FOMC Minutes

Meeting of the Federal Open Market Committee

May 21, 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, May 21, 1985, at 9:30 a.m.

PRESENT:

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Ms.

Mr.

Volcker, Chairman

Corrigan, Vice Chairman

Balles

Black

Forrestal

Gramley

Keehn

Martin

Partee

Rice

Seger

Wallich

Messrs. Boykin, Guffey, Mrs. Horn, and Mr. Morris, Alternate

Members of the Federal Open Market Committee

Messrs. Boehne and Stern, Presidents of the Federal

Reserve Banks of Philadelphia and Minneapolis,

respectively

Mr. Axilrod, Staff Director and Secretary

Mr. Bernard, Assistant Secretary

Mrs. Steele, Deputy Assistant Secretary

Mr. Bradfield, 1/ General Counsel

Mr. Truman, Economist (International)

Messrs. Bisignano, Broaddus, Kohn, Lindsey, Prell,

Scheld, Siegman, and Ms. Tschinkel,

Associate Economists

Mr. Sternlight, Manager for Domestic Operations,

System Open Market Account

Mr. Cross, Manager for Foreign Operations,

System Open Market Account

1/

Entered the meeting after action to ratify transactions in domestic

operations.

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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

Mrs. Low, Open Market Secretariat Assistant,

Board of Governors

Mr. Garbarini, First Vice President, Federal Reserve Bank

of St. Louis

Mr. Fousek, Executive Vice President, Federal Reserve Bank

of New York

Messrs. Balbach, J. Davis, T. Davis, Lang, and Syron,

Senior Vice Presidents, Federal Reserve Banks of

St. Louis, Cleveland, Kansas City, Philadelphia,

and Boston, respectively

Messrs. Pearce and Rolnick, Vice Presidents, Federal

Reserve Banks of Dallas and Minneapolis,

respectively

Mr. McCurdy, Research Officer, Federal Reserve Bank of

New York

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

the Federal Open Market Committee held on March 26, 1985, were approved.

By unanimous vote, System open market transactions in Government

securities and agency obligations during the period March 26, 1985, through

May 20, 1985, were ratified.

With Mr. Black dissenting, 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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-3-

The information reviewed at this meeting suggests

only a modest pick-up in real GNP in the current

quarter from the reduced rate of growth in the first

quarter. Total retail sales rose in April to a

level somewhat above the average for the first quarter,

and housing starts increased further after rising

substantially in the first quarter. Information on

business capital spending suggests further growth,

though at a much less rapid pace than earlier in the

economic expansion. Industrial production declined

slightly in April after rising little over the first

quarter. Total nonfarm payroll employment increased

at a somewhat reduced pace in April with employment

in manufacturing registering another decline. The

civilian unemployment rate remained at 7.3 percent

in April. Broad measures of prices and wages appear

to be rising at rates close to those recorded in 1984.

Since the Committee's meeting in late March, the

trade-weighted value of the dollar against major

foreign currencies has continued to fluctuate widely

in often volatile market conditions and has declined

moderately on balance. The trade and current account

deficits widened in the first quarter as a rebound in

non-oil imports from their low fourth-quarter level

extended the pattern of sharp quarter-to-quarter

swings experienced since the beginning of 1984.

Growth in M1 slowed markedly in March from the

rapid pace of earlier months and remained moderate

in April. The broader aggregates showed little change

in April after their growth had slowed appreciably in

March. Expansion in total domestic nonfinancial debt

has remained relatively rapid. Interest rates have

declined considerably since the March meeting of the

Committee. On May 17, the Federal Reserve Board

approved a reduction in the discount rate from 8 to

7-1/2 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 its meeting

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in February 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,

including evaluation of conditions in domestic credit

and foreign exchange markets.

In the implementation of policy for the immediate

future, and against the background of the recent

reduction in the discount rate, the Committee seeks

to maintain about the same degree of pressure on bank

reserve positions. This action is expected to be

consistent with growth in Ml at an annual rate of

around 6 percent or a little higher during the

period from March to June, while M2 and M3, in the

light of their weakness in April, are expected to

grow more slowly over the quarter than the 7 and 8

percent annual rates, respectively, anticipated

earlier. Somewhat lesser reserve restraint would

be acceptable in the event of substantially slower

growth of the monetary aggregates while somewhat

greater restraint might be acceptable in the event

of substantially higher growth. In either case such

a change would be considered in the context of

appraisals of the strength of the business expansion,

progress against inflation, and conditions in

domestic credit and 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.

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

held on Tuesday-Wednesday, July 9-10, 1985.

The meeting adjourned.

Secretary