Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, December 21-22, 1981 : Bluebook

View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

Prefatory Note

The attached document represents the most complete and accurate version
available based on original copies culled from the files of the FOMC Secretariat at the
Board of Governors of the Federal Reserve System. This electronic document was
created through a comprehensive digitization process which included identifying the bestpreserved paper copies, scanning those copies, 1 and then making the scanned versions
text-searchable. 2 Though a stringent quality assurance process was employed, some
imperfections may remain.
Please note that this document may contain occasional gaps in the text. These
gaps are the result of a redaction process that removed information obtained on a
confidential basis. All redacted passages are exempt from disclosure under applicable
provisions of the Freedom of Information Act.

In some cases, original copies needed to be photocopied before being scanned into electronic format. All
scanned images were deskewed (to remove the effects of printer- and scanner-introduced tilting) and lightly
cleaned (to remove dark spots caused by staple holes, hole punches, and other blemishes caused after initial
printing).
2
A two-step process was used. An advanced optimal character recognition computer program (OCR) first
created electronic text from the document image. Where the OCR results were inconclusive, staff checked
and corrected the text as necessary. Please note that the numbers and text in charts and tables were not
reliably recognized by the OCR process and were not checked or corrected by staff.

Strictly Confidential (FR)

Class I FOMC

December 18, 1981

MONETARY POLICY ALTERNATIVES

Prepared for the Federal Open Market Committee
By the staff

Board of Governors of the Federal Reserve System

STRICTLY CONFIDENTIAL (FR)
CLASS I -

December 18,

1981

FOMC

MONETARY POLICY ALTERNATIVES
Recent developments
(1)

M1-B growth, adjusted for shifts into NOW accounts, rose to

an 81 percent annual rate in

November,

and continued rapid in

early December.

The strength in M1-B reflected a marked pickup in other checkable deposits,
while demand deposits also rose a little
the first

three quarters of the year).

(in

contrast to marked declines over

The exceptional strength in

OCDs

growth may be associated with the public's desire to accumulate passbook
savings type assets in light of uncertainty about the near-term course of
economic activity and interest rates.

Growth in M-B over the October to

December period probably will be at about a 7¾ percent annual rate (assuming
an appreciable decline in
Despite the recent pickup,

the level of M1-B over the last

half of December).

QIV '80 to QIV '81 growth in adjusted M1-B will

be only about 2 percent, well below the Committee's 3½ to 6 percent longer-

(Recent monetary and reserves data are shown in the table on the

run range.
next page.)

(2)

M2 expansion surged to a 16½ percent annual rate in November,

and is estimated at a 14½ percent annual rate over the two-month October to
December period--considerably more than expected at the time of the last
meeting.
funds

M2 growth was buoyed by continued brisk inflows to money market

and by a turnaround in savings deposit flows to a modest increase

following a steady decline for more than a year.

For the QIV '80 to QIV '81

period, M2 is expected to grow at a 9½ percent rate, above the Committee's
6 to 9 percent longer-run range.

Reflecting the strength in M2, M3 growth

Key Monetary Policy Aggregates
(Seasonally adjusted annual rates of growth)

Dec. '81

over

Oct. '81

Sept. '81

QIV '80

QIV '81

Oct.

Nov.

Dec.-

M-B (shift adjusted)

3.1

8.8

6.8

7.8

6.3

1.9

8.1

16.5

12.6

14.6

12.5

9.5

7.9

16.0

12.8

14.5

12.4

L0.2

5.7

12.3

12.2

12.3

10.1

11.2

Bank Credit

8.5

3.2

n.a.

1.9

7.5

14.1

10.9

7.9

7.0

-10.3

0.1

11.7

5.9

0.5

4.4

-0.6

5.8

9.0

7.4

4.8

743
189

498
265

424
165

Money and Credit AgZregates

M2 plus retail RPs

.a.

Reserve Measures-

Nonborrowed Reserves-4/
Total Reserves
Monetary Base

Memo:

(Millions of dollars)
Adjustment Borrowing
Excess Reserves

1/ December 1981 estimated on the basis of partial data.
2/ Retail RPs have been estimated based on an August 31, 1981, universe survey and subsequent partial FRB and FHLBB samples.
3/ Growth rates for reserve measures are adjusted to remove the effects of discontinuities

resulting from phased changes in reserve ratios under the Monetary Control Act.
In
addition, reserve data for QIV '80 have been adjusted to remove the distorting effects
of the reduction in weekend reserve avoidance activities that occurred in late 1980.
Nonborrowed reserves include special borrowing and other extended credit from the
Federal Reserve.

MEMO:

FOMC long-run targets
(Percent increase)
MI-B (shift adjusted)

M2
M3
Bank Credit

QIV '81
over

QIV '80
3k to 6
6 to 9

64 to 9
6 to 9

-3also has accelerated recently, and remains well above the upper end of the
Committee's longer-run range.
Bank credit expansion slowed in November to a 3 percent

(3)

annual rate, due mainly to a continued reduction in holdings of U.S. government securities and a further moderation in the growth of business loans.
The weak loan growth,

coupled with stronger inflows to core deposits,

allowed commercial banks to run off large time deposits for the second consecutive month in

November.

S&Ls,

however,

continued to issue such deposits

at the appreciable pace of other recent months, with the premium over
offering rates of commercial banks reduced from the unusually high spread
of last summer.
(4)

Total reserves are expected to grow at a 6 percent annual

rate over the last

two months of the year,

reflecting the increase in

required reserves associated with the strength in

the aggregates.

Non-

borrowed reserves are likely to expand at about an 11 percent rate over
this interval as adjustment borrowing in
October level.

December will be down from its

In the first two weeks of the intermeeting period, adjust-

ment borrowing averaged only about $200 million.

