May 22, 1979 FOMC Record of Policy Actions

FOMC minutes

the objective for the funds rate was to be raised or lowered in an orderly fashion within a range of 9-3/4 to 10-1/2 percent, although it was understood that a reduction in the rate below 10 percent would not be sought until the Committee had an opportunity for further consultation. It was also agreed that in assessing the behavior of the aggregates, the Manager should give approximately equal weight to M-1 and M-2. As is customary, it was understood that the Chairman might call upon the Committee to consider the need for supplementary instructions before the next scheduled meeting if significant inconsistencies appeared to be developing among the Committee's various objectives. The following domestic policy directive was issued to the Federal Reserve Bank of New York: The information reviewed at this meeting suggests a moderate pickup in growth of real out put of goods and services in the current quarter from the sharply reduced pace in the first quarter, when public and private construction activity was adversely affected by unusually severe weather. In April, however, industrial production declined and growth in nonfarm payroll employment slowed, in large part owing to effects of a work stoppage in the trucking industry early in the month. The unemployment rate, at 5.8 percent, remained at about the level prevailing earlier in the year. The dollar value of total retail sales rose somewhat in April, although apparently by less than the increase in average prices. 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. Demand for the dollar has continued strong in exchange markets over the past five weeks, and the trade-weighted value of the dollar against major foreign currencies has risen further. The U.S. trade deficit declined further in March and was slightly lower in the first quarter as a whole than in the fourth quarter of 1978.

M-1 expanded sharply in April, after having declined in the first quarter, and M-2 and M-3 grew rapidly. The interest-bearing component of M-2 also grew rapidly, following several months of slow growth, as net flows into money market certificates at commercial banks increased while outflows of savings deposits slowed. At nonbank thrift institutions, net flows into money market certifi cates moderated, and overall inflows of funds receded from the already reduced pace of the first quarter. Since mid-April, short-term market interest rates have changed little, on balance; most longer-term rates have increased. 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 inter national transactions. At its meeting on February 6, 1979, 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 per cent, 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 May-June period of M-1 and M-2 and the following ranges of tolerance: 0 to 5 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, Volcker, Black, Coldwell, Kimbrel, Mayo, and Mrs. Teeters. Votes against this action: Messrs. Balles, Partee, and Wallich. Messrs. Balles and Partee dissented from this action in view of indications that a cyclical peak might be near at hand. Thus, they favored a less restrictive policy posture, especially in view of the delayed impact of policy changes on the economy. In the present uncertain environment, they believed that some prompt easing in money market conditions, along with a greater emphasis on the behavior of the monetary aggregates in guiding the conduct of operations, would reduce the risk of a continuing shortfall in monetary growth and would tend to provide needed support to the economy later in the year. Mr. Wallich dissented from this action because, in view of the strong inflationary pressures in the economy, he continued to favor a more

posture. Believing that inflationary expectations restrictive policy in recent months while-interest rates had changed little, had increased in money market conditions would have he thought that additional firming and would have little effect on a favorable effect on such expectations the course of real output. on June 15, incoming data indicated that Subsequent to the meeting, rapid rates in early June, and M-1 and M-2 were growing at exceptionally for the May-June period both monetary aggregates projections suggested that would grow at annual rates above the upper limits of the ranges that had been specified by the Committee. Since the meeting on May 22 the Manager for a weekly average federal funds rate of 10-1/4 percent. had been aiming The behavior of the aggregates would have called for an increase in the the 10-1/2 percent upper limit of its objective for the funds rate toward specified range. However, in view of many indications of weakening in economic activity, the difficulties of interpreting the behavior of the aggregates in the light of these circumstances, the condition of markets, and the general uncertainty about the economic outlook, financial Chairman Miller recommended that the Manager be instructed to continue to aim for a federal funds rate of about 10-1/4 percent. On June 15, the Committee modified the domestic policy directive adopted at its meeting on May 22, 1979, to call for open market operations directed at maintaining the weekly average federal funds rate at about 10-1/4 percent. Votes for this action: Messrs. Miller, Balles, Black, Kimbrel, Mayo, Partee, Mrs. Teeters, and Mr. Timlen. Vote against this action: Mr. Coldwell. Absent: Messrs. Volcker and Wallich. (Mr. Timlen voted as alternate for Mr. Volcker.)