The Federal Reserve, worried about the continued recession and increasing strains in the international economy, decided last month to ease its short-term monetary policy slightly, according to the minutes released yesterday of the Nov. 16 meeting of the Fed's policy-making Open Market Committee.
The FOMC disclosed that the range for the key federal funds interest rate had been lowered from 7-10 1/2 percent to 6-10 percent for the six weeks following its November meeting. The minutes also said the Fed set a target for growth in the broader monetary aggregates at about 9 1/2 percent for the period from September to December, compared to a range of 8 1/2 percent to 9 1/2 percent agreed at its previous meeting.
Since the November FOMC meeting, the Federal Reserve Board has twice lowered its discount rate, charged to banks that borrow from it, by half a point each time. It now stands at 8 1/2 percent. The last FOMC meeting took place on December 21.
"Most of the committee members endorsed the view that monetary growth running somewhat above the committee's target ranges set early in the year was appropriate given the indications of continuing strong demands for liquidity during a period of relatively weak economic activity," the minutes said.
The one dissenter, William Ford of the Atlanta Fed, said that substantial increases in the money supply, together with large budget deficits, would overstimulate the economy and could rekindle inflation.
Fed Chairman Paul Volcker has repeatedly warned of the dangers of present world financial problems. He reportedly has argued strongly in favor of increased funds for international agencies to lend to developing countries that are having problems meeting their loan commitments. The November FOMC meeting pointed to the "expectations of a very slow recovery abroad" from the worldwide recession and said the prospects "were complicated by the financing difficulties of many developing countries."
Some FOMC members were also concerned that the U.S. economy was being weakened significantly because of the strong dollar's impact on exports. The minutes reported that some of the FOMC members feared the economy might weaken still further "at least over the near term."
The FOMC was given a gloomy analysis of the prospects for the economy at the November meeting. "Any recovery in economic activity in the months just ahead was likely to be quite limited," the minutes reported the Fed staff as saying. These projections "suggested that unemployment would remain at a high level" while inflation continued to improve.
Several FOMC members were concerned that recent improvements in financial markets and in business and consumer confidence was "still quite tentative and could easily be reversed, with highly adverse consequences for the economy, if interest rates were to rise significantly from current levels," the minutes reported.
The Fed has moved away from close targeting of the narrow M1 measure of the money supply in recent months, citing the unreliability of the numbers because of new accounts being offered by banks and savings associations. At the October FOMC meeting, it decided not to set short-term targets for M1 growth. This policy continued at the November meeting.
The Fed yesterday announced that M1 expanded by $600 million in the week ended Dec. 15, bringing to 15.3 percent the average growth rate over the past four weeks from 13 weeks earlier.
The target range for growth in M2 was set earlier this year at six percent to nine percent. M2 includes the cash and checking accounts that make up M1, along with passbook savings accounts, money market funds and some other deposits.