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FEDERAL RESERVE
press release
For Use at 4:10 p.m.
July 11, 1980
The Federal Reserve Board and the Federal Open Market Committee
today released the attached record of policy actions taken by the Federal
Open Market Committee at its meeting on May 20, 1980.
Such records for each meeting of the Committee are made avail
able a few days after the next regularly scheduled meeting and are
published in the Federal Reserve Bulletin and the Board's Annual Report.
The summary descriptions of economic and financial conditions they contain
are based solely on the information that was available to the Committee
at the time of the meeting.
Attachment
RECORD OF POLICY ACTIONS
OF THE FEDERAL OPEN MARKET COMMITTEE
Meeting held on May 20, 1980
1. Domestic policy directive
The information reviewed at this meeting suggested that real
output of goods and services was declining markedly in the current
quarter after increasing at an annual rate of 0.6 percent in the first
quarter.
However, average prices, as measured by the fixed-weight price
index for gross domestic business product, were continuing to rise at
a rapid pace following increases at an annual rate of about 11 percent
in the first quarter and nearly 10 percent during 1979.
The dollar value of total retail sales fell substantially
further in April after declining sharply in February and March.
Unit
sales of new automobiles slowed markedly further in April to the
lowest level since the spring of 1975 and apparently remained ex
ceptionally weak in early May.
The index of industrial production fell 1.9 percent in
April, following small reductions in February and March.
decline reflected widespread cutbacks in output.
The April
The rate of capacity
utilization in manufacturing fell 2 percentage points further in April
to 81 percent, 6 percentage points below the recent peak in March 1979.
5/20/80
In April nonfarm payroll employment declined substantially
following a moderate reduction in March, and the rate of un
employment rose from 6.2 to 7.0 percent.
Decreases in employment
were especially pronounced in automobile- and construction-related
industries.
The length of the average workweek fell for the third
successive month.
Private housing starts declined throughout the first quarter
and edged down further in April to an annual rate of about 1 million
units.
Building permits for new units were down substantially further
in April.
In March sales of single-family homes fell for the sixth
consecutive month.
The rise in producer prices of finished goods moderated
appreciably in April, reflecting a large drop in prices of consumer
foods and a less rapid advance in prices of energy-related items than
in earlier months.
In the first quarter both producer prices and
consumer prices had risen at accelerated rates following rapid advances
in 1979.
The index of average hourly earnings of private nonfarm pro
duction workers rose at an annual rate of about 8 percent over the
first four months of the year, compared with an increase of 8-1/2
percent during 1979.
In foreign exchange markets the dollar had remained under down
ward pressure over most of the previous four weeks.
Such pressure, which
had emerged in early April, reflected primarily a sharp decline in interest
rates on dollar assets in relation to those on foreign-currency assets.
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The trade-weighted value of the dollar against major foreign currencies
had fallen about 3-1/2 percent since the Committee's meeting on April 22
and about 7-1/2 percent since early April.
The U.S. foreign trade deficit increased substantially from the
fourth quarter of 1979 to the first quarter of 1980 despite a consider
able reduction in March from the average in January and February.
For
the quarter as a whole, imports,including both petroleum and nonpetroleum
even though nonagri
products,rose at a much faster rate than exports
cultural exports exhibited considerable strength.
At its meeting on April 22, the Committee had agreed that open
market operations in the period until this meeting should continue to
be directed toward expansion of reserve aggregates consistent with
growth over the first half of 1980 at annual rates of 4-1/2 percent
for M-1A and 5 percent for M-1B, or somewhat less, provided that in the
intermeeting period the weekly average federal funds rate remained with
in a range of 13 to 19 percent.
In the Committee's view, this short-run
policy should be consistent with growth in M-2 at an annual rate of about
7-3/4 percent over the first half of the year.
The Committee had also
agreed that if the constraint on the federal funds rate appeared to be
inconsistent with the objective for the expansion of reserves, the
Manager for Domestic Operations was promptly to notify the Chairman,
who would then decide whether the situation called for supplementary
instructions from the Committee.
Immediately after the meeting, required reserves and thus
member bank demands for reserves began to fall substantially in relation
5/20/80
to the supply being made available through open market operations,
reflecting a sharp weakening of the monetary aggregates during April.
Consequently, member bank borrowings for adjustment purposes and the fed
eral funds rate both declined sharply.
