February 10–11, 1987 FOMC Record of Policy Actions

FOMC minutes

2/10-11/87 -19 members did not want to rule out the possibility of some slight easing period, although they did not view the conditions during the intermeeting for such a move as likely to emerge. of the Committee's discussion, all but one At the conclusion member indicated that they could vote for a directive that called for no change in the current degree of pressure on reserve positions. The members expected this approach to policy implementation to be consistent with some reduction in the growth of M2 and M3 to annual rates of about 6 to 7 percent over the two-month period from January-to-March. Over the same interval, growth in Ml was expected to moderate substantially from an extraordinarily high rate in the closing months of 1986. The members indicated that some what greater reserve restraint would be acceptable, and slightly less reserve restraint might be acceptable, over the intermeeting period depending on the behavior of the monetary aggregates, taking into account 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 on balance that economic activity continues to grow at a moderate pace. Total nonfarm payroll employment grew sharply in January in part reflecting unusual seasonal developments. The civilian unemployment rate remained

2/10-11/87 at 6.7 percent in January. Industrial production increased considerably in December and over the fourth quarter as a whole. Total retail sales rose sub stantially in December, largely reflecting a year-end surge in automobile sales, but were little changed on balance in the fourth quarter. Housing starts also strengthened in December after trending lower since late spring. Business capital spending generally appears to have remained sluggish. Available data for the U.S. merchandise trade deficit in the fourth quarter suggest a slight increase from the third quarter; however, after allowing for price changes, net exports of goods and services improved somewhat during the quarter. In late 1986 consumer and producer prices generally were continuing to rise at moderate rates, although prices of crude oil and some other industrial commodities firmed. Labor cost increases were more restrained in 1986 than in other recent years. Growth of M2 and M3 picked up substantially in December before slowing a little in January. For 1986 as a whole, expansion of these two aggregates was near the upper end of their respective ranges established by the Committee for the year. Growth of Ml slowed in January from an exceptionally rapid pace in late 1986. Expansion in total domestic nonfinancial debt remained appreciably above the Committee's monitoring range for 1986. Although short-term interest rates generally firmed around year-end, on balance interest rates have shown small mixed changes since the December 15-16 meeting of the Committee; rates on Treasury securities, including bonds, have risen a little over the period rates on most private obligations have declined while slightly. In foreign exchange markets the trade-weighted of the dollar against the other G-10 currencies value declined substantially on balance since the December has meeting. Open Market Committee seeks monetary The Federal conditions that will foster reasonable and financial over time, promote growth in output price stability a sustainable basis, and contribute to an improved on international transactions. In furtherance pattern of the Committee established growth of these objectives to 8-1/2 percent for both M2 and M3, ranges of 5-1/2 quarter of 1986 to the fourth measured from the fourth 1987. The associated range for growth in quarter of nonfinancial debt was set at 8 to 11 total domestic percent for 1987.

2/10-11/87 -21- With respect to Ml, the Committee recognized that, based on experience, the behavior of that aggregate must be judged in the light of other evidence relating to economic activity and prices; fluctuations in Ml have become much more sensitive in recent years to changes in interest rates, among other factors. During 1987, the Committee anticipates that growth in M1 should slow. However, in the light of its sensitivity to a variety of influences, the Committee decided not to establish a precise target for its growth over the year as a whole at this time. Instead, the appropriateness of changes in M1 during the course of the year will be evaluated in the light of the behavior of its velocity, developments in the economy and financial markets, and the nature of emerging price pressures. In that connection, the Committee believes that, particularly in the light of the extraordinary expansion of this aggregate in recent years, much slower monetary growth would be appropriate in the context of continuing economic expansion accompanied by signs of intensifying price pressures, perhaps related to significant weakness of the dollar in exchange markets, and relatively strong growth in the broad monetary aggregates. Conversely, continuing sizable increases in Ml could be accommodated in circumstances characterized by sluggish business activity, maintenance of progress toward underlying price stability, and progress toward international equilibrium. As this implies, the Committee in reaching operational decisions during the year, might target appropriate growth in Ml from time to time in the light of circumstances then prevailing, including the rate of growth of the broader aggregates. 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 January through March at annual rates of about 6 to 7 percent. Growth in Ml is ex pected to slow substantially from the high rate of earlier months. Somewhat greater reserve restraint would, or slightly lesser reserve restraint might, 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

2/10-11/87 -22 Domestic Operations that reserve conditions Manager for during the period before the next meeting are likely be associated with a federal funds rate persistently to outside a range of 4 to 8 percent. Votes for the short-run operational paragraph: Messrs. Volcker, Corrigan, Angell, Guffey, Heller, Johnson, Keehn, Morris, and Ms. Seger. Vote against this action: Mr. Melzer. Absent and not voting: Mrs. Horn. Mr. Keehn voted as alternate for Mrs. Horn. Mr. Melzer favored some tightening of reserve conditions. He noted the strong growth in bank loans in the November through January period and the firm federal funds rate which had prevailed despite the extraordinary pace of reserve growth. In addition, he cited the recent declines in the foreign exchange value of the dollar. Finally, looking ahead, he pointed out the potential for a further rise in inflationary expectations and, accordingly, he believed that prompt action toward restraint might avert the need for more substantial tightening later. At a telephone conference on February 23, the Committee heard a report from the Chairman regarding the deliberations in Paris during the previous weekend of the Ministers of Finance and Central Bank Governors of several major industrial countries. The Committee members discussed the possible implications of the decisions reached in Paris for U.S. intervention in the foreign exchange markets.