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____________ Review____________
Vol. 68, No. 4




April 1985

5 Local Area Labor Statistics— A Phantom
Arm y o f the Unem ployed?
15 The FOMC in 1983-84: Setting Policy in
an Uncertain World

The Review is published 10 times per year by the Research and Public Information Department o f the
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Federal Reserve Bank o f St. Louis

Review
A pril 1985

In This Issue . . .




In the first article in this Review , "Local Area Labor Statistics— A Phantom Army
of the Unemployed?” G. J. Santoni discusses a sharp increase in official estimates
of local area unemployment rates for 40 “small” (less populous) states including
those in the Eighth Federal Reserve District. These estimates of unemployment
show a significant runup relative to the national unemployment rate in the late
1970s and subsequently remained high in comparison to the national unemploy­
ment rate throughout the 1979-84 period.
Many observers have attributed this increase to various structural changes in
the national economy that have had large and adverse consequences on particu­
lar states. This explanation is puzzling because the asserted change has had no
apparent effect on other indicators of regional economic activity. In contrast,
Santoni shows that the upward shift in the official estimates of the unemploy­
ment rate for the 40 small states was due to a change in the method of estimating
local area unemployment. In short, pre- and post-1978 official estimates of local
area unemployment rates are not comparable. The relative rise in local area
unemployment rates indicated by official estimates vanishes when a consistent
estimating technique is used.
In the second article, R. W. Hafer examines the numerous factors affecting the
policy decisions made by the Federal Open Market Committee (FOMC) during the
past two years. In "The FOMC in 1983-84: Setting Policy in an Uncertain World,”
Hafer notes that the environment in which the FOMC set policy was changing in
unpredictable ways: financial innovations in late 1982 and early 1983 caused
some concern over the correct measurement of the key monetary aggregates M l
and M2; the depth and breadth of the economic recovery in 1983 was unclear; and
the size of the federal deficit caused constant concern about its impact on
financial markets.
To understand the effects that these varied aspects had on policy decisions,
Hafer reviews both the long- and short-run policy discussions of the FOMC. These
discussions are set in the economic climate at the time of their formation and are
examined with hindsight to gauge their relative success. In addition, a detailed
supplement providing selected excerpts from the published “Minutes” of the
FOMC meetings provides a useful chronology of policy discussions during 1983
and 1984.

3




Local Area Labor Statistics—
A Phantom Army of the
Unemployed?
G. J. Santoni

O
FFICIAL estimates of local area unemployment
rates for 40 “small” (less populous) states, including
those in the Eighth Federal Reserve District and the
District of Columbia, registered a sharp increase rela­
tive to the national unemployment rate in the late
1970s.' Subsequently, these unemployment rates re­
mained higher than the national rate throughout the
1979-84 period, leading a number of observers to con­
clude that the problem of unemployment has become
relatively more severe in these states.2
This shift is important. Federal grants to economi­
cally distressed areas depend, in part, on state unem­
ployment estimates so, the shifting pattern of geo­
graphical unem ploym ent can have significant
consequences on the distribution of federal funds.
Chart 1 is a plot of seasonally adjusted quarterly
unemployment rates in the Eighth Federal Reserve
G. J. Santoni is a senior economist at the Federal Reserve Bank of St.
Louis. Thomas A Polimann provided research assistance.

’The Eighth Federal Reserve District includes the state of Arkansas
and parts of Missouri, Illinois, Indiana, Mississippi, Kentucky and
Tennessee. Since data by county are not available in a convenient
form and since the bulk of economic activity in the District is ac­
counted for by the states of Arkansas, Kentucky, Missouri and
Tennessee, references to the Eighth Federal Reserve District in this
article include data from just these four states. The District’s unem­
ployment rate is a weighted average of state unemployment rates in
which the weight for each state is the ratio of the state's labor force to
the total (District) labor force.
2See Szymczak (1984), Wagman (1984), Luecke (1984), Flaum
(1984) and Ellis (1984).



District and the nation. With one exception, the two
unemployment rates appear to track one another
quite closely. Before 1979, the District’s unemploy­
ment rate rose and fell in tandem with the national
average though the District rate was lower. Beginning
in 1979, however, the District’s unemployment rate
rose sharply relative to the nation’s. Within one year,
the unemployment rate in the Eighth District had
risen above the national average. The sharp accelera­
tion in District unemployment ceased in 1980 and has
been tracking the national average since then, al­
though at a higher level. The purpose of this article is
to analyze this apparent shift in local area unemploy­
ment rates.

THE SHIFT IS NOT DUE TO
CHANCE . . .
Table 1 compares the average quarterly differences
between the unemployment rate in each District state
and the national average before and after the fourth
quarter of 1978. The unemployment rates in Kentucky,
Missouri, Tennessee and the District as a whole are
significantly below the national average during the
earlier period, while Arkansas' unemployment rate
does not differ significantly from the national average.
As can be seen from the table, these relationships
changed substantially in the more recent period. Un­
employment rates in Arkansas, Kentucky, Tennessee,
as well as in the District, are significantly greater than

5

FEDERAL RESERVE BANK OF ST. LOUIS

APRIL 1985

C h a rt 1

Unemployment Rate
P e rc e it

Percent

the U.S. average in the later period. The unemploy­
ment rate in Missouri, which had been significantly
below the national average, does not differ signifi­
cantly from the national average in the more recent
period.

District of Columbia is plotted in place of the Eighth
District data .3 Notice that the average unemployment
rate in these states is also substantially below the na­
tional rate until 1979 when the difference between the
two rates began to shrink.

The data in table 1 indicate that the apparent shift in
the relationship between District and national unem­
ployment rates is probably not due to chance variation
in the data, nor is it the result of a change in just one or
two District states. Rather, it is systematic, occurring
in each District state at about the same time.

While the average unemployment rate in these
states never rose above the national average, as it did
in the District, the average difference between the two
rates fell by about .50 percentage points .4

. . . NOR IS IT UNIQUE TO THE
EIGHTH DISTRICT
Chart 2 is similar to chart 1 except that the average
unemployment rate for the 40 small states plus the

6


3The states excluded from this sample are: California, Florida, Illi­
nois, Massachusetts, Michigan, New Jersey, New York, Ohio,
Pennsylvania and Texas. The average unemployment rate for the
40 small states and the District of Columbia is a weighted average in
which the weights are given by the method described in footnote 1.
4The change is significant in a statistical sense (t = 9.42).

FEDERAL RESERVE BANK OF ST. LOUIS

APRIL 1985

SOME COMMON EXPLANATIONS . . .
A number of explanations for the apparent shift in
these relationships have been advanced. In most
cases, analysts attribute the change to structural shifts
in the national economy that have had large adverse
consequences on particular states. Some believe that
various geographic areas are not attracting an ade­
quate share of new capital investment spending .5
Others believe the structural shift is the result of the
“international competitive situation” as well as
"changes in federal fiscal policies and tax strategies.”6
Still others attribute it to ‘ the shifting structure of the
United States toward a service economy” or to “employment-migration interactions.”7 Each of these
“maladies" suggests a particular cure, most of which
carry substantial price tags.8

Table 1
Average Quarterly Differences Between
the Unemployment Rates in the
United States, the District and Various
District States_______________________
I/1970-IV/1978

Average
difference
U.S. minus:
District
Arkansas
Kentucky
Missouri
Tennessee

Second, a structural change presumably would pre­
cipitate real wage adjustments and shifts in the geo­
graphic distribution of the labor force that would miti­
gate such unemployment discrepancies after a time.
While real wages may be sticky in the short run, there
is no reason for this stickiness to persist in the longer
run. Real wage rates eventually will adjust, and labor

5See Szymczak (1984) and Wagman (1984).
6See Luecke (1984).
7See Kester (1984a) and (1984b), Greenwood and Hunt (1984),
Flaum (1984) and Ellis (1984).
8An exception is Clarkson and Meiners (1977, 1979) who have ar­
gued that the increase in the U.S. unemployment rate that occurred
during the 1970s can be attributed to work registration requirements
imposed on welfare recipients. If welfare recipients are heavily con­
centrated in some states, this institutional change may have rele­
vant implications for the problem discussed here. See, as well, Oi
(1979) and Supel(1977).
9See Santoni (1983).



Variance

1.022
-0.056
1.609
1.326
0.724

9.08'
0.27
7.80’
17.39'
4:33'

0.21
0.67
0.68
0.09
0.45

1/1979-11/1984

.. . AND SOME PUZZLES
There are problems with these explanations, how­
ever. First, the shift is not apparent in other indicators
of local area economic activity. For example, the rela­
tionship between the growth rates of total (and pay­
roll) employment at the District and national levels
show no break in the late 1970s. This is true of other
indicators as well, such as the growth rates in District
personal income, the value of total building and mort­
gage loans relative to national growth rates.9 A struc­
tural shift of the magnitude necessary to raise the
average District unemployment rate by almost 2 per­
centage points relative to the national average would
surely have been reflected in other indicators of rela­
tive economic performance.

t-stat

Average
difference
U.S. minus:
District
Arkansas
Kentucky
Missouri
Tennessee

t-stat

Variance

-0.588
-0.637
-0.937
0.195
-1.137

4.52’
4.93’
5.38’
1.45
5.74’

0.38
0.37
0.67
0.39
0.86

'Significantly different from zero at the 5 percent level (two-tailed
test).
will migrate to other geographic areas in which eco­
nomic activity is more brisk. Both of these factors
cause local area unemployment rates to adjust toward
the national average as time passes.1
0
One implication of this argument is that, over time,
the difference between local and national unemploy­
ment rates should shrink. The data plotted in chart 1,
however, do not appear to support this implication. In
fact, after the shift, the difference between the District
and U.S. unemployment rates increased as time
passed. This can be shown by splitting the period 1
/
1979-11/1984 in half and comparing the average differ­
ence between the U.S. and District unemployment
rates in the two subperiods. The mean difference dur­
ing the first half was -.152, while in the second half it
was -.968. Thus, instead of shrinking, the difference

l0Of course, some difference between the unemployment rate in a
particular local area and the national average may persist for a
considerable period of time due to differences in the age (experi­
ence) mix of the population, for example, or differences in the struc­
ture of the labor market (extent of unionization) and industrial com­
position of the region.
7

FEDERAL RESERVE BANK OF ST. LOUIS

APRIL 1985

C hart 2

Unemployment Rate

in crea se d , an d this in crea se is statistically
significant.1
1
The same argument can be applied with equal force
to the earlier period running from I/1970-IV/1978. If
the difference between the U.S. and District unem­
ployment rates during this period was due to some
structural advantage that the District possessed, the
difference should have gradually shrunk as District
wage rates rose and labor migrated into the District
from other geographic areas. This did not occur.
Rather, there was an abrupt change in the late 1970s,
when the District unemployment rate jumped above
the national average. A similar argument applies in the
case of the 40 small states and the District of Colum­
bia. The average unemployment rate for these states
was significantly below the national average until 1979
when, like the District's, it shot up relative to the na­
tional average.

"The t-statistic is 3.72, which is significant at the 95 percent level.

8


AN ALTERNATIVE EXPLANATION
The hypothesis that the shift in the relationship
between local and national unemployment rates is
due to a change in the structure of the economy con­
flicts with other relevant data. The following analysis
indicates that the 1979 shift in unemployment rates
that occurred in the 40 small states and the District of
Columbia was probably the result of a change in the
method of estimating local area unemployment statis­
tics. In short, pre- and post-1978 local unemployment
rates are not comparable. The sharp rise in these local
area unemployment rates is simply a statistical
artifact.

Estimating Unemployment Statistics
Currently, there are two different methods used to
estimate unemployment statistics. Estimates of unem­
ployment for the nation and for the 10 largest states

FEDERAL RESERVE BANK OF ST. LOUIS
are drawn directly from the Current Population Sur­
vey (CPS).1 For the remaining 40 states and the District
2
of Columbia, estimates of unemployment are obtained
by applying the “Handbook Method,” which was de­
veloped by the Department of Labor in the 1950s.
The two methods of estimating unemployment are
like a pair of shoes. Both shoes perform a similar task
but it pays to remember which is which. The CPS
develops monthly estimates of unemployment for the
United States and 10 large states by surveying 60,000
households during a one-week period containing the
12th day of the month. The week runs from Sunday
through Saturday.1
3
The Handbook Method used by 40 states and the
District of Columbia draws heavily on data from the
unemployment insurance system for covered employ­
ment. An estimate of unemployment among workers
who are not covered by unemployment insurance is
added to this. This estimate of unemployment among
uncovered workers is based primarily on historical
national data and is referred to as a “synthetic” esti­
mate by the Department of Labor.1
4
Prior to Januaiy 1978, all 50 states and the District of
Columbia used the Handbook Method to estimate
statewide unemployment rates, while the U.S. unem­
ployment rate was estimated by the CPS. Since differ­
ent estimating techniques were used, it is not surpris­
ing that observed statewide unemployment rates
diverge from the U.S. “average” during this period .1
5

The Distribution o f Federal Funds and
Divergent Estimates o f Unemployment
A second problem of noncomparability became par­
ticularly acute in the 1970s. While each state was using
the Handbook Method to estimate unemployment

,2See note 3 for a list of the 10 large states. The Current Population
Survey is discussed further below.
t3U.S. Department of Labor (1982), pp. 3-4.
'4For additional information on this method of estimating unemploy­
ment, see U.S. Department of Labor (1982), pp. 28-9; U.S. Depart­
ment of Labor (1979), chapters 1-2; Norwood and Early (1984), pp.
757-59; and Stinson (1984).
15Official state estimates of unemployment rates are not seasonally
adjusted, while official estimates of the U.S. unemployment rate are
typically reported in a seasonally adjusted form. Consequently, re­
ported state and national unemployment rates generally will differ
for this reason as well. All of the comparisons made in this paper are
of seasonally adjusted data. State unemployment rates are season­
ally adjusted using the X-11 program. This is the same method used
by the Department of Labor to adjust national data.



APRIL 1985

Table 2
Federal Grants to Depressed Areas1
Annual Appropriations
(in millions)
Years

CETA

1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
Total

$ 620
3,743
6,304
12,737
3,440
10,297
8,128
7,526
$52,795

JTPA

$3,032
3,900
$6,932

CETA = Comprehensive Employment and Training Act
JTPA = Job Training Partnership Act
'In addition to the amounts given in the table, a total of about $6
billion was appropriated from 1976-83 under the Public Works
Act of 1976, the Intergovernmental Anti-Recession Assistance
Act and the Urban Development Action Grant program.
prior to 1978, laws regarding eligibility for unemploy­
ment insurance differed across states. As a result,
some states counted people as unemployed who
would not be counted as such in other states. This
meant that estimates of the unemployment rate were
not strictly comparable across states.
The problem of noncomparable unemployment es­
timates became troublesome in the 1970s, when fed­
eral agencies began using these estimates to deter­
mine a state’s eligibility for benefits under various
federal programs.1 These programs include the Com­
6
prehensive Employment and Training Act, Public
Works and Economic Development Act, Urban Devel­
opment Action Grant Program, the Labor Surplus Area
designation, the Job Training Partnership Act and the
Intergovernmental Anti-Recession Assistance Act of
1977. Table 2 lists the amounts appropriated for these
programs in various years. The amounts are substan­
tial, so it is not surprising that the noncomparability of
state unem ploym ent data becam e a matter of
concern.

