I HE policy objectives of the Federal Open MarketCommittee (FOMC) in 1977, as repeatedly expressedin the domestic policy directive to the Federal Re-serve Bank of New York, were to foster bank reserveand other financial conditions that will encourage con-tinued economic expansion and help resist inflationarypressures, wlnle contributing to a sustainable patternof international transactions.1 By lowering their long-run ranges for growth of the monetary aggregates,the Committee also intended to move gradually to-ward longer-run rates of monetary expansion con-sistent with general price stability,2

The desire of the FOMC to reduce gradually thegrowth of the monetary aggregates to rates con-sistent with general price stability was also expectedto help re-establish a foundation for economicstability over the longer term.3 Elaborations of thisposition are found in Chairman Burns quarterly re-ports of the Board of Governors of the Federal Re-serve System to Congress. Chairman Burns noted inFebruary of last year that a healthy and prosperouseconomy can be achieved only by pursuing policiesthat are consistent with steady progress toward resto-ration of general price stability.1 I-Ic went on to notethat substantial further reduction in growth rates ofall the major monetary aggregates will be neededover the next few years if our Nation is to succeed inhalting inflation.5

Chairman Burns did not anticipate that movingtoward rates of monetary expansion consistent withprice stability could come rapidly or without diffi-culty. But he observed in May that failure to adhere

Note: Unless otherwise stated, citations throughout this paperare from cither the Record of Policy Actions of the FederalOpen Market Committee or Statements to Congress, Fed-eral Reserve Bulletin (February 1977-February 1978),1Record (July 1977), p. 665. Also see Records of March

1977 through February 1978,2Record (March, June, September, December 1977), pp 256,570, 831, 1069, respectively.

3Record (March 1977), p. 256.

~Statements (February 1977), p. 122.5lbid., p. 124.

Page 2

to policies aimed at bringing about noninflationaryeconomic growth would reduce the chances of sus-taining the recovery and reducing unemployment.

In concluding this morning, I am obliged to ob-serve that we have still a considerable distance to goin potting our financial house in order. Too often inthe past, we have lacked the courage or the patienceto stay long enough on a monetary and fiscal paththat will lend to noninflationary economic growth.We cannot afford to backslide once again. Unless weachieve a less inflationary environment, there will belittle chance of sustaining the expansion that is nowin progress or of significantly reducing the high levelof unemployment that is blighting the lives of mil-lions of Americans. That, in a sentence, is the Boardscentral message to the Congress.~~

As to how much of a reduction in money growthwould be required to achieve general price stability

over the next few years, Chairman Burns indicatedthat money growth would have to he less than thelong~rnngrowth rate of total output.

The long-run growth rate of physical production atfull employment has declined in recent years and isprobably around 3per cent at present. Judging bythe experience of the past two or three decades, astable price level would require a rate of expansionin M-1 that over the long run is well below thegrowth rate of total output.7

Thus, Chairman Burns envisioned in February 1977that over a span of a few years the FOMC wouldhave to reduce the growth rate of Ml from about 5percent in 1976 (from fourth quarter 1975 to fourthquarter 1976) to a rate of less than 3percent.

In 1977, however, no progress was made towardsachieving the FOMCs long-run objective of a reduc-tion in the growth of Ml. Instead Ml growth acceler-ated to a 7.4 percent rate in 1977 (from fourth quarter

1976 to fourth quarter 1977). To understand howmoney stock growth could vary to such an extent

from the FOMCs intended objectives, one must con-sider the other factors which the FOMC took intoaccount in its shorter-run policy decisions. Further-

6Statements (May 1977), p. 468~Statements (February 1977), p. 124.

The Federal Open Market Committee in 1977RICHARD W. LANG

FEDERAL RESERVE BANK OF ST. LOUIS MARCH 1978

Table I

FOMC Operating Range1977

Short-Run Ranges

Date of F deral Funds F d rad Funds Period to whi h Range Specified Actual Growth RatesMeeting Rate Rang Rate Ta get Ml & M2 apply Ml M2 Ml M2

Januay 1718 41/5% 4%4%% Jan Feb. 3-7% 711% 3,1% 84%

February 5 45 4% 4% Feb.Ma 37 6%-10/, 3.1 79

March 15 4~/45 4%-4% Mar Ap 4/~8% 7 11 124 11.1April 19 4/~5/4 4% Apr May 6 10 8 12 101 91

May 624VrSYz

May17 5~J4-5% 5% Mayiune 04 31/2-7% 26 64

June II 55% % June-July 21/, 6% 6.10 11.4 12,4July 19 5% 5% 5% July Aug 31/, 7% 61/, 101/, 121 11.6

August 5 5/ 6 5%

Augut 16 5% 6/ 6 Aug Sept 05 3 8 66 72

Septembe 20 66% 61/ p1 Oct. 27 4 & 97 9-1October 1718 6% 6% 6 2 0 Na, 38 5)~ 9% 53 7,4

November15 61/46% 6% Nov Dec 17 5 9 31 5.2

Deernber 1920 61/ 6% 6% Dec. Jan 2/ 8 2 6-TO 74 70January 9, 1978 81/2 7 6%

tang Run Ranges

Pa e a Target CreditMe ting Fe ad Ml M2 M3 Proxy

4

Jan any 17 8 iV/76-IV/77 45/, 6/o 7-10% 834-111/2% 710%AprI 19 /771/78 4/,6/, 7 9% 8% 1 710

ii 19 11771178 46 7 9/, 3/211 710k

O tab r 17 18 III 77111/78 4-6% 69 8 TOy, 740

hr an e dod chothFOIC Ily I mein Tea fob o gte ac ccctonion impi nuul te ch tomb zonh a to he in atihch he n _ni etabi bed oth

o Ion he tin Ph n o h in e rfied oco h less] om hemeel a ehthe do a h solosin r Tel bed ed meeting Slio a n e mad a- PaIJe in the Record 0 Ioliay Action

th Yule 10 31 cm,~ p oimtly& d ater hm tingTIe ceo Ic amennaul tione hel between eheduedmetin orth upo a od i stenneetin ag to th Fd alo tehas ItheF Ill efi d rtls YBurn anounce inede -oth a otmout age t 0 Us dscatedoneyar

perod in n r etedbef on lanai ttee tint Ia osmaei PdahejI 1 mec heeomnctteed lOt a b ad so h oadsman o alleonun Ca bank rethtth, Can

w d na be otthg hi nnpo a mon b link (cirltpro b edond oil tom be baak)adinp h ueh po doe o nid e hor In I h s hiss.

Bled nedathimel 1, hebelx h iGhani niso lost! ohptohbhao tin thtt o Is, a n ha atTn lb cc in t I I - -n an ho honquent,nhen ueifltsonTh Co ,h iota hh a I so h inn s thn aipte a pit d

Us th Sri intinsu to n, o t

Is Id - athim nbc hi e xl od t a - pree ,o ertop it m encoo heRe fond n houldth oh n,F\lapa as hel their ii Ira, o Tn

cd 0 th .1 Jul pc d

Iantt I nt tb en t eli mu non m eodt thith tool,to,, Uss donn h I coo c utton, 0 on In dna Si dir is ed tfuhetg a

-n ,codi,n soul nob ifo dli i h n lyn at tin nI It dRoo , utodo s d h thepl rp p ednnnds, o t hr rt 0mmryg o a 31 Iloo 4th 1 - t ala Ml ovthno n,fi,owldaelatondmor

SC eto o4ld b t nine.h n,etn b u h - 010 h ommite hoi I mo a i cos to ub -

seth, to onta a etc H thu t ho -ni ii ne I so orth sethout I ifiati damnss h tornr p ets economic a ti

Roo then a hi metin ban I tha th up lois oth D emhtja -an. os 0 bnl bond!th , bthtottooad -o h,thrae t lbs psaso 1 0 th i ad a cc oC pec ould

rely ictaplielt sfthrO lo oh e itoh has

31 di dS oflOcH c nardnoosd ented eetn,lOo t

hint, Wail hils cr1 Sefa So text

Page 3

FEDERAL RESERVE BANK OF ST. LOUTS

more, strong growth of credit in 1977 along with un-certainties about the relationship of money growth toeconomic activity affected the short-inn implementa-Hon of the FOMCs operating objectives.

This article reviews the decisions of the FOMC in1977. Table I summarizes the FOMCs economic

policy directives in 1977, and a Supplement at theend of the article presents a more detailed meeting-by-meeting summary of FOMC discussions anddecisions,

FOMC OPERATING TARGETS IN 1977

For the third consecutive year, the FOMC in 1977

publicly announced longer-run ranges for the majormonetary aggregates, Ml, M2, and M3. This policywas begun in early 1975 at the request of Congress asexpressed in House Concurrent Resolution 133, whichwas passed on March 24, 1975. The substance of thisresolution was made law in November of last yearwith the passage of the Federal Reserve Reform Actof 1977. This Act requires that the l3oard of Governorsof the Federal Reserve System consult with Commit-tees of the Congress on a quarterly basis with respectto its objectives and plans for the ranges of growth ofthe monetary aggregates over the next twelve months,

During 1977 Chairman Burns met with Congres-sional Committees at roughly 90-day intervals topresent the intended ranges of growth of tile mone-tary aggregates that the FOMC decided upon at itsmost recent meeting. These yearly ranges are basedon the quarterly average for the most recent qnarterto the quarterly average for one year in the future(see Chart I). The FOMC has repeatedly empha-sized that targets of this nature are subject to reviewand modification at subsequent meetings and thatshort-run factors might cause growth rates frommonth to month to fall outside the ranges contem-plated for the year ahead,8

The month-to-month flexibility in the growth of themonetary aggregates is reflected in the shorter-runranges which are set by the FOMC. These short-runranges are specified over moving two-month periods.For example, the FOMC at its January meeting speci-fies short-run ranges For the monetary aggregates forthe two-month January-February period.9 Then at theFebruary meeting the FOMC sets new ranges for theFebruary-March period. These two-month ranges,

5Record (March 1977), pp. 256-57,Siace the FOMC meets in snidmr,nth, these 2mantIs ranges

are actually set whess a quarter of the 2month period is over,

Page 4

MARCH 1978

along with the longer-run ranges, are shown inTable 1. All of the two-month ranges for both Ml andM2 in 1977 were wider than the longer-run ranges an-nounced by the FOMC.

