FOMC Minutes

Meeting of the Federal Open Market Committee

August 20, 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, August 20, 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. Kichline, Economist

Mr. Truman, Economist (International)

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

Scheld, and Siegman, 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 approve minutes for the July meeting.

8/20/85

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. Jack Guynn, First Vice President, Federal Reserve

Bank of Atlanta

Messrs. Balbach, T. Davis, and Lang, Senior Vice

Presidents, Federal Reserve Banks of St. Louis,

Kansas City, and Philadelphia, respectively

Messrs. McNees, Miller, Pearce, and Beebe, Vice Presidents,

Federal Reserve Banks of Boston, Minneapolis, Dallas,

and San Francisco, respectively

Mr. Stevens, Assistant Vice President, Federal Reserve

Bank of Cleveland

Ms. Meulendyke, Manager, Securities Department,

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 July 9-10, 1985, were approved.

By unanimous vote, System open market transactions in Government

securities and agency obligations during the period July 10, 1985, through

August 19, 1985, were ratified.

With Mr. Black and Ms. Seger 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:

8/20/85

The information reviewed at this meeting suggests

that economic activity is probably expanding in the

current quarter at a moderately faster rate than in

the first half of the year. In July, industrial

production continued to move somewhat higher and

total retail sales rose modestly after two months

of decline. On the other hand, housing starts fell

somewhat in July. Information on business capital

spending suggests further growth, though at a much

less rapid pace than earlier in the economic ex

pansion. Total nonfarm payroll employment continued

to increase in July, although employment in manu

facturing declined slightly further. The civilian

unemployment rate remained at 7.3 percent in July,

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 July, the trade

weighted value of the dollar against major foreign

currencies has depreciated further. The merchandise

trade deficit widened in the second quarter to the

highest rate on record. Both agricultural and non

agricultural exports fell substantially, while imports

registered a small increase.

Based on data for July and early August, M1 has

been growing relatively rapidly. Demand deposits have

shown little change on balance, but other checkable

deposits have expanded substantially. Growth in M2

has continued at around the upper end of its 1985

range, while relatively sluggish growth in M3 recently

has brought this aggregate to the midpoint of its

range. Expansion in total domestic nonfinancial debt

has remained high relative to the Committee's monitoring

range for the year. Most interest rates have risen

somewhat since the July 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 the July 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 re

affirmed at 9 to 12 percent. With respect to M1,

the base was moved forward to the second quarter of

8/20/85

-41985 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 appropriateness of

the new range will continue to be reexamined 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.

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

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 degree of

pressure on reserve positions sought in recent weeks.

This action is expected to be consistent with growth

in M2 and M3 at annual rates of around 8-1/2 and 6-1/2

percent, respectively, during the period from June to

September. M1 growth is expected to slow from its

recent pace, but given the rapid growth in recent

weeks, expansion over the June to September period may

be at an 8 to 9 percent annual rate. Somewhat greater

restraint would be acceptable in the event of sub

stantially higher growth in the monetary aggregates.

Somewhat lesser restraint would be acceptable in the

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8/20/85

event of substantially slower growth. In either case

such a change would be considered in the context of

appraisals of the strength of the business expansion,

developments in foreign exchange markets, progress

against inflation, and conditions in domestic and

international credit 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 October 1, 1985.

The meeting adjourned.

Secretary