September 20, 1977 FOMC Record of Policy Actions

FOMC minutes

borrowing increased somewhat from the reduced pace in July, but remained below the volume of preceding months. Short-term interest rates, which had risen appreciably in early August, most recently have advanced somewhat further. Yields on longer-term market securities, however, have changed little on balance in recent months. Federal Reserve discount rates were increased from 5-1/4 to 5-3/4 per cent in late August and early September, and member bank borrowings receded from the high levels of the latter part of August. In light of the foregoing developments, it is the policy of the Federal Open Market Committee to foster bank reserve and other conditions that will encourage financial continued economic expansion and help resist inflationary pressures, while contributing to a sustainable pattern of international transactions. At its meeting on July 19, 1977, the Committee agreed that growth of M-1, M-2, and M-3 within ranges of 4 to 6-1/2 per cent, 9-1/2 per cent, and 8-1/2 to 11 per cent, 7 to the second quarter of 1977 respectively, from second quarter of 1978 appears to be to the consistent with these objectives. These subject to reconsideration at ranges are any time as conditions warrant. seeks to encourage near The Committee 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 preceding paragraph. Specifically, cited in the it expects the annual growth rates at present,

over the September-October period to be within the ranges of 2 to 7 per cent for M-1 and 4 to 8 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 6-1/4 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 mid points of the indicated ranges, the operational objective for the Federal funds rate shall be modified in an orderly fashion within a range of 6 to 6-1/2 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, Mayo, and Partee. Votes against this action: Messrs. Lilly, Morris, Roos, and Wallich. Messrs. Lilly and Wallich dissented from this action because it allowed for somewhat more firming in money market conditions than they thought was appropriate at present in view of their judgment that the economic situation was not very strong. They also felt that the

rapid monetary growth over recent months might represent an increase in the public's demand for money in relation to growth in GNP of a kind that should be accommodated. Mr. Lilly believed, in addition, that further tightening in money market conditions would not be effective in dealing with the underlying structural inflation. Messrs. Morris and Roos dissented on the ground that the policy adopted by the Committee represented an inadequate response to the rapid rates of monetary growth over recent months, which in their view were not compatible with a healthy economy over the longer run. Mr. Roos felt that, if the Committee did not take action now that would assure a reduction in the rate of growth in M-1, the rate of inflation would accelerate and more drastic action would need to be taken later on. 2. Authorization for domestic open market operations On September 30, 1977, Committee members voted to increase from $2 billion to $3 billion the limit on Federal Reserve Bank holdings of special short-term certificates of indebtedness purchased directly from the Treasury, specified

in paragraph 2 of the authorization for domestic open operations, effective immediately. market Votes for this action: Messrs. Coldwell, Gardner, Guffey, Burns, Lilly, Mayo, Partee, Roos, Jackson, Wallich, Eastburn, and Timlen. Votes against this action: None. (Messrs. Eastburn and Timlen voted as alternates for Messrs. Morris and Volcker, respectively.) This action was taken on the recommendation of The Chairman had advised the Committee that Chairman Burns. the current temporary debt ceiling of $700 billion would expire at midnight on September 30, 1977; that unless congressional action to extend the temporary ceiling were completed before that time, the ceiling would revert to its permanent level of $400 billion; and that under the ceiling, the Treasury had leeway to borrow an temporary additional amount between $2 billion and $3 billion and had requested that the System stand ready to purchase that day the Treasury such amounts of special short directly from term certificates of indebtedness as the Treasury might be able to issue under the temporary ceiling.