July 11, 1979 FOMC Record of Policy Actions

FOMC minutes

relationship between the maximum rates that commercial banks and savings and loan associations may pay on money market certificates. At the conclusion of the discussion the Committee decided that ranges of tolerance for the annual rates of growth in M-1 and M-2 over the July-August period should be 2-1/2 to 6-1/2 percent and 6-1/2 to 10-1/2 per cent respectively. The Manager was instructed to direct open market opera tions initially toward maintaining the weekly average federal funds rate at level, represented by a rate of 10-1/4 percent. Sub about the current sequently, if the two-month growth rates of M-1 and M-2 appeared to be close to or beyond the upper or lower limits of the indicated ranges, 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. 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 the Committee to consider the need for supplementary instructions upon 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 that real output of goods and services declined somewhat in the second quarter, as slackening in demands was intensified by reduced supplies and sharply higher prices of motor fuels. During the quarter, the dollar value of retail sales declined, and in real terms, sales in June were substantially below those of last December. Growth in nonfarm payroll employment slowed during the quarter to a pace considerably below that in the preceding six months, but the unemployment rate in June, at 5.6 percent, was somewhat lower than earlier in the year.

production recovered in May, after having declined Industrial large part because of a work stoppage. Over the in April in first half of this year, broad measures of prices increased at a much faster pace than during 1978, although producer prices in the second quarter. The rise in the index of foods declined of average hourly earnings has slowed in recent months. Downward pressure on the dollar in foreign exchange markets emerged in mid-June after several months of strength, and since then the trade-weighted value of the dollar against major foreign currencies has declined about 3 percent. The U.S. trade deficit for April and May combined widened some what from the first-quarter rate. M-1 expanded sharply in June, after having increased little in May, and M-2 and M-3 also grew rapidly. Inflows of interest-bearing deposits included in M-2 grew rapidly in June, as net flows into money market certificates at commercial banks expanded further and savings deposits increased for the first time since last September. At non bank thrift institutions, inflows of deposits picked up from the sharply reduced pace in May. On a quarterly average basis, M-1 grew at an annual rate of about 7-1/2 percent in the second quarter, compared with a decline at a rate of about 2 percent in the first quarter; M-2 and M-3 grew at rates of about 8-1/2 percent and 7-3/4 percent respectively in the second quarter, compared with rates of about 1-3/4 percent and 4-3/4 percent-in the first quarter. Market interest rates in general have declined substantially over the past several weeks, but mortgage interest rates have risen further. 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. The Committee agreed that these objec tives 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 same ranges that had been established in February. Having established the range for M-1 in February on the assumption that expansion of ATS and NOW accounts would dampen growth by about 3 percentage points over the year, the Committee also agreed that actual growth in M-1 might vary in relation to its range to the extent of

any deviation from that estimate. The associated range for bank credit is 7-1/2 to 10-1/2 percent. The Committee antic ipates that for the period from the fourth quarter of 1979 to the fourth quarter of 1980, growth may be within the same ranges, depending upon emerging economic conditions and appro priate adjustments that may be required by legislation or judicial developments affecting interest-bearing transactions accounts. These ranges will be reconsidered at any time as conditions warrant. In the short run, the Committee seeks to achieve bank reserve and money market conditions that are broadly consis tent 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, opera tions 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 July-August period of M-1 and M-2 and the following ranges of tolerance: 2-1/2 to 6-1/2 percent for M-1 and 6-1/2 to 10-1/2 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 indi at a time when the objective for the funds rate cated ranges 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 instruc tions from the Committee. Votes for this action: Messrs. Miller, Volcker, Balles, Black, Coldwell, Kimbrel, Mayo, Partee, Rice, Mrs. Teeters, and Mr. Wallich. Votes against this action: None.

About a week after the meeting, on July 19, projections suggested that over the July-August period M-1 would grow at an annual rate moderately above the upper limit of the range of 2-1/2 to 6-1/2 percent that had been specified by the Committee and that M-2 would grow at a rate about equal to the upper limit of its range of 6-1/2 to 10-1/2 percent; in those circum stances, the Manager began to aim for a weekly average federal funds rate a. about the 10-1/2 percent upper limit of its range. On July 27, with the projections suggesting that growth of both M-1 and M-2 over the July-August period would exceed the upper limits of their ranges and with the objec tive for the federal funds rate at the upper limit of its range, the Committee voted to modify the directive adopted at the meeting on July 11. Specifically, the Committee raised the upper limit of the intermeeting range for the federal funds rate to 10-3/4 percent and instructed the Manager to aim for a rate within a range of 10-1/2 to 10-3/4 percent, depending on subsequent behavior of the monetary aggregates, on conditions in foreign exchange markets, and on the current Treasury financing. On July 27, the Committee modified the domestic policy directive adopted at its meeting on July 11, 1979, by raising the upper limit of the intermeeting range for the federal funds rate to 10-3/4 percent and by instructing the Manager to aim for a weekly average rate within a range of 10-1/2 to 10-3/4 percent, depending on subsequent projections of growth of M-1 and M-2 over the July-August period, on conditions in foreign exchange markets, and on the current Treasury financing. Votes for this action: Messrs. Miller, Volcker, Black, Coldwell, Partee, Rice, Wallich, Guffey, Roos, and Winn. Vote against this action: Mrs. Teeters. Absent: Messrs. Balles, Kimbrel, and Mayo. (Messrs. Guffey, Roos, and Winn voted as alternates for Messrs. Balles, Kimbrel, and Mayo respectively.)