As M1 and M2 strengthened,

the increase in required reserves was accompanied by a rise in adjustment
borrowings.

During the past two statement weeks, borrowing averaged $380

million; this was less than the $450-500 million implied by the reserve
path, as banks economized on excess reserves.1/

The reduced level of

borrowing early in the period, and the one percentage point decline in the
discount rate to 12 percent on December 3, contributed to a further easing

Reserve paths and adjustments made since the last Committee meeting
are shown in appendix.

-4in the federal funds rate to the 11
from

to 12 percent area in early December

13 to 13 1/2
percent at the time of the November meeting.

Most recently

federal funds have been trading in a 12 to 12 1/2
percent range.
(5)

Both short- and long-term interest rates continued to decline

early in the intermeeting period, responding to the further easing in money
market conditions and the weakness of economic activity.

Rates subsequently

backed up, however, owing to strength in the monetary aggregates, reports of
Administration estimates of a greatly enlarged budget deficit, and a rise
in the funds rate to levels above the discount rate.

At present, market

rates are generally above levels prevailing at the time of the previous
Committee meeting, but the prime loan rate is down one percentage point
and primary mortgage rates have dropped about 3/4
of a point.
(6)

After declining through late November,

with the recent rise

U.S.

the dollar rebounded

short-term interest rates to post a small

net advance on a weighted average basis since the last

Committee meeting.

Political developments abroad and more favorable inflation expectations
for the United States also contributed to the strength of the dollar.

-5Background for preliminary consideration of target ranges for 1982
(7) The growth ranges for the aggregates in 1982 tentatively set
by the FOMC in July are 2-1/2 to 5-1/2 percent for M1, 6 to 9 percent for M2,
6-1/2 to 9-1/2 percent for M3, and 6 to 9 percent for bank credit.

With the

exception of M1, these are the same ranges that were set for 1981.

The M1

range is a reduction from the 1981 range of 3-1/2 to 6 percent for M-B,
shift adjusted.1/
(8) As statistical background for consideration of the annual
targets for 1982, the table on the next page shows actual growth of money
supply measures for the years 1977 through 1981.

Annual growth in M-B

measured from QIV to QIV decelerated gradually over the last few years,
followed by a sharper drop-off in 1981, particularly on a shift-adjusted
basis.

But whether the marked deceleration in shift-adjusted M1-B this year

accurately measures the degree of greater restraint depends in part on
whether there was a downward shift in money demand (relative to nominal income
and interest rates).

In the degree that there was such a shift, slower growth

The nomenclature "M1" represents the same measure as M1-B. It is assumed
that, consistent with earlier FOMC discussion, the distinction between
M1-A and M1-B will be dropped and that M1-A will not be published (though
its components will be). Moreover, it has also been assumed that the FOMC
will not wish to continue with the "shift-adjusted" concept. It has been
a year since NOW accounts were introduced nationwide and the great bulk of
the conversion of outstanding savings and other interest-bearing deposits
into newly established NOW accounts has apparently already taken place.
It is likely that the public learned about nationwide NOW accounts more
rapidly than they did when these accounts were first introduced in New
England, when significant conversions of accounts continued over several
years. This is supported by reports from a sampling of banks in midNovember that suggest the stock adjustment is about over. In addition,
growth in the number of NOW accounts has tailed off considerably since
summer. Nonetheless, it should be recognized that further structural
shifts of funds into NOW accounts might develop, and need to be adjusted
for, should, say, regulatory changes by DIDC change the nature of the
the account.

-6Annual Growth in Monetary Aggregates
1977 - 1981

[(1) - measured QIV over QIV;

(2) - measured year over year]

1977

1978

1979

1980

1981

M-B

(1)
(2)

8.2
7.7

8.2
8.2

7.5
7.8

7.3 ( 6 . 7 )1/
6.3 (6.0)

4.7 (1.9)
6.9 (4.5)

(1)
(2)

11.5
13.0

8.3
8.9

8.9
8.9

9.6
8.9

9.5
9.7

(1)
(2)

12.6
12.3

11.2
11.7

9.8
10.4

10.2
9.5

11.2
11.6

Figures in parentheses are shift-adjusted.

would not indicate more restraint but would represent an accommodation to the

shift in public preference away from narrow money assets to other assets.

is difficult to judge the extent of sach

hifts in practice.

Econometric

results, supported by more direct evidence of changing cash management
practices,
this year.

suggest a fairly substantial downward shift

desired M1 balances

This would indicate that the "effective" deceleration in money

could be considerably less than measured.
(9)

With regard to the broader aggregates, there has been no

measured deceleration over recent years .M

And this year, their growth

has been above the upper limits of the ranges set for them, markedly so in
the case of M3.

However, the broader aggregates, like Ml, have also been

subject to demand shifts.

If, for instance, allowance were made for shifts

from market assets to money market funds, the growth in the broader Ms would

Growth rates were higher in 1977 than over the 1978-81 period, but
growth in the earlier year was still being influenced by the low level
of market rates relative to deposit ceiling rates.

-7-

be reduced, particularly in the past two years.1/

In addition, broader

Ms have been subject to other structural changes this year, such as the

further deregulation of time deposit accounts by removing the cap on the
SSC ceiling rate effective at the beginning of August, a more active use
of retail RPs by depository institutions, and the introduction of ASCs at
the beginning of October.

(10) Among the considerations entering into the Committee's
decision about ranges for the aggregates in 1982 would be the need to continue to show determination to slow money growth over time.

