August 14, 1979 FOMC Record of Policy Actions: Full Text
FEDERAL RESERVE press release For Use at 4:10 p.m. September 21, 1979 The Federal Reserve Board and the Federal Open Market Committee today released the attached record of policy actions taken by the Federal Open Market Committee at its meeting on August 14, 1979. This record also includes policy actions taken during the period between the meeting on August 14, 1979, and the next regularly scheduled meeting held on September 18, 1979. Such records for each meeting of the Committee are made available a few days after the next regularly scheduled meeting and are published in the Federal Reserve Bulletin and the Board's Annual Report. The summary descriptions of economic and financial conditions they contain are based solely on the information that was available to the Committee at the time of the meeting. Attachment
OF POLICY ACTIONS RECORD THE FEDERAL OPEN MARKET COMMITTEE OF Meeting held on August 14, 1979 1. Domestic policy directive suggested that real reviewed at this meeting The information to decline in the current and services was continuing output of goods estimates of the Commerce Department, quarter; according to preliminary rate of 3.3 percent in the second output had fallen at an annual real by the fixed-weight price index quarter. Average prices, as measured product, appeared to be rising at an annual for gross domestic business percent that had been estimated for the second rate close to the 10-1/2 quarter. suggested some further contraction in economic Staff projections activity and then an upturn beginning in 1980. Over the year ahead the rise in average prices was projected to moderate a little. The rate of unemployment was expected to increase substantially. The dollar value of retail sales edged up in July, but in real terms such sales were estimated to be about 5-1/2 percent below their December 1978 peak. A sizable decline in sales of new automobiles contributed substantially to the recent weakness in retail sales. At the end of July, dealers' stocks of unsold cars, particularly of the less fuel-efficient models, were exceptionally large. Growth in nonfarm payroll employment slowed considerably further in July after having expanded at a much reduced pace during the second quarter. In manufacturing, employment declined for the fourth month in a row and the average workweek remained at the reduced level of
May and June. However, the unemployment rate, at 5.7 percent, stayed within the narrow range that has prevailed since the beginning of the year. The index of industrial production declined 0.3 percent in June, and available data suggested a further small decline in July to a level close to that of December 1978. The weakness in June and July was dominated by reduced output of consumer durable goods, especially motor vehicles. Manufacturers' new orders for nondefense capital goods rose moderately in June but remained below their March peak. Contract awards for commercial and industrial buildings--measured in terms of floor spacedeclined for the fourth consecutive month. Housing starts rose further in June but, at an annual rate of about 1.9 million, were still moderately lower than in 1977 and 1978. Sales of both new and existing single-family homes fell substantially in June. Producer prices of finished goods and of materials rose sharply further in July, after a much more rapid rate of increase over the first half of 1979 than during 1978. In July the increases continued to be especially pronounced in energy-related items. Prices of consumer finished foods were unchanged, after having declined in the previous three months. However, producer prices of crude foods and animal feeds, which had also declined during the second quarter, rose substantially.
In June consumer prices continued to increase rapidly. The rise in energy prices accelerated further and increases in homeownership costs remained large. The rise in food prices moderated further, however, following especially sharp increases during the early months of the year. Over the first half of 1979, consumer prices rose at an annual rate of about 13-1/4 percent, compared with 9 percent in 1978. In July the rise in the index of average hourly earnings of private nonfarm production workers picked up to an annual rate of about 8-1/2 percent, following a marked slowing in the advance during May and June. Over the first seven months of the year the rise was at an annual rate of 7-1/2 percent compared with 8-1/2 percent during 1978. In the nonfarm business sector, the advance in total compensation per manhour moderated in the second quarter from the very rapid pace in the first quarter, which had been affected by increases in social security taxes at the beginning of the year. The rise in unit labor costs was as rapid as in the first quarter, however, as output per manhour declined significantly further. In foreign exchange markets the trade-weighted value of the dollar against major foreign currencies declined somewhat further in the second half of July, and central banks made additional net purchases of dollars. The dollar recovered subsequently, but it was still about 3-1/2 percent June. The U.S. trade deficit widened between the below its level in early A sizable increase in the value of oil and other first and second quarters. imports exceeded the rise in nonagricultural exports.
