October 21, 1980 FOMC Record of Policy Actions

FOMC minutes

growth of M-1B could marginally exceed the upper bound of its range for 1980 if increases over the months ahead equalled or exceeded the numerical specifications. In that connection, it was also emphasized that an inconsistency had become apparent during the course of the year between the longer-run ranges for M-1A and M-1B as a result of faster than expected growth of ATS and NOW accounts, which had been at the ex pense partly of demand deposits and partly of savings deposits or other sources of funds not included in M-1. In light of those developments during the past year, the range for growth of M-1B in 1980 presumably should have been somewhat higher than that actually adopted, while the range for M-1A should have been somewhat lower, to achieve the intended economic result. It was understood that the agreed approach would be associated with significant further pressures on bank reserve positions if growth of the monetary aggregates and the associated demands for reserves proved to be greater than anticipated. In light of the recent rise in the federal funds rate and the objective of sharply reducing monetary growth, sentiment was expressed for raising the intermeeting range for the funds rate from the range of 8 to 14 percent specified at the September meeting. At the conclusion of the discussion 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 September-to-December period at annual rates of about 2-1/2 percent, 5 percent, and 7-1/4 percent respectively, or somewhat less, provided that in the period before the next regular meeting the weekly average federal funds rate remained within a range of

9 to 15 percent. If it appeared during the period before the next regular the constraint on the federal funds rate was inconsistent meeting that of reserves, the Manager for Domestic with the objective for the expansion the Chairman, who would then decide Operations was promptly to notify for supplementary instructions from the whether the situation called 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 GNP increased somewhat in the third quarter following the sharp contraction in the second quarter, while prices on the average continued to rise rapidly. The recovery in retail sales and housing starts that began in June continued during the third quarter. Industrial production and nonfarm payroll employment expanded in September for the second consecutive month, and the unemployment rate edged down from 7.6 to 7.5 percent. The rise in the index of average hourly earnings moderated in the third quarter, but the rise over the first nine months of the year was about as rapid as in 1979. The weighted average value of the dollar in ex change markets on balance has risen somewhat over the past month. The U.S. trade deficit in August remained well below the monthly average in the second quarter. M-1A and M-1B continued to grow rapidly in September, although not so rapidly as in August, while growth in M-2 moderated further. From the fourth quarter of 1979 to September, growth of M-1A was slightly above the midpoint of the range set by the Committee for growth over the year ending in the fourth quarter of 1980, while growth of M-1B and. M-2 was somewhat above the upper limits of their ranges. Expansion in commercial bank credit was relatively rapid in both August and

September. On balance short-term market interest rates have risen considerably further since mid September while long-term rates have changed little; average rates on new home mortgage commitments have continued upward. An increase in Federal Reserve discount rates from 10 to 11 percent was announced on September 25. The Federal Open Market Committee seeks to foster monetary and financial conditions that will help to reduce inflation, encourage economic re covery, 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 per cent, 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 percentage point from the ranges adopted for 1980, abstracting from institutional in fluences affecting the behavior of the aggregates. These ranges will be reconsidered as conditions warrant. In the short run, the Committee seeks behavior of reserve aggregates consistent with growth of M-1A, M-1B, and M-2 over the September-to-December period at annual rates of about 2 percent, 5 percent, and percent respectively, or somewhat less, provided that in the period before the next regular meeting the weekly average federal funds rate remains within a range of 9 to 15 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 the Manager for Domestic Operations is of reserves, notify the Chairman, who will then decide promptly to calls for supplementary instruc whether the situation tions from the Committee.

Votes for this action: Messrs. Volcker, Gramley, Guffey, Partee, Rice, Schultz, Solomon, and Mrs. Teeters. Votes against.this action: Messrs. Morris, Roos, Wallich, and Winn. Messrs. Morris, Roos, Wallich and Winn dissented from this action because, given the excessive monetary expansion in recent months, they favored specification of lower monetary growth rates for the period from September to December than those adopted at this meeting. In their view, such a policy stance was appropriate in order to enhance the pro spects for restraining growth of the monetary aggregates within the Committee's ranges for the period from the fourth quarter of 1979 to the fourth quarter of 1980 and thereby contribute to restraining inflation. 2. Authorization for domestic open market operations At this meeting the Committee voted to increase from $3 billion to $4 billion the limit on changes between Committee meetings in System Account holdings of U.S. government and federal agency securities specified in paragraph 1(a) of the authorization for domestic open market operations, effective immediately, for the period ending with the close of business on November 18, 1980. Votes for this action: Messrs. Volcker, Gramley, Guffey, Morris, Partee, Rice, Roos, Schultz, Solomon, Mrs. Teeters, Messrs. Wallich, and Winn. Votes against this action: None.