Fed's inner circle split on raising interest rates July's 11-1 vote masked dissent

August 21, 1993|By Steven Greenhouse | Steven Greenhouse,New York Times News Service

JACKSON HOLE, Wyo. -- The Federal Reserve's main policy-making committee voted in July to maintain its bias toward raising short-term interest rates, even though some members urged it to drop that bias because economic growth was so weak.

As Federal Reserve officials and private economists gathered in this Rocky Mountain resort for an annual conference, the economists were divided over whether the Fed's policy-making committee had maintained the bias when it met Tuesday.

The Fed panel meets eight times a year but its deliberations are not disclosed until after the next meeting.

Several economists speculated that the Fed maintained its tilt toward higher rates because it was eager to convince financial markets that it wanted to keep inflation subdued. But others said they believed the Fed adopted a neutral stance because it was pleased by recent inflation reports but worried about slow growth. Federal Reserve officials refused to discuss what was decided at Tuesday's meeting.

According to a summary that the Federal Reserve released Friday of the meeting on July 6 and 7, the policy-making committee, known as the Federal Open Market Committee, voted 11-1 to continue its bias toward tighter rates. The action gives Fed Chairman Alan Greenspan the authority to raise rates somewhat without seeking board approval, although he usually consults board members before acting.

At the July meeting, Wayne D. Angell, a member of the Federal Reserve Board, cast the dissenting vote, arguing that the central bank should raise interest rates immediately. He said there was a disappointing lack of progress in reducing inflation and that monetary policy was overly expansive because the central bank's short-term interest rates, currently 3 percent, were less than the inflation rate.

Several committee members called for dropping the bias toward raising rates, suggesting that a neutral policy was more consistent with the weak growth and the subdued inflation being reported.

But those members ended up voting with the majority after being convinced that if the committee abandoned that bias so soon after adopting it in May it "could convey a misleading impression" -- in the report's words -- that the Fed had become less committed to fighting inflation.

The central bank adopted the bias toward raising rates in May, when its members grew upset that inflation was running at an annual rate of more than 4 percent in the first four months of this year.

According to the summary of the July meeting, many Fed officials felt that the statistics pointed to a sustained rate of economic expansion -- a sentiment that may have been too optimistic because in late July the Commerce Department announced that the economy grew by a lackluster 1.6 percent in the second quarter.

The report of the July meeting said, "While current monetary policy seemed likely to support further economic expansion, the committee needed to remain alert to the potential for intensifying inflation."

Some members said that while the need for any change in policy seemed somewhat remote in coming months, the next policy move was more likely to be toward tightening.

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