FOMC Minutes

Meeting of the Federal Open Market Committee

May 21-22, 1984

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 Monday, May 21, 1984, at 3:30 p.m., and continuing

on Tuesday, May 22, 1984, at 9:30 a.m.

PRESENT:

Mr. Volcker, Chairman

Mr. Solomon, Vice Chairman

Mr. Boehne

Mr. Boykin

Mr. Corrigan

Mr. Gramley

Mrs. Horn

Mr. Martin

Mr. Partee

Mr. Rice 1/

Mr. Wallich

Messrs. Balles, Black, Forrestal, and Keehn, Alternate Members

of the Federal Open Market Committee

Messrs, Guffey, Morris, and Roberts, Presidents of the Federal

Reserve Banks of Kansas City, Boston, and St. Louis,

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. Burns, J. Davis, Kohn, Lang, Lindsey, Prell,

Siegman, Stern, and Zeisel, Associate Economists

Mr. Cross, Manager for Foreign Operations,

System Open Market Account

Mr. Sternlight, Manager for Domestic Operations,

System Open Market Account

1/

Attended Tuesday session only.

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Mr. Coyne, Assistant to the Board of Governors

Mr. Roberts, Assistant to the Chairman, Board of Governors

Mr. Promisel, Senior Associate Director, Division of

International Finance, 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, T. Davis, Eisenmenger, Keran, Parthemos,

Scheld, and Ms. Tschinkel, Senior Vice Presidents,

Federal Reserve Banks of St. Louis, Kansas City,

Boston, San Francisco, Richmond, Chicago, and Atlanta,

respectively

Ms. Lovett, Manager, Securities Department, Federal Reseve

Bank of New York

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

Federal Open Market Committee held on March 26-27, 1984, were approved.

By unanimous vote, System open market transactions in Government

securities, agency obligations, and bankers acceptances during the period

March 27, 1984 through May 21, 1984, were ratified.

Secretary's Note: All of the above actions were taken on

Monday, May 21, 1984.

With Mr. Boykin 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 growth in real GNP, while moderating from the

unusually strong first-quarter pace, remains relatively

rapid in the current quarter. In April, industrial

production and nonfarm payroll employment rose sub

stantially following decreased growth in March; the

civilian unemployment rate was unchanged at 7.8 per

cent in March and April as the labor force increased

5/21-22/84

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appreciably. Retail sales grew rapidly in April after

two months of decline, and housing starts recovered

to a rate equaling their first-quarter average.

Information on outlays and spending plans generally

suggests continuing strength in business fixed

investment. Since the beginning of the year, prices

and wages have continued to rise at about the same

pace as in 1983.

Ml changed little in April on average, but data

available for early May suggest a considerable

strengthening. In April M2 grew about in line with

expectations while M3 expanded more rapidly than

anticipated. From the fourth quarter of 1983 through

April, M1 grew at a rate a little below the midpoint

of the Committee's range for 1984; M2 increased at a

rate in the lower part of its longer-run range, while

M3 expanded at a rate a bit above the upper limit of

its range. Total domestic nonfinancial debt apparently

is growing at a pace above the Committee's monitoring

range for the year, with borrowing by businesses

continuing to be concentrated in the short-term

markets. Interest rates have risen considerably

further since late March. On April 6, the Federal

Reserve announced an increase in the discount rate

from 8-1/2 to 9 percent. Recently, day-to-day market

conditions have reflected considerable sensitivity

to potential liquidity strains, as highlighted by

problems of one large bank, and to uncertainties

about the financial and budgetary outlook generally.

The foreign exchange value of the dollar against

a trade-weighted average of major foreign currencies

has risen considerably further since late March to

a level close to the peak in early January. The

merchandise trade deficit widened further in the first

quarter, as a sharp rise in non-oil imports offset a

substantial rise in exports.

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 an improved

pattern of international transactions. The Committee

established growth ranges for the broader aggregates

of 6 to 9 percent for both M2 and M3 for the period

from the fourth quarter of 1983 to the fourth quarter

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of 1984. The Committee also considered that a range

of 4 to 8 percent for M1 would be appropriate for

the same period, taking account of the possibility

that, in the light of the changed composition of M1,

its relationship to GNP over time may be shifting.

Pending further experience, growth in that aggregate

will need to be interpreted in the light of the

growth in the other monetary aggregates, which for

the time being would continue to receive substantial

weight. The associated range for total domestic

nonfinancial debt was set at 8 to 11 percent for the

year 1984.

The Committee understood that policy implementation

would require continuing appraisal of the relationships

not only among the various measures of money and credit

but also between those aggregates and nominal GNP,

including evaluation of conditions in domestic credit

and foreign exchange markets.

In the short run, the Committee seeks to maintain

existing pressures on bank reserve positions. This is

expected to be consistent with growth in M1, M2, and

M3 at annual rates of around 6-1/2, 8, and 10 percent,

respectively, during the period from March to June.

Somewhat greater reserve restraint might be acceptable

in the event of more substantial growth of the monetary

aggregates, while somewhat lesser restraint might be

acceptable if growth of the monetary aggregates slowed

significantly. In either case, such a change would be

considered only in the context of appraisals of the

continuing strength of the business expansion, infla

tionary pressures, financial market conditions, and

the rate of credit growth. 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

7-1/2 to 11-1/2 percent.

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

held on Tuesday-Wednesday, July 10-11, 1984.

The meeting adjourned.

Secretary