By unanimous vote, the minutes of
the meeting of the Federal Open Market Committee held on November 16,
1999, were approved.
The Report of Examination of the
System Open Market Account, conducted by the Board's Division of
Reserve Bank Operations and Payment Systems as of the close of
business on September 10, 1999, was accepted.
The Manager of the System Open
Market Account reported on recent developments in foreign exchange
markets. There were no open market operations in foreign currencies
for the System's account in the period since the previous meeting, 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 November 16, 1999, through December 20, 1999. By
unanimous vote, the Committee ratified these transactions.
The Committee then turned to a
discussion of recent and prospective economic and financial
developments, and the implementation of monetary policy over the
intermeeting period ahead.
The information reviewed at this
meeting suggested continued strong expansion of economic activity.
Consumer demand was particularly robust and business fixed investment
remained on a strong upward trend. Housing activity was still at an
elevated level despite some recent slippage. As a consequence,
manufacturing production had increased briskly in recent months, and
nonfarm payrolls continued to rise rapidly. Despite very tight labor
markets, labor compensation had been climbing more slowly than last
year. Aggregate price increases had been smaller in recent months,
reflecting a flattening in energy prices after a rapid run-up.
Nonfarm payroll employment rose
substantially further in October and November. Job growth in the
services industry remained rapid in the two months, construction
hiring continued buoyant against a backdrop of project backlogs and
unseasonably warm weather, and the pace of job losses in manufacturing
slowed further. The civilian unemployment rate fell to 4.1 percent in
October, its low for the year, and remained at that level in November.
Industrial production continued to
advance briskly in the October-November period, reflecting sizable
gains in manufacturing and mining output. Within manufacturing, the
production of consumer goods, construction supplies, and materials was
up substantially. The further advance in manufacturing production in
the two months boosted the factory operating rate, but capacity
utilization in manufacturing in November was still a little below its
long-term average.
Total nominal retail sales rose
appreciably in the first two months of the fourth quarter. Sales gains
were widespread, but purchases of durable goods, especially light
vehicles, were particularly strong. Anecdotal reports suggested that
growth in consumer outlays was remaining brisk in December.
Housing activity, though somewhat
softer in recent months, continued at a high level. Total private
housing starts slipped in November after having held steady in
October. In addition, sales of new homes in the September-October
period (latest data) were a little below the pace recorded in the
spring and early summer months, and existing home sales registered a
fourth consecutive decline in October.
The available information on orders
and shipments suggested some slowing in the very rapid growth of
business spending for capital equipment. Shipments of nondefense
capital equipment recovered only partially in October from a large
September decline. Much of the pickup reflected a surge in shipments
of computers and related equipment in October after a plunge in the
preceding two months. Trends in orders suggested that business
spending on capital equipment, notably for high-tech and
transportation equipment, probably had increased further over the
balance of the fourth quarter. Outlays and contracts for
nonresidential construction slowed further in October. The pace of
office construction in October was close to its third-quarter average;
spending for industrial buildings continued to drop, and outlays for
commercial structures were unchanged from their low September level.
Business inventory investment slowed
in October from the third-quarter pace, primarily reflecting a sizable
liquidation of stocks at automotive dealerships. Stockbuilding among
manufacturers stepped up slightly in October, but the stock-sales
ratio for the sector was near the bottom of its range for the last
twelve months. At the wholesale level, inventory accumulation slowed
noticeably and the inventory-sales ratio for this sector also was near
the bottom of its range for the last twelve months. Total retail
stocks changed little on balance in October because of the sharp
runoff at automotive dealerships. The inventory-sales ratio for the
retail sector as a whole was at the bottom of its range for the last
year.
The U.S. deficit on trade in goods
and services widened somewhat in October from its average for the
third quarter. The value of exports edged up in October from its
third-quarter level but the value of imports rose appreciably more,
with much of the increase reflecting greater imports of consumer goods
and machinery. The available information suggested that economic
expansion in the euro area, the United Kingdom, and Canada picked up
sharply in the third quarter. In contrast, economic activity declined
in Japan during the third quarter after a surge in the first half of
the year. Among the developing countries, economic activity continued
to expand in emerging Asia and parts of Latin America.
