November 20, 1979 FOMC Record of Policy Actions

FOMC minutes

period; it was recognized that persistence of recent relationships might result in growth of M-2 at about the upper limit of its range. Specifically, the Committee instructed the Manager to restrain expansion of bank reserves to a pace thought to be consistent with growth on the average in November and December at an annual rate of about 5 percent in M-1 and 8-1/2 percent in M-2, provided that in the period before the next regular meeting the federal funds rate remained generally within a range of 11-1/2 to 15-1/2 percent. 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 declining in the current quarter, after the third-quarter rebound, and that prices on the average are continuing to rise rapidly. Retail sales, which had expanded sharply during the third quarter in both constant and current dollars, dropped in October. Industrial production remained near its midyear level. Nonfarm payroll employment rose considerably, after three months of little growth, but the unemployment rate increased from 5.8 to 6.0 percent. Producer prices of finished goods continued to rise rapidly in October, in part because of further sharp increases in energy items and the spreading effects of earlier increases in energy costs. The rise in the index of average hourly earnings during the first 10 months of the year was close to the rapid pace during 1978. On October 6 the Federal Reserve announced a series of complementary actions directed toward assuring control over the expansion of money and bank credit and toward curb ing speculative excesses in commodity and financial markets, including foreign exchange markets. The actions included an increase in Federal Reserve Bank discount rates from 11 per cent to 12 percent; establishment of a marginal reserve requirement on increases in the total of managed liabilities of member banks, Edge corporations,and U.S. agencies and branches of foreign banks; and a shift in the conduct of open market operations to an approach placing greater

supply of bank on the operations emphasis in day-to-day on confining short-term and less emphasis reserves federal funds rate. fluctuations in the on October 6, the down Following the announcement markets that dollar in the exchange pressure on the ward and by the end in September was reversed, had developed of the dollar against trade-weighted value of October the had risen about 3-1/2 percent. major foreign currencies value of the dollar declined, mid-November, however, the In Iran. The U.S. part developments concerning reflecting in in September as the cost foreign trade deficit increased deficit was somewhat lower imports rose, but the of oil for the second quarter. quarter as a whole than for the third in September and of M-1, which had accelerated Growth the third quarter as a whole, was exceptionally rapid in an annual rate of 2-1/2 percent. sharply in October to slowed deposits included in M-2 Expansion of interest-bearing in net flows into time deposits remained strong, as a rise to increased yields offset at commercial banks in response deposits. Inflows of deposits at a contraction in savings institutions slowed somewhat. Flows into nonbank thrift mutual funds accelerated. Growth of commer money market moderated in October; nevertheless, banks cial bank credit their reliance on the negotiable, large-denomina increased tion CD's and other managed liabilities that became subject to the marginal reserve requirement in the statement week beginning October 11. Both short- and long-term market interest rates have risen sharply on balance since the early October announcement of the System's policy actions, although most recently rates have declined; mortgage inter est rates have increased substantially further. 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 pres sures 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. The range for M-1 had been established

originally on the basis of an assumption that expansion of ATS and NOW accounts would dampen growth by about 3 percentage points over the year. It now appears that expansion of such accounts will dampen growth by about 1-1/2 percentage points over the year; thus after allow ance for the deviation from the earlier estimate, 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 per cent. 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 emerg ing 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 restrain expansion 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. If it appears during the period before the next meeting that the constraint on the federal funds rate is inconsistent with the objective for the expansion of reserves, the Manager for Domestic Operations is promptly to notify the Chairman who will then decide whether the situation calls for supple mentary instructions from the Committee. 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.) 2. Authorization for domestic open market operations On December 20, 1979, the Committee voted to increase from $3 billion to $4 billion the limit on changes between Committee meetings

in System Account holdings of U.S. government and federal agency securities specified in paragraph 1(a) of the authorization for domestic open market operations, effective immediately, for the period ending with the close of business on January 9, 1980. Votes for this action: Messrs Balles, Black, Coldwell, Kimbrel, Mayo, Partee, Rice, Schultz, Mrs. Teeters, Messrs. Wallich, and Timlen. Votes against this action: None. Absent and not voting: Mr. Volcker. (Mr. Timlen voted as an alternate member.) This action was taken on recommendation of the Manager for Domestic Operations, System Open Market Account. The Manager had advised that since the November meeting large-scale purchases of securities primarily to counter the effects of seasonal increases in currency in circulation had reduced the leeway for further purchases to about $500 million. It appeared likely that additional purchases would be required because projections indicated a need for further reserve-providing operations over the coming weeks.