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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. 1 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. January 30, Strictly Confidential (FR) 1981 Class I FOMC MONETARY AGGREGATES AND MONEY MARKET CONDITIONS Prepared for the Federal Open Market Committee By the staff Board of Governors of the Federal Reserve System STRICTLY CONFIDENTIAL (FR) January 30, 1981 CLASS I - FOMC MONETARY AGGREGATES AND MONEY MARKET CONDITIONS Recent develcoments (1) Rather than posting a small increase as expected at the time of the last FOMC meeting, the narrow monetary aggregates fell sharply in December. In the early weeks of January, actual M-1A and M-1Bwere con- siderably affected by shifts into NOW accounts, which were much larger than anticipated. Other checkable deposits (OCD) in January--the first month of nationwide NOW accounts--appear to be increasing by about $16¾ billion, some $13 billion more than expected at the time of the last Committee meeting.1/ Surveys of commercial banks and inspection of reported data suggest that in early January four-fifths of the net OCD growth came from demand deposits rather than the two-thirds previously estimated. Adding back that proportion of OCD growth to M-1A, and reducing M-1B by estimated shifts from other assets to OCD, provide an estimate of the "adjusted" growth in these aggregates, that is, growth as if nationwide NOWs had not occurred. This adjusted growth can then be compared with the target paths that were specified to abstract from NOW account shifts. As shown by the first two rows of each panel in the table on the next page, the rebound in "adjusted" growth of M-1A and M-1B in January still left these 2/ aggregates well below target path levels.- 1/ About 85 percent of the growth in OCD occurred at commercial banks, mainly in the first two weeks of the month. 2/ All monetary aggregates data in this Bluebook reflect benchmark adjustments, as described in Appendix I. MONETARY AGGREGATES (December-January) Levels (S billion) Dec. Jan..1/ Dec. 388.8 384.8 384.8 390.2 386.9 373.8 1.2 -11.1 -11.1 4.3 6.5 -34.3 Target Path-' 416.1 417.7 3.2 4.6 3.9 Adjusted Actual Actual 411.9 411.9 414.2 417.5 -9.0 -9.0 6.7 16.3 -1.2 3.6 Growth Rates (SAAR) Jan.!/ Dec. -Jan...! M-1 Target Path-2/ -, Adjusted Actual-Actual 2.8 -2.3 -22.6 M-B1 1/ January partially estimated 2/ Abstracting from impact of nationwide NOW's (2) M-2 growth accelerated considerably in January, as M-1B strengthened and as money market mutual funds, whose posted yields came to exceed market rates, increased by a record amount. However, growth in M-2 for the December-January period was at only about a 5 percent annual rate, less than expected at the time of the last meeting. Total credit growth at large banks appears to have been strong in the early weeks of January, but business loans at these institutions grew at the lowest rate since July. Although nonfinancial businesses in January relied considerably more on the commercial paper market as the spread between the paper and prime rate widened further, total short-term borrowing by these firms appears to have moderated; on the other hand, their capital market financing increased from the depressed levels of recent months. (3) Growth in nonborrowed reserves was substantial over the past two months. About two-thirds of the expansion was offset by a decline 1/ That is, adding back to savings accounts the proportion of OCD assumed to have reflected shifts from savings accounts. -3- in adjustment borrowing, despite the continuation generally of a wide spread of the federal funds rate over even the surcharge discount rate; total reserves and the monetary base grew much less than nonborrowed reserves. Excess reserves remained higher than expected over the past Recent Growth in Reserve Aggregates (SAAR) 1/ November- December January Nonborrowed reserves -5.1 13.4 2/ 16.5- Total reserves 18.1 1.6 6." Monetary base 7.3 4.9 L.0 $2,059 $1,690 $1,362 $498 S552 $617 Memo: (S million) Average level of adjustment borrowing Average level of excess reserves 1/ 2/ 3/ 7/3/ 3/ " Excludes reserves required in association with reduction of weekend reserve avoidance activities. Includes in nonborrowed reserves and excludes from adjustment borrowings $1S billion of special borrowing for one day by one bank in association with transfers of funds to Iran, Includes data through January 28. S1/ several weeks.- The persistently large excess reserve levels are somewhat puzzling, but appear to be related to implementation of the Monetary Control Act. The larger excess reserve holdings have been concentrated at member banks, with no indications of a concentration in particular Districts or by size of institution. Only a very small part of the higher excess reserves that emerged beginning in November was held by nonmember commercial banks and thrifts. 