The Federal Reserve tightened credit conditions very slightly in early August in an effort to slow down the explosive growth of the money supply, a Fed report disclosed yesterday.
However, the move to make reserves less readily available to financial institutions was sufficiently small that market analysts generally were unaware of it, and growth of M1 continued well above the Fed's long- and short-term targets.
The small shift in day-to-day implementation of policy was described in the record of an Aug. 20 meeting of the central bank's policy-making group, the Federal Open Market Committee, or FOMC. The committee met again earlier this week and analysts said they have seen no indication of a policy change since then.
At a meeting in mid-July, FOMC members had expected M1 -- which includes currency in circulation and checking deposits at financial institutions -- to grow at a 5 percent to 6 percent rate between June and September. At the August meeting, it was raised to 8 1/2 percent.
Even after declines in the two weeks ended Sept. 23 totaling $3.9 billion, M1 appeared likely to have gone up at about a 13 percent rate over the last three months and remains well above the upper limit of its target range for the second half of this year. The rate of increase between August and September could be in the neighborhood of 18 percent, analysts said.
In August, a majority of the FOMC decided to make no further change in the degree of restraint on reserves. Two of the 11 voting members dissented. A 12th member, Fed Gov. Lyle Gramley, had announced his resignation and did not participate.
Robert Black, president of the Richmond Federal Reserve Bank, dissented because he wanted greater restraint to "thereby improve the prospects of moderating M1 growth to within the committee's range for the second half of the year," the policy record said.
Gov. Martha Seger also dissented, but "favored some reduction in the degree of reserve restraint in light of the financial vulnerability of some sectors of the economy and in order to encourage sustained economic expansion," the statement said.
In a separate telephone consultation Sept. 23, the committee discussed "the possible implications for intervention in foreign exchange markets of the deliberations during the weekend of the ministers of finance and central bank governors of the G-5 countries," the report said. No action was taken as a result of the consultation, it indicated.
The G-5, or Group of Five, countries are the United States, Japan, Britain, France and West Germany. Given their decision at a meeting in New York to seek a lower value for the U.S. dollar on foreign exchange markets, some analysts have speculated that the Fed might ease its policies and lower interest rates.
The record of the August meeting indicated that the FOMC spent an unusual amount of time discussing the value of the dollar and other international issues. It spent even more time on the issue of the uncertainties surrounding the rapid growth of M1 in the face of relatively sluggish economic growth.
A number of members emphasized those uncertainties "and the downside risks they saw in the economy," the statement said. "Under prevailing circumstances, the surge in M1 growth might not have the usual inflationary implications," they felt.
"Other members expressed more concern that further M1 growth at rates substantially above the committee's long-run range would have inflationary consequences over time," the policy record continued. "Continued strength in M1 could also raise questions about the committee's commitment to an anti-inflationary policy, with potentially adverse implications for inflationary expectations," they argued.
The FOMC majority agreed that if the monetary aggregates were to grow substantially faster than expected following the August meeting that "somewhat greater restraint on reserve positions would be acceptable. . . . As in the past, any such adjustment should not be made automatically in response to the behavior of the monetary aggregates alone, but should take broader economic and financial developments into account, including conditions in domestic and international financial markets. For the period ahead, several members believed that policy implementation should be especially alert to developments in the foreign exchange markets."