Inflation remained subdued in recent
months. Consumer price inflation edged down in October and November as
energy prices steadied after having increased rapidly earlier in the
year. Moreover, excluding the volatile food and energy components,
consumer prices rose slightly less in the twelve months ended in
November than in the previous twelve-month period. At the producer
level, prices of finished goods other than food and energy were
unchanged in November after a moderate increase in October. For the
year ended in November, core producer prices rose somewhat more than
in the preceding year. However, producer prices at earlier stages of
processing continued to register increases somewhat larger than those
for finished goods. With regard to labor costs, the rise in
compensation per hour in the nonfarm business sector over the four
quarters ending in September was down considerably from the advance in
the preceding four-quarter period. In addition, average hourly
earnings rose moderately in the October-November period and in the
twelve months ended in November.
At its meeting on November 16, the
Committee adopted a directive that called for a slight tightening of
conditions in reserve markets consistent with an increase of �
percentage point in the federal funds rate to an average of around
5-1/2 percent. The members noted that the slight tightening would
enhance the chances for containing inflation and forestalling the
emergence of inflationary imbalances that could undermine the
economy's highly favorable performance. The members also agreed on a
symmetric directive. The special situation in financial markets over
the year-end, along with uncertainty about the economy's response to
the firming already undertaken in 1999, suggested that the Committee
would want to assess further developments through early next year
before considering additional policy action.
Open market operations during the
intermeeting period were directed toward implementing the desired
slightly greater pressure on reserve positions, and the federal funds
rate averaged close to the Committee's 5-1/2 percent target. However,
with the economic expansion still quite strong and in the context of
the expression of concern about the inflationary implications of
unsustainably fast growth in the Committee's announcement of its
decision at the November meeting, incoming economic data were viewed
by market participants as increasing, on balance, the chances of
further monetary tightening in 2000. As a result, most market interest
rates rose somewhat in the period after the November 16 meeting.
Despite the appreciable increase in Treasury bond yields, most broad
stock market indexes advanced further during the intermeeting period.
In foreign exchange markets, the
trade-weighted value of the dollar changed little over the period in
relation to the currencies of a broad group of important U.S. trading
partners. The dollar appreciated against the euro and the Canadian
dollar, but those movements were largely counterbalanced by declines
against the Japanese yen and the currencies of other important trading
partners.
M2 continued to grow at a moderate
rate in November despite strong currency demand that likely was
associated with a combination of robust holiday spending and
precautionary stockpiling for the century rollover. Higher opportunity
costs and currency demand apparently damped growth in holdings of
liquid deposits. By contrast, M3 surged in November, reflecting heavy
issuance of large time deposits to fund increases in bank credit and
vault cash and large inflows to institution-only money market funds.
For the year through November, M2 and M3 were estimated to have
increased at rates somewhat above the Committee's annual ranges for
1999. Total domestic nonfinancial debt continued to expand at a pace
in the upper portion of its range.
The staff forecast prepared for this
meeting suggested that the expansion would gradually moderate from its
currently elevated pace to a rate around or perhaps a little below the
growth of the economy's estimated potential. The expansion of domestic
final demand increasingly would be held back by the anticipated waning
of positive wealth effects associated with large earlier gains in
equity prices, the slower growth of spending on consumer durables,
houses, and business equipment and software in the wake of the
prolonged buildup in the stocks of these items, and the higher
intermediate- and longer-term interest rates that had evolved as
markets came to expect that a rise in short-term interest rates would
be needed to achieve sustainable, noninflationary growth. However,
continued solid economic expansion abroad was expected to boost the
growth of U.S. exports for some period ahead. Core price inflation was
projected to rise somewhat over the forecast horizon, partly as a
result of higher non-oil import prices and some firming of gains in
nominal labor compensation in persistently tight labor markets that
would increasingly outpace even continued rapid productivity growth.
