February 2–3, 1981 FOMC Record of Policy Actions

FOMC minutes

2/2-3/81 of the discussion, the Committee decided to At the conclusion with growth of M-1A and behavior of reserve aggregates associated seek M-1B over the period from December to March at annual rates of 5 to 6 per percent, abstracting from the impact of flows cent and in M-2 of about 8 into NOW accounts. Those rates were associated with growth of M-1A, M-1B, fourth quarter of 1980 to the first quarter of 1981 at and M-2 from the annual rates of about 2 percent, 2-3/4 percent, and 7 percent respectively. shifts into NOW accounts would continue to dis The members recognized that growth in M-1A and M-1B to an unpredictable extent and that tort measured paths would have to be developed in the light of evaluation operational of those distortions. 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: The information reviewed at this meeting suggests that real GNP expanded substantially in the fourth quarter of 1980 and that prices on the average continued to rise rapidly. In December industrial production and nonfarm payroll employment expanded further, and the unemploy ment rate was essentially unchanged at about 7-1/2 per cent. Retail sales declined, however, following a sizable gain over the preceding six months. Housing starts were about unchanged for the third month. Over the last few months of 1980, the rise in the index of average hourly earnings was at about the rapid pace recorded earlier in the year.

2/2-3/81 -15- The weighted average value of the dollar in exchange markets has risen further over the past six weeks. The U.S. trade deficit in the final quarter of 1980 widened from the exceptionally low rate in the third quarter but remained substantially less than the rate in the first half. M-1A and M-1B declined sharply in December; in January, after adjustment of the actual figures for the estimated effects of shifts into NOW accounts, these aggregates recovered in part. Growth in M-2 slowed markedly in December but accelerated in January, Some moderation of the expansion in commercial bank credit in December and early January was accompanied by stepped up financing of nonfinancial businesses through issuance of commercial paper and longer-term debt instruments. Market interest rates have declined on balance from their highs of mid-December. The Federal Open Market Committee seeks to foster monetary and financial conditions that will help to reduce inflation, encourage economic recovery, and con tribute to a sustainable pattern of international trans actions. 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 1980 to the fourth quarter of 1981 within ranges of 3 to 5-1/2 percent, 3-1/2 to 6 percent, 6 to 9 percent, and 6-1/2 to 9-1/2 percent respectively, abstracting from the impact of introduction of NOW accounts on a nationwide basis. The associated for bank credit was 6 to 9 percent. These ranges range will be reconsidered as conditions warrant. In the short-run the Committee seeks behavior of reserve aggregates consistent with growth in M-1A and M-1B from December to March at annual rates of 5 to 6 per cent and in M-2 at a rate of about 8 percent, abstracting from the impact of flows into NOW accounts. These rates are associated with growth of M-1A, M-1B, and M-2 from the fourth quarter of 1980 to the first quarter of 1981 at annual rates of about 2 percent, 2-3/4 percent, and 7 percent respectively. It is recognized that shifts into NOW accounts will continue to distort measured growth in M-1A and M-1B to an unpredictable extent, and operational reserve paths will be developed in the light of evaluation of those distortions. If it appears during the period before the next meeting that fluc tuations 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 Operations is promptly to notify the Chairman, who will then decide whether the situation calls for supplementary instructions from the Committee.

2/2-3/81 -16- 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. Teeters dissented from this action because she believed Mrs. adopted for monetary growth over the first quarter that the specifications She preferred specification of higher rates for were unduly restrictive. over the first quarter, consistent with the ranges adopted monetary growth for monetary growth over the whole year, in association with a lower intermeeting range for the federal funds rate. Mr. Wallich dissented from this action because he preferred to set a higher range for the federal funds rate in order to help avoid a repetition of the sharp drop in interest rates that occurred in the second quarter of 1980. In late February, incoming data indicated that M-1A and M-1B, after adjustment for the estimated effects of shifts into NOW accounts, were growing at rates well below those consistent with the Committee's objectives for the period from December to March. Consequently, member bank demands for reserves had eased in relation to the supply of reserves being made available through open market operations, and member bank borrowings had fallen appreciably. At the same time, growth of M-2 and M-3 appeared to be strong. These developments were associated with a decline in the federal funds rate to around 15 percent, the lower end of the range of 15 to 20 percent specified by the Committee, raising the question of whether the situation called for supplementary instructions from the Committee.

2/2-3/81 -17- In a telephone conference on February 24, the Committee adopted the following modification of the domestic policy directive adopted on February 3: In light of the relatively strong growth of M-2 and M-3 and the substantial easing recently in money market conditions, as well as uncertainties about the interpretation of the behavior of M-1, the Committee on February 24 agreed to accept some shortfall in growth of M-1A and M-1B from the specified rates in the domestic policy directive adopted on February 3 as consistent with developments in the aggregates generally and the objectives for the year. Votes for this action: Messrs. Volcker, Gramley, Guffey, Morris, Partee, Rice, Schultz, Mrs. Teeters, and Mr. Winn. Vote against this action: Mr. Roos. Absent: Messrs. Solomon and Wallich. Mr. Roos dissented from this action because he believed that it would tend to prolong unduly the shortfall in growth of M-1A and M-1B from the Committee's ranges for the year. In the circumstances, he preferred to reduce the lower limit of the intermeeting range for the federal funds rate in order to encourage a more prompt pickup in growth of the narrowly defined monetary aggregates.