June 20, 1978 FOMC Record of Policy Actions

FOMC minutes

is given as "the sum (disregarding signs) of net positions currencies" in individual currencies" rather than as "the sum (disregarding signs) of open positions in each currency." This change was approved in the clarity, and to make the language of this paragraph con interest of form to certain new language concurrently introduced in the procedural instructions governing foreign currency operations, as described below. With this amendment, paragraph 1D read as follows: To maintain an over-all open position in all foreign currencies not exceeding $1.0 billion, unless a larger position is expressly authorized by the Committee. For this purpose, the over-all open position in all foreign currencies is defined as the sum (disregarding signs) of net positions in individual currencies. The net position in a single foreign currency is defined as holdings of balances in that currency, plus outstanding contracts for future receipt, minus outstanding contracts for future delivery of that currency, i.e., as the sum of these ele ments with due regard to sign. Votes for this action: Messrs. Miller, Volcker, Baughman, Coldwell, Eastburn, Jackson, Partee, Wallich, Willes, and Winn. Votes against this action: None. Absent and not voting: Mr. Gardner. Under the first sentence of paragraph 1D, which was not affected by the foregoing amendment, the Federal Reserve Bank of New York is authorized, for System Open Market Account, to maintain an over-all open position in all foreign currencies not exceeding $1.0 billion, unless a larger position is expressly authorized by the Com mittee. On March 21, 1978, the Committee had authorized an open position of $2.25 billion in view of the scale of recent and poten tial System operations in foreign currencies. On May 16, 1978, the

Committee had reduced this limit to $2.0 billion, in light of decreases in the System's open position. Against the background of further decreases in the open position, the Committee reduced the limit to $1.5 billion at this meeting. Votes for this action: Messrs. Miller, Volcker, Baughman, Coldwell, Eastburn, Jackson, Partee, Wallich, Willes, and Winn. Votes against this action: None. Absent and not voting: Mr. Gardner. 4. Procedural instructions with respect to operations under the foreign currency documents In December 1976 the Committee had adopted certain procedural instructions for the purpose of clarifying the respec tive roles of the Committee, the Foreign Currency Subcommittee designated in paragraph 6 of the authorization for foreign currency operations, and the Chairman in providing guidance to the Manager of the System Open Market Account with respect to proposed or on going foreign currency operations under the authorization and the foreign currency directive. Paragraph 1B of the instructions called for clearance of any transactions that would result in gross trans actions in a single foreign currency exceeding $100 million on any day or $300 million since the most recent regular meeting of the Com mittee. At its meeting in March 1978 the Committee amended paragraph 1B to increase these dollar limits, which had occasionally hampered ongoing operations, and to remove an ambiguity in the language.

At this meeting the Committee decided to discontinue the use of the concept of gross transactions in the procedural instructions. In its stead it introduced (a) a clearance require ment formulated in terms of daily and inter-meeting changes in the System's net position in a single foreign currency and (b) a require ment for clearance of any operation that might generate a substan tial volume of trading in a particular currency by the System, regardless of the effect on the System's net position in that cur rency. The purpose of these changes was to improve the effective ness of the consultation procedure. In addition, for the sake of clarity the word "transaction" was replaced by the word "operation" wherever the former had occurred in the instructions. The two new provisions were identified as paragraphs 1B and 1C. Paragraph 1A, which refers to daily and inter-meeting changes in the System's over-all open position in foreign currencies, was retained, and the paragraph previously designated 1C, which relates to swap drawings by foreign central banks, was redesignated 1D. With these changes, the procedural instructions read as follows: In conducting operations pursuant to the authorization and direction of the Federal Open Market Committee as set forth in the Authorization for Foreign Currency Operations and the Foreign Currency Directive, the Federal Reserve Bank of New York, through the Manager of the System Open Market Account, shall be guided by the following procedural understandings with respect to consultations and clearance with the Committee, the Foreign Currency Subcommittee, and the Chairman of the Committee. All operations undertaken pursuant to such clearances shall be reported promptly to the Committee.

(or with with the Subcommittee shall clear 1. The Manager that consultation believes if the Chairman the Chairman, time available): in the is not feasible the Subcommittee with in a change in which would result A. Any operation cur in foreign open position over-all the System's any day or $300 million on exceeding $100 rencies meeting of most recent regular since the million the Committee. in a change in which would result B. Any operation foreign cur in a single net position the System's or $300 mil on any day $100 million rency exceeding of the regular meeting most recent since the lion Committee. a substantial might generate which C. Any operation currency by the trading in a particular volume of System's net change in the though the System, even less than the might be in that currency position in 1B. limits specified by a foreign bank not D. Any swap drawing proposed the larger of (i) $200 million or (ii) 15 exceeding per cent of the size of the swap arrangement. shall clear with the Committee (or with the 2. The Manager Subcommittee, if the Subcommittee believes that consultation with the full Committee is not feasible in the time available, or with the Chairman, if the Chairman believes that consultation with the Subcommittee is not feasible in the time available): A. Any operation which would result in a change in the System's over-all open position in foreign cur rencies exceeding $500 million since the most recent regular meeting of the Committee. B. Any swap drawing proposed by a foreign bank exceeding the larger of (i) $200 million or (ii) 15 per cent of the size of the swap arrangement. 3. The Manager shall also consult with the Subcommittee or the Chairman about proposed swap drawings by the System, and about any operations that are not of a routine character. Votes for this action: Messrs. Miller, Volcker, Baughman, Coldwell, Eastburn, Jackson, Partee, Wallich, Willes, and Winn. Votes against this action: None. Absent and not voting: Mr. Gardner.