FOMC Minutes

Meeting of Federal Open Market Committee

November 21, 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, November 21,

1978, at 8:00 a.m.

PRESENT:

Mr. Miller, Chairman

Mr. Volcker, Vice Chairman

Mr. Baughman

Mr. Coldwell

Mr. Eastburn

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.

Mr.

Mr.

Mr.

Mr.

Altmann, Secretary

Bernard, Assistant Secretary

O'Connell, General Counsel

Mannion, Assistant General Counsel

Axilrod, Economist

Messrs. Burns, J. Davis, R. Davis, Keir,

Kichline, Paulus, and Zeisel,

Associate Economists

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Mr. Holmes, Manager, System Open Market

Account

Mr. Sternlight, Deputy Manager for

Domestic Operations

Mr. Pardee, Deputy Manager for Foreign

Operations

Mr. Wallace, 1/ Staff Director for Federal

Reserve Bank Activities, Board of

Governors

Mr. Coyne, Assistant to the Board of

Governors

Mr. Kalchbrenner, Associate Director,

Division of Research and Statistics,

Board of Governors

Messrs. Gemmill and Siegman, Associate

Directors, 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, Parthemos, Scheld, and

Sims, Senior Vice Presidents, Federal

Reserve Banks of St. Louis, Philadelphia,

Kansas City, Boston, Richmond, Chicago,

and San Francisco, respectively

Mr. Brandt, Vice President, Federal Reserve

Bank of Atlanta

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

October 17, 1978, were approved.

1/

Left the meeting at the point indicated.

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11/21/78

3 -

The report of examination of the System Open Market

Account, made by the Board's Office of Staff Director for

Federal Reserve Bank Activities as of the close of business

September 8, 1978, was accepted.

Mr. Wallace left the meeting prior to the following

action.

By unanimous vote, System open market transactions

in foreign currencies during the period October 17 through

November 20, 1978, were ratified.

By unanimous vote, renewal for further periods of

3 months of System drawings on the German Federal Bank maturing

December 15 through 29, 1978, was authorized.

Renewal for further periods of 3 months of System

drawings on

the Swiss National Bank maturing December 15

through 29, 1978, was noted without objection.

By unanimous vote, the Committee approved the

renewal for further periods of up to one year of the following

swap arrangements, having the indicated amounts and maturity

dates:

-

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4 -

Amount of

arrangement

(Millions of dollars

equivalent)

Foreign bank

Austrian National Bank

National Bank of Belgium

Bank of Canada

National Bank of Denmark

Bank of England

Bank of France

German Federal Bank

Bank of Italy

Bank of Japan

Bank of Mexico

Netherlands Bank

Bank of Norway

Bank of Sweden

Swiss National Bank

Bank for International

Settlements:

Dollars against Swiss francs

Dollars against authorized

European currencies other

than Swiss francs

$ 250

1,000

Term

(months)

12 mos.

2,000

250

3,000

2,000

I,

"

6,000

3,000

5,000

360

500

250

300

4,000

"

I

""

"

"

Maturity

date

12/4/79

12/20/79

12/29/79

12/29/79

12/4/79

12/29/79

12/29/79

12/29/79

12/4/79

12/4/79

12/29/79

12/4/79

12/4/79

12/4/79

600

12/4/79

1,250

12/4/79

By unanimous vote, System open market transactions

in Government securities, agency obligations, and bankers'

acceptances during the period October 17 through November 20,

1978, were ratified.

By unanimous vote, 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:

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5 -

The information reviewed at this meeting

suggests that in the current quarter real out

put of goods and services is continuing to grow

In October industrial production

moderately.

expanded further, nonfarm payroll employment

rose considerably, and the unemployment rate

declined from 6.0 to 5.8 per cent. Following

2 months of gains, the dollar value of total

retail sales declined somewhat to a level

slightly above the average in the third

quarter. Average producer prices of finished

goods rose substantially in October, as in

September, in part because of further large

increases in prices of foods. The advance in

the index of average hourly earnings has been

somewhat faster so far in 1978 than it was

In late October

on the average during 1977.

the Government announced a new program aimed

at moderating increases in prices and wages.

On November 1 a braod program to strengthen

the dollar in foreign exchange markets and

thereby to counter continuing domestic inflationary

pressures was announced. The program included

an increase in Federal Reserve discount rates

from 8-1/2 to 9-1/2 per cent, establishment of a

supplementary reserve requirement of 2 per cent

against member bank time deposits in denominations

of $100,000 or more, increases in Federal Reserve

reciprocal currency arrangements with certain

central banks, and other measures to mobilize

key foreign currencies.

The trade-weighted value of the dollar

against major foreign currencies declined

rapidly during the last week of October, but

following the actions taken to strengthen the

dollar, it rose sharply to a level somewhat

above that in early October. The U. S. trade

deficit was about the same in the third quarter

as in the second quarter.

Growth in M-1, which had been rapid in

August and September, slowed markedly in

October, and growth in M-2 and M-3 also moder

ated. Inflows of the interest-bearing deposits

included in the broader aggregates slowed some

what, although sales of 6-month money market

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- 6 certificates at both commercial banks and

nonbank thrift institutions expanded to record

levels. Short-term market interest rates have

risen substantially further since mid-October.

Bond rates also have increased on balance,

although they have declined appreciably since

November 1; mortgage interest rates have con

tinued to rise.

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 October 17,

1978, in setting ranges for the monetary

aggregates, the Committee recognized the

uncertainties concerning the effects that the

November 1 introduction 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 intro

duction 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.

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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 the program for

supporting the foreign exchange value of the

dollar, to developing conditions in domestic

financial markets, and to uncertainties

associated with the introduction of ATS.

Early in the period before the next regular

meeting, System open market operations are to

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 of 9-3/4

to 10 per cent. In deciding on the specific

objective for the Federal funds rate, the

Manager is to be guided mainly by a range of

tolerance for the annual rate of growth over

the November-December period of 6 to 9-1/2

per cent in M-2, provided that the rate of

growth in M-1 does not appear to exceed 5 per

cent.

The objective for the funds rate is to be

raised or lowered within its range if the rate

of growth of M-2 appears to be close to or

beyond the upper or lower limit of its range.

Weight is to be given to M-1 if it appears to

be growing at a rate close to or above its

limit.

If the rates of growth in the aggregates

appear to be falling outside the limits 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

will promptly notify the Chairman, who will

then decide whether the situation calls for

supplementary instructions from the Committee.

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8

It was agreed that the next meeting of the Committee

would be held on Tuesday, December 19, 1978, beginning at

9:30 a.m.

The meeting adjourned.

Secretary