October 2, 1990 FOMC Record of Policy Actions

FOMC minutes

the strength of the business expansion, the toward price stability, behavior of the monetary aggregates, and developments in foreign markets. The intermeeting range for the exchange and domestic financial funds rate, which provides one mechanism for initiating federal consultation of the Committee when its boundaries are persistently exceeded, was left unchanged at 6 to 10 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 economic activity expanded at a slow pace in the third quarter. The recent large increase in oil prices has boosted key measures of inflation and eroded real personal income; however, data available thus far provide only limited evidence of a retarding effect on production and aggregate spending. Total nonfarm payroll employment declined in July and August, reflecting layoffs of temporary census workers; employment in the private sector changed little over the two months. The civilian unemployment rate edged up to 5.6 percent in August. Consumer spending appeared to be about unchanged in real terms over July and August but was at a level significantly above the average for the second quarter. Advance indicators of business capital spending point to some softening in investment in coming months. Residential construction weakened further in August. The nominal U.S. merchandise trade deficit increased sharply in July from the low rate in June. Markedly higher oil prices contributed to substantial increases in consumer and producer prices in August; excluding energy and food items, consumer inflation has picked up from the second-quarter rate. Data on labor costs suggest no improvement in underlying trends. In short-term debt markets, Treasury bill rates have fallen somewhat since the Committee meeting on August 21, while rates on private market instruments are little changed. In the bond markets, most rates have edged lower on balance over this period. The trade-weighted foreign exchange value of the dollar in terms of the other G-10 currencies has declined slightly further on balance from the low level reached at the time of the August meeting.

M2 and M3 expanded at appreciably faster rates in August; available data for September suggest continued strength in M2 and some slowing in the growth of M3. More rapid expansion of Ml and money market funds has contributed to the greater strength in the broad over the two months. Through September, aggregates expansion of M2 was estimated to be a little below the middle of the Committee's range for the year and growth of M3 in the lower portion of its range. Expansion of total domestic nonfinancial debt appears to have been near the midpoint of its monitoring 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 range it had established in February for M2 growth of 3 to 7 percent, measured from the fourth quarter of 1989 to the fourth quarter of 1990. The Committee in July also retained the monitoring range of 5 to 9 percent for the year that it had set for growth of total domestic nonfinancial debt. With regard to M3, the Committee recognized that the ongoing restructuring of thrift depository institutions had depressed its growth relative to spending and total credit more than anticipated. Taking account of the unexpectedly strong M3 velocity, the Committee decided in July to reduce the 1990 range to 1 to 5 percent. For 1991, the Committee agreed on provisional ranges for monetary growth, measured from the fourth quarter of 1990 to the fourth quarter of 1991, of 2-1/2 to 6-1/2 percent for M2 and 1 to 5 percent for M3. The Committee tentatively set the associated monitoring range for growth of total domestic nonfinancial debt at 4-1/2 to 8-1/2 percent for 1991. 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 might or somewhat 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 September through December at annual rates of about 4 and 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, Boehne, Kelley, LaWare, Mullins, and Stern. Votes against this action: Messrs. Angell, Boykin, Hoskins, and Ms. Seger. Ms. Seger dissented because she favored an immediate easing of reserve conditions. In her view, such a move was needed at this time in light of the spreading weakness in the economy, the growing difficulty being experienced by many borrowers in obtaining credit, and more generally the increasing fragility of the financial system. She also felt that enactment of the deficit-reduction measures now under consideration would provide a desirable opportunity for some additional easing later during the intermeeting period. Messrs. Angell, Boykin, and Hoskins dissented because they were opposed to the easing of reserve conditions contemplated by the majority. Not only was there a presumption of some easing in the near term, but the bias in the language of the directive suggested the possibility of some further easing later in the intermeeting period. To a considerable extent, this policy seemed to be a response to short-run softening in the economy that was an inevitable outcome of the disruption to oil supplies. By paying close attention to those nearterm developments, the Committee risked losing sight of its fundamental objective of controlling and ultimately bringing down inflation. Moreover, the timing of the prospective easing was linked to fiscal

policy actions, and such a linkage could establish an undesirable precedent that could limit the flexibility of monetary policy in the future. Mr. Hoskins also questioned the adequacy of the fiscal policy measures being considered in the Congress and the desirability of adjusting monetary policy in response to the enactment of those measures.