FOMC Minutes

Meeting of Federal Open Market Committee

August 14, 1979

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, August 14,

1979, beginning at 9:30 a.m.

PRESENT:

Mr. Volcker, Chairman

Mr. Balles

Mr. Black

Mr. Coldwell

Mr. Kimbrel

Mr. Mayo

Mr. Partee

Mr. Rice

Mr. Schultz

Mrs. Teeters

Mr. Wallich

Messrs. Guffey, Morris, Roos, Timlen, and Winn,

Alternate Members of the Federal Open Market

Committee

Messrs. Baughman, Eastburn, and Willes, Presidents

of the Federal Reserve Banks of Dallas,

Philadelphia, and Minneapolis, respectively

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Altmann, Secretary

Bernard 1/, Assistant Secretary

Oltman 1/, Deputy General Counsel

Mannion 1/, Assistant General Counsel

Axilrod 1/, Economist

Holmes 1/, Adviser for Market Operations

Messrs. Brandt 1/, R. Davis 1/, Keir 1/,

Scheld 1/, Truman 1/, and Zeisel 1/,

Associate Economists

1/

Entered the meeting prior to the vote to approve the Minutes

of Actions.

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Mr. Sternlight 1/, Manager for Domestic

Operations, System Open Market Account

Mr. Pardee 1/, Manager for Foreign Opera

tions, System Open Market Account

Mr. Coyne 1/, Assistant to the Board of

Governors

Messrs. Farnsworth 1/2/

and Siegman 1/,

Associate Directors, Division of

Federal Reserve Bank Examinations and

Budgets and Division of International

Finance,respectively, Board of Governors

Mr. Prell 1/, Associate Research Division

Officer, Division of Research and

Statistics, Board of Governors

Mr. Robinson 1/2/, Manager, Financial

Examinations, Division of Federal

Reserve Bank Examinations and Budgets,

Board of Governors

Ms. Farar 1/, Economist, Open Market

Secretariat, Board of Governors

Mrs. Deck 1/, Staff Assistant, Open Market

Secretariat, Board of Governors

Mr. Smoot 1/, First Vice President, Federal

Reserve Bank of Philadelphia

Messrs. Burns 1/ and J. Davis 1/, Senior

Vice Presidents, Federal Reserve Banks

of Dallas and Cleveland, respectively

Messrs. Broaddus

1/,Danforth 1/, T. Davis 1/,

and Fieleke 1/, Vice Presidents, Federal

Reserve Banks of Richmond, Minneapolis,

Kansas City, and Boston, respectively

Mr. Burger 1/, Assistant Vice President,

Federal Reserve Bank of St. Louis

Mr. Levin 1/, Manager, Securities Department,

Federal Reserve Bank of New York

1/

2/

Entered the meeting prior to the vote to approve the Minutes

of Actions.

Left the meeting following the vote to accept the Report of

Examinations of System Open Market Account.

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By unanimous vote, the Committee elected Paul A. Volcker

to serve as Chairman for the period until the election of a suc

cessor at the

first meeting of the Committee after February 29,

1980, with the understanding that in the event of the discon

tinuance of his offical connection with the Board of Governors

of the Federal Reserve System,, he would cease to have any

official connection with the Federal Open Market Committee.

By unanimous vote, Alan R. Holmes was elected Adviser

for Market Operations for the period until the election of a

successor at the first meeting of the Committee after February

29, 1980, with the understanding that in the event of the dis

continuance of his official connection with the Federal Reserve

Bank of New York, he would cease to have any official connection

with the Federal Open Market Committee.

By unanimous vote, Peter D.

Sternlight, and Scott E.

Pardee were selected to serve at the pleasure of the Committee

in the capacities of Manager for Domestic Operations, System

Open Market Account, and Manager for Foreign Operations, System

Open Market Account, respectively, on the understanding that

their selection was subject to their being satisfactory to the

Federal Reserve Bank of New York.

Secretary's note;

Advice was subsequently

received that the selection of the Managers

indicated above were satisfactory to the

Federal Reserve Bank of New York.

By unanimous vote, Sections 4 and 5 of the Rules of

Organization were amended to read as follows:

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RULES OF ORGANIZATION

SECTION 4--STAFF:

(a) Selection of staff officers.--At its first

meeting on or after March 1 of each year, the

Committee selects, from among the officers and

employees of the Board and the Federal Reserve Banks,

the following staff officers to serve until the first

meeting on or after March 1 of the next following

year:

Secretary, Deputy Secretary, and one or more

Assistant Secretaries; General Counsel, Deputy General

Counsel, and one or more Assistant General Counsels;

Economists, one or more of whom may be designated as

Senior or Associate Economists or given titles

reflecting their areas of particular specialization;

and such other officers as the Committee might wish

from time to time.

