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February 8,

Strictly Confidential (FR)

Class I FOMC

MONETARY POLICY ALTERNATIVES

Prepared for the Federal Open Market Committee
By the staff

Board of Governors of the Federal Reserve System

1985

STRICTLY CONFIDENTIAL (FR)
CLASS I - FOMC

February 8, 1985

MONETARY POLICY ALTERNATIVES
Recent Developments

(1)
two months.

The monetary aggregates expanded rapidly over the last
Growth in M1 was at a 10.4 percent annual rate in December and

a 9 percent rate in January, above the growth path for November to March of
7 percent established by the Committee at its last meeting.

1

M2 and M3

over the past two months increased considerably more rapidly than their
short-run objectives of 9 percent, rising on average by 14 and 13-1/2
percent at an annual rate, respectively.

From the fourth quarter of 1983

to the fourth quarter of 1984 M1 is now estimated to have grown 5.2 percent,
somewhat below the midpoint of the 4 to 8 percent growth range for the year
while M2 expanded 7.7 percent, just above the midpoint of its 6 to 9 percent
range; M3 grew by 10.5 percent, well above its 6 to 9 percent range.
(2)

All of the major components of M1 contributed to its recent

strength, which has reflected the decline in interest rates since late
summer and the lift

in economic activity in the fourth quarter.

Growth of

M2 and M3 continued to be boosted by the tendency for declines in rates on
both MMDAs and MMMFs to lag the decrease in market rates.

The reduction in

the minimum balance for super NOW accounts and MMDAs apparently had little
impact on either M1 or M2.

Flows into these accounts picked up early in

the year, but contacts with banks and examination of data suggest that any

shifts to take advantage of the lower minimums came, in the case of super

1.

These growth rates and all subsequent data on the monetary aggregates

in this Bluebook incorporate annual benchmark and seasonal factor revisions. The revised series will be published on Thursday, February 14,
along with seasonal factors for 1985. The revisions and their effects
on growth in M1, M2, and M3 over recent years are described in the
appendix. Data are confidential until that time.

-2-

KEY MONETARY AGGREGATES
(Seasonally adjusted annual rates of growth)
Nov.
to
Jan.

Nov.

Dec.

Jan.P

OIV '83
to
QV '84

12.0

10.4

9.0

5.2

14.0

13.4

14.5

7.7

14.0

14.2

14.4

12.6

10.5

13.5

Domestic nonfinancial debt

14.9

14.0

Bank credit

12.8

Money and Credit Aggregates

Reserve Measures

n.a.

13.4

6.7

10.7

n.a.

2

Nonborrowed reserves 3

17.4

25.8

39.0

Total reserves

11.3

19.1

31.0

5.7

6.0

12.9

6.9

Monetary base
Memo:

32.8
25.3

(Millions of dollars)

Adjustment and seasonal
borrowing
Excess reserves

342
680

727

NOTE: Monthly reserve measures, including excess reserves and borrowing,
are calculated by prorating averages for 2-week reserve maintenance periods
that overlap months.
1. Incorporates benchmark revisions and new seasonal adjustment factors.
2. Growth rates of reserve measures are adjusted to remove the effects
of discontinuities resulting from phased changes in reserve ratios under
the Monetary Control Act.
3. Includes "other extended credit" from the Federal Reserve.
p - Preliminary.

-3NOWs, preponderantly out of ordinary NOW accounts and, in the case of
MMDAs, out of other components of M2.
(3)

The debt of domestic nonfinancial sectors is estimated to

have expanded at about a 14 percent annual rate in December, bringing
growth for the year to 13.4 percent, considerably above the annual monitoring range of 8 to 11 percent for 1984.

Unusual merger activity and

share repurchases contributed about one percentage point to credit growth
last year.

In addition, growth was raised a little--perhaps 1/4 of a

percentage point--by a rush of tax-exempt securities toward year-end in
advance of a lightening of certain restrictions.
(4)

Total reserves increased at an average annual rate of 25

percent over December and January, as transactions accounts expanded
rapidly.

With borrowing at the discount window declining over the two

months, nonborrowed reserves increased somewhat more rapidly, at an average
annual rate of 33 percent.

The nonborrowed reserves path has been con-

structed over the entire intermeeting period on the assumption of seasonal plus adjustment borrowing of $300 million.

In the first part of

the period the Desk conducted operations in such a way as to tilt the
odds toward a reserve provision consistent with borrowing of $300 million
or somewhat less.

More recently, with the aggregates running above the

FOMC's short-run paths, open market operations have been conducted without such a tilt.

Borrowing averaged $260 million in the first complete

reserve period in January, following a bulge in both excess reserves and
borrowing over the year-end statement date.

In the following reserve

period ending January 30 and during the first half of the current reserve
period, borrowing has averaged $389 million, with excess reserves running
somewhat stronger than anticipated.

(5)

Federal funds have traded mostly in an 8 to 8-1/2 percent

range over the intermeeting period, averaging just over 8-1/4 percent.
During the last week of January and into the early days of February, trading was mostly near the upper end of this range, and for a few days above
it.

This development, taken together with the strength in money growth and

the relatively good performance of the economy, worked to eliminate expectations in the market that the Federal Reserve would ease further and
tended to raise concerns that the System might be seeking tighter reserve
conditions.

Since the previous Committee meeting, short-term rates have

risen 20 to 40 basis points.

Long-term rates fell sharply in late January

when prospects for oil prices seemed to portend a more favorable inflation
outlook; these rate declines have been largely reversed subsequently in
response to rising short-term rates and a mid-quarter Treasury financing
package that was a little larger than anticipated.

On balance taxable

bond yields are up about 5 to down about 10 basis points over the period.
(6)

The dollar has appreciated by about 5-1/4 percent on a

weighted average basis since the last Committee meeting to reach a new
record high.

