fomc minutes · July 1, 1997

FOMC Minutes

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, July 1, 1997,

at 2:30 p.m. and continued on Wednesday, July 2, 1997, at 9:00 a.m.

Present:

Mr. Greenspan, Chairman

Mr. McDonough, Vice Chairman

Mr. Broaddus

Mr. Guynn

Mr. Kelley

Mr. Moskow

Mr. Meyer

Mr. Parry

Ms. Phillips

Ms. Rivlin

Messrs. Hoenig, Jordan, Melzer, and Ms. Minehan, 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. Kohn, Secretary and Economist

Mr. Bernard, Deputy Secretary

Mr. Coyne, Assistant Secretary

Mr. Gillum, Assistant Secretary

Mr. Mattingly, General Counsel

Mr. Baxter, Deputy General Counsel

Mr. Prell, Economist

Mr. Truman, Economist

Messrs. Beebe, Goodfriend, Hunter, Lindsey, Mishkin, Promisel, Siegman, Slifman,

and Stockton, Associate Economists

Mr. Fisher, Manager, System Open Market Account

Mr. Ettin, Deputy Director, Division of Research and Statistics, Board of Governors

Messrs. Madigan and Simpson, Associate Directors, Divisions of Monetary Affairs

and Research and Statistics respectively, Board of Governors

Ms. Johnson, Assistant Director, Division of International Finance, Board of

Governors

Messrs. Reifschneider1 and Small, 1 Section Chiefs, Divisions of Research and

Statistics and Monetary Affairs respectively, Board of Governors

Mr. Sichel, 1 Senior Economist, Division of Research and Statistics, Board of

Governors

Mr. Elmendorf, 1 and Ms. Garrett, Economists, Division of Monetary Affairs, Board

of Governors

Mr. Lebow, 2 and Ms. Lindner, 2 Economists, Division of Research and Statistics,

Board of Governors

Ms. Low, Open Market Secretariat Assistant, Division of Monetary Affairs, Board of

Governors

Ms. Holcomb, First Vice President, Federal Reserve Bank of Dallas

Ms. Browne, Messrs. Dewald, Hakkio, Kos, Lang, Rolnick, Rosenblum, and

Sniderman, Senior Vice Presidents, Federal Reserve Banks of Boston, St. Louis,

Kansas City, New York, Philadelphia, Minneapolis, Dallas, and Cleveland

respectively

Ms. Rosenbaum, Vice President, Federal Reserve Bank of Atlanta

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

on May 20, 1997, were approved.

The Manager of the System Open Market Account reported on developments in foreign

exchange markets since the meeting on May 20, 1997. There were no System open market

transactions in foreign currencies during this period, and thus no vote was required of the

Committee.

The Manager also reported on developments in domestic financial markets and on System

open market transactions in government securities and federal agency obligations during the

period May 20, 1997, through June 30, 1997. By unanimous vote, the Committee ratified

these transactions.

The Committee then turned to a discussion of the economic outlook, the ranges for the

growth of money and debt in 1997 and 1998, 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 the economic expansion slowed

substantially in the second quarter after having surged in late 1996 and earlier this year.

Consumer spending decelerated considerably, but business spending on durable equipment

increased substantially further and housing demand appeared to have been well maintained.

Employment growth moderated recently, while industrial production continued to rise

appreciably. Price inflation remained subdued despite high rates of resource utilization,

notably that of labor.

Private nonfarm payroll employment rose at a reduced pace in May after having registered

sizable advances over the first four months of the year. Job growth remained brisk in the

services sector despite a further drop in employment at temporary help agencies that might

have reflected constraints on the availability of workers for hire. Although employment in

construction recovered in May from the weather-depressed level in April, the underlying

growth in such jobs seemed to have slowed. Employment in manufacturing changed little

over April and May after having increased moderately in the first quarter. The average

workweek for production or nonsupervisory workers was unchanged in May but was slightly

below the average for the first quarter. The civilian unemployment rate fell slightly further to

4.8 percent in May.

Industrial production continued to grow briskly in May. Manufacturing output recorded a

substantial gain and mining production rose considerably; however, cooler-than-average

weather led to a drop in utility output. Much of the rise in manufacturing reflected a rebound

in the production of motor vehicles and parts from strike-depressed levels in April and

strength in the output of business equipment, construction supplies, and materials. With

output generally keeping pace with the rapid expansion of factory capacity, the rate of

utilization of manufacturing capacity remained at a relatively high level.

