FOMC Minutes

Meeting of the Federal Open Market Committee

August 19, 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, August 19, 1986, at 9:00 a.m.

PRESENT:

Mr.

Mr.

Mr.

Mr.

Mr.

Mrs

Mr.

Mr.

Mr.

Mr.

Ms.

Mr.

Volcker, Chairman

Corrigan, Vice Chairman

Angell

Guffey

Heller

Horn

Johnson

Melzer

Morris

Rice

Seger

Wallich

Messrs. Boehne, 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, Deputy General Counsel

Kichline, Economist

Truman, Economist (International)

Messrs. Balbach, T. Davis, Kohn, Lindsey, and

Prell, Associate Economists

Mr. Sternlight, Manager for Domestic Operations, System

Open Market Account

Mr. Cross, Manager for Foreign Operations, System

Open Market Account

8/19/86

-2Mr. Coyne, Assistant to the Board, Board of Governors

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

Mr. Promisel, Senior Associate Director, Division of

International Finance, 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. Low, Open Market Secretariat Assistant,

Board of Governors

Mr. Wallace, First Vice President, Federal Reserve Bank

of Dallas

Mr. Fousek, Executive Vice President, Federal Reserve

Bank of New York

Messrs. Broaddus, Lang, Scadding, and Scheld, Senior

Vice Presidents, Federal Reserve Banks of Richmond,

Philadelphia, San Francisco, and Chicago,

respectively

Messrs. McNees, Pearce, and Sniderman, Vice Presidents,

Federal Reserve Banks of Boston, Dallas, and

Cleveland, respectively

Ms. Meulendyke, Manager, Federal Reserve Bank of New York

Mr. Weber, Senior Economist, and Ms. Rosenbaum, Economist

Federal Reserve Banks of Minneapolis and Atlanta,

respectively

Secretary's Note: Prior to this meeting notice was

given that Mr. H. Robert Heller had executed his oath

as member of the Federal Open Market Committee.

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

the Federal Open Market Committee held on July 8-9, 1986, were approved.

By unanimous vote, System open market transactions in government

securities and federal agency obligations during the period July 9, 1986,

through August 18, 1986, were ratified.

-3-

8/19/86

With Messrs. Melzer and 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 moderately in the

current quarter. In July total nonfarm payroll employ

ment grew strongly, boosted in part by the return of

striking workers. However, continued weakness in the

industrial sector was reflected in further declines

in employment in manufacturing and mining. The civilian

unemployment rate moved down to 6.9 percent from 7.1

percent in June. Industrial production declined

slightly further in July. The nominal value of total

retail sales was about unchanged during the month, as

sales of new autos declined somewhat but spending on

other consumer goods remained strong. Housing starts

fell somewhat in May and June from a relatively high

level earlier in the year. Business capital spending

appears to have remained weak, partly reflecting

continuing declines in the energy sector. While

fluctuations in energy prices have caused some

month-to-month volatility, on average prices and

wages are rising more slowly this year than in 1985.

The trade-weighted value of the dollar against

major foreign currencies has continued to decline

since the July 8-9 meeting of the Committee. The

U.S. merchandise trade deficit in the second quarter

appears to have been about unchanged from the first

quarter. The value of total exports and of total

imports remained about the same in the two quarters,

although the value of oil imports continued to fall in

the second quarter while that of non-oil imports rose

further.

Growth of M2

lifting expansion

through July well

respective ranges

and especially of M3 picked up in July,

of these two aggregates for the year

into the upper portion of their

established by the Committee for 1986.

In July M1 continued to grow at a rate close to the very

rapid pace of the second quarter. Expansion in total

domestic nonfinancial debt remains appreciably above

8/19/86

the Committee's monitoring range for 1986. Short-term

interest rates have declined somewhat since the July

meeting of the Committee, while most long-term interest

rates are about unchanged to slightly lower on balance.

On July 10, the Federal Reserve Board approved a reduction

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

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 the July 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 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.

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.

8/19/86

In the implementation of policy for the immediate

future, the Committee seeks to decrease slightly 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.

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

held on September 23, 1986.

The meeting adjourned.

Assistant Secretary