Monetary Policy Report

Monetary Policl Objectives for 1984 Summary Report of the Federal Reserve Board February.7, 1984 · Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Monetary Policy Objectives for 1984 Summary of Report to the Congress on Monetary Policy pursuant to the Full Employment and Balanced Growth Act of 1978. February 7, 1984. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Contents Section Page Monetary Policy in 1984 2 Ranges for Growth of Broader Aggregates 2 Range for Ml Growth 2 Implications for Credit Markets 3 The Outlook for the Economy in 1984 4 Continuation of Economic Recovery 4 Economic Projections 5 Monetary Policy and the Performance of the Economy in 1983 6 The Growth of Money and Credit in 1983 6 Economic Performance in 1983 7 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Monetary Policy in 1984 The ranges selected by the Federal Open Market as the year progressed, which in fact took place. In Committee for 1984, and shown below, are intended any event, M2 in 1983 was maintained well within to be consistent with the basic policy objective of its target range, and growth in 1984 should not be achieving long lasting economic expansion in a con influenced by that special factor. text of continuing control of inflationary pressures. The Committee anticipates that both M2 and M3, They assume that relationships between monetary which will continue to receive substantial weight in and credit growth and economic activity and infla policy implementation, may well fluctuate in the tion will be broadly consistent with past trends and upper part of their ranges in the current year. The cyclical developments. There is reason to expect that actual growth of M2 and M3 will depend in part on the special considerations affecting monetary growth the strategies and aggressiveness with which deposi rates last year-including important institutional tory institutions seek deposits in a deregulated changes in the financial system-will be less signifi deposit interest rate environment. Growth of the cant in 1984. Specifically, the large-scale shifts of broader aggregates will also be influenced by the pat funds associated with the introduction of money tern of net capital inflows from abroad. market deposit accounts (MMDAs) and Super NOW accounts appear to be completed. &>me of the other Range for Mt Growth special influences particularly on the demand for Ml last year-uncertainties about the economic and The range for Ml was reduced by 1 percentage financial outlook early in the year and the lagged point from the range set for the last half of 1983. effect of the sharp decline of interest rates in late Growth around the midpoint of the range would 1982-are behind us. No further regulatory or statu appear appropriate on the assumption of relatively tory changes that would significantly affect growth normal velocity growth; if velocity growth remained rates of the monetary aggregates appear imminent. weak compared with historical experience, Ml However, some proposals-such as payment of growth might appropriately be higher in the range. interest on demand deposits or on required reserve While there is evidence of more "normal" and balances-would have important impacts on the predictable patterns for Ml reappearing, the Com aggregates and would require reconsideration of the mittee felt that more time would be required for ranges, especially for Ml, if they were enacted to be assessing the impact of recent structural changes on effective in 1984. public and institutional behavior before full or pri- Ranges for Growth of Broader Aggregates The reduction in the growth range for M2 for 1984 was influenced by technical considerations. Last year's range-though it was based on February Ranges of Monet,ry Growth 1~841 March to abstract from the distortions connected with the introduction of MMDAs-necessarily Measured from fourth quarter 1983 to fourth quarter 1984 allowed for some residual shifting into such accounts M2 6 to 9 percent M3 6 to 9 percent Ml 4 to 8 percent Total Domestic N onfinancial Debt 8 to 11 percent 2 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis mary weight could be placed on Ml as a policy GNP in 1983, the high for the post-World War II guide. Thus, in setting a range for Ml, the Commit years, and is likely to be only slightly lower in 1984, tee decided that its behavior should be evaluated in the second year of cyclical expansion. In the com the context of movements in the broader monetary parable stage of earlier cyclical recoveries, this per aggregates, which for the time being would continue centage generally dropped rapidly or was at much to be given substantial weight in policy lower levels-providing room for additional borrow implementation. ing to support expanding business capital outlays and housing. The persistence of large deficits in the face of Implications for Credit Markets strengthening private credit demands would tend to Developments in credit markets and interest rates, as exert pressures on domestic credit markets, keeping always, will be subject to a variety of influences at interest rates higher than they otherwise would be; home and abroad. The ranges specified for the