FOMC Minutes

Meeting of the Federal Open Market Committee

November 5, 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 Wednesday, November 5, 1986, at 9:00 a.m.

PRESENT:

Mr.

Mr.

Mr,

Mr.

Mr.

Mrs

Mr.

Mr.

Mr.

Mr.

Ms.

Volcker, Chairman

Corrigan, Vice Chairman 1/

Angell

Guffey

Heller

Horn

Johnson

Melzer

Morris

Rice

Seger

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

Mr. Bradfield, General Counsel

Mr. Truman, Economist (International)

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

Kohn, 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

1/

Entered the meeting after action to approve minutes for meeting

of September 23, 1986.

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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

Messrs. Simpson and Slifman, Deputy Associate Directors,

Division of Research and Statistics, Board of Governors

Mrs. Low, Open Market Secretariat Assistant,

Board of Governors

Messrs. Broaddus, Rolnick, Rosenblum, and Ms. Tschinkel,

Senior Vice Presidents, Federal Reserve Banks of

Richmond, Minneapolis, Dallas, and Atlanta,

respectively

Mr. Beebe and Ms. Clarkin, Vice Presidents, Federal Reserve

Banks of San Francisco and New York, respectively

Ms. Gonczy, Assistant Vice President, Federal Reserve Bank

of Chicago

Mr. Meyer, Research Officer, Federal Reserve Bank of

Philadelphia

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

the Federal Open Market Committee held on September 23, 1986, were approved.

By unanimous vote, System open market transactions in government

securities and federal agency obligations during the period September 23, 1986,

through November 4, 1986, were ratified.

By unanimous vote, the Committee authorized the renewal for further

periods of one year of the System's reciprocal currency ("swap") arrangements

having the amounts and maturity dates indicated below:

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Amount of

Foreign bank

Austrian National Bank

National Bank of Belgium

Bank of Canada

National Bank of Denmark

Bank of England

Bank of France

German Federal Bank

Bank of Italy

Bank of Japan

Bank of Mexico

Netherlands Bank

Bank of Norway

Bank of Sweden

Swiss National Bank

Bank for International

Settlements

Swiss francs

Other authorized

European currencies

arrangement

(millions of

$ equivalent)

$ 250.0

1,000.0

2,000.0

250.0

3,000.0

2,000.0

6,000.0

3,000.0

5,000.0

700.0

500.0

250.0

300.0

4,000.0

600.0

1,250.0

Term

(months)

Maturity

date

12 mos.

"12/17/86

"

"

"

"12/26/86

"

"12/26/86

"12/

"12/

"12/26/86

"

"12/

"12/

"12/

"

12/ 3/86

12/26/86

12/29/86

12/ 3/86

12/26/86

3/86

3/86

12/ 3/86

3/86

3/86

3/86

12/ 3/86

By unanimous vote, 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

that economic activity grew at a moderate pace in the

third quarter. In September total nonfarm payroll

employment grew somewhat further, although employment

in manufacturing fell after changing little in August.

The civilian unemployment rate moved back up to 7.0

percent in September, close to its average level earlier

in the year. Industrial production rose slightly further

in September and posted a moderate gain over the third

quarter. Consumer spending has remained strong in

recent months, with gains in retail sales in August

and especially in September paced by a sharp rise in

Housing starts fell in September, but

auto sales.

residential investment increased further in the third

quarter as a whole. Business capital spending appears

to have remained sluggish; equipment spending picked

up in the third quarter and new orders were strong in

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September, but outlays for nonresidential construction

continued to decline. Real net exports of goods and

services dropped further in the third quarter, reflecting

in large part a surge in the volume of oil imports.

Increases in labor compensation have slowed over the

course of the year, while broad measures of prices have

firmed somewhat recently due to developments in food

and energy markets.

Growth of M2 moderated further in September, but

appears to have picked up in October, while growth of

M3 has tended to slow. Expansion of these two aggre

gates for the year through September has been at the

upper end of their respective ranges established by

the Committee for 1986. Growth of M1 slowed in the

September-October period from the very rapid pace

experienced since early spring. Expansion in total

domestic nonfinancial debt remains appreciably above

the Committee's monitoring range for 1986. Most

interest rates have declined somewhat since the

September 23 meeting of the Committee. Although

the trade-weighted value of the dollar against major

foreign currencies continued to decline for several

weeks after the September meeting, it subsequently

recovered and has risen somewhat on balance.

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

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

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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 nonfinanical 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 September to December at annual

rates of 7 to 9 percent. While growth in M1 over the

same period is expected to moderate from its exceptional

pace during the previous several months, growth in this

aggregate will continue to be judged in the light of

the behavior of M2 and M3 and other factors. Slightly

greater reserve restraint or slightly lesser reserve

restraint might be acceptable depending on the behavior

of the aggregates, taking into account 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 December 15-16, 1986.

The meeting adjourned.

Assistant Secretary