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FEDERAL RESERVE press release
For Use at 4:10 p.m.
October 8, 1982
The Federal Reserve Board and the Federal Open Market
Committee today released the attached record of policy actions
taken by the Federal Open Market Committee at its meeting on
August 24, 1982.
Such records for each meeting of the Committee are made
available a few days after the next regularly scheduled meeting
and are published in the Federal Reserve Bulletin and the Board's
Annual Report.
The summary descriptions of economic and financial
conditions they contain are based solely on the information that
was available to the Committee at the time of the meeting.
Attachment
RECORD OF POLICY ACTIONS OF
THE FEDERAL OPEN MARKET COMMITTEE
Meeting Held on August 24, 1982
1.
Domestic policy directive
The information reviewed at this meeting suggested that real GNP
would advance only a little further in the current quarter, following an
increase at an annual rate of about 1-1/4 percent in the second quarter.
Average prices, as measured by the fixed-weight price index for gross
domestic business product, were continuing to rise more slowly than in
1981.
The nominal value of retail sales rose 1 percent in July,
according to the advance report, recovering only part of the 3-1/4 per
cent decline recorded in June.
Sales of new domestic automobiles, which
had dropped to an annual rate of 4.8 million units in June, rose a little
in July and early August.
The index of industrial production was about unchanged in July,
following a cumulative decline of more than 10 percent from the pre
recession level in July 1981.
Production of business equipment continued
to drop at its recent pace of 2 to 3 percent per month, while output of
defense and space equipment continued to expand.
Output of consumer
goods picked up, reflecting mainly an increase in automobile assemblies,
but automobile output in July was at a rate substantially above the sales
pace of June and July, and production schedules for August were cut back.
8/24/82
Nonfarm payroll employment, after declining sharply in June, was
essentially unchanged in July, as continued job losses in manufacturing
were about offset by gains in trade and service industries.
The unemploy
ment rate rose 0.3 percentage point to 9.8 percent, as the civilian labor
force expanded and total civilian employment was unchanged.
Private housing starts rose 34 percent in July, more than reversing
the decline in June; but at an annual rate of 1.2 million units, starts
remained low by historical standards.
All of the July increase was in
multifamily units; starts of such units more than doubled, in part because
of an upsurge in those qualifying for rental subsidies under a federal
government program terminating on September 30.
That impending termination
also apparently contributed to a substantial rise in July in newly issued
permits for multifamily units; permits for single-family dwellings declined
slightly and were at about the same pace as in the second quarter as a whole.
Combined sales of new and existing homes in June continued about 25 percent
below those of a year earlier.
The producer price index for finished goods and the consumer price
index both rose 0.6 percent in July, following increases of 1.0 percent in
June.
At the producer level, prices of energy-related items increased sharply
in both months and in July accounted for nearly all of the rise in the index;
prices of foods and food materials fell substantially in July.
At the
consumer level, food prices edged down in July, while increases in energy
prices and homeownership costs moderated from the rapid rates recorded
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in June.
Over the first seven months of the year, the producer price
index for finished goods and the consumer price index rose at annual
rates of about 3 percent and 5-1/2 percent respectively, compared with
increases of about 7 percent and 9 percent in 1981.
The advance in the
index of average hourly earnings also was considerably less rapid through
July than during 1981.
In foreign exchange markets the trade-weighted value of the dollar
against major currencies, while fluctuating over a wide range, had changed
little on balance since late June despite a sharp decline in U.S. interest
rates relative to foreign rates.
The strength of the dollar in the face of
narrowing interest rate differentials apparently reflected concerns of
market participants about economic and financial difficulties abroad.
The
U.S. foreign trade deficit in the second quarter was somewhat below the
first-quarter deficit, reflecting primarily a substantial drop in petroleum
imports; the total of other imports rose somewhat and exports were about
unchanged.
At its meeting on June 30 - July 1, the Committee had agreed to
seek behavior of reserve aggregates associated with growth of M1 and M2
from June to September at annual rates of about 5 percent and about 9 per
cent respectively.
It had also decided that somewhat more rapid growth
would be acceptable depending on evidence that economic and financial uncer
tainties were leading to exceptional liquidity demands.
Moreover, the Com
mittee had noted that seasonal uncertainties, together with increased social
security payments and the initial impact of the tax cut on cash balances,
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8/24/82
might lead to a temporary bulge in the monetary aggregates, particularly Ml.
The intermeeting range for the federal funds rate, which provides a mechanism
for initiating further consultation of the Committee, was set at 10 to 15
percent.
M1 in fact declined slightly in July, following declines in May and
June, as demand deposits continued to contract and growth in currency slowed
further.
Growth of M2, after moderating in June from a rapid pace in previous
months, accelerated again in July.
