FOMC Minutes

Meeting of Federal Open Market Committee

June 20, 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, June 20, 1978, at 9:15 a.m.

PRESENT:

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Miller, Chairman

Volcker, Vice Chairman

Baughman

Coldwell

Eastburn

Gardner 1/

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.

Broida, Secretary

Bernard, Assistant Secretary

O'Connell, General Counsel

Axilrod, Economist

Messrs. Burns, J. Davis, R. Davis, Ettin,

Keir, Kichline, Paulus, Truman, and

Zeisel, Associate Economists

Mr. Holmes, Manager, System Open Market Account

Mr. Pardee, Deputy Manager for Foreign Operations

Mr. Sternlight, Deputy Manager for Domestic

Operations

1/

Entered the meeting at the point indicated.

6/20/78

Mr. Kalchbrenner, Associate Director,

Division of Research and Statistics,

Board of Governors

Mr. Siegman, Associate Director, Division

of International Finance, Board of

Governors

Mr. O'Brien, Special Assistant to the Board

of Governors

Mr. Smith, 2/ Chief, Financial Markets Section,

Division of International Finance, Board of

Governors

Ms. Farar, Economist, Open Market Secretariat,

Board of Governors

Mrs. Deck, Staff Assistant, Open Market Secretariat,

Board of Governors

Messrs. Balbach, Boehne, T. Davis, Eisenmenger,

Scheld, and Sims, Senior Vice Presidents,

Federal Reserve Banks of St. Louis, Philadelphia,

Kansas City, Boston, Chicago, and San Francisco,

respectively

Messrs. Brandt and Broaddus, Vice Presidents,

Federal Reserve Banks of Atlanta and Richmond,

respectively

Mr. Ozog, Manager, Securities Department, Federal

Reserve Bank of New York

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

of the Federal Open Market Committee held on May 16, 1978, were approved.

By unanimous vote, System open market transactions in foreign

currencies during the period May 16 through June 19, 1978, were ratified.

By unanimous vote, renewal for further periods of 3 months of

System drawings on the German Federal Bank maturing in the period July 3

through July 26, 1978, was authorized.

2/

Left the meeting at the point indicated.

6/20/78

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 $1.5

billion, effective immediately.

By unanimous vote, the Committee amended the Procedural

Instructions governing foreign currency operations to read as follows:

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 operation which would result in a change in

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

rencies exceeding $100 million on any day or $300

million since the most recent regular meeting of

the Committee.

B. Any operation which would result in a change in

the System's net position in a single foreign cur

rency exceeding $100 million on any day or $300 mil

lion since the most recent regular meeting of the

Committee.

C. Any operation which might generate a substantial

volume of trading in a particular currency by the

System, even though the change in the System's net

position in that currency might be less than the

limits specified in 1B.

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D. 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):

A. Any operation which would result in a change in

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

rencies 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 operations that are not of a routine character.

By unanimous vote, the Committee amended paragraph 1D of the

Authorization for Foreign Currency Operations to read as follows:

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

net positions in individual currencies. The net position

in a single foreign currency is defined as holdings of

balances in that currency, plus outstanding contracts for

future receipt, minus outstanding contracts for future

delivery of that currency, i.e., as the sum of these ele

ments with due regard to sign. 3/ 4/

3/ Effective December 28, 1976, the Federal Open Market Committee

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

open position in foreign currencies exceeding the figure of $1 billion

specified in this paragraph by an amount equal to the remaining forward

commitment associated with the System's outstanding 1971 Swiss franc swap

drawings.

4/ Earlier in this meeting, the Committee authorized an over-all open

position in foreign currencies of $1.5 billion (excluding the authoriza

tion relating to outstanding 1971 Swiss franc swap drawings cited in the

preceding footnote).

6/20/78

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Following the preceding actions Mr. Smith left the meeting.

Prior to the following actions Mr. Gardner entered the meeting.

By unanimous vote, System open market transactions in Government

securities, agency obligations, and bankers' acceptances during the

period May 16 through June 19, 1978, were ratified.

With Messrs. Willes and Winn 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 has grown rapidly

on the average in the current quarter as activity rebounded

from the effects of the unusually severe winter weather and

the lengthy coal strike, but the rate of advance most recently

appears to be slowing. Following substantial gains in March

and April, increases in industrial production and nonfarm

payroll employment moderated in May and retail sales changed

little. The unemployment rate edged up from 6.0 to 6.1 per

cent in association with a large increase in the civilian

labor force. Average wholesale prices rose somewhat less

rapidly in May than earlier in 1978, reflecting smaller

reported increases in farm products and processed foods.

So far this year prices have increased at a considerably

faster rate than they had on average during 1977. The index

of average hourly earnings also has increased at a somewhat

faster pace so far in 1978 than during 1977.

Since the end of May the trade-weighted value of the

dollar against major foreign currencies has declined about

2 per cent, but it remains above its early-April low. The

trade deficit in April was down somewhat from its very high

first-quarter rate.

Growth in M-1 moderated in May from the extraordinarily

rapid pace in April, and as a result growth in M-2 and M-3

also slowed. Inflows of the interest-bearing deposits included

in M-2 picked up somewhat as commercial banks increased

their reliance on large-denomination time deposits to

finance an unusually sharp increase in business loans.

Market interest rates have risen somewhat further in

recent weeks.

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In light of the foregoing developments, it is the

policy of the Federal Open Market Committee to foster

monetary and financial conditions that will resist

inflationary pressures while encouraging continued

moderate economic expansion and contributing to a

sustainable pattern of international transactions.

At its meeting on April 18, 1978, the Committee agreed

that these objectives would be furthered by growth of

M-1, M-2, and M-3 from the first quarter of 1978 to

the first quarter of 1979 at rates 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. 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.

In the short run, the Committee seeks to achieve

bank reserve and money market conditions that are

broadly consistent with the longer-run ranges for

monetary aggregates cited above, while giving due

regard to developing conditions in financial markets

more generally. During the period until the next

regular meeting, System open market operations shall

be directed initially at attaining a weekly-average

Federal funds rate slightly above the current level.

Subsequently, operations shall be directed at main

taining the weekly Federal funds rate within the range

of 7-1/2 to 8 per cent. In deciding on his specific

objective for the Federal funds rate the Manager shall

be guided mainly by the relationship between the latest

estimates of annual rates of growth in the June-July

period of M-1 and M-2 and the following ranges of

tolerance: 5 to 10 per cent for M-1 and 6 to 10 per

cent for M-2. If, giving approximately equal weight

to M-1 and M-2, their rates of growth appear to be

significantly above or below the midpoints of the

indicated ranges, the objective for the funds rate

shall be raised or lowered in an orderly fashion

within its range.

If the rates of growth in the aggregates appear

to be above the upper limit or below the lower limit

of the indicated ranges at a time when the objective

for the funds rate has already been moved to the

corresponding limit of its range, the Manager is

promptly to notify the Chairman who will then decide

whether the situation calls for supplementary instruc

tions from the Committee.

6/20/78

It was agreed that the next meeting of the Committee would

be held on Tuesday, July 18, 1978, beginning at 9:30 a.m.

The meeting adjourned.

-7Secretary