The Federal Reserve continued in September to tighten its monetary policy position very slightly by making reserves somewhat less readily available to financial institutions, according to a record of policy actions released yesterday.
The move, taken because of very rapid money supply growth, was so slight that it caused little or no upward move in interest rates, the report said.
At an Oct. 1 meeting of the Fed's policymaking group, the Federal Open Market Committee, or FOMC, no further changes were made in reserve availability, the key method the Fed uses to affect interest rates and growth of the money supply.
As has frequently been the case at FOMC meetings this year, members were divided over whether firmer steps were needed to slow the rapid rise in M1, the money measure that includes currency in circulation and checking deposits at financial institutions.
Ten of the FOMC's 11 voting members agreed no further action was needed. But Robert Black, president of the Federal Reserve Bank of Richmond, dissented "because he believed some increase in the degree of reserve pressure was needed at this time to insure adquate slowing of M1 growth in the period ahead."
The FOMC met again earlier this week. At this week's meeting, Fed Chairman Paul A. Volcker disclosed in at letter to a House Banking subcommittee, that the FOMC decided not to tighten policy in order to bring M1 back within the target range of a 3 percent to 8 percent annual rate of growth between the second and fourth quarters of this year.
At the October session, the policy record said, the FOMC doubted that the target could be met "without an inappropriately abrupt increase in reserve pressures and in interest rates."
However, formal agreement not to try to hit the target came only at this week's meeting. That decision was regarded by the committee as a change in the target, which the Fed is obligated to report to Congress, as Volcker did in his letter.
Several FOMC members in October said they thought that "moderate" economic growth was likely in coming quarters.
Other members "stressed the downside risks in various sectors of the economy, such as potential restraint on consumer spending because of the large buildup in debt, the weak performance in manufacturing attributable in part to competitive pressures from abroad, and the continued signs of deterioration in the agricultural sector.
They expressed the view that continued sluggish expansion was the more likely course for the economy," the statement said.
While noting that the "extraordinary" strength of the U.S. dollar on foreign exchange markets had contributed to the growing trade deficit, members "also emphasized the importance of maintaining underlying confidence in the dollar, given the dependence of the United States for the time being on large capital inflows.
"It was noted that the possibility, while perhaps remote, of a precipitate continuing decline in the value of the dollar would present a threat to the financial system and the economy because of its potential implications for higher interest rates and inflationary pressures, particularly in the absence of stronger budgetary restraint than had yet been achieved," it continued.