Personal consumption expenditures, in real terms, rose substantially in May after having

changed little on balance over the preceding three months. Spending on services remained on

a solid uptrend in May, while aggregate purchases of goods turned up after three months of

lackluster spending on nondurable goods and motor vehicles. The unusual weather patterns

of late winter and early spring apparently had a depressing effect on consumer expenditures,

especially for seasonal items; however, the combination of strong job gains, buoyant

sentiment, and increased household net worth pointed to a possible resumption of more

robust spending by consumers.

Housing activity appeared to have been generally well maintained in recent months.

Although housing starts were down somewhat in May from the relatively elevated average

rate for the first four months of the year, this slowing might have been, at least in part, the

result of unusually mild winter weather that enabled an early start on spring building activity.

The latest information on home sales suggested continued firm demand for single-family

housing: Sales of existing homes rose in May and were among the highest monthly totals on

record, and sales of new homes in April (latest data available) were down only a little from

the brisk pace of earlier months in the year.

Available information suggested further sizable gains in business fixed investment.

Shipments of nondefense capital goods edged higher in May after posting large increases in

earlier months of the year. Shipments of computers had been particularly strong this year in

conjunction with rapidly falling prices, but shipments of other categories of capital goods

also had been robust on balance. Recent data on orders pointed to further brisk growth in

coming months. Nonresidential construction activity appeared to have eased recently, with

construction-put-in-place slipping in March and April from the elevated pace of the first two

months of the year. However, other information suggested that the downturn might be

shortlived: Vacancy rates for office space had been declining, prices for commercial real

estate had been edging up, and recent data on contracts suggested that building activity

would improve in coming months.

Business inventory investment picked up sharply in April from the slow pace in March but,

overall, stocks remained at a low level in relation to sales. In manufacturing, much of the

increase in stocks occurred in capital goods industries in which production was expanding

briskly. In the wholesale sector, a substantial decline in stocks in April more than offset a

sizable increase in March, and the aggregate stock-sales ratio for the sector fell further over

the March-April period. Retail inventories rose considerably in April, with notable increases

in stocks of apparel and general merchandise. In a departure from the general downtrend of

recent months, inventory-sales ratios for most types of retail establishments were up

appreciably in April.

The nominal deficit on U.S. trade in goods and services narrowed somewhat in April from a

downward-revised average rate in the first quarter. The value of exports in April rose

substantially from the first-quarter level, led by increases in exports of machinery and

aircraft. The value of imports also rose but by less than that of exports; imports were up in

most trade categories except petroleum products. Recent information suggested that, on

average, economic activity in the major foreign industrial countries continued to grow at a

moderate rate in the second quarter. Growth remained robust in Canada and the United

Kingdom and was improving in Germany, France, and Italy. Economic activity appeared to

have flattened temporarily in Japan following an increase in the consumption tax in April.

Price inflation remained subdued. For a third straight month, consumer prices recorded only

a slight increase in May. Favorable developments in food and energy continued to hold down

the overall rise and accounted for a much smaller advance in the index of prices of all

consumer items over the twelve months ended in May than over the previous twelve months.

The decline in core CPI inflation over the same time period was much less, though this

measure of inflation also remained relatively restrained. At the producer level, prices of

finished goods other than food and energy fell further in May and were little changed over

the year ended that month. At earlier stages of processing, producer prices for intermediate

materials other than food and energy changed little over the year ended in May, and producer

prices at the crude level advanced only slightly. The tight conditions prevailing in labor

markets were associated with a somewhat larger increase in average hourly earnings in the

twelve months ended in May than in the year-earlier period.

At its meeting on May 20, 1997, the Committee adopted a directive that called for

maintaining the existing degree of pressure on reserve positions. Because the members saw

the potential need for some tightening in monetary policy to counter rising inflationary

pressures, perhaps in the relatively near term, the directive included a bias toward the

possible firming of reserve conditions during the intermeeting period. The reserve conditions

associated with this directive were expected to be consistent with moderate growth of M2

and M3 over coming months.

Open market operations were directed throughout the intermeeting period toward

maintaining the existing degree of pressure on reserve positions, and the federal funds rate

averaged close to the intended level of 5-1/2 percent. Most other market interest rates

declined somewhat on balance during the period. Market participants apparently concluded

that the likelihood of further policy tightening had decreased substantially in light of

incoming data that suggested slowing growth of final demand and continued subdued

inflation. Share prices in equity markets rose considerably further.

