FOMC Minutes

Meeting of the Federal Open Market Committee

December 15-16, 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., starting on Tuesday, December 15, 1987, at 3:15 p.m.,

and continuing on Wednesday, December 16, 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 1

Kelley

Seger

Stern

Messrs. Black, Hoskins, and Parry, Alternate Members

of the Federal Open Market Committee

Messrs. Guffey, Melzer and Morris, 2 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. Patrikis, Deputy General Counsel

Mr. Truman, Economist (International)

Messrs. Lang, Lindsey, Prell, Rolnick, Rosenblum, Scheld, 1

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

1/

Present for Wednesday session; participated in Tuesday session via telephone

conference from the Federal Reserve Bank of Chicago.

2/

Entered meeting after action to approve minutes of meeting held on

November 3, 1987.

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12/15-16/87

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

Mr. Promisel, Senior Associate Director, Division of

International Finance, Board of Governors

Mr. Slifman, Associate Director, Division of Research

and Statistics, Board of Governors

Mr. Madigan, 1 Assistant Director, Division of Monetary

Affairs, Board of Governors

Mr. Small, 1 Economist, Division of Monetary Affairs,

Board of Governors

Ms. Low, Open Market Secretariat Assistant, Division of

Monetary Affairs, Board of Governors

Mr. Guynn, First Vice President, Federal Reserve Bank

of Atlanta

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

and Ms. Tschinkel, 2 Senior Vice Presidents,

Federal Reserve Banks of St. Louis, San Francisco,

Richmond, Cleveland, Kansas City, and Atlanta,

respectively

Messrs. Frydl and McNees, Vice Presidents, Federal Reserve

Banks of New York and Boston, respectively

Mr. Guentner, Manager, Federal Reserve Bank of New York

Ms. Rosenbaum, 3 Research Officer, Federal Reserve Bank of

Atlanta

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

of the Federal Open Market Committee held on November 3, 1987, were approved.

Secretary's Note: The following actions were taken at the

Wednesday session.

By unanimous vote, System open market transactions in foreign

currencies during the period November 3, 1987 through December 15, 1987,

were ratified.

By unanimous vote, System open market transactions in government

securities and federal agency obligations during the period November 3, 1987,

through December 15, 1987, were ratified.

1/

Attended portion of meeting on Tuesday.

2/

Attended Wednesday session only.

3/

Attended Tuesday session only.

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By unanimous vote, paragraph l(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

February 10, 1988.

With

Mr. Johnson and 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 domestic policy directive:

The economic information reviewed at this meeting

largely reflected the influence of developments that

were under way before the financial disturbances of mid

October. The extent to which those disturbances would

affect the economy remained uncertain. Information

available for the current quarter suggested that the

expansion in economic activity was moderating from a

brisk pace in the third quarter. Total nonfarm payroll

employment rose strongly further over October and

November, with the manufacturing sector recording

relatively large gains. The civilian unemployment

rate, at 5.9 percent in November, remained close to

its level since mid-year. Industrial production also

increased considerably further over October and

November, following sizable advances since late

spring. Retail sales edged up in November after two

months of substantial declines. Recent indicators

of business capital spending suggested modest further

growth after a surge in the third quarter. Housing

starts rose somewhat in November, after slowing in

October, but were little changed from the average

pace in the second and third quarters. The nominal

U.S. merchandise trade deficit in October appeared

to have deteriorated substantially from the average

rate in the third quarter. The rise in broad measures

of prices and wages in recent months generally has

been close to that experienced earlier in the year.

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Financial markets remained somewhat unsettled. Stock

and bond prices continued to fluctuate over a relatively

wide range during the period since the previous Committee

meeting on November 3. On balance, share prices fell

somewhat further in this period. Changes in long-term

yields were mixed while short-term interest rates rose,

especially on short-maturity private market instruments.

The trade-weighted foreign exchange value of the dollar

in terms of the other G-10 currencies declined considerably

further.

The monetary aggregates weakened in November after

strengthening in October in conjunction with a temporary

surge in demands for transaction balances and other liquid

assets in the latter part of that month. For 1987 through

November, expansion of M2 fell somewhat further below the

lower end of the range established by the Committee for

the year, while growth of M3 remained around the lower

end of its range. Growth of M1 was close to that of

nominal GNP for the year to date and expansion in total

domestic nonfinancial debt remained well within the

Committee's monitoring range for the year.

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

might 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 was 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 in July 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.

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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 had 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

would 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 welcomed 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 indicated

in July that in reaching operational decisions over the

balance of the year it would take account of growth in

M1in 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. The Committee

recognizes that still sensitive conditions in financial

markets and uncertainties in the economic outlook may

continue to call for a special degree of flexibility

in open market operations. Taking account of conditions

in financial markets, somewhat lesser reserve restraint

or somewhat greater reserve restraint would 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. The contemplated reserve

conditions are expected to be consistent with growth

in M2 and M3 over the period from November through March

at annual rates of about 5 percent and 6 percent, re

spectively. Over the same period, growth in M1 is

expected to remain relatively limited. 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.

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

held on February 9-10, 1988.

The meeting adjourned.

Secretary