16U.S. Department of Labor (1982), pp. 10 and 31.
9

FEDERAL RESERVE BANK OF ST. LOUIS
The 1978 Revision
The problem of comparability prompted the De­
partment of Labor to revise the method used to gener­
ate estimates of unemployment for the various states.
In January 1978, the 10 largest states dropped the
Handbook Method entirely and began using monthly
CPS data to estimate unemployment rates. In the re­
maining 40 states and the District of Columbia, where
it was felt that the size of the sample would not sup­
port the direct use of the CPS estimates, a modified
form of the Handbook estimating technique was ap­
plied .17This modification requires the state to multiply
its Handbook estimate of the unemployment rate by a
ratio of the six-month moving average of the CPS esti­
mate to the corresponding moving average of the
Handbook estimate (see appendix on page 14 for de­
tail).
Since this change in estimating technique shifted
the estimated level of unemployment for any given
state, the official state unemployment estimates were
revised backward in time. This had the effect of splic­
ing the new official series with the old series at a point
prior to 1978. Had this not been done, the official state
series would have shown a sharp break in 1978.

The Effect o f the Revision
The purpose of the 1978 revision was to make esti­
mates of unemployment rates more comparable
across states. According to the Department of Labor,
the revision accomplished this by making state esti­
mates conform more closely to the CPS estimate, the
method of estimating unemployment at the national
level. This was clearly the case for the 10 large states
that began using CPS estimates directly. Though less
obvious, it may also be true for the 40 smaller states
and the District of Columbia. Under certain assump­
tions, the official monthly unemployment estimates
collapse to the monthly CPS estimate for these smaller
states. This is true even if the monthly Handbook esti­
mate is upward- or downward-biased relative to the
monthly CPS estimate (see appendix).
If, for example, the Handbook Method produces an
estimate of a state’s unemployment rate that is consis­
tently 10 percent less than the CPS estimate for the
state, this revision in the estimating technique has the
effect of raising the official state estimate of the unem­
ployment rate by 10 percent. The reverse is true if the
Handbook estimate is consistently higher than the
CPS estimate by some constant proportion. It is even

1 lbid., p. 30.
7

10


APRIL 1985
possible for the revision to cause estimates of unem­
ployment across all states to rise or fall relative to the
national “average.” This is true because the method of
estimating unemployment at the national level is not
an average of state estimates.

Some Implications o f the 1978 Revision
The revision caused the official unemployment rate
estimates for the 40 small states and the District of
Columbia to rise on average relative to the national
rate. This can be shown by examining state Handbook
estimates of unemployment.1
8
By definition, Handbook estimates of unemploy­
ment at the state level are the same as official esti­
mates of unemployment for data prior to 1978. After
1978, official estimates may diverge from the Hand­
book estimates by the adjustment factor. It has been
shown earlier that official state estimates rose signifi­
cantly relative to the national rate after 1978. If, how­
ever, the relationship between the Handbook esti­
mates and the national estimate did not change after
1978, while official state estimates rose relative to
Handbook estimates, the case that the shift in the
relationship between official state and national unem­
ployment rates was due to the reporting change (and
not to a structural change in the economy) is quite
strong.

The Handbook Estimates
Chart 3 is identical to chart 1 except that it includes
a plot of the Handbook estimate of the average unem­
ployment rate for the states in the Eighth Federal Re­
serve District (HB District). The official estimate of un­
employment for the District (labeled District) and the
Handbook estimate are virtually identical up to 1977.
After 1977, the two estimates diverge with the official
estimate rising sharply relative to the U.S. average. The
Handbook estimate, however, shows no sharp break at
this time. Rather, it remains below the U.S. average
and, in 1981, appears to fall slightly relative to the
national unemployment rate.
Notice that the official and Handbook unemploy­
ment estimates begin to diverge in 1977 even though
the reporting change did not occur until January 1978.
Recall, however, that the official unemployment series
for individual states were revised backward. This elim­
inated a sharp break in the series that would have
occurred in 1978.

'8These estimates are no longer published. However, they are still
computed and were supplied by the Department of Labor upon
request.

APRIL 1985

FEDERAL RESERVE BANK OF ST. LOUIS

Chart 3

Unemployment Rate
Percent

Chart 4 is similar to chart 2 except that it includes a
plot of the Handbook estimate of the average unem­
ployment rate for the 40 small states and the District of
Columbia [labeled 40 states plus D.C. (HB)]. Again, this
plot coincides with a plot of the official estimate until
1977 when the official estimate rises relative to both
the Handbook and U.S. estimates.
The data plotted in charts 3 and 4 indicate that,
when the same technique of estimating unemploy­
ment is applied, the shift in the unemployment series
in both the District and other small states relative to
the U.S. average vanishes. These data suggest that of­
ficial estimates of state unemployment produce mis­
leading evidence on changes in the relative severity of
the unemployment problem in the late 1970s and
early 1980s.
Interestingly, the Handbook series, which employs



Percent

the same estimating technique across the whole pe­
riod, suggests some improvement in the average un­
employment rate in the small states relative to the U.S.
rate. This was examined by splitting the period 1/197511/1984 in half and comparing the average differences
between the U.S. and Handbook unemployment esti­
mates in the two subperiods. The data presented in
table 3 indicate that the District unemployment rate
declined significantly relative to the national rate in
the more recent subperiod. The same was true in the
40 small states and the District of Columbia. This, of
course, conflicts with the results obtained by compar­
ing the national unemployment rate to the average of
the o ffic ia l estimates of the unemployment rate for the
various states.
It is important to keep in mind that estimates of the
U.S. unemployment rate and estimates for the small
states (generated by either the old Handbook Method

11

APRIL 1985

FEDERAL RESERVE BANK OF ST. LOUIS

C hart

4

Unemployment Rate
P ir c u t

Percent

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

Table 3
A Comparison of Average Differences Between National and
Local Area Unemployment Rates
__________________________
1/1975-111/1979
111/1979-11/1984
Change
Difference I
Difference II

1.42
1-36

2.46
2.87

1 04’
1.51'

Difference I = The average difference between the U.S. unemployment rate and the Handbook
estimate of the District unemployment rate
Difference II = The average difference between the U.S. unemployment rate and the Handbook
estimate of the unemployment rate for the 40 small states and the District of Columbia
'Significantly different from zero at the 5 percent level.


12


FEDERAL RESERVE BANK OF ST. LOUIS
or new Handbook adjusted method) are not strictly
comparable either before or after the 1978 change.
Consequently, a good deal of care should be used in
interpreting the results in table 3. The table 3 compari­
son is presented to indicate that, if the same tech­
nique is applied in estimating local area unemploy­
ment rates, the results show no increase in the
unemployment rates for the small states relative to the
national unemployment rate in the late 1970s.

CONCLUSION
Official estimates of local area unemployment rates
for 40 small states, including those in the Eighth Fed­
eral Reserve District, and the District of Columbia
show a sharp increase relative to the national unem­
ployment rate beginning in the late 1970s. Further,
unemployment rates in the small states remained per­
sistently high relative to the national rate throughout
the 1979-84 period.
Many observers have attributed the increase to vari­
ous structural changes in the national economy that
have had large adverse consequences for particular
states. This article shows that the upward shift in the
official estimates of the unemployment rate for the 40
small states and the District of Columbia was due
instead to a change in the method of estimating local
area unemployment. In short, pre- and post-1978 o f­
fic ia l estimates of local area unemployment rates are
not comparable. When a consistent method of esti­
mating local area unemployment rates is applied over
the entire period, the resulting series shows no break
in 1978.

REFERENCES

Clarkson, Kenneth W. and Roger E. Meiners. Inflated Unemploy­
ment Statistics, The Effects of Welfare Work Registration Require­
ments (Law and Economics Center, University of Miami School of
Law, March 1977).




APRIL 1985

_________“ Institutional Changes, Reported Unemployment, and
Induced Institutional Changes,” Camegie-Rochester Conference
Series on Public Policy (1979), pp. 205-35.
Ellis, Leslie. “Economic Recovery Is Only Seen As a Painful Myth to
Some," Louisville Courier Journal, October 7,1984.
Flaum, David. “ Recession Hit Area Hard,” Memphis Commercial
Appeal, June 12,1984.
Greenwood, M. J. and G. L. Hunt. “Migration and Interregional
Employment Redistribution in the United States,” American Eco­
nomic Review (December 1984), pp. 957-69.
Kester, William H. “Jobless Rate Here Declines to 7.6%,” St. Louis
Post-Dispatch, August 30,1984a.
--------------- “Good News for St. Louis on Two Fronts,” St. Louis
Post-Dispatch, September 2,1984b.
Luecke, Pam. “Campaign Cliche Overlooks Region’s Many Com­
plexities,” Louisville Courier Journal, October 7,1984.
Norwood, Janet L. and John F. Early. “A Century of Methodological
Progress at the U.S. Bureau of Labor Statistics,” Journal of the
American Statistical Association (December 1984), pp. 748-61.
Oi, Walter Y. “Government Labor Policies and Equilibrium Unem­
ployment Rates,” Camegie-Rochester Conference Series on Pub­
lic Policy (1979), pp. 237-52.
Olson, Mancur. "The South Will Fall Again: The South as Leader
and Laggard in Economic Growth,” Southern Economic Journal
(April 1983), pp. 917-32.
Santoni, G. J. "Business Cycles and the Eighth District," this
Review (December 1983), pp. 14-21.
Stinson, John F. Jr. "Comparison of Nonagricultural Employment
Estimates From Two Surveys,” Employment and Earnings (March
1984), pp. 6-9.
Supel, Thomas M. “The Impact of Welfare Work Registration Rules
on Labor Market Data,” Staff Reports, Federal Reserve Bank of
Minneapolis (October 1977).
Szymczak, Patricia. “Venture Capital Skips Midwest,” St. Louis
Globe-Democrat, October 3,1984.
U.S. Department of Labor, Bureau of Labor Statistics. Handbook of
Methods (December 1982), pp. 3-36.
U.S. Department of Labor, Bureau of Labor Statistics. Manual for
Developing Local Area Unemployment Statistics (1979).
Wagman, Paul. "RCGA Study Says Area Needs Venture Capital,”
St. Louis Post-Dispatch, September 15,1984.
Wonnacott, Thomas H. and Ronald J. Wonnacott. Introductory Sta­
tistics for Business and Economics, 2nd ed. (John Wiley and Sons,
Inc., 1977).

13

FEDERAL RESERVE BANK OF ST. LOUIS

APRIL 1985

APPENDIX
In 1978, the technique used to estimate official un­
employment rates in each of 40 small states and the
District of Columbia was modified. Rather than relying
solely on state estimates produced by the Handbook
Method, these estimates were adjusted by the ratio of
two moving averages. Specifically, for each state i,

5
2

U(t), = UHB(t),

UCPS, as follows:
UCPS, = a,UHB,,
where a, is a constant. If a, > 1, UHB, is biased down­
ward relative to UCPS,. If a, < 1, UHB is biased upward
relative to UCPS,. The official unemployment estimate
for any state, i, is

5

UCPS(t-k),

2

----------------- ,

a,UHB(t-k),

U(t), = UHB(t), - ^ 9 ----------------- or

5

2 UHB(t-k),
k= 0

2 UHB(t-k),
k= 0

where
U(t), = the official state estimate of the un­
employment rate in month t;
UHB(t), = the Handbook estimate of the un­
employment rate for the state in
month t;
UCPS, = the CPS estimate of the unemploy­
ment rate for the state in month t.
Under certain assumptions, the official unemploy­
ment estimate collapses to the CPS estimate for these
small states. Suppose for state i, UHB, is related to


14


U(t), = a,UHB(t), = UCPS(t),
The expected value of the official estimate for state i is
E(U), = a,E(UHB), = E(UCPS),
and its variance is
Var(U), = a? Var(UHB),1

'See Wonnacott and Wonnacott (1977),

pp. 127-30.

The FOMC in 1983-84: Setting
Policy in an Uncertain World
fi. II . Hafer

A

IM S

one reads through the record of the Federal
Open Market Committee (FOMC) meetings during
1983 and 1984, two issues pervade the discussions.
One is the effect of new financial innovations on the
measurement of the monetary aggregates, especially
M l. The uncertain impact of such innovations can be
viewed as the underlying reason for reducing the
weight attached to M l in favor of the broader aggre­
gates, M2 and M3. This action, taken in October 1982,
continued to hold throughout 1983 and through the
first part of 1984.

The other major issue throughout the two years was
the economic recovery. Concern focused initially on
the emerging possibility of the recovery and later on
the strength and depth of the expansion. Because of
these uncertainties, policy implementation involved
increased attention to recent economic develop­
ments. This sensitivity to economic developments was
heightened by uncertainties arising from both the di­
vergence of the relationship of M l and M2 to GNP —
the income velocity of each monetary measure — from
historical patterns and concern about the influence of
recent financial innovations on velocity. Later, uncer­
tainty persisted because the economy was expanding
more rapidly than expected and little upward move­
ment in the rate of inflation was evident. Moreover, the
size of the federal budget deficit and its presumed
interest rate effects were viewed as a menace to a
continuing economic expansion and a burden to the
setting of a non-inflationary monetary policy.

R. W. Hafer is a research officer at the Federal Reserve Bank of St.
Louis. Larry J. DiMariano provided research assistance.



The purpose of this article is to provide a chronolog­
ical examination of the Federal Open Market Commit­
tee’s (hereafter “Committee’s”) policy decisions dur­
ing the 1983-84 period .1 In doing so, we shall attempt
to summarize the numerous factors influencing the
setting of its long- and short-run monetary policy
objectives.

LONG-RUN POLICY OBJECTIVES
Under the requirements set forth in the Full Em­
ployment and Balanced Growth Act of 1978, also
known as the Humphrey-Hawkins Act, the Committee
must transmit to Congress reports on its objectives for
annual monetary and credit growth targets. These re­
ports are submitted twice a year, in February and
again in July. The February report discusses the Com­
mittee’s annual growth rate targets for the current
calendar year, typically expressed as a growth rate
range from the fourth quarter of the previous year to
the fourth quarter of the current year .2 At the July

NOTE: Citations referred to as "Record" are to the "Record of
Policy Actions of the Federal Open Market Committee" found in
various issues of the Federal Reserve Bulletin. Citations referred to as
“Report” are to the "Monetary Policy Report to the Congress," also
found in various issues of the Bulletin.
'For a description of the FOMC’s membership during 1983-84, see
the insert on p. 16 of this issue.
2The use of fourth-quarter-to-fourth-quarter target ranges reduces
the problem of base drift. Before the use of these set annual targets,
the Committee would establish an annual money growth target each
quarter. Thus, the base of the new annual target would "drift” during
the calendar year depending on whether actual money growth in
any one quarter was above or below the existing target range. It
should be noted, however, that the current procedure does not
eliminate base drift from one calendar year to the next.
15

