February 5–6, 1991 FOMC Record of Policy Actions

FOMC minutes

members expressed a preference for continuing to tilt the directive toward possible easing during the weeks ahead. In this view, the downside risks to the economy and the potential for inadequate monetary growth made it likely that any intermeeting adjustment would be in the direction of easier reserve conditions. Several members also noted that the Committee needed to place a high premium on avoiding any tendency for the weakness in the economy to cumulate because they were more concerned about the severe consequences of a potentially deep and prolonged recession than those of a sharp rebound in the economy, especially given current financial strains and fragilities in the economy. Accordingly, the Committee should be willing to ease in response to evidence of additional weakness in the economy and abatement of inflationary pressures; the need for further easing might be signaled in part by a continuing shortfall in monetary growth. In following such a policy, however, a number of members stressed that the Committee would need to be prepared to tighten policy promptly down the road in the event that inflationary pressures should threaten to re-emerge. A few members, while acknowledging the potential need for some easing, preferred not to bias the directive in either direction. In this view, there were considerable risks of overreacting to indications of a weakening economy, particularly since conditions for a recovery in economic activity already appeared to be in place and weak data for the period at the start of the Persian Gulf war might well reflect what would prove to be a short-lived development.

of the Committee's discussion, all of the At the conclusion members indicated that they favored a directive that called for maintaining the existing degree of pressure on reserve positions. They also noted their preference or acceptance of a directive that gave special weight to potential developments that might require some easing during the intermeeting period. Accordingly, the Committee decided that 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 at this meeting were expected to be consistent with some pickup in the growth of M2 and M3 to annual rates of around 3-1/2 percent to 4 percent over the three-month period from December 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 further weakening in economic activity. Total nonfarm payroll employment fell sharply further in December and January, reflecting widespread job losses that were especially pronounced in manufacturing and construction; the civilian unemployment rate rose to 6.2 percent in January. Industrial output declined markedly in the fourth quarter, in part because of sizable cutbacks in the production of motor vehicles, and partial data suggest a further drop in January. Consumer spending has remained soft. Advance indicators of business capital spending point to considerable weakness in investment in coming months. Residential construction has declined substantially further in recent months. The nominal U.S. merchandise trade deficit narrowed in November, as the value of imports declined more than that of exports; the average deficit for October and November exceeded that for the third quarter. Increases in consumer prices

moderated and producer prices changed little in November and December, largely as a result of a softening in energy prices. The latest data suggest some further deceleration in wages and overall labor costs. Short-term interest rates have fallen considerably since the Committee meeting on December 18, while rates in longer-term markets are unchanged to down slightly. The Board of Governors approved a reduction in the discount rate from 7 to 6-1/2 percent on December 18 and a further reduction to 6 percent on February 1. In foreign exchange markets, the tradeweighted value of the dollar in terms of the other G-10 currencies has declined somewhat on balance over the intermeeting period. Growth of M2 remained sluggish in December and January; expansion of M3 picked up in January from the very slow pace of recent months. For the year 1990, M2 and M3 expanded at rates in the lower portions of the Committee's ranges for the year. Expansion of total domestic nonfinancial debt appears to have been near the midpoint of its monitoring range for the year. The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability, promote a resumption of sustainable growth in output, and contribute to an improved pattern of international transactions. In furtherance of these objectives, the Committee at this meeting established ranges for growth of M2 and M3 of 2-1/2 to 6-1/2 percent and 1 to 5 percent, respectively, measured from the fourth quarter of 1990 to the fourth quarter of 1991. The monitoring range for growth of total domestic nonfinancial debt was set at 4-1/2 to 8-1/2 percent for the year. With regard to M3, the Committee anticipated that the ongoing restructuring of thrift depository institutions would continue to depress its growth relative to spending and total credit. 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. 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 reserve restraint would be acceptable in the intermeeting period. The contemplated reserve conditions are expected to be consistent with growth of both M2 and M3 over the period from December through March at annual rates of about 3-1/2 to 4 percent. Votes for the paragraph on short-run policy implementation: Messrs. Greenspan, Corrigan, Angell, Black, Forrestal, Keehn, Kelley, LaWare, Mullins, Parry, and Ms. Seger. Votes against this action: None. 2. Agreement to "Warehouse" Foreign Currencies At its meeting on March 27, 1990, the Committee approved an increase, if requested by the Treasury, from $10 billion to $15 billion in the amount of eligible foreign currencies that the System would be prepared to "warehouse" for the Treasury and the Exchange Stabilization Fund (ESF). The purpose of the warehousing facility is to supplement the resources of the Treasury and the ESF for financing their purchases of foreign currencies. System holdings of foreign currencies under the facility had risen to $9.0 billion, based on acquisition costs, in March 1990, but subsequent ESF repayments had reduced the total to $4.5 billion by November 1, 1990. At this meeting, the Committee decided to reduce the limit to $10.0 billion. Such a limit would provide an adequate cushion of unused capacity and thus maintain operational flexibility to respond on short notice to unanticipated developments. Votes for this action: Messrs. Greenspan, Corrigan, Angell, Black, Forrestal, Keehn, Kelley, LaWare, Mullins, Parry, and Ms. Seger. Votes against this action: None.