1/ Targeted paths were adjusted to reflect the increased demands for excess reserves, as well as other factors affecting the multiplier. Appendix II for reserve targecs and adjustments. See (4) In the first three weeks of January, despite the further decline in adjustment borrowing, the federal funds rate remained high, trading generally in the 19 to 20 percent zone. More recently, the funds rate has been in the 17 to 19 percent area, even as borrowing ran markedly above earlier levels. Short-term rates fluctuated considerably over the intermeeting period, responding to published money stock data and other economic news. On balance, money market yields are 2 1/2 to 4 percentage points below their highs in mid-December prior to the last FOMC meeting. (5) Bond yields have moved in a pattern similar to short rates in recent weeks and are currently 3/4to 1 percentage point below their December highs. Corporate bond issuance has recovered from the low November-December level. The Treasury has continued to raise substantial amounts of new billion over the past two months. money with coupon offerings--$11 1/4 In the February mid-quarter financing just announced, the Treasury will raise another $3 billion. Mortgage commitment rates have changed little since mid-December, remaining around 14-7/8 percent. (6) The dollar has risen more than 4 percentage points on a weighted average basis since the last FOMC meeting, with most of the increase in the last week; small declines against sterling and the yen were more than offset by rises against continental European currencies. Developments surrounding the Iranian settlement appeared to have little net effect on exchange U.S. authorities markets. sold $1.3 billion in official intervention over the period. (7) The table on the next page shows seasonally adjusted annual rates of change, in percent, for selected monetary and financial flows over various time periods. Dec. 1978- / 19"91 / 1/ '80 over 1980-' Seat. 'SO Jan. '31 over Dec. 'S0 Nonborrowed reserves 6.3 0.3 7.8 10.8 Tocal reserves 6.2 2.6 7.1 1L.3 6.4 Monetary base 9.2 7.8 8.5 8.9 &.0 7.4 5.0 5.0 1.5 -34.3, 15.0 Concents of Monev M-1A (Currency plus demand deposits) 2/ (6.5)M-13 (M,-1A plus other checkable deposits) 8.2 7.7 7.3 3.3 16.3, (6.7)- mutual fund shares and overnight RP's and Eurodollars) 8.4 9.0 9.8 7.3 8.4 M-3 c-2 plus large time deposits and cerm RP's) 11.3 9.8 10.0 11.5 13.5 12.3 7.9 14.2 M-2 (M-13 plus small time and savings deposits, money market 14.1 Bank Credit Loans and investments of all commercial banks 3/ n.a. Managed Liabilities of Banks (Monthly average change in billions) Large time deposits 4.2 1.6 1.8 4.6 9.9 Eurodollars Other borrowings A/ 0.6 1.4 2.1 1.3 -2.0 n.a. -0.7 n.a. n.a. n.a. 1/ QIV to QIV. 2/ Other than interbank and U.S. Government. 3/ Includes loans sold to affiliates and branches. Primarily federal funds purchases and securities sold under agreements to 4/ repurchase. 5/ Adjusted for nationwide NOW accounts. NOTE: All items are based on averages of daily figures excepc for data on total loans and investments of commercial banks, comercial paper, and thrift institutions--which Growth are derived from either end-of-month or Wednesday statement date figures. rates for reserve measures in this and subsequent tables are adjusted to remove the effect of discontinuities from breaks in the series when reserve requirements are changed. -6- Alternative Longer-Run Targets (8) The December Bluebook contained a discussion of alternative longer-run monetary strategies for the 1981-83 period, and their implications for economic activity and prices. Against that background, this Bluebook focuses on possible alternative growth ranges for 1981 (QIV '80 to QIV '81) which must be reported to Congress in February. Various ranges that might be considered are shown in the table below, where the ranges abstract from impacts of shifts during the year into NOW accounts (to be discussed in paragraph 11). Target ranges for 1980 3½ to 6 M-1A Tentative target ranges for 1981 announced in July 3 to 5½ M-1B 4 to 6½ 3½ to 6 M-2 6 to 9 5½ to 8½ M-3 6½ to 9½ 6½ to 9½ 6 to 9 6 to 9 Bank Credit 1/ Alternative target ranges for 1981 I II 3 to 5½ 3½ to 6 7 to 10 Memo: Actual growth in 1980 2½ to 5 3 to 5½ 6¾ to 9¾ 7½ to 10½ 7¼ to 10¼ 6½ to 9½ 6¼ to 9¼ 5.0-1/ 7.3 1/ 9.8 10.0 7.9 M-1A and M-1B growth in 1980 was affected by shifts from demand and savings accounts to ATS/NOW accounts. The staff estimates that as a result of larger-than-anticipated shifts actual M-1A growth was reduced by about 1¼ percentage points more, and M-1B increased by about ½ percentage point more, than had been assumed at the time the 1980 targets were established. Adjusting for the effects of these unanticipated shifts, growth in M-1A and M-1B last year would be about 6¼ and 6¾ percent respectively. (9) The tentative target ranges for 1981 adopted by the Committee in July, shown in the second column of the table, incorporate one-half percentage point reductions in the announced 1980 ranges for M-1A, M-1B, and M-2. Alternative I also involves ½ percentage point reductions in the ranges for 1981 for M-1A and M-1B, but presents higher ranges for the broader -7aggregates than tentatively adopted. These higher ranges reflect the staff's current estimates of growth rates consistent with the M-1A and and associated GNP and interest rate projections. M-1B targets Alternative II specifies a one percentage point reduction from 1980 in target ranges for M-1A and M-1B as well as associated estimates of consistent growth ranges for the other aggregates. (10) current year. Alternative I underlies the staff's GNP projection for the It implies the continuation of considerable restraint on economic activity, with real output projected to show little change over 1981; the rate of price increase is expected to decelerate in the course of the year (though for the year as a whole remaining near the 1980 pace). Interest rate levels that might be associated with that alternative are shown in the table below, which assumes that nominal GNP over the year expands by about 9½ percent.1/ Projected Interest Rates for 1981 Associated with Alternative I (Quarterly Averages, Except as Noted) Dec.