By unanimous vote, the minutes of
the meeting of the Federal Open Market Committee held on August 22,
2000, were approved.
The Manager of the System Open
Market Account reported on recent developments in foreign exchange
markets and on System transactions in those markets during the period
August 22, 2000, through October 2, 2000. By unanimous vote, the
Committee ratified these transactions.
In ratifying these transactions,
members emphasized that the action was not intended to signal an
increased willingness by the Committee to intervene in foreign
exchange markets. In the current instance, the intervention
transactions were undertaken in a spirit of cooperation with the
international financial community and at the express request of the
European Central Bank (ECB). Members commented that historical
experience suggested that foreign exchange market interventions
generally had not had lasting effects when not accompanied by
supporting changes in macroeconomic policies.
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 August 22, 2000, through October 2, 2000. By
unanimous vote, the Committee ratified these transactions.
The Committee then turned to a
discussion of the economic outlook and the implementation of monetary
policy over the intermeeting period ahead.
The information reviewed at this
meeting suggested that economic activity was expanding at a more
moderate pace than in the first half of the year. The moderation
reflected lower growth in most major expenditure sectors. As a result
of the deceleration in aggregate demand, expansion of employment and
industrial production had slowed. Rising energy prices had boosted
overall price inflation considerably, but core measures of consumer
inflation had increased substantially less.
Total nonfarm payroll employment
dropped further in August, in part reflecting additional large
declines in the number of temporary Census workers. In the private
sector, a labor strike held down the August rise in payroll
employment, but even after adjusting for the effects of the strike,
the pace of private job gains in the July-August period fell
considerably from the rate for the first half of the year. The
slowdown was particularly pronounced in the construction,
manufacturing, and services sectors. The civilian unemployment rate
edged up to 4.1 percent in August.
Total industrial production rose
only slightly on balance during July and August after having
registered strong gains earlier in the year. The pace of production of
high-tech equipment remained rapid, though not at the extraordinary
rates posted earlier in the year, and softer conditions had emerged in
a number of manufacturing industries, including steel, trucks, motor
vehicles, and construction supplies. Because of the weakness in
production, the rate of capacity utilization in manufacturing edged
down to a level slightly below its long-term average.
Consumer spending picked up somewhat
in July and August from a moderate rate of increase in the second
quarter. Real personal consumption expenditures on durable goods
surged in the July-August period, spending on nondurable goods picked
up somewhat less, and consumption of services decelerated a little.
The recent strengthening of consumer spending occurred against the
background of moderate growth of real disposable income in recent
quarters but generally buoyant consumer sentiment.
With interest rates on fixed-rate
mortgages having fallen significantly since mid-May and consumers'
assessments of homebuying conditions having risen recently,
single-family housing starts picked up somewhat in August. However,
such starts were still sharply below their levels of early in the
year, likely reflecting in part the recent smaller gains in income and
employment and the flattening out of equity prices thus far this year.
New home sales picked up in July (latest data), though that gain might
have been overstated as a result of problems with estimation
procedures, and existing home sales bounced back in August, roughly
offsetting a drop in July. Multifamily starts, by contrast, declined
further in August even though vacancy rates remained low and apartment
rents continued to rise.
The available information suggested
that business investment in durable equipment and software increased
substantially further in the third quarter. Data on shipments of
nondefense capital goods in July and August indicated that outlays for
high-tech equipment, notably computing and communications equipment,
remained quite strong. For other types of equipment, spending growth
seemed to be have moderated somewhat after the substantial gains of
the first half of the year. Information on orders for nondefense
capital goods pointed to further slowing in the pace of spending
increases in coming months. Nonresidential construction activity fell
in July but market fundamentals, including rising property values and
lower vacancy rates, suggested the likelihood of further expansion in
nonresidential investment, particularly in office buildings.
Business inventory investment
decreased sharply in July after a large second-quarter advance. Much
of the slowdown was associated with a runoff of stocks of motor
vehicles at wholesalers and automotive dealerships. Elsewhere,
stockbuilding eased a little and sales decelerated somewhat.
