July 7, 1987 FOMC Record of Policy Actions: Full Text
FEDERAL RESERVE press release For Use at 4:30 p.m. August 21, 1987 The Federal Reserve Board and the Federal Open Market Committee today released the attached record of policy actions taken by the Federal Open Market Committee at its meeting on July 7, 1987. Such records for each meeting of the Committee are made available a few days after the next regularly scheduled meeting and are published in the Federal Reserve Bulletin and the Board's Annual Report. The summary descriptions of economic and financial conditions they contain are based solely on the information that was available to the Committee at the time of the meeting. Attachment
RECORD OF POLICY ACTIONS OF THE FEDERAL OPEN MARKET COMMITTEE Meeting held on July 7, 1987 Domestic policy directive The information reviewed at this meeting suggested that economic activity expanded at a moderate pace in the second quarter, as consumer expenditures grew at a relatively modest pace, business capital spending experienced some recovery, and the trade deficit apparently continued to narrow in volume terms. Producer and consumer prices slowed in May, after sizable increases earlier in the year that reflected, to a considerable extent, higher energy prices. Rising import prices also contributed to higher consumer prices. Wage increases have remained relatively limited in recent months. Payroll employment rose modestly further in May and June, follow ing substantial increases in the first four months of the year, with the gains again concentrated in the service-producing sector. Employment advances in the goods-producing sector were lackluster as manufacturing employment rose minimally. In June, the household survey indicated a small drop in employment, but the labor force fell noticeably. As a result, the unemploy ment rate fell 0.2 percentage point to 6.1 percent; most of the drop in employment was attributed to fewer young people than normal entering the labor force as of the early June survey week. The index of industrial production rose 0.5 percent in May; and following upward revisions to the three preceding months, the index was (annual rate) above the first-quarter average. The recent 2-1/2 percent growth reflects in part the increased production of business equipment,
and of a wide variety of consumer especially high-technology capital goods, however, auto assemblies have slowed goods. In the motor vehicles sector, depressed sales and large dealer stocks. in recent months due to relatively Partly because of the lagging auto sales, consumer spending in in recent months, though above its first real terms has been sluggish for services have continued to advance steadily, but quarter pace. Outlays auto sales dropped back noticeably in May to the slow pace experienced total in the first quarter. Excluding autos, outlays for durables have been flat on balance since the end of 1986, while spending on nondurable goods has edged down. has dropped back from its elevated pace early Housing activity this year. Total starts fell to an annual rate of 1.62 million units in May. Single-family starts were down appreciably, apparently reflecting the upturn in mortgage interest rates after March. Multifamily starts increased somewhat from an extremely low level in April but remained below the first quarter average. Business fixed investment has rebounded after a tax-related de cline at the beginning of the year. Shipments of nondefense capital goods were about flat in April and May but on average were above the first quarter level. Outlays for nonresidential structures turned up in May, with the gains fairly widespread; and petroleum-drilling activity has con tinued to recover. In addition, new orders for nondefense capital goods, excluding aircraft, picked up in the spring and new commitments for non residential construction have moved up slightly. Inventory investment apparently slowed in the second quarter from its rapid first-quarter pace. Production cutbacks trimmed auto inventories,
still was relatively high. Outside of but the level of dealer stocks have been relatively small in recent months autos, inventory changes and inventory-sales ratios have remained low. trade deficit in nominal terms was about The U.S. merchandise from its value in the final quarter of 1986. unchanged in the first quarter suggest that the deficit declined in April as exports rose Preliminary data and imports fell from their first-quarter rate. Economic activity has remained sluggish in most major foreign industrial nations so far this industrial production declined sharply in Germany in year. Real GNP and the first quarter, although industrial production picked up in April and May. Japan has shown the reverse pattern with declines in industrial production registered in both April and May. Inflation rates slowed in May. The consumer price index (CPI) rose 0.3 percent, after more rapid increases earlier this year. Increases in retail energy prices, which had boosted prices during the first quarter, were smaller in April and May and accounted for much of the slower rise in consumer prices. However, the price of crude oil has advanced further since mid-April, which suggests upward pressure on retail energy prices in the period ahead. Excluding food and energy, the CPI has risen about 1 per centage point faster so far this year than in 1986 partly because of more rapid increases in consumer goods that have high import proportions. Wage inflation, in contrast, has remained relatively low for the year to date. At its meeting on May 19, the Committee adopted a directive that called for increasing somewhat the degree of reserve pressure from that sought in the weeks just before the meeting, taking into account the possi bility of a change in the discount rate. The members agreed that somewhat
