FOMC Minutes

Meeting of the Federal Open Market Committee

August 18, 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, August 18, 1987, at 9:00 a.m.

PRESENT:

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Ms.

Mr.

Greenspan, Chairman

Corrigan, Vice Chairman

Angell

Boehne

Boykin

Heller

Johnson

Keehn

Kelley

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. Oltman, Deputy General Counsel

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

8/18/87

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

Mr. Gemmill, Staff Adviser, Division of International

Finance, Board of Governors

Mrs. Zickler, Assistant Director, Division of Research

and Statistics, Board of Governors

Ms. Low, Open Market Secretariat Assistant, Office of

Board Members, 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. Balbach, Beebe, Broaddus, J. Davis, T. Davis,

Ms. Munnell, Mr. Thieke, and Ms. Tshinkel, Senior

Vice Presidents, Federal Reserve Banks of St. Louis,

San Francisco, Richmond, Cleveland, Kansas City,

Boston, New York, and Atlanta, respectively

By unanimous vote, Alan Greenspan was elected to serve as Chairman

of the Committee until the first meeting of the Committee after February 29,

1988.

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

the Federal Open Market Committee held on July 7, 1987, were approved.

By unanimous vote, System open market transactions in foreign

currencies during the period July 7, 1987, through August 17, 1987, were

ratified.

By unanimous vote, System open market transactions in government

securities and federal agency obligations during the period July 7, 1987,

through August 17, 1987, were ratified.

By unanimous vote, paragraph 1(a) of the Authorization for Domestic

Open Market Operations was amended to raise from $6 billion to $12 billion

the dollar limit on intermeeting changes in System account holdings of U.S.

government and federal agency securities for the intermeeting period ending

on September 22, 1987.

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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

on balance that economic activity is expanding at a

moderate pace in the current quarter. In July, total

nonfarm payroll employment rose considerably further;

the increase included continuing large gains in the

service-producing sector and a sizable advance in

manufacturing. The civilian unemployment rate fell

slightly further to 6.0 percent. Industrial production

increased strongly in July after rising moderately on

balance in the first half of the year. Consumer

spending grew at a reduced pace earlier in the year

but retail sales posted large increases in June and

July. Housing starts were unchanged in July and

remained at their reduced second-quarter level.

Recent indicators of business capital spending point

to some strength, particularly in equipment outlays.

The rise in consumer and producer prices has been

moderate in recent months, but for the year to date

prices generally 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.

In foreign exchange markets, the trade-weighted

value of the dollar in terms of the other G-10 currencies

was unchanged on balance since the meeting of the

Committee on July 7. In the second quarter the

merchandise trade deficit in current dollars was about

the same as in the first quarter.

The monetary aggregates grew slowly in July. For

1987 through July, expansion of both M2 and M3 has been

below the lower ends of the ranges established by the

Committee for the year, while growth in M1 has been well

below its pace in 1986. Expansion in total domestic non

financial debt has moderated this year. Most long-term

interest rates have risen somewhat since the July meeting;

in short-term markets, Treasury bill rates also have

increased somewhat while private rates are little changed.

Stock prices have risen substantially since the latest

meeting.

8/18/87

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 its meeting in July

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 of developments with respect to velocity and

signs of the potential for some strengthening in under

lying 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 at the July meeting

not to establish a specific target for growth in M1 over

the remainder of 1987 and no tentative range was set for

1988. The appropriateness of changes in M1 this year

will continue to be evaluated in the light of the be

havior 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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8/18/87

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 would, or slightly lesser reserve

restraint might, be acceptable depending on indications

of inflationary pressures, the strength of the business

expansion, developments in foreign exchange markets,

as well as the behavior of the aggregates. 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 percent. 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 September 22, 1987.

The meeting adjourned.

Secretary