At a May 20 meeting, Federal Reserve policy makers, expecting faster economic growth and concerned about rapid growth of the money supply, directed central bank officials to be alert to the need to tighten credit conditions, a record of the meeting released yesterday said.
The policy-making group, the Federal Open Market Committee, voted 10 to 1 to make no immediate change in the degree of pressure on bank reserves.
Gov. Henry C. Wallich cast the dissenting vote because he favored implementing a tighter policy immediately. Wallich "preferred to direct open market operations toward somewhat greater restraint. He was concerned about the implications of rapid monetary expansion for inflation and wanted to take action promptly to help assure slower monetary growth," the Fed statement said.
The sentiment at the May meeting that the most likely need to adjust policy would come from stronger-than-desired economic growth highlights the change in thinking that must have occurred for the Federal Reserve Board to have decided, as it did this week, to reduce the central bank's discount rate from 6.5 percent to 6 percent. The discount rate is the interest rate the Fed charges on loans to financial institutions.
Thursday's discount-rate action followed another FOMC meeting Tuesday and Wednesday at which money-growth targets were set for the remainder of 1986 and set tentatively for 1987.
The Fed's six board members, who have responsibility for setting the discount rate, are members of the FOMC. So are five presidents of regional Federal Reserve banks. The heads of the other seven banks participate in FOMC discussions but do not vote. There is one vacancy on the board, and therefore on the committee.
Federal Reserve Chairman Paul A. Volcker will disclose the Fed's new money targets at a meeting of the Senate Banking Committee July 23.
While noting that the money supply measure, M1 -- which includes currency in circulation and checking account deposits -- had been growing far more rapidly than had been intended, the policy makers decided at the May 20 session to do nothing about it at that time.
The FOMC "recognized that, based on the experience of recent years, the behavior of M1 was subject to substantial uncertainties in relationship to economic activity and prices," the statement said.
At the meeting, the FOMC also agreed to cut by 1 percentage point, to 5 percent, the low end of the target range of the federal funds rate. The federal funds rate is the rate that banks charge one another for overnight loans. The new range, 5 percent to 9 percent, would "provide a more symmetrical range around the lower federal funds rate that had prevailed for some time," the statement explained.
The committee members also expressed some concern about inflation at the May 20 meeting. While prices had not been rising, on average, according to statistics then available, they were being held down by food and energy price declines. "Those declines would soon be in the past and upward pressures on open prices would reemerge, stimulated in part by the lagged inflationary effects of the dollar's depreciation," the members feared.