greater reserve restraint would, or somewhat lesser reserve restraint might, be acceptable depending on developments relating to inflation and the dollar in foreign exchange markets, as well as the behavior of the monetary aggregates and the strength of the business expansion. M2 and M3 were expected to grow at annual rates of around 6 percent or less from March through June, while growth in Ml was expected to be well below its pace in 1986. The intermeeting range for federal funds was left unchanged at 4 to 8 percent. Adjustment plus seasonal borrowing at the discount window aver aged $580 million for the three complete maintenance periods since the May meeting, close to its average level around the time of that meeting. Bor rowing during the first full maintenance period after the May meeting was heavy, particularly over the long Memorial Day weekend when an imminent increase in the discount rate was expected by market participants. Total reserves decreased at an annual rate of about 2 percent between April and June, reflecting a falloff in required reserves associated with a net con traction in Ml. M2 grew only a little on balance in May and June, bringing its for the March to June period to 2-3/4 percent, and its Ml growth rate two months. While some of the weakness in May component declined over the the unwinding of the previous tax-related buildup, more generally reflected aggregates appear to have been substantially affected by the increase these factors this year. Expansion in M3 in market interest rates among other institutions continued to fund a better maintained as banks and thrift was and for the March to June period this moderate pace of credit extension, The growth of M2 rate of 5-1/2 percent. increased at an annual aggregate
in 1987 through June left this aggregate below the lower end of the growth "cone" representing the Committee's 5-1/2 to 8-1/2 percent range for the year, and growth of M3 around the lower end of its 5-1/2 to 8-1/2 percent growth cone. Early in the intermeeting period interest rates remained near the higher levels reached in the weeks before the May meeting, as markets continued to reflect concerns about the course of inflation and the dollar. However, rates subsequently declined in response to a sharp drop in some commodity prices, a firmer dollar, and an abatement of inflation fears. The federal funds rate continued to average around 6-3/4 percent during the intermeeting period, but other short-term interest rates were down 10 to 55 basis points on balance. Longer-term Treasury yields were about 60 basis points lower and corporate bond rates declined about half that much. The commitment rate for fixed-rate mortgages fell slightly since the May FOMC meeting, but still was well above the low established earlier in the year. Stock price indexes increased strongly over most of the period to record levels. The dollar strengthened somewhat during the intermeeting period, by the announcement of an economic stimulus package in boosted in part than expected economic and price news for the Japan as well as better On balance, the weighted-average foreign exchange value of United States. G-10 currencies moved up by about 3-3/4 percent the dollar against other increases of nearly 7-3/4 percent against since the May meeting, including against the mark. Over the same period, bond the yen and 3-3/4 percent in Germany and Japan and with U.S. long-term rates rates rose substantially somewhat, the rate differentials narrowed. declining
suggested that real GNP would grow at a The staff projections and perhaps slow slightly from this moderate rate through the end of 1987 was expected to be a Improvement in the external sector pace in 1988. in overall output. Growth in domestic major factor contributing to growth be sluggish over the forecast horizon. In parti demand was anticipated to associated with the fall in the dollar was cular, the rise in import prices real income gains and thus consumer expenditures. expected to hold down Construction spending was anticipated to be damped by high vacancy rates for office structures and rental housing and recent increases in mortgage rates, while the expansion of government expenditures would likely be held down by budgetary limitations. Business equipment spending, however, should rise moderately in coming quarters, reflecting continued moderni zation efforts and expanding domestic production. Inflation rates were forecast to edge down over the second half of this year but then to move up again in 1988, primarily due to increases in non-petroleum import prices. Moreover, with the civilian unemployment rate projected to remain close to 6-1/4 percent, labor market slack would have a reduced influence in damping inflationary pressures. In the Committee's discussion of the economic situation and out look, the members generally agreed that business activity was likely to ex pand at a moderate pace over the balance of the year. Greater uncertainty surrounded the outlook for 1988, but most of the members felt that further moderate growth also was a reasonable expectation for next year. In general, the members anticipated relatively sluggish expansion in domestic demands over the projection horizon, and as at earlier meetings they believed that
would depend to an important extent sustained growth in overall activity improvement in the nation's balance of on the achievement of significant members anticipated a marginally higher rate of price trade. Most of the increase in 1988. In keeping with the usual practice at meetings when the Committee considers its long-run objectives for monetary growth, the members of the Committee and the Federal Reserve Bank presidents not currently serving as members presented specific projections of economic growth, the rate of unemployment, and changes in the overall price level. With regard to the rate of expansion in real GNP, the projections had a central tendency of 2-1/2 to 3 percent for 1987 as a whole and the same central tendency for 1988, though with a slightly wider range of individual forecasts for next year. Projections of growth in nominal GNP centered on ranges of 6-1/4 to 7 percent for 1987 and 5-3/4 to 7 percent for 1988. The rate of unemploy ment was not expected to deviate significantly from current levels; the central tendency of the forecasts was 6.2 to 6.4 percent for the fourth quarter of 1987 and 6.0 to 6.5 percent for the fourth quarter of 1988. With respect to the rate of inflation, as indexed by the GNP deflator, the pro jections centered on rates of 3-3/4 percent for 1987 and 4 percent for 1988. In making these forecasts, the members took account of the Committee's objectives for monetary growth established at this meeting. The members also assumed that fluctuations in the exchange value of the dollar would not be of sufficient magnitude to affect the projections significantly. While the central tendency of the members' forecasts suggested some moderation in the rate of expansion from the pace currently indicated