Some of the dollar's recent strength may be attributable to

indications that U.S. economic activity is more robust than had been anticipated two months ago.

Lower than expected U.S. trade deficits for

November-December may also have helped to boost the dollar.

The United States sold $321 million, of which $272 million was against
marks and the remainder against yen.

Alternative monetary growth ranges for 1985
(7)

Three alternative long-run growth ranges for the year 1985

(QIV to QIV basis) are shown below for Committee consideration, along with
the tentative ranges for that year adopted in mid-1984.1

Alternative II

encompasses the growth ranges for the monetary aggregates adopted in July,
but includes a higher range for credit.

Alternatives I and III call for

somewhat higher and somewhat lower rates of growth, respectively, in the
monetary and credit aggregates.
Alt. I

Alt. II

Alt. III

Adopted in
mid-1984

Ml

4 to 8

4 to 7

3-1/2 to 6-1/2

4 to 7

M2

6 to 9

6 to 8-1/2

5-1/2 to 8-1/2

6 to 8-1/2

M3

6-1/2 to 9-1/2

6 to 9

5-1/2 to 8-1/2

6 to 9

9-1/2 to
12-1/2

9 to 12

8-1/2 to 11-1/2

8 to 11

Total credit
(8)

The growth ranges of alternative II

for the staff's
cent; it

were taken as the basis

projection of growth in nominal GNP for 1985 of 7-1/4 per-

was assumed that growth of M1 would be in the upper part of its

range, with interest rates expected to be around, or somewhat higher than,
current levels.

Growth in the other monetary aggregates may be close to

the upper limits of their ranges,

in part reflecting the strong expansion

1. A number of background issues in connection with monetary targets and
operating procedures in 1985 were discussed by the FOMC at its last
meeting. At that time, the Committee considered, in terms of Ml,
questions about the appropriate base for the 1985 range--whether it
should be the actual average level for the fourth quarter of 1984, as
assumed in the presentation of the alternatives, or the fourth-quarter
level that represents the midpoint of the 4 to 8 percent range for
last year. With growth for 1984 on a QIV to QIV basis at 5.2 percent,
the amount of "shortfall" from the 6 percent midpoint growth of last
year's range seems moderate enough to be readily compensated, should
the Committee wish, by encouraging growth in the upper part of whatever
range for 1985 is adopted.

expected in the first

quarter.

To the degree that interest rates rose

somewhat as the year progressed, M2 and M3 growth would more likely be
held within the ranges.
(9) The income velocity of M1 will probably increase much less
this year than in 1984, falling to a rate of increase of perhaps one percent or so, to a degree reflecting a carry-through effect on the year of
the expected contraction of M1 velocity in the first quarter (as a result
of the lagged impact on money demand of late '84 interest rate declines).
So low a rate of increase for the year in velocity would also be noticeably
less than average experience in the third year of earlier expansions-a
period, however, when short-term interest rates in the past rose on average by about one-third, a rise that is not now expected in the current
The expected growth in M1 velocity over 1985 would be in the

expansion.

neighborhood of, probably on the low side of, its likely long-run trend.
That trend may be currently estimated at 1 to 2 percent per year (abstracting from the impact of interest rate movements).

However, uncertainties

remain about the trend rate of increase of Vl, as well as the velocity of
other monetary aggregates, given still limited experience under varying
economic circumstances in a deregulated environment.

In light of the new

conditions affecting the reaction of both the public in their asset
preferences and depository institutions in their deposit pricing and
overall liability management, it is problematic to rely heavily on past
experience, and models of that experience, in estimating the interest and
income elasticities of money demand as well as the pace of financial
innovation.
(10)

Credit growth under alternative II is expected to be just

below the upper end of the range shown.

The higher range for credit

growth in alternative II than had been tentatively adopted provides a
greater chance of encompassing actual growth, but has the disadvantage of
possibly signalling to the market a more accommodative posture by the
Federal Reserve vis-a-vis the large federal budgetary deficit.

Growth of

federal debt is expected to decelerate some in 1985, but to remain quite
high relative to historical experience, and to be faster than private
debt growth.

Expansion in private debt is likely to be lower this year,

as growth of nominal GNP slows.

But we still

expect the rate of increase

in total debt to exceed expansion in nominal GNP by about as much as last
year.

Debt growth is expected to be sustained by larger than normal

merger financing, though less than last year; by the still rapid expansion
of federal debt: a wider corporate financing gap; and by the continuing
need to finance an expansion of spending by domestic sectors that is
greater than the rise in nominal GNP (given the projected continued
deterioration in our international balance on goods and services).
(11)

The lessened rate of debt expansion should help restrain

growth in the broad monetary aggregates, particularly M3.

Given the

portfolio quality problems faced by depository institutions, and the need
to increase their capital, we do not expect them to be significantly more
aggressive than last year in seeking to finance credit demands.

Part of

the increase in credit demands is also expected to continue to be met
by net borrowings from abroad by banks, displacing issuance of CDS or
other deposits that might appear in M3 (and possibly also M2).

Nonethe-

less, as noted earlier, M2 and M3 are likely to grow close to the upper
limits of the proposed alternative II ranges.

Somewhat higher growth

ranges for these aggregates would increase the odds of encompassing the
actual outcome for the year, providing leeway should credit demands fall

more heavily than expected on depository institutions or should funding
patterns change.
(12)
II,

Alternative I, which involves higher ranges than alternative

might also be considered as consistent with the GNP projection, pro-

vided expansion of M1 were at, or a little above, the midpoint of the
specified range.

The approach of alternative I would also provide more

leeway for greater M1 growth should the Committee believe that is needed
to accommodate to a real GNP growth that is as rapid as, or more rapid
than, projections.

However, growth of M1 toward the upper end of the

range may also generate stronger upward price pressures as it accommodates
greater demands for goods and services in a period when inflationary
expectations are not fully abated and when fiscal policy will probably
remain expansive.