-Jan. Q1 QII QIII OIV Federal funds rate 19¼ 18½ 16 18 18¾ 3-month bill rate 15 15 14 15¼ 16¼ Corporate bonds 14¼ 14 13-7/8 14-1/8 Mortgage rate 14¾ 14-7/8 14-7/8 15 14¼% 15-1/8 1/ According to the Board's quarterly econometric model, alternative I implies around a 2 percentage point downward shift in money demand. On the other hand, a modification of this model to include the effects of changing cash management techniques induced by high market rates of interest, suggests a slight upward shift in money demand associated with the staff's GNP and interest rate projections. -8(11) The longer-run alternatives presented in paragraph (8) abstract from the impact of nationwide NOW accounts, which will, of course, depress actual M-1A growth and inflate M-1B expansion. Implied ranges for the actual growth in the narrow aggregates under alternatives I and II that take account of the expected amount of shifting into NOW accounts are shown in the table extent. below; shifts would not affect M-2 and M-3 to any significant The size of NOW-account distortion depends on the assumed growth in QIV '80 to QIV '81 Alternative Targets (Including the effect of ATS/NOW Accounts Shifts) Alt. I M-1A -4½ to -2 M-1B 6 to 8½ Alt. II -5 to -2½ 5½ to 8 OCD and is also highly sensitive to the proportion of shifts from demand deposits and other assets, mainly savings accounts. In the December Bluebook, the staff had assumed that the midpoint of the range of likely growth in OCD over 1981 was about $23 billion and that about two-thirds of the growth of OCD would represent shifts from demand deposits and one-third shifts from other assets. In view of the very large inflows into NOW accounts during January, the staff has raised the midpoint of the range of likely growth in OCDs to about $40 billion (on the assumption that about half of the shift for the year has already taken place). In addition, the staff now assumes that, by early spring, the proportion of NOW growth representing shifts from demand deposits will be gradually reduced from the 4/5 estimated for January to the 2/3 originally assumed; this reflects an expectation that the bulk of large demand deposit holders will have shifted by the end of the first quarter. Given these assumptions, the actual growth ranges for M-1A and M-1B over 1981 consistent with those that abstract from shifts to OCD should be about -97 percentage points lower for M-1A and 2½ percentage points higher for M-13. As additional information becomes available about the extent and sources of NOW account growth, adjustments will be made to keep the actual ranges consistent with the "effective" targets set by the Comittee. Short-run alternatives (12) Alternative policy approaches to the first three months of the year are shown below for Committee consideration. Growth rates for M-1A and M-1B are specified abstracting from the impact of nationwide NOW accounts. Actual growth rates that would be consistent with these targets will of course depend on flows into NOW accounts. The staff's current estimates of such actual measured growth are shown in parentheses in the table on pp. 10 and 11, which also contains additional and more detailed data on the various aggregates. Alt. A Alt. B Alt. C Growth from December to March M-1A 7½ 6¾ 4¼ M-1B 7½ 6¾ 4¾ M-2 8¾ 8½ 8 M-1A M-1B 8 7¾ 6¾ 6½ 3 3¾ M-2 8¾ 8½ 7½ Intermeeting federal funds rate range 14 to 20 15 to 21 16 to 22 Implied growth for January-March (13) As shown in the upper panel of charts 1 and 2 on the following pages, alternative A is based on growth in M-1a and M-1B at a rate that would bring the level of these aggregates by March to the midpoints of their tEntative longer-run ranges adopted in July. This implies growth in M-1B Chart 1 CONFDENTIAL (FR) Class FOMC II Actual and Tentatively Targeted M-1A Abstracting from NOW AccountsImpact sa!'icns Cr csi.05 L05 Lcnger-RuLn Range - S.... Shcr-Run Alternatives -- - ~ :00C A a1 S3C 375 , I O N _ I D I J I I F M I A I M I J 1980 ___ J I I A Ii S N 0 1981 Including Assumed NOW Accounts Impact Billions of dollars -Longer-Run Range .... Short-Run Alternatives -- 3S K- - 385 -380 - 375 -370 -365 / O N 1980 1 11 J F M A M III! J 1981 J A S 0 N 0 Chart 2 CONFIDENTIAL (FR) Class IIFOMC Actual and Tentatively Targeted M-1B Abstracting from NOW Accounts impact * E.ilhcns ct Collars - LcPger- un Range Short-un Alternatives 5 - 6% -- 1 - 445 - 439 --2 ________I _ I O N O I J F I M A M I J J A _J I S 0 403 N 0 1981 1980 Including Assumed NOW Accounts Impact Billions of dollars 463 Lcnger-Run Pange *** Short-Run Alternatives - 457 - 451 S - 445 6% - 439 - 427 - -- .. l A i403 SI N 0 CaP J F M A M J 1981 A S 0 N O Chart 3 CONF'OENTIAL iFR) Class Actual and Tentatively Targeted M-2 and M-3 M-2 Billions of dollars -1S08 81.