fomc minutes · July 5, 1994

FOMC Minutes

Meeting of July 5-6, 1994

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., beginning on Tuesday, July 5, 1994, at 2:30 p.m.

and continuing on Wednesday, July 6, 1994, at 9:00 a.m.

PRESENT:

Mr. Greenspan, Chairman

Mr. McDonough, Vice Chairman

Mr. Blinder

Mr. Broaddus

Mr. Forrestal

Mr. Jordan

Mr. Kelley

Mr. LaWare

Mr. Lindsey

Mr. Parry

Ms. Phillips

Messrs. Hoenig, Keehn, and Melzer, Alternate

Members of the Federal Open Market Committee

Messrs. Boehne, McTeer, and Stern, Presidents of

the Federal Reserve Banks of Philadelphia,

Dallas, and Minneapolis respectively

Mr. Conrad and Ms. Minehan, First Vice Presidents,

Federal Reserve Banks of Chicago and Boston

respectively

Mr. Kohn, Secretary and Economist

Mr. Bernard, Deputy Secretary

Mr. Coyne, Assistant Secretary

Mr. Gillum, Assistant Secretary

Mr. Mattingly, General Counsel

Mr. Patrikis, Deputy General Counsel

Mr. Prell, Economist

Mr. Truman, Economist

Messrs. Beebe, Goodfriend, Lindsey, Promisel,

Siegman, Simpson, and Ms. Tschinkel, Associate

Economists

Ms. Lovett, Manager for Domestic Operations, System

Open Market Account

Mr. Fisher, Manager for Foreign Operations, System

Open Market Account

Mr. Winn, Assistant to the Board, Office of Board

Members, Board of Governors

Mr. Ettin, Deputy Director, Division of Research

and Statistics, Board of Governors

Mr. Madigan, Associate Director, Division of

Monetary Affairs, Board of Governors

Mr. Struckmeyer and Ms. Zickler, Assistant

Directors, Division of Research and Statistics,

Board of Governors

Mr. Oliner,1Senior Economist, Division of

Research and Statistics, Board of Governors

Ms. Edwards,1 Economist, Division of Monetary

Affairs, Board of Governors

Ms. Low, Open Market Secretariat Assistant,

Division of Monetary Affairs, Board of

Governors

Mr. Bennett, Ms. Browne, Messrs. Davis, Dewald,

Lang, Rolnick, Rosenblum, and Scheld, Senior

Vice Presidents, Federal Reserve Banks of New

York, Boston, Kansas City, St. Louis,

Philadelphia, Minneapolis, Dallas, and Chicago

respectively

Messrs. Guentner and Sniderman, Vice Presidents,

Federal Reserve Banks of New York and Cleveland

respectively

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

outlook and its longer-run growth objectives for monetary and debt aggregates.

Secretary's Note: Advice had been received that Alan S. Blinder had executed his oath

of office as a member of the Federal Open Market Committee.

By unanimous vote, the minutes of the meeting of the Federal Open Market Committee held on May

17, 1994, were approved.

The Manager for Foreign Operations reported on developments in foreign exchange markets and on

System open market transactions in foreign currencies during the period May 17, 1994, to July 5,

1994.

The Committee ratified these transactions.

Votes for this action: Messrs. Greenspan, McDonough, Blinder, Broaddus, Forrestal, Kelley,

LaWare, Parry, and Ms. Phillips.

Votes against this action: Messrs. Jordan and Lindsey.

Messrs. Jordan and Lindsey dissented from this action, although they agreed that the foreign

exchange transactions conducted during the intermeeting period were authorized under the

Committee's rules. Their dissents were based on their strong reservations about the efficacy of

sterilized intervention in most circumstances, including those prevailing during the intermeeting

period. In their view, to the extent that repeated intervention failed to achieve stated or perceived

objectives, questions would tend to arise about the credibility of monetary policy more generally.

The Manager for Domestic Operations reported on developments in domestic financial markets and

on System open market transactions in government securities and federal agency obligations during

the period May 17, 1994, to July 5, 1994. By unanimous vote, the Committee ratified these

transactions.