Under those conditions, if progress is to continue to

be made toward reasonable price stability, such an approach is likely to
limit real growth if not later in 1985, at least in 1986.
(13)

Alternative III, by contrast, would be more consistent than

I or II with a policy tilted toward a slowing of Ml and M2 growth in 1985
relative to 1984 and encouraging a greater slowdown in growth of M3 and
credit.

The marked tightening of credit market conditions, at least for

part of this year, that is probably consistent with this alternative
would work toward slower growth in real GNP in 1985 than in the staff
projection.

However, this alternative would also foster more restraint

on price increases than under either alternatives I or II, which do not
entail a significant price deceleration this year or probably next.

If

the deceleration of inflation under alternative III occurred at the
expense of a slower real GNP growth than currently projected, it would
nonetheless lay the groundwork for a stronger real growth later consistent

with continued abatement of inflation and inflationary expectations and a
lowering of interest rates over time.
(14)

The preceding paragraphs have assumed that upward price

pressures in 1985 would be essentially no less than in 1984.

However,

should they be less--because, for instance, oil and other commodity
prices weakened significantly further, the dollar remained high on exchange
markets, or the increase in labor costs was even smaller than expected-nominal interest rates could well have to fall to maintain satisfactory
real GNP growth.

As the decline in yields on bank deposits and money

market funds lagged the decline in market rates, demand for monetary
assets could be expected to increase, probably for a while more than
offsetting the lessened growth in money demand associated with slower
expansion in nominal GNP.

Under such circumstances, the Committee might

need to be prepared for relatively rapid growth in M2, and to a degree
Ml, for a time.

For the year as a whole, growth would probably be near

the upper end of, and possibly above, the ranges adopted, as the spread of
market rates over yields on money assets remained narrower in some cases
(such as demand deposits or NOW accounts) over the whole period and as
some of the funds that had initially moved into nontransactions monetary
assets remained there even as spreads returned to more normal proportions.

-10-

Prospective near-term developments
(15)

The table below presents three alternative specifications

for growth in the monetary aggregates from December to March, along with
associated federal funds rate ranges.

(More detailed data can be found

on the table and charts on the following pages.)

All the alternatives

call for a slowing in money growth over the next two months, but given
their rapid growth in December and January the aggregates in March would
be at levels above the upper ends of cones encompassing any of the longerterm ranges discussed above.1

(Growth implied for QIV to March for each

alternative is given on the detailed table.)
Alt. A

Alt. B

Alt. C

8-3/4
11-1/2
10-1/2

8
10-1/2
9-3/4

7-1/4
9-1/2
9

5 to 9

6 to 10

7 to 11

Growth from Dec.

to March
Ml
M2
M3

Federal funds
rate range
(16)

The specifications of alternative B, which are expected

to involve continuation of about the existing degree of pressure on
reserve positions, can be considered most consistent with growth over
a longer period within the ranges of alternative II.

Under the speci-

fications of B, M1 growth would slow to around a 7-1/2 percent annual
rate on average over February and March.

Such a moderation of M1 is

expected to develop without appreciable firming in money markets as the

1.

All of the alternatives imply higher growth from November '84 to
March '85 than adopted by the Committee at its last meeting. In
terms of M1, attainment of the 7 percent November-March growth
rate previously adopted would require growth from December to
March of around 5-3/4 percent.

Alternative Levels and Growth Rates for Key Monetary Aggregates
M1

M2

M3

Monthly Levels

Alt. A
------

Alt. B
------

Alt. C
------

Alt. A
------

Alt. B
------

Alt. C
------

Alt. A
------

Alt. B
------

Alt. C
------

1984--October
November
December

548.4
553.9
558.7

548.4
553.9
558.7

548.4
553.9
558.7

2318.7
2345.8
2372.0

2318.7
2345.8
2372.0

2318.7
2345.8
2372.0

2925.5
2960.1
2995.5

2925.5
2960.1
2995.5

2925.5
2960.1
2995.5

1985--January
February
March

562.9
567.0
570.9

562.9
566.7
569.9

562.9
566.3
568.8

2400.6
2420.6
2440.2

2400.6
2418.6
2434.3

2400.6
2416.6
2428.3

3027.0
3051.7
3074.1

3027.0
3049.7
3068.5

3027.0
3047.7
3062.9

-6.7
12.0
10.4

5.4
14.0
13.4

5.4
14.0
13.4

5.4
14.0
13.4

9.9
14.2
14.4

9.9
14.2
14.4

9.9
14.2
14.4

Growth Rates
Monthly
1984--October
November
December

-6.7
12.0
10.4

-6.7
12.0
10.4

1985--January
February
March

9.0
8.8
8.3

9.0
8.0
6.8

9.0
7.3
5.3

14.5
10.0
9.7

14.5
9.0
7.8

14.5
8.0
5.8

12.6
9.8
8.8

12.6
9.0
7.4

12.6
8.2
6.0

Nov. 84 to Mar. 85
Dec. 84 to Mar. 85
Q4 83 to Q4 84
Q4 84 to Mar. 85

9.2
8.8
5.2
9.3

8.7
8.0
5.2
8.8

8.1
7.3
5.2
8.2

12.1
11.5
7.7
12.1

11.3
10.5
7.7
11.4

10.6
9.5
7.7
10.6

11.6
10.5
10.5
11.5

11.0
9.8
10.5
11.0

10.4
9.0
10.5
10.4

1984--Q1
Q2
Q3
Q4

6.2
6.5
4.5
3.4

6.2
6.5
4.5
3.4

6.2
6.5
4.5
3.4

7.2
7.1
6.9
9.0

7.2
7.1
6.9
9.0

9.2
10.5
9.5
11.0

9.2
10.5
9.5
11.0

9.2
10.5
9.5
11.0

1985--Q1

9.5

9.2

8.9

12.8

12.3

12.2

11.9

11.6

Growth Rates
Quarterly Average
7.2
7.1
6.9
9.0
11.9

1
Actual and Targeted M1
Chart

Billions of dollars
mm"
ann
ACTUAL LEVEL
ESTIMATED LEVEL
SSHORT RUN ALTERNATIVES

- --

-- 590

-- 570

-1560

4%

-1550

-1540

-I 530

1
O

1
N

1983

1
O

J

i 1 I
F

M

I
A

M

I

I
J

J

1984

A

I

I
S

O

I
N

I
D

II

I
J

F

I

I
M

A

M

J

I
J

1985

A

J

I
S

0

I
N

D

Chart 2

Actual and Targeted M2

Billions of dollars
2600
-ACTUAL
LEVEL
- -- ESTIMATED LEVEL
* SHORT RUN ALTERNATIVES

2550

-2500
6%

6%
9%.