% v -- Longer-Run Range ** Short-Run Alternatives FCoC - 734 .1750 -1736 - 1712 - 1688 -- 1664 1840 I N o I I M J 0 __ I I [ _ A M 1980 i I J J I I A S I -I II 0 0 N 1981 M-3 Billions cf Oollars S2138 - Longer-Run Range " -. Short-Pun Aitematives -2114 -2090 F -2066 -2042 -2018 - -1994 - -1970 1946 1922 SI 0 N 1980 S i J F M A M I I I J 1981 A S 0 N 0 -10- Alternative Levels and Growth Rates for Key Monetary Aggregates M-1A Alt. 1981--January February March A Alt. B 386.9 389.6 392.0 386.9 389.3 391.3 8.4 (-10.6) 7.4 (0.0) 7.4 (-11.6) 6.2 (-1.3) 7.5 (-14.9) 7.9 (-5.3) M-l. Alt. C 386.9 388.3 388.9 Alt. A 414.2 417.1 419.5 Alt. B 414.2 416.8 418.8 Alt. C 414.2 415.8 416.8 Crowth Rates Monthly 1981--February March December '80 March '81 January '81 March '81 4.3 (-14.8) 8.4 7.5 (14.1) (13.2) (10.3) 5.8 2.9 (8.8) (6.0) 6.7 (12.9) (11.0) 4.6 (-5.9) 6.9 (9.9) 6.8 (-15.6) 4.3 (-18.1) (13.6) 6.8 (-6.4) 3.1 (-10.2) 6.6 3.8 (12.1) (11.1) (8.2) 8.1 2.8 (-15.7) 8.1 1.6 (-17.0) 10.8 3.8 (8.6) 10.8 3.5 10.8 (8.3) (7.4) 1.9 7.4 4.8 7.7 Quarterly Average 1980--Q1V 1981--Ql 8.1 3.1 (-15.5) NOTE: Growth rates shown In parentheses 2.5 include the assumed NOW accounts impact. -11- Alternative Levels and Growth Rates for Key Monetary Aggregates M-2 1981--January February March (cont'd) M-3 B Alt. C 1982.5 1999.3 2011.2 1982.5 1999.0 2010.4 1982.5 1998.0 2008.4 8.0 7.1 10.2 7.1 10.0 6.8 9.4 6.2 8.5 7.9 10.5 10.4 10.0 8.8 8.4 7.6 8.7 8.4 7.8 9.2 7.6 9.2 7.4 9.2 7.1 11.7 11.4 11.7 11.3 11.7 11.1 B Alt. C Alt. A Alt. 1686.3 1699.1 1711.0 1686.3 1698.7 1710.0 1686.3 1697.5 1707.6 9.1 8.4 8.8 8.0 8.7 Alt. A Alt. Growth Rates Monthly 1981---ebruary March - December '80 March '81 January '81 March '81 - Quarterly Average 1980--QIV 1981--Q[ -12- over the first three months of the year at about a 7½ percent annual rate, given the shortfall that developed in December. Alternative 3 achieves the midpoint of the alternative II longer-run path by March, and implies growth in M-1B at a 6¾ percent annual rate over the first three months of 1/ the year.1/ Alternative C accepts the December shortfall, at least for the first quarter, and specifies from that lower base the same growth rate in the narrow aggregates over the first three months of the year that had been adopted by the Committee at its December meeting. This alternative implies relatively slow growth in February and March, as shown in last column of the middle panel of the table on page 9. (14) We have assumed that funds will flow into OCD at a progressively slower pace in February and March--increasing about $1½ billion and $750 million per week in those months, respectively. (In the first week of January OCD increased by about $9 billion, but in the last week of the month such accounts are estimated to have risen only about $2¼ billion.) actual growth in M-1A would be reduced by about 13 February and March and points. On these assumptions percentage points over growth would be increased by about 4½ percentage M-1B This would mean, for instance, that under alternative A actual M-1A 1/ Under alternatives A and B, M-1A would grow at the same rates as M-1B over 2/ the December to March period. This seeming anomaly (whereby M-1B does not grow percentage point faster than M-1A) is simply the arithmetic result of the particular relationships of these aggregates in December 1980 to their QIV '80 averages. All of the short-run alternatives imply a March level of M-1B that is lower than would have been attained if this aggregate had grown in December at the 3.2 percent rate projected at the time of the December FOMC meeting (instead of declining 9 percent) and then at a 4¾ percent annual rate targeted for the first three months of 1981. Growth of M-1B in February and March would have to be about 9¾ percent at an annual rate to attain the March level implicit in the Committee's December decision. -13- would decline at a 5½ percent annual rate, and actual M-1B increase at a 12 percent rate. As can be seen in the lower panels of charts 1 and 2, the relatively large degree of shifting in the early months of 1981 results in a temporary deviation of actual M-1A and M-1B growth from their expected ranges for the year. (15) Under all three alternatives, the growth of M-2 over the first quarter would offset the December shortfall and leave this aggregate in March at a level in the middle to upper part of the Committee's tentative long-run growth range for 1981. (See the upper panel of chart 3.) Growth in the non-transactions component of M-2 over the next two months is expected to be buoyed by the growth of money market funds, which is projected to be relatively strong as MMMF yields remain high in comparison to market rates. Growth of bank credit and, consequently, the issuance of large CDs is expected to moderate in the months ahead from the recent very rapid pace, contributing to some deceleration of M-3 expansion in February and March. Nonetheless, as shown in the lower panel of chart 3, owing to the relatively high current level of M-3, such growth will leave this aggregate in March above the upper end of the tentative longer-run range under all of the short-run alternatives. (16) All of the alternatives imply a substantial slowing in growth of the transactions-related aggregates on a quarterly average basis in the first three months of 1981. For example, implied quarterly average growth in M-1B ranges from a high of 3¾ percent under alternative A to a low of 2 percent under alternative C. This suggests substantial monetary restraint against a projected expansion in nominal GNP for the quarter at an annual rate of more than 13 percent. The sizable implied velocity increases -14would indicate little room for further short-term interest rate declines. Under alternative A, rates might be near, or perhaps a bit below, current levels over the balance of the quarter. Alternative B might involve somewhat higher interest rates, while alternative C seems quite likely to entail an increase in interest rates over the balance of the quarter. Of course, great uncertainty attaches to these interest rate projections, with