FOMC Minutes

Meeting of the Federal Open Market Committee

February 8-9, 1983

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, February 8, 1983, at 2:30 p.m. and

continuing on Wednesday, February 9, 1983, at 9:00 a.m.

PRESENT:

Mr. Volcker, Chairman

Mr. Solomon, Vice Chairman

Mr. Balles

Mr. Black

Mr. Ford

Mr. Gramley

Mrs. Horn

Mr. Martin

Mr. Partee

Mr. Rice

Mrs. Teeters

Mr. Wallich

Messrs. Guffey, Keehn, Morris 1/, and Roberts, 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.

Mr.

Mrs

Mr.

Mr.

Mr.

Axilrod, Staff Director

Bernard, Assistant Secretary

Steele, Deputy Assistant Secretary

Bradfield, General Counsel

Oltman, Deputy General Counsel

Kichline, Economist

Messrs. Ettin, J. Davis, Keran, Koch, Parthemos,

Prell, Siegman, Truman, and Zeisel, Associate

Economists

1/

Entered the meeting following the action to approve minutes for the

December 20-21, 1982, meeting.

2/8-9/83

Mr. Sternlight, Manager for Domestic Operations,

System Open Market Account

Mr. Cross, Manager for Foreign Operations,

System Open Market Account

Mr. Coyne, Assistant to the 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

Mr. Dooley, Assistant Director, Division of International

Finance, Board of Governors

Ms. Scanlon 1/, Senior Economist, Division of Research and

Statistics, Board of Governors

Mrs. Low, Open Market Secretariat Assistant,

Board of Governors

Mr. Fousek, Executive Vice President, Federal Reserve

Bank of New York

Messrs. Balbach, Burns, T. Davis, Eisenmenger 2/,

Mullineaux, Scheld, and Stern, Senior Vice

Presidents, Federal Reserve Banks of St. Louis,

Dallas, Kansas City, Boston, Philadelphia, Chicago,

and Minneapolis, respectively

Messrs. Meek and Soss, Vice Presidents, 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 December 20-21, 1982, were approved.

By unanimous vote, System open market transactions in Government

securities, agency obligations, and bankers acceptances during the period

December 21 through February 8, 1983, were ratified.

1/

Left the meeting following discussion of the Committee's longer-run

objectives for monetary and credit aggregates.

2/

Entered the meeting following the action to approve minutes for the

December 20-21, 1982, meeting.

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2/8-9/83

Renewal for further periods of three months of drawings on the

System by the Bank of Mexico maturing February 20 through April 8, 1983,

was noted without objection.

With Messrs. Black, Ford, Mrs. Horn, and Mr. Wallich dissenting,

the Committee established the following longer-run ranges for monetary

growth: for the period from February-March of 1983 to the fourth quarter

of 1983, 7 to 10 percent at an annual rate for M2, taking into account the

probability of some residual shifting into that aggregate from non-M2 sources;

and for the period from the fourth quarter of 1982 to the fourth quarter of

1983, 6-1/2 to 9-1/2 percent for M3, which appears to be less distorted by

the new accounts.

For the same period a tentative range of 4 to 8 percent

has been established for monitoring M1, assuming that Super NOW accounts

draw only modest amounts of funds from sources outside M1 and assuming that

the authority to pay interest on transaction balances is not extended beyond

presently eligible accounts.

An associated range of growth for total domestic

nonfinancial debt has been estimated at 8-1/2 to 11-1/2 percent.

With Mr. Ford 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 indicates

that real GNP declined in the fourth quarter because

of a sharp reduction in business inventories. Final

sales increased appreciably, and the rise in prices

remained much less rapid than in 1981. Retail sales

and housing activity have strengthened in recent months,

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but business fixed investment has weakened further.

Nonfarm payroll employment rose in January, after an

extended period of declines, and the civilian unemploy

ment rate fell 0.4 percentage point to 10.4 percent.

In recent months the advance in the index of average

hourly earnings has slowed further.

