A number of senior Federal Reserve officials, like many private economists, generally expect the current sluggish pace of economic activity to quicken substantially in the second half of this year and into 1987.
As a result, the officials are not apt to be pushing for a significant easing of monetary policy at a meeting this week of the Fed's policy-making group, the Federal Open Market Committee, or FOMC.
The officials are uncertain when the speedup will come and just how strong it will prove to be. If growth continues for long in the 2 percent range seen by a number of forecasters for this quarter, or if the economy appeared to be weakening, the wait-and-see policy mood now prevalent would quickly change.
Only six members of the Federal Reserve Board will participate in this week's meeting of the FOMC. President Reagan only last week nominated H. Robert Heller, a Bank of America economist, to fill the vacancy on the board created by the resignation of Vice Chairman Preston Martin. Gov. Manuel H. Johnson was nominated to be vice chairman. Both appointments must be confirmed by the Senate.
The other five voting members of the FOMC are presidents of some of the 12 Federal Reserve district banks.
Some financial analysts point out that any FOMC decision to move toward lower interest rates in this country that was not preceded by a drop in rates in West Germany and Japan likely would put new downward pressure on the value of the U.S. dollar on foreign exchange markets.
Fed officials, including Chairman Paul A. Volcker, have publicly expressed their worries about the dollar's rapid plunge and do not want to weaken the currency further -- particularly at a time when the German and Japanese central banks are intervening in exchange markets to prop up the dollar.
Fed officials do not want to appear uncooperative to their foreign counterparts, though there is no indication the United States has joined in the intervention so far, analysts say. Among other reasons, the Fed officials are hoping the governments and central banks in Germany and Japan will take steps soon to stimulate their domestic economies.
Faster growth in those countries would, the officials say, help reduce the huge U.S. trade deficit by providing a bigger market for American exports, and that would give this economy a boost. Other things being equal, more growth in Japan and Germany would also tend to slow down or halt the rise of their currencies relative to the U.S. dollar.
In other words, from the Fed's point of view, more growth abroad is just what the doctor ordered. It would improve a number of things at home -- perhaps including taking some steam out of the congressional drive for protectionist legislation to help import-battered industries -- without, at the same time, making something else worse, such as weakening the dollar.
Gov. Emmett J. Rice is among those more confident about what the second half of the year will bring.
When the Federal Reserve Board cut the discount rate to 6.5 percent last month, Rice dissented because, as he said then, he believes the economy does not need additional stimulus. Cutting the discount rate -- the interest rate charged when financial institutions borrow reserves directly from the Fed -- runs the risk that rates will have to be raised more than they otherwise would be after economic growth accelerates later this year, he said then.
"The economy, in my view, is not all that weak," Rice said in explaining his dissent. He noted that consumer spending has continued to increase and that the trade balance may have begun to improve. "I realize there is some question about that, but the figures do indicate some [trade] improvement," he said. "The only clearly weak spot [in the first quarter] was business fixed investment, and that was concentrated pretty much in the oil industry and in computers and office buildings."
Several other officials, in more recent interviews, echo a point Rice also made then: The money supply measure M1 has been growing strongly; and other monetary aggregates, at adequate rates. Moreover, many corporations have been floating long-term bond issues.
"There is no reason to feel the present level of interest rates is inhibiting the expansion," Rice said.
M1, which includes currency in circulation and checking account deposits at financial institutions, has continued to grow much more rapidly than the Fed had intended. The measure is currently well above the upper limit of the target range for its growth this year.
A broader measure, M2, which also includes savings and small time deposits, most money market mutual fund balances and some other items, has been growing more slowly, but it accelerated somewhat during April, according to figures released last week.
Another senior official, who is not as confident as Rice about the second half of the year, nevertheless regards policy as about as accommodative as it should be. Pointing to the substantial decline in interest rates this year and the growing monetary aggregates, the official declared, "We've been helping [the economy] along a bit. How much do you want? Our policy looks pretty expansionary to me."
Even Johnson, nominee for the vice chairman, who some observers have thought would push constantly for an easier monetary policy, said in a recent speech, "There is a temptation whenever there are weaknesses or tensions in the economy to seek relief through the provision of greater liquidity. This may for a time ease the problems, but the longer-range costs can be substantial" in terms of added inflation.
In an interview, Johnson described the current state of the economy as "sluggish" but expressed optimism about a pickup later in the year. For right now, he said, "The only reason that I would envision why we should have to be more accommodative would be almost a technical reason," with the Fed having to offset any new weakness in the velocity of money, he said. The velocity of money is the ratio between current-dollar gross national product and the level of a monetary aggregate such as M1.
"Given the fundamentals, I don't think we have to go out and push the economy ahead," Johnson said.
The other governor who joined the board this year, Wayne D. Angell, is concerned that the improvement in the U.S. trade balance and the economic boost from lower oil prices might turn out to be less than many economists expect. Eventually, he said in an interview, the positive effect on consumers' real purchasing power will be greater than the depressing effects of spending cutbacks by the oil industry.
Meanwhile, Angell said, "we have had long-term interest rate declines in the United States, some so recently that we do not know the eventual response" of the economy to them. "I am going to assume, until I see evidence to the contrary, that the economy is on a 2 percent growth path."
Angell stressed that he is "not given to trying to fine-tune the economic growth rate. I am not indifferent to it, I just don't want to fine-tune it. I am given to trying to maintain a given price level" for certain commodities that are traded in auction markets. If that can be done, he said, "then you will get an optimum growth rate."
The summary of economic conditions in the 12 Federal Reserve districts around the country, which was prepared for this week's FOMC meeting, said, "Virtually all districts report continued moderate economic growth. With the exception of Dallas, which is plagued by problems related to falling oil and gas prices, no district reports general stagnation."
However, agriculture and manufacturing sectors still have problems that are causing "unbalanced growth" in most districts, the report said. On the other hand, consumer spending "appears to have been strengthening lately and active housing markets in almost all districts have generated much construction activity . . . ," it added.
None of the officials interviewed thought that faster growth than described in the summary would pose any inflationary threat. For instance, Rice, who expects economic activity to be expanding at a 4 percent rate or more later this year, said that his discount rate cut dissent did not indicate that he was worried about a revival of inflation anytime soon. "I am concerned about a possible need to slow the economy down if it surges too rapidly. I am not concerned about inflation this year, or early next year," he said.