market reaction to the forthcoming economic program of the new Administration likely to be a critical factor in near-term rate movements. (17) The aggregate specifications of alternative A would appear to involve growth in total reserves at a 1/1½percent annual rate from January to March, and, as noted earlier, only a small decline, if any, in the funds While an average rate from the recent trading range of 17 to 19 percent. level of borrowing at the discount window of about $1¼ billion might be associated with attainment of the alternative A specifications, borrowing demands have been erratic recently--with the funds rate first staying high as borrowing declined and then falling as borrowing rose. Over the next two months total reserve growth under alternative B would be only percent at an annual rate and reserves would decline at a 3 percent annual rate under alternative C. Under both alternatives relatively more reserves would be expected to be provided through borrowing at the discount window, given the current discount rate structure and assuming that these alternatives involve some upward short-term interest rate pressure. Under alternative 3, borrowing might be $1½ billion, or a little less, and under alternative C $1¾ billion or a little more. (18) Credit demands over the months immediately ahead are expected to remain substantial. Business credit demands are projected to be well -15- maintained; however, relative to the fourth quarter of last year, more of the borrowing may be shifted to bond markets with less occurring at banks. But should interest rates again begin rising, business firms could once more postpone capital market financing and temporarily increase reliance on banks and the commercial paper market. The market will also have to absorb a sizable amount of new Treasury issues for cash over the next two months (perhaps $8½ billion of new bills and $10 billion of intermediate-term bonds) before the seasonal swing to budget surplus in the second quarter. (19) Given these credit demands, longer-term bond yields are not likely to decline significantly over the weeks ahead. And there could be some increase if short-term rates were to rise in consequence of restraint on reserve growth in line with short-run money targets. Any rise in bond rates under such conditions may be limited if borrowers backed away from the market in anticipation of more receptive conditions later. Reactions to the Administrations' forthcoming economic program will also strongly influence longer-term rates. The possibility of a significant rise in longer-term rates cannot be discounted if tax cuts are in prospect without accompanying near-term expenditure cutbacks, but a rally in markets may develop if convincing signs of a move to fiscal restraint emerge or if evidence of economic weakness begins to cumulate. (20) Should market rates remain near current levels, or even fall slightly, conventional home mortgage rates likely would remain around 15 percent; if market rates were to move back toward the recent peak levels, however, mortgage rates could well move significantly higher. In any event, housing activity and mortgage credit flows would be expected to moderate in the current quarter from the pace of the fourth quarter of 1980. -16Commitment activity at S&Ls declined over the final months of last year, and it is expected that continuation of the high mortgage rates recently attained will cut further into housing demand. At the same time, the willingness of thrift institutions to extend new mortgage commitments probably will be limited by their concern about the cost and size of prospective deposit flows. The severe pressure on earnings margins of the thrift institutions would continue even if market interest rates were to drop appreciably in the next several months; the higher average cost of funds created by recent rollovers of MMCs has for S&Ls and MSBs in the first half. effectively ensured aggregate losses Directive language Given below is (21) directive. a suggested operational paragraph for the The language calls for expansion of reserve aggregates con- sistent with desired rates of monetary growth over the three-month period from December to March. The language used in December to specify the federal funds rate constraint is retained. December meeting are shown in The specifications adopted at the strike-through form. In the short-run the Committee seeks behavior of reserve associated] CONSISTENT with growth of M-1A, M-1B, aggregates [DEL: M-2 [DEL: quarter] first the over OF ____ PERCENT, FROM THE with and FROM DECEMBER TO MARCH AT ANNUAL RATES ____PERCENT, AND ____ PERCENT RESPECTIVELY, ABSTRACTING consistent apath along IMPACT OF FLOWS INTO NOW ACCOUNTS [DEL: growthin the ranges for which earlier, 1981 contemplated These abstracting from ranges, 1981. February in reviewed be will effects with connected shifts deposit of the the introduction of NOW accountsimply growth in basis, anationwide on these aggregates percent, and 7 percent respectively.] It 4½ on centered is recognized that [DEL: of] introduction the NOW and ITS] SHIFTS INTO [DEL: likely is 1981 of beginning the at nationwide accounts [DEL: discrepancy between] accurately be now cannot [DEL: that emerge] they as differences light of evaluation of those [DEL: [DEL: credit and monetary growth rapid of light the In near term if M-1A operational reserve paths will be developed in the estimated,] and in acceptable in be would growth in shortfall some months, recent