Organization of the Committee in 1983-84
The Federal Open Market Committee (FOMC) consists
of 12 members: the seven members of the Federal Re­
serve Board of Governors and five of the 12 Federal Re­
serve Bank presidents. The Chairman of the Board of
Governors is, by tradition, also chairman of the Commit­
tee. The president of the N ew York Federal Reserve Bank
is, also by tradition, its vice chairman. All Federal Reserve
Bank presidents attend Committee meetings and
present their views, but only those presidents who are
members of the Committee may vote. Four memberships
rotate among Bank presidents and are held for one-year
terms beginning March 1 of each year. The president of
the New York Federal Reserve Bank is a permanent vot­
ing member of the Committee.
Members of the Board of Governors at the beginning of
1983 included Chairman Paul A. Volcker, Preston Martin,
Heniy C. Wallich, J. Charles Partee, Nancy H. Teeters,
Emmett J. Rice and Lyle E. Gramley. Governor Teeters’
term expired on January 31,1984, and, in July 1984, she
was replaced by Martha R. Seger. The following presi­
dents served on the Committee during January and Feb­
ruary 1983: Anthony M. Solomon (New York), John J.
Balles (San Francisco), Robert P. Black (Richmond), W il­
liam F. Ford (Atlanta) and Karen N. Horn (Cleveland). The
Committee membership changed in March 1983 and the
four rotating positions were filled by: Roger Guffey (Kan­
sas City), Silas Keehn (Chicago), Frank E. Morris (Boston),
and Theodore H. Roberts (St. Louis ).1 The Committee
membership changed again in March 1984 and the four
rotating positions were filled by: Edward G. Boehne (Phil­
adelphia), Robert H. Boykin (Dallas), Karen N. Horn
(Cleveland), and E. Gerald Corrigan (Minneapolis).
The Committee met eight times at regularly scheduled
meetings during 1983 and during 1984 to discuss, among
other things, economic trends and to decide upon the
future course of open market operations .2 As in previous
years, however, telephone or telegram consultations
were held occasionally between scheduled meetings.
During each regularly scheduled meeting, a directive
was issued to the Federal Reserve Bank of New York.
Each directive contained a short review of economic
developments, the general economic goals sought by the
Committee, the Committee's long-run monetary growth
objectives, and instructions to the Manager of the System
Open Market Account at the New York Bank for the
conduct of open market operations. These instructions
typically were stated in terms of the reserve conditions
deemed consistent with the short-term growth rates for
M l and M2 that were considered in turn to be consistent
with desired longer-run growth rates of the monetary
aggregates.3 The Committee also specified intermeeting
ranges for the federal funds rate. These ranges provide a
mechanism for initiating consultations between meet­
ings whenever it appears that the constraint of the fed­
eral funds rate is proving inconsistent with the objec­
tives for the behavior of the monetary aggregates.
The Account Manager has the major responsibility for
formulating plans regarding the timing, types and
amount of daily buying and selling of securities in fulfill­
ing the Committee’s directive. Each morning the Man­




ager and his staff plan the open market operations for
that day. This plan is developed on the basis of the
Committee’s directive and the latest developments af­
fecting money and credit market conditions, growth of
the monetary aggregates and bank reserve conditions.
The Manager also consults with staff at the Board of
Governors. Present market conditions and open market
operations that the Manager proposes to execute each
day are discussed that morning in a telephone confer­
ence call involving staff at the N ew York Bank, the Board
and one voting president. Other members of the Com­
mittee are informed of the daily plan by internal memo
or wire.
The directives issued by the Committee and a sum­
mary of the reasons for the Committee actions are pub­
lished in the "Record of Policy Actions of the Federal
Open Market Committee." The "Record" for each meeting
is released a few days after the following Committee
meeting. Soon after its release, it appears in the Federal
Reserve Bulletin. In addition, "Records" for the entire
year are published in the annual report of the Board of
Governors. The "Record" for each meeting during 1983
and 1984 included:

1 ) a staff summary of recent economic developments
— such as changes in prices, employment, indus­
trial production and components of the national
income accounts — and projections of general
price, output and employment developments for
the year ahead;

2 ) a summary of recent international financial devel­
opments and the U.S. foreign trade balance;
3) a summary of open market operations, growth of
the monetary aggregates and bank reserves, and
money market conditions since the previous
meeting;
4) a summary of the Committee’s discussion of cur­
rent and prospective economic and financial con­
ditions and the current policy considerations, in­
c lu d in g m oney m arket co n d itio n s a n d the
movement of monetary aggregates;
5) decisions of the Committee;

6 ) a policy directive issued by the Committee to the
Federal Reserve Bank of New York;
7) a list of the members’ votes and any dissenting
comments; and

8 ) a description of any actions regarding the Commit­
tee’s other authorizations and directives and any
actions or consultations that may have occurred
between the regularly scheduled meetings.

'Theodore H. Roberts took office as president of the St. Louis
Bank on February 1,1983, replacing Lawrence K. Roos.
2No formal meetings were held in January, April, June and Sep­
tember 1983. In 1984, no formal meetings were held in February,
April, June and September.
3During 1983 and the first half of 1984, short-run objectives for M1
were stated in terms of a monitoring range. During this period,
short-run objectives were set for M2 and M3. Also, a monitoring
range was established for total debt of the domestic nonfinancial
sector.

FEDERAL RESERVE BANK OF ST. LOUIS

APRIL 1985

meeting and in its midyear report to Congress, the
Committee reviews its progress toward achieving
these goals. At this meeting it also establishes tentative
growth rate ranges for the following calendar year.

IV/1983 (see table 1). Although higher and wider than
the 1983 target growth range established at the July
1982 meeting (2.5 percent to 5.5 percent), the new
monitoring range reflected a slowing from the actual
M l growth of 8.7 percent for 1982.

LONG-RUN POLICY TARGETS IN 1983

The setting of this relatively wide range reflected
most Committee members’ concern about M l ’s future
relationship with GNP because of the introduction of
new deposit accounts. Dissenting from the majority
vote, however, Presidents Black and Horn argued that
more policy weight should be given to M l. In this
regard they expressed the opinion that M l "was more
reliably related to the Committee’s ultimate economic
objectives than were the broader aggregates" and that
it was more controllable.5 In the end, however, the
majority of the Committee voted to monitor the behav­
ior of M l and evaluate its appropriate policy weight in
light of incoming evidence about the behavior of M l
velocity.

February 1983: The Impact o f
Financial Innovation
In establishing the 1983 growth rate ranges at its
February 1983 meeting, the Committee faced a situa­
tion in which the money-income relationship during
1982 had deviated substantially from historical norms.
Moreover, there was concern about the possibility that
these relationships would continue to change during
1983.
The cause of this concern was the significant de­
cline in the income velocity of both M l and M2 in 1982.
For example, from the fourth quarter of 1981 to the
fourth quarter of 1982, M l velocity fell at a 5.6 percent
rate and M2 velocity declined at a 6.2 percent rate. In
both instances, this prolonged decline in velocity was
unprecedented since the 1950s.3
Concern about the unpredictability of velocity was
related to a number of institutional developments that
transpired in 1982. These developments were the large
volume of maturing all-savers certificates beginning in
October, the introduction on December 14 of money
market deposit accounts (MMDAs) and the availability
of Super NOW accounts beginning January 5,1983. It
was believed that these new accounts would blur the
historical distinction between M l and non-M l bal­
ances, that is, between balances held primarily for
transaction purposes and those held for savings. Con­
sequently, the Committee decided at its October 1982
meeting to attach less weight in making policy deci­
sions on the behavior of M l and rely more on the
behavior of M2 and M3 .4
Following this decision, the Committee set only a
tentative 1983 "monitoring” range for M l. This range
was set at 4 to 8 percent for the period from IV/1982 to

3Numerous studies have appeared recently attempting to explain the
recent behavior of velocity. Explanations for the large decline in M1
velocity include a significant reduction in inflationary expectations
(Keran (1984)), the decline in inflation and nominal interest rates
(Judd (1983)), the cyclical response of velocity to a lengthy and
severe recession (Tatom (1983)), and the effect of the introduction
of new accounts in late 1982 and early 1983, which led to sharp
increases in the growth of M1 and, therefore, temporarily distorted
the observed behavior of velocity (Hafer (1984)).
4See Thornton (1983a) for a full discussion of this decision.



In setting the 1983 growth target for M2, the Com­
mittee voted for a range of 7 to 10 percent. Breaking
from the use of a fourth-quarter-to-fourth-quarter pe­
riod, the M2 growth range for 1983 uses the FebruaryMarch average as the base period (see table 1). This
change was made because of the surge of funds in late
1982 and early 1983 into the new MMDA accounts
from sources not currently included in M2.
For example, by the end of 1982, MMDAs outstand­
ing had increased to about $87 billion and, by the end
of January 1983, to about $230 billion. It was expected,
however, that this influx of funds into MMDAs from
non-M2 assets would run its course by March. Thus,
the February-March base period was used to mini­
mize the distortions associated with banks’ aggressive
campaigns for the new MMDA accounts that occurred
since their mid-December introduction. Moreover, al­
though the 7 to 10 percent range for 1983 was higher
than the tentative 6 to 9 percent range established at
the July 1982 meeting, this growth path was judged to
represent about the same growth for the year as a
whole, once the distortions from the new accounts
were considered.
The 1983 growth range for M3 was set at 6.5 to 9.5
percent, identical to its 1982 range (see table 1). This
range reflected a reduction from M3’s actual growth in
1982, about a 10 percent rate. Moreover, the Commit­
tee generally assumed that the new deposit accounts
would have only a minor impact on the behavior of
M3.

5Record (April 1983), p. 290.
17

FEDERAL RESERVE BANK OF ST. LOUIS

APRIL 1985

Table 1
FOMC Long-Run Operating Ranges
Ranges
Date of meeting

February 8-9,1983'
July 12-13,19832

January 30-31,19843
July 16-17,1984

Target period

M1

M2

M3

IV/1982-IV/1983
February-March 1983 to
IV/1983
IV/1982-IV/1983
February-March 1983 to
IV/1983
11/1983-IV/1983
IV/1983-IV/1984
IV/1983—
IV/1984

tentative 4-8%
---

___

7-10%

6.5-9.5%

------

_

5-9%
4-8%
reaffirmed
above range

—

reaffirmed
above range
—
6-9%
reaffirmed
above range

reaffirmed
above range
—
6-9%
reaffirmed
above range

Dissents:
’Mr. Black and Mrs. Horn dissented from this action because they preferred to give more weight to M1 as a policy objective. While
recognizing the difficulties in interpreting M1 currently, they believed that over time M1 was more reliably related to the Committee’s
ultimate economic objectives than were the broader aggregates and that it constituted a better basis for setting appropriate paths for
reserve growth. They also favored reemphasizing M1 because they viewed it as a more controllable aggregate. In addition, Mr. Black
indicated that he saw a need for lower target ranges, but he wanted to reduce monetary expansion gradually to avert dislocative effects.
Mr. Ford dissented because he believed that policy should focus more firmly on implementing noninflationary growth via a smaller
number of monetary targets. He also saw an urgent need to begin gradually reducing the rate of monetary growth in light of its inflationary
potential, particularly when complemented by highly stimulative fiscal policy. He felt strongly that this combination of policies ran the risk of
triggering another short-lived recovery that might be aborted in 1984 by a private credit shortage and the return of high inflation and interest
rates.
Mr. Wallich favored somewhat lower monetary growth ranges for 1983, which in his view would be more consistent with the objectives of
fostering economic recovery while minimizing the risks of stimulating inflation.
2Mr. Morris dissented from this action because he did not believe that target ranges should be set for M1 and M2. Because of financial
innovations, these aggregates in his view are no longer predictably related to nominal GNP— an essential characteristic of an intermediate
target for monetary policy. Thus, the Committee should turn to broader financial aggregates, specifically M3, total liquid assets, and total
domestic nonfinancial debt as targets for monetary policy.
3Mr. Morris dissented from this action because he believed that regulatory changes and financial innovations had made M1, M2, and M3
unsuitable targets for monetary policy since, in his view, they were no longer predictably related to nominal GNP. Accordingly, he preferred
to focus on total domestic nonfinancial debt and total liquid assets as intermediate targets for monetary policy.

Also at this meeting the Committee agreed to estab­
lish a monitoring range for the growth of the total debt
of domestic nonfinancial sectors. The consensus was
to establish a growth range of 8.5 to 11.5 percent for the
period from fourth quarter 1982 to fourth quarter 1983.
The Committee hoped that the debt measure would
provide an alternative piece of information that it
might use in assessing developments in the targeted
monetary aggregates.6

6lbid., p. 289. The usefulness of this broad debt measure was argued
in a series of articles by Benjamin Friedman (1981, 1982, 1983).
Further support for this debt measure was presented in Kopcke
(1983) and Morris (1982, 1983). Other studies have demonstrated
that the relationship between the behavior of debt and economic
activity makes debt a dubious candidate for an intermediate target.
See Hafer (1984,1985), Porter and Offenbacher (1983) and David­
son and Hafer (1983).

18


July 1983: Rebasing the M l
Monitoring Range
As shown in table 1, the Committee reaffirmed its 7
to 10 percent growth range for M2 (using a FebruaiyMarch 1983 base period) and its 6.5 to 9.5 percent
range for M3 at its midyear review. For 1984, the tenta­
tive ranges for M2 and M3 were reduced 0.5 percent­
age points. Thus, measured from IV/1983 to IV/1984,
the tentative growth range for M2 was set at 6.5 to 9.5
percent and at 6 to 9 percent for M3. In setting these
ranges, it was argued that the distortions caused by
the shifting of non-M2 funds into MMDAs earlier in the
year had ceased to be significant. Also, the Committee
reaffirmed the 1983 range for total debt and estab­
lished a tentative 1984 growth range one-half percent­
age point lower at 8 to 11 percent.

FEDERAL RESERVE BANK OF ST. LOUIS

APRIL 1985

would clarify to the public the fact that the expansive
growth of M l during late 1982 and early 1983 was a
function of special financial innovations and not a
policy decision. Thus, by rebasing to II/1983, the Com­
mittee wished to emphasize the point that it expected
and desired slower M l growth .8

Table 2
Actual and Desired Money Growth
Actual
Measure

1983
1984

Target range

M1
M2
M3
M1
M2
M3

5-9%2
7-103
6.5-9.5*
4-85
6-95
6-95

Original

Revised'

5.5%
7.8
9.2
5.0
7.5
10.0

7.2%
8.3
9.7
5.2
7.7
10.5

'The data for 1983 represent revisions as of February 1984.
These revisions include adjustments for benchmark changes and
alterations in seasonal factors. Also, M3 was changed in 1984 to
include term Eurodollars held by U.S. residents in Canada and
the United Kingdom and at foreign branches of U.S. banks
elsewhere. The revised data for 1984 are based on data available
in February 1985.
2Target period is 11/1983 to IV/1983.
3Target period is February-March 1983 to IV/1983.
‘Target period is IV/1982-IV/1983.
Target period is IV/1983-IV/1984.

The M l data available for the first half of 1983 sug­
gested that the declines in M l velocity observed dur­
ing 1982 and early 1983 were abating. To some extent,
the Committee recognized that factors influencing M l
velocity (and, therefore, M l demand) during the pre­
ceding year probably were beginning to wane:
As the upward impact on M l demand of earlier inter­
est rate declines has faded and a sizable buildup in
liquid balances has taken place, it seems probable that
some pickup in the velocity of M l will develop over the
quarters ahead, in closer conformance with cyclical
and secular patterns of earlier years .7

Though it appeared that the relationship between
M l and GNP was returning to its historical norm, un­
certainty remained about the changing nature of the
M l measure. That is, to the extent that M l reflected
both transaction demands and the “savings propensi­
ties of the public,” the behavior of the current measure
of M l relative to economic activity remained unclear.
In light of these doubts, two actions were taken:
First, the Committee agreed to retain the current
weighting structure of the monetary aggregates in the
formation of policy. Second, it decided to rebase the
1983 M l growth range from IV/1982 to 11/1983. The
Committee agreed that rebasing M l growth ranges

7Report (August 1983), p. 582.



With the base period set at II/1983, the Committee
established a 5 to 9 percent growth monitoring range
for M l ending in IV/1983. Moreover, it also decided to
establish a tentative monitoring range of 4 to 8 percent
growth for the period from IV/1983 to IV/1984.

Actual Money Growth in 1983
Table 2 reports both the target ranges and actual
growth rates for M l, M2 and M3 in 1983. The actual
growth rates reported use the original data and data
that reflect the 1984 benchmark and seasonal adjust­
ment revisions. Also, the M3 revision captures some
changes in its definition.”
The data reported in table 2 indicate that the actual
growth of M l and M2 during 1983 were within the
targeted growth ranges set by the Committee. M3’s
original growth rate of 9.2 percent was at the upper
bound of the range established for the year. Revisions
and the definitional change increased its growth
slightly, pushing the actual growth rate to 9.7 percent,
just above the 9.5 percent targeted upper bound for
the year.

