May 18, 1981 FOMC Record of Policy Actions

FOMC minutes

growth in savings deposits and small-denomination reflecting a slowing of well as continued weakness in money market mutual funds. time deposits as Thus, growth of the broader monetary aggregates might begin to move down target ranges for growth over the year from the fourth quarter toward their of 1980 to the fourth quarter of 1981. objectives for monetary growth over the remainder In considering quarter, the members in general agreed that a posture of restraint of the They generally agreed with the view that it was needed to be maintained. particularly important to reduce growth of the monetary aggregates rather and initial differences in views concerning the precise specifica quickly, tions for monetary growth were relatively narrow. In the discussion, a number of points were emphasized. The indications of continuing strength in economic activity combined with the recent exceptional rise in the income velocity of money posed the risk of pressure for excessive expansion in money and credit as the year developed. Growth of the broader monetary aggregates was already somewhat high relative to the Committee's ranges for the year. The indications of some slowing of the rise in the consumer price index did not appear to reflect as yet any clear relaxation of underlying inflationary pressures, and emphasis was placed on the importance of conveying a clear sense of restraint at a critical time with respect to inflation and inflation ary expectations. With respect to the federal funds rate, it was again stressed that the specification of an intermeeting range for fluctuations over a period of time provided a mechanism for initiating timely consultations

between regularly scheduled meetings when it appeared that fluctuations within the specified range were proving to be inconsistent with the objec tives for the behavior of the reserve and monetary aggregates. The ranges proposed for the period ahead typically were from 16 or 17 percent to 21 or 22 percent. At the conclusion of the discussion, the Committee decided to seek behavior of reserve aggregates associated with growth of M-1B from April to June at an annual rate of 3 percent or lower, after allowance for the impact of flows into NOW accounts, and growth in M-2 at an annual rate of about 6 percent. A shortfall in growth of M-1B from the two-month rate of 3 percent would be acceptable, in light of the rapid growth in April and the objective adopted by the Committee on March 31 for growth from March to June at an annual rate of 5-1/2 percent or somewhat less. The members recog nized that shifts into NOW accounts would continue to distort measured growth in M-1B to an unpredictable extent and that operational paths would have to be developed in the light of evaluation of those distortions. The Chairman might call for Committee consultation if it appeared to the Manager for Domestic Operations that pursuit of the monetary objectives and related reserve paths during the period before the next meeting was likely to be associated with a federal funds rate persistently outside a range of 16 to 22 percent. The following domestic policy directive was issued to the Federal Reserve Bank of New York: suggests that at this meeting information reviewed The the current quarter, rapidly in grow much less real GNP will in the first quarter; the substantial expansion following to rise rapidly, although the average have continued prices on in the year. The than earlier less so most recently somewhat slightly further retail sales increased value of total dollar when sales of in April it declined appreciably in March, but of price concessions. response to the ending new cars fell in both months, while moderately in production rose Industrial little, after adjustment employment changed nonfarm payroll

was stable at 7.3 the unemployment rate for strikes, and starts remained at a reduced pace. percent. In March housing in the index of 1981, the rise four months of Over the first less rapid than during hourly earnings was slightly average the dollar against major average value of The weighted the end of March steadily since currencies has risen foreign years. The U.S. in three and a half to its highest level bringing the first sharply in March, trade deficit declined level well below the 1980 average. quarter deficit to a adjusted for the estimated effects of Growth in M-1B, sharply in April and into NOW accounts, accelerated shifts rapid. Since March, both short-term growth in M-2 remained market interest rates have risen substantially. and long-term of Governors announced an increase in On May 4 the Board Federal Reserve discount rates from 13 to 14 percent and an increase in the surcharge from 3 to 4 percentage points on frequent borrowings of large institutions. Open Market Committee seeks to foster monetary The Federal and financial conditions that will help to reduce inflation, economic growth, and contribute to a sustainable promote transactions. At its meeting in early pattern of international February, 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 percent, 3 to 6 percent, 6 to 9 percent, and 6 to 9 percent respectively, abstracting from the impact of introduction of NOW accounts on a nationwide basis. The associated range for bank credit was 6 to 9 percent. These ranges will be reconsidered as conditions warrant. In the short run the Committee seeks behavior of reserve with a substantial deceleration of growth aggregates consistent in M-1B from April to June to an annual rate of 3 percent or lower, after allowance for the impact of flows into NOW accounts, and with growth in M-2 at an annual rate of about 6 percent. The shortfall in growth of M-1B from the two-month rate speci fied above would be acceptable, in light of the rapid growth in April and the objective adopted by the Committee on March 31 for growth from March to June at an annual rate of 5 percent or somewhat less. It is recognized that shifts into NOW accounts will continue to distort measured growth in M-1B to an unpre dictable extent, and operational reserve paths will be developed in the light of evaluation of those distortions. The Chairman may call for Committee consultation if it appears to the Manager for Domestic Operations that pursuit of the monetary objectives and related reserve paths during the period before the next meeting is likely to be associated with a federal funds rate persistently outside a range of 16 to 22 percent.

Votes for this action: Messrs. Volcker, Solomon, Boehne, Boykin, Corrigan, Gramley, Partee, Rice, Schultz, Mrs. Teeters, Messrs. Wallich, and Winn. Votes against this action: None. (Mr. Winn voted as an alternate member.)