widenthe to WILL CONTINUE TO DISTORT MEASURED growth in and M-1B to an UNPREDICTABLE extent, SUCH DISTORTIONS. aggregates the that developed in the context of reduced pressures in -18the money market. If it appears during the period before the next meeting that fluctuations in the federal funds rate, taken over a 15 _____ 20] to period of time, within a range of [DEL: TO ____ percent are likely to be inconsistent with the monetary and related reserve paths, the Manager for Domestic Operations is promptly to notify the Chairman, who will then decide whether the situation calls for supplementary instructions from the Committee. Appendix I Money Stock Benchmarks During the intermeeting period money stock measures and related data were benchmarked to the December 1979 and March 1980 call reports. In addition, daily deposits data from all nonmember commercial banks with total deposits greater than $15 million as of December 1979 were incorporated 1/ into the series.- These nonmember banks have been reporting daily deposits data since November of last year in conjunction with the implementation of the Monetary Control Act of 1980. This revision also includes revised estimates of deposits at credit unions and other minor deposit items at all thrift institutions. In addition, the revision incorporates benchmarks for overnight and term RR's and the "L" series--M-3 plus other liquid assets--has been revised back to late 1969 to incorporate new estimates of term Eurodollar assets of U.S. nonbank holders. The benchmark adjustments had only minor impact on the levels of M-1A and M-lB. The level of M-1A was raised $100 million in December 1979 and lowered $900 million in April of 1980. adjustment was only $500 million. By the end of 1980 the downward Benchmark adjustments raised the level of M-13 about $500 million at the end of 1979 and about $1.0 billion at the end of 1980. The M-1B adjustment reflects faster growth in the other checkable deposits component (NOW/ATS and share draft deposits at credit unions). The net adjustments to M-2 and M-3 were somewhat larger, on average. The level of M-2 was raised roughly $500 million in late 1979 and nearly $5.0 billion in late 1980. 1/ M-3 was unchanged in late 1979, but by the end Deposits of nonmember banks with less than $15 million in total deposits will continue to be estimated from call report data until data from quarterly reporting, which began with the week ending January 21, are available. Data from these reports are not expected until mid-February, however. of 1980 the level of the series had gradually been raised over $6.5 billion. The major factors contributing to these upward adjustments were revised estimates of RP components based on March call report data. In addition, the net adjustments reflect stronger savings deposits and weaker small-time M-3 also reflects a downward revision in the large time deposits deposits. at banks component. The average level of the "L" series was raised sub- stantially in 1980 reflecting the adjustments to M-3 plus a %12 billion increase in the term Eurodollar component. As indicated, the Eurodollar adjustments were carried back to late 1969 with the amounts added decreasing These adjustments reflect Eurodollar CDs held in custody by banks over time. in London for the account of banks in the U.S. which are beneficially owned by nonbank U.S. residents. Table I-A shows the impact of the benchmark adjustments on M-1A and M-1B growth rates. As the table shows the impacts on growth rates were minimal for the year as a whole. M-1A for the year 1980 was about unchanged and M-1B growth was raised less than 1/4 of a percentage point. patterns over the year were modified slightly. The growth The revised series show a bit less growth in the first half of 1980 and slightly faster growth in the second half of the year. Changes in monthly growth rates were generally small with the largest change in M-1A growth occurring in April of last year. Table I-B basis. shows M-2 and M-3 growth rates on an old and a revised For these series the impacts of the benchmark adjustments were also small. TABLE I-A COMPARISON OF OLD AND REVISED M1-A AND M1-B3 GROWTH (percent annual rate) RATES M1-B M1-A Old Revised 5.0 5.1 5.0 5.0 4.3 -3.9 11.0 8.4 4.6 Old Revised Annual1/ 1979 1980 7.7 7.3 Quarterly Average QI 1980 QII QIII QIV -4.4 11.5 8.1 5.9 -2.4 13.5 14.6 10.9 10.8 5.8 -2.6 Monthly 1980 1/ January February March April May June July August September October Novenber December 3.6 9.4 -1.9 -17.7 0.7 11.4 7.8 19.3 12.6 9.4 6.8 -11.1 QIV average to QIV average. 2.6 5.3 A.3 9.4 -1.9 -20.0 1.3 12.4 8.A 19.3 12.3 9.1 6.5 -11.1 9.9 -0.3 -14.1 -1.2 14.6 11.1 21.6 15.8 11.5 9.3 -9.0 9.6 0.0 -15.6 -0.6 16.2 12.9 21.8 15.8 11.3 8.7 -9.0 TABLE I-B COMPARISON OF OLD AND REVISED M-2 AND M-3 (percent annual rate) M-3 M-2 Old Revi se Old Revised Annual-8.9 9.6 9.0 9.8 9.8 9.7 9.8 10.0 QI QIi QIII QIV 7.2 5.5 15.5 9.0 7.3 5.6 16.0 9.2 7.3 5.7 12.6 11.3 8.0 5.8 13.0 11.7 January February March April May June July August September OctoBer November December 7.1 9.5 5.0 -2.5 9.4 18.1 18.2 14.5 8.6 8.8 10.4 1.8 6.8 10.1 5.4 -3.2 10.3 18.3 18.8 14.9 8.7 8.8 10.4.8 2.7 7.7 11.8 4.& 0.0 8.7 13.4 13.5 13.6 9.2 10.4 7.5 12.6 5.1 -0.7 9.1 13.5 14.0 14.0 9.6 10.8 15.2 8.2 1979 1980 Ouarterlv Averaa 1980 Monthly 1980 1/ QIV average over QIV average. 