In foreign exchange markets, the trade-weighted value of the dollar in terms of the other

G-10 currencies was up on balance over the intermeeting period; the advance occurred

despite a smaller decline on average in long-term interest rates abroad than in the United

States. The dollar rose appreciably against the German mark and most other continental

European currencies amid growing market concerns that there would be broad participation

in the European Monetary Union despite the fact that the major European countries would

not be able to comply strictly with the Maastricht fiscal standards and related expectations

that the euro would be a weak currency. In contrast, the dollar fell against the Japanese yen

and the British pound; the yen moved up as markets focused more closely on recent and

prospective increases in Japan's current account surplus, and the pound strengthened in

anticipation of further policy tightening by the Bank of England.

Expansion of M2 and M3 slowed sharply in May in association with a swing in household

balances related to large tax payments; growth of M2 rebounded in June, but M3 accelerated

by less. For the year through June, M2 increased at a rate near the upper bound of its range

for the year. Rapid growth of M3 over the first half of the year, partly in conjunction with

robust expansion of bank credit, placed growth of this aggregate somewhat above the upper

bound of its range. The rate of increase in total domestic nonfinancial debt had been a little

higher in recent months; for the year to date, this aggregate had grown at a rate near the

middle of its range.

The staff forecast prepared for this meeting suggested that the economy would expand at a

pace somewhat above that of its estimated potential in the second half of the year but would

slow to a rate of increase more in line with that of potential in 1998. Growth of consumer

spending, supported by high levels of household wealth and further projected gains in

employment and income, was expected to be relatively brisk for some time. Business

spending on equipment and structures was anticipated to continue outpacing the overall

expansion of the economy, though the differential would tend to narrow in association with

the gradual diminution of increases in sales and profits that was expected to occur in the

context of moderating economic growth. Housing construction was projected to drift lower

over the forecast period. The staff anticipated that fiscal policy and the external sector would

exert mild restraint on the expansion of economic activity. With labor compensation

gradually accelerating in the context of high resource utilization, core consumer price

inflation was forecast to drift slightly higher.

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

commented on the continuing exceptional performance of the economy, including

widespread indications of strength in business activity and subdued inflation. Following a

surge in late 1996 and earlier this year, the rate of expansion had moderated considerably in

recent months, and the members generally expected economic activity to settle into a pattern

of growth over the next six quarters that would approximate the economy's estimated output

potential. A major factor in that outlook was their expectation of some deceleration in

demands for consumer durables and business plant and equipment in light of the substantial

buildup of such assets that already had taken place in recent years. However, given the

underlying strength of the expansion, favorable financial conditions, and the absence of

major imbalances in the economy, the risks of a different outcome were judged to be in the

direction of somewhat faster growth than currently projected. The outlook for inflation was

subject to particular uncertainty. Despite an economy that had been operating for a

considerable period at rates of resource utilization that were very close to, and by some

estimates somewhat above, sustainable levels, inflation had remained relatively low and

indeed had declined on the basis of some broad measures of prices. Such an outcome was

very much welcome, but the reasons for it were not completely understood and appeared to

include some factors that might exert only temporary restraint on price increases.

Consequently, continuing pressures on resources associated with economic growth in line

with the members' current forecasts could well be reflected in rising inflation over time.

In keeping with the practice at meetings when the Committee sets its long-run ranges for the

money and debt aggregates, the members of the Committee and the Federal Reserve Bank

presidents not currently serving as members provided individual projections of the growth in

real and nominal GDP, the rate of unemployment, and the rate of inflation for the years 1997

and 1998. The forecasts of the rate of expansion in real GDP for 1997 as a whole had a

central tendency of 3 to 3-1/4 percent and for 1998 were centered on a range of 2 to 2-1/2

percent. With regard to the growth of nominal GDP, most of the forecasts were in ranges of 5

to 5-1/2 percent for 1997 and 4-1/2 to 5 percent for 1998. The civilian rate of unemployment

associated with these forecasts had a central tendency of 4-3/4 to 5 percent in the fourth

quarters of both years. Projections of the rate of inflation, as measured by the consumer price

index, pointed to a sizable moderation this year from the rate in 1996 and a partially

offsetting rise in 1998, with prices of food and energy accounting for much of the swing.

