Fed Won’t Up Interest Rates : Decides Against Raise Despite Money Supply

Policy-makers at the Federal Reserve Board have decided against pushing interest rates higher in coming weeks even though a key money supply measure is growing faster than the target set by the nation’s central bank, Chairman Paul A. Volcker disclosed today.

Volcker, in a letter to a congressional committee, said the Fed’s policy-making committee “chose not to move aggressively to tighten (bank) reserve availability to constrain M1 growth.”

M1, the basic measure of money supply, including currency and deposits in checking accounts, has been growing well above Fed targets for much of the year. The Fed seeks to control the growth of the money supply in an effort to provide for steady, non-inflationary economic growth.

Volcker said the Fed decided that growth in M1 is acceptable even though it is still faster than the central bank’s liberalized target range for the second half of the year.

While some economists have warned that the surge in money growth carries a risk of rekindling inflation, others have urged the Fed to ignore the rapid growth, warning that any move by the central bank to restrain money growth would send interest rates higher and threaten the faltering economic recovery.

Volcker’s comments came in a letter to the House domestic monetary policy subcommittee.