August 16, 1988 FOMC Record of Policy Actions

FOMC minutes

primary emphasis to these measures. According to a staff analysis prepared for this meeting, growth of both M2 and M3 was likely to be appreciably slower in the current quarter than had been anticipated at the time of the previous meeting, given the rise in interest rates that had occurred over the inter meeting period. Assuming no further increase in interest rates, the cumula tive expansion of M2 through September might be around the midpoint of the Committee's range for the year while that of M3 might be only marginally above the midpoint of its range. Growth of M1 also was expected to slow sub stantially from its relatively rapid rates of expansion in June and July. Members who wanted to give the monetary aggregates greater attention expressed satisfaction that monetary growth appeared to have slowed to a pace deemed more consistent with progress in reducing inflationary pressures and a sustainable expansion in economic activity over time. They also observed that the behavior of M2 had resumed a more predictable pattern over the past several quarters in relation to aggregate measures of economic performance. However, several members expressed the reservation that more time was needed to assess the ongoing reliability of M2 as a guide for the conduct of monetary policy. A number commented that the major focus in policy implementation should continue to be on incoming indications of inflationary pressures in the economy. In light of the increase that had occurred in the federal funds rate, including the recent rise following the advance in the discount rate, the members accepted a proposal to raise the intermeeting range for the federal funds rate by 1 percentage point to a range of 6 to 10 percent. The upward adjustment in the range was intended to align its midpoint more closely with the current average level of the federal funds rate. The range for the

mechanism for initiating consultation of the federal funds rate provides one Committee when its boundaries are persistently exceeded. of the Committee's discussion, all but one member At the conclusion they favored or could accept a directive that called for indicated that the current degree of pressure on reserve positions. The members maintaining decided that somewhat greater reserve restraint would be acceptable, or slightly lesser reserve restraint might be acceptable, over the intermeeting period depending on indications of inflationary pressures, the strength of the business expansion, the behavior of the monetary aggregates, and developments in foreign exchange and domestic financial markets. The reserve conditions the Committee were expected to be consistent with growth of M2 contemplated by annual rates of around 3-1/2 percent and 5-1/2 percent, respec and M3 at tively, over the three-month period from June to September. The intermeeting range for the federal funds rate was raised by 1 percentage point to a range of 6 to 10 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 that economic activity has continued to expand at a vigorous pace. Total nonfarm payroll employment grew sharply further in June and July. The civilian unemployment rate in July, at 5.4 percent, was slightly below its average level in the second quarter. Indus trial production advanced considerably further in July. Growth in retail sales remained moderate last month. Business capital spending has continued to grow rapidly. Some measures of prices indicate a pickup from recent trends and labor costs have risen more rapidly in recent months. Most interest rates have increased appreciably since the Committee's meeting on June 29-30. On August 9 the Federal Reserve Board approved an increase in the discount rate from 6 to 6-1/2 percent.

The nominal U.S. merchandise trade deficit fell in the second quarter as exports continued to rise and non oil imports declined. Over the intermeeting period, the trade-weighted foreign exchange value of the dollar appreciated somewhat further in terms of the other G-10 currencies. Expansion of M2 and to a lesser extent M3 slowed in July but growth of M1 remained relatively strong. From a fourth-quarter base through July, M2 and M3 have grown at rates somewhat above the midpoints of the ranges established by the Committee for 1988. Expansion in total domestic nonfinancial 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 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 at its meeting in late June reaffirmed 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 , 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 target 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 financial markets, and the nature of emerging price pressures. In the implementation of policy for the immediate future, the Committee seeks to maintain the existing degree of pressure on reserve positions. Taking account of indications of inflationary pressures, the strength of the business expansion, the behavior of the monetary in foreign exchange and aggregates, and developments financial markets, somewhat greater reserve domestic

restraint would, or slightly lesser reserve restraint might, be acceptable in the intermeeting period. The contemplated reserve conditions are expected to be consistent with growth in M2 and M3 over the period from June through September at annual rates of about 3-1/2 and 5-1/2 percent, respectively. 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 6 to 10 percent. Votes for this action: Messrs. Greenspan, Corrigan, Angell, Black, Forrestal, Heller, Johnson, LaWare, Parry, and Ms. Seger. Vote against this action: Mr. Hoskins. Absent and not voting: Mr. Kelley. President Hoskins dissented because he preferred a policy that would give less emphasis to near-term business conditions and exchange rate considerations and greater emphasis to the longer-term objective of price stability. He viewed the current rate of inflation as too high relative to that objective and believed that the strength of final demand and associated pressures on costs in the economy suggested that inflation may be heading higher. In the circumstances, he thought further monetary restraint would be more consistent with the Committee's long-run price stability objective and would increase market confidence in the eventual achievement of that objective.