FOMC Minutes

Meeting of the Federal Open Market Committee

February 11-12, 1986

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, February 11, 1986, at 3:10 p.m. and

continuing on Wednesday, February 12, 1986, at 9:00 a.m.

PRESENT:

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Ms.

Mr.

Volcker, Chairman

Corrigan,1/ Vice Chairman

Angell

Black

Forrestal

Johnson

Keehn

Martin

Parry

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, Kohn,1/ Lindsey, Prell, Scheld,

Siegman, and Ms. Tschinkel, Associate Economists

Mr. Sternlight, Manager for Domestic Operations,

System Open Market Account

Mr. Cross,1/ Manager for Foreign Operations,

System Open Market Account

1/

Entered meeting after action to approve minutes for meeting of

December 16-17, 1985, and acceptance of the report of Examination

of the System Open Market Account.

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2/11-12/86

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

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

Mr. Gemmill, Staff Adviser, Division of International

Finance, Board of Governors

Mrs. Danker 1/ and Mr. Stockton,1/ Economists, Division of

Research and Statistics, Board of Governors

Mrs. Low, Open Market Secretariat Assistant,

Board of Governors

Mr. Fousek,2/ Executive Vice President, Federal Reserve Bank

of New York

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

Rosenblum, and Scadding, Senior Vice Presidents,

Federal Reserve Banks of St. Louis, Cleveland,

Kansas City, Philadelphia, Minneapolis, Dallas,

and San Francisco, respectively

Messrs. Higgins and McNees, Vice Presidents, Federal Reserve

Banks of Kansas City and Boston, respectively

Mr. Guentner, Manager, Securities Department, Federal

Reserve Bank of New York

Secretary's Note: Prior to this meeting notice of the

election of Robert T. Parry as member of the Federal Open

Market Committee for the period February 5 through

February 28, 1986, had been received by the Secretary,

and Mr. Parry had executed his oath of office.

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

the Federal Open Market Committee held on December 16-17, 1985, were approved.

The report of examination of the System Open Market Account, made

by the Board's Division of Federal Reserve Bank Operations as of the close of

business May 31, 1985, was accepted.

By unanimous vote, System open market transactions in Government

securites and Federal agency obligations during the period December 17, 1985,

through February 11, 1986, were ratified.

1/ Attended portion of meeting relating to the Committee's discussion

and action on monetary growth ranges for 1986.

2/ Entered meeting after action to approve minutes for meeting of

December 16-17, 1985, and acceptance of the report of Examination

of the System Open Market Account.

2/11-12/86

-3Secretary's Note: The following actions were taken at the

Wednesday session.

By unanimous vote, the Comittee voted for the following longer-run

policy:

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 agreed to establish

the following ranges for monetary growth, measured

from the fourth quarter of 1985 to the fourth quarter

of 1986. With respect to M1, the Committee recognized

that, based on the experience of recent years, the

behavior of that aggregate was subject to substantial

uncertainties in relationship to economic activity

and prices, depending among other things on its

responsiveness to changes in interest rates. It

agreed that an appropriate target range under existing

circumstances would be 3 to 8 percent, but it intends

to evaluate movements in M1 in the light of its

consistency with the other monetary aggregates,

developments in the economy and financial markets,

and potential inflationary pressures. It adopted

a range of 6 to 9 percent for M2 and 6 to 9 percent

for M3. The associated range for growth in total

domestic nonfinancial debt was set at 8 to 11 percent

for the year 1986.

With Mr. Martin 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:

The information reviewed at this meeting suggests

that economic activity is currently expanding at a

moderate pace. Total nonfarm payroll employment

increased substantially further in January, and the

civilian unemployment rate declined to 6.7 percent.

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In December industrial production rose further, and

available information suggests some additional rise

in January. Retail sales increased considerably in

December after declining on balance over the previous

two months, and housing starts rebounded from their

October-November pace. Business capital spending

strengthened somewhat in the fourth quarter.

Merchandise trade data for the fourth quarter

suggest that the deficit widened further from the

very high third-quarter level. In late 1985

consumer and producer prices rose somewhat more

than earlier, but for the year as a whole broad

measures of prices and wages increased at rates

close to those recorded in 1984.

With respect to the Committee's ranges for longer

term monetary growth, M1 expanded at a rate well above

the range set for the second half of 1985; M2 grew at a

rate somewhat below the upper end of its range for the

year; and M3 expanded at a rate near the midpoint of its

range for 1985. Expansion in total domestic nonfinancial

debt was above the upper end of its monitoring range for

the year. In January growth in M1 and M2 slowed markedly,

while growth in M3 picked up as banks issued a substantial

volume of large time deposits to support further robust

growth in bank credit. Interest rates have fluctuated

considerably since the December meeting of the Committee;

on balance, short-term interest rates have risen a little

while longer-term rates are unchanged to somewhat lower.

The trade-weighted value of the dollar against major

foreign currencies has declined further.

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 agreed to establish

the following ranges for monetary growth, measured

from the fourth quarter of 1985 to the fourth quarter

of 1986. With respect to M1, the Committee recognized

that, based on the experience of recent years, the

behavior of that aggregate was subject to substantial

uncertainties in relationship to economic activity

and prices, depending among other things on its

responsiveness to changes in interest rates. It

agreed that an appropriate target range under existing

2/11-12/86

circumstances would be 3 to 8 percent, but it intends

to evaluate movements in M1 in the light of its

consistency with the other monetary aggregates,

developments in the economy and financial markets,

and potential inflationary pressures. It adopted

a range of 6 to 9 percent for M2 and 6 to 9 percent

for M3. The associated range for growth in total

domestic nonfinancial debt was set at 8 to 11 percent

for the year 1986.

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

over the period from November to March at annual rates

of about 6 percent and 7 percent, respectively; while

the behavior of M1 continues to be subject to unusual

uncertainty, growth at an annual rate of about 7 percent

over the period is anticipated. Somewhat greater reserve

restraint or somewhat lesser reserve restraint might be

acceptable depending on behavior of the aggregates, 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

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 April 1, 1986.

The meeting adjourned.

Secretary