October 5–6, 1981 FOMC Record of Policy Actions

FOMC minutes

10/5-6/81 -10- and induce a rebound in interest rates after no more than a temporary decline. Moreover, rapid growth in M1-B would significantly increase the risk that the broader monetary aggregates would exceed their ranges for growth over the year by sizable margins, which was a source of concern in light of the uncertainties about the interpretation of the various monetary aggregates in the current circumstances. In weighing the risks of inadequate monetary growth versus ex cessive growth over the last three months of 1981, Committee members took account of the need to reduce the chances of large destabilizing swings in both monetary growth and interest rates, while at the same time achieving the targets for money growth tentatively established for 1982. Agreement was reached to seek behavior of reserve aggregates associated with growth of M1-B from September to December at an annual rate of 7 percent, after allow ance for the impact of flows into NOW accounts, and growth of M2 at an annual rate of 10 percent or slightly higher; in specifying the rate for M2, the Committee recognized that the behavior of that aggregate would be affected by the recent regulatory and legislative changes, particularly the public's response to the availability of the all savers certificate. In developing related reserve paths, approximately equal weight would be given to the movements of M1-B and M2. It was understood that if these objectives were realized, growth of M1-B from the fourth quarter of 1980 to the fourth quarter of 1981 would remain below the Committee's range for the year, while growth of M2 would equal or slightly exceed the upper end of its range. The intermeeting range for the federal funds rate that provided a mechanism for initiating further consultation of the Committee was set at 12 to 17 percent.

10/5-6/81 directive was issued to the Federal The following domestic policy Reserve Bank of New York: at this meeting suggests that The information reviewed in the third quarter and real GNP declined slightly further continued to rise at the somewhat that prices on the average the second quarter. In July and lower rate that emerged in value of total retail sales was essentially August the nominal from the June level, and unit sales of domestic unchanged in September. Industrial production automobiles weakened August and apparently slackened further declined slightly in payroll employment changed little in September, while nonfarm The unemployment rate rose to 7.5 percent in in both months. about equal to its average in the first half of September, fell in August to the lowest rate in 1981. Housing starts first nine months of the year, the several years. Over the the index of average hourly earnings was somewhat rise in less rapid than during 1980. average value of the dollar against major The weighted sharply through mid-September from foreign currencies declined in early August and on balance has changed little its peak then. In August the U.S. foreign trade deficit widened since from the low rate in July; for July and August substantially deficit was considerably larger than the second combined, the quarter rate. M1-B, adjusted for the estimated effects of shifts into NOW accounts, increased little over the period from June to September, while M2 grew at a relatively strong pace. The level of adjusted M1-B in September 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; the level of M2 was at the upper end of its range for the year. In frequently volatile markets, short term interest rates have declined on balance since mid-August while long-term rates have risen considerably further. On September 21 the Board of Governors announced a reduction in the surcharge from 4 to 3 percentage points on frequent borrowings of large depository institutions. 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 re affirming the monetary growth ranges for the period from the fourth

10/5-6/81 quarter of 1980 to the fourth quarter of 19,81 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 aggre gates 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 aggre gates 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 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 September to December at an annual rate of 7 percent after allowance for the impact of flows into NOW accounts and with growth in M2 at an annual rate around 10 percent or slightly higher, recognizing that the behavior of M2 will be affected by recent regulatory and legislative changes, particularly the public's response to the availability of the all savers certificate. 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 12 to 17 percent. Votes for this action: Messrs. Volcker, Solomon, Boehne, Boykin, Corrigan, Gramley, Keehn, Partee, Rice, Schultz, and Mrs. Teeters. Vote against this action: Mr. Wallich. Mr. Wallich dissented from this action because he favored specification of somewhat lower rates for growth in the monetary aggre gates over the last three months of 1981 than those adopted at.this

10/5-6/81 -13- meeting and was willing to accept a greater shortfall in growth of M1-B from the Committee's range for growth over the year. In his opinion, much of the shortfall was attributable to a decline in the public's desire to hold transaction balances of the types included in M1-B and to the growth of other asset forms, especially money market mutual funds, that to some extent serve as transaction balances. He was also concerned that the public might perceive fairly rapid monetary growth over the balance of the year as a relaxation of the System's policy of restraint, especially if such growth were to be accompanied by sizable decreases in interest rates.