Monetary Policy Report

July 19, 1995 SUMMARY REPORT OF THE FEDERAL RESERVE BOARD MONETARY POLICY OBJECTIVES Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis July 19, 1995 This Executive Summary provides highlights of the Board's Midyear Review to Congress on the Full Employment and Balanced Growth Act of 1978. MONETARY POLICY OBJECTIVES Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Contents Section Page Testimony of Alan Greenspan Chairman, Federal Reserve Board 1 Monetary Policy and the Economic Outlook for 1995 and 1996 8 Economic Projections for 1995 and 1996 12 Money and Debt Ranges for 1995 and 1996 15 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Testimony of Alan Greenspan Chairman, Federal Reserve Board Mr. Chairman and members Reflecting market pressures, prices of raw materials and intermediate goods of the Subcommittee, I am had already risen considerably, and pleased to appear today to a surge in the prices of a variety of imported goods could be expected to present the Federal Reserve' s follow the weakening in the dollar semi-annual report on through early 1995. Monetary policy tightenings over monetary policy. the previous year had been designed to foster the type of moderation in ~al ~emand that would help damp inflation pressures going forward and sustain the economic expansion. When In February, when I was last here for we began the policy tightening this purpose, I reported that the U.S. process, we knew the previous drags economy had turned in a remarkable on the economy stemming from performance in 1994. Growth had been balance-sheet stresses and restraints quite rapid, reaching a torrid pace by on lending were largely behind us. the final quarter of the year, when real But that still did not make it a simple GDP rose at a 5 percent annual rate t? ~at~er gauge just what degree of and final sales increased at a 5¾ per firming in reserve market conditions cent rate. Inflation had remained would be necessary to produce a subdued through year-end, although financial environment consistent with productive resources were stretched: sustainable economic growth. In the The unemployment rate had fallen to event, the federal funds rate was its lowest level in years, while manu raised to 6 percent, as the surprising facturing capacity utilization had been strength in the economy and associ pushed up to a historically high level. ated pressures on resources required . As I indicated in February, a slow a degree of monetary policy restraint ing of economic growth to a more to ensure thac inflation would be sustainable pace, with resource use contained. s~ttling in around its long-run poten ~ortunately, we started the tight tial, was required to avoid inflationary ening process early enough and instabilities and the adverse conse advanced it far enough that mone quences for economic activity that tary restraint began to bite before ~ould invariably follow. After post some potential problems could ing three straight years of consumer assume major proportions. price increases of less than 3 percent With inadequate monetary restraint, for the first time in decades, inflation aggregate demand could have seemed poised to move upward. significantly overshot the economy's long-run supply potential and created serious inflationary instabilities. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 1 Moreover, the perceived capacity But a less favorable scenario certainly constraints and lengthening delivery cannot be ruled out. The inventory times that come with an overheated adjustment could be extended and economy could have fostered the severe enough to drive down incomes, development of more serious inven disrupt final demand, and set in tory over-accumulation. In such motion a period of weak growth, circumstances, the longer the modera or even a recession. tion in output growth is delayed, the Useful insights into how an inven larger will be the inventory overhang, tory correction is proceeding often and the more severe will be the sub can be gained by evaluating develop sequent production correction. As ments in industries that supply hoped, final sales slowed appreciably producers of final durable products in the first quarter of this year, but with key primary inputs-such as inventory investment didn't match steel, aluminum, and capital equip that slowing, and overall inventory ment components and parts. This is sales ratios increased slightly. because inventory adjustments often Although the aggregate level of are larger in durable goods and they inventories remained modest, become magnified at progressively a few major industries, such as motor earlier stages in the production vehicles and home goods, found process. Typically, when purchasing themselves with substantial excesses. managers for durable-goods produc Attempts to control inventory levels ing firms find their inventories at triggered cutbacks in orders and excessive levels, they reduce orders for output that inevitably put a damper materials and also for components of on employment and income. capital goods, and as a consequence How the ongoing pattern of inven