FOMC Minutes

Meeting of the Federal Open Market Committee

October 5, 1982

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, October 5, 1982, at 9:00 a.m.

PRESENT:

Mr.

Mr.

Mr.

Mr.

Mr.

Volcker, Chairman

Solomon, Vice Chairman

Balles

Black

Ford

Mr. Gramley

Mrs. Horn

Mr. Martin 1/

Mr. Partee

Mr. Rice

Mrs. Teeters

Mr. Wallich

Messrs. Guffey, Keehn, Morris, and Roos, Alternate Members of

the Federal Open Market Committee

Messrs. Boehne, Boykin, and Corrigan, Presidents of the Federal

Reserve Banks of Philadelphia, Dallas, and Minneapolis,

respectively

Mr. Axilrod, Staff Director

Mr. Altmann, Secretary

Mr. Bernard, Assistant Secretary

Mrs. Steele, Deputy Assistant Secretary

Mr. Bradfield, General Counsel

Mr. Mannion, Assistant General Counsel

Mr. Kichline, Economist

Messrs. Ettin, J. Davis, R. Davis, Koch, Prell, Siegman,

Truman, and Zeisel, Associate Economists

Mr. Sternlight, Manager for Domestic Operations,

System Open Market Account

Mr. Cross, Manager for Foreign Operations,

System Open Market Account

1/ Entered the meeting following approval of minutes.

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10/5/82

Mr. James McIntosh, First Vice President, Federal

Reserve Bank of Boston

Mr. Coyne, Assistant to the Board of Governors

Mr. Gemmill, Associate Director, Division of International

Finance, Board of Governors

Mr. Kohn, Senior Deputy Associate Director, Division of

Research and Statistics, Board of Governors

Mr. Lindsey, Assistant Director, Division of Research

and Statistics, Board of Governors

Mrs. Low, Secretary, Open Market Secretariat,

Board of Governors

Messrs. Balbach, Burns, T. Davis, Mullineaux, Scheld,

and Stern, Senior Vice Presidents, Federal Reserve Banks

of St. Louis, Dallas, Kansas City, Philadelphia,

Chicago, and Minneapolis, respectively

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

Federal Reserve Banks of Richmond, San Francisco,

and New York, respectively

Mr. McCurdy, Research Officer and Senior Economist, 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 August 24, 1982, were approved.

By unanimous vote, System open market transactions in foreign

currencies during the period August 24, through October 4, 1982, were

ratified.

Renewal for a further period of three months of a drawing on the

System by the Bank of Mexico maturing on November 4, 1982, was noted without

objection.

By unanimous vote, System open market transactions in Government

securities, agency obligations, and bankers acceptances during the period

August 24, through October 4, 1982, were ratified.

10/5/82

- 3 With Messrs. Black and Ford and Mrs. Horn 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 changed little in the third quarter,

following a small increase in the second quarter,

while prices on the average continued to rise more

slowly than in 1981. In August the nominal value of

retail sales fell back to the sharply reduced June

level, while industrial production and nonfarm payroll

employment also declined. Housing starts fell, re

versing much of the substantial July increase. The

unemployment rate was unchanged at 9.8 percent in

August, but claims for unemployment insurance have

risen further in recent weeks and there are indica

tions of some further decline in production. In

recent months the advance in the index of average

hourly earnings has remained considerably less rapid

than during 1981.

The weighted average value of the dollar against

major foreign currencies has risen strongly further

over the past month, reflecting in part a continuing

concern in the market about economic and financial

difficulties abroad and also some firming of U.S.

interest rates relative to foreign rates after a

considerable drop earlier. The U.S. merchandise

trade deficit rose sharply in August and on average

in July and August the deficit rate was well above

that for the first half.

After three months of weakness, M1 grew rapidly in

August and September; growth in M2 accelerated in August

from an already rapid pace but appears to have slowed

markedly in September. Following large declines over

the preceding two months, short-term market interest

rates have risen somewhat on balance since late August,

while bond yields and mortgage rates have continued to

decline. The Federal Reserve discount rate was reduced

10/5/82

-4from 10-1/2 percent to 10 percent in late August. Mean

while, reflecting some well-publicized problems in recent

months of a few banks here and abroad and the financing

difficulties of Mexico, a more cautious atmosphere in

private credit markets has been reflected in wider spreads

between U.S. government and some private credit instruments.

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. In

July, the Committee agreed that these objectives would

be furthered by reaffirming the monetary growth ranges

for the period from the fourth quarter of 1981 to the

fourth quarter of 1982 that it had set at the February

meeting. These ranges were 2-1/2 to 5-1/2 percent for

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

for M3. The associated range for bank credit was 6 to

9 percent. The Committee agreed that growth in the

monetary and credit aggregates around the top of the

indicated ranges would be acceptable in the light of

the relatively low base period for the M1 target and

other factors, and that it would tolerate for some

period of time growth somewhat above the target range

should unusual precautionary demands for money and

liquidity be evident in the light of current economic

uncertainties. The Committee also indicated that it was

tentatively planning to continue the current ranges for

1983 but that it would review that decision carefully

in the light of developments over the remainder of 1982.

Specification of the behavior of M1 over the balance

of the year is subject to unusually great uncertainties

because it will be substantially affected by special

circumstances -- in the very near term by reinvestment

of funds from maturing all savers certificates and later

by the public's response to the new account directly

competitive with money market funds mandated by recent

legislation. The probable difficulties in interpretation

of M1 during the period suggest much less than usual weight

be placed on movements in that aggregate during the current

quarter. These developments are expected to affect M2 and

other broader aggregates to a much smaller extent.

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10/5/82

In all the circumstances, the Committee seeks to maintain

expansion in bank reserves needed for an orderly and sustained

flow of money and credit, consistent with growth of M2 (and M3)

in a range of around 8-1/2 to 9-1/2 percent at an annual rate

from September to December, and taking account of the desir

ability of somewhat reduced pressures in private credit markets

in the light of current economic conditions. Somewhat slower

growth, bringing those aggregates around the upper part of the

ranges set for the year, would be acceptable and desirable

in a context of declining interest rates. Should economic

and financial uncertainties lead to exceptional liquidity

demands, somewhat more rapid growth in the broader aggregates

would be tolerated. The Chairman may call for Committee con

sultation 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 7 to 10-1/2 percent.

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

on Tuesday, November 16, 1982, beginning at 9:30 a.m.

The meeting adjourned.

Secretary