February 7–8, 1989 FOMC Record of Policy Actions

FOMC minutes

which would tend to imbed inflation and inflationary expectations in the economic structure. A number of members observed that the relatively slow monetary expansion that had been experienced in recent months--and indeed on balance for some two years--portended restraint on prices and was a welcome development. A staff forecast suggested that money growth was likely to remain damped over coming months, with both M2 and M3 growing at the lower end of the Committee's 1989 ranges. In the view of a number of members, this might be acceptable or even desirable depending on the extent of inflationary pressures being experienced in the economy. At the same time some members cautioned that a persistent shortfall from the ranges might be a cause for concern. In the Committee's discussion of possible intermeeting adjust ments in the degree of reserve restraint, members generally felt that there should be a clear presumption of some further firming if the in coming information tended to confirm expectations of growing inflation ary pressures. Indeed, several members indicated that such a presump tion would enable them to accept a directive that called for no immediate change in the degree of reserve pressure. Some members ex pressed the view that developments in foreign exchange markets might have an important bearing on the timing or even the desirability of any firming in the period ahead. More generally, the Committee agreed that consideration would need to be given to the usual range of factors that might call for a change in policy implementation, including the possi bility that some easing might be warranted under certain conditions.

For the immediate future, however, several stressed that any perceptions that monetary policy might be easing should be resisted. At the conclusion of the Committee's discussion, all but two members indicated that they favored or could accept a directive that called for maintaining the current degree of pressure on reserve con ditions and for remaining alert to potential developments that might require some firming during the intermeeting period. Accordingly, some what 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 devel opments in foreign exchange and domestic financial markets. The reserve conditions contemplated by the Committee were expected to be consistent with growth of M2 and M3 at annual rates of around 2 percent and 3-1/2 percent respectively over the three-month period from December to March. It was understood that operations would continue to be conducted with some flexibility in light of the persisting uncertainty in the relation ship between the demand for borrowed reserves and the federal funds rate. The intermeeting range for the federal funds rate, which provides one mechanism for initiating consultation of the Committee when its boundaries are persistently exceeded, was left unchanged at 7 to 11 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, apart from the direct effects of the drought, economic activity has continued to expand at a fairly vigorous pace. After strong gains in the fourth quarter, total nonfarm payroll employment rose sharply

in January, including a sizable increase in manufac turing. The civilian unemployment rate, at 5.4 percent in January, remained in the lower part of the range that has prevailed since the early spring of last year. Industrial production rose appreciably further in December and January. Housing starts declined somewhat in December but were up substantially on balance in the fourth quarter. Consumer spending advanced considerably in the fourth quarter, in part reflecting stronger sales of durable goods. Indicators of business capital spend ing suggest some weakening in recent months. The nominal U.S. merchandise trade deficit was slightly larger on average in October and November than in the third quarter. The latest information on prices sug gests little change from recent trends, while wages have tended to accelerate. The federal funds rate and Treasury bill rates have risen since the Committee meeting in mid-December; other short-term interest rates are generally unchanged to somewhat lower. Bond yields have declined somewhat. In foreign exchange markets, the trade-weighted value of the dollar in terms of the other G-10 currencies rose substantially over the intermeeting period. M2 and M3 weakened appreciably in January, espe cially M2. For the year 1988, M2 expanded at a rate a little below, and M3 at a rate around, the midpoint of the ranges established by the Committee. M1 has changed little on balance over the past several months; it grew about 4-1/4 percent in 1988. Expansion of total domes tic nonfinancial debt appears to have moderated somewhat in 1988 to a pace around the midpoint of the Committee's monitoring range for the year. The Federal Open Market Committee seeks monetary and financial conditions that will foster price sta bility, 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 this meeting reaffirmed its decision of late June to lower the ranges for growth of M2 and M3 to 3 to 7 percent and 3-1/2 to 7-1/2 percent, respectively, measured from the fourth quarter of 1988 to the fourth quarter of 1989. The monitoring range for growth of total domestic nonfinancial debt was set at 6-1/2 to 10-1/2 percent for the year. The behavior of the monetary aggregates will continue to be evaluated in the light of movements in their velocities, developments in the economy and financial markets, and progress toward price level stability.

implementation of policy for the immediate In the future, the Committee seeks to maintain the existing on reserve positions. Taking account degree of pressure of indications of inflationary pressures, the strength the business expansion, the behavior of the monetary of foreign exchange and and developments in aggregates, financial markets, somewhat greater reserve domestic would, or slightly lesser reserve restraint restraint in the intermeeting period. The might, be acceptable reserve conditions are expected to be con contemplated growth of M2 and M3 over the period from sistent with March at annual rates of about 2 and December through respectively. The Chairman may call for 3-1/2 percent, Committee consultation if it appears to the Manager for Operations that reserve conditions during the Domestic before the next meeting are likely to be asso period ciated with a federal funds rate persistently outside a range of 7 to 11 percent. Votes for the paragraph on short-term policy implementation: Messrs. Greenspan, Corrigan, Angell, Black, Forrestal, Heller, Johnson, Kelley, LaWare, and Ms. Seger. Votes against this action: Messrs. Hoskins and Parry. and Parry dissented because they believed that Messrs. Hoskins a prompt move to greater monetary restraint was needed. Mr Hoskins felt that additional restraint was desirable to put policy on a course that would lead toward longer-run price stability. Mr. Parry emphasized that inflationary pressures appeared to be intensifying as the economy had grown to a level in excess of its long-run, noninflationary potential. Both believed that any delay in implementing more restraint probably would aggravate inflationary pressures, thereby increasing the diffi culty of achieving the Committee's anti-inflationary objectives and leading to even higher interest rates over time.