Longer-Run Ranges

The FOMC began 1977 with longer-run growthranges of 4to 6percent for Ml, 7to 10 per-cent for M2, and 9 to 11percent for M3. Theseranges, which had been announced in November1976, covered the period from third quarter 1976 tothird quarter 1977. The FOMC reviewed theselonger-run ranges at its January meeting and decidedto reduce the lower limits of the M2and M3 rangesby of a percentage point while leaving tile Mlrange unchanged, When Chairman Burns announced

the new M2 and M3 ranges in February 1977, hestated that tile downward adjustment of the rangeslargely reflects technical considerations concerning

the shifting of existing stocks of financial assets amongmarket securities and time and savings deposits. Inaddition, he went on to state that:

Besides these technical considerations, the adjustsIlent of the lower limit of the projected ranges forM-2 and M-3 reflects the Federal Reserves firstsintention to continue moving gradually toward ratesof monetary expansion that over the longer run areconsistent with general price stability. -

The projected range for lot-i in the year aheadreflects our assinnption that the financial innovationsnow in train will continue to reduce materially thepropos-tion of transactions balances that al-c held inthe form of currency and demand depositsJ~

At the January meeting at which the above rangeswere set, the Committee agreed that tile outlook foreconomic activity had improved after the pause inthe fourth quarter of 1976. But there was still concernexpressed about the current high rates of unemploy-ment and inflation, as well as the possible effects ofthe severe winter weather and the new Administra-tions proposed fiscal package.2

By the lime of the April meeting when the longer-run ranges were again reviewed, the Administrationsfiscal program had been substantially changed. The

economic outlook had proceeded to improve duringthe first quarter, although there still remained someuncertainties about the impacts of proposed Adminis-

State,nents (February 1977), pp. 123-24.

ilIbid., p. 124.12Record (March 1977), p. 254.

FEDERAL RESERVE BANK OF ST. LOUIS

Ch ~I

Twelve-Month M1 Ranges Announced During 1977

MARCH 1978

OCT. NOV. DEC. jAN. PEE. MAR. APE. MAY JUNE JULY AUG. SEPT. OCT. NOV. DEC. JAN. PEE MAE APR MAY TUNE JULY ADO. SEPT.

19Th 1911 1911NST,..TEsI,p,.N,,,,

5,,,,d ~

Page 5

FEDERAL RESERVE BANK OF ST. LOUIS MARCH 1978

tration policies notably the energy program andthere was still concern about possible increases ininflation during the year.18

At the April meeting there was general agreement

that the longer-run ranges should be reduced, butthat only small reductions could be made at this lime.

members 0f the Committee were almost unani-mous in believing that a reduction of some kindwould be appropriate at this time as another steptoward the ultimate objective of achieving longer-run rates of monetary expansion consistent with gen-eral price stability. However, opinions differed as tothe specific reduction to be made.

Partly because of the uncertainties associated withthe energy program, there was little sentiment formaking more than small reductions in the longer-runranges at this time.4

The Committee decided in April to reduce the upperlimits of the M2 and M3 ranges by of a percentagepoint changing the ranges to 7 to 9percent and

81/u to 11 percent, respectively while keeping theMl growth range unchanged at 4to 6percent.15

In announcing these ranges to Congress on May 3,1977, Chairman Burns noted:

The trend of growth in monetary aggregates is stillrapid, perhaps mneh too rapid. To be sure, the Fed-eral Reserve has moved fairly steadily toward lowermanges for monetary expansion during the past 2years. But that movement has been extremel grad-ual; indeed, at the current pace it would requirenearly a decade to reach rates of growth that areconsistent with a stable price level.

I must report, moreover, that despite the gradualreduction of projected growth ranges for the aggre-gates during the past 2 years, no meaningful reduc-tion has as yet occurred in actual growth rates.16

[Emphasis added.]

The longer-run ranges set in April followed a firstquarter in which N-Il grew at a quarterly average rateslightly below the lower limit of the long-run range of4percent set in January, and M2 was reported to

have grown at a quarterly average rate close to themidpoint of the long-run range set in January. In con-

trast, the July meeting followed a second quarter inwhich Ml grew at a quarterly average rate of about

8Record (June 1977), pp. 568-69.~Ibid p. 570.

titbid., p. 571. Mr. Partee dissented from this action becausehe opposed iTnplementing a downward adiustment at thisparticular time, although not opposing it as a long-tersnobieetive.

leStatements (May 1977), p. 467.

Page 6

8percent, well above the longer-run ranges upperlimit of 6percent set in April. M2 was reported tohave grown in the second quarter at an annual rate

in the upper half of its long-term range.7 The FOMCtook these second quarter rates of growth of the

monetary aggregates into account when discussingthe longer-run ranges in July.

Moreover, it was observed that the ammual rate ofgrowth in M~-lfrElm the first to the second quarter of1977 had exceeded tile range adopted by the Cons-mittee at its meeting in April; that despite the grad-hal reduction of projected ranges of growth for theaggregates during tile past 2 years, no meaningfulreduction had as yet occurred in actual rates ofgrowth , , ~8 [Emphasis added.J

The Committee then decided at this meeting to re-

duce the losver limit of the Mi range by 1/~of a per-centage point, while leaving the ranges for M2 andM3 unchanged.19

Although some members wanted to reduce theranges of M2 and M3 or wanted to reduce the upperhmit of the Ml range as well, the majority of theFOMC rejected additional changes. It was suggestedthat reducing the upper as well as the lower limit ofMl might run tile risk of undesirable pressures infinancial markets, a principal effect of which would beto slow growth in real GNP more than projected.2

At the October 1977 meeting, members of the Com-mittee agreed that the expansion in economic activitywould likely continue for some time. Most membersagreed with staff projections that growth in real GNPwould accelerate in the fourth quarter and wouldcontinue at a moderate pace in 1978, although somemembers indicated that uncertainties about the out-look had increased recently.21

In reviewing the longer-run ranges, considerationwas given to the fact that both Ml and M2 had in-creased in the third qtiarter at rates above the upperlimits of their longer-run ranges Ml increased at a

tmtAfter data revisions, the first quarter rate of growth of M2was revised upward to an annual rate of 10.3 percent,slightly above the upper limit of the range set in January.The second quarter rate of growth of M2 was also revisedupward to 9percent, the upper limit of the range setin April.

18Record (September 1977), p. 831.

Ibid., pp. 832-33 Messrs. Cnldwell, Jackson, and Roos dis-sented from this action. They favored reducing the upperlimit of Ml, and Messrs. Cohdweli and Jackson also wantedto reduce the ranges of the broader mnnetary aggregates.

2~Ibid.,p. 832.01

Rccord (Decesnber 1977), p. 1064,

FEDERAL RESERVE BANK OF ST. LOUIS MARCH 1978

9.7 percent rate while M2 increased at a 10.7 percentrate. The FOMC again sought to make clear itsdetermination to reduce the ranges of monetarygrowth, while at the same time assuring that growthin the aggregates would be suThcient to facilitate theexpansion of economic activity. But it was also feltthat the FOMC should emphasize that the Commit-tees basic goal was to contribute to the satisfactory

performance of the economy rather than to pursuepredetermined rates of monetary growth. Althoughthis position is generally implicit at all meetings, itwas felt that it should be emphasized at this meetingdue to various uncertainties regarding recent Ni 1growth.

Uncertainty was expressed about the underlyingcauses of the expansion of the demand for money(narrowly defined) in the second and third quartersand about the implications of that expansion forpolicy.

Because of the uncertainty about the underlyingcauses of the recent expansion in the demand forM-l and about the prospects for its velocity, somemembers indicated that they now had less confi-dence in the behavior of the monetary aggregates asguides to monetary policy than they might have hadearlier.22

The Committee decided in October to reduce boththe upper and lower ranges for M2 and M3 by ofa percentage point, while leaving the range for Nilunchanged.23 This action reduced the N12 and M3ranges to 6to 9 percent and 8 to 10percent,respectively.

In the fourth quarter of 1977, the quarterly averagegrowth rate for Ml was still outside the longer-runrange of 4 to 6percent; Ml increased at a 7 per-cent annual rate between the third and fourth quar-ters. The growth rate of M2 was within its longer-runrange, however; M2 increased at a 7.8 percent ratebetween the third and fourth quarters. The slowdownin the growth of net time deposits reduced M2 growthin late 1977 as market rates of interest approached orrose above the ceiling rates of interest that could belegally paid on these types of deposits.24

D2Jbid,, p. 1067-69.

2~Ibid.,pp. 1070-71. Mr. Wallieh dissented from this actionbecause he favored widening the Ml range by raising theupper limit to 7 percent whije lowering the lower limit to3 percent.

24Net time deposits are defined as: savings deposits, time de-posits open account plus time certificates of deposit (otherthan negotiable time certificates of deposit issued in denom-inations of $100,000 or more by weekly-reporting largecommercial banks).

Thus, in the last three quarters of 1977 the quarter-to-quarter growth rates of Ml exceeded the upperlimit of the longer-run ranges set by the FOMC. Afterdata revisions, M2 growth during the first three quar-ters of 1977 was at, or exceeded, the upper limits ofthe FOMCs long-run ranges. Although M2 growth inthe fourth quarter slowed substantially due to the risein market rates of interest, M2 increased 9.6 percentfrom foui-th quarter 1976 to fourth quarter 1977. Thisrate of growth was near the upper end of the long-term range set at the beginning of 1977 (see Table I),but was above the upper limit of the long-term rangeannounced in November.

On balance, the quarter-to-quarter growth rates ofthe monetary aggregates in 1977 often exceeded therates of growth which the FOMC had established forthe year ahead and which it felt would be consistent

with its long-run objective of gradually reducing thegrowth rates of the aggregates. The reasons for this

result involve the shorter-run objectives 0f the FONIC.As noted earlier, the FOMC has repeatedly stated

that shorter-run factors may lead to monthly moneygrowth that fails outside the longer-run ranges.25

Shorter-Run Ranges

At each monthly meeting, the FOMC sets short-run

ranges for Ml, M2, and the Federal funds rate thatare thought to be consistent with the longer-run goals

of monetary policy. The shorter-rtnl ranges for thegrowth rates of Ml and M2 are stated in terms ofaverage growth rates over two-month periods, and

are generally wider than the longer-run ranges forMl and M2.