outstanding at U.S. commercial banks, Expansion of total credit picked up in June, moderated in July to about the April-May pace. which had in July after an acceleration in June. Growth in loans also moderated sizable amounts to their holdings of securities, Banks continued to add Growth in commercial paper issued especially U.S. government obligations. strong second-quarter pace, owing in by nonfinancial firms exceeded the part to large sales by foreign issuers. The monetary aggregates--M-1, M-2, and M-3--continued to expand rapidly in July. Growth in M-1, at an annual rate of about 10 percent, was moderately lower than in June but close to the average pace during the second quarter. Inflows to commercial banks of interest-bearing deposits included in M-2 increased slightly in July. Net inflows of funds to nonbank thrift institutions moderated somewhat, despite a pickup in net issuance of money market certificates by these institutions. At its meeting on July 11, the Committee had decided on ranges of tolerance for the annual rates of growth in M-1 and M-2 during the July-August period of 2-1/2 to 6-1/2 percent and 6-1/2 to 10-1/2 percent respectively. The Committee had agreed that early in the intermeeting period the Manager of the System Open Market Account should continue to direct operations toward maintaining the weekly average federal funds rate at around 10-1/4 percent. Subsequently, if the two-month growth rates of M-1 and M-2, given approximately equal weight, 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.
on July 19, projections week after the meeting, About a in M-1 would be period growth that over the July-August suggested the Committee and specified by limit of the range above the upper the upper limit of its range. in M-2 would about equal that growth began to aim for a weekly average In those circumstances, the Manager percent upper limit of its range. funds rate at about the 10-1/2 federal an increase in Federal Reserve Board of Governors announced On July 20 the from 9-1/2 to 10 percent. Bank discount rates suggesting that over the two On July 27, with projections exceed the upper limits of growth of both M-1 and M-2 would month period the federal funds rate at the ranges and with the objective for their the Committee voted to raise the upper limit upper limit of its range, rate to 10-3/4 percent and instructed the of the range for the funds aim for a rate within a range of 10-1/2 to 10-3/4 percent. Manager to Over the remainder of the intermeeting period the funds rate averaged just under 10-3/4 percent. Short-term market rates in general rose during the intermeeting period. In late July most banks raised their loan rate to prime business borrowers from 11-1/2 to 11-3/4 percent. In long-term debt markets, however, interest rates changed little during the period, reflecting a relatively light schedule of new corporate and municipal bond offerings and also reactions to further evidence of a weakening economy. In home mortgage markets, yields on new mortgage commitments declined slightly. In the Committee's discussion of the economic situation and outlook, none of the members expressed disagreement with the staff appraisal that real gross national product was continuing to decline in
the current quarter. However, members expressed considerable uncertainty about the duration and extent of the decline in activity. On the one hand, it was suggested that a substantial decline in consumer spending--generated by high consumer debt and low consumer confidence as well as by energy problems and inflation--could have a major effect on business spending for plant and equipment. Concurrent weakness in those two sectors could quickly produce an unwanted accumulation of business inventories, a cumulative curtailment in output, and a sharp rise in unemployment. On the other hand, it was observed, certain elements in the current situation suggested that the curtailment in output could be limited to modest proportions. For example, prices of common stocks on the average had been rising, in contrast with the more usual decline associated with the onset of recession, and various measures of risk premiums in markets for debt instruments had remained low by historical standards. Moreover, growth of the monetary aggregates had strengthened in recent months after a period of weakness, whereas generally in recession growth had weakened and then remained weak. Members continued to express great concern about inflation. It was observed that for a long period elements in the economic situation had seemed to justify expectations of a reduction in the rise in prices. Such expectations had been disappointed. Moreover, little reduction could be expected in the short run because recent increases in energy prices had not yet fully worked through the price structure. It was
noted that the decline in the rate of inflation projected for the quarters immediately ahead was small, and much smaller than that associated with the previous recession. Thus, inflation might still be at a high rate when economic activity turned up again. Inflationary expectations appeared to have worsened in the sense that, more than ever before, consumers and businessmen seemed to take the inflationary environ ment into account in making spending and investing decisions. In considering policy for the period immediately ahead, Committee members focused on the problems posed by emerging recession and its potential for substantial increases in unemployment, concurrent with strong monetary growth, high actual and expected rates of inflation, and an exposed position of the dollar in foreign exchange markets pending anticipated improvement in the U.S. foreign trade and current accounts. Any policy course in these circumstances necessarily involved unusual risks: prompt pursuit of a policy aimed at moderating the effects of the curtailment in output could be perceived as exacerbating inflation and thus could have perverse effects on economic activity and employment; a policy directed toward moderating inflation and lending support to the dollar in the foreign exchange markets could risk intensifying the recession. There was little disagreement with the proposition that for the near term modest measures should be taken to direct policy toward slowing monetary aggregates. Control of monetary growth was regarded growth of the expectations of a decline in the rate of inflation as essential to restore It was suggested that public confidence in the over a period of time.
