bluebooks · July 9, 1985

Bluebook

Prefatory Note

The attached document represents the most complete and accurate version available based on original copies culled from the files of the FOMC Secretariat at the Board of Governors of the Federal Reserve System. This electronic document was created through a comprehensive digitization process which included identifying the bestpreserved paper copies, scanning those copies, 1 and then making the scanned versions text-searchable. 2 Though a stringent quality assurance process was employed, some imperfections may remain. Please note that this document may contain occasional gaps in the text. These gaps are the result of a redaction process that removed information obtained on a confidential basis. All redacted passages are exempt from disclosure under applicable provisions of the Freedom of Information Act.

In some cases, original copies needed to be photocopied before being scanned into electronic format. All scanned images were deskewed (to remove the effects of printer- and scanner-introduced tilting) and lightly cleaned (to remove dark spots caused by staple holes, hole punches, and other blemishes caused after initial printing). 2 A two-step process was used. An advanced optimal character recognition computer program (OCR) first created electronic text from the document image. Where the OCR results were inconclusive, staff checked and corrected the text as necessary. Please note that the numbers and text in charts and tables were not reliably recognized by the OCR process and were not checked or corrected by staff.

July 5, 1985 Strictly Confidential (FR)

Class I FOMC

MONETARY POLICY ALTERNATIVES

Prepared for the Federal Open Market Committee

By the staff

Board of Governors of the Federal Reserve System

STRICTLY CONFIDENTIAL (FR) CLASS I - FOMC

July 5,

1985

MONETARY POLICY ALTERNATIVES Recent Developments (1)

With growth very rapid in May and June, M1 expanded at about

a 13-1/4 percent annual rate over the March-to-June interval, well above the path for that period of a little over 6 percent adopted at the last FOMC meeting and bringing the aggregate far above the upper edge of the parallel band associated with its 1985 growth range.

The overall strength in demand

for M1, even as income growth remained moderate, probably has reflected in some degree the effects of recent interest rate declines.

The velocity of

M1 has declined by about 5 percent at an annual rate in both the first and second quarters, in association with growth in M1 averaging 10-1/2 percent over the two quarters. (2)

The extent of M1 growth over the past two months has been

much greater than monthly models predict.

Strength has been evident

during that period in all major components of M1 and is widespread across

Reserve Districts.

However, demand deposits have been particularly strong

for several weeks now.

Examination of the data and contacts with banks

do not suggest any clear special factor at work-such as a change in cash management techniques in response to the E.F. Hutton development or a much larger rise in compensating balances than would be expected in response to recent interest rate declines.

It may be noted, though, that

the total Teasury balance dropped very sharply from mid-May to mid-June, perhaps providing some temporary stimulus to demand deposits at the time. (3)

Growth in M2 and M3 picked up further in June to 13-3/4 and

10-3/4 percent annual rates, respectively.

The nontransactions component

of M2 strengthened considerably in June as flows into MMDAs and money funds

KEY MONETARY AGGREGATES (Seasonally adjusted annual rates

of growth) March

April

May

QIV

JuneP

to QIIP

to JuneP

Money and Credit Aggregates M1

5.9

14.0

19.4

13.2

10.5

11.6

-0.8

8.4

13.8

7.2

8.7

9.3

0.2

7.1

10.7

6.0

7.9

8.2

12.0

11.9

12.7

4.7

13.3

10.0

9.4

9.9

10.1

Nonborrowed reserves 2

9.6

7.9

33.1

17.0

16.3

17.7

Total reserves

7.1

18.1

24.9

16.9

15.1

16.4

Monetary base

3.7

10.6

14.8

9.8

8.0

8.9

455

800

540

362

607

506

738

804

939

Domestic nonfinancial debt Bank credit Reserve Measures1

Memo:

(Millions of dollars)

Adjustment and seasonal borrowing btal

Excluding special situation borrowing Excess reserves

p-preliminary. NOTE:

Monthly reserve measures, including excess reserves and borrowing, are calculated by prorating averages for 2-week reserve maintenance periods that overlap months.

1. Growth rates of reserve measures are adjusted to remove the effects of discontinuities resulting from phased changes in reserve ratios under the Monetary Control Act. 2.

Includes "other extended credit" from the Federal Reserve,

but not special

situation borrowing by thrifts that was part of adjustment plus seasonal borrowing until reclassified as extended credit.

were sizable in response to relatively favorable yields on these instruments, whose offering rates, as usual, lagged behind the recent decline in market rates.

Over the three-month period ending in June, M2 and M3 expanded at

annual rates of 7-1/4 and 6 percent-somewhat stronger than anticipated at the time of the last meeting, and in the case of M2 in line with earlier expectations at the time of the March meeting.

By June, M2 was slightly

above the upper end of its long-run target growth cone and M3 was still

well

within its range. (4)

Growth in total domestic nonfinancial debt has slowed from

its first-quarter pace,

though second-quarter expansion remains relatively

high at around an 11-3/4 percent annual rate.

Both federal and private

sectors contributed to the recent deceleration in debt.

Business borrowing

has continued to be boosted by unusually large debt-financed retirements of corporate equity, which are estimated to account for around one percentage point of total credit growth thus far this year.

Issuance of debt by

state and local governments has been quite heavy as refunding issues have surged. (5)

Total reserves grew at about a 22 percent annual rate over

May and June, on average, transaction accounts.

reflecting strength in required reserves against

The nonborrowed reserve path over the entire inter-

meeting period was constructed assuming $350 million of adjustment plus seasonal borrowing,

abstracting from any borrowing still

category by thrifts in special situations.

in the adjustment

Excluding special situations,

adjustment plus seasonal borrowing averaged around $510 million over the past six weeks--fluctuating on a weekly basis between $240 million and $850 million.

Throughout the period, excess reserves ran higher than expected,

particularly during the last maintenance period containing the mid-year

statement date, and averaged around $940 million.