The shorter-run objectives for the Federal fundsrate are stated in terms of both a raTlge and a specificlevel that is thought to be consistent with the short-run

ranges set for Ml and M2. For example, at the meet-ing held on April 19, 1977, the FOMC stated that thegrowth rates of Ml and M2 were likely to he associ-ated with a weekly-average Federal funds rate ofabout 4per cent. _R, However, if tile two-monthgro\vth rates of Ml and M2 appeared to deviatesignificantly from the midpoints of the indicatedranges, the operational objective for the Federal fundsrate shall be modified in an orderly fashion within arange of 4to 5per cent.27

CDRecord (March, June, September, December 1977), pp.257, 571, 832, 1071, respectively.

2RTRecord (June 1977), p. 574.

2IJbid

Page ~7

FEDERAL RESERVE BANK OF ST. LOUIS MARCH 1978

The April domestic policy directive was an aggre-gates directive since it gave greater weight to growth

rates of Ml and M2 than to money market conditions.Alternatively, the FOMC could have given the OpenMarket Desk a money market directive which would

have given greater weight to money market condi-tions than to growth rates of Ml and M2. During 1977there were four money market directives and eigiltaggregates directives.28 The differences betweenthese two types of directives during 1977 can he snorereadily observed by citing the entire paragraph fromthe domestic policy directive which relates to theshort-term operational objectives of the FOMC.

The aggregates directive of tIle April 19, 1977meeting stated:

The Committee seeks to encourage near-termrates of growth in M-1 and NI-2 on a path hehevedto he reasonably consistent with the longer-runranges for monetary-aggregates cited in the preced-ing paragraph. Specifically, at present, it expects theannual growth rates over the April-May period to bewithin the ranges of 6 to 10 per cent for NI-i and 8 to12 per cent for M-2. In the judgment of the Com-mittee such growth rates are likely to be associatedwith a weeklyaverage Federal funds rate of about4per cent. If, giving approximately equal weightto Al-I and M-2, U appears that growth rates overthe 2month period will deviate significantly fromthe midpoints of the indicated ranges, the opera-tional objective for the Federal funds rate shall bemodified in all orderly fashion within a range of~ to 5per cent.2 [Emphasis added.]

In contrast, the money market directive of the Octo-ber 17-18, 1977 meeting stated:

At this time, the Committee seeks to maintainabout the prevailing money market conditions dur-ing the period inlmediateiv -ahead, provided thatmonetary aggregates appear to he growing at ap-proximately the rates currently expected, which arebelieved to be on a path reasonably consistent withtile longer-run ranges for monetary aggregates citedin the preceding paragraph. Specifically, the Com-nlittee seeks to maintain the weekly-average Federalfunds rate at about 6 per cent, so long as M-1 andM-2 appear to he growing over the October-Novem-ber period at annual rates within ranges of 3 to 8 percent and 5to 9per cent, respectively. If, givingapproximately equal weight to M-I and M-2, it ap-pears that growth rates over the 2-month period areapproaching or moving beyond the limits of theindicated ranges, the operational objective for the

28Money market directives vere given to the Desk in June,October, Novemnber, and December. Aggregates directiveswere given to the Desk in January, Februamy, March, April,May, July, August, and September.

29Record (June 1977), p. 574.

Page 8

weekly-average Federal funds rate shall he modifiedin an orderly fashion withnl a range of 6 to 6per cent.

30[Emphasis added.]

All of the aggregates directives in 1977, exceptJanuarys, were of tile same general form as the aboveApril directive, while all of tile money market direc-

tives in 1977 were of the same general form as theabove October directive.3 In both forms of the direc-

tive, a level of the Federal funds rate is specificallygiven as a near-term operating target (see Table I).Thus, in following an aggregates directive, the Open

Market Desk still uses a Federal funds rate as itsoperational objective.

The Open Market Desks implementation of theFOMCs domestic policy directives in 1977 resultedin rates of monetary growth that often exceeded thelonger-run target ranges set by the FOMC (Chart I),and which often exceeded the shorter-run ranges as

well (see Chart II). The Federal funds rate, on theother hand, svas almost always kept witlnn its shorter-

run ranges during 1977 (see Chart III). This result isnot surprising given that the short-run implementation

a range hut also in terms of a level within a range,one could expect that the Federal funds rate wouldfluctuate less than the monetars- aggregates.

Under a money market directive, the Open MarketDesk in 1977 sought to alter the Federal funds rate illresponse to growth of the monetary aggregates only

if these aggregates grew, or were projected to grow,at rates approaching or outside the limits of theirranges. Since the shorter-run ranges for the aggregateswere wider than the longer-run ranges, and since tileFOMC in 1977 instructed the Desk to give equalweight to Ml and N12 in implementing policy, therecould he substantial fluctuations in either Ml or M2from tile midpoints of their specified ranges withoutleading the Desk to cilange its operating target level

for the Federal funds rate.

l0Record (December 1977), pp. 1073-74.3~

TlleJanuary directive bad a less specific format than otherdomestic policy directives im~1977. In January the Committeesought to achieve bank reserve and money market condi-turns consistent with moderate growth in monetary aggre-gates over time period ahead. See the Record (March1977), p. 259. As was the case in previous years, specificranges for the monetary aggregates and Federal funds ratewere given in the Record of Policy Actions at the Januarymeetulg, instead of in the domestic policy directive. In addi-tion, the J aauasy Record did not specify that the Federalfunds rate should be changed in response to deviations fromthe midpoint.s of the monetary growth ranges, as was thecase in other aggregates directives in 1977.

of policy remained, as in previous years,control of the Federal funds rate. Since theFederal funds target was set not just in

keyed toshort-runternis of

FEDERAL RESERVE BANK OF ST. LOUIS MARCH 1978

FOMC Short-Run Ranges for Monetary AggregatesFOMC Ranges for Federal Funds Rate

Under an aggregates directive, with the exceptionof Januarys directive, the Open Market Desk in 1977sought to alter tile Federal funds i-ate in response togrowth of the monetary aggregates only if these ag-gregates grew, or were projected to grow, at ratessignificantly different from the midpoints of theirranges. However, since the FOMC again instructed

the Desk to give equal weight to Ml and M2 inimplementing policy, there could he substantial fluc-tuations from tile midpoint of the range of one of tileaggregates without leading tile Desk to change itsoperating target level for the Federal funds rate, pro-vicled that the other monetary aggregate was growigat a rate close to the midpoillt (If its shortertermrange.

UNCERTAINTIES AFFECTINGSHORT-RUN OPERATING

TARGETS IN 1977

The possibility of wide short-run fluctuations in Niland M2 was increased further in 1977 by the cautionsapproach taken by tile FOMC in interpreting changesill these monetary -aggregates. At time January meet-ing, the Committee took into account tl~efact thatgrowth of Ml ill 1976 llad ileell significantly slowerthan expected due to the spread of various financialinnovations that reduced the ptiblics demand for de-mand deposits for transactions purposes. In contrast,growtll of the broader money measures (M2 and M3)

had been more rapid than expected in 1976. Severalmembers of the Committee suggested that these ad-justments to financial innovations were expected tohave less impact in 1977, so that M2 and M3 wereexpected to grosv at somewhat slolver rates in 1977than they did in 1976.32

Since the duration of the effects of tllese financialinnovations could only be very roughly foreseen, theFOMC at tIle beginning of 1977 was faced with someuncertainty as to what extent future ei~anges in thepattern of growth (If tile aggregates would he ~nflu

eneed by these innos-ations. This tended to lead theFOMC to react cautiously- to changes in moneygrowtll. However, members of the FOMC reactedcantiouslv to cilanges in money growth for a numberof other reasons as well, as can he seen by examiningthe Committees discussions at various meetings.

For example, at tile March meeting it was ohservedthat increased economic activity over the weeks aileadwould tend to isles-ease the demands for transactionsbalances and thereby tend to increase the growtllrates of the n,onetas-v aggregates. At the April meet-ing. the Comnmittee decided it would he willing totolerate twon,onth ranges for n,onetarv growth thatwere higher than the longer-nm ranges determnined atthis mneeting (see Table I) because of tile expectationthat the forces contributing to rapid expansion in M-1

llteLrCF ( MareS 1977 ), pp. 25-556, and Staienseuts ( Fel,ruarv 1977). pp. 123-24.

Record (May 1977), P 481.

vi

Page 9

FEDERAL RESERVE BANK OF ST. LOUIS

in early April would prove to he transitory and thatthe bulge in growth for the month as a whole wouldfor the most part be offset by slower growth lateron.34 At this meeting there was also discussion ofuncertainties associated with the energy program.which some members of the Committee felt limitedreductions in the longer-run growth ranges.:ls

At the May meeting the Committee reduced theirtwo-month ranges for Nfl and M2, as they took ac-count of a staff study which suggested that the largeincrease in Ml in April raised the money stock suth-eiently to accommodate much of the publics need foradditional transactions balances in the second quarterand, consequently, that monetary growth was likelyto be slow.36 The conclusions of this study were alsotaken into account in setting the two-month growthranges at the June meeting. However, a staff studyindicated that demand deposits were likely to be in-creased snore than usual in July as a result of theearly distribution of social security cheeks. Due inpart to the uncertainty which this technical factorintroduced into the growth of money during July, theFOMC adopted a money market directive for thefirst time in 1977,~

The FOMC returned to an aggregates directive atthe July meeting after money growth was moderatein June. Although money growth was very rapid inJuly, data on Ml and M2 that became available afterthe July meeting were considered to be very tentativebecause of unusual patterns in the data received justafter the power failure in New York City. In addition.the Comnmittee at its August meeting expected moneygrowth to slow in August and September. Conse-quently, an aggregates directive was mamtanled andthe two-month ranges for money growth were low-ered (see Table I).

However, at the September meeting it was notedthat money growth had not slowed in August as muchas was expected at the August meeting and thatmoney growth was also expected to increase in Sep-tember. Some members of the Con,rnittee thoughtthat the recent higher growth in Ml reflected the endof the effects of earlier financial innovations. Thus,they thought the demand for money may have in-creased, returning to a more typical relationshipbetween money and CNP.35 There was considerable

~Record(June 1977), p. 572.

Ibid., p. 570,

~Record (July 1977), p. 663.

~Reeord(August 1977), pp. 736-37.

~~Record (November 1977), pp. 1002-3.

