December 20–21, 1982 FOMC Record of Policy Actions

FOMC minutes

12/20-21/82 -12- monetary and credit aggregates around the top of the indicated ranges would be acceptable in the light of the relatively low base period for the M1 target and other factors, and that it would tolerate for some period of time growth somewhat above the target should unusual precautionary demands for money and liquidity be evident in the light of current economic uncertain ties. The Committee had also earlier indicated that it was tentatively planning to continue the current ranges for 1983, but it will review that decision carefully at its February 1983 meeting in light of economic develop ments and institutional changes associated with the new deposit accounts authorized by the Depository Institutions Deregulation Committee. Specification of the behavior of M1 over the months ahead remains subject to substantial uncertainty because of special circumstances in connection with the public's response to the new deposit accounts available at deposi tory institutions. The difficulties in interpretation of M1 continue to suggest that much less than usual weight be placed on movements in that aggregate during the coming quarter. The institutional changes also add a degree of uncertainty to the behavior of the broader monetary aggre gates. In all the circumstances, the Committee seeks to maintain expansion in bank reserves consistent with growth of M2 of around 9-1/2 percent at an annual rate, and of M3 at about an 8 percent rate, from December to March, allowing in the case of M2 for modest shifting into the new money market accounts from large-denomination CD's or market instruments. The Committee indicated that greater growth would be acceptable if analysis of incoming data and other evidence from bank and market reports in dicate that the new money market accounts are generating more substantial shifts of funds into broader aggregates from market instruments. The Chairman may call for Committee consultation if it appears to the Manager for Domestic Operations that pursuit of the monetary objec tives 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 6 to 10 percent. Votes for this action: Messrs. Volcker, Solomon, Balles, Gramley, Mrs. Horn, Messrs. Martin, Partee, Rice, Mrs. Teeters, and Mr. Wallich. Votes against this action: Messrs. Black and Ford.

12/20-21/82 -13- Mr. Black dissented because he preferred to direct policy in the weeks immediately ahead toward ensuring that the growth of M1, abstracting from temporary effects of the introduction of new money market deposit accounts, would moderate from the extremely rapid rate of recent months. While recognizing the difficulties in interpreting M1 currently, he was concerned that excessive underlying growth in that aggregate might reverse the progress achieved in reducing inflation and inflationary expectations and lead to substantially weaker markets for long-term securities. Mr. Ford dissented from this action because he continued to prefer a policy for the current period that was more firmly directed toward restraining monetary growth, after allowance for the short-run impact of the introduction of the new money market deposit accounts. He remained concerned that rapid expansion in the supply of money together with very large budget deficits would produce an overly stimulative combination of policies that could re kindle inflation and inflationary expectations and lead to higher interest rates during 1983 and 1984. The Committee subsequently, on several occasions, discussed the rapid growth in money market deposit accounts (MMDAs) that extraordinarily place since they became available in mid-December and the implica has taken tions of this growth for behavior and interpretation of the monetary aggre gates. At a telephone conference on January 28, 1983, it was noted that these accounts had risen to a level of about $185 billion on average by the January 19, leading to a very sharp expansion in M2. Estimates week ending of sources of MMDA inflows at this time were inevitably subject to considerable

12/20-21/82 -14- uncertainty. Growth of M2 seemed clearly to be on a track well above the 9-1/2 percent annual rate for the December to March period set at the December meeting, but staff analysis--based on assessment of incoming data as well as various reports on sources of MMDA inflows--suggested it was possible that virtually all of the greater M2 growth might be attributed to unexpectedly large shifts into MMDAs out of instruments not included in M2. Effects on M3 were more problematical, but actual growth of this aggregate in December and January on average appeared to have been modest. Expansion of M1 had remained on the strong side; while there may have been some diversion from M1 to MMDAs, its growth very recently had been raised by the introduction of Super Now accounts. It was the Committee consensus for the time being to maintain the existing degree of reserve restraint but not to increase this restraint further in response to the recent reported over-target growth of the broader monetary aggregates because that growth appeared to be primarily related to the massive redistribution of funds currently under way. The situation will be reviewed at the FOMC meeting on February 8-9. 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 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 February 9, 1983. Votes for this action: Messrs. Volcker Solomon, Balles, Black, Ford, Gramley, Mrs. Horn, Messrs. Martin, Partee, Rice, Mrs. Teeters, and Mr. Wallich. Votes against this action: None.

12/20-21/82 -15- This action was taken on the 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. On January 25-26, 1983, the Committee voted to approve an additional $5.5 billion in the intermeeting limit on changes in holdings of increase to U.S. government and federal agency securities, effective immediately, for the period ending with the close of business on February 9, 1983. This action the Manager had advised that the seasonal need to absorb was taken after in association with the return flow of currency would be greater reserves than anticipated earlier. Votes for this action: Messrs. Volcker Solomon, Balles, Black, Ford, Gramley, Mrs. Horn, Messrs. Martin, Partee, Rice, Mrs. Teeters, and Mr. Wallich. Votes against this action: None.