December 19–20, 1977 FOMC Record of Policy Actions

FOMC minutes

12/19-20/77 -25- Mr. Roos dissented from this action because he believed that the upper limit of the December-January range for growth in M-1 specified by the Committee allowed for the possibility of too rapid growth in that aggregate, particularly in view of the rate at which it had grown so far this year. In his opinion, growth in M-1 over the December-January period at a rate in excess of 6-1/2 per cent would require an excessively restrictive policy later, if the Committee's long-range growth path was to be achieved. Subsequent to the meeting, on January 9, 1978, the Committee voted to raise the range for the Federal funds rate to 6-1/2 to 7 per cent and to instruct the Manager to raise to 6-3/4 per cent over the next few days. This action the rate was taken upon recommendation of Chairman Burns. During the preceding 2 weeks the Federal funds rate had averaged a little over 6-5/8 per cent, or above the midpoint 6-1/4 to 6-3/4 per cent established at the of the range of December meeting. Year-end money market pressures had affected the rate, but most recently the Manager had not discouraged above the midpoint of the range in view of unsettled some rise

12/19-20/77 -26- conditions in foreign exchange markets. Available data had suggested that over the December-January period M-1 and M-2 would grow at rates within the ranges specified at the December meeting. On January 6,just before the Chairman recommended this action, the Board of Governors had approved action by directors of two Federal Reserve Banks raising the discount rate from 6 to 6-1/2 per cent. In announcing the increase in the discount rate, the Board had issued the following press release: "The recent disorder in foreign exchange markets constitutes a threat to orderly expansion of the domestic and international economy. In view of this, the Board of Governors of the Federal Reserve System today approved an increase in the discount rate from 6 per cent to 6-1/2 per cent. "The Board expressed the hope that the need for the increase will prove temporary. The Board further indicated that the condition of the domestic economy is sound and that credit supplies to sustain economic expansion will remain ample.

12/19-20/77 -27- "In making the change, the Board acted on requests from directors of the Federal Reserve Banks of New York and Chicago, increasing the discount rates of those Banks to 6-1/2 per cent, effective Monday, January 9. The discount rate is the interest rate that is charged member banks when they borrow from their district Federal Reserve Banks." On January 9, 1978, the Committee modified the domestic policy directive adopted at its meeting of December 19-20, 1977, by raising the range for the Federal funds rate to 6-1/2 to 7 per cent and by instructing the Manager to raise the rate to 6-3/4 per cent over the next few days. Votes for this action: Messrs. Burns, VolcKer, Coldwell, Gardner, Guffey, Mayo, Roos, and Wallich. Votes against this action: Messrs. Lilly, Morris, and Partee. Absent and not voting: Mr. Jackson. Messrs. Lilly, Morris, and Partee voted against this action because they did not believe that the performance of the domestic economy justified an increase in interest rates at this time. Mr. Morris believed, in addition, that the proper response to present conditions in the foreign exchange markets was more aggressive intervention, not a higher level of domestic interest rates.

12/19-20/77 2. Authorization for foreign currency operations Paragraph 1D of the Committee's authorization for foreign currency operations authorizes the System Open Market Account to maintain an over-all open position in all foreign cur rencies not exceeding $1.0 billion, unless a larger position is expressly authorized by the Committee. On January 6, 1978, the Committee authorized an increase in the limit to $1.5 billion. The Foreign Currency Subcommittee (consisting of Messrs. Burns, Gardner, recommended the increase of $500 million in Volcker, and Wallich) the limit in view of the recent scale of operations and the continuing unsettled condition of the foreign exchange markets. It was announced on January 4, 1978, that the Exchange Stabilization Fund of the U.S. Treasury would henceforth be utilized actively together with the $20 billion swap network operated by the Federal Reserve System to check speculation and to help reestablish order in the foreign exchange markets.