Federal Reserve Monetary Policy Goals
The Federal Reserve Board's objectives for money and credit growth in the coming year and views on the health of the financial markets are outlined in these excerpts from the Fed's semiannual report on monetary policy to Congress. The report is required by the Full Employment and Balanced Growth Act of 1978. Remarks accompanying these excerpts were delivered on Wednesday to a House Banking panel by Federal Reserve Board Chairman Paul A. Volcker. His monetary policy remarks to the Senate Banking Committee are scheduled for today.
Monetary Policy and the Economic Outlook for 1985 and 1986
THE FUNDAMENTAL objective of the Federal Reserve in charting a course for monetary and debt expansion remains unchanged -- to foster a financial environment conducive to sustained growth of the economy, consistent with progress over time toward price stability. In working toward those goals, developments with respect to the dollar and our external position have necessarily assumed greater prominence. More generally, while policy initiatives are stated in terms of growth rates of certain monetary and credit aggregates, the Federal Open Market Committee has emphasized the need to interpret those aggregates in the light of other information about the economy, prices, and financial markets. Moreover, the monetary targets for 1985 needed to be evaluated, and in the case M1 adjusted, in light of the unusual and unexpected behavior of GNP relative to money during the first half of this year.
Ranges for Money and Debt Growth In 1985 and 1986
In reexamining its M1 range for 1985, and in setting a tentative range for 1986, the committee expected that velocity, after its sharp decline in the first half of this year, would cease falling rapidly -- while recognizing that much of the recent decline may not be reversed. Allowance also needed to be made for the high degree of uncertainty surrounding the behavior of M1 velocity, given the experience of the past few years. To take account of these considerations, the base for the range of M1 was shifted forward to the second quarter of 1985, and the range was set to encompass growth at a 3% to 8% annual rate over the second half of this year. This range contemplates a substantial slowing in growth from the pace of the first half, and the lower part of the range implies a willingness to see relatively slow growth should the recent velocity decline be reversed and economic growth be satisfactory.
The appropriateness of the new range will be under continuing review in light of evidence with respect to economic and financial developments, including conditions in foreign exchange markets. It was noted that, because of the burst of money growth in June, the current level of M1 is high relative to the new range. The committee expected that the aggregate would move into the new range gradually over time as more usual behavior of velocity emerged.
For 1986, the M1 range was tentatively set at 4% to 7%. The committee recognized that uncertainties about interest rates and other factors that could affect velocity would require careful reappraisal of the range at the beginning of that year. In addition, it was noted that actual experience with institutional and depositor behavior after the completion early next year of deposit rate deregulation would need to be taken into account in judging the appropriateness of the ranges. At the beginning of next year, regulatory minimum balance requirements on Super NOW accounts and money market deposit accounts will be removed, and at the end of March 1986, deposit ceiling rates will be lifted entirely, affecting savings deposits and regular NOW accounts.
The table below summarizes decisions with respect to the ranges of growth for the aggregates for 1985 and 1986. Except for M1 in 1985, the growth ranges apply to one-year periods measured on a fourth-quarter-to-fourth-quarter basis. The M1 range for 1985 applies to the second half of the year, as noted above. …