May 15, 1990 FOMC Record of Policy Actions

FOMC minutes

months, growth of M2 for the year to date was close to the midpoint of the Committee's range, reflecting relatively robust expansion in late 1989 and early 1990. With respect to possible adjustments in the degree of reserve pressure during the period before the next Committee meeting in early July, a majority of the members expressed a preference for a directive that did not bias prospective operations toward tightening or easing but made an intermeeting adjustment, if any, equally likely in either direction, depending on economic and financial developments and the behavior of the monetary aggregates. Other members preferred a directive that was tilted toward possible tightening, given their desire to respond promptly to any indications of greater inflationary pressures and their judgment that in the current inflationary environment the next policy move was likely to be in the tightening direction. Some of these members commented that such a bias in the directive would tend, as it became known, to enhance the credibility of the System's antiinflationary policy and help to make that policy more effective over time. However, given the risks to the economy and the uncertainties in the outlook, these members also could accept a symmetric directive with regard to intermeeting adjustments. At the conclusion of the Committee's discussion, all except one member indicated that they preferred or could accept a directive that called for maintaining the existing degree of pressure on reserve positions and that did not include any presumption about the likely direction of adjustments in policy, if any, during the intermeeting period. With regard to the factors that were important in considering

in reserve conditions, the need for any intermeeting changes the those bearing on the primary weight to continued to give Committee or slightly less pressure slightly more outlook. Accordingly, inflation the period ahead be appropriate during positions would on reserve the strength of the toward price stability, depending on progress monetary aggregates, and the behavior of the business expansion, financial markets. The exchange and domestic developments in foreign was expected to be consistent of steady reserve conditions maintenance the current quarter than the slower monetary expansion in with somewhat time of the March meeting, including members had anticipated at the annual rates of about 4 and 3 percent growth of M2 and M3 at period ending in June. The respectively over the three-month funds rate, which provides one intermeeting range for the federal consultation of the Committee when its mechanism for initiating exceeded, was left unchanged at 6 to 10 boundaries are persistently percent. of the meeting, the following domestic policy At the conclusion directive was issued to the Federal Reserve Bank of New York: The information reviewed at this meeting suggests that economic activity is continuing to expand moderately. Total nonfarm payroll employment increased more slowly in March and April after sharp advances earlier in the year; its average growth thus far this year has been above that in the second half of 1989, in part because of the hiring of temporary workers for the census. In April, the civilian unemployment rate moved up to 5.4 percent. Industrial production declined in April, reflecting what appears to be a temporary cutback in the manufacture of motor vehicles. Consumer spending has been sluggish on balance in recent months; outlays for goods have been weak while expenditures for services have remained strong. Business spending for equipment has been rising, but construction activity, both residential and nonresidential, appears to have weakened after a

boost early in the year. The nominal U.S. temporary trade deficit narrowed somewhat in January merchandise from its average rate in the fourth and February continued to rise at a quarter. Consumer prices than in 1989; producer prices faster pace in March further in April, reflecting were down somewhat additional unwinding of the earlier surge in prices of latest data on employment costs food and energy. The some deterioration in underlying trends. suggest Short-term interest rates have declined a little since the Committee meeting on March 27, on balance debt markets have risen while rates in long-term over the period. In foreign exchange slightly markets, the trade-weighted value of the dollar in terms of the other G-10 currencies declined considerably over the intermeeting period. Growth of M2 slowed in April and that of M3 remained relatively weak. Through April, expansion of M2 and M3 was a little above the midpoint and around the lower end, respectively, of the ranges established by the Committee for 1990. 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 February established ranges for growth of M2 and M3 of 3 to 7 percent and 2-1/2 to 6-1/2 percent respectively, measured from the fourth quarter of 1989 to the fourth quarter of 1990. The monitoring range for growth of total domestic nonfinancial debt was set at 5 to 9 percent for the year. The behavior of the monetary aggregates will continue to be evaluated in the light of progress toward price level stability, movements in their velocities, and developments in the economy and financial markets. 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 or slightly lesser reserve restraint would be acceptable in the intermeeting The contemplated reserve conditions are period. expected to be consistent with growth of M2 and M3 over the period from March through June at annual

rates of about 4 and 3 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, Boehne, Boykin, Johnson, Kelley, LaWare, Ms. Seger, and Mr. Stern. Vote against this action: Mr. Hoskins. Mr. Hoskins dissented because he preferred a tightening of reserve conditions to help assure that progress would be made toward a reduced rate of inflation and the Committee's ultimate objective of price stability. Although price pressures appeared to be receding from the pace of early in the year, inflation remained too high. He recognized that M2 growth had slowed and there were potential financial developments that might have adverse consequences for the expansion, but he believed that growth of M2 in the bottom half of the 1990 target range would be desirable in order to achieve a gradual reduction in inflation in 1991 and thereafter. Moreover, a timely move toward greater monetary restraint would enhance the credibility and effectiveness of monetary policy in countering the persisting strength of inflationary pressures.