suppliers shorten promised delivery tory investment unfolds is a crucial times and cut back on production. In element in the near-term outlook for the current instance, domestic orders the economy. Production adjustments for steel and aluminum and for some could fairly quickly shut off unin capital equipment components have tended inventory accumulation weakened, but not enough to have had without a prolonged period of slack more than modest effects on produc output-one that could adversely tion. Prices of key inputs also suggest affect personal incomes and business that demand so far is holding up and profitability, which in tum could the inventory correction is contained. undermine confidence and depress The price of steel scrap, for example, spending plans. Under these condi has not fallen, and spot prices of tions, final sales should continue to nonferrous metals on average have grow through and beyond the inven stabilized recently after considerable tory correction, leading to sustained weakness in the first part of the year. moderate economic expansion. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 2 Though still lethargic, the behavior of A significant downside risk when durable goods materials and supplies I testified in February related to the markets scarcely evidences the type situation in Mexico. The economic of broader inventory liquidation that contraction in that country and the usually has been at the forefront of the depreciation of the peso did act to major inventory recessions of the past. depress our net exports in the first half At the finished goods level, we of the year. But with the external experienced significant inventory adjustment of the Mexican economy liquidation in both cars and trucks apparently near completion, this drag in May and June. We do not have should be largely behind us. More comprehensive, up-to-date inventory over, our trade with the rest of the evaluations for recent months as yet, world should begin to impart a but inferring what we can from positive impetus to our economic scattered and partial data, the pros activity, partly because of the strong pects seem reasonably good for a competitive position of U.S. goods in reduction in inventory investment that world markets. moves us a considerable way toward Regarding domestic final demand, eliminating unwanted stocks. financial developments so far this year That process and the longer run should provide important support outlook for the economy depend over coming quarters. Interest rates, ultimately on the behavior of final especially on intermediate-and sales. In that regard, the slowing of the long-term instruments, have fallen growth of final sales that began in the a great deal since last fall, in reaction first quarter seems to have continued to the improved fiscal outlook, the a little further in the second quarter. effects on inflation expectations of Combining final sales and the likely our earlier monetary tightening, and, reduced second-quarter pace of of course, recently, the slowed inventory investment, the level of economy. Lower interest rates have overall domestic production of final helped to buoy stock prices, which goods and services, or real GDP, have soared ever higher. The positive evidently changed little last quarter. implications of the rally in financial Going forward, of the several markets for household debt-service credible outlooks, the most probable is burdens and wealth and for the cost for an upturn in the growth rate of of capital to businesses augur well for final sales and real GDP over the rest spending on consumer durables, on of this year and a moderate pace of housing, and on plant and equipment. expansion next year with the economy operating in the neighborhood of its potential. One area of improve ment should be our external sector. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 3 These influences should be reinforced This prospect is evident in the central by the generally strong financial tendency of the expectations of the condition and the willingness to lend Governors and Presidents for the of depository institutions, as well as unemployment rate in the fourth the receptiveness of capital markets quarter of this year, which has been to offerings of debt and equity. revised up from about 5½ percent in Early signs of a little firming in February to 5¾ to 61/s percent. This consumer durables spending are outlook for unemployment has been already visible in the stabilization of extended through next year as well. the motor vehicles sector. Residential Increases in employment costs to date construction also has started to revive, have been modest, and labor compen judging by the recent data on home sation evinces few signs of exacerbat sales and mortgage applications. ing inflation pressures, although the Unfilled orders are sizable in the recent unusually favorable behavior capital goods area, suggesting business of benefit costs is unlikely to continue. investment in equipment will continue Declines in industrial output over growing, albeit perhaps more slowly recent months have already eased than in the