A telephone conference meeting was held on
January 3, 2001, for the purpose of considering a policy easing action. In
keeping with the Committee's Rules of Organization, the members at the start
of the meeting unanimously re-elected Alan Greenspan as Chairman of the
Federal Open Market Committee and William J. McDonough as Vice Chairman. Their
terms of office were extended for one year until the first meeting of the
Committee after December 31, 2001. By unanimous vote, the Federal Reserve Bank
of New York was selected to execute transactions for the System Open Market
Account until the adjournment of the first meeting of the Committee after
December 31, 2001.
At its meeting on December 19, 2000, the
Committee had contemplated the possibility that ongoing economic and financial
developments might warrant a reassessment of the stance of monetary policy
prior to the next scheduled meeting in late January. Information that had
become available since the December meeting tended to confirm that the
economic expansion had continued to weaken. The manufacturing sector was
especially soft, reflecting apparent efforts in a number of industries to
readjust inventories that were now deemed to be too high, notably those
related to motor vehicles. Retail sales were appreciably below business
expectations for the holiday season despite some pickup in the latter half of
December, apparently largely induced by price discounting, and sales of motor
vehicles evidenced significant further weakness as the month progressed.
Business confidence appeared to have deteriorated further since the December
meeting amid widespread reports of reductions in planned production and
capital spending. Elevated energy costs were continuing to drain consumer
purchasing power and were adding to the costs of many business firms, with
adverse effects on profits and stock market valuations. Interacting with these
developments were forecasts of further declines in business profits over
coming quarters. On the more positive side, housing activity appeared to be
responding to lower mortgage interest rates, and on the whole nonresidential
construction activity seemed to be reasonably well maintained. Moreover, while
the expansion had weakened and economic activity might remain soft in the near
term, the longer-term outlook for reasonably sustained economic expansion,
supported by easier financial conditions and the response of investment and
consumption to rising productivity and living standards, was still quite good.
Inflation expectations appeared to be declining, with businesses continuing to
encounter marked and even increased resistance to their efforts to raise
prices. On balance, the information already in hand indicated that the
expansion clearly was weakening and by more than had been anticipated. In the
circumstances, prompt and forceful policy action sooner and larger than
expected by financial markets seemed called for.
Against this background, all the members
supported a proposal for an easing of reserve conditions consistent with a
reduction of 50 basis points in the federal funds rate to a level of 6
percent. The Committee voted to authorize and direct the Federal Reserve Bank
of New York, until it was instructed otherwise, to execute transactions in the
System Account in accordance with the following domestic policy directive:
The Federal Open Market Committee seeks
monetary and financial conditions that will foster price stability and
promote sustainable growth in output. To further its long-run objectives,
the Committee in the immediate future seeks conditions in reserve markets
consistent with a reduction in the federal funds rate to an average of
around 6 percent.
The vote encompassed approval of the
sentence below for inclusion in the press statement to be released shortly
after the meeting:
Against the background of its long-run goals
of price stability and sustainable economic growth and of the information
currently available, the Committee believes that the risks are weighted
mainly toward conditions that may generate economic weakness in the
Votes for this action: Messrs.
Greenspan, McDonough, Ferguson, Gramlich, Hoenig, Kelley, Meyer, Minehan,
Moskow, and Poole.
Votes against this action: None.
Chairman Greenspan indicated that shortly
after this meeting the Board of Governors would consider pending requests by
several Federal Reserve Banks to reduce the discount rate by 25 basis points.
At the time of this conference call meeting, no pending requests for a 50
basis point reduction were outstanding, but the press release would indicate
that the Board would be prepared to consider requests for further reductions
of 25 basis points if they were received.
Donald L. Kohn