August 21, 1984 FOMC Record of Policy Actions

FOMC minutes

At the conclusion of the discussion, all but one member indicated their acceptance of a directive specifying no change at this time in the degree of pressure on reserve positions, but calling for a response to any significant deviation in the aggregates from expectations against the background of economic and financial developments. The members anticipated that this approach to policy implementation would be consistent with growth of the various aggregates at rates for the quarter close to those specified at the previous meeting. Specifically, M1 was expected to grow at an annual rate of around 5 percent or slightly less for the period from June to September, a little less than expected at the previous meeting reflecting the contraction in M1 in July. The annual rates of growth for M2 and M3 in the third quarter would continue to be 7-1/2 and 9 percent respectively. The intermeeting range for the federal funds rate was left unchanged at 8 to 12 percent. It was also recognized that, within the context of this overall approach, operations might need to be modified if unusual financial strains appeared to be developing. 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 a moderation in the rate of growth. In July, industrial production and nonfarm payroll employment rose further, but retail sales fell after rising considerably in earlier months and housing starts declined to a rate appreciably below the average in the second quarter. The civilian un employment rate increased 0.4 percentage point to 7.5 percent. Information on outlays and spending plans

continues to suggest strength in business fixed invest ment. Since the beginning of the year, average prices and the index of average hourly earnings have risen more slowly than in 1983. In July, M1 declined after two months of rapid growth, though data for early August suggested some rebound, while M2 expanded at a relatively slow pace. M3 growth, however, remained comparatively sizable. From the fourth quarter of 1983 through July, M1 grew at a rate a bit above the midpoint of the Committee's range for 1984; M2 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. Growth in total domestic nonfinancial debt appears to be continuing at a pace above the Committee's monitoring range for the year, reflecting very large government borrowing along with strong private credit growth. Most interest rates have fallen considerably since the July meeting of the Committee, with the largest declines generally in intermediate and long-term bond markets. The foreign exchange value of the dollar against a trade-weighted average of major foreign currencies rose further to a new high in early August and since then has fluctuated in a range just below the peak. The merchandise trade deficit in June was somewhat above the May level, and for the second quarter as a whole the deficit was little changed from the high first-quarter rate. 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 the July meeting to reaffirm the ranges for monetary growth that it had established in January: 4 to 8 percent for M1 and 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 associated range for total domestic non financial 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 would provide inappropriate benchmarks for evaluating longer-term trends in M3 and credit growth. For 1985 the Committee agreed on tentative ranges of monetary growth, measured from the fourth quarter of 1984 to the fourth quarter of 1985, of 4 to 7 percent for M1, 6 to 8-1/2 percent for M2, and 6 to 9 percent for M3. The associated range for nonfinancial debt was set at 8 to 11 percent. 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 implementation of policy in the short run, the Committee seeks to maintain existing pressures on reserve positions. This action is expected to be con sistent with growth in M1 at an annual rate of around 5 percent or slightly less, and in M2 and M3 at annual rates of around 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 would be acceptable in the event of significantly slower growth. 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. Martin, Partee, Rice, and Ms. Seger. Vote against this action: Mr. Wallich.

Mr. Wallich dissented from this action because he preferred a directive calling for a somewhat greater degree of reserve restraint and marginally lower monetary growth in the third quarter. In his view such a directive was more likely to help avert more serious inflation and financial pressures later. 2. Authorization for domestic open market operations At this meeting, the Committee approved a temporary increase from $4 billion to $6 billion in the limit on changes between Committee meetings in System Account holdings of U.S. government and federal agency securities specified in paragraph 1(a) of the authorization for domestic open market operations. The increase was effective for the intermeeting period ending with the close of business on October 2, 1984. Votes for this action: Messrs. Volcker, Solomon, Boehne, Boykin, Corrigan, Gramley, Mrs. Horn, Messrs. Martin, Partee, Rice, Ms. Seger, and Mr. Wallich. Votes against this action: None. This action was taken on the recommendation of the Manager for Domestic Operations. The Manager had advised that projected increases in required reserves and currency might require net purchases of securities over the intermeeting interval in amounts close to the usual $4 billion leeway. A likely rise in Treasury balances at Federal Reserve Banks would add to the need for System purchases of securities. Accordingly, the Manager requested the temporary increase in the limit to provide the necessary leeway for handling that contingency.