FOMC Minutes

Meeting of the Federal Open Market Committee

November 3, 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, November 3, 1987, at 9:30 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, Hoskins, 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 Cleveland, 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. Fousek, 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

Mr. Slifman, Deputy Associate Director, Division of

Research and Statistics, Board of Governors

Ms. Low, Open Market Secretariat Assistant, Division of

Monetary Affairs, Board of Governors

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

Mmes. Munnell and Tshinkel, Senior Vice Presidents

Federal Reserve Banks of St. Louis, San Francisco,

Richmond, Cleveland, Kansas City, Boston, and

Atlanta, respectively

Ms. Lovett, Vice President, Federal Reserve Bank of

New York

Mr. Weber, Assistant Vice President, Federal Reserve

Bank of Minneapolis

Secretary's Note: Prior to this meeting, notice

had been received of the election of W. Lee Hoskins

as an alternate member of the Federal Open Market

Committee for the period October 9, 1987 through

February 29, 1988, and Mr. Hoskins had executed

his Oath of Office.

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

of the Federal Open Market Committee held on September 22 1987, were approved.

By unanimous vote, System open market transactions in government

securities and federal agency obligations during the period September 22, 1987,

through November 2, 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 $9 billion

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

government and federal agency securities for the intermeeting period ending

December 16, 1987.

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By unanimous vote, System open market transactions in foreign

currencies during the period September 22, 1987, through November 2, 1987

were ratified.

By unanimous vote, the Committee authorized the renewal for further

periods of one year of the System's reciprocal currency ("swap") arrangements

having the amounts and maturity dates indicated below:

Amount of

Foreign bank

arrangement

(millions of

$ equivalent)

Austrian National Bank

National Bank of Belgium

Bank of Canada

$ 250.0

1,000.0

National Bank of Denmark

250.0

Maturity

date

4,000.0

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12/17/87

12/28/87

12/29/87

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600.0

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1,250.0

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12 mos.

2,000.0

Bank of England

3,000.0

Bank of France

2,000.0

6,000.0

3,000.0

German Federal Bank

Bank of Italy

Bank of Japan

Bank of Mexico

Netherlands Bank

Bank of Norway

Bank of Sweden

Swiss National Bank

Term

(months)

"

5,000.0

700.0

500.0

"

250.0

300.0

"

Bank for International

Settlements

Swiss francs

Other authorized

European currencies

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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The economic information available at this meeting

was reviewed against the backdrop of extraordinary develop

ments in financial markets in the period since the previous

Committee meeting on September 22,

Share prices in the

stock market were down sharply. Following a particularly

large decline of stock prices in mid-October, interest

rates fell steeply and increases that had occurred during

the first part of the intermeeting period subsequently

were more than reversed on most types of debt obligations.

Foreign exchange markets were relatively calm over most

of the intermeeting period, but the dollar came under

significant downward pressure late in the period.

In the third quarter economic activity had expanded

at a fairly brisk pace. Total nonfarm payroll employment

rose further in September, with the manufacturing sector

continuing to record relatively sizable gains. The

civilian unemployment rate edged down to 5.9 percent.

Industrial production increased somewhat further in

September following large gains in other recent months.

Retail sales declined somewhat in September, but consumer

spending, bolstered by a rise in auto sales, posted a

large increase over the third quarter. Business capital

spending was strong in the third quarter and forward

indicators pointed to continuing gains. Housing starts

were up in September but were little changed in the

third quarter from their second-quarter average. The

nominal U.S. merchandise trade deficit narrowed in

August, but the July-August average remained above

the second-quarter rate. The rise in consumer and

producer prices was relatively moderate in recent

months following more rapid increases earlier in

the year.

Growth of the monetary aggregates appeared to have

strengthened in October, with some of the strength

reflecting heightened demands for transaction balances

and other liquid assets in the latter part of the

month. Even so, for 1987 through October, expansion

of M2 evidently moved closer to, but remained below,

the lower end of the range established by the Committee

for the year, while growth of M3 was around the lower

end of its range.

Expansion in total domestic non

financial debt has remained on a more moderate trend

in recent months.

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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 strength

ening 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 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

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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 days.

The Committee recognizes that the volatile conditions

in financial markets and uncertainties in the economic

outlook may continue to call for a special degree of

flexibility in open market operations, depending, in

particular, on demands for liquidity growing out of

recent or prospective developments in financial markets.

Apart from such considerations, somewhat lesser reserve

restraint would, or slightly greater reserve restraint

might, be acceptable depending on the strength of the

business expansion, indications of inflationary pressures,

developments in foreign exchange markets, as well as the

behavior of the monetary aggregates. While the outlook

for monetary growth over the months ahead is subject to

unusual uncertainty, the contemplated reserve conditions

are expected to be consistent with growth in M2 and M3

over the period from September through December at annual

rates of about 6 to 7 percent, but more rapid growth is

possible should preferences for liquidity be particularly

strong. Over the same period, growth in M1 is expected

to be well above its average pace in the previous several

months. 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 December 15-16, 1987.

The meeting adjourned.

Secretary