Specifically, the projections converged on CPI inflation rates of 2-1/4 to 2-1/2 percent in

1997 and 2-1/2 to 3 percent in 1998.

In their review of the outlook for economic activity in major sectors of the economy,

members referred to the generally sluggish pace of retail sales in recent months. It was noted,

however, that the slowdown was perhaps in part an adjustment to very strong growth of sales

in previous months, and some members commented on anecdotal indications of some pickup

in recent weeks. More importantly, underlying trends and fundamentals pointed to

prospective growth in consumer expenditures at a pace that was likely to continue to provide

key support for further moderate expansion in overall economic activity. In particular, jobs

and incomes had continued to post sizable gains; further large increases in stock market

prices had raised wealth-to-income ratios sharply; and consumer optimism had risen to new

highs. On the other hand, the accumulation of consumer durables that had occurred over the

course of the current cyclical advance was likely to exert a retarding influence on the rise in

consumer spending. Other somewhat restraining factors included the prospect of some

softening in housing demand and related purchases of household goods and the already

heavy debt repayment burdens of many consumers. Some members also noted that a possible

correction from the currently elevated levels of stock market prices could have adverse

effects on consumer sentiment and purchasing power. On balance, growth in personal

consumer expenditures was seen as likely to approximate the moderate rate of increase

projected in overall domestic demand.

The members viewed the prospects for further growth in business fixed investment as

another important supportive factor in the outlook for sustained economic expansion. Current

indicators pointed to the continuation of very rapid growth in such spending over the near

term, but some moderation was likely over the course of coming quarters in conjunction with

the projected slowing in the increase of overall demand and the very large buildup in the

stock of capital that already had occurred in recent years. Even so, investment spending was

likely to be relatively robust over the projection horizon in the context of continuing

incentives to hold down production costs in highly competitive markets and to take

advantage of falling prices and wider applications for certain types of new equipment,

notably computer-related equipment. The ready availability of both debt and equity finance

on favorable terms, an upbeat outlook for sales in many industries, and generally high profit

levels were other positive factors. The outlook for nonresidential construction activity also

seemed to be relatively favorable. Members referred to declining vacancy rates and rising

rents for commercial structures in many parts of the country and noted that construction

contracts for new office buildings and hotels recently had turned up on a nationwide basis

after a pause earlier this year. In sum, the growth in business fixed investment seemed likely

to continue to outpace that of overall demand in coming quarters.

Some restraint on aggregate demand would come from other sectors of the economy--notably

government spending, net exports, housing, and perhaps business inventories. None of these

factors seemed likely to exert a substantially negative effect, but in total they were expected

to help keep the pace of the expansion close to the estimated rate of increase in the

economy's potential over coming quarters.

During the course of the Committee's discussion, many of the members commented on the

persistence of an impressively benign inflation performance despite widespread indications

of very high, and by some measures increasing, levels of capacity use. Indeed, most broad

measures of prices pointed to subdued or even declining inflation, and it was difficult to find

evidence of rising inflation pressures in "pipeline" price data or the wage structure. The

members anticipated that inflation as measured by the consumer price index would decline

appreciably over 1997 as a result of favorable developments in the food and especially the

energy sectors of the economy and declining import prices associated with the previous

appreciation of the dollar. These positive influences would wane over time, however, and

consumer prices were likely to rise at a somewhat faster pace in 1998.

The members agreed that the risks to their price forecasts were in the direction of higher

inflation, given already high levels of capacity use and their expectations of appreciable

further economic growth. Nonetheless, the relatively low inflation experienced despite a

lengthy period of fully employed resources suggested that the timing of a potential upturn in

inflation--indeed whether inflation would in fact pick up--could not be predicted with any

degree of confidence on the basis of past historical patterns. The reasons for the persistence

of a relatively benign inflation performance in the current expansion were not fully

understood. They included some temporary factors such as the effect of the rise in the dollar

on import prices and the restraint on health care costs. More fundamentally, they presumably

also involved the favorable effects on production costs of widespread business restructurings

and the large volume of investment in more productive technology in recent years, the impact

of both factors on the job security concerns of workers and their willingness to accept

reduced increases in compensation, and the effects of an intense degree of competition

among domestic and foreign producers in U.S. markets. With regard to the possibility that

more robust productivity increases would be holding down production costs, it was noted

that a surge in economic activity, such as had occurred in late 1996 and early 1997, tended to

be accompanied by above-trend gains in productivity. A slower pace of economic growth in

the second quarter and beyond might provide an opportunity to assess whether productivity

increases were on a clear uptrend and could help to explain the favorable behavior of prices

over an extended period. In any event, it was too early to reach any firm conclusion on this

issue or the broader question of whether or when a rise in inflation might materialize under

anticipated economic conditions.