In that context,

the Committee's intention to continue a policy of gradually reducing growth
over time would be signalled by a lower target range for 1982 than for 1981,
even if actual growth in M1 next year were to be more rapid than the relatively low rate of this year (on a QIV to QIV basis).
Committee practice,
in

Following past

the range for M1 next year would take off from its

the fourth quarter of 1981,

not shift adjusted.

which is

level

given by the actual level of M1-B,

Another approach would be to take off from the

targeted level for 1981 (say,

either the bottom or the midpoint of the

1/ Estimates based on responses from Michigan surveys and on assumptions
about institutional behavior in the absence of money market funds
suggest that M2 growth could be reduced by a percentage point or so
in the past two years, more in 1981 and less in 1980.
2/

The series does not link onto shift-adjusted M1-B because the latter
series excludes that portion of NOW accounts which represents funds
that would, in the absence of nationwide NOW accounts have been in
other interest-bearing assets in 1981. Those accounts, totaling about
$12 billion in the fourth quarter of 1981, are of course included in
M1.

-81981 range).1/

However,

to the extent that there was in fact a downward

shift in money demand in 1981, such an approach would lead to a higher
level of money in 1982 than was warranted by the Committee's basic policy
intentions.
(11)

From another viewpoint, though, a higher range for M1

(taking off from the actual QIV '81 level) or perhaps a further widening
by raising the upper end, might be considered on the grounds that it may be
needed to encourage satisfactory economic recovery, especially if the view
is also taken that there may be no, or only a minor, downward shift in
money demand relative to income and interest rates next year.

An increase

in the upper end of the range might also be considered to allow for the
possibility that either significantly lower market interest rates (a
possibility, for example, if inflation improves more than anticipated) or
actions by DIDC to make NOW accounts significantly more attractive would
occasion a surge in such deposits and substantial upward pressures on M1.
The offsetting risk to such an approach, however, is the possibility that

The relevant range for this purpose would be the 6 to 8-1/2 percent
growth in measured M-B that was indicated by the Committee in early
1981 to be consistent with the basic shift-adjusted target of 3-1/2
to 6 percent. The 2-1/2 point difference between the two reflects the
estimate made than of shifts into NOW accounts from interest-bearing
assets. In the event it appears that such an estimate was approximately
correct. The shift appears to have been equivalent to about a 2-3/4
percent differential. The increase in NOW accounts outside the
Northeast (net of transfers from ATS accounts) in 1981 (QIV '80 to
QIV '81) was about $45 billion, with the fraction coming from interestbearing assets estimated at just over 1/4 for the year on the basis of
reports from depository institutions. At mid-year, the staff had
estimated an increase of $50 billion, with about the same fractional
shift from interest-bearing assets. Thus, the behavior of NOW accounts
on balance has been about as expected. M1-B growth was weaker than
targeted-whether shift-adjusted or not--because of shortfalls in
currency and demand deposits that presumably at least in part reflected
a downward shift in money demand.

-9public would construe an increase in the tentative range as reflecting
a diminution in the Federal Reserve's determination to curb money growth,
given the need to finance large budgetary deficits.
(12)

Reductions, rather than increases, in the tentative M1

range, or at least in the lower end of it,

might be considered if a

continued sizable downward shift in money demand (given income and interest
rates) is anticipated next year.

The staff's GNP projection, based on

4 percent M1 growth, assumes a shift on the order of 2-1/2 percentage
points on the basis of our conventional quarterly money demand equation.
The low end of the tentative range provides scope for a larger shift.

market interest rates remain high next year-and we are projecting that
rates will, on average, exceed current levels-there will be continued
incentive for financial innovations, such as the proposed sweeps of NOW and
demand deposit accounts into money market funds, that may work to reduce
M1 balances considerably.
(13)

Attainment of the tentative 1982 ranges for the broader Ms

would represent a deceleration in their measured growth.

From that view-

point, there may be little need to consider a further lowering of those
ranges at this time.

While some little

lowering might not be inconsistent

with a view that price increases will be lower in 1982 and that real income
growth will be weak (particularly if one held the view that such a combination would lead to weaker nominal income growth than the 8-1/2 percent
projected by the staff), the credibility of a reduced range might be in
doubt given this year's results.

Moreover, with more deregulation possibly

in prospect for next year, a case might also be made for adjusting the
ranges upward, at least for M2, to accommodate a more favorable competitive
position for depository institutions relative to market instruments.

-10-

more particular question may also be raised about the interpretation for
purposes of monetary policy of a possible increase in M2 from a liberalization of tax and deposit ceiling rate regulations on IRAs; indeed, whether
these accounts should be included in M2 is uncertain given their role as a
vehicle for long-term savings.

The staff currently projects in 1982 M2

would grow by 8-1/2 percent, and M3 just a shade faster, given M1 growth of
4 percent (the midpoint of the tentative 2-1/2 to 5-1/2 percent range) and
our nominal GNP projection.
(14)

Uncertainties about the impact of ongoing changes in

financial technology on the public's holdings of deposits and closely related
assets argue for retaining long-run target ranges for money as wide as 3
percentage points.

Indeed, given the particular uncertainties about M1

at this juncture in the development of financial services and markets, one
might even argue that its range should be somewhat wider.

the issues noted in paragraphs (11) and (12),

In addition to

the interpretation of M1, and

its proper setting as a target, could be affected by its changing composition.
With relatively more of the aggregate held by consumers in NOW accounts,
which behave in part like savings accounts, the sensitivity of M1 demand to
both interest rates and income-and in turn the impact of M1 supply on
income-could be affected.

However, we estimate that no more than roughly

5 percent of M1 represents NOW accounts that have been shifted from saving
balances.

-11Near-term Targets
(15)

The upper panel of thetable below presents three alternative

specifications for the monetary aggregates during the first
Growth rates are measured from a QIV '81 average base-in

quarter of 1982.
part because of the

very preliminary nature of the December estimates of the aggregates-with the
alternatives designed to achieve growth of M1 by March consistent with the
upper, middle,

and lower ends,

run range for that aggregate in

respectively,
1982.

of the FOMC's tentative long-

Implied growth rates over the three

month December-to-March period, based on the staff's
estimates,

are shown in the second panel.

current December

Possible ranges for the inter-

meeting federal funds rate are indicated in

the last

line of the table.

