FOMC Minutes

12/20-21/76

Meeting of Federal Open Market Committee

December 20-21, 1976

MINUTES OF ACTIONS

A meeting of the Federal Open Market Committee was held

in the offices of the Board of Governors of the Federal Reserve

System in Washington, D.C.,

on Monday and Tuesday, December 20-21,

1976, beginning at 3:30 p.m. on Monday.

PRESENT: Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Burns, Chairman

Volcker, Vice Chairman

Balles

Black

Coldwell

Gardner

Jackson

Kimbrel

Lilly

Partee

Wallich

Winn

Messrs. Baughman, Guffey, Mayo, and Morris,

Alternate Members of the Federal Open

Market Committee

Messrs. MacLaury, Eastburn, and Roos, Presidents

of the Federal Reserve Banks of Minneapolis,

Philadelphia, and St. Louis, respectively

Mr. Broida, Secretary

Mr. Altmann, Deputy Secretary

Mr. Bernard, 1/ Assistant Secretary

Mr. O'Connell, General Counsel

Mr. Axilrod, Economist (Domestic Finance)

Mr. Gramley, 2/ Economist (Domestic Business)

Messrs. Brandt, Davis, Kichline, Parthemos,

Reynolds, and Zeisel, 2/ Associate Economists

1/ Attended Monday session only.

2/ Attended Tuesday session only.

12/20-21/76

- 2 -

Mr. Pardee, Deputy Manager for Foreign

Operations

Mr. Sternlight, Deputy Manager for

Domestic Operations

Messrs. Coyne and Keir, Assistants to

the Board of Governors

Messrs. Gemmill and Kalchbrenner, 3/

Advisers, Divisions of International

Finance and Research and Statistics,

respectively, Board of Governors

Mr. Paulus, 3/ Chief, Banking Section, Division

of Research and Statistics, Board of

Governors

Mr. Smith, 3/ Chief, Financial Markets Section,

Division of International Finance, Board

of Governors

Mr. Beck, 3/ Senior Economist, Division of Research

and Statistics, Board of Governors

Mrs. Farar, Economist, Open Market

Secretariat, Board of Governors

Mrs. Deck, Staff Assistant, Open Market

Secretariat, Board of Governors

Messrs. Boehne, Doll, Eisenmenger, and

Scheld, Senior Vice Presidents,

Federal Reserve Banks of Philadelphia,

Kansas City, Boston and Chicago,

respectively

Messrs. Burns, Karnosky, and Keran, Vice

Presidents, Federal Reserve Banks of

Dallas, St. Louis, and San Francisco

respectively

Mr. Hall, Assistant Vice President, Federal

Reserve Bank of Cleveland

Mr. Duprey, Economic Adviser, Federal

Reserve Bank of Minneapolis

Ms. Tschinkel, Adviser, Federal Reserve

Bank of New York

3/ Attended part of Monday session only.

-

12/20-21/76

3 -

By unanimous vote, the following revised Authorization for

Foreign Currency Operations,

revised Foreign Currency Directive,

and Special Authorization were approved, on the understanding that

they would become effective upon the resolution subsequent to the

meeting of a technical question concerning the wording of a clause

in the Directive.

The actions were effective December 28,

1976.

AUTHORIZATION FOR FOREIGN CURRENCY OPERATIONS

1.

The Federal Open Market Committee authorizes

and directs the Federal Reserve Bank of New York, for

System Open Market Account, to the extent necessary

to carry out the Committee's foreign currency directive

and express authorizations by the Committee pursuant

thereto, and in conformity with such procedural instructions

as the Committee may issue from time to time:

A.

To purchase and sell the following foreign

currencies in the form of cable transfers through

spot or forward transactions on the open market at

home and abroad, including transactions with the

U.S. Exchange Stabilization Fund established by

Section 10 of the Gold Reserve Act of 1934, with

foreign monetary authorities, with the Bank

for International Settlements, and with other

international financial institutions:

Austrian schillings

Belgian francs

Canadian dollars

Danish kroner

Pounds sterling

French francs

German marks

Italian lire

Japanese Yen

Mexican pesos

Netherlands guilders

Norwegian kroner

Swedish kronor

Swiss francs

12/20-21/76

- 4

-

B. To hold balances of, and to have

outstanding forward contracts to receive

or to deliver, the foreign currencies listed

in paragraph A above.

