February 4–5, 1980 FOMC Record of Policy Actions

FOMC minutes

2/4-5/80 toward expansion of reserve aggregates consistent should be directed with growth over the first quarter of 1980 at an annual rate of about for M-1A and about 5 percent for M-1B, provided that 4-1/2 percent in the period until the next meeting the weekly average federal funds rate remained within a range of 11-1/2 to 15-1/2 percent. Consistent policy, in the Committee's view, the newly defined with this short-run M-2 should grow at an annual rate of about 6-1/2 percent over the first quarter. If the constraint on the federal funds rate appeared to be inconsistent with the objective for the expansion of reserves, the Manager for Domestic Operations was promptly to notify the Chairman who would then decide whether the situation called for supplementary instructions from the Committee. 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 expanded some what in the final quarter of 1979 and that prices on the average continued to rise rapidly. In December retail sales strengthened, industrial production edged up, and nonfarm payroll employment continued to rise, while private housing starts remained at the reduced level of November. Nonfarm payroll employment rose substantially further in January, but the unemployment rate rose from 5.9 to 6.2 percent. Producer prices of finished goods and consumer prices continued to rise rapidly toward the end of 1979, in part because of the spreading effects of earlier increases in energy costs. Over the past several months the rise in the index of average hourly earnings has remained close to the rapid pace recorded earlier in 1979.

2/4-5/80 -14- The trade-weighted value of the dollar against major foreign currencies changed little in January, and exchange market pressures were relatively slight in spite of increased international political tensions. The U.S. foreign trade deficit rose in December, in large part because of an increase in imports of petroleum. Growth of the major monetary aggregates, which had subsided in the final months of 1979, remained at reduced rates in January. Most market interest rates, especially long-term rates, have risen since the Committee's meeting in early January. Taking account of past and prospective economic developments, the Federal Open Market Committee seeks to foster monetary and financial conditions that will resist inflationary pressures while encouraging moder ate economic expansion and contributing to a sustain able pattern of international transactions. The Committee agreed that these objectives would be furthered by growth of M-1A, M-1B, M-2,and M-3 from the fourth quarter of 1979 to the fourth quarter of 1980 within ranges of 3 to 6, 4 to 6 , 6 to 9, and 6 to 9 percent respectively. The associated range for bank credit was 6 to 9 percent. In the short run, the Committee seeks expansion of reserve aggregates consistent with growth over the first quarter of 1980 at an annual rate of about 4 percent for M-1A and 5 percent for M-1B, provided that in the period before the next regular meeting the weekly average federal funds rate remains within a range of 11 to 15 percent. The Committee believes that, consistent with this short-run policy, M-2 as newly defined should grow at an annual rate of about 6 percent over the first quarter. 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 Chairmn who will then decide whether the situation calls for supplementary instructions from the Committee.

2/4-5/80 Votes for this action: Messrs. Volcker, Balles, Black, Kimbrel, Mayo, Partee, Rice, Schultz, Mrs. Teeters, and Mr. Timlen. Votes against this action: Messrs. Coldwell and Wallich. Timlen voted as an alternate member.) (Mr. Messrs. Coldwell and Wallich dissented from this action because a more restrictive policy for the period immediately ahead. they favored inflationary expectations had worsened in recent weeks Believing that for economic activity had strengthened, they thought that while prospects credit were too readily available and current levels of interest money and rates were not exerting sufficient restraint. Subsequent to the meeting, on February 22, available data suggested that M-1A and M-1B were growing at rapid rates in February, and in consequence the demand for bank reserves had strengthened considerably. The federal funds rate had risen to about 15 percent, and member bank borrowings had also in creased. To provide the Manager for Domestic Operations with additional scope for operations in these circumstances, Chairman Volcker recommended that the upper limit of the range of 11-1/2 to 15-1/2 percent specified for the federal funds rate be raised to 16-1/2 percent on a temporary basis until the situation could be reassessed. On February 22, the Committee modified the domestic policy directive adopted at its meeting on February 4-5, 1980, to raise the upper limit of the range for the federal funds rate to 16-1/2 percent. Votes for this action: Messrs. Volcker, Balles, Black, Kimbrel, Mayo, Partee, Rice, Schultz, Mrs. Teeters, Messrs. Wallich and Timlen. Votes against this action: None. Absent: Mr. Coldwell. (Mr. Timlen voted as alternate member.)

In the statement week ending March 5, the federal funds rate rose to an average of slightly more than 16-1/8 percent and member bank borrowings expanded further to a daily average of about $2-1/2 billion. On March 6 federal funds generally traded around 17 percent, despite sizable reserve-supplying operations by the System, and the Manager advised that in his opinion additional leeway above the existing upper limit of 16-1/2 percent was needed for operational flexibility in meeting reserve objectives. In late afternoon, Chairman Volcker recommended that the upper limit of the intermeeting range for the federal funds rate be raised to 17-1/2 percent, pending a discussion of the situation in a telephone con ference of the Committee to be held in the afternoon of the following day, and the Committee voted to approve the Chairman's recommendation. Votes for this action: Messrs. Volcker, Guffey, Morris, Partee, Rice, Roos, Schultz, Mrs. Teeters, Messrs. Wallich, Winn, and Timlen. Votes against this action: None. (Mr. Timlen voted as alternate member.) In the telephone conference held in the afternoon of March 7, the Committee voted to raise the upper limit of the intermeeting range for the federal funds rate to 18 percent, to provide greater opera tional flexibility in meeting reserve objectives. On March 7, the Committee further modified the domestic policy directive adopted at its meeting of February 4-5, 1980, to raise the upper limit of the range for the federal funds rate to 18 percent. Votes for this action: Messrs. Volcker, Guffey, Morris, Partee, Rice, Roos, Schultz, Mrs. Teeters, Messrs. Wallich, Winn, and Timlen. Votes against this action: None. (Mr. Timlen voted as alternate member.)