Small-denomination time deposits increased
sharply during the month, and shares in money market mutual funds continued
to expand at a relatively strong pace; in contrast, savings deposits at all
depository institutions declined substantially after growing moderately during
earlier months of the year.
Total credit outstanding at U.S. commercial banks grew at an annual
rate of about 6-1/2 percent in July, well below the pace in the first half
of the year.
Growth in business loans slowed in July, but generally strong
business demands for short-term credit were reflected in an increase in
loans booked at foreign branches of U.S. banks and in a sharp acceleration
in issuance of commercial paper by nonfinancial businesses.
Issuance of
publicly offered bonds rose in July.
Nonborrowed reserves expanded relatively rapidly in July.
However
with the demand for reserves weak, in part reflecting the sluggishness of
M1, adjustment borrowing by depository institutions (including seasonal
borrowing) declined from an average of about $1.1 billion in June to about
$330 million in the two statement weeks ending August 18.
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Market interest rates had declined sharply over the period since
the last Committee meeting.
points.
Short-term market rates fell 4 to 6 percentage
The federal funds rate, for example, declined from around 14-1/2
percent at the end of June to about 10 percent in the statement week ending
August 18 and to around 9 percent in the days immediately preceding this
Committee meeting.
Bond yields declined about 1-3/4 to 2 percentage points.
A substantial part of the decline in long-term rates occurred in an unusually
strong rally in debt markets around mid-August, when record price increases
also occurred in the stock market.
The strength of the downward movement
in interest rates apparently reflected a shift in market sentiment about
the outlook for interest rates against the background of strains in financial
markets, relatively weak economic indicators, and legislative action on the
federal budget.
Over the intermeeting interval, the prime rate charged by
commercial banks on short-term business loans was lowered from 16-1/2 per
cent to 13-1/2 percent.
In conjunction with the decline in short-term market
rates, the Federal Reserve discount rate was reduced in three steps from 12
percent to 10-1/2 percent over the period.
In home mortgage markets, average
rates on new commitments for fixed-rate conventional loans at savings and
loan associations declined about 1/2 percentage point on balance.
The staff projections presented at this meeting suggested that
real GNP would grow at a moderate pace over the year ahead but that the
unemployment rate would remain near its recent high level.
Inflation,
as measured by the fixed-weight price index for gross domestic business
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product, was expected to pick up somewhat over the months ahead from the
substantially reduced pace in the first half of 1982, but continued improve
ment in the underlying trend was anticipated.
In the Committee's discussion of the economic situation and
outlook, several members commented that the timing of an economic recovery
was subject to considerable uncertainty, but no member expressed disagreement
with the general character of the staff projection.
As at other recent
meetings, some Committee members suggested that the principal risks of a
deviation from the projection were on the down side.
Reference was made
to the growing expressions of concern in the business community and to
financial strains being experienced by many business firms, financial
institutions, and others.
In this situation, spending might well remain
weak in key sectors of the economy.
Business capital spending was cited
as especially vulnerable to remaining depressed, particularly in the event
of renewed upward pressure on long-term interest rates.
On the other hand,
it was observed, continued success in the fight against inflation would
over time ease pressures in long-term debt markets, improve business con
fidence, and strengthen business capital spending.
Some members commented that to date the midyear reduction in
federal income taxes and the concurrent cost-of-living increase in social
security payments appeared to have had little impact on consumer spending.
The view was expressed, however, that the midyear tax actions were likely
to exert a positive influence on a delayed basis.
It was also noted that
the recently reduced levels of interest rates, if they were sustained, would
8/24/82
help to relieve financial pressures throughout the economy and thereby con
tribute to improvement in economic activity over the months ahead.
At its meeting on June 30 - July 1, the Committee had begun a
review of the monetary growth objectives for the period from the fourth
quarter of 1981 to the fourth quarter
February.
of 1982 that it had set in early
Subsequently, at a meeting on July 15, the Committee had reaf
firmed those objectives, which included ranges of 2-1/2 to 5-1/2 percent
for M1, 6 to,9 percent for M2, and 6-1/2 to 9-1/2 percent for M3.
associated range for bank credit was 6 to 9 percent.
The
At the same time the
Committee agreed that growth in the monetary and credit aggregates around
the top of the indicated ranges would be acceptable in the light of the rela
tively low base period for the M1 target and other factors, and that it would
tolerate for some period of time growth somewhat above the target range should
unusual precautionary demands for money and liquidity be evident in the light
of current economic uncertainties.
The Committee also indicated that it was
tentatively planning to continue the current ranges for 1983 but that it would
review that decision carefully in the light of developments over the remainder
of 1982.
