December 18–19, 1989 FOMC Record of Policy Actions

FOMC minutes

September rate. Broad measures of inflation suggest that prices have risen more slowly on balance since reflecting sharp reductions in energy midyear, partly prices, but the latest data on labor compensation suggest no significant change in prevailing trends. Interest rates have changed little on balance since the Committee meeting on November 14. In foreign exchange markets, the trade-weighted value of the dollar in terms of the other G-10 currencies declined substantially over the intermeeting period, with a particularly pronounced depreciation against the German mark and related European currencies in the last week of the period. M2 continued to grow fairly briskly in November, largely reflecting strength in its retail deposit components; M2 has expanded this year at a pace near the midpoint of the Committee's annual range. Growth of M3 picked up in November but has remained more restrained than that of M2, as assets of thrift institutions and their associated funding needs apparently continued to contract; for the year to date, M3 has grown at a rate a little above the lower bound of the Committee's annual range. The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability, 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 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 decrease slightly 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 or slightly lesser reserve restraint would 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 November through March at annual rates of about 8-1/2 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, Guffey, Johnson, Keehn, Kelley, LaWare, Ms. Seger, and Mr. Syron. Votes against this action: Messrs. Angell and Melzer. Messrs. Angell and Melzer dissented because they did not believe that policy should be eased. Mr. Angell was concerned that the Committee was responding to indicators of recent weakness in economic activity, a weakness that was a consequence of somewhat cautious policy responses earlier. Policy decisions should rely mainly on leading indicators, including commodity prices, the exchange rate, the yield curve, and money supply growth. Attention to such indicators had served policy well in the past. During the spring and summer while the dollar was appreciating and commodity prices, including gold, were generally falling, easing of reserve conditions was accompanied by the lower longterm interest rates necessary to undergird housing and other long-term investments. At this meeting, price-level indicators were not signalling a need for further ease. In these circumstances, an additional drop in the federal funds rate, coming after two previous

easing moves in the fourth quarter, could raise doubts about the System's commitment to its objective of price stability, especially given that the easing would further stimulate M2 growth. Under such conditions, further easing of reserve pressures would tend to accommodate rising prices, foster uncertainty in financial markets, and drive up long-term interest rates, thereby increasing the likelihood of economic instability. Steady policy in pursuit of price stability, using forward-looking indicators, would reduce uncertainty about price trends, bolster confidence in the dollar domestically and internationally, and bring about lower interest rates and higher economic growth. Mr. Melzer dissented because he favored an unchanged degree of reserve restraint. He noted that policy had been eased considerably over the last six months in anticipation of prospective sluggishness in the economy and that ample liquidity was now being provided by the central bank. In addition, based on recent and projected growth in the monetary aggregates, he was concerned that long-term progress toward price stability would be jeopardized by a more accommodative short-run policy stance. 2. Foreign Currency Authorization At this meeting, the Committee approved an increase in the limit on holdings of foreign currencies in the System Open Market Account. Paragraph 1D of the Committee's Authorization for Foreign Currency Operations permitted the Federal Reserve Bank of New York, for System Open Market Account, to maintain an overall open position in all foreign currencies not exceeding $20 billion, based on historical costs.

of foreign currencies, which were coordinated with System purchases similar transactions by the U.S. Treasury, had been relatively limited recently, but with the accumulation of interest total holdings were approaching the $20 billion limit. The Manager for Foreign Operations advised that even in the absence of new market purchases, continuing accruals of interest would raise total holdings to the current limit by February. The Committee agreed to raise the limit to $21 billion, effective immediately. Votes for this action: Messrs. Greenspan, Corrigan, Angell, Guffey, Johnson, Keehn, Kelley, LaWare, Melzer, Ms. Seger, and Mr. Syron. Votes against this action: None.