FOMC Minutes

Meeting of the Federal Open Market Committee

August 21, 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 Tuesday, August 21, 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

Ms. Seger

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. Oltman, Deputy General Counsel

Mr. Kichline, Economist

Mr. Truman, Economist (International)

Messrs. Burns, J. Davis, Lang, Lindsey, Stern,

and Zeisel, Associate Economists

Mr. Sternlight, Manager for Domestic Operations,

System Open Market Account

Mr. Cross, Manager for Foreign Operations,

System Open Market Account

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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

Mr. Henderson, 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, Keran, Parthemos, Scheld,

and Ms. Tschinkel, Senior Vice Presidents, Federal

Reserve Banks of St. Louis, Kansas City, San Francisco,

Richmond, Chicago, and Atlanta, respectively

Mr. McNees, Vice President, Federal Reserve Bank of

Boston

Mr. McCurdy, Research Officer, Open Market Operations,

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 16-17, 1984, were approved.

The report of examination of the System Open Market Account, made

by the Board's Division of Federal Reserve Bank Operations as of the close of

business January 13, 1984, was accepted.

By unanimous vote, System open market transactions in Government

securities and agency obligations during the period July 17 through

August 20, 1984, were ratified.

By unanimous vote, paragraph 1(a) of the Authorization for Domestic

Open Market Operations was amended to raise temporarily from $4 billion to

$6 billion the dollar limit on intermeeting changes in System account holdings

of U. S. government and federal agency securities for the period from

August 21, 1984 through October 2, 1984.

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With 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 information reviewed at this meeting suggests

that the expansion in econpmic activity is continuing at

a strong pace, but there are indications of a moderation

in the rate of growth. In July, industrial production

and nonfarm payroll employment rose further, but retail

sales fell after rising considerably in earlier months

and housing starts declined to a rate appreciably below

the average in the second quarter. The civilian un

employment rate increased 0.4 percentage point to 7.5

percent. Information on outlays and spending plans

continues to suggest strength in business fixed invest

ment. Since the beginning of the year, average prices

and the index of average hourly earnings have risen

more slowly than in 1983.

In July, M1 declined after two months of rapid

growth, though data for early August suggested some

rebound, while M2 expanded at a relatively slow pace.

M3 growth, however, remained comparatively sizable.

From the fourth quarter of 1983 through July, M1 grew

at a rate a bit above the midpoint of the Committee's

range for 1984; M2 increased at a rate a little below

the midpoint of its longer-run range, while M3 expanded

at a rate above the upper limit of its range. Growth

in total domestic nonfinancial debt appears to be

continuing at a pace above the Committee's monitoring

range for the year, reflecting very large government

borrowing along with strong private credit growth.

Most interest rates have fallen considerably since

the July meeting of the Committee, with the largest

declines generally in intermediate and long-term

bond markets.

The foreign exchange value of the dollar against

a trade-weighted average of major foreign currencies

rose further to a new high in early August and since

then has fluctuated in a range just below the peak.

The merchandise trade deficit in June was somewhat

above the May level, and for the second quarter as

a whole the deficit was little changed from the high

first-quarter rate.

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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. In furtherance

of these objectives the Committee agreed at the July

meeting to reaffirm the ranges for monetary growth that

it had established in January: 4 to 8 percent for M1

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

from the fourth quarter of 1983 to the fourth quarter

of 1984. The associated range for total domestic non

financial debt was also reaffirmed at 8 to 11 percent

for the year 1984. It was anticipated that M3 and

nonfinancial debt might increase at rates somewhat

above the upper limits of their 1984 ranges, given

developments in the first half of the year, but the

Committee felt that higher target ranges would provide

inappropriate benchmarks for evaluating longer-term

trends in M3 and credit growth. For 1985 the Committee

agreed on tentative ranges of monetary growth, measured

from the fourth quarter of 1984 to the fourth quarter

of 1985, of 4 to 7 percent for M1, 6 to 8-1/2 percent

for M2, and 6 to 9 percent for M3. The associated

range for nonfinancial debt was set at 8 to 11 percent.

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 implementation of policy in the short run,

the Committee seeks to maintain existing pressures on

reserve positions. This action is expected to be con

sistent with growth in M1 at an annual rate of around

5 percent or slightly less, and in M2 and M3 at annual

rates of around 7-1/2 and 9 percent respectively during

the period from June to September. Somewhat greater

reserve restraint would be acceptable in the event of

more substantial growth of the monetary aggregates,

while somewhat lesser restraint would be acceptable

in the event of significantly slower growth. In either

case, such a change would be considered only in the

context of appraisals of the continuing strength of the

business expansion, inflationary pressures, financial

market conditions, and the rate of credit growth. The

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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 8 to 12 percent.

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

held on Tuesday, October 2, 1984.

The meeting adjourned.

Secretary