On May 6, after the funds rate
had fallen below the 13 percent lower limit of the Committee's inter
meeting range and available data had suggested that the demand for money
and for reserves had remained weak, the Committee voted to reduce the
lower limit of the intermeeting range for the funds rate to 10-1/2
percent.
In the statement week ending May 14, the funds rate averaged
10-7/8 percent, down from an average of about 18-3/8 percent in the
statement week ending April 16.
In April M-1A and M-1B contracted at annual rates of 18-1/2
and 14-1/2 percent respectively following small declines in March,
while M-2 fell at an annual rate of about 3 percent after increasing
moderately in March.
As a result, expansion of the monetary aggregates-
especially M-1A and M-1B--over the first four months of the year averaged
well below the growth paths set by the Committee for the first half;
M-1A declined at an annual rate of 1-1/2 percent over that period; M-1B
was unchanged; and M-2 expanded at an annual rate of 4-1/2 percent.
In
early May, however, there were substantial increases in demand deposits
and money market mutual funds.
Total credit outstanding at U.S. commercial banks contracted
in April after expanding at a substantially reduced pace during March.
5/20/80
The April decline reflected reductions in both investments and loans,
which included a drop in business loans.
Net issues of commercial
paper by nonfinancial corporations moderated in April from an
exceptionally strong pace during the first quarter.
Interest rates fell sharply further during the intermeeting
period as market participants reacted to accumulating signs of a slow
down in economic activity, to sustained weakness in the money stock,
and to the decline in the federal funds rate.
The rate declines were
especially pronounced in short-term debt markets, but bond yields also
moved substantially lower.
Commercial banks reduced their loan rate
to prime business borrowers from 19-1/2 to 16-1/2 percent over the
interval.
In primary markets for home mortgages, average rates on new
commitments at sampled savings and loan institutions fell more than 2
percentage points to about 14-1/8 percent.
On May 6 the Federal Reserve
announced the removal of the surcharge of 3 percentage points on frequent
borrowings from the Federal Reserve Banks by member banks with deposits
of $500 million or more.
This surcharge had been imposed in mid-March
as part of a broad program of credit restraint.
Staff projections prepared for this meeting suggested a larger
decline in real GNP in the current quarter than had been anticipated a
month earlier.
Further declines were expected in subsequent quarters,
and unemployment was projected to increase substantially.
Prices of
goods and services were projected to continue under substantial upward
pressure, although the rate of increase was not expected to be so
rapid as in the first quarter.
5/20/80
Committee members agreed that a marked contraction in real
GNP was under way in the current quarter.
The rapidity of the decline,
reflecting in part the abrupt weakening in consumption expenditures,
suggested a risk that the contraction would prove to be deeper than was
widely expected.
At the same time, inflation remained a serious problem.
The rise in prices appeared likely to remain rapid, even though there
were grounds for anticipating some moderation of the rise over the
months ahead.
At its meeting on February 4-5, 1980, the Committee had agreed
that from the fourth quarter of 1979 to the fourth quarter of 1980 average
rates of growth in the monetary aggregates within the following ranges
appeared to be consistent with broad economic aims:
M-1A, 3-1/2 to 6
percent; M-1B, 4 to 6-1/2 percent; M-2, 6 to 9 percent; and M-3, 6-1/2 to
9-1/2 percent.
The associated range for the rate of growth in commercial
bank credit was 6 to 9 percent.
It had also been agreed that the longer
run ranges, as well as the particular aggregates for which such ranges
were specified, would be reconsidered in July or at any other time that
conditions might warrant, and also that short-run factors might cause
considerable variation in annual rates of growth from one month to the
next and from one quarter to the next.
In contemplating policy for the period immediately ahead, the
Committee took note of a staff analysis indicating that growth of M-1A
and M-1B over the first four months of the year had fallen considerably
short of the rates consistent with the objectives for the first half of
the year that the Committee had established at its meeting in March and re
affirmed at its meeting in April.
Some rebound in growth of these
5/20/80
aggregates was likely to occur over the May-June period, assuming
interest rates at around current levels and given the staff projection
of expansion in nominal GNP during the second quarter and the public's
likely need to rebuild depleted cash balances, It still seemed likely,
however, that growth of these aggregates over the first half of 1980
would fall considerably short of the rates consistent with the
Committee's ranges for the year from the fourth quarter of 1979 to
the fourth quarter of 1980.
