August 15, 1978 FOMC Record of Policy Actions

FOMC minutes

which had dropped 0.4 of a percentage point in June, jumped 0.5 of a percentage point in July to 6.2 per cent, about the average rate in the first 5 months of the year. Average prices of goods and services have continued to rise rapidly, although producer prices of foods and foodstuffs declined in July. The advance in the index of average hourly earnings has been somewhat faster so far in 1978 than it had been on the average during "Since mid-July the trade-weighted value of the dollar against major foreign currencies has declined sharply further. The U.S. trade deficit was lower in the second quarter than the very high rate of the first quarter. "Growth in M-1 remained moderate in July. Inflows of the interest-bearing deposits included in M-2 and M-3 picked up, owing to substantial flows into large-denomination time deposits at banks and into the new money market certificates at nonbank thrift institutions. Nevertheless, expansion in the broader aggregates also remained moderate in July. Most market interest rates have declined appreciably on balance in recent weeks. "In light of the foregoing developments, it is the policy of the Federal Open Market Committee to foster monetary and financial conditions that will resist inflationary pressures while encouraging continued moderate economic expansion and contributing to a sustainable pattern of international transactions. At its meeting on July 18, 1978, the Committee agreed that these objectives would be furthered by growth of M-1, M-2, and M-3 from the second quarter of 1978 to the second quarter of 1979 at rates 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. The associated range for bank credit is 8-1/2 to 11-1/2 per cent. These ranges are subject to reconsideration at any time as conditions warrant.

"In the short run, the Committee seeks to achieve bank reserve and money market conditions that are broadly consistent with the longer-run ranges for monetary aggregates cited above, while giving due regard to developing conditions in domestic and international financial markets more generally. Early in the period until the next regular meeting, System open market operations shall be directed at attaining a weekly-average Federal funds rate slightly above the current level. Subsequently, operations shall be directed at maintaining the weekly-average Federal funds rate within the range of 7-3/4 to 8-1/4 per cent. In deciding on the specific objective for the Federal funds rate the Manager shall be guided mainly by the relationship between the latest estimates of annual rates of growth in the August-September period of M-1 and M-2 and the following ranges of tolerance: 4 to 8 per cent for M-1 and 6 to 10 per cent for M-2. If, giving approximately equal weight to M-1 and M-2, their rates of growth appear to be significantly above or below the midpoints of the indicated ranges, the objective for the funds rate shall be raised or lowered in an orderly fashion within its range. "If the rates of growth in the aggregates appear to be above the upper limit or below the lower limit of the indicated ranges at a time when the objective for the funds rate has already been moved to the corresponding limit of its range, 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, Wallich, and Winn. Votes against this action: Messrs. Partee and Willes.

from this action because he Mr. Partee dissented for growth in M-1 that was favored a 2-month range of tolerance by the majority. He did higher than the range advocated somewhat that a further move toward firmer money market not believe unless monetary expansion proved to be conditions was warranted especially in view of the marked distinctly on the high side, in real economic growth that now appeared to be in progress. slowing Mr. Willes dissented because he favored a more vigorous effort to curb the expansion of the monetary aggregates in light of current and expected inflationary pressures in the domestic economy and the weakness of the dollar in foreign exchange markets. He preferred to specify a 2-month range of tolerance for M-1, below the range agreed upon by the majority. Subsequent to the meeting, on September 8, the Committee held a telephone conference meeting pursuant to its decision on August 15 to consult further if the rates of growth in the monetary aggregates appeared to be above or below the limits of the Committee's ranges of tolerance for the August-September period and the Federal funds rate had already moved to the corresponding limit of its range. The latest staff projections suggested that M-1 and M-2 would grow at annual rates of 9.0 and 11.3 per cent, respectively, over the August-September period; the ranges of

tolerance established at the August 15 meeting were 4 to 8 per cent for M-1 and 6 to 10 per cent for M-2. The Manager had been aiming for a funds rate of about 8-1/4 per cent, the top of the range that the Committee had specified at its August meeting, and the average rate in each of the two latest statement weeks was at about that level. Against this background, the Committee decided to raise the upper limit of the range for the Federal funds rate to 8-1/2 per cent and to instruct the Manager to aim promptly for a weekly-average Federal funds rate of about 8-3/8 per cent. It was understood that the funds rate might be raised to the upper limit of the range if new data suggested that the aggregates were strengthening further, or be reduced slightly if such data suggested significant weakening from current projections. On September 8, 1978, the Committee modified the domestic policy directive adopted at its meeting of August 15, 1978, by increasing the upper limit of the 7-3/4 to 8-1/4 per cent range specified for the Federal funds rate to 8-1/2 per cent and by calling for operations directed at raising the weekly-average Federal funds rate promptly to 8-3/8 per cent. Votes for this action: Messrs. Miller, Volcker, Coldwell, Eastburn, Gardner, Jackson, Kimbrel, Partee, Willes, and Winn. Votes against this action: None. Absent and not voting: Messrs. Baughman and Wallich (Mr. Kimbrel voted as alternate for Mr. Baughman.)