for the first half of this year, business activity was thought likely to be better balanced in that a number of previously depressed industries, notably in manufacturing, would benefit from further growth in net exports. Some members commented that relatively moderate expansion in line with that fore cast by most of the members would represent a satisfactory economic perform ance under foreseeable circumstances. In this view appreciably faster growth would incur a considerable risk of increased inflationary pressures and the resulting distortions would threaten the sustainability of the ex pansion itself. Relatively rapid growth in domestic demands, in particular, would be inconsistent with needed external adjustment. In the Committee's discussion of various factors bearing on the business outlook, some members commented that the growth in consumer demands seemed likely to be reasonably well maintained, especially in the services area, based on current trends and on prior cyclical experience. Others gave more weight to recent indications of softness in overall consumer spending and, in the context of increased consumer debt burdens and a relatively low saving rate, they saw relatively weak growth as a more like for the next several quarters. The members generally expected ly prospect in net exports as both importers and exporters continued further improvement to adjust to a lower value of the dollar, but the extent of such improvement to considerable uncertainty. The possibility of relatively remained subject limited economic expansion in key foreign industrial countries was again cited as a negative factor. With regard to the federal budget deficit, emphasized that further reductions were essential to assure the members economic performance over time. The outlook for continuing satisfactory
progress in lowering the deficit was uncertain, but any reduction in the deficit would tend to relieve pressures on financial markets, particularly in the context of diminished inflows of funds from abroad as the balance of trade improved, and would enhance the ability of the domestic economy to fund needed private capital formation. The members differed to some extent in their assessments of the outlook for inflation, although most expected higher import prices to con tribute to slightly greater price pressures in the period through 1988. In one view, there was a considerable risk that rising import prices would have a sizable impact on domestic pricing decisions as well. That risk might be augmented by efforts to raise wages in line with increasing infla tion, particularly with reduced levels of unemployment and possible pres sures on capacity in some industries experiencing strong export demand. members commented, however, that most industries were still operating Other appreciably below capacity, including in many cases industries that had been depressed earlier by the effects of the dollar's appreciation; some members also noted that most commodities remained in ample supply on world markets. A key factor tending to limit inflationary pressures was the continuing moderation in overall wage increases, but the members recognized that a substantial upturn, if it were to occur, would deal a major setback to the effort to restore price stability. The members also observed that potential developments in world oil prices were a major uncertainty in the inflation outlook. At this meeting the Committee reviewed its ranges for growth of monetary and debt aggregates in 1987 and established tentative ranges for
Employment and Balanced Growth Act of 1988 within the framework of the Full 1/ Act). At its meeting on February 10-11, 1987 1978 (the Humphrey-Hawkins of 5-1/2 to 8-1/2 percent for both the Committee had adopted growth ranges for the period from the fourth quarter of 1986 to the fourth M2 and M3 range for growth in total domestic non quarter of 1987. The associated debt was set at 8 to 11 percent. The Committee had anticipated financial that growth in M1 would slow in 1987 from its very rapid pace in 1986, but the members had decided not to establish a numerical target for the year; instead, the appropriateness of Ml changes would be evaluated during the year in the light of the behavior of Ml velocity, developments in the economy and financial markets, and potential inflationary pressures. In the course of the Committee's review of the ranges for 1987, most of the members indicated a preference for not changing the existing ranges set in February, but some sentiment also was expressed in favor of a slightly lower range for M2. The members took account of the sharp deceleration in the growth of the broader aggregates thus far in 1987, especially in M2. However, with the advance in business activity evidenc ing reasonable momentum and velocity showing signs of increasing in the context of rising interest rates associated with a pickup in inflation and a weaker dollar, the members viewed such a development as acceptable. According to a staff analysis prepared for this meeting, the relatively weak growth in the monetary aggregates in the first half of the year appeared to reflect a number of developments whose impact might be greatly diminished over coming quarters. To some extent, special factors 1/ The midyear Monetary Policy Report prepared pursuant to this legislation was transmitted to Congress on July 21, 1987.
