March 26, 1991 FOMC Record of Policy Actions

FOMC minutes

not be ruled out, but the greater risks were deepening recession could of too much ease and of persisting or increasing in the direction the directive should envision any easing as a inflation; consequently, remote prospect. At this meeting, the interaction between changes in the by the Board of Governors, and open market discount rate, as approved implemented under the current operating procedures and operations, as of the Committee, also was discussed. The principal issue directives extent to which changes in the discount rate should show related to the through to the federal funds rate that would be expected in the implementation of open market operations. In recent years, changes in the discount rate usually had been allowed to pass through automatically to the federal funds rate; there had been some exceptions involving instances where only partial pass-throughs had been permitted and where the change in the discount rate had been intended to conform the latter to movements that had already occurred in the federal funds rate. In general, however, both rates had tended to move together over time, and adjustments to both policy instruments are made in appropriately so, as the context of the same economic and financial developments. Members agreed that in general the existing practice should be continued, but that consultation among members of the Committee would be particularly appropriate in circumstances where changes in the discount rate perhaps should not be permitted to show through entirely to market rates, or where their showing through would result in quite sizable changes in money market rates in the period between meetings.

Committee's discussion all of the At the conclusion of the members indicated that they favored a directive that called for maintaining the existing degree of pressure on reserve positions. The that they preferred or could accept a directive that members also noted did not include a presumption about the likely direction of any intermeeting adjustments in policy. Accordingly, the Committee decided that somewhat greater reserve restraint or somewhat lesser reserve restraint might be acceptable during the period ahead depending on progress toward price stability, trends in economic activity, 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 reduction in the growth of M2 and M3 from their recent pace to annual rates of around 5-1/2 and 3-1/2 percent respectively over the threemonth period from March through June. 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 weakened further in the opening months of 1991. In February, total nonfarm payroll employment fell sharply further, especially in manufacturing, and the civilian unemployment rate rose to 6.5 percent. Industrial output also declined markedly again in February, with cutbacks evident in a wide range of industries. Advance indicators point to further weakness in business fixed investment in coming months, notably in nonresidential construction. On the other hand, after declining considerably in previous months, retail sales turned up in February; consumer sentiment appears to have rebounded sharply in recent weeks. Housing starts jumped in February, retracing a sizable decline in January but remaining at a low level. The nominal U.S. merchandise trade deficit increased somewhat in January but was considerably below its average rate in the fourth quarter. Energy prices fell substantially further in January and

February, but prices of other consumer goods and services rose more rapidly than in preceding months. Wage increases have moderated in recent months. Short-term interest rates have declined slightly since the Committee meeting on February 5-6. In longer-term markets, rates on Treasury bonds have risen appreciably, owing at least in part to heightened expectations of a recovery in U.S. economic activity. Risk premiums on corporate debt instruments have declined, and stock prices have moved up considerably on balance. The trade-weighted value of the dollar in terms of the other G-10 currencies increased very sharply over the intermeeting period. Growth of M2 and M3 strengthened substantially in February, reflecting rapid expansion in liquid retail deposits; partial data suggest appreciable further growth in March. 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 its meeting in February 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 the Committee seeks to maintain the existing future, degree of pressure on reserve positions. Depending upon progress toward price stability, trends in economic activity, the behavior of the monetary in foreign exchange and aggregates, and developments domestic financial markets, somewhat greater reserve restraint or somewhat lesser reserve restraint might 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 March through June at annual rates of about 5-1/2 and 3-1/2 percent, respectively. Votes for this action: Messrs. Greenspan, Corrigan, Angell, Black, Forrestal, Keehn, Kelley, LaWare, Mullins, and Parry. Votes against this action: None.