FOMC Minutes

Meeting of Federal Open Market Committee

December 19, 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, December 19,

1978, at 9:00 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. J. 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

Messrs. Coyne and Guenther 1/, Assistants

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

Messrs. Balbach, T. Davis, Eisenmenger,

and Scheld, Senior Vice Presidents,

Federal Reserve Banks of St. Louis,

Kansas City, Boston, and Chicago,

respectively

Messrs. Brandt, Broaddus, Fousek, and Keran,

Vice Presidents, Federal Reserve Banks

of Atlanta, Richmond, New York, and

San Francisco, respectively

Mr. Mullineaux, Research Officer, Federal

Reserve Bank of Philadelphia

Mr. Levin, 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

November 21, 1978, were approved.

1/

Entered the meeting at the point indicated.

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By unanimous vote, System open market transactions

in foreign currencies during the period November 21 through

December 18, 1978, were ratified.

By unanimous vote, System open market transactions

in Government securities, agency obligations, and bankers'

acceptances during the period November 21 through December 18,

1978, were ratified.

With Mrs. Teeters and Mr. Wallich 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 in the current quarter real output

of goods and services has picked up somewhat

In November,

from the rate in the third quarter.

as in October, the dollar value of total retail

Industrial pro

sales expanded substantially.

duction and nonfarm payroll employment rose

considerably further, and the unemployment rate

remained at 5.8 per cent.

Over recent months,

broad measures of prices and the index of

average hourly earnings have risen rapidly.

The trade-weighted value of the dollar

against major foreign currencies declined sharply

following OPEC's announcement on December 17 of

increased oil prices for 1979, after having

declined slightly over the previous few weeks,

but it remains substantially above the low

reached just prior to the actions taken on

November 1 to strengthen the dollar. The U. S.

trade deficit in October was at about the rate

recorded in the second and third quarters.

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M-1 declined in November. only in part because

of shifts of funds from demand deposits to savings

deposits after the introduction of the automatic

transfer service (ATS) at the beginning of the month.

Over the first 11 months of 1978, M-1 grew at an

annual rate of about 7-1/4 per cent. Growth of

M-2 and M-3 slackened further in November; they

grew at rates of about 8-1/4 and 9-1/4 per cent,

respectively, over the first 11 months of the year.

Inflows of deposits to nonbank thrift institutions

slowed in November, after having grown rapidly in

the preceding 3 months. Market interest rates in

general have risen further in recent weeks.

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. 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

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 con

ditions 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

In deciding on the

9-3/4 to 10-1/2 per cent.

specific objective for the Federal funds rate the

Manager shall be guided mainly by the relation

ship between the latest estimates of annual rates

of growth in the December-January period of M-1

and M-2 and the following ranges of tolerance:

2 to 6 per cent for M-1 and 5 to 9 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 the midpoints of the indicated

ranges, the objective for the funds rate shall be

raised in an orderly fashion within its range;

if their rates of growth appear to be approaching

the lower limits of the indicated ranges, the

funds rate shall be lowered in an orderly fashion

within its range.

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 supple

mentary instructions from the Committee.

By unanimous vote, renewal for further periods of

3 months of System drawings on the German Federal Bank maturing

January 5, 1979, through February 15, 1979, was authorized.

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Renewals for further periods of 3 months of System

drawings on the Bank of Japan and the Swiss National Bank

maturing January 5, 1979, through February 15, 1979, were

noted without objection.

Pursuant to paragraph 1D of the Authorization for

Foreign Currency Operations the Committee, by unanimous vote,

expressly authorized an over-all open position in all foreign

currencies of $8 billion, effective immediately.

By unanimous vote, the Committee agreed to raise

the amount of eligible foreign currencies that the Federal

Reserve would be prepared to warehouse for the U. S. Treasury,

or for the Exchange Stabilization Fund of the U. S. Treasury,

to $5 billion and to be prepared to warehouse such currencies

for periods of up to 12 months.

Prior to the following action, Mr. Guenther entered

the meeting.

By unanimous vote, transfer to the National Archives

of the FOMC memoranda of discussion for 1973, on the basis

described in a memorandum from the Secretariat dated

December 6, 1978, was authorized.

It was agreed that the next meeting of the Committee

would be held on Tuesday, February 6, 1979, beginning at

9:30 a.m.

The meeting adjourned.

Secretary