June 29–30, 1988 FOMC Record of Policy Actions

FOMC minutes

6/29-30/88 might be acceptable, depending on indications of inflationary pressures, the strength of the business expansion, developments in foreign exchange and domestic financial markets, and the behavior of the monetary ag gregates. The reserve conditions contemplated by the Committee were expected to be consistent with growth in M2 and M3 at annual rates of about 5-1/2 and 7 percent, respectively, over the three-month period from June through September. In keeping with its decision on the longer-run ranges, the Committee decided not to indicate any expecta tions regarding the growth of M1 over the months immediately ahead. The members agreed that the intermeeting range for the federal funds rate, which provides one mechanism for initiating consultation of the Commit tee when its boundaries are persistently exceeded, should be left unchanged at 5 to 9 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 sug gests that economic activity has continued to expand at a fairly vigorous pace. Growth in total nonfarm payroll employment moderated somewhat in April and May. The civilian unemployment rate rose to 5.6 per cent in May, a level just below its average in the first quarter. Industrial production advanced con siderably in April and May. Retail sales were little changed on balance over the two months after rising appreciably in the first quarter. Available data indicate that business capital spending has remained at the high level reached in the first quarter. Hous ing starts fell sharply in May, but other indicators suggested little change in the pace of recent housing activity. The nominal U.S. merchandise trade deficit declined substantially in April, as imports dropped sharply and exports were essentially unchanged. Most measures indicate that prices and wages have risen somewhat more rapidly in recent months. Prices of a broad range of commodities, particularly agricultural goods, have increased sharply in the past few weeks.

6/29-30/88 interest rates have risen since the Short-term meeting on May 17, while bond yields have Committee's moved lower. The trade-weighted foreign exchange the dollar in terms of the other G-10 cur value of rencies appreciated considerably over the intermeeting period. Expansion of M2 and M3 slowed considerably in May and M1 was about unchanged, but data available for June suggested some pickup in monetary growth. From a fourth-quarter base, M2 and M3 have grown at rates in the upper portion of the ranges established by the Committee for 1988. Expansion in total domestic non financial debt for the year thus far appears to be at a pace somewhat below that in 1987. The Federal Open Market Committee seeks monetary and financial conditions that will foster price sta bility over time, promote growth in output on a sus tainable basis, and contribute to an improved pattern of international transactions. In furtherance of these objectives, the Committee reaffirmed at this meeting the ranges it had established in February for growth 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 nonfinancial debt was also maintained at 7 to 11 percent for the year. For 1989, the Committee agreed on tentative ranges for monetary growth, measured from the fourth quarter of 1988 to the fourth quarter of 1989, of 3 to 7 percent for M2 and 3-1/2 to 7-1/2 percent for M3. The Committee set the associated monitoring range for growth in total domestic nonfinancial debt at 6-1/2 to 10-1/2 percent. It was understood that all these ranges were provisional and that they would be reviewed in early 1989 in the light of intervening developments. With respect to Ml, the Committee reaffirmed its decision in February not to establish a specific tar get for 1988 and also decided not to set a tentative range for 1989. The behavior of this aggregate will continue to be evaluated in the light of movements in its velocity, developments in the economy and finan cial markets, and the nature of emerging price pres sures. In the implementation of policy for the immedi ate future, the Committee seeks to increase slightly the existing degree of pressure on reserve positions.

6/29-30/88 -21 Taking account of indications of inflationary pres of the business expansion, devel sures, the strength opments in foreign exchange and domestic financial markets, and the behavior of the monetary aggregates, somewhat greater reserve restraint would, or slightly restraint might, be acceptable in the lesser reserve intermeeting period. The contemplated reserve condi to be consistent with growth in M2 tions are expected and M3 over the period from June through September at annual rates of about 5-1/2 and 7 percent, respec tively. The Chairman may call for Committee consul tation 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 5 to 9 percent. Votes for the paragraph on short-term policy implementation: Messrs. Greenspan, Corrigan, Black, Forrestal, Heller, Hoskins, Johnson, and Parry. Votes against: Messrs. Angell, Kelley, and Ms. Seger. Messrs. Angell and Kelley and Ms. Seger dissented because they preferred to direct policy toward maintaining unchanged conditions of reserve availability. They did not rule out the possible need for some firming later during the intermeeting period, subject to a review of developments by the Committee. Mr. Angell indicated that he supported a continued slowing in the growth of the monetary aggregates that was directed toward price level stability over time. In his view, while longer-run developments in prices remained somewhat uncertain, recent information from exchange rate and commodity markets, as well as the monetary aggregates, called for a pause in the process of continuous tightening in order to gain additional insight regarding the effects of previous actions. In addition, the dollar had been under substantial upward pressure, which had prompted central bank intervention. He felt that the exchange rate objectives implied in dollar sales would be frustrated by the double

6/29-30/88 -22- sterilization of reserves implied by monetary tightening. He wanted to call attention to the cross purposes of these actions. Mr. Kelley noted that he had supported firming actions over the past several months, but he could not concur with a decision to increase reserve pressure further at this time. The economy, for the most part, was behaving satisfactorily, with evidence that the rate of growth in real activity might be decelerating. He recognized and shared the concern that inflation had the potential to accelerate. However, there was insufficient evidence at this time to justify further tightening that might foster undue slowing in economic growth. He would be prepared to support appropriate firming action later should adequate evidence of increased inflationary pressures emerge, taking into account overall economic activity. Ms. Seger emphasized that some current business indicators already pointed to a slower economic expansion. Moreover, the full impact of the firming of policy in recent months had not yet materialized. In the circumstances and also taking into account the strength of the dollar and the absence of broad indications of significant acceleration in the rate of inflation, she believed that a further increase in the degree of reserve restraint represented an unwarranted risk at this time to satisfactory economic performance.