December 17, 1991 FOMC Record of Policy Actions

FOMC minutes

developments that might prompt an intermeeting adjustment. monetary implied less focus in the directive itself on the This new wording of the factors, but the understandings reached at meetings ranking importance would continue to be explained regarding their relative record. The members agreed that the revised fully in the policy be reviewed every year or more often if warranted by statement should changing economic or financial conditions. of the Committee's discussion, all but one At the conclusion of the members indicated that they favored or could accept a directive that would call initially for maintaining the existing degree of pressure on reserve positions. The members also noted their preference or acceptance of a directive that included a marked bias toward easing during the intermeeting period. Accordingly, in the context of the Committee's long-run objectives for price stability and sustainable economic growth, and giving careful consideration to economic, financial, and monetary developments, slightly greater reserve restraint might be acceptable or somewhat lesser reserve restraint would be acceptable during the intermeeting period. 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 four-month period from November through March. 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 continues to portray a sluggish economy and a depressed state of business and consumer confidence. Total nonfarm payroll employment fell sharply in November; however, the average workweek in the private nonfarm sector edged up and the civilian unemployment rate remained at 6.8 percent. Industrial production fell in November, partly reflecting a sizable drop in motor vehicle assemblies. Consumer spending has been soft on balance in recent months. Real outlays for business equipment

appear to be rising slowly, and nonresidential construction has continued to decline. Housing starts were appreciably higher on average in October and November than in the third quarter. The nominal U.S. merchandise trade deficit widened slightly further in September; the deficit in the third quarter was substantially larger than in the second quarter. Wage and price increases have continued to trend downward. Interest rates have declined appreciably since the Committee meeting on November 5. The Board of Governors approved a reduction in the discount rate from 5 to 4-1/2 percent on November 6. In foreign exchange markets, the trade-weighted value of the dollar in terms of the other G-10 currencies declined further over the intermeeting period; the dollar depreciated primarily against the mark and other European currencies. Expansion in M2 and M3 edged up in November from a slow pace in October; the slightly faster growth reflected a strengthening in the most liquid components of the aggregates. For the year through November, expansion 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 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. In the

the Committee's long-run objectives for context of sustainable economic growth, and price stability and consideration to economic, financial, giving careful slightly greater reserve and monetary developments, might or somewhat lesser reserve restraint restraint in the intermeeting period. The would be acceptable reserve conditions are expected to be contemplated with growth of M2 and M3 over the period consistent March at annual rates of about 3 from November through and 1-1/2 percent, respectively. for this action: Messrs. Greenspan, Votes Angell, Black, Forrestal, Keehn, Kelley, Corrigan, Lindsey, Mullins, Parry, and Ms. Phillips. Vote against this action: Mr. LaWare. Mr. LaWare dissented because he did not favor the inclusion in the directive of a strong presumption that monetary would be eased further during the intermeeting period. While policy might call for further easing, he preferred not to future developments prejudge that need but to wait and assess the effects of the considerable easing actions undertaken earlier. In his view, the main barrier to a satisfactory economic performance was a crisis in confidence that was not likely to be alleviated by further incremental easing. In present circumstances, a steady policy could provide a firm signal that the downward drift in interest rates associated with a long series of small easing actions had come to an end. This signal might well prove to be beneficial to the economy as interest-sensitive decisions to spend no longer were postponed in anticipation of still lower interest rates. He recognized that lower interest rates could alleviate heavy debt service burdens, but he was concerned about the effects of a further decline in interest rates on the value of the dollar in foreign exchange markets. At a telephone conference on December 20, 1991, the Committee discussed the approval by the Board of Governors of a 1 percentage point reduction in the discount rate, effective that day,

and the implications of that action for the implementation of the Committee's policy with regard to the degree of pressure to be sought in reserve markets. It was noted during this discussion that the limited data received since the Committee's meeting on December 17 continued to point to a very sluggish economy. In keeping with the Committee's decision at its recent meeting, it was deemed appropriate to direct open market operations toward allowing part of the reduction in the discount rate to be reflected in the federal funds rate. Members commented that the substantial cut in the discount rate and the accompanying adjustment in open market operations were likely to have a favorable effect on financial markets and the behavior of the monetary aggregates and in conjunction with the ongoing effects of earlier easing actions would provide the financial basis for a resumption of sustainable economic growth. In light of the substantial size of these actions, it would be appropriate to view the directive as symmetrical with regard to any further changes in policy over the remainder of the intermeeting period.