February 1–2, 1982 FOMC Record of Policy Actions

FOMC minutes

2/1-2/82 -11- on the cash balances included in M1. The Committee also of economizing contemplated that growth of M2 was likely to be high within its range, although growth still would be somewhat below that in 1981. However, growth of M2 might appropriately reach or even slightly exceed the upper end of its range if personal savings grew much more rapidly in relation to income than anticipated or if depository institutions attracted an exceptionally large flow of funds into IRAs from sources outside measured M2. In light of the unusual growth of NOW accounts in recent weeks, it was emphasized that the Committee might wish to reconsider the range for M1 should evidence suggest a more lasting change in individuals' liquidity preferences; in any event, it would reconsider the ranges in July within the framework of the Full Employment and Balanced Growth Act of 1978. The Committee adopted the following ranges for growth in the monetary aggregates for the period from the fourth quarter of 1981 to the fourth quarter of 1982: M1, 2-1/2 to 5-1/2 percent; M2, 6 to 9 percent; and M3, 6-1/2 to 9-1/2 percent. The associated range for bank credit is 6 to 9 percent. Votes for this action: Messrs. Volcker, Solomon, Boehne, Boykin, Corrigan, Gramley, Keehn, Partee, Rice, Schultz, and Wallich. Vote against this action: Mrs. Teeters. Mrs. Teeters dissented from this action because she believed that somewhat higher monetary growth over the year ahead was needed to promote adequate expansion in economic activity and a reduction in the rate of un employment. Specifically, she favored a range for Ml that was at least 1/2 percentage point higher than that adopted by the Committee and a range for M2 that provided for somewhat greater growth in the broader aggregate relative to that in Ml.

2/1-2/82 -12- In contemplating its objectives for monetary growth over the remainder of the first quarter of the new year, the Committee took account of the very rapid rise in M1 in recent months, especially in January. Given the apparent persistence of slow growth in nominal GNP in the first quarter, it seemed quite likely that the demand for money would abate sub stantially over the months ahead. Even if M1 grew no further from January to March, its income velocity on the average for the first quarter could well decline at a postwar record rate. While some decline in M1 seemed desirable, the Committee did not feel that much stronger measures than those already in place would be necessary or appropriate in the period immediately ahead to force such a decline. Against this background, the Committee decided to seek behavior of reserve aggregates associated with no further growth of Ml from January to March and with growth of M2 at an annual rate of around 8 percent, with a view to bringing growth of both aggregates over time into their longer-run target ranges for the year. It was also agreed that some decline in M1, which would be associated with a faster return to its longer-run range, would be acceptable in the context of reduced pressure in the money market. The intermeeting range for the federal funds rate, which provides a mechanism for initiating consultation of the Committee, was set at 12 to 16 percent. The following domestic policy directive was issued to the Federal Reserve Bank of New York:

2/1-2/82 -13- The information reviewed at this meeting indicate, that real GNP declined appreciably in the fourth quarter of 1981 and that prices on the average rose much less rapidly than over the first three quarters of the year. In December industrial production and nonfarm payroll employnent declined sharply for the third consecutive month, and the unemployment rate rose an additional 0.5 percentage point to 8.9 Percent. The nominal value of retail sales increased somewhat further, but the level was still below the average for the third quarter. Although housing starts expanded, they emained at a depressed level. The rise in the index of average hourly earnings was considerably less rapid over the fourth quarter of 1981 than on the average earlier in the year. The weighted average value of the dollar against major foreign currencies rose substantially during January; foreign monetary authorities intervened considerably to resist the depreciation of their currencies. In the fourth quarter the U.S. foreign trade deficit increased from the rate in the previous two quarters. M1 grew rapidly in December and January, reflecting in part rapid expansion in checkable deposits other than demand accounts. Growth of M2 also was substantial, owing to strength in the more liquid of the nontransaction com ponents as well as in M1. Short-term market interest rates and bond yields on balance have risen further in recent weeks, and mortgage interest rates have also increased. 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. The Committee agreed that its objectives would be furthered by growth of M1, M2, and M3 from the fourth quarter of 1981 to the fourth quarter of 1982 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. The associated range for bank credit was 6 to 9 percent.

2/1-2/82 of reserve aggregates Committee seeks behavior The consistent with bringing the balance of the quarter over longer-run target ranges M1 and M2 over time into their account of the recent surge in for the year. Taking no further growth in of Ml, the Committee seeks growth and growth in M2 at January-to-March period M1 for the 8 percent. Some decline in M1 an annual rate of around rapid attainment of the be associated with more would range and would be acceptable in the context longer-run reduced pressure in the money market. The Chairman of Committee consultation if it appears to the may call for 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 16 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.