recent past. Finally, rising factory utilization rates closer to their permits suggest expansion in nonresi long-term averages. Reflecting a dential construction. slowing in foreign industrial econo An outlook embodying a resump mies as well as in the United States, tion of moderate economic growth is the earlier surge in prices of materials conveyed by the central tendencies of and supplies has tapered off. More the expectations of the Federal Reserve over, the stability of the exchange Governors and Reserve Bank Presi value of the dollar in recent months dents for real GDP. After the second bodes well for an abatement of the quarter pause, a projected pickup in recent faster increase in import prices. activity in the second half would put Against this background, most output growth over the four quarters Governors and Presidents see lower of the year in the neighborhood of inflation over coming quarters than 1½ to 2 percent. For next year, projec experienced in earlier months of 1995. tions of real GDP growth center on The central tendency for this year's 2½ percent. four-quarter rise in the CPI is 31/s to The inflation picture is less worri 33/s percent. And for next year, the some than when I testified six months central tendency suggests that CPI ago, just after our last policy tighten inflation will be shaved to 27/s to ing. Demands on productive 3¼ percent. resources should press less heavily on available capacity in the future than we envisioned in February. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 4 The success of our previous policy We do not as yet fully understand all tightenings in damping prospective the reasons for the degree of slowing inflation pressures set the stage for our in economic activity in the first half of recent modest policy easing. Because the year, so we need to be somewhat the risks of inflation apparently have tentative in our projections of a receded, the previous degree of rebound. Imbalances seem to be restriction in policy no longer seemed limited, financial conditions should needed, and we were able at the last be supportive of spending, and meeting of the Federal Open Market businesses and consumers are largely Committee (FOMC) to reduce the optimistic about the future. Nonethe federal funds rate by¼ percentage less, questions remain about the point to around 5¾ percent. strength of demand for goods and Indeed, inflation pressures were services, not only in the United States damped somewhat more quickly than but abroad as well. we might have expected. This experi Upside risks to the forecast also can ence underlines the uncertainties and be readily identified, particularly if the risks in any forecasting exercise. The inventory correction is masking a projections of the Governors and much stronger underlying economy Presidents are for a rather benign than appears from other evidence to outlook, as are the views of many be the case. If so, spending could private sector forecasters. But these strengthen appreciably, especially in expectations can't convey the risks and light of the very substantial increases subtleties in the developing economic in financial market values so far this situation. year. A month or so ago, I noted publicly In a transition period to sustainable that a moderation in growth was both growth such as this, reactions to inevitable and desirable, but that the unexpected events may be especially process could not reasonably be pronounced. This is not a time for the expected to be entirely smooth, and Federal Reserve to relax its surveil that accordingly the risks of a near lance of, and efforts to analyze, the term inventory-led recession, though evolving situation. The Federal small, had increased. More recent Reserve must do its best to understand evidence suggests that we may developing economic trends. While we have passed the point of maximum cannot expect to eliminate cyclical risk. But we have certainly not yet booms and busts-human nature reached the point at which no risk of being what it is-we should nonethe undue economic weakness remains. less try where possible to reduce their amplitude. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 5 Some observers have viewed This year, M3 growth has begun to prospective year-by-year budget outpace that of M2, as it did for several deficit reduction as constituting an decades prior to 1989. Overall credit important downside risk to the flows have picked up some, and a economy. I do not share this concern. higher proportion has gone through In response to fiscal consolidation, depositories. As a consequence, while financial markets provide an impor M2 and debt remain within their tant shock absorber for the economy. respective annual ranges, M3 has Declines in long-term rates help appreciably overshot the upper end stimulate private, interest-sensitive of its range. The 2 percentage point spending when government spending increase in the upper and lower and transfers are reduced. Clearly, the bounds of the M3 range to 2 to Federal Reserve will have to watch 6 percent was made in recognition of this process carefully, and take the