By unanimous vote, the minutes of
the meeting of the Federal Open Market Committee held on August 24,
1999, 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 August 24, 1999, through October 4, 1999. By
unanimous vote, the Committee ratified these transactions.
The information reviewed at this
meeting suggested that the expansion of economic activity was
substantial in the quarter just ended. Consumer spending and business
investment in durable equipment remained strong, and inventory
investment picked up from the sluggish pace of the second quarter,
while residential housing activity showed some signs of deceleration.
To meet aggregate demand, industrial production increased further and
employment gains continued to be relatively robust, keeping labor
markets taut. Inflation was moderate, but somewhat above that in 1998,
owing to a sharp rebound in energy prices.
Although private nonfarm payroll
employment expanded relatively slowly in August, the slowdown had
followed a surge in July, and growth for the two months was very close
to the brisk pace of the first half of the year. Job gains in the
service-producing sector remained strong in the July-August period,
while employment in the goods-producing sector continued to decline,
though at a slightly slower rate than earlier in the year. The
civilian unemployment rate dropped back to 4.2 percent in August,
matching its low for the year.
Industrial production was up
appreciably further on balance in July and August. Mining activity
rose markedly, utility output increased moderately on balance, and
manufacturing production recorded a further sizable advance over the
two months. Within manufacturing, high-tech goods and motor vehicles
were sources of particular strength, while the production of
nondurable goods changed little. The rate of utilization of
manufacturing capacity climbed over the two months but remained well
below its long-term average.
Total retail sales posted strong
gains over July