FOMC Minutes

Meeting of the Federal Open Market Committee

February 9-10, 1988

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, February 9, 1988, at 3:00 p.m.,

and continuing on Wednesday, February 10, 1988, at 9:00 a.m.

PRESENT:

Mr. Greenspan, 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, 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 Boston, respectively

Mr. Kohn, Secretary and Staff Adviser

Mr. Bernard, Assistant Secretary

Mrs Loney, Deputy Assistant Secretary

Mr. Bradfield General Counsel

Mr. Patrikis, 1 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

1/

Attended Wednesday session only.

2/9-10/88

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. Gillum, 1 Economist, Division of Monetary Affairs

Board of Governors

Mr. Wascher, 1 Economist, 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, R. Davis,

and Ms. Tschinkel, Senior Vice Presidents,

Federal Reserve Banks of St. Louis, San Francisco,

Richmond, Cleveland, New York, and Atlanta,

respectively

Messrs. McNees and Cacy, Vice Presidents, Federal Reserve

Banks of Boston and Kansas City, respectively

Mr. Vangel, Assistant Vice President, 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 December 15-16, 1987, and

January 5, 1988, 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 December 16, 1987, through February 9, 1988,

were ratified.

By unanimous vote, System open market transactions in government

securities and federal agency obligations during the period December 16, 1987,

through February 9, 1988, were ratified.

1/

Attended portion of meeting relating to the Committee's discussion

and action on monetary growth ranges for 1988.

-3-

2/9-10/88

By unanimous vote, the following longer-run policy for 1988 was

approved by the Committee:

The Federal Open Market Committee seeks monetary and

financial conditions that will foster reasonable price

stability over time, promote growth in output on a sustain

able basis, and contribute to an improved pattern of inter

national transactions. In furtherance of these objectives,

the Committee at this meeting established growth ranges

of 4 to 8 percent for both M2 and M3, measured from the

fourth quarter of 1987 to the fourth quarter of 1988.

The monitoring range for growth in total domestic non

financial debt was set at 7 to 11 percent for the year.

With respect to M1,the Committee again decided not

to establish a specific target for 1988. The behavior of

this aggregate in relation to economic activity and prices

has become very sensitive to changes in interest rates,

among other factors, as evidenced by sharp swings in its

velocity in recent years. Consequently, 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.

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 indicated

that economic activity continued to expand rapidly in

the fourth quarter but that the advance reflected a

build-up in inventories as domestic final demands

weakened. The growth in output appeared to have slowed

around year-end. Total nonfarm payroll employment rose

much less in January than on average over the previous

three months; the manufacturing sector also recorded

reduced employment growth in January. The civilian

unemployment rate, at 5.8 percent in January, was un

changed from December. Growth in industrial production

moderated further in December. Retail sales picked up

in December, buoyed by improved auto sales, but remained

below levels reached during the summer. Indicators of

business capital spending were mixed late in the year.

Housing starts fell markedly in December, and were down

somewhat on balance in the fourth quarter from the

2/9-10/88

-4average pace in the second and third quarters. The

nominal U.S. merchandise trade deficit declined

substantially in November. For October and November

combined, the deficit rose slightly from the average

rate in the third quarter, but in real terms the deficit

was estimated to have narrowed further. The rise in

consumer prices slowed and producer prices fell in

late 1987, reflecting declines in energy prices; wage

trends have shown little change in recent months.

Most interest rates were down substantially on balance

since the Committee's meeting in mid-December. In the

Treasury securities market, long-term yields fell consider

ably more than short-term rates. Broad indexes of stock

prices rose somewhat on balance over the intermeeting

period in still relatively volatile trading. The trade

weighted foreign exchange value of the dollar in terms of

the other G-10 currencies declined further in the second

half of December but recovered after the turn of the year

and has increased moderately on balance since the December

meeting.

Growth of M2 and M3 strengthened substantially in

January after slowing over November and December. For

1987 as a whole, expansion of M2 fell considerably below

the lower end of the range established by the Committee

for the year, while growth of M3 was at the lower end of

its range. Growth of M1 surged in January following two

months of declines. For the year 1987, M1 growth was

marginally below that of nominal GNP, and expansion in

total domestic nonfinancial debt was at the midpoint of

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 sustain

able basis, and contribute to an improved pattern of inter

national transactions. In furtherance of these objectives,

the Committee at this meeting established growth ranges

of 4 to 8 percent for both M2 and M3, measured from the

fourth quarter of 1987 to the fourth quarter of 1988.

The monitoring range for growth in total domestic non

financial debt was set at 7 to 11 percent for the year.

2/9-10/88

M1,the Committee again decided not

With respect to

to establish a specific target for 1988. The behavior of

this aggregate in relation to economic activity and prices

has become very sensitive to changes in interest rates,

among other factors, as evidenced by sharp swings in its

velocity in recent years. Consequently, 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.

In the implementation of policy for the immediate

future, the Committee seeks to maintain the slightly

reduced degree of pressure on reserve positions sought

in recent days. The Committee agrees that the current

more normal approach to open market operations remains

appropriate; still sensitive conditions in financial

markets and uncertainties in the economic outlook may

continue to call for some flexibility in 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 aggre

gates. The contemplated reserve conditions are expected

to be consistent with growth in both M2 and M3 over the

period from November through March at annual rates of

about 6 to 7 percent. 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 March 29, 1988.

The meeting adjourned.

Secretary