FOMC Minutes

Meeting of the Federal Open Market Committee

July 12-13, 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., starting on Tuesday, July 12, 1983, at 2:30 p.m.,

and continuing on Wednesday, July 13, 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 and Black, Presidents of the Federal Reserve

Banks of San Francisco and Richmond, respectively

Mr. Axilrod, Staff Director and Secretary

Mr. Bernard, Assistant Secretary

Mrs. Steele,1/ Deputy Assistant Secretary

Mr. Bradfield, General Counsel

Mr. Oltman,1/ Deputy General Counsel

Mr. Kichline, Economist

Mr. Truman, Economist (International)

Messrs. Balbach,1/ R. Davis,1/ T. Davis,1/ Eisenmenger,1/

Ettin,1/ Prell,1/ Scheld,1/ Siegman,1/ and Zeisel,1/

Associate Economists

Mr. Cross, Manager for Foreign Operations,

System Open Market Account

1/ Attended Tuesday session only.

7/12-13/83

Mr. Coyne, Assistant to the Board of Governors

Mr. Gemmill,1/ Senior Associate Director, Division

of International Finance, Board of Governors

Mr. Kohn,1/ Associate Director, Division of

Research and Statistics, Board of Governors

Mr. Lindsey,1/ Deputy Associate Director, Division

of Research and Statistics, Board of Governors

Mr. Jensen,1/ Economist, Division of Research and

Statistics, Board of Governors

Mr. Rosine,1/ Economist, Division of Research and

Statistics, Board of Governors

Mrs. Low, Open Market Secretariat Assistant,

Board of Governors

Mr. Forrestal, First Vice President, Federal Reserve

Bank of Atlanta

Messrs. Burns,1/ J. Davis,1/ Keran,1/ Koch,1/ Mullineaux,1/

and Stern,1/ Senior Vice Presidents, Federal Reserve

Banks of Dallas, Cleveland, San Francisco, Atlanta,

Philadelphia, and Minneapolis, respectively

Messrs. Broaddus,1/ Meek, and Soss, Vice Presidents,

Federal Reserve Banks of Richmond, New York,

and New York, respectively

Mr. McCurdy,1/ Research 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 May 24, 1983, were approved.

Secretary's Note: The following actions were taken at the

Wednesday session.

Renewal for further periods through August 23, 1983, of drawings on

the System by the Bank of Mexico maturing July 24 through August 17, 1983,

was noted without objection.

By unanimous vote, System open market transactions in Government

securities, agency obligations, and bankers acceptances during the period

May 24 through July 12, 1983, were ratified.

1/

Attended Tuesday session only.

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7/12-13/83

With Mr. Morris dissenting, the Committee voted for the following

longer-run policy:

The Committee reaffirmed the longer-run ranges

established earlier for growth in M2 and M3 for 1983.

The Committee also agreed on tentative growth ranges

for the period from the fourth quarter of 1983 to the

fourth quarter of 1984 of 6-1/2 to 9-1/2 percent for M2

and 6 to 9 percent for M3. The Committee considered that

growth in M1 in a range of 5 to 9 percent from the second

quarter of 1983 to the fourth quarter of 1983 and in a

range of 4 to 8 percent from the fourth quarter of 1983

to the fourth quarter of 1984 would be consistent with

the ranges for the broader aggregates. The associated

range for total domestic nonfinancial debt was reaffirmed

at 8-1/2 to 11-1/2 percent for 1983 and tentatively set

at 8 to 11 percent for 1984.

With Mrs. Teeters and 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 rapid growth in real GNP in the second quarter

and other information reviewed at this meeting suggest

that the economic recovery is proceeding at a strengthened

pace. Expenditures on consumption and housing expanded

substantially in the second quarter and businesses

apparently began to add to inventories after a period

of sharp liquidation. Nonfarm payroll employment rose

considerably in May and June and the civilian unemploy

ment rate declined to 10.0 percent in June. Industrial

production continued to rise markedly in May and partial

data suggest a sizable gain in June. Data on new orders

and shipments continued to indicate improvement in the

demand for business equipment. In May housing starts

increased substantially following small declines earlier

and retail sales rose appreciably further. Average

prices and the index of average hourly earnings have

risen at a reduced pace in the first five months of 1983.

The weighted average value of the dollar against

major foreign currencies rose substantially in late

May and the first half of June and subsequently

has fluctuated in a narrow range. Reflecting the

strength of the U.S. economy and the persistent high

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level of the dollar, the U.S. foreign trade deficit

increased sharply in April-May from its reduced

first-quarter rate; exports declined and both oil

and nonoil imports rose.

Strong growth in the broader aggregates in May

and June raised M2 to a level somewhat above the mid

point of the Committee's range for 1983 and M3 to

around the upper limit of its range. M1 grew very

rapidly over both months and was well above its

range for the year. Growth in debt of domestic

nonfinancial sectors appears to have picked up in

the second quarter. Interest rates have risen

appreciably since early May.

The Federal Open Market Committee seeks to foster

monetary and financial conditions that will help to

reduce inflation further, promote 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.

In establishing growth ranges last February 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. 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

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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. These

ranges were reviewed at the May meeting and left unchanged,

pending further review in July.

At this meeting, the Committee reaffirmed the longer-run

ranges established earlier for growth in M2 and M3 for 1983.

The Committee also agreed on tentative growth ranges for the

period from the fourth quarter of 1983 to the fourth quarter

of 1984 of 6-1/2 to 9-1/2 percent for M2 and 6 to 9 percent

for M3. The Committee considered that growth in M1 in a

range of 5 to 9 percent from the second quarter of 1983 to

the fourth quarter of 1983, and in a range of 4 to 8 percent

from the fourth quarter of 1983 to the fourth quarter of

1984 would be consistent with the ranges for the broader

aggregates. The associated range for total domestic non

financial debt was reaffirmed at 8-1/2 to 11-1/2 percent

for 1983 and tentatively set at 8 to 11 percent for 1984.

In implementing monetary policy, the Committee agreed

that substantial weight would continue to be placed on the

behavior of the broader monetary aggregates. The behavior

of M1 and total domestic nonfinancial debt will be monitored,

with the degree of weight placed on M1 over time dependent

on evidence that velocity characteristics are resuming

more predictable patterns. 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.

The Committee seeks in the short run to increase

slightly further the existing degree of reserve restraint.

The action is expected to be associated with growth of

M2 and M3 at annual rates of about 8-1/2 and 8 percent

respectively from June to September, consistent with the

targets established for these aggregates for the year.

Depending on evidence about the strength of economic

recovery and other factors bearing on the business and

inflation outlook, lesser restraint would be acceptable

in the context of a significant shortfall in growth of

the aggregates from current expectations, while somewhat

greater restraint would be acceptable should the aggregates

expand more rapidly. The Committee anticipates that a

deceleration in M1 growth to an annual rate of around 7

percent from June to September will be consistent with

its third-quarter objectives for the broader aggregates,

and that expansion in total domestic nonfinancial debt

would remain within the range established for the year.

The Chairman may call for Committee consultation if it

appears to the Manager for Domestic Operations that

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pursuit of the monetary

paths during the period

to be associated with a

outside a range of 6 to

objectives and related reserve

before the next meeting is likely

federal funds rate persistently

10 percent.

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

held on Tuesday, August 23, 1983.

The meeting adjourned.

Secretary