A

- 2450
- - 2400
2350

.'

.

2300

2250

2200

A

O

I

I
N

1983

i
D

J

I
F

I
M

A

I
M

I
J

I

I
J

1984

A

S

O

N

D

J

II
F

I
M

I

I

I

A

M

J

J

1985

I2150
A

S

O

1
N

D

Chart 3

Actual and Targeted M3
Billlons of dollars
3300
-ACTUAL
LEVEL
-- ESTIMATED LEVEL
SSHORT RUN ALTERNATIVES

-

3200

-

3100

-- 3000

-- 2900

-- 2800

-1 2700

I
O

I

N
1983

I
D

I
J

I
F

I 1 I
M

A

M

1
J
J
1984

I
A

I
S

I
O

N

I
D

J

I
F

I
M

I
A

I
M

1

I

I

I

I

J
J
1985

A

S

O

N

2600
D

-12-

upward effects on money demand of the steep decline of interest rates
over recent months abate.

Moreover, given the rapid growth of money late

in the fourth quarter and in January, a slowing in growth would still be
consistent with the expected increase in spending on goods and services
in the first quarter.

On a quarterly average basis, M1 would increase at

a 9-1/4 percent annual rate in the first quarter under alternative B, and
velocity would decline at about a 1-1/4 percent annual rate, given the
staff's GNP projection.

By March, M1 under this alternative would have

increased by about 8-3/4 percent from the QIV '84 long-run base.
(17)

A less rapid expansion in the nontransactions components

of M2 and M3 is also expected to contribute to a slowdown in growth in the
broader monetary aggregates under alternative B. Weakness in inflows to
MMMFs is already evident in the most recent data, as yields on these
assets have declined into fairly close alignment with the lower level
of market interest rates; a similar pattern for MMDAs can be expected as
their offering rates continue to drop in response to previous declines in
other yields.

As more normal rate alignments are restored, M2 growth

should slow considerably.

However, M2 velocity in the first quarter

would decline at around a 4 percent annual rate under alternative B, owing

mostly to the surge in growth of this aggregate around year-end.

M3 growth

is expected to be held down by continued moderate bank CD issuance as
well as weakness in institution-only money funds.
(18)

The debt of nonfinancial sectors is projected to expand

at around a 12-1/4 percent annual rate in the first quarter-still in
excess of GNP growth, but significantly below the very rapid pace of
borrowing in the fourth quarter.

Growth in both private and federal debt

is expected to decelerate from the exceptionally rapid fourth-quarter

-13-

pace.

Borrowing by state and local governments is anticipated to slow

sharply following its temporary surge at the end of last year, returning
to a pace more in line with the average of recent years.

Household

credit usage may also ease off from its fourth-quarter pace, although
expansion of both mortgage and consumer debt is projected to continue to
outpace growth of disposable income.

Borrowing to finance mergers and

stock repurchases is expected to continue at about the rate of second
half of last year, but underlying demands for funds by businesses may
strengthen, reflecting an increase in capital and inventory investment
while internal funds remain close to fourth-quarter levels.

Federal debt

issuance is expected to be relatively large over the balance of the
quarter.
(19)

The specifications of alternative B are expected to in-

volve reserve conditions consistent with borrowing at the discount window
remaining around $300 million.

With borrowing remaining a little above

its frictional level, federal funds should trade in the neighborhood
of 8-1/4 percent.

Nonborrowed and total reserves would increase at

12-1/4 and 11-1/2 percent annual rates, respectively, over the FebruaryMarch period.
(20)

Short-term interest rates could decline a little over the

intermeeting period under this alternative, as continuation of the funds
rate and borrowing levels assumed allay same of the current concerns in
markets about a possible tightening of reserve positions over the weeks
ahead.

The rate on 3-month Treasury bills could drop back to around 8

percent, while 3-month CDs fall to about 8-1/4 percent.
could improve somewhat following their recent drop.

Bond prices

However, increases

are likely to be limited by still pervasive uncertainties about the

-14federal budget, by strength in money relative to long-run target ranges,
and an economic outlook that is not at the moment weakening.

(21)

Alternative A, which contemplates that M1 growth will

slow relatively little from the December-January average to around an
8-1/2 percent annual rate over February and March, seems most consistent
with long-run alternative I.

Borrowing at the discount window might be

reduced to its frictional level--about $100-200 million at present.
However, a further reduction in the discount rate, or provision of above

average excess reserves through open market operations at least for a
while, may also be needed if the federal funds rate is to drop nearer to
the 7-1/2 percent area that seems more consistent with the reserve growth
needed to attain the money specifications of this alternative.

Non-

borrowed reserves would be expected to grow at about a 20 percent

annual rate over the February-March period.
(22)

Market interest rates would be expected to drop fairly

sharply in the near term under alternative A, especially if it was
accompanied by a lower discount rate.

The Treasury bill rate might

decline to around 7-1/4 percent and CDs to about 7-1/2 percent, putting
the prime rate under considerable downward pressure.

Such yield declines

would probably lead to continued strong growth of M2 and M3, particularly
of their nontransactions components.

