July 16–17, 1984 FOMC Record of Policy Actions

FOMC minutes

7/16-17/84 With regard to possible deviations in pressure on reserve positions toward greater or lesser restraint in response to incoming information, some members endorsed a symmetrical approach that would relate any deviation in either direction to the behavior of the monetary aggregates judged in the context of developments in economic activity, inflationary pressures, financial market conditions, and the rate of growth in credit. However, most of the members preferred a somewhat asymmetrical approach that would involve a more prompt response to the potential need for a move toward somewhat greater restraint if monetary growth should accelerate in association with continued indications of an ebullient economy. In this view, policy implementation should be relatively tolerant, for a time, of some shortfall in monetary growth because the latter might well prove to be temporary if the present apparent momentum in the economy were to continue. market developments, the members generally favored, In light of recent for technical reasons, raising the intermeeting range for the federal funds rate by a small amount. The members regard the federal funds range as essentially a mechanism for initiating Committee consultation when its limits are persistently exceeded. In recent weeks federal funds had tended to trade 7-1/2 to 11-1/2 percent range, and occasionally above that well up in the current range, despite a relatively unchanged level of borrowing at the discount window (apart from special borrowing by one large bank). A small upward adjustment to provide some leeway above the recent trading level was deemed advisable before triggering a consultation of the Committee. the Committee's discussion, the members indicated At the conclusion of their acceptance of a directive that called for maintaining the existing degree

7/16-17/84 -16- members expected such an approach to restraint on reserve positions. The of with growth of M1, M2, and M3 at annual rates of around 5-1/2, be associated in the period from June to September. The 7-1/2, and 9 percent, respectively, restraint on reserve conditions would be members agreed that somewhat greater acceptable in the context of more substantial growth in the monetary aggregates, might be appropriate if monetary growth were while somewhat lesser restraint event, the need for greater or lesser restraint significantly slower. In either the background of developments relating to the would be considered only against of the business expansion, inflationary pressures, conditions continuing strength in financial markets, and the rate of credit growth. It was agreed that the intermeeting range for the federal funds rate would be raised to 8 to 12 percent. 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 the expansion in economic activity is continuing at a strong pace, but there are indications of moderation in some sectors. In May and June, industrial production and retail sales expanded further, though at a somewhat slower pace than earlier in the year. Nonfarm payroll employment rose substantially further in both months and the civilian unemployment rate fell to 7.1 percent in June. Housing starts declined in May to a rate appreciably below the average in the first four months of 1984. Information on outlays and spending plans continues to suggest strength in business fixed in vestment. Since the beginning of the year, average prices and the index of average hourly earnings have risen more slowly than in 1983. M1 grew rapidly in May and June after having changed little in April, while M2 continued to expand moderately. M3 growth slowed somewhat in June but was relatively strong over the second quarter. From the fourth quarter of 1983 through June, M1 grew at a rate somewhat below the upper limit of the Committee's range for 1984; M2

7/16-17/84 -17- increased at a rate a little below the midpoint of its longer-run range, while M3 expanded at a rate above the upper limit of its range. Total domestic non financial debt continued to grow in the second quarter at a pace above the Committee's monitoring range for the year, reflecting very large government borrowing along with strong private credit growth. Interest rates have fluctuated considerably since the May meeting of the Committee. Financial markets were affected by concerns arising from international debt problems. On balance, rates on private short-term securities rose further, while rates on Treasury bills were about unchanged; in long-term debt markets, rates on most private obligations changed little while those on Treasury bonds declined. The foreign exchange value of the dollar against a trade-weighted average of major foreign currencies has risen considerably further since mid-May to a level above its peak in early January. The merchandise trade deficit rose further in April-May compared with the first quarter; an increase in oil and non-oil imports exceeded a slight 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. In furtherance of these objectives the Committee agreed at this meeting to reaffirm the ranges for monetary growth that it had established in January: 4 to 8 percent 6 to 9 percent for both M2 and M3 for the for M1 and period from the fourth quarter of 1983 to the fourth 1984. The associated range for total quarter of domestic nonfinancial debt was also reaffirmed at 8 to 11 percent for the year 1984. It was anticipated that M3 and nonfinancial debt might increase at rates somewhat above the upper limits of their 1984 ranges, given developments in the first half of the year, but the Committee felt that higher target ranges provide inappropriate benchmarks for evaluating would longer-term trends in M3 and credit growth. For agreed on tentative ranges of 1985 the Committee growth, measured from the fourth quarter monetary of 1984 to the fourth quarter of 1985, of 4 to 7 percent for M1, 6 to 8-1/2 percent for M2, and M3. The associated range for 6 to 9 percent for nonfinancial debt was set at 8 to 11 percent.

7/16-17/84 -18- 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 reserve positions. This action is expected to be consistent with growth in M1, M2, and M3 at annual rates of around 5-1/2, 7-1/2, and 9 percent respectively during the period from June to September. Somewhat 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 only in the context of appraisals of the continuing strength of the business expansion, inflationary pressures, financial market conditions, 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 8 to 12 percent. Votes for this action: Messrs. Volcker, Solomon, Boehne, Boykin, Corrigan, Gramley, Mrs. Horn, Messrs. Partee, Rice, Ms. Seger, and Mr. Wallich. Vote against this action: Mr. Martin. Mr. Martin dissented from this action because he wanted to give more weight to the possible need for some easing of reserve conditions in light of the vulnerability of key sectors of the economy and of financial markets to high interest rates. He also believed that somewhat higher objectives for monetary growth should be established for the third quarter.