Growth of M-2 and M-3 appeared to be
less weak relative to the Committee's longer-run ranges than that of
the narrowly defined aggregates.
In the Committee's discussion of policy, the members agreed
that operations in the period immediately ahead should be directed
toward expansion of monetary aggregates at rates high enough to promote
achievement of the Committee's objectives for monetary growth over the
year, recognizing that a number of months might well be required in the
process.
They differed to some extent in their views concerning the
speed with which that goal should be sought and about the further
near-term decline in the federal funds rate that might be tolerated
in its pursuit.
Several members believed that if the demand for money were to
remain weak, the Committee should move in a relatively gradual fashion
over the balance of the year to restore the desired longer-run rates
of money growth.
Concern was expressed that a more aggressive approach
would lead to such sharp declines in the federal funds rate and other
-8-
5/20/80
short-term interest rates in the period immediately ahead that there
could be a perverse impact on long-term interest rates by exacerbating
inflationary expectations, and there could also be strong adverse effects
on the value of the dollar in foreign exchange markets.
Moreover, aggres
sive efforts to promote monetary growth might have to be reversed before
long, perhaps leading to significant increases in interest rates in a
period of substantial weakness in the economy.
The possibility was
also suggested that the demand for money had shifted downward once again,
so that vigorous efforts in the short run to bring monetary growth into
line with the Committee's longer-run objectives could result in exces
sive creation of money.
Other members of the Committee preferred efforts to bring
monetary growth more promptly into line with the Committee's objectives
for the year.
Such an approach, which they regarded as more consistent
with the operating procedures the Committee had been following since
early October 1979, could make an important contribution to moderating
the severity of the recession.
At the conclusion of the discussion, the Committee agreed that
open market operations in the period until the next meeting should be
directed toward expansion of reserve aggregates consistent with growth
of M-1A, M-1B, and M-2 at rates high enough to promote achievement of the
Committee's objectives for monetary growth for the year as a whole, pro
vided that in the period before the next regular meeting the weekly
average federal funds rate remained within a range of 8-1/2 to 14 percent.
5/20/80
-9-
Specifically, the Committee agreed that operations should be directed
toward encouraging growth of M-1A, M-1B, and M-2 over May and June at
annual rates of 7 to 7-1/2 percent, 7-1/2 to 8 percent, and about 8
percent respectively.
The Committee also agreed that, in light of the
recent shortfall, moderately faster monetary growth would be acceptable
if that developed in response to a strengthening of the demand for
money.
It was understood that if the demand for money and for bank
reserves proved to be weak and the federal funds rate declined signifi
cantly within its specified range, the Committee would review the situa
tion in advance of the next regular meeting scheduled for July 9.
In
any case, if it appeared that the constraint on the federal funds rate
was inconsistent with the objective for the expansion of reserves, the
Manager for Domestic Operations was promptly to notify the Chairman,
who would then decide whether the situation called for supplementary
instructions from the Committee.
The following domestic policy directive was issued to the
Federal Reserve Bank of New York:
The information reviewed at this meeting suggests
a marked contraction in real GNP in the current quarter.
In April the dollar value of total retail sales declined
substantially for the third consecutive month. Industrial
production and nonfarm payroll employment were curtailed
sharply, and the unemployment rate rose from 6.2 to 7.0
percent. Private housing starts, which had declined
throughout the first quarter to a relatively low rate,
edged down further in April.
The overall rise in prices
of goods and services has remained rapid in recent
months, although in April the rise in producer prices
of finished goods was slowed by a large decrease in
foods and by a lessening of the rapid rise in energy
items.
Over the first four months of the year, the
rise in the index of average hourly earnings was some
what less than the rapid pace recorded in 1979.
5/20/80
-10The downward pressure on the dollar in exchange
markets that emerged in early April has continued over
most of the past four weeks, in response primarily to
the sharp decline in U.S. interest rates relative to
foreign interest rates; the trade-weighted value of the
dollar against major foreign currencies has declined
about 3-1/2 percent. The U.S. foreign trade deficit
was substantially larger in the first quarter of 1980
than in the preceding quarter, despite a considerable
decline in March from the average in the preceding
two months.
M-1A and M-1B contracted sharply further in April,
and M-2 also declined. Commercial bank credit, both
loans and investments, contracted in April after having
slowed substantially in March. Over recent weeks,
market interest rates have declined sharply further.
