FOMC Minutes

Meeting of the Federal Open Market Committee

October 1, 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, October 1, 1985, at 9:00 a.m.

PRESENT:

Mr. Volcker, Chairman

Mr. Corrigan, Vice Chairman

Mr. Balles

Mr. Black

Mr. Forrestal

Mr. Keehn

Mr.

Mr.

Mr.

Ms.

Mr.

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, 1/ Deputy Assistant Secretary

Mr. Bradfield, General Counsel

Mr. Oltman, 1/ Deputy General Counsel

Mr. Kichline, Economist

Mr. Truman, Economist (International)

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

Scheld,l/ and Ms. Tschinkel,l/ Associate Economists

Mr. Sternlight, Manager for Domestic Operations,

System Open Market Account

Mr. Cross, Manager for Foreign Operations,

System Open Market Account

1/

Entered meeting after action to ratify foreign currency transactions.

10/1/85

Mr. Coyne, Assistant to the Board of Governors

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

Mr. Promisel,1/ Senior Associate Director, Division of

International Finance, Board of Governors

Mr. Gemmill,1/ Staff Adviser, Division of International

Finance, Board of Governors

Mrs. Low,1/ Open Market Secretariat Assistant,

Board of Governors

Messrs. T. Davis,1/ Lang,1/ Ms. Munnell,1/ and Mr. Rolnick,1/

Senior Vice Presidents, Federal Reserve Banks of

Kansas City, Philadelphia, Boston, and Minneapolis,

respectively

Messrs. Burger,1/ Pearce,1/ and Scadding,1/ Vice Presidents,

Federal Reserve Banks of St. Louis, Dallas, and

San Francisco, respectively

Mr. Sniderman,1/ Assistant Vice President, Federal Reserve

Bank of Cleveland

Ms. Meulendyke,1/ 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 August 20, 1985, were approved.

By unanimous vote, System open market transactions in foreign

currencies during the period August 20, 1985, through September 30, 1985,

were ratified.

By unanimous vote, System open market transactions in Government

securities and agency obligations during the period August 20, 1985, through

September 30, 1985, were ratified.

By unanimous vote, the Committee approved an increase from $8.0

billion to $10.0 billion in the limit on the System's overall open position

in all foreign currencies contained in paragraph 1D of the Authorization

for Foreign Currency Operations.

1/

This action was effective immediately.

Entered meeting after action to ratify foreign currency transactions.

10/1/85

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:

The information reviewed at this meeting suggests

that economic activity expanded in the third quarter

at a moderately faster rate than in the first half of

the year. In August, industrial production increased

somewhat. Total retail sales rose considerably, boosted

by a surge in auto sales. Housing starts, while

increasing in August, were still no higher than their

average level in the second quarter. Incoming informa

tion generally suggested a leveling of business capital

spending. The merchandise trade deficit in July and

August averaged somewhat less than in the second

quarter as a drop in imports was partly offset by

a slight decline in exports. Total nonfarm payroll

employment rose somewhat more in August than in most

other recent months. The civilian unemployment rate

fell from 7.3 percent in July -- its level since

February -- to 7.0 percent in August. Broad measures

of prices and wages appear to be rising at rates

close to or somewhat below those recorded earlier

in the year.

Following the Committee's meeting on August 20, the

trade-weighted value of the dollar against major foreign

currencies appreciated through mid-September. The dollar

subsequently declined sharply, especially after the

announcement on September 22 by the Finance Ministers

and Central Bank Governors of the G-5 countries that

exchange rates have not fully reflected economic

fundamentals.

M1 growth surged in August, reflecting exceptional

strength in interest-bearing checkable deposits and

relatively rapid expansion in other components; data

for the first half of September suggest slower but still

substantial expansion. Reflecting the surge in M1, M2

accelerated in August, and M3 also strengthened somewhat.

Expansion in total domestic nonfinancial debt has remained

relatively rapid. Most market interest rates have changed

little on balance since the August meeting of the Committee.

10/1/85

-4The 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 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 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 over the period from September to December

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10/1/85

at annual rates of about 6 to 7 percent. A marked slowing

of Ml growth over the period to an annual rate of around

6 to 7 percent is also anticipated; slower growth over

the next three months would be acceptable in the context

of satisfactory economic performance, given recent very

rapid growth in M1. Somewhat greater or lesser reserve

restraint would be acceptable depending on behavior of

the aggregates, taking account 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 consulta

tion if it appears to the Manager for Domestic Operations

that reserve conditions during the period before the

next meeting are 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 November 5, 1985.

The meeting adjourned.

Secretary

Secretary's Note: On October 24, 1985, the Committee

members approved an increase of $500 million, to a

level of $2.0 billion, in the intermeeting limit on

changes in the System's overall open position in

foreign currencies specified under paragraph 2A of

the "Procedural Instructions with Respect to Foreign

Currency Operations." The action was effective

October 24, 1985, for the period ending November 5,

1985.

Votes for this action: Messrs. Volcker,

Black, Guffey, Keehn, Martin, Melzer, Rice,

Ms. Seger, and Mr. Timlen. Votes against

this action: None. Absent and not voting:

Messrs. Partee and Wallich (Messrs. Guffey,

Melzer, and Timlen voted as alternates).