Inventory-sales ratios generally were within their ranges for the
preceding twelve months, and there seemed to be only a few scattered
indications of inventory imbalances at the industry level.
The U.S. trade deficit in goods and
services widened considerably in July from its June level, with the
dollar value of exports retracing part of its extraordinary June
increase and the value of imports rising further. The drop in exports
was concentrated in aircraft and automotive products while the advance
in imports was largely in industrial supplies, automotive products,
and services. The available information indicated that economic
expansion in the foreign industrial countries had slowed somewhat in
the third quarter from the robust growth during the first half of the
year, primarily reflecting reduced economic expansion in Japan. Growth
appeared to be somewhat uneven among the developing countries in the
third quarter but remained solid on balance.
Recent information continued to
indicate a slight pickup in price inflation. Consumer prices edged up
on balance over July and August, despite a net drop in energy prices;
excluding the food and energy components, consumer price inflation
remained moderate in both months. On a year-over-year basis, however,
core consumer prices increased somewhat more in the twelve months
ended in August than in the previous twelve-month period. Core
producer prices edged up over the July-August period and decelerated a
little on a year-over-year basis. With regard to labor costs, average
hourly earnings of production or nonsupervisory workers rose
moderately in July and August. The advance for the twelve months ended
in August was slightly larger than that for the previous twelve-month
period.
At its meeting on August 22, 2000,
the Committee adopted a directive that called for maintaining
conditions in reserve markets consistent with an unchanged federal
funds rate of about 6-1/2 percent. In reaching their decision, the
members noted that decelerating demand and surging productivity seemed
to have narrowed the gap between the growth rates of aggregate demand
and potential supply, even though previous policy tightening actions
had not yet exerted their full restraining effects. The members
emphasized, however, that unusually taut labor markets could result in
greater upward pressures on unit costs and prices, especially if
productivity growth were to level out or edge lower in the future, and
they agreed that the statement accompanying the announcement of their
decision should continue to indicate that the risks remained weighted
mainly in the direction of rising inflation.
Open market operations throughout
the intermeeting period were directed toward maintaining the federal
funds rate at the Committee's targeted level of 6-1/2 percent, and the
average rate was close to the intended level. Most short- and
intermediate-term interest rates moved lower over the interval, though
long-term yields changed little or drifted slightly higher. Market
expectations about the near-term prospects for interest rates were
revised downward in response to both the Committee's statement after
the August meeting, which was interpreted as expressing greater
confidence that growth rates of aggregate demand and aggregate supply
were coming into better alignment, and to subsequent data releases,
which were seen as confirming earlier indications of some slowing in
the economic expansion. Against a background of some upward pressure
on long-term Treasury yields and of growing concerns about corporate
earnings, most broad indexes of stock market prices declined somewhat
over the intermeeting period.
In foreign exchange markets, the
trade-weighted value of the dollar increased somewhat further on
balance in terms of an index of major foreign currencies. The dollar's
net appreciation against the euro occurred despite a small policy
tightening by the ECB on August 31 as sentiment toward that currency
remained negative, in part because of concerns about capital flows out
of the euro area. The major industrial countries undertook joint
foreign exchange intervention late in the period, on September 22, to
stem the euro's slide. The intervention was at the initiative of the
ECB and was joined by the United States and other nations because of
shared concern about the potential implications of recent movements in
the euro. The dollar also posted gains against the currencies of a
number of other important trading partners, notably the Brazilian real
and the Mexican peso.
The broad monetary aggregates had
expanded relatively briskly in recent months. The growth of M2,
perhaps reflecting the recent vigor of consumer spending, picked up
considerably in August and September after having increased slowly in
June and July. Averaged across the past four months, however, M2
increased at a pace noticeably below that of earlier in the year, with
the slowdown partly reflecting a lagged response to a widening, during
the first half of the year, of the opportunity costs of holding M2
assets. M3 expansion remained robust in August and September, though
somewhat below the pace in the first half of the year. The growth of
domestic nonfinancial debt slowed somewhat in July and August in
association with some moderation in the brisk pace of private
borrowing that was offset in part by a less rapid paydown of federal
debt.
