December 16–17, 1985 FOMC Record of Policy Actions

FOMC minutes

12/16-17/85 -11 some sentiment was expressed for further reducing the emphasis on M1, but a majority of the members agreed that it should be retained as one guide among others for the conduct of monetary policy. In keeping with past practice, the members considered the question of possible intermeeting adjustments in the degree of pressure on reserve positions. While no member wanted to rule out possible adjustments in either direction, most believed that policy implementation should be especially alert to the potential need for some further easing in light of the relatively sluggish performance of the economy and the generally favorable outlook for prices and wages. Policy implementation also needed to take account of the behavior of the monetary aggregates, conditions in domestic and international financial markets, and developments in foreign exchange markets, as well as the impact of a reduction in the discount rate, should one take place. It was also suggested that the Committee's expectations with regard to the short run growth of the aggregates be stated with less precision than in the past and that the behavior of Ml, in particular, be evaluated in the context of other economic and financial developments, including the growth of the broader any substantial deviation of Ml growth aggregates. In one view, however, from expectations should be resisted -- in either direction -- by an appropriate adjustment in the degree of reserve pressure. At the conclusion of the Committee's discussion, most of the members they favored or could accept a directive that called for some indicated that of pressure on reserve positions. The members limited decrease in the degree implementation to be consistent with growth expected such an approach to policy rates of 6 to 8 percent for the four-month period from of M2 and M3 at annual

12/16-17/85 -12- November to March. Over the same period they expected the expansion of Ml to slow to an annual rate of 7 to 9 percent, though the outlook for Ml growth continued to be subject to unusual uncertainty. Somewhat greater reserve restraint might, and somewhat lesser restraint would, be acceptable over the intermeeting period depending on the growth of the monetary aggregates, the strength of the business expansion, the performance of the dollar on foreign exchange markets, progress against inflation, and conditions in domestic and international credit markets. The members agreed that the intermeeting range for the federal funds rate, which provides a mechanism for initiating con sultation 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 that economic activity is expanding at a relatively modest pace in the current quarter. Total nonfarm payroll employment increased further in November, though less than in October, and the civilian unemploy ment rate edged down to 7.0 percent. Retail sales and industrial production picked up in November after declining in October. After strengthening in October, housing starts fell appreciably in November. Incoming information generally suggests relatively sluggish business capital spending. Revised merchandise trade data for the third quarter confirm that the deficit widened further, as non-oil imports continued to increase and exports fell somewhat. Broad measures of prices and wages appear to be rising at rates close to those recorded earlier in the year. After declining in October, Ml grew substantially in November while growth in M2 and M3 continued quite moderate. Expansion in total domestic nonfinancial debt has remained rapid. Through November, Ml expanded at a rate well above the long-run range set by the Committee,

12/16-17/85 -13- M2 grew at a rate a bit below the upper end of its range for the year, and M3 expanded at a rate near the mid point of its range for 1985. Treasury bill rates have fallen somewhat while other short-term market interest rates have changed little on balance since the November meeting of the Committee; long-term rates have moved appreciably lower over the period. The trade-weighted value of the dollar against major foreign currencies has declined on balance since the Committee's meeting in early November, though the dollar has tended to stabilize more recently. 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 9-1/2 percent for M3. The associated range M2 and 6 to for total domestic nonfinancial debt was reaffirmed at 9 to 12 percent. With respect to Ml, 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 Ml particularly,

12/16-17/85 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 depository 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 decrease somewhat the existing degree of pressure on reserve positions. This action is expected to be consistent with growth in M2 and M3 over the period from November to March at annual rates of about 6 to 8 percent; while the behavior of Ml continues to be subject to unusual uncertainty, growth at an annual rate of 7 to 9 percent over the period is anticipated. Somewhat greater reserve restraint might, and somewhat lesser reserve restraint would, be acceptable depending on behavior of the aggregates, the strength of the business expansion, developments in foreign exchange markets, progress against inflation, and conditions in domestic and international credit markets. The Chairman may call for Committee consultation 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, Forrestal, Guffey, Keehn, Martin, Partee, Rice, and Ms. Seger. Vote against this action: Mr. Black. Absent and not voting: Messrs. Balles and Wallich. (Mr. Guffey voted as alternate for Mr. Balles.) Mr. Black dissented because he was concerned about the rapid growth of M1 and he did not think a decrease in the degree of pressure on reserve positions was desirable under present circumstances.