The Committee then turned to a discussion of the economic and financial outlook and the

implementation of monetary policy over the intermeeting period ahead. A summary of the economic

and financial information available at the time of the meeting and of the Committee's discussion is

provided below, followed by the domestic policy directive that was approved by the Committee and

issued to the Federal Reserve Bank of New York.

The information reviewed at this meeting suggested that economic activity recorded another

substantial gain in the second quarter. Although consumer spending and homebuying apparently had

increased at a slower pace, business spending on durable equipment remained quite strong and

investment in nonresidential structures rebounded from a weather-depressed level in the first quarter.

In addition, the rate of nonfarm inventory investment evidently had picked up in the second quarter.

Levels of resource utilization had risen further: factory operating rates were at relatively high levels,

and the slack in labor markets had narrowed considerably over the first half of the year to what

appeared to be very low levels. Increases in consumer and producer prices had remained moderate in

recent months, but prices of many basic industrial materials had risen.

Nonfarm payroll employment advanced somewhat less rapidly in May after the brisk increases of

recent months; however, the average workweek of production and nonsupervisory workers reached

its highest level since 1987. The reduction in job gains was widespread by sector--including business

services; finance, insurance, and real estate; manufacturing; and construction. Employment in

transportation rebounded, reflecting the end of a Teamsters strike. The civilian unemployment rate,

measured on the new basis introduced in January, declined sharply in May, to 6.0 percent; the decline

might have been overstated as a result of seasonal adjustment problems, but even after correcting for

these factors, the unemployment rate had fallen sharply since late 1993.

The rise in industrial production slackened in April and May after strong first-quarter gains. Much of

the slowing was the result of capacity constraints that prevented normal seasonal increases in the

production of motor vehicles. Growth of output of manufactured goods other than motor vehicles

and parts was at a slightly less robust pace than in the first quarter but close to the rapid rate seen in

1993; business equipment and construction supplies continued to be areas of strength. The overall

rate of utilization in manufacturing stayed at a high level in May, with most major industry groups

operating at or near capacity. In addition to motor vehicles, capacity constraints were evident in the

petroleum products and nonelectrical machinery industry groups and in some individual product

lines in other industries.

Real personal consumption expenditures fell on balance in April and May after a strong advance

earlier in the year, but the level of expenditures for the two months combined was a little above the

first-quarter average. The recent slowdown in consumer spending in large part reflected reduced

outlays for motor vehicles. Spending for durable goods other than motor vehicles increased over

April and May at about the first-quarter pace. Outlays for nondurable goods were down on balance in

April and May, while spending for services in May more than reversed a small April decline.

Housing activity had rebounded from weather disruptions early in the year to a pace close to the

elevated fourth-quarter rate. Single-family starts edged down in May after declining substantially in

April but were still at a relatively high level. While the cash-flow affordability of home ownership

had fallen since late last year, it remained at favorable levels in comparison with recent years.

Multifamily starts in May were at their highest level in more than three years; most of the pickup

occurred in the South, where vacancy rates had declined recently.

Shipments of nondefense capital goods other than aircraft and parts posted a further solid gain in

May, although the upward trend appeared to have moderated in recent months. Sales of heavy trucks

also were strong in April and May. Shipments of aircraft declined sharply in April (latest available

data), retracing much of a March surge. Available data on orders for nondefense capital goods

pointed to a continued strong uptrend in business spending on durable equipment. Nonresidential

construction picked up in April and May from a weather-depressed slump in the first quarter.

Business inventories increased in April, more than reversing a March runoff; the overall pace of

accumulation remained moderate, and buildups were largely concentrated in segments of the

economy where market demand was robust. In manufacturing, inventories increased in April and

May after a small drawdown in March. The rise in stocks was in line with shipments, and the ratio of

stocks to shipments stayed at a very low level. In April (latest available data), wholesale inventories

retraced most of the sizable March drawdown. The ratio of inventories to sales in this sector

remained below the range that has prevailed in recent years. At the retail level, inventory stocks

again edged higher; the inventory-to-sales ratio for this sector was well within the range observed

over the past year.

