February 11–12, 1986 FOMC Record of Policy Actions

FOMC minutes

2/11-12/86 -17 with the suggestion that there should be no presumptions about the likely direction of any intermeeting adjustments, given the many uncertainties about prospective economic and financial developments and the behavior of the monetary aggregates. However, some members believed that policy implementation should remain especially alert to developments that might call for some easing of reserve conditions in light of the considerable risks that they saw of some weakening in the economic expansion. At the conclusion of the Committee's discussion a majority of the members indicated their acceptance of a directive that called for maintaining unchanged conditions of reserve availability. The members expected such an approach to policy implementation to be consistent with growth in M2 and M3 at annual rates of about 6 percent and 7 percent respectively for the period from November to March. Over the same period they expected Ml to expand at an annual rate of around 7 percent, although the behavior of Ml was seen as still subject to unusual uncertainty. The indicated that it might find somewhat greater or somewhat lesser Committee acceptable over the intermeeting period depending on the reserve restraint aggregates, the strength of the business expansion, growth of the monetary on foreign exchange markets, progress against the performance of the dollar in domestic and international credit markets. inflation, and conditions intermeeting range for the federal funds rate, The members agreed that the provides a mechanism for initiating consultation of the Committee which exceeded, should be left unchanged when its boundaries are persistently at 6 to 10 percent.

2/11-12/86 At the conclusion of the meeting, the following domestic policy embodying the Committee's long-run ranges and its short-run directive, operating instructions, was issued to the Federal Reserve Bank of New York: The information reviewed at this meeting suggests that economic activity is currently expanding at a moderate pace. Total nonfarm payroll employment increased substantially further in January, and the civilian unemployment rate declined to 6.7 percent. In December industrial production rose further, and available information suggests some additional rise in January. Retail sales increased considerably in December after declining on balance over the previous two months, and housing starts rebounded from their October-November pace. Business capital spending strengthened somewhat in the fourth quarter. Mer chandise trade data for the fourth quarter suggest that the deficit widened further from the very high third-quarter level. In late 1985 consumer and producer prices rose somewhat more than earlier, but for the year as a whole broad measures of prices and wages increased at rates close to those recorded in 1984. With respect to the Committee's ranges for longer term monetary growth, Ml expanded at a rate well above the range set for the second half of 1985; M2 grew at a rate somewhat below the upper end of its range for the year; and M3 expanded at a rate near the midpoint of its range for 1985. Expansion in total domestic nonfinancial debt was above the upper end of its monitoring range for the year. In January growth in Ml and M2 slowed markedly, while growth in M3 picked up as banks issued a substantial volume of large time deposits to support further robust growth in bank credit. Interest rates have fluctuated considerably since the December meeting of the Committee; on balance, short-term interest rates have risen a little while longer-term rates are unchanged to somewhat lower. The trade-weighted value of the dollar against major foreign currencies has declined further. 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 to establish

2/11-12/86 -19- the following ranges for monetary growth, measured from the fourth quarter of 1985 to the fourth quarter of 1986. With respect to Ml, the Committee recognized that, based on the experience of recent years, the behavior of that aggregate was subject to substantial uncertainties in relationship to economic activity and prices, depending among other things on its responsiveness to changes in interest rates. It agreed that an appropriate target range under existing circumstances would be 3 to 8 percent, but it intends to evaluate movements in Ml in the light of its consistency with the other monetary aggregates, developments in the economy and financial markets, and potential inflationary pressures. It adopted a range of 6 to 9 percent for M2 and 6 to 9 percent for M3. The associated range for growth in total domestic nonfinancial debt was set at 8 to 11 percent for the year 1986. In the implementation of policy for the immediate future, the Committee seeks to maintain 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 percent and 7 percent, respectively; while the behavior of Ml continues to be subject to unusual uncertainty, growth at an annual rate of about 7 percent over the period is anticipated. Somewhat greater reserve restraint or somewhat lesser reserve restraint might 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 the short-run operational paragraph: Messrs. Volcker, Corrigan, Angell, Black, Forrestal, Johnson, Keehn, Parry, Rice, and Wallich. Votes against this action: Mr. Martin and Ms. Seger. Mr. Martin and Ms. Seger dissented because they preferred some easing of reserve conditions given the risks they saw of unacceptably

2/11-12/86 -20 sluggish economic expansion. Such risks would be reduced in their view by lower short-term interest rates, which had not declined in line with recent reductions in long-term interest rates and in inflation expectations. They also believed some modest easing could lead to market conditions that would facilitate a reduction in the discount rate.