December 15–16, 1987 FOMC Record of Policy Actions

FOMC minutes

12/15-16/87 rates, among other factors. Because of this interest sensitivity, which had been reflected in a sharp slowing velocity over the first half of the of the decline in Ml Committee again decided at the July meeting year, the a specific target for growth in Ml over not to establish of 1987 and no tentative range was set for the remainder The appropriateness of changes in Ml this year to be evaluated in the light of the be would continue of its velocity, developments in the economy and havior financial markets, and the nature of emerging price pressures. The Committee welcomed 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 indicated in July that in reaching operational decisions over the balance of the year it would take account of growth in M1 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. The Committee recognizes that still sensitive conditions in financial markets and uncertainties in the economic outlook may continue to call for a special degree of flexibility in open market operations. Taking account of conditions in financial markets, somewhat lesser reserve restraint or somewhat greater reserve restraint would be acceptable depending on the strength of the business expansion, indications of inflationary pressures, developments in foreign exchange markets, as well as the behavior of the monetary aggregates. The contemplated reserve conditions are expected to be consistent with growth in M2 and M3 over the period from November through March at annual rates of about 5 percent and 6 percent, re spectively. Over the same period, growth in Ml is expected to remain relatively limited. 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. Greenspan Corrigan, Angell, Boehne, Boykin, Heller, Keehn, Kelley, and Stern. Votes against this action: Mr. Johnson and Ms. Seger.

12/15-16/87 -19- Mr. Johnson dissented because he believed that policy implementation should continue to focus on maintaining generally stable conditions in the money market, at least through the year-end, pending the emergence of more settled conditions in financial markets and a more predictable relationship between reserve objectives and money market conditions. He also preferred a directive that gave greater weight to the possibility for some easing, given potential developments during the intermeeting period. Ms. Seger dissented because she favored some slight easing of reserve conditions in light of her concern about the downside risks in the economy, especially in the context of sluggish growth in reserves and the monetary aggregates over an extended period. She also wanted to continue to focus on money market conditions in System open market operations and in particular to counter upward pressures on short-term interest rates. 2. Authorization for Domestic Open Market Operations. December 17, 1987, the Committee approved a temporary Effective increase of $3 billion, to $9 billion, in the limit between Committee meetings on changes in System Account holdings of U.S. government and federal agency securities specified in paragraph l(a) of the Authorization for Domestic Operations. The increase was effective for the intermeeting period ending with the close of business on February 10, 1988. Votes for this action: Messrs. Greenspan, Corrigan, Angell, Boehne, Boykin, Heller, Johnson, Keehn, Kelley, Ms. Seger, and Mr. Stern. Votes against this action: None. was taken on the recommendation of the Manager for This action advised that the normal leeway of $6 Domestic Operations. The Manager in System Account holdings of securities probably billion for changes

12/15-16/87 reductions in the inter to accommodate desirable would not be sufficient currency in circulation and of seasonal declines in meeting period because required reserves. the Committee held a meeting by telephone On January 5, 1988, financial developments since mid-December conference to review monetary and decisions at the December meeting to begin and to assess the Committee's procedures towards more emphasis on achieving to redirect its operating degree of pressure on reserve positions. In the period after a desirable the stock market collapse in October, open market operations had been to an important extent by the objective of restoring and sustaining guided stability in the money market, and less attention was given than previously to the implementation of objectives relating to reserve conditions. In the Committee's discussion most of the members agreed that with the further passage of time since the October disturbances in financial markets and with year-end pressures in the money market now unwinding, further progress could be made toward restoring the Committee's earlier approach to open market operations. The members recognized that conditions in financial markets were still somewhat unsettled and that the relationship between reserves and money market conditions had not been reestablished on a fully normal or predictable basis. In the circumstances and in light of the uncertainties in the economic outlook, it was agreed that some amount of flexibility might continue to be needed in the conduct of open market operations. To reflect and endorse the further progress toward the operating procedures in use before mid-October, the Committee decided to amend the

12/15-16/87 of its directive issued at reference in the operational paragraph relevant encompassed solely a change in emphasis its December meeting. The amendment and did not include any change in the relating to operating procedures short-run policy objectives. Committee's this telephone meeting, the Committee voted At the conclusion of of its directive to read as follows: to change the operational paragraph the implementation of policy for the immediate In future, the Committee seeks to maintain the existing degree of pressure on reserve positions. The Committee the passing of time and the year-end should agrees that permit further progress toward restoring a normal approach to open market operations, although still sensitive conditions in financial markets and uncer tainties in the economic outlook may continue to call for some flexibility in operations. Taking account of conditions in financial markets, somewhat lesser reserve restraint or somewhat greater reserve restraint would be acceptable depending on the strength of the business expansion, indications of inflationary pressures, developments in foreign exchange markets, as well as the behavior of the monetary aggregates. The contem plated reserve conditions are expected to be consistent with growth in M2 and M3 over the period from November through March at annual rates of about 5 percent and 6 percent, respectively. Over the same period, growth in Ml is expected to remain relatively limited. 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. Greenspan, Corrigan, Angell, Boehne, Boykin, Heller, Johnson, Keehn, Kelley, and Stern. Vote against this action: Ms. Seger. Ms. Seger dissented because she continued to believe that open market operations should be directed toward some slight easing. She also felt that financial markets remained too unsettled to warrant any shift at this time in operational procedures toward more emphasis on reserve objectives.