The nominal deficit on U.S. trade in goods and services widened in April but was little changed from

the average for the first quarter; over the first four months of 1994, the deficit was significantly

larger than that recorded in the fourth quarter of last year. The value of exports of goods and services

was down somewhat in April, retracing part of a sharp runup in March. The uptrend in exports since

last fall has been led by shipments of machinery, especially to expanding markets in Asia. The value

of imports of goods and services was about the same in April as in March; increases in consumer

goods, machinery, and oil were offset by declines in other categories. The economies of all the major

foreign industrial countries expanded in the first quarter of 1994. Growth resumed in Japan, western

Germany, and France, while economic expansion continued at a healthy pace in the United Kingdom

and Canada.

Broad indexes of consumer and producer prices had risen moderately through the first five months of

the year. In May, the rise in the overall index of consumer prices continued to be held down by

declines in energy prices. Excluding the food and energy components, the increase in consumer

prices in the twelve months ending in May was smaller than that for the previous twelve months.

Producer prices of finished goods continued to edge lower in May, reflecting further declines in

prices of finished foods and energy goods. Producer prices for items other than food and energy

increased at a faster rate in May, but the change over the twelve-month period ending in May was

very small. At an earlier stage of processing, producer prices of crude materials other than food and

energy registered another small decline in May, although the index was substantially higher in May

than a year ago. Furthermore, prices of many basic industrial materials had remained under upward

pressure. Average hourly earnings of production or nonsupervisory workers increased by a larger

amount in May than in April, but the rise over the twelve months ended in May was about the same

as in the previous twelve months.

At its meeting on May 17, 1994, the Committee adopted a directive that called for increasing

somewhat the degree of pressure on reserve positions, taking account of a possible increase in the

discount rate. The directive did not include a presumption about the likely direction of any further

adjustment to policy during the intermeeting period. The directive stated that in the context of the

Committee's long-run objectives for price stability and sustainable economic growth, and giving

careful consideration to economic, financial, and monetary developments, slightly greater or slightly

lesser reserve restraint might be acceptable during the intermeeting period. The reserve conditions

associated with this directive were expected to be consistent with modest growth of M2 and M3 over

coming months.

Immediately after the conclusion of the May meeting, the Board of Governors approved a 1/2

percentage point increase in the discount rate, to 3-1/2 percent, and the Committee permitted the full

amount of the increase to pass through to interest rates in reserve markets. Thereafter, open market

operations were conducted with a view to maintaining the less accommodative degree of reserve

pressure sought by the Committee. After the policy change, the federal funds rate rose 1/2 percentage

point, to 4-1/4 percent, and remained at about that level over the intermeeting period. Adjustment

plus seasonal borrowing trended higher over the intermeeting period, reflecting the usual seasonal

pickup in lending activity, and averaged close to anticipated levels.

Market interest rates on instruments with more than three-month maturities moved lower

immediately following the announcement of the Committee's action, although some very short-term

interest rates moved up. The commercial bank prime rate also was raised by 1/2 percentage point, to

7-1/4 percent. Market participants apparently interpreted the policy actions and the accompanying

announcement as signaling that the System would not take further tightening actions as soon as they

had anticipated earlier. Incoming data suggesting sluggish spending and subdued inflation tended to

confirm these market assessments. Late in the intermeeting period, however, bond yields retraced

these declines, partly in association with a weakening dollar in foreign exchange markets and rising

commodity prices. Most major indexes of equity prices rose early in the intermeeting period, but

they then moved lower in sympathy with the declines in bond prices and the dollar and ended the

period with small losses.

The trade-weighted value of the dollar in terms of the other G-10 currencies fell significantly further

on balance over the intermeeting period. The renewed decline, which began toward the middle of

June, occurred in response to indications of an improved economic outlook abroad, associated

increases in foreign bond yields, and heightened concerns about possible increases in U.S. inflation.

