October 1, 1985 FOMC Record of Policy Actions

FOMC minutes

decision argued for little or no change from the recently prevailing degree of pressure on reserve positions. At the conclusion of the Committee's discussion, a directive that called for maintaining the degree of reserve pressure sought in recent weeks was favored by most members. They expected such an approach to policy implementation to be consistent with growth of both M2 and M3 at annual rates of around 6 to 7 percent for the period from September to December. Over the same period, growth in M1 was expected to slow markedly -- also to an annual rate of 6 to 7 percent -- and even slower growth would be acceptable in the context of satisfactory economic performance, given the very rapid expansion experienced in recent months. The members agreed that somewhat greater or lesser reserve restraint would be acceptable over the intermeeting period, depending on the behavior of the monetary aggregates and taking account of appraisals of the strength of the business expansion, the performance of the dollar in foreign exchange markets, progress against inflation, and conditions in domestic and inter national credit markets. It was also understood that policy might be implemented with somewhat more flexibility than usual over the relatively short intermeeting period, given the uncertainties associated with partic ularly sensitive conditions in the foreign exchange and other markets. The members agreed that the intermeeting range for the federal funds rate, which provides a mechanism for initiating consultation of the Committee when its boundaries are persistently exceeded, should be left unchanged at 6 to 10 percent. At the conclusion of the meeting, the following domestic policy directive was issued to the Federal Reserve Bank of New York:

The information reviewed at this meeting suggests activity expanded in the third quarter that economic faster rate than in the first half of at a moderately August, industrial production increased the year. In retail sales rose considerably, boosted somewhat. Total surge in auto sales. Housing starts, while by a in August, were still no higher than their increasing level in the second quarter. Incoming informa average generally suggested a leveling of business capital tion The merchandise trade deficit in July and spending. August averaged somewhat less than in the second quarter as a drop in imports was partly offset by decline in exports. Total nonfarm payroll a slight employment rose somewhat more in August than in most other recent months. The civilian unemployment rate fell from 7.3 percent in July -- its level since February -- to 7.0 percent in August. Broad measures of prices and wages appear to be rising at rates close to or somewhat below those recorded earlier in the year. Following the Committee's meeting on August 20, the trade-weighted value of the dollar against major foreign currencies appreciated through mid-September. The dollar subsequently declined sharply, especially after the announcement on September 22 by the Finance Ministers and Central Bank Governors of the G-5 countries that exchange rates have not fully reflected economic fundamentals. Ml growth surged in August, reflecting exceptional strength in interest-bearing checkable deposits and relatively rapid expansion in other components; data for the first half of September suggest slower but still substantial expansion. Reflecting the surge in M1, M2 accelerated in August, and M3 also strengthened somewhat. Expansion in total domestic nonfinancial debt has remained relatively rapid. Most market interest rates have changed little on balance since the August meeting of the Committee. 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 at the July meeting reaffirmed ranges for the year of 6 to 9 percent for M2 and 6 to 9-1/2 percent for M3. The associated range for total domestic

nonfinancial debt was reaffirmed at 9 to 12 percent. With respect to M1, the base was moved forward to the second quarter of 1985 and a range was established at an annual growth rate of 3 to 8 percent. The range takes account of expectations of a return of velocity growth toward more usual patterns, following the sharp decline in velocity during the first half of the year, while also recognizing a higher degree of uncertainty regarding that behavior. The appropriateness of the new range will continue to be reexamined in the light of evidence with respect to economic and financial developments including developments in foreign exchange markets. More generally, the Committee agreed that growth in the aggregates may be in the upper parts of their ranges, depending on continuing developments with respect to velocity and provided that inflationary pressures remain subdued. For 1986 the Committee agreed on tentative ranges of monetary growth, measured from the fourth quarter of 1985 to the fourth quarter of 1986, of 4 to 7 percent for Ml, 6 to 9 percent for M2, and 6 to 9 percent for M3. The associated range for growth in total domestic nonfinancial debt was provisionally set at 8 to 11 percent for 1986. With respect to M1 particularly, the Committee recognized that uncertainties surrounding recent behavior of velocity would require careful reappraisal of the target range at the beginning of 1986. Moreover, in establishing ranges for next year, the Committee also recognized that account would need to be taken of experience with institutional and depositor behavior in response to the completion of deposit rate deregulation early in the year. In the implementation of policy for the immediate future, the Committee seeks to maintain the degree of pressure on reserve positions sought in recent weeks. This action is expected to be consistent with growth in M2 and M3 over the period from September to December at annual rates of about 6 to 7 percent, A marked slowing of M1 growth over the period to an annual rate of around 6 to 7 percent is also anticipated; slower growth over the next three months would be acceptable in the context of satisfactory economic performance, given recent very rapid growth in Ml. Somewhat greater or lesser reserve restraint would be acceptable depending on behavior of the aggregates, taking account of appraisals of the strength of the business expansion, developments in

foreign exchange markets, progress against inflation, and conditions in domestic and international credit The Chairman may call for Committee consulta markets. tion if it appears to the Manager for Domestic Operations that reserve conditions during the period before the next meeting are likely to be associated with a federal funds rate persistently outside a range of 6 to 10 percent. Votes for this action: Messrs. Volcker, Corrigan, Balles, Forrestal, Keehn, Martin, Partee, Rice, Ms. Seger, and Mr. Wallich. Vote against this action: Mr. Black. Mr. Black dissented because he believed some increase in the degree of reserve pressure was needed at this time to insure adequate slowing of M1 growth in the period ahead. 2. Authorization for Foreign Currency Operations At this meeting the Committee also considered the need for adjust ment in the limit on holdings of foreign currencies in the System Open Market Account. At present, Paragraph 1D of the Committee's authorization for foreign currency operations authorized the Federal Reserve Bank of New York, for the System Open Market Account, to maintain an overall open position in all foreign currencies not exceeding $8.0 billion. System holdings of foreign currencies currently totaled about $5-1/2 billion, based on historical costs. In light of the potential for foreign exchange operations by the United States and other countries following the recent G-5 announcement, the Committee agreed to raise the limit in paragraph 1D of the authorization to $10.0 billion, effective immediately. Votes for this action: Messrs. Volcker, Corrigan, Balles, Black, Forrestal, Keehn, Martin, Partee, Rice, Ms. Seger, and Mr. Wallich. Votes against this action: None.