helped to depress the growth the tax reform legislation may have related to by some unusual patterns in while growth in M3 also was restrained in M2, institutions. However, the available funding asset expansion at depository a substantial portion of the slowing in monetary evidence suggested that relatively slow adjustments in deposit inter growth could be attributed to Opportunity costs of holding money bal est rates to rising market rates. over the spring after an extended period of declines. ances had increased rates on many components of the broad aggre By the time of the meeting, market rates and the impact of wider oppor gates had adjusted to the higher on overall M2 and M3 growth appeared to be abating. The anal tunity costs that growth in M2 could be expected to pick up over the ysis concluded balance of the year to a rate closer to the expansion in nominal GNP, assuming steady reserve conditions and market interest rates near current levels, and for the year as a whole M2 might expand at a rate around the lower end of the Committee's existing range. Growth in M3 also might strengthen somewhat over the balance of the year, leaving this aggregate well within its range. In further discussion a number of members took the view that the existing M2 range should not be "fined tuned" at this time despite the out look for actual growth near the bottom of the range for 1987 as a whole. The members recognized that in light of the weakness during the first half of the year and the uncertainties that were involved, growth in this aggre gate might in fact be somewhat below the lower end of the range for 1987. if it occurred, would be acceptable provided it was The latter development, in M2 velocity and satisfactory economic associated with some strengthening
performance; in particular, a very limited pickup in M2 growth might be appropriate should the dollar tend to weaken or inflation concerns intensify. A number of members expressed concern that a reduction in the M2 range at this point might be misread as an indication of intended firm ing in monetary policy. On the other hand, several members observed that they would not endorse an easier policy posture solely for the purpose of assuring M2 growth within the Committee's existing range without regard for ongoing economic and financial developments, including the behavior of the dollar in foreign exchange markets. The members anticipated that growth in the debt of nonfinancial sectors would remain well within its monitoring range for the year, re flecting a marked reduction from the expansion in other recent years. The reduced rate of expansion was in large measure the consequence of a lower federal deficit and some slowing in state and local government borrowing. However, with growth in private debt remaining relatively strong and that in federal debt still on the high side, expansion in total nonfinancial debt appeared likely to continue to exceed that in nominal GNP and average close to its pace of recent months over the balance of the year. Turning to Ml, the members considered whether or not a specific numerical range should be reestablished for its growth over the balance of for 1988. The sharp slowing of Ml growth thus far this year or tentatively of rapid expansion, while appropriate in in 1987 following a long period the first half of the year, provided further evidence the circumstances of that this aggregate had become highly sensitive to movements in interest concluded that the prospective be rates and other factors. The members uncertainties, and no member havior of Ml remained subject to exceptional
favored establishing a specific target range at this time. However, the behavior of this aggregate, evaluated in the light of other economic and financial developments, would be taken into account in implementing policy over the second half of the year. The Committee also discussed M1A--a narrower measure of aggregate transactions accounts that includes demand deposits plus currency in circulation but excludes other checkable deposits from M1. The members noted that the characteristics of this aggregate prob ably also had changed in recent years as households shifted transactions deposits from demand to NOW accounts and more businesses adopted sophisti cated techniques for managing their cash balances. The velocity of this aggregate had varied less than that of M1, but given the uncertainties in its relationship to the economy and prices, the members saw no advantage at this time in introducing MA as a formal guide to policy. At the conclusion of the Committee's review, all of the members indicated that they favored, or could accept, a proposal not to change the ranges for growth in the broader aggregates or the monitoring range for nonfinancial debt that had been established in February for the year 1987. Growth in both M2 and M3 around the lower ends of their ranges might be depending on developments relating to their velocities and acceptable conditions, notably the strength of infla attendant economic and financial range would be established for Ml growth tionary pressures. No numerical 1988, but M1 developments, weighed in the in 1987, or tentatively for financial conditions, would be taken into context of emerging economic and over the balance of 1987, and in reaching operational decisions account
range for 1988 would be reassessed early the desirability of a numerical in the light of circumstances at that time. next year approved the following paragraphs relat Thereupon, the Committee aggregates and nonfinancial debt in ing to its objectives for the broader 1987 and the role of Ml: The Committee agreed at this meeting to reaffirm established in February for growth of 5-1/2 the ranges both M2 and M3, measured from the to 8-1/2 percent for 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. 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. Because of this sensitivity, which has been reflected in a sharp slowing of the decline in M1 velocity over the first half of the year, the Committee again decided not to establish a 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 of its velocity, developments in the economy and financial markets, and the nature of emerging price pressures. The Committee welcomes substantially 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 reaching operational decisions over the balance of 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.