By mid-June virtually

all special situation borrowing had been reclassified as extended credit, and total borrowing by privately-insured thrift institutions has dropped to $330 million most recently from $463 million at the time of the May FOMC meeting. (6)

Federal funds since the last FOMC meeting have traded

mainly in the 7-1/2 to 7-3/4 percent range reached following the discount rate cut, although around mid-June the funds rate fell to around 7 percent and below.

Very recently, the funds rate moved above 8 percent for a time

with the approach of the July 4 holiday and an unusually sharp reserve drain as Treasury balances at Federal Reserve Banks soared on the settlement date of two new Treasury issues.

Other market rates generally varied within

a wide range over the intermeeting period, in response to the ebb and flow of expectations about the proximity of further cuts in the discount rate, incoming economic information, and at times unanticipated money supply developments.

On balance, Treasury bill rates are currently around 60

basis points below their levels at the time of the last FOMC meeting, while commercial paper and CD rates have declined less, as risk premiums widened somewhat in response to concerns about the health of some financial institutions.

The prime rate was reduced from 10 to 9-1/2 percent.

In the capital

markets, Treasury and corporate bond yields are down a little more than 1/2 percentage point, and some broad stock price indices reached record levels; mortgage rates have fallen by about 80 basis points in lagged response to earlier market gains. (7)

Foreign exchange market conditions have generally been less

volatile since the last FOMC meeting than in earlier periods of the year. The dollar has declined by about 2-1/2 percent on a weighted average basis, with trading in a relatively narrow range.

Interest differentials among

-5major currencies have shown little change since the last Committee meeting.

Long-run targets (8)

Two alternative long-run targets for the monetary and debt

aggregates for 1985, plus the currently established targets, are shown below.

Alternative I differs only with respect to M1.

Alternative II

suggests a larger revision for M1, together with small increases in the upper limits of the M2 and debt ranges.

At mid-year, M2 was around its

upper bound and debt was running strong, so that some adjustments of the ranges for those aggregates might be considered. Growth Ranges for 1985 Current

Alt. I

Alt. II

4 to 7

4 to 8

5 to 9

6 to 9

6 to 9-1/2

Debt

9 to 12

9 to 12-1/2

(9)

The table below focuses on the arithmetic of achieving

the upper bounds of the current and proposed M1 long-run growth ranges for the year 1985, given growth of 10-1/2 percent annual rate over the first half of 1985 (QIV '84 to QII '85).

A particular problem arises

because M1 was so strong in the latter part of the second quarter.

This

high jumping off point means that attainment of, say, the 7 percent upper limit of the current long-run range would entail virtually no month-bymonth growth on average over the balance of the year-as can be seen from the table, one-half of one percent at an annual rate.

However, implied

growth over the second half measured from QII '85 to QIV '85 would be higher-about 3-1/4 percent annual rate-owing to the carry-over effect of the acceleration of M1 late in the second quarter.

The upper limit

of the alternative II range could be achieved with 5 percent, annual rate,

month-by-month growth, which would yield substantial quarterly average growth. Ml Growth rate from QIV '84 to QIV '85

(10)

Implied M1 Growth June-December QII '85-QIV '85

3.3

5.3

2.8

7.1

5.0

The staff GNP projection for 1985 assumes, given recent

developments, M1 growth above the upper limit of the current range-increasing 8 to 9 percent for the year--with interest rates showing little net change over the balance of the year.

Growth of M2 and M3

for the year is expected to be within their current long-run ranges, though well into the upper part for M2, while debt growth may be just above the upper limit of the range. (11)

The alternatives presented in paragraph (8) above assume

the Committee retains the QIV '84 base for M1.

However, as in mid-1983,

the FOMC may wish to contemplate shifting the base to the second quarter of 1985; relevant economic considerations are discussed in the next paragraph.

Because of the very rapid growth of M1 toward the end of the

spring quarter, the aggregate would still be starting off high relative to a rebased long-run path.

If the Committee chose to retain the existing

4 to 7 percent range, but to shift the base to the second quarter (so that the range applied to the QII '85-QIV '85 period), the upper limit could be attained with growth from June-to-December at a 4-3/4 percent, annual rate, while growth around the mid-point of the range would be consistent with month-by-month growth averaging 3 percent at an annual rate.

If an 8 percent upper limit were employed in a rebased range,

-8-

June-to-December growth of 6 percent, annual rate, would be consistent with the upper limit. (12)

The economic argument for shifting the base is similar

to the consideration that prompted the base shift in mid-1983-the likelihood that the rapid growth of M1 above target was needed to accommodate to a "permanent" downward shift in the level of velocity and thus did not entail the need to offset rapid growth by commensurately lower growth subsequently.1/

Assuming the recent decline in velocity

represents a "permanent" adjustment, it could be appropriate to rebase, with the new M1 target range designed to be more consistent with the longer-run trend of velocity (abstracting from interest rate movements) allowing for a reasonable range of actual velocity variation in light of emerging economic and financial conditions.

The target would also

need to take account of the speed with which the FOMC wishes to move to decelerate price inflation further and assessment of the prospective strength of the economy.

It would not seem appropriate to rebase, however,

if the Committee felt that the recent burst of M1 growth would contribute in the period ahead to undesirably strong demand pressures and to accelerating inflation or felt that rebasing would be perceived as signaling less determination to resist inflation.

In those circumstances, it would

be desirable to aim at a greater slowdown of M1 growth than is implied by rebasing, although one might still wish to consider raising the current Ml range so as to avoid a deceleration that is unduly abrupt, given the

Factors behind the recent behavior of M1, in comparison with 1982-83, and implications for monetary targeting are discussed in some detail in the memorandum circulated to the Committee under date of July 2, 1985.

remaining lagged effects on M1 demand that can be expected from the recent declines in interest rates. (13)

Regarding tentative money and credit targets to be set

for 1986, three alternatives are presented below.

