The Federal Reserve moved to a somewhat easier monetary policy in September and its policy makers agreed at a meeting Oct. 2 that policy should be eased further if money supply growth did not speed up, according to the policy record of that meeting released yesterday.
Since that time, money growth has not increased, nor has economic growth, and some financial analysts believe the Fed has taken another step in recent weeks toward easing. In any event, short- and long-term interest rates have dropped by substantial amounts.
Three members of the policy-making group, the Federal Open Market Committee, dissented from the position of the other nine voting members on the grounds that they wanted even more easing than did the majority. Federal Reserve Vice Chairman Preston Martin and Govs. Emmett J. Rice and Martha Seger dissented "because they preferred a directive calling for a somewhat lesser degree of bank reserve restraint and marginally faster monetary growth in the fourth quarter," the policy record said.
"In their view, some additional easing of reserve positions would be appropriate, given the reduction in monetary growth over the third quarter and indications of further slowing in the rate of economic expansion," it added. Moreover, the dissenters argued, the easier policy would not risk more inflation and would ease strains on some financial institutions.
The majority, led by Chairman Paul A. Volcker, resisted for various reasons, including the assertion that "appreciably lesser restraint might well induce a sharp decline in market interest rates, excessive money growth, and an unsustainably strong rebound in economic activity," the policy record said. A quick reversal of a sharp drop in rates could damage both the financial system and the economy, some members warned.
In the month since the meeting, there has been little evidence of a pickup in economic activity, and the money supply measure M1 -- which the FOMC decided at the meeting should grow at a 6 percent rate between September and December -- has declined. Other broader money measures have grown more than M1 but still not quite as fast as the FOMC said it wants. M1 includes currency in circulation and checking account deposits at financial institutions.
There are signs that in response to those developments, the Fed has further reduced its restraint on the availability of bank reserves. Reserves are a portion of certain types of deposits that financial institutions must set aside in accounts at the Federal Reserve or hold in the form of vault cash.
Some Reagan administration officials have been critical of the Fed's failure to keep M1 growing in recent months, though the measure is still within the Fed's target range for the year as a whole. The officials, including Treasury Secretary Donald T. Regan, blame the abrupt slowing of economic growth in the third quarter to a rate less than half the growth in the previous quarter on the drop in money growth. They have warned that, if money growth does not increase, the economy could fall into a recession next year.