November 5, 1991 FOMC Record of Policy Actions

FOMC minutes

Treasury auctions were completed later in the week. It was noted in this connection that a prompt easing of reserve conditions, and any accompanying Board action to approve a lower discount rate, would become known to outside observers after the auction of the shorter term Treasury note but before the auctions of the intermediate- and long-term Treasury issues. At the conclusion of the Committee's discussion, all but two of the members indicated that they favored or could accept a directive that called for an immediate slight easing in the degree of pressure on reserve positions. These members also noted their acceptance of a directive that included a 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 percent respectively over the 3-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 portrays a sluggish economy and a marked deterioration in business and consumer confidence. Total nonfarm pay roll employment was unchanged in October after rising slightly over the third quarter, and the civilian unemployment rate edged back up to 6.8 percent. Industrial production has been flat in recent months. Consumer spending increased considerably through the summer, in part because of a sizable rise in expendi tures on motor vehicles: sales of motor vehicles slowed in October, however. Real outlays for business equipment--especially for computers--have been rising,

but nonresidential construction has continued to decline. Housing starts and home sales have weakened recently. The nominal U.S. merchandise trade deficit in July-August was significantly above its average rate in the second quarter. Wage and price increases have continued to trend downward. Short-term interest rates have declined somewhat further since the Committee meeting on October 1, while bond yields are about unchanged to slightly higher on balance. The trade-weighted value of the dollar in terms of the other G-10 currencies declined on balance over the intermeeting period. Expansion in M2 and M3 resumed in October, albeit at a slow pace. For the year through October, expan sion of both M2 and M3 is estimated to have been at the lower ends of the Committee's ranges. The Federal Open Market Committee seeks monetary and financial conditions that will foster price sta bility and promote sustainable growth in output. In furtherance of these objectives, the Committee at its meeting in July reaffirmed the ranges it had estab lished 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 decrease somewhat 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 percent, respectively. Votes for this action: Messrs. Greenspan, Corrigan, Black, Forrestal, Keehn, LaWare, Mullins, and Parry. Votes against this action: Messrs. Angell and Kelley. Mr. Angell dissented because he was concerned about the impact of further easing on inflation expectations and consequently on long-term interest rates. In his view, the prospect for a robust and long-lasting recovery is dependent on the completion of adjustments in business pricing practices, household savings, and balance sheets more generally. Monetary policy actions that are perceived as a shift from a focus on price-level stability to one on short-term economic growth may well abort the needed adjustments. In his view, credible price level targeting would provide assurance, particularly given the somewhat precarious short-term business outlook, that monetary policy would act to counter either deflation or inflation. The consequence would be to foster a considerable downward thrust in long-term interest rates and to set the stage for sustained expansion. Mr. Kelley dissented because he believed that a steady policy course was appropriate, at least for now, in the context of the ongoing stimulus that could be anticipated from the System's earlier easing actions. In his view, the outlook for continuing expansion in economic activity remained favorable, and he saw considerable risks in further easing at this time. In particular, he was concerned that a policy easing move would stimulate inflation expectations with adverse implications for long-term interest rates and the performance of

sectors of the economy. Further, he did not interest-sensitive many of the factors that are importantly inhibiting believe that could be constructively addressed by a more economic expansion position. He also feared that the dollar would come accommodative pressure in foreign exchange markets with only slight under downward exports but added inflation pressures in the domestic benefits for economy. 2. Authorization for Domestic Open Market Operations approved a temporary increase of $2 billion, to The Committee a level of $10 billion, in the limit on changes between Committee meetings in System Account holdings of U.S. government and federal agency securities. The increase amended paragraph 1(a) of the Authorization for Domestic Open Market Operations and was effective for the intermeeting period ending with the close of business on December 17, 1991. Votes for this action: Messrs. Greenspan, Corrigan, Angell, Black, Forrestal, Keehn, Kelley, LaWare, Mullins, and Parry. Votes against this action: None. The Manager for Domestic Operations advised the Committee that the current leeway of $8 billion for changes in System Account holdings might not be sufficient to accommodate the potentially large need to add reserves over the intermeeting period ahead to meet an anticipated seasonal bulge in currency in circulation and required reserves.