Alternative I encom-

passes a 4 to 7 percent range for M1, the same as that currently in place, and also an unchanged range for M2.

The growth range for M3 has an upper

limit that is one-half percent lower than the current one and the credit range is lower by a full percentage point.

Nominal GNP is projected by

the staff to grow about 1/2 percentage point more than this year, but with no further worsening in the current account deficit expected, spending and the credit needed to finance it would tend to grow less than this year.

In addition, debt growth should be damped by an abatement of

mergers and other activities associated with greater leveraging by businesses.

Alternative II widens the M1 and M2 ranges to provide added

flexibility in the face of uncertainties such as those described in paragraphs (14) to (17) below. Alternative III represents a stronger move in the direction of attaining reasonable price stability. Growth ranges for 1986 Alt. I

Alt. II

Alt. III

4 to 7

4 to 8

3-1/2 to 6-1/2

6 to 9

6 to 9-1/2

5-1/2 to 8-1/2

6 to 9

5-1/2 to 8-1/2

Debt

8 to 11

8-1/2 to 11-1/2

7-1/2 to 10-1/2

(14) The staff's GNP projection for next year assumes M1 growth on the order of 5-1/2 percent and little change in the level of market interest rates from recent levels.

That assumption is encompassed by

-10-

all of the alternatives, with alternative II representing a looser and alternative III a tighter fit. would depend on,

The Committee's choice of monetary targets

among other things, the extent to which it

projected growth of GNP acceptable,

the pace at which it

finds the

wishes to move

toward price stability, and the extent to which it wishes to allow for uncertainties such as the sustainability of real growth under current credit and exchange market conditions, the course of fiscal policy, the behavior of the dollar, and effects of institutional change. (15) needed if

In general, money growth on the high side would likely be

nominal interest rates were, contrary to our expectation, to

notch down further next year. II

Indeed,

may not encompass developments in

even the upper limit of alternative

the event of a substantial downward

adjustment of interest rates, as the experience of 1982-1983 and from late last year through the first

half of this year tends to suggest.

interest rates could drop if

Nominal

the present level of real interest rates

turns out to be too high, as the expansion matures further, to sustain real growth at a satisfactory pace (assuming the level of real rates is not reduced by acceleration of inflation).

Nominal rates could also drop

in the event of a further decline of inflation expectations.

The evolution

of fiscal policy could also affect interest rates, though perhaps not substantially given the range of probable fiscal outcomes.

In principle,

a move toward greater fiscal restraint than the $50 billion federal deficit cut in the fiscal year 1986 assumed by the staff should exert greater downward presure on interest rates, with potential one-time feedback effects on money demand.

On the other hand, a failure to act on the

deficit would exert some upward impact on interest rates and possibly also inflation expectations.

-11-

(16)

The behavior of the dollar on exchange markets is another

area of uncertainty.

The GNP outlook assumes a moderate decline, but

a very sharp decline would entail certain fundamental changes in the underlying economic situation.

Upward price pressures would be stronger,

there would be a greater stimulus to domestic output from the declining dollar, and there would be a risk of worsening inflationary expectations. Desirable behavior of money under these conditions would depend in part on other surrounding circumstances.

But, in general, keeping money growth

at rates earlier contemplated would involve upward pressure on interest rates, with real GNP growth sustained over time by the positive impact on domestic production of the dollar depreciation.

The continued restraint

on money growth would work to check tendencies for inflationary expectations to rise.

An increase in money growth might relieve potential

strains in financial markets, and help ensure that economic growth was not unduly depressed by behavior of interest-sensitive domestic sectors, but probably at the cost of worsening the long-run inflationary consequences of a sharp dollar decline.

A lessening of money growth would do most to

restrain any inflationary impact of a sharp dollar decline, but would tend to exacerbate financial strains as added upward pressures were placed on interest rates and would most risk a weakening, at least in the short run, of real growth. (17)

The institutional changes known to be in prospect for next

year are the lifting of ceiling rates on regular NOW accounts and savings deposits on March 31, 1986, and the removal of the present $1,000 minimum balance restriction on super NOWs and MMDAs on January 1 of that year. There will undoubtedly be some resulting deposit shifts.

However, we do

not at this point expect any significant impact on growth of M1 or M2,

-12-

taking into account experience with reductions in the minimum balance earlier this year, the availability of ceiling-free checking and savings accounts in any event for sane time now, and the observation that most banks currently impose minimum balance requirements above $1,000 on regular NOW accounts

(if

fees are to be avoided) and on super NOWs.

-13-

Near-term policy alternatives (18)

The table below gives three alternative specifications

for the monetary aggregates over the June-to-September period along with associated federal funds rate ranges.

(More detailed data, including

growth implied under each alternative for the fourth quarter to September, can be found on the table and charts on the following pages.) Alt. A

Alt. B

Alt. C

M1 M2

7 8-1/2

5-1/2 7-1/2

4 6-1/2

7-1/4

6-1/2

5 to 9

6 to 10

7 to 11

Growth from June to Sept.

Associated federal funds rate range (19)

Alternative B contemplates a slowing of M1 growth to a

5-1/2 percent annual rate over the June-to-September period, consistent with seasonal and adjustment borrowing at the discount window at around the $350 million level used in constructing reserve paths since the last FOMC meeting.

Federal funds would generally trade in a 7-1/2 to 7-3/4

percent area.