At this meeting the Committee reviewed the short-run objectives
that it had established at the previous meeting calling for expansion at
annual rates of about 5 percent for M1 and about 9 percent for M2 over the
three months from June to September.
Data available through mid-August
indicated that growth in M1 was running below the Committee's objective,
while partial data suggested that growth in M2 had moved above the objective
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for the three-month period.
In relation to the Committee's objectives for
the year as a whole, the latest staff estimates indicated that the expansion
of M1 was within its longer-run range, while that of M2 was somewhat above
its 1982 range.
During the Committee's discussion, most of the members agreed
that the short-run growth objectives adopted at the previous meeting remained
appropriate under current economic and financial conditions and should be
retained.
The view was expressed that the substantial recent decline in
interest rates, which in part reflected growing public awareness of the
progress that had been made in curbing inflation, provided welcome relief
in easing financial strains throughout the economy.
A number of members
expressed concern, however, about the volatility of interest rates and some
commented that further sharp movements in either direction over the near
term might have damaging consequences.
Some members emphasized that a pro
nounced increase from current levels would aggravate financial strains and
inhibit recovery in interest-sensitive sectors of the economy.
Some members
also suggested that a large further decline might foster a resurgence of in
flationary expectations and could prove to be unsustainable and therefore
unsettling to financial markets.
Several members expressed the view that
the Committee should review its policy if reserve provision to meet monetary
growth objectives was fostering a substantial change in pressures on bank
reserve positions and in credit markets.
Reference was made to the relative strength in M2 over the course
of recent weeks that appeared to be related in part to unusual demands for
8/24/82
liquid investments, such as money market funds, at comparatively attractive
yields.
The members agreed that under prevailing circumstances, M2 growth
somewhat above its short-run target would be acceptable over the period
immediately ahead.
At the conclusion of the discussion the Committee agreed to
reaffirm the objectives for monetary growth established at the June 30
July 1 meeting for the June to September period.
The Committee decided
that somewhat more rapid growth in the monetary aggregates would be
acceptable depending upon evidence that economic and financial uncertainties
were fostering unusual liquidity demands for monetary assets and were con
tributing to substantial volatility in interest rates.
The intermeeting
range for the federal funds rate, which provides a mechanism for initiating
further consultation of the Committee, was set at 7 to 11 percent.
The following domestic policy directive was issued to the Federal
Reserve Bank of New York:
The information reviewed at this meeting suggests
only a little further advance in real GNP in the current
quarter, following a relatively small increase in the
second quarter, while prices on the average are continuing
to rise more slowly than in 1981. In July the nominal
value of retail sales rose somewhat from a sharply reduced
June level; housing starts increased substantially, though
from a relatively low rate; and industrial production and
nonfarm payroll employment were essentially unchanged.
The unemployment rate rose 0.3 percentage point to 9.8
percent. Over the first seven months of the year the
advance in the index of average hourly earnings was
considerably less rapid than during 1981.
8/24/82
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The weighted average value of the dollar against
major foreign currencies, while fluctuating over a wide
range, has changed little on balance since late June
despite a sharp decline in U.S. interest rates relative
to foreign rates. Demand for dollars appeared to reflect
concern about economic and financial difficulties abroad.
The U.S. foreign trade deficit in the second quarter was
somewhat below the first-quarter deficit, with petroleum
imports down substantially.
M1 declined slightly in June and July, while growth of
M2 moderated somewhat from its average pace earlier in the
year. Business demands for credit, especially short-term
credit, remained generally strong. Market interest rates
have declined sharply since around midyear, reflecting
a shift in market sentiment about the outlook for interest
rates against the background of strains in financial
markets, relatively weak economic indicators, and legis
lative action on the federal budget. The Federal Reserve
discount rate was reduced in three steps from 12 percent
to 10-1/2 percent during the period.
The Federal Open Market Committee seeks to foster
monetary and financial conditions that will help to reduce
inflation, promote a resumption of growth in output on a
sustainable basis, and contribute to a sustainable pattern
of international transactions. At its meeting in early
February, the Committee had agreed that its objectives would
be furthered by growth of M1, M2, and M3 from the fourth
quarter of 1981 to the fourth quarter of 1982 within ranges
of 2-1/2 to 5-1/2 percent, 6 to 9 percent, and 6-1/2 to
9-1/2 percent respectively. The associated range for bank
credit was 6 to 9 percent. The Committee began a review
of these ranges at its meeting on June 30 - July 1, and
at a meeting on July 15, it reaffirmed the targets for the
year set in February. At the same time the Committee
agreed that growth in the monetary and credit aggregates
around the top of the indicated ranges would be acceptable
in the light of the relatively low base period for the
Ml target and other factors, and that it would tolerate
for some period of time growth somewhat above the target
range should unusual precautionary demands for money and
liquidity be evident in the light of current economic un
certainties. The Committee also indicated that it was
tentatively planning to continue the current ranges for
1983 but that it would review that decision carefully
in the light of developments over the remainder of 1982.
