May 16, 1978 FOMC Record of Policy Actions

FOMC minutes

remained slow. Market interest rates have increased in recent weeks. On May 11 an increase in Federal Reserve discount rates from 6-1/2 to 7 per cent was announced. 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 resist inflationary pressures while encouraging continued moderate economic expansion and contributing to a sustain able pattern of international transactions. At its meeting on April 18, 1978, the Committee agreed that growth of M-1, M-2, and M-3 within ranges of 4 to 6-1/2 per cent, 6-1/2 to 9 per cent, and 7-1/2 to 10 per cent, respectively, from the first quarter of 1978 to the first quarter of 1979 appears to be consistent with The associated range for bank credit these objectives. 10-1/2 per cent. These ranges are subject to is 7-1/2 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 aggre gates cited in the preceding paragraph. Specifically, at present, the ranges of tolerance for the annual growth rates over the May-June period will be 3 to 8 per cent for M-1 and 4 to 9 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 slightly above the current level. 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 7-1/4 to 7-3/4 per cent. In the conduct of day-to-day operations, account shall be taken of emerging financial market conditions.

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, and Winn. Vote against this action: Mr. Willes. Mr. Willes dissented from this action because he favored more vigorous measures to reduce the rate of monetary growth, given the acceleration of the rate of inflation and its adverse effect on consumer and business confidence and spending plans. Specifically, he preferred a range of 2-1/2 to 6-1/2 per cent for the annual rate of growth in M-1 over the May-June period and an inter-meeting range of 7-1/4 to 8 per cent for the Federal funds rate. Subsequent to the meeting, on June 15, revised pro on newly available data suggested that M-1 would jections based grow in the May-June period at an annual rate of about 7-1/2 per cent, near the upper limit of the range of tolerance of 3 to 8 per cent specified in the Committee's directive. M-2 also was in the 2-month period at a 7-1/2 per cent annual projected to grow within the range of 4 to 9 per cent specified rate, but this was well for that aggregate.

In general, the strength of the aggregates suggested Committee consultation, looking toward further instruc a need for tion to the Desk. In view of the proximity of the Committee meet for June 20, Chairman Miller recommended that the ing scheduled to continue aiming for a Federal funds rate of Desk be instructed 7-1/2 per cent at this time. On June 16, 1978, the Committee modified the domestic policy directive adopted at its meeting on May 16, the Desk to continue aiming for 1978, to instruct Federal funds rate of 7-1/2 per cent a weekly-average at this time. Votes for this action: Messrs. Miller, Baughman, Coldwell, Eastburn, Gardner, Partee, Wallich, Willes, Winn, and Timlen. Votes against this action: None. Absent and not voting: Messrs. Volcker and Jackson. (Mr. Timlen voted as alternate for Mr. Volcker.) 2. Authorization for foreign currency operations Paragraph 1D of the Committee's authorization for foreign currency operations authorizes the Federal Reserve Bank of New York, for the System Open Market Account, to maintain an over-all open position in all foreign currencies not to exceed $1.0 billion, unless a larger position is expressly authorized by the Committee. On March 21, 1978, the Committee had authorized an open position of $2.25 billion in view of the scale of recent and

potential Federal Reserve operations in the foreign exchange markets undertaken pursuant to the Committee's foreign currency directive. At this meeting the Committee voted to reduce the authorized open position to $2 billion. This action was taken in view of the decrease in the open position that had occurred in recent weeks. Vctes for this action: Messrs. Miller, Volcker, Baughman, Coldwell, Eastburn, Gardner, Jackson, Partee, Wallich, Willes, and Winn. Votes against this action: None.