Growth in total and nonborrowed reserves would slow to 3-1/2

and 5-1/2 percent annual rates respectively over the June-to-September period as the expansion of transaction deposits moderates. (20)

In part, the slowing of M1 growth under alternative B is

expected to result from a substantial weakening in the demand deposit component, working off a portion of its recent unusually large bulge. The rapid growth of M1 late last quarter has brought money balances to a point where they might be considered to be sufficiently high to finance at least some significant GNP growth in the third quarter without further

Alternative Levels and Growth Rates for Key Monetary Aggregates M3 M2 M1 ------------------------------------- ------------------------ -----------------------Alt. C Alt. B Alt. A Alt. C Alt. B Alt. A Alt. C Alt. B Alt. A ------ ------ ------ ------ ------ ------ ------ --------------------------------1985--April May June July August September

574.9 581.6 591.0

2427.5 2444.5 2472.7

3055.9 3074.1 3101.4

594.6 598.0 601.3

594.4 597.1 599.1

594.2 596.2 596.9

2490.1 2508.0 2524.7

2489.2 2504.2 2518.5

2488.3 2500.4 2512.4

3114.4 3137.8 3162.8

3113.4 3133.7 3157.0

3112.4 3129.6 3151.3

Growth Rates Monthly 5.9

5.9

-0.8

0.2

14.0 19.4

8.4 13.8

7.1 10.7

July August

7.4 6.9

6.9 5.5

6.4 4.1

8.5 8.6

8.0 7.2

7.5 5.8

5.0 9.0

4.6 7.8

4.2 6.6

September

6.6

4.0

1.4

8.0

6.9

5.8

9.6

8.9

8.3

1985--01 Q2 Q3

10.6 10.1 10.6

10.6 10.1 9.9

10.6 10.1 9.1

12.0 5.3 9.7

12.0 5.3 9.1

12.0 5.3 8.5

10.7 5.0 8.0

10.7 5.0 7.5

10.7 5.0 7.0

Q4 84 to June 85 Q4 84 to Sept. 85 1985 Mar. to June 1985 June to Sept.

11.6 10.4 13.2 7.0

11.6 9.9 13.2 5.5

11.6 9.4 13.2 4.0

9.3 9.2 7.2 8.4

9.3 8.8 7.2 7.4

9.3 8.5 7.2 6.4

8.2 8.2 6.0 7.9

8.2 8.0 6.0 7.2

8.2 7.8 6.0 6.4

1985--April

May June

Growth Rates

Chart 1

ACTUAL AND TARGETED M1 Billions of dollars

I 610

-- 600

ACTUAL LEVEL

PROJECTED LEVEL SHORT RUN ALTERNATIVES

-- 590

-- 580

-- 570

-- 560

-- 550

N 1984

I..

.. I"

-____

___

J 1985

___

540

Chart 2

ACTUAL AND TARGETED M2 Bi ll ions of doll ars

2650

-2600 -ACTUAL LEVEL --- PROJECTED LEVEL * SHORT RUN ALTERNATIVES -

2550

2500

-. .*

., 67

.** y

,"*^

2450

"~2400

23 0

2300

225C O

N 1984

J J 1985

Chart 3

ACTUAL AND TARGETED M3 Bill ions of dollars

13300

ACTUAL LEVEL --- PROJECTED LEVEL * SHORT RUN ALTERNATIVES

3200

3100

3000

-1 2900

N 198 .

J 1985

2800

Chart 4

DEBT Bill ions of do I I ars -1 6800

ACTUAL LEVEL

6600

--- PROJECTED LEVEL

6400

6200

-1 6000

-- 5800

SN 1984

J 1985

-I_

5600

-15expansion of M1.

Indeed, if M1 remained at its June level during the

third quarter, average growth for the quarter would be more than 5-3/4 percent at an annual rate.

While this suggests that transactions needs

of the third quarter may have been in some measure already satisfied, M1 growth over the months ahead is likely to be sustained by the continuing effect on money demand of the recent declines of interest rates, if for no other reason.

On a quarterly average basis, M1 would be expected to

increase at around a 10 percent annual rate, implying another appreciable decline in velocity of more than 3-3/4 percent at an annual rate given the Greenbook GNP forecast. (21)

Under alternative B, M1 by September would be about 10

percent at an annual rate above the fourth-quarter 1984 long-run target base.

It would of course be less high relative to a long-run target

rebased to QII '85,

with growth from that base to September at an 8-1/2

percent annual rate.

M1 expansion would be expected to slow further on a

month-by-month basis in the fourth quarter, to a 3 to 4 percent annual rate, if reserve market conditions remain essentially unchanged, as the effects on money demand of recent interest rate declines wear off and velocity returns to around its expected trend rate of growth (absent interest rate changes).

As a result, M1 by the fourth quarter on average

might be about 8-3/4 percent above its QIV '84 level and 7 percent, annual rate, above a QII '85 level. (22)

Growth of M2 and M3 under alternative B would also be

expected to slow relative to their average pace of May and June.

addition to the moderation of M1 growth, the nontransaction components of M2 and M3 should expand less rapidly over coming months, with inflows to money market funds and MMDAs tapering off as their yields fall into more

-16-

normal alignment with market interest rates.

Moreover, issuance of

managed liabilities in the broader aggregates is unlikely to strengthen greatly, given expectations of some weakening in bank credit growth and continuing constraints on thrift asset expansion from capital requirements and market concerns about the thrifts' financial condition.

Under

alternative B, M2 in September would be just below the upper end of its current long-run range, while M3 would be expected to be a little above the midpoint of its range. (23)

Growth in the debt of nonfinancial sectors is expected

to slow slightly further in the third quarter, but expansion through September might be around the upper end of the Committee's 9 to 12 percent long-run range.

Some of the moderation in overall debt growth is attri-

butable to less rapid expansion of federal government debt on a seasonally adjusted basis.

In addition, state and local governments' advance re-

funding of existing debt is expected to taper off.

Consumer credit growth

also should slow along with the growth of consumption expenditures-including those for durable goods.

Mortgage credit expansion is expected

to edge higher, however, as housing activity responds to the previous declines in interest rates.

