FOMC Minutes

Meeting of the Federal Open Market Committee

September 23, 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, September 23, 1986, at 9:00 a.m.

PRESENT:

Mr. Volcker, Chairman

Mr. Corrigan, Vice Chairman

Mr. Angell

Mr. Guffey

Mr. Heller

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, Deputy General Counsel

Kichline, Economist

Truman, Economist (International)

Messrs. Balbach, T. Davis, Kohn, Lindsey, Ms. Munnell,

Messrs. 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

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Mr. Coyne, Assistant to the Board, 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

Mr. Simpson, Deputy Associate Director, Division of

Research and Statistics, Board of Governors

Mrs. Low, Open Market Secretariat Assistant,

Board of Governors

Mr. Fousek, Executive Vice President, Federal Reserve

Bank of New York

Messrs. Broaddus, Lang, Rolnick, Rosenblum, Scadding,

Scheld, Thieke, and Ms. Tschinkel, Senior Vice

Presidents, Federal Reserve Banks of Richmond,

Philadelphia, Minneapolis, Dallas, San Francisco,

Chicago, New York, and Atlanta, respectively

Mr. Skaperdas, Assistant Vice President, Federal Reserve

of Cleveland

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

the Federal Open Market Committee held on August 19, 1986, were approved.

By unanimous vote, System open market transactions in government

securities and federal agency obligations during the period August 19, 1986,

through September 22, 1986, were ratified.

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 suggests

some pickup in the growth of economic activity from the

slow pace in the second quarter. In August total nonfarm

payroll employment grew considerably further, with

employment in manufacturing rising for the first time

since January. The civilian unemployment rate edged

down further to 6.8 percent. Industrial production rose

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slightly in July and August after declining on balance

during the first half of the year. Consumer spending

has remained relatively strong in recent months, with

gains in retail sales in August paced by a sharp rise

in auto sales. Housing starts in July and August

stayed at a relatively high level. Business capital

spending appears to have remained sluggish, reflecting

weakness in nonresidential construction. A more

moderate rate of wage increases has been sustained in

recent months, while broad measures of prices have

firmed somewhat due to developments in food and energy

markets.

The trade-weighted value of the dollar against major

foreign currencies is essentially unchanged on balance

since the August 19 meeting of the Committee. Preliminary

data for the U.S. merchandise trade deficit in July

indicate a larger deficit than in previous months.

Growth of M2 and especially of M3 moderated in

August, but expansion of these two aggregates for the

year through August has been at the upper end of their

respective ranges established by the Committee for 1986.

In August M1 continued to grow very rapidly. Expansion

in total domestic nonfinancial debt remains appreciably

above the Committee's monitoring range for 1986. Short

term interest rates have declined further since the

August meeting of the Committee while long-term market

rates have risen on balance. On August 20, the Federal

Reserve Board approved a reduction in the discount rate

from 6 to 5-1/2 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

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-4to 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 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.

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 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 August to December at annual rates

of 7 to 9 percent. While growth in M1 is expected to

moderate from the exceptionally large increase during

the past several months, that growth will continue to

be judged in the light of the behavior of M2 and M3 and

other factors. Slightly greater reserve restaint would,

or slightly lesser reserve restraint might, be acceptable

depending on the behavior of the aggregates, taking into

account the strength of the business expansion, develop

ments 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.

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

held on November 5, 1986.

The meeting adjourned.

Assistant Secretary