April 22, 1980 FOMC Record of Policy Actions

FOMC minutes

as with resistance to recession forces over time as well inflationary With respect to foreign exchange ary tendencies in the short run. that the possibility of down markets, the view was expressed with a relative decline ward pressure on the dollar in association rates would have to be faced sooner or later. On the in U.S. interest U.S. interest rates might already have been other hand, some decline in markets should in any event be reassured by the discounted, and exchange of monetary policy and the prospect for improvement over general thrust performance of the current account. It was also noted that time in the U.S. interest rates remained higher than key interest rates abroad. In light of the outlook for a somewhat lower federal funds rate in the weeks immediately ahead, most members believed it would be appro priate to reduce the upper limit of the current range, and several members suggested 19 percent for the new upper limit. Most members expressed a preference for retaining the current lower limit of 13 percent. At the conclusion of the discussion, the Committee agreed that open market operations in the period until the next meeting should con tinue to be directed toward expansion of reserve aggregates consistent with growth over the first half of 1980 at annual rates of 4-1/2 percent for M-1A and 5 percent for M-1B, or somewhat less, provided that in the intermeeting period the weekly average federal funds rate remained within a range of 13 to 19 percent. Consistent with this short-run policy, in the Committee's view, M-2 should grow at an annual rate of about 6-3/4 percent over the first half, and expansion of bank credit should slow in the months ahead to a pace compatible with growth over

as a whole within the range of 6 to 9 percent agreed upon. the year that conditions could arise that might It was generally recognized make desirable a review of the situation in advance of the next meeting scheduled for May 20. In any case, if it appeared regular constraint on the federal funds rate was inconsistent with that the 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 economic activity turned down in the latter part of the first quarter of 1980, although for the quarter as a whole real GNP expanded somewhat further and the rise in prices accelerated. Retail sales in real terms declined sharply in February and March, after having increased in January. In March industrial production and nonfarm payroll employment declined, and the unemployment rate edged up to 6'.2 percent. Private housing starts declined throughout the first quarter, to a rate in March about two-fifths below that in the third quarter of last year. The rise in producer prices of finished goods and in consumer prices was considerably more rapid during the first three months of 1980 than in 1979. Over the first quarter, the rise in the index of average hourly earnings was somewhat above the rapid pace recorded in 1979. The strong demand for the dollar in exchange markets that began in mid-February persisted through early April. Some selling pressure developed in the second week of April as market participants reacted to indications that U.S. interest rates might have peaked, but the trade weighted value of the dollar against major foreign currencies remained well above its level of early February. The U.S. foreign trade deficit rose further in February.

M-1A and M-1B, which had expanded sharply in in March and early April; M-2 February, contracted in March. From December relatively little increased at annual rates of M-1A and M-1B grew to March, about 4 percent and 4-1/2 percent respectively, a rate of 7 percent. Expansion and M-2 grew at credit slowed substantially in of commercial bank pace earlier in the March from the accelerated most market interest rates year. Since mid-March, on balance have declined considerably. of past and prospective economic Taking account Open Market Committee seeks developments, the Federal and financial conditions that will to foster monetary while encouraging moder resist inflationary pressures and contributing to a sustain ate economic expansion transactions. At its able pattern of international meeting on February 4-5, 1980, 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 3-1/2 to 6, 4 to 6-1/2, 6 to 9, and 6-1/2 to 9-1/2 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 half of 1980 at an annual rate of. 4-1/2 percent for M-1A and 5 percent for M-1B, or somewhat less, provided that in the period before the next regular meeting the weekly average federal funds rate remains within a range of 13 to 19 percent. The Committee believes that, to be con sistent with this short-run policy, M-2 should grow at an annual rate of about 6-3/4 percent over the first half and that bank credit should grow in the months ahead at a pace compatible with growth over the year as a whole within the range agreed upon. 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 supplementary instruc tions from the Committee. this action: Messrs. Votes for Guffey, Morris, Partee, Rice, Volcker, Solomon, Mrs. Teeters, Roos, Schultz, against this Mr. Winn. Vote and action: Mr. Wallich.

Mr. Wallich dissented from this action because he believed that it represented a premature and excessive relaxation of restraint. a policy for the period until the next meeting directed He favored toward lower rates of monetary growth over the first half of the year, an intermeeting range for the federal funds rate that accompanied by would allow for considerably less decline. On May 6 the Committee held a telephone conference to review the situation and to consider whether supplementary instruc tions were needed. Available data suggested that the demand for money and hence the demand for reserves had remained weak, and the federal funds rate most recently had fallen below the 13 percent lower limit of the intermeeting range of 13 to 19 percent. The Committee voted to reduce the lower limit of the intermeeting range for the funds rate to 10-1/2 percent. On May 6 the Committee modified the domestic policy directive adopted at its meeting on April 22, 1980, to reduce the lower limit of the range for the federal funds rate to 10-1/2 percent. Votes for this action: Messrs. Volcker, Morris, Rice, Roos, Schultz, Mrs. Teeters, and Mr. Winn. Votes against this action: Messrs. Guffey, Solomon, and Wallich. Absent: Mr. Partee. Messrs. Guffey and Solomon voted against this action because they preferred smaller reductions in the lower limit of the federal funds rate and Mr. Wallich voted against it because he preferred to maintain the lower limit at 13 percent.