Underlying needs for funds by businesses may

increase, with capital spending expanding in the face of relatively flat profits, but borrowing to finance mergers, buyouts and stock retirements is projected to moderate a little.

In the fourth quarter, growth of debt

of private nonfinancial sectors is expected to remain close to the thirdquarter pace, assuming interest rates stay around current levels.

However,

federal government borrowing is likely to pick up, seasonally adjusted, and credit growth for the year probably would be just above the upper end of the Committee's long-run range.

-17-

(24)

Unchanged reserve and money market conditions, as under

alternative B, are likely to be associated with a modest back-up in shortterm interest rates as the summer progresses, given fairly widespread expectations of some easing of Federal Reserve policy over coming months. The 3-month Treasury bill rate might rise to around 7-1/4 percent.

Bond

yields, although increasing a bit initially in sympathy with short-term rates, might change relatively little on balance, since long-term rates are high in real terms and relative to short-term rates.

Some upward

movement in long-term rates may develop, however, should there be substantial disappointment with Congressional action on federal deficits. In foreign exchange markets, the dollar is expected to remain within the trading range prevailing in the last few months. (25)

Alternative A contemplates an easing in money market

conditions consistent with somewhat more rapid money growth over the Juneto-September period.

Borrowing at the discount window would drop to

minimal levels of around $150-200 million, or a more modest reduction in borrowing might be accompanied by a cut in the discount rate to 7 percent. The federal funds rate under this alternative would be expected to decline toward 7 percent.

Total and nonborrowed reserves would increase at 5-1/2

and 9-1/4 percent annual rates, respectively, over the summer.

Other market

interest rates would fall relatively little under this alternative from most recent levels-levels that appear to reflect anticipations of some easing by the Federal Reserve over the near-term.

The three-month bill

would probably trade in a 6-1/2 to 6-3/4 percent area.

Private short-term

rates might decline more than bill rates as the lower overall level of rates was seen as helping those financial institutions currently under some stress.

The dollar would decline in foreign exchange markets.

-18-

(26)

Alternative A incorporates M1 growth at a 7 percent

annual rate over the third quarter, and at a 10-1/2 percent annual rate from its fourth-quarter 1984 base.

Growth of M2, and to a lesser extent

M3, would be bolstered under this alternative, as lower interest rates boosted flows into MMDAs and MMFs.

The lower interest rates likely to

develop, if maintained over the balance of the year, would also tend, along with stronger growth in income, to raise money demand into the fourth quarter.

Under those conditions, growth of M1, M2 and debt for

the QIV 1984 to QIV 1985 period could be around the upper ends of the specifications of alternative II. (27)

Alternative C contemplates a more marked slowing of money

growth over the months ahead than alternative B, with M1 specified to grow at a 4 percent annual rate.

Adjustment plus seasonal credit at the

discount window would be expected to increase to around $600 million, with growth in nonborrowed reserves slowing to a one percent annual rate over the coming three months.

The federal funds rate would be expected to

rise to around the 8-1/4 to 8-1/2 percent area, and other interest rates, as well as the foreign exchange value of the dollar, would increase substantially in response to the unexpected tightening in money markets. This greater slowing of money growth and tightening of credit conditions would increase the odds that M1 might approach its current long-run upper limit by late this year, although growth at the upper bound of or within the current range would probably require a further tightening of reserve conditions.

-19-

Directive language (28)

Given below is draft directive language, with variants,

relating to the Committee's decisions on the longer-run ranges.

(Draft

language for the operating paragraph is shown in paragraph (29) beginning on p. 22.)

To improve readability, the language adopted at the previous

meeting is intially shown below in crossed-out form and proposed language is shown thereafter without the usual format of strike-throughs and capital letters.

For simplicity, the proposed language does not repeat

the first sentence containing the general statement of the Committee's policy objectives nor the ensuing standard paragraph on policy implementation.

The first proposal is structured to allow for consideration of

raising the base of the M1 range for 1985, or, as shown in brackets, for shifting the base; the possibility of adjusting the upper limits of certain other ranges is also provided for.

The second proposal assumes all

current ranges for 1985 are retained but allows for accepting growth in M1 above the range.

After the two proposals, a proposed paragraph for 1986

ranges is shown. Current language 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. of the objectives these

Committee agreed-at-its-meeting in

to- establish percent for 7 to 4 of growth monetary for ranges 6to 9

percent

The associated

M2, for

range- for- total-

that agreed Committee The 1985. year the for percent

February M1,

period the M3 for percent 9-1/2 to 6 and

1985. to 1984 of quarter fourth the from

12 at-9-to

furtherance In [DEL:

nonfinancial domestic

set was debt

-20theupper part of their growth aggregates monetary the in appropriate, be may 1985 for ranges depending on developments withe that provided and velocity to respect

pressures inflationary

remain subdued.] 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.

Proposal 1 ... In furtherance of these objectives the Committee at this meeting established a range of ____ to ____ percent for M1 for the period from the fourth quarter of 1984 to the fourth quarter of 1985 [for the period from the second quarter of 1985 to the fourth quarter of 1985] and reaffirmed

[established] ranges

for the year of ____ to ____ percent for M2 and percent for M3.

____to ____

The associated range for total domestic

nonfinancial debt was reaffirmed [established] at ____ to percent.

Although growth in M1 was expected to slow in the

second half of 1985, the range for the year was raised from that established in February to allow for the possibility that the velocity of M1 may decline for the year as a whole, the substantial drop in the first half of the year.

given

[The base

for the M1 range was moved forward to the second quarter of 1985 to be consistent with a gradual return of velocity growth toward more usual patterns, following the sharp decline in velocity during the first half of the year.]

[The upper limit(s) of the

-21-

range(s) for (M2 and/or debt) was (were) also raised in light of the decline(s) in its (their) velocity on average over the first

half of the year.]

