FOMC Minutes

Meeting of the Federal Open Market Committee

February 7-8, 1989

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, February 7, 1989, at 3:00 p.m. and

continuing on Wednesday, February 8, 1989, at 9:30 a.m.

PRESENT:

Greenspan, Chairman

Corrigan, Vice Chairman

Angell

Black

Forrestal

Heller

Hoskins

Johnson

Kelley

LaWare

Parry

Seger

Messrs. Guffey, Keehn, Melzer, and Syron, 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

Kohn, Secretary and Economist

Bernard, Assistant Secretary

Patrikis, Deputy General Counsel

Prell, Economist

Mr. Truman, Economist

Mr.

Mr.

Mr.

Mr.

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

Lindsey, Siegman, Simpson, and Ms. Tschinkel,

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.

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

2

3

Messrs. Hooper, Madigan, and Stockton, Assistant

Directors, Divisions of International Finance, Monetary

Affairs, and Research and Statistics, respectively,

Board of Governors

2

3

3

Messrs. Brayton, Duca, and Rosine, Economists, Divisions of

Research and Statistics, Monetary Affairs, and Research

and Statistics, respectively, 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. Gillum, Economist, Open Market Secretariat, Division

of Monetary Affairs, Board of Governors

Ms. Low, Open Market Secretariat Assistant, Division of

Monetary Affairs, Board of Governors

Messrs. T. Davis, Lang, Rolnick, Rosenblum, and Scheld,

Senior Vice Presidents, Federal Reserve Banks of

Kansas City, Philadelphia, Minneapolis, Dallas,

and Chicago, respectively

Messrs. Burger and McNees, Vice Presidents,

Federal Reserve Banks of St. Louis and Boston,

respectively

Ms. Krieger, Manager, Open Market Operations,

Federal Reserve Bank of New York

Secretary's Note: Prior to this meeting, notice

had been received of the election of Richard F. Syron

as an alternate member of the Federal Open Market

Committee for the period January 1, 1989 through

February 28, 1989, and Mr. Syron 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 December 13-14, 1988, were

approved.

2. Attended portion of meeting relating to the Committee's discussion

of the economic outlook.

3. Attended portion of meeting relating to the Committee's discussion

of the economic outlook and its longer-run objectives for monetary

and debt aggregates.

-3-

By unanimous vote, System open market transactions in foreign

currencies during the period December 14, 1988, through February 7, 1989,

were ratified.

By unanimous vote, System open market transactions in government

securities and federal agency obligations during the period December 14,

1988, through February 7, 1989, were ratified.

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

Wednesday session.

With Mr. Hoskins dissenting, the following longer-run policy for

1989 was approved by the Committee:

The Federal Open Market Committee seeks monetary

and financial conditions that will foster price

stability, promote growth in output on a sustainable

basis, and contribute to an improved pattern of

international transactions. In furtherance of these

objectives, the Committee at this meeting reaffirmed

its decision of late June to lower the ranges for

growth of M2 and M3 to 3 to 7 percent and 3-1/2 to

7-1/2 percent, respectively, measured from the

fourth quarter of 1988 to the fourth quarter of

1989. The monitoring range for growth of total

domestic nonfinancial debt was set at 6-1/2 to 10

1/2 percent for the year. The behavior of the

monetary aggregates will continue to be evaluated in

the light of movements in their velocities,

developments in the economy and financial markets,

and progress toward price level stability.

With Messrs. Hoskins and Parry dissenting from the operational

paragraph on policy implementation in the period immediately ahead, 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 suggests

that, apart from the direct effects of the drought,

economic activity has continued to expand at a fairly

vigorous pace. After strong gains in the fourth

quarter, total nonfarm payroll employment rose sharply

-4in January, including a sizable increase in manu

facturing. The civilian unemployment rate, at 5.4

percent in January, remained in the lower part of the

range that has prevailed since the early spring of last

year. Industrial production rose appreciably further in

December and January. Housing starts declined somewhat

in December but were up substantially on balance in the

fourth quarter. Consumer spending advanced considerably

in the fourth quarter, in part reflecting stronger sales

of durable goods. Indicators of business capital

spending suggest some weakening in recent months. The

nominal U.S. merchandise trade deficit was slightly

larger on average in October and November than in the

third quarter. The latest information on prices

suggests little change from recent trends, while wages

have tended to accelerate.

The federal funds rate and Treasury bill rates have

risen since the Committee meeting in mid-December; other

short-term interest rates are generally unchanged to

somewhat lower. Bond yields have declined somewhat. In

foreign exchange markets, the trade-weighted value of

the dollar in terms of the other G-10 currencies rose

substantially over the intermeeting period.

M2 and M3 weakened appreciably in January, espe

cially M2. For the year 1988, M2 expanded at a rate a

little below, and M3 at a rate around, the midpoint of

the ranges established by the Committee. M1 has changed

little on balance over the past several months; it grew

about 4-1/4 percent in 1988. Expansion of total

domestic nonfinancial debt appears to have moderated

somewhat in 1988 to a pace around the midpoint of the

Committee's monitoring range for the year.

The Federal Open Market Committee seeks monetary

and financial conditions that will foster price

stability, promote growth in output on a sustainable

basis, and contribute to an improved pattern of

international transactions. In furtherance of these

objectives, the Committee at this meeting reaffirmed its

decision of late June to lower the ranges for growth of

M2 and M3 to 3 to 7 percent and 3-1/2 to 7-1/2 percent,

respectively, measured from the fourth quarter of 1988

to the fourth quarter of 1989. The monitoring range for

growth of total domestic nonfinancial debt was set at

6-1/2 to 10-1/2 percent for the year. The behavior of

the monetary aggregates will continue to be evaluated in

the light of movements in their velocities, developments

in the economy and financial markets, and progress

toward price level stability.

-5

In the implementation of policy for the immediate

future, the Committee seeks to maintain the existing

degree of pressure on reserve positions. Taking account

of indications of inflationary pressures, the strength

of the business expansion, the behavior of the monetary

aggregates, and developments in foreign exchange and

domestic financial markets, somewhat greater reserve

restraint would, or slightly lesser reserve restraint

might, be acceptable in the intermeeting period. The

contemplated reserve conditions are expected to be

consistent with growth of M2 and M3 over the period from

December through March at annual rates of about 2 and

3-1/2 percent, respectively. 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 7 to 11 percent.

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

on Tuesday March 28, 1989.

The meeting adjourned.

Secretary