The members also discussed a staff study of the relative performance of various prices

indices as measures of inflation. Members noted that most broad measures of inflation

moved together over extended periods of time, but they did not always do so over short

intervals. Differences in construction, coverage, and other factors meant that none of the

individual measures was clearly superior in assessing general inflation trends, and several

members commented that all measures needed to be monitored.

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

of the monetary and debt aggregates that it had established in February for 1997 and it

decided on tentative ranges for those aggregates for 1998. The current ranges set in February

for the period from the fourth quarter of 1996 to the fourth quarter of 1997 were unchanged

from the ranges for 1996 and included expansion of 1 to 5 percent for M2 and 2 to 6 percent

for M3. An unchanged range of 3 to 7 percent also was set in January for growth of total

domestic nonfinancial debt in 1997.

All the members favored retaining the current ranges for this year and extending them on a

provisional basis to 1998. They anticipated that growth of M2 probably would continue at

rates in the upper part of its current range in both years and that of M3 at rates approximating

or even slightly above the upper bound of its range, given the Committee's expectations for

the performance of the economy and prices. The current ranges were not expected to be

guides to money growth under anticipated conditions in the period ahead, but instead could

be viewed as anchors or benchmarks for money growth that would be associated with

approximate price stability and sustained economic growth, assuming behavior of velocity in

line with historical experience. Accordingly, a reaffirmation of those ranges would

underscore the Committee's commitment to a policy of achieving price stability over time,

and in the view of at least some members, higher ranges could raise questions in this regard.

Over the last few years, in contrast to earlier in the 1990s, the behavior of the broad

aggregates, especially that of M2, in relation to nominal GDP and short-term interest rates

had displayed a pattern that was in line with historical norms prior to the 1990s. The

members viewed this as an encouraging development in that it raised the possibility of giving

more weight at some point to the performance of these aggregates as useful indicators in

formulating monetary policy. However, the period of more predictable M2 and M3 behavior

was still relatively brief and such behavior had occurred at a time of generally settled

conditions in financial markets and the overall economy. The prospective performance of

these aggregates in periods of rapid changes in financial and economic conditions was still an

open question, and in light of the uncertainties that were involved the members concluded

that it would be premature to place increased reliance on them in the conduct of policy.

Accordingly, the Committee decided that despite projected growth of M2 and M3 at rates in

the vicinity of the upper limits of the current ranges, prevailing uncertainties made it

desirable to retain those ranges as benchmarks for the achievement of price stability rather

than to establish higher ranges that seemed more likely to capture expected outcomes. In the

circumstances, any tendency for growth of the monetary aggregates to move outside the

Committee's ranges would not in itself call for a policy adjustment but would continue to be

interpreted in the context of a broad range of business and financial developments bearing on

the prospective performance of the overall economy.

The Committee members were unanimously in favor of retaining the current range of 3 to 7

percent for growth of total domestic nonfinancial debt in 1997 and extending that range on a

provisional basis to 1998. They took account of a staff projection indicating that growth of

the debt aggregate was likely to slow somewhat from its pace in 1995 and 1996, reflecting a

small reduction in the expansion of federal government debt. According to the staff

projection, growth in the debt measure would be near the midpoint of the existing range over

the period through 1998.

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

of M2, M3 and total domestic nonfinancial debt that it had established in February for 1997.

For the year 1998, the Committee approved provisional ranges for the three aggregates that

were unchanged from the 1997 ranges. In keeping with its usual procedure under the

Humphrey-Hawkins Act, the Committee would review its preliminary ranges for 1998 early

next year, or sooner if interim conditions warranted, in light of their growth and velocity

behavior and ongoing economic and financial developments. Accordingly, the Committee

voted to incorporate the following statement regarding the 1997 and 1998 ranges in its

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 2 to 6 percent respectively, measured from the fourth quarter of 1996 to the

fourth quarter of 1997. The range for growth of total domestic nonfinancial debt

was maintained at 3 to 7 percent for the year. For 1998, the Committee agreed on

tentative ranges for monetary growth, measured from the fourth quarter of 1997

to the fourth quarter of 1998, of 1 to 5 percent for M2 and 2 to 6 percent for M3.