(More detailed and longer-run data for the monetary aggregates may be found

on the following page, and charts indicating the relationships of the alternative targets to the Committee's tentative longer-run ranges for 1982
may be found on the next three pages.)
Alt. A

Alt. B

Alt. C

4
9

2½
8½

Growth from QIV '81
to March '82

5½
10

M1
M2
Implied growth from

December '81p/

March '82

4¼.

2¼

8¾

7½

6½

10 to 14

11 to 15

12 to 16

Federal funds rate

range
p/

preliminary

Alternative Levels and Growth Rates for Key Monetary Aggregates
M3

M1
Alt. A

Alt. B

Alt. C

Alt. A

Alt. B

Alt. C

Alt. A

Alt. B

Alt. C

1981--October
November
December

433.0
437.0
439.9

1798.8
1823.6
1842.7

2143.8
2165.8
2187.8

1982--January
February
March

441.3
442.9
444.6

440.7
441.6
442.4

440.1
440.2
440.2

1855.4
1869.0
1883.4

1853.9
1866.9
1877.6

1852.6
1863.1
1872.6

2203.2
2220.0
2237.7

2201.7
2217.9
2231.9

2200.4
2214.1
2226.9

1981--October
November
December

3.3
11.1
8.0

8.1
16.5
12.6

5.7
12.3
12.2

1982--January
February
March

3.8
4.3
4.6

2.2
2.2
2.2

0.6
0.3
0.0

8.2
8.8
9.2

7.3
7.p
7.5

6.4
6.8
6.1

8.4
9.2
9.6

7.6
8.3
8.1

6.9
7.5
6.9

Depember 1981 - March 1981

4.3

2.3

0.3

8.8

7.6

6.5

9.1

8.1

7.1

1981--QIII
QIV
1982--QI

0.5
4.6
5.8

0.5
4.6
4.6

0.5
4.6
3.3

10.3
9.6
10.5

10.3
9.6
9.7

10.3
9.6
9.0

10.3
9.6
10.0

10.3
9.6
9.4

10.3
9.6
8.9

1980 QIV - 1981 QIV
1981 QIV - March 1982

1.91
5.5

4.0

1.91/
2.5

9.5
10.2

9.5
9.2

9.5
8.4

11.1
10.0

11.1
9.2

11.1
8.5

4.51-

4.51

9.7

11.6

Growth Rates
Monthly

Quarterly Average

Annual Average
1981 over 1980
1/

Based on MI-B adjusted for shifts to nationwide NOW accounts in 1981.

Chart 1

CONFIDENTIAL (FR)
Class II-FOMC

Actual and Targeted M1

Billions of dollars
1480
-

Actual Level'
S Short -Run Alternatives

-1 470

-4460

2'%

-4

-1 430

--1 420

I' F I
I11111111111111
N
0
J
1981

1 0*cember leel Is protected.

I
1982

I
S

410
N

Chart 2

CONFIDENTIAL
(FR)
Class II FOMC

Actual and Targeted M2

Billions of dollars

-12000
SActual Level

S Short -Run Alternatives

1980

-11960

1940

1920

1900
A'

/
'1880

.-'.

-9
/

*/
.; f

-- i1860

'
/

x
-11840

-t 1820

1800

-4 1780
C

0
0

1981
Seoember level Is projcted.

I
J

I
F

I
M

I
A

I
M

I
J

1982

I
A

I
S

I
O

I
N

Chart 3

CONFIDENTIAL (FR)
Class II FOMC

Actual and Targeted M3

Billions of dollars
- 2400
9'/*%

Actual Level1

..*

Short -Run Alternatives

2350

2300

2250

2150
*NOTE;

1981
1 December level is poectd.

A. B. and C aflerra

e ua IndisanglluWiUle on th

1982

scale.

100
N

-13(16)

Alternative B calls for M1 growth from QIV '81 to March

at a 4 percent annual rate, but probably involves M2 growth slightly above
the upper end of its range.

Growth of M1 from the estimated December level

to March would be at a slower 2¼ percent rate since the level of December is
high relative to the fourth quarter average.

Growth of M2 over that period

would also be relatively moderate-at a 7-1/2 percent annual rate--for the
same reason.
(17)

Assuming a continued downward shift

a slower pace than last

year,

and a small increase in

M1 demand,

though at

nominal GNP in

the

first quarter, such a slowing in M1 growth from the recent pace may be
accompanied by little net change in short-term interest rates over the
next several weeks.

However,

both the economic outlook and the state of

money demand (given income and interest rates) are highly uncertain at
this juncture,

so that an even wider range than usual should be placed around,

interest rate projections.

For instance, strong downward pressures could

develop--more consistent with a normal cyclical pattern of short-term ratesif

the economic recession does not tend to abate early next year as assumed

the GNP projection.

even with a weak GNP,

On the other hand,
if

upward pressures could emerge,

the demand for money were relatively strong either

because of a return to historical relationships or because economic uncertainties caused the public to continue to save more than earlier in
and to hold part of this saving in
(18)

the year

NOW accounts.

The alternative B specifications would require expansion in

total reserves at a 2 percent pace from December to March.1

Assuming

adjustment borrowing in the $450 million area, nonborrowed reserves would
increase at a 1-1/2 percent rate and, at the present discount rate, the
1/

Abstracting from any impact on required reserves from shifts from
reservable deposits to nonreservable IBF liabilities.

-14-

federal funds rate in the intermeeting period would likely fluctuate up
in a 12 to 13 percent range.

