FOMC Minutes

Meeting of the Federal Open Market Committee

May 16, 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, May 16, 1989, at 9:00 a.m.

PRESENT:

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Ms.

Mr.

Greenspan, Chairman

Corrigan, Vice Chairman

Angell

Guffey

Heller

Johnson

Keehn

Kelley

LaWare

Melzer

Seger

Syron

Messrs. Boehne, Boykin, Hoskins, and Stern, Alternate

Members of the Federal Open Market Committee

Messrs. Black, Forrestal, and Parry, Presidents of the

Federal Reserve Banks of Richmond, Atlanta,

and San Francisco, respectively

Kohn, Secretary and Economist

Bernard, Assistant Secretary

Gillum, Deputy Assistant Secretary

Mattingly, General Counsel

Patrikis, Deputy General Counsel

Prell, Economist

Truman, Economist

Messrs. Balbach, R. Davis, T. Davis, Lindsey,

Ms. Munnell, Messrs. Promisel, 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

-2

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

Mr. Ettin, Deputy Director, Division of Research and

Statistics, Board of Governors

Ms. Zickler, Assistant Director, Division of Research

and Statistics, 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

Ms. Low, Open Market Secretariat Assistant, Division of

Monetary Affairs, Board of Governors

Mr. Thomson, Executive Vice President, Federal Reserve

Bank of San Francisco

Messrs. Broaddus, Lang, Rolnick, Rosenblum, and

Ms. Tschinkel, Senior Vice Presidents, Federal

Reserve Banks of Richmond, Philadelphia, Minneapolis,

Dallas, and Atlanta, respectively

Mr. Sniderman, Vice President, Federal Reserve Bank

of Cleveland

Ms. Krieger, Manager, Open Market Operations,

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 March 28, 1989, were approved.

By unanimous vote, System open market transactions in foreign

currencies during the period March 28, 1989, through May 15, 1989, were

ratified.

With Mr. LaWare dissenting, the Committee approved an increase

from $12.0 billion to $15.0 billion in the limit on the System's overall

open position in all foreign currencies contained in paragraph lD of the

Authorization for Foreign Currency Operations.

This action was effective

immediately.

By unanimous vote, System open market transactions in government

securities and federal agency obligations during the period March 28, 1989,

through May 15, 1989, were ratified.

With Mr. Melzer 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

policy directive:

The information reviewed at this meeting suggests

that the rate of economic growth has slowed in recent

months. Gains in total nonfarm payroll employment

moderated substantially in March and April, and

employment in manufacturing was about unchanged over

the two months. The civilian unemployment rate rose

considerably to 5.3 percent in April. Industrial

production increased in April after declining on

balance in the preceding two months. Growth in

consumer spending has slowed considerably in recent

months. Housing starts declined further in April.

Recent indicators of business capital spending show a

rebound after a decline in the fourth quarter. The

nominal U.S. merchandise trade deficit was smaller on

average in January and February than in the fourth

quarter. Broad measures of prices have risen somewhat

more rapidly in 1989, with a significant contribution

from sharp increases in energy prices.

Interest rates have declined considerably since

the Committee meeting in late March. In foreign

exchange markets, the trade-weighted value of the

dollar in terms of the other G-10 currencies rose

further on balance over the intermeeting period.

Growth of M2 and M3 was sluggish in April,

primarily because of a sizable decline in transactions

balances. Through April, expansion of M2 has been at

a rate below the Committee's range for the year, while

growth of M3 has been in the lower portion of its

range.

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 its meeting in February

established ranges for growth of M2 and M3 of 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, develop

ments in the economy and financial markets, and

progress toward price level stability.

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 or somewhat lesser reserve

restraint would 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 March through June at annual

rates of about 1-1/2 and 4 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

8 to 12 percent.

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

on Wednesday-Thursday, July 5-6, 1989.

The meeting adjourned.

Secretary