August 18, 1981 FOMC Record of Policy Actions

FOMC minutes

about policy implementation and reserve provision over the coming period. A view was also expressed that the increasing difficulty of interpreting the performance of the monetary aggregates argued for giving weight to interest rates in evaluating the degree of restraint being exerted by monetary policy. This view was based on the premise that interest rates were already exerting a great deal of restraint and a small decline would be welcomed, provided it was not inconsistent with achievement of the Committee's longer-term objectives for monetary growth. In contrast, the danger was emphasized that a change in approach that attempted to stabilize interest rates or to encourage a near term decline could well be counterproductive if such an effort were accom panied by or fostered an excessive rebound in monetary growth; the net result could then be to encourage inflationary expectations, call into question the commitment of the Federal Reserve to an anti-inflationary policy, and thereby actually jeopardize the prospects for ultimately achieving and sustaining the significantly lower interest rates that were sought. Several members expressed concern about placing too much reliance on M2 as a guide to policy over the weeks ahead in light of the various factors that were potential sources of distortion. In this view the pro vision of reserves should not be restrained solely on the basis of M2 growth in excess of the Committee's objective. In the discussion, it was understood that the sizable growth in M2 in prospect for August would not in itself call for further restraint in the provision of reserves, since such growth would, in any event, leave M2 around the upper end of its range for the year as pro vided in the directive. Should measured growth subsequently appear excessive in the light of the target, careful assessment would be required of the pos sibility that special factors, including regulatory and institutional changes,

were distorting the data. If necessary, the Chairman might call for Committee consultation to evaluate the implications for policy. of the discussion, the Committee agreed to reaffirm At the conclusion the short-run policy objectives for the third quarter adopted at its previous meeting. The following domestic policy directive was issued to the Federal Reserve Bank of New York: The information reviewed at this meeting suggests little change in real GNP in the current quarter, following a small decline in the second quarter; prices on the average appeared to be continuing to rise less rapidly than earlier in the year. The dollar value of total retail sales increased appreciably further in July, reflecting some recovery in sales at automotive dealers. Industrial production rose slightly in July, while nonfarm payroll employment advanced substantially; the unemployment rate declined to 7.0 percent, somewhat below its average level in earlier months of 1981. In June housing starts declined sharply further. Over the first seven months of the year, the rise in the index of average hourly earnings was somewhat less rapid than during The weighted average value of the dollar rose further against major foreign currencies in July and early August, registering gains against all major currencies. In June the U.S. foreign trade deficit declined slightly from the May level, but for the second quarter the deficit was up substantially over the first-quarter rate. In July M1-B, adjusted for the estimated effects of shifts into NOW accounts, expanded somewhat following a substantial decline in May and June, and growth in M2 accelerated from a relatively sluggish pace in the previous two months. The level of adjusted M1-B in July was well 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 while the level of M2 was slightly below the upper end of its range for the year. Available data for early August suggested further acceleration in growth of M1-B and M2, with acceleration in M2 apparently influenced in part by

initial responses of the public to the availability of more attractive deposit instruments, pointing up the necessity of evaluating the behavior of M2 in the light of the impact of regulatory and legislative changes. Since early July most market interest rates have risen considerably on balance. 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 July, the Committee agreed that these objectives would be furthered by reaffirming the monetary growth ranges for the period from the fourth quarter of 1980 to the fourth quarter of 1981 that it had set at the February meeting. These ranges included growth of 3-1/2 to 6 percent for M1-B, abstracting from the impact of flows into NOW accounts on a nationwide basis, and growth of 6 to 9 percent and 6-1/2 to 9-1/2 percent for M2 and M3, respectively. 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 had been running at about or somewhat above the upper ends of their ranges. 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 might 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 M1, 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 re considered as warranted to take account of developing ex perience with public preferences for NOW and similar accounts as well as changing economic and financial conditions. In the short run the Committee continues to seek be havior 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 asso ciated with a federal funds rate persistently outside a range of 15 to 21 percent. Votes for this action: Messrs. Volcker, Solomon, Boykin, Corrigan, Gramley, Keehn, Rice, Schultz, Mrs. Teeters, Messrs. Wallich and Black. Vote against this action: Mr. Partee. (Mr. Black voted as alternate for Mr. Boehne.) Mr. Partee dissented from this action because, as at the previous meeting, he preferred to give more emphasis to reducing the risk of a cumula tive decline in growth of M1-B in light of the indications of weakening in economic activity. Accordingly, he favored specification of a somewhat higher objective for growth of M1-B over the period from June to September, and with out 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 the volatile influence of money market mutual funds, the liberaliza tion of deposit rate ceilings on small saver certificates beginning August 1, and the introduction of tax-exempt "all saver" certificates beginning October 1.