FOMC Minutes

Meeting of the Federal Open Market Committee

November 4-5, 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 Monday, November 4, 1985, at 3:00 p.m. and continuing

on Tuesday, November 5, 1985, at 9:30 a.m.

PRESENT:

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Ms.

Volcker, Chairman

Corrigan, Vice Chairman

Balles

Black

Forrestal

Keehn

Martin

Partee

Rice

Seger

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, 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 meeting after action to approve minutes of meeting held on

October 1, 1985.

11/4-5/85

Mr. Coyne, 1/ Assistant to the Board of Governors

Mr. Roberts, 2/ Assistant to the Chairman, Board of Governors

Mr. Promisel,3/ Senior Associate Director, Division of

International Finance, Board of Governors

Mr. Slifman, 3/ Deputy Associate Director, Division of Research

and Statistics, Board of Governors

Mr. Gemmill,2/ Staff Adviser, Division of International

Finance, Board of Governors

Mr. Hooper, 3/ Assistant Director, Division of International

Finance, Board of Governors

Mr. Stockton, 3/ Economist, Division of Research and

Statistics, Board of Governors

Mrs. Low, Open Market Secretariat Assistant,

Board of Governors

Mr. Fousek, Executive Vice President, Federal Reserve

Bank of New York

Messrs. Balbach, J. Davis, T. Davis, Lang, Ms. Munnell,

Messrs. Rolnick and Rosenblum, Senior Vice Presidents,

Federal Reserve Banks of St. Louis, Cleveland,

Kansas City, Philadelphia, Boston, Minneapolis, and

Dallas, respectively

Mr. Judd, Vice President, Federal Reserve Bank of

San Francisco

Ms. Walter, Adviser, Open Market Operations,

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 October 1, 1985, were approved.

By unanimous vote, System open market transactions in foreign

currencies during the period October 1, 1985, through November 4, 1985,

were ratified.

By unanimous vote, the Committee authorized the renewal for further

periods of one year of the System's reciprocal currency ("swap") arrangements

having the amounts and maturity dates indicated below:

1/ Entered meeting after action to approve minutes of meeting held on

October 1, 1985.

2/ Attended Tuesday session only.

3/ Attended Monday session only.

-3-

11/4-5/85

Foreign bank

Amount of

arrangement

(millions of

$ equivalent)

Term

(months)

$ 250.0

1,000.0

2,000.0

250.0

3,000.0

2,000.0

6,000.0

3,000.0

5,000.0

700.0

500.0

250.0

300.0

4,000.0

12 mos.

"

"

"

"

"

"

"

"

"

"

"

"

"

Austrian National Bank

National Bank of Belgium

Bank of Canada

National Bank of Denmark

Bank of England

Bank of France

German Federal Bank

Bank of Italy

Bank of Japan

Bank of Mexico

Netherlands Bank

Bank of Norway

Bank of Sweden

Swiss National Bank

Bank for International

SettlementsSwiss francs

Other authorized

European currencies

Maturity

date

12/ 3/85

12/17/85

12/28/85

12/28/85

12/ 3/85

12/28/85

12/28/85

12/28/85

12/ 3/85

12/ 3/85

12/28/85

12/ 3/85

12/ 3/85

12/ 3/85

600.0

12/ 3/85

1,250.0

12/ 3/85

By unanimous vote, System open market transactions in Government

securities and agency obligations during the period October 1, 1985, through

November 4, 1985, were ratified.

With 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:

The information reviewed at this meeting suggests

that economic activity is continuing to expand at a

relatively modest pace. In September, total retail

sales rose considerably further, but the gain was

boosted by a temporary surge in auto sales that was

reversed in October. Total nonfarm payroll employment

increased considerably in October, following a much

11/4-5/85

-4-

slower advance in September, and the civilian unemploy

ment rate was unchanged at 7.1 percent. In recent

months industrial production has increased only slightly

on balance. Housing starts fell in September, but sales

of new and existing homes remained at a relatively high

level on average. Incoming information generally suggests

a leveling of business capital spending. Merchandise

trade data for the third quarter indicate that the

deficit widened slightly, as imports continued to in

crease. Broad measures of prices and wages appear to

be rising at rates close to or somewhat below those

recorded earlier in the year.

M1 appears to have shown little net change in

October following several months of rapid expansion.

Largely reflecting the weakness in M1, growth in M2

and M3 apparently was quite moderate in October.

Expansion in total domestic nonfinancial debt has

remained relatively rapid. Most short-term market

interest rates have changed little on balance since

the October 1 meeting of the Committee, while long

term rates have declined somewhat. The trade-weighted

value of the dollar against major foreign currencies

has dropped slightly further on balance since October 1,

following a substantial decline after the September 22

meeting of the Finance Ministers and Central Bank

Governors of the G-5 countries.

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 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

11/4-5/85

-5-

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 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 ex

perience with institutional and depository 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 generally to maintain

about the existing degree of pressure on reserve

positions. This action is expected to be consistent

with growth in M2 and M3 over the period from September

to December at annual rates of about 6 percent. M1

growth over the period at an annual rate of around 6

percent is also anticipated; slower growth for that

aggregate would be acceptable in the context of

satisfactory economic performance, given the very

rapid growth in M1 over the summer. Somewhat greater

reserve restraint might, and somewhat 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.

11/4-5/85

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

held on December 17, 1985.

The meeting adjourned.

Secretary

Secretary's Note: On December 9, 1985, the Committee

approved an increase of $1 billion, to $7 billion, in

the intermeeting limit on changes in System holdings

of U.S. government and federal agency securities

specified in paragraph l(a) of the Authorization for

Domestic Open Market Operations. The action was

effective immediately, for the period ending

December 17, 1985.

Votes for this action: Messrs. Volcker,

Balles, Black, Forrestal, Keehn, Martin, Partee,

Rice, Ms. Seger, and Mr. Timlen. Votes against

this action: None. Absent and not voting:

Messrs. Corrigan and Wallich. (Mr. Timlen

votes as alternate for Mr. Corrigan.)