reducing inflation would direct monetary policy toward determination to of long-term interest rates influence on the course have a constructive and it might also be an on sentiment in foreign exchange markets, and Should developments over the element in wage and price determinations. of policy measures aimed at reversing months ahead suggest the desirability would be more effective in decline in output, moreover, such measures the in the government's adherence to the fundamental an environment of confidence objective of reducing inflation. directed toward restraint, it was In support of modest measures policy recently had not been so restrictive as it suggested that monetary growth since the beginning of the year had might have appeared. Monetary greater than that indicated by M-1, owing to rapid been considerably expansion in close substitutes for demand deposits and currency. In addition, the increase in interest rates had been less than that in expected rates of inflation. On the other hand, it was noted that interest rates were close to historic highs. Some doubt was expressed, moreover, that further restraint could have a significant effect on inflation, particularly in view of the role of energy in the rapid rate of increase in prices recently. In the face of clear evidence of weakening in economic activity, it was observed, the need to balance the objective of containing the recession with the goal of moderating inflation called for a steady policy for the time being. In considering policy specifications for the period immediately ahead, the Committee took note of a staff analysis suggesting that the
and other influences, including growth rate of nominal GNP current precautionary balances by the a temporary accumulation of possibly were tending to support in response to unusual uncertainties, public assumption of continuance of prevailing the demand for money. On the both M-1 and M-2 over the therefore, growth of money market conditions, be high relative to the period most likely would August-September could be expected to slow longer-run ranges, although growth Committee's the rapid rates of recent months. substantially from discussion of policy, the Committee At the conclusion of its for Domestic Operations to direct open decided to instruct the Manager toward an increase in the weekly average market operations initially rate to about 11 percent. Subsequently, the objective for federal funds raised or lowered in an orderly fashion within the funds rate was to be a range of 10-3/4 to 11-1/4 percent, if M-1 and M-2 appeared to be growing over the August-September period at rates close to or beyond the upper or lower limits of the ranges specified for those monetary aggregates. The members decided that the two-month ranges of tolerance for the annual rates of growth in M-1 and M-2 should be 4 to 8 percent and 7 to 11 percent respectively. They 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 that real output of goods and services is continuing to decline in the current quarter, while prices on the average are continuing to rise rapidly. In July the dollar value of retail sales edged up; in real terms, sales were still substantially below those of last December. Growth in nonfarm payroll employment slowed considerably further, but the unemployment rate, at 5.7 percent, remained within the narrow range prevailing since the beginning of the year. Industrial production declined in June, and it apparently slackened further in July to about the level of last December. So far this year, broad measures of prices have increased at a much faster pace than during 1978, although producer prices of foods have declined since March. The rise in the index of average hourly earnings, which had slowed in May and June, picked up in July. The trade-weighted value of the dollar against major foreign currencies declined somewhat further in the second half of July, and although it subsequently recovered, it remained below its level of early June. The U.S. trade deficit in the second quarter was larger than in the previous quarter, reflecting largely the significant rise in the price and value of oil imports. Growth of M-1, M-2, and M-3 remained rapid in July. Inflows of interest-bearing deposits included in M-2 were slightly stronger than in June. At nonbank thrift institutions, inflows of deposits declined somewhat. Short-term market interest rates have risen over recent weeks, while long-term rates have changed little on balance. An increase in Federal Reserve discount rates from 9-1/2 to 10 percent was announced on July 20. Taking account of past and prospective developments in employment, unemployment, production, investment, real income, productivity, international trade and payments, and prices, the Federal Open Market Committee seeks 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. At