Page 10

MARCH 1978

disagreement among Committee members as to theappropriate ranges for the monetary aggregates andFederal funds rate at this meeting. The Committeedecided on an aggregates directive with a higherrange for Ml growth than that adopted at the Augustmeeting (see Table I), but there were four dissentingvotes. Messrs. lily and \Valheh dissented becausethey felt the directive allowed more firming in moneymarket conditions than was appropriate at the time,while Messrs. Morris and Boos dissented because the)felt the directive was all inadequate response to re-cent rapid growth of the monetary aggregates.39

At the October meeting, the growth rates for Mland M2 were expected to increase at or above theupper limits of their September-October ranges. Un-eertamty was expressed at this meeting as to theunderlpng causes of the expansion of the demand formoney (narrowly defined) in the second and thirdquarters 40

It was suggested tlsat various changes in financialtechnology that had been resulting in substitutionof income-earning deposits for demand deposits hadbecome less powerful and, eonsequentiv, that in-creasing demands for transactions balances in thelatest two quarters had had a greater effect ongrowtll in Ni-i.

Because of uncertainty about the causes of recentrapid Nil growth, some members had less confidencein the behavior of tile monetary aggregates as guidesto monetary policy and thought that it was impor-tant to emphasize that tile Committees basic goalwas to contribute to the satisfactory performance ofthe economy rather than to pursue pre-determinedrates of monetary growth.~2Against this backgroundof uncertainty, the FOMC decided on a money mar-ket directive and raised the two-month ranges forNil and M2 growth.43

Money market directives were also decided uponat the November and December meetings, whilegrowth of the monetary aggregates slowed down dur-ing the last two months of the year. In November theCommittee favored maintaining stable Condlitions inthe money market and were willing to accept a wider

pp. 1005-6.40

Reeord (December 1977), pp. 1063 and 1068.

Ibid., p. 1068.

12Ibid. p. 1069.

Ibid., p. 1072, Mr. Morris dissented frons this actioss becausehe preferred that the Committee take mole aggressive actionto eurhl excessive growth in the nsonetamy aggregates. ,(Ibid., p. 1074).

FEDERAL RESERVE BANK OF ST. LOUIS

growth range for Ml which included relatively lowgrowth. Slower growth of the aggregates in the lasttwo months of the year was acceptable to tbe Coin-mittee in view of their earlier rapid rates of growth.At the December meeting the Committee again fa-vored maintaining stable money market conditions.Taking account of the performance of the economy.the slowing in the growth of the aggregates. anduncertainties in financial markets associated with theend of the year, the FOMC did not feel that increasesin short-term interest rates were warranted. On theother hand, with the decline in the value of the dol-lar on foreign exchange markets, the FOMC did notfeel that decreases in short-term rates were warrantedeither.44

The uncertainties about the monetary aggregatesexpressed at the monthly meetings reflect variouscases of more general uncertainties. In presenting thequarterly report of the Board of Governors to Con-gress, Chairman Burns stated on February 3, 1977:

I must note, however, as I have repeatedly in thepast, that profound uncertainties surround the rela-tionships among the various monetary aggregatesand between rates of monetary expansion and eco-nomic performance.45

Furthermore, in the quarterly report presented toCongress on May 3, 1977, Chairman Burns discussedone of the reasons why monetary growth objectivesare difficult to achieve. After noting that tlsere hadbeen no meaningful reduction in actual rates ofmoney growth over the past two years despite reduc-tions in the FOMCs longer-run ranges, he stated:

That unintended consequence is part1~-the result ofdata deficiencies that complicate the already formi-dable task of adjusting or approximating monetarygrowth objectives. Initial estimates of the monetaryaggregates sometimes differ considerably from esti-mates made later when fuller data became available.

A factor contributing to the measurement problesnhas been the inadequacy of deposit data for non-member commercial banks. [Emphasis added.]

Mr. J. Charles Partee, a member of the Board ofGovernors, presented the views of the Board of Gov-

44Record (January, February 1978), pp. 23, 106.

~Statemeats (February 1977), p. 124.

~Statements (May 1977), p. 467. The problem of data de-ficiencies mentioned by Chairman Burns became more diffi-cult as 1977 progressed. Benchmark revisions based on 1977Call Report data from nonmcmber banks were not made,Due to a reporting problem, no quarterly Call Reports fromnomnember banks in 1977 were used to npdate the monetaryaggregates.

Page 12

MARCH 1978

ernors to Congress on September 27, 1977, concerningthe rapid rates of monetary growth between Februaryand August. In his statement to Congress, he dis-cussed sources of uncertainty in controlling the mone-tary aggregates.

Some would argue that the Federal Reserveshould have responded more forcefully to the Apriland July bulges in the money supply. Irdeed, a fewwould say that the ,eserves necessary to support thedeposit expansion simply should not have been pro-vided, letting financial markets-and the economysuffer whatever consequences might result. But theFOMC continues to believe that the wiser course isto limit the speed with which money market condi-tions are adjusted to changing monetary growthrates. We believe this partly because the monetaryaggregr-iteu particularly M-1 have proved to heinherently unstable in the short run. Bulges of amonth or two in duration are often reversed subse-quentlv, as was the case in the spring and summerof 1975 and again in 1976. Prudence in our actions isdictated also by the fact that the relationship be-tween the various pleasures of monetary growth andthe performance of the economy is loose and urn-c-liable, since it is subject to rather abrupt slsifts as theresult 0f changing financial pracbces and economicconditions.4 [Emphasis added.]

Instability in the demand for money is of particularimportance to implementation of the FOMCs policydirectives to the Open Market Desk, since in theshort run the Desk seeks to accommodate the publicsdemand for money.

The FOMCs instructions to the Manager of tlseSystem Open Market Account regarding the man-agement of bank reserves provide to a consider-able extent for the accommodation of the publicsdemand for money in the short run, while at thesame time prescribing a response when growth ofmoney appears inconsistent with the Committeeslongterm objectives.48

If the publics demand for money is unstable in theshort run, a point on which economists disagree,accommodating these shifts by holding short-terminterest rates constant requires frequent changes in

the supply of bank reserves. As a result, moneyfluctuate considerably fromgrocvth rates could

month-to-month.

~~Statemeats (October 1977), p. 890.

~~The Insplcmentatioa of Monetary Policy in 1976, FederalReserve Bulletin (April 1977), p. 326. This article wasadapted from a report subnsittcd to the FOMC by Alan R.Flohncs and Peter D. Sternlight. Manager and Deputy Man-ager of the System Open Market Account, respectively. JohnS. Hill and Christopher J. McCurdy were primarily respon-sible for its preparation.

FEDERAL RESERVE BANK OF ST. LOUIS MARCH 1978

CREDIT AND MONEY GROWTHMonthto-mouth fluctuations in money growth can

also be related to changes in the demand for credit.In his quarterly report of the Board of Governors toCongress on November 9. 1977, Chairman Bums dlis-cussed the growth of credit during 1977 as an addi-tional reason for the rapid growth of money,

There is no iigid link between the total volume ofcredit outstanding in the economy and! the Nationsstock of money. but movements in credit and moneyd0 tend. 0f course, to be positivcl~ related. If thedlemandl for credit begins to strengthen at a timewhen financial mstitutions are relatively 1i~pid, agood amount 0f credlit expansiors can 0cc Sr withoutmuch if any change in monetary balances. Butas the economy grows and credlit expansion con-tinues, sooner or later a needl for enlarged1 moneybalances will arise in order to facilitate the enlargedltotal of credit transactions. Such a process has un-questionably been at work this year. and it explainsin some measure why the growth of Ml thenarrow money stock has acceleratedl recently inrelation to ninue\ - growth earlier in this expansion:5

At almost every FOMC meeting in 1977. data on theexpansion of bank credlit was reported as being strong(see Supplement).

lo the extent that the shortterm operating targetof the Federal Reserve is keyed to stabilizing theFederal funds rate, increases in the demand for creditwhich put upward pressure on this interest rate willtend to he accomnsodatcd by the Open Market Desk.Thus, increased crerlit demand!s may be accommo-dlated just as an increase in the demandl for money isaccommodated by the Open Market Desk. ,As pointedout in the abnye quotation by Chairman Burns. suchan accommodation of increasedl credit demands ap-

parently occurred in 1977.

Since an increase in the dlemanol hr money and anincrease in the dlemandl for credit can both be sources

of upward pressure on the Fetleral fundls rate, it maybe difficult in practice for the Federal Reserve todistinguish between the two. Thus, by stabilizing theFederal funds rate through changes in bank reserves,the Federal Reserve may accommodate an increase in

the demand for credit, with the result that the moneystock rises.

MONETARY POLICY IN 1977TIGHT OR EASY?

If the tightness or easiness of monetary policy isdlefined solely in terms of the changes in interest

Statements ( November 1977), p. 990.

rates, then monetary policy in 1971 was tight be-cause interest rates increased! during the ~ear. On theother handl, if the tightness or easiness of monetary

policy is dlefinedl in terms of the behavior of bank re-serves or the money stock (Ml). then monetary policyin 1977 was easy because these reserve or monetaryaggregate measures increased more sapidly in 1977than they did in 1976.

General descriptions of monetary policy sucb as

tight, easy, or moderate rarely appear in themonthly Record! of Policy Actions of the FOMC,However, in the Record for the September 20, 1977meeting it is mentioned! that most FOMC members

favoredl finding some middle groundl in tenns of apolicy response to rapid growth in Ml and M2.5 Indhscussing FOMC actions in the first ten months of1977, Chairman Burns in November also dlescrihed

monetary policy as taking a middle course.

Under the circumstances, we have ~udged it wiseto moe cautiously in adapting policy e wellrealize tlsat the middle course actually followed that of gradually limiting the availability of hank re-serves and thereby slowing the growth of money has left us open to the charge of temporizing. Infact, ye (lid not temporize at all, hut we did moveprudlentlv.

On the one band, restrictive action vigorousenougis to have kept M I growth within the projected ranges wnm Id. we believe, have forced a farsteeper d-lnnb in shnrttenn intes-est rates than actu-ally has occurred since April. This couldl has-cproved destructn-e to the smooth functioning offinancial uarkets audi might eventually liiive broughtserious injury to) our edonomv.