In the Committee's discussion of
current and prospective economic developments, members commented that
the most recent statistical and anecdotal information provided further
evidence of persisting strength in the expansion and of relatively
subdued wage and price inflation. The economy clearly would carry
substantial expansionary momentum into the new year, quite possibly in
excess of growth in the economy's long-run potential, and the key
issue for the Committee was whether growth in aggregate demand would
slow to a more sustainable pace without further tightening in the
stance of monetary policy. Members noted in this regard that evidence
of a slowdown in the expansion was quite marginal at this point and
seemed to be limited largely to some softening in housing activity.
Looking beyond the near term, members continued to anticipate some
moderation in the growth of domestic demand, though the extent of the
moderation remained subject to a wide range of uncertainty related in
part to the difficulty of anticipating trends in stock market prices
and their effects on business and consumer sentiment and spending.
Members also noted that prospective slowing in domestic demand was
likely to be offset, at least to some extent, by further growth in
exports should foreign economies as a group continue to strengthen as
many forecasters anticipated.
Uncertainties about the level and
growth of potential output and the dynamics of the inflation process
made it difficult to relate with confidence projections of demand and
activity to prospects for inflation. Members observed that they saw no
indications that the impressive gains in productivity might be
moderating and, indeed, the most recent data suggested some further
acceleration. Moreover, persistent disparities between the household
and establishment series on employment growth might be reconciled by
higher immigration than previously estimated, further boosting
potential growth. Nonetheless, the increase in aggregate demand had
been exceeding even the now-higher sustainable rate of growth in
aggregate supply, as indicated by declines in the pool of available
but unemployed workers to a very low level and by the rise in imports.
This difference between the growth of demand and potential supply
could well persist unless demand moderated. Absent a possible
moderation, an upturn in unit labor costs was seen as a likely
possibility, with eventual adverse implications for price inflation.
Inflation pressures might also be augmented over time by a number of
special factors such as the rise in energy prices, the effects on
import prices of the dollar's depreciation and strengthening foreign
economies, and faster increases in medical costs. While several of
these factors implied limited price level adjustments, they could
become embedded to a degree in ongoing inflation through their effects
on wage increases and inflation expectations. Over the nearer term,
however, subdued inflation expectations were likely to damp any
incipient uptrend in the rate of price inflation.
In their review of economic
conditions across the nation, several members noted that high levels
of business activity were severely taxing available labor resources
and appeared to be constraining growth in a number of industries and
parts of the country. Rising employment and incomes along with the
advance in stock market prices to new highs in recent weeks were
fostering elevated levels of consumer confidence and would be
supporting consumer spending going forward. Anecdotal reports pointed
to notably brisk retail sales during the current holiday season in
many parts of the country. Sales of new automobiles had rebounded
recently after moderating somewhat from an exceptionally rapid pace
earlier. While recent developments provided little basis for
anticipating slower growth in consumer spending, members commented
that such spending could be vulnerable to adverse developments in the
stock market and the attendant effects on consumer wealth and
confidence; and spending for household durables could be damped by the
anticipated softness in housing activity.
The capital goods markets also
displayed very little evidence of any weakening. They continued to be
characterized by disproportionately large investments in high-tech
business equipment, although demand for more conventional equipment,
apart from farm equipment, also was relatively robust. Assessments of
the outlook for overall business capital investment pointed to further
rapid growth led by outlays for equipment. Business spending on
construction was expected to change little on the whole, with strength
in some sectors, such as warehouse facilities, offset by softness in
sectors such as industrial structures and office buildings. Some
members noted, however, that public works projects would help to
support overall construction activity.
Recent data along with anecdotal
reports indicated some loss of vigor in the nation's housing markets,
though overall activity was still at a high level. The recent pace of
homebuilding was somewhat uneven, with relative strength in some areas
supported by seasonally favorable weather conditions or large
backlogs. Rising mortgage rates were cited as a key factor underlying
the limited moderation in residential construction, but other factors
included the scarcity of skilled construction workers, with some
diverted to nonresidential construction projects, and indications of
overbuilding in some areas. Looking ahead, the members anticipated
that further growth in incomes and the ready availability financing
for most homebuyers would sustain overall housing activity at a
relatively high level.
