FOMC Minutes

Meeting of Federal Open Market Committee

October 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.,

on Tuesday, October 17,

1978, at 9:15 a.m.

PRESENT:

Mr. Miller, Chairman

Mr. Volcker, Vice Chairman

Mr. Baughman

Mr. Coldwell

Mr. Eastburn

Mr. Jackson

Mr. Partee

Mrs. Teeters

Mr. Wallich

Mr. Willes

Mr. 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. Altmann, Secretary

Mr.

Mr.

Mr.

Mr.

Bernard, Assistant Secretary

O'Connell, General Counsel

Mannion, Assistant 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

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Mr. Sternlight, Deputy Manager for Domestic

Operations

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. 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. McIntosh, First Vice President,

Federal Reserve Bank of Boston

Messrs. Balbach, Boehne, T. Davis, and

Scheld, Senior Vice Presidents, Federal

Reserve Banks of St. Louis, Philadelphia,

Kansas City, and Chicago, respectively

Messrs. Cox and Keran, Vice Presidents,

Federal Reserve Banks of Atlanta 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 meeting of the Federal Open Market Committee held on

September 19, 1978, were approved.

By unanimous vote, System open market transactions

in foreign currencies during the period September 19 through

October 16, 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

November 10 through December 1, 1978, was authorized.

Renewal for further periods of 3 months of System

drawings on the Swiss National Bank maturing November 2

through November 30, 1978, was noted without objection.

By unanimous vote, the Committee authorized the

Manager to undertake negotiations involving certain technical

changes in the terms of the reciprocal currency arrangements

maintained with foreign central banks, subject to final

approval by the Foreign Currency Subcommittee.

By unanimous vote, System open market transactions

in Government securities, agency obligations, and bankers'

acceptances during the period September 19 through October 16,

1978, were ratified.

With Messrs. Wallich, Willes, and Winn dissenting,

the Committee adopted the following ranges for rates of growth

in monetary aggregates for the period from the third

of 1978 to the third

quarter of 1979:

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

quarter

M-2, 6-1/2 to 9 per

M-1 was expected to grow

within a range of 2 to 6 per cent over the period, depending

in part on the speed and extent of transfers from demand to

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savings deposits resulting from the introduction of the auto

matic transfer service.

The associated range for bank credit

is 8-1/2 to 11-1/2 per cent.

Growth of M-1+ (M-1 plus savings

deposits at commercial banks and NOW accounts) in a range of

5 to 7-1/2 per cent was thought to be generally consistent

with the ranges of growth for the foregoing aggregates.

With Mrs. Teeters and Mr. 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

grew moderately in the third quarter, although

the pace was somewhat below the average for the

first two quarters of the year. In September, as

in August, the dollar value of total retail sales

rose considerably. Industrial production con

tinued to expand while nonfarm payroll employment

changed little. The unemployment rate edged up

from 5.9 to 6.0 per cent. Average producer prices

of finished goods rose substantially in September,

as prices of foods increased sharply after having

declined for 2 months. 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.

The trade-weighted value of the dollar against

major foreign currencies has declined further since

mid-September in frequently volatile exchange markets.

The U. S. trade deficit fell sharply in August,

reversing the jump recorded in July; for the 2

months the deficit was close to the rate for the

second quarter.

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Growth in M-1, which had been rapid in August,

accelerated in September. Inflows of the interest

bearing deposits included in M-2 and M-3 remained

strong, and expansion in the broader aggregates

Short-term market

also accelerated somewhat.

interest rates have risen further in recent weeks;

long-term rates also have increased, but they

remain below their July peaks.

An increase in

Federal Reserve discount rates from 7-3/4 to 8 per

cent was announced on September 22; another increase

to 8-1/2 per cent was announced on October 13.

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 con

tributing to a sustainable pattern of international

transactions.

In setting ranges for the monetary

aggregates, the Committee recognized the uncertainties

concerning the effects that the November 1 intro

duction of the automatic transfer service (ATS)

would have on measures of the money supply, especially

M-1. Against that background, the Committee agreed

that appropriate monetary and financial conditions

would be furthered by growth of M-2 and M-3 from

the third quarter of 1978 to the third quarter of

1979 within ranges of 6-1/2 to 9 per cent and 7-1/2

to 10 per cent, respectively. The narrowly defined

money supply (M-1) was expected to grow within a

range of 2 to 6 per cent over the period, depending

in part on the speed and extent of transfers from

demand to savings deposits resulting from the

introduction of ATS. The associated range for

bank credit is 8-1/2 to 11-1/2 per cent. Growth of

M-1+ (M-1 plus savings deposits at commercial banks

and NOW accounts) in a range of 5 to 7-1/2 per cent

was thought to be generally consistent with the

ranges of growth for the foregoing aggregates.

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

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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 and

to uncertainties associated with the introduction

of ATS. 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. Sub

sequently, operations shall be directed at main

taining the weekly-average Federal funds rate

In

within the range of 8-3/4 to 9-1/4 per cent.

deciding on the specific objective for the Federal

funds rate the Manager shall be guided mainly by a

range of tolerance for growth in M-2 over the

October-November period of 5-1/2 to 9-1/2 per cent,

provided that growth of M-1 over that period does

not exceed an annual rate of 6-1/2 per cent.

It was agreed that the next meeting of the Committee

would be held on Tuesday, November 21, 1978, beginning at

9:30 a.m.

The meeting adjourned.

Secretary