October 1, 1991 FOMC Record of Policy Actions

FOMC minutes

to an unusual array of problems and While the economy was subject related uncertainties, the members generally felt that monetary policy on the right course under currently prevailing and immediately was economic and financial circumstances. In particular, forseeable be judged at this point, the present policy stance insofar as could appropriate balance between the risks of a faltering provided an and the risks of little or no progress toward price economic expansion The easing steps in recent months and the associated stability. rates, including mortgage rates, appeared to have declines in interest supplied more monetary stimulus than had yet shown through to the economy. Several members commented, however, that the Committee needed to remain particularly alert to indications of renewed weakening in business activity, especially given the current financial fragilities in the economy and the likely difficulty of reviving the economy in the event of another downturn. Other members gave somewhat more weight to the need to avoid over-stimulating the economy; a failure to take advantage of the apparent momentum toward lower inflation would have seriously adverse consequences on longer-term debt markets and the outlook for sustained economic growth. The members agreed that a steady policy course was desirable for now while the Committee assessed the economy's responses to its earlier easing actions. In the course of the Committee's discussion, the members expressed varying degrees of concern about the continuing weakness in the broader monetary aggregates and overall credit growth. It was clear that a significant restructuring of household and business balance sheets was occurring that partly involved adjustments to the unusually rapid buildup of debt during the 1980's and that such restructuring was being reflected in the behavior of the broader

monetary aggregates. Resolutions of insolvent thrift institutions, which in recent months had resumed in volume, also were acting to depress M2 as well as M3. In addition, the more liquid components of the monetary aggregates were growing relatively strongly. Under these circumstances, slow growth in broader money and credit did not necessarily indicate that monetary policy was being too restrictive by damping the expansion of incomes or curtailing demands for goods and services. Moreover, a staff analysis prepared for this meeting indicated that some recovery in the growth of these aggregates could be expected over the balance of 1991, assuming an unchanged degree of pressure in reserve markets. Nonetheless, many of the members felt that the behavior of M2 and M3, whose growth for the year to date was at the bottom of the Committee's ranges, needed to be monitored with special care and, at least in one view, that some further easing measures might be desirable in the near term to improve the prospects that monetary expansion for the year would be within the Committee's ranges. Turning to possible adjustments to the degree of reserve pressure during the intermeeting period, a majority of the members indicated a preference for a directive that was biased at least marginally toward easing. Such a bias was called for in this view by the downside risks in the economy, though a number of these members also felt that there should be no strong presumption that any easing would be undertaken during the intermeeting period ahead. The other members indicated that they could support an asymmetric directive toward ease though they preferred a symmetric intermeeting instruction, especially in the context of the further stimulus that could be expected to result over time from the earlier monetary easing actions.

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 included a slight bias toward possible easing during the intermeeting period. Accordingly, the Committee decided that slightly greater reserve restraint might be acceptable during the intermeeting period or slightly lesser reserve restraint would be acceptable 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 3 percent and 1-1/2 percent respectively over the three-month period from September through December. 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 has been expanding at a moderate pace. Total nonfarm payroll employment changed little over July and August, and the civilian unemployment rate was 6.8 percent in both months. Employment in manufacturing continued to advance in August, and industrial production posted a further rise after several months of sizable gains. Consumer spending increased considerably on balance in July and August. Recent data on orders and shipments of nondefense capital goods point to a small increase in real outlays for business equipment, but nonresidential construction has remained weak. Housing starts rose only slightly further in July and August after increasing appreciably on balance since January. The nominal U.S. merchandise trade deficit widened substantially in July and was considerably above its average rate in the second quarter. Increases in consumer prices have been small in recent months, owing to declines in food and energy prices.

Most interest rates have declined further since the Committee meeting on August 20. The Board of Governors approved a reduction in the discount rate from 5-1/2 to 5 percent on September 13. The tradeweighted value of the dollar in terms of the other G-10 currencies fell sharply over the intermeeting period; much of the drop retraced the previous run-up associated with the attempted coup in the Soviet Union that began shortly before the August Committee meeting. After contracting in July, M2 was about unchanged in August and September. M3 declined further in July and August and is indicated to have changed little in September. For the year thus far, expansion of M2 and M3 has been at the lower end 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, slightly greater reserve restraint might or slightly lesser reserve restraint would 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 September through December at annual rates of about 3 and 1-1/2 percent, respectively. Votes for this action: Messrs. Greenspan, Corrigan, Angell, Black, Forrestal, Keehn, Kelley, LaWare, Mullins, and Parry. Votes against this action: None.