LONG-RUN POLICY TARGETS IN 1984
January 1984: The Recovery Continues
At its January 30—
31, 1984, meeting, the Committee
reviewed the tentative growth ranges (established in
July 1983) for the monetary aggregates. Although the
economic record of 1983 indicated that a substantial
recovery from the 1981-82 recession was under way,
concerns over the sustainability of the current expan­
sion and the breadth of the economic advance into
0
1984 remained .1

8Frank Morris, president of the Federal Reserve Bank of Boston,
dissented from this action on the grounds that both M1 and M2 were
unreliable measures to be used as intermediate targets for policy.
Instead, he argued for increased emphasis on M3, L and total
nonfinancial debt in policy discussions.
9See Appendix B to Report (February 1984).
'“Staff projections presented at this meeting indicated that real GNP
growth in 1984 would be moderate. Also, the central tendency of
Committee members’ forecasts for real GNP in 1984, measured on
a IV/1983 to IV/1984 basis, was 4 to 4.75 percent, reflecting some
slowing from the actual 6 percent growth rate in 1983.
19

FEDERAL RESERVE BANK OF ST. LOUIS
With the possible impact of unprecedented federal
budget deficits, the rising foreign value of the dollar
and a growing imbalance between our exports and
imports viewed as threats to the current expansion,
Committee members argued at this meeting that the
monetary growth ranges set for 1984 should promote a
long-lasting expansion along with a continuing con­
trol of inflation. As shown in table 1, the ranges estab­
lished for the period from IV/1983 to IV/1984 were as
follows: a 4 to 8 percent growth range for M l; 6 to 9
percent for M2; 6 to 9 percent for M3; and 8 to 11
percent for total domestic nonfinancial debt."
At this meeting there also was some discussion
about the relative weight to be given to M l in imple­
menting policy. The growth of M l velocity had begun
to return to “normal,” expanding at a 5.4 percent rate
in IV/1983. Given M l ’s recent behavior, “one member
urged placing primaiy emphasis on M l ” and “a num­
ber of other members supported giving M l greater
weight, if not primary emphasis, in light of what they
viewed as the emergence of a more predictable pat­
tern in its velocity.”1
2
Other members viewed M l ’s future behavior in rela­
tion to GNP as uncertain due to the increased propor­
tion of M l accounted for by interest-bearing NOW and
Super NOW deposits. Because of the perceived dif­
ficulties in predicting the public’s reaction to changes
in the economic environment — especially the inter­
est elasticity of these new accounts — the policy use­
fulness of M l remained questionable. Thus, it was
agreed “for the time being” that “substantial weight”
would continue to be placed on the behavior of M2
and M3, relative to M l and total domestic nonfinancial
debt, in implementing policy.

July 1984: Re-emphasiz,ing M l
During the first half of 1984, the M l and M2 aggre­
gates behaved in a manner consistent with the Com­
mittee’s Objectives established at its January meeting.
Although some concern remained about the measure­
ment of the public’s demand for M l, the ranges estab­
lished previously for 1984 were reaffirmed (see table 1).
Although M3 and total debt increased at rates above
their target ranges during early 1984, the Committee
voted to retain their current 1984 growth ranges. The
Committee indicated, however, that, given develop­
ments in the first half of the year, M3 and total debt
might increase at rates somewhat above the limits of
their 1984 ranges.

"Record (April 1984), p. 339.
12lbid., p. 338.

20


APRIL 1985
The Committee discussed tentative ranges for 1985
at this meeting and, for M3 and total debt, the 1984
growth ranges were reaffirmed. For M l and M2, how­
ever, the tentative 1985 ranges were set at rates below
those for 1984: the tentative range for M2 was set at 6 to
8.5 percent and, for M l, a range of 4 to 7 percent was
agreed upon.
An important decision in this midyear review was
establishing a primary target range for M l rather than
a monitoring range. Incoming evidence suggested that
M l velocity was returning to a pattern consistent with
previous cycles. For instance, from 1/1983 to 11/1984,
M l velocity increased at a 3.3 percent rate and, during
the first half of 1984, M l velocity advanced at a 5.6
percent rate. Thus, with the evidence suggesting that
the M l-GNP relationship had returned to a more “nor­
mal” pattern, it was agreed that M l once again would
be used as an important tool in the implementation of
monetary policy.

Actual Money Growth in 1984
The growth of M l during 1984, as in 1983, was
within the Committee’s long-run target range. As
shown in table 2, M l growth was near the lower end of
the Committee’s 4— percent IV/1983-IV/1984 target
8
range. The growth rate for M2 in 1984 fell in the center
of the Committee’s annual target: for the period from
IV/1983 to IV/1984, M2 increased at a 7.7 percent rate.
In contrast to M l and M2 growth, the growth of M3
exceeded its target growth. The IV/1983 to IV/1984
growth rate for M3 — 10.5 percent — was 1.5 percent­
age points greater than the upper bound of the Com­
mittee’s desired 6 to 9 percent target growth range.

Summary
Two themes clearly are evident in the long-run pol­
icy decisions of the Federal Open Market Committee.
One, the financial innovations of late 1982 and early
1983 influenced the Committee’s willingness to estab­
lish growth ranges for M l and, to some extent, M2. The
rebasing of each measure’s growth targets attests to
the fact that the effects of the innovations were viewed
as temporary distortions.
While the perception that M2 was temporarily dis­
torted can be found in Committee discussions, the
majority opinion was that M l would not prove as
dependable an intermediate target as M2. Stemming
from the fact that savings-type deposits had recently
become a larger proportion of M l, the Committee con­
tinued only to “monitor” its behavior until July 1984.
As more data became available through 1984, however,
the recognition that M l ’s behavior was returning to a

APRIL 1985

FEDERAL RESERVE BANK OF ST. LOUIS
more normal relationship with GNP induced the Com­
mittee to assign M l a formal target range.
The Committee’s setting of long-run growth objec­
tives in 1983 and 1984 secondly reveals its concern
over the durability and strength of the recoveiy. This
concern does not seem to have stemmed from mone­
tary policy effects as much as non-monetary factors,
which some viewed as a threat to the expansion. Thus,
the long-run objectives aimed at promoting the recov­
ery and, at the same time, restraining the probable
inflationary impacts of rapid money growth.

SHORT-RUN POLICY OBJECTIVES
To examine more closely the impact of the changing
financial environment and the conflicting information
from the real economy, the following discussion
presents an outline of the Committee ’s short-run deci­
sions during 1983-84.1
3

First Quarter 1983
The uncertainties stemming from the effect of the
newly introduced MMDA and Super NOW deposits on
the monetary aggregates is revealed in the fact that no
short-term ranges were established at the February
1983 meeting (see table 3). At the March 28-29 meeting,
the data indicated that, although M2 had increased at
an exceptional pace in February due to a continuing
influx of non-M2 funds into MMDA accounts, the flow
had decreased sharply in March. M l also had ex­
panded sharply since January. Because the policy im­
portance of M l had been lessened since the October
1982 meeting, however, the Committee focused on the
behavior of the broader aggregates.
In light of the monetary data, the Committee agreed
that it would establish an environment consistent
with a slowing in M2 and M3 growth during the
March-June period to rates of about 9 and 8 percent,
respectively. Consistent with this was a growth range
of about 6 to 7 percent for M l, although the growth of
M l was only monitored. It was noted, however, that
should predicted behavior of the monetary measures
or economic conditions change appreciably, policy
prescriptions may be altered during the intermeeting
period.

reviewed at the May 24 meeting showed real GNP
rising at about a 2.5 percent rate during 1/1983. More
timely data indicated a strengthening in the economy:
industrial production increased 2.1 percent in April —
the largest one-month rise since 1975 — and unem­
ployment showed some downward movement. The
pace of inflation also continued to be moderate.
The monetary data for the period since the March
meeting supported the Committee’s expectation that
M2 growth would subside once the flow of funds into
the MMDA accounts slowed. Indeed, M2 increased at
only a 3 percent rate in April after growing at an 11
percent rate in March. Preliminary data for May, how­
ever, suggested that M2 growth had picked up again,
indicating that over the March-June period it might
run only slightly below the 9 percent target rate estab­
lished in March. As shown in table 5, the actual growth
rate of M2 during this period was 9 percent.
Although the policy importance of M l had been
reduced, its above-target growth during the first quar­
ter of 1983 concerned some members of the Commit­
tee. That concern, together with continued signs of an
expanding economy, were factors in the decision to
follow a course of slightly reducing reserve availability
over the near term, even though M2 appeared to be
running only slightly below the 9 percent target
growth rate:
Other Committee members ... felt that at least limited
tightening of reserve conditions was desirable in light
of the very rapid growth in M l against the background
of accumulating evidence that the economic recoveiy
was accelerating.1
4

Although several members dissented, this policy
was reaffirmed in a telephone conference on June 23.
The evidence of a continued strengthening in eco­
nomic activity was mounting, and the growth of M l
remained relatively rapid. Consistent with these de­
velopments, it was agreed that the appropriate action
would be a modest increase in reserve restraint, even
though the growth rates of M2 and M3 remained near
their short-term targets.

Third Quarter 1983

As the year progressed, the growth of real GNP came
in faster than had been forecasted. Preliminary data

As shown in table 3, the Committee at its July 12-13
meeting established target growth rates for M2 and M3
at about 8.5 percent and about 8 percent, respectively,
for the period from June to September. The M l moni­
toring rate for this period was set at around 7 percent.
At this meeting and again in August when the June-

13Synopses of the individual meetings are presented in the supple­
ment to this paper.

14Record (August 1983), p. 629.

Second Quarter 1983




21

FEDERAL RESERVE BANK OF ST. LOUIS

APRIL 1985

Table 3
FOMC Short-Run Operating Specifications
Intermeeting
federal
funds range

Periods for monetary
growth path

February 8-9,1983’
March 28-29,1983
May 24,19832
July 12-13,19833
August 23,1983
October 4,1983
November 14-15,1983
December 19-20,19834
January 30-31,1984
March 26-27,19845
May 21-22,1984s
July 16-17,19847
August 21,1984®

6-10%
6-10
6-10
6-10
6-10
6-10
6-10
6-10
6-10
7.5-11.5
7.5-11.5
8-12
8-12

Not specified
March-June 1983
March-June
June-September
June-September
September-December
September-December
November 1983-March 1984
December 1983-March 1984
March-June 1984
March-June
June-September
June-September

October 2 ,1984s
November 7 ,198410
December 17-18,1984”

8-12
7-11
6-10

Date of meeting

none
6-7%
well-above 6-7
around 7
around 7
around 7
around 5-6
around 6
about 7
around 6.5
around 6.5
around 5.5
around 5 or
slightly less
September-December
around 6
September-December
around 3
November 1984-March 1985 around 7

September growth targets established in July re­
mained unchanged, the course and prospects of the
economic recovery were discussed at length. The
Commerce Department’s preliminary estimate of a 6.5
percent growth in real GNP during the second quarter
was revised substantially upward to about 9.3 percent.
Moreover, incoming data suggested that the economy
was continuing to expand quite rapidly in the third
quarter.1
5
Some Committee members expressed their concern
during these mid-1983 meetings that the economy
might “overheat.” Two factors stand out in this re­
spect: first, the possible impacts of recently rising in­
terest rates on interest-sensitive sectors of the econ­
omy, such as housing; second, the growing belief that
large federal deficits and their effects on domestic
interest rates could, if left unchecked, “intensify credit
market pressures and divert financial and real re­
sources from needed private investment in plant and
equipment and housing .” 1 As Chairman Volcker
6
stated, “Left unattended [the budget deficit] remains

"For example, the index of industrial production increased 1.8 per­
cent in July; non-farm payroll employment increased in July; produc­
tion of business equipment continued its early 1983 growth; and
inflation, measured by both the producer price and the consumer
price indexes, continued to be moderate.
’'Record (October 1983), p. 789.

22


Expected growth
M1

M2

M3

none
about 9%
slightly below 9
about 8.5
around 8
around 8.5
around 8.5
around 8
around 8
around 8
around 8
around 7.5

none
about 8%
slightly below 8
about 8
around 8
around 8.5
around 8.5
around 8
around 8
around 8.5
about 10
around 9

around 7.5
around 7.5
around 7.5
around 9

around 9
around 9
around 9
around 9

the most single important hazard to the sustained and
balanced recovery we want .”1
7

Fourth Quarter 1983
The notion that the budget deficit would adversely
affect the economic recovery through its effect on in­
terest rates was stated often during the final meetings
of 1983. For example, at the meeting held on December
19-20, the retarding effects of deficit-induced high in­
terest rates again were discussed:
Some emphasized the vulnerability of the economy to
a substantial rise in interest rates, should one occur,
from levels that were already high in real terms. In this
connection, members referred to the desirability of
prompt action to reduce the federal deficit, whose size,
both current and prospective, was a major factor main­
taining upward pressure on interest rates.1
'

The continued rapid expansion of the economy also
brought forth concerns about future inflation. Al­
though some Committee members thought that the
available evidence from commodity and other price
measures did not indicate an acceleration of inflation,
others were less optimistic. The factors cited as har­
bingers of rising prices included underlying wage
pressures, a projected decline in productivity and the

"Volcker (1983), p. 603.
’“Record (February 1984), p. 117.

Table 3 (continued)

