FOMC Minutes

Meeting of the Federal Open Market Committee

May 24, 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, May 24, 1983, at 9:00 a.m.

PRESENT:

Mr. Volcker, Chairman

Mr. Solomon, Vice Chairman

Mr. Gramley

Mr. Guffey

Mr. Keehn

Mr. Martin

Mr. Morris

Mr. Partee

Mr. Rice

Mr. Roberts

Mrs. Teeters

Mr. Wallich

Messrs.

Boehne, Boykin, Corrigan, and Mrs. Horn, Alternate

Members of the Federal Open Market Committee

Messrs. Balles, Black, and Ford, Presidents of the Federal

Reserve Banks of San Francisco, Richmond, and Atlanta,

respectively

Axilrod, Staff Director and Secretary

Bernard, Assistant Secretary

. Steele, Deputy Assistant Secretary

Bradfield, 1/ General Counsel

Oltman, Deputy General Counsel

Truman, Economist (International)

Messrs. Balbach, T. Davis, Eisenmenger, Ettin, Prell,

Scheld, Siegman, 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 prior to the action to ratify System Open Market transactions.

5/24/83

Mr. Coyne, Assistant to the Board of Governors

Mr. Gemmill, Senior Associate Director, Division

of International Finance, Board of Governors

Mr. Lindsey, Deputy Associate Director, Division

of Research and Statistics, Board of Governors

Mrs. Low, Open Market Secretariat Assistant,

Board of Governors

Messrs. Burns, Koch, Parthemos, and Stern,

Senior Vice Presidents, Federal Reserve Banks

of Dallas, Atlanta, Richmond, and Minneapolis,

respectively

Ms. Arak, Messrs. Bisignano, Lang, and Soss,

Vice Presidents, Federal Reserve Banks of

New York, San Francisco, Philadelphia, and

New York, respectively

Ms. Meulendyke, Manager, Securities Department, Federal

Reserve Bank of New York

Mr. Stevens, Economic Advisor, Federal Reserve Bank of

Cleveland

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

Federal Open Market Committee held on March 28-29, 1983, were approved.

By unanimous vote, System open market transactions in Government

securities, agency obligations, and bankers acceptances during the period

March 29 through May 23, 1983, were ratified.

Renewal through August 23 of drawings on the System by the Bank of

Mexico maturing June 7 through July 20, 1983, was noted without objection.

With Messrs. Solomon, Guffey, Morris, Rice, and Mrs. Teeters

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:

5/24/83

-3-

The information reviewed at this meeting suggests

that growth in real GNP has accelerated in the current

quarter following a moderate increase in the first

quarter. Industrial production increased sharply in

April after rising at a moderate pace in previous months;

nonfarm payroll employment and retail sales rose con

siderably in March and April. Housing starts declined

somewhat in both months but were still well above

depressed 1982 levels. Data on new orders and shipments

suggest that the demand for business equipment is

reviving. The civilian unemployment rate edged down

to 10.2 percent in April. Average prices have changed

little and the index of average hourly earnings has risen

at a much reduced pace in the early months of 1983.

The weighted average value of the dollar against

major foreign currencies has remained in a narrow range

near its recent high level since late March. The U.S.

foreign trade deficit fell substantially in the first

quarter, reflecting a sharp drop in the value of oil

imports.

Growth in M2 and M3 decelerated further in April to

relatively low rates but appears to have picked up recently.

Ml declined in April but has strengthened markedly in

early May. Growth in debt of domestic nonfinancial sectors

appears to have been moderate over the first four months of

the year. Interest rates have changed little on balance

since late March.

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. At

its meeting in February the Committee established 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 impact of new deposit accounts on growth

ranges 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 from

market instruments, including large certificates of

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deposit not included in M2, in association with the

extraordinarily rapid build-up of money market deposit

accounts, distorted growth in that aggregate during the

first 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 had subsided. The Committee also felt that a

somewhat wider range was appropriate for monitoring M1.

Those growth ranges were to be reviewed in the spring and

altered, if appropriate, in the light of evidence at that

time. The Committee reviewed the ranges at this meeting and

decided not to change them at this time, pending further

review at the July meeting. 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 appeared to be less

distorted by the new accounts. For the same period a

tentative range of 4 to 8 percent was established for M1,

assuming that Super NOW accounts would draw only modest

amounts of funds from sources outside M1 and assuming that

the authority to pay interest on transaction balances was

not extended beyond presently eligible accounts. An

associated range of growth for total domestic nonfinancial

debt was estimated at 8-1/2 to 11-1/2 percent.

In implementing monetary policy, the Committee agreed

that substantial weight would continue to be placed on

behavior of the broader monetary aggregates expecting that

distortions in M2 from the initial adjustment to the new

deposit accounts will abate. The behavior of M1 will

continue to be monitored, with the degree of weight placed

on that aggregate over time dependent on evidence that

velocity characteristics are resuming more predictable

patterns. Debt expansion, while not directly targeted,

will be evaluated in judging responses to the monetary

aggregates. The Committee understood that policy imple

mentation 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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The Committee seeks in the short run to increase only

slightly the degree of reserve restraint. The action was

taken against the background of M2 and M3 remaining slightly

below the rates of growth of 9 and 8 percent, respectively,

established earlier for the quarter and within their long

term ranges, M1 growing well above anticipated levels for

some time, and evidence of some acceleration in the rate

of business recovery. Lesser restraint would be appropriate

in the context of more pronounced slowing of growth in the

broader monetary aggregates relative to the paths implied

by the long-term ranges and deceleration of M1, or indica

tions of a weakening in the pace of economic recovery. 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

6 to 10 percent.

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

on Tuesday-Wednesday, July 12-13, 1983.

The meeting adjourned.

Secretary