On the other hand, a determined effort by theFederal Resers-e System to prevent any rise in inter-est rates (luring recent months would have produced in the face of the credit pressures that have beenexperienced a rate of monetary expansion veilahos-e the rise that has actually occurred. That wouldhave been s-cry damaging, for it wouldl have prac-tically destroed any remaining hope of achiex-ingmastery over the inflationary forces that now uiose0! Sr society,

By taking measures to dumb the growth 0f mone. wehave diemonstratedl that we remain alert to the dan-gers of inflation. As a consedlueuce, longterm inter-est rates, which nowadays are extremely sensitive toexpectations of inflation, have remained substan-tially stable.51

Thus, Chairman Bums felt that in 1977 the FederalReserve moderated increases both in interest rates and

iSORecord (November 1977), p. 1003.

aiStatcinents (November 1977), pp. 991-92.

Page 13

This supplement consists of selected excerpts fromthe Record of Policy Actions for each of the FOMCmeetings in 1977. Each Record includes analyses ofcurrent and projected economic developments, dis-cussions of current policy actions, and long- and short-run operating instructions issued by the FOMC to theTrading Desk. The full text of each Record of PolicyActions appears in issues of the Federal ReserveBulletin,

Meeting held on January 17-18, 1977Over most of the inter-meeting period incomingdata suggested that the aggregates were growing atabout the expected rates, and the Manager of theSystem Open Market Account conducted operationswith a view to maintaining the Federal funds rateclose to 4% per cent the level prevailing at thetime of the December meeting. Near the end of theinter-meeting pes-iod, incoming data began to) sug-gest that over the December-January period growthin M-1 would be snmewhat above the range that hadbeen specifleol by the Connnittee but that growth inM-2 would he near the midpoint of its range. Withthe Committee scheduled to meet in a few days, theManager continued to) aim for a Federal funds s-ateof about 4% per cent, although with a little greaterwillingness to tolerate small deviations above thatrate than below it.

In the discussion of the ecorsomic situation at thismeeting, members of the Committee agreed that theoutlook for growth in real output of goods and senices had strengthened It was also observed,however, that even if growth in real GNP during1977 were siguificantlv greater than projected by thestaff, rates of resource use iss the fourtis d4uarter of

Page 14

the year still would not appear to he excessive;indeed, unemployment would still be relatively high.

Although Committee members in general nowheld a more favorable view of the economic situa-tion and outlook than they had a month or two ago,attention \vas called to) a number of problems. Forone, the severity of the winter weather and its im-pact on the availability of fuels for mdlustrial useposed a threat to output and employment in someparts of the country. Even though the unemploymentrate was still unacceptably lugh, current and pro-spective rates ef inflatims also remained a source ofmajor concern.

A measure of concern was also provoked by cer-tain aspects of the Feoleral huolget. after incorpora-tion of assumptions about the new adiministrationsfiscal proposals.

It appeared likely that over-all dlemands for fundsin securities markets would continue to) lie sizableduring the months just ahead,

most members preferred to have operatingdecisions in the period ahead based primarily on thebehavior of the nsonetarv aggregates.

Meeting Held on February 15, 1977Throughout the intermeeting period iucomning datasuggested that growth in both M 1 and M2 over theJanuaryFebruary pcriool woinld he well within theranges that bad been specified by the Cojnn,ittee.Accordingly, the Manager d-ontmnerl to) dlnect op-erations toward maintaining the Federal funds ratein the-area 0f 4% to 4% per cent.

In tlseir discussion of recent economic develop-ments and prospects, members of the Cmnmittee

FEDERAL RESERVE BANK OF ST. LOUIS MARCH 1978

iii money growth, and at the same time avoided in- tant factors affecting the implementation of the

creases in inflationary expectations. FOMCs short-nm operating objectives.

One of the FOMCs long-run objectives in 1977was to reduce gradually the growth of the mone-

SUMMARY AND CONCLUSIONS tam-v aggregates over time to rates consistent withgeneral price stability. During the year the FOMC

The Federal funds rate was generally within the reduced its longer-run ranges for growth of the mone-FOMCs short-nm ranges during 1977. Growth of Ml tary aggregates in pursuit of this policy. However,and M2, on the other hand, frequently exceedeol the due to the rapid growth of Ml and M2 during theFOMCs shorter-run ranges. Strong growth of credit in second and third quarters of the year, actual growth1977 and uncertainties about the relationship of rates of the monetary aggregates were not consistentmoney growth to economic activity were both inipor- with the FOMCs longer-run objectives.

SUPPLEMENT

FOMC Discussions in 1977

FEDERAL RESERVE BANK OF ST. LOUIS MARCH 1978

agreed that the underlying situation was strong andthat the losses in output, hours of work, and incomeresulting from the weather would soon he made imp.Most members agreed with the staff projectionssuggesting that growth in real CNP would accelerateto a rapid pace in the second quarter reflectingnot only the recovers from the weather-indlucedlosses but also the disbursement of tax rebates andrelated payments and then would continue at arelatively good rate thronghout the secmid half ofthe year.

However, one or two members expressed concernthat the weather disturbance and the tax rebatesmight cause large swings in business inventory in-vestment and therefore in total GNP.

Looking to the latter part of 1977 and into) 1978,some questions were raised about the adequacy ofindustrial capacity. . . . Concern was expressed thatthe margin of unused plant capacity that cculd bedrawn into production might be low in relation tothe amount of unemployeoi labor. It was also ob-served that rates of capacity utilization varied con-siderably among industries and that during businessexpansions bottlenecks begin to spread through theindustrial system long before over-all measures ofcapacity utilization reach relatively high levels.

It was suggested that the rise in prices mightbecome more rapid as activity expanded during theperiod ahead.

Total credit at U.S. commercial banks increasedconsiderably in January, following a small rise inDecember. Data for both months, however, weredistorted by special influences particularly a sub-stantial increase in bank holdings of bankers accept-ances late in 1976 that was largely reversed inJanuary.

As to policy for the period immediately ahead,Committee members in general advocated continua-tion of about the current stance. They differed littlein their preferences for ranges of growth in themonetar aggregates over the February-Marchperiod.

Meeting Held on March 15, 1977

Throughont the interval since the February meet-big, the Manager of the System Open Market Ac-count had continued to aim fosr a Federal funois ratein the area of 4% to 4% per cent. In the early weeksof the intenal, incoming data had suggested thatgrowth in both M-I and M-2 over the February-March period would be close to the midpoints of thespecified ranges. Estimates of the 2-month growthrates subsequently were revised downivard, but theyremained reasonably well within their specifiedranges.

In the discussion of the economic situation at thismeeting, members of the Committee were in generalagreement with the staff projection that real GNP

would expand at a rapid rate in the second quarterof 1977 and at a more moderate, hut still rathersubstantial, rate in subsequent quarters.

Several members expressed concern about the re-cent and prospective behavior of prices.

It was observed during the discussion that, giventhe longer-run ranges for growth in the monetaryaggregates adopted at the January meeting, theprojected rates of increase in nominal GNP implieda rise in the income velocity of money that was largefor this stage of a business expansion. In that connec-tion it was noted that significant upward pressureson interest rates miglst develop later in the year,particularly if prices should rise more rapidly thanprojected or if inflationary expectations shouldstrengthen. On the other hand, one member re-marked that, while interest rates played a role, thepredominant determinant of velocity changes wasthe state of confidence. On the basis of Isis judgmentthat confidence was improving, he thought it waslikely that the rate of increase in velocity would bequite high. Another member observed that in almostevery business expansion since \-Vorld War II, therate of increase in velocity had reached a primarypeak, then dropped back before reaccelerating to asecondary peak not quite so high as the first one.

Total credit at U.S. coinmercial banks rose more inFebruary than in any other month since the summerof 1974. Acquisitions of U.S. Treasury securities wereespecially large, holdings of other securities rosesomewhat for the first time since Nnvember, anoltotal loans continued to expand.

It appeared likely that over-all credit demandswould remain strong in the periool immediatelyahead.

As to policy for the period ismmediately aheaol,members of the Committee diol not ohffer greatlyin their preferences for ranges of growth for themonetary aggregates over the March-April period. ftwas suggested that the forces that had contributedto particularly slow growth in the monetary aggre-gates in February might he reversed and might con-tribute to rapid growth in March, and that such adevelopment should not necessarily cause concern.It was also observed that the upward momentum ofeconomic activity in the weeks ahead would tend to)expand demands for transactions balances and thusto exert some upward pressure on growth rates forthe monetary aggregates.

Meeting held on April 19, 1977

Over most of the interval between the March andApril meetings, incoming data suggested that the2-month growth rates for M-l andl M-2 would1 he veilwithin their respective ranges. Consequently, theManager of the System Open Market Account con-tinued to aim for a Federal funds rate in the area of4% to 4% per cent. Near the end of the period,however, it appeared that growth in M-1 would

Page 15

FEDERAL RESERVE BANK OF ST. LOUIS

exceed the upper limit of its 2-month range as,d thatgrowth in M-2 would he is, the upper past of itsrange. In those cirm,mstances, the Manager aimedfor a Federal funds rate of around 4% per cent.

The staff projections for subsequent quarters in-corporated revised assmnptions for fiscal policy, asa result of the Presiolents announcement on April 14of changes irs his package of n,easures designed tostimulate growth isi economk- activity.

Growtls in meal CNP over the next few quarterswas still projecteoi to, he substautial, refleo:tingstrength in consumer demands and expansion ofhusiness inyestn,ent ii, hoth fixed d-apital and inven-tories. The projections continued to suggest that therise in the fixed-weighted price inolex for gsoss busi-ness product would he less rapidl in the quartersimmediately aheaol than iii tl,e first quarter, when itbad accehcmated because of the adverse effects ofsevere weather. Upwaroh price pressures o\er thenext several quarters were nonetheless expectedl to,be somev,-hat greater than haol bees, anticipatedearlier, partly because of further deteriamatio,ms in theoutlook for prices of some foodls and partly becauseof the prospect of ano,ther increase i, the minimumwage soon after midyear.

Withdrawal of the proposal for tax rebates wasthought to be of co,nsidesah,le significance. Somemembers expected that this change. especially inconjunction with, the n,easures aismed at reducinginflatio,n, would contribute to improvement in h,sssiness and consumer confidence and is, that way wouldadd strength to the economic outloo,k.