C. To draw foreign currencies and to permit

foreign banks to draw dollars under the

reciprocal currency arrangements listed

in paragraph 2 below, provided that drawings

by either party to any such arrangement

shall be fully liquidated within 12 months

after any amount outstanding at that time was

first drawn, unless the Committee, because

of exceptional circumstances, specifically

authorizes a delay.

D. To maintain an over-all open position

in all foreign currencies not exceeding

$1.0 billion, unless a larger position is

expressly authorized by the Committee.

For this purpose, the over-all open position

in all foreign currencies is defined as the

sum (disregarding signs) of open positions

in each currency. The open position in a

single foreign currency is defined as holdings

of balances in that currency, plus outstanding

contracts for future receipt, minus outstand

ing contracts for future delivery of that

currency, i. e., as the sum of these elements

with due regard to sign.

2. The Federal Open Market Committee directs the Federal

Reserve Bank of New York to maintain reciprocal currency

arrangements ("swap" arrangements) for the System Open

Market Account for periods up to a maximum of 12 months

with the following foreign banks, which are among those

designated by the Board of Governors of the Federal

Reserve System under Section 214. 5 of Regulation N,

Relations with Foreign Banks and Bankers, and with the

approval of the Committee to renew such arrangements

on maturity:

-

12/20-21/76

5

Foreign bank

Austrian National Bank

National Bank of Belgium

Bank of Canada

National Bank of Denmark

Bank of England

Bank of France

German Federal Bank

Bank of Italy

Bank of Japan

Bank of Mexico

Netherlands Bank

Bank of Norway

Bank of Sweden

Swiss National Bank

Bank for International

Settlements:

Dollars against Swiss francs

Dollars against authorized

European currencies other

than Swiss francs

Amount of

arrangement

(Millions of

dollars equivalent)

250

1, 000

2, 000

250

3, 000

2, 000

2, 000

3, 000

2, 000

360

500

250

300

1, 400

600

1, 250

Any changes in the terms of existing swap arrangements, and

the proposed terms of any new arrangements that may be

authorized, shall be referred for review and approval to the

Committee.

3. Currencies to be used for liquidation of System swap

commitments may be purchased from the foreign central

bank drawn on, at the same exchange rate as that employed

in the drawing to be liquidated. Apart from any such

purchases at the rate of the drawing, all transactions in foreign

currencies undertaken under paragraph 1(A) above shall,

unless otherwise expressly authorized by the Committee, be

at prevailing market rates.

12/20-21/76

- 6

4. It shall be the normal practice to arrange with foreign

central banks for the coordination of foreign currency trans

actions. In making operating arrangements with foreign

central banks on System holdings of foreign currencies, the

Federal Reserve Bank of New York shall not commit itself

to maintain any specific balance, unless authorized by the

Federal Open Market Committee. Any agreements or

understandings concerning the administration of the accounts

maintained by the Federal Reserve Bank of New York with

the Foreign banks designated by the Board of Governors

under Section 214. 5 of Regulation N shall be referred for

review and approval to the Committee.

5. Foreign currency holdings shall be invested insofar as

practicable, considering needs for minimum working balances.

Such investments shall be in accordance with Section 14(e) of

the Federal Reserve Act.

6. All operations undertaken pursuant to the preceding

paragraphs shall be reported daily to the Foreign Currency

Subcommittee. The Foreign Currency Subcommittee consists

of the Chairman and Vice Chairman of the Committee, the Vice

Chairman of the Board of Governors, and such other member

of the Board as the Chairman may designate (or in the absence

of members of the Board serving on the Subcommittee, other

Board Members designated by the Chairman as alternates, and

in the absence of the Vice Chairman of the Committee, his

alternate).

Meetings of the Subcommittee shall be called

at the request of any member, or at the request of the Manager,

for the purposes of reviewing recent or contemplated operations

and of consulting with the Manager on other matters relating

to his responsibilities. At the request of any member of the

Subcommittee, questions arising from such reviews and

consultations shall be referred for determination to the

Federal Open Market Committee.

