FOMC Minutes

Meeting of the Federal Open Market Committee

July 6-7, 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., beginning on Monday, July 6, 1981, at 2:30 p.m. and continuing on

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

PRESENT:

Mr. Volcker, Chairman

Mr. Solomon, Vice Chairman

Mr. Boehne

Mr. Boykin

Mr. Corrigan

Mr. Gramley

Mr. Keehn

Mr. Partee

Mr. Rice

Mr. Schultz

Mrs. Teeters

Mr. Wallich

Messrs. Balles, Black, Ford, Timlen,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.

Mr.

Mr.

Mrs

Mr.

Mr.

Mr.

Axilrod, Staff Director

Altmann, Secretary

Bernard, Assistant Secretary

Steele, Deputy Assistant Secretary

Bradfield, General Counsel

Mannion, Assistant General Counsel

Kichline, Economist

Messrs. Burns, Danforth, R. Davis, Keir, Mullineaux,

Prell, Scheld, Truman, and Zeisel, Associate

Economists

Mr. Pardee, Manager for Foreign Operations, System

Open Market Account

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Mr. Coyne, Assistant to the Board of Governors

Mr. Siegman, Associate Director, Division of International

Finance, Board of Governors

Mr. Lindsey, Assistant Director, Division of Research

and Statistics, Board of Governors

Mr. Johnson 1/, and Ms. Scanlon 1/, Economists, Division

of Research and Statistics, Board of Governors

Mrs. Deck, Staff Assistant, Open Market Secretariat,

Board of Governors

Messrs. J. Davis, T. Davis, Eisenmenger, Keran, and

Koch, Senior Vice Presidents, Federal Reserve Banks

of Cleveland, Kansas City, Boston, San Francisco,

and Atlanta, respectively

Messrs. Broaddus, Burger, and Syron, Vice Presidents,

Federal Reserve Banks of Richmond, St. Louis, and

Boston, respectively

Mr. Meek, Monetary Adviser, Federal Reserve Bank of

New York

Ms. Meulendyke, Research Officer, Federal Reserve Bank

of New York

By unanimous vote, Michael Bradfield was elected General Counsel of

the Federal Open Market Committee to serve until the election of a successor

at the first meeting of the Committee after February 28, 1982, with the

understanding that in the event of the discontinuance of his official

connection with the Board of Governors, he would cease to have any official

connection with the Federal Open Market Committee.

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

of the Federal Open Market Committee held on May 18, 1981, were approved.

By unanimous vote, System open market transactions in Government

securities, agency obligations, and bankers acceptances during the period

May 18 through July 6, 1981, were ratified.

1/

Mr. Johnson and Ms. Scanlon entered the meeting following the action to

ratify system open market transactions in Government securities, agency

obligations,and bankers acceptances and left the meeting prior to the

adoption of the domestic policy directive.

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7/6-7/81

By unanimous vote, the Committee reaffirmed the ranges for growth

in the monetary aggregates for the period from the fourth quarter of 1980

to the fourth quarter of 1981 that it had adopted at its meeting in early

February 1981.

These ranges, abstracting from the impact of NOW accounts

on a nationwide basis, were 3 to 5-1/2 percent for M1-A, 3-1/2 to 6 percent

for M1-B, 6 to 9 percent for M2, and 6-1/2 to 9-1/2 percent for M3.

associated range for bank credit was 6 to 9 percent.

The

The Committee

recognized that a shortfall in M1-B growth in the first half of the year

partly reflected a shift in public preferences toward other highly liquid

assets and that growth in the broader aggregates had been running somewhat

above the upper ends of the ranges.

In light of its desire to maintain

moderate growth in money over the balance of the year, the Committee

expected that growth in M1-B for the year would be near the lower end of

its range.

At the same time, growth in the broader monetary aggregates

might be high in their ranges.

With Mrs. Teeters dissenting, the Committee tentatively agreed

that for the period from the fourth quarter of 1981 to the fourth quarter

of 1982 growth of M1, M2, and M3 within ranges of 2-1/2 to 5-1/2 percent,

6 to 9 percent, and 6-1/2 to 9-1/2 percent, respectively would be

appropriate.

With Mr. Partee 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:

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The information reviewed at this meeting suggests that

real GNP changed little in the second quarter, following the

substantial expansion in the first quarter; prices on the

average rose less rapidly than in the first quarter. The

dollar value of total retail sales was virtually unchanged

in May after having declined appreciably in April, and sales

of new cars remained weak in June. Industrial production

rose slightly on the average in April and May, while non

farm payroll employment continued to advance, after adjust

ment for strikes. In June strike-adjusted nonfarm employment

declined appreciably; the unemployment rate was 7.3 percent,

somewhat lower than in May but unchanged from earlier months

of 1981. In May housing starts declined sharply. Over the

first six 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 continued to rise through May and early

In April-May the U.S. foreign

June and then leveled off.

trade deficit was somewhat above the first-quarter rate.

M1-B, adjusted for the estimated effects of shifts

into NOW accounts, declined substantially in May and June

following the sharp expansion in April, and growth in M2

slowed. The level of adjusted M1-B in the second quarter

on the average was below the lower end of the Committee's

range for growth over the year from the fourth quarter of

1980 to the fourth quarter of 1981; the level of M2 in

the second quarter was slightly above the upper end of

its range for the year.

Since mid-May, on balance,

short-term market interest rates have declined somewhat

while long-term yields generally have changed little.

The Federal Open Market Committee seeks to foster

monetary and financial conditions that will help to reduce

inflation, promote sustained 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 M1-A, M1-B,

M2, and M3 from the fourth quarter of 1980 to the fourth

quarter of 1981 within ranges of 3 to 5½ percent, 3½ 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 Committee recognized that the

shortfall in M1-B growth in the first half of the year

partly reflected a shift in public preferences toward

other highly liquid assets and that growth in the broader

aggregates has been running somewhat above the upper ends

of the ranges.

The Committee reaffirmed its ranges for 1981,

but in light of its desire to maintain moderate growth in

money over the balance of the year, the Committee expected

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7/6-7/81

that growth in M1-B for the year would be near the lower

end of its range. At the same time, growth in the broader

aggregates may be high in their ranges.

The associated

range for bank credit was 6 to 9 percent.

The Committee

also tentatively agreed that for the period from the fourth

quarter of 1981 to the fourth quarter of 1982 growth of

M1, M2, and M3 within ranges of 2½ to 5½ percent, 6 to 9

percent, and 6½ to 9½ percent would be appropriate. These

ranges will be reconsidered as warranted to take account

of developing experience with public preferences for NOW

and similar accounts as well as changing economic and

financial conditions.

In the short run the Committee seeks behavior of reserve

aggregates consistent with growth of M1-B from June to September

at an annual rate of 7 percent after

allowance for the impact

of flows into NOW accounts (resulting in growth at an annual

rate of about 2 percent from the average in the second quarter

to the average in the third quarter), provided that growth

of M2 remains around the upper limit of, or moves within,

its range for the year. It is recognized that shifts into

NOW accounts will continue to distort measured growth in

M1-B to an unpredictable extent, and operational reserve

paths will be developed in the light of evaluation of those

distortions. The Chairman may call for Committee consulta

tion 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 wth a federal funds rate persistently outside

a range of 15 to 21 percent.

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

on Tuesday, August 18, 1981, beginning at 9:30 a.m.

The meeting adjourned.

Secretary