The Committee agreed that growth in the

aggregates generally may be in the upper parts of their ranges, depending on continuing developments with respect to velocity and provided that inflationary pressures remain subdued.

Proposal 2

... In furtherance of these objectives the

Committee at this

meeting reaffirmed the ranges of money growth established in February of 4 to 7 percent for M1, 6 to 9 percent for M2,

and

6 to 9-1/2 percent for M3 for the period from the fourth quarter

of 1984 to the fourth quarter of 1985.

The associated range for

total domestic nonfinancial debt was retained at 9 to 12 percent. In reaffiming these ranges, the Committee recognized, with

respect to M1, that the velocity of M1 for the year may decline, given the substantial drop in the first half.

In that context,

although growth in M1 was expected to slow from the first-half pace in the second half of the year, growth for the year as a whole above the range would be acceptable provided that inflationary pressures remain subdued.

Growth of other aggregates in

the upper part of their ranges would also be acceptable depending in part on velocity developments. Proposal for 1986 ranges monetary of ranges tentative on agree Committee the 1986 For quarter of 1986, of ____to ____percent for M1, ____ to____

for M2, and ____ to ____ percent for M3.

percent

The associated range for

growth in total domestic nonfinancial debt was provisionally set at

-22-

____

However,

to ____ percent for 1986.

next year,

in establishing ranges for

the Comittee recognized that account would need to be

taken of experience with institutional and depositor behavior in response to the completion of deposit rate deregulation early in the year.

(29)

An operating paragraph structured along the lines of the

Committee's usual approach of recent months is proposed below. Proposed operating paragraph and In the implementation of policy for the immediate future, [DEL: the recent reduction in against of background the

rate]

the discount

the Committee seeks to DECREASE SLIGHTLY (ALT. A)/maintain

about] the[DEL: same] EXISTING degree (ALT. B)/INCREASE SLIGHTLY (ALT. C) [DEL:

bank] reserve positions. of pressure on [DEL:

This action is expected

an] annual rate to be consistent with growth in M1, M2, AND M3 at[DEL: RATES of around 6 ____,____,

AND ____ percent [DEL: higher] little a or

while M2 March to] June TO SEPTEMBER,[DEL: during the period from[DEL: and in April, weakness their of light the M3, are expected to grow anticipated respectively, rates, annual

slowly over the quarter than the more per 8 and 7 earlier.] Somewhat lesser

reserve restraint would (MIGHT) be acceptable in the event of

substantially slower growth of the monetary aggregates while somewhat greater restraint might (WOULD) be acceptable in the event of substantially higher growth.

In either case such a

change would be considered in the context of appraisals of the strength of the business expansion, progress against inflation, and conditions in domestic credit and foreign exchange markets. The Chairman may call for Committee consultation if it appears

-23to 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 10] to ____ federal funds rate persistently outside a range of [DEL:6 TO ____ percent.

