July 19, 1977 FOMC Record of Policy Actions

FOMC minutes

rise in employment moderated, and the unemployment rate edged up from 6.9 to 7.1 per cent. Total retail sales remained at about the level reached in March; for the second quarter as a whole, however, sales were moderately above the first-quarter level. The wholesale price index for all commodities declined in June, owing to sharp decreases among farm products and foods; as in May, average prices of industrial commodities rose appreciably less than in earlier months of 1977. The index of average hourly earnings rose over the first half of the year at about the same pace that it had on the average during 1976. The average value of the dollar against leading foreign currencies has declined more than 1 per cent over the past month; the declines were especially marked against the Japanese, German, and Swiss currencies. In May the U.S. foreign trade deficit diminished somewhat from the high rate in the first 4 months of the year. M-1, after rising at an exceptionally rapid rate in April, increased little in May and grew at a moderate pace in June. Growth in M-2 and M-3 also was moderate in June. Inflows to banks of time and savings deposits included in M-2 picked up somewhat, after having slackened for a number of months, and inflows to nonbank thrift institutions remained sizable. Business short-term borrowing expanded sharply in June. Market interest rates in general have changed little in recent weeks. 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 inter national transactions.

Growth in M-1, M-2, and M-3 within ranges of 4 to 6-1/2 per cent, 7 to 9-1/2 per cent, and 8-1/2 to 11 per cent, respectively, from the second quarter of 1977 to the second 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 July-August period to be within the ranges of 3-1/2 to 7-1/2 per cent for M-1 and 6-1/2 to 10-1/2 per cent for M-2. 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.

Subsequent to the meeting, on August 4, nearly final estimates indicated that in July M-1 had grown at an annual rate of about 18-1/2 per cent and M-2 at a rate of about 16-1/2 per cent. For the July-August period staff projections suggested that the annual rates of growth for both aggregates would be well above the upper limits of the ranges specified by the Committee in the next-to-last paragraph of the domestic policy directive issued at the July meeting. The Federal funds rate had averaged 5.80 per cent in the statement week ended August 3, up from 5.45 per cent in the week ended July 27 and 5.35 per cent in the preceding 3 weeks. The Manager of the System Open Market Account was currently aiming at a funds rate of 5-3/4 per cent, the upper limit of the inter-meeting range specified in the directive. Against that background, Chairman Burns recommended on August 4 that the upper limit of the range for the Federal funds rate be increased to 6 per cent so that the Manager might have some additional leeway for operations, while continuing to take account of the current Treasury financing and financial market developments. He further recommended that

this additional leeway be used very gradually, and only in the event that the aggregates continued to register values far beyond the Committee's objectives. On August 5, 1977, the Committee modified the inter-meeting range for the Federal funds rate specified in the next-to-last paragraph of the domestic policy directive issued on July 19, 1977, by increasing the upper limit from 5-3/4 to 6 per cent. Votes for this action: Messrs. Burns, Jackson, Mayo, Morris, Partee, Roos, Wallich, Balles, and Timlen. Absent and not voting: Messrs. Coldwell, Gardner, Guffey, Lilly, and Volcker. (Messrs. Balles and Timlen voted as alternates for Messrs. Guffey and Volcker, respectively.)