November 14, 1989 FOMC Record of Policy Actions

FOMC minutes

of assets by undercapitalized thrift institutions and the funding made available through RTC resolutions; for the year, the growth of M3 was to be somewhat above the lower bound of the Committee's range. projected Turning to the instruction in the directive relating to possible adjustments in the degree of reserve pressure during the intermeeting period, a majority of the members expressed a preference for retaining the existing asymmetry that would permit any adjustments to be made more readily toward easing than toward firming. In this view, current tendencies toward weakening in the economy outweighed the sources of strength, and some further easing might be needed if the incoming information on business activity suggested more softening than most members currently expected. In these circumstances, an easing would be consistent with the Committee's long-run inflation objective. Other members, who saw the risks to the expansion as more evenly balanced, indicated a preference for a symmetric instruction in the directive; however, they could accept retention of the bias toward ease contained in the October 3 directive. Some of these members nonetheless stressed the desirability of not overreacting to possible indications of slower economic growth in the period ahead for fear of creating financial conditions and stimulating monetary growth that would prove to be inconsistent with the Committee's long-run goal of price stability. In light of these considerations and in the context of the recent easing actions, the members generally endorsed or found acceptable a proposal to approach with caution any further easing in the weeks ahead. At the conclusion of the Committee's discussion, all but one of the members indicated that they preferred or could accept a directive

that called for maintaining the existing degree of pressure on reserve and that provided for giving greater weight to developments positions that might require some slight easing during the intermeeting period. Accordingly, slightly greater reserve restraint might be acceptable during the intermeeting period, while some slight easing of reserve restraint would be acceptable, depending on progress toward price stability, the strength of the business expansion, the behavior of the monetary aggregates, and developments 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 7-1/2 percent and 4-1/2 percent respectively over the threemonth period from September to December. 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 continuing expansion in economic activity, though at a somewhat slower pace than earlier in the year. Total nonfarm payroll employment increased appreciably in October, but on balance its growth has been more moderate over the past several months, especially in the private sector. The civilian unemployment rate has remained around 5-1/4 percent. Strike activity and other disruptions depressed industrial production noticeably in October. Retail sales fell appreciably in October, reflecting a sharp drop in purchases of motor vehicles, but some upward revisions were made for August and September. Housing starts fell further in September and for the third quarter as a whole were about unchanged from their reduced second-quarter average. Indicators of business capital spending suggest slower growth after a substantial increase in the first half of the year. The nominal U.S. merchandise trade deficit widened in August from its July

increased markedly. Consumer rate as non-oil imports have risen more slowly on balance since prices partly reflecting sharp reductions in energy midyear, the latest data on labor compensation prices, but no significant change in prevailing trends. suggest rates have declined appreciably Most interest Committee meeting on October 3. In foreign since the the trade-weighted value of the exchange markets, in terms of the other G-10 currencies declined dollar on balance over the intermeeting period. slightly continued to grow fairly briskly in October, M2 in its M1 and other liquid largely reflecting strength this year M2 has expanded at a components; thus far below the midpoint of the Committee's pace somewhat of M3 picked up in October but annual range. Growth restrained than that of M2, as has remained much more assets of thrift institutions and their associated funding needs apparently continued to contract; for date, M3 has grown at a rate around the the year to bound of the Committee's annual range. lower Federal Open Market Committee seeks monetary The and financial conditions that will foster price stability, promote growth in output on a sustainable and contribute to an improved pattern of interbasis, national transactions. In furtherance of these objectives, the Committee at its meeting in July reaffirmed the ranges it had established in February for growth of M2 and M3 of 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 also was maintained at 6-1/2 to 10-1/2 percent for the year. For 1990, on a tentative basis, the Committee agreed in July to use the same ranges as in 1989 for growth in each of the monetary aggregates and debt, measured from the fourth quarter of 1989 to the fourth quarter of 1990. 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. 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 progress toward price stability, the strength of the business expansion, the behavior of the monetary aggregates, and developments in foreign exchange and domestic financial markets, slightly greater reserve restraint might or slightly lesser

reserve restraint would be acceptable in the intermeeting period. The contemplated reserve conditions to be consistent with growth of M2 and M3 are expected over the period from September through December at annual rates of about 7-1/2 and 4-1/2 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, Guffey, Johnson, Keehn, Kelley, LaWare, Melzer, and Syron. Vote against this action: Ms. Seger. Ms. Seger dissented because she felt that a further easing of monetary policy was needed at this time. In her view, the persisting weakness in the manufacturing sector, most notably in motor vehicles, along with a likely softening in construction activity and capital expenditures posed a substantial risk to the economy. In these circumstances, a moderate easing of policy could help forestall a slide into recession in the months ahead without adding to inflationary pressures.