the evident return this year to a more likely effects of fiscal policy into normal pattern of M3 growth. The account in considering the appropriate ranges specified for M2, M3, and debt stance in monetary policy. But there is this year also were provisionally no doubt, in my judgment, that the net carried over to 1996. The Committee result of moving to budget balance stressed that uncertainties about will be a more efficient, more produc evolving relationships of these tive U.S. economy. variables to income continued to With regard to the money and debt impair their usefulness in policy. ranges chosen by the FOMC for this In summary, the economic outlook, year, the specifications for M2 and on balance, is encouraging, despite the domestic nonfinancial debt were left inevitable risks. The American unchanged, at 1 to 5 percent and economy rests on a solid foundation of 3 to 7 percent, respectively. The FOMC entrepreneurial initiative and competi also made a purely technical upward tive markets. With the cyclical expan revision to the M3 range. Last Febru sion more than likely to persist in the ary's Humphrey-Hawkins testimony period ahead, the circumstances are and report had noted the potential particularly opportune for pressing need for such a revision to this year's forward with plans to institute further M3 range. Starting in 1989, the significant deficit reduction. For such restructuring of thrift institutions and actions, by raising the share of national the difficulties facing commercial saving available to the private sector, banks depressed their lending and should foster declines in real interest their need for managed liabilities. The rates and spur capital accumulation. FOMC responded by reducing the Higher levels of capital investment in upper and lower bounds of the range tum will raise the growth in produ c for M3 to below those of the M2 range. tivity and living standards well into the next century. Digitized for FRASER https://fraser.stlouisfed.org 6 Federal Reserve Bank of St. Louis The Federal Reserve believes that 25 basis points was made in this the main contribution it can make to context. As I noted in my February enhancing the long-run health of the testimony, easing would be appropri American economy is to promote price ate if underlying forces were clearly stability over time. Our short-run pointing toward reduced inflation policy adjustments, while necessarily pressures in the future. Considerable undertaken against the background progress toward price stability has of the current condition of the U.S. occurred across successive business economy, must be consistent with cycles in the last 15 years. We at the moving toward the long-run goal of Federal Reserve are committed to price stability. Our recent policy action further progress in this direction. to reduce the federal funds rate Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 7 Monetary Policy and the Economic Outlook for 1995 and 1996 During 1994, spending by U.S. house Change in Real GDP holds and businesses grew at an Percent, annual rate exceptionally rapid pace, and by the end of the year, demands clearly were Seasonally adjusted I 1987 dollars taxing the productive capacity of the economy. Pressures on resources were particularly intense in sectors of 3 manufacturing that provide inputs for other producers, and sharp increases in the prices of materials and supplies II + signaled what could have been the 0 first stage of a broader inflationary process. A weakening of the dollar on foreign exchange markets as 1995 began heightened that risk. To damp 1990 1991 1992 1993 1994 1995 these inflationary pressures and foster a sustainable economic expansion, the Federal Open Market Committee The economy's growth began to (FOMC) in February tightened policy moderate in the first quarter of 1995. somewhat, extending the series of Among the factors contributing to the actions undertaken during 1994,and slowing were the lagged effects of the Board of Governors approved a 1994's increases in interest rates on one-half percentage point increase in housing and other rate-sensitive the discount rate. sectors and the impact on U.S. exports of the sharp contraction in Mexico's economy and fall in the foreign Manufacturing Capacity exchange value of the peso. As final Utilization Rate sales moderated, businesses scaled Percent back their desired inventory accu Seasonally adjusted mulation. In some key sectors, the slackening in sales was greater than anticipated, leaving firms with excess ---a------------A-- 85 inventories. As.businesses took steps to trim stocks, aggregate production decelerated further in the second quarter and was probably about flat, ------+----#------- as measured by real gross domestic 80 product. The inventory adjustment was especially large in the motor vehicle sector, which accounted for much of the downswing in manu 1989 1991 1993 1995 facturing activity in the spring. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 8 Private Housing Starts The moderation in economic growth Millions of units, annual rate and improvement in inflation pros pects over the first half of 1995 Quarterly average sparked a considerable decline in market interest rates. The greater likelihood of significant progress toward a balanced federal budget also seemed to contribute to the decrease . in longer-term interest rates. Intermediate-and long-term yields have fallen 1¼ to 1¾ percentage points since year-end 1994, with the decline in 30-year fixed mortgage rates this year reversing most of the increases registered since early 1994. 1989 1991 1993 1995 Lower interest rates, solid earnings Seasonally adjusted. Value for 1995:Q2 is average of growth, and prospects for sustained April and May. economic expansion helped push most broad stock price indexes to record Homebuilding also showed marked highs. weakness, in part because builders hesitated to start new projects until they could work down stocks of Long-Term Interest Rates unsold new homes. Percent While output growth was stalling in Monthly the first half of this year, the still high level of resource utilization of the Home Mortgage economy, as well as the effects of rapid Primary Conventional increases in materials prices, contrib uted to a pickup in inflation from its 1994 pace. Nonetheless, by July it appeared likely that pressures on resources and hence on prices were in the process of easing. Materials prices were showing signs of softening, and a period of greater stability in the exchange value of the dollar suggested 1983 1985 1987 1989 1991 1993 1995 that the rise of import prices might soon slow. With the threat of future inflation thus reduced, the FOMC elected to ease the stance of policy slightly at its meeting in July. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 9 Weighted Average Foreign Exchange With the dollar at times under greater Value of the U.S. Dollar downward pressure than seemed December 1993 = 100 justified by fundamentals, the Federal Reserve, acting on behalf of the Daily Treasury and for its own account, joined other central banks in concerted intervention in support of the currency on several occasions in 1995. In recent weeks, the dollar has fluctuated in a range somewhat above the lows reached in the spring. Despite the slower expansion of nominal spending this year, net borrowing by households and busi nesses remained substantial. In fact, total private credit flows strengthened, 1993 1994 1995 offsetting slower growth of federal Note. Index of weighted average foreign exchange debt and an outright decline in state value of U.S. dollar in terms of currencies of the other and local government debt; as a result, G-10 countries. Weights are based on 1972-76 global trade of each of the foreign countries. total domestic nonfinancial debt expanded at a 5½ percent pace from the fourth quarter of 1994 through The drop in longer-term interest May, a little faster than in 1994. Credit rates in the United States contributed supply conditions remained quite to downward pressure on the foreign favorable, with banks continuing to exchange value of the dollar in 1995. ease terms and conditions of lending In terms of the currencies of the other and risk spreads in securities markets G-10 countries, the dollar has declined persisting at quite low levels. House 7½ percent on balance. Over the past hold borrowing this year has been a half-year, foreign long-term interest bit more subdued than in 1994 but still rates have fallen significantly as appreciable. Nonfinancial businesses growth prospects abroad have have stepped up their borrowing weakened, but by less than U.S. considerably, reflecting a widening long-term interest rates. In addition, gap between capital expenditures the Mexican crisis was seen by market (including inventory investment) and participants as having adverse internally generated funds, along with implications for U.S. growth, espe balance sheet restructuring associated cially exports, and contributed to the with stock repurchases and a surge in dollar's decline in terms of currencies merger and acquisition activity. other than the peso in early 1995. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 10 Changes in Bank Lending In their usual fashion, yields on small Standards for Business Loans time deposits and money market by Size of Borrower mutual funds have adjusted with a lag Percent to the declines in market interest rates this year. Investors have responded by shifting their portfolios toward these assets, boosting M2 growth from the -.....\-,;\ __L__ ar-=-g_e __________ 50 fourth quarter through June to 3¼ percent at an annual rate. M2 velocity over the first half of 1995 is ---~---------- 25 estimated to have held about steady, ·in marked contrast to the rise in M2 velocity over the previous five years. + --------'..