The Committee provisionally set the associated range for growth of total

domestic nonfinancial debt at 3 to 7 percent for 1998. 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, Broaddus, Guynn, Kelley, Meyer,

Moskow, Parry, Mses. Phillips and Rivlin.

Votes against this action: None.

In the Committee's discussion of policy for the intermeeting period ahead, all the members

favored or could support a proposal to maintain an unchanged policy stance, and they

strongly supported the retention of a bias toward restraint. An unchanged policy seemed

appropriate with inflation still quiescent and business activity projected to settle into a pattern

of moderate growth broadly consistent with the economy's long-run output potential. While

the members assessed risks surrounding such a forecast as decidedly tilted to the upside, the

slowing of the expansion should keep resource utilization from rising substantially further,

and this outlook together with the absence of significant early signs of rising inflationary

pressures suggested the desirability of a cautious "wait and see" policy stance at this point. In

the current uncertain environment, this would afford the Committee an opportunity to gauge

the momentum of the expansion and the related degree of pressure on resources and prices.

The risks of waiting appeared to be limited, given that the evidence at hand did not point to a

step-up in inflation despite low unemployment and that the current stance of monetary policy

did not seem to be overly accommodative, at least on the basis of some measures such as the

level of real short-term interest rates. In these circumstances, any tendency for price

pressures to mount was likely to emerge only gradually and to be reversible through a

relatively limited policy adjustment. Some members commented, however, that in the

absence of unanticipated weakness in the economy, some tightening of policy was likely to

be needed in the relatively near future, and one expressed the view that a tightening action at

this meeting seemed desirable to forestall or limit the risks of intensifying inflationary

pressures. However, waiting was an acceptable alternative given the favorable economic

news and the persisting uncertainties surrounding the relationship of output to prices.

In their discussion of possible adjustments to policy during the intermeeting period, all the

members indicated that they wanted to retain the existing asymmetry toward restraint

adopted at the May meeting. An asymmetric directive was consistent with their view that the

risks clearly were in the direction of excessive demand pressures in the economy and an

associated upward trend in inflation. Such a bias in the directive also would serve the purpose

of signaling the Committee's ongoing commitment to curb inflation in the interest of

fostering maximum sustainable economic growth and employment. The members agreed that

the current environment called for careful monitoring of developments and for prompt action

by the Committee if needed to counter rising inflation. Indeed, in the interest of fostering a

continuation of sustainable growth of the economy, it would be desirable to tighten on the

basis of early signs of potentially intensifying inflation and before higher inflation actually

materialized.

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

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

positions and that retained 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 somewhat

greater reserve restraint would be acceptable and slightly lesser reserve restraint might be

acceptable during the intermeeting period. The reserve conditions contemplated at this

meeting were expected to be consistent with moderate expansion in M2 and M3 over coming

months.

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 the economic expansion

slowed substantially in the second quarter after surging in late 1996 and earlier

this year. Private nonfarm payroll employment increased at a reduced pace in

May, but the civilian unemployment rate fell slightly further to 4.8 percent.

Industrial production registered another sizable gain in May. Personal

consumption expenditures, in real terms, rose substantially in May after having

changed little over the preceding three months. Housing activity appears to have

been well maintained in recent months. Available indicators point to further

sizable gains in business fixed investment. The nominal deficit on U.S. trade in

goods and services narrowed somewhat in April from its downward-revised

average rate in the first quarter. Price inflation has remained subdued.

Market interest rates generally have declined somewhat since the day before the

Committee meeting on May 20, 1997; share prices in equity markets have risen

considerably further. In foreign exchange markets, the trade-weighted value of

the dollar in terms of the other G-10 currencies was up slightly on balance over

the intermeeting period.

Growth of M2 and M3 fluctuated sharply from April to May in association with

a swing in household balances related to large tax payments; on balance, both

aggregates expanded at a moderate pace over the two months, and available data

pointed to further moderate growth in June. For the year through June, M2

expanded at a rate near the upper bound of its range for the year and M3 at a rate

somewhat above the upper bound of its range. Total domestic nonfinancial debt

has continued to expand in recent months and is near the middle of its range.