December 13–14, 1988 FOMC Record of Policy Actions

FOMC minutes

discussion, all but one of At the conclusion of the Committee's the members indicated that they favored or could accept a directive that called for some immediate firming of reserve conditions, with some further tightening to be implemented at the start of 1989, assuming that economic and financial conditions remained reasonably consistent with current expectations. In keeping with the Committee's usual approach to policy, the conduct of open market operations would be subject to fur ther adjustment during the intermeeting period based on indications of inflationary pressures, the strength of the business expansion, the be havior of the monetary aggregates, and developments in foreign exchange and domestic financial markets. Depending on such developments, some added reserve restraint would be acceptable, or some slight lessening of reserve pressure might be acceptable. The reserve conditions contem plated at this meeting were expected to be consistent with growth of M2 and M3 at annual rates of around 3 percent and 6-1/2 percent respec tively over the four-month period from November 1988 to March 1989. 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, apart from the direct effects of the drought, economic activity has continued to expand at a vigorous pace. Total nonfarm payroll employment rose sharply in October and November, with sizable increases indicated in manufacturing after declines in late summer. The civilian unemployment rate, at 5.4 percent in November, remained in the lower part of the range that has pre vailed since early spring. Industrial production advanced considerably in October and November. Housing starts turned up in October after changing little on balance over the previous several months. Growth in consumer spending has been somewhat more moderate in recent months, and indicators of business capital spend ing suggest a substantially slower rate of expansion than earlier in the year. The nominal U.S. merchandise trade deficit narrowed further in the third quarter.

Preliminary data for October indicate a small decline from the revised deficit for September. The latest in formation on prices and wages suggests little if any change from recent trends. Interest rates have risen since the Committee meet ing on November 1, with appreciable increases occurring in short-term markets. In foreign exchange markets, the trade-weighted value of the dollar in terms of the other G-10 currencies declined significantly further on balance over the intermeeting period. Expansion of M2 and M3 strengthened in November from relatively slow rates of growth in previous months, especially in the case of M2. Thus far this year, M2 has grown at a rate a little below, and M3 at a rate a little above, the midpoint of the ranges established by the Committee for 1988. M1 has increased only slightly on balance over the past several months, bringing growth so far this year to 4 percent. Expansion of total domestic nonfinancial debt for the year thus far appears to be at a pace somewhat below that in 1987 and around the midpoint of the Committee's monitoring range for The Federal Open Market Committee seeks monetary and financial conditions that will foster price sta bility over time, promote growth in output on a sustain able 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 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 increase somewhat the existing degree of pressure on reserve positions. account of indications of inflationary pressures, Taking business expansion, the behavior of the strength of the 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 inter The contemplated reserve conditions are meeting period. to be consistent with growth of M2 and M3 over expected the period from November through March at annual rates of about 3 and 6-1/2 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 7 to 11 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 dissented because she viewed current business indicators as already pointing on balance to slower economic expansion, and in the circumstances she did not feel that any added monetary restraint was needed to foster economic conditions consistent with progress in reducing inflationary pressures. In the context of already restrained monetary growth, she was concerned that a further increase in the degree of reserve pressure would pose unnecessary risks to interest sensitive sectors of the economy and ultimately to the sustainability of the expansion itself. She expressed particular concern that the higher interest rates implied by greater monetary restraint would aggravate the condition of financially troubled thrift institutions. At this meeting the Committee reviewed its current procedure for implementing open market operations against the background of a

marked change over recent months in the relationship between the level of adjustment plus seasonal borrowing and the federal funds rate. The current procedure of focusing on the degree of reserve restraint, as indexed by borrowed reserves, had been implemented with some flexibility in recent weeks in light of the substantial shortfall of borrowing in relation to expectations. The policy results had been satisfactory, but some members proposed that consideration be given to focusing more directly on the federal funds rate in carrying out open market operations, particularly if uncertainty about the borrowing - federal funds relationship were to persist. Others felt that despite its drawbacks the current procedure had a number of advantages, including that of allowing greater scope for market forces to determine short-term interest rates. The Committee concluded that no changes in the current needed at this time, but that flexibility would remain procedure were important in accomplishing Committee objectives under changing circumstances.