December 15–16, 1986 FOMC Record of Policy Actions

FOMC minutes

12/15-16/86 -11 underlying forces seemed consistent with a considerable slowing over time from the extraordinary expansion experienced during 1986. Some concern was expressed that the failure of such a slowing to occur and the associated large provision of reserves could eventually have inflationary consequences. Even with some moderation over coming months, Ml might continue to expand at rates markedly in excess of the growth in nominal GNP. In view of the uncertainties that were involved and in keeping with the Committee's practice since mid-1986, the members did not want to indicate specific expectations with regard to Ml growth in the operational paragraph of the Committee's directive. Nonetheless, it was understood that growth of this aggregate would continue to be evaluated in light of the behavior of the broader monetary aggregates and other economic and financial developments. In their discussion of possible intermeeting adjustments in the degree of reserve pressure, the members thought it unlikely that develop ments would warrant more than a minor, if any, change in reserve conditions during the weeks ahead. All of the members understood that some small adjustment in either direction might be appropriate under certain circum stances. However, in the context of what they perceived as greater downside risks in the outlook for economic activity, several believed that policy implementation should remain especially alert to developments that might call for somewhat easier reserve conditions. It was noted in this connection that the relative stability of the dollar in foreign exchange markets over the past few months provided greater flexibility for potential easing actions.

12/15-16/86 discussion, all of the members At the conclusion of the Committee's that called for no change in the indicated that they favored a directive The members expected this approach degree of pressure on reserve positions. with growth of both M2 and M3 at to policy implementation to be consistent over the 4-month period from November to an annual rate of about 7 percent of M1 remained subject to unusual uncertainty, March. Because the behavior decided they would continue to evaluate this aggregate in the the members the broader monetary aggregates and other factors. light of the performance of indicated that slightly greater reserve restraint or somewhat The members lesser reserve restraint would be acceptable over the intermeeting period behavior of the monetary aggregates, taking into account the depending on the strength of the business expansion, the performance of the dollar in 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 consultation of the Committee when its boundaries are persistently exceeded, should be left unchanged at 4 to 8 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 continues to grow at a moderate pace in the current quarter. Total nonfarm payroll employment grew appreciably further in October and November, and employment in manufacturing also rose after declining on balance in previous months. The civilian unemployment rate remained at 7.0 percent in November for the third consecutive month. Industrial production picked up considerably in November. Total retail sales rose moderately last month after changing

12/15-16/86 -13- little on balance over September and October. Housing starts have weakened and business capital spending generally appears to have remained sluggish. Pre liminary data for the U.S. merchandise trade deficit in October suggest a moderate narrowing. Broad measures of prices have firmed somewhat in recent months due to developments in food and energy markets. Labor cost increases this year have remained moderate compared with other recent years. Growth of M2 slowed substantially in November, while growth of M3 remained moderate. Expansion of these two aggregates for the year through November has been just below the upper end of their respective ranges established by the Committee for 1986. In November growth of Ml accelerated to a very rapid rate. Expansion in total domestic nonfinancial debt remains appreciably above the Committee's monitoring range for 1986. Short-term interest rates have risen somewhat since the November 5 meeting of the Committee, while long-term rates have declined on balance. In foreign exchange markets the trade-weighted value of the dollar against other G-10 currencies has declined moderately on balance since the November meeting. The Federal Open Market Committee seeks monetary and financial conditions that will foster reasonable price stability over time, promote growth in output on a sustainable basis, and contribute to an improved pattern of international transactions. In furtherance objectives the Committee agreed at the July of these meeting to reaffirm the ranges established in February for growth of 6 to 9 percent for both M2 and M3, 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 is subject to substantial uncertainties in relation to economic activity and depending among other things on the responsive prices, ness of Ml growth to changes in interest rates. In light of these uncertainties and of the substantial decline in velocity in the first half of the year, the Committee decided that growth of Ml in excess of the previously established 3 to 8 percent range for 1986 would be acceptable. Acceptable growth of Ml over the remainder of the year would depend on the behavior of growth in the other monetary aggregates, velocity, developments in the economy and financial markets, and pressures. Given its rapid growth in the early price

12/15-16/86 the Committee recognized that the part of the year, total domestic nonfinancial debt in 1986 increase in may exceed its monitoring range of 8 to 11 percent, an increase in that range would provide an but felt inappropriate benchmark for evaluating longer-term trends in that aggregate. For 1987 the Committee agreed on tentative ranges of monetary growth, measured from the fourth quarter of 1986 to the fourth quarter of 1987, of 5-1/2 to 8-1/2 percent for M2 and M3. While a range of 3 to 8 percent for M1 in 1987 would appear appropriate in the light of most historical experience, the Committee recognized that the exceptional uncertainties surrounding the behavior of Ml velocity over the more recent period would require careful appraisal of the target range at the beginning of 1987. The associated range for growth in total domestic nonfinancial debt was provisionally set at 8 to 11 percent for 1987. 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 an annual rate of about 7 percent. Growth in Ml will continue to be appraised in the light of the behavior of M2 and M3 and the other factors cited below. Slightly greater reserve restraint or somewhat lesser reserve restraint would be acceptable depending on the behavior of the aggregates, taking into account 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 4 to 8 percent. Votes for this action: Messrs. Volcker, Corrigan, Angell, Guffey, Heller, Mrs. Horn, Messrs. Johnson, Melzer, Morris, and Ms. Seger. Votes against this action: None. Absent and not voting: Mr. Rice.