FOMC Minutes

Meeting of the Federal Open Market Committee

May 19, 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, May 19, 1987, at 9:10 a.m.

PRESENT:

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Ms.

Mr.

Volcker, Chairman

Corrigan, Vice Chairman

Angell

Boehne

Boykin

Heller

Johnson

Keehn

Seger

Stern

Messrs. Black, Forrestal, and Parry, Alternate

Members of the Federal Open Market Committee

Messrs. Guffey, Melzer, and Morris, Presidents of the Federal

Reserve Banks of Kansas City, St. Louis, and Boston,

respectively

Mr. Kohn, Secretary and Staff Adviser

Mr. Bernard, Assistant Secretary

Mrs. Loney, Deputy Assistant Secretary

Mr. Bradfield, General Counsel

Mr. Kichline, Economist

Mr. Truman, Economist (International)

Messrs. Lang, Lindsey, Prell, Rolnick, Rosenblum,

Scheld, Siegman, and Simpson, Associate Economists

Mr. Sternlight, Manager for Domestic Operations, System

Open Market Account

Mr. Cross, Manager for Foreign Operations, System

Open Market Account

-2-

5/19/87

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

Mr. Gemmill, Staff Adviser, Division of International

Finance, Board of Governors

Ms. Low, Open Market Secretariat Assistant, Office of

Staff Director for Monetary and Financial Policy,

Board of Governors

Mr. Hendricks, First Vice President, Federal Reserve Bank

of Cleveland

Mr. Fousek, Executive Vice President, Federal Reserve Bank

of New York

Messrs. J. Davis, T. Davis, Mmes. Munnell and Tshinkel,

Senior Vice Presidents, Federal Reserve Banks of

Cleveland, Kansas City, Boston, and Atlanta,

respectively

Messrs. Beebe, Burger, and Cook, Vice Presidents,

Federal Reserve Banks of San Francisco, St. Louis,

and Richmond, respectively

Ms. Lovett, Assistant Vice President, 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 March 31, 1987, were approved.

The report of examination of the System Open Market Account, made

by the Board's Division of Federal Reserve Bank Operations as of the close

of business October 31, 1986, was accepted.

By unanimous vote, System open market transactions in foreign

currencies during the period March 31, 1987, through May 18, 1987,

were ratified.

By unanimous vote, System open market transactions in government

securities and federal agency obligations during the period March 31, 1987,

through May 18, 1987, were ratified.

-3-

5/19/87

With Ms. Seger 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

policy directive:

The information reviewed at this meeting suggests

on balance that economic activity is expanding at a

moderate pace in the current quarter. Total nonfarm

payroll employment rose considerably further in April,

with most of the gains continuing to be in the service

producing sectors. The civilian unemployment rate fell

to 6.3 percent from 6.6 percent in March. In April,

industrial production declined after increasing at a

moderate rate in the first quarter. Total retail sales

changed little but were up somewhat from their average

level in the first quarter. Housing starts were down

somewhat in April from their first-quarter average.

Recent indicators of business capital spending point

to some recovery over the near term from a depressed

level in the first quarter. Consumer and producer

prices have risen more rapidly this year, primarily

reflecting sizable increases in prices of energy and

non-oil imports. Labor cost increases have remained

relatively moderate in recent months.

Growth of M2 and M3 strengthened in April from a

sluggish pace in February and March, but for 1987 to

date expansion of these two aggregates has been slightly

below the lower ends of their respective ranges estab

lished by the Committee for the year. M1 surged in

April prompted by exceptionally large tax payments.

Expansion in total domestic nonfinancial debt has

moderated somewhat thus far this year. Most interest

rates have risen considerably since the March 31 meeting

of the Committee, with the largest increases occurring

in longer-term markets.

In foreign exchange markets, the dollar was under

heavy downward pressure over most of the intermeeting

period and intervention purchases of dollars were sub

stantial. Recently the dollar has tended to stabilize,

but on balance its trade-weighted value against the

other G-10 currencies declined over the period. In

March the merchandise trade deficit was close to the

average for January and February.

5/19/87

-4The 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 at its February meeting 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 at the February

meeting not to establish a precise target for its growth

over the year as a whole. 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.

5/19/87

In the implementation of policy for the immediate

future, the Committee seeks to increase somewhat the

degree of reserve pressure sought in recent weeks, taking

into account the possibility of a change in the discount

rate. Somewhat greater reserve restraint would, or somewhat

lesser reserve restraint might, be acceptable depending on

indications of inflationary pressures and on developments

in foreign exchange markets, as well as the behavior of

the aggregates and the strength of the business expansion.

This approach is expected to be consistent with growth

in M2 and M3 over the period from March through June at

annual rates of around 6 percent or less. Growth in M1

is expected to remain well below its pace during 1986.

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 July 7-8, 1987.

The meeting adjourned.

Secretary