February 6, 1979 FOMC Record of Policy Actions

FOMC minutes

if growth of M-1 and M-2 for the two-month period Committee agreed that appeared to be outside the indicated limits, the Manager was promptly to Chairman, who would then consult with the Committee to determine notify the whether the situation called for supplementary instructions. The following domestic policy directive was issued to the Federal Reserve Bank of New York: The information reviewed at this meeting suggests that in the fourth quarter of 1978 growth in real output of goods and services picked up sharply from the reduced rate in the third quarter. In December, as in the preced ing two months, the dollar value of total retail sales expanded substantially, and industrial production and nonfarm payroll employment rose considerably further. Employment continued to grow in January, and the unemployment rate, at 5.8 percent, was virtually the same as in the final months of 1978. Over recent months, broad measures of prices and the index of average hourly earnings have continued to rise rapidly. The trade-weighted value of the dollar against major foreign currencies has tended upward since the turn of the year, returning to about its level in mid-December prior to the OPEC announcement of increased oil prices. The U.S. trade deficit in the fourth quarter of 1978 was at about the same rate as in the second and third quarters. M-1 increased little in December and appears to have declined in January, in part because of the continuing effects of the introduction of the automatic transfer service (ATS) on November 1, and M-2 and M-3 grew at relatively slow rates. With market interest rates relatively high, inflows to banks of the interest bearing deposits included in M-2 slowed sharply, and inflows of deposits to nonbank thrift institutions slackened further. Over the year from the fourth quarter of 1977 to the fourth quarter of 1978, M-1, M-2, and M-3 grew about 7-1/4, 8-1/2, and 9-1/2 per cent, respectively. Most market interest rates have declined on balance in recent weeks.

Taking account of past and prospective develop ments in employment, unemployment, production, investment, real income, productivity, international trade and payments, and prices, it is the policy of the Federal Open Market Committee to foster monetary and financial conditions that will resist inflationary pressures while encouraging moderate economic expansion and contributing to a sustainable pattern of international transactions. The Committee agreed that these objectives would be furthered by growth of M-1, M-2, and M-3 from the fourth quarter of 1978 to the fourth quarter of 1979 within ranges of 1-1/2 to 4-1/2 percent, 5 to 8 percent, and 6 to 9 percent, respectively. The associated range for bank credit is 7-1/2 to 10-1/2 percent. These ranges will be reconsidered in July or 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 above, while giving due regard to the aggregates cited program for supporting the foreign exchange value of the dollar and to developing conditions in domestic financial markets. In the period before the next System open market operations are to be regular meeting, directed at maintaining the weekly average federal funds about the current level, provided that over the rate at annual rates of growth of M-1 February-March period the and M-2, given approximately equal weight, appear to be within ranges of 3 to 7 percent and 5 to 9 percent, If growth of M-1 and M-2 for the two respectively. appears to be outside the indicated limits, month period the Manager will promptly notify the Chairman, who will then consult with the Committee to determine whether the situation calls for supplementary instructions. Votes for this action: Messrs. Miller, Volcker, Baughman, Eastburn, Partee, Mrs. Teeters, Messrs. Wallich, Willes, and Mayo. Vote against this action: Mr. Coldwell. Absent: Mr. Winn. (Mr. Mayo voted as alternate for Mr. Winn.)

dissented from this action because he preferred to Mr. Coldwell direct open market operations early in the coming period toward a slight firming in money market conditions. He felt that the greatest danger intensification of inflationary pressures and that the currently was an longer-range prospects for inflation were unacceptable. Subsequent to the meeting, at the beginning of March, projections suggested that over the February-March period M-1 would grow at an annual below the lower limit of the range of 3 to 7 percent that rate moderately by the Committee and M-2 would grow at a rate just below had been specified the lower limit of its range of 5 to 9 percent. On March 2 the Committee held a telephone meeting to determine whether the situation called for supplementary instructions. In light of contradictory evidence concerning underlying trends in economic activity following the strong performance in the fourth quarter of 1978, Chairman Miller recommended that the Manager be instructed to continue to aim for a weekly average federal funds rate of or slightly higher. The members concurred in the Chairman's about 10 percent recommendation. By unanimous vote, the Committee modified the domestic policy directive adopted at its meeting on February 6, 1979, to call for continuance of open market operations directed toward maintaining the weekly average federal funds rate at about 10 percent or slightly above. Votes for this action: Messrs. Miller, Volcker, Black, Coldwell, Kimbrel, Mayo, Partee, Mrs. Teeters, Messrs. Wallich, and Guffey. Absent: Mr. Balles (Mr. Guffey voted as alternate for Mr. Balles.)

2. Authorization for domestic open market operations At this meeting the Committee voted to set a limit of $5 billion on changes between Committee meetings in holdings of U.S. Government and Federal agency securities specified in paragraph 1(a) of the authorization for domestic open market operations, effective for the period ending with the close of business on March 20, 1979. During the period since its meeting on December 19, 1978, the Committee had temporarily increased the limit specified in paragraph 1(a) in two steps, from $3 billion to $5 billion and subsequently to $6 billion until the close of business on February 6, 1979. The action to set the limit at $5 billion for the coming period was taken to provide flexibility for operations in view of the magnitude of float and other factors that might affect reserves in the weeks ahead and in view of the length of the interval until the next Committee meeting scheduled for March 20, 1979. Votes for this action: Messrs. Miller, Volcker, Baughman, Coldwell, Eastburn, Partee, Mrs. Teeters, Messrs. Wallich, Willes, and Mayo. Votes against this action: None. Absent: Mr. Winn. (Mr. Mayo voted as alternate for Mr. Winn.)