Developments suggesting less favorable prospects for progress in U.S. Japanese trade negotiations

also tended to strengthen the yen against the dollar.

The broad monetary aggregates were weaker than the Committee anticipated at the time of its

previous meeting, with both M2 and M3 declining on average over May and June. The declines

appeared to be related in part to the continuing appeal of capital market instruments. More generally,

however, the rise in short-and long-term interest rates since the beginning of 1994, coupled with the

reluctance of banks and other depository institutions to adjust their offering rates promptly, had

produced a widening of the opportunity costs of holding deposits and had led households to move

deposit monies into direct and indirect holdings of market instruments. For the year through June,

both M2 and M3 were at the bottom of the Committee's ranges for 1994, and total domestic

nonfinancial debt had expanded at a moderate rate in the lower half of its monitoring range.

The staff forecast prepared for this meeting suggested that the economy was operating at a level

close to capacity and that the expansion would slow over the next several quarters to a rate generally

in line with the growth of the economy's potential. To the extent that aggregate demand tended to

expand at a pace that could foster higher inflation, it would not be accommodated by monetary

policy, and pressures would be generated in financial markets that would restrain domestic spending.

Consumer spending, which had been increasing faster than household income for some time, was

expected to moderate as smaller gains in employment and income, coupled with higher interest rates

and reductions in the value of household financial assets, exerted a restraining influence on

consumption patterns. Business fixed investment was projected to continue at a brisk pace, although

growth would be damped somewhat by the expected deceleration in economic activity, a growing

shortfall of corporate cash flow relative to capital outlays, and higher financing costs. The effects of

higher mortgage interest rates were expected to cause some slowing in the relatively robust pace of

single-family homebuilding. The restraint on output growth exerted by weak export demand was

expected to diminish because of the lower value of the dollar and the somewhat faster recovery now

projected in economic activity abroad. The staff analysis suggested that, with the economy already

operating close to its long-run potential, no further reduction in the core rate of inflation was likely

over the forecast horizon.

In the Committee's discussion of current and prospective economic developments, members

commented that the expansion continued to display considerable momentum, with business activity

apparently still increasing at a pace above the economy's long-run growth potential. At the same

time, indications of some slowing in aggregate demand had tended to increase over the last few

months. The extent of that slowing remained subject to considerable uncertainty, especially in light

of somewhat disparate data on employment and spending. Nonetheless, it was generally agreed that,

in the context of appropriate fiscal and monetary policies, some moderation in economic growth to a

pace closer to that of the economy's long-run potential was a reasonable expectation. Such a slowing

seemed necessary to forestall a buildup of inflation pressures in the view of many members. A

number of members emphasized that remaining margins of unemployed labor and other production

resources, while difficult to assess, now appeared to be quite limited. Although views differed to

some degree, the members generally concluded that the various factors affecting the course of

inflation were likely to result, on balance, in little change, or perhaps a small rise, in inflation over

the 1994-1995 forecast horizon. Some members regarded the risks of a significant divergence from

their forecasts of economic growth and inflation as fairly evenly balanced in either direction, but

most believed that those risks were tilted to the upside.

In keeping with the usual practice at meetings when the Committee considers its long-run objectives

for growth of the money and debt aggregates, the members of the Committee and the Federal

Reserve Bank presidents not currently serving as members provided specific individual projections

of growth in real and nominal GDP, the rate of unemployment, and the rate of inflation for the years

1994 and 1995. The central tendency of the forecasts of the rate of expansion in real GDP for 1994

as a whole was 3 to 3-1/4 percent, a little below the rate of growth estimated for the first half of the

year; for 1995, the projections had a central tendency of 2-1/2 to 2-3/4 percent. With regard to the

expansion of nominal GDP, the forecasts centered on growth rates of 5-1/2 to 6 percent for 1994 and

5 to 5-1/2 percent for 1995. The projections of more moderate growth in economic activity were

associated with rates of unemployment in a range of 6 to 6-1/4 percent in the fourth quarters of both

1994 and 1995, about the same as the average unemployment rate in recent months. For the rate of

inflation, as measured by the CPI, the projections had a central tendency of 2-3/4 to 3 percent for

1994 and 2-3/4 to 3-1/2 percent for 1995; both ranges represented a slight increase from the average

rate over the past year. Favorable developments in the food and energy sectors, which had held down

overall inflation measures over the past several quarters, were not expected to continue and the drop

in the dollar would be exerting upward pressures on prices in coming quarters.