0.4 8.3 Appendix II RESERVE TARGETS AND RELATED MEASURES Intermeeting Period ($ millions, not seasonally adjusted) Targets for 4-Week Averages Dec. 24 to Jan. 14 NonTotal borrowed Reserves Reserves Projections for Total Required Reserves Reserves (3) (4) (2) (1) L-week Averages Adjustaenc Excess Reserves Borrowin (5) (3)-(2) As of December 19 (FOMC Meeting) 60, 9,8 December 26 41,048- 39,548- January 2 41,148- / 39,648 January 9 41,338-3/ 39,838 33/ 39,4/8 1/ 548 / 40,948 LO,548 400 1,500 40,991 40,509 482 1,"43 40,971 40,446 525 1,323 41,168 40,529 639 1,330 Targets for 3-Week Averages Jan. 21 to Feb. 4 January 16 42,041 January 23 January 30 1/ 2/ 3/ A/ 5/ A0,541 40,341 41,841 Proiections for 3-week Averages / 40,0615 / 41,740 41,240 500 1,199 41,509 40,964 545 1,168 41,427 40,939 488 1,366 Total and nonborrowed reserves path adjusted upward by $100 million on December 26, 1980 to account for changes in multiplier relationships. Total and nonborrowed reserves path adjusted upward by $100 million on January 2, 1981 to account for changes in multiplier relationships. On January 9, 1981 total and nonborrowed reserves path adjusted upward by $190 million to account for further changes in multiplier relationships. Total and nonborrowed reserves path adjusted downward by $200 million on January 23, 1981 to account for changes in multiplier relationships. Adjusted downward to reflect the large unexpected rise in demand for borrowing in the week ending January 28. TABLE 1 SELECTED INTEREST (Percent) Slho__rt-lerm_ CD Treaasry Billa Sectdary redletal fundas ,at Pe'ril Auction 6-no Market 1-r S3-,n "-11 - _ tl-____ Iank Prl me Couni. Pap L U.S. Coiiauant l d. a 10-yr 30-yr Cop.-Aa t MunoI, iy, cipal til'Iy ilond Neu |lluyer ( I r rd laule 8- (9) noy- -(l Covt. rtIyj Irate I -mo -- f---) -- -(-T- Mrket 3-ao STRICTLY CONFIDENTIAL - FOMC II CLASS RATES - 3-yr 112r - - .____.l Priaary C(:iv. (FR) - - ,l !il~r'i.a __ Sn..aI a a. LI 1(IlA li(llA :t. Aail. (1nr . (141- (1(- t ) 1919--llgh Low 15.61 9.91 12.60 8.85 11.89 8.64 12.65 8.87 14.53 9.64 14.26 9.66 15.75 11.50 11.68 8.76 10.87 B.79 10.42 8.82 11.50 9.40 11.45 9.39 7.38 6.08 12.90 10.38 1 .29 10.42 11.// 9.51 19U0--ll18h l.ow 19 83 8.68 16.73 6.49 14.39 7.18 15.70 6.66 20.58 8.11 19.74 7.97 21.50 11.00 14.29 8.61 13.36 9.51 12.91 9.54 14.51 10.51 15.03 10.79 10.56 7.11 16. J5 12.18 1I 91 12.28 14 11 1Il. 71 1979--1ec. 13.78 12.04 10.92 11.85 13.43 13.24 15.30 10.71 10.39 10.12 11.25 11.31 7.22 12.90 12.49 11.35 1980--Jan. Feb. 11ar. 13.82 14.13 17.19 12.00 12.86 15.20 10.96 12.46 14.03 11.85 12.72 15.10 13.39 14.30 17.57 IJ.04 15.25 15.63 18.31 10.88 12.84 14.05 10.80 12.41 12.75 10.60 12.13 12.34 11.71 13.57 14.00 11.77 13.35 13.90 7.35 8.16 9.17 12.U81 13.01 15.211 12.91 14.49 15.6, 11 .94 13.14 13./8 16.81 17.61 10.98 9.47 13.20 8.511 7.0/ 11.97 8.66 7.54 13.62 9.15 7.22 16.14 9.79 8.49 15.78 9.49 8.27 19.77 16.57 12.63 12.02 9.44 8.92 11.41 10.18 9.78 11.40 10.36 9.81 12.901 11.51 10.96 12.91 11.64 11.00 8.61 7.59 7.63 16.31 14.26 12.71 14.161 12.811 12.35 2.4( 11 . 10 11.07 SeCpt. 9.03 9.61 10.87 8. 16 9.1 10.27 8.00 9.39 10.48 8.10 9.44 10.55 8.65 9.91 11.29 8.41 9.57 10.97 11.481 11.12 L2.23 9.21 10.63 11.57 10.25 11.10 11.51 10.24 11.00 11.34 11.60 12.32 12.74 11.41 12.31 12.72 8.12 8.67 8.94 12.19 12.56 13.10 12 66 13.92 14.17 11.51 12. 34 12.84 Oct. Nov. U.ec. 12.81 15.85r 11.90 11.62 13.73 15.49 11.30 12.66 13.23 11.57 13.61 14.71 12.94 15.68 111.65 12.52 15.18 18.07 13.79 16.06 20.35 12.01 13.31 13.65 11.75 12.68 12.84 11.59 12.37 12.40 11. tl 1J.111 13.85 14.51 13.1 1 13.91 14.39p 9.11 9.56 10.11 11.79 14.21 14. /9 14.95 15.51 12. '1 11.55 I 1.62 5 12 19 26 13.99 14.65 15.22 17.43 12.96 11.30 13.62 14.21 12.41 12.32 12.48 13.03 13.27 13.23 13.92 14.03 14.43 15.17 15.17 16.54 13.81 14.80 14.85 16.04 14.50 15.50 15.82 17.00 13.017 13.18 13.16 13.52 12.50 12.74 12.67 12.11 12.2/ 12.54 12.35 12.29 3 10 17 24 31 17.72 18.82 19 83 19.44 18.45 14.67 16.17 16.73 15.03 14.26 13.43 13.59 13.89 12.80 12.32 14.55 15.07 15.42 14.03 13.41 17. 34 18.71 20.58 18.53 17.21 16.81 18.02 19. 74 18.32 16.60 17.96 19.07 20.29 21.43 21.50 13.74 13.93 14.27 13.35 12.80 12.88 12.911 13.36 12.55 12.32 12.44 12.51 12.91 12.09 11.91 7 14 21 28 20.06 19.64 19.35 18.12 14.06 15.10 15.44 15.41 12.15 12.56 12.17 13.18 14.23 14.47 14.12 16.34 17.19 17.14 17.47 15.63 16.69 16.84 20.64 20.07 20.00 20.00 12.55 12.98 13.12 13.26 12.27 12.49 12.61 12.78 11.111 12.05 12.21 12.3'5 19.05 36.U8p 15.72 14.f17 13.24 12.67 17.93 16.80 17.25 16.14 2(.00 20.00 13.47 13.18p 12.87 12.79p 12.46 12.37p Apr. Hay .June Si.ly 1980--Nov. Dec. 1981--lal. Daily--Jan22 29 12.90 -- -" 17.17 14.51 14.05 14.07 14.219 13.951p 1 1.97 13.72 13.91 14.02 9.64 9.50 9.50 9.61 t14.081 14.11 14.28 14.211 14.16 9.84 10.42 10.56 9.99 9.76 14.43 14.1 1 14.95 14.95 14.95 15.01 14.25 14.20 14.15 14.10 14.17 14.33 14.11p 9.4'1 9.5/ 9.60 9.91 11.16 11. /9 11.42 15.21 11.61 11.49 14.92 13.75 13. 19 14.01 11.211 14.80 14 85 14.89 1 1. 0 1 14 15.50 . t5 814 11-11. 