Footnotes — Dissents to FOMC Actions

’Mr. Ford dissented from this action because he believed that policy should be directed more firmly toward gradually reducing monetary
growth in the period immediately ahead. He was concerned that continued monetary expansion at recent rapid rates would restimulate
inflation and threaten the sustainability of the economic recovery, especially against the backdrop of a very expansionary fiscal policy.
2Messrs. Solomon, Guffey, Morris, Rice, and Mrs. Teeters dissented from this action because they wanted open market operations to
continue being directed toward maintaining approximately the degree of reserve restraint approved at the previous meeting. In the view of
these members, a firming of reserve conditions was not warranted by the performance of the monetary aggregates or by the current
economic situation. M2 and M3 were expanding more slowly in the second quarter than the Committee had anticipated at its previous
meeting and for the year to date these broader aggregates, along with total domestic nonfinancial credit, were growing at rates that were
within the Committee’s 1983 ranges. M1 had been expanding at a pace markedly in excess of the Committee’s expectations in recent
weeks and for the year to date, but this aggregate was not viewed as a sufficiently reliable guide for policy, at least for the present, since its
performance was substantially distorted by various developments and it was not predictably related to nominal GNP.
Under current economic and financial circumstances, the implementation of firmer reserve conditions would also incur an undue risk of
an exaggerated reaction in domestic and international financial markets. Substantially higher domestic interest rates would have
damaging consequences for interest-sensitive industries and could limit the recovery in economic activity. These members agreed that
current interest rate levels appeared to be more consistent with continuing economic expansion in the months immediately ahead, but
Mrs. Teeters believed that lower interest rates might well be needed later to sustain the recovery.
These members also referred to the potentially disruptive international impact of rising U.S. interest rates. Messrs. Solomon, Guffey,
and Morris in particular believed that the already strong dollar in foreign exchange markets, the tenuous situation of some of the
developing countries, the still fragile economic recovery in other industrial countries, and the continuing weak outlook for U.S. exports
counseled against an increase in reserve restraint.
3Mrs. Teeters dissented from this action because she preferred to direct open market operations toward maintaining the existing degree of
reserve restraint. In her view the additional upward pressure on interest rates from further restraint on reserve positions was unnecessary
and would retard activity in interest-sensitive sectors of the economy and threaten the sustainability of the recovery.
Mr. Wallich dissented from this action because he favored a directive calling for somewhat greater reserve restraint. In his judgment,
such a policy course would contribute to better control of the monetary aggregates and, given the strong momentum of the economy,
would be more likely to prove consistent with the Committee's longer-run objectives of fostering sustained economic recovery while
curbing inflation.
4Mr. Martin dissented from this action because of his concern that any tightening of reserve conditions and the associated increase in
interest rates would present a threat to the sustainability of the economic expansion: needed business investment would be more
expensive, international debt servicing more burdensome, and interest-sensitive housing more vulnerable.
5Messrs. Gramley and Wallich dissented from this action because they preferred a directive calling for a somewhat greater degree of
reserve restraint and slightly lower objectives for monetary growth in the second quarter. In their view the strength of the economic
expansion warranted more restraint now in order to help avert more serious inflation and financial pressures later.
Mr. Martin dissented because he was concerned that implementation of the Committee’s policy was likely to lead to more restraint than
would be desirable in light of the vulnerability of key sectors of the economy to rising interest rates. Thrift institutions, housing, agriculture,
and also problems associated with less developed country debt were examples that he cited. In his view, slightly higher objectives for
monetary growth needed to be established for the second quarter.
6Mr. Boykin dissented because he believed a directive calling for somewhat greater reserve restraint and marginally lower monetary
growth would improve the prospects for curbing inflation and achieving sustainable expansion without incurring a material risk of
unsettling financial markets.
7Mr. Martin dissented from this action because he wanted to give more weight to the possible need for some easing of reserve conditions in
light of the vulnerability of key sectors of the economy and of financial markets to high interest rates. He also believed that somewhat
higher objectives for monetary growth should be established for the third quarter.
8Mr. Wallich dissented from this action because he preferred a directive calling for a somewhat greater degree of reserve restraint and
marginally lower monetary growth in the third quarter. In his view such a directive was more likely to help avert more serious inflation and
financial pressures later.
9Messrs. Martin, Rice, and Ms. Seger dissented from this action because they preferred a directive calling for a somewhat lesser degree of
reserve restraint and marginally faster monetary growth in the fourth quarter. In their view some additional easing of reserve positions
would be appropriate given the reduction in monetary growth over the third quarter and indications of further slowing in the rate of
economic expansion. Somewhat lesser restraint would not incur a significant risk of stimulating inflation and would also be desirable in
light of current conditions in domestic and international financial markets. Mr. Martin in particular expressed concern about strains now
being experienced by some financial institutions.
,0Mr. Gramley dissented from this action because he preferred a directive that called for maintaining approximately the existing degree of
reserve restraint. Despite the pause in the current expansion, underlying forces in the economy, together with the decline in interest rates
that had already occurred, were likely to produce a resumption of economic expansion in the reasonably near future. In those
circumstances, he was concerned that further easing of reserve positions might lead to a significant decline in interest rates that would
subsequently have to be reversed as economic activity and money growth picked up again.
"Mr. Solomon dissented from this action because, although he thought some further easing would be appropriate over the coming period,
he believed such action should be relatively gradual. In particular, he was concerned that the provision of reserves sought by the
Committee risked an excessive decline in short-term rates and an overreaction in the financial markets. He therefore preferred a more
cautious probing towards easier reserve conditions.
Mr. Gramley dissented because he could not accept a directive that called for further easing of reserve conditions. In his view the
underlying strength of the economy together pvith the ongoing effects of earlier declines in interest rates provided the basis for a likely
rebound in economic growth during 1985. He also believed that the Committee needed to take greater account of the broader monetary
aggregates whose expansion appeared to be exceeding the Committee’s expectations by a substantial margin in the fourth quarter.
Under current circumstances he was concerned that significant further easing of reserve conditions would foster additional declines in

interest rates that would have to be reversed later as economic growth picked up again.


{FEDERAL RESERVE BANK OF ST. LOUIS

APRIL 1985

Table 4
Comparison of Actual and Desired Money Growth: M1
Period

March-June 1983
June-September
September-December3
November 1983-March 1984
December 1983-March 1984
March-vJune
June-September4
September-December

Desired
growth rate

6-7%
around 7
around 7
around 6
about 7
around 6.5
around 5.5
around 6

Actual’

Error2

12.1%
4.5
3.1
7.2
7.8
8.5
2.1
4.0

5.6%
-2 .5
-3 .9
1.2
0.8
2.0
-3.4
-2.0

’Actual based on first announced monthly data.
2Error is actual less desired. Where desired growth rate is a range, the midpoint is used.
3The September-December desired growth rate was revised to around 5-6 percent at the November
1983 meeting.
4The June-September desired growth rate was revised to around 5 percent at the August 1984 meeting.
possible fall in the foreign exchange value of the dollar.
These concerns are reflected, to a varying degree, in
the Committee’s directives during these final meet­
ings of 1983. At the October 4 meeting, M2 appeared to
be increasing at a rate well below the desired JuneSeptember pace of 8 percent. As shown in table 5,
actual M2 growth for the June-September period was
about 6 percent. Although it continued only to be
monitored, M l increased at about a 3 percent rate in
August and continued its slow growth into September.
In fact, actual M l growth was 2.5 percentage points
below the Committee’s desired June-September
growth rate of around 7 percent (see table 4).
In contrast to this sluggish end-of-summer growth,
the data reviewed at the November and December
meetings showed that M2 was increasing at a pace
near the 8.5 percent growth rate established for the
September-December period (see table 3). The growth
of M l, however, was slow in October, increasing at
only about a 1.5 percent rate. This slow growth contin­
ued through November, then showed a substantial
increase in early December. As shown in table 4, M l
increased at a 3.1 percent rate from September to De­
cember, well below the Committee’s monitoring rate
of around 7 percent. Thus, although M l appeared to
be increasing at a slow pace, the strength of the recov­
ery and the renewed growth in the M2 and M3 mea­
sures cautioned against an easing policy stance dur­
ing the final months of 1983.

First Quarter 1984
The economic data reviewed at the meeting held on

24


January 30-31,1984, suggested that the expansion was
slowing. Staff forecasts also suggested that real GNP
would grow moderately in 1984. At the same time,
most Committee members felt that there would be
increased upward pressure on prices in 1984, due to
increased cost pressures as the economy experienced
a rise in its capacity utilization, decreased unemploy­
ment and the possibility of "special circumstances,”
such as an adverse harvest or a substantial decline in
the exchange value of the dollar. With M2 and M3
increasing at moderate rates during December and
January, and M l growth accelerating in January
(based on unrevised data), the Committee agreed to a
policy action consistent with a growth rate of M2 and
M3 of about 8 percent and an M l growth rate of about
7 percent for the period from December 1983 to March
1984,1
9

,9Revised money growth data for 1983 became available after the
January meeting. These revisions, based on changes in the 1983
seasonal factors and benchmark adjustments, had significant ef­
fects on the growth of the monetary aggregates, especially in the
short run. For example, based on original data, M1 increased at
rates of 1.9 percent, 0.9 percent and 6.5 percent in October, Novem­
ber and December 1983, respectively. The revisions suggested a
much stronger advance: October’s growth rate was revised upward
to a 6.2 percent rate, November was increased to a 3.2 percent rate
and the December figure was revised downward to a 5.3 percent
rate. Thus, the growth of M1 in IV/1983 jumped from a 2.1 percent
rate to a revised rate of 4.8 percent rate.
The revisions to M2 and M3 data also increased their growth rates
for IV/1983. On average, M2’s growth rate for October, November
and December was increased 1.8 percentage points. Revised M3
growth in November and December was 14.1 percent and 8.8 per­
cent, respectively, representing a 2.2 percentage-point increase in
the growth rate for each month over the preliminary data.

APRIL 1985

FEDERAL RESERVE BANK OF ST. LOUIS

Record of Telephone Meetings of the FOMC
June 23, 1983

March 20, 1984

On June 23 the Committee held a telephone conference
to review recent developments in the domestic and in­
ternational economy and financial markets since the
May 24 meeting. Evidence suggested that economic ac­
tivity was continuing to strengthen at a somewhat more
rapid pace than had generally been anticipated earlier.
Some interest rates had increased modestly in recent
weeks. Growth in monetary aggregates, particularly M l,
had been relatively rapid although growth in M2 and M3
remained close to the targets established for the quarter
as a whole.

On March 20, the Committee held a telephone confer­
ence to review monetary and economic developments
following the January 30-31 meeting, including some
increase in interest rates over the period. It was noted
that economic activity in most sectors was rising with
considerable momentum, helping to generate strong de­
mands for credit. While measures of monetary growth
have remained broadly in line with objectives for the
year, it was also felt that, in the light of current and
prospective developments, the Committee w ould need
to remain alert to the possibility of excessive growth in
credit and money. Against that background, it was the
consensus of the Committee that, in the short interval
until the next scheduled meeting, pursuit of the degree
of reserve restraint and associated reserve paths, con­
sistent with the money and credit objectives set at the
January 30-31 meeting, should not be constrained by a
federal funds rate at or above the monitoring range set at
that meeting.

Against that background, the consensus was that a mod­
est increase in reserve restraint, within the framework of
the directive adopted at the May 24 meeting and con­
sistent with recent reserve conditions, rem ained
appropriate.

Several changes in the monetary, economic and
financial environment had transpired by the March
26-27 meeting. Based on data through mid-March,
M l ’s first quarter growth rate was estimated to be
about 7.3 percent, slightly above the short-run objec­
tive set in January (see table 3). M3 also was showing
some first quarter strength, rising at an estimated 8.5
percent rate. Both of these growth rates already placed
the two aggregates near the upper boundaries of their
1984 annual objectives. In contrast, M2 appeared to be
increasing at a rate that placed it near the lower
boundary of the 6 to 9 percent annual growth rate
objective.
The data available at the March meeting suggested
that real GNP growth was accelerating during 1/1984,
in contrast with earlier projections. In actuality, real
GNP increased at a 10.1 percent rate in 1/1984, up from
the 5.9 percent growth rate for IV/1983.2 Moreover,
0
monthly data available to the Committee at the March
meeting indicated falling unemployment and moder­
ate price increases.
Market interest rates generally increased 75 to 100
basis points between the January and March meet­
ings. Concern about these rising rates is reflected by
the telephone conference held on March 20, about a

“ Based on revised data.



week before the regularly scheduled March meeting.
During that discussion, the consensus was to pursue
the prevailing degree of reserve restraint, even if the
federal funds rate was persistently above the upper
boundary of 10 percent.
In light of these data, the FOMC decided at the
March meeting to maintain enough pressure on bank
reserve positions to be consistent with March-to-June
growth rate objectives of around 6.5 percent for M l, 8
percent for M2 and 8.5 percent for M3 .2
1
An increase in credit demands during early 1984,
along with the relative restraint in money growth, ne­
cessitated an increase in the intermeeting range for
the federal funds rate to 7.5 to 11.5 percent, the first
such increase in over a year. In making this decision,
Committee members recognized that, not only was
there upward pressure on the federal funds rate, but

2,Three members dissented from this action. Governors Gramley and
Wallich dissented in favor of a directive urging more reserve re­
straint and lower objectives for money growth in the near term. Their
view was predicated on the idea that more restraint, given the
already robust recovery, would reduce the necessity of significant
restraint in the future should greater inflationary and financial market
pressures develop.
Governor Martin also dissented, based on the belief that currently
rising interest rates would adversely affect certain sectors of the
economy, such as housing, agriculture and thrift institutions.
25

FEDERAL RESERVE BANK OF ST. LOUIS

APRIL 1985

Table 5
Comparison of Actual and Desired Money Growth: M2
Desired
growth rate

Actual'

Error2

around 9.5%
about 9
about 8.5
around 8.5
around 8
around 8
around 8
around 7.5
around 7.5

23.6%
9.0
6.1
7.5
6.5
6.0
7.9
5.9
12.7

14.1%
0.0
-2 .4
-1.0
-1 .5
-2 .0
-0.1
-1 .6
5.2

Period

December 1982-March 1983
March-June
June-September3
September-December
November 1983-March 1984
December 1983-March 1984
March-June
June-September
September-December

'Actual based on first announced monthly data.
2Error is actual less desired.
3The June-September desired growth rate was revised to around 8 percent at the August 1983 meeting.
the funds rate would likely fluctuate more because of
changing market expectations and the newly intro­
duced two-week reserve period .2
2

Second Quarter 1984
During the period between the March and the May
21-22 meetings, interest rates continued to rise. In
response to these rising rates, the Federal Reserve
Board increased the discount rate from 8.5 percent to
9 percent effective April 9,1984. This increase, the first
since late 1982, came in response to larger spreads
between short-term market interest rates and the dis­
count rate. As noted in the minutes of the May 21-22
meeting,
The increases in market rates apparently reflected
continuing strong credit demands as economic activ­
ity expanded, the absence of rapid progress in reduc­
ing the federal deficit, and related concerns about fu­
ture inflationary pressures and a possible need for a
more restrictive provision of reserves.2
3

In response to the conflicting signals from the monetaiy measures, the economy and the financial mar­
kets, the Committee at its May meeting reaffirmed the
March-to-June growth rates for M l and M2 estab­
lished at the March 26-27 meeting (see table 3). The
range for M3 growth was increased to about 10 per­
cent, up from the 8.5 percent rate previously set.

Third Quarter 1984
Interest rates continued to increase through the
summer. By the July 16-17 meeting, the federal funds
rate was about 75 basis points above its level at the
May meeting. Interest rates on bank CDs also were 50
to 75 basis points higher.2 In contrast, rates on short­
4
term Treasury bills were little changed. Moreover, rel­
ative to the Committee’s desired money growth rates
for the March-June period, M l was above its range
(table 4), while M2 and M3 were about in line with
expectations for the three-month period (table 5).

Along with rising interest rates, the data available at
the May meeting indicated that the real economy con­
tinued to expand at a relatively strong pace. Moreover,
the growth of M2 and M3 in April was consistent with
the short-run objective set at the March meeting. M l,
however, showed essentially no change in its level
between March and April. Early May data, on the other
hand, suggested that M l growth was strengthening
considerably.

The Committee faced an economic horizon clouded
by a variety of signals. It consequently agreed on pol­
icy actions consistent with getting the growth of the
monetary aggregates back to the desired annual range.
To do this, the June-September growth rate objectives
for M l, M2 and M3 each were revised downward from
the March-June path (see table 3). The Committee also
favored a further increase in the intermeeting range of
the federal funds rate to 8 to 12 percent.

“ For a discussion of the effects of the contemporaneous reserve
requirements, see Thornton (1983b).
“ Record (August 1984), p. 647.

“ Although CD rates were higher, there was concern that the recent
problems with Continental Illinois may have imparted a large risk
premium in bank CDs.


26


FEDERAL RESERVE BANK OF ST. LOUIS
The rise in short-term interest rates continued
through the August 21 meeting. In response, some
Committee members noted that a "lessening in the
degree of reserve restraint would appropriately tend
to offset the unusual pressures that had developed in
the federal funds market during June and July."2
5
This lessening in reserve restraint also was noted
with regard to the recent behavior of the monetary
aggregates. M l, for example, had declined at about a 1
percent rate in July, after increasing at about a 12
percent rate in June. Early August data suggested that
M l growth had recovered somewhat and that M2
growth was increasing at a relatively slow pace. In
light of the available data and the relative uncertainty
prevailing in financial markets, a June-September M l
growth of 5 percent or slightly less, down 0.5 percent­
age points from the three-month rate established at
the preceding meeting, was agreed upon. The rates for
M2 and M3 were not changed (see table 3).