The 3-month Treasury bill could be expected

to trade in the 11 to 11-1/2 percent area, as sizable first quarter
Treasury financing demands make themselves felt in an environment in which
the money market shows no sign of easing.
(19)

Private short-term credit demands are likely to remain weak,

partly as borrowing is fairly strong in bond markets and partly in connection
with projected inventory liquidation.

Corporate borrowers who had postponed

bond issues in December because of the rebound in long-term rates, may
come back into the market early next year if they come to believe that the
cost of staying out will be higher than expected-especially with enlarged
Treasury offerings in prospect later in the year.

Should corporate bond

yields remain near current levels, there may be some scope for a further
drop in interest rates on home mortgage commitments given the relatively
wide spread existing between bond and mortgage rates.

Even though thrift

operating losses can be expected to moderate further at the projected shortterm interest rate level as high cost deposits are rolled over, their deposit
growth is not expected to be robust; this, together with continuing uncertainties about future rate developments,

is likely to discourage them from

aggressively offering mortgages.
(20)

Alternative A calls for a 5-1/2 percent growth target for

M1 from the fourth quarter to March and 4-1/4 percent from the estimated
December level to March, and involves a greater risk that the level of M2
in the first quarter will be above the upper limit of its tentative
long-run range.

This alternative would entail growth in total reserves at

a 4 percent annual rate over the first three months of the year.

Assuming

a level of adjustment borrowing of around $250 million, nonborrowed

-15-

reserves would grow at a 6 percent rate.

Such a pace of reserve provision

would likely be associated with a federal funds rate near or a little below
the current 12 percent discount rate.

That probably would be accompanied

by a decline in short-term rates from recent levels, with the 3-month bill
perhaps around 10 to 10-1/2 percent. Bond yields are likely to decline some,
but declines might be limited by a sizable pickup in bond offerings as the
market viewed the decline as opening another "window". With an indication
of lower borrowing costs, thrift institutions would be somewhat more willing
to cut mortgage rates further and increase commitment activity.
(21)

The contemplated modest decline in short-term interest

rates under alternative A might be accompanied by a tendency for the dollar
to decline on exchange markets.

However, any decline could be short-lived,

or limited, as foreign central banks take advantage of any strengthening
in their currencies to lower their own interest rates further in light
of continued weak performance of their economies.

(22)

Alternative C--which calls for virtually no growth in M1

between December and March--may be expected to bring M2 into the upper part
of its tentative long-run range by March.

Essentially no growth in total

reserves would be involved, and assuming adjustment borrowing of $650 million,
nonborrowed reserves would decline at about a 2-1/2 percent rate in the first
quarter.

A federal funds rate of perhaps 13 to 14 percent in the inter-

meeting period would be implied.

Such a move in the funds rate would surprise

market participants, and a fairly substantial rise in other market interest
rates, at least temporarily, would tend to develop.

The 3-month bill rate

would probably move to near 12-1/2 percent, the corporate bond rate might

approach 16 percent, and new issue volume would probably drop significantly

-16-

as firms return to short-term credit markets.
would retrace part of their recent decline.

Residential mortgage rates
The higher than expected level

of interest rates would tend to strengthen the dollar further in foreign
exchange markets and limit reductions in foreign interest rates.
(23)

As 1982 progresses, short-term interest rates likely will

rise to levels above those currently prevailing, assuming M1 grows at the
midpoint of the FOMC's tentative range.

The table below shows interest

rate forecasts for the year, assuming alternative B for the first quarter
and midpoint growth of M1 thereafter.
Greenbook GNP projection.

These assumptions lie behind the

Selection of alternative A might involve a

larger rise in rates later in the year to compensate for the greater nearterm monetary stimulus associated with this approach if the Committee desires
to slow money growth later in an effort to achieve midpoint growth for the
year.

Alternative C, on the other hand, by exerting near-term restraint

would probably be associated with lower rate levels later in the year,
reflecting not only the greater scope for faster money growth at that time
but also possibly weaker economic activity.

3-month
Federal

Treasury

Funds

Bill

Recently
Offered

Fixed

Aaa Corporate

Rate Mortgage

Bond

Commitments

1981 IV

11¾

17¾

1982 I

12¾

16½

III

15¼

16¼

15½

13½

15¼

16¼

-17Directive language
(24)

Given below is a suggested operational paragraph for the

The specifications adopted at the meeting on November 17 are

directive.

shown in strike-through form.
IN THE SHORT RUN, THE COMMITTEE[DEL:
moderate
a
noting
after
,
shortfall
in October from the target path set
M1-B
of
growth
in
seeks
meeting,]
last
the
at

behavior of reserve aggregates

con-

sistent with growth of[DEL:
M1-B]M1 AND M2 [DEL:
from
to December]
October
FROM THE FOURTH QUARTER OF 1981 TO MARCH at [DEL:
an] annual [DEL:
rate] RATES
(after
flows
of
impact
the
for
allowance
of about [DEL:
7]____ percent[DEL:
NOW
into

with
growth
around
rate
annual
an
at
M2
of
accounts)] and[DEL:

11] ____percent RESPECTIVELY.
consultation if

The Chairman may call for Committee

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 asso-

ciated with a federal funds rate persistently outside a range of
[DEL:11
15]
to

____ TO ____ percent.

Appendix I

RESERVE TARGETS AND RELATED MEASURES
INTERMEETING PERIOD
(millions of dollars; not seasonally adjusted)
Reserves Targets for
5-week Average
(5-week Average Basis)
Date Reserves
Pat Conseructed

November 25 to December 23
Total

Nonborrowed

Reserves

(1)
November 17
(FOMC Meeting)
20
30
December 4
11
18

(2)

Projection of Reserves Demanded
(5-week Average Basis)
November 25 to December 23

Implied Adjustment Borrowing
For Remaineek
entStateOn a ing

Required

Excess

5-week
Avg.

