February 9–10, 1988 FOMC Record of Policy Actions

FOMC minutes

2/9-10/88 -18 to open market operations. These members emphasized that financial market conditions still exhibited some degree of fragility and, against the back ground of substantial uncertainty in the economic outlook, unanticipated developments might well continue to warrant occasional departures from the focus on reserve objectives for the purpose of moderating temporary fluctuations in money market conditions. A number of these members also commented on the need for flexibility because a relatively normal or pre dictable relationship between the provision of reserves and money market conditions had not yet emerged. The members expressed some shadings of opinion with regard to possible adjustments in policy during the intermeeting period. A majority felt that there should be no presumptions about the likely direction of any such adjustments, especially in light of the consensus at this meeting for maintaining reserve conditions that were consistent with the slight easing that had been sought since late January. Some members believed, however, that policy implementation should be especially alert to developments that might point to somewhat easier reserve conditions, particularly because of the risks that they saw of a weaker economy than was currently projected. In the view of some members, further easing might also be appropriate if monetary growth fell appreciably short of current expectations. Several members cautioned that any decision to ease should take careful account of the potential impact on the dollar in foreign exchange markets. While the dollar had tended to stabilize recently, it could be vulnerable to a further decline.

2/9-10/88 -19 of the Committee's discussion, all of the members At the conclusion indicated their acceptance of a directive that called for maintaining the slightly easier degree of reserve pressure that had been sought recently. With regard to the Committee's operating procedures, a majority endorsed the view that some flexibility might continue to be needed in the conduct of open market operations in light of the still somewhat unsettled conditions in financial markets, the uncertainties in the relationship between reserve and money market conditions, and the substantial risks of unanticipated economic and financial developments. Taking account of conditions in financial markets, the members indicated that somewhat less or somewhat more reserve restraint would be acceptable, depending on the strength of the business expansion, indications of inflation, the performance of the dollar in foreign exchange markets, with consideration also given to the behavior of the monetary aggregates. The reserve conditions contemplated by the Committee were expected to be consistent with growth in both M2 and M3 over the 4-month period from November through March at annual rates of about 6 to 7 percent. Because of the unusual uncertainty relating to the behavior of Ml and in keeping with the decision not to set a longer-run target for this aggregate, the Committee decided not to indicate any expectation regarding its growth over the months ahead. The members agreed that the intermeeting range for the federal funds rate, which provides one 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:

2/9-10/88 The information reviewed at this meeting indicated that economic activity continued to expand rapidly in the fourth quarter but that the advance reflected a build-up in inventories as domestic final demands weakened. The growth in output appeared to have slowed around year-end. Total nonfarm payroll employment rose much less in January than on average over the previous three months; the manufacturing sector also recorded reduced employment growth in January. The civilian unemployment rate, at 5.8 percent in January, was un changed from December. Growth in industrial production moderated further in December. Retail sales picked up in December, buoyed by improved auto sales, but remained below levels reached during the summer. Indicators of business capital spending were mixed late in the year. Housing starts fell markedly in December, and were down somewhat on balance in the fourth quarter from the average pace in the second and third quarters. The nominal U.S. merchandise trade deficit declined substantially in November. For October and November combined, the deficit rose slightly from the average rate in the third quarter, but in real terms the deficit was estimated to have narrowed further. The rise in consumer prices slowed and producer prices fell in late 1987, reflecting declines in energy prices; wage trends have shown little change in recent months. Most interest rates were down substantially on balance since the Committee's meeting in mid-December. In the Treasury securities market, long-term yields fell consider ably more than short-term rates. Broad indexes of stock prices rose somewhat on balance over the intermeeting period in still relatively volatile trading. The trade weighted foreign exchange value of the dollar in terms of the other G-10 currencies declined further in the second half of December but recovered after the turn of the year and has increased moderately on balance since the December meeting. Growth of M2 and M3 strengthened substantially in January after slowing over November and December. For 1987 as a whole, expansion of M2 fell considerably below the lower end of the range established by the Committee for the year, while growth of M3 was at the lower end of its range. Growth of Ml surged in January following two months of declines. For the year 1987, M1 growth was marginally below that of nominal GNP, and expansion in total domestic nonfinancial debt was at the midpoint of the Committee's monitoring range for the year.

2/9-10/38 Open Market Committee seeks monetary and The Federal financial conditions that will foster reasonable price stability over time, promote growth in output on a sustain able basis, and contribute to an improved pattern of inter national transactions. In furtherance of these objectives, the Committee at this meeting established growth ranges of 4 to 8 percent for both M2 and M3, measured from the fourth quarter of 1987 to the fourth quarter of 1988. The monitoring range for growth in total domestic non financial debt was set at 7 to 11 percent for the year. With respect to Ml, the Committee again decided not to establish a specific target for 1988. The behavior of this aggregate in relation to economic activity and prices has become very sensitive to changes in interest rates, among other factors, as evidenced by sharp swings in its velocity in recent years. Consequently, 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. In the implementation of policy for the immediate future, the Committee seeks to maintain the slightly reduced degree of pressure on reserve positions sought in recent days. The Committee agrees that the current more normal approach to open market operations remains appropriate; still sensitive conditions in financial markets and uncertainties 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 aggre gates. The contemplated reserve conditions are expected to be consistent with growth in both M2 and M3 over the period from November through March at annual rates of about 6 to 7 percent. 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, Ms. Seger, and Mr. Stern. Votes against this action: None.