FOMC Minutes

Meeting of Federal Open Market Committee

May 16, 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.,

on Tuesday, May 16, 1978,

at 9:30 a.m.

PRESENT:

Mr. Miller, Chairman

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Volcker, Vice Chairman

Baughman

Coldwell

Eastburn

Gardner

Jackson

Partee

Wallich

Willes

Winn

Messrs. Balles, Black, Kimbrel, and Mayo,

Alternate Members of the Federal Open

Market Committee

Messrs. Guffey, Morris, and Roos, Presidents

of the Federal Reserve Banks of Kansas

City, Boston, and St. Louis, respectively

Mr.

Mr.

Mr.

Mr.

Mr.

Broida, Secretary

Altmann, Deputy Secretary

Bernard, Assistant Secretary

O'Connell, General Counsel

Axilrod, Economist

Messrs. Burns, J. Davis, Ettin, Kaminow,

Keir, Kichline, Paulus, Truman, and

Zeisel, Associate Economists

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Mr. Pardee, Deputy Manager for Foreign

Operations

Mr. Sternlight, Deputy Manager for

Domestic Operations

Mr. Coyne, Assistant to the Board of

Governors

Mr. Henry, Associate Director, Division

of International Finance, Board of

Governors

Mr. Kalchbrenner, Associate Director,

Division of Research and Statistics,

Board of Governors

Ms. Farar, Economist, Open Market

Secretariat, Board of Governors

Mrs. Deck, Staff Assistant, Open Market

Secretariat, Board of Governors

Messrs. T. Davis, Eisenmenger, Parthemos,

and Scheld, Senior Vice Presidents,

Federal Reserve Banks of Kansas City,

Boston, Richmond, and Chicago,

respectively

Messrs. Brandt, Burns, Fousek, Karnosky,

and Keran, Vice Presidents, Federal

Reserve Banks of Atlanta, Dallas,

New York, St. Louis, and San Francisco,

respectively

Ms. Lovett, Securities Trading Officer,

Federal Reserve Bank of New York

By unanimous vote, the minutes of actions taken at

the meetings of the Federal Open Market Committee held on

April 18 and May 5, 1978, were approved.

By unanimous vote, System open market transactions

in foreign currencies during the period April 18 through

May 15, 1978, were ratified.

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5/16/78

Renewal for further periods of 3 months of System

drawings on the German Federal Bank maturing in the period

May 29 through June 29, 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 $2.0 billion, effective immediately.

By unanimous vote, System open market transactions

in Government securities,agency obligations, and bankers'

acceptances during the period April 18 through May 15, 1978,

were ratified.

With Mr. Willes dissenting, 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 meeting

suggests that real output of goods and services

is growing at a rapid rate in the current

quarter, after having declined somewhat in the

first quarter when activity was adversely

affected by the unusually severe weather and

In April

the lengthy strike in coal mining.

retail sales, industrial production, and non

farm payroll employment increased substantially

further and the unemployment rate declined

The pace of the

from 6.2 to 6.0 per cent.

rise in wholesale prices remained rapid,

reflecting mainly further large increases in

farm products and processed foods. The index

of average hourly earnings continued to

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the average during the first quarter.

The trade-weighted value of the dollar

against major foreign currencies has risen

over the past 4 weeks to the level prevailing

at the beginning of the year. The trade

deficit in the first quarter widened sub

stantially from the already large deficit

recorded in the final quarter of 1977.

M-1, which had grown moderately in the

first quarter, rose sharply in April. Growth

in M-2 and M-3 also stepped up but much less

than growth in M-1, because inflows of the

interest-bearing deposits included in these

aggregates remained slow. Market interest

rates have increased in recent weeks. On

May 11 an increase in Federal Reserve discount

rates from 6-1/2 to 7 per cent was announced.

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 resist in

flationary pressures while encouraging con

tinued moderate economic expansion and con

tributing to a sustainable pattern of inter

national transactions.

At its meeting on April 18, 1978, 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 7-1/2 to 10 per

cent, respectively, from the first quarter of

1978 to the first quarter of 1979 appears to

be consistent with these objectives. The

associated range for bank credit is 7-1/2 to

10-1/2 per cent. These ranges are subject to

reconsideration at any time as conditions

warrant.

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The Committee seeks to encourage near

term rates of growth in M-1 and M-2 on a path

believed to be reasonably consistent with the

longer-run ranges for monetary aggregates

cited in the preceding paragraph. Specific

ally, at present, the ranges of tolerance for

the annual growth rates over the May-June

period will be 3 to 8 per cent for M-1 and 4

to 9 per cent for M-2. In the judgment of the

Committee such growth rates are likely to be

associated with a weekly-average Federal funds

rate slightly above the current level. If,

giving approximately equal weight to M-1 and

M-2, it appears that growth rates over the

2-month period will deviate significantly

from the midpoints of the indicated ranges,

the operational objective for the Federal

funds rate shall be modified in an orderly

fashion within a range of 7-1/4 to 7-3/4 per

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

account shall be taken of emerging financial

market conditions.

If it appears during the period before

the next meeting that the operating con

straints 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.

It was agreed that the next meeting of the Committee

would be held on Tuesday, June 20, 1978, beginning at 9:30 a.m.

The meeting adjourned.

Secretary