FOMC Minutes

Meeting of the Federal Open Market Committee

July 7, 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, July 7, 1987, at 10:30 a.m.

PRESENT:

Mr. Volcker, Chairman

Mr. Corrigan, Vice Chairman

Mr. Angell

Mr. Boehne

Mr. Boykin

Mr. Heller

Mr. Johnson

Mr. Keehn

Mr. Kelley

Ms. Seger

Mr. 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. Truman, Economist (International)

Messrs. Lang, Lindsey, Prell, 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

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

Mr. Promisel, Senior Associate Director, Division of

International Finance, Board of Governors

Mrs. Zickler, 1/ Assistant Director, Division of Research

and Statistics, Board of Governors

Mr. Brady, 1/ Economist, Division of Research and Statistics,

Board of Governors

Ms. Low, Open Market Secretariat Assistant, Office of

Board Members, Board of Governors

Messrs. Hendricks and Stone, First Vice Presidents,

Federal Reserve Banks of Cleveland and Philadelphia,

respectively

Messrs. Balbach, Beebe, Broaddus, J. Davis, T. Davis, and

Ms. Tshinkel, Senior Vice Presidents, Federal Reserve

Banks of St. Louis, San Francisco, Richmond, Cleveland,

Kansas City, and Atlanta, respectively

Mr. R. Davis, Senior Economic Adviser, Federal Reserve

Bank of New York

Messrs. McNees and Miller, Vice Presidents, Federal

Reserve Banks of Boston and Minneapolis, respectively

Mr. Keleher, Research Officer, Federal Reserve Bank

of Atlanta

Mr. Guentner, 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 May 19, 1987, were approved.

By unanimous vote, System open market transactions in foreign

currencies during the period May 19, 1987, through July 6, 1987, were

ratified.

By unanimous vote, System open market transactions in government

securities and federal agency obligations during the period May 19, 1987,

through July 6, 1987, were ratified.

1/ Attended portion of meeting related to consideration of the Committee's

longer-run objectives for monetary and debt aggregates.

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7/7/87

By unanimous vote, the following ranges for growth in the broader

aggregates and nonfinancial debt in 1987 and the role of M1 were approved

by the Committee:

The Committee agreed at this meeting to reaffirm

the ranges established in February for growth 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 Committee agreed that growth in these aggregates

around the lower ends of their ranges may be appropriate

in light ofdevelopments with respect to velocity and

signs of the potential for some strengthening in underlying

inflationary pressures, provided that economic activity

is expanding at an acceptable pace. The monitoring range

for growth in total domestic nonfinancial debt set in

February for the year was left unchanged at 8 to 11

percent.

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. Because of this

sensitivity, which has been reflected in a sharp slowing

of the decline in M1 velocity over the first half of the

year, the Committee again decided not to establish a

specific target for growth in M1 over the remainder

of 1987 and no tentative range has been set for 1988.

The appropriateness of changes in M1 this year will

continue to 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. The Committee welcomes substantially

slower growth of M1 in 1987 than in 1986 in the context

of continuing economic expansion and some evidence

of greater inflationary pressures. The Committee in

reaching operational decisions over the balance of

the year will take account of growth in M1 in the light

of circumstances then prevailing. The issues involved

with establishing a target for M1 will be carefully

reappraised at the beginning of 1988.

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7/7/87

With Ms. Seger dissenting, the following tentative ranges for

growth in the broader aggregates and nonfinancial debt in 1988 were

adopted by the Committee:

For 1988, the Committee agreed on tentative ranges of

monetary growth, measured from the fourth quarter of 1987

to the fourth quarter of 1988, of 5 to 8 percent for both

M2 and M3. The Committee provisionally set the associated

range for growth in total domestic nonfinancial debt at

7-1/2 to 10-1/2 percent.

By unanimous vote (with Ms. Seger dissenting from the decision

on the tentative ranges for 1988), 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 expanded at a moderate

pace in the second quarter. In May and June, total non

farm payroll employment rose modestly further, with most

of the gains continuing to be in the service-producing

sectors. The civilian unemployment rate fell to 6.1

percent in June and was down appreciably from its average

level in the first quarter. Industrial production

increased substantially in May after rising moderately

on balance in earlier months of the year. Consumer

spending appears to have increased in the second quarter,

but housing starts were down somewhat further in May to

a level considerably below their first-quarter average.

Recent indicators of business capital spending point to

some recovery, particularly in equipment outlays, from

a depressed level in the first quarter. In April the

merchandise trade deficit was smaller than in March and

below the monthly average for the first quarter. The

rise in consumer and producer prices moderated in May

but for the year to date prices have risen more rapidly

than in 1986, primarily reflecting sizable increases in

prices of energy and non-oil imports. Wage increases

have remained relatively moderate in recent months.

M2 increased slightly in May and June while growth

of M3 remained moderate. For 1987 through June, ex

pansion of M2 has been below the lower end of the range

established by the Committee for the year, and growth

of M3 around the lower end of its range. Following a

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surge in April, M1 contracted on balance in May and June.

Expansion in total domestic nonfinancial debt has

moderated this year.

Most interest rates have declined somewhat on balance

since the May 19 meeting of the Committee. In foreign

exchange markets, the trade-weighted value of the dollar

against the other G-10 currencies has risen on balance

since the May 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 this meeting to re

affirm the ranges established in February for growth 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 Committee agreed that growth in these aggregates

around the lower ends of their ranges may be appropriate

in light of developments with respect to velocity and

signs of the potential for some strengthening in underlying

inflationary pressures, provided that economic activity

is expanding at an acceptable pace. The monitoring range

for growth in total domestic nonfinancial debt set in

February for the year was left unchanged at 8 to 11

percent.

For 1988, the Committee agreed on tentative ranges of

monetary growth, measured from the fourth quarter of 1987

to the fourth quarter of 1988, of 5 to 8 percent for both

M2 and M3. The Committee provisionally set the associated

range for growth in total domestic nonfinancial debt at

7-1/2 to 10-1/2 percent.

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. Because of this

sensitivity, which has been reflected in a sharp slowing

of the decline in M1 velocity over the first half of the

year, the Committee again decided not to establish a

specific target for growth in M1 over the remainder

of 1987 and no tentative range has been set for 1988.

The appropriateness of changes in M1 this year will

continue to be evaluated in the light of the behavior

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of its velocity, developments in the economy and

financial markets, and the nature of emerging price

pressures. The Committee welcomes substantially

slower growth of M1 in 1987 than in 1986 in the context

of continuing economic expansion and some evidence

of greater inflationary pressures. The Committee in

reaching operational decisions over the balance of

the year will take account of growth in M1 in the light

of circumstances then prevailing. The issues involved

with establishing a target for M1 will be.carefully

reappraised at the beginning of 1988.

In the implementation of policy for the immediate

future, the Committee seeks to maintain the existing

degree of pressure on reserve positions. Somewhat

greater reserve restraint or somewhat lesser reserve

restraint would 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 ex

pansion. This approach is expected to be consistent

with growth in M2 and M3 over the period from June

through September at annual rates of around 5 and

7-1/2 percent, respectively. Growth in M1,while

picking up from recent levels, 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 August 18, 1987.

The meeting adjourned.

Secretary