May 19, 1987 FOMC Record of Policy Actions

FOMC minutes

At the conclusion of the Committee's discussion, all but one of the members indicated that they favored or could accept a directive that called for some increase in the degree of reserve pressure beyond that sought in recent weeks, taking account of the possibility that such firming might be accomplished through an increase in the discount rate. Subsequent to some initial firming in reserve conditions through a reduced availability of reserves or through an increase in the discount rate, the members in dicated that somewhat greater reserve restraint would be acceptable, and somewhat lesser reserve restraint might be acceptable, over the intermeeting period depending on developments relating to inflation and the performance of the dollar in foreign exchange markets, while also giving consideration to the behavior of the monetary aggregates and the strength of the business expansion. This approach to policy implementation was expected to be con sistent with growth in M2 and M3 at annual rates of around 6 percent or less for the three-month period from March to June. Over the same period growth in Ml was expected to remain well below its pace in 1986; the members would continue to evaluate this aggregate in the light of the performance of the broader monetary aggregates and other factors. 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 Resrve Bank of New York: The information reviewed at this meeting suggests on balance that economic activity is expanding at a moderate pace in the current quarter. Total nonfarm payroll employment rose considerably further in April,

continuing to be in the service with most of the gains The civilian unemployment rate fell producing sectors. 6.6 percent in March. In April, to 6.3 percent from declined after increasing at a industrial production quarter. Total retail sales moderate rate in the first were up somewhat from their average changed little but Housing starts were down level in the first quarter. in April from their first-quarter average. somewhat of business capital spending point Recent indicators over the near term from a depressed to some recovery the first quarter. Consumer and producer level in have risen more rapidly this year, primarily prices reflecting sizable increases in prices of energy and non-oil imports. Labor cost increases have remained relatively moderate in recent months. Growth of M2 and M3 strengthened in April from a sluggish pace in February and March, but for 1987 to date expansion of these two aggregates has been slightly below the lower ends of their respective ranges estab lished by the Committee for the year. Ml surged in April prompted by exceptionally large tax payments. Expansion in total domestic nonfinancial debt has moderated somewhat thus far this year. Most interest rates have risen considerably since the March 31 meeting of the Committee, with the largest increases occurring in longer-term markets. In foreign exchange markets, the dollar was under heavy downward pressure over most of the intermeeting period and intervention purchases of dollars were sub stantial. Recently the dollar has tended to stabilize, but on balance its trade-weighted value against the other G-10 currencies declined over the period. In March the merchandise trade deficit was close to the average for January and February. 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 of these objectives the Committee at its February meeting established growth ranges of 5-1/2 to 8-1/2 percent for both M2 and M3, measured from the fourth quarter of 1986 to the fourth quarter of 1987. The associated range for growth in total domestic nonfinancial debt was set at 8 to 11 percent for

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 M1 have become much more sensitive in recent years to changes in interest rates, among other factors. During 1987, that growth in Ml should slow. the Committee anticipates in the light of its sensitivity to a variety However, influences, the Committee decided at the February of not to establish a precise target for its growth meeting over the year as a whole. Instead, the appropriateness in Ml during the course of the year will be of changes 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 increase somewhat the degree of reserve pressure sought in recent weeks, taking into account the possibility of a change in the discount rate. Somewhat greater reserve restraint would, or somewhat lesser reserve restraint might, be acceptable depending on indications of inflationary pressures and on developments in foreign exchange markets, as well as the behavior of the aggregates and the strength of the business expansion. This approach is expected to be consistent with growth in M2 and M3 over the period from March through June at annual rates of around 6 percent or less. Growth in Ml

to remain well below its pace during 1986. is expected may call for Committee consultation if it The Chairman 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, Boehne, Boykin, Heller, Johnson, Keehn, and Stern. Vote against this action: Ms. Seger. Ms. Seger dissented because she did not want to lean on the side of any tightening of reserve conditions beyond the firming that had occurred since the March meeting. She was concerned that the degree of reserve pressure prevailing recently, which was somewhat greater than intended, represented a risk to an already weak economic expansion. She noted that the negative effects of recent increases in interest rates had not yet been felt in the economy. She also referred to recent indications of moderating growth in the monetary aggregates, and she did not expect inflationary pressures to persist in the context of excess production capacity and commodity surpluses worldwide.