May 17, 1977 FOMC Record of Policy Actions

FOMC minutes

Most Committee members did not wish to see a rise in the weekly-average Federal funds rate above 5-3/4 per cent during the inter-meeting period--at least not without further consultation. In addition to advocating an upper limit of 5-3/4 per cent for the inter-meeting range, these members generally favored maintain ing the funds rate at the outset of the period in the area of 5-1/4 to 5-3/8 per cent or permitting it to rise only slightly. In support of constraining the upper limit to 5-3/4 per cent, it was suggested that a further rise of 50 to 60 basis points--roughly the magnitude of the increase since the April meeting--was likely to have more significant repercussions on financial markets and that considerable uncertainty existed about the underlying strength of the monetary aggregates. A few members of the Committee suggested an upper limit of 6 per cent for the funds rate range and an initial objective of 5-1/2 or 5-5/8 per cent, because they viewed the economic situation as quite strong and they thought such a course would be helpful in restraining excessive growth in the aggregates later on. At the conclusion of the discussion the Committee decided that growth in M-1 and M-2 over the May-June period at annual rates

of 0 to 4 per cent and 3-1/2 to 7-1/2 per cent, within ranges respectively, would be appropriate. It was understood that in assessing the behavior of the aggregates, the Manager should equal weight to the behavior of continue to give approximately M-1 and M-2. In the judgment of the Committee, such growth rates of were likely to be associated with a weekly-average the aggregates Federal funds rate of about 5-3/8 per cent. The Committee agreed growth rates of the aggregates over the 2-month period that if appeared to be deviating significantly from the midpoints of the ranges, the operational objective for the weekly-average indicated be modified in an orderly fashion within Federal funds rate should a range of 5-1/4 to 5-3/4 per cent. As customary, it was understood might call upon the Committee to consider the that the Chairman need for supplementary instructions before the next scheduled if significant inconsistencies appeared to be developing meeting 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 real output of goods and services rate in the current quarter. is growing at a rapid April industrial output and employment continued In to expand at a substantial pace, and the unemployment rate declined from 7.3 to 7.0 per cent. Total retail remained at the advanced level reached in March. sales price index for all commodities rose The wholesale substantially in April for the third consecutive month; increases again were particularly sharp among farm products and foods, and they remained sizable for industrial commodities. The average value of the dollar against leading foreign currencies has changed little on balance over the past month. The U.S. foreign trade deficit widened further in March; for the first quarter as a whole, the deficit was twice as large as for the preceding quarter. The increase in M-1, which had been moderate in the first quarter, was exceptionally large in Inflows of the time and savings deposits April. included in the broader aggregates were slower earlier in the year, but because of the rapid than expansion in M-1, growth in M-2 and M-3 accelerated. Business short-term borrowing expanded sharply while corporate financing in the capital markets was reduced. Market interest rates have risen in recent weeks. the foregoing developments, it is In light of the Federal Open Market Committee to the policy of foster bank reserve and other financial conditions that will encourage continued economic expansion resist inflationary pressures, while and help to a sustainable pattern of international contributing transactions.

At its meeting on April 19, 1977, the Committee agreed that growth of M-1, M-2, and M-3 within ranges of 4-1/2 to 6-1/2 per cent, 7 to 9-1/2 per cent, and 8-1/2 to 11 per cent, respectively, from the first quarter of 1977 to the first quarter of 1978 appears to be consistent with these objectives. These ranges are subject to reconsideration at any time as conditions warrant. The Committee seeks to encourage near-term rates of growth in M-1 and M-2 on a path believed to be reasonably consistent with the longer-run ranges for monetary aggregates cited in the preceding paragraph. Specifically, at present, it expects the annual growth rates over the May June period to be within the ranges of 0 to 4 per M-1 and 3-1/2 to 7-1/2 per cent for M-2. cent for In the judgment of the Committee such growth rates are likely to be associated with a weekly average Federal funds rate of about 5-3/8 per cent. If, giving approximately equal weight to M-1 and M-2, it appears that growth rates over the 2-month period will deviate significantly from the midpoints of the indicated ranges, the operational objective for the Federal funds rate shall be modified in an orderly fashion within a range of 5-1/4 to 5-3/4 per cent. If it appears during the period before the next meeting that the operating constraints specified above are proving to be significantly inconsistent, the Manager is promptly to notify the Chairman who will then decide whether the situation calls for supplementary instructions from the Committee. Votes for this action: Messrs. Burns, Volcker, Coldwell, Gardner, Guffey, Jackson, Lilly, Mayo, Morris, Partee, Roos, and Wallich. Votes against this action: None.