1 . /11 NOTE: Wuekly data fur couliann 1, 2, 3, and 5 thloughli 10 are Itatlilmenit week avciauges ot dally data. 14,ly r daLta Ill calumn 4 are average atiea 'tL.L In l Ii aucltion of 6-n1onLh bill thatL i11 be lasuidi on thle 'Iluruday following tie end of the staement week. Vor clauumi 11 , tie wekly dute I l te ill--iiln lot tlhu calendar week over uhlclh data axe averaged. Collnum 12 itid 13 adr l-day quoltes for Friday and hlluraday, reupe.tlvely, fltlituings (lite endJ l tlie laevuienltvweek. Coluun 14 l an avercage of contract Inetesat rlate oun cutuiltmntllUli fir counvenlJon ial tiat mairli aJgeU wlih 810 pecenll L lUo-Lo--valiu rul ln uuilad bly a saaile li aI bl-weekly nmor(tgage. of Inaured lucLIton C NIf ylelj.l savlngs and for loan ulioit-cer are average net asoauclllton foriaaid yf'el' onl coinunttlli *", tlie ot rliday tolloulng ithe enld of guoviiLr-aent uniderUitlite on Itllrtgage-bla&'r e aecurltie. or linvrlstrs of 30-year 1'HA/VA 11ctg ag.tc cuiying the coupdtn rate 5110basl pulllu l elow l he current lthe staltmeLin aloMtlgage; for ueak. blegnlnlag itmedlate delivery, lIIA/VA callling. FIIIt 'the hlly 7. allctlon yield lu LIn- UvI tU. aiaii.Altd ausurning plepiaylmelle Ill 12 ytVIIU l 1910,. figluri e .iluad dl yield yiiiyAIenl .11 ilus TABLE 2 STRICTLY CONFIDENTIAL CLASS -FOMC II NET CHANCES IN SYSTEM HOLDINGS OF SECURITIES 1/ (Millions of (lIange 863 4,361 870 6,241 1979--QLr. 9 1 80--QLr. - 5 -year -3,052 IV 4.164 118 1,101 I II -2,945 3,249 Ill IV -3,298 -58 292 8 110 137 100 / 355 1,516V 541 5 - 10 1,048 758 1,526 523 701 FeV.!Lral Agenciea Net Plrchlaaea 4/ ________ Over 10 Total 642 553 1,063 454 811 5,187 4,660 7,962 5,015 4,564 51 1,351 81 410 320 836 2,395 1,234 -- -3,214 -47 -37 Oct. tlov. 1 -vear IIlhhe - 5 5 - 10 Over 10 Total 891 1,431 127 454 -- t'h- Total 6/ 8,724 10,790 2,015 - -- t_ t~ - 6,107 2,1/1 -2,157 -1,181 S1,107 I -1,216 -261 ---- 1 ,267 332 -- -- -- -1,100 -- -1,100 - -- 3 10 11 24 31 1 14 21 28 - ----- 321 1,010 -- -- -- - -- -268 -98 723 -2,477 44.9 ---- -- - 12.7 34.5 75.6 2 4 4.6 0.7 .49 -- ---- LEVEL--Jan. 28 (In billions) 9 19 1,110 ..... -49 11.7 10/ -9115 911 5 12 19 26 -I, -128 -1,10 1,360 -- 162 -2,114 -- 100 -- 3,607 -2,8112 I, /74 2,59/ 2.462 'I ~4,839--,1 -- -- Itt 5/ 6,2LI 6611 1,234 Out I ihl i I ndi t ri 10,0315 obll -241 -1,100 1,282 DI) c. 1981--Jan. - 3,025 2,833 4,188 3,456 2,138 Aug. Sepj. Dec. Within 472 517 1,184 603 912 1980--July 1980--Nov. 2/ _- adjusted) Treasury Coupons Nt Net I', Prlrchiaa!3_ chase 3/t T'reasary ills Net dollars, not seasonally (FR) -2Lt -98 123 -2,4// 129.2 L/ (Mange trom end-of-perlod to cnd-of-period. 2/ Outright Lransat.Loni in market and ulith foreign accounts, and redemptions (-) In bill auctions. 3/ Outright traiiaactions in market and with foreign accounts, and short-term notes acquired In exc.ihange for nmiruriung billa. Excltina iud,,,miitlIiou, maturily ahlttf, rolloivers o matuilng coupon lanies, and direct Treasury borrouing from the SynLteim. 4/ Oixtright tranactlonj in matket and with foieign accounts only. Excludes redemptlnum aud mtLurity slitts. 5/ In additin to lthle net purchiaaes of securities, also reflect Lhanges In System hIoldizigs of bankeltc acce..cpt(ancLa, direct 'lIcaauary huorowing liLom the SyLCiM and r.di~oupt lonS (-) of agency and Tieuaauy couplon Iianea. 6/ in-clude changes in It' (-), itatched sale-lpuchaltue tLalactLionu (-), and maLtched purliase--aleI transnctions (I). 7/ O Ocltober I, 1979, $668 milllio of inatlling 2- and 4-year notes wrUe xcLhangel)d fort like asmolunt oL alhtoL-Let bille, beaunnue the inoe una L oni were dIlauy.d. On Octobli 9 and 10, the billa wiiL Lxclanged for new 2- and 4-year note, leupect vely. l/ Itnllting 2-year notea were cx(hlaned on June 2, 198U', for upecial 2-d'ls. At their maturity the hills w ere exchanLged oiai Itl, 2-yea noita. -492 ----116 -1,812 ,207 -6.677 -6 6,731 .-4 ,511 4,3/0 -5,011 4,339 -8,412 3,1102 - 5.1 STRICLY -IICLASS FOMC TABLE 3 BANK AND POSITIONS DEALER SECURITY CONFIDENTIAL (FR) (Millionsof dollars) U.S. Covt. Security Dealer Positions Coupon Bill a ITasnes Meuilwr Iank Reserve Pa itions Browulain at FiMtll_* Uliderwri ting I- dllcate IPooloin0s Corpo rate lMnilcipal BIUc Is Bonda IOlid a Bond a T'ral eaasonal Sp.ecial IIL Ad ilnusi 2 .116t 510 726 -122 2,960 1,0801 -2281p 3,4139 215 -1,901 441 1,473 81 1. 190 4,380 2,937 2,964 -944 -212 -659 251 211 106 1,241 1,644 /4 97 2,823 150 1,167 1,551 2,515 167 1,372 1,429 19/ 178 203 2,455 June 7,838 4,008 3,724 155 63 12 1,748 212 61 July Aug. Sept. 4,581 5,108 3,681 634 798 -416 284 395 302 658 1,311 6 9 25 116 408 I, 196 Oct. 2,447 3,047 4,287 143 149 20 206p 4918p 552p 1,310 66 2,059p 1.690p 97p 116p 1,244 I , 96t p 4 l,51 p 2,694 3,072 3,833 2,231 -128 1,005 181 -400 567p 404)p 5041) 317p 1,8ll/Bp 2,0611p 1.9/9p 2,2151p 72p 3 10 17 24 31 3,501 4,018 3,880 4,108 5,862 13 485 -1,011 288 496 881 2,1412p 262p 502p 809 p 496p 1,78 op 1981--Jan. 7 14 21 28 n.a. n.a. n.a. n. a. 1979--1l1gh Lou 8,091 138 1980--11gh Low 8,838 1,972 1919--Dlec. 5,760 1980--Jan. iarb. Mlar. Apr. May Nov. Dec. 1980--Nov. 5 12 19 26 Dec. 902 -2.569 Exce aas Reserves n.a. n.a. n.a. 256 127 56 65 'L9p 664p 74 1p 507p 562p 628 1,018 379 1,290 12 177 5p 92p 95p 115p 1111) 1,5 0 5 p 1,649p 1,627p 1240 119p 115p 1,117p 1,312p 1,4179p 1,79/1p 112p 105p 123p 13 7 p Weekly data are daily averages for utaltinciLt weeks, k Strictly ** Mtintly averages for excess reserves and Iorrouwng are weighted averages of sLatcment week figules. eltident tal. 1, 80 6 p 1.95p 1, h 4 p 0 0 0 0I 2,0 14p. 1,6151p 1 , 18 p I , 5 ip 1,51 Ap 0 I, 5121) 2,1 214p1 0 except for (0. I ,005p 0 0 which exclude Treasury sectlll Trading poltions, NOTE: Covernment security dealer trading polLionsa are on a colunitment basans. Iladeiurltig repurchase agreements maturing in 16 days or more. are indicators of holdings available for sale over the near Lerm. conalst of Isauea in syndicate, excluding trading positions. Issulki in syndicate, which are 'rlday figureq. 0 0 0 0 ea 1 ,227p 1 ,0t2p I, J6 p finaunced by ayndI.ILLLe pLosi)lotin uunitCIipal 0co1polut) and
@FedFRASER