Taking account of past and prospective economic
developments, the Federal Open Market Committee seeks
to foster monetary and financial conditions that will
resist inflationary pressures while encouraging moderate
economic expansion and contributing to a sustainable
pattern of international transactions. At its meeting
on February 4-5, 1980, the Committee agreed that these
objectives would be furthered by growth of M-1A, M-1B,
M-2, and M-3 from the fourth quarter of 1979 to the
fourth quarter of 1980 within ranges of 3-1/2 to 6,
4 to 6-1/2, 6 to 9, and 6-1/2 to 9-1/2 percent respec
tively. The associated range for bank credit was 6 to
9 percent.
In the short run, the Committee seeks expansion
of reserve aggregates consistent with growth of M-1A,
M-1B, and M-2 at rates high enough to promote achieve
ment of the Committee's objectives for monetary growth
over the year, provided that in the period before the
next regular meeting the weekly average federal funds
rate remains within a range of 8-1/2 to 14 percent.
If it appears during the period before the next
meeting that the constraint on the federal funds rate
is inconsistent with the objective for the expansion
of reserves, the Manager for Domestic Operations is
promptly to notify the Chairman who will then decide
whether the situation calls for supplementary instruc
tions from the Committee.
Votes for this action: Messrs.
Volcker, Guffey, Morris, Rice, Schultz,
Solomon, Mrs. Teeters, Messrs. Wallich,
and Winn. Votes against this action:
Messrs. Partee and Roos.
5/20/80
-11-
Mr. Partee dissented from this action because he believed that
it involved a risk of extending the shortfall in monetary growth relative
to the Committee's growth ranges for the year.
In an effort to guard
against the continuation of such a shortfall, which could worsen reces
sionary prospects, he preferred to direct operations toward achieving
somewhat higher rates of monetary growth in the May-June period.
He
also preferred an intermeeting range for the federal funds rate with a
lower limit below 8-1/2 percent, because such a range would be less
likely to interfere with reserve-supplying operations consistent with
the objectives for the aggregates.
Mr. Roos dissented because in his view the annual growth rate
objective of 3-1/2 to 6 percent for M-1A established by the Committee
in February 1980 was consistent with reduction of inflation without
aggravating recessionary pressures.
He believed that the 8-1/2 to 14
percent constraint on the federal funds rate was incompatible with that
agreed-upon objective and would cause money growth to remain below it.
Such slow growth would unnecessarily exacerbate the current economic
slowdown.
Historically, deep recessions had inevitably brought about
countermeasures that intensified inflation.
2. Authorization for Foreign Currency Operations
The Committee approved an increase from $300 million to $500
million in the System's swap arrangement with the Bank of Sweden and
the corresponding amendment to paragraph 2 of the authorization for
foreign currency operations, effective May 23, 1980, for a period of
one year.
With this change paragraph 2 read as follows:
5/20/80
-122. The Federal Open Market Committee directs the Federal
Reserve Bank of New York to maintain reciprocal currency
arrangements ("swap" arrangements) for the System Open
Market Account for periods up to a maximum of 12 months
with the following foreign banks, which are among those
designated by the Board of Governors of the Federal
Reserve System under Section 214.5 of Regulation N,
Relations with Foreign Banks and Bankers, and with the
approval of the Committee to renew such arrangements
on maturity:
Foreign bank
Austrian National Bank
National Bank of Belgium
Bank of Canada
National Bank of Denmark
Bank of England
Bank of France
German Federal Bank
Bank of Italy
Bank of Japan
Bank of Mexico
Netherlands Bank
Bank of Norway
Bank of Sweden
Swiss National Bank
Bank for International
Settlements:
Dollars against Swiss francs
Dollars against authorized
European currencies other
than Swiss francs
Amount of
arrangement
(Millions of
dollars equivalent)
250
1,000
2,000
250
3,000
2,000
6,000
3,000
5,000
700
500
250
500
4,000
600
1,250
Any changes in the terms of existing swap arrangements,
and the proposed terms of any new arrangements that may
be authorized, shall be referred for review and approval
to the Committee.
Votes for this action: Messrs. Volcker,
Guffey, Morris, Partee, Rice, Roos, Schultz,
Solomon, Mrs. Teeters, Messrs. Wallich,and
Winn. Votes against this action: None.
This action was taken to expand the short-term financing
facilities available to the Bank of Sweden.
@FedFRASER