Pursuant to a request from the Chairman of the Senate Banking Committee, the members considered

extending their specific forecasts by an additional year. Many expressed reservations about the

reliability and thus the usefulness of numerical forecasts extending relatively far into the future.

Moreover, they were concerned about misunderstandings of specific long-range forecasts in relation

to the Committee's goals and the ongoing formulation of monetary policy. The members concluded

that, on balance, the Committee's policy intentions and expectations would be conveyed more

effectively by the Chairman in his upcoming Congressional testimony through a discussion of the

important factors bearing on trends in economic growth, prices, and unemployment; the uncertainties

involved in projecting such variables; and the role of monetary policy in achieving desired economic

goals. In the course of their discussion, Committee members noted that the Administration's

medium-term outlook contained reasonable estimates of the trend growth in output.

In their review of developments in different parts of the country and sectors of the economy,

members referred to indications of continuing growth in regional business activity ranging from

relatively modest to quite robust across much of the nation; at the same time, some areas such as

California continued to experience generally stagnant economic conditions. While solid growth

seemed to characterize the overall economy, the members saw increasing signs of some slowing in

many areas. Business and consumer sentiment generally remained quite positive, although a number

of members commented on a new note of caution among some of their business contacts and some

shaving of industry forecasts for the balance of the year.

Turning to the key consumer sector, members commented on various indications of some moderation

in the growth of expenditures. Higher interest costs were cited by some business contacts as

constraining purchases of consumer durables, but members also referred to the negative impact of

persisting, highly visible cutbacks in workforces by some major business firms and of growing

consumer debt. Some members also noted that supply constraints, such as limitations on the

availability of some popular automobile models, had tended to curb the expansion in sales. Looking

ahead, more moderate growth in consumer spending seemed likely; apart from the direct effects of

higher interest rates on such spending, the prospectively less ebullient housing sector was likely to

retard demands for household furnishings.

Business fixed investment was thought likely to continue to provide appreciable stimulus to the

expansion, though to a diminishing extent in the context of slower overall growth in economic

activity and higher financing costs. While spending for equipment was likely to moderate

considerably from the extraordinarily rapid increases recorded over an extended period, ongoing

business efforts to improve operating efficiencies would probably sustain substantial further growth

in equipment outlays. Nonresidential construction expenditures were expected to post moderate

increases after stagnating earlier; in this connection, a number of members observed that commercial

vacancy rates were declining in various metropolitan areas and improved demand for space was

likely to generate increased construction activity. Although higher interest costs could have some

restraining effect, financing for such projects was more readily available than earlier. The outlook for

inventory investment remained uncertain. Some buildup in inventories was occurring, but business

firms were continuing to resist sizable increases and inventory-to-sales ratios remained at unusually

low levels. Developments that might be expected to foster a faster buildup, such as some lengthening

of order lead times and rising pressures on capacity in some industries, had not led to the

strengthening in inventory investment that had characterized comparable stages of previous business

cycle expansions.

Members observed that the outlook for exports appeared to have improved and that foreign trade, on

net, probably would make a small contribution to economic growth over the next several quarters.

Some noted that business contacts were reporting strong foreign demand for various U.S. products.

As members had noted at previous meetings, the North American Free Trade Agreement appeared to

have stimulated increased trade between Mexico and the United States, although it was still too early

to gauge the extent of this development. More generally, the decline in the foreign exchange value of

the dollar and a somewhat greater strengthening in the economies of major trading partners than was

expected earlier had enhanced the prospects for appreciable growth in U.S. exports, and in the view

of at least some members that growth might prove to be considerably greater than was currently

projected.

