FOMC Minutes

Meeting of the Federal Open Market Committee

December 21-22, 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, December 21, 1981, at 3:30 p.m. and

continuing on Tuesday, December 22, 1981, at 9:30 a.m.

PRESENT:

Mr. Volcker, Chairman

Mr. Solomon, Vice Chairman

Mr. Boehne

Mr. Boykin

Mr. Corrigan 1/

Mr. Gramley

Mr. Keehn

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. Mannion, Assistant General Counsel 2/

Mr. Kichline, Economist

Messrs. R. Davis, Duprey, Mullineaux, Prell, Scheld, Truman,

and Zeisel, Associate Economists

1/ Entered the meeting prior to the action to ratify System Open Market trans

actions in Government securities, agency obligations and bankers acceptances.

2/

Attended Tuesday session only.

12/21-22/81

- 2 -

Mr. Cross, Manager for Foreign Operations, System

Open Market Account

Mr. Sternlight, Manager for Domestic Operations,

System Open Market Account

Mr. Wallace, First Vice President, Federal Reserve

Bank of Dallas

Mr. Coyne, Assistant to the Board of Governors

Messrs. Gemmill and Siegman, Associate Directors, Division

of International Finance, Board of Governors

Mr. Lindsey, Assistant Director, Division of Research

and Statistics, Board of Governors

Mr. Kohn, Deputy Associate Director, 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, Koch,

and Parthemos, Senior Vice Presidents, Federal

Reserve Banks of Cleveland, Kansas City, Boston,

San Francisco, Atlanta, and Richmond, respectively

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

Reserve Banks of St. Louis and Boston

Ms. Lovett, Securities Trading Officer, Federal Reserve Bank

of New York

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

the Federal Open Market Committee held on November 17, 1981, were approved.

By unanimous vote, System open market transactions in Government

securities, agency obligations, and bankers acceptances during the period

November 17 through December 21, 1981, were ratified.

By unanimous vote, paragraph 1(a) of the Authorization for Domestic

Open Market Operations was amended to raise to $4 billion the dollar limit on

12/21-22/81

intermeeting changes in System Account holdings of U.S. Government and Federal

agency securities, effective immediately, for the period through the close of

business on February 2, 1982.

With Messrs. Solomon and Boykin 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 accor

dance with the following domestic policy directive:

The information reviewed at this meeting suggests that

real GNP declined appreciably in the fourth quarter and that

prices on the average rose less rapidly than over the first

three quarters of the year. In November industrial production

fell more than in preceding months; nonfarm payroll employment,

especially in manufacturing, declined sharply further; and the

unemployment rate rose an additional 0.4 percentage points

to 8.4 percent. The nominal value of retail sales increased,

but the level was still well below the average for the third

quarter. Housing starts remained at a depressed level. The

rise in the index of average hourly earnings has been somewhat

less rapid this year than during 1980.

The weighted average value of the dollar against major

foreign currencies has changed little on balance since mid

November. The U.S. foreign trade deficit in October widened

substantially from the unusually low rate in September, and

the average for the two months was about the same as that for

July and August.

M-B (adjusted for estimated shifts into NOW accounts)

expanded substantially in November and early December, but

its level in November was still 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. Growth

of M2 accelerated sharply in November, raising its level

above the upper end of its range for the year. Short-term

market interest rates and bond yields continued to decline

in the latter part of November, but since then they have

risen to levels generally higher than those of mid-November;

over the period since mid-November, mortgage interest rates

have declined further. On December 3 the Board of Governors

announced a reduction in Federal Reserve basic discount

rates from 13 to 12 .percent.

12/21-22/81

The Federal Open Market Committee seeks to foster monetary

and financial conditions that will help to reduce inflation,

promote a resumption of growth in output on a sustainable

basis, and contribute to a sustainable pattern of international

transactions. At its meeting in early July, the Committee

agreed that its objectives would be furthered by reaffirming

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 M1-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 aggregates had been running at about or somewhat

above the upper end 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 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.

In the short run, the Committee seeks behavior of reserve

aggregates consistent with growth of M1 and M2 from November

1981 to March at annual rates of around 4 to 5 percent and

9 to 10 percent respectively. The target for M1 no longer

reflects the "shift-adjustment" for conversion of outstanding

interest-bearing assets into new NOW accounts, formerly

estimated in the "shift-adjusted" M1-B series. In setting

the M1 target the Committee took account of the relatively

rapid growth that had already taken place through the first

part of December; it also recognized that interpretation of

actual money growth may need to take account of the signifi

cance of fluctuations in NOW accounts, which have recently

been growing relatively rapidly. 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 10 to 14 percent.

12/21-22/81

By unanimous vote, transfer to the National Archives of the FOMC

unofficial memoranda of discussion for the first three meetings of 1976,

on the basis described in a memorandum from the Secretary dated December 3,

1981, was authorized.

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

on Tuesday, February 2, 1982, beginning at 9:30 a.m.

The meeting adjourned.

Secretary