they are an offset to other forces working toward monetary and credit aggregates, which are felt to be lower interest rates. These pressures work to restrain broadly consistent with the expectations of members expansion in areas of the economy that are more of the FOMC about the course of economic activity sensitive to interest rates-such as housing, autos, and prices, will not in and of themselves determine and long-term business capital spending. They the course of interest rates and the degree of credit also-to the extent higher interest rates lead to a market pressures. Whether interest rates fall or strong dollar on exchange markets-retard our rise-or remain stable-will depend importantly on export industries. And, finally, high interest rates the strength and composition of demands on the contribute to strains on the domestic and interna economy, actual and anticipated price pressures, and tional financial system from the lingering heavy credit demands. indebtedness incurred during inflationary expansion Dominating the outlook for credit flows in the of earlier years. year ahead is the prospect that-in the absence of Actions taken to reverse the upward trend in the immediate action by the fiscal authorities-the fed structural budgetary deficit clearly would work to eral deficit will approach the record level of the past reduce potential credit market pressures, to help year. The federal deficit was nearly 6 percent of assure a balanced and sustain<\.ble economic expan sion, and to promote a more orderly readjustment of our balance of payments position. The timing and magnitude of the favorable impact would depend on the scheduling, force, and prospective "carry through" of any action to reduce the budgetary defi cit as well as on the surrounding econpmic environment. 3 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis The Outlook for the Economy in 1984 The performance of the economy in 1983 suggested As is typical, the composition of output is likely to that the immediate objective of permitting sufficient change as the cyclical expansion moves through its growth in monetary and credit aggregates to foster a second year. Business investment in plant and equip solid economic recovery, while not encouraging ment can be expected to provide a greater share of developments that would rekindle inflationary pres the impetus to economic growth. Conversely, 1984 sures, was achieved. probably will see smaller contributions to growth from those sectors that lent early strength to the recovery. Absent an appreciable movement in mort Continuation of Economic Recovery gage rates from current levels, homebuilding can be But success cannot be measured by performance expected to be more stable this year. Consumption during any one year, and iri some respects the first spending, whose upswing strongly boosted aggregate year of recovery-beginning in the context of excess demand in 1983, is likely to decelerate in the coming capacity and high unemployment-provided the most year. With the liquidation and initial-accumulation favorable environment for combining economic phases of the cycle complete, inventory investment in growth with progress toward price stability. The 1984 is likely to add less to economic growth than in more stringent and meaningful test will come as we 1983. seek to maintain the momentum of expansion and The prospects for continued progress against infla the progress toward stability while the margin of tion have been improved by better productivity per unemployed resources diminishes. Moreover, formance, more realistic wage bargaining, and a developments in 1983 were marred by certain struc more competitive environment for price decisions. tural imbalances, particularly in the federal budget The supply-demand situation in the oil market sug and in foreign trade, that represent risks to orderly gests that another inflationary shock from that progress. source is unlikely, and indicators of inflation expecta At present, the prospects for extending the eco tions have remained at lower levels thus far in the nomic gains of the past year into 1984 appear to be recovery. good. Economic growth slowed in the final quarter However, the competitive forces associated with of 1983, with real GNP up 4½ percent at an annual the appreciation of the dollar and the ample availa rate. A continuation of growth in· that general range bility of goods from abroad-which have been exert would be consistent with significant progress toward ing downward pressures on the rate of inflation lower unemployment this year and with sustained could recede. More fundamentally, as margins of expansion in a framework of greater price stability in excess capacity diminish, and as the availability of the years beyond. experienced labor declines, there may be temptations to revert to the pricing and wage bargaining patterns characteristic of earlier years of rapid inflation. 