October 6, 1979 FOMC Record of Policy Actions

FOMC minutes

the immediate future than would otherwise occur. On the other hand, the emphasis on reserves also could be expected to produce a shift toward easier conditions in money markets more promptly whenever the demand for money and credit abated significantly in response to a weak ening in economic activity. The point was made that an easing in money market conditions under circumstances in which growth of monetary aggre gates was restrained, economic activity was weakening, and the rise in prices was moderating should not adversely affect inflationary expecta tions and the value of the dollar in foreign exchange markets. At the conclusion of the discussion and after full consideration of the advantages and disadvantages of alternative courses of action, the Committee agreed that in the conduct of open market operations over the remainder of 1979 the Manager for Domestic Operations should place primary emphasis on restraining expansion of bank reserves in pursuit of the Com mittee's objective of decelerating growth of M-1, M-2, and M-3 to rates that would hold growth of these monetary aggregates over the year from the fourth quarter of 1978 to the fourth quarter of 1979 within the Committee's ranges for that period. Specifically, the Committee instructed the Manager expansion of bank reserves to a pace consistent with growth to restrain from September to December at an annual rate on the order of 4-1/2 percent in M-1 and about 7-1/2 percent in M-2 and M-3, provided that in the period regular meeting the federal funds rate remained generally before the next of 11-1/2 to 15-1/2 percent. Because such rates of expansion within a range aggregates in the uppper part of their would result in growth of the monetary

for the year, the Committee also agreed that over the three-month ranges period somewhat slower growth would be acceptable. The Committee anticipated that the shift to an operating approach that placed primary emphasis on the volume of reserves would result in both a prompt increase and greater fluctuations in the federal was recognized that on particular days, or for several funds rate. It days, the federal funds rate might rise above or fall below the general limits established, and those limits were interpreted to apply to weekly also agreed that it would consider whether sup averages. The Committee if it appeared that operations to plementary instructions were needed achieve the necessary restraint in expansion of reserves would tend to federal funds rate within 1 percentage point of the upper maintain the its range of 11-1/2 to 15-1/2 percent. It was understood, more limit of decisions with respect to open market operations over, that the Committee's immediately ahead had implications for Federal Reserve Bank in the period discount rates. The following domestic policy directive was issued to the Federal Reserve Bank of New York: 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, Committee agreed that these objectives would be 1979, the M-1, M-2, and M-3 from the fourth furthered by growth of the fourth quarter of 1979 within ranges quarter of 1978 to

5 to 8 percent, and 6 to 9 percent of 1-1/2 to 4-1/2 percent, that had been established in respectively, the same ranges had been established on the basis February. The range for M-1 expansion of ATS and NOW accounts would of an assumption that about 3 percentage points over the year. It dampen growth by of such accounts will dampen growth now appears that expansion by about 1-1/2 percentage points over the year; thus, the equivalent range for M-1 is now 3 to 6 percent. 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 appro priate adjustments that may be required by legislation or judi cial 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 restrain expan sion of reserve aggregates to a pace consistent with deceleration in growth of M-1, M-2, and M-3 in the fourth quarter of 1979 to rates that would hold growth of these monetary aggregates over the whole period from the fourth quarter of 1978 to the fourth quarter of 1979 within the Committee's longer-run ranges, provided that in the period before the next regular meeting the weekly average federal funds rate remains within a range of 11-1/2 to 15-1/2 percent. The Committee will consider the need for supple mentary instructions if it appears that operations to restrain expansion of reserve aggregates would maintain the federal funds rate near the upper limit of its range. 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 alter nate member.) On October 6, after the meeting of the Committee, the Board of Governors unanimously approved complementary actions also directed toward assuring better control over the expansion of money and bank credit and toward curbing speculative excesses in financial and commodity markets. Specifically, the Board approved an increase in Federal Reserve Bank dis count rates from 11 percent to 12 percent and established a marginal reserve

of managed liabilities in the total of 8 percent on increases requirement and branches of and U.S. agencies banks, Edge corporations, of member time include large-denomination banks. (Managed liabilities foreign than one year, Eurodollar borrowings, deposits with maturities of less and federal agency securi against U.S. Government repurchase agreements from institutions other than members ties, and borrowings of federal funds of the Federal Reserve System.) on October 22, 1979, the Committee held a tele Subsequently, to review the situation and to consider whether supple phone conference to the Manager were needed. Since October 6, expan mentary instructions sion of total reserves had exceeded the pace consistent with the Committee's objective for growth of the monetary aggregates during the fourth quarter. At the same time, the federal funds rate had begun fluctuating close to the upper limit of the 11-1/2 to 15-1/2 percent range established by the Com mittee. It was recognized that the desired restraint in the expansion of total reserves might involve continued pressure on money market conditions, including higher levels of member bank borrowings from the Federal Reserve than had been anticipated, as banks made orderly adjustments that would in time slow monetary growth. It was not clear, however, that retention of the 15-1/2 percent upper limit of the range for the federal funds rate would be inconsistent with the desired restraint on monetary growth. Moreover, unsettled conditions in financial markets also suggested no change in the upper limit of the range for the federal funds rate. Consequently, no change was proposed in the domestic policy directive issued at the meeting on October 6.