FOMC Minutes

Meeting of the Federal Open Market Committee

July 9-10, 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, July 9, 1985, at 3:00 p.m., and continuing

on Wednesday, July 10, 1985, at 9:00 a.m.

PRESENT:

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Ms.

Mr.

Volcker, Chairman

Corrigan, Vice Chairman

Balles

Black

Forrestal

Keehn

Martin

Partee

Rice

Seger

Wallich

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

Members of the Federal Open Market Committee

Messrs. Boehne, Boykin, and Stern, Presidents of the Federal

Reserve Banks of Philadelphia, Dallas, and Minneapolis,

respectively

Mr. Axilrod, Staff Director and Secretary

Mr. Bernard, Assistant Secretary

Mrs. Steele, Deputy Assistant Secretary

Mr. Bradfield, 1/ General Counsel

Mr. Oltman, 2/ Deputy General Counsel

Mr. Kichline, Economist

Mr. Truman, Economist (International)

Messrs. Broaddus, R. Davis, Kohn, Lindsey, Prell,

Scheld, Siegman, and Ms. Tschinkel,

Associate Economists

Mr. Sternlight, Manager for Domestic Operations,

System Open Market Account

1/

Entered the meeting after action to approve minutes for the May meeting.

2/

Attended Wednesday session only.

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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

Messrs. Balbach, J. Davis, T. Davis, Ms. Greene,

Messrs. Lang, Rolnick, and Syron, Senior Vice

Presidents, Federal Reserve Banks of St. Louis,

Cleveland, Kansas City, New York, Philadelphia,

Minneapolis, and Boston, respectively

Messrs. Judd, Pearce, and Scadding, Vice Presidents,

Federal Reserve Banks of San Francisco, Dallas, and

San Francisco, respectively

Ms. Lovett, Assistant Vice President, 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 May 21, 1985, were approved.

By unanimous vote, System open market transactions in Government

securities and agency obligations during the period May 21, 1985, through

July 9, 1985, were ratified.

With Mr. Black dissenting, the following longer-run policy for 1985

was approved by the Committee:

The Committee at this meeting reaffirmed ranges

for the year of 6 to 9 percent for M2 and 6 to 9-1/2

percent for M3. The associated range for total domestic

nonfinancial debt was reaffirmed at 9 to 12 percent.

With respect to M1, the base was moved forward to the

second quarter of 1985 and a range was established at

an annual growth rate of 3 to 8 percent. The range

takes account of expectations of a return of velocity

growth toward more usual patterns, following the

sharp decline in velocity during the first half of

the year, while also recognizing a higher degree of

uncertainty regarding that behavior. The appropriate

ness of the new range will continue to be reexamined

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in the light of evidence with respect to economic

and financial developments including developments

in foreign exchange markets. More generally, the

Committee agreed that growth in the aggregates

may be in the upper parts of their ranges, depending

on continuing developments with respect to velocity

and provided that inflationary pressures remain

subdued.

With Mr. Martin and Ms. Seger dissenting, the following longer-run

policy for 1986 was adopted by the Committee:

For 1986 the Committee agreed on tentative

ranges of monetary growth, measured from the

fourth quarter of 1985 to the fourth quarter of

1986, of 4 to 7 percent for M1, 6 to 9 percent

for M2, and 6 to 9 percent for M3. The associated

range for growth in total domestic nonfinancial

debt was provisionally set at 8 to 11 percent for

1986. With respect to M1 particularly, the Committee

recognized that uncertainties surrounding recent

behavior of velocity would require careful re

appraisal of the target range at the beginning of

1986. Moreover, in establishing ranges for next year,

the Committee also recognized that account would

need to be taken of experience with institutional

and depositor behavior in response to the completion

of deposit rate deregulation early in the year.

With Mr. Black and Ms. Seger dissenting from the short-run operational

paragraph, 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:

The information reviewed at this meeting suggests

some pickup in the expansion of economic activity in

recent months following virtually no growth in the

first quarter. Total retail sales rose on balance in

April and May to a level appreciably above the average

for the first quarter, and housing starts held earlier

gains 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 and May after rising little

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over the first quarter. Total nonfarm payroll employ

ment increased at a somewhat reduced pace in May and

June with employment in manufacturing registering

further declines. The civilian unemployment rate

remained at 7.3 percent in June, unchanged since

February. Broad measures of prices and wages appear

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

Since the Committee's meeting in May, the trade

weighted value of the dollar against major foreign

currencies has generally moved within a relatively

narrow range but recently has declined to a level

below its April low. The merchandise trade deficit in

April-May widened from the first-quarter rate as both

agricultural and non-agricultural exports fell, while

imports remained close to their high first-quarter

level.

M1 expanded very rapidly in May and June after

growing at a moderate pace in the preceding two months.

The broader aggregates also grew more rapidly in May

and June after slowing appreciably earlier. From the

fourth quarter of 1984 through June, M1 grew at a rate

well above the Committee's range for 1985; M2 increased

at a rate around the upper end of its longer-run range;

while M3 expanded at a rate in the upper half of its

range. Expansion in total domestic nonfinancial debt

slowed a little in the second quarter but remained

high relative to the Committee's monitoring range

for the year. Interest rates have declined somewhat

further since the May meeting of the Committee.

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 at this meeting

reaffirmed ranges for the year of 6 to 9 percent for

M2 and 6 to 9-1/2 percent for M3. The associated range

for total domestic nonfinancial debt was reaffirmed

at 9 to 12 percent. With respect to M1, the base was

moved forward to the second quarter of 1985 and a range

was established at an annual growth rate of 3 to 8

percent. The range takes account of expectations of

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a return of velocity growth toward more usual patterns,

following the sharp decline in velocity during the

first half of the year, while also recognizing a

higher degree of uncertainty regarding that behavior.

The appropriateness of the new range will continue to

be reexamined in the light of evidence with respect to

economic and financial developments including develop

ments in foreign exchange markets. More generally, the

Committee agreed that growth in the aggregates may be

in the upper parts of their ranges, depending on

continuing developments with respect to velocity and

provided that inflationary pressures remain subdued.

For 1986 the Committee agreed on tentative ranges

of monetary growth, measured from the fourth quarter

of 1985 to the fourth quarter of 1986, of 4 to 7 percent

for M1, 6 to 9 percent for M2, and 6 to 9 percent for M3.

The associated range for growth in total domestic non

financial debt was provisionally set at 8 to 11 percent

for 1986. With respect to Ml particularly, the Committee

recognized that uncertainties surrounding recent behavior

of velocity would require careful reappraisal of the

target range at the beginning of 1986. Moreover, in

establishing ranges for next year, the Committee also

recognized that account would need to be taken of

experience with institutional and depositor behavior

in response to the completion of deposit rate deregulation

early in the year.

In the implementation of policy for the immediate

future, the Committee seeks to maintain the existing

degree of pressure on reserve positions. This action

is expected to be consistent with growth in M2 and M3

at an annual rate of around 7-1/2 percent during the

period from June to September, and with a substantial

slowing of M1 growth to an annual rate of 5 to 6 percent.

Somewhat lesser reserve restraint might be acceptable

in the event of substantially slower growth of the

monetary aggregates while somewhat greater restraint

would 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

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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 August 20, 1985.

The meeting adjourned.

Secretary