April 17, 1979 FOMC Record of Policy Actions

FOMC minutes

following a sharp increase in the fourth quarter of 1978, and the advance in industrial output slowed appreciably. Growth in employment remained strong in the quarter, however, and the unemployment rate in March, at 5.7 percent, was virtually unchanged from its level in late 1978 and the first two months of 1979. Over recent months, broad measures of prices have increased at a faster pace than during 1978, and the index of average hourly earnings has continued to rise rapidly. The trade-weighted value of the dollar against major foreign currencies has risen over the past four weeks, with the dollar showing particular strength against the yen, the Swiss franc, and the mark. The U.S. trade deficit in February was about half the size of the large deficit in January, but the average for the two months was above the monthly average in the fourth quarter of 1978. M-1 increased slightly in March after having declined in both January and February. With market interest rates continuing high, inflows of the interest bearing deposits included in M-2 and M-3 remained at reduced levels, despite substantial flows into money market certificates at both commercial banks and nonbank thrift institutions, and the broader monetary aggregates continued to grow at relatively slow rates. From the fourth quarter of 1978 to the first quarter of 1979, M-1 declined at an annual rate of about 2-1/2 percent, in part because of the effects of the growth of the automatic transfer service, and M-2 and M-3 grew at rates of about 1-1/2 percent and 4-1/2 percent respectively. The behavior of all three monetary aggregates was affected by shifts of funds from deposits to money market mutual funds and other liquid assets. Since mid-March, market interest rates generally have risen somewhat, on balance. Taking account of past and prospective, developments 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 aggregates cited above, while giving due regard to the program for supporting the foreign exchange value of the dollar and to developing conditions in domestic financial markets. Early in the period before the next regular meeting, System open market operations are to be directed at maintaining the weekly average federal funds rate at about the current level. Subsequently, operations shall be directed at maintaining the weekly average federal funds rate within the range of 9-3/4 to 10-1/2 percent. 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 April-May period of M-1 and M-2 and the following ranges of tolerance: 4 to 8 percent for M-1 and 4 to 8-1/2 percent for M-2. If, with approximately equal weight given to M-1 and M-2, their rates of growth appear to be close to or beyond the upper or lower limits of the indicated ranges, the objective for the funds rate is to 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 will promptly notify the Chairman, who will then decide whether the situation calls for supplementary instructions from the Committee.

Votes for this action: Messrs. Miller, Balles, Black, Kimbrel, Mayo, Partee, and Mrs. Teeters. Votes against this action: Messrs. Volcker, Coldwell, and Wallich. Messrs. Volcker, Coldwell, and Wallich dissented from this action because they continued to favor a somewhat more restrictive policy posture, in view of strong inflationary forces reinforced by pressure on capacity in some industries. They believed that, despite uncertainty about prospects for economic activity later this year, some additional firming in money market conditions at this time would help in limiting inflationary pressures by curbing inflationary expectations quickly. On April 27 the Committee held a telephone conference to review the situation and to consider whether supplementary instructions were needed. However, no change was made in the domestic policy directive adopted at the meeting on April 17. 2. Authorization for foreign currency operations On May 9 the Committee voted to amend paragraph 5 of the authorization for foreign currency operations, effective immediately, to authorize purchases of U.S. Government securities from foreign central banks under agreements for repurchase of such securities within 30 calendar days, when appropriate in connection with arrangements to provide investment foreign currency holdings. Paragraph 5 as amended read as facilities for follows:

5. Foreign currency holdings shall be invested insofar as practicable, considering needs for minimum working balances. When appropriate in connection with arrangements to provide investment facilities for foreign currency holdings, U.S. Government securities may be purchased from foreign central banks under agreements for repurchase of such securities within 30 calendar days. Votes for this action: Messrs. Miller, Volcker, Balles, Black, Coldwell, Kimbrel, Mayo, Partee, Mrs. Teeters, and Mr. Wallich. Votes against this action: None. This action was taken on the recommendation of the Manager of the System Open Market Account to provide an additional investment mechanism for System balances of foreign currencies. The mechanism involved (1) a transaction with a foreign central bank in which the System would sell a foreign currency spot and buy it forward; and (2) a repurchase agreement in which the System would acquire U.S. Treasury securities from the foreign central bank for the same period of time involved in the foreign currency transaction.