May 14, 1991 FOMC Record of Policy Actions

FOMC minutes

probably induce a backup in long-term interest rates, including mortgage rates, with adverse implications for housing markets and the economy. Against this background, the members concluded that a desirable policy was to take no action at this time but to monitor carefully the ongoing effects of the System's earlier easing moves. In the course of the Committee's discussion, a number of members underscored the desirability of achieving monetary growth within the Committee's ranges for the year. According to a staff analysis prepared for this meeting, both M2 and M3 were likely to strengthen over the balance of the current quarter after showing little or no growth in April. For the quarter as a whole, expansion of both monetary aggregates was expected to be below the rates projected at the time of the March meeting, but their cumulative growth through midyear would still be in the middle portions of their respective annual ranges. The members recognized that the economy was subject to events beyond the Committee's control, but an appropriate rate of monetary expansion at this stage would support the view that policy was positioned to help prevent substantial further weakening in business activity on the one hand while guarding against disappointing inflation results later on the other. Subnormal monetary growth might be an indication that monetary policy was still too tight, perhaps because of the reluctance of depository institutions and other lenders to extend credit. In that regard, it might be especially useful in this period to scrutinize the asset side of bank balance sheets, notably the behavior of various categories of loans, and other data on debt trends in relation to typical cyclical behavior for possible clues regarding both the strength

of credit demands and business activity and changes in lending practices and conditions. Turning to possible adjustments to the degree of reserve pressure during the intermeeting period, all of the members supported or could accept a symmetrical directive in light of their current assessments of the prospects for the economy and the behavior of the monetary members emphasized that the marked uncertainties in aggregates. Some the current economic situation underscored the need for a great deal of vigilance in appraising ongoing economic developments. Some indicated a slight preference for a directive that was tilted toward possible easing. These members believed that the risks in the economy remained at least marginally tilted toward a weaker than projected economic performance and that any policy adjustments in the intermeeting period were likely to be in the direction of some easing. Should the incoming data suggest a substantial shortfall from expectations, monetary policy in this view should be adjusted promptly toward ease. In the view of a majority of the members, however, a symmetrical directive was warranted because the risks to the economy were reasonably well balanced at this point. While incoming data on business activity might remain relatively weak over the near term, a change in policy probably would not be called for so long as such data did not suggest a further cumulative decline in economic activity but tended to confirm already available anecdotal information and current Committee expectations. At the conclusion of the Committee's discussion, all of the members indicated that they favored a directive that called for maintaining the existing degree of pressure on reserve positions. The

noted that they preferred or could accept a directive that members also a presumption about the likely direction of any did not include adjustments in policy. Accordingly, the Committee decided intermeeting greater reserve restraint or somewhat lesser reserve that somewhat 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 growth of M2 and M3 at annual rates of around 4 and 2 percent respectively over the three-month 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 provides mixed signals regarding the course of economic activity, which had weakened appreciably further earlier in the year. Following sharp decreases in previous months, total nonfarm payroll employment fell somewhat further in April; the civilian unemployment rate edged down to 6.6 percent. Industrial output changed little in April after declining markedly in earlier months. Retail sales were about unchanged in April and are now indicated to have risen somewhat in March. Advance indicators continue to point to weakness in business fixed investment in coming months. Housing starts were down in March, partly offsetting a sizable advance in February, but sales of new and existing homes continued to rise. The nominal U.S. merchandise trade deficit declined in February and its January-February rate was considerably below the average rate in the fourth quarter. Producer and consumer prices were little changed over March and April, partly reflecting further reductions in energy prices. Short-term interest rates have declined since the Committee meeting on March 26, while bond yields have changed little. The Board of Governors approved a reduction in the discount rate from 6 to 5-1/2 percent on April 30. The trade-weighted value of the dollar in

terms of the other G-10 currencies showed little change on balance over the intermeeting period. Growth of M2 and M3 weakened in April; for the year thus far, expansion of M2 has been at the midpoint of the Committee's range, while growth of M3 has been in the upper half of its range. 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 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, 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 4 and 2 percent, respectively. Votes for this action: Messrs. Greenspan, Corrigan, Angell, Black, Forrestal, Keehn, Kelley, LaWare, Mullins, and Parry. Votes against this action: None.