FOMC Minutes

Meeting of the Federal Open Market Committee

December 15-16, 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 Monday, December 15, 1986, at 3:30 p.m. and continuing

on Tuesday, December 16, 1986, at 9:15 a.m.

PRESENT:

Mr. Volcker, Chairman

Mr. Corrigan, Vice Chairman

Mr. Angell

Mr. Guffey

Mr. Heller

Mrs. Horn

Mr. Johnson

Mr. Melzer

Mr. Morris

Ms. 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. Kichline, Economist

Mr. Truman, Economist (International)

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

Kohn, 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. Oltman, Executive Vice President, Federal Reserve Bank

of New York

Messrs. Broaddus, Lang, Scheld, Rosenblum, and Ms. Tschinkel,

Senior Vice Presidents, Federal Reserve Banks of

Richmond, Philadelphia, Chicago, Dallas, and

Atlanta, respectively

Messrs. Beebe, Fieleke, and Miller, Vice Presidents,

Federal Reserve Banks of San Francisco, Boston, and

Minneapolis, respectively

Mr. Guentner, Securities, 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 November 5, 1986, were approved.

By unanimous vote, System open market transactions in government

securities and federal agency obligations during the period November 5, 1986,

through December 15, 1986, were ratified.

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 suggests

that economic activity continues to grow at a moderate

pace in the current quarter. Total nonfarm payroll

employment grew appreciably further in October and

November, and employment in manufacturing also rose

after declining on balance in previous months. The

civilian unemployment rate remained at 7.0 percent in

November for the third consecutive month. Industrial

production picked up considerably in November. Total

retail sales rose moderately last month after changing

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little on balance over September and October. Housing

starts have weakened and business capital spending

generally appears to have remained sluggish. Pre

liminary data for the U.S. merchandise trade deficit

in October suggest a moderate narrowing. Broad

measures of prices have firmed somewhat in recent

months due to developments in food and energy markets.

Labor cost increases this year have remained moderate

compared with other recent years.

Growth of M2 slowed substantially in November, while

growth of M3 remained moderate. Expansion of these two

aggregates for the year through November has been just

below the upper end of their respective ranges established

by the Committee for 1986. In November growth of M1

accelerated to a very rapid rate. Expansion in total

domestic nonfinancial debt remains appreciably above

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

interest rates have risen somewhat since the November 5

meeting of the Committee, while long-term rates have

declined on balance. In foreign exchange markets the

trade-weighted value of the dollar against other G-10

currencies has declined moderately on balance since

the November 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 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 responsive

ness 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 would depend on the behavior of

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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 November to March at an annual

rate of about 7 percent. Growth in M1 will continue

to be appraised in the light of the behavior of M2 and

M3 and the other factors cited below. Slightly greater

reserve restraint or somewhat lesser reserve restraint

would 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 February 10-11, 1987.

The meeting adjourned.

Assistant Secretary