The staff forecast prepared for this
meeting suggested that the economic expansion, after slowing
considerably from its elevated pace of recent quarters, would be
sustained at a rate a little below the staff's current estimate of the
economy's potential output. The forecast anticipated that the
expansion of domestic final demand would be held back to some extent
by the eventual disappearance of positive wealth effects associated
with outsized earlier gains in equity prices and by higher interest
rates. As a result, growth of spending on consumer durables was
expected to remain appreciably below that in recent quarters and
housing demand would trend slightly downward. By contrast, business
fixed investment, notably outlays for equipment and software, was
projected to remain robust, and brisk growth abroad would boost the
expansion of U.S. exports for some period ahead. Core consumer price
inflation was projected to rise a little over the forecast horizon, in
part as a result of higher import prices but largely as a consequence
of further increases in nominal labor compensation gains that would
not be fully offset by growth in productivity.
In the Committee's discussion of
current and prospective economic developments, members referred to
recent statistical and anecdotal information that tended to confirm
earlier indications of appreciable slowing in the pace of the
expansion from the outsized increases experienced in the latter part
of 1999 and the first half of this year. Several commented that growth
of aggregate demand now appeared to be closer to, and perhaps slightly
below, the rate of expansion in the nation's output potential. Looking
ahead, they generally anticipated that the softening in equity prices
and the rise in interest rates that had occurred earlier in the year
would contribute to keeping growth in demand at a more subdued but
still relatively robust pace. The members recognized that marked
uncertainties surrounded any forecast in present circumstances. Those
uncertainties had been augmented by recent developments in world oil
markets and continued to include questions about the extent of further
gains in productivity, the effects of such gains on the growth of
aggregate demand as well as supply, and the associated degree of
prospective pressures on resources and inflation. In the latter
regard, members anticipated that even assuming reduced economic growth
in line with their forecasts and further impressive gains in
productivity, conditions in labor markets were likely to remain
relatively tight, and risks persisted that at some point such
tightness could exert upward pressures on labor costs and prices.
Developments in world oil markets
also might exert continued upward pressure on inflation, while at the
same time posing a downward risk to economic activity. Uncertainties
relating to political events in the Middle East superimposed on
limited available inventories of oil products held by producers and
refiners had fostered recent "spikes" in oil prices. While
price quotations in futures markets pointed to a decline in oil prices
over time, such prices might well remain relatively elevated for a
extended period, with negative effects on spending and inflation.
There already were scattered signs that higher energy prices, by
reducing income available for discretionary purchases, might be
damping retail sales. Moreover, to the extent that relatively high oil
prices persisted, they were likely to have increasing passthrough
effects on core measures of inflation as well as on
"headline" inflation, especially if the energy price
increases began to affect inflation expectations. However, the course
of oil prices was very difficult to predict not only because of
political and market uncertainties but in part also because of the
lack of information about the extent of what appeared to be a
precautionary buildup of fuel supplies by households and retail
businesses.
In their review of the outlook for
household spending, members cited a number of developments that
pointed to slower but continuing growth. With some exceptions,
anecdotal reports from various parts of the country suggested a recent
softening in retail sales, and some industry contacts indicated that
they were marking down their forecasts of retail sales. A flat and
volatile stock market and the rise in energy costs appeared to be key
factors currently tending to inhibit growth in consumer spending at
least to some extent. On the positive side, continuing gains in
consumer incomes and a high level of consumer confidence could be
expected to foster sustained growth in such spending, albeit probably
at a pace below recent trends.
With regard to the outlook for
residential construction, anecdotal reports indicated some softening
in housing activity in many parts of the country, though some members
cited regional evidence of a partial rebound recently that was
attributed to declines in mortgage interest rates. However, financial
factors, including mortgage interest rates at levels still appreciably
above earlier lows and the sideways performance of the stock market,
were expected to constrain housing activity somewhat over coming
quarters, though such activity likely would remain on a relatively
high plateau.