The weighted average value of the dollar against

major foreign currencies depreciated moderately further

from mid-December to mid-January, but a subsequent

appreciation has more than offset that decline. In

the fourth quarter the U.S. merchandise trade deficit

was close to the relatively high third-quarter rate.

Growth of M2 surged to an extraordinary pace in

January, apparently reflecting shifts of funds into

recently authorized money market deposit accounts.

Growth of M3 accelerated, following very slow expansion

in December. Growth of M1 remained rapid in January,

although it was down appreciably from the average pace

in other recent months. Market interest rates on U.S.

Treasury obligations have risen somewhat since the latter

part of December, while rates on most private market

instruments are about unchanged to slightly higher.

Mortgage rates have declined further.

The Federal Open Market Committee seeks to foster

monetary and financial conditions that will help to

reduce inflation further, promote a resumption of

growth in output on a sustainable basis, and contribute

to a sustainable pattern of international transactions.

In establishing growth ranges for monetary and credit

aggregates for 1983 in furtherance of these objectives,

the Committee recognized that the relationships between

such ranges and ultimate economic goals have been less

predictable over the past year; that the current impact

of new deposit accounts on growth rates of monetary

aggregates cannot be determined with a high degree of

confidence; and that the availability of interest on

large portions of transaction accounts, declining

inflation, and lower market rates of interest may be

reflected in some changes in the historical trends

in velocity. A substantial shift of funds into M2

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from market instruments, including large certificates

of deposit not included in M2, in association with the

extraordinarily rapid build-up of money market deposit

accounts has distorted growth in that aggregate during

the current quarter.

In establishing growth ranges for the aggregates

for 1983 against this background, the Committee felt

that growth in M2 might be more appropriately measured

after the period of highly aggressive marketing of

money market deposit accounts has subsided. The

Committee also felt that a somewhat wider range was

appropriate for monitoring M1. Those growth ranges

will be reviewed in the spring and altered, if appro

priate, in the light of evidence at that time.

With these understandings, the Committee established

the following growth ranges: for the period from

February-March of 1983 to the fourth quarter of 1983,

7 to 10 percent at an annual rate for M2, taking into

account the probability of some residual shifting into

that aggregate from non-M2 sources; and for the period

from the fourth quarter of 1982 to the fourth quarter

of 1983, 6-1/2 to 9-1/2 percent for M3, which appears

to be less distorted by the new accounts. For the same

period a tentative range of 4 to 8 percent has been

established for M1, assuming that Super NOW accounts

draw only modest amounts of funds from sources outside

M1 and assuming that the authority to pay interest on

transaction balances is not extended beyond presently

eligible accounts. An associated range of growth for

total domestic nonfinancial debt has been estimated at

8-1/2 to 11-1/2 percent.

In implementing monetary policy, the Committee agreed

that substantial weight would be placed on behavior of

the broader monetary aggregates, expecting that current

distortions in M2 from the initial adjustment to the new

deposit accounts will abate. The behavior of M1 will be

monitored, with the degree of weight placed on that aggre

gate over time dependent on evidence that velocity character

istics are resuming more predictable patterns. Debt ex

pansion, while not directly targeted, will be evaluated

in judging responses to the monetary aggregates. The

Committee understood that policy implementation would

involve continuing appraisal of the relationships between

the various measures of money and credit and nominal GNP,

including evaluation of conditions in domestic credit

and foreign exchange markets.

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For the more immediate future, the Committee seeks

to maintain the existing degree of restraint on reserve

positions. Lesser restraint would be acceptable in the

context of appreciable slowing of growth in the monetary

aggregates to or below the paths implied by the long-term

ranges, taking account of the distortions relating to the

introduction of new accounts. The Chairman may call for

Committee consultation if it appears to the Manager for

Domestic Operations that pursuit of the monetary objec

tives 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 6 to 10 percent.

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

on Tuesday, March 29, 1983, beginning at 9:30 a.m.

The meeting adjourned.

Assistant Secretary