7.

The Chairman is authorized:

A. With the approval of the Committee, to

enter into any needed agreement or under

standing with the Secretary of the Treasury

about the division of responsibility for foreign

currency operations between the System and

the Treasury;

12/20-21/76

- 7 -

B. To keep the Secretary of the Treasury fully

advised concerning System foreign currency

operations, and to consult with the Secretary on

policy matters relating to foreign currency

operations;

C. From time to time, to transmit appropriate

reports and information to the National

Advisory Council on International Monetary

and Financial Policies.

8. Staff officers of the Committee are authorized to

transmit pertinent information on System foreign

currency operations to appropriate officials of

the Treasury Department.

9. All Federal Reserve Banks shall participate in the

foreign currency operations for System Account in

accordance with paragraph 3 G(1) of the Board of

Governors' Statement of Procedure with Respect to

Foreign Relationships of Federal Reserve Banks dated

January 1, 1944.

FOREIGN CURRENCY DIRECTIVE

1. System operations in foreign currencies

be directed at countering disorderly market

provided that market exchange rates for the

reflect actions and behavior consistent with

IMF Article IV, Section 1.

2.

shall generally

conditions,

U.S. dollar

the proposed

To achieve this end the System shall:

A. Undertake spot and forward purchases and

sales of foreign exchange.

B. Maintain reciprocal currency ("swap")

arrangements with selected foreign central

banks and with the Bank for International

Settlements.

C. Cooperate in other respects with central

banks of other countries and with international

monetary institutions.

12/20-21/76

3.

- 8 -

Transactions may also be undertaken:

A. To adjust System balances in light of

probable future needs for currencies.

B. To provide means for meeting System

and Treasury commitments in particular

currencies, and to facilitate operations

of the Exchange Stabilization Fund.

C. For such other purposes as may be expressly

authorized by the Commttee.

4.

System foreign currency operations shall be conducted:

A. In close and continuous consultation and

cooperation with the United States Treasury;

B. In cooperation, as appropriate, with

foreign monetary authorities; and

C. In a manner consistent with the obligations of

the United States in the International Monetary

Fund regarding exchange arrangements under the

proposed IMF Article IV.

SPECIAL AUTHORIZATION UNDER PARAGRAPH 1(D) OF

AUTHORIZATION FOR FOREIGN CURRENCY OPERATIONS

The Federal Open Market Committee authorizes the

Federal Reserve Bank of New York to maintain an over-all

open position in foreign currencies exceeding the figure of

$1.0 billion specified in paragraph 1(D) of the Authorization for

Foreign Currency Operations by an amount equal to the

remaining forward commitment associated with the System's

outstanding 1971 swap drawings in Swiss francs.

With Mr. Coldwell dissenting, the following procedural instructions

relating to foreign currency operations were approved, to become

effective simultaneously with the foregoing instruments:

12/20-21/76

-

9 -

PROCEDURAL INSTRUCTIONS

In conducting operations pursuant to the authorization

and direction of the Federal Open Market Committee as set

forth in the Authorization for Foreign Currency Operations

and the Foreign Currency Directive, the Federal Reserve

Bank of New York, through the Manager of the System Open

Market Account, shall be guided by the following procedural

understandings with respect to consultations and clearance

with the Committee, the Foreign Currency Subcommittee,

and the Chairman of the Committee. All operations

undertaken pursuant to such clearances shall be reported

promptly to the Committee.

1. The Manager shall clear with the Subcommittee (or with

the Chairman, if the Chairman believes that consultation

with the Subcommittee is not feasible in the time available):

A. Any transaction which would result in a change

in the System's over-all open position in foreign

currencies exceeding $100 million on any day or

$300 million since the most recent regular meeting

of the Committee.

B. Any transaction which would result in gross

transactions (excluding swap drawings and repayments)

in a single foreign currency exceeding $100 million on

any day or $300 million since the most recent regular

meeting of the Committee.

C. Any swap drawing proposed by a foreign bank

not exceeding the larger of (i) $200 million or (ii)

15 per cent of the size of the swap arrangement.