In long-term markets, yields would

also fall, though the extent of such declines might be reduced by the
very heavy volume of corporate and state and local bond issuance that
would probably ensue.

In addition, rate declines in long-term markets

could be limited by concerns that such an approach might lead to an
intensification of inflationary pressures, or in any event to a tightening
of market conditions later in the year to avert such pressures and to

-15-

constrain growth in the aggregates to within the long-term ranges adopted.
In exchange markets, the dollar would be likely to come under downward
pressure.
(23)

Alternative C specifies a sharper slowing of money growth

in February and March, consistent with a more rapid return of the
aggregates toward their longer-run ranges, an approach that may be
particularly in line with a Comittee choice of long-run alternative
III.

M1 growth of around 6-1/4 percent over February and March under this

alternative would require restraining growth in total reserves to a 7
percent annual rate.

This may be consistent with growth of nonborrowed

reserves of 2-1/2 percent, and a rise in borrowing to the $600-700 million
area.

The federal funds rate would probably rise to around 9 percent.
(24)

Other interest rates would also be expected to rise

substantially under alternative C, with the Treasury bill rate increasing
to around 8-3/4 percent.

Long-term rates are also likely to advance

significantly in the short run.

Upward pressures on the dollar on foreign

exchange markets would intensify, and U.S. trading partners also would
be under pressure to raise short-term rates.

-16-

Directive language
(25)

Given below is draft directive language related to the

Committee's decisions on the longer-run ranges (draft language for the
operating paragraph is shown in (26) below).

Suggested deletions from

the current directive are shown in strike-through form with proposed
additions in caps and certain alternatives in brackets.

The considerable

uncertainties that still remain in interpreting M1 and the other aggregate
given ongoing adaptation to institutional changes by banks and the public,
appear to be clearly encompassed by the language of the second paragraph
below.

With regard to Ml, the lagnuage in brackets is suggested should

the Committee wish to indicate an expectation that M1 may be in the upper
part of its range.
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 further-

the
ance of these objectives the Committee agreed at THIS [DEL: July]
that
reaffirm] ranges for monetary growth OF [DEL:
meeting to ESTABLISH [DEL:
had
it

established in January: 4-to-8] ___ TO ___ percent for

both]
TO
and-6-to 9] ____ ____percent for[DEL: M2, and ____ TO ____
M1, [DEL:

1983]
PERCENT FOR M3 for the period from the fourth quarter of [DEL:
1984]
1984 to the fourth quarter of [DEL: 1985.

The associated range

also
reaffirmed] at
for total domestic nonfinancial debt was SET[DEL:
1984]
TO
[DEL: 11] ____ ____ percent for the year [DEL: 1985.
8
to

[THE COMMITTEE

AGREED THAT GROWTH OF M1 IN THE UPPER PART OF ITS RANGE FOR
1985 MAY BE APPROPRIATE, GIVEN GROWTH OF THAT AGGREGATE IN THE
LOWER PORTION OF ITS RANGE OVER THE PREVIOUS YEAR.

It was
[DEL:

-17-

and

anticipated that-M3

rates
nonfincial debt might increase at

somewhat above the upper limits of their 1984 ranges, given
develepments in the first half of

that higher
target
longer
evaluating
for

1985 the-

the year, but the Committee felt

ranges would provide

inappropriate benchmarks

For
growth.
credit
and
M2
in
trends
term

Committee- agreed-en- 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-l/2-percent
for-M2,

and-6-to 9- percent-for

associated

The
M3.

range for
nonfinancia1

debt-was- set- at- 8- to-11-perent.]

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 evaluations of conditions
in domestic credit and foreign exchange markets.
OPERATIONAL PARAGRAPH
(26)

In the implementation of policy in

Cammittee seeks to reduce SOMEWHAT (ALT.
INCREASE SOMEWHAT (ALT.

the

the short run,

A)/MAINTAIN (ALT.

C) pressures on reserve positions.

B)/
THIS

ACTION IS EXPECTED TO BE consistent with growth of M1, M2, and M3
9,
7,
at annual rates of around [DEL: and 9] ____,____. AND ____ percent,

November] DECEMBER to March.
respectively, during the period from[DEL:
somewhat-more-rapid-growth
LESSER RESTRAINT ON RESERVE POSITIONS [DEL:
of-M1]would [MIGHT] be acceptable IN THE EVENT OF SUBSTANTIALLY
in light of
SLOWER GROWTH IN THE MONETARY AGGREGATES, EVALUATED [DEL:
the

growth
estimated shortfall in
currently

relative-to- the- Committee's

fourth
the
for

the
expectations at beginning of

quarter
the

-18-

period,

particularly] in the context of sluggish growth in

economic activity and continued strength of the dollar in
FOREIGN exchange markets.

Greater restraint on reserve

positions might [WOULD] 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
to
6
persistently outside a range of[DEL: 10] ___ TO ____ percent.

Appendix I
Money Stock Revisions
Measures of the money stock have been revised to incorporate
annual seasonal and benchmark adjustments.

This appendix discusses the

revisions and presents tables comparing growth rates of the old and
new series.

These revisions are to be regarded as strictly confidential

until their release planned for Thursday, February 14.
Benchmark Revisions
Deposits have been benchmarked to recent call reports; call reports
used for commercial banks span the period from mid-1983 to mid-1984 while
those used for thrift institutions begin at an earlier date.
new survey has been used to benchmark RPs.

In addition, a

The net impact of benchmark

revisions has been to raise growth of the aggregates by relatively small
amounts in 1984 and also in 1983.

In the case of M3, where benchmark

revisions are largest, the most important source of revision was term
RPs at thrifts, which now incorporate information from the new RP survey.
Seasonal Revisions
Revisions to seasonal factors were based on an X-11 ARIMA procedure
used in recent years.