-,::::::,~--¥-------- 0 Unlike the broad monetary aggre gates, Ml growth has been quite sluggish this year. Low interest returns on transaction deposits have encour 1990 1991 1992 1993 1994 1995 aged households and businesses to Note. Percentage of banks tightening standards less move excess balances into higher percentage easing standards. yielding M2 assets and also into market instruments. This process has Although the decline in long-term been amplified by the expansion of interest rates this year has spurred a retail sweep accounts offered by a few significant pickup in bond issuance banks that allow customers to hold a and fixed-rate mortgage borrowing lower average level of transaction very recently, the increase in credit balances. Currency growth-although this year has been concentrated in slower than the double-digit pace of short-term or floating-rate debt. the last two years-has remained Depository institutions, as tradi strong, boosted again by heavy foreign tional providers of short-term and demands. floating-rate credit, have enjoyed a sharp increase in loan demand. To fund the growth of their loan port folios, banks and thrifts pulled in more deposits, providing a lift to growth of the broad monetary aggregates. Indeed, M3 expanded at a 6¼ percent pace from the fourth quarter through June, slightly exceeding the upper bound of its revised annual range. Digitized for FRASER https://fraser.stlouisfed.org 11 Federal Reserve Bank of St. Louis Economic Projections be less severe than in the first half of for 1995 and 1996 1995. Finally, the anticipated pickup in spending will help businesses work off The members of the Board of Gover excess inventories more rapidly and nors and the Reserve Bank presidents, reduce the need for further production all of whom participate in the delibera cutbacks to bring inventories back in tions of the Federal Open Market line with final sales. Committee, generally anticipate that, The Board members and the Reserve after a weak second quarter, the Bank presidents generally expect the economy will experience moderate rise in the consumer price index over growth in the second half of 1995 and the four quarters of 1995 to end up in 1996. For all of 1995, this would around 3¼ percent, the same as in the produce growth that was somewhat first half of the year. For 1996, inflation below forecasts made for the February is projected to edge down to the ~eeting. In line with these expecta neighborhood of 3 percent. The tions, the unemployment rate in the first-half slowdown in the industrial second half of 1995 may move up sector has reduced pressure on somewhat from its recent relatively materials prices; moreover, wage low level. trends have been stable, suggesting A number of factors should contrib tha~ labor costs are unlikely to provide ute to a pick up in demand and an rmpetus to inflation. production over coming months. Lower interest rates, in particular, likely will directly stimulate spending Change in Consumer Prices on housing, motor vehicles and Percent, Dec. to Dec. consumer durables, and business investment. Moreover, increases in the value of bond and stock portfolios that have accompanied the decline in ----------6 interest rates should strengthen aggregate demand more generally. The strong competitive position of the ----------4 United States likely will bolster net export growth on balance over the remainder of 1995. To be sure, the -1--- 2 level of U.S. exports to Mexico probably will remain depressed for some time, but Mexico's external adjustment has already been substan 1989 1991 1993 1995 tial and further declines in U.S. export Consumer price index for all urban consumers. Value for 1995 is measured from December 1994 to June 1995, demands from this source are likely to at an annual rate. Digitized for FRASER https://fraser.stlouisfed.org 12 Federal Reserve Bank of St. Louis The Administration has not released The inflation rates anticipated by an update of the economic projections the FOMC are marginally above those contained in the February Economic prevailing in 1993 and 1994 but are Report of the President. Those earlier considerably below rates of only a few forecasts pointed to real GDP growth years ago-and lower than many of 2.4 percent for 1995, well within observers seemed to anticipate for the the central tendency range in the current economic expansion only a Federal Reserve' s February report. few months ago. Nonetheless, they Given the slow startthis year, that should be regarded as only a milepost growth pace for the year appears less along the path toward the long-term likely, and the average unemployment goal of price stability. The Federal rate for the year probably will be Reserve recognizes that eliminating around the upper end of the 5.5 to the economic distortions associated 5.8 percent range in the Administra with inflation is the most important tion's February report. The Adminis long-run contribution it can make to tration's 3.2 percent CPI forecast is in the economic growth and welfare of line with the Federal Reserve' s central the nation. tendency. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 13 Economic Projections for 1995 and 1996 Percent Federal Reserve Governors and Reserve Bank Presidents Administration Central 1995 Range Tendency Change, Nominal GDP 3¾to5¼ 4¼to4¾ 5.4 fourth quarter to fourth Real GDP P/s to 3 l½to2 2.4 quarter:1 Consumer price index2 3to3½ 31/s to 33/s 3.2 Average level in Civilian unemployment rate 5½ to6¼ 5¾ to 61/s 5.5-5.83 the fourth quarter: Central 1996 Range Tendency Change, Nominal GDP 45/sto5½ 4¾to53/s 5.5 fourth quarter ---------------------- to fourth Real GDP 21/s to 3 2¼to2¾ 2.5 quarter:1 Consumer price index 2 2½to3½ 27/sto3¼ 3.2 Average level in Civilian unemployment rate 5½ to6¼ 5¾to61/s 5.5-5.83 the fourth quarter: 1. Change from average for fourth quarter of 2. All urban consumers. previous year to average for fourth quarter of 3. Annual average. year indicated. Digitized for FRASER https://fraser.stlouisfed.org 14 Federal Reserve Bank of St. Louis Money and Debt Ranges The Committee retained its current for 1995 and 1996 range of 1 to 5 percent for M2 for 1995 and chose the same range for 1996. In setting ranges for money and debt If M2 velocity continues on a more in 1995 and 1996, the Committee noted normal track, growth of M2 in the that the velocities of the monetary upper half of this range in 1995 and aggregates have been behaving more near the upper bound of the provi in line with historical patterns than sional range in 1996 would was the case earlier in the decade. be consistent with the Committee's However, financial innovation, expectations for nominal income technological change, and deregula growth. The existing range was tion have blurred distinctions among retained for next year in view of the various financial instruments that can lingering uncertainties about the serve as savings vehicles and sources money-income relationship and of credit. As a consequence, consider to serve as a benchmark for the rate able uncertainty remains about the of growth of M2 that would be future relationships of money and expected under conditions of reason debt to the fundamental objectives of able price stability and historical monetary policy; the Committee will velocity behavior. The Committee also thus continue to rely primarily on a reaffirmed the 3-to-7 percent range for wide range of other information in the debt aggregate and carried this determining the stance of policy. range forward on a provisional basis for 1996, concluding that debt growth Ranges for Growth of Monetary and within this range would be expected Credit Aggregates 1 to accompany the moderate economic Percent expansion it was seeking to foste_r. With regard to M3, the Comrmttee Provisional had noted in its February 1995 report Aggregate 1994 1995 for 1996 to Congress that the depressed growth of this aggregate in recent M2 1-5 1-5 1-5 years reflected the balance sh~et . adjustments of banks and thrifts m M3 0-4 2-6* 2-6 response to the extraordinary strains they experienced in the early 1990s. Debt2 4-8 3-7 3-7 The Committee observed that, as these institutions returned to health and 1. Change from average for fourth quarter of intermediation resumed more normal preceding year to average for fourth quarter of year indicated. . patterns, M3 growth could pick up 2. Monitoring range for debt of domestic appreciably and the velocity of M3 nonfinancial sectors. might begin to stabilize or even *Revised at July 1995 FOMC meeting. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 15 decline, as it had on average over meeting-to 2 to 6 percent for 1995- several decades before 1990. In the and carried that range forward on a event, M3 has strengthened consider provisional basis into 1996. The ably so far in 1995, apparently for the Committee stressed that this change reasons noted by the Committee in simply recognized the return of February. As a consequence, the historical financing patterns and bore Committee made a technical adjust no implications for the underlying ment in its M3 range at the July thrust of monetary policy. Digitized for FRASER https://fraser.stlouisfed.org 16 Federal Reserve Bank of St. Louis Growth of Money and Debt Percent Domestic Period Ml M2 M3 Nonfinancial Debt Year1 1980 7.4 8.9 9.6 9.1 1981 5.4 (2.5)2 9.3 12.4 9.9 1982 8.8 9.2 9.9 9.6 1983 10.4 12.2 9.9 11.8 1984 5.5 8.1 10.9 14.4 1985 12.0 8.7 7.6 14.1 1986 15.5 9.3 8.9 13.5 1987 6.3 4.3 5.7 10.2 1988 4.3 5.3 6.3 9.0 1989 0.6 4.8 3.8 7.9 1990 4.2 4.0 1.7 6.5 1991 7.9 2.9 1.2 4.6 1992 14.3 2.0 0.5 4.7 1993 10.5 1.7 1.0 5.2 1994 2.3 1.0 1.4 5.1 1994 Ql 5.5 1.8 0.6 5.2 Quarter (annual rate)3 Q2 2.7 1.7 1.3 5.4 Q3 2.4 0.9 2.1 4.2 Q4 -1.2 ---0.3 1.7 5.2 1995 Ql 0.0 1.6 4.3 5.5 Quarter (annual rate) 3 Q2 ---0.9 4.2 6.7 5.4 1. From average for fourth quarter of preced- 3. From average for preceding quarter to ing year to average for fourth quarter of year average for quarter indicated. indicated. 2. Adjusted for shifts to NOW accounts in Digitized for1 9F8R1A. SER FRBl-45000-0795 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 17

Federal Reserve (1995, July 18). Monetary Policy Report. Monetary Policy Reports, Federal Reserve. https://whenthefedspeaks.com/doc/monetary_policy_report_19950719

@misc{wtfs_monetary_policy_report_19950719,
  author = {Federal Reserve},
  title = {Monetary Policy Report},
  year = {1995},
  month = {Jul},
  howpublished = {Monetary Policy Reports, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/monetary_policy_report_19950719},
  note = {Retrieved via When the Fed Speaks corpus}
}