FOMC Minutes

Meeting of the Federal Open Market Committee

February 12-13, 1985

Minutes of Actions

A meeting of the Federal Open Market Committee was held in

the offices of the Board of Governors of the Federal Reserve System in

Washington, D. C., on Tuesday, February 12, 1985, at 2:30 p.m. and

continuing on Wednesday, February 13, 1985, at 9:30 a.m.

PRESENT:

Mr. Volcker, Chairman

Mr. Corrigan, Vice Chairman

Mr. Boehne

Mr. Boykin

Mr. Gramley

Mrs. Horn

Mr. Martin

Mr. Partee

Mr. Rice

Ms. Seger

Mr. Wallich

Messrs. Balles, Black, Forrestal, and Keehn, Alternate

Members o f the Federal Open Market Committee

Messrs. Guffey and Morris, Presidents of the Federal

Reserve Banks of Kansas City and Boston,

respectively

Mr. Axilrod, Staff Director and Secretary

Mr. Bernard, Assistant Secretary

Mrs. Steele, Deputy Assistant Secretary

Mr. Bradfield, General Counsel

Mr. Oltman, Deputy General Counsel

Mr. Kichline, Economist

Mr. Truman, Economist (International)

Messrs. Burns, J. Davis, Kohn, Lang, Lindsey,

Prell, Siegman, and Stern, Associate Economists

Mr. Sternlight, Manager for Domestic Operations,

System Open Market Account

Mr. Cross, Manager for Foreign Operations,

System Open Market Account

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Mr. Coyne, Assistant to the Board of Governors

Mr. Roberts, Assistant to the Chairman, Board of Governors

Mr. Gemmill, Staff Adviser, Division of International

Finance, Board of Governors

Messrs. Jones 1/ and Teplin 1/, Economists, Division of

Research and Statistics, Board of Governors

Mrs. Low, Open Market Secretariat Assistant,

Board of Governors

Messrs. Gainor and Garbarini, First Vice Presidents, Federal

Reserve Banks of Minneapolis and St. Louis, respectively

Mr. Fousek, Executive Vice President, Federal Reserve Bank

of New York

Messrs. Balbach, Bisignano, T. Davis, Parthemos, Scheld,

and Ms. Tschinkel, Senior Vice Presidents, Federal

Reserve Banks of St. Louis, San Francisco, Kansas City,

Richmond, Chicago, and Atlanta, respectively

Ms. Clarkin, Messrs. Judd and McNees, Vice Presidents,

Federal Reserve Banks of New York, San Francisco, and

Boston, respectively

By unanimous vote, E. Gerald Corrigan was elected to serve as

Vice Chairman of the Committee until the first meeting of the Committee after

February 28, 1985.

By unanimous vote, the minutes of actions taken at the meeting of

the Federal Open Market Committee held on December 17-18, 1984, were approved.

By unanimous vote, System open market transactions in foreign currencies

during the period December 18, 1984 through February 12, 1985, were ratified.

By unanimous vote, System open market transactions in Government

securities and agency obligations during the period December 18, 1984, through

February 12, 1985, were ratified.

1/

Attended portion of meeting on Tuesday and Wednesday related to

consideration of the Committee's longer-run objectives for monetary

and credit aggregates.

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By unanimous vote, paragraph 1(a) of the Authorization for Domestic

Open Market Operations was amended to raise from $4 billion to $6 billion the

dollar limit on intermeeting changes in System account holdings of U. S.

government and federal agency securities for the intermeeting period ending

on March 26, 1985.

Secretary's Note: The following actions were taken at the

Wednesday session.

With Messrs. Boehne, Martin, and Wallich dissenting, the Committee

voted for the following longer-run policy:

The Federal Open Market Committee seeks to foster

monetary and financial conditions that will help to

reduce inflation further, promote growth in output on

a sustainable basis, and contribute to an improved

pattern of international transactions. In furtherance

of these objectives the Committee agreed at this

meeting to establish ranges for monetary growth of

4 to 7 percent for M1, 6 to 9 percent for M2, and

6 to 9-1/2 percent for M3 for the period from the

fourth quarter of 1984 to the fourth quarter of 1985.

The associated range for total domestic nonfinancial

debt was set at 9 to 12 percent for the year 1985.

The Committee agreed that growth in the monetary

aggregates in the upper part of their ranges for 1985

may be appropriate, depending on developments with

respect to velocity and provided that inflationary

pressures remain subdued.