its meeting on July 11, 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 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 anticipates 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 appropriate 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 consistent with the longer-run ranges for monetary aggregates cited above, while giving due regard to developing conditions in foreign exchange and domestic financial markets. Early in the period before the next regular meeting, System open market operations are to 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 10-3/4 to 11-1/4 percent. In deciding on the specific objective for the federal funds rate the Manager for Domestic Operations 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 percent for M-1 and 7 to 11 percent for M-2. If rates of growth of M-1 and M-2, given approximately equal weight, 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 be beyond the upper or lower limits of the indicated to a time when the objective for the funds rate ranges at to the corresponding limit of has already been moved its range, the Manager shall promptly notify the will then decide whether the situation Chairman, who instructions from the Committee. calls for supplementary Votes for this action: Messrs. Volcker, Balles, Coldwell, Kimbrel, Mayo, Schultz, Mrs. Teeters, Messrs. Partee, Wallich and Timlen. Votes against this action: Messrs. Black and Rice. (Mr. Timlen voted as an alternate member.) Mr. Black dissented from this action because, in view of the rapid monetary growth in recent months, he preferred to specify lower ranges for growth of M-1 and M-2 over the August-September period in order to increase the probability of holding growth within the Committee's longer-run ranges. While he agreed that open market operations should be directed toward attaining a slight increase in the federal funds rate initially in the coming intermeeting period, he believed that the directive adopted by the Committee allowed for too rapid monetary growth before a further increase in the funds rate would be triggered. Mr. Rice dissented from this action because he believed that an additional firming in money market conditions at this time, to restrict growth of money and credit, in the face of the evidence of weakening in economic activity would risk deepening the recession. In his view, the effort to balance the goal of reducing the rate of inflation with the objective of minimizing the impact of the recession called for a policy directed toward the maintenance of prevailing money market conditions unless growth of the monetary aggregates over the August-September period
the rates currently or slower than faster to be substantially appeared expected. to the meeting, in late August, incoming data Subsequent rapid rates in August. On M-1 and M-2 were growing at indicated that period suggested that 30, projections for the August-September August well above the upper limit of would be at an annual rate growth of M-1 by the Committee and that growth of the range that had been specified would be at about the upper limit of its range. Over the preceding M-2 for Domestic Operations had been aiming for a weekly week, the Manager rate approaching the 11-1/4 percent upper limit of average federal funds its specified range, and in the statement week ending August 29, the rate averaged 11.16 percent. In these circumstances, Chairman Volcker recommended that the upper limit of the range for the funds rate be raised to 11-1/2 percent, but with the understanding that not all of the additional leeway would be used immediately; use of the leeway would depend on subsequent behavior of the monetary aggregates and on developments in foreign exchange markets. The Committee voted to amend the domestic policy directive in accordance with the Chairman's recommendation. On August 30, 1979, the Committee modified the domestic policy directive adopted at its meeting on August 14 by raising the upper limit of the intermeeting range for the federal funds rate to 11-1/2 percent and by instructing the Manager for Domestic Operations not to raise the objective for the weekly average funds rate to the new upper limit immediately but to be guided by the subsequent behavior of the monetary aggregates and by developments in foreign exchange markets.