of Intermeeting

Reserves

Basis

Period

(3)

(4)

Total

(5)

(6)

41,209

40,809

41,209

40,984

225

400

41,209,/
41,252- /
41,2525/
41,52641,389-

40,8092/3/
40,894F,40,95241,243:: -'
41,154' -'

41,209
41,277
41,305
41,621
41,488

40,984
41,085
41,081
41,379
41,289

225
192
224
242
199

400
383
353
378
334

(7)

400
425
453
496
500

1/ Represents borrowing in remaining statement weeks (as intermeeting period progresses)
implied by each weekly updating of the 5-week average nonborrowed path. The movement
in implied borrowing represents deviations in total reserves from target as well as
the implications of compensating to whatever extent, for misses in nonborrowed reserves
from target in the earlier weeks of the reserve period.
2/ Total and nonborrowed reserves paths adjusted upward by $43 million due to changes affecting
the reserves multiplier.
3/ To prevent unexpectedly low borrowings in the week of November 25 from distorting the nonborrowed reserves path, the 5-week average nonborrowed reserves path was adjusted upward by
an additional $42 million.
4/ To prevent the unexpectedly low borrowings in the weeks of November 25 and December 2 from
distorting the nonborrowed reserves path, the upward adjustment to the 5-week average nonborrowed reserves path noted in footnote 3 was raised to $100 million.
5/ Total and nonborrowed reserves paths adjusted upward by $274 million due to changes affecting
the reserves multiplier.
6/ To prevent the unexpectedly low borrowings in the week of November 25 and December 2 from
distorting the nonborrowed reserves path, the upward adjustment to the 5-week average non
borrowed reserves path noted in footnotes 3 and 4 was raised to $117 million.
7/ Total and nonborrowed reserves paths adjusted downward by $137 million due to changes
affecting the reserves multiplier.
8/ To prevent the unexpectedly low borrowings in the week of November 25 and December 2 froe
distorting the nonborrowed reserves path and to avoid a sharp change in bank reserves
positions just prior to the Committee meeting, the upward adjustment to the 5-week average
nonborrowed reserves path noted in footnotes 3, 4, and 6 was raised to $165 million.

Chart 2

STRICTLY CONFIDENTIAL (FR)
Class L.-FOMC
12/21/81

M1-B

Billions of dollars
7-450
SActual Level

Level Adjusted for Impact of Nationwide NOW Accounts
6%
440

3%%
-- 430

*...

*.e
6e.

*S.**.e*

420

400

Percent annual rate of growth'
Actal

Aug.

Adjusted

7.5

Sept.

-2.8

Oct

6.6

-3.7

3.3

Nov.

11.1

3.1
8.8

1980 QIV-Nov.

4.8

2.0
390

I
0

I
N

1980

I
D

I ___
J

I
M

I
J

I I

380
N

1981

1 Blmal on
a mdoltb of telownlg mammed rrMges fr Ue popoalon of OCD growth (lapatfom tnd) omilg from demand dspolts:
75-0 percent in Jmmuy id 70-75 pwerct in subequmt montr.

Chart 3

STRICTLY CONFIRENTIAL (FR)

clas

M2
pmt

- FOMC
12/21/81

Billions of dollars
' 11840

Actual Level

-1820

-11800

1780

:1760

-1740

-11720

-11700
Percent annual

rats of growth

r I I
U

..N

1980

Aug.

11.7

Sept.

6.6

Oct.
Nov.
1980 QIV-Nov.

8.1
16.5
9.6

1680

860

1640

I
I

I
F

I
M

I
A

I
M

I
J

1981

I
A

I
O

Chart 4

STRICTLY CONFOENTlAL IFR)
Cass.-

FOMC

Billions of dollars
2200
SActual Lavel
S-

2150

-2100

S-

Pe2rcent annual
o
grovt
rate

2050

2000

rate of growth
13.5
Aug.
9.2

Sept.

5.7
12.3
11.2

Oct.
Nov.
1980 QIV-Nov.

1950

1981

1980

'1350
-

Actua Levl

1300

Percent annual
rate of growth
10.4
Aug.
10.6
8.5
3.2
8.8

Sept.
Oct.
Nov.
1980 QIV-Nov.

N
1980
Lev

I S
S A
S
A

1250

1961

adJusted beginflng in February to remov doiscaunUiy du to abaorptkon by on* bank of a nontlben afflUae.

1200

Table 1
Selected Interest Rates

December 21, 1981

Percent
Short-Ten
Peod

Federal
funds

Treasury bills
market
auction
3_mnonthl 1ye-r

CD
seconday
I
market
-month
3-monh
8
3l|
-1--4
8

Long-Term

____rm
comm.
paper
3-month

bank
prime
rate

7
T0

U.8. government constant
maturity yields
3-year

10-year

30-year
o

corporate Aa
utility
new
I recently
Iuy
o 12e
11 !

municipal
ond
B1

home mortgages
secondary market
primary
NMAI GNMA
auction security
14|

1980--High
Low

19.83
8.68

16.73
6.49

14.39
7.18

15.70
6.66

20.50
8.17

19.74
7.97

21.50
11.00

14.29
8.61

13.36
9.51

12.91
9.54

14.51
10.53

15.03
10.79

10.56
7.11

16.35
12.18

15.93
12.28

14.17
10.73

1981--igh
Low

20.06
12.04

16.72
10.20

15.05
10.64

15.85
10.70

18.70
11.51

18.04
11.26

20.64
15.75

16.54
12.55

15.65
12.27

15.03
11.81

17.62
14.05

17.72
13.98

13.21
9.49

18.63
14.80

19.23
14.84

17.46
13.18

1981--Nov.
Dec.

