July 7, 1987 FOMC Record of Policy Actions

FOMC minutes

eased somewhat, and growth in the monetary the time of the May meeting had months. One member felt quite restrained in recent aggregates had been especially alert to developments that that policy implementation should be given the risks in this view that indicators might call for some easing, prove to be weaker than expected and a related of business activity might the risks of greater inflation were limited. The members belief that generally indicated that attention should continue to be given to develop ments bearing on the outlook for inflation and the performance of the dol markets, but in keeping with the Committee's usual lar in foreign exchange to policy implementation, any decision to alter reserve objectives approach period would take account of the behavior of the during the intermeeting monetary aggregates and the overall performance of the economy. At the conclusion of the Committee's discussion, all of the members agreed on the desirability of a directive that called for no change in the degree of pressure on reserve positions. Some firming or some easing of reserve conditions would be acceptable depending especially on developments relating to inflation and the performance of the dollar in foreign exchange markets, while also taking account of the behavior of the monetary aggregates and the strength of the business expansion. This approach to policy implementation was expected to be consistent with growth of M2 and M3 at annual rates of around 5 percent and 7-1/2 percent, respec tively, over the three-month period from June to September. Over the same period, growth in Ml was expected to resume after declining on balance in May and June but to remain well below its pace in 1986. Because the be havior of Ml was still subject to unusual uncertainty and in keeping with its decision regarding the longer-run target, the Committee decided to

specifying a numerical expectation for its continue its practice of not members agreed that the intermeeting range for the short-run growth. The which provides a mechanism for initiating consultation federal funds rate, when its boundaries are persistently exceeded, should be of the Committee 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 expanded at a moderate pace in the second quarter. In May and June, total non farm payroll employment rose modestly further, with most of the gains continuing to be in the service-producing sectors. The civilian unemployment rate fell to 6.1 percent in June and was down appreciably from its average level in the first quarter. Industrial production increased substantially in May after rising moderately on balance in earlier months of the year. Consumer spending appears to have increased in the second quarter, but housing starts were down somewhat further in May to a level considerably below their first-quarter average. Recent indicators of business capital spending point to some recovery, particularly in equipment outlays, from a depressed level in the first quarter. In April the merchandise trade deficit was smaller than in March and below the monthly average for the first quarter. The rise in consumer and producer prices moderated in May but for the year to date prices have risen more rapidly than in 1986, primarily reflecting sizable increases in prices of energy and non-oil imports. Wage increases have remained relatively moderate in recent months. M2 increased slightly in May and June while growth of M3 remained moderate. For 1987 through June, ex pansion of M2 has been below the lower end of the range established by the Committee for the year, and growth of M3 around the lower end of its range. Following a surge in April, Ml contracted on balance in May and June. Expansion in total domestic nonfinancial debt has moderated this year.

Most interest rates have declined somewhat on balance since the May 19 meeting of the Committee. In foreign exchange markets, the trade-weighted value of the dollar against the other G-10 currencies has risen on balance since the May 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 of these objectives the Committee agreed at this meeting to re affirm the ranges established in February for growth 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 Committee agreed that growth in these aggregates around the lower ends of their ranges may be appropriate in light of developments with respect to velocity and signs of the potential for some strengthening in underlying inflationary pressures, provided that economic activity is expanding at an acceptable pace. The monitoring range for growth in total domestic nonfinancial debt set in February for the year was left unchanged at 8 to 11 percent. For 1988, the Committee agreed on tentative ranges of monetary growth, measured from the fourth quarter of 1987 to the fourth quarter of 1988, of 5 to 8 percent for both M2 and M3. The Committee provisionally set the associated range for growth in total domestic nonfinancial debt at 7-1/2 to 10-1/2 percent. 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. Because of this sensitivity, which has been reflected in a sharp slowing of the decline in M1 velocity over the first half of the again decided not to establish a year, the Committee specific target for growth in Ml over the remainder of 1987 and no tentative range has been set for 1988. The appropriateness of changes in Ml this year will continue to be evaluated in the light of the behavior developments in the economy and of its velocity, financial markets, and the nature of emerging price The Committee welcomes substantially pressures.

slower growth of Ml in 1987 than in 1986 in the context of continuing economic expansion and some evidence of greater inflationary pressures. The Committee in decisions over the balance of reaching operational the year will take account of growth in Ml in the light of circumstances then prevailing. The issues involved with establishing a target for Ml will be carefully reappraised at the beginning of 1988. In the implementation of policy for the immediate future, the Committee seeks to maintain the existing degree of pressure on reserve positions. Somewhat greater reserve restraint or somewhat lesser reserve restraint would 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 ex pansion. This approach is expected to be consistent with growth in M2 and M3 over the period from June through September at annual rates of around 5 and 7-1/2 percent, respectively. Growth in Ml, while picking up from recent levels, is expected to remain well below its pace during 1986. 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 the short-run operational paragraph: Messrs. Volcker, Corrigan, Angell, Boehne, Boykin, Heller, Johnson, Keehn, Kelley, Ms. Seger, and Mr. Stern. Votes against this action: None.