Following the practice introduced last year, nontrans-

actions M2 has been seasonally adjusted as a whole-instead of being built
up from seasonally adjusted savings and small time deposits-to reduce distortions caused by sizable portfolio shifts in recent years; a similar
procedure has been used to seasonally adjust the non-M2 portion of M3.

-A2-

Revisions to seasonal factors had a greater impact on the pattern
of M1 growth last year than on growth in the broader aggregates, a typical
occurrence.

On a quarterly average basis, M1 growth was reduced about 1-1/4

percent at an annual rate in the first quarter of 1984 and boosted in the
fourth quarter by a similar amount.

Table I-1
COMPARISON OF REVISED AND OLD M1 GROWTH RATES

(percent changes at annual rates)
Revised
M1

Old
M1

(1)

(2)

Difference
(1-2)

Difference
due to
Benchmark
Seasonals

(3)

(4)

(5)

1.7
1.6
-1.3

Monthly
1983--Oct.
Nov.
Dec.

8.1
5.0
4.1

6.2
3.2
5.3

1.9
1.8
-1.2

0.2
0.2
0.1

1984-Jan.
Feb.
Mar.
Apr.
May
June
July
Aug.
Sept.

7.7
6.3
7.0
4.2
7.3
10.6
-0.9
4.4
5.7

10.7
6.6
5.2
0.4
12.8
11.3
-1.1
1.8
5.0

-3.0
-0.3
1.8
3.8
-5.5
-0.7
0.2
2.6
0.7

0.1
0.4
0.6
0.1
0.0
-0.1
0.2
-0.2
-0.1

Oct.

-6.7

-7.4

0.7

0.2

0.5

Nov.
Dec.

12.0
10.4

8.6
11.1

3.4
-0.7

0.6
0.1

2.8
-0.8

1985--Jan.

9.0

9.5

-0.5

0.3

-0.8

6.3
6.2
6.5
4.5
3.4

4.8
7.2
6.2
4.5
2.0

1.5
-1.0
0.3
0.0
1.4

0.3
0.3
0.2
0.0
0.2

1.2
-1.3
0.1
0.0
1.2

1984--QIV '83 to
OII '84

6.4

6.7

-0.3

0.2

-0.5

OII '84 to
QIV '84

3.9

3.3

0.6

0.1

0.5

10.4
5.2

10.0
5.0

0.4
0.2

0.3
0.2

0.1
0.0

-3.1
-0.7
1.2
3.7
-5.5
-0.6
0.0
2.8
0.8

Quarterly
1983--IV
1984-QI
QII
QIII
QIV
Semi-Annual

Annual (QIV to QIV)
1983
1984

Table I-2

COMPARISON OF REVISED AND OLD M2 GROWTH RATES
(percent changes at annual rates)
Difference
due to
Benchmark
Seasonals
(4)
(5)

Revised
M2
(1)

Old
M2
(2)

1983--Oct.
Nov.
Dec.

10.7
7.7
5.9

10.8
8.2
7.8

-0.1
-0.5
-1.9

0.1
0.2
0.1

-0.2
-0.7
-2.0

1984-Jan.
Feb.
Mar.
Apr.
May
June
July
Aug.
Sept.
Oct.
Nov.
Dec.

7.3
8.0
6.6
6.5
7.5
7.5
5.8
6.6
8.1
5.4
14.0
13.4

5.7
8.6
4.0
6.9
8.4
7.2
5.2
4.8
7.6
6.0
15.1
15.3

1.6
-0.6
2.6
-0.4
-0.9
0.3
0.6
1.8
0.5
-0.6
-1.1
-1.9

0.1
0.2
0.5
0.1
0.1
0.3
0.2
0.3
0.2
-0.1
-0.2
0.1

1.5
-0.8
2.1
-0.5
-1.0
0.0
0.4
1.5
0.3
-0.5
-0.9
-2.0

1985-Jan.

14.5

12.5

2.0

-0.2

2.2

8.4
7.2
7.1
6.9
9.0

8.5
6.9
6.9
6.2
9.4

-0.1
0.3
0.2
0.7
-0.4

0.2
0.2
0.2
0.3
0.0

-0.3
0.1
0.0
0.4
-0.4

OII '84

7.2

7.0

0.2

0.2

0.0

OII '84 to
QIV '84

8.0

7.9

0.1

0.1

0.0

12.2
7.7

12.1
7.5

0.1
0.2

0.2
0.2

-0.1
0.0

Difference
(1-2)
(3)

Monthly

Quarterly
1983-OIV
1984-QI
QII
QIII
QIV
Semi-Annual
1 9 8 4-- IV '83 to

Annual (QIV to QIV)
1983
1984

Table I-3

COMPARISON OF REVISED AND OLD M3 GROWTH RATES
(percent changes at annual rates)
Old
M3
(2)

1983-Oct.
Nov.
Dec.

8.4
12.4
8.2

9.0
13.7
9.4

1984--Jan.
Feb.
Mar.
Apr.
May
June

Nov.

7.8
9.9
10.4
9.8
11.7
10.1
9.8
7.1
9.3
9.9
14.2

Dec.

14.4

5.6
10.2
9.1
10.8
11.6
9.6
8.9
4.6
7.4
10.1
15.3
14.8

1985--Jan.

12.6

10.6

2.0

9.8
9.2
10.5
9.5
11.0

9.9
8.8
10.5
8.3
10.7

-0.1
0.4
0.0
1.2
0.3

1984--IV '83 to
OII '84

10.0

9.8

-0.2

OII '84 to
QIV '84

10.4

9.6

0.3

10.0
10.5

9.7
9.9

July

Aug.
Sept.
Oct.