Members remarked that uncertainties about remaining margins of slack in the economy, accentuated

by the change in the household employment survey, and about potential levels of economic activity

over the quarters ahead made it particularly difficult to assess the outlook for inflation. However,

based on what seemed to be reasonable estimates of resource utilization levels and their own

projections that the rate of economic growth would slow to a pace nearer the economy's growth

potential, the members generally concluded that the rate of inflation, as measured by the CPI, might

remain about unchanged or tilt slightly higher over the forecast horizon. This conclusion took into

account the effects of the decline in the foreign exchange value of the dollar, the increase in oil prices

on world markets, and the at-least-temporary rise in food prices. Some members observed that the

overall behavior of prices had been somewhat more favorable than they would have predicted, given

the strength of the expansion and the level of resource utilization. One explanation could be that

increases in overall capacity and productivity stemming from business restructuring activities and

investments in new equipment and facilities had been greater than expected. Comments from

numerous business contacts around the country continued to indicate that despite the rising costs of

many materials used in the production process, highly competitive markets rendered it very difficult

or impossible to pass these higher costs through to prices of finished goods. At the same time, labor

compensation increases had remained subdued despite indications of shortages of some types of

labor in many parts of the country. Exceptions involving sizable wage increases continued to be cited

for some industries, such as construction and trucking, that were operating at full capacity.

Nonetheless, in the absence of an uptrend thus far in consumer price inflation and given continuing

uncertainties about job prospects despite large job gains, wage pressures had remained restrained.

In keeping with the requirements of the Full Employment and Balanced Growth Act of 1978 (the

Humphrey-Hawkins Act), the Committee at this meeting reviewed the ranges for growth in the

monetary and debt aggregates that it had established in February for 1994 and it decided on tentative

ranges for growth in those aggregates in 1995. The current ranges set in February for the period from

the fourth quarter of 1993 to the fourth quarter of 1994 included expansion of 1 to 5 percent for M2

and 0 to 4 percent for M3. A monitoring range for growth of total domestic nonfinancial debt had

been set at 4 to 8 percent for 1994.

In the Committee's discussion, which as in the past tended to focus on M2, all the members indicated

that they were in favor of retaining the current ranges for M2 and M3 for 1994 and extending those

ranges on a provisional basis to 1995. In their evaluation of appropriate growth ranges for 1994, the

members anticipated that the projected moderation in the expansion of nominal GDP and the

likelihood that funds would continue to be diverted from deposits to higher yielding market

instruments would be reflected in relatively sluggish growth in M2 and M3 and further increases in

their velocity--the ratio of nominal GDP to these monetary measures. In the circumstances, expected

growth in M2 and M3 at rates around the lower end of their ranges would be consistent with the

Committee's overall objective of fostering financial conditions that would promote sustainable

economic growth and contain pressures on prices. Indeed, that objective might even imply a shortfall

from one or both of the current ranges, but shortfalls could be tolerated and explained if they

reflected greater-than-expected increases in velocity associated with an acceptable economic

performance. While growth of the broad monetary aggregates might pick up somewhat next year, it

probably would remain damped relative to income. In light of this prospect, and of the uncertainties

about appropriate monetary growth in 1995, the Committee decided to carry forward the 1994

ranges, subject to a review early next year. The Committee noted that the current ranges, which had

been reduced greatly over the years, could be viewed as long-run benchmarks for monetary growth

consistent with maximum sustainable economic expansion in a noninflationary environment, if there

were a return to more normal velocity behavior. The Committee recognized that considerable

uncertainty about the behavior of velocity was likely to persist and that a broad range of financial

and economic indicators, in addition to the monetary aggregates, would need to be monitored in

determining the appropriate course for monetary policy.