Votes for this action: Messrs. Volcker, Angell, Boehne, Boykin, Heller, Corrigan, Johnson, Keehn, Kelley, Ms. Seger, and Mr. Stern. Votes against this action: None. ranges for 1988, all but one member With regard to the tentative of the Committee felt that some reduction in the broader aggregates from ranges would be consistent with the Committee's longer-run their 1987 progress toward price stability while also encourag objective of fostering in business activity. A majority indicated a ing sustained expansion preference for reducing the M2 range by 1/2 percentage point. Of these, a number commented that, should economic and financial conditions warrant, they would be prepared to support a further reduction of 1/2 percentage point when the tentative ranges were reviewed in February 1988. Some sentiment was expressed for lowering the M2 range by a full percentage point at this time on the ground that such a reduction appeared fully consistent with satisfactory economic growth and with the reduced rate of inflation that was anticipated and desired over the longer run; in this view a smaller reduction might not appear sufficiently decisive with respect to restraining inflation. However, one member expressed concern that a reduction of more than 1/2 percentage point would establish a lower limit that might not be consistent with adequate economic growth, at least insofar as could be foreseen at this time. In light of the uncertainties that were involved some members also indicated that they could support a proposal to widen the tentative range for M2 in the expectation that it might be narrowed later. Others objected to a wider range on the ground that, because of the Committee's focus on the broader aggregates, such a
range might be viewed as weakening the importance of the Committee's monetary targets. At the conclusion of the Committee's discussion, all but one of the members indicated that they could accept a reduction of 1/2 percentage point in the tentative ranges for M2 and M3 and in the monitoring range for nonfinancial debt in 1988. It was understood that all these ranges were provisional and that they, along with the possibility of establishing a numerical range for Ml, would be reviewed in early 1988 in the light of intervening developments. The following paragraph relating to the ranges for 1988 was approved for inclusion in the domestic policy directive: 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. Votes for this action: Messrs. Volcker, Corrigan, Angell, Boehne, Boykin, Heller, Johnson, Keehn, Kelley, and Stern. Vote against this action: Ms. Seger. Ms. Seger dissented because she did not want to reduce at this time the tentative M2 and M3 ranges for 1988 below those established for this year of key sectors of the domestic economy implied In her view the performance weak business expansion, and she did not anticipate enough a relatively offsetting support from gains in foreign trade. In the circumstances inflationary pressures seemed likely to remain subdued, and she concluded consistent with monetary growth within this year's ranges that a policy to sustain the expansion in 1988. She recognized would probably be needed
that the economic outlook was surrounded by a great deal of uncertainty, and she would be prepared to lower the M2 and M3 ranges early next year if intervening developments seemed to warrant such a reduction. In the Committee's discussion of policy implementation for the weeks immediately ahead, all of the members indicated that they were in favor of continuing to direct open market operations toward maintaining the existing degree of reserve availability. Recent financial developments, including indications of some easing in inflationary sentiment and the emergence of a more stable dollar in foreign exchange markets, along with evidence of continued moderate expansion in business activity did not point to the need for any change in reserve conditions at this time. The outlook for monetary expansion also seemed consistent with such a stance since unchanged reserve conditions and relatively stable market rates were to be associated with some strengthening in money growth thought likely third quarter. Even so, the cumulative expansion of M2 through over the September might still be somewhat below the Committee's target range for the year; growth in M3 might move this aggregate closer to the middle of the Committee's 1987 range by September. The outlook for growth in Ml but a relatively moderate rate of expansion in this remained uncertain, appeared consistent with stable reserve aggregate over the third quarter and the Committee's expectations for the broader aggregates. conditions felt that there should be no presumption about the Most members any intermeeting adjustment in policy implementation. likely direction of and downward pressures on the dollar The market concerns about inflation prompt firming of reserve conditions at that had argued for a relatively
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.
Also: Minutes of Actions