December 18, 1990 FOMC Record of Policy Actions

FOMC minutes

this discussion, members noted the potential During open market policy and a possible, near-term interactions between discount rate. Most of the Federal Reserve Banks had reduction in the of one-half percentage point in the discount rate, proposed a reduction and in light of their concerns about the narrowing spread between the and short-term market rates, the members generally favored discount rate of that reduction to implement an easing of conditions in Board approval money markets. Ordinarily, a reduction in the discount rate would show in lower short-term market rates. However, because of through fully their desire to ease reserve conditions only slightly in the near term, the members generally supported a proposal to gear open market operations toward allowing only about one-half of the proposed cut in be reflected immediately in the money market. If the discount rate to the discount rate were not reduced, the Manager for Domestic Operations would execute the slight easing of policy through open market operations alone. With regard to any further adjustment in the degree of reserve pressure later in the intermeeting period, nearly all the members expressed a preference for retaining a bias in the directive toward potential easing, especially given the recessionary tendencies in the economy, current fragilities in the financial system, and the weakness in the monetary aggregates. At the conclusion of the Committee's discussion, all of the members indicated that they could support a directive that called for some slight further easing in the degree of pressure on reserve positions and that also provided for giving emphasis to potential developments that might require some additional easing during the

intermeeting period. It was recognized that open market operations initially might need to take account of a possible reduction in the discount rate. Subsequent to the initial easing, slightly greater reserve restraint might be acceptable during the intermeeting period or somewhat lesser 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 some pickup in monetary growth, including expansion of M2 and M3 at annual rates of about 4 and 1 percent respectively over the four-month period from November to March. 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 appreciable weakening in economic activity. Total nonfarm payroll employment fell sharply further in November, reflecting widespread job losses that were especially pronounced in manufacturing and construction; the civilian unemployment rate rose to 5.9 percent. Industrial output declined markedly in October and November, in part because of sizable cutbacks in the production of motor vehicles. Retail sales were weak in real terms in October and November; real disposable income has been reduced not only by a decrease in total hours worked but also by the effects of higher energy prices. Advance indicators of business capital spending point to considerable softening in investment in coming months. Residential construction has declined substantially further in recent months. The nominal U.S. merchandise trade deficit widened in October from its average rate in the third quarter as non-oil imports rose more sharply than exports. Increases in consumer prices moderated in November largely as a result of a softening in oil prices. The latest data on labor costs suggest some improvement from earlier trends.

interest rates have fallen appreciably since Most the Committee meeting on November 13. In foreign exchange markets, the trade-weighted value of the dollar in terms of the other G-10 currencies rose slightly on balance over the intermeeting period. M2 was about unchanged on balance over October and November after several months of relatively limited expansion, while M3 declined slightly in both months. From the fourth quarter of 1989 through November, expansion of M2 was estimated to be in the lower half of the Committee's range for the year and growth of M3 near the lower end 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 decrease slightly the existing degree of pressure on reserve positions, taking account of a possible change in the discount rate. Depending upon progress toward price stability, trends in economic activity, the behavior of the

monetary aggregates, and developments in foreign exchange and domestic financial markets, slightly greater reserve restraint might or somewhat lesser restraint would be acceptable in the interreserve meeting 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 4 and 1 percent, respectively. Votes for this action: Messrs. Greenspan Corrigan, Angell, Boehne, Boykin, Hoskins, Kelley, LaWare, Mullins, Ms. Seger, and Mr. Stern. Votes against this action: None. 2. Authorization for Domestic Open Market Operations The Committee approved a temporary increase of $6 billion, to a level of $14 billion, in the limit on changes between Committee meetings in System Account holdings of U.S. government and federal agency securities. The increase amended paragraph 1(a) of the Authorization for Domestic Open Market Operations and was effective for the intermeeting period ending with the close of business on February 6, 1991. Votes for this action: Messrs. Greenspan Corrigan, Angell, Boehne, Boykin, Hoskins, Kelley, LaWare, Mullins, Ms. Seger, and Mr. Stern. Votes against this action: None. The Manager for Domestic Operations advised the Committee that the current leeway of $8 billion for changes in System Account holdings was not likely to be sufficient to accommodate the potentially very large need to drain reserves over the intermeeting period ahead. That need would reflect a bulge in available reserves stemming from the elimination of reserve requirements on nonpersonal time deposits and net Eurocurrency liabilities combined with the effects of seasonal reductions in currency in circulation and in required reserves over the intermeeting period.