The Federal Reserve Board voted to increase the upper limit on the range of the federal funds rate to 6 per cent from 5 per cent as its open market committee meeting on Aug. 4.
The minutes of that meeting, released yesterday show that the Fed took the move in response to the unusually rapid growth in the money supply in prior weeks. The federal funds rate is the fee banks charge each other for overnight loans of excess reservers and is a key method employed by the Fed to implement its monetary policy.
The minutes revealed that on Aug. 4 the Fed estimated that the basic money supply, M-1, which includes money in circulation plus checking account deposits, grew at an annual rate of about 18 1/2 per cent in July. It estimated that M-2, which includes M-1 plus savings deposits at commercial banks, expanded at a rate of 16 1/2 per cent. Both figures were well over the upper limits set by the committee at its July 19 meeting.
At the July 19 meeting, the open market committee had voted to mantained the fed funds rate range of 5 1/4 to 5 3/4 per cent, the level it had approved at the June meeting.
At the same time, the Fed decided that the growth in the basic money supply during July and August should be within a range of 3 1/2 to 7 1/2 per cent and the growth of M-2 within a 6 1/2 to 10 1/2 per cent range.
At the June open market meeting the committee had set ranges for the basic money supply of 2 1/2 to 6 1/2 per cent and for M-2 of 6 to 10 per cent.