Fourth Quarter 1984
Signs of an appreciable slowing in the pace of eco­
nomic activity appeared by the October 2 meeting. The
available data indicated that real GNP was still ex­
panding, but that its rate of growth had declined sub­
stantially since the first half of 1984. Final sales growth
also was off from rates established earlier, and the rate
of inventory accumulation had picked up sharply.
Consumer spending was down during the late sum­
mer months, and housing starts fell sharply in August.
In addition, the monetary data pointed to an unex­
pected shortfall in money growth for III/1984. The
available evidence showed M l decreasing at a 1.1 per­
cent rate in July, a modest 2 percent rate of growth in
August and a moderate acceleration in September.
The broader measures, M2 and M3, also increased at
relatively sluggish rates during July and August. In
September, each measure showed some rebound in
growth .2
6
At the October 2 meeting, a policy of increased re­
serve availability, followed during the August-October
intermeeting period, was continued. As shown in
table 3, this policy was expected to be associated with
a September-December growth rate for M l of around
6 percent, up from the sluggish growth for the third

“ Record (November 1984), p. 825.
“ The growth rates of M2 for July, August and September (original
values) were 5.3 percent, 4.9 percent and 7.9 percent, respectively.
The relevant growth rates for M3 are 5.0 percent, 8.0 percent and
11.2 percent.



APRIL 1985
quarter. The growth rates for M2 and M3 also were
expected to be slightly above actual third-quarter
rates.
Although this increase of reserve availability was
expected to produce faster fourth-quarter monetary
growth, the data available at the November 7 meeting
continued to indicate that M l and M2 were running
below fourth-quarter expectations. Although data for
M l growth showed a sharp increase in September,
available October data suggested that M l growth
would be negative.2
7
The persistent sluggish growth of M l again gener­
ated opposing viewpoints among Committee mem­
bers about the reliability of M l as an intermediate
target for policy. This is revealed in the following re­
port of the discussion:
During the Committee’s discussion of policy imple­
mentation for the weeks immediately ahead, a number
of members expressed concern about the persisting
weakness in M l, especially in the context of the con­
current "pause” or “lull” in the economic expansion,
and they saw a need for some easing of reserve condi­
tions to encourage a resumption in M l growth. Other
members, while not necessarily disagreeing, nonethe­
less noted that the recent expansion of M2 had been
much closer to the Committee’s expectations and that
growth in M3 had been somewhat faster. A few mem­
bers cautioned against putting too much emphasis on
M l in light of its typically volatile behavior, the difficul­
ties of achieving accurate seasonal adjustments, and
the often unpredictable relationship of M l to aggre­
gate measures of economic performance.2
*

In setting policy for the intermeeting period, the
Committee voted for policy actions consistent with a
growth rate for M2 of around 7.5 percent and for M3 of
around 9 percent for the September-December pe­
riod. In each case, the expected growth was the same
as that indicated at the October meeting. In contrast,
M l was expected to increase at only around a 3 per­
cent rate during the fourth quarter, or about half the
monitoring growth rate set at the October meeting. In
addition, the intermeeting federal funds rate range
was dropped to 7 to 11 percent, down from the 8 to 12
percent range used since the July 16-17 meeting. This
reduction reflects the fact that interest rates fell sub­
stantially during the October-November intermeeting
period.

27The sharp increase in September’s growth rate over August (4.9
percent vs. 2.0 percent) reflects the effect of about a $7 billion
increase during the week of September 10. This increase, reflecting
the so-called Social Security effect, was temporary: during the next
few weeks, reported changes in M1 were negative. In fact, the
growth rate for October was -7.0 percent.
“ Record (February 1985), p. 95.
27

FEDERAL RESERVE BANK OF ST. LOUIS
Between the November and December meetings,
open market operations were directed toward an eas­
ing of reserve pressures in the banking system. This
policy course was taken for several reasons: “lagging
growth in the narrow money supply, generally slug­
gish expansion in the economy, subdued inflation,
and continued strength of the dollar in foreign ex­
change markets.”2
9
The desire to increase reserve availability during
this period stems partly from the observation that,
even with a strong growth of M l in November (about
8.5 percent), M l growth was low since summer and
would probably come in somewhere in the lower half
of the Committee’s 1984 range. Indeed, the discussion
of policy actions at the December meeting focuses on
the behavior of M l more so than during previous
meetings. This is clear from the fact that, even though
the policy for the intermeeting period called for easing
reserve positions, M2 and M3 had shown extremely
strong advances in November (15 percent and 16 per­
cent, respectively).
At the December meeting, some members favored
“some further easing of reserve conditions to encour­
age satisfactoiy growth in M l and to improve the pros­
pects for economic expansion in 1985."3 Also,
0
because of the currently estimated shortfall in M l
growth in the fourth quarter compared with the mem­
bers’ expectations at the beginning of the quarter, the
Committee decided that somewhat more rapid growth
of M l would be acceptable for the period ahead, par­
ticularly if the faster growth occurred in the context of
sluggish expansion in economic activity and contin­
ued strength of the dollar in foreign exchange
markets.31

Thus, in the final meetings of 1984, concern about
various factors that might slow the expansion contin­
ued to play a major role in policy discussion. Staff
forecasts anticipated a moderate expansion in 1985.
Even so, considerable attention was paid to the “po­
tential complications associated with massive and
sustained federal deficits and very large imbalances in
the nation’s foreign trade.”3
2
Because of uncertainty about the sustainability of
the expansion, the Committee established the Novem­
ber 1984-to-March 1985 short-run growth ranges for
M l and M2 at rates slightly above those for the fourth

a’lbid., p. 232.
“ Ibid., p. 234.
31Ibid., p. 235.
“ Ibid., p. 233.

28


APRIL 1985
quarter. The range for M l was set at around 7 percent;
for M2, it was set at around 9 percent. Combined with
a lowering of the intermeeting federal funds range to 6
to 10 percent, this decision reflected the consensus
that somewhat faster money growth was desirable.

CONCLUSION
The impact of financial deregulation on the mea­
surement and interpretation of the monetary aggre­
gates, along with concern about the strength of the
economic recovery, were major factors influencing the
setting of monetary policy in 1983 and 1984. The po­
tential effect of two new accounts — money market
deposit accounts in December 1983 and Super NOW
accounts in January 1984 — on the growth of M l and
M2 influenced the Committee to continue its policy of
giving little weight to M l behavior and, with regard to
M2, to alter the base period for the 1983 annual target
to a February-March average. Indeed, the uncertainly
about M l growth and the coincident behavior of its
income velocity perpetuated the Committee’s posi­
tion begun in late 1982 of basing policy primarily on
behavior of the broader aggregates throughout 1983
and the first half of 1984.
Uncertainty about the economic recovery also per­
vaded Committee discussions during the past two
years. This concern arose not only from the changing
behavior of the money-income linkage, but also from
the massive increases in the federal deficit, variable
interest rates and the sustained strength of the dollar
in foreign exchange markets. In large part, however,
these fears did not materialize in a faltering economic
expansion.
Changes in the financial and economic environ­
ment will continue to influence monetary policy­
makers’ decisions. Although changes in financial reg­
ulations influenced the use of monetary aggregates,
especially M l, during the past two years, recent evi­
dence and Committee discussions suggest that M l is
once again receiving an important place in policy. The
important policy problem confronting the Committee
once again is how to maintain a noninflationary
growth of the monetary aggregates in the context of a
dynamic economy.

REFERENCES

Axilrod, Stephen H. "Issues in Monetary Targeting and Velocity,” in
Monetary Targeting and Velocity (Federal Reserve Bank of San
Francisco, 1983).

APRIL 1985

FEDERAL RESERVE BANK OF ST. LOUIS

Davidson, Lawrence S., and R. W. Hafer. “Some Evidence on Se­
lecting an Intermediate Target for Monetary Policy,” Southern Eco­
nomic Journal (October 1983), pp. 406-21.
Friedman, Benjamin M. "The Relative Stability of Money and Credit
'Velocities' in the United States: Evidence and Some Specula­
tions," Working Paper No. 645 (National Bureau of Economic
Research, 1981).
_________“Monetary Policy with a Credit Aggregate Target,” in
Karl Brunner and Allan H. Meltzer, eds., Money, Monetary Policy,
and Financial Institutions, Carnegie-Rochester Conference Series
on Public Policy (Spring 1983a), pp. 117-48.
_________“The Roles of Money and Credit in Macroeconomic
Analysis," in James Tobin, ed., Macroeconomics, Prices, and
Quantities: Essays in Memory of Arthur M. Okun (The Brookings
Institution, 1983b), pp. 161-89.
Hafer, R. W. “The Money-GNP Link: Assessing Alternative Trans­
action Measures,” this Review (March 1984a), pp. 19-27.
_________“Money, Debt and Economic Activity,” this Review
(June/July 1984b), pp. 18-25.
_________"Choosing Between M1 and Debt as an Intermediate
Target for Monetary Policy,” in Karl Brunner and Allan Meltzer,
eds., Camegie-Rochester Conference Series on Public Policy
(Spring 1985, forthcoming).
Judd, John P. “The Recent Decline in Velocity: Instability in Money
Demand or Inflation?” Federal Reserve Bank of San Francisco
Economic Review (Spring 1983), pp. 12-19.

Keran, Michael W. "Velocity and Inflation Expectations: 19221983,” Federal Reserve Bank of San Francisco Economic Review
(Summer 1984), pp. 40-55.
Kopcke, Richard W. "Must the Ideal 'Money Stock’ be Controlla­
ble?” New England Economic Review (March/April 1983), pp.
10-23.
Morris, Frank E. “Do the Monetary Aggregates Have a Future as
Targets of Federal Reserve Policy?" New England Economic Re­
view (March/April 1982), pp. 5-14.
_________"Monetarism without Money." New England Economic
Review (March/April 1983), pp. 5-9.
Porter, Richard D., and Edward K. Offenbacher. “Empirical Com­
parisons of Credit and Monetary Aggregates Using Vector Autore­
gressive Methods,” Federal Reserve Bank of Richmond Economic
Review (November/December 1983), pp. 16-29.
Tatom, John A. “Alternative Explanations of the 1982-83 Decline in
Velocity," in Monetary Targeting and Velocity (Federal Reserve
Bank of San Francisco 1983).
Thornton, Daniel L. “The FOMC in 1982: De-emphasizing M1th is
Review (June/July 1983a), pp. 26-35.
_________“Lagged and Contemporaneous Reserve Accounting:
An Alternative View,” this Review (November 1983b), pp. 26-33.
Volcker, Paul A. “Statement before the Committee on Banking,
Finance and Urban Affairs,” Federal Reserve Bulletin (August
1983), pp. 601-09.

Supplement
FOMC Discussions in 1983 and 1984

This supplement provides the reader with a chronologi­
cal account of policy discussions for the meetings held in
1983 and 1984. These selected excerpts are taken from the
"Record of Policy Actions.” Included in each “Record" are
analyses of current economic conditions, staff projections
of future economic developments, discussions of existing
and possible policy actions and a reporting of the operating
instructions issued by the FOMC. The full text of each "Re­
cord" appears in issues of the Federal Reserve Bulletin.

Meeting Held on February 8— 1983
9,
On several occasions following the December meeting,

At this meeting it was reported that MMDAs had grown to
more than $210 billion by late January, and available evi­
dence suggested that some of the December increase in M2
and much of the surge in January was related to the associ­
ated shifts of funds out of non-M2 assets — such as market
instruments and large-denomination CDs — into MMDAs....
Growth of M l remained rapid in January, although the
increase was appreciably smaller than the average pace in
other recent months. To date, M l growth appeared to have
been little affected on balance by the introduction of
MMDAs in mid-December or of Super NOW accounts in
early January.

the Committee discussed the extraordinarily rapid growth

While the outlook for economic activity and prices was

in MMDAs that had taken place since the accounts had
become available in mid-December and the implications of
that growth for the behavior and interpretation of the mon­
etary aggregates. At the conclusion of a discussion on Janu­

generally viewed as favorable, it remained subject to consid­
erable uncertainty. Some members stressed the potential
obstacles to a sustained recovery, including the prospect of

ary 28, 1983, it was the Committee consensus to maintain
the existing degree of reserve restraint for the time being but
not to increase that restraint further in response to the
reported over-target growth of the broader monetary aggre­
gates because that growth appeared to be primarily related
to the massive redistribution of funds under way.

lation, the outlook for weak export markets, real interest




continuing large federal deficits in the absence of new legis­
rates that were still high by historical standards, and the
possibility of further disturbances in international and do­
mestic financial markets. On the other hand, a number of
members commented that once under way, the recovery
might gather momentum and prove to be markedly more

29

FEDERAL RESERVE BANK OF ST. LOUIS
vigorous than the staff had projected, with the expansion in
1983 perhaps more in line with the average experience in
the first year of previous economic recoveries.
For 1983 the Committee faced the question of whether
underlying relationships between monetaiy and ultimate
economic objectives might still be in the process of chang­
ing. Past cyclical expansions had typically been accompa­
nied by sharp increases in velocity, particularly for the nar­
rower measures of money.... Members recognized that it
could take some time before this newly emerging behavior
of Ml in relation to GNP became clear. The broader mone­
tary aggregates, too, were being affected by institutional
changes, with M2 especially influenced in 1983 by shifts
into its MMDA component from market instruments and
large-denomination CDs.
In the course of the Committee’s discussion, a consensus
emerged in favor of setting target ranges for all three mea­
sures of money but to depart from past practice in some
respects in light of the complexities and uncertainties that
were involved. Most of the Committee members agreed that
it would be desirable for the time being to place substantial
weight on the broader aggregates, M2 and M3. It was ex­
pected that, once the bulk of shifts had taken place, the
performance of those aggregates in relation to economic
activity might be somewhat more predictable than that of
Ml during the year ahead, although major uncertainties
affected all of the aggregates.
It was agreed that the behavior of M l would be monitored
and that the degree of emphasis to be placed on that aggre­
gate as the year progressed would depend on evidence
about whether the behavior of the velocity of Ml was be­
coming more predictable and beginning to show its usual
cyclical characteristics.

Meeting Held on March 28—
29, 1983
M2 grew at an estimated annual rate of about 24 percent
in February, only a little below the exceptional pace in
January, as its growth continued to be greatly affected by
shifts of funds from market instruments and other non-M2
sources into the new money market deposit accounts
(MMDAs) included in M2. M3 grew at annual rates of about
12 and 13 V2 percent in January and February respectively.
However, growth in both of the broader aggregates ap­
peared to have decelerated substantially during March.
Growth in Ml accelerated to an extraordinary annual rate
of about 22 percent in February, and, on the basis of prelimi­
nary data, was estimated to have remained rapid in Marun,
though probably slowing somewhat from the February rate.
In the Committee’s discussion of the economic situation
and outlook, the members agreed that a recovery in eco­
nomic activity appeared to be under way, although several
commented that the evidence available thus far was too
fragmentary to permit a firm evaluation of the strength of
the upturn.
Reference was also made to the retarding impact of rela­

30


APRIL 1985
tively high real interest rates, and some members expressed
the view that an appreciable rise in interest rates, if such a
rise 'were to occur, could greatly inhibit the recovery in
interest-sensitive sectors of the economy, such as housing
and automobiles, which had tended to lead the recovery
thus far.
With respect to Ml, most members felt that persistence of
its unusually sharp decline in velocity early this year cast
doubt on the aggregate as a principal guide for policy at this
time; however, a view was also expressed in favor of giving
Ml more weight in the formulation of the Committee’s
policy.

