February 12–13, 1985 FOMC Record of Policy Actions

FOMC minutes

2/12-13/85 -18- restraint would be sought that modest increases in reserve The members agreed rate of about 8 percent to be exceeding an annual if growth in M1 appeared percent during the period from M3 a rate of around 10 to 11 and M2 and if such monetary expansion was associated December to March, particularly business activity and diminishing pressures with satisfactory growth in agreed that lesser restraint on markets. The members also in exchange would be acceptable in the event of substantially reserve positions aggregates, especially against the background slower growth in the monetary of sluggish growth in economic activity and continued strength of the in foreign exchange markets. It was agreed that the intermeeting dollar the federal funds rate, which provides a mechanism for initiating range for of the Committee when its boundaries are persistently exceeded, consultation should be left unchanged at 6 to 10 percent. The following directive, embodying the Committee's longer-run ranges and its short-run operating instructions, was issued to the Federal Reserve Bank of New York: The information reviewed at this meeting suggests that real GNP expanded at a moderate pace in the fourth quarter, reflecting some strengthening in late 1984 after several months of considerably reduced growth, and there was evidence of continued moderate expansion in early 1985. Total retail sales rose in January at about the same pace as the average for November and December, while the decline in housing starts appears to have ended. Industrial production and nonfarm payroll employment increased appreciably in the November-December period and nonfarm payroll employment rose substantially further in January. The civilian unemployment rate rose slightly in January to 7.4 percent. Information on business spending suggests less rapid expansion in outlays for fixed invest ment, following exceptional growth earlier; businesses also appear to have made substantial progress in adjusting

2/12-13/85 broad measures of prices inventories. During 1984 their close to those recorded in generally increased at rates of average hourly earnings rose 1983, and the index somewhat more slowly. value of the dollar against a The foreign exchange major foreign currencies has trade-weighted average of continued to appreciate strongly since mid-December. on January 17 by the G-5 Ministers After the announcement Central Bank Governors regarding coordinated of Finance and in exchange markets, and subsequent operations, intervention moderated somewhat. The merchandise the dollar's rise declined sharply in December and for the trade deficit fourth quarter as a whole, primarily because of a large drop in imports from the high rate in the third quarter. the deficit for the full year 1984 was sub Nevertheless, stantially higher than in 1983. After growing little on balance since early summer, M1 expanded at a rapid pace in late 1984 and early 1985. The broader aggregates also expanded rapidly in recent months. For the period from the fourth quarter of 1983 to the fourth quarter of 1984, M1 grew at a rate of about somewhat below the midpoint of the Committee's 5-1/4 percent, range for the year, and M2 increased at a rate of about 7-3/4 percent, a bit above the midpoint of its longer-run range. Both M3 and total domestic nonfinancial debt expanded at rates above the Committee's ranges for the year, reflecting very large government borrowing and strong private credit growth, boosted in part by the unusual size of merger-related credit activity. Short-term interest rates have risen somewhat on balance since the December meeting of the Committee, but long-term rates are about unchanged to a little lower. On December 21, the Federal Reserve approved a reduction in the discount rate from 8-1/2 to 8 percent. The Federal Open Market Committee seeks to foster monetary and financial conditions that will help to reduce inflation further, promote growth in output on a sustainable basis, and contribute to an improved pattern of international transactions. In furtherance of these objectives the Committee agreed at this meeting to establish ranges for monetary growth of 4 to 7 percent for M1, 6 to 9 percent for M2, and 6 to 9-1/2 percent for M3 for the period from the fourth quarter of 1984 to the fourth quarter of 1985. The associated range for total domestic nonfinancial debt was set at 9 to 12 percent

2/12-13/85 -20- for the year 1985. The Committee agreed that growth in the monetary aggregates in the upper part of their ranges for 1985 may be appropriate, depending on developments with respect to velocity and provided that inflationary pressures remain subdued. The Committee understood that policy implementation would require continuing appraisal of the relationships not only among the various measures of money and credit but also between those aggregates and nominal GNP, in cluding evaluation of conditions in domestic credit and foreign exchange markets. In the implementation of policy for the immediate future, taking account of the progress against inflation, remaining uncertainties in the business outlook, and the strength of the dollar in the exchange markets, the Committee seeks to maintain reserve conditions character istic of recent weeks. Should growth in M1 appear to be exceeding an annual rate of around 8 percent and M2 and M3 a rate of around 10 to 11 percent during the period from December to March, modest increases in reserve pressures would be sought, particularly if business activity is rising at a satisfactory rate and exchange market pressures diminish. Lesser restraint on reserve positions would be acceptable in the event of substantially slower growth in the monetary aggre gates, particularly in the context of sluggish growth in economic activity and continued strength of the dollar in foreign exchange markets. The Chairman may call for Committee consultation if it appears to the Manager for Domestic Operations that pursuit of the monetary objectives and related reserve paths during the period before the next meeting is likely to be associated with a federal funds rate persistently outside a range of 6 to 10 percent. Votes for short-run operational paragraph: Volcker, Corrigan, Boehne, Boykin, Gramley, Messrs. Mrs. Horn, Messrs. Martin, Partee, Rice, Ms. Seger, and Balles. Votes against this Messrs. Wallich action: None. (Mr. Balles voted as an alternate).

2/12-13/85 -21- for Domestic Open Market Operations 2. Authorization the Committee voted to increase from $4 billion At this meeting to $6 billion the limit on changes between Committee meetings in System account holdings of U.S. government and federal agency securities specified in paragraph 1(a) of the authorization for domestic open market operations, effective for the intermeeting period ending with the close of business on March 26, 1985. Votes for this action: Messrs. Volcker, Corrigan, Boehne, Boykin, Gramley, Mrs. Horn, Messrs. Martin, Partee, Rice, Ms. Seger, Messrs. Wallich and Balles. Votes against this action: None. (Mr. Balles voted as an alternate). This action was taken on the recommendation of the Manager for Domestic Operations. The Manager had advised that substantial net purchases of securities were likely to be necessary over the upcoming intermeeting interval in order to offset the estimated absorption of reserves stemming from technical factors including changes in currency in circulation, vault cash, and required reserves.