April 18, 1978 FOMC Record of Policy Actions

FOMC minutes

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. Miller, Volcker, Baughman, Coldwell, Eastburn, Gardner, Jackson, Partee, Wallich, Willes, and Winn. Votes against this action: None. Subsequent to the meeting, on May 5, a telephone conference meeting was held to consult about System open market to the decision at the April meeting that an operations, pursuant increase in the Federal funds rate above 7-1/4 per cent, within the specified range of 6-3/4 to 7-1/2 per cent, would not be the Committee had had an opportunity for further sought until consultation. estimates had indicated that M-1 had grown at The latest pace in April. For the April-May period staff a very rapid that the annual rate of growth in M-1 projections had suggested upper limit of the range of 4 to 8-1/2 would be well above the specified by the Committee in the next-to-last paragraph per cent issued at the meeting of April 18. of the domestic policy directive

Growth in M-2 for the 2-month period had been projected to be at about the upper limit of the Committee's range of 5-1/2 to 9-1/2 per cent for that aggregate. During the preceding week the Federal funds rate had averaged about 7-1/4 per cent, 1/2 of a percentage point above the level prevailing at the time of the April meeting. It was reported during the telephone conference that the Commerce Department's preliminary estimates indicated that real GNP had declined at an annual rate of 0.6 per cent in the first quarter, a somewhat weaker performance than had been anticipated at the time of the April meeting, but that real GNP appeared to be rising more rapidly in the second quarter than the staff had projected then. The behavior of GNP in both quarters was importantly affected by temporary influences. The acceleration of growth of nominal GNP in the current quarter from the reduced pace in the first quarter appeared to be the main factor explaining the sharp acceleration of monetary growth in April. Other transitory forces--specifically, mobilization of cash by the public to make unusually large payments of Federal income taxes not withheld, somewhat slower processing of tax returns,

and the upsurge in the volume of trading on the stock exchangesmight also have contributed to the April rate of monetary growth. In its discussion the Committee agreed that, while the firming in money market conditions that had been accomplished since the meeting of April 18 had clearly been appropriate, there was some question as to whether further firming at this point would be desirable. Specifically, the Committee concluded that it would be appropriate to await some further evidence on the economic outlook and some indication of the extent to which the April surge in M-1 would subside. At the conclusion of the discussion the Committee directed the Manager, until further instructed, to seek to maintain the weekly-average Federal funds rate at about 7-1/4 per cent, with any deviations tending to be in the direction of higher rather than lower funds rates. On May 5, 1978, the Committee modified the domestic policy directive adopted at its meeting of April 18, 1978, to direct the Desk, until further instructed, to seek to maintain the weekly-average Federal funds rate at about the prevailing level of 7-1/4 per cent, with any deviations tending to be in the direction of higher rather than lower funds rates.

Votes for this action: Messrs. Miller, Volcker, Baughman, Gardner, Jackson, Partee, Wallich, and Winn. Votes against this action: Messrs. Black and Willes. Absent and not voting: Messrs. Coldwell and Eastburn. (Mr. Black voted as alternate for Mr. Eastburn.) Messrs. Black and Willes dissented from this action because they preferred to make use of the full range that had been specified for the Federal funds rate. They believed that, given the accelerated pace of expansion in nominal GNP, growth of both M-1 and M-2 would be subjected to persistent upward pressure throughout the rest of the second quarter and that a further upward adjustment in the funds rate at this time would be helpful in moderating such pressures and, like the firming that had already occurred, would be regarded as a positive step in resisting inflationary pressures.