FOMC Minutes

1/17/78

Meeting of Federal Open Market Committee

January 17, 1978

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.,

PRESENT:

on Tuesday, January 17,

1978, at 9:00 a.m.

Mr. Burns, Chairman

Mr. Volcker, Vice Chairman

Mr. Coldwell

Mr. Gardner

Mr. Guffey

Mr. Lilly

Mr. Mayo

Mr.

Mr.

Mr.

Mr.

Morris

Partee

Roos

Wallich

Messrs. Balles, Baughman, Eastburn, and Winn, Alternate

Members of the Federal Open Market Committee

Messrs. Black, Kimbrel, and Willes, Presidents of the

Federal Reserve Banks of Richmond, Atlanta, and

Minneapolis, respectively

Mr.

Mr.

Mr.

Mr.

Mr.

Broida, Secretary

Altmann, Deputy Secretary

Bernard, Assistant Secretary

O'Connell, General Counsel

Axilrod, Economist

Messrs. Balbach, T. Davis, Kichiine, Scheld, Truman,

and Zeisel, Associate Economists

- 2 -

1/17/78

Mr. Pardee, Deputy Manager for Foreign Operations

Mr. Sternlight, Deputy Manager for Domestic

Operations

Messrs. Coyne and Keir, Assistants to the Board of

Governors

Mrs. Farar, Economist, Open Market Secretariat,

Board of Governors

Mrs. Deck, Staff Assistant, Open Market Secretariat,

Board of Governors

Mr. McIntosh, First Vice President, Federal Reserve

Bank of Boston

Messrs. Boehne, J. Davis, and Parthemos, Senior

Vice Presidents, Federal Reserve Banks of

Philadelphia, Cleveland, and Richmond,

respectively

Messrs. Brandt, Burns, Fousek, and Keran, Vice

Presidents, Federal Reserve Banks of Atlanta,

Richmond, Dallas, New York, and San Francisco,

respectively

Mr. Kareken, Economic Adviser, Federal Reserve

Bank of Minneapolis

Ms. Lovett, Securities Trading Officer, Federal

Reserve Bank of New York

Secretary's Note:

On January 6, 1978, pursuant to paragraph

1D of the Authorization for Foreign Currency Operations, the Committee,

with Mr. Jackson absent and not voting, expressly authorized an over-all

open position in foreign currencies of $1.5 billion, effective immediately.

Secretary's Note:

On January 9, 1978, the Committee, with Messrs.

Lilly, Morris, and Partee dissenting and Mr. Jackson absent and not voting,

- 3 -

1/17/78

modified the domestic policy directive adopted at its meeting of December

19-20, 1977, by raising the range for the Federal funds rate to 6-1/2 to 7

per cent and by instructing the Manager to raise the rate to 6-3/4 per cent

over the next few days.

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

of the Federal Open Market Committee held on December 19-20, 1977, were

approved.

By unanimous vote, System open market transactions in foreign

currencies during the period December 20, 1977, through January 16, 1978,

were approved, ratified, and confirmed.

Renewal for further periods of 3 months of System drawings on

the German Federal Bank maturing in the period February 2-24, 1978, was

noted without objection.

Pursuant to paragraph 1D of the Authorization for Foreign Currency

Operations, the Committee,

by unanimous vote,

expressly authorized an

over-all open position in foreign currencies of $1.75 billion, effective

immediately.

By unanimous vote, transfer to the National Archives of the FOMC

memoranda of discussion for 1972, on the basis described in a memorandum

from the Secretariat dated December 12, 1977, was authorized.

- 4 -

1/17/78

By unanimous vote, the Committee amended the Authorization for

Domestic Open Market Operations by the addition of the following new

paragraph 4, effective immediately:

4. In order to ensure the effective conduct of

open market operations, while assisting in the provi

sion of short-term investments for foreign and inter

national accounts maintained at the Federal Reserve

Bank of New York,the Federal Open Market Committee

authorizes and directs the Federal Reserve Bank of

New York, (a) for System Open Market Account, to sell

U. S. Government securities to such foreign and inter

national accounts on the bases set forth in paragraph

1(a) under agreements providing for the resale by such

accounts of those securities within 15 calendar days on

terms comparable to those available on such transactions

in the market; and (b) for New York Bank account, when

appropriate, to undertake with dealers, subject to the

conditions imposed on purchases and sales of securities

in paragraph 1(c), repurchase agreements in U. S. Govern

ment and agency securities, and to arrange corresponding

sale and repurchase agreements between its own account

and foreign and international accounts maintained at the

Bank. Transactions undertaken with such accounts under

the provisions of this paragraph may provide for a

service fee when appropriate.