Selected Interest Rates Pucent

July

1985

1984--High Low

11.77 7.95

10.65 7.71

10.76 8.01

11.09 8.39

11.71 0.24

11.35 8.04

10.72 8.38

13.00 11.00

13.44 10.39

13.84 11.30

13 81 11.36

15.30 12.70

11.44 9.86

14.68 11.14

14.00 12.50

12.31 10.81

1985--nlgh Low

8.75 7.13

8.65 6.77

9.03 6.92

9.21

9.13 7.34

8.83 7.22

8.31 7.01

10.75 9.50

11.19 8.86

11.95 10.02

11.89 10.34

13.23 11.50

10.31 9.19

13.29 12.05

13.00 11.50

11.14 9.83

1984--Apr. may June

10.29 10.32 11.06

9.69 9.83 9.87

9.84 10.31 10.51

10.41 11.11

10.17

10.57

10.93

11.34

10.82

9.29 9.52 9.92

11.93 12.39 12.60

11.98 12.75 13.18

12.63 13.41 13.56

12.65 13.43 13.44

13.96 14.79 15.00

10.26 10.88 11.07

13.65 13.94 14.42

13.00 13.94 14.00

11.16 11.35 11.67

July

11.23 11.64 11.30

10.12 10.47 10.37

10.52 10.61 10.47

10.89 10.71 10.51

11.56 11.47 11.29

11.06 11.19 11.11

10.30 10.58 10.62

13.00 13.00 12.97

13.08 12.50 12.34

13.36 12.72 12.52

13.21 12.54 12.29

14.93 14.12 13.86

10.84 10.40 10.54

14.67 14.47 14.35

14.00 13.70 13.50

12.20 12.14 12.00

9.99 9.43 8.38

9.74 8.61 8.06

9.87 8.81 8.28

9.93 9.01 8.60

10.38 9.18 8.60

10.05 9.01 8.39

10.16 9.34 8.55

12.58 11.77 11.06

11.85 10.90 10.56

12.16 11.57 11.50

11.98 11.56 11.52

13.52 12.98 12.88

10.77 10.69 10.40

14.13 13.64 13.18

13.38 12.75 12.50

11.96 11.54 11.01

8.35 8.50 8.58

7.76 8.27 8.52

8.00 8.39 8.90

8.31

8.14 8.69 9.02

7.99 8.46 0.74

8.00 7.80 7.97

10.61 10.50

10.43 10.55 11.05

11.38 11.51 11.86

11.45 11.47 11.81

12.78 12.76 13.17

9.96 10.07 10.23

13.08 12.92 13.17

12.50 12.50 12.63

10.84 10.63 10.92

8.31 7.80 7.34

7.97 7.71 7.26p

10.50

10.31 9.78

10.49 9.75 9.05

11.43 10.85 10.16

11.47 11.05 10.45

12.75 12.25 11.60

9.85 9.46 9.18

13.20 12.91 12.21

12.75 12.30 11.50

10.83 10.56 9.89

8.57 8.40 7.99

8.03 8.08 7.92

10.50 10.50 10.50

10.79 10.42 10.21

11.69 11.35 11.18

11.67 11.36 11.28

12.71 12.53 12.65

9.83 9.64 9.82

13.23 13.16 13.12

13.00 12.50 12.50

10.83 10.80 10.72

8.11 8.06 7.98 7.67 7.49

7.83 7.82 7.77 7.74 7.55

10.50 10.50 10.50 10.29 10.00

10.37 10.16 9.89 9.49 9.44

11.37 11.22 11.01 10.69 10.53

11.45 11.33 11.18 10.93 10.80

12.56 12.49 12.24 12.01 11.78

9.73 9.56 9.34 9.39 9.27

11.07 13.02 12.94 12.83 12.71

12.50 12.50 12.50 12.00 12.00

10.61 In.59 10.52 10.40

7.47 7.29 7.26

10.00 10.00 9.86

10.12 10.10 10.02 10.39

10.46 10.43 10.34 10.60

11.57 11.50 11.71 11.62

9.10 9.18 9.19 9.24

12.39 12.27 12.05 12.15

11.50 11.50 11.50 11.50

10.05 9.90 9.83

11.37

9.25

N.A.

11.50

N.A.

Aug.

Sept. Oct. Nov.

Dec. 1985-Jan. Feb. Nar.

Mhy

8.56

9.06

10.38

10.50

7.95 7.48 6.95

8.23 7.65 7.09

8.44 7.85 7.27

8.49 7.92

8.45 8.46 7.69

8.11 7.98 7.74

8.53 8.20 7.95

8.73 8.39 8.17

8.75 8.55

7.82 7.76 7.64 7.32 7.22

8.07 7.94 7.81 7.48 7.38

8.29 8.13

8.27 8.19

8.00

8.11

22 29

8.35 8.19 8.14 7.91 7.60

7.70

7.17 1.60

7.75 7.62 7.13 7.46

7.04 7.12 6.77 7.00

7.15 7.21

7.32 7.37

7.45

12 19 26

6.92

7.34

7.19

7.10 7.38

7.40 7.40 7.22

7.52

7.34

7.01

9.50

9.10 9.09 8.86 9.22

8.06

6.91

7.04

7.22

7.55

7.49

7.12

9.50

9.11

10.25

10.47

7.95 9 7. 8p

6.83 6.77

6.97 6.79

7.19 6.93

7.55

7.49 7.47

9.50 9.50

9.08

10.25 9.94P

10.47 10.26P

10 17 I 8 15

July

9.95

8.27 7.97 7.53

Apr. May June 1985-Apr.

7.10

Dallv--Jtme 28 July 5

7.61

7.44

8.20

7.46

7.41

NOTE: Weekly data for columns I through 11 re statement week averages. Data in column 7 are taken from Donoghue' Money Fund Report. Columns 12 and 13 are 1 day quotes for Friday and Thursday. respectively, following Ihe nldol the Statr ent week Column 13 Ir the Bond Buyer revenue Index Column 14 is an average of contrcli Interest rlte on nw commlitmnt lot conventional tirsl mortgages wtlh 80 percenl loan-lo vlue

8.7 p

9.77

rftios at a ample of Savings and loan associations on the Friday following the end of Ins statement week After tovember 30. 1983, column 15 etersl only to VA guaranteed loans Column 1 Is the average Initial con. tract rate on new commltmenla for onl-year ARM s t those institutions olering both fixed and adiustable rae morgages with the rnmenlunei of discount points. FR 1367 (485)

Security Dealer Positions July I,

Millions or dollars

ash Positions

Forward and

Treasury coupons

Net S

TreenuY bill

Total

under 1 year

over I year

federal

agency

private short-term

Treasury bills

1985

utures Potllions

reasury coupons under over 1 yer 1 year

federal agency

tort em-ti

3 381 -986

-7.223 -10,679

-4 -13,053

private

1984--I1 ih Loa

12,155 5.107

15.505 -18.251

1 296 -1,038

6 840 -5 664

19.525 11 086

21,064 11,263

8 272 -14 456

1985--Nigh Low

53,514 9.356

14.672 3 900

2 068 -390

6 479 -6 653

21 007 16.693

21.623 14 603

3 823 -14 946

Ill -327 117 -128

6 909 -373

-6.190 -8..827

6.988 -20.453

1984--Apr. Nay June

14.408 14.163 16.483

2.929 -7.105 -2,631

-32 -291 -596

-1,643 -1.754 -3.248

16.649 16.849 15 999

13,065 12.525 14.457

-2 140 5 511 2 207

-13 -10 -21

476 347 1 448

-9.422 -9.676

-5,462 -2.233 -1.195

July

-2,382 4,542 10.316

-604 -89 310

16,040 16,098 14.063

14,751 15,556 17,695

-2,528 -7,312 -9 771

-89 -240 -122

2,800 2 504 2,156 2.156

-9.650 -9.073 -8.334

-2,592

Sept.

12.355 11,499 17,976

-3,391 -1.184 623

Oct. Nov. Dec.

21.955 19.094 26,220

11.649 9.748 13,841

116 -487 -416

2.649 5.087 4,762

13.168 16,106 18,470

16.285 17.950 19,180

-9,867 -8 549 -11,718

-72 -76 59

2.154 533 -389

-8 815 -9.229 -8,313

-5.312 -11.991 -9,256

1985--Jan. Feb. Har.

24,020) 32,989 48,477

11.614 12,456 14.027

-110 851 1,316

2,467 227 -4,338

19,416 19,614 19,337

19,977 19,449 16,216

-13,318 -3,648 848

-31 -12 -52

702 2,494 4,677

-7,033 -8,155 -8.353

-9,662 -10.287 4,799

Apr. May June

36,627 22,475 13,785*

11.538 8.016 4,690*

1,203 1,082 830*

-4,536 -3.965 -3,868*

18,049 19,814 22,729*

17,560 19,294 19,271*

-2,950 -5,805 -5,057*

10 95 61*

5.,575 6,104 4,473*

-7,843 -7,904 -9,608*

-1,978 -14,176 -19.735*

Aug.

