Federal Reserve policy makers meeting on Aug. 21 decided to make no changes in monetary policy at that point but left open the possibility of easing or tightening that policy as economic events might require, according to a record of the meeting released yesterday.
Most financial analysts believe the central bank, in fact, has since eased policy in response to very slow growth of the money supply and strong evidence that the economic expansion has slowed substantially.
But the analysts also generally thought that the policy making group, the Federal Open Market Committee, had held a telephone conference call sometime in early September at which it explicitly had decided to supply more reserves to the nation's banking system. Such a meeting would have been reported in the record released yesterday, and none was.
One analyst said the lack of such a meeting and the tone of the policy record was "disappointing" to those in the market who believed the Fed was set to pump in enough reserves to keep short-term interest rates declining.
"A majority of the members expressed a preference for continuing to maintain about the current degree of restraint on reserve positions," the statement said. "A number of members, while finding the current approach to policy implementation acceptable, nonetheless were prepared to look toward some slight easing of reserve conditions, either currently or soon should monetary growth fail to pick up from recent trends."
It went on to note, however, that other members of the FOMC thought "that any active effort to ease reserve conditions would be undesirable at present, and could well be misinterpreted, unless clearly related to emerging weakness in monetary growth in the context of appreciably slower-than-expected expansion in economic activity."
Fed Governor Henry Wallich dissented from the official position because he favored somewhat more restraint on reserves and "marginally lower monetary growth in the third quarter" than the majority desired, the statement said.
Financial institutions must maintain as reserves a portion of checking and certain other deposits. The Federal Reserve, by buying or selling government securities, adds or subtracts reserves from the banking system, and in that fashion influences growth of the money supply, interest rates and economic activity.
The FOMC includes the seven Fed governors and the 12 presidents of district Federal Reserve banks, five of whom are voting members at any one time. When it met in August, much of the recent evidence of slower economic growth was not yet available and the unexpectedly small increase in the money supply for that month was not yet reported.
But there were enough signs of incipient weakness, the policy record indicates, that the committee majority seemed to think that a move toward an easier policy was more likely to be required than toward a tighter one, and that is apparently what happened. The FOMC met again earlier this week but the record of that meeting will not be released until after the next meeting.
Analysts have seen no sign so far that the FOMC took any additional steps toward easing this week.
Another reason for last month's easing could be found in the fact that even though the Fed left the degree of pressure unchanged between the July and August meetings, the federal funds rate -- the interest rate institutions charge when they lend reserve to each other -- nevertheless rose. Banks appeared to be reluctant to borrow reserves directly from the Fed and instead "bid more aggressively for funds in the market."
The policy record did not speculate why banks had become reluctant to borrow. However, analysts have said that the larger banks particularly did not wish to do so for fear depositors might find out and think that, like Continental Illinois National Bank, they were being forced to do so. During this period, Continental was borrowing around $7 billion each day because a loss of confidence had caused many large depositors to withdraw funds.
One passage in the policy record underscored the eclectic approach the Fed is using in determining precisely where to set its monetary policy dial. "It was understood," the statement said, "that any inter-meeting adjustment in reserve pressures would not be made automatically in response to the behavior of the monetary aggregates, but would be undertaken only in the context of appraisals of the strength of economic activity and inflationary pressures, and evaluations of conditions in domestic and international financial and banking markets and the rate of credit growth."