February 8–9, 1983 FOMC Record of Policy Actions

FOMC minutes

2/8-9/83 -16- The Federal Open Market Committee seeks to foster monetary and financial conditions that will help to reduce inflation further, promote a resumption of growth in output on a sustainable basis, and contribute to a sustainable pattern of international transactions. In establishing growth ranges for monetary and credit in furtherance of these objectives, aggregates for 1983 the Committee recognized that the relationships between such ranges and ultimate economic goals have been less predictable over the past year; that the current impact of new deposit accounts on growth rates of monetary with a high degree of aggregates cannot be determined confidence; and that the availability of interest on large portions of transaction accounts, declining inflation, and lower market rates of interest may be reflected in some changes in the historical trends in velocity. A substantial shift of funds into M2 from market instruments, including large certificates of deposit not included in M2, in association with the extraordinarily rapid build-up of money market deposit accounts has distorted growth in that aggregate during the current quarter. In establishing growth ranges for the aggregates for 1983 against this background, the Committee felt that growth in M2 might be more appropriately measured after the period of highly aggressive marketing of money market deposit accounts has subsided. The Committee also felt that a somewhat wider range was for monitoring M1. Those growth ranges appropriate will be reviewed in the spring and altered, if appro priate, in the light of evidence at that time. With these understandings, the Committee established the following growth ranges: for the period from February-March of 1983 to the fourth quarter of 1983, 7 to 10 percent at an annual rate for M2, taking into account the probability of some residual shifting into that aggregate from non-M2 sources; and for the period from the fourth quarter of 1982 to the fourth quarter of 1983, 6-1/2 to 9-1/2 percent for M3, which appears to be less distorted by the new accounts. For the same period a tentative range of 4 to 8 percent has been established for M1, assuming that Super Now accounts draw only modest amounts of funds from sources outside M1 and assuming that the authority to pay interest on transaction balances is not extended beyond presently eligible accounts. An associated range of growth for total domestic nonfinancial debt has been estimated at 8-1/2 to 11-1/2 percent.

2/8-9/83 -17- In implementing monetary policy, the Committee agreed that substantial weight would be placed on behavior of the broader monetary aggregates, expecting that current distortions in M2 from the initial adjustment to the new deposit accounts will abate. The behavior of M1 will be monitored, with the degree of weight placed on that aggre gate over time dependent on evidence that velocity character istics are resuming more predictable patterns. Debt ex pansion, while not directly targeted, will be evaluated in judging responses to the monetary aggregates. The Committee understood that policy implementation would involve continuing appraisal of the relationships between the various measures of money and credit and nominal GNP, including evaluation of conditions in domestic credit and foreign exchange markets. Votes for this action: Messrs. Volcker, Solomon, Balles, Gramley, Martin, Partee, Rice, and Mrs. Teeters. Votes against this action: Messrs. Black, Ford, Mrs. Horn, and Mr. Wallich. Mr. Black and Mrs. Horn dissented from this action because they pre ferred to give more weight to M1 as a policy objective. While recognizing the difficulties in interpreting M1 currently, they believed that over time M1 was more reliably related to the Committee's ultimate economic objectives than were the broader aggregates and that it constituted a better basis for setting appro priate paths for reserve growth. They also favored reemphasizing M1 because they viewed it as a more controllable aggregate. In addition, Mr. Black in dicated that he saw a need for lower target ranges, but he wanted to reduce monetary expansion gradually to avert dislocative effects. Mr. Ford dissented because he believed that policy should focus more firmly on implementing noninflationary growth via a smaller number of monetary an urgent need to begin gradually reducing the rate of targets. He also saw monetary growth in light of its inflationary potential, particularly when

2/8-9/83 by highly stimulative fiscal policy. He felt strongly that this complemented the risk of triggering another short-lived recovery combination of policies ran in 1984 by a private credit shortage and the return of that might be aborted high inflation and interest rates. favored somewhat lower monetary growth ranges for 1983 Mr. Wallich which in his view would be more consistent with the objectives of fostering economic recovery while minimizing the risks of stimulating inflation. In their discussion of policy for the weeks immediately ahead, Committee members were generally in favor of maintaining the existing degree of restraint on reserve positions. Reference was made to an analysis which indicated that the current degree of restraint was likely to be associated with a slowing in the growth rates of the various monetary aggregates, although M2 growth would probably remain relatively rapid. The members agreed that the near-term outlook for growth in the monetary aggregates remained subject to unusual uncertainties, and an appropriate assessment of such growth would need to take account of dis tortions that might continue to be created by the introduction of new deposit accounts. If after adjustment for such distortions monetary growth were to slow appreciably over the weeks ahead and the monetary aggregates appeared to be growing at rates in line with or below the paths implied by the Committee's ranges for the year, most of the members indicated that they would find a reduced degree of reserve restraint acceptable. With regard to the intermeeting range for the federal funds rate, which provides a mechanism for initiating consultation of the Committee, the members favored retention of the current range of 6 to 10 percent.

2/8-9/83 -19 conclusion of the Committee's discussion, the following At the paragraph of the domestic policy directive was short-run operational approved and issued to the Federal Reserve Bank of New York: more immediate future, the Committee seeks For the to maintain the existing degree of restraint on reserve positions. Lesser restraint would be acceptable in the context of appreciable slowing of growth in the monetary or below the paths implied by the long-term aggregates to ranges, taking account of the distortions relating to the introduction of new accounts. 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, Black, Balles, Gramley, Mrs. Horn, Messrs. Martin, Partee, Rice, Mrs. Teeters, and Mr. Wallich. Vote against this action: Mr. Ford. Mr. Ford dissented from this action because he believed that policy should be directed more firmly toward gradually reducing monetary growth in the period immediately ahead. He was concerned that continued monetary expansion at recent rapid rates would restimulate inflation and threaten the sustainability of the economic recovery, especially against the backdrop of a very expansionary fiscal policy.