FOMC Minutes

Meeting of Federal Open Market Committee

September 19, 1978

MINUTES OF ACTION

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, September 19,

1978, at 9:30 a.m.

PRESENT:

Mr. Miller, Chairman

Mr. Volcker, Vice Chairman

Mr. Baughman

Mr. Coldwell

Mr. Eastburn

Mr. Gardner

Mr. Jackson

Mr. Partee

Mrs. Teeters

Mr. Wallich

Mr. Willes

Mr. Winn

Messrs. Balles, Black, Kimbrel, Mayo, and Timlen,

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.

Altmann, Secretary

Bernard, Assistant Secretary

O'Connell, General Counsel

Mannion, Assistant General Counsel

Axilrod, Economist

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

Keir, Kichline, Paulus, and Truman,

Associate Economists

Mr. Holmes, Manager, System Open Market

Account

9/19/78

- 2 Mr. Pardee, Deputy Manager for Foreign

Operations

Mr. Coyne, Assistant to the Board of

Governors

Mr. Kalchbrenner, Associate Director,

Division of Research and Statistics,

Board of Governors

Mr. Siegman, 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

Messrs. Balbach, T. Davis, Eisenmenger,

Parthemos, and Scheld, Senior Vice

Presidents, Federal Reserve Banks of

St. Louis, 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

Ms. Clarkin, 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

August 15, and September 8, 1978, were approved.

By unanimous vote, System open market transactions

in foreign currencies during the period August 15 through

September 18, 1978, were ratified.

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By unanimous vote, renewal for further periods of

3 months of System drawings on the German Federal Bank maturing

on October 5, 1978, was authorized.

Renewal for a further period of 3 months of a System

drawing on the Swiss National Bank maturing on October 5,

1978, was noted without objection.

By unanimous vote, System use of the "swap" line

with the German Federal Bank beyond October 5, 1978, was

authorized, the line with that Bank having been in continuous

use since October 5, 1977.

By unanimous vote, System open market transactions

in Government securities, agency obligations, and bankers'

acceptances during the period August 15 through September 18,

1978, were ratified.

By unanimous vote, the limit on System holdings of

U. S. government and Federal agency securities specified in

paragraph 1(a) of the Authorization for Domestic Open Market

Operations was raised from $3 billion to $4 billion, effective

immediately, for the period ending with the close of business

October 17, 1978.

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With Messrs. Wallich and Willes 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 real output of goods and services

has grown moderately in the current quarter,

although the pace is somewhat below the average for

the first two quarters of the year. In August the

dollar value of total retail sales rose, after having

declined in July, but remained close to the level

reached in April. Industrial production continued

to expand at about the moderate pace of the preceding

3 months, and nonfarm payroll employment rose some

what further. The unemployment rate declined from

6.2 to 5.9 per cent, slightly below the average

rate in the first 7 months of the year. Since mid

year average prices of goods and services have risen

less rapidly than earlier, in large part because of

declines in prices of foods. The advance in the

index of average hourly earnings has been somewhat

faster so far in 1978 than it had been on the average

during 1977.

After a sharp decline in early August, the trade

weighted value of the dollar against major foreign

currencies has recovered against a background of

uncertain conditions in exchange markets. In late

August it was announced that the U. S. trade deficit

had increased sharply in July.

Growth in M-1 picked up in August to about the

average rate in the first two quarters of the year.

Inflows of the interest-bearing deposits included in

M-2 and M-3 also accelerated somewhat, and expansion

in the broader aggregates was relatively rapid.

Short-term market interest rates have risen appreci

ably since mid-August, but longer-term rates

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generally have edged down further. On August 18

an increase in Federal Reserve discount rates from

7-1/4 to 7-3/4 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 contri

buting to a sustainable pattern of international

At its meeting on July 18, 1978, the

transactions.

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

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 domestic and

international financial markets more generally.

Early in the period until the next regular meeting,

System open market operations shall be directed at

attaining a weekly-average Federal funds rate

slightly above the current level. Subsequently,

operations shall be directed at maintaining the

weekly-average Federal funds rate within the range

In deciding on the

of 8-1/4 to 8-3/4 per cent.

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 September-October period of M-1 and

5 to 9

M-2 and the following ranges of tolerance:

per cent for M-1 and 6-1/2 to 10-1/2 per cent for

If, giving approximately equal weight to M-1

M-2.

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

ficantly 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.

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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.

It was agreed that the next meeting of the Committee

would be held on Tuesday, October 17, 1978, beginning at

9:30 a.m.

The meeting adjourned.

Secretary