By unanimous vote, the Federal Reserve Bank of New York was

authorized and directed, until otherwise directed by the Committee, to

execute transactions in the System Account in accordance with the following

domestic policy directive:

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The information reviewed at this meeting suggests

that real GNP expanded at a moderate pace in the fourth

quarter, reflecting some strengthening in late 1984

after several months of considerably reduced growth, and

there was evidence of continued moderate expansion in

early 1985. Total retail sales rose in January at about

the same pace as the average for November and December,

while the decline in housing starts appears to have ended.

Industrial production and nonfarm payroll employment

increased appreciably in the November-December period and

nonfarm payroll employment rose substantially further in

January. The civilian unemployment rate rose slightly in

January to 7.4 percent. Information on business spending

suggests less rapid expansion in outlays for fixed invest

ment, following exceptional growth earlier; businesses

also appear to have made substantial progress in adjusting

their inventories. During 1984 broad measures of prices

generally increased at rates close to those recorded in

1983, and the index of average hourly earnings rose

somewhat more slowly.

The foreign exchange value of the dollar against a

trade-weighted average of major foreign currencies has

continued to appreciate strongly since mid-December.

After the announcement on January 17 by the G-5 Ministers

of Finance and Central Bank Governors regarding coordinated

intervention in exchange markets, and subsequent operations,

the dollar's rise moderated somewhat. The merchandise

trade deficit declined sharply in December and for the

fourth quarter as a whole, primarily because of a large

drop in imports from the high rate in the third quarter.

Nevertheless, the deficit for the full year 1984 was sub

stantially higher than in 1983.

After growing little on balance since early summer,

Ml expanded at a rapid pace in late 1984 and early 1985.

The broader aggregates also expanded rapidly in recent

months. For the period from the fourth quarter of 1983

to the fourth quarter of 1984, M1 grew at a rate of about

5-1/4 percent, somewhat below the midpoint of the Committee's

range for the year, and M2 increased at a rate of about

7-3/4 percent, a bit above the midpoint of its longer-run

range. Both M3 and total domestic nonfinancial debt

expanded at rates above the Committee's ranges for the

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-5-

year, reflecting very large government borrowing and strong

private credit growth, boosted in part by the unusual size

of merger-related credit activity. Short-term interest

rates have risen somewhat on balance since the December

meeting of the Committee, but long-term rates are about

unchanged to a little lower. On December 21, the Federal

Reserve approved a reduction in the discount rate from 8-1/2

to 8 percent.

The Federal Open Market Committee seeks to foster

monetary and financial conditions that will help to reduce

inflation further, promote growth in output on a sustainable

basis, and contribute to an improved pattern of international

transactions. In furtherance of these objectives the Committee

agreed at this meeting to establish ranges for monetary growth

of 4 to 7 percent for M1, 6 to 9 percent for M2, and 6 to

9-1/2 percent for M3 for the period from the fourth quarter

of 1984 to the fourth quarter of 1985. The associated range

for total domestic nonfinancial debt was set at 9 to 12 percent

for the year 1985. The Committee agreed that growth in the

monetary aggregates in the upper part of their ranges for

1985 may be appropriate, depending on developments with

respect to velocity and provided that inflationary pressures

remain subdued.

The Committee understood that policy implementation

would require continuing appraisal of the relationships

not only among the various measures of money and credit

but also between those aggregates and nominal GNP, in

cluding evaluation of conditions in domestic credit and

foreign exchange markets.

In the implementation of policy for the immediate

future, taking account of the progress against inflation,

remaining uncertainties in the business outlook, and the

strength of the dollar in the exchange markets, the

Committee seeks to maintain reserve conditions character

istic of recent weeks. Should growth in M1 appear to

be exceeding an annual rate of around 8 percent and

M2 and M3 a rate of around 10 to 11 percent during the

period from December to March, modest increases in

reserve pressures would be sought, particularly if

business activity is rising at a satisfactory rate and

exchange market pressures diminish. Lesser restraint

on reserve positions would be acceptable in the event

of substantially slower growth in the monetary aggre

gates, particularly in the context of sluggish growth

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in economic activity and continued strength of the

dollar in foreign exchange markets. The Chairman may

call for Committee consultation if it appears to the

Manager for Domestic Operations that pursuit of the

monetary objectives and related reserve paths during

the period before the next meeting is likely to be

associated with a federal funds rate persistently

outside a range of 6 to 10 percent.

It was agreed that the next meeting of the Committee would be

held on Tuesday, March 26, 1985.

The meeting adjourned.

Secretary