FOMC Minutes

Meeting of the Federal Open Market Committee

December 16-17, 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, December 16, 1985, at 3:30 p.m. and continuing

on Tuesday, December 17, 1985, at 9:30 a.m.

PRESENT:

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Ms.

Volcker, Chairman

Corrigan, Vice Chairman

Black

Forrestal

Keehn

Martin

Partee

Rice

Seger

Mr. Guffey,1/ 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, 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

Mr. Cross, Manager for Foreign Operations,

System Open Market Account

1/ At this meeting, Mr. Guffey voted as alternate for Mr. Balles.

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Mr. Roberts,1/ Assistant to the Chairman, Board of Governors

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

Finance, Board of Governors

Mrs. Low, Open Market Secretariat Assistant,

Board of Governors

Mr. Griffith, First Vice President, Federal Reserve

Bank of San Francisco

Messrs. Balbach, J. Davis, T. Davis, Lang, Rosenblum,

Scadding, and Thieke, Senior Vice Presidents,

Federal Reserve Banks of St. Louis, Cleveland,

Kansas City, Philadelphia, Dallas, San Francisco,

and New York, respectively

Messrs. McNees and Miller, Vice Presidents, Federal Reserve

Banks of Boston and Minneapolis, respectively

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

the Federal Open Market Committee held on November 4-5, 1985, were approved.

By unanimous vote, System open market transactions in foreign

currencies during the period November 5, 1985, through December 16, 1985

were ratified.

By unanimous vote, System open market transactions in Government

securites and agency obligations during the period November 5, 1985, through

December 16, 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:

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

November 4-5, 1985.

12/16-17/85

The information reviewed at this meeting suggests

that economic activity is expanding at a relatively

modest pace in the current quarter. Total nonfarm

payroll employment increased further in November,

though less than in October, and the civilian unemploy

ment rate edged down to 7.0 percent. Retail sales and

industrial production picked up in November after

declining in October. After strengthening in October,

housing starts fell appreciably in November. Incoming

information generally suggests relatively sluggish

business capital spending. Revised merchandise trade

data for the third quarter confirm that the deficit

widened further, as non-oil imports continued to

increase and exports fell somewhat. Broad measures

of prices and wages appear to be rising at rates

close to those recorded earlier in the year.

After declining in October, M1 grew substantially

in November while growth in M2 and M3 continued quite

moderate. Expansion in total domestic nonfinancial debt

has remained rapid. Through November, M1 expanded at a

rate well above the long-run range set by the Committee,

M2 grew at a rate a bit below the upper end of its range

for the year, and M3 expanded at a rate near the mid

point of its range for 1985. Treasury bill rates have

fallen somewhat while other short-term market interest

rates have changed little on balance since the November

meeting of the Committee; long-term rates have moved

appreciably lower over the period. The trade-weighted

value of the dollar against major foreign currencies

has declined on balance since the Committee's meeting

in early November, though the dollar has tended to

stabilize more recently.

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

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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

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 to decrease somewhat 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 November to March

at annual rates of about 6 to 8 percent; while the

behavior of Ml continues to be subject to unusual

uncertainty, growth at an annual rate of 7 to 9

percent over the period is anticipated. Somewhat

greater reserve restraint might, and somewhat lesser

reserve restraint would, be acceptable depending on

behavior of the aggregates, the strength of the

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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

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 February 11-12, 1986.

The meeting adjourned.

Secretary