FOMC Minutes

Meeting of the Federal Open Market Committee

July 8-9, 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, July 8, 1986, at 3:00 p.m., and continuing

on Wednesday, July 9, 1986, at 9:00 a.m.

PRESENT:

Mr. Volcker, Chairman

Mr. Corrigan, Vice Chairman

Mr. Angell

Mr. Guffey

Mrs. Horn

Mr. Johnson

Mr. Melzer

Mr. Morris

Mr. Rice

Ms. Seger

Mr. 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.

Mr.

Mr.

Mr.

Mr.

Bernard, Assistant Secretary

Bradfield, General Counsel

Oltman, 1/ Deputy General Counsel

Kichline, Economist

Truman, Economist (International)

Messrs. Balbach, J. Davis, R. Davis, T. Davis, Kohn,

Lindsey, Prell, and Siegman, Associate Economists

1/

Attended Wednesday session only.

7/8-9/86

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. Loney, Economist, Office of the Staff Director for

Monetary and Financial Policy, Board of Governors

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

Research and Statistics, Board of Governors

Mrs. Low, Open Market Secretariat Assistant,

Board of Governors

Mr. Broaddus, Ms. Greene, Messrs. Lang, Rolnick,

Rosenblum, Scadding, Scheld, Thieke, and Ms. Tschinkel,

Senior Vice Presidents, Federal Reserve Banks of

Richmond, New York, Philadelphia, Minneapolis, Dallas,

San Francisco, Chicago, New York, and Atlanta,

respectively

Mr. McNees, Vice President, Federal Reserve Bank

of Boston

Ms. Lovett, Assistant Vice President, 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 May 20, 1986, were approved.

By unanimous vote, System open market transactions in Government

securities and Federal agency obligations during the period May 20, 1986,

through July 8, 1986, were ratified.

By unanimous vote, the following longer-run policy for 1986 was

approved by the Committee:

The Committee agreed at this meeting to reaffirm

the ranges established in February for growth of

6 to 9 percent for both M2 and M3, measured from

the fourth quarter of 1985 to the fourth quarter of

1986. With respect to Ml, the Committee recognized

that, based on the experience of recent years, the

1/

Attended portion of meeting on Tuesday and Wednesday.related to

consideration of the Committee's longer-run objectives for

monetary and debt aggregates.

7/8-9/86

behavior of that aggregate is subject to substantial

uncertainties in relation to economic activity and

prices, depending among other things on the respon

siveness of M1 growth to changes in interest rates. In

light of these uncertainties and of the substantial

decline in velocity in the first half of the year, the

Committee decided that growth of M1 in excess of the

previously established 3 to 8 percent range for 1986

would be acceptable. Acceptable growth of M1 over the

remainder of the year will depend on the behavior of

velocity, growth in the other monetary aggregates,

developments in the economy and financial markets, and

price pressures. Given its rapid growth in the early

part of the year, the Committee recognized that the

increase in total domestic nonfinancial debt in 1986

may exceed its monitoring range of 8 to 11 percent, but

felt an increase in that range would provide an

inappropriate benchmark for evaluating longer-term

trends in that aggregate.

With Ms. Seger dissenting, the following longer-run policy for

1987 was adopted by the Committee:

For 1987 the Committee agreed on tentative ranges

of monetary growth, measured from the fourth quarter

of 1986 to the fourth quarter of 1987, of 5-1/2 to

8-1/2 percent for M2 and M3. While a range of 3 to 8

percent for M1 in 1987 would appear appropriate in the

light of most historical experience, the Committee

recognized that the exceptional uncertainties surrounding

the behavior of M1 velocity over the more recent period

would require careful appraisal of the target range at

the beginning of 1987. The associated range for growth

in total domestic nonfinancial debt was provisionally

set at 8 to 11 percent for 1987.

With Mr. Melzer dissenting from the short-run operational para

graph, 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 expanded slowly in the second

quarter. In June total nonfarm payroll employment grew

7/8-9/86

-4-

little after accounting for striking workers, with

continued weakness in the industrial sector reflected

in further declines in employment in manufacturing and

mining. The civilian unemployment rate moved down to

7.1 percent from 7.3 percent in May. Industrial

production declined in May. Total retail sales were

about unchanged during the month, although consumer

spending rose considerably for the second quarter as

a whole. Housing starts fell somewhat in May from a

relatively high level. Weakness in the energy sector

has contributed to a slowing of business capital

spending. Preliminary data for the U.S. merchandise

trade balance in April show a somewhat larger deficit

than the rate recorded in the first quarter. Both

consumer and producer prices turned up in May but

have fallen on balance since late 1985, largely

reflecting declines in energy prices.

M1 growth in June, though less than in May, was

still rapid; through June, M1 grew at a rate well above

the Committee's range for 1986. Growth of M2 slowed

somewhat and expansion of M3 remained relatively moderate

in June, keeping these two aggregates close to the middle

of their respective ranges for the year. Expansion in

total domestic nonfinancial debt remains appreciably

above the monitoring range for 1986. Most short-term

interest rates have declined on balance since the

May 20 meeting of the Committee. Rates on Treasury

bonds also have moved lower while rates on private

long-term obligations are about unchanged to somewhat

higher. The trade-weighted value of the dollar against

major foreign currencies has declined somewhat on balance

since the May meeting.

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 this meeting to re

affirm the ranges established in February for growth of

6 to 9 percent for both M2 and M3, 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 is subject to substantial uncertainties

in relation to economic activity and prices, depending

among other things on the responsiveness of M1 growth

to changes in interest rates. In light of these un

certainties and of the substantial decline in velocity

in the first half of the year, the Committee decided

that growth of M1 in excess of the previously established

3 to 8 percent range for 1986 would be acceptable.

7/8-9/86

-5-

Acceptable growth of M1 over the remainder of the year

will depend on the behavior of velocity, growth in the

other monetary aggregates, developments in the economy

and financial markets, and price pressures. Given its

rapid growth in the early part of the year, the Committee

recognized that the increase in total domestic non

financial debt in 1986 may exceed its monitoring range

of 8 to 11 percent, but felt an increase in that range

would provide an inappropriate benchmark for evaluating

longer-term trends in that aggregate.

For 1987 the Committee agreed on tentative ranges

of monetary growth, measured from the fourth quarter

of 1986 to the fourth quarter of 1987, of 5-1/2 to 8-1/2

percent for M2 and M3. While a range of 3 to 8 percent

for M1 in 1987 would appear appropriate in the light of

most historical experience, the Committee recognized

that the exceptional uncertainties surrounding the

behavior of M1 velocity over the more recent period would

require careful appraisal of the target range at the

beginning of 1987. The associated range for growth in

total domestic nonfinancial debt was provisionally

set at 8 to 11 percent for 1987.

In the implementation of policy for the immediate

future, the Committee seeks to decrease somewhat the

existing degree of pressure on reserve positions,.taking

account of the possibility of a change in the discount

rate. This action is expected to be consistent with

growth in M2 and M3 over the period from June to September

at annual rates of about 7 to 9 percent. While growth

in M1 is expected to moderate from the exceptionally

large increase during the second quarter, that growth

will continue to be judged in the light of the behavior

of M2 and M3 and other factors. Somewhat greater or

lesser reserve restraint might be acceptable depending

on the 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 4 to 8

percent.

7/8-9/86

-6

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

held on August 19, 1986.

The meeting adjourned.

Assistant Secretary