4 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Furthermore, as time passes, the imbalances Economic Projections associated with the current expansion will pose While recognizing the risks implicit in the budgetary increasing risks. The second year of an expansion is and international circumstances, the members of the likely to bring with it growing business. c_redit . . Federal Open Market Committee (together with demands. At the same time, unless dec1S1ve action 1s other Reserve Bank presidents) believe the most taken the federal government deficit will continue to probable course of developments during 1984 is fur drain' off an extremely large portion of available net ther growth, significant reduction in unemployment, saving in the economy. With no easing of the ten and only modest-and essentially cyclical-increases sions in credit markets, interest-sensitive sectors, in price pressures. such as housing and long-term business investment, FOMC members expect the GNP implicit deflator in all probability ~ill continue to operate well below to rise a bit more rapidly this year than in 1983-. their underlying potential and below the levels con While some members have expressed concern that sistent with sustained, balanced economic growth recent labor force trends and pressures on capacity and a strong productivity performance. in a few industries could lead to a more significant pickup in inflation, such a development generally is perceived to be only a risk rather than the most likely outcome. Economic Projections for 1984 (Percent) FOMC members and other FRB Presidents Administration Range Central Tendency Change, fourth Nominal GNP 8 to 10½ 9 to 10 9.8 quarter to fourth quarter Real GNP 3½ to 5 4 to 4¾ 4.5 GNP deflator 4 to 6 4½ to 5 5.0 Average unemployment rate in the fourth quarter 7¼ to 8 7½. to 7¾ 7.7 5 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Monetary Policy and the Performance of the Economy in 1983 The Growth of Money and Credit in 1983 practice in several respects in establishing monetary objectives for 1983. The C ommittee agreed that In its reports to Congress last February and July, uncertainties regarding Ml continued to warrant the the Federal Reserve indicated that monetary policy practice, begun in October of 1982, of placing prin during 1983 would be conducted with the aim of cipal weight on the broader monetary aggregates fostering a recovery in economic activity and M2 and M3-in the imple mentation of monetary encouraging further progress toward price stability. policy. Although the deman ds of the public for M2 Establishing specific objectives for growth in the and M3 might be affected by shifts in asset prefe r monetary aggregates was fraught with difficulties, ences that were rooted in r egulatory changes or however. Beginning in 1982, the behavior of M 1 in other causes, it seemed that such effects would be relation to economic activity had diverged sharply smaller and more predictab le for the broader from historical trends, raising doubts about the use- aggregates than for Ml. fulness of that aggregate-at least over the near The specific ranges chos en by the FOMC for M2 term-as a policy target; the effects of newly and M3 last February and reaffirmed in July are introduced Super NOWs and money market deposit shown below. accounts (MMDAs) on the behavior of Ml also The FOMC in July estab lished a new monitoring were subject to considerable uncertainty. In addi- range for Ml for the secon d half of 1983, based on tion, it was evident early in 1983 that M2 was being the second quarter average, rather than the fourth swelled by masive shifts of funds from outside that quarter of 1982. The decisi on to adopt a new base aggregate into MMDAs, but it was impossible to for monitoring M 1 growth reflected a judgment that predict the precise timing and volume of such shifts. the rapid growth of M 1 in early 1983 would Given these special factors, in early 1983 the Fed- appropriately be treated as a onetime phenomenon eral Open Market Committee departed from past which was expected to be n either reversed nor extended. The monitoring ranges for M 1 and debt for 1983 are shown below. Growth of Broader Aggregates 19832 1983 Range 1983 Actual Base Levels Revised Old Billions of Dollars Data Data Seasonally Adjusted M2 7-10 percent 8.3 percent 7.8 percent 2060.7 M3 6 ½-9 ½ percent 9.7 percent 9.2 percent 2447.3 Growth of M1 and Debt 19832 1983 Range 1983 Actual Base Levels Revised Old Billions of Dollars Data Data Seasonally Adjusted Mt 5-9 percent 7.2 percent 5.5 percent 505.1 Total Domestic Nonfinancial Debt 8½-11 ½ percent 10.5 percent 10.5 percent 4710.1 6 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Each of the monetary and credit aggregates fin rates rose during the year as the economic recovery ished the year close to or within the ranges set by progressed, on average interest rates were substan the FOMC. (In fact, prior to the recent benchmark, tially lower in 1983 than in 1982. For example, rates seasonal, and definition revisions, all of the money on level-payment home mortgages averaged nearly stock measures were well within their ranges at the three percentage points below 1982 levels; business end of 1983.) Achievement of these objectives and borrowing costs, likewise, declined significantly. the broader goals of the Federal Reserve was Other indicators attested to a greater degree of sta brought about by relatively small changes in the bility and confidence in financial