In their review of the Committee's monitoring range for the growth of total domestic nonfinancial

debt, the members agreed that the current range for 1994 should be retained. This view took into

account staff projections indicating that the debt aggregate was likely to grow within its present

range this year, albeit the lower half of that range. Considerable sentiment was expressed, however,

for reducing the debt monitoring range for 1995. Debt growth was expected to remain relatively

subdued in association with projections of a slower rate of expansion in nominal GDP. Lowering the

range would underscore the Committee's view that rapid debt growth, should it materialize and be

sustained, could have adverse implications for inflation and financial stability. Members emphasized,

however, that action to adjust the debt range did not imply increased Committee emphasis on the

debt aggregate, and most believed that the risks of any misinterpretation could be minimized by

including an appropriate explanation in the report to Congress.

At the conclusion of this discussion, the Committee voted to reaffirm the ranges for growth of M2

and M3 and the monitoring range for growth of total domestic nonfinancial debt that it had

established in February for 1994. The following statement was approved for inclusion in the

Committee's domestic policy directive:

The Federal Open Market Committee seeks monetary and financial conditions that will

foster price stability and promote sustainable growth in output. 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 1 to 5 percent and 0 to 4 percent respectively,

measured from the fourth quarter of 1993 to the fourth quarter of 1994. The Committee

anticipated that developments contributing to unusual velocity increases could persist

during the year and that money growth within these ranges would be consistent with its

broad policy objectives. The monitoring range for growth of total domestic nonfinancial

debt was maintained at 4 to 8 percent for the year.

Votes for this action: Messrs. Greenspan, McDonough, Blinder, Broaddus, Forrestal,

Jordan, Kelley, LaWare, Lindsey, Parry, and Ms. Phillips.

Votes against this action: None.

For the year 1995, the Committee approved provisional ranges for M2 and M3 that were unchanged

from the 1994 ranges. The Committee reduced the monitoring range for growth in total domestic

nonfinancial debt by one percentage point from 1994 to a range of 3 to 7 percent. Accordingly, the

Committee voted to incorporate the following statement regarding the 1995 ranges in its domestic

policy directive:

For 1995, the Committee agreed on tentative ranges for monetary growth, measured

from the fourth quarter of 1994 to the fourth quarter of 1995, of 1 to 5 percent for M2

and 0 to 4 percent for M3. The Committee provisionally set the associated monitoring

range for growth of domestic nonfinancial debt at 3 to 7 percent for 1995. The behavior

of the monetary aggregates will continue to be evaluated in the light of progress toward

price level stability, movements in their velocities, and developments in the economy

and financial markets.

Votes for this action: Messrs. Greenspan, McDonough, Blinder, Broaddus, Forrestal,

Jordan, Kelley, LaWare, Lindsey, Parry, and Ms. Phillips.

Votes against this action: None.

In the Committee's discussion of policy for the intermeeting period ahead, most members endorsed a

proposal to maintain an unchanged degree of pressure in reserve markets. The economy seemed to be

slowing, although to an uncertain extent. Earlier policy tightening actions were being reflected in the

sluggish behavior of money and reserves, although the extent of their effects on spending were still

in question. Inflation was a concern, but direct evidence of additional pressures on costs and prices

was quite fragmentary. In these circumstances, all but one of the members concluded that it would be

prudent for the Committee to assess further developments before taking any action. One member

believed that prompt further tightening was needed to avert the development of greater inflation.

In the discussion of the near-term course of policy, the members took account of the substantial

weakness of the dollar in foreign exchange markets over the course of recent weeks. By itself, the

drop in the dollar could put some pressure on resources and prices. However, the members agreed

that these effects needed to be considered in the context of overall prospects for the economy and

financial markets, and policy should not be focused narrowly on the dollar alone. In any case, given

the negative sentiment in the foreign exchange markets, the effects on the dollar that would flow

from a small change in policy were uncertain. Ultimately, the most effective support that monetary

policy could provide for the dollar was to foster the objectives of sustainable economic growth and

progress toward price stability.

