Some Federal Reserve officials who were expecting a substantial pickup in the economy in the second half of this year say they are becoming concerned that they may have been too optimistic.
The failure of housing construction has been the biggest disappointment, said one key official this week. The official was among the more optimistic members of the Federal Open Market Committee (FOMC), the central bank's policy-making group, when it met in July.
At that meeting, officials predicted that the faster economic growth would be accompanied by a marked slowing in the previously rapid expansion of the money supply, according to a policy record of the meeting released yesterday.
With two dissents -- from Fed Gov. Martha Seger and Robert P. Black, president of the Richmond Federal Reserve Bank -- the FOMC voted to make no change in the degree of pressure on the availability of bank reserves, the key way though which the Fed seeks to implement its policy.
Seger dissented because she "favored some easing of reserve conditions to help reduce current financial strains, moderate the strength of the dollar in foreign exchange markets, and promote faster economic expansion," the policy record said.
Black, on the other hand, disagreed because he wanted more pressure placed on bank reserves -- which probably would have meant a somewhat higher level for short-term interest rates -- "to help assure an adequate slowing of M1 growth over the months ahead," the statement said.
Growth of M1, the money supply measure that includes currency in circulation and checking deposits at financial institutions, has slowed somewhat since then but not nearly as much as the policy makers expected.
They set a target of growth in M1 of a 5 percent to 6 percent rate from the June-to-September period, the policy record said. In the week ended Aug. 12, M1 was $603.1 billion, a figure showing more than a 10 percent rate of increase from the June level.
Meanwhile, monthly economic statistics have continued to indicate little, if any, speedup in economic activity. Another senior official said recently that there is some evidence of a small acceleration. "But is it fully convincing? No," the official said.
"If we don't get a pickup, interest rates would be on the soft side," the FOMC member continued. "The interesting question is what to do if the dollar is going down too far too fast at the same time and nothing has been done about the budget" deficit.
Gov. Henry Wallich, attending a Fed conference in Jackson Hole, Wyo., said that all of the central bank's usual policy guides, including the money supply, are proving unreliable right now. Wallich, normally among the Fed officials most concerned about inflation, indicated to some persons at the conference that he, too, is worried that economic growth could be slower than expected.
Federal Reserve Chairman Paul A. Volcker told Congress last month that the FOMC had decided at the July FOMC meeting to "rebase" its 1985 target for M1 by measuring its growth from the second quarter's average rather than from the fourth quarter of last year. The shift meant, in effect, that the Fed would not try to offset later in the year the unusually rapid growth of M1 in the first six months of 1985.
The FOMC also decided to widen the target range to 3 to 8 percent from the previous 4 to 7 percent. Volcker also had said that there was one dissent from that action, which the policy record showed was Black. Black agreed to the rebasing but argued that the previous target range "was more likely to be consistent with both sustained economic expansion and progress towards price stability," the statement said.
In setting an M1 target range for 1986, which the FOMC put at 4 percent to 7 percent measured from the fourth quarter of this year to the fourth quarter of next year, there were also two dissents.
Fed Vice Chairman Preston Martin dissented, the policy record said, "because he preferred a somewhat higher growth range for M1 to provide for greater flexibility if needed to accommodate sustained economic expansion."
Gov. Seger dissented for much the same reasons. Both she and Martin "saw little risk under current conditions that inflation would intensify," the record said.
During the period between the July meeting and another one earlier this week, the FOMC members agreed that no changes should be made automatically in response to behavior of the money supply. The economy, inflation, credit conditions and the value of the dollar should also be considered, the policy record indicated.
However, "the members agreed that some shortfall in the growth of M1 from expectations, should it occur for a month or two, should not be resisted and might indeed be desirable in the context of acceptable economic performance. Conversely, a tendency for M1 growth to exceed expectations should be countered more promptly, at least in the view of some members, in light of the rapid earlier growth in transaction balances [which are measured by M1]," the record said.
While decisions made at this week's meeting were not disclosed, the failure of the economy to show more signs of faster growth may have at least moved the FOMC back to a more neutral stance regarding money growth, said one New York financial analyst. "They probably did not do much this week but they could be forced to move before long."