September 16, 1980 FOMC Record of Policy Actions

FOMC minutes

of present economic and financial market conditions, growth in the August to-December period might reasonably be a bit higher, consistent with growth for the year in the upper part of the range established for M-1B and around the midpoint of the range set for M-1A; this approach was also viewed as consistent with broad, longer-run policy objectives. In this connection it was observed that interest rates had already risen appreciably from their recent lows, that these increases might well begin to reduce money and credit demands over the months ahead, that economic recovery was in its very early stages, and that some sectors such as housing were especially sensitive to emerging credit conditions. members proposed a middle course--a policy approach Still other that was adopted. It was generally recognized that differences in approach the members favored a policy that would greatly were relatively minor: all of in the aggregates over the balance of the year. In the dis reduce growth cussion, it was observed that the reserve path to achieve restraint in money growth would probably not involve an immediate change in money market con ditions, assuming that money growth did slow sharply in September. Differ ences for the most part turned on the degree of pressure on bank reserve positions that could emerge should money demand begin to exceed the money supply path. At the conclusion of the discussion the Committee agreed that open in the period until the next meeting should be directed market operations of reserve aggregates consistent with growth of M-1A, M-1B, toward expansion period at annual rates of about 4 percent, and M-2 over the August-to-December provided that in the period 6-1/2 percent, and 8-1/2 percent respectively,

before the next regular meeting the weekly average federal funds rate remained within a range of 8 to 14 percent. 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 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 the decline in economic activity has moderated in the third quarter following a sharp contraction in the second quarter. Industrial production and nonfarm pay roll employment expanded in August after several months of decline; the unemployment rate edged down from 7.8 to 7.6 percent; and total retail sales advanced con siderably further. In July housing starts rose slightly, following a substantial rebound in June, and were well above the depressed levels of the preceding three months. Producer prices of finished goods rose rapidly in July and August, after increasing at a sharply reduced pace in the second quarter; the recent advance reflected mainly a surge in food prices. Over the first eight 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 declined somewhat over the past five weeks. The U.S. trade deficit in July was significantly lower than the monthly average in the second quarter, reflec ting a sharp decline in petroleum imports. M-1A and M-1B grew at record rates in August, while growth in M-2 moderated from an exceptionally rapid pace in June and July. For the year through August growth of M-1A was in the lower half and growth of M-1B in the upper half of their respective ranges set by the Committee for the year from the fourth quarter of 1979 to the fourth

1980, while growth in M-2 was somewhat above quarter of of its range. Market interest rates the upper limit widely since mid-August and on balance have fluctuated rates have risen considerably while long short-term term rates have increased moderately. Open Market Committee seeks to foster The Federal monetary and financial conditions that will help to encourage economic recovery, and reduce inflation, contribute to a sustainable pattern of international transactions. At its meeting in July, the Committee would be furthered by growth agreed that these objectives M-1B, M-2, and M-3 from the fourth quarter of of M-1A, fourth quarter of 1980 within ranges of 3 1979 to the to 6½ percent, 6 to 9 percent, and 6 to 6 percent, 4 The associated range for to 9½ percent respectively. 6 to 9 percent. For the period from bank credit was quarter of 1980 to the fourth quarter of the fourth toward a reduction in the 1981, the Committee looked of M-1A, M-1B, and M-2 on the order ranges for growth point from the ranges adopted for 1980, of ½ percentage from institutional influences affecting abstracting the aggregates. These ranges will be the behavior of 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 August to December period at annual rates of about 4 percent, 6 percent, and 8 percent respectively, 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 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, Gramley, Morris, Partee, Rice, Schultz, Solomon, and Mrs. Teeters. Votes against this action: Messrs. Guffey, Roos, Wallich and Winn.

Messrs. Guffey, Roos, Wallich and Winn dissented because they believed that, given the excessive monetary expansion in recent months and the outlook for inflation, the directive adopted at this meeting incurred too much of a risk that the Committee's objectives for monetary growth in 1980 would be exceeded. To enhance the prospects for re straining monetary growth to rates consistent with the longer-run ranges, specifying lower rates of growth for M-1A, M-1B, and M-2 they favored over the August-to-December period than those that were adopted.