Votes for this action: Messrs. Volcker, Balles, Black, Coldwell, Kimbrel, Mayo, Partee, Schultz, Mrs. Teeters, Messrs. Wallich and Timlen. Vote against this action: Mr. Rice. (Mr. Timlen voted as an alternate member.) 2. Authorization for Foreign Currency Operations The Committee approved an increase from $360 million to $700 million in the System's swap arrangement with the Bank of Mexico and the corresponding amendment to paragraph 2 of the authorization for foreign currency operations, effective August 17, 1979. With this change paragraph 2 read as follows: The Federal Open Market Committee directs the Federal Reserve Bank of New York to maintain reciprocal currency arrangements ("swap" arrangements) for the System Open Market Account for periods up to a maximum of 12 months with the following foreign banks, which are among those designated by the Board of Governors of the Federal Reserve System under Section 214.5 of Regulation N, Relations with Foreign Banks and Bankers, and with the approval of the Committee to renew such arrangements on maturity: Amount of arrangement (millions of Foreign bank dollars equivalent) Austrian National Bank 250 National Bank of Belgium 1,000 Bank of Canada 2,000 National Bank of Denmark 250 Bank of England 3,000 Bank of France 2,000 German Federal Bank 6,000 Bank of Italy 3,000 Bank of Japan 5,000 Bank of Mexico 700 Netherlands Bank 500 Bank of Norway 250 Bank of Sweden 300 Swiss National Bank 4,000 Bank for International Settlements: Dollars against Swiss francs 600 Dollars against authorized European currencies other than Swiss francs 1,250
Votes for this action: Messrs. Volcker, Balles, Black, Coldwell, Kimbrel, Mayo, Partee, Rice, Schultz, Mrs. Teeters, Messrs. Wallich and Timlen. Votes against this action: None. (Mr. Timlen voted as an alternate member.) This action was taken in light of the increase in recent years in the scale of economic and financial transactions between the United States and Mexico. 3. Authorization for Domestic Open Market Operations At this meeting the Committee amended paragraph 2 of the authorization for domestic open market operations, effective immediately, to take account of amendments to the Federal Reserve Act enacted in June 1979. The amendments extended for two years the authority for lending to the Treasury through direct purchases of securities, under more restrictive conditions than formerly, and for the first time provided for an alternative means of assisting the Treasury in meeting short-term cash needs in more routine circumstances. the legislation provided authority for the System to Specifically, purchase securities directly from the Treasury in unusual and exigent circumstances, for renewable periods not to exceed thirty days, when authorized by the Board of Governors pursuant to an affirmative vote of The legislation also provided authority for not less than five members. and rules and regulations of the Federal the System, subject to the approval to the Treasury for sale in the Open Market Committee, to lend securities would be required to repurchase the securities open market. The Treasury not later than six months after the date of and return them to the System
of securities loaned to and purchased directly sale. The total amount Treasury at any one time may not exceed $5 billion. from the As amended, paragraph 2 read as follows: The Federal Open Market Committee authorizes and directs the Federal Reserve Bank of New York (or, under special circumstances, such as when the New York Reserve Bank is closed, any other Federal Reserve Bank) (a) to lend to the Treasury such amounts of securities held in the System Open Market Account as may be necessary from time to time for the temporary accommodation of the Treasury, under such conditions as the Committee may specify; and (b) to purchase directly from the Treasury for renewable periods not to exceed thirty days, when authorized by the Board of Governors of the Federal Reserve System pursuant to an affirmative vote of not less than five members, for its own account (with discretion, in cases where it seems desirable, to issue participations to one or more Federal Reserve Banks) such amounts of special short-term certificates of indebtedness as may be necessary from time to time for the temporary accommodation of the Treasury, provided that the rate charged on such certificates shall be a rate of 1/4 of 1 percent below the discount rate of the Federal Reserve Bank of New York at the time of such purchases and provided that the total amount of such certificates held at any one time by the Federal Reserve Banks shall not exceed $2 billion. Votes for this action: Messrs. Volcker, Balles, Black, Coldwell, Kimbrel, Mayo, Partee, Rice, Schultz, Mrs. Teeters, Messrs. Wallich and Timlen. Votes against this action: None. (Mr. Timlen voted as an alternate member.)
Also: Minutes of Actions