November 1, 1988 FOMC Record of Policy Actions

FOMC minutes

September after a sharp increase in July, while housing construction has been flat in recent months. Consumer substantially on average in the spending increased apparently slowed in recent months. third quarter but of business capital spending suggest Indicators considerably slower expansion in the third quarter, following very rapid growth in the first half of the year. Preliminary data for the nominal U.S. merchandise trade deficit in August showed a greater deficit than in July, but the average for July-August was slightly less than the second-quarter rate. The latest information on prices and wages suggests little if any change from recent trends. Interest rates in long-term debt markets have declined a little further since the Committee meeting on September 20, while rates in short-term markets have edged higher. The trade-weighted foreign exchange value of the dollar in terms of the other G-10 currencies declined appreciably over the intermeeting period from the high level of last summer. E::pansion of M2 has slowed considerably in recent months; growth of M3 moderated in August and September appears to have strengthened somewhat in October. but Thus far this year, M2 has grown at a rate somewhat below, and M3 at a rate somewhat above, the midpoint of the ranges established by the Committee for 1988. M1 has increased only slightly on balance in recent months after registering relatively strong growth in June and July. Expansion of 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 of 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 of 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 early 1989 in the light of intervening developments. in With respect to M1, 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 aggregates, and developments in foreign exchange and domestic financial markets, somewhat greater reserve 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 of M2 and M3 over the period from September through December at annual rates of about 2-1/2 and 6 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, Hoskins, Johnson, Kelley, LaWare, and Parry. Vote against this action: Ms. Seger. Ms. Seger indicated that while an unchanged policy was acceptable to her at this point, she did not want to bias the directive toward potential tightening. In her view current indications of slower economic growth and the lagged effects of earlier policy tightening actions pointed to relatively slow expansion and reduced inflationary pressures over the year ahead. In these circumstances, she would not want to react more promptly or vigorously to indications of greater strength or price

pressures in the economy, which might well prove to be temporary, than to evidence of a weakening economy. In the period following the Committee meeting on November 1, it became increasingly evident in the implementation of policy that depository institutions had reduced their demands on the discount window; in this period, a significantly lower level of adjustment plus seasonal borrowing was being associated with a slightly higher federal funds rate than had been anticipated at the time of the meeting. To take account of this change in behavior, but also in light of recent information suggesting that the economic expansion retained considerable strength, the Manager for Domestic Operations adjusted the reserve paths to incorporate a lower level of borrowing, with the expectation that federal funds would continue to trade in the slightly higher range that had prevailed recently. This adjustment in open market operations was discussed with the Committee on November 22, 1988. The members agreed that the factors relating to the apparent change in the relationship between borrowing and the federal funds rate, and the broader implications for the conduct of open market operations, would be reviewed further at the December meeting. 2. Authorization for Domestic Open Market Operations Effective November 2, 1988, the Committee approved a temporary increase of $4 billion, to $10 billion, in the limit between Committee meetings on changes in System Account holdings of U.S. government and federal agency securities that is specified in paragraph 1(a) of the Authorization for Domestic Open Market Operations. The increase was effective for the intermeeting period ending with the close of business on December 14, 1988.

Votes for this action: Messrs. Greenspan, Corrigan, Angell, Black, Forrestal, Heller, Hoskins, Johnson, Kelley, LaWare, Parry, and Ms. Seger. Votes against this action: None. This action was taken on the recommendation of the Manager for Domestic Operations. The Manager had advised that the usual leeway of $6 billion for changes in System Account holdings would probably not be sufficient over the intermeeting period because of seasonal increases in currency in circulation and in required reserves. 3. Change in Terms of Certain Members to Calendar-Year Basis The Committee amended its "Rules of Organization" to advance from March 1 to January 1 of each year the start of the terms of office of the Federal Reserve Bank presidents who serve one-year terms as Committee members or alternate members. The change will be effective starting with the calendar year 1990. Because the Committee's objectives for monetary growth are established on a calendar-year basis, the Committee believed that it would be appropriate to have all the members responsible for carrying out those objectives during the year participate in the vote to establish them at the start of the year. The Committee emphasized that this change was essentially procedural in nature, given the continuity of its decision-making process. The Full Employment and Balanced Growth Act of 1978 requires that the Committee's monetary growth objectives for the calendar year be transmitted to Congress by February 20 of each year. Votes for this action: Messrs. Greenspan, Corrigan, Angell, Black, Forrestal, Heller, Hoskins, Johnson, Kelley, LaWare, Parry, and Ms. Seger. Votes against this action: None.