Federal Reserve Policymakers Will Tighten Monetary Policy

Article excerpt

WASHINGTON (AP) - Federal Reserve policymakers voted 9-1 at their May 19 meeting to tighten monetary policy slightly while leaving open the possibility for an increase in a key interest rate, minutes of that meeting released on Friday showed.

However, an increase in the discount rate, the rate at which the Fed lends money to other banks, never materialized as financial markets calmed down and the value of the U.S. dollar on foreign exchange markets appeared to stabilize.

In the May meeting, the Open Market Committee - the arm of the Fed that orders the buying and selling of government bonds and other securities - agreed to seek ``to increase somewhat the degree of reserve pressure'' on banks, the minutes showed.

Such a move, with Fed member Martha Seger casting the sole dissenting vote, was characterized as an effort to counter inflationary pressures and to help bolster a then-weak dollar.

Generally, the Fed reduces bank reserves - tightening credit - by selling off some of its vast holdings of Treasury bonds and other government securities in open-market transactions conducted by the Federal Reserve Bank of New York.

The Fed's purchase of securities, by contrast, increases bank reserves and helps to ease credit.

In dissenting, Ms. Seger voiced concern ``that the degree of reserve pressure prevailing recently, which was somewhat greater than intended, represented a risk to an already weak economic expansion.''

She also ``noted that the negative effects of recent increases in interest rates had not yet been felt in the economy,'' the minutes said. …