SECTION 5--MANAGERS

The Committee selects a Manager for Domestic

Operations, System Open Market Account; and a

Manager for Foreign Operations, System Open Market

Account.

The foregoing shall be satisfactory to

the Federal Reserve Bank selected by the Committee

to execute open market transactions for such

Account and shall serve at the pleasure of

the Committee. The Managers keep the Committee

informed on market conditions and on transactions

they have made and render such reports as the

Committee may specify.

By unanimous vote, subsections (d) and (e) of Section

272.3 of the Rules of Procedure

were amended to read as follows:

RULES OF PROCEDURE

SECTION 272.3--MEETINGS

(d) Attendance at meetings.--Attendance at

Committee meetings is restricted to members and

alternate members of the Committee, the Presidents

of Federal Reserve Banks who are not at the time

members or alternates, staff officers of the

Committee, the Managers, and such other advisers

as the Committee may invite from time to time.

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(e)

Meeting

agendas.--The Secretary, in con

sultation with the Chairman, prepares an agenda of

matters to be discussed at each meeting and the

Secretary transmits the agenda to the members of the

Committee within a reasonable time in advance of

such meeting.

In general, the agendas include

approval of minutes of actions; reports by the

Managers on open market operations since the pre

vious meeting, and ratification by the Committee

of such operations; reports by Economists on, and

Committee discussion of, the economic and financial

situation and outlook; Committee discussion of

monetary policy and action with respect thereto;

and such other matters as may be considered

necessary.

By unanimous vote, the Procedural Instructions with

Respect to Foreign Currency Operations were amended to read as

follows:

PROCEDURAL INSTRUCTIONS WITH RESPECT TO

FOREIGN CURRENCY OPERATIONS

In conducting operations pursuant to the

authorization and direction of the Federal Open

Market Committee as set forth in the Authorization

for Foreign Currency Operations and the Foreign

Currency Directive, the Federal Reserve Bank of

New York, through the Manager for Foreign Opera

tions, System Open Market Account, shall be guided

by the following procedural understandings with

respect to consultations and clearance with the

Committee, the Foreign Currency Subcommittee, and

the Chairman of the Committee. All operations

undertaken pursuant to such clearances shall be

reported promptly to the Committee.

1.

The Manager for Foreign Operations shall clear

with the Subcommittee (or with the Chairman, if

the Chairman believes that consultation with the

Subcommittee is not feasible in the time available):

A.

Any operation which would result in a

change in the System's overall open position

in foreign currencies exceeding $300 million

on any day or $600 million since the most

recent regular meeting of the Committee.

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B.

Any operation which would result in a change

on any day in the System's net position in a

single foreign currency exceeding $150 million,

or $300 million when the operation is associated

with repayment of swap drawings.

C.

Any operation which might generate a sub

stantial volume of trading in a particular

currency by the System, even though the change

in the System's net position in that currency

might be less than the limits specified in 1B.

D.

Any swap drawing proposed by a foreign

bank not exceeding the larger of (i) $200

million or (ii) 15 percent of the size of the

swap arrangement.

2.

The Manager for Foreign Operations shall clear

with the Committee (or with the Subcommittee, if

the Subcommittee believes that consultation with

the full Committee is not feasible in the time

available, or with the Chairman, if the Chairman

believes that consultation with the Subcommittee

is not feasible in the time available):

A.

Any operation which would result in a

change in the System's overall open position

in foreign currencies exceeding $1.5 billion

since the most recent regular meeting of the

Committee.

B.

Any swap drawing proposed by a foreign

bank exceeding the larger of (i) $200 million

or (ii) 15 percent of the size of the swap

arrangement.

3.

The Manager for Foreign Operations shall also

consult with the Subcommittee or the Chairman about

proposed swap drawings by the System, and about any

operations that are not of a routine character.

By unanimous vote, the minutes of actions taken at the

meeting of the Federal Open Market Committee held on July 11,

1979, were approved.

The report of examination of the System Open. Market

Account, made by the Board's Division of Federal Reserve Bank

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8/14/79

Examinations and Budgets as of the close of business April 20,

1979, was accepted.

By unanimous vote, System open market transactions in

foreign currencies during the period July 11 through August 13,

1979, were ratified.

By unanimous vote, the amount of the reciprocal

currency arrangement with the Bank of Mexico specified in

paragraph 2 of the Authorization for Foreign Currency Operations

was raised to $700 million, effective August

17, 1979.

By unanimous vote, System open market transactions

in Government securities, agency obligations, and bankers

acceptances during the period July 11 through August 13, 1979,

were ratified.

With Messrs. Black and Rice dissenting, 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:

The information reviewed at this meeting

suggests that real output of goods and services is

continuing to decline in the current quarter, while

prices on the average are continuing to rise rapidly.

In July the dollar value of retail sales edged up; in

real terms, sales were still substantially below

those of last December.