Difference
(1-2)
(3)

Difference
due to
Benchmark
Seasonals
(4)
(5)

Revised
M3
(1)

-0.6
-1.3
-1.2

-0.2
-0.7
-0.3

-0.4
-0.6
-0.9

2.2

0.7
0.6
1.1
0.1
0.1
0.8
0.9
0.4
1.0
0.6
-0.3
0.1

1.5
-0.9
0.2

-0.1

2.1

-0.3

1.3
-1.0

0.1
0.5
0.9
2.5
1.9
-0.2
-1.1

-0.4

-1.1

0.0
-0.3
0.0
2.1
0.9
-0.8

-0.8
-0.5

Quarterly
1983--OIV
1984--01
oII
QIII

QIv

-0.1
0.0
-0.5
0.5
-0.2

Semi-Annual

Annual (QIV to QIV)
1983
1984

Selected Interest Rates

February 11, 1985

Percent
Short-Term

3 month

Per

eo

6-month

1-year

CDs
secondary
market
3-lth

2

3

4

5

Treasury bills
secondary market

federal
funds
1

U S government constant
maturity yields

paper
1-mmonth

money
market
mutual
fund

bank
prime
pre
loan

3-year

10-year

6

7

8

9

10

omm

30year
11

Long-Term
municpal
Bond
Buyer
13

corporate
A utility
recently
offered
12

conven
tional
at S&Ls
14

home mortgages
FHAA
c
15

NMA
1-year
ARM
16

9.79
7.82

9.93
8.15

9.85
8.01

8.79
7.71

11.50
10.50

11.57
9.40

12.14
10.18

12.11
10.32

13.42
11.64

10.56
9.21

13.89
12.55

13.50
11.50

12.50
10.49

10.76
8.01

11.09

11.71
8.24

11.35
8.04

10.72
8.38

13.00
11.00

13.44
10.39

13.84
11.30

13.81
11.36

15.30
12.70

11.44
9.86

14.68
13.14

14.00
12.50

13.70
10.55

8.90
9.09
9.52

9.02

9.07
9.20
9.67

9.42
10.08

9.23
9.35
9.81

8.80
8.72
8.91

11.00
11.00
11.21

10.93
11.05
11.59

11.67
11.84
12.32

11.75
11.95
12.38

12.99
13.05
13.63

10.03
10.00
10.37

13.37
13.23
13.39

12.50
12.50
12.70

11.45
11.38
11.91

10.29
10.32
11.06

9.69
9.83
9.87

9.84
10.31
10.51

9.95
10.57

10.17
10.38
10.82

9.29

10.93

10.41
11.11
11.34

11.93
12.39
12.60

11.98
12.75
13.18

12.63
13.41
13.56

12.65
13.43
13.44

13.96
14.79
15.00

10.26
10.88
11.07

13.65
13.94
14.42

13.00
13.94
14.00

12.30
12.83
13.45

July
Aug.
Sept.

11.23
11.64
11.30

10.12
10.47
10.37

10.52
10.61
10.47

10.89
10.71
10.51

11.56
11.47
11.29

11.06
11.19
11.11

10.30

13.00
13.00
12.97

13.08
12.50
12.34

13.36
12.72
12.52

13.21
12.54
12.29

14.93
14.12
13.86

10.84
10.40
10.54

14.67
14.47
14.35

14.00
13.70
13.50

13.59
13.27
13.15

Oct.
Nov.
Dec.

9.99
9.43
8.38

9.74
8.61
8.06

9.87
8.81
8.28

9.93
9.01
8.60

10.38
9.18

10.16
9.34
8.55

12.58

8.60

10.05
9.01
8.39

11.77
11.06

11.85
10.90
10.56

12.16
11.57
11.50

11.98
11.56
11.52

13.52
12.98
12.88

10.77
10.69
10.40

14.13
13.64
13.18

13.38
12.75
12.50

12.58
11.46
10.88

1985--Jan.

8.35

7.76

8.00

8.33

8.14

7.99

8.07p

10.61

10.43

11.38

11.45

12.78

9.96

13.05

12.50

10.54

5
12
19
26

8.83
8.70
7.99
7.95

8.43
8.36
7.98
7.71

8.60
8.55
8.16
8.01

8.84
8.82
8.47
8.39

8.87
8.92
8.54
8.24

8.64
8.68
8.33
8.04

8.85
8.69
8.60
8.38

11.25
11.25
11.25
10.75

10.77
10.78
10.45
10.39

11.52
11.62
11.48
11.37

11.53
11.63
11.49
11.41

13.01
12.98
12.70
12.79

10.47
10.44
10.36
10.33

13.20
13.20
13.18
13.14

12.50
12.50
12.50
12.50

11.05
11.10
10.80
10.55

1985--Jan.

2
9
16
23
30

8.75
8.27
8.23
8.19
8.45

7.77
7.78
7.73
7.71
7.73

8.12
8.05
7.99
7.94
7.96

8.47
8.37
8.36
8.28
8.25

8.31
8.19
8.12
8.08
8.12

8.16
8.04
7.95
7.89
7.99

8.31
8.21
8.04
7.93
7.85

10.75
10.75
10.68
10.50
10.50

10.51
10.52
10.54
10.35
10.25

11.54
11.54
11.53
11.34
11.09

11.55
11.57
11.60
11.45
11.27

12.96
12.92
12.82
12.51
12.59

10.31
10.11
9.95
9.60
9.81

13.10
13.12
13.12
12.96
12.93

12.50
12.50
12.50
12.50
12.50

10.55
10.60
10.50
10.50
10.50

1915--Feb.

6
13
20
27

8.59

8.14

8.25

8.46

8.44

8.34

7.79

10.50

10.42

11.30

11.43

12.68

9.96

n.a.

12.50

10.50

Daily--Feb.

1
7
8

8.74
8.41
5
8. 2p

8.19
8.17
8.23

8.29
8.29
8.30

8.50
8.49
8.46

8.48
8.49
8.77

8.41
8.32
8.49

10.50
10.50
10.50

10.48
10.44
10.40p

11.29
11.41
7
11.3 p

11.32
11.29
29
11.
p

1983--High
Low

10.21
8.42

9.49
7.63

9.64

1914--High
Low

11.77
7.95

10.65
7.71

1984--Jan.
Feb.
Mar.

