March 31, 1992 FOMC Record of Policy Actions

FOMC minutes

growth could be signalling an overly accommodative monetary this rapid if continued, could boost inflation pressures at some policy which, Conclusions could not be drawn on the basis of short-term point. movements in the narrow or broad monetary aggregates, and in any event for the economy of specific monetary growth rates the implications were clouded by a variety of developments that the members had discussed at length at the February meeting. Nonetheless, against the background of relatively sluggish growth in the broader aggregates for an extended period, many members agreed that the ongoing performance of those aggregates should be monitored closely. Indeed, some observed that concerns about the behavior of the broader aggregates, rather than the currently available information on economic activity, persuaded them that a directive that was tilted toward ease was preferable to a symmetrical directive at this time. At this meeting, the Committee reviewed its practices with regard to the maturity composition of its portfolio of Treasury obligations. The overall approach in recent years had been to meet the long-term need for growth in the System's portfolio through purchases in all maturity sectors of the market for Treasury obligations, with a major emphasis on ensuring substantial liquidity in the System's portfolio. With regard to the Treasury's quarterly financings, the Manager had followed the practice over the past several years of exchanging the bulk of the maturing securities held in the System account into the shortest issue offered by the Treasury, while placing relatively small amounts in the longer-term Treasury offerings. This approach had replaced the earlier practice of rolling over maturing System holdings into the refinancing issues in roughly proportionate amounts to the size of those issues being offered to the public. The System's participation in Treasury financings had

contributed importantly to the reduction in the average maturity of the System portfolio in recent years; however, given Treasury techniques with regard to accommodating System rollovers, the System's actions did not have any effect on the amounts or the maturity composition of the securities being acquired by the public. The members generally agreed that current practices for managing the composition of the System's portfolio remained appropriate. Rollovers in Treasury financings would continue to be tilted toward the shortermaturity offerings, and net additions to System holdings would be made in all maturity areas, taking account of the progress already made in enhancing the liquidity of the System's portfolio. 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 members also noted their preference for or acceptance of a directive that included some 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 slightly 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 3-1/2 percent and 1-1/2 percent respectively over the threemonth 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 suggests a strengthening in domestic final spending, although industrial production and overall employment do not appear to have picked up correspondingly. Retail sales

registered large gains in January and February, with data on inventories, which are available through January, showing some offsetting decline in that month. Single-family housing starts increased substantially further in January and February. Recent data on orders and shipments of nondefense capital goods indicate an outlays for business equipment, but nonincrease in residential construction has remained in a steep decline. The nominal U.S. merchandise trade deficit narrowed slightly in January and was essentially unchanged from its average rate in the fourth quarter Industrial production rose considerably in February, partly reflecting an upturn in motor vehicle assemblies, but was little changed on balance over the first two months of the year. Total nonfarm payroll employment rebounded in February from a large decline in January. With the labor force growing appreciably in recent months, the civilian unemployment rate has risen to 7.3 percent. Wage and price increases have continued to trend downward. Most interest rates have risen appreciably since the Committee meeting on February 4-5. In foreign exchange markets, the trade-weighted value of the dollar in terms of the other G-10 currencies increased substantially over the intermeeting period. Growth of M2 and M3 accelerated in February, but M2 appears to have leveled off and M3 to have declined in March. Much of the growth in the broader aggregates over recent months has been accounted for by a surge in transactions balances. 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 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 1991 to the fourth quarter of 1992. 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 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 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 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 March through June at annual rates of about 3-1/2 and 1-1/2 percent, respectively. Votes for this action: Messrs. Greenspan, Corrigan, Angell, Hoenig, Jordan, Kelley, LaWare, Lindsey, Melzer, Mullins, Ms. Phillips, and Mr. Syron. Votes against this action: None.