December 21–22, 1981 FOMC Record of Policy Actions

FOMC minutes

12/21-22/81 -10- M1, the Committee took account of the relatively rapid growth that had already taken place through the first part of December. It also recognized that interpretation of actual money growth might need to take account of the significance of fluctuations in NOW accounts, which recently had been growing relatively rapidly. The intermeeting range for the federal funds rate that provides a mechanism for initiating consultation of the Committee was set at 10 to 14 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 declined appreciably in the fourth quarter and that prices on the average rose less rapidly than over the first three quarters of the year, In November industrial production fell more than in preceding months; nonfarm payroll employment, especially in manufacturing, declined sharply further; and the unemployment rate rose an additional 0.4 percentage points to 8.4 percent. The nominal value of retail sales increased, but the level was still well below the average for the third quarter. Housing starts remained at a depressed level. The rise in the index of average hourly earnings has been somewhat less rapid this year than during 1980. The weighted average value of the dollar against major foreign currencies has changed little on balance since mid November. The U.S. foreign trade deficit in October widened substantially from the unusually low rate in September, and the average for the two months was about the same as that for July and August. M1-B (adjusted for estimated shifts into NOW accounts) expanded substantially in November and early December, but its level in November was still well below the lower end of the Conmittee's range for growth over the year from the fourth quarter of 1980 to the fourth quarter of 1981. Growth of M2 accelerated sharply in November, raising its level above the upper end of its range for the year. Short-term market interest rates and bond yields continued to decline

12/21-22/81 in the latter part of November, but since then they have risen to levels generally higher than those of mid-November; period since mid-November, mortgage interest rates over the declined further. On December 3 the Board of Governors have a reduction in Federal Reserve basic discount announced rates from 13 to 12 percent. Open Market Committee seeks to foster monetary The Federal financial conditions that will help to reduce inflation, and a resumption of growth in output on a sustainable promote and contribute to a sustainable pattern of international basis, At its meeting in early July, the Committee transactions. agreed that its objectives would be furthered by reaffirming growth ranges for the period from the fourth the monetary quarter of 1980 to the fourth quarter of 1981 that it had set These ranges included growth of 3-1/2 at the February meeting. 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 end 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 M-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 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 respectively would be appropriate. In the short run, the Committee seeks behavior of reserve consistent with growth of M1 and M2 from November aggregates 1981 to March at annual rates of around 4 to 5 percent and 9 to 10 percent respectively. The target for M1 no longer reflects the "shift-adjustment" for conversion of outstanding interest-bearing assets into new NOW accounts, formerly estimated in the "shift-adjusted" M1-B series. In setting the M1 target the Committee took account of the relatively rapid growth that had already taken place through the first part of December; it also recognized that interpretation of

12/21-22/81 growth may need to take account of the signifi actual money cance of fluctuations in NOW accounts, which have recently been growing relatively rapidly. The Chairman may call for Committee consultation if it appears to the Manager for Domestic Operations that pursuit of the monetary objectives reserve paths during the period before the next and related meeting is likely to be associated with a federal funds rate persistently outside a range of 10 to 14 percent. Votes for this action: Messrs. Volcker, Boehne, Corrigan, Gramley, Keehn, Partee, Rice, Schultz, Mrs. Teeters, and Mr. Wallich. Votes against this action: Messrs. Solomon and Boykin. Mr. Solomon dissented from this action because he felt it was particularly important at the beginning of an annual target period that the Committee not formulate its directive in terms that conveyed an un realistic sense of precision. In his view, the directive language referring to the November-to-March growth rates in M1 and M2 did seem to convey such a sense. Mr. Boykin dissented from this action because he favored specifi cation of somewhat lower rates for growth in the monetary aggregates from November to March. For M2 in particular, he stressed the desirability of specifying a rate no higher than the range of 6 to 9 percent that had earlier been tentatively adopted for growth over 1982, with a view to avoiding a possible interpretation that the Committee had implicitly raised its objec tive before completion of the current review of the growth ranges for 1982. 2. Authorization for domestic open market operations At this meeting the Committee voted to increase from $3 billion to $4 billion the limit on changes between Committee meetings in System

12/21-22/81 -13- holdings of U.S. government and federal agency securities specified Account in paragraph 1(a) of the authorization for domestic open market operations, effective immediately for the period ending with the close of business on February 2, 1982. 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. This action was taken on recommendation of the Manager for Domestic Operations. The Manager had advised that substantial net sales of securities were likely to be required during January in order to absorb reserves that had been provided over recent weeks to meet seasonal needs for currency in circulation.