FOMC Minutes

Meeting of the Federal Open Market Committee

May 20, 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, May 20, 1986, at 9:15 a.m.

PRESENT:

Mr.

Mr.

Mr.

Mr.

Mrs

Mr.

Mr.

Mr.

Mr.

Ms.

Mr.

Volcker, Chairman

Corrigan, Vice Chairman

Angell

Guffey

Horn

Johnson

Melzer

Morris

Rice

Seger

Wallich

Messrs. Boehne, Boykin, Keehn, and Stern, Alternate

Members of the Federal Open Market Committee

Messrs. Black, Forrestal, and Parry, Presidents of the Federal

Reserve Banks of Richmond, Atlanta, and San Francisco,

respectively

Mr. Bernard, Assistant Secretary

Mrs. Steele, Deputy Assistant Secretary

Mr. Bradfield, 1/ General Counsel

Mr. Oltman, Deputy General Counsel

Mr. Kichline, Economist

Mr. Truman, Economist (International)

Messrs. J. Davis, T. Davis, Kohn, Lindsey, Prell,

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/

meetingafter action to approve minutes for meeting of

Entered

1986.

1,

April

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Mr. Coyne, 1/ 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. Low, Open Market Secretariat Assistant,

Board of Governors

Mr. Fousek, Executive Vice President, Federal Reserve Bank

of New York

Messrs. Lang, Rolnick, Rosenblum, Scadding, Scheld,

Thieke, and Ms. Tschinkel, Senior Vice Presidents,

Federal Reserve Banks of Philadelphia, Minneapolis,

Dallas, San Francisco, Chicago, New York, and

Atlanta, respectively

Messrs. Burger, Cook, and Fieleke, Vice Presidents,

Federal Reserve Banks of St. Louis, Richmond,

and Boston, respectively

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

the Federal Open Market Committee held on April 1, 1986, were approved.

By unanimous vote, System open market transactions in Government

securites and Federal agency obligations during the period April 1, 1986,

through May 19, 1986, were ratified.

Without objection, the Committee agreed to a suggestion by the

Manager for Domestic Operations, System Open Market Account, that, given

changes in recent years in reserve requirement reporting periods, the Manager's

weekly "Report of Open Market Operations and Money Market Conditions" should

be replaced by a report covering operations and money market developments

for each 2-week reserve maintenance period.

1/

Entered meeting after action to approve minutes for meeting of

April 1, 1986.

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With Mr. Wallich 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 indicates

a mixed pattern of developments but suggests on balance

that economic activity is expanding at a relatively

modest pace in the current quarter. Total nonfarm pay

roll employment increased moderately further in April

following a considerable rise in the first quarter,

but employment in manufacturing fell for the third

consecutive month. The civilian unemployment rate

edged down to 7.1 percent. Industrial production and

total retail sales turned up in April following earlier

declines, while housing starts rose somewhat further

from a relatively high level. Weakness in the energy

sector has contributed to a slowing of business capital

spending. The merchandise trade deficit appears to

have decreased somewhat in the first quarter, as the

volume and average price of oil imports fell. Largely

reflecting declines in energy prices, consumer prices

have declined somewhat since late 1985 and producer

prices have fallen substantially.

In April M1 continued to grow at a rapid pace, leaving

this aggregate above the upper end of its range for the

year. Growth of the broader aggregates, especially of M2,

strengthened considerably in April, bringing M2 into the

lower part of its long-run range and M3 slightly above the

midpoint of its range for 1986. Most short-term interest

rates have declined on balance since the April 1 meeting

of the Committee, while long-term rates are somewhat

higher. On April 18, the Federal Reserve Board approved

a reduction in the discount rate from 7 to 6-1/2 percent.

The trade-weighted value of the dollar against major

foreign currencies has risen somewhat recently but on

balance the dollar has declined further since the April

meeting, particularly against the Japanese yen.

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The Federal Open Market Committee seeks monetary and

financial conditions that will foster reasonable price

stability over time, 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 at its February meeting

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 con

sistency 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 a deceleration in

money growth over the balance of the quarter. However,

in view of the rapid money growth thus far in the

quarter and the apparent weakness in velocity, the

Committee anticipates faster growth for the monetary

aggregates, particularly M1, than expected at the

last meeting. M2 and M3 are expected to expand over

the period from March to June at annual rates of about

8 to 10 percent. While the behavior of M1 continues

to be subject to unusual uncertainty, growth at an

annual rate of about 12 to 14 percent over the period

is now anticipated. If the anticipated slowing in

monetary growth does not develop, somewhat greater

reserve restraint would be acceptable in the context

of a pickup in growth of the economy, taking account

of conditions in domestic and international financial

markets and the behavior of the dollar in foreign

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exchange markets. Somewhat lesser reserve restraint

might be acceptable in the context of a marked slowing

in money growth and pronounced sluggishness in economic

performance. The Chairman may call for Committee con

sultation 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 5 to 9 percent.

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

held on July 8-9, 1986.

The meeting adjourned.

Secretary