FOMC Minutes

Meeting of the Federal Open Market Committee

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

PRESENT:

Mr. Volcker, Chairman

Mr. Solomon, Vice Chairman

Mr. Boykin

Mr. Corrigan

Mr. Gramley

Mr. Keehn

Mr. Partee

Mr. Rice

Mr. Schultz

Mrs. Teeters

Mr. Wallich

Messrs. Balles, Black, and Winn, Alternate Members of the

Federal Open Market Committee

Messrs. Morris and Roos, Presidents of the Federal Reserve

Banks of Boston and St. Louis, respectively

Mr. Axilrod, Staff Director

Mr. Bernard, Assistant Secretary

Mrs. Steele, Deputy Assistant Secretary

Mr. Bradfield, General Counsel

Mr. Mannion, Assistant General Counsel

Messrs. Burns, Ettin, Keir, Prell, Scheld, and Zeisel,

Associate Economists

Mr. Cross, Manager for Foreign Operations, System

Open Market Account

Mr. Sternlight, Manager for Domestic Operations,

System Open Market Account

Mr. Coyne, Assistant to the Board of Governors

Messrs. Gemmill and Siegman, Associate Directors,

Division of International Finance, Board of

Governors

- 2 -

8/18/81

Mr. Lindsey, Assistant Director, Division of Research

and Statistics, Board of Governors

Mrs. Deck, Staff Assistant, Open Market Secretariat,

Board of Governors

Messrs. Czerwinski, Forrestal, McIntosh, and Smoot, First

Vice Presidents, Federal Reserve Banks of Kansas

City, Atlanta, Boston, and Philadelphia, respectively

Messrs. Balbach, T. Davis, Fousek, and Koch, Senior

Vice Presidents, Federal Reserve Banks of St. Louis,

Kansas City, New York, and Atlanta, respectively

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

Federal Reserve Banks of San Francisco, Richmond,

and Boston, respectively

Mr. Duprey, Senior Economist, Federal Reserve Bank of

Minneapolis

Mr. Lang, Research Officer, Federal Reserve Bank of

Philadelphia

Mr. Levin, Manager, Federal Reserve Bank of New York

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

of the Federal Open Market Committee held on July 6-7,and August 7, 1981,

were approved.

By unanimous vote, System open market transactions in Government

securities, agency obligations, and bankers acceptances during the period

July 7 through August 17, 1981, were ratified.

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:

8/18/81

- 3 The information reviewed at this meeting suggests little

change in real GNP in the current quarter, following a small

decline in the second quarter; prices on the average appeared

to be continuing to rise less rapidly than earlier in the

year. The dollar value of total retail sales increased

appreciably further in July, reflecting some recovery in

sales at automotive dealers. Industrial production rose

slightly in July, while nonfarm payroll employment advanced

substantially; the unemployment rate declined to 7.0 percent,

somewhat below its average level in earlier months of 1981.

In June housing starts declined sharply further. Over the

first seven months of the year, the rise in the index of

average hourly earnings was somewhat less rapid than during

1980.

The weighted average value of the dollar rose further

against major foreign currencies in July and early August,

registering gains against all major currencies. In June

the U.S. foreign trade deficit declined slightly from the

May level, but for the second quarter the deficit was up

substantially over the first-quarter rate.

In July M1-B, adjusted for the estimated effects of

shifts into NOW accounts, expanded somewhat following a

substantial decline in May and June, and growth in M2

accelerated from a relatively sluggish pace in the

previous two months. The level of adjusted M1-B in

July was well 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 while the level

of M2 was slightly below the upper end of its range for

the year. Available data for early August suggested

further acceleration in growth of M1-B and M2, with

acceleration in M2 apparently influenced in part by

initial responses of the public to the availability

of more attractive deposit instruments, pointing up

the necessity of evaluating the behavior of M2 in the

light of the impact of regulatory and legislative

changes. Since early July most market interest rates

have risen considerably on balance.

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 July, the Committee

agreed that these objectives would be furthered by re

affirming the monetary gowth ranges for the period

from the fourth quarter of 1980 to the fourth quarter

of 1981 that it had set at the February meeting. These

ranges included growth of 3½ to 6 percent for M1-B,

8/18/81

- 4 abstracting from the impact of flows into NOW accounts

on a nationwide basis, and growth of 6 to 9 percent

and 6½ to 9½ percent for M2 and M3, respectively. 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 had been

running at about or somewhat above the upper ends of

their 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 aggregates might

be high in their ranges. The associated range for bank

credit was 6 to 9 percent. The Committee also tenta

tively 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 continues to seek

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 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 15 to 21 percent.

-

8/18/81

5

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

on Tuesday, October 6, 1981, beginning at 9:30 a.m.

The meeting adjourned.

Secretary