FOMC Minutes

Meeting of Federal Open Market Committee

July 18, 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, July 18, 1978, at 9:15

a.m.

PRESENT:

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Miller, Chairman

Volcker, Vice Chairman

Baughman

Coldwell

Eastburn

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, Keir,

Kichline, Paulus, Truman, and Zeisel,

Associate Economists

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7/18/78

Mr. Pardee, Deputy Manager for Foreign

Operations

Mr. Sternlight, Deputy Manager for Domestic

Operations

Mr. Coyne, Assistant to the Board of

Governors

Mr. Kalchbrenner, Associate Director,

Division of Research and Statistics,

Board of Governors

Mr. Henry, Associate Director, 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

Mr. Czerwinski, First Vice President,

Federal Reserve Bank of Kansas City

Messrs. Balbach, Boehne, T. Davis,

Eisenmenger, Parthemos, and Scheld,

Senior Vice Presidents, Federal

Reserve Banks of St. Louis, Philadelphia,

Kansas City, Boston, Richmond, and

Chicago, respectively

Messrs. Brandt, Fousek, and Keran, Vice

Presidents, Federal Reserve Banks of

Atlanta, New York, and San Francisco,

respectively

Mr. Meek, Monetary Adviser, 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 June 20,

1978, were approved.

By unanimous vote, System open market transactions in

foreign currencies during the period June 20 through July 17,

1978, were ratified.

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7/18/78

By unanimous vote, renewal for further periods of 3

months of System drawings on the German Federal Bank maturing in

the period August 2 through August 29, 1978, was authorized.

With Messrs. Jackson and Partee dissenting, the

Committee adopted the following ranges for rates of growth in

monetary aggregates for the period from the second quarter of

1978 to the second quarter of 1979:

M-1, 4 to 6-1/2 per cent;

M-2, 6-1/2 to 9 per cent; and M-3, 7-1/2 to 10 per cent.

The

associated range for bank credit is 8-1/2 to 11-1/2 per cent.

By unanimous vote, System open market transactions in

Government securities, agency obligations, and bankers'

acceptances during the period June 20 through July 17, 1978,

were ratified.

With Messrs. Baughman, Willes, and Winn dissenting, the

Federal Reserve Bank of New York was authorized and directed,

until otherwise directed by the Committee, to execute trans

actions in the System Account in accordance with the following

domestic policy directive:

The information reviewed at this meeting

suggests that growth in economic activity has

slowed in recent months. Following substantial

gains in March and April, increases in

industrial production and nonfarm payroll

employment moderated in May and June and

retail sales changed little. In June, however,

the unemployment rate dropped 0.4 of a per

centage point to 5.7 per cent. Average

producer prices rose somewhat less rapidly

in May and June than earlier in 1978, but

7/18/78

- 4 over the first half of this year prices

increased at a considerably faster rate than

they had on the average during 1977. The

advance in the index of average hourly

earnings also moderated in May and June but

was at a somewhat faster pace over the first

half of 1978 than during 1977.

Since mid-June the trade-weighted value

of the dollar against major foreign currencies

has declined further to its lowest level of

the year. The U. S. trade deficit in May was

lower than the very high rate of the first 4

months of the year.

Growth in M-1 moderated in May and June,

but reflecting the extraordinarily rapid pace

in April, growth from the first to the second

quarter was relatively high. Growth in M-2

and M-3 has been moderate over recent months.

In June inflows of small-denomination time

deposits to commercial banks and other thrift

institutions picked up, following introduction

of the new 6-month certificate. Market interest

rates have risen further in recent weeks. On

June 30 an increase in Federal Reserve discount

rates from 7 to 7-1/4 per cent was announced.

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 sus

tainable pattern of international transactions.

The Committee agreed that these objectives

would be furthered by growth of M-1, M-2, and

M-3 from the second quarter of 1978 to the second

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 8-1/2 to 11-1/2 per

cent. These ranges are subject to reconsidera

tion at any time as conditions warrant.

7/18/78

- 5 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

at maintaining the weekly-average Federal funds

rate within the range of 7-3/4 to 8 per cent.

In deciding on the 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 July-August period of M-1 and M-2 and the

following ranges of tolerance:

4 to 8 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 close

to or beyond the upper or lower limits 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 instructions

from the Committee.

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 expira

tion, on April 30, 1978, of the underlying statutory authority

contained in a provision of Section 14(b) of the Federal Reserve

Act.

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8/17/78

It was agreed that the next meeting of the Committee

would be held on Tuesday, August 15, 1978, beginning at 9:30

a.m.

The meeting adjourned.

Secretary