November 17, 1981 FOMC Record of Policy Actions

FOMC minutes

in short-term interest rates to levels that might by a precipitous decline not be sustainable. Such a decline in short-term rates could exacerbate expectations and abort a desirable downtrend in bond yields inflationary and mortgage interest rates. Committee members in general believed that additional weakness in could well be accompanied by further declines in interest economic activity be constructive in supporting economic activity. In that rates, which would light, they wished to set objectives for monetary growth over the period ahead consistent with achieving further progress in reducing inflationary expectations and with minimizing the risk of destabilizing swings in both monetary growth and interest rates. Their view was reinforced by the con cern that projection of large budgetary deficits in the years ahead, combined with inflationary sensitivities, could generate anticipations of a reversal of favorable interest rate trends as recovery in activity got under way. After noting the moderate shortfall in growth of M1-B in October from the 7 percent annual rate that had been adopted for growth from September to December, the Committee decided to seek behavior of reserve aggregates associated with growth of M1-B from October to December at an annual rate of about 7 percent (after allowance for the impact of flows into NOW accounts) and with growth of M2 at an annual rate of around 11 percent. It was understood that somewhat more rapid growth of M1-B, consistent with the objective for growth over the fourth quarter adopted at the previous meeting, would be accepted in the event that transaction demands for money proved to be stronger than anticipated; it was also understood that moderate shortfalls from the

growth path would not be unacceptable, particularly if broader aggregates continued to expand rapidly. The intermeeting range for the federal funds rate that provided a mechanism for initiating further consultation of the Committee was set at 11 to 15 percent. 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 is declining appreciably in the current quarter and that prices on the average are rising somewhat less rapidly than over the first three quarters of the year. In October the nominal value of total retail sales dropped; industrial production fell more than in September; and nonfarm payroll employment, especially in manufacturing, declined sharply. The unemployment rate rose from 7.5 percent to 8.0 percent. Housing starts edged down in September from an already de pressed level. Over the first 10 months of 1981, the rise in the index of average hourly earnings was less rapid than during 1980. The weighted average value of the dollar against major foreign currencies has declined only a little since early October, although U.S. short-term interest rates have declined more than foreign rates. A reduced U.S. foreign trade deficit in September brought the deficit for the third quarter close to the second-quarter rate. M-B (adjusted for estimated shifts into NOW accounts) expanded in October almost as much as it had declined in September, and growth of M2 picked up. The level of adjusted M1-B remained 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. Short-term market interest rates have declined substantially since the end of September, and bond yields have also dropped from the peaks generally reached about then. On October 30 the Board of Governors announced a reduction in Federal Reserve basic discount rates from 14 to 13 percent. The surcharge on frequent borrowings of large depository institutions had been reduced from 3 to 2 percentage points on October 9, and on November 16 the Board removed the remaining 2 per centage points.

The Federal Open Market Committee seeks to foster monetary and financial conditions that will help to reduce inflation, promote a resumption of growth in output on a sustainable basis, and contribute to a sustainable pattern of international transactions. At its meeting in early July, the Committee agreed that its 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 respec tively. The Committee recognized that the shortfall in M-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 end of their ranges. In light of its desire to maintain moderate growth in money over the balance of the year, the Committee ex pected 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 respectively 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. The Committee, after noting a moderate shortfall in growth of M1-B in October from the target path set at the last meeting, seeks behavior of reserve aggregates con sistent with growth of M1-B from October to December at an annual rate of about 7 percent (after allowance for the impact of flows into NOW accounts) and with growth of M2 at an annual rate around 11 percent. 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 11 to 15 percent.

Votes for this action: Messrs. Volcker, Solomon, Boehne, Boykin, Corrigan, Gramley, Keehn, Partee, Rice, Schultz, Mrs. Teeters, and Mr. Wallich. Votes against this action: None. 2. Authorization for domestic open market operations On December 4, 1981, the Committee voted to increase from $3 billion to $4 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 December 22, 1981. Votes for this action: Messrs. Volcker, Solomon, Boehne, Boykin, Corrigan, Gramley, Keehn, Partee, Rice, Schultz, and Mrs. Teeters. Votes against this action: None. Absent: Mr. Wallich. This action was taken on recommendation of the Manager for Domestic Operations. The Manager had advised that since the November meeting, substantial net purchases of securities had been undertaken to provide reserves in association with a seasonal increase in currency in circulation. The leeway for further purchases had been reduced to about $900 million, and additional purchases in excess of that amount were likely to be required before the next Committee meeting.