2. The Manager shall clear with the Committee (or with

the Subcommittee, if the Subcommittee believes that

consultation with the full Committee is not feasible in the

time available, or with the Chairman, if the Chairman

believes that consultation with the Subcommittee is not

feasible in the time available):

12/20-21/76

-

10 -

A. Any transaction which would result in a

change in the System's over-all open position in

foreign currencies exceeding $500 million since

the most recent regular meeting of the Committee.

B. Any swap drawing proposed by a foreign

bank exceeding the larger of (i) $200 million or

(ii) 15 per cent of the size of the swap arrangement.

3. The Manager shall also consult with the Subcommittee

or the Chairman about proposed swap drawings by the System,

and about any transactions that are not of a routine character.

Secretary's Note:

The following actions were taken on

Tuesday, December 21, 1976.

By unanimous vote, the minutes of actions taken at the meeting

of the Federal Open Market Commitee held on November 16, 1976,

were approved.

By unanimous vote, the System Open Market transactions in

foreign currencies during the period November 16 through December 20,

1976, were approved, ratified, and confirmed.

By unanimous vote, System open market transactions in

Government securities, agency obligations, and bankers' acceptances

during the period November 16 through December 20, 1976,

were

approved, ratified, and confirmed.

By unanimous vote, the Federal Reserve Bank of New York was

authorized and directed, until otherwise directed by the Committee, to

execute transactions in the System Account in accordance with the

following domestic policy directive:

12/20-21/76

-

11 -

The information reviewed at this meeting suggests

that growth in real output of goods and services in the

fourth quarter has remained at about the reduced pace of

the third quarter. In both October and November retail

sales increased substantially. Industrial production

rose appreciably in November--following 2 months of

decline--in large part as a result of termination of

strikes in two major industries, although advances in

Employ

output were widespread among other industries.

ment in manufacturing also recovered from the effects

of strikes. According to household survey data, the

gain in total employment was large, but the unemploy

ment rate increased from 7.9 to 8.1 per cent as the

civilian labor force--which had changed little over

The

the preceding 3 months--increased considerably.

wholesale price index for all commodities rose as much

in November as in October, reflecting another substan

tial increase in average prices of industrial commodities;

average prices of farm products and foods changed little.

The advance in the index of average wage rates over

recent months has remained below the rapid rate of

increase during 1975.

The average value of the dollar against leading

foreign currencies has declined slightly in recent

weeks. The pound sterling and also the currencies

associated in the European "snake" arrangement

strengthened against the U. S. dollar, while the

Canadian dollar depreciated sharply. In October the

U. S. foreign trade deficit remained substantial.

M-1, which had expanded sharply in October, was

unchanged in November. Although growth in M-2 and

M-3 moderated, it remained substantial as inflows of

the time and savings deposits included in these broader

aggregates continued strong. Interest rates have

declined appreciably in recent weeks.

In late November

Federal Reserve discount rates were reduced from 5-1/2

to 5-1/4 per cent, and in mid-December member bank

reserve requirements were lowered somewhat.

In light of the foregoing developments, it is the

policy of the Federal Open Market Committee to foster

financial conditions that will encourage continued

economic expansion, while resisting inflationary pres

sures and contributing to a sustainable pattern of

international transactions.

12/20-21/76

-

12 -

To implement this policy, while taking

account of developments in domestic and

international financial markets, the Committee

seeks to maintain prevailing bank reserve and

money market conditions over the period

immediately ahead, provided that monetary

aggregates appear to be growing at about the

rates currently expected.

By unanimous vote, transfer to the National Archives

of the FOMC memoranda of discussion for 1971, on the basis

described in a memorandum from the Secretariat

dated

December 8, 1976, was authorized.

The Committee took note of the present state of

de

facto suspension of paragraph 2 of the Authorization

for

Domestic Open Market Operations as a consequence of the

expiration, on October

31, 1976, of the underlying statutory

authority contained in a provision of Section 14(b) of the

Federal Reserve Act.

It was agreed that the next meeting of the Committee

would be held on January 18,

1977, at 9:30 a.m.

The meeting adjourned.

Secretary