June 30–July 1, 1992 FOMC Record of Policy Actions

FOMC minutes

tend to boost spending by reducing the a policy move would nonetheless costs of borrowing. the members took account of a staff In their discussion, modest growth in M2 and virtually none in analysis that suggested only on the assumption of an unchanged degree of M3 for the third quarter reserve pressure. Relatively weak expansion in these broad measures not appear to have the usual implications for the of money did economy, as evidenced by experience over the first half of the year. The prospects were for continuing balance sheet and other adjustments that would tend to curb the demand for money assets relative to and income. Many members nonetheless were concerned about spending the possible persistence of the recent weakness in reserves and the longer-term sluggish behavior of broad money, especially given the relatively subdued pace of the expansion. While monetary measures might well have lost some of their indicator and predictive properties, continued weakness in money might still be a signal that financial conditions were not yet conducive to fostering a sustained pickup in spending. The varying policy preferences expressed by the members were reflected in differing views with regard to possible adjustments to the degree of reserve pressure in the intermeeting period ahead. All of the members who favored some immediate easing in policy indicated that they could support an unchanged directive that was tilted toward ease, and at least some of these members anticipated that developments over the near term were likely to trigger an adjustment toward easing. Most of the members who favored an unchanged policy stance at this point also indicated that they could accept a bias toward ease in the directive, especially in light of current uncertainties and the potential problems associated with any significant shortfall in the

Other members who preferred a expansion from current expectations. that it would be premature for the steady policy course believed signal any bias toward easing, given the relatively low Committee to that they assigned to the potential need for such a move, probability that a return to an asymmetric directive after the and they believed at the May meeting could have unfavorable repermove to symmetry cussions on the Committee's credibility. of the Committee's discussion, all but two At the conclusion indicated that they favored or could accept a directive of the members maintaining the existing degree of pressure on reserve that called for included a bias toward possible easing during the positions and that period. Accordingly, in the context of the Committee's intermeeting for price stability and sustainable economic long-run objectives consideration to economic, financial, and growth, and giving careful slightly greater reserve restraint might be monetary developments, or slightly lesser reserve restraint would be acceptable acceptable during the intermeeting period. The reserve conditions contemplated expected to be consistent with a resumption of at this meeting were in M2 and M3 at annual rates of about 2 percent and 1/2 percent growth respectively over the three-month 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 continues to suggest that economic activity is expanding at a moderate pace. Total nonfarm payroll employment increased somewhat further in May, but a surge in job seekers led to a sizable rise in the civilian unemployment rate to 7.5 percent. Industrial production rose appreciably further in May, partly reflecting continued vehicle assemblies. Growth in recovery in motor spending has slackened after a sharp advance consumer earlier this year. Although sales of new homes declined in May, single-family housing starts rebounded close to the first-quarter pace. Recent to a level on orders and shipments of nondefense capital data appreciable increases in outlays for goods indicate

business equipment, and the trend of building contracts points to some slowing of the decline in nonresidential construction. The nominal U.S. merchandise trade deficit increased in April and was substantially above its average rate in the first quarter. Incoming data on retail prices and labor costs suggest that inflation is slowing. Most interest rates have changed little since the Committee meeting on May 19. 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. M2 and M3 changed little in May and appear to have contracted in June; both retail and large-denomination time deposits continued to run off rapidly. Through June, expansion of the two aggregates was somewhat below the lower ends of the ranges established by the Committee for the year. 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 reaffirmed at this meeting 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 1991 to the fourth quarter of 1992. The Committee anticipated that developments contributing to unusual velocity increases could persist in the second half of the year. 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 1993, the Committee on a tentative basis set the same ranges as in 1992 for growth of the monetary aggregates and debt, measured from the fourth quarter of 1992 to the fourth quarter of 1993. 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 June through September at annual rates of about 2 and 1/2 percent, respectively. Votes for short-run policy: Messrs. Greenspan, Corrigan, Angell, Hoenig, Jordan, Kelley, Lindsey, Mullins, Ms. Phillips, and Mr. Syron. Votes against this action: Messrs. LaWare and Melzer. Messrs. LaWare and Melzer dissented because they judged an asymmetric directive, with a bias toward easing, as being inappropriate at this time. In their view, the current stance of monetary was not impeding an expansion consistent with the economy's policy long-run potential. In addition, a bias toward ease, especially in the context of the Committee's decision at the May meeting to adopt a symmetrical directive, suggested an excessive emphasis on short-term economic developments that might undermine the credibility of the System's long-run policies. They were concerned that such a loss of credibility could have adverse effects on the dollar in foreign exchange markets and on long-term interest rates in domestic markets. Mr. Melzer also believed that, if additional easing were undertaken, a greater policy reversal ultimately would be necessary, making the attainment of sustainable economic growth more difficult in the long run.