FOMC Minutes

Meeting of the Federal Open Market Committee

September 22, 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, September 22, 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 and Melzer, Presidents of the Federal

Reserve Banks of Kansas City and St. Louis,

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, 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

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

Mr. Gemmill, Staff Adviser, Division of International

Finance, Board of Governors

Mr. Slifman, Deputy Associate Director, Division of

Research and Statistics, Board of Governors

Ms. Low, Open Market Secretariat Assistant, Office of

Board Members, Board of Governors

Messrs. Eisenmenger and Hendricks, First Vice Presidents,

Federal Reserve Banks of Boston and Cleveland,

respectively

Messrs. Balbach, Broaddus, T. Davis, and Ms. Tshinkel,

Senior Vice Presidents, Federal Reserve Banks

of St. Louis, Richmond, Kansas City, and

and Atlanta, respectively

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

Bank of New York

Messrs. Judd, McNees, and Sniderman, Vice Presidents,

Federal Reserve Banks of San Francisco, Boston,

and Cleveland, respectively

Ms. Ann-Marie 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 August 18, 1987, were approved.

By unanimous vote, System open market transactions in government

securities and federal agency obligations during the period August 18, 1987,

through September 21, 1987, were ratified.

By unanimous vote, System open market transactions in foreign

currencies during the period August 18, 1987, through September 21, 1987,

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:

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-3The information reviewed at this meeting suggests

on balance that economic activity is expanding in the

current quarter at a pace similar to that in the first

half of the year. Total nonfarm payroll employment

rose further in August after a large increase in July.

The civilian unemployment rate remained at 6.0 percent,

well below its level at the start of the year. Indus

trial production increased further in August following

large gains in other recent months. Consumer spending,

bolstered by a rise in auto sales, posted a large

increase in August. Recent indicators of business

capital spending point to some strength, particularly

in equipment outlays. Housing starts fell in August

to a level a little below their average in other

recent months. Preliminary data suggest that the

nominal U.S. merchandise trade deficit was unchanged

in July from its June level but larger than the second

quarter average. The rise in consumer and producer

prices has slowed in recent months, reflecting favor

able price developments in food and energy.

Growth of the monetary aggregates strengthened in

August, but for 1987 through August, expansion of both

M2 and M3 remained below the lower ends of the ranges

established by the Committee for the year; growth in

M1 has been at a much reduced pace in 1987. Expansion

in total domestic nonfinancial debt has moderated this

year. Interest rates have risen considerably since the

meeting on August 18. On September 4, the Federal

Reserve Board approved an increase in the discount rate

from 5-1/2 to 6 percent. In foreign exchange markets,

the trade-weighted value of the dollar in terms of

the other G-10 currencies has depreciated on balance

since the latest meeting; some of the decline in the

dollar early in the intermeeting period was later

reversed.

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 re

spect to velocity and signs of the potential for some

strengthening in underlying inflationary pressures,

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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 non

financial 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.

In the implementation of policy for the immediate

future, the Committee seeks to maintain the degree of

pressure on reserve positions sought in recent weeks.

Somewhat greater reserve restraint or somewhat lesser

reserve restraint would 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 August through December at

annual rates of around 4 percent and around 6 percent,

respectively. M1 is expected to continue to grow

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relatively slowly. 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 5 to 9 percent.

It was agreed that the next meeting of the Committee would be

held on November 3, 1987.

The meeting adjourned.

Secretary

Secretary's note: By unanimous vote, Mr. Ernest T.

Patrikis was elected as Deputy General Counsel of the

Federal Open Market Committee, effective October 28,

1987, to serve until the election of his successor at

the first meeting of the Committee after February 29,

1988, with the understanding that in the event of

discontinuance of his offical connection with the

Federal Reserve Bank of New York, he would cease to

have any official connection with the Federal Open

Market Committee.