FOMC Minutes

Meeting of the Federal Open Market Committee

July 5-6, 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 Wednesday, July 5, 1989, at 3:00 p.m., and continuing

on Thursday, July 6, 1989, at 9:00 a.m.

PRESENT:

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Ms.

Mr.

Greenspan, Chairman

Corrigan, Vice Chairman

Angell

Guffey

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

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

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,

Promisel, Scheld, Siegman, and Simpson,

Associate Economists

Mr. Cross, Manager for Foreign Operations,

System Open Market Account

1.

Attended Thursday session only.

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

Mr. Ettin, Deputy Director, Division of Research and

Statistics, Board of Governors

Mr. Stockton, Assistant Director, Division of Research

and Statistics, Board of Governors

Mr. Keleher, Assistant to Governor Johnson, Office of

Board Members, Board of Governors

2

Mr. Wajid, Office of Board Members, Board of Governors

Mr. Hooper, Assistant Director, Division of International

Finance, Board of Governors

Ms. Danker, 3 Section Chief, Division of Monetary Affairs,

Board of Governors

Mr. Mahoney, 3Senior Economist, Division of Monetary Affairs,

Board of Governors

Mr. Teplin, 3Economist, Division of Research and Statistics,

Board of Governors

Ms. Low, Open Market Secretariat Assistant, Division of

Monetary Affairs, Board of Governors

Messrs. Beebe, Broaddus, J. Davis, Lang, and Rosenblum,

Senior Vice Presidents, Federal Reserve Banks of San

Francisco, Richmond, Cleveland, Philadelphia, and Dallas,

respectively

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

Banks of New York and Boston, respectively

Mr. Vangel, Assistant Vice President, Federal Reserve Bank

of New York

Mr. Weber, Senior Research Officer, Federal Reserve Bank

of Minneapolis

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 May 16, 1989, were approved.

By unanimous vote, System open market transactions in foreign

currencies during the period May 16, 1989, through July 5, 1989, were

ratified.

By unanimous vote, System open market transactions in government

securities and federal agency obligations during the period May 16, 1989,

through July 5, 1989, were ratified.

2.

3.

Attended Thursday session only.

Attended portion of the meeting relating to the Committee's

discussion of the economic outlook and its longer-run objectives

for monetary and debt aggregates.

By unanimous vote, paragraph 1(a) of the Authorization for

Domestic Open Market Operations was amended to raise from $6 billion to $8

billion the dollar limit on intermeeting changes in System Account holdings

of U.S. Government and federal agency securities for the intermeeting

period ending August 22, 1989.4

Secretary's Note:

Thursday session.

The following actions were taken at the

By unanimous vote, the following ranges for growth in the broader

aggregates and nonfinancial debt for 1989 were 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 reaffirmed at this meeting

the ranges it had established in February 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 non

financial debt also was maintained at 6-1/2 to 10-1/2

percent for the year.

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

1990 was approved by the Committee:

For 1990, on a tentative basis, the Committee

agreed to use the same ranges as in 1989 for

growth in each of the monetary aggregates and

debt, measured from the fourth quarter of 1989 to

the fourth quarter of 1990. 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.

4. Subsequently, available members of the Committee, or their

alternates, unanimously approved a further increase of $2 billion, to

$10 billion, in the intermeeting limit, effective July 31, 1989.

Messrs. Heller and LaWare were absent and did not vote. Messrs. Boykin

and Oltman voted as alternates for Messrs. Melzer and Corrigan,

respectively.

With Ms. Seger dissenting from the operational paragrah 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 tends

to confirm earlier indications that economic growth

has slowed this year. Gains in total nonfarm payroll

employment have moderated substantially in recent

months, but the civilian unemployment rate, at 5.2

percent in May, remained close to its average level in

earlier months of the year. Industrial production

increased on balance in April and May at about the

reduced rate experienced earlier in the year. Growth

in consumer spending has weakened considerably this

year. Housing starts declined slightly further in

May. Recent indicators of business capital spending

suggest a substantial additional increase in the

second quarter after a rebound in the first quarter.

The nominal U.S. merchandise trade deficit narrowed in

April from a substantially reduced average value in

the first quarter. Broad measures of prices have

risen more rapidly this year than in 1988, reflecting

sharp increases in energy and food prices.

Interest rates have fallen since the Committee

meeting on May 16, with the largest declines generally

occurring in long-term markets. In foreign exchange

markets, the trade-weighted value of the dollar in

terms of the other G-10 currencies rose sharply

earlier in the intermeeting period but subsequently

more than retraced that rise in often volatile

trading.

M2 and M3 declined in May, primarily because of

sizable reductions in transaction and other liquid

balances arising from the clearing of unusually large

tax payments; data through mid-June point to a rebound

in these measures of money. Thus far this year, ex

pansion of M2 has been at a rate below the Committee's

annual range, while growth of M3 has been around the

lower bound of the Committee's 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 reaffirmed at this meeting

the ranges it had established in February 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 non

financial debt also was maintained at 6-1/2 to 10-1/2

percent for the year. For 1990, on a tentative basis,

the Committee agreed to use the same ranges as in

1989 for growth in each of the monetary aggregates and

debt, measured from the fourth quarter of 1989 to the

fourth quarter of 1990. 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.

In the implementation of policy for the immediate

future, the Committee seeks to decrease slightly 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 inter

meeting period. The contemplated reserve conditions

are expected to be consistent with growth of M2 and M3

over the period from June through September at annual

rates of about 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 7 to 11 percent.

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

on Tuesday, August 22, 1989.

The meeting adjourned.

Secretary