markets and the reserve position of the banking system, and was economy. accompanied by generally stable financial market conditions. Interest rates fluctuated far less than in Economic Performance in 1983 the past few years. Moreover, although most interest Output and employment registered sharp gains in 1983, lifting the economy out of one of the most severe recessions since World War II. These gains brought a considerable reduction in the unemploy ment rate, which fell 2 ½ percentage points over the Growth of Money and Credit (Percentage changes) Domestic Ml M2 M3 Nonfinancial Debt4 Base to fourth quarter2 1983 7.2 8.3 9.7 10.5 Fourth quarter 1978 8.2 8.0 11.8 13.0 to fourth quarter 1979 7.5 8.1 10.3 12.0 1980 7.4 9.0 9.6 9.5 1981 5.1 (2.5)3 9.3 12.3 9.6 1982 8.7 9.5 10.5 9.2 1983 10.0 12.1 9.7 10.5 Quarterly Ql 12.8 20.5 10.8 8.8 growth rates 1983 Q2 11.6 10.6 9.3 12.0 Q3 9.5 6.9 7.4 9.9 Q4 4.8 8.5 10.0 9.8 7 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Real GNP the broader forces affecting prices and wages. With Percent change, Q4 to Q4 important lags, business and labor involved in key 1972 Dollars contract settlements seemed to be adapting construc tively to the less inflationary environment, and over all wage and compensation increases were considera bly smaller than during the previous year. At the same time, productivity improved, thereby helping to limit increases in unit labor costs, and average real incomes rose. While the performance of the economy in 1983 represented a strong and encouraging advance toward the goal of sustained, non-inflationary growth, several areas of concern remained. Although labor market conditions improved markedly, unem ployment continued to be unacceptably high especially for younger job seekers and minorities. In addition, 1983 saw a sharp and worrisome increase 1978 1979 1980 1981 1982 1983 in the federal deficit. For the fiscal year ending in September, the deficit (not including off-budget pro year to 8.2 percent by year-end. The first year of grams) climbed to almost $200 billion, representing recovery was marked by broadly based increases in about 6 percent of GNP. The borrowing necessary spending by consumers and businesses; these to finance the deficit, in combination with continu advances were stronger than generally anticipated, ing huge prospective government credit demands, given the low confidence and historically high credit exerted pressures on market interest rates-offsetting costs that prevailed as the year began. The impressive progress in reducing inflation in 1982 extended into 1983. The consumer price index rose only 3 ¾ percent in 1983, the smallest increase Consumer Prices Percent change, December to December in more than a decade. The continued slowing in inflation was aided by favorable price developments in energy markets and by the damping effect on food prices of abundant supplies of livestock 16 products. However, 1983 also saw improvements in 1978 1979 1980 1981 1982 1983 8 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Producer Prices Percent change, December to December economic expansion and its possible implications for future inflation, as well as concern about the outlook for federal deficits, were factors. ------+.~ii---,,...,.,,...-----------_:.::.12 Household Sector Most households experienced financial and economic gains in 1983. With unemployment down and gains 8 in employment sizable, growth in personal income rebounded smartly during the past year. Further deceleration of inflation, lower interest rates, and the cumulative 25 percent reduction in federal tax rates 4 on personal income during the past three years all helped raise the purchasing power of household income. In addition, household net worth rose sub stantially last year. 1978 1979 1980 1981 1982 1983 These gains no doubt were instrumental in boost ing consumer confidence, which surveys indicated rose sharply in 1983 to its highest level in a decade. the effects of lower inflation and other factors thereby tending to temper expansion of credit sensitive s.ectors of the private economy. The inter Unemployment Rate national debt situation also remained a major con Percent cern in 1983. Financial Markets Partly reflecting the ready availability of funds from abroad, financial markets absorbed increased demands for credit associated with both the financ ing of the record federal deficit and upturn in the economy in 1983 without undue stress. In fact, interest rates were lower on average, and less varia ble, than during the preceding few years, although most rates were somewhat higher at the end of the year than at the start. Long-term interest rates remained quite high rela tive to the current rate of inflation throughout 1983; continuing uncertainties regarding the speed of the 1978 1979 1980 1981 1982 1983 9 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Federal Government Deficit Billions of dollars International Trade The rising exchange value of the dollar was a major Fiscal Years, Unified Budget Basis influence on United States exports and imports. On a weighted average basis, the dollar rose an addi 200 tional 10 percent during the course of 1983, bringing l■.'f'!'l'ft'!'