Growth in nonfarm payroll

employment slowed considerably further, but the

unemployment rate, at 5.7 percent, remained within

the narrow range prevailing since the beginning of

the year.

Industrial production declined in June,

and it apparently slackened further in July to

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about the level of last December. So far this

year, broad measures of prices have increased at

a much faster pace than during 1978, although

producer prices of foods have declined since

The rise in the index of average hourly

March.

earnings, which had slowed in May and June, picked

up in July.

The trade-weighted value of the dollar

against major foreign currencies declined some

what further in the second half of July, and

although it subsequently recovered, it remained

The U. S. trade

below its level of early June.

deficit in the second quarter was larger than

in the previous quarter, reflecting largely the

significant rise in the price and value of oil

imports.

Growth of M-1, M-2, and M-3 remained rapid

in July.

Inflows of interest-bearing deposits

included in M-2 were slightly stronger than in

June.

At nonbank thrift institutions, inflows

Short-term market

of deposits declined somewhat.

interest rates have risen over recent weeks,

while long-term rates have changed little on

balance.

An increase in Federal Reserve discount

rates from 9-1/2 to 10 percent was announced on

July 20.

Taking account of past and prospective

developments in employment, unemployment, pro

duction, investment, real income, productivity,

international trade and payments, and prices,

the Federal Open Market Committee seeks to foster

monetary and financial conditions that will resist

inflationary pressures while encouraging moderate

economic expansion and contributing to a sustain

able pattern of international transactions.

At

its meeting on July 11, 1979, the Committee agreed

that these objectives would be furthered by growth

of M-1, M-2, and M-3 from the fourth quarter of

1978 to the fourth quarter of 1979 within ranges

of 1-1/2 to 4-1/2 percent, 5 to 8 percent, and 6

to 9 percent respectively, the same ranges that

had been established in February.

Having estab

lished the range for M-1 in February on the assump

tion that expansion of ATS and NOW accounts would

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dampen growth by about 3 percentage points over

the year, the Committee also agreed that actual

growth in M-1 might vary in relation to its

range to the extent of any deviation from that

estimate.

The associated range for bank credit

The Committee antic

is 7-1/2 to 10-1/2 percent.

ipates that for the period from the fourth.

quarter of 1979 to the fourth quarter of 1980,

growth may be within the same ranges, depending

upon emerging economic conditions and appropriate

adjustments that may be required by legislation

or judicial developments affecting interest

bearing transactions accounts. These ranges will

be reconsidered 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

foreign exchange and domestic financial markets.

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 10-3/4 to 11-1/4 per

cent.

In deciding on the specific objective for

the federal funds rate the Manager for Domestic

Operations shall be guided mainly by the relation

ship between the latest estimates of annual rates

of growth in the August-September period of M-1

and M-2 and the following ranges of tolerance:

4 to 8 percent for M-1 and 7 to 11 percent for

M-2.

If rates of growth of M-1 and M-2, given

approximately equal weight, appear to be close

to or beyond the upper or lower limits of the

indicated ranges, the objective for the funds rate

is to be raised or lowered in an orderly fashion

within its range.

If the rates of growth in the aggregates

appear to be beyond the upper or lower 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 shall

promptly notify the Chairman, who will then decide

whether the situation calls for supplementary

instructions from the Committee.

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By unanimous vote, paragraph 2 of the Authorization

for Domestic Open Market Operations was amended to read as

follows:

The Federal Open Market Committee authorizes

and directs the Federal Reserve Bank of New York

(or, under special circumstances, such as when the

New York Reserve Bank is closed, any other Federal

(a) to lend to the Treasury such

Reserve Bank)

amounts of securities held in the System Open

Market Account as may be necessary from time to

time for the temporary accommodation of the

.Treasury, under such conditions as the Committee

may specify; and (b) to purchase directly from

the Treasury for renewable periods not to exceed

thirty days, when authorized by the Board of

Governors of the Federal Reserve System pursuant

to an affirmative vote of not less than five

members, for its own account (with discretion,

in cases where it seems desirable, to issue

participations to one or more Federal Reserve

Banks) such amounts of special short-term certi

ficates of indebtedness as may be necessary from

time to time for the temporary accommodation of

the Treasury, provided that the rate charged on such

certificates shall be a rate of 1/4 of 1 percent

below the discount rate of the Federal Reserve

Bank of New York at the time of such purchases and

provided that the total amount of such certificates

held at any one time by the Federal Reserve Banks

shall not exceed $2 billion.

By unanimous vote, the Committee approved the guidelines

for lending securities from the System Open Market Account to

the Treasury recommended by FOMC staff in a memorandum dated

August 8, 1979, except that the Committee approved a charge for

borrowed securities at a rate of 1/8 of 1 percent per annum.

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- 11 It was agreed that the next meeting of the Committee

would be held on Tuesday, September .18, 1979, beginning at 9:30

a.m.

The meeting adjourned.

Secretary