FOMC Minutes

Meeting of the Federal Open Market Committee

December 18-19, 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 Monday, December 18, 1989, at 1:00 p.m. and continued

on Tuesday, December 19, 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, 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

1. Entered meeting after action to approve minutes of November 14,

1989 meeting.

2. Attended Tuesday session only.

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Messrs. Coyne and Winn,3 Assistants to the Board,

Board of Governors

Mr. Keleher, Assistant to Governor Johnson, Office of

Board Members, Board of Governors

Mr. Ettin, Deputy Director, Division of Research and

Statistics, Board of Governors

Mr. Stockton, Associate Director, Division of Research

and Statistics, Board of Governors

Mr. Hooper, Assistant Director, Division of International

Finance, Board of Governors,

Messrs. Brayton, Gagnon, Ms. Rehm, Messrs. Small, and

Tryon, Economists, Divisions of Research and Statistics,

International Finance, Research and Statistics,

Monetary Affairs, and International Finance,

respectively, Board of Governors

Ms. Low, Open Market Secretariat Assistant, Division of

Monetary Affairs, Board of Governors

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

Ms. Tschinkel, Senior Vice Presidents, Federal Reserve

Banks of San Francisco, Richmond, Cleveland,

Philadelphia, Dallas, and Atlanta, respectively

Messrs. McNees and Miller, Vice Presidents, Federal Reserve

Banks of Boston and Minneapolis, respectively

Mr. Vangel, Assistant Vice President, 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 November 14, 1989, were approved.

By unanimous vote, System open market transactions in foreign

currencies during the period November 14, 1989, through December 18, 1989,

were ratified.

By unanimous vote, paragraph 1.D. of the Authorization for Foreign

Currency Operations was amended to raise from $20 billion to $21 billion

the dollar limit in System Account holdings of foreign currencies.

By unanimous vote, System open market transactions in government

securities and federal agency obligations during the period November 14,

1989, through December 18, 1989, were ratified.

3. Attended Monday session only.

4. Attended Tuesday session covering discussion and action to adopt

domestic policy directive.

5. Left meeting before discussion and action to adopt the domestic

policy directive.

With Messrs. Angell and 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 domestic policy directive:

The information reviewed at this meeting suggests

that economic activity is expanding slowly in the

current quarter. Total nonfarm payroll employment has

increased at a reduced pace on average over the past

several months, with declines continuing in the

manufacturing sector. The civilian unemployment rate

edged up to 5.4 percent in November. Industrial

production rose slightly in November after a decline

in October resulting from strike activity and other

disruptions. Nominal retail sales excluding motor

vehicles strengthened in November, but continued weak

sales of vehicles held total retail sales for the

month to a level that was little changed from the

third-quarter average. Housing starts fell in

November but for the October-November period were up

somewhat on average from their third-quarter level.

Indicators of business capital spending suggest a

weakening in expenditures after a substantial increase

earlier in the year. The preliminary data indicate

that the nominal U.S. merchandise trade deficit

widened appreciably in October from an upward revised

September rate. Broad measures of inflation suggest

that prices have risen more slowly on balance since

midyear, partly reflecting sharp reductions in energy

prices, but the latest data on labor compensation

suggest no significant change in prevailing trends.

Interest rates have changed little on balance

since the Committee meeting on November 14. In

foreign exchange markets, the trade-weighted value of

the dollar in terms of the other G-10 currencies

declined substantially over the intermeeting period,

with a particularly pronounced depreciation against

the German mark and related European currencies in the

last week of the period.

M2 continued to grow fairly briskly in November,

largely reflecting strength in its retail deposit

components; M2 has expanded this year at a pace near

the midpoint of the Committee's annual range. Growth

of M3 picked up in November but has remained more

restrained than that of M2, as assets of thrift

institutions and their associated funding needs

apparently continued to contract; for the year to

date, M3 has grown at a rate a little above the lower

bound of the Committee's annual 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 decrease slightly 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 or slightly 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 November through March at annual

rates of about 8-1/2 and 5-1/2 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 6 to 10

percent.

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

held on Tuesday-Wednesday, February 6-7, 1990.

The meeting adjourned.

Secretary