Attention was drawn toi other potentially tro,ublesome aspects of the dexeloping economic sits sation.Thus, one member con,n,enteoi thsat growth is,nominal CNP over the o1uarters aheadi at the rateindicated in tl,e staff proijectio~ns which did nottake the energy prograu~i,ito account might wellbe accompanied by o-onsiderabhe strain in financialmarkets.

Over the first quarter, expansion in to,tai bank credit

was greater tbau i, any o,tl,er quarter in 2years.

For the period immediately ahead, tb,e principalnew factor in the outlook for credit demands wastime prospective sh,fft in the position o,f tb,e U.S.Treastsrv from a sizable net borro,wer tos a temporaryrepayer oif debt At the same tis,,e, how-ever, l,usinessdemands for d-redhit were still expected to expas~das a,-esult of continuing impro~veme,mtin econon~icaditv. Projectio,us of consus,,er expessohtsss-cs is,iphied acoutimsed high rate of growth in co,nsnmer creditoutstanding, ai~dexpansion of smortgage debt wasanticipated to remain large. State and local go~-ern-meat borrowing was-also expected to ren~ainsizable.

As to policy for the period immediately ahead, theCommittee nsemhers wem-e willing to to,lerate growthin the monetary aggregates over tue April-Marperiod within ranges that were higher than thoseadopted for the year ahead because of the expecta-

Page 16

MARCH 1978

tion tb,at the fo,s-ces contributing to rapid expansionin M-l in early April would prove to he transitoryauol that the bulge i,, gro~wtli fo,r the month as awh,ole wouhol for the most part be offset by slowergs-owth later on.

Meeting 1.-held on May 17, 1977

Data that had become-available in the days imme-diately after the April uieeting suggested that overthe April-May period both M-1 and M-2 wouldgrow at rates well within their specified ranges,although it appeared that growth in April would bestrong. Accordingly, the Manager of the SystemOpen Market -kccount sought to maintain the Fed-eral funds rate at about 4% per cent or a shadehigher. liv late April, ho,wever, incoming olata sug-gested that over the 2-mo,,tI, period M-1 was likelyto grow at a rate considerably above the upper limitof its specified range as,d that M-2 was likely to growat a rate close to the mioll,onnt of its range. In thosecircumstances System operatio,us is hate April andearly May were co,nducted with a view to raising theFederal funds rate to,ward 5per cent, the upperlimit of its specified range.

On May 6 the Committee voted to increase theupper limits o,f the range fo,r the Federal funds ratefrosn 5to 5per cent, with the understandingthat the Manager wouhd use the additional leewayonly if new data becoming available befo,re May 17,the date for this meeting, suggested tl,at the aggre-gates were strengthening sigsmflcantly further on bal-ance. Such, additional streugthi did not develop inthat period, and the Manager continued to am, for afunds rate of aro,uud 5per cent. In the final daysof the period, the rate actually fluctuated between5amid 5% per cent.

With respect to the economic situation and out-look, men,bers of the Committee generally were ofthe view that the expansion in business activity wasquite strong. In particular, they expected over-allgrowth to rea~ainsubstantial for a number of quar-ters ahead.

The recesit acceleration in the rate of price risewas a scurce of concern.

At U.S. banks, gro,wtl, in total credit acceleratedduring April from th,e already brisk pace of the firstquarter. All major loan categosries expanded signifi-cantly further, and holdings of tax-exempt securitiesincreased sisas-phy for the first time since November.

As to) policy for the period ia,mediately ah,ead,men,bers o,f the Co,snn,ittee thought that relativelyslow growthi iii monetary aggregates over the May-Juae period would be appropriate in order to com-pensate at least in part for the exceptionally rapidgs-oiwthi is, April. In considerissg the ranges o,f growth~to be specified for the 2-mom,th, period, they tookaccount o,f a staff a,,ahysis tl,at suggested that theextremely large expansion in hi-i in April appeared

FEDERAL RESERVE BANK OF ST. LOUIS MARCH 1978

to, hae raiserh the smoner stock sufficiently to accosm-mo,-date much of tb,e prshhics need for additionaltrarmsactions h,alances in the seconob quarter and, con-sequentlv. tl~atmonetary growth was hikelv to heshow.

Most Cos,,mittee n~emb,ersdiol ,,ot wish to~ see arise in th~eweekly-average Federal fisnds rate above5% per cem,t during the inter-meeting period atheart not with,out further co,nsuhtation In sup-po,rt of com,straining tb~eupper his,,it to -5per ces~t,it was suggested that a further rise of 50 to 60 basispoints roughly the magnitmmde r,f the increascsince the April meeting was likely to h,ave moresignificant repercussions on financial markets andthat co,nsiderabhe uncertais~ty existed about the sin-denying strength of the monetary aggregates.

Meeting Held on June 21. 1977

Throughout the inter-meetiisg period, incoming datasuggested that over th,e May-June period M-i andM-2 on the average wouhd grow at rates well with,inthe specified ranges. Accordingly, the Manager con-tinned to aim for a weekly-average funds rate ofabo,ut 5per cent, am,d the rate remained chose tothat level during the period.

Staff projections suggested that in the second half of1977 amid in early 1978 the rate o,f growth in realCNP would be fairly rapid, ahthough significantlyless so than in the first half of this year. The projec-tions also suggested th,at the rate of increase imi priceswould moderate frosm th,at in the first h,ahf but wouldremain comparativehy high.

It was ahso suggested that confidence has beenenhanced by System policies specifically, by thepromptness with which open market operations dur-ing the periosd between the Aprih as,d May sneetingsresponded to th,e April surge is monetary growth.Thie magnitude of recent declines in yields on hong-tem, bonds was cited as partial evidence for thisview.

At U.S. has,ks, growth in to,tah credit showedi some-what in May froiu th,e relatively rapid pace of April,but th,e rate was close to the average for theJanuary-Apsil period.

In considering policy for the period insmediatehyahead, the n,embers o,f the Comn,ittee to,ok accountof the hkehih,ood that growth in hi-i would ren,ainrelatively show in June continuing to respond tomth,e April surge but that growth fron, the first to,the second quarter would nevertheless exceed tl,eCommittees homsger-rum, range for th,at aggregate. IsmJuhy, according to staff analysis, expas~sion of hi-iwas likely to be magnified b~-a purely tech,nicahfactor namely, distm-ibution of sociah securitychecks earhier in the month than usual, therebycausing demand deposits to be larger than theyothenyise would be over the 3-day weekend includ-ing Juhy 4.

Most menmb,ers favo,red giving greater weight thannsssal to mos,ev market condition,s in o onds.sctingopen market operations in tl,e nerir,d ns,tih tb,e nextnieeting because of uncertainty ahoust hi-i grov.thrates in the near temn~.However, a rm,smber of themneml,ers expresseoh a preference for continuing tob,aye operatis,g ohecisio,ns i,, th~e 1,eniod ah,eaolb,ased prin~arih o,,, the heb,avior of th~emonetaryaggregates.

Ahmost all mesmhers fayo,red ohireo~ting operations at heast initiahhv toward s,,ointaiuing tb,e Fed-eral fui,ds rate at about its prevaihing level of5% per cent.

Meeting Held on July 19, 1977

Throughout the inter-meeting period, incoming datasuggested that over the Jnne-Jnhy periodl M-i ammoM-2 wouhol grow at rates within those [tl,eir] ranges.Accordingly, th,e Manager of the Systemmi Open Mar-ket Account sought to, mnaim,tais~ th~eFeoleral fundsrate around 5% per cent.

Staff projections stsggested that the mate osf groswthiin reah CNP iyouhd be hess rapid in the second halfof 1977 than in the first amid that it wo,uhd showson,ewl,at further into 1978. The projectiomns ahso ssmggesteol that the rate o,f im,crease in prices wouldsmo,derate fsosss th,at in tue first half hot wo,uhd res,,ainhigh.

In their discussio,n of the economic sitosation, acmhers of the Co,s,,s,, ittee ags-eeol with time general out-lines of the staff projectiosms, wl,ich, were describeohas presesiting a fairly optimistic picture of pro)spec-tive developments. Despite thme bmo,aol com,se,sus onthe osstho,o,k, several s,,cmbers suggested thait expannomi in sosne sectomrs of den,as,oh mnigh~tprove to) behess stromig than ex1,ected by tl,e staff and thatgrowth is~s-cal GNP was more hikehy to fall short o,ftIns, to exceed the pro,jected rates.

At U.S. comn,erciah bas,ks, gmowth, in total creditslowed somewhat further is, June and was shigh,thybelow the average for th,e first 5 months of th,e year,T1,e showing iii June s-eflected dec]ines in s,et acoluisitions of Treasury as,ol other securities. Cro,wth, omf reahestate loans acceherateol to near-record pace, amidgsowth of most osther major catego,ries rif loams wassubstantial.

All i,,embers fa-os,s-ed a retursm tom basing decisiom,sfor o,pemr n,arket operations is, the perio,d in,mediatehv aheadh pnisnanihy on the beh,as-ior omf thse mom,etory- aggregates. At its n~ectis,gims June thie Co,s,,mittee h,ad ohecioled to giye greater weigh,t than misualto mnonev n,arket con,ditiom,s in conductis~goperatiomisism the peniooi ,mm,tih thus meetim~g.

Alasomst all members fayo,ned directing operatiosusinitialhy toward the osbjective of maintaining timeFederal fsms,ds rate at its current level of 5% percem,t, but a few members suggested that operations

Page 17

FEDERAL RESERVE BANK OF ST. LOUIS

be directed toward achieving a slightly higher ratewithin a short time.

Subsequent to the meeting, on August 4, nearlyfinal estimates indicated that in Jmmly M-1. had grownat an annuah rate of about 18per cent and M-2 ata rate of ahonit 16per cemut, For the Juhy-Ansgustperiod staff projections suggested tb,at the amnmsalrates o,f growth for bo,th aggregates wo,uhd he wellabove the tspper limits of the ranges specified by tl,eCosmmittee in the next-to-last paragraph of thedomestic policy directive issued at the July n,eeting.

The Manager of the System Open Market Accountwas currently aiming at a funds rate of 5% per cent,the upper limit of the inter-meeting range specifiedin the directive.

Against that background, Chairman Bums recom-mended on Augssst 4 that the upper limit of therange for the Federal funds rate be increased tom 6per cent so th,at the Manager might have some addi-tional leeway for operations, while continuing to takeaccount of the current Treasury financing and finan-cial market developments. He further recommendedthat this additional leeway be mssed very gradmmahhy,and only in the event that the aggregates continued toregister values far beyond the Committees objectives.

