December 18–19, 1980 FOMC Record of Policy Actions

FOMC minutes

12/18-19/80 -10- toward the lower end of the range. One member expressed the opinion that setting 18 percent as the upper end of the range, which would lead to a prompt easing in money market conditions consistent with a decline in the funds rate to or below that level, would contribute over time to in the volatility of both interest rates and monetary growth. a reduction At the conclusion of the discussion, the Committee decided to seek behavior of reserve aggregates associated with growth of M-1A, M-1B, and M-2 over the first quarter along a path consistent with the ranges for growth in 1981 contemplated in July 1980, abstracting from the effects of deposit shifts connected with the introduction of NOW accounts on a nationwide basis. The members recognized that the spread of NOW accounts and ATS accounts nationally was likely to widen the differential between growth of M-1A and of M-1B to an unpredictable extent and that operational paths for reserves would have to be adjusted in the light of the developing differential. Some shortfall in growth would be acceptable in the near term if that developed in the context of reduced pressures in the money market. If it appeared during the period before the next regular meeting that fluctuations in the federal funds rate, taken over a period of time, within a range of 15 to 20 percent were likely to be inconsistent with the monetary and related reserve paths, 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:

12/18-19/80 -11- The information reviewed at this meeting suggests that real GNP expanded more in the fourth quarter than in the third, and prices on the average continued to rise rapidly. In November retail sales, industrial production, and nonfarm payroll employment expanded substantially further, and the unemployment rate was essentially unchanged at 7-1/2 percent. Housing starts remained at their September-October level. The rise in the index of average hourly earnings has been somewhat more rapid this year than in 1979. The weighted average value of the dollar in exchange markets has risen considerably further over the past month. The U.S. trade deficit was unchanged in October, remaining well below the rate in the first half. Growth in M-1A and M-1B continued to moderate in November but was still relatively rapid; growth in M-2 continued to accelerate, reflecting a further pickup in expansion of its nontransaction component. In early December, growth of M-1A and M-1B slowed substantially further. From the fourth quarter of 1979 to November, growth of M-1A was in the upper part of the range set by the Committee for growth over the year ending in the fourth quarter of 1980; M-1B and M-2 grew at rates some what above the upper limits of their respective ranges. Expansion in commercial bank credit was about as rapid in November as on the average in the preceding three months. Short-term market interest rates have risen sharply further in recent weeks. Long-term market yields have also risen, although considerably less, and average rates on new home mortgage commitments have continued upward. On December 4 the Board of Governors announced an increase in Federal Reserve discount rates from 12 to 13 percent and an increase in the surcharge from 2 to 3 percentage points on frequent borrowing of large institutions. 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 ob jectives 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 percent, 4 to 6-1/2 percent, 6 to 9 percent, and 6-1/2 to 9-1/2 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 1/2 percentage point from the ranges for 1980, abstracting from institutional influences adopted affecting the behavior of the aggregates.

12/18-19/80 -12- In the short-run the Committee seeks behavior of reserve with growth of M-1A, M-1B, and M-2 over aggregates associated the first quarter along a path consistent with the ranges for growth in 1981 contemplated earlier, which will be reviewed in February 1981. Those ranges, abstracting from the effects of deposit shifts connected with the introduction of NOW accounts on a nationwide basis, imply growth in these aggre gates centered on 4-1/4 percent, 4-3/4 percent, and 7 percent respectively. It is recognized that the introduction of NOW and ATS accounts nationwide at the beginning of 1981 is likely to widen the discrepancy between growth in M-1A and M-1B to an extent that cannot now be accurately estimated, and oper ational reserve paths will be developed in the light of eval uation of those differences as they emerge. In the light of the rapid growth of monetary and credit aggregates in recent months, some shortfall in growth would be acceptable in the near term if that developed in the context of reduced pressures in the money market. If it appears during the period before the next meeting that fluctuations in the federal funds rate, taken over a period of time, within a range of 15 to 20 percent are likely to be inconsistent with the monetary and related reserve paths, the Manager for Domestic Operation is promptly to notify the Chairman, who will then decide whether the situation calls for supplementary instructions from the Committee. Votes for this action: Messrs: Volcker, Gramley, Guffey, Morris, Partee, Rice, Roos, Schultz, Solomon, and Winn. Votes against this action: Mrs. Teeters and Mr. Wallich. Mrs. Teeters dissented from this action because she believed that the objectives for monetary growth were unduly restrictive in terms of their eventual effects on output and employment without improving prospects for significantly tempering the rate of inflation. Pending completion of the Committee's review of its ranges for growth in 1981, she preferred specification of moderately higher rates for monetary growth over the first quarter.

12/18-19/80 -13- Mr. Wallich dissented from this action because, given the excessive monetary expansion in recent months, he favored specification of lower monetary growth rates for the first quarter of 1981 than those adopted at this meeting along with a higher intermeeting range for the federal funds rate. In his view, such a policy stance was appropriate both to restrain monetary growth if economic activity remained strong and to moderate the probable decline in interest rates if economic activity weakened. 2. Authorization for domestic open market operations On January 23, 1981, 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 February 3, 1981. Votes for this action: Messrs. Volcker, Gramley, Guffey, Morris, Partee, Rice, Roos, Schultz, Solomon, Mrs. Teeters, Messrs. Wallich, and Winn. This action was taken on recommendation of the Manager for Domestic Operations. The Manager had advised that since the December meeting, substantial net sales of securities had been undertaken to absorb reserves in association with a seasonal reduction in currency and deposits. The leeway for further sales had been reduced to about $1 billion, and additional sales in excess of that amount might be required over the rest of the intermeeting interval.