September 21, 1976 FOMC Record of Policy Actions

FOMC minutes

was also agreed that the Manager should continue to aim for a Federal funds rate of 5-1/4 per cent, unless growth in the monetary aggregates appeared to be deviating significantly from the midpoints of the specified ranges. As customary, it was understood that the Chairman might call upon the Committee to consider the need for supplementary instructions before the next scheduled meeting if significant inconsistencies appeared to be developing among the Committee's various objectives. The following domestic policy directive was issued to the Federal Reserve Bank of New York: The information reviewed at this meeting suggests that growth in real output of goods and services has remained moderate in the current quarter. In August industrial production contin ued to expand at about the average rate in the preceding 4 months. Retail sales apparently rose vigorously, after having changed little on balance since April. Payroll employment in nonfarm establishments rose appreciably further, but according to household survey data, the unemployment rate edged up from 7.8 to 7.9 per cent. The wholesale price index for all commodities was about unchanged in August, as a substantial decline in average prices of farm products and foods offset another large increase in average prices of industrial commodities. So far this year the advance in the index of average wage rates has been somewhat below the rapid rate of increase during 1975,

The average value of the dollar against leading foreign currencies has remained relatively steady in recent weeks, declining somewhat against most of these currencies but rising against the pound sterling. The Mexican peso was allowed to depreciate on September 1 and in recent days has been about 37 per cent below its old value against the dollar. In July the U.S. foreign trade deficit increased sharply. M and M2 grew at moderate rates in August. Inflows of the time and savings deposits included in M2 were relatively strong, although they slackened from the high rate in July. Inflows of deposits to nonbank thrift institutions accelerated, however, and growth in M3 remained rapid. Most market interest rates have declined somewhat further in recent weeks. In light of the foregoing developments, it is the policy of the Federal Open Market Committee to foster financial conditions that will encourage continued economic expansion, while resisting inflationary pressures and contributing to a sustainable pattern of international transactions. To implement this policy, while taking account of developments in domestic and inter national financial markets, the Committee seeks to achieve bank reserve and money market conditions consistent with moderate growth in monetary aggregates over the period ahead. Votes for this action: Messrs. Burns, Volcker, Balles, Black, Coldwell, Gardner, Jackson, Kimbrel, Lilly, Wallich, and Winn. Votes against this action: None. Absent and not voting: Mr. Partee.

2. Financing arrangements with Mexico On the day before this meeting it was announced that the U.S. Treasury Department and the Federal Reserve had made arrangements with the Government of Mexico under which up to $600 million would be available to the Bank of Mexico to counter disorderly exchange market conditions during a transition period pending the receipt of medium-term financing from the International Monetary Fund. Following the devaluation of the peso on August 31, 1976, the Mexican Government had developed a detailed economic program designed to cope with Mexico's balance of payments problem. Subsequently, the Managing Director of the International Monetary Fund had advised the Mexican authorities that he found the program adequate to deal with Mexico's balance of payments problem and was prepared to recommend that the Fund's Executive Board authorize drawings by Mexico under the Extended Fund Facility and other facilities of the Fund. At the time these arrangements were made, the Bank of Mexico had outstanding drawings of $360 million on its swap line with the Federal Reserve. These drawings were due to mature in early October. The arrangements provided that,

at the option of the Mexican Government, the Federal Reserve would make available amounts repaid in advance of maturity under the existing swap line, up to $180 million. The remaining amounts would be made available by the Treasury through the Exchange Stabilization Fund. These arrangements were approved on behalf of the Federal Open Market Committee by the Foreign Currency Subcommittee, consisting of Messrs. Burns, Volcker, Gardner, and Wallich.