Meeting Held on August 16, 1977

Data that had beco,me available in the days imsme-diately following the July meeting smsggested thatover the July-August period both hi-i and M-2wom,hd grow at rates in the upper parts of theirspecified ranges. These data were considered espe-cially tentative, however, becamsse nsnusmsah patternsin the figures received jsnst after the power failure inNew Yo,rk City suggested that the faihnmre might haveintroduced statistical distortions. Th,e System Ac-count Manager, therefore, continued to seek a Fed-eral funds rate of about 5per cent. Later, however,when new data not o,nly confirmed the initial signsof strength bmmt also suggested that growth in theaggregates would be somewhat above the upperlimits of the specified ranges, System opesations wesedirected at achievim,g a higher Federal funds rate,

Information that became available on August 4suggested th,at the growth rates in the aggregates inthe July-Augnst period wotsld be well above theranges specified by the Committee, and on August 5the Committee voted tom increase the upper himit ofthe range for the funds rate to 6 per cent, It wasunderstood that the Manager would use this addi-tional leeway very graduahly and only in the eventthat the aggregates continued to register values farin excess of the Commmittees objectives. When suchstrength in the aggregates did persist, the AccountManager aimed at a Federal funds rate of about6 per cent.

In the Committees discussion of the economicsituation, the snembers agreed that the expansionwas likely to continue for some time.

Page 18

MARCH 1978

Total loans [in Juhy] rose n,ore rapidly than in anyother month since last October, sefiecting strength inmost major categories.

In crsnsidering policy fomr tl,e period immediatelyahead, members of the Committee nomted that growthin the monetary aggregates was expected to slowmarkedly in Augssst and September. Because of thesharp increases in July, however, expansion in thethird quarter as a whole particmmharly in M-1 would be relatively rapid. It svas observed that con-siderably shower growth rates wo,mdd he needed insubsequesut quarters if monetary growth for the yearending with the second quarter of i978 was to bekept within the ranges that the Committee had de-cided upon in July.

While the views of members on appropriate short-run policy did not differ greatly, a nun,ber of mem-bers placed particular stress on the need to resistfurther sizable increases in the monetary aggregates,nosting that continued rapid growth would foster in-flationary expectations and weakening of confidencewithin the business community, Other members putmore emphasis on the sizable increase thuat had oc-curred since hate April in the Federal funds rate andother short-term interest rates, and sonIc expressedreluctance to seek further tightening in the moneymarket at a time when growth in economic activitywas showing signs of moderating. These memberssmsggested that, in the absence of unusual behavior inthe monetary aggregates, it wonshd be desirable to)maintaimi relatively stable conditions in the moneymarket for the time being.

The members agreed that, in view of the Julybulge in the nuonetar aggregates, no easing ofmoney market co,nditions should be sought in thecoming interval even if growth rates in the aggre-gates during the August-September period appearedto be quite how.

Meeting Field on September 20, 1977Data that had become available in the weeks

immediately following the August FOMC meetingsuggested that over the August-September periodM-i was growing at a rate in the sipper half andM-2 at a rate near the midpoint of their respectiveranges. Accordingly, the System Account Managercontinued to seek a Federal fmmnds rate of arosmnd6 per cent. Near the end of the inter-nueeting period,growth in M-1 for the 2-month period appeared tobe exceeding the upper limit of its range and growthin M-2 appeared to be in the upper half of its range.Therefore, the Manager sought a firming in the Fed-eral funds rate to around 1/~per cent, and the rateaveraged close to that level in the 5 days jnmst priorto this nueeting of the Co,mmittee.

In the Committees discnssiors of the economicsituation and outlook, the members agreed asthey h,ad at the August meeting that the expan-sion was likely to continue for some time, and most

FEDERAL RESERVE BANK OF ST. LOUIS

of tl,emn expected that real GNP wonsld grow atabout the momderate pace projecteoh by tise staff.Howeves-, somne members expressed dotsbts aho,nstthe vigor omf the expansion.

Concern was expressed about the outlomok for bothnsnemploysnent as,ol prices.. It was remarkeol thateven if real CNP grew at a n,oderate pace over thenext year. little progmess woisld he n,aohe in reducingthe unenuplovnuent rate. . . - Moreover, one snemberobserved, recent experience had shosvn that highunemployment did not greatly seduce the rate ofinflation, and the staff projections did suggest per-sistence of bothu a rapid rate omf isillation assd a }sig}srate of nmnemphoyment.

At U.S. commercial banks, growth, iss total creditaccelerated during August to a rate somewl,at abosvethe average for the first 7 mosuths of i977.

In their discussion at this meeting of policy fomr thseimmediate future, Commmittee members diffes-ed intheir views on the apprompriate response to the re-cent rapid growth in the monetary aggregates. Itwas nomted that growth in M-i and M-2 had nomtslowed so much in August as had been expected andthat it apparenthy syas picking msp somewhat in Sep-tesnber making it likely that the rates omf mnonetaryexpansion in the third quarter wom.shd be high relativeto the Committees longer-run ranges. Son,e men-bers thought that the Comn,ittees primary objectivein the period imn,ediately ahead should be tom resistcontinued rapid expansion in the aggregates, in lightof the implications of such expansion for infiatiomsand inflationary expectatiomns. On the omther hand,some n,embers advocated avoiding substantial in-creases in interest sates at present, in light of theirdoubts about the econosnic ossthook, It was also ssotedthat the recent ligh rate of gromwths imi hi-i snightrepresent a return tom a snomre typical relatiomishiphehyeen that rate and tlse growth rate in nominalGNP fomhhomwing a period is, wisich the dlemaas,ol formoney had been held doswn by changes in financialpractices and accordimsghv th~atit might not war-rant the kind omf policy sespoase tim at wosmld he ap-propriate under omther circmsmstances. Most men,bers.however, were of the opinioms ti,at tI,e Comnsmitteecould not afford to ignore eithser the uncertainties ina generally favorable ecomnomic outhomomk or the recenthigh rates of momnetary growth, and the~favoredfinding some middle ground.

Meeting Field on October 17-18, 1977

In accordance with the Comnsittees decision, theManager of the System,, Open Market Acco,msnt beganimmediately after the September meetissg tom seekbank reserve conditions consistent with a Federalfisnols rate of aromss,d 6per cem~t,Data that werebecoming available at the same time suggested thatover the September-October period hi-i and M-2wonmhOl grow at rates at or ahomve th,e Tipper himits ofthe ranges specified by the Committee, amid tue esti-

MARCH 1978

mnates omf these gromwth rates were raised further onthe l,asis of the ohata that became available in sub-seqmsent weeks, Tl,em-efo,re, the Manager sosmght agradmsah finning in thue Fecheral funds rate to 6perces,t, the smpper hin,it of its specifleoi range.

Isu the Cosnsnittees discussion of the economicsituatioms. tlse members agreedh that th,e expansion inactivity \\as likely tom coss,tinue fomr some time to comme.Tl,ey ohiffereol, however, in their assessments omf thuepromspective vigor omf the expansion.

Uncertaim,ty was expresseol about time nsnderhvingcas,ses o,f the expansiomi of the ohes,,as,d for money(narromwlv defls,ed) in the secomnd and third quartersand about the implications omf that expansiom, forpohicv. It was suggested th,at variomnms changes imsfinancial technology that haoh been resulting in smsb-stitutios, of incomn,e-earning deposits for demand de-posits had hecomn,e less pomwerfuh andl, com,seqssently,that increasing demnands for transactions halas,ces is~the latest two quarters h,aol 1,ad a greater effect ongrowths in hii. Os~emneinslmer suggested that thedemas,ol fomr momsey h~adahsom imeen raisedh recem,tly byincreased1 osmucertairmty omf varionss kinds abomnst con-ditions in the job snarket, abo,mst prices of securities,about foreigu exchamsge rates, as,d ahmomst other ele-ments in the ecosnommic situatios~ and tI,at thus hadcontrihsmteoh tom thue apparent olechis~e is) the incommevelomcity of hi-i is~the third quarter. In his view,however, the oiechis,e in vehomcity n,omre fm.ss~d1amentalhreflecteoi tlse shsiggishssmess omf ecos,omic expansion inth~ethirdh qnsarter, and a pick-nsp is, the pace of expansiom~ once again nuight be accosnpanieoi lmv ash~arprise in velomcit.

Because of the sss,certaim,tv almout the nss~derhyingcauses omf the recent expansiomsl is, tl,e olemas,d fomrNii and abosst the pi-ospects for its velocity, sommemen,lmers inohicated th,at they m,ow h,ad less confi-oles,ce in the hel,avio,r omf tlse sssomm,etarv aggregatesas gnmides to n,oms,etary pom1i~vthan tl,ey snighut hsavehad earlier, It yas felt, n,omreover, tlsat tI,ose um~cer-tainties made it particuharhy imapomrtasst tom emphasizetl~atthe Co,n,mittees l,asic gomal was to coms,trihute tomthue satisfactory perfomrmamuce of the ecos~osmyrathertisas~ to, pursnse preoheternsineoh rates of roonetarvgrowth~.

At U.S. coms,,s,,ercial banks, gromwth is total creditwas sn,ahl in Septemhmer fomllowing ssshmstantiah expasu-siomn in the precedimsg 2 nsonths.

A.s to podicy- fomr the periomd imnmediateh- ah,ead,i,,embers omf time Comsns,,ittee were is~relatively- clomseagreen,es,t with, respect tom th~eir preferences fomrranges omf growth fosr tb,e monetary aggregates omvcrthe October-Noven,ber period.

The s,,esi,lmers were agreed tl,at little omr no, decline is,the Feoleral ftsssols rate shuommshdi be cos~tesnplateolosnder fosrcsccahhc circumsmstances, but views wereohividhed with respect to the nsplmer his,,it tl,at shmomuldbe set fomr the rate . .