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In the short run, the Committee continues to seek behavior
of reserve aggregates consistent with growth of Ml and M2 from
June to September at annual rates of about 5 percent and about
9 percent respectively. Somewhat more rapid growth would be
acceptable depending on evidence that economic and financial
uncertainties are leading to exceptional liquidity demands
and changes in financial asset holdings. 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 to 11 percent.
Votes for this action: Messrs.
Volcker, Solomon, Balles, Black, Ford,
Mrs. Horn, Messrs. Martin, Partee,
Rice, and Mrs. Teeters. Vote against
this action: Mr. Wallich. Absent and
not voting: Mr. Gramley.
Mr. Wallich dissented from this action because he favored an
approach to operations early in the period that would lessen the chances
of short-term interest rates remaining below the prevailing discount
rate or falling further below it.
He was concerned that such interest
rate behavior would tend to accelerate monetary expansion and that the
necessary restraint of reserve growth to curb such expansion might lead
to a sizable rebound in short-term rates with adverse implications for
business and consumer confidence.
2.
Authorization for foreign currency operations
At this meeting Committee members were apprised of the status of
ongoing discussions with the Government of Mexico regarding short-term financ
ing arrangements to support Mexico's efforts to strengthen its economic and
financial position.
At its meeting on June 30 - July 1, the Committee
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had agreed, in response to a request by officials of the Bank of Mexico, that
it would stand ready to provide to the Bank of Mexico up to the full $700
million available under the Federal Reserve System's existing swap arrangement
with that Bank.
Subsequently, on August 4, 1982, the Bank of Mexico, which
had drawn on its swap line on an overnight basis on a few occasions in recent
months, drew $700 million for a period of three months.
At the time of this meeting, negotiations were under way among
Mexico, the U.S. Treasury, major central banks, and other lenders to provide
multilateral financial support to Mexico.
The purpose of the support was to
effect an orderly transition to an economic stabilization program that the
Government of Mexico had announced was being developed.
The Committee author
ized Federal Reserve participation in the proposed multilateral financing
package through the temporary establishment of a special swap arrangement of
$325 million with the Bank of Mexico in addition to the regular arrangement
of $700 million.
Accordingly, paragraph 2 of the Committee's authorization
for foreign currency operations was amended, effective August 28, 1982, for
the period through August 23, 1983, to read as follows:
2. The Federal Open Market Committee directs the Federal Reserve Bank
of New York to maintain reciprocal currency arrangements ("swap" arrangements)
for the System Open Market Account for periods up to a maximum of 12 months
with the following foreign banks, which are among those designated by the Board
of Governors of the Federal Reserve System under Section 214.5 of Regulation N
Relations with Foreign Banks and Bankers, and with the approval of the Committee
to renew such arrangements on maturity:
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Foreign Bank
Austrian National Bank
National Bank of Belgium
Bank of Canada
National Bank of Denmark
Bank of England
Bank of France
German Federal Bank
Bank of Italy
Bank of Japan
Bank of Mexico:
Regular
Special
Netherlands Bank
Bank of Norway
Bank of Sweden
Swiss National Bank
Bank for International Settlements:
Dollars against Swiss francs
Dollars against authorized European
currencies other than Swiss francs
Amount of arrangement
(millions of dollars
equivalent)
250
1,000
2,000
250
3,000
2,000
6,000
3,000
5,000
700
325
500
250
300
4,000
600
1,250
Any changes in the terms of existing swap arrangements, and the proposed
terms of any new arrangements that may be authorized, shall be referred
for review and approval to the Committee.
Votes for this action: Messrs.
Volcker, Solomon, Balles, Black, Ford,
Mrs. Horn, Messrs. Martin, Partee, Rice,
Mrs. Teeters, and Mr. Wallich. Votes
against this action: None. Absent and
not voting: Mr. Gramley.
On August 30, 1982, the U.S. Treasury and the Federal Reserve
announced that they were participating with central banks of other Group of
Ten countries, Spain, and Switzerland, under the aegis of the Bank for Inter
national Settlements, in making available to the Bank of Mexico short-term
8/24/82
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financing totaling $1.85 billion.
The Treasury would provide $600 million
through the Exchange Stabilization Fund, in conjunction with the $325 million
that the Federal Reserve was making available through its additional swap
arrangement.
The multilateral financing program provided that drawings by
Mexico would be made in line with progress toward agreement between the
Mexican Government and the International Monetary Fund (IMF) on an economic
adjustment program that will permit Mexico to qualify for drawings under the
IMF's Extended Fund Facility.
@FedFRASER