June 21, 1977 FOMC Record of Policy Actions

FOMC minutes

At the conclusion of the discussion the Committee decided that operations in the period immediately ahead should be directed toward maintaining about the prevailing money market conditions, as represented by a weekly-average Federal funds rate of 5-3/8 per cent. With respect to the annual rates of growth in M-1 and M-2 over the June-July period, the Committee specified ranges of 2-1/2 to 6-1/2 per cent and 6 to 10 per cent, respectively. The members agreed that if growth in the aggregates should appear to approach or move beyond the limits of the specified ranges, with approximately equal weight given to M-1 and M-2, the operational objective for the weekly-average Federal funds rate should be varied in an orderly fashion within a range of 5-1/4 to 5-3/4 per cent. 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 t;e 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 has grown in the current quarter at about the rapid rate of the first quarter. In May industrial

output and employment continued to expand at a substantial pace, and the unemployment rate edged down from 7.0 to 5.9 per cent. Total retail sales increased from the advanced March April level. The rise in the wholesale price index for all commodities slowed substantially in May, as average prices of farm products and foods changed little after having increased sharply for three consecutive months; average prices of industrial commodities also rose less than in other recent months. 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 was nearly as large in April as in March. M-1 increased only slightly in May, after rising at an exceptionally rapid rate in April. Reflecting mainly the behavior of M-1, growth in M-2 and M-3 also slowed sharply. Inflows to banks of time and savings deposits other than large-denomination CD's continued to slacken, but inflows to nonbank thrift institutions remained sizable. Business short-term borrowing moderated from the sharply increased pace of April, and corporate borrowing in the capital markets was reduced further. Short-term market interest rates have changed little on balance in recent weeks, while longer-term yields have declined. In light of the foregoing developments, it is the policy of the Federal Open Market Committee to foster bank reserve and other financial conditions that will encourage

continued economic expansion and help resist inflationary pressures, while contributing to a sustainable pattern of international 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. At this time, the Committee seeks to maintain about the prevailing money market conditions during the period immediately ahead, provided that monetary aggregates appear to be growing at approximately the rates currently expected, which are believed to be on a path reasonably consistent with the longer-run ranges for monetary aggregates cited in the preceding paragraph. Specifically, the Committee seeks to maintain the weekly-average Federal funds rate at about 5-3/8 per cent, so long as M-1 and M-2 appear to be growing over the June-July period at annual rates within ranges of 2-1/2 to 6-1/2 per cent and 6 to 10 per cent, respectively. If, giving approximately equal weight to M-1 and M-2, it appears that growth rates over the 2-month period are approaching or moving beyond the limits of the indicated ranges, the operational objective for the weekly-average 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, Gardner, Guffey, Jackson, Lilly, Mayo, Morris, Partee, Roos, and Wallich. Vote against this action: Mr. Coldwell. Mr. Coldwell dissented from this action because he favored a funds rate range of 5 to 5-3/4 per cent, in order to provide more leeway for a reduction should the rates of growth in M-1 and M-2 appear to be near or below the lower limits of their specified ranges for the June-July period. This preference reflected his views that the April bulge in M-1 had been caused largely by special factors, that the projections of the aggregates for the June-July period were highly uncertain, and that realization of the staff projection for growth in nominal GNP would involve very large increases in the velocity of money.