Meeting Held on May 24,1983
In the course of their discussion, Committee members
expressed differing views with regard to the appropriate
course for policy in the weeks immediately ahead. The
members were narrowly divided between those who fa­
vored some increase in reserve restraint over the next few
weeks and others who preferred to maintain the degree of
reserve restraint contemplated at the March meeting. This
divergence reflected varying assessments of the strength
and sustainability of the economic recovery; differing views
with regard to the interpretation of the monetary aggre­
gates; and different opinions concerning the risks associ­
ated with the likely impact of alternative policy courses on
domestic interest rates.
A number of members were also concerned that under
current circumstances even a modest tightening of reserve
conditions might have a disproportionate impact on senti­
ment in domestic and international financial markets and
lead to sizable increases in domestic interest rates.
Other Committee members, however, weighed the risks
associated with alternative policy courses differently. They
felt that at least limited tightening of reserve conditions was
desirable in light of the very rapid growth in Ml against the
background of accumulating evidence that the economic
recovery was accelerating.
Several members commented that slightly greater re­
straint on reserves would be desirable at this point to mini­
mize the possible need for more substantial restraint later,
reducing the interest rate impact on financial markets over
time and helping to sustain the expansion. Reference was
made to the favorable effect such a move might have on
market perceptions about monetary policy and the outlook
for containing inflation, with the consequence that pros­
pects for stable or declining interest rates in long-term debt
markets would be enhanced as the recovery proceeded.

Meeting Held on July 12—
13,1983
Growth in M2 and M3 accelerated in May and continued
relatively strong in June, with both aggregates expanding at
an estimated annual rate of about 10 percent.
Ml, which had surged to an annual rate of growth of
about 26 percent in May, expanded at a rate of around 10V2

FEDERAL RESERVE BANK OF ST. LOUIS
percent in June.
The view was expressed that the restraining impact on
private credit demands and economic activity of even cur­
rent relatively high interest rates — which seemed espe­
cially high in real terms — could well be underestimated,
and a view was expressed that a decline in interest rates
from present levels would probably be needed to prolong
the recovery during 1984.
At this meeting the Committee reviewed its target ranges
for 1983 and established tentative ranges for 1984 in light of
the basic objectives of encouraging sustained economic
recovery while fostering continued progress toward price
stability and promoting a sustainable pattern of interna­
tional transactions. In setting these ranges, the Committee
recognized that the relationships among the money and
credit aggregates and nominal GNP in the period ahead
were subject to considerable uncertainty.
Against this background, a key uncertainty confronting
the Committee was whether M l velocity in the future would
exhibit characteristics more in line with earlier postwar
experience. Recent evidence seemed to suggest that the
decline in M l velocity was ending, as might be expected as
the lagged upward effect on demand from earlier declines
in interest rates wore off and as business and consumer
attitudes became more optimistic.
In this view M l would continue to be given reduced
weight in the formulation of monetary policy and primary
emphasis would continue to be placed on the broader ag­
gregates. A few members, however, preferred to suspend
the targeting of M l at this time because they viewed its
prospective behavior as too uncertain to permit the estab­
lishment of a meaningful range.

Meeting Held on August 2,3,1983
With a little greater restraint on reserve availability rela­
tive to demands, the federal funds rate and other short-term
interest rates rose about 20 to 40 basis points on balance
over the intermeeting period. Atypically, long-term rates
rose by more than short-term rates, increasing about 80
basis points. Market participants apparently reacted to in­
dications of further strength in the economy, to concern
about possible increases in inflationary pressure later dur­
ing the economic recovery, and to the heavy borrowing by
the U.S. Treasury, particularly in connection with the midAugust financing, as well as to the slightly firmer degree of
restraint on bank reserve positions.
Members continued to express concern about the pros­
pects for large federal deficits. Although a stimulative fiscal
policy had contributed to the rebound in economic activity,
continued large deficits as the recovery proceeded would
tend to intensify credit market pressures and divert finan­
cial and real resources from needed private investment in
plant and equipment and housing. The view was expressed
that actions to reduce future deficits, if of sufficient magni­
tude, could work to ease pressures on interest rates in a
period of rising private credit demands.




APRIL 1985
Turning to policy for the near term, the Committee con­
sidered whether any further adjustment in the degree of
restraint on bank reserve conditions would be desirable
under current economic and financial circumstances, given
the behavior of the monetary and credit aggregates. The
members noted that growth in the broader aggregates, on
which the Committee had been placing primary emphasis,
had slowed substantially.... Growth in M l had moderated
somewhat further in July, but it remained above the shortrun, June-to-September path that the Committee had ex­
pected would be consistent with its third-quarter objectives
for the broader aggregates and also above its longer-run
monitoring range. Incoming data suggested, however, that
M l growth w ould probably continue to decelerate in
August.
At the conclusion of the discussion the members agreed
that no change needed to be made at this time in the degree
of pressure on bank reserves. Accordingly, a consensus was
expressed in favor of maintaining about the existing degree
of reserve restraint for the period immediately ahead.

Meeting Held on October 4, 1983
In the latter part of the summer, growth in M2 remained
at, or below, its reduced pace in July, and over the June-toSeptember period its growth was estimated to have been
well below the annual rate of around 8 percent expected by
the Committee. Growth in M3 strengthened somewhat in
late summer and in the third quarter that aggregate ex­
panded at a pace close to the expected rate. Meanwhile,
expansion in M l fell to an annual rate a little below 3
percent in August, and growth remained relatively low in
September. By September all three monetary aggregates
appeared to be within the longer-run ranges specified by
the Committee, with M2 in the lower portion of its range, M3
in the upper portion of its range, and M l somewhat above
the midpoint of its monitoring range.
In the Committee’s discussion of the economic situation,
the members were generally optimistic about the prospects
for continued recovery in economic activity and contain­
ment of inflationary pressures. They agreed that the staff
projection of moderate economic growth seemed to be the
most likely outcome for the year ahead, and in this connec­
tion some members commented that a more moderate rate
of economic growth than that experienced recently would
be more consistent over time with sustaining the expansion
and containing inflation. The view was expressed, however,
that the rate of inflation could turn out to be somewhat
higher than projected and the rate of expansion somewhat
slower . . . the members again expressed a great deal of
concern about the prospects for massive federal deficits. It
was observed that the Treasury’s large borrowing needs
were already exerting upward pressure on interest rates,
and that greater pressure could be expected if relatively
large Treasury credit demands continued and were aug­
mented by growing business demands for a substantial
amount of external funds to finance their investments.

31

FEDERAL RESERVE BANK OF ST. LOUIS

APRIL 1985

Meeting Held on November 14— 19S3
15,

tive, was a major factor maintaining upward pressure on
interest rates.

In October, both M2 and M3 grew at annual rates close to
the 8 V2 percent pace sought by the Committee for the September-to-December period: growth in M2, after slowing
substantially over the summer months, accelerated to an
estimated annual rate of about 9 percent, while growth in
M3 was at an estimated annual rate of about 8 V4 percent. On
the other hand, expansion in M l, at an annual rate of about
IV 2 percent, remained low. Through October, M2 was at a

While nearly all the members could accept a policy of
maintaining at least the existing degree of reserve restraint,
some expressed a preference for some slight firming imme­
diately in light of their assessment of the economic situa­
tion and concerns about the potential for a reemergence of
inflationary pressures. Other members preferred to make
no change in the existing degree of restraint for now, pend­
ing a further evaluation of economic developments and
monetary growth.

level in the lower portion of the Committee’s range for 1983
and M3 was in the upper portion of its range. M l was in the
lower portion o f the Committee’s monitoring range for the
second half of the year.
While all the members expected the rate of economic
growth to moderate over the year ahead, there were some
differences of view with regard to the timing and likely
extent of the slowdown. Some members anticipated that
the slowdown might be appreciably less than projected by
the staff, with unfavorable implications for inflationary
pressures and the ultimate sustainability of the expansion.
In the view of some, however, an argument could be made
in favor of a small, precautionaiy step in the direction of
firming in light of the continuing strength of the economic
expansion and the associated danger of a resurgence of
inflationary pressures during the year ahead. While ac­
knowledging the risks of inflation in a rapidly expanding
economy combined with large budget deficits and the rela­
tively rapid monetary growth earlier in the year, most mem­
bers saw sufficient uncertainties in the outlook to counsel
against any change in reserve pressures at this time. Some
members were also concerned that under the prevailing
circumstances even a modest increase in restraint on re­
serves might have a disproportionate impact on domestic
and international financial markets.
One member indicated a preference for giving increased
weight to M l in the formulation of monetaiy policy and
commented that its slow growth, should it persist, could
threaten the sustainability of the economic expansion.
Other members commented that the deceleration of M l
growth in recent months had to be evaluated against the
background of unusually rapid expansion in the latter part
of 1982 and the first half of 1983.

Meeting Held on December 19—
20,1983
In the view of some Committee members, the expansion
in economic activity during 1984 might well exceed the staff
projection, given the momentum of the recovery and a stim­
ulative fiscal policy.
Other members were somewhat less sanguine about the
prospective strength of the ongoing expansion. Some em­
phasized the vulnerability of the economy to a substantial
rise in interest rates, should one occur, from levels that
were already high in real terms. In this connection, mem­

A number of members were also influenced by the rela­
tively sluggish growth of M l over the course of recent
months, although such growth appeared to be accelerating
in December. Some urged that greater weight be placed on
M l in the formulation and implementation of policy; and in
the view of one member, reserve conditions should be
eased promptly if it became clear that growth in M l was
remaining sluggish.

Meeting Held on January 30—
31,1984
In the Committee’s discussion, nearly all the members
indicated that the ranges tentatively established for 1984
remained acceptable, although some expressed a prefer­
ence for slightly lower ranges for one or more of the
aggregates.
The ranges under consideration for 1984 assumed that
the relationships between the monetary aggregates and
nominal GNP — the velocity of money — would be broadly
consistent with past trends and cyclical patterns following
atypical behavior in 1982 and early 1983. A tendency for
velocity to rise as 1983 progressed suggested a return to­
ward earlier velocity patterns, but several Committee mem­
bers believed that more experience was needed before that
trend was confirmed.
In this situation most members agreed that for the time
being substantial weight should continue to be placed on
M2 and M3 in policy implementation, while growth in M l
should be evaluated in light of the performance of the
broader aggregates. The view was expressed that emphasis
on the broader aggregates appropriately recognized the
remaining uncertainties with respect to the relationship
between M l and economic activity, and it was also observed
that the use of a relatively wide range for M l tended to work
in the same direction. However, one member urged placing
primary emphasis on M l and also supported a narrower
range for that aggregate, noting that the introduction of
contemporaneous reserve accounting provided an oppor­
tunity to exert closer control over its short-run behavior. A
number of other members supported giving M l greater
weight, if not primary emphasis, in light of what they viewed

bers referred to the desirability of prompt action to reduce

as the emergence of a more predictable pattern in its veloc­
ity, at least in relation to that of M2 and of M3. Still other
members were not prepared to increase the policy role of
M l, at least at this time. In the view of these members, the

the federal deficit, whose size, both current and prospec­

prospective behavior of M l velocity remained subject to


32


FEDERAL RESERVE BANK OF ST. LOUIS
unusual uncertainties, in part because of the institutional
changes reflected in the increased role in M l of NO W (nego­
tiable order of withdrawal account) and Super NOW com­
ponents, which bear interest and serve both a transactions
and a longer-term savings function. These and related
changes made it difficult to anticipate the public's demand
for cash balances under varying circumstances or the re­
sponse of depository institutions in altering terms on the
newer components of M l.
In the Committee’s discussion of policy for the short run,
all of the members indicated that they could support a
policy directed toward maintaining essentially the existing
degree of restraint on reserve positions. Such a policy was
thought likely to be associated with short-run growth in the
monetary aggregates consistent with the Committee’s ob­
jectives for the year.
In their discussion the members took note of uncertain­
ties associated with the introduction of contemporaneous
reserve accounting on February 2. The members agreed
that no substantial changes would be made in open market
operating procedures at this time, but they anticipated the
passage of some time before depository institutions fully
adjusted their reserve management to the new accounting
system. In that interval, for instance, depository institutions
might want to hold more excess reserves than usual. The
members agreed that such developments would need to be
accommodated by adjustments to reserve paths.

Meeting Held on March 26— 1984
27,
Data available through mid-March indicated that since
December M l and M3 had been expanding somewhat more
rapidly than anticipated at the January meeting. Tentative
estimates suggested that in the first quarter as a whole M l
and M3 grew at annual rates of about 7’A percent and 8 V2
percent from the fourth quarter, well up in their longer-run
ranges of 4 to 8 percent and 6 to 9 percent respectively
established by the Committee for 1984. Growth in M2 ap­
peared to have been less rapid than previously expected
and was estimated to be at a rate in the lower part of the 6 to
9 percent range for 1984.
Market interest rates moved considerably higher over the
intermeeting period, generally rising about 3U to 1 percent­
age point in both short- and long-term markets. The in­
creases appeared to be induced by the strength of eco­
nomic activity and private credit demands, disappointment
over the absence of significant progress to curb the federal
deficit, concern that prices might rise more rapidly, and
expectations that monetary policy would not accommo­
date rapid growth in money and credit.

APRIL 1985
— of exceptionally heavy credit demands. Consequently,
the sustainability of the expansion would be jeopardized.
At the same time, several members observed that, in the
light of various imbalances and distortions, both domestic
and international, the economy might be vulnerable to large
and sudden increases in interest rates and pressures on
financial markets. The emergence of strong business credit
demands on top of a continuing large rate of increase in
consumer and mortgage credit and massive Treasury
financings accentuated these risks.
The point was also emphasized by some members that
significant shortfalls in monetary growth might desirably
lead to some easing of interest rate pressures. There was
general acceptance of an approach that would take into
account such factors as the apparent strength of economic
activity and of inflationary pressures in any adjustment of
the degree of reserve restraint. A number of members also
called attention to the rate of credit growth, which had
accelerated considerably in early 1984 and which appeared
to be an important factor in recent interest rate increases.
With regard to preferences for the Committee’s opera­
tional approach, there were some differences of view about
whether the recent degree of reserve restraint should be
maintained or altered in the period ahead, and under what
conditions. Many felt that maintenance of something like
the degree of restraint that had developed in recent days
offered a reasonable prospect for achieving the monetary
growth and financial market conditions that would foster a
sustainable pace of economic expansion, help to contain
inflation, and minimize the potential damage to interestsensitive sectors of the economy.
Other members of the Committee, viewing demand pres­
sures on the economy as stronger and posing a more imme­
diate threat of rising price pressures and growing im­
balances, felt that some intensification in the degree of
reserve restraint was called for at this time. This would, it
was maintained, reduce the risk that much more vigorous
restraint would be needed later, with sharply adverse con­
sequences for sectors of the economy that were vulnerable
to rising interest rates. These members were, nonetheless,
concerned about moving too aggressively3 n the direction of
greater restraint, given the sensitive stat^of domestic and
international credit markets and uncertainties about the
underlying strength of demand pressures.

Meeting Held on May 21—
22,1984
M l changed little in April, but data available for early May
suggested a considerable strengthening. Given the pickup
in early May, it was estimated that growth of M l since
March was roughly in line with the 6 Vz percent annual rate
of expansion sought by the Committee for the March-to-

In the Committee’s discussion of the economic situation
and outlook, members expressed concern that the current
pace of the economic expansion, if maintained for long,
would lead to growing imbalances, to price and wage pres­

June period. Expansion in M2 was at an annual rate of about
7*/4 percent in April, close to the rate specified by the Com­
mittee for the three-month period, while growth in M3, at

sures in some sectors of the economy and to continuation
— against the background of persisting large federal deficits

an annual rate of 1 0 3/4 percent in April, was well above its
8 V2 percent March-to-June growth path.




