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Meeting of Federal Open Market Committee April 17, 1979 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, April 17, 1979, beginning at 9:30 a.m. PRESENT: Mr. Miller, Chairman Mr. Volcker, Vice Chairman Mr. Balles Mr. Black Mr. Coldwell Mr. Kimbrel Mr. Mayo Mr. Partee Mrs. Teeters Mr. Wallich Messrs. Guffey, Roos, and Winn, Alternate Members of the Federal Open Market Committee Messrs. Baughman and Willes, Presidents of the Federal Reserve Banks of Dallas and Minneapolis, respectively Mr. Mr. Mr. Mr. Mr. Mr. Altmann, Secretary Bernard, Assistant Secretary Petersen, General Counsel Oltman, Deputy General Counsel Mannion, Assistant General Counsel Axilrod, Economist Messrs. Brandt, R. Davis, Ettin, Henry, Keir, Keran, Kichline, Parthemos, Scheld, Truman, and Zeisel, Associate Economists Mr. Holmes, Manager System Open Market Account Mr. Sternlight, Deputy Manager for Domestic Operations - 4/17/79 2 - Mr. Coyne, Assistant to the Board of Governors Mr. Kalchbrenner, Associate Director Division of Research and Statistics, Board of Governors Mr. Gemmill, Associate Director, Division of International Finance, Board of Governors Ms. Farar, Economist, Open Market Secretariat, Board of Governors Mrs. Deck, Staff Assistant, Open Market Secretariat, Board of Governors Messrs. McIntosh and Smoot, First Vice Presidents, Federal Reserve Banks of Boston and Philadelphia, respectively Messrs. Balbach, Boehne, J. Davis, and Eisenmenger, Senior Vice Presidents, Federal Reserve Banks of St. Louis, Philadelphia, Cleveland, and Boston, respectively Messrs. Burns, Danforth, and T. Davis, Vice Presidents, Federal Reserve Banks of Dallas, Minneapolis, and Kansas City, respectively Mr. Levin, Manager, Securities Department, Federal Reserve Bank of New York Mr. John Morton, Economist, Division of International Finance, Board of Governors By unanimous vote, the minutes of actions taken at the meeting March 20, of the Federal Open Market Committee held on 1979, were approved. - 3 - 4/17/79 By unanimous vote, System open market transactions in foreign currencies during the period March 20 through April 16, 1979, were ratified. By unanimous vote, System open market transactions in Government securities, agency obligations, and bankers acceptances during the period March 20 through April 16, 1979, were ratified. With Messrs. Coldwell, Volcker, and Wallich dissenting, the Federal Reserve Bank of New York was authorized and directed, until otherwise directed by the Committee, to execute trans actions in the System Account in accordance with the following domestic policy directive: The information reviewed at this meeting suggests that in the first quarter of 1979 growth in real output of goods and services slowed substantially from the rapid rate in the last quarter of 1978, while the rise in prices accelerated. In March the dollar value of total retail sales, industrial pro duction, and nonfarm payroll employment expanded considerably, but part of the strength was attributable to recovery from the effects of severe weather in the pre ceding two months. For the first quarter as a whole, retail sales in real terms dec lined somewhat, following a sharp increase in the fourth quarter of 1978, and the advance in industrial output slowed appreciably. Growth in employment remained strong in the quarter, however, and the unemployment rate in March, at 5.7 percent, was virtually 4/17/79 - 4 unchanged from its level in late 1978 and the first two months of 1979. Over recent months, broad measures of prices have increased at a faster pace than during 1978, and the index of average hourly earnings has continued to rise rapidly. The trade-weighted value of the dollar against major foreign currencies has risen over the past four weeks, with the dollar showing particular strength against the yen, the Swiss franc, and the mark. The U. S. trade deficit in February was about half the size of the large deficit in January, but the average for the two months was above the monthly average in the fourth quarter of 1978. M-1 increased slightly in March after having declined in both January and February. With market interest rates continuing high, inflows of the interest-bearing deposits included in M-2 and M-3 remained at reduced levels, despite substantial flows into money market certificates at both commercial banks and nonbank thrift institutions, and the broader monetary aggregates continued to grow at relatively slow rates. From the fourth quarter of 1978 to the first quarter of 1979, M-1 declined at an annual rate of about 2-1/2 percent, in part because of the effects of the growth of the automatic transfer service, and M-2 and M-3 grew at rates of about 1-1/2 percent and 4-1/2 percent, respectively. The behavior of all three monetary aggregates was affected by shifts of funds from deposits to money market mutual funds and other liquid assets. Since mid-March, market interest rates generally have risen somewhat, on balance. Taking account of past and propective [prospective] developments in employment, unemployment, production, investment, real income, pro ductivity, international trade, and payments, and prices, it is the policy of the Federal 4/17/79 - 5 - Open Market Committee to foster monetary and financial conditions that will resist inflationary pressures while encouraging moderate economic expansion and contributing to a sustainable pattern of international transactions. The Committee agreed that these objectives would be furthered by growth of M-1, M-2, and M-3 from the fourth quarter of 1978 to the fourth quarter of 1979 within ranges of 1-1/2 to 4-1/2 percent, 5 to 8 The percent, and 6 to 9 percent, respectively. associated range for bank credit is 7-1/2 to 10-1/2 percent. These ranges will be reconsidered in July or at any time as conditions warrant. In the short run, the Committee seeks to achieve bank reserve and money market conditions that are broadly consistent with the longer-run ranges for monetary aggregates cited above, while giving due regard to the program for supporting the foreign exchange value of the dollar and to developing conditions in domestic financial markets. Early in the period before the next regular meeting, System open market operations are to be directed at maintaining the weekly average federal funds rate at about the current level. Subsequently, operations shall be directed at maintaining the weekly average federal funds rate within the range of 9-3/4 to 10-1/2 percent. In deciding on the specific objective for the federal funds rate the Manager shall be guided mainly by the relationship between the latest estimates of annual rates of growth in the April-May period of M-1 and M-2 and the following ranges of tolerance: 4 to 8 percent for M-1 and 4 to 8-1/2 percent for M-2. If, with approximately equal weight given to M-1 and M-2, their rates of growth appear to be close to or beyond the upper or lower limits of the indicated ranges, the objective for the funds rate is to be raised or lowered in an orderly fashion within its range. If the rates of growth in the aggregates appear to be above the upper limit or below the lower limit of the indicated ranges at a time when the objective - 4/17/79 6 - for the funds rate has already been moved to the corresponding limit of its range, the Manager will promptly notify the Chairman, who will then decide whether the situation calls for supplementary instructions from the Committee. By unanimous vote, System renewal for further periods of 3 months of System drawings on the German Federal Bank maturing in the period May 7-9, 1979, was noted without objection. Following the preceding action, Mr. Morton entered the meeting. It was agreed that the next meeting of the Committee would be held on Tuesday, May 22, 1979, beginning a 9:30 a.m. The meeting adjourned. Secretary
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