131

-9

937

-9.304

-8,960

1985--Apr.

10 17 24

34,889 37,578 35,760

10,255 13,109 12,110

705 1,019 1,648

-4,252 -4,602 -5,840

17,372 18,862 18,671

16,350 16,509 18.679

-3,772 -2,927 -2,993

-14 3 10

5,532 6.177 5,650

-8.539 -7,910 -7,411

1,251 -2,663 -4,765

May

I 8 22 29

37,977 37,553 26.763 15.131 9,356

9.513 11,219 9.958 6.546 3.900

1,545 1,223 1.195 999 913

-4,634 -4,912 -1.091 -5,148 -5.221

18,029 19,243 19,515 19,634 20,720

19,500 20,019 18,410 18,533 19,349

112 -2,744 -7,410 -7 051 -7 152

67 104 98 56 117

5,357 6.678 6,909 6,031 5,245

-7,346 -7,393 -7,905 -8,139 -8.062

-4.166 -5,85 -12,919 -16.330 -20.453

5 12 19 26

12.883 8,276* 12,256* 17.183*

7.422 7.323* 5.692* 1,168*

1,011 1,078* 709* 581*

-2,727 -3,906* -3,902* -5.513*

22,147 23,370* 22,377* 22.694"

21.555 21,497* 18,123* 17,406*

-7.348 -6,774' -6 214* -2.898*

113 114* 68* -7*

4.512 4.227* 4,964* 4,414*

-8.866 -9,632* -9,651*

-24,936 -28,530* -19.929* -11,011*

July 3

22,244*

550

876*

-899*

22,333*

18,353*

-1,493'

-3'

3,657*

-9,049*

-12,082*

June

NOTE: Government securitt

ltments to buy (ll)

deae cash polttions consist o secuttiea

Iteady delivered, com-

Scurilies on an oulrlght basis for Immediate delivery (5 business days or less),

and certain "when-lssued" securities for delayed delivery (more than 5 business days). Futures and for-

ward positions include all other commitments Involving delayed delivery: fulures contracts are arrang ed on organized exchanges. 1. Cash plus forward plus futures positions In Treasury, federal agency, and private short-term securilies. * Stctly confidential

-10.123'

STRICTLY CONFIDENTIAL (FR) CLASS II-FOMC

Net Changes In System Holdings of Securities 1 Millions of dollars, not seasonally adjusted July 8,

198) 1981 1982 1903 1984

Treasury coupons net purchases w within over 10 510 1yr g1.5

Treasury bills net chan

Peiod

-3052 5.337 5,698 13,068 3,779

912 294 312 484 826

-1,168

2 130 1 702 1,794 1 896 1,938

703 393 388 890 236

Nt change

Federal agencies net purchases ioutright within over 10 10 1t5

total

811 379 307 383 441

4 564 2 768 2,003 3 653 3,440

-300

217 133 --- met Rp

hold)a total

24 --

668 494 -

29 --- -

298 360

1985

2.035 8 91 8,312 16.342 6,964

2,462 684 1.461 -5,445 1,450

1,555

-286

491 -424 4,880

198 600 26

808 1,130

200 335

277 164

1,484 600 1,657

--- --- ----

1,918 169 6,432

70 1,982 -316

-2,044 7,183

961 245

465 846

-100 108

1,326 1,295

--- -

-735 8,409

462 -350

1985--Ja Peb. Itar.

-4,268 2,362 -138

-961

-465

-100 -

-100 -1,426

--- --

-4368 2,345 1,289

-2,315 3,095 -318

Apr. hay June

6,026 -942 2,099

245 --

846 -

108 --- 96 --

1,295 --

--- --

--- -

7,321 -91 2,039

6,141 -9,257 2,766

-751

-846

1,883

1,604

-----

----

3985 1,387 --688

-1,954 891 10500 -7,202 -4,922

--- --- --- 1984--QT.

II III IV 1985--

R. I II

1985--Apr.

422

1,883

17 24

2.691 1,388

245 -

Nay

15 22 29

-80 -300

12 19

S-

Jame

-300

249

2,010 --

July

LEEL--July

76.3

17.7

1,295

----

--- -

-300 3

30 449 286

--- --- --- --- --

851

739

4.0

1.2

8.3

20.8

90.8

2.6

15.3

37.0

108 -

249

1,9 -

179.1

-444 -1,385

3.7

1 Change from and-of-period to end-of-period. 5 In addition to the net purchases of securities, also reflects changes in System holdings of bankers' acceptances, direct Treasury borrowing from the System and redemptions (-I of agency and Tree 2 Outright transactions in market and with foreign accounts, and redemptions (-) in bill auctions. sury coupon issues. 3 Outright transctions in market and with foreign accounts, and short-term notes acquired in exchange for maturing bills. Excludes redemptions, maturity shifts, rollovers of maturing coupon 8 Includes changes in RPs 1+), matched sale purchase transactions 1-), and matched purchase-sale isues,.and direct Treasury borrowing from the System. transactions 1+). 4 Outright transactions in market and with foreign accounts only. Excludes redemptions and maturity shifts.

FR 1388 (7T81)

Cite this document

APA

Federal Reserve (1985, July 9). Bluebook. Bluebooks, Federal Reserve. https://whenthefedspeaks.com/doc/bluebook_19850710

BibTeX

@misc{wtfs_bluebook_19850710,
  author = {Federal Reserve},
  title = {Bluebook},
  year = {1985},
  month = {Jul},
  howpublished = {Bluebooks, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/bluebook_19850710},
  note = {Retrieved via When the Fed Speaks corpus}
}