FOMC Minutes

Meeting of the Federal Open Market Committee

May 17, 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., on Tuesday, May 17, 1988, at 9:00 a.m.

PRESENT:

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Ms.

Greenspan, Chairman

Corrigan, Vice Chairman

Angell

Black

Forrestal

Heller

Hoskins

Johnson

Kelley

Parry

Seger

Messrs. Guffey, Keehn, Melzer, and Morris, Alternate

Members of the Federal Open Market Committee

Messrs. Boehne, Boykin, and Stern, Presidents of the

Federal Reserve Banks of Philadelphia, Dallas, and

Minneapolis, respectively

Mr. Kohn, Secretary and Economist

Mr. Bernard, Assistant Secretary

Mr. Bradfield, General Counsel

Mr. Prell, Economist

Mr. Truman, Economist

Messrs. Beebe, Broaddus, J. Davis, R.Davis, Lindsey,

Siegman, Simpson, and Slifman, Associate Economists

Mr. Sternlight, Manager for Domestic Operations, System

Open Market Account

Mr. Cross, Manager for Foreign Operations, System

Open Market Account

5/17/88

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

Mr. Ettin, Deputy Director, Division of Research and

Statistics, Board of Governors

Mr. Promisel, Senior Associate Director, Division of

International Finance, Board of Governors

Mr. Keleher, Assistant to Governor Johnson, Office of

Board Members, Board of Governors

Mr. Wajid, Assistant to Governor Heller, Office of

Board Members, Board of Governors

Mr. Whitesell, Economist, Division of Monetary Affairs,

Board of Governors

Ms. Low, Open Market Secretariat Assistant, Division of

Monetary Affairs, Board of Governors

Messrs. Balbach, T. Davis, Lang, Rolnick, Rosenblum,

and Scheld, Senior Vice Presidents, Federal Reserve

Banks of St. Louis, Kansas City, Philadelphia,

Minneapolis, Dallas, and Chicago, respectively

Mr. Fieleke and Ms. Lovett, Vice Presidents, Federal Reserve

Banks of Boston and New York, respectively

Ms. Rosenbaum, 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 March 29, 1988, were approved.

By unanimous vote, System open market transactions in foreign

currencies during the period March 29, 1988, through May 16, 1988, were

ratified.

By unanimous vote, System open market transactions in government

securities and federal agency obligations during the period March 29, 1988,

through May 16, 1988, were ratified.

With Messrs. Hoskins and Parry 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:

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-3The information reviewed at this meeting suggests

continuing strong expansion in economic activity and

rising levels of resource utilization. In April total

nonfarm payroll employment rose further; the increase

included sizable growth in the manufacturing sector.

The civilian unemployment rate fell to 5.4 percent,

down appreciably from its level at the start of the

year. Growth in industrial production picked up

considerably in April from a reduced pace earlier in

the year. Retail sales fell appreciably last month

but estimates of sales in February and March were

revised substantially higher. Indicators of business

capital spending point to substantial gains thus far

this year, notably for equipment. The nominal U.S.

merchandise trade deficit in the first quarter was

substantially smaller than that for the fourth quarter.

Consumer and producer prices have risen more rapidly

recently following a period of relatively modest

increases. Broad measures of labor costs indicate

a substantial advance in the first quarter, in part

because of a rise in payroll taxes.

Interest rates have risen somewhat since the

Committee's meeting on March 29. The trade-weighted

foreign exchange value of the dollar in terms of other

G-10 currencies had increased slightly on balance over

the intermeeting period prior to May 17 and jumped

following release of the March trade data.

M1and M2 grew rapidly in April, owing in part to

a buildup in transaction balances associated with tax

payments, while M3 expanded at a slower pace than in

previous months. Through April, expansion of M2 and M3

was in the upper portion of the ranges established by

the Committee for 1988. Expansion in total domestic

nonfinancial debt appears to be continuing at a pace

close to that in 1987.

The Federal Open Market Committee seeks monetary

and financial conditions that will foster price stability

over time, promote growth in output on a sustainable

basis, and contribute to an improved pattern of inter

national transactions. In furtherance of these objectives,

the Committee at its meeting in February 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 nonfinancial debt was set at 7 to 11

percent for the year.

-4-

5/17/88

With respect to M1,the Committee decided in

February 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. Conse

quently, 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 initial implementation of policy, the

Committee seeks to maintain the existing degree of

pressure on reserve positions. Taking account of

conditions in financial markets, the strength of the

business expansion, indications of inflationary

pressures, developments in foreign exchange markets,

and the behavior of the monetary aggregates, the

Committee expects that a slight increase in the

degree of pressure on reserve positions would be

appropriate in the weeks ahead. Depending on further

developments in these factors, somewhat greater

reserve restraint would, or slightly lesser reserve

restraint might, also be acceptable later in the

intermeeting period. The contemplated reserve

conditions are expected to be consistent with growth

in M2 and M3 over the period from March through June

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 5 to 9 percent.

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

held on June 29-30, 1988.

The meeting adjourned.

Secretary