By unanimous vote, System open market transactions in Government

securities, agency obligations, and bankers' acceptances during the

period December 20, 1977,through January 16, 1978, were approved, ratified,

and confirmed.

- 5-

1/17/78

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:

The information reviewed at this meetings suggests

that growth in real output of goods and services in the

fourth quarter was close to the pace in the third quarter.

The dollar value of total retail sales declined in December,

but the gain from the third to the fourth quarter was sub

stantial. Industrial production expanded somewhat further

in December, although the rise was limited by a strike in

coal mining. Employment increased appreciably, and the

unemployment rate declined from 6.7 per cent to 6.4 per

cent. The wholesale price index for all commodities rose

considerably less in December than in the preceding 2 months,

reflecting a much smaller increase in average prices of

farm products and foods. Prices of industrial commodities

advanced at about the average pace in the preceding 2 months.

The index of average hourly earnings advanced slightly faster

during 1977 than it had during 1976.

Exchange market pressure on the dollar has continued

in recent weeks. On January 4 it was announced that the

Exchange Stabilization Fund would be utilized actively

together with the swap network operated by the Federal

Reserve System to help reestablish order in the foreign

exchange markets. On January 6 an increase in Federal

Reserve discount rates from 6 to 6-1/2 per cent was

announced. The trade-weighted value of the dollar against

major foreign currencies declined about 2-1/2 per cent

further from mid-December to the early days of January

but subsequently recovered about 1-3/4 per cent.

M-1--which had declined slightly in November--rose

in December. Growth in M-2 remained relatively slow, as

inflows to banks of time and savings deposits other than

negotiable CD's were sharply curtailed. Inflows to non

bank thrift institutions slowed somewhat further. Market

interest rates edged up in late December, and ratesparticularly for short-term securities--rose substantially

further in the early weeks of January.

1/17/78

- 6 In light of the foregoing developments, it is the

policy of the Federal Open Market Committee to foster

bank reserve and other financial conditions that will

encourage continued economic expansion and help resist

inflationary pressures, while contributing to a sustain

able pattern of international transactions.

At its meeting on October 18, 1977, the Committee

agreed that growth of M-1, M-2, and M-3 within ranges

of 4 to 6-1/2 per cent, 6-1/2 to 9 per cent, and 8 to

10-1/2 per cent, respectively, from the third quarter

of 1977 to the third quarter of 1978 appears to be con

sistent with these objectives. These ranges are subject

to reconsideration at any time as conditions warrant.

At this time, the Committee seeks to maintain about

the prevailing money market conditions during the period

immediately ahead, provided that monetary aggregates

appear to be growing at approximately the rates currently

expected, which are believed to be on a path reasonably

consistent with the longer-run ranges for monetary aggre

gates cited in the preceding paragraph. Specifically,

the Committee seeks to maintain the weekly-average Federal

funds rate at about the current level, so long as M-1 and

M-2 appear to be growing over the January-February period

at annual rates within ranges of 2-1/2 to 7-1/2 per cent

and 5 to 9 per cent, respectively. If, giving approxi

mately equal weight to M-1 and M-2, it appears that growth

rates over the 2-month period are approaching or moving

beyond the limits of the indicated ranges, the operational

objective for the weekly-average Federal funds rate shall be

modified in an orderly fashion within a range of 6-1/2 to

7 per cent. In the conduct of day-to-day operations,

account shall be taken of emerging financial market

conditions, including the unsettled conditions in foreign

exchange markets.

If it appears during the period before the next

meeting that the operating constraints specified above

are proving to be significantly inconsistent, the

Manager is promptly to notify the Chairman who will then

decide whether the situation calls for supplementary

instructions from the Committee.

-7-

1/17/78

It was agreed that the next meeting of the Committee would be

held on Wednesday, February 22, 1978, beginning at 9:30 a.m.

The meeting adjourned.

Secretary