FOMC Minutes

Meeting of the Federal Open Market Committee

October 5-6, 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., starting on Monday, October 5, 1981, at 4:30 p.m. and

continuing on Tuesday, October 6, 1981, at 9:00 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, 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. Axilrod, Staff Director

Mr. Altmann, Secretary

Mr. Bernard, Assistant Secretary

Mrs. Steele, Deputy Assistant Secretary

Mr. Bradfield, General Counsel 1/

Mr. Oltman, Deputy General Counsel

Mr. Mannion, Assistant General Counsel 1/

Mr. Kichline, Economist

Messrs. Burns, R. Davis, Ettin, Keir, Mullineaux, Prell,

Scheld, Truman, and Zeisel, Associate Economists

1/

Attended Tuesday session only.

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10/5-6/81

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

Mr. Siegman, Associate Director, Division of Inter

national Finance, Board of Governors

Mr. Lindsey 2/, Assistant Director, Division of Research

and Statistics, Board of Governors

Mr. Simpson, Chief, Banking Section, Division of Research

And Statistics, Board of Governors

Mrs. Deck 1/, Staff Assistant, Open Market Secretariat,

Board of Governors

Mr. Monhollon, First Vice President, Federal Reserve

Bank of Richmond

Messrs. Balbach, J. Davis, T. Davis, Keran, Koch, and

Parthemos, Senior Vice Presidents, Federal Reserve

Reserve Banks of St. Louis, Cleveland, Kansas City,

San Francisco, Atlanta, and Richmond, respectively

Messrs. Fieleke and Syron 1/, Vice Presidents, Federal

Reserve Bank of Boston

Mr. Duprey, Senior Economist, Federal Reserve Bank of

Minneapolis

Mr. Ozog, 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 August 18, 1981, were approved.

By unanimous vote, System open market transactions in Government

securities, agency obligations, and bankers acceptances during the period

August 18 through October 5, 1981, were ratified.

1/

2/

Attended Tuesday session only.

Attended Monday session only.

10/5-6/81

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With Mr. Wallich 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 GNP declined slightly further in the third quarter and

that prices on the average continued to rise at the somewhat

lower rate that emerged in the second quarter. In July and

August the nominal value of total retail sales was essentially

unchanged from the June level, and unit sales of domestic

automobiles weakened in September. Industrial production

declined slightly in August and apparently slackened further

in September, while nonfarm payroll employment changed little

in both months. The unemployment rate rose to 7.5 percent in

September, about equal to its average in the first half of

1981. Housing starts fell in August to the lowest rate in

several years. Over the first nine 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 against major

foreign currencies declined sharply through mid-September from

its peak in early August and on balance has changed little

since then. In August the U.S. foreign trade deficit widened

substantially from the low rate in July; for July and August

combined, the deficit was considerably larger than the second

quarter rate.

M1-B, adjusted for the estimated effects of shifts into NOW

accounts, increased little over the period from June to September,

while M2 grew at a relatively strong pace. The level of adjusted

M1-B in September 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; the level of M2 was at the upper end

of its range for the year. In frequently volatile markets, short

term interest rates have declined on balance since mid-August while

long-term rates have risen considerably further. On September 21

the Board of Governors announced a reduction in the surcharge from

4 to 3 percentage points on frequent borrowings of large depository

institutions.

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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 growth 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 3-1/2 to 6

percent for M-B, abstracting from the impact of flows into NOW

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

6-1/2 to 9-1/2 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 aggre

gates 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 aggre

gates might 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 2-1/2 to 5-1/2 percent, 6 to 9 percent, and 6-1/2 to 9-1/2

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 September to

December at an annual rate of 7 percent after allowance for

the impact of flows into NOW accounts and with growth in M2 at

an annual rate around 10 percent or slightly higher, recognizing

that the behavior of M2 will be affected by recent regulatory

and legislative changes, particularly the public's response to

the availability of the all savers certificate. 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 12 to 17 percent.

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10/5-6/81

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

on Tuesday, November 17, 1981, beginning at 9:30 a.m.

The meeting adjourned.

Secretary