August 20, 1991 FOMC Record of Policy Actions

FOMC minutes

credit-worthy borrowers and supply constraints by lending institutions. The behavior of M2 and M3 also might be indicative of even weaker nominal spending than was currently recognized and hence a monetary policy stance that was too tight under such circumstances. According to a staff analysis prepared for this meeting, growth in both measures could be expected to pick up a little over the months ahead, assuming steady reserve conditions. The persistence in some degree of recent relationships between movements in short-term interest rates, income, and monetary growth would imply slower monetary expansion than might otherwise be expected. In these circumstances, many members indicated that continued weakness in M2 and M3 would be a matter of increasing concern, especially given questions about the strength of the economic recovery. Some favored a proposal to give greater emphasis in the directive to the behavior of the monetary aggregates in guiding possible intermeeting adjustments in policy, at least for the period ahead. However, a majority preferred to retain the current directive wording. In support of this view, some commented that in recent years the broader aggregates have been unreliable indicators of the path of the economy over the quarters immediately ahead and thus imperfect guides for short-run policy adjustments. Some observed that growth in M1 and total reserves had held up fairly well on balance over the past several months and that the behavior of those measures might be more indicative of the underlying thrust of monetary policy than that of the broader aggregates on which the Committee had tended to focus monetary aggregates more prominence in the directive could Giving the of the adjustments that would be made provide a misleading indication in response to the behavior of the aggregates. to reserve conditions

including aberrant fluctuations, thereby misconstruing the views of many members. At the conclusion of the Committee's discussion, all of the members indicated that they could vote for a directive that called for maintaining the existing degree of pressure on reserve positions. All also indicated that they preferred or could accept a directive that included a bias toward possible easing during the intermeeting period. Accordingly, the Committee decided that somewhat greater reserve restraint might be acceptable or somewhat lesser reserve restraint would 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 a resumption in the growth of M2 and M3 during the weeks ahead, but in light of the declines in these aggregates since June, the Committee now anticipated that M2 would be little changed and M3 would be down at an annual rate of about 1 percent in the period from June through September. 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 has been mixed, but it suggests on balance that economic activity is expanding at a moderate pace. The unemployment rate fell slightly to 6.8 percent in July, but total nonfarm payroll employment edged down and the average workweek posted a sharp decline. Industrial production rose appreciably further in July. Consumer spending has increased considerably in recent months, led by sizable gains in expenditures for motor vehicles. New orders for nondefense capital goods point to little change in spending for business equipment over the near term, and nonresidential construction remains weak. Housing starts rose further in June and July. The nominal U.S. merchandise trade deficit declined in June, and its average for the second quarter was somewhat below the rate in the first quarter. Increases in consumer prices have been small in recent months.

Over the intermeeting period prior to August 19, market interest rates declined appreciably and the trade-weighted value of the dollar in terms of the other G-10 currencies depreciated somewhat. Subsequently, in the wake of events in the Soviet Union, Treasury bill rates fell somewhat further and the dollar rebounded sharply against many European currencies. M2 contracted in July after several months of slow growth and M3 fell further. For the year through July, expansion of M2 and M3 has been near the lower ends of the Committee's ranges. The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. In furtherance of these objectives, the Committee at its meeting in July reaffirmed the ranges it had established in February 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 also was maintained at 4-1/2 to 8-1/2 percent for the year. For 1992, on a tentative basis, the Committee agreed in July to use the same ranges as in 1991 for growth in each of the monetary aggregates and debt, measured from the fourth quarter of 1991 to the fourth quarter of 1992. With regard to M3, the Committee anticipated that the ongoing restructuring of thrift depository institutions would continue to depress the growth of this aggregate 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 might or somewhat lesser reserve restraint would be acceptable in the intermeeting period. The contemplated reserve conditions are expected to be consistent with a resumption of growth of M2 and M3 in the weeks ahead; but in view of the declines already

posted since June, the Committee anticipates that M2 would be little changed and M3 would be down at an annual rate of about 1 percent over the period from June through September. Votes for this action: Messrs. Greenspan, Corrigan, Angell, Black, Forrestal, Keehn, Kelley, LaWare, Mullins, and Parry. Votes against this action: None.