. the cumulative appreciation since 1980 to 50 percent. The sustained strength of the dollar has reflected ::\::,iil:If 150 economic policies here and abroad as well as the attractiveness of dollar investments in the face of international political and financial uncertainty. 100 Despite a comparatively good inflation perfor mance, the competitive position of firms in the 50 United States eroded further in 1983. After declining "'."'!':"." by more than 15 percent in 1982, the volume of U.S. exports remained weak last year. In contrast, the vig orous expansion in the United States economy and 1978 1979 1980 1981 1982 1983 the strength of the dollar pushed both the volume and value of imports significantly higher. As a result, the United States trade deficit increased from an annual rate of about $45 billion in the fourth quar ter of 1982 to a rate of about $75 billion in the The improved economic and financial status of fourth quarter of 1983. The U.S. current account households fostered a substantive upswing in con registered a corresponding shift, with the deficit for sumer spending. the year reaching about $40 billion. Demand for housing surged in 1983, as early in the year long-term mortgage interest rates fell below 13 percent for the first time since the summer of Exchange Value of the 1980. For the year as a whole, total private housing U.S. Dollar starts rose 60 percent. Index, March 1973 -100 The Business Sector 130 Economic and financial conditions in the business sector also improved markedly in 1983, as firms started the process of rebuilding their balance sheets 110 from the recession. Sales and production rose sharply, bringing increased capacity utilization and productivity. These gains helped propel before-tax 90 profits_:_which had been depressed in the early 1980s-to an unusually rapid increase for the first year of an economic expansion. A marked shift in inventory investment from liqui 1978 1979 1980 1981 1982 1983 dation to accumulation took place in 1983. In addi tion, business fixed investment increased almost 11 ½ percent in real terms over the four quarters of the year. 10 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Labor Markets Footnotes The recovery of production in 1983 was translated 1. Ml is the sum of currency held by the public, plus into an impressive improvement in labor markets. travelers' checks, plus demand deposits, plus other check Three million workers were added to nonagricultural able deposits (including negotiable order of withdrawal payrolls in the twelve months ending in December (NOW and Super NOW) accounts, automatic transfer service (ATS) accounts, and credit union share draft 1983. accounts.) Nominal wage increases continued to decelerate in M2 is Ml plus savings and small denomination time 1983. Hourly compensation rose at a rate of 5 per deposits, plus Money Market Deposit Accounts, plus cent over the four quarters of 1983-the slowest pace shares in money market mutual funds ( other than those since 1965. The easing of wage increases reflected restricted to institutional investors), plus overnight repur slack in labor markets in general as well as con chase agreements and certain Eurodollar deposits. tinued concessions in several major collective bar M3 is M2 plus large time deposits, large denomination gaining agreements. term repurchase agreements, shares in money market On average, wage gains in 1983 exceeded price mutual funds restricted to institutional investors, and term increases, so that most workers experienced improved Eurodollars. purchasing power. Rising real wages mirrored Total Domestic Nonfinancial Sector Debt is outstand ing debt of domestic governmental units (federal, state improvements in labor productivity. Reflecting wage and local), households and nonfinancial businesses. and productivity developments, unit labor costs rose only 1¼ percent in 1983. This was the best perfor 2. Base Period for Aggregates: For Ml-&cond Quarter 1983. mance since the mid-1960s. For M2-Average of February-March 1983. For M3-Fourth Quarter 1982. For Debt-December 1982. 1983 ranges and figures for "1983 Actual" are measured from base period through fourth quarter 1983; Ml, M2 and M3 "revised data" incorporate effects of benchmark and seasonal adjustments; M3 also incorporates defini tional change-the inclusion of term Eurodollars. 3. Ml figure in parentheses is adjusted for shifts to NOW accounts in 1981. 4. Growth rates of domestic nonfinancial sector debt are measured between last months of periods. A copy of the full report to Congress is available from Publication Services, Federal Reserve Board, Washington, D.C. 20551 FRB5-55000-0284 11 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis

Federal Reserve (1984, February 6). Monetary Policy Report. Monetary Policy Reports, Federal Reserve. https://whenthefedspeaks.com/doc/monetary_policy_report_19840207

@misc{wtfs_monetary_policy_report_19840207,
  author = {Federal Reserve},
  title = {Monetary Policy Report},
  year = {1984},
  month = {Feb},
  howpublished = {Monetary Policy Reports, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/monetary_policy_report_19840207},
  note = {Retrieved via When the Fed Speaks corpus}
}