dollar would slow the economy unnecessarily.