January 30–31, 1984 FOMC Record of Policy Actions

FOMC minutes

1/30-31/84 -14- that would call for a substantial change in the degree of reserve pressure over the weeks ahead. In their discussion the members took note of uncertainties associated with the introduction of contemporaneous reserve accounting on February 2. The members agreed that no substantial changes would be made in open market operating procedures at this time, but they anticipated the passage of some time before depository institutions fully adjusted their reserve management to the new accounting system. In that interval, for instance, depository institutions might want to hold more excess reserves than usual. The members agreed that such developments would need to be accommodated by adjustments to reserve paths. At the conclusion of the Committee's discussion, the members indicated their acceptance of a short-run policy directed at maintaining the existing degree of restraint on reserve positions. The members expected such a policy to be associated with growth of both M2 and M3 at an annual rate of around 8 percent for the period from December to March and growth of M1 at an annual rate of about 7 percent over the 3-month period. The rate of expansion in total domestic nonfinancial debt was thought likely to be within the Committee's monitoring range for 1984. The members agreed that lesser restraint on reserve conditions would be acceptable in the event of a significant short fall in the growth of the aggregates over the period ahead, while somewhat greater restraint might be acceptable in the context of more rapid growth in the aggregates. In either case, the need for lesser or greater restraint on reserves would also be evaluated against the background of developments relating to the strength of the business expansion and of inflationary pressures. It

1/30-31/84 was agreed that the intermeeting range for the federal funds rate, which provides a mechanism for initiating consultation of the Committee, would remain at 6 to 10 percent. The following directive, embodying the Committee's longer-run ranges and its short-run operating instructions, was issued to the Federal Reserve Bank of New York: The information reviewed at this meeting indicates that the advance in real GNP moderated in the fourth quarter, following rapid expansion in the spring and summer. In December, industrial production and nonfarm payroll employment increased somewhat further and the civilian unemployment rate declined 0.2 percentage point to 8.2 percent. Retail sales were reported to have changed little in December following sizable gains in preceding months. Housing starts declined in December but for the fourth quarter as a whole were close to their average for the year. Recent data indicate substantial strength in business capital spending. Producer prices were about unchanged on average in November and December, and consumer prices increased at about the moderate pace recorded for the year as a whole. The index of average hourly earnings rose somewhat faster in the fourth quarter than in the previous quarter, but for the year 1983 the index increased more slowly than in 1982. The foreign exchange value of the dollar against a trade-weighted average of major foreign currencies has appreciated somewhat further since the latter part of December, with most of the rise occurring in early January. In the fourth quarter the U.S. foreign trade deficit was markedly higher than in the third quarter, reflecting a sharp rise in non-oil imports. M2 and M3 have expanded at moderate rates over the past two months. Expansion in Ml apparently accelerated in January, following several months of reduced growth. By the fourth quarter M2 was at a level close to the midpoint of the Committee's range for 1983, M3 was around the upper limit of its range, and Ml was around the middle of the Committee's monitoring range for the second half of the year. Most interest rates have declined somewhat since the latter part of December.

1/30-31/84 -16- Federal Open Market Committee seeks to foster The monetary and financial conditions that will help to reduce inflation further, promote growth in output on a sustainable basis, and contribute to an improved pattern of international transactions. The Committee established growth ranges for the broader aggregates of 6 to 9 percent for both M2 and M3 for the period from the fourth quarter of 1983 to the fourth quarter of 1984. The Committee also considered that a range of 4 to 8 percent for M1 would be appropriate for the same period, taking account of the possibility that, in the light of the changed composition of M1, its relationship to GNP over time may be shifting. Pending further experience, growth in that aggregate will need to be interpreted in the light of the growth in the other monetary aggregates, which for the time being would continue to receive substantial weight. The associated range for total domestic nonfinancial debt was set at 8 to 11 percent for the year 1984. The Committee understood that policy implementation would require continuing appraisal of the relationships not only among the various measures of money and credit but also between those aggregates and nominal GNP, in cluding evaluation of conditions in domestic credit and foreign exchange markets. In the short run, the Committee seeks to maintain the existing degree of pressure on bank reserve positions, anticipating that approach will be consistent with growth of M2 and M3 each at annual rates of about 8 percent and M1 at an annual rate of about 7 percent during the period from December to March. Growth in nonfinancial debt is expected to be within the range established for the year. Lesser restraint would be acceptable in the context of a shortfall in monetary and credit growth from current expectations, while somewhat greater restraint might be acceptable with more rapid expansion of the aggregates, both viewed in the context of the strength of the business expansion and inflationary pressures. In implementing policy in the weeks ahead, the Manager was instructed to take account of the uncertainties asso ciated with the introduction of the system of more con temporaneous reserve requirements, particularly including the possibility that depository institutions, during a transition period, may desire to hold more excess reserves.

1/30-31/84 -17- The Chairman may call for Committee 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 6 to 10 percent. Votes for the short-run operational paragraphs: Messrs. Volcker, Solomon, Gramley, Guffey, Keehn, Martin, Morris, Partee, Rice, Roberts, Mrs. Teeters, and Mr. Wallich. Votes against this action: None. On March 20, the Committee held a telephone conference to review monetary and economic developments following the January 30-31 meeting, including some increase in interest rates over the period. It was noted that economic activity in most sectors was rising with considerable momentum, helping to generate strong demands for credit. While measures of monetary growth have remained broadly in line with objectives for the year, it was also felt that, in the light of current and prospective developments, the Committee would need to remain alert to the possibility of excessive growth in credit and money. Against that background, it was the consensus of the Committee that, in the short interval until the next scheduled meeting, pursuit of the degree of reserve restraint and associated reserve paths, consistent with the money and credit objectives set at the January 30-31 meeting, should not be constrained by a federal funds rate at or above the monitoring range set at that meeting.