With regard to possible changes in policy during the intermeeting period, a majority favored a

change in the intermeeting instruction in the directive from symmetry to asymmetry toward restraint.

Some of the members indicated that near-term developments were not likely to call for an adjustment

to policy. Nonetheless, the risk of inflationary momentum in the expansion remained high, given an

economy that appeared to be operating at or very close to full capacity, and they believed that the

probable direction of the next policy move was likely to be in the direction of restraint. Some

emphasized that such a move should be made promptly in response to information suggesting a

greater potential for inflation. In the view of many, though not all, members the costs of policy errors

were asymmetrical at this point. The costs of reversing a policy stance that turned out to be slightly

too tight would be limited to somewhat slower economic growth for a time; the expansion appeared

to be so well established at this juncture that the risks of a greater economic adjustment were remote.

On the other hand, a policy that turned out to be unduly stimulative would foster greater inflation and

inflationary expectations that probably could be reversed only at the cost of considerable disruption

in financial markets and the economy. It also was noted that an asymmetric directive would

underscore the Committee's determination to resist greater inflation; the asymmetry could be viewed

as a logical extension of the strategy adopted in February to move to a policy stance consistent with

averting inflationary pressures in a firmly established expansion.

Some members indicated a preference for retaining a symmetric directive. These members did not

rule out the possible need for further policy tightening, but they believed that the risks surrounding

current forecasts were about evenly weighted in both directions. One member expressed strong

reservations about the use of an asymmetric directive on the grounds that such language made

intermeeting changes more likely and in the view of that member markets reacted more favorably

when actions were taken and announced at regular meetings. However, all those favoring a

symmetric directive with an unchanged policy stance could accept an asymmetric intermeeting

instruction.

At the conclusion of the Committee's discussion, all but one of the members indicated that they could

support a directive that called for maintaining the existing degree of pressure on reserve positions

and that included a bias toward the possible firming of reserve conditions during the intermeeting

period. Accordingly, in the context of the Committee's long-run objectives for price stability and

sustainable economic growth, and giving careful consideration to economic, financial, and monetary

developments, the Committee decided that slightly greater reserve restraint would be acceptable or

slightly lesser reserve restraint might be acceptable during the intermeeting period. The reserve

conditions contemplated at this meeting were expected to be consistent with modest growth in the

broader monetary aggregates over coming months.

At the conclusion of the meeting, the Federal Reserve Bank of New York was authorized and

directed, until instructed otherwise 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 recorded

another substantial gain in the second quarter, causing levels of resource utilization to

rise further. Increases in nonfarm payroll employment have been relatively large on

average in recent months; the civilian unemployment rate is reported to have declined to

6.0 percent in May. The rise in industrial production slackened in April and May,

primarily because capacity constraints prevented normal seasonal increases in the

production of motor vehicles. Growth in consumer spending has slowed in recent

months after very large increases in February and March. Housing starts have rebounded

from winter disruptions to a pace close to the elevated fourth-quarter level. Orders for

nondefense capital goods point to a continued strong uptrend in spending on business

equipment, while nonresidential construction has recovered from a weather-depressed

level in the first quarter. The nominal deficit on U.S. trade in goods and services was

larger in April than in March but about unchanged from the average for the first quarter.

Increases in broad indexes of consumer and producer prices have remained moderate in

recent months, though prices of many basic industrial materials have risen.

On May 17, 1994, the Board of Governors approved an increase in the discount rate

from 3 to 3-1/2 percent. Most market interest rates were up slightly on balance since the

May meeting; declines in bond yields early in the intermeeting period were offset later

by market reactions to a weakening dollar in foreign exchange markets and rising

commodity prices. The trade-weighted value of the dollar in terms of the other G-10

currencies was down significantly further on balance over the intermeeting period,

reflecting a sizable drop since early June.

M2 and M3 declined on average over May and June; for the year through June, both M2

and M3 are at the bottom of their ranges for 1994. Total domestic nonfinancial debt has

continued to expand at a moderate rate in recent months.