15.85
18.90

13.73
15.49

12.66
13.23

13.61
14.77

15.68
18.65

15.18
18.07

16.06
20.35

13.31
13.65

12.68
12.84

12.37
12.40

13.85
14.51

13.91
14.38

9.56
10.11

14.21
14.79

15.53
15.21

13.55
13.62

1981--Jan.
Feb.

Her.

19.08
15.93
14.70

15.02
14.79
13.36

12.62
12.99
12.28

13.88
14.13
12.98

17.19
16.14
14.43

16.58
15.49
13.94

20.16
19.43
18.05

13.01
13.65
13.51

12.57
13.19
13.12

12.14
12.80
12.69

14.12
14.90
14.71

14.17
14.58
14.41

9.66
10.10
10.16

14.90
15.13
15.40

14.87
15.24
15.74

13.55
14.13
14.18

Apr.
May
June

15.72
18.52
19.10

13.69
16.30
14.73

12.79
14.29
13.22

13.43
15.33
13.95

15.08
18.27
16.90

14.56
17.56
16.32

17.15
19.61
20.03

14.09
15.08
14.29

13.68
14.10
13.47

13.20
13.60
12.96

15.68
15.81
14.76

15.48
15.48
14.81

10.62
10.79
10.67

15.58
16.40
16.70

16.54
16.93
16.17

14.59
15.31
15.02

July
Aug.
Sept.

19.04
17.82
15.87

14.95
15.51
14.70

13.91
14.70
14.53

14.40
15.55
15.06

17.76
17.96
16.84

17.00
17.23
16.09

20.39
20.50
20.06

15.15
16.00
16.22

14.28
14.94
15.32

13.59
14.17
14.67

16.30
17.21

15.73
16.82
17.33

11.14
12.26
12.92

16.83
17.29
18.16

16.65
17.63
18.99

15.76
16.67
17.06

Oct.
Nov.

15.08
13.31

13.54
10.86

13.62
11.20

14.01
11.53

15.39
12.48

14.85
12.16

18.45
16.84

15.50
13.11

15.15
13.39

14.68
13.35

16.94
15.56

17.24
15.49

12.83
11.89

18.45
17.83

18.13
16.64

16.61
15.10

Oct.

7
14
21
28

15.46
14.93
15.32
14.87

14.25
13.44
13.43
13.29

14.11
13.44
13.55
13.60

14.22
13.50
13.80
13.62

16.04
15.21
15.16
15.30

15.44
14.67
14.65
14.74

19.29
18.71
18.00
18.00

15.94
15.29
15.37
15.61

15.31
14.86
15.04
15.45

14.74
14.39
14.61
15.01

16.94

16.96
17.21
17.38
17.16

12.73
12.53
12.99
12.99

18.63
18.53
18.39
18.44

17.74
18.51

16.80
16.30
16.36
16.97

Nov.

4
11
18
25

14.79
14.01
13.17
12.42

12.70
11.55
10.54
10.20

12.74
11.83
10.97
10.64

12.72
11.51
10.97
10.92

14.67
13.43
12.29
11.64

14.21
13.05
12.04
11.26

17.86
17.29
16.93
16.39

14.58
13.65
12.81
12.69

14.61
13.73
13.12
13.15

14.35
13.76
13.18
13.08

17.20

16.88
15.89
14.65
14.52

12.44
11.43
11.71
11.98

18.37
18.02
17.70
17.21

16.82
16.45

16.08
15.15
14.62
14.68

2
9
16
23
30

12.48
12.04
12.26

10.41
10.26
10.84

10.84
10.82
11.50

10.70
10.77
11.60

11.51
11.67
12.54

11.26
11.39
12.20

15.93
15.75
15.75

12.96
13.17
13.60

13.23
13.45
13.67

12.99
13.19
13.42

14.96
15.44

14.77
15.18
15.28p

12.18
12.89
13.00

16.90
16.94
n.a.

14.96

16.76

15.36

15.49

12.22
12.38
12.27p

10.82
11.14
10.87

11.65
11.68
11.50

12.62
12.61
12.85

12.25
12.23
12.42

15.75
15.75
15.75

13.70
13.68
13.58p

13.84
13.71
13.49p

13.55
13.48
13.30p

Dec.

Daily-De,. 11
17
18

NOTE: Weekly data for columns 1, 2, 3, and 5 through 10 are statement week averages of daily dat.
Weekly data in column 4 ae average rates st in the auction of 6-month bills that will be issued on the
Thursday following the end of the statement week. For column 11, the weekly date is the mid-point
of the calendar week over which data are averaged. Columns 12 and 13 are 1-day quotes for Friday
and Thursday, respectively, following the end of the statement week. Column 14 s an average of con.
trat interest rate on commitments for conventional first mortgages with 80 percent loen-to-value

14.62
14.85

ratios mad by a sample of insured savings and loan associations on the Friday following the end of
the statement week. The FNMA auction yield is the average yield in a bi-weekly auction for short-term
forward commitments for government underwritten mortgages; figures exclude graduated payment
mortgages. GNMA yields are average nt yields to investors on mortgage-backed securities for immediate
delivery, assuming prepayment in 12 years on pools of 30-year FHA/VA mortgages carrying the coupon
rate 50 basis points below the current FHA/VA ceiling.
FR 1367 (7/1)

Table 2

Net Changes In System Holdings of Securities 1

December 21,

1981

Millions of dollars, not seasonally adjusted

Period

1976
1917
1978
1979
1980
1980--Qtr.

