May 21–22, 1984 FOMC Record of Policy Actions

FOMC minutes

5/21-22/84 -10- However, most of the members preferred to retain the current the range. range which they believed was likely to encompass the probable trading range over the intermeeting period. At the conclusion of the discussion, all but one member agreed that no change should be made at this time in the existing degree of pressure on reserve positions. The members anticipated that this policy would continue to be associated with growth of M1 and M2 at annual rates of around 6-1/2 and 8 percent for the period from March to June and with growth of M3 at an annual rate of about 10 percent, somewhat above the objective set in March for the second quarter. It was agreed that the intermeeting range for the federal funds rate would remain at 7-1/2 to 11-1/2 percent. It was also recognized that, within the context of this overall policy approach, operations might need to be modified if unusual financial strains appeared to be developing. In keeping with the Committee's usual practice, the members contem plated that operations might be adjusted during the intermeeting period toward implementing somewhat greater or somewhat lesser restraint on reserves if monetary growth should prove to be significantly faster or slower than targeted for the current quarter. In the view of most members, the implementation of open market operations should be equally sensitive to the potential need for greater or lesser restraint over the weeks ahead. Any such adjustment should but should be undertaken only after an appraisal of not be made automatically the strength of economic activity and inflationary pressures, and evaluations of conditions in financial and banking markets and the rate of growth in total domestic nonfinancial debt.

5/21-22/84 At the conclusion of the meeting, the following domestic policy directive was issued to the Federal Reserve Bank of New York: The information reviewed at this meeting suggests that growth in real GNP, while moderating from the unusually strong first-quarter pace, remains relatively rapid in the current quarter. In April, industrial production and nonfarm payroll employment rose sub stantially following decreased growth in March; the civilian unemployment rate was unchanged at 7.8 per cent in March and April as the labor force increased appreciably. Retail sales grew rapidly in April after two months of decline, and housing starts recovered to a rate equaling their first-quarter average. Information on outlays and spending plans generally suggests continuing strength in business fixed investment. Since the beginning of the year, prices and wages have continued to rise at about the same pace as in 1983. M changed little in April on average, but data available for early May suggest a considerable strengthening. In April M2 grew about in line with expectations while M3 expanded more rapidly than anticipated. From the fourth quarter of 1983 through April, M1 grew at a rate a little below the midpoint of the Committee's range for 1984; M2 increased at a rate in the lower part of its longer-run range, while M3 expanded at a rate a bit above the upper limit of its range. Total domestic nonfinancial debt apparently is growing at a pace above the Committee's monitoring range for the year, with borrowing by businesses continuing to be concentrated in the short-term markets. Interest rates have risen considerably further since late March. On April 6, the Federal Reserve announced an increase in the discount rate from 8-1/2 to 9 percent. Recently, day-to-day market conditions have reflected considerable sensitivity to potential liquidity strains, as highlighted by problems of one large bank, and to uncertainties about the financial and budgetary outlook generally. The foreign exchange value of the dollar against a trade-weighted average of major foreign currencies has risen considerably further since late March to a level close to the peak in early January. The

5/21-22/84 -12- merchandise trade deficit widened further in the first quarter, as a sharp rise in non-oil imports offset a substantial rise in exports. 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, in the light of the changed composition of Ml, 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 existing pressures on bank reserve positions. This is expected to be consistent with growth in M1, M2, and M3 at annual rates of around 6-1/2, 8, and 10 percent, during the period from March to June. respectively, Somewhat greater reserve restraint might be acceptable in the event of more substantial growth of the monetary lesser restraint might be aggregates, while somewhat acceptable if growth of the monetary aggregates slowed significantly. In either case, such a change would be only in the context of appraisals of the considered strength of the business expansion, infla continuing financial market conditions, and tionary pressures, credit growth. The Chairman may call for the rate of

5/21-22/84 -13- 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, Corrigan, Gramley, Mrs. Horn, Messrs. Martin, Partee, Rice, and Wallich. Vote against this action: Mr. Boykin. (Absent and not voting: Mrs. Teeters.) Mr. Boykin dissented because he believed a directive calling for somewhat greater reserve restraint and marginally lower monetary growth would improve the prospects for curbing inflation and achieving sustainable expansion without incurring a material risk of unsettling financial markets.