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FEDERAL RESERVE BANK OF ST. LOUIS

Meeting Field on November 15, 1977

Isnmediatehy following the [October] meeting. ins-commisug ohata huad suggested tl,at omver the OctomlmerNoyen,lmer pes-iomd Mi as,d M2 wonshol gnmmw at rateswitl,is, their specified ras~ges coms-ohinglv, the Man-ager omf the Sy-stess, Olmdms Market Accmmns,t sosmsgh,t tommaintais, the Federal fmss,ohs rate at aro sssmol 6percent. In hsste Octomber, horn-ever. aohdhitioms,al dhata sisggested thsat NI-i and hi-2 were gromwing at ratesappromachiog omr sno\ing bevomnd the upper hin,its mmftheir rammges. Tlmerefosre. the hianager sosught a slightfirn,is,g in the fus,ohs rate. Still later, available ohataagais) suggesteoh tb,at growth, is~ bosth aggregateswould bme withim, tl,e rangen h,es,oe time hias,aaersothjective for the funds rate was returs,ed tom 6percent.

Staff promjections snggesteoh thmat gronvth is~real CNPwomuloh comsmtiosme at a snodherate, ahthoms.sgh, graohuallvdin~isisb~img,pace thss-o,ssg},omut 1978. It was alsom cxpecteoi that the rate omf increase in prices wouholren,ain high.

isu the Committees ohiscussion of the ecomoomn,ic situatim,n. the meobers agreed that th,e staff projections ss,ggestis~g thmat gromwthu is~real CNP would cost,-tinsse at a n,mmderate, ahthomssgb, gradualhy ohimis~ishing.pace tl~rosmsghommst 1978 ivcre reasomm,ah,le. Th,erewere. hoswcves. sommne sb,aohings omf \-iew almo,tst prspects fomr the econos,,v.

It was s,o,ted during tl,e discussion that. accomrohingtom projections omf th~eFederal budhget on a high~emplovsnent basis, fiscal poshicv womulol n~om\-e frs,n, ahuighlv stimulative stam,ce ims th,e secom,d half omf 1977to, approximate nemstrahitv by the essoh of 1978, unhesssomsne new fiscal is,itiatives were undertakes,.

At U.S. commnmnerciah lmam,ks, growth in total creditacceleratcol in Octomber froam, the relativchv slomw pacerecomrdeoh in Sclmtenuhmer. The pickup reihecteol a\igomrous expansion in Imam,k lenohisig Lh,at w~ssosffsetonly irs part lmv a fssrther reoluctismss ii, holdings omfTreasury s oecus-i ti ow -

Is, the chiscssssion, of pohiox- fo,r tl,e 1,eriomd io,s~ueohiatelv al,ead, s,,cn,hers nosted th,at growth, in themos~etaryaggregates appeareoh to he shomwissg sharplyin Noven,ber. It was observed th,at fomr a sosn,her omfreasomss growth, rates fomr Decen,Imer were particsslarlydifficult tom project, hut eves, if the)- alsom 1mrsmved tomhme bmw, twos cossseo:istive sxsos,th,s osf shomw growthwomnhd heac ceptabhe is, \-iew omf tl,e rapid s,,omnetarvexpaosioms omf recem~tmoms,tl,s. The coss,,snesst was n,adethat time sharp shoswiog in early Non-esisbmer suggestedfl,at the aggregates o,igl~tgrow at reasomssahmhy satis-factory rates over thc Noves,mber-Decesm,lmcr period,assuming comntismuatioms~ smf a Feoheral fu,,ohs rate atabomut its cursesit level. hiany soesnimers is,diyatedthat tImex- would like to ms,aiatais, stable coms,dhitioms,5 is,tl,e mos,ey n,arket fomr a tis,,e and tb,at ti,ev werewilling to accept a rate of gromwtl, in hii omyer th~eNovem,,ber~Deceis,imer pesiomol withis, a sosmewhmat

Page 20

MARCH 1978

wider range than usual, encompassing relatively howgrowth.

Most snesnl,ers expressed a preferessce for cosn-tis~mus~gto, give greater weigist tl~as,msstsal tom n,osnevss,arket coms,ohitiom,s in o-omm,ohucting opes~mm,arket olmerations in th,e pemiomol m,til the next meeting osf theComi,,s,,ittee. However, a ,,sssnber omf n~es,~imes-su-es-c infavomr of Imasisig osperating oiecisions primarilx- oss, thelmel,aviomr omf time snoms,etarv aggregates.

Meeting Field on December 19-20, 1977

Thromisgimomsst tIme pes-iool bmetween the Non-emberas,d Deceo,l,er ameetii,gs, incomming data smsggestedithat gromwtl, is hii anol hI2 womuloh hmc well withinthe rammges that lmaoh hmeem, speo-iflech by the Comsmnit-tee. Accosrdingh-, the hianages o,f the System OpenMarket Accomtss,t somssgi~t tom snais,tain reserve comndlitions comnsistes,t witlm a Feoherah fns~dsrate of 6percent.

Staff projectiomas fomr the year ah,eaoh, which werehasedi os~assumptismns th,at did smot is,cluohe reductionsin Ferleral isId-Osne taxes, differed little from,, tl,omseprepared just hefomrc time Noves,,hmer meeting osf tbmeConnmittee~ th,ev stsggesteol th,at real CNF wommboicontinsse tom gromw at a s,,o,derate, ahthosugl, graduai~-ohisninishim~g, pace throsughomsst 1978. It was -ahssm ex-pected that th~erate of increase in prices \voosloh re-maim, high sind th,at thme unemploymes~t rate wouldT

decline gradually.

Is~the Committees discssssioss, omf the ecomnomsnicsitisatioms,, the s,,es,,lmers were in agrecmnent tl,at theexpansiomm, is, activit\- was hikch- tom oomntimase ti,romugbuoust the year al,ead. A smtssnher smf mm,es,,hmers expressedthe view tlmat gromw-tl, is, real CNP olsss-is~g1978 womulohhe as stromsg as omr strossger tl,an that suggested Imytb,e stall projectiomns. Other mesnl,ers fosresaw susimst~ss,tiahstrcs,gth, fomr tIme periosoh in,n,eohiateiv ah,eadl in respom~setom the reces,t pickup is~final sales andcoms,seo1sses~t aohjustn~es,tcmf ismves,tor,- pomsitiomns butless stres,gthm hater is, 1978. It was ssomtedl. homxyes-er,that the ads,,is,istratioms, was plans~im~gto propomse asubstantial reduction is, taxes os is,ohividual asmol bsmsisess imscoms,,es is, the s,ew -ear, as,d tl,~stsuch~redssctioss,s o1epensdis~g sspomm~ tlseir natssre and timsming could have a significsss~t eflect on the comsmrse omfactivity.

- it was alsom omhmscrved that esslargeol deficits is~timeFederal budget n~igl~t hme accos,,pasmieoh hmv is,creasesis, interest rates as th,e year progressed. It was sosggestedh, s~momreo-cr, ti,at the rate of inflation coosidpromve to be hmighes tharm expected as,d comuhdh, there-fomre, hamnper the promgress of the expisnsiomss.

Is, the Coms,,mittees discussioms,, serirmus cosmcersm wasexpressed ahmosmt the reces,t weakm,ess of thme ohsmhhar issmforeigs~excbsasmge s,,arkets. \Vh,ihe it was s,oted thmatoleoreciatiomss of th,e ohomihar mmmigl,t is tisne coss,trihmsstetom is,,prosvess,es,t is, the U.S. trade baias,ce, it waspomis,ted omut tlmat it com,trihmssted tim the rate of inflatioms,

FEDERAL RESERVE BANK OF ST. LOWS MARCH 1978

in this comnntrv asmd weakened imtssiness confidenceboth here and aimroad. Excessie appreciatiomn omf frmreigs~ currencies, it was ssmggested, could have ad-verse effects om over-all ecomnimsssic activity aimromadand, cos,sequentlv, osm the U.S. trarhe hmalam,ce. Theombservation wm,s n,aohe th~atthe positiosm osf the oioshlarwould be strengthmessed imvadoptioo is timis cosnsmtrvof an effective energy promgrism, of a tax policy con-dtscive tim imissiness investmm~es,t i,ere, as,oh of a mosreeffective attack on is,fhatioms,, as well as by pursuitahrsmad of faster rates of ecosnomsnic gromwtlm.

At U.S. commercial banks, expansismn omf tomtal creditin Novemimer was close to tIme fast pace is, October.Bank lomans cosstis,ued to gromw at a rapioh rate, as~rhthe strength was broadly- distriimssted asmmrmsmg nmajorloan categories.

Is, the Committees discussion of pomlicy fmmr timeperiod imn,cdiatehv aimeadl, tue mes,,bems tomok s,imtcof the slowdomwn is, tIme grommvth of the nnrms,etary ag-gregates in recesmt ,veeks -as,d of the usmcertais,ties is,financial markets ussmaliy- associated with, time year-end. Agaisist that lmackgrossnd and iss light of timeperfos-mance of the econrmmy, it was observed tl,atincreases in short-tern, interest rates were probably

aomt warranterl ~st this tii,,e. Omm tl,e omtimer hmanrl, it wassuggested, th,e weaksmess of the doshhar is fomm-eiga ex-change markets argueoh against deciisses in sudsrates.Aocordismgiv, s,most smmes,mhmers yes-c is, fayo,r oftime s,maismtenamsce i,f 15revaihing coms,olitiom,s is) timesnonev mas-ket fomr the tisi,c lmeismg asmd osf cosmtirnsingto, give greater weigimt ti,an sssoai tsm 50051ev rn~,rketconrhitiomns is, comsmohsscting opesm smmas-ket omlmeratiomsms is,the period sss,til time smext ssseetissg omf tlme Conmsnittee.However, sonme smmenmlmers im,ohicated a preference fomrimasismg operatismg decisimmmms is, the perismoI aimead primanic on the lmeh,avioms omf time smmosmetarv aggregates.

The Cos,mnmittee decided to is,ciude iss time mmext tolast paragrapim o,f its directix-e to time Federal ReserveBank of New York the fimhhomwing sesmtes,ce: lit timecondluct of day-to-day- omperatiosms, account simail betaken omf esmmergismg fismancial smmarket cossditiomss. is,-cludimsg time unsettled eomssoiitioms,s iss foseigs, exclmasmgesnarkets. Th,is is,structiomsi was ~,dded tom provide timehiaaager witim sosnewimat greater fiexilmihity-, is, partbecause omf the Co,snn,ittees view thmat presstsres isathe dohlar is, foreign excimasmge smmarkets smmight appro-priatel)- is,fluence time smisture amid tismmissg ssf dosm,esticopen sm,arket operations fron, day to day.

Page 21