In their comments about the
prospects for business fixed investment, members cited some
indications that the expansion in business spending for equipment and
software might be moderating from the extraordinary pace of recent
years, though growth in such expenditures probably would remain
robust. Retarding influences bearing on the outlook for investment
expenditures included forecasts of slower growth in final demand and
less favorable financial conditions, notably weakness in the equity
prices of numerous "new economy" firms and tightening credit
availability for business firms that did not enjoy investment-grade
credit ratings or favorable earnings prospects. Evidence of
overbuilding in some areas of commercial and other nonresidential real
estate also was mentioned. Against this background, some members
referred to a growing sense of caution among business- and
financial-sector executives about undertaking or financing business
investments. At the same time, the incentive to take advantage of
increasingly efficient high-tech equipment and software typically
available at declining prices would continue to provide an important
underpinning for further large gains in investment spending, with
favorable implications for continued rapid growth in productivity.
In their assessment of the outlook
for inflation, members agreed that although forecasts of more moderate
growth in aggregate demand at a pace around potential output had
substantially reduced the odds on rising inflation, the risks still
were pointed in that direction on balance. Even so, any increase in
inflation was likely to be modest and gradual and was subject to
substantial uncertainty for a variety of reasons. As noted previously,
the behavior of oil prices was one highly uncertain source of
potentially greater inflation pressures. Another major source of
uncertainty was the prospective performance of productivity. Largely
as a consequence of rapidly expanding "new economy"
investments, gains in productivity had occurred at remarkable rates in
recent years. However, the anticipated moderation in the expansion of
economic activity and the related softening in expected returns on
such investments might well restrain the further expansion of
investment spending and limit the associated pickup in productivity.
Once productivity growth tended to level out, employers would find it
more difficult to offset the rise in their costs that might occur
should tight labor markets persist. Finally, a decline in the dollar
from its current level, should that happen, might add to inflation
pressures going forward. On the more positive side, there were no
signs that the pace of productivity gains was currently leveling out
and no evidence of rising longer-term inflation expectations.
Moreover, cost pressures and price inflation had remained subdued for
an extended period despite low rates of unemployment that in the past
had been associated with increasing inflation.
Against the backdrop of these
uncertainties and the current performance of the economy, all the
Committee members indicated that they favored an unchanged policy
stance for the intermeeting period ahead. In support of this view,
they placed considerable weight on widespread indications, reinforced
by developments since the August meeting, that growth in aggregate
demand had moderated appreciably to a pace that improved the prospects
for containing pressures on resources. Moreover, the tightening that
had occurred in financial conditions through the spring and the rise
in energy prices since the fall of 1998 had not yet exerted their full
effects on aggregate demand, and members expected these effects to
contribute to a more sustainable rate of growth in aggregate spending.
Although inflation had picked up, a decline in energy prices, should
it materialize in line with market expectations, clearly would have
favorable implications for inflation expectations and cost pressures
in the economy. Questions nonetheless remained regarding the extent
and duration of the slowdown in the economic expansion and the other
factors bearing on the outlook for inflation, especially against the
backdrop of substantial pressures on labor resources.
All the members agreed that their
views regarding the outlook for inflation were consistent with
retaining the press release sentence indicating that the risks
remained weighted toward higher inflation over time. Some expressed
the opinion that those risks were now less decidedly tilted to the
upside and that a reconsideration of the sentence might be warranted
over the next several months, but they believed that a change at this
point would be premature. While the prospects of a significant rise in
inflation seemed quite limited for the nearer term, the members agreed
on the need to remain especially vigilant for signs of potentially
rising inflation over the intermediate term, particularly since any
increase in inflation would occur from a level that in the view of
many members was already on the high side of an acceptable range.
At the conclusion of this
discussion, the Committee voted to authorize and direct the Federal
Reserve Bank of New York, until it is 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 maintaining the
federal funds rate at 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
that the risks are weighted mainly toward conditions that may
generate heightened inflation pressures 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 Wednesday, November 15, 2000.
The meeting adjourned at 12:05 p.m.
