May 20, 1980 FOMC Record of Policy Actions

FOMC minutes

Specifically, the Committee agreed that operations should be directed toward encouraging growth of M-1A, M-1B, and M-2 over May and June at annual rates of 7 to 7-1/2 percent, 7-1/2 to 8 percent, and about 8 percent respectively. The Committee also agreed that, in light of the recent shortfall, moderately faster monetary growth would be acceptable if that developed in response to a strengthening of the demand for money. It was understood that if the demand for money and for bank reserves proved to be weak and the federal funds rate declined signifi cantly within its specified range, the Committee would review the situa tion in advance of the next regular meeting scheduled for July 9. In any case, if it appeared that the constraint on the federal funds rate was 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 a marked contraction in real GNP in the current quarter. In April the dollar value of total retail sales declined substantially for the third consecutive month. Industrial production and nonfarm payroll employment were curtailed sharply, and the unemployment rate rose from 6.2 to 7.0 percent. Private housing starts, which had declined throughout the first quarter to a relatively low rate, edged down further in April. The overall rise in prices of goods and services has remained rapid in recent months, although in April the rise in producer prices of finished goods was slowed by a large decrease in foods and by a lessening of the rapid rise in energy items. Over the first four months of the year, the rise in the index of average hourly earnings was some what less than the rapid pace recorded in 1979.

pressure on the dollar in exchange The downward has continued over emerged in early April markets that in response primarily to most of the past four weeks, relative to U.S. interest rates sharp decline in the value of the rates; the trade-weighted foreign interest has declined major foreign currencies dollar against foreign trade deficit percent. The U.S. about 3-1/2 first quarter of 1980 larger in the was substantially despite a considerable in the preceding quarter, than from the average in the preceding decline in March two months. M-1A and M-1B contracted sharply further in April, and M-2 also declined. Commercial bank credit, both loans and investments, contracted in April after having slowed substantially in March. Over recent weeks, market interest rates have declined sharply further. 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 moderate economic expansion and contributing to a sustainable pattern of international transactions. At its 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 respec tively. 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 of M-1A, M-1B, and M-2 at rates high enough to promote achieve ment of the Committee's objectives for monetary growth over the year, provided that in the period before the next regular meeting the weekly average federal funds rate remains within a range of 8-1/2 to 14 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 supplementary instruc tions from the Committee. Votes for this action: Messrs. Volcker, Guffey, Morris, Rice, Schultz, Solomon, Mrs. Teeters, Messrs. Wallich, and Winn. Votes against this action: Messrs. Partee and Roos.

Mr. Partee dissented from this action because he believed that it involved a risk of extending the shortfall in monetary growth relative to the Committee's growth ranges for the year. In an effort to guard against the continuation of such a shortfall, which could worsen reces sionary prospects, he preferred to direct operations toward achieving somewhat higher rates of monetary growth in the May-June period. He also preferred an intermeeting range for the federal funds rate with a lower limit below 8-1/2 percent, because such a range would be less likely to interfere with reserve-supplying operations consistent with the objectives for the aggregates. Mr. Roos dissented because in his view the annual growth rate objective of 3-1/2 to 6 percent for M-1A established by the Committee in February 1980 was consistent with reduction of inflation without aggravating recessionary pressures. He believed that the 8-1/2 to 14 percent constraint on the federal funds rate was incompatible with that agreed-upon objective and would cause money growth to remain below it. Such slow growth would unnecessarily exacerbate the current economic slowdown. Historically, deep recessions had inevitably brought about countermeasures that intensified inflation. 2. Authorization for Foreign Currency Operations The Committee approved an increase from $300 million to $500 million in the System's swap arrangement with the Bank of Sweden and the corresponding amendment to paragraph 2 of the authorization for foreign currency operations, effective May 23, 1980, for a period of one year. With this change paragraph 2 read as follows:

2. The Federal Open Market Committee directs the Federal Reserve Bank of New York to maintain reciprocal currency arrangements ("swap" arrangements) for the System Open Market Account for periods up to a maximum of 12 months with the following foreign banks, which are among those designated by the Board of Governors of the Federal Reserve System under Section 214.5 of Regulation N, Relations with Foreign Banks and Bankers, and with the approval of the Committee to renew such arrangements on maturity: Amount of arrangement (Millions of Foreign bank dollars equivalent) Austrian National Bank 250 National Bank of Belgium 1,000 Bank of Canada 2,000 National Bank of Denmark 250 Bank of England 3,000 Bank of France 2,000 German Federal Bank 6,000 Bank of Italy 3,000 Bank of Japan 5,000 Bank of Mexico 700 Netherlands Bank 500 Bank of Norway 250 Bank of Sweden 500 Swiss National Bank 4,000 Bank for International Settlements: Dollars against Swiss francs 600 Dollars against authorized European currencies other than Swiss francs 1,250 Any changes in the terms of existing swap arrangements, and the proposed terms of any new arrangements that may be authorized, shall be referred for review and approval to the Committee. Votes for this action: Messrs. Volcker, Guffey, Morris, Partee, Rice, Roos, Schultz, Solomon, Mrs. Teeters, Messrs. Wallich,and Winn. Votes against this action: None. This action was taken to expand the short-term financing facilities available to the Bank of Sweden.