FOMC Minutes

Meeting of the Federal Open Market Committee

May 18, 1981

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 Monday, May 18, 1981 at 9:30 a.m.

PRESENT:

Mr. Volcker 1/, Chairman

Mr. Solomon, Vice Chairman

Mr. Boehne

Mr. Boykin

Mr. Corrigan

Mr. Gramley

Mr. Partee

Mr. Rice

Mr. Schultz

Mrs. Teeters

Mr. Wallich

Messrs. Balles, Black, Ford and Winn, 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. Axilrod, Staff Director

Mr. Altmann, Secretary

Mr. Bernard, Assistant Secretary

Mrs. Steele, Deputy Assistant Secretary

Mr. Oltman, Deputy General Counsel

Mr. Mannion, Assistant General Counsel

Mr. Kichline, Economist

Messrs. Burns, Danforth, Ettin, Keir, Prell, Scheld,

Truman, and Zeisel, Associate Economists

Mr. Sternlight, Manager for Domestic Operations, System

Open Market Account

Mr. Pardee, Manager for Foreign Operations, System

Open Market Account

1/

Left the meeting following the action to approve the minutes and returned

prior to the action to ratify System open market transactions in Govern

ment securities, agency obligations,and bankers acceptances.

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5/18/81

Mr. Coyne, Assistant to the Board of Governors

Mr. Gemmill, Associate Director, Division of International

Finance, Board of Governors

Mr. Lindsey, Assistant Director, Division of Research

and Statistics, Board of Governors

Mrs. Deck, Staff Assistant, Open Market Secretariat,

Board of Governors

Mr. Doyle, First Vice President, Federal Reserve

Bank of Chicago

Messrs. Balbach, J. Davis, Fousek, Koch, and Parthemos

Senior Vice Presidents, Federal Reserve Banks

of St. Louis, Cleveland, New York, Atlanta,

and Richmond, respectively

Messrs. Bisignano, Cacy, Fieleke, Sandberg, and Syron,

Vice Presidents, Federal Reserve Banks of San

Francisco, Kansas City, Boston, New York, and

Boston, respectively

Mr. Lang, Research Officer, Federal Reserve Bank of

Philadelphia

By unanimous vote, the minutes of actions taken at the meetings

of the Federal Open Market Committee held on March 31, 1981 and May 6, 1981,

were approved.

The report of examination of the System Open Market Account, made

by the Board's Division of Federal Reserve Bank Operations as of the close of

business November 21, 1980, was accepted.

By unanimous vote, System open market transactions in Government

securities, agency obligations, and bankers acceptances during the period

March 31 through May 17, 1981, 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:

5/18/81

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The information reviewed at this meeting suggests that

real GNP will grow much less rapidly in the current quarter,

following the substantial expansion in the first quarter;

prices on the average have continued to rise rapidly, although

somewhat less so most recently than earlier in the year. The

dollar value of total retail sales increased slightly further

in March, but it declined appreciably in April when sales of

new cars fell in response to the ending of price concessions.

Industrial production rose moderately in both months, while

nonfarm payroll employment changed little, after adjustment

for strikes, and the unemployment rate was stable at 7.3

percent. In March housing starts remained at a reduced pace.

Over the first four months of 1981, the rise in the index of

average hourly earnings was slightly less rapid than during

1980.

The weighted average value of the dollar against major

foreign currencies has risen steadily since the end of March

to its highest level in three and a half years. The U.S.

trade deficit declined sharply in March, bringing the first

quarter deficit to a level well below the 1980 average.

Growth in M-1B, adjusted for the estimated effects of

shifts into NOW accounts, accelerated sharply in April and

growth in M-2 remained rapid. Since March, both short-term

and long-term market interest rates have risen substantially.

On May 4 the Board of Governors announced an increase in

Federal Reserve discount rates from 13 to 14 percent and an

increase in the surcharge from 3 to 4 percentage points on

frequent borrowings of large institutions.

The Federal Open Market Committee seeks to foster monetary

and financial conditions that will help to reduce inflation,

promote economic growth, and contribute to a sustainable

pattern of international transactions. At its meeting in early

February, the Committee agreed that these objectives would be

furthered by growth of M-1A, M-1B, M-2, and M-3 from the

fourth quarter of 1980 to the fourth quarter of 1981 within

ranges of 3 to 5 percent, 31 to 6 percent, 6 to 9 percent,

and 6½ to 9½ percent respectively, abstracting from the impact

of introduction of NOW accounts on a nationwide basis. The

associated range for bank credit was 6 to 9 percent. These

ranges will be reconsidered as conditions warrant.

In the short run the Committee seeks behavior of reserve

aggregates consistent with a substantial deceleration of growth

in M-1B from April to June to an annual rate of 3 percent or

lower, after allowance for the impact of flows into NOW accounts,

and with growth in M-2 at an annual rate of about 6 percent.

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5/18/81

The shortfall in growth of M-1B from the two-month rate speci

fied above would be acceptable, in light of the rapid growth

in April and the objective adopted by the Committee on March 31

for growth from March to June at an annual rate of 5 percent

or somewhat less. It is recognized that shifts into NOW accounts

will continue to distort measured growth in M-1B to an unpre

dictable extent, and operational reserve paths will be developed

in the light of evaluation of those distortions. The Chairman

may call for Committee consultation if it appears to the Manager

for Domestic Operations that pursuit of the monetary objectives

and related reserve paths during the period before the next

meeting is likely to be associated with a federal funds rate

persistently outside a range of 16 to 22 percent.

It was agreed that the next meeting of the Committee would be held

on Tuesday, July 7, 1981, beginning at 9:30 a.m.

The meeting adjourned.

Secretary