May 18, 1982 FOMC Record of Policy Actions

FOMC minutes

first quarter, and indeed in the period since of the growth in M1 in the in its NOW account component. A variety of October 1981, had occurred preference on the part of individuals to evidence suggested an increased balances in an environment of considerable uncer accumulate highly liquid tainty about prospects for economic activity and interest rates. It was course of the current quarter the strong savings or thought that in the liquid balances were likely to begin to moderate, precautionary demands for prospects appeared to be improving as and perhaps to unwind, if economic if uncertainties about financial conditions were reduced. projected and While considerable uncertainties remained, the behavior of NOW accounts in late April and early May was consistent with that expectation. The staff analysis also suggested that continued pursuit of the second-quarter objectives for monetary growth set at the preceding meeting and the related provision of reserves through open market operations would be consistent with at least modest easing in bank reserve positions. Such easing in turn could be reflected in some decline in short-term interest rates. Rates appeared high, considering the recession in activity, the slower rise in prices and, more technically, the degree of pressure on bank reserve positions. During the Committee's review of its second-quarter objectives, almost all the members agreed that growth rates consistent with those adopted at the previous meeting remained appropriate under current economic and financial conditions. Some sentiment was expressed for moderately faster monetary growth in the current quarter with the objective of improving

and easing financial pressures, but no member favored substantially liquidity expansion. Pursuit of the latter policy course, it was faster monetary probably exacerbate inflationary expectations, especially suggested, would of the outlook for large deficits in the federal budget, and thereby in light exert upward pressure on interest rates. Given the uncertainties relating to the public's demand for liquid balances, notably NOW accounts, most members continued to believe that the be evaluated partly in light of the behavior of M2 behavior of M1 should Thus, for example, somewhat more rapid growth of M1 over the weeks ahead. if it appeared to be associated with a continuing desire might be accepted up liquid balances and with growth of M2 near its by the public to build specified rate. of the discussion the Committee agreed to At the conclusion reaffirm the objectives for monetary growth established at the previous to seek behavior of reserve aggregates associated with growth meeting and of M1 and M2 from March to June at annual rates of about 3 percent and 8 percent respectively. The Committee noted that deviations from these be evaluated in light of changes in the relative impor objectives should tance of NOW accounts as a savings vehicle. The intermeeting range for the federal funds rate, which provides a mechanism for initiating further consultation of the Committee, was set at 10 to 15 percent. The following domestic policy directive was issued to the Federal Reserve Bank of New York:

reviewed at this meeting suggests that The information change little in the current quarter after the real GNP will decline in the first quarter, as business appreciable further liquidation moderates from last quarter's extra inventory rate. In April the nominal value of retail sales ordinary expanded, while industrial production and nonfarm payroll employment continued to decline. The unemployment rate rose point to 9.4 percent. Although housing starts 0.4 percentage in March for the fifth consecutive month, they remained edged up level. The rate of increase in prices on the at a depressed average appears to be slowing somewhat further in the current this year both the consumer price index and quarter; so far the producer price index for finished goods have risen little on balance, and the advance in the index of average hourly earnings has remained at a reduced pace. average value of the dollar against major The weighted foreign currencies, after rising somewhat further in early has fallen sharply over the past month, reflecting April, in part a decline in U.S. interest rates relative to foreign rates and market expectations of further declines. The U.S. foreign trade deficit in the first quarter was one-third less than in the preceding quarter. M1 increased sharply in April, but the expansion was concentrated in the first half of the month and was largely retraced later. Growth of M2 moderated somewhat, owing to a slackening of the expansion in the nontransaction component. Short-term market interest rates and bond yields on balance have declined since the end of March, and mortgage interest rates have edged down further. 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 trans actions. At its meeting in early February, 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.

In the short run, the Committee seeks behavior of reserve growth of M1 and M2 from March to aggregates consistent with June at annual rates of about 3 percent and 8 percent respectively. also noted that deviations from these targets should The Committee be evaluated in light of changes in the relative importance of NOW a savings vehicle. The Chairman may call for Committee accounts as 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 10 to 15 percent. Votes for this action: Messrs. Volcker, Black, Balles, Ford, Gramley, Mrs. Horn, Messrs. Martin, Partee, Rice, Wallich and Timlen. Vote against this action: Mrs. Teeters. (Mr. Timlen voted as alternate for Mr. Solomon.) Mrs. Teeters dissented from this action because she favored specification of somewhat higher rates of monetary growth from March to June with the objective of improving liquidity and easing financial pressures. In her opinion, the time had come to foster lower and less variable interest rates in order to enhance prospects for significant recovery in output and employment.