FOMC Minutes

Meeting of the Federal Open Market Committee

February 10-11, 1987

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, February 10, 1987, at 3:00 p.m. and continuing

on Wednesday, February 11, 1987, at 9:00 a.m.

PRESENT:

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Ms.

Mr.

Volcker, Chairman

Corrigan, Vice Chairman

Angell

Guffey

Heller

Johnson

Melzer

Morris 1/

Seger

Keehn, Alternate for Mrs. Horn

Messrs. Boehne, Boykin, Stern, and Timlen, 2/ 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.

Bernard, Assistant Secretary

Bradfield, General Counsel

Kichline, Economist

Truman, Economist (International)

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

Lindsey, 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 the minutes from the

December meeting.

2/

Attended Tuesday afternoon session only.

2/10-11/87

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

Ms. Kusko 1/ and Mr. Moran, 1/ Economists, Divison of

Research and Statistics, Board of Governors

Ms. Low, Open Market Secretariat Assistant, Office of

Staff Director for Monetary and Financial Policy,

Board of Governors

Mr. Fousek, Executive Vice President, Federal Reserve Bank

of New York

Messrs. Broaddus, Lang, Rolnick, Scheld, Rosenblum,

Ms. Tschinkel, and Mr. Scadding, Senior Vice

Presidents, Federal Reserve Banks of Richmond,

Philadelphia, Minneapolis, Chicago, Dallas,

Atlanta, and San Francisco, respectively

Mr. McNees, Vice President, Federal Reserve Bank of Boston

Mr. Keleher, Research Officer, Federal Reserve Bank of Atlanta

Ms. Meulendyke, Manager, 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 December 15-16, 1986, were approved.

By unanimous vote, System open market transactions in foreign

currencies during the period December 16, 1986, through February 10, 1987,

were ratified.

By unanimous vote, System open market transactions in government

securities and federal agency obligations during the period December 16, 1986,

through February 10, 1987, were ratified.

Secretary's Note: The following actions were taken at the

Wednesday session.

1/ Attended portion of meeting on Tuesday and Wednesday related to

consideration of the Committee's longer-run objectives for monetary

and debt aggregates.

2/10-11/87

By unanimous vote, the following longer-run policy for 1987 was

approved by the Committee:

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 established growth

ranges of 5-1/2 to 8-1/2 percent for both M2 and M3,

measured from the fourth quarter of 1986 to the fourth

quarter of 1987. The associated range for growth in

total domestic nonfinancial debt was set at 8 to 11

percent for 1987.

With respect to M1,the Committee recognized that,

based on experience, the behavior of that aggregate must

be judged in the light of other evidence relating to

economic activity and prices; fluctuations in M1 have

become much more sensitive in recent years to changes in

interest rates, among other factors. During 1987, the

Committee anticipates that growth in M1 should slow.

However, in the light of its sensitivity to a variety

of influences, the Committee decided not to establish

a precise target for its growth over the year as a whole

at this time. Instead, the appropriateness of changes

in M1 during the course of the year will be evaluated in

the light of the behavior of its velocity, developments

in the economy and financial markets, and the nature of

emerging price pressures.

In that connection, the Committee believes that,

particularly in the light of the extraordinary expansion

of this aggregate in recent years, much slower monetary

growth would be appropriate in the context of continuing

economic expansion accompanied by signs of intensifying

price pressures, perhaps related to significant weakness

of the dollar in exchange markets, and relatively strong

growth in the broad monetary aggregates. Conversely,

continuing sizable increases in M1 could be accommodated

in circumstances characterized by sluggish business

activity, maintenance of progress toward underlying price

stability, and progress toward international equilibrium.

As this implies, the Committee in reaching operational

decisions during the year, might target appropriate growth

in M1 from time to time in the light of circumstances then

prevailing, including the rate of growth of the broader

aggregates.

2/10-11/87

With Mr. Melzer dissenting from the short-run operational paragraph,

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

on balance that economic activity continues to grow at

a moderate pace. Total nonfarm payroll employment grew

sharply in January in part reflecting unusual seasonal

developments. The civilian unemployment rate remained

at 6.7 percent in January. Industrial production

increased considerably in December and over the fourth

quarter as a whole. Total retail sales rose sub

stantially in December, largely reflecting a year-end

surge in automobile sales, but were little changed on

balance in the fourth quarter. Housing starts also

strengthened in December after trending lower since

late spring. Business capital spending generally

appears to have remained sluggish. Available data

for the U.S. merchandise trade deficit in the fourth

quarter suggest a slight increase from the third

quarter; however, after allowing for price changes,

net exports of goods and services improved somewhat

during the quarter. In late 1986 consumer and producer

prices generally were continuing to rise at moderate

rates, although prices of crude oil and some other

industrial commodities firmed. Labor cost increases

were more restrained in 1986 than in other recent

years.

Growth of M2 and M3 picked up substantially in

December before slowing a little in January. For 1986

as a whole, expansion of these two aggregates was near

the upper end of their respective ranges established

by the Committee for the year. Growth of M1 slowed in

January from an exceptionally rapid pace in late 1986.

Expansion in total domestic nonfinancial debt remained

appreciably above the Committee's monitoring range for

1986. Although short-term interest rates generally

firmed around year-end, on balance interest rates have

shown small mixed changes since the December 15-16

meeting of the Committee; rates on Treasury securities,

including bonds, have risen a little over the period

while rates on most private obligations have declined

slightly. In foreign exchange markets the trade-weighted

value of the dollar against the other G-10 currencies

has declined substantially on balance since the December

meeting.

2/10-11/87

-5

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 established growth

ranges of 5-1/2 to 8-1/2 percent for both M2 and M3,

measured from the fourth quarter of 1986 to the fourth

quarter of 1987. The associated range for growth in

total domestic nonfinancial debt was set at 8 to 11

percent for 1987.

With respect to M1,the Committee recognized that,

based on experience, the behavior of that aggregate must

be judged in the light of other evidence relating to

economic activity and prices; fluctuations in M1 have

become much more sensitive in recent years to changes in

interest rates, among other factors. During 1987, the

Committee anticipates that growth in M1 should slow.

However, in the light of its sensitivity to a variety

of influences, the Committee decided not to establish

a precise target for its growth over the year as a whole

at this time. Instead, the appropriateness of changes

in M1 during the course of the year will be evaluated in

the light of the behavior of its velocity, developments

in the economy and financial markets, and the nature of

emerging price pressures.

In that connection, the Committee believes that,

particularly in the light of the extraordinary expansion

of this aggregate in recent years, much slower monetary

growth would be appropriate in the context of continuing

economic expansion accompanied by signs of intensifying

price pressures, perhaps related to significant weakness

of the dollar in exchange markets, and relatively strong

growth in the broad monetary aggregates. Conversely,

continuing sizable increases in M1 could be accommodated

in circumstances characterized by sluggish business

activity, maintenance of progress toward underlying price

stability, and progress toward international equilibrium.

As this implies, the Committee in reaching operational

decisions during the year, might target appropriate growth

in M1 from time to time in the light of circumstances then

prevailing, including the rate of growth of the broader

aggregates.

-6-

2/10-11/87

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 January through March at annual

rates of about 6 to 7 percent. Growth in M1 is ex

pected to slow substantially from the high rate of

earlier months. Somewhat greater reserve restraint

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, 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 March 31, 1987.

The meeting adjourned.

Assistant Secretary