September 18, 1979 FOMC Record of Policy Actions

FOMC minutes

directive was issued to the The following domestic policy Federal Reserve Bank of New York: The information reviewed at this meeting suggests the third quarter real output of goods and services that in near the reduced level of the preceding quarter remained prices on the average continued to rise rapidly. and that the dollar value of retail sales In August, as in July, sales in real terms changed little expanded moderately, but and were substantially below those of last December. production dropped from the May-July level, Industrial because of sharp curtailments in output of motor largely and parts. Nonfarm payroll employment was unchanged; vehicles the unemployment rate rose from 5.7 percent to 6.0 percent, the narrow range in which it had fluctuated thus moving above since the beginning of the year. Producer prices of finished goods continued to rise rapidly in August, led by further large increases in energy items and a substantial advance in consumer foods following a significant decline over the preceding four months. The rise in the index of average hourly earnings over the first eight months of this year was moderately below the pace during 1978, but the increase in total hourly compensation in the nonfarm business sector has been about as rapid this year as last. The dollar came under downward pressure in foreign exchange markets in the last days of August and the early days of September, but its trade-weighted value against major foreign currencies has changed little on balance since mid-August. The U.S. trade deficit in July was sharply reduced from the average in the first half of the year. Growth of M-1, M-2, and M-3 was relatively rapid in August and early September, although not so rapid as in June and July. Market interest rates have risen appreciably over recent weeks. An increase in Federal Reserve discount rates from 10 to 10-1/2 percent was announced on August 16. 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 cited above, while giving due regard to aggregates 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 11-1/4 to 11-3/4 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 September-October period of M-1 and M-2 and the following ranges of tolerance: 3 to 8 percent for M-1 and 6-1/2 to 10-1/2 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 to be beyond the upper or lower limits 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 shall promptly notify the Chairman, who will then decide whether the situation calls for supplementary instructions from the Committee.

Votes for this action: Messrs. Volcker, Kimbrel, Mayo, Partee, Schultz, Mrs. Teeters, Messrs. Wallich, and Timlen. Votes against this action: Messrs. Balles, Black, Coldwell,and Rice. (Mr. Timlen voted as an alternate member.) Balles, Black, and Coldwell agreed with the majority Messrs. market operations should be directed toward attaining a slight that open in the federal funds rate initially in the coming intermeeting increase they dissented because they believed that, given the excessive period, but growth in recent months relative to the Committee's longer-run monetary by the Committee would allow for too rapid ranges, the directive adopted an additional increase in the objective for the monetary growth before funds rate would be triggered. To enhance the prospects for achieving the Committee's objective of restraining monetary growth they preferred, moreover, to provide leeway for a rise in the funds rate to an upper limit of 12 percent. Mr. Rice dissented from this action because he believed that an additional firming in money market conditions would intensify the developing weakness in economic activity and was unlikely to affect the rate of inflation favorably within six to nine months. In his judgment, monetary growth most likely would slow in the months immediately ahead even if current money market conditions were maintained, and growth of the monetary aggregates over the year ending in the fourth quarter of 1979 probably would fall within the Committee's longer-run ranges.

2. Authorization for domestic open market operations The Committee took note of paragraph 3 of the authorization for domestic open market operations, which authorizes the Reserve Banks to engage in the lending of U.S. government securities held in the System Open Market Account under such instructions as the Committee might specify from time to time. That paragraph had been added to the authorization on October 7, 1969, on the basis of a judgment by the Committee that such lending of securities was reasonably necessary to the effective conduct of open market operations and to the implementation of open market policies, and on the understanding that the authorization would be reviewed periodically. At this meeting the Committee concurred in the judgment of the Manager for Domestic Operations that the lending activity in question remained reasonably necessary and that, accordingly, the authorization should remain in effect subject to review in six months. 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.)