FOMC Minutes

Meeting of the Federal Open Market Committee

August 23, 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, August 23, 1983, at 9:30 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

Mr. Axilrod, Staff Director and Secretary

Mr. Bernard, Assistant Secretary

Mrs. Steele, Deputy Assistant Secretary

Mr. Bradfield, General Counsel

Mr. Oltman, Deputy General Counsel

Mr. Kichline, Economist

Mr. Truman, Economist (International)

Messrs. Eisenmenger, Prell, Scheld, and Zeisel,

Associate Economists

Mr. Cross, Manager for Foreign Operations,

System Open Market Account

Mr. Sternlight, Manager for Domestic Operations,

System Open Market Account

8/23/83

Mr. Coyne, Assistant to the Board of Governors

Mr. Promisel, Associate Director, Division of

International Finance, Board of Governors

Mr. Kohn, Associate Director, Division of

Research and Statistics, 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

Mr. Fousek, Executive Vice President, Federal Reserve

Bank of New York

Messrs. Burns, J. Davis, Keran, Koch, Mullineaux, Parthemos,

and Stern, Senior Vice Presidents, Federal Reserve

Banks of Dallas, Cleveland, San Francisco, Atlanta,

Philadelphia, Richmond, and Minneapolis, respectively

Messrs. Burger, and Soss, Vice Presidents, Federal Reserve

Banks of St. Louis, and New York, respectively

Ms. Clarkin, Assistant Vice President, 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 July 12-13, 1983, were approved.

By unanimous vote, System open market transactions in foreign

currencies during the period July 13 through August 22, 1983, were ratified.

By unanimous vote, System open market transactions in Government

securities, agency obligations, and bankers acceptances during the period

July 13 through August 22, 1983, were ratified.

By unanimous vote, 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:

8/23/83

The information reviewed at this meeting suggests

continued rapid growth in real GNP in the current

quarter. Industrial production increased sharply in

July following large gains in the second quarter.

Nonfarm payroll employment also rose substantially

further in July and the civilian unemployment rate

declined 1/2 percentage point to 9.5 percent. After

rising sharply in the spring, retail sales have

leveled off recently. Housing starts edged down

over the past two months but permits continued to

rise. Recent data on new orders and shipments on

average continued to indicate strength in the demand

for business equipment. In July, information on

producer and consumer prices and the index of

average hourly earnings was consistent with earlier

indications of a considerable moderation in the

rate of inflation.

Growth in the broader monetary aggregates slowed

substantially in July, bringing M2 to a level near the

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

a level somewhat below the upper limit of its range.

Growth in M1 decelerated considerably from.its May

June pace, but its level remained above the Committee's

monitoring range for the year. Interest rates rose

appreciably through much of the intermeeting period

but recently market rates have retraced most of their

rise.

In part reflecting the course of U.S. interest

rates, the weighted average value of the dollar against

major foreign currencies rose substantially further in

July and early August, but the rise was followed by a

subsequent decline that reversed most of the earlier

increase. The U.S. foreign trade deficit was smaller

in June than in May, but the deficit in the second

quarter was much larger than in the first as imports

rose while exports were essentially unchanged.

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 July the Committee reconsidered the growth ranges

for monetary and credit aggregates established earlier

for 1983 in furtherance of these objectives and set

tentative ranges for 1984. The Committee recognized

that the relationships between such ranges and ultimate

8/23/83

-4

economic goals have become less predictable; that the

impact of new deposit accounts on growth of the monetary

aggregates cannot be determined with a high degree of

confidence; and that the availability of interest on

large portions of transaction accounts may be reflected

in some changes in the historical trends in velocity.

Against this background, the Committee at its July

meeting reaffirmed the following growth ranges for the

broader aggregates: for the period from February-March

of 1983 to the fourth quarter of 1983, 7 to 10 percent

at an annual rate for M2; 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. 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 Ml 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 re

affirmed 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 maintain the

existing degree of reserve restraint. The action is

expected to be associated with growth of M2 and M3 at

annual rates of around 8 percent from June to September,

consistent with the targets established for these aggre

gates 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 ex

pectations, while somewhat greater restraint would be

8/23/83

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 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, October 4, 1983.

The meeting adjourned.

Secretary