Forecasts indicated that while real
net exports would continue to decline over the next several quarters,
the rate of decline would moderate substantially. The solid further
expansion expected in many foreign economies, the slower growth of
domestic demand in the United States, and the effects of the slippage
of the foreign exchange value of the dollar on the relative prices of
U.S. goods and services were all seen as contributing to this outcome.
In the course of their comments, members cited a number of examples of
already-improved export markets for a variety of U.S. products. While
expanding foreign demand for U.S. goods and services was a welcome
development from the perspective of numerous business firms, such
demand might add to pressures on U.S. resources with potentially
inflationary implications, depending on the extent to which the growth
in domestic demand would slow going forward. Several members indicated
their concern about the burgeoning current account deficit and the
potential that it could lead to a considerable weakening of the dollar
at some point, which would tend to add to upward pressure on prices
and demand.
In their comments regarding the
outlook for inflation, a number of members expressed concern that the
anticipated moderation in overall demand might not be large enough or
soon enough to forestall added pressures on already-taut labor
markets. Although wage growth had remained moderate to date and unit
labor costs damped, at some point tightening labor markets would begin
to generate wage gains increasingly in excess of productivity gains.
Indeed, a few members were concerned that unit labor costs could begin
to accelerate even at existing labor utilization levels. In addition,
some of the forces that had been restraining inflation--declining oil,
import, and commodity prices, and subdued increases in the costs of
health care--had already reversed. Even so, resulting acceleration in
price inflation might be held down and possibly averted for a time by
the economy's buoyant upward trend in productivity, which could
support profit margins and help maintain the highly competitive
conditions in many markets that made it difficult or impossible for
most business firms to raise their prices. In addition, there had been
no evidence of any erosion in the widespread expectation that
inflation would remain subdued over the long run.
In the Committee's discussion of
policy for the period immediately ahead, all the members endorsed a
proposal to maintain an unchanged policy stance consistent with a
target for the federal funds rate centering on 5-1/2 percent. The
members agreed that the Committee's primary near-term objective was to
foster steady conditions in financial markets during the period of the
century date change and to avoid any action that might erode the
markets' confidence that the Federal Reserve was fully prepared to
provide whatever liquidity would be needed in this period. The members
generally agreed that, if necessary, their concerns about rising
inflation could be addressed at the meeting in early February. They
saw little risk of a significant acceleration in inflation over the
near term, given recent price trends and the absence of indications
that inflationary expectations might be deteriorating, and thus little
cost in deferring consideration of a policy tightening action.
Moreover, the Committee would be in a better position by early
February to assess the delayed effects of its earlier tightening
actions.
On the issue of the intermeeting
tilt in the Committee's directive, most of the members expressed a
preference for retaining the symmetry adopted at the November meeting.
While a preemptive tightening move might be warranted in the
not-too-distant future to help contain inflationary pressures in the
economy, these members believed that a symmetrical directive would
best convey the message that no tightening action was contemplated for
the weeks immediately ahead. Such a directive would therefore be more
consistent with their desire to avoid any misinterpretations of their
policy intentions that might unsettle financial markets during the
sensitive century-date-change period. In this view, longer-run
concerns about rising inflation could be addressed in the press
statement that would be issued after this meeting. A few members
indicated a marginal preference for an asymmetric directive that
focused on the possibility of an eventual rise in interest rates. In
their view, an asymmetric directive would be more consistent with the
consensus among the Committee members regarding the most likely course
of monetary policy over the next few meetings and the use of the bias
statement that had come to encompass this longer horizon and was
understood as such by financial market participants and the public.
Moreover, such a directive was widely anticipated in financial markets
and hence would incur little risk in their view of a market
disturbance in the weeks immediately ahead. However, they could
readily accept a symmetrical directive in light of the contemplated
press announcement.
At the conclusion of this
discussion, the members 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 directive:
The information reviewed at this
meeting suggests continued strong expansion of economic activity.
Nonfarm payroll employment increased substantially further in
October and November, and the civilian unemployment rate stayed at
4.1 percent in November, its low for the year. Manufacturing output
recorded sizable gains in October and November. Total retail sales
rose appreciably over the two months. Housing activity has softened
somewhat over recent months but has remained at a high level. Trends
in orders suggest that business spending on capital equipment has
increased further. The U.S. nominal trade deficit in goods and
services rose in October from its average in the third quarter.
Aggregate price increases have been smaller in the past two months,
reflecting a flattening in energy prices; labor compensation rates
have been rising more slowly than last year.
Most market interest rates are up
somewhat since the meeting on November 16, 1999. Measures of share
prices in equity markets have risen further over the intermeeting
period. In foreign exchange markets, the trade-weighted value of the
dollar has changed little over the period in relation to the
currencies of a broad group of important U.S. trading partners.
M2 continued to grow at a moderate
pace in November while M3 surged. For the year through November, M2
and M3 are estimated to have increased at rates somewhat above the
Committee's annual ranges for 1999. Total domestic nonfinancial debt
has expanded at a pace in the upper end of its range.
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 its meeting in June
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 1998 to the fourth quarter of 1999. The range for
growth of total domestic nonfinancial debt was maintained at 3 to 7
percent for the year. For 2000, the Committee agreed on a tentative
basis in June to retain the same ranges for growth of the monetary
aggregates and debt, measured from the fourth quarter of 1999 to the
fourth quarter of 2000. 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.
To promote the Committee's
long-run objectives of price stability and sustainable economic
growth, the Committee in the immediate future seeks conditions in
reserve markets consistent with maintaining the federal funds rate
at an average of around 5-1/2 percent. In view of the evidence
currently available, the Committee believes that prospective
developments are equally likely to warrant an increase or a decrease
in the federal funds rate operating objective during the
intermeeting period.
Votes for this action:
Messrs. Greenspan, McDonough, Boehne, Ferguson, Gramlich, Kelley,
McTeer, Meyer, Moskow, and Stern.
Votes against this action:
None.
Disclosure Policy
The members of the Committee agreed at this meeting to adopt a number
of proposals offered by the Working Group on the Directive and
Disclosure Policy chaired by Mr. Ferguson, effective with the first
meeting in 2000. One proposal was to issue a press statement after
every meeting even when the Committee decided to maintain its existing
policy stance and did not change its view of future developments in a
major way.
Another proposal was to change the
way the Committee characterized its view of future developments. A few
members wanted to retain the current focus on the possible future
stance of policy, because they thought that the Committee would more
readily be able to reach agreement on the likelihood of future actions
than on the potential reasons such actions might be considered. The
consensus opinion, however, was to replace the Committee's judgment
about the likelihood of an increase or decrease in the intended
federal funds rate with a description of the Committee's perception of
the risks in the foreseeable future to the attainment of its long-run
goals of price stability and sustainable economic growth. Although the
Committee would vote on this assessment of the risks together with its
policy stance, the Committee would no longer include its view of
future developments in the domestic policy directive to the Federal
Reserve Bank of New York, because the new wording did not refer to an
operational matter. The Committee's new directive would contain only a
general statement of its policy objectives, its specific operating
instructions for the intermeeting period, and in February and July a
paragraph on the yearly money and debt ranges. To inform the public
about these decisions, the members agreed that an explanatory press
release should be issued before the February meeting.
The Committee also accepted a
proposal to codify current practice regarding policy moves in the
intermeeting period by amending the Authorization for Domestic Open
Market Operations in February. The amendment was made necessary by the
change in the language of the directive. Intermeeting moves,
authorized by the Chairman, would remain possible but, as in recent
years, would be made only in exceptional circumstances. One member
expressed reservations about the proposed amendment, questioning its
need in light of the instruments already in place to deal with
liquidity emergencies and its appropriateness since it could
potentially allow policy moves to be made, however rarely, without
necessarily drawing on the benefits of full Committee participation.
The other members, however, noted that the practices in place had
worked well over the years, proving themselves a useful adjunct to the
regular Committee decision-making process; that the new language would
maintain those practices, clarifying that latitude to change policy
was to be exercised against the background of the Committee's previous
discussions and only in unusual circumstances; and that, if necessary,
adjustments to the Authorization could be made in the future.
It was agreed that the next meeting
of the Committee would be held on Tuesday-Wednesday, February 1-2,
2000.
The meeting adjourned at 1:30 p.m.
