FOMC Minutes

Meeting of the Federal Open Market Committee

December 17-18, 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, December 17, 1984, at 3:00 p.m. and

continuing on Tuesday, December 18, 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 and Morris, Presidents of the Federal

Reserve Banks of Kansas City and Boston,

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, R. Davis, Kohn, Lang,

Lindsey, Prell, Siegman, Stern, and

Zeisel, 1/ Associate Economists

Mr. Sternlight, Manager for Domestic Operations,

System Open Market Account

Mr. Cross, Manager for Foreign 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. Gemmill, Staff Adviser, Division of International

Finance, Board of Governors

Mrs. Low, Open Market Secretariat Assistant,

Board of Governors

Mr. Garbarini, First Vice President, Federal Reserve

Bank of St. Louis

Messrs. Balbach, Bisignano, T. Davis, Ms. Munnell,

Mr. Scheld, and Ms. Tschinkel, Senior Vice Presidents,

Federal Reserve Banks of St. Louis, San Francisco,

Kansas City, Boston, Chicago, and Atlanta, respectively

Mr. Broaddus, Vice President, Federal Reserve Bank of

Richmond

Ms. Meulendyke, Manager, Securities Department, 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 November 7, 1984, were approved.

By unanimous vote, the Committee approved the renewal for further

periods of one year of all of the Committee's reciprocal currency ("swap")

arrangements.

By unanimous vote, System open market transactions in Government

securities and agency obligations during the period November 7 through

December 17, 1984, were ratified.

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

Open Market Operations was amended to raise 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 intermeeting period ending

on February 13, 1985.

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With Messrs. Gramley and Solomon 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 indicates a

mixed pattern of developments but on balance suggests that

economic activity is continuing to expand in the current

quarter at a rate approximating the considerably reduced

pace recorded in the third quarter. Nonfarm payroll employ

ment rose substantially further outside of manufacturing in

November, and the civilian unemployment rate fell from 7.4

to 7.2 percent. After two months of decline industrial

production increased somewhat in November, largely reflect

ing a rebound in auto production from strike-reduced levels.

Retail sales registered a large gain in November after

changing little in October. Information on outlays suggests

substantially slower expansion in business fixed investment,

following exceptionally rapid growth earlier. Since the

beginning of the year, broad measures of prices generally

have continued to rise at rates close to, or somewhat

above, those recorded in 1983, and the index of average

hourly earnings has risen somewhat more slowly.

Growth of the monetary aggregates strengthened

markedly in November. The November expansion in M1

offset the decline in October, and this aggregate.has

grown little on balance since early summer; from the

fourth quarter of 1983 through November, M1 grew at a

rate in the lower half of the Committee's range for

1984. Growth in the broader aggregates was especially

rapid in November, bringing M2 to the midpoint of its

longer-run range and M3 a bit further above the upper

limit of its range. Expansion in total domestic non

financial debt is continuing above the Committee's

monitoring range for the year, reflecting very large

government borrowing and strong private credit growth.

Interest rates have fallen further since the November

meeting of the Committee, with the largest declines

concentrated in short-term markets. On November 21,

the Federal Reserve approved a reduction in the discount

rate from 9 to 8-1/2 percent.

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Since early November the foreign exchange value of

the dollar against a trade-weighted average of major

foreign currencies has appreciated substantially, re

versing most of the previous decline from its mid-October

peak. The merchandise trade deficit in October was

significantly reduced from the rate in the third quarter,

mainly reflecting a sharp decline in non-oil imports.

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 nonfinancial 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, in

cluding evaluations of conditions in domestic credit and

foreign exchange markets.

In the implementation of policy in the short run, the

Committee seeks to reduce pressures on reserve positions

consistent with growth of M1, M2, and M3 at annual rates

of around 7, 9, and 9 percent, respectively, during the

period from November to March. Somewhat more rapid growth

of M1 would be acceptable in light of the currently estima

ted shortfall in growth for the fourth quarter relative

to the Committee's expectations at the beginning of the

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period, particularly in the context of sluggish growth in

economic activity and continued strength of the dollar in

exchange markets. Greater restraint on reserve positions

might be acceptable in the event of substantially more rapid

monetary growth and indications of significant strengthening

of economic activity and inflationary pressures. 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, February 12-13, 1985.

The meeting adjourned.

Secretary's note: Advice was received of the election

by the directors of the Federal Reserve Bank of New York

of E. Gerald Corrigan as a member of the Federal Open

Market Committee. It was noted that Mr. Corrigan was

elected to serve from January 1, 1985 for the term

ending February 28, 1985 and had executed his oath of

office.

Secretary