9.56
9.59
9.91

Apr.
May
June

1934--Dec.

7.72

9.18

9.66

8.39

9.54

9.52

9.92

10.58
10.62

NOTE Weekly data for columns 1 through 11 are statement week averages Data in column 7 are taken from
Donoghue's Money Fund Report Columns 12 and 13 are 1-day quotes for Friday and Thursday, respectively.
following the end of the statement week Column 13 is the Bond Buyer revenue index Column 14 is an averaae

ratios at a sample of savings and loan associations on the Friday following the end of the statement week
Alter November 30, 1983, column 15 refers only to VA-guaranteed loans Column 16 is the initial gross yield
posted by FNMA on the Friday lollowinq the end of the statpment week in its purchase prooram for adiustable

Security Dealer Positions
Millions of dollars
February

I

^ _
Cash Positions

t

1

Period

Net
Total

Treasury
bills

Treasury coupons
over
under
1 year
1 year

federal
agency

private
short term

Treasury

Forward and Futures Positions
Treasury coupons
federal
under
over

bills

1 year

11,

1985

1 year

agency

private
short-term

1,516

-907
-8,001

-4,411
-9,564

-7,223
-10,679

-4
-13,053

1983--High
Low

20,858
-296

13,273
-3,461

1,579
-687

8,778
-3,148

12,088
4,013

17,005
8,839

1,654
-11,307

-95

1984--Hligh
Low

32,076
5,107

15,653
-8,251

1,296
-1,038

6,834
-5,664

19,525
11,)086

21,046
11,263

8,272
-14,456

131
-327

3,381
-986

1984--Jan.
Feb.
Mar.

12,472
9,287
15,936

10,815
9,658
4,619

1,083
949
811

667
-1,547
-2,626

11,398
12,532
16,151

12,788
13,349
12,764

-10,846
-8,774
-1,026

-15
-38
-10

-116
23
1,042

-7,474
-8,192
-9,552

-5,829
-8,673
-6,236

Apr.
May
June

14,408
14,163
16,483

2,929
-7,105
-2,631

-32
-291
-596

-1,643
-1,754
-3,248

16,649
16,849
15,999

13,065
12,525
14,457

-2,140
5,511
2,207

-13
-10
-21

476
347
1,448

-9,422
-9,676
-9,937

-5,462
-2,233
-1,195

July
Aug.
Sept.

12,353
11,497
17,978

-2,382
4,542
10,316

-604
-89
310

-3,393
-1,186
623

16,040
16,098
14,063

14,751
15,556
17,695

-2,528
-7,312
-9,771

-89
-240
-122

2,800
2,504
2,156

-9,650
-9,073
-8,332

-2,592
-9,304
-8,960

Oct.
Nov.
Dec.

21,990
19,130
26,239

11,675
9,770
13,845

116
-487
-414

2,658
5,089
4,761

13,168
16,108
18,468

16,285
17,950
19,167

-9,867
-8,546
-11,711

2,154
547
-376

-8,815
-9,229
-8,309

-5,312
-11,994
-9,249

1985--Jan.

24,083*

11,596*

-115*

2,503*

19,429*

19,980*

-13,306*

1984--Dec.

18,089
21,948
24,491
32,076

10,887
13,517
13,585
15,653

-647
-244
-419
-662

3,357
3,880
3,592
6,834

17,524
18,540
18,438
18,602

17,747
17,542
18,580
21,046

-8,586
-9,862
-12,247
-14,456

14

-72
-76
59
31*
68
131
-10
18

-3,270

733*

-7,047*

-9,659*

-986
-178
-199
-708

-8,222
-8,950
-8,308
-7,761

-13,053
-12,428
-8,522
-6,487

1985--Jan.

2
9
16
23
30

34,848
31,283
19,281*
21,240*
23,665*

14,017
12,876
9,598*
11.431*
12,425*

-253
-209
-389*
-16*
93*

6,483
6,053
2,591*
477*
540*

19,163
19,136
18,287*
18,806*
20,941*

21,404
21 ,625
19,238*
18,383*
19,969*

-12,738
-13,020
-14,926*
-13,705*
-12,519*

16
-287
290*
1,144*
1,892*

-7,678
-7,774
-7,600*
-4,774*
-6,244*

-5,570
-7,064
-7,769*
-10,444*
-13,404*

Feb.

6
13
20
27

24,391*

12,434*

425*

-462*

21,354*

21,059*

-9,739*

1,874*

-7,879*

-14,657*

NOTE Government securities dealer cash positions consist of securities already delivered, commitments to buy (sell) securities on an outright basis for immediate delivery (5 business days or less),
and certain "when-issued" securities for delayed delivery (more than 5 business days) Futures and for
ward positions Include all other commitments involving delayed delivery, futures contracts are arrang
ed on organized exchanges
1

Cash plus forward plus futures positions in Treasury, federal agency, and private short-term
securities
SStrictly confidential

STRICTLY CONFIDENTIAL (FR)
CLASS II-FOMC

Net Changes In System Holdings of Securities1
Millions of dollars, not seasonally adjusted

1 Change from end-of-period to end-of-period.
2 Outright transactions in market and with foreign accounts, and redemptions (-) in bill auctions,
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
issues, and direct Treasury borrowing from the System.
4 Outright transactions in market and with foreign accounts only. Excludes redemptions and maturity
shifts.

February 11, 1985

5 In addition to the net purchases of securities, also reflects changes in System holdings of bankers'
acceptances, direct Treasury borrowing from the System and redemptions (-) of agency and Treasury coupon issues.
6 Includes changes in RPs (+), matched sale-purchase transactions (-), and matched purchase-sale
transactions (+).


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102