July 6–7, 1981 FOMC Record of Policy Actions

FOMC minutes

7/6-7/81 -12- In the Committee's discussion of policy for the short run, the members in general agreed that operations in the period before the next meeting should be directed toward growth of monetary aggregates over the third quarter at rates that would promote achievement of the monetary objectives for the year as a whole. Thus, they wished to foster growth of M1-B over the third quarter at a rate high enough to permit growth of this monetary aggregate toward the lower end of its range for the year. At the same time, however, they wished to avoid generating an excessively rapid rebound in growth of M1-B, both because the pace would need to be sharply reduced later and because such a rebound might tend to raise growth of M2 above the upper end of its range for the year. With respect to the inter meeting range for the federal funds rate that provided a mechanism for initiating further consultation of the Committee, proposals typically were from 15 or 16 percent to 21 or 22 percent. Specifically, the members agreed to seek behavior of reserve aggre gates associated with growth of M1-B from June to September at an annual rate of 7 percent, after allowance for flows into NOW accounts, provided that growth of M2 remained around the upper end of its range for the year or tended to move down within the range. Given the declines in May and June, growth of M1-B at the rate specified for the period from June to September would result in growth percent from the average in the second quarter to at an annual rate of about 2 the average in the third quarter. The members recognized that shifts into NOW would continue to distort measured growth in M1-B to an unpredictable accounts paths would have to be developed in the light of extent and that operational of those distortions. The Chairman might call for Committee con evaluation the Manager for Domestic Operations that pursuit sultation if it appeared to and related reserve paths during the period before of the monetary objectives

7/6-7/81 meeting was likely to be associated with a federal funds rate the next persistently outside a range of 15 to 21 percent. policy directive was issued to the Federal The following domestic Reserve Bank of New York: The information reviewed at this meeting suggests that real GNP changed little in the second quarter, following the substantial expansion in the first quarter; prices on the average rose less rapidly than in the first quarter. The dollar value of total retail sales was virtually unchanged in May after having declined appreciably in April, and sales of new cars remained weak in June. Industrial production rose slightly on the average in April and May, while non farm payroll employment continued to advance, after adjust ment for strikes. In June strike-adjusted nonfarm employment declined appreciably; the unemployment rate was 7.3 percent, somewhat lower than in May but unchanged from earlier months of 1981. In May housing starts declined sharply. Over the first six months of 1981, the rise in the index of average hourly earnings was slightly less rapid than during 1980. The weighted average value of the dollar against major foreign currencies continued to rise through May and early June and then leveled off. In April-May the U.S. foreign trade deficit was somewhat above the first-quarter rate. M1-B, adjusted for the estimated effects of shifts into NOW accounts, declined substantially in May and June following the sharp expansion in April, and growth in M2 slowed. The level of adjusted M1-B in the second quarter on the average was below the lower end of the Committee's range for growth over the year from the fourth quarter of 1980 to the fourth quarter of 1981; the level of M2 in the second quarter was slightly above the upper end of its range for the year. Since mid-May, on balance, short-term market interest rates have declined somewhat while long-term yields generally have changed little. The Federal Open Market Committee seeks to foster monetary and financial conditions that will help to reduce inflation, promote sustained economic growth, and contribute to a sustainable pattern of international transactions. At its meeting in early February, the Committee agreed that these objectives would be furthered by growth of M1-A, M1-B, M2, and M3 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

7/6-7/81 -14- respectively, abstracting from the impact of introduction of NOW accounts on a nationwide basis. The Committee recognized that the shortfall in M1-B growth in the first half of the year partly reflected a shift in public preferences toward other highly liquid assets and that growth in the broader aggregates has been running somewhat above the upper ends of the ranges. The Committee reaffirmed its ranges for 1981, but in light of its desire to maintain moderate growth in money over the balance of the year, the Committee expected that growth in M1-B for the year would be near the lower end of its range. At the same time, growth in the broader aggregates may be high in their ranges. The associated range for bank credit was 6 to 9 percent. The Committee also tentatively agreed that for the period from the fourth quarter of 1981 to the fourth quarter of 1982 growth of Ml, M2, and M3 within ranges of 2-1/2 to 5-1/2 percent, 6 to 9 percent, and 6-1/2 to 9-1/2 percent would be appropriate. These ranges will be reconsidered as warranted to take account of developing experience with public preferences for NOW and similar accounts as well as changing economic and financial conditions. In the short run the Committee seeks behavior of reserve aggregates consistent with growth of M1-B from June to September at an annual rate of 7 percent after allowance for the impact of flows into NOW accounts (resulting in growth at an annual rate of about 2 percent from the average in the second quarter to the average in the third quarter), provided that growth of M2 remains around the upper limit of, or moves within, its range for the year. It is recognized that shifts into NOW accounts will continue to distort measured growth in M1-B to an unpredictable 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 15 to 21 percent. Votes for this action: Messrs. Volcker, Solomon, Boehne, Boykin, Corrigan, Gramley, Keehn, Rice, Schultz, Mrs. Teeters, and Mr. Wallich. Vote against this action: Mr. Partee. Mr. Partee dissented from this action because, in light of the indications of weakening in economic activity, he preferred to give more reducing the risk of a cumulative shortfall in growth of M1-B. emphasis to

7/6-7/81 -15- Accordingly, he favored specification of a somewhat higher objective for growth of M1-B over the period from June to September, and without the additional weight assigned to the potential for more rapid growth of M2. In his view, the short-run behavior of M2 was subject to great uncertainty because of both the volatile influence of money market mutual funds and the recent DIDC actions authorizing certain deposit instruments to be offered at competitive interest rates beginning August 1. 2. Authorization for domestic open market operations On August 6, 1981, the Committee voted to increase from $3 billion to $4-1/2 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 August 18, 1981. Votes for this action: Messrs. Volcker, Solomon, Boykin, Corrigan, Gramley, Keehn, Rice, Schultz, Mrs. Teeters, Messrs. Winn, and Black. Votes against this action: None. Absent: Messrs. Boehne and Partee. (Mr. Black voted as alternate for Mr. Boehne.) This action was taken on recommendation of the Manager for Domestic Operations. The Manager had advised that since the July meeting, substantial net purchases of securities had been undertaken to counter the effects on member bank reserves of the transfer of funds associated with settlement of Iranian accounts and also the effects of levels of float that were lower than normal. The leeway for further purchases had been reduced to about $200 million, and additional purchases in excess of that amount might be required over the rest of the intermeeting interval.