March 26–27, 1984 FOMC Record of Policy Actions

FOMC minutes

3/26-27/84 -12- over the two-month period. The civilian unemploy large declined 0.2 percentage point each month to ment rate 7.8 percent in February. Retail sales grew at an pace in January and changed little in exceptional Housing starts rose substantially in both February. months to the highest rate in several years. Informa tion on outlays and spending plans generally suggests continuing strength in business fixed investment. Prices rose somewhat faster in early 1984 than in the fourth quarter, with increases concentrated in the food sector. The index of average hourly earnings rose only slightly over the first two months of the year, although total compensation costs appear to have increased more rapidly. The foreign exchange value of the dollar against a trade-weighted average of major foreign currencies declined considerably from the end of January through the first week of March, but part of that decline was retraced more recently. The merchandise trade deficit rose sharply in January, mainly because of larger non-oil imports. Data available through mid-March indicate that M1 and M3 have expanded somewhat more rapidly than antici pated at the previous meeting; since the fourth quarter of 1983, Ml and M3 are tentatively estimated to have grown at rates close to the upper limits of the Committee's ranges for 1984. Growth in M2 appears to have been less rapid than previously expected and was estimated to be at a rate in the lower part of its longer-run range. In January and February, growth of total domestic nonfinancial debt apparently rose at a pace substantially above the Committee's monitoring range for the year, and bank credit continued to expand at a relatively rapid rate. Interest rates have risen considerably since late January. The Federal Open Market Committee seeks to foster 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,

3/26-27/84 -13- 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, including evaluation of conditions in domestic credit and foreign exchange markets. In the short run the Committee seeks to maintain pressures on bank reserve positions judged to be consis tent with growth in M1, M2, and M3 at annual rates of around 6-1/2, 8, and 8-1/2 percent, respectively, during the period from March to June. Greater reserve restraint would be acceptable in the event of more substantial growth of the monetary aggregates, while somewhat lesser restraint might be acceptable if growth of the monetary aggregates slowed significantly; in either case, such a change would be considered in the context of appraisals of the continuing strength of the business expansion, inflationary pressures, and the rate of credit growth. 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 7-1/2 to 11-1/2 percent. Votes for this action: Messrs. Volcker, Solomon, Boehne, Boykin, Corrigan, Mrs. Horn, Messrs. Partee, Rice, and Mrs. Teeters. Votes against this action: Messrs. Gramley, Martin, and Wallich. Messrs. Gramley and Wallich dissented from this action because they preferred a directive calling for a somewhat greater degree of reserve restraint and slightly lower objectives for monetary growth in the second

3/26-27/84 view the strength of the economic expansion warranted more quarter. In their now in order to help avert more serious inflation and financial restraint pressures later. because he was concerned that implementation of Mr. Martin disented policy was likely to lead to more restraint than would be the Committee's desirable in light of the vulnerability of key sectors of the economy to rising interest rates. Thrift institutions, housing, agriculture, and also problems associated with less developed country debt were examples that he cited. In his view, slightly higher objectives for monetary growth needed to be established for the second quarter. 2. Review of continuing authorizations The Committee followed its customary practice of reviewing all of its continuing authorizations and directives at this first regular meeting. of the Federal Open Market Committee following the election of new members from the Federal Reserve Banks to serve for the year beginning March 1, 1984. The Committee reaffirmed the authorization for domestic open market operations, the authorization for foreign currency operations, the foreign currency directive, and the procedural instructions with respect to foreign currency operations in the forms in which they were currently outstanding. The Committee also reaffirmed its agreement with the Treasury to warehouse foreign currencies on the terms adopted on March 18, 1980, with the under standing that the agreement would continue to be subject to annual review. Votes for these actions: Messrs. Volcker, Solomon, Boehne, Boykin, Corrigan, Gramley, Mrs. Horn, Messrs. Martin, Partee, Rice, Mrs. Teeters, and Mr. Wallich. Votes against these actions: None.

3/26-27/84 3. Authorization for domestic open market operations approved a temporary increase from At this meeting, the Committee limit on changes between Committee meetings $4 billion to $6 billion in the government and federal agency securities in System Account holdings of U.S. of the authorization for domestic open market specified in paragraph 1(a) The increase was effective for the intermeeting period ending operations. with the close of business on May 22, 1984. Subsequently, on April 18, 1984, to increase the limit for the intermeeting period by the Committee voted an additional $1 billion to $7 billion. Votes for these actions: Messrs. Volcker, Solomon, Boehne, Boykin, Corrigan, Gramley, Mrs. Horn, Messrs. Martin, Partee, Rice, Mrs. Teeters, and Mr. Wallich. Votes against these actions: None. These actions were taken on the recommendation of the Manager for Domestic Operations. The Manager had advised that substantial net purchases of securities were likely to be required over the intermeeting interval in order to accommodate large reserve needs resulting from an expected bulge in Treasury balances at Federal Reserve Banks. By April 18, the leeway for further purchases had been reduced to about $100 million, as the increase in Treasury balances proved to be somewhat larger than had been anticipated earlier. The Manager requested the additional $1 billion increase in the limit to provide for flexibility in the normal course of open market operations.