FOMC Minutes

Meeting of the Federal Open Market Committee

August 22, 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, August 22, 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. Forrestal and Parry, Presidents of the

Federal Reserve Banks of 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,

Scheld, 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

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

Mr. Ettin, Deputy Director, Division of Research and

Statistics, Board of Governors

Mr. Keleher, Assistant to Governor Johnson, Office of

Board Members, Board of Governors

Mr. Smith, Assistant Director, Division of

International Finance, Board of Governors

Ms. Low, Open Market Secretariat Assistant, Division of

Monetary Affairs, Board of Governors

Messrs. Hendricks and Monhollon, First Vice Presidents,

Federal Reserve Banks of Cleveland and Richmond,

respectively

Messrs. Beebe, Broaddus, Rolnick, Rosenblum, and

Ms. Tschinkel, Senior Vice Presidents, Federal

Reserve Banks of San Francisco, Richmond,

Minneapolis, Dallas, and Atlanta, respectively

Ms. Lovett and Messrs. McNees and Meyer, Vice Presidents,

Federal Reserve Banks of New York, Boston, and

Philadelphia, respectively

By unanimous vote, the minutes of actions taken at the meeting of

the Federal Open Market Committee held on July 5-6, 1989, were approved.

By unanimous vote, System open market transactions in foreign

currencies during the period July 6, 1989, through August 21, 1989, were

ratified.

By unanimous vote, the Committee approved, as part of a multi

lateral bridge financing for Mexico, a special reciprocal currency

arrangement of $125 million with the Bank of Mexico.

This facility

supplements the regular $700 million arrangement with the Bank of Mexico

specified in paragraph 2 of the Authorization for Foreign Currency

Operations.

The Committee delegated to Chairman Greenspan authority to

give final clearance for actual drawings on these facilities, subject to

his determination that the appropriate terms and conditions had been met.

By unanimous vote, System open market transactions in government

securities and federal agency obligations during the period July 6, 1989,

through August 21, 1989, were ratified.

1. Left meeting after action to approve special reciprocal currency

arrangement with the Bank of Mexico.

With Mr. Guffey 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:

The information reviewed at this meeting suggests

that economic activity has continued to expand at a

moderate pace in recent months. In July, total

nonfarm payroll employment rose appreciably further

after a large advance in June, and the civilian

unemployment rate, at 5.2 percent, remained close to

its average level in earlier months of the year.

Industrial production edged higher in July, continuing

the slower growth observed since the beginning of the

year. Retail sales have grown at a moderate pace in

recent months. Housing starts rose slightly further

in July following a large gain in June. Recent

indicators of business capital spending suggest slower

growth after the substantial increase in the first

half of the year. The nominal U.S. merchandise trade

deficit narrowed considerably in June and for the

second quarter as a whole was about unchanged from a

substantially reduced average value in the first

quarter. Partly reflecting reductions in energy

prices, increases in consumer prices moderated in June

and July. The latest wage data suggest no change in

prevailing trends.

Interest rates show mixed changes on balance

since the Committee meeting on July 5-6. In foreign

exchange markets, the trade-weighted value of the

dollar in terms of the other G-10 currencies has risen

on balance over the intermeeting period.

M2 and M3 grew markedly in July, lifting

expansion of M2 thus far this year to around the lower

end of the Committee's annual range, and keeping M3

somewhat above 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 inter

national transactions. In furtherance of these

objectives, the Committee at its meeting in July

reaffirmed 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 in July 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, 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 progress toward price stability, the

strength of the business expansion, the behavior of

the monetary aggregates, and developments in foreign

exchange and domestic financial markets, slightly

greater reserve restraint might or slightly 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 9 and 7 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, October 3, 1989.

The meeting adjourned.

Secretary

SECRETARY'S NOTES:

Effective September 19, 1989, the Committee

approved an increase from $5 billion to $10

billion in the amount of eligible foreign

currencies that the Federal Reserve would be

prepared to warehouse for the U.S. Treasury or

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the Exchange Stabilization Fund for periods of

up to 12 months. All the members voted to

approve this action except for Mr. Johnson who

abstained.

With Messrs. Angell and Johnson dissenting,

the Committee approved, effective September 25,

1989, an increase from $18 billion to $20

billion in the limit on the System's overall

open position in all foreign currencies

specified in paragraph 1D of the Authorization

for Foreign Currency Operations.