1981--qtr. I
II
III
1981-June

Treasury
bi.
e
chennl

within
1-year

1.5

&10

over fO

tot
total

642
553
1,063
434
811

5,18
4,660
7,962
5,035
4,564

863
4.361
870
6,243
-3,052

472
517
1,184
603
912

3,025
2,833
4,188
3.456
2,138

1,048
758
1,526
523
703

-3,298
-58

137
100

541
--

236
-

321'
-

-2.514

-23
115
122

469
607

164
64

89
182

2,135
2.912

Treasury coupons nol purchases*

Federal agencies not purchases
0
| o
1
|
|
ver 10
within
1-year
I
105
-47
131
217

469
792
45
317
398

203
428
104
5
29

114
213
24
24

total

1,225
1,379
308

Oct.
Nov.

-1,116
1,750

891
1,433
127
454
668

3,507
-2,892
-1.774
-2,597
2,462

1,234
100

-2,157
-1

-1,381
1,107

-23
636
976

-2,555
2,944
3,855

-1,694
-1,352
425

179

1,502

2,200
1,379
275

1,768
-843
-500

-1,131
2,333

2.747

FRPs

6,227
10,035
8.724
10,290
2,035

976

100

Net

Iota

204

July
Aug.
Sept.

Not rhnge
oul ingh

100

133

360

494

-209

1981--Oct.

7
14
21
28

-169
-414
131
-454

-169
-429
131
-454

-7,855
8,095
5,064
-7,234

Nov.

4
11
18
25

-211
116
: 1,383
276

133

-211
116
1,383
770

4,634
-2,451
1,975
-216

1,273
150
822

1,263
150
1,547

439
-1,685
-160

Dec.

9
16
23
30

LEVEL-Dec. 16

729

36.1

11.8

16.6

78.2

2.3

5.3

1.0

0.6

9.1

139.7

-2.0

I Change from end-of-period to end-of-period.
6 In addition to the net purchases of securities, also reflects changes in System holdings of bankers'
2 Outright transactions in market and with foreign accounts, and redemptions (-) In bill uctions.
acceptances, direct Treasury borrowing from the System and redemptions I-) of agency and Trea
ury coupon Issues.
3 Outright transactions In market and with foreign accounts, and short-term notes acquired In exchange for maturing bills. Excludes redemptions, maturity shifts, rollovers of maturing coupon
6 Includes changes in RPs (+),
matched sale purchase transactions (-), and matched purchase sale
issues, and direct Treasury borrowing from the System.
transactions (+).
4 Outright transactions in market and with foreign accounts only. Excludes redemptions and maturity
shifts.

STRICTLY CONFIDENTIAL (FR)
CLASS II-FOMC

Table 3

Security Dealer Positions and Bank Positions
Millions of dollars

U.S. government securities dealer positions

_ _ _n

bills

cash

couIupons

futures and forwards
s
coupons

1980--High
Low

8,838
1,972

2,263
-1,482

1981--High

Low

15,668
1,273

4,633
965

-12,865
-5,930

1980--Nov.
Dec.

3,047
4,287

149
20

1981--Jan.
Feb.
Mar.

9,985
13,317
13,597

Apr.
May
June

December 21, 1981

Member bank resrve

Underwriting

syndicate positions
corporte
bonds

municipal
bonds

lon

borrwing at RB
adjustment

seasonal

Extended
ICLWJ
al)

total

3,298
12

174
5

816
0

3,438
215

-4,676**
-2,514

2,597
334

309
99

464

2,912
561

-7,068
-9,812

-2,663
-2,751

1,963
1,571

97
116

2,059
1,690

1,584
1,812
3,415

-11,976
-12,203
-11,561

-2,884
-2,798
-3,251

1,204
1,135
789

120
148
196

22
21
15

1,395
1,303
1,000

8,518
1,676
5,547

3,149
2,745
3,278

-7,277
-6,486
-9,934

-3,050
-2,822
-2,925

1,168
1,154
1,139

162
269
291

8
5
7

1,338
2,228
2,037

July
Aug.
Sept.

2,950
4,324
5,611

3,314
2,242
1,614

-8,340
-10,071
-9,830

-3,012
-2,972
-2,856

1,429
1,105
933

247
235
222

3
80
301

1,679
1,420
1,456

Oct.
Nov.

4,781
5,037**

1,629
3,821**

-8,575
-7,120**

-3,655
-4,307**

591
403p

152

438
5
16 p

1,181
6
63p

Oct.

7
14
21
28

5,640
5,577
4,247
4,056

1,280
2,133
1,071
1,889

-8,110
-8,919
-8,419
-8,001

-3,438
-3,953
-3,789
-3,351

577
529
656
576

156
158
155
147

413
423
444
464

1,146
1,110
1,255
1,187

Nov.

4
11
18
25

5,108
5,908
4,705

2,494
3,713
3,259

-10,242
-8,530
-6,299

-3,884
-4,427
-4,338

651

134
130
101

4,349*

4,727**

-5,986*

-4,302**

452
111
126
123p

1,237
1,009
561
337p

2
9
16
23
30

4,484**

3,691**

-6,444**

-4,632**

3,200**
1,070P*

2,779**
5
74p**

-6,383*
-4,782p*

-4,676**
2
-4, 06p**

Dec.

NOTE: Government securities dealer cash positions consist of securities already delivered, commitments to buy (sll) securities on an outright basis for immediate delivery (6 business days or le), and
certain "when-isued" securities for delayed delivery (more than 5 business days). Futures and forward
positions include all other commitments involving delayed delivery; futures contracts are arranged on
organized exchanges. Underwriting syndicate position conists of issue in syndicate, excluding
trading positions.

34
145p

151p

463

p
198p

41p
30
p
65p

12 5

p
125p
135p

3 17

p
8
61 p
398p

Weekly data are daily averages for statement weeks, except for corporate and municipal issuein
syndicate, which are Friday figures Monthly averages for excess reserves and borrowing are weighted
averages of statement week figures. Monthly data for dealer futures and forwards are end-of-month
figures for 1980.
*

Strictly confidential
FR 136 (781)

Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, December 21-22, 1981 : Bluebook

FRASER