By unanimous vote, the minutes of
the meeting of the Federal Open Market Committee held on March 21,
2000, were approved.
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 March 21, 2000, through May 15, 2000. The Committee
ratified these transactions by unanimous vote.
With Mr. Broaddus dissenting, the
Committee voted to extend for one year beginning in mid-December 2000
the reciprocal currency ("swap") arrangements with the Bank
of Canada and the Bank of Mexico. The arrangement with the Bank of
Canada is in the amount of $2 billion equivalent and that with the
Bank of Mexico in the amount of $3 billion equivalent. Both
arrangements are associated with the Federal Reserve's participation
in the North American Framework Agreement, which was established in
1994. Mr. Broaddus dissented because he believed that the swap lines
existed primarily to facilitate foreign exchange market intervention,
and he was opposed to such intervention for the reasons he had
expressed at the February meeting.
The Manager discussed some aspects
of a suggested approach to the management of the System's portfolio
over coming quarters prior to the Committee's review of an ongoing
study relating to the conduct of open market operations in a period of
substantial declines in outstanding Treasury debt. During that
interim, the management of the System portfolio should try to satisfy
a number of objectives: keeping the maturity of the portfolio from
lengthening materially; meeting long-run reserve needs to the extent
possible through outright purchases of Treasury securities without
distorting the yield curve or impairing the liquidity of the market;
and concentrating expansion of the System portfolio in
"off-the-run" securities in the secondary market to help to
maintain liquid markets in benchmark securities. It was important to
announce a strategy to allow market participants to take the System's
operations into account as they adapted to the declining Treasury debt
levels. While no specific blueprint could be given at this point
regarding future Desk operations, the members encouraged the Manager
to discuss his plans with Treasury officials.
The Committee then turned to a
discussion of the economic and financial outlook and the
implementation of monetary policy over the intermeeting period ahead.
The information reviewed at this
meeting suggested that economic growth had remained rapid through
early spring. Consumer spending and business fixed investment were
still trending upward strongly, and housing demand was holding at a
high level. Industrial production and nonfarm payrolls were expanding
briskly in response to burgeoning domestic demand, but the strength of
demand was also showing through in the form of rising imports. Labor
markets continued to be very tight, and some measures of labor costs
and price inflation showed signs that they might be picking up.
Employment surged in March and
April. Part of the pickup resulted from a step-up in government hiring
of census workers, but gains in private employment were very large
over the two months. Job growth in retail trade and services was
robust, and employment in manufacturing and construction trended
higher. The civilian unemployment rate dropped in April to 3.9
percent, a thirty-year low.
Industrial production accelerated in
April after a strong gain in the first quarter. Manufacturing, notably
in high-tech industries, led the way, but growth in mining and
utilities also was sizable. The pickup in manufacturing lifted the
factory operating rate further, and capacity utilization in April was
about equal to its long-term average.
Consumer spending increased very
rapidly in the first quarter but apparently decelerated early in the
second quarter. Nominal retail sales were down slightly in April after
brisk gains in February and March. Sales slumped at durable goods
stores and changed little at nondurable goods outlets. However, the
underlying trend in spending remained strong as a result of robust
expansion of disposable incomes, the large accumulated gains in
household wealth, and very positive consumer sentiment.
Residential housing activity stayed
at an elevated level in April; total private housing starts edged
higher while starts of multifamily units partially reversed a sharp
drop in March. Sales of both new and existing single-family homes rose
in March (latest data). The persisting strong demand for housing
during a period of rising mortgage rates apparently was being
underpinned by the rapid growth of jobs and the accumulated gains in
stock market wealth.
Business fixed investment was up
sharply in the first quarter after a sluggish performance late last
year. The pickup encompassed both durable equipment and software and
nonresidential structures. Shipments of computing and communications
equipment surged following the century rollover, and shipments of
other non-aircraft capital goods recorded an unusually large rise as
well. Moreover, the recent strength in orders for many types of
equipment pointed to further advances in capital spending in coming
months. Expenditures for nonresidential structures, which had turned
up last autumn, rose rapidly in the first quarter; unusually favorable
weather over the two quarters likely was a contributing factor. The
upturn in nonresidential building activity was spread broadly across
the major types of structures.
The pace of accumulation of
manufacturing and trade inventories slowed somewhat in the first
quarter following a sizable buildup in late 1999, and the aggregate
inventory-sales ratio edged down from an already very low level.
Stockbuilding by manufacturers and merchant wholesalers picked up
slightly in the first quarter, but stocks remained at low levels in
relation to sales. By contrast, inventory investment slowed among
retailers. Part of this slowdown might have involved a liquidation of
precautionary stocks built up in anticipation of the century date
change. The inventory-sales ratio in this sector was at a historically
lean level.
The U.S. trade deficit in goods and
services reached another new high in February as the value of imports
rose sharply further and the value of exports changed little. For the
January-February period, the moderate rise in exports and the sharp
increase in imports from fourth-quarter levels were spread across most
major trade categories. The available information suggested that
economic expansion remained robust in most foreign industrial
economies. The recent decline in the exchange value of the euro was
spurring economic activity in the euro area, and Canada was benefiting
from spillovers from the U.S. economy. For the Japanese economy, which
had been the notable exception among the foreign industrial economies,
there were indications of some strengthening of aggregate demand
during the first five months of the year. Economic activity in the
developing countries also continued to pick up. Key South American
countries were recovering from recent recessions, while several Asian
emerging-market countries were settling into growth at more
sustainable rates.
Recent information suggested that
price inflation might be picking up slightly and only partly as a
direct result of increases in energy prices. Although consumer prices
were unchanged in April, they recorded sizable step-ups in February
and March; moreover, while the rise in core consumer prices over the
twelve months ended in April was the same as the change in the
year-earlier twelve-month period, core consumer price inflation was up
slightly in the March-April period compared with other recent months.
At the producer level, prices of finished goods other than food and
energy edged higher in March and April, but the increase over the
twelve months ended in February was a little smaller than the rise
over the preceding twelve months. With regard to labor costs, the
employment cost index for hourly compensation of private industry
workers registered a larger advance in the first quarter than in
previous quarters, and the rate of increase in compensation over the
year ended in March was substantially larger than the rise over the
year-earlier period. Faster growth in benefits accounted for more than
half of the acceleration. Average hourly earnings of production or
nonsupervisory workers grew at a slightly faster rate in April than in
March, and the increase for the twelve months ended in April was
larger than for the previous twelve-month period.
At its meeting on March 21, 2000,
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 about 6
percent. The members saw substantial risks of rising pressures on
labor and other resources and of higher inflation, and they agreed
that the tightening action would help bring the growth of aggregate
demand into better alignment with the sustainable expansion of
aggregate supply. They also noted that even with this additional
firming the risks were still weighted mainly in the direction of
rising inflation pressures and that more tightening might be needed.
Open market operations during the
intermeeting period were directed toward implementing the desired
slightly tighter pressure on reserve positions, and the federal funds
rate averaged very close to the Committee's 6 percent target. The
Committee's action and its announcement were widely anticipated and
had little initial effect on financial markets. Later in the week,
however, market interest rates moved up in response to the release of
the minutes of the February meeting and the mention therein of some
sentiment for a larger policy tightening than had been undertaken.
Subsequently, interest rates fell as stock prices tumbled over the
first half of April, when investors seemed to revise downward their
assessments of equity valuations, especially those of more speculative
technology shares that previously had risen considerably. Interest
rates more than reversed those declines, however, when stock prices
began to level out and incoming data suggested that aggregate demand
continued to expand faster than potential supply and that wage and
price developments were becoming more worrisome. On balance over the
intermeeting period, private interest rates moved up appreciably while
Treasury yields increased somewhat less. Most major indexes of equity
prices declined significantly over the intermeeting period.
In foreign exchange markets, the
trade-weighted value of the dollar appreciated considerably over the
intermeeting period against a basket of major currencies, reflecting
in part the larger intermeeting increase in U.S. long-term yields
relative to rates in most foreign industrial countries. The dollar's
rise against the euro was sizable, but the dollar also made moderate
gains against the British pound, the Japanese yen, and the Canadian
dollar. The dollar also appreciated somewhat against the currencies of
a group of other important trading partners, notably the Mexican peso
and the Brazilian real.
Growth of M2 picked up further in
April from its already strong pace in March, as households boosted
their liquid balances to meet higher-than-usual levels of final
payments on 1999 taxes. In contrast, M3 growth slowed considerably in
April after a robust March advance. From the fourth quarter of 1999
through April, M2 and M3 expanded at rates well above the upper ends
of their annual ranges for 2000. Total domestic nonfinancial debt
continued to expand at a pace in the upper portion of its range.
The staff forecast prepared for this
meeting continued to suggest 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
earlier large gains in equity prices and by higher interest rates. As
a result, the growth of spending on consumer durables and houses was
expected to slow; in contrast, however, overall business investment in
equipment and software was projected to remain robust, partly because
of the upward trend in replacement demand, especially for computers
and software. In addition, continued solid economic growth abroad was
expected to boost the growth of U.S. exports for some period ahead.
Core price inflation was projected to rise noticeably over the
forecast horizon, partly as a result of higher import prices and some
firming of gains in nominal labor compensation in persistently tight
labor markets that would not be fully offset by productivity growth.
In the Committee's review of current
and prospective economic and financial developments, members focused
on persisting indications that aggregate demand was expanding more
rapidly than potential supply and that pressures on labor and other
producer resources were continuing to increase. While there were
tentative signs that the growth in demand might be moderating in some
key sectors of the economy, such as retail sales and housing,
clear-cut evidence of any significant deceleration in the rapid growth
of aggregate demand was lacking. Bond yields and other financial
conditions had firmed to some extent recently, but those adjustments
had been influenced by the buildup in market expectations of more
monetary policy tightening. In the absence of further monetary
restraint, any slowing over coming quarters was not viewed as likely
to be sufficient to avert increasing pressures on the economy's
already strained resources and rising inflation rates that would
undermine the economy's remarkable performance. Adding to concerns
about heightened inflation pressures was statistical and anecdotal
evidence that could be read as suggesting that underlying inflation
already was beginning to pick up. Unit costs, however, were still
remarkably subdued and members saw no developments at this stage that
might augur a sharp near-term deterioration in price inflation.
In their assessment of business
conditions across the country, members commented on continuing
indications of robust economic activity in all regions and widely
increasing pressures on labor and other resources. Indeed, economic
activity appeared to have grown appreciably further from already
elevated levels in numerous parts of the country, although the latest
regional data and anecdotal reports provided scattered indications
that business conditions might be starting to soften in some areas. In
this regard, members referred to the emergence of slightly more
cautious attitudes on the part of some business executives concerning
the prospects for their industries.
With respect to developments in key
expenditure sectors of the economy, growth in consumer spending was
expected to slow from the exceptional pace of the first quarter,
though still likely to be relatively robust. Retail sales had edged
lower in April, but members commented that it was too early to gauge
whether this softening was a harbinger of a more moderate trend.
Consumer sentiment had remained upbeat in the context of an extended
period of sizable expansion in employment and incomes and the sharp
rise in stock market prices over the course of recent years. Some
members observed that the slightly less ebullient consumer behavior
recently might have been influenced to some extent by the volatility
and downward movement in the stock market over the course of the past
several weeks. Higher financing costs probably also were beginning to
play a role. Looking ahead, the experience of recent years amply
demonstrated the difficulty of forecasting the performance of the
stock market. The failure of further large increases to materialize,
should that occur, would over time imply a more neutral or even a
negative net impact from wealth once the positive effects of the
earlier advance had played themselves out, but the latter would take
some time.
The same background factors were
likely to govern the prospective behavior of housing activity. The
evidence of a downturn in homebuilding was still quite marginal, but
some anecdotal reports suggested that higher mortgage rates were
starting to exert a retarding influence on housing demand. Even so,
members continued to identify areas of remarkable strength across the
nation, and overall housing construction remained at an elevated
level. On the assumption of further growth in jobs and incomes in line
with current forecasts and absent markedly higher mortgage financing
costs, housing activity might reasonably be expected to settle at a
level a bit below recent highs.
Business investment spending
retained strong upward momentum, though it had exhibited an uneven
growth pattern in recent quarters that importantly reflected Y2K
effects. Looking ahead, further rapid growth was expected in spending
for business equipment and software in light of likely ongoing efforts
to hold down costs by substituting capital embodying advanced
technology for scarce labor resources. Recent order trends and rising
capacity utilization rates were consistent with this expectation.
Expenditures on nonresidential structures and other construction
generally had strengthened in recent months, and members expected them
to be well maintained in part because of heavy spending on roads and
other public projects by state and local governments.
The foreign trade sector of the
economy was projected to provide less of a safety valve for the
accommodation of domestic demand going forward. Although a number of
foreign nations continued to face political and economic problems, the
strengthening economies of many U.S. trading partners would tend to
limit the availability of excess foreign production capacity to help
meet the growth in U. S. demand. At the same time, foreign demand for
U.S. goods and services would be expanding, thereby adding to demand
pressures on U.S. producer resources, other things equal. In the
latter regard, several members mentioned anecdotal evidence of growing
export demand for a variety of domestic products.
In their discussion of the outlook
for inflation, the members focused on statistical and anecdotal
indications of further tightening of labor resources, acceleration in
some measures of labor compensation, and early signs of a possible
upturn in underlying price inflation. Data on employment, reinforced
by anecdotal commentary from around the country, continued to provide
evidence of extremely tight labor markets, which at least in some
parts of the country appeared to have tightened further since early in
the year. Business contacts spoke of spending a great deal of time and
expense to attract and retain workers while concomitantly persisting
in efforts to improve the productivity of their operations to
accommodate burgeoning growth in demand in the face of labor force
constraints. There were more reports that rising wages and benefits
and increasing costs of nonlabor inputs could no longer be fully
offset by improvements in productivity, and more business firms
appeared to be attempting or considering increases in their selling
prices to maintain or improve their profit margins. However, their
ability to set higher prices, or at least to raise them significantly,
continued to be severely constrained by the persistence of strong
competition across much of the economy. Indeed, examples of successful
efforts to mark up prices, which tended to be concentrated in products
using oil-related inputs, were still the exception. Even so, the
members believed that the risks of acceleration in core prices were
now appreciably higher given current trends in aggregate demand,
pressures on resources, and developments in foreign economies.
In the Committee's discussion of
policy for the intermeeting period ahead, all the members endorsed a
proposal to tighten reserve conditions sufficiently to raise the
federal funds rate by � percentage point to a level of 6-1/2 percent.
A more forceful policy move than the 25 basis point increases that had
been implemented since mid-1999 was desirable in light of the
extraordinary and persisting strength of overall demand, exceeding
even the increasingly rapid growth of potential supply, and the
attendant indications of growing pressures in already tight markets
for labor and other resources. The strength in demand might itself be,
at least in part, the result of the ongoing acceleration of
productivity, with the latter feeding back on demand through higher
equity prices and profitable investment opportunities. Financial
markets seemed to have recognized the need for real interest rates to
rise further under these circumstances, and while market assessments
were not always correct, the evidence suggested that a more
substantial tightening at this meeting was needed to limit inflation
pressures. The members saw little risk in a relatively aggressive
policy move, given the strong momentum of the expansion and widespread
market expectations of such a move. The greater risk to the economic
expansion at this point was for policy to be too sluggish in
adjusting, thereby allowing inflationary disturbances and dislocations
to build. A 50 basis point adjustment was more likely to help
forestall a rise in inflationary expectations that, at least in the
opinion of some members, already showed signs of worsening. A
widespread view that the Federal Reserve would take whatever steps
were needed to hold down inflation over time probably had contributed
to the persistence of subdued long-run inflation expectations during
an extended period when rapidly rising demand was pressing on limited
supply resources. Today's policy move would undergird such relatively
benign expectations and help assure the success of the Committee's
policy.
The members agreed that the balance
of risks sentence that would be included in the press statement to be
released shortly after this meeting should indicate, as it had for
other recent meetings, that even after today's tightening action the
members believed the risks would remain tilted toward rising
inflation. This view of the risks was based primarily on the
persisting momentum of aggregate demand growth and the unusually high
level of labor resource utilization. At the same time, a number of the
members commented that they did not want to prejudge the potential
extent or pace of future policy tightening and that the Committee
should continue to assess the need for further policy moves in the
light of evolving economic conditions to be reviewed on a
meeting-by-meeting basis.
At the conclusion of this
discussion, 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 increasing the federal
funds rate to an average of around 6-1/2 percent.
The vote also 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
the risks are weighted mainly toward conditions that may generate
heightened inflation pressure in the foreseeable future.
Votes for this action:
Messrs. Greenspan, McDonough, Broaddus, Ferguson, Gramlich, Guynn,
Jordan, Kelley, Meyer, and Parry.
Votes against this action:
None.
It was agreed that the next meeting
of the Committee would be held on Tuesday-Wednesday, June 27-28, 2000.
The meeting adjourned at 1:05 p.m.