33

FEDERAL RESERVE BANK OF ST. LOUIS
Most of the members, as they had at previous meetings,
expressed concern that growing capacity constraints, de­
clining unemployment, and the prospect of reduced pro­
ductivity growth might be conducive to greater inflationary
pressures over time.
A more optimistic view of the outlook for inflation empha­
sized the possibility of currently relatively favorable wagecost developments continuing for some time.
In the view of most members, no significant change in
policy — in either direction — was desirable at this time in
light of the performance of the economy, the behavior of the
monetary aggregates, and conditions in financial markets.
Under present circumstances, it was argued, any significant
further restraint would produce added strains in interestsensitive sectors of the economy such as housing and agri­
culture and would incur an undue risk of a pronounced
effect on already somewhat unsettled financial markets,
with adverse effects on economic activity. At the same time,
the apparent strength of the ongoing expansion and in­
flationary concerns argued against any significant easing.
An argument advanced in favor of slightly greater restraint
was that such a policy w ould tend to improve the prospects
of achieving a desirable moderation in the rate of business
expansion and progress over time in containing inflation.

Meeting Held on July 16—
17,1984
The members recognized that there were a number of
threats to the realization of the relatively favorable eco­
nomic developments implied by their projections and that
the maintenance of a satisfactory economic performance
for an extended period could only be assured by timely
actions in a number of policy areas. Given the persisting
strength of domestic demands, which had been growing
faster than GNP as reflected in the widening deficit in exter­
nal trade, several members indicated their concern about
the risks that those demands might proceed too long at an
unsustainable pace, with potentially adverse implications
for inflationary pressures and for the continuation of the
expansion itself. On the other hand, most members clearly
did not want to rule out the possibility that relatively high
interest rates, partly related strains in international and
domestic financial markets, and cautionary attitudes that
might be emerging in economic sectors such as housing
might result in more substantial slowing than was typically
indicated. Various imbalances and distortions in the eco­
nomic and financial picture, notably the massive deficits in
the federal budget and in the current account of the bal­
ance of payments, were also viewed as particular sources of
concern.
In the course of discussion about the appropriate ranges
for the aggregates, the members noted that in recent quar­
ters the behavior of M l in relation to nominal GNP had been
more consistent with previous cyclical patterns than had
been the case during 1982 and early 1983. As a result it was
concluded that M l should be given roughly equal weight
with the broader monetary aggregates in the implementa­


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34
Federal Reserve Bank of St. Louis

APRIL 1985
tion of monetary policy. However, the behavior of M l as well
as that of the broader aggregates w ould still continue to be
appraised in light of developments in the economy and
financial markets, the outlook for inflation, and rate of credit
growth.

Meeting Held on August 21,1984
In the Committee’s discussion of policy implementation
for the weeks immediately ahead, a majority of the mem­
bers expressed a preference for continuing to maintain
about the current degree of restraint on reserve positions. A
number of members, while finding the current approach to
policy implementation acceptable, nonetheless were pre­
pared to look toward some slight easing of reserve condi­
tions, either currently or soon should monetary growth fail
to pick up from recent trends. They believed that such an
approach would likely be consistent with attainment of the
third-quarter objectives for monetary growth that had been
set at the July meeting, given the shortfall in the aggregates
since the meeting, and w ould also be consistent with signs
of some weakening in the rate of economic growth relative
to expectations. Moreover, in the view of at least some of
these members, some lessening in the degree of reserve
restraint w ould appropriately tend to offset the unusual
pressures that had developed in the federal funds market
during June and July. Those pressures were not associated
with any change in the degree of reserve restraint, but they
appeared to reflect the emergence of more conservative
reserve management attitudes on the part of banks. Other
members commented, however, that any active effort to
ease reserve conditions would be undesirable at present,
and could well be misinterpreted, unless clearly related to
emerging weakness in monetary growth in the context of
appreciably slower-than-expected expansion in economic
activity.
As compared with conditions at the time of the previous
meeting, the monetary aggregates had weakened — with
M l, for example, closer to the middle of its longer-run range
— and there were more indications of a moderation in the
expansion of economic activity. It was understood that any
intermeeting adjustment in reserve pressures would not be
made automatically in response to the behavior of the mon­
etary aggregates, but would be undertaken only in the con­
text of appraisals of the strength of economic activity and
inflationary pressures, and evaluations of conditions in do­
mestic and international financial and banking markets and
the rate of credit growth.

Meeting Held on October 2,1984
The information reviewed at this meeting indicated that
growth in real GNP had slowed appreciably in the third
quarter from the annual rate of about 8Vz percent recorded
in the first half of the year. The slowing was most marked in
final sales, which seemed to grow little during the quarter,
while the rate of inventory accumulation appeared to have
accelerated. Thus far in 1984, the rise in various measures of

APRIL 1985

FEDERAL RESERVE BANK OF ST. LOUIS
prices and wages appeared to be close to, or slightly below,
the pace in 1983.
As the intermeeting period progressed, incoming infor­
mation pointed to continuing substantial shortfalls in
growth of the monetary aggregates relative to the Commit­
tee’s expectations for the third quarter. Growth of M l in
August turned out to be quite small, and while there ap­
peared to be a moderate acceleration in September, expan­
sion over the three-month period from June to September
was running well below the Committee’s expectations.
Growth of M2 and M3 also appeared to have picked up in
September after expanding at relatively sluggish rates over
the previous two months, but growth in these broader ag­
gregates over the summer was also lower than expected.
Against the background of monetaiy growth that was
weaker than anticipated, evidence of a slowing pace of eco­
nomic advance, and a rapidly rising dollar in foreign ex­
change markets, open market operations were conducted,
as the intermeeting period progressed, so as to lessen pres­
sures on bank reserve positions.
The Committee’s discussion of the economic situation
and outlook focused on the implications of recent indica­
tions of appreciably slower growth in the context of an
economic outlook that was already complicated by unusu­
ally large, sustained federal deficits, a strengthening dollar
on exchange markets, and sensitive domestic and interna­
tional financial markets. Many members commented that
the economy appeared to be adjusting to a reduced, but
potentially more sustainable, rate of expansion and that the
moderation was likely in turn to be associated with rela­
tively subdued rates of wage and price inflation. It was
noted that many past expansions had been interrupted by a
“pause” in the rate of economic growth. Although no one
could say with certainty whether this most recent experi­
ence represented a "pause” and, if so, how long it would
last, a number of members believed that a modest rebound
was a likely prospect for the next quarter or two followed by
some moderation in the rate of expansion later. Other mem­
bers gave more weight to elements of slowing in the current
economic situation, and they saw a greater likelihood of

favored directing open market operations, at least initially,
toward maintaining the lesser degree of reserve restraint
that had been sought in recent weeks. Such an approach to
policy was expected to be associated with expansion in the
monetaiy aggregates from September to December at rates
that were somewhat above those experienced over the third
quarter, especially in the case of M l. It was noted in this
connection that the degree of reserve restraint had been
eased appreciably in recent weeks and that any further
easing should be contingent upon clear evidence of further
weakness in the monetary aggregates and the economy.

Meeting Held on November 7,1984
Growth in the monetaiy aggregates strengthened in Sep­
tember from the sluggish pace in August. But data available
for October indicated that M l declined during the month;
as a result, M l was running well below the Committee’s
expectations for growth in the fourth quarter. Expansion in
M2 was also below the Committee’s expectations, although
to a much lesser extent, while growth in M3 appeared to be
at a pace somewhat above the Committee’s expectations.

sluggish growth in the period ahead.

Toward the end of the intermeeting interval, open market
operations were conducted to further reduce pressures to
borrow in recognition of the extended weakness of M l, and
to a degree M2, against the background of incoming eco­
nomic and financial indicators suggesting, on balance, a
marked slowing in the pace of economic expansion. As a
result of these developments, together with market expec­
tations of monetaiy easing and a drop in other short-term
rates, the federal funds rate moved down irregularly from
around 11 percent just before the October meeting to
around 10 percent most recently, with trading on several
days in the area of 9Vz percent or below. At the same time,
other short-term rates fell about 1 V» to IV 2 percentage
points over the period. Long-term rates on taxable securi­
ties generally declined about 3/4 percentage point, re­
sponding in part to expectations of an improved outlook for
inflation as oil prices weakened as well as to the signs of
moderating economic expansion. Most major banks re­
duced their "prime" lending rate in several steps from 1 2 3/4
percent to 12 percent, and a few banks lowered their rate to
ll3/4 percent.

Several members referred to the progress that had been
made in containing inflation, although some threats to fu­
ture progress remained, and a few members commented
that inflation was still the main economic problem for the

In the Committee's discussion of the economic situation
and outlook, members commented that a mixed pattern of
developments had fostered increased uncertainty about
the prospects for economic activity. While most agreed that

longer run. In this connection, concern was expressed that
too strong a resurgence in spending, though not viewed as a

the staff projection of moderate growth in real GNP was a
reasonable expectation, much of the discussion focused on

likely development, would intensify inflationaiy pressures

the risks of an appreciable deviation from the projection

and would set in motion forces, which could threaten the
sustainability of the expansion itself. Moreover, as the for­

under prevailing circumstances. A few members believed
that the chances of a deviation were tilted in the direction of
somewhat faster expansion than the staff was projecting,

eign exchange value of the dollar rose, the possibility in­
creased that a subsequent decline in the exchange rate

but others expressed concern that the rate of growth might

could be precipitous when it occurred, which w ould exert
significant upward pressures on domestic prices.

remain quite sluggish in the near term with some possibility
of a rise in the rate of unemployment.

In the Committee's discussion of policy implementation
for the weeks immediately ahead, most of the members

The outlook for consumer expenditures was cited as a
key area of uncertainty. Several members felt that evidence




35

FEDERAL RESERVE BANK OF ST. LOUIS
of general improvement was still lacking after the summer
slowdown. It was noted, however, that a number of retailers
expected sales to improve in conjunction with the forth­
coming holiday season. A failure of consumer spending to
revive in line with expectations would have adverse impli­
cations for economic growth beyond the fourth quarter, as
it would reinforce a recent tendency by businesses to curb
their accumulation of inventories or possibly induce them
to attempt to reduce previously acceptable inventory levels.
Members who were relatively optimistic about the pros­
pects for economic activity noted the favorable impact that
recent declines in interest rates were likely to have on inter­
est-sensitive sectors of the economy such as housing. They
also noted that the basic forces that had given impetus to
the expansion over the last several quarters were still largely
present. These included rising consumer incomes, a high
degree of consumer confidence and relatively strong finan­
cial positions, a subdued rate of inflation, a favorable out­
look for investment in plant and equipment, and a large
federal deficit that, at least in the short run, provided a
strong stimulus to the expansion. A number of members
observed, however, that while underlying factors favored
sustained expansion, the timing of a pickup in economic
growth following the “pause" experienced in recent
months remained uncertain and growth might well remain
relatively sluggish in the current quarter.
Most members felt that the potential for a sharp upward
surge in business activity had diminished appreciably for
the time being and with it the possible need for a near-term
reversal of easing steps already taken. On balance, nearly all
of the members favored further easing from the reduced
degree of reserve restraint sought recently. While prefer­
ences with regard to the extent of such easing differed
somewhat, a majority urged that the lesser restraint be
implemented in limited steps, pending an evaluation of its
impact on financial markets and of incoming information
on the economy and the monetary aggregates. A number of
members, who suggested slightly more aggressive steps,
stressed that the risks of stimulating an intensification of
inflationary pressures were relatively small under foresee­
able circumstances and that, on balance, more weight
needed to be given to the risks of inadequate monetary and
economic growth. With regard to the latter, some members
noted that the economy appeared to have the capacity for
somewhat faster expansion than was generally expected
without generating significantly greater inflationary
pressures.
In the course of the Committee's discussion, the mem­
bers generally agreed that under prevailing economic and
financial conditions, policy implementation should be par­
ticularly alert to the possible need for adjustment toward
lesser restraint. It was felt that any such adjustment should
be made promptly, although not automatically, depending
on the behavior of the monetary aggregates and continuing
indications of relatively sluggish economic activity. In this
view, policy implementation should be relatively tolerant,
for a time, of a substantial rebound in monetary growth,

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36
Federal Reserve Bank of St. Louis

APRIL 1985
given the unexpected weakness of Ml in October. Any ad­
justment of operations in a tightening direction should also
depend upon clear evidence of substantial strengthening in
economic activity.

Meeting Held on December 17—
18,1984
The information reviewed at this meeting indicated a
mixed pattern of developments, with some sectors showing
a pickup from the lull of earlier months. On balance, how­
ever, economic activity appeared to be expanding in the
current quarter at a rate approximating the considerably
reduced pace recorded in the third quarter. Broad mea­
sures of prices generally continued to increase at rates
close to those in 1983.
Open market operations over the intermeeting interval
were directed at achieving some reduction in pressures on
bank reserves against the background of lagging growth in
the narrow money supply, generally sluggish expansion in
the economy, subdued inflation, and continued strength of
the dollar in foreign exchange markets. The average level of
borrowing by depository institutions at the discount win­
dow moved down on balance over the period, and in No­
vember nonborrowed and total reserves increased at an­
nual rates of about 17V2 and 11 V4 percent respectively. The
decline in borrowing, along with a reduction in the dis­
count rate from 9 to 8V2 percent on November 21, was
associated with a drop in the federal funds rate from the 9Vz
to 10 percent area at the time of the November FOMC meet­
ing to around 83U percent recently, with trading on the days
immediately preceding this meeting somewhat below that
level. Other short-term interest rates also moved down, de­
clining about 50 to 90 basis points; intermediate-term rates
fell about 45 to 65 basis points, while most long-term rates
declined only modestly.
In the Committee's discussion of the economic situation
and outlook, the members differed to some extent on the
prospects for economic activity in 1985, but they generally
agreed that underlying economic conditions favored fur­
ther moderate growth during the year, especially in the
context of a stimulative fiscal policy and the decline in
interest rates that had occurred. While various measures of
economic activity continued to indicate a mixed pattern of
developments, some recent information suggested a less
sluggish overall performance than earlier.
The members continued to give considerable emphasis
to the many risks that could lead to an unexpected out­
come, especially in view of potential complications associ­
ated with massive and sustained federal deficits and very
large imbalances in the nation's foreign trade. Other areas
of uncertainty related to various financial strains or other
problems in several sectors of the economy, including
energy-related industries and especially agriculture which
was experiencing serious difficulties in many parts of the
country. It was also noted that the recent tax proposals of
the U.S. Treasury might tend to alter business spending
plans in uncertain ways as the likelihood of implementa­
tion of various elements of the proposals was assessed.

As they had at previous meetings, the members gave a
good deal of attention to the effects of the continuing
strength of the dollar in foreign exchange markets. The
related surge in imports was having a veiy negative impact
on production in many domestic industries, while expan­
sion in exports was being curbed by the appreciated value
of the dollar as well as by relatively slow economic growth
abroad. Some members commented that they saw little or
no prospect for significant improvement in the trade bal­
ance in 1985.
The members continued to regard the outlook for in­
flation as relatively favorable in the sense that a moderate
expansion in economic activity was not seen as likely to be
associated with renewed upward pressures on wages and
prices or, absent a sharp decline in the dollar, strong new
price pressures from other sources. Members noted that
prices of sensitive commodities were still declining and that
there appeared to have been a downward shift in in­




flationary expectations in recent months, with favorable
implications for future progress in containing wage and
price increases. Indeed, a number of members commented
that somewhat faster economic growth than was generally
expected at this time might also be compatible with little or
no additional inflationary pressures in 1985. At the same
time, it was emphasized that the rate of inflation was still
too high and needed to be reduced over time.
During the Committee’s discussion of policy implemen­
tation for the intermeeting period ahead, most of the mem­
bers expressed a preference for directing open market oper­
ations toward some further easing of reserve conditions to
encourage satisfactory growth in M l and to improve the
prospects for economic expansion in 1985. The views of
these members differed to some extent on the degree of
easing that should be sought. A few members, though,
wanted essentially to maintain, pending new develop­
ments, the lesser degree of reserve restraint that had been
achieved recently.