August 12, 1980 FOMC Record of Policy Actions

FOMC minutes

circumstances, increases in interest rates would be seen more clearly as a consequence of the need to avoid excessive monetary growth. A few members preferred to reduce somewhat the specified rate for growth of M-1A over the period from June to September and to specify a rate for growth of M1-B that was closer to or the same as the rate that had been specified a month earlier. It was suggested that it would be appropriate at this time to take steps to provide greater assurance that growth of the aggregates would be moderate over the remainder of the year, in view of the rapid growth recently and the resulting progress in overcoming the April-May shortfall. The indications of some improve ment in the outlook for economic activity recently, combined with the per ceived deterioration in prospects for inflation, seemed consistent with a slightly lower rate of reserve provision. The opinion was also expressed that, at least for the present, M-1B was the most reliable of the monetary aggregates as a guide to policy. that with any of the approaches to the It was generally expected funds rate on a weekly average under discussion, the federal aggregates to 14 percent that had within the range of 8-1/2 basis would remain well July, although in the statement at the meeting in early been specified fallen as low as 8-3/4 percent. There were week ending July 23 it had reduction in the lower limit, in the upper proposals to make a slight limits, as well as to retain the range of 8-1/2 to limit, or in both 14 percent. the Committee agreed to At the conclusion of the discussion, over the third quarter of growth for M-1A a slightly lower rate specify a month earlier. than the rates specified for M-1B and M-2 and higher rates

Specifically, the Committee agreed that open market operations in the period until the next meeting should be directed toward expansion of reserve aggregates consistent with growth of M-1A, M-1B, and M-2 over the period from June to September at annual rates of about 6-1/2 percent, 9 percent, and 12 percent respectively, provided that in the period before the next regular meeting the weekly average federal funds rate remained within a range of 8 to 14 percent. Member bank borrowings were not expected to increase appreciably from the recent, near-frictional levels unless the monetary aggregates grew more rapidly than the specified rates. If it appeared during the period before the next regular meeting that the constraint on the federal funds rate was inconsistent with the objective for the expansion of reserves, the Manager for Domestic Opera tions 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 the decline in economic activity, which was marked in the second quarter as a whole, has been moderating. While industrial production and nonfarm payroll employ ment continued to decline sharply in June, total retail sales advanced after four months of substantial decreases, and housing starts rose from a depressed level. In July retail sales advanced further; nonfarm payroll employment declined, but not so sharply as during the second quarter, and the unemployment rate edged up from 7.7 to 7.8 percent. The overall rise in prices of goods and services moderated in the second quarter, in large part owing to a lessening of the rapid rise in energy items. Over the first seven months of the year, the rise in the index of average hourly earnings was somewhat faster than the pace recorded in 1979.

The weighted average value of the dollar in exchange markets has risen somewhat since late July, after having fluctuated in a narrow range earlier in the month. A reduced U.S. foreign trade deficit in June brought the average for the second quarter well below the average for the first quarter. Monetary expansion remained rapid in July, although not so rapid as in June. The recent resurgence brought growth of M-1A closer to and that of M-1B about to the lower bounds of the Committee's ranges for the year from the fourth quarter of 1979 to the fourth quarter of 1980. However, the rate of growth for M-2 was near the upper bound of its range. Market interest rates have risen con siderably further in recent weeks. Taking account of past and prospective economic developments, the Federal Open Market Committee seeks to foster monetary and financial conditions that will help to reduce inflation, encourage economic recovery, and contribute to a sustainable pattern of international transactions. At its meeting in July, 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 percent, 4 to 6 percent, 6 to 9 percent, and 6 to 9 percent respectively. The associated range for bank credit was 6 to 9 percent. For the period from the fourth quarter of 1980 to the fourth quarter of 1981, the Committee looked toward a reduction in the ranges for growth of M-1A, M-1B, and M-2 on the order of per centage point from the ranges adopted for 1980, abstract ing from institutional influences affecting the behavior of the aggregates. These ranges will be reconsidered as conditions warrant. In the short run, the Committee seeks expansion of reserve aggregates consistent with growth of M-1A, M-1B, and M-2 over the third quarter of 1980 at annual rates of about 6 percent, 9 percent, and 12 percent respec tively, provided that in the period before the next regular meeting the weekly average federal funds rate remains within a range of 8 to 14 percent. If it appears during the period before the next meeting that the constraint on the federal funds rate with the objective for the expansion is inconsistent 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, Gramley, Morris, Partee, Rice, Roos, Schultz, Solomon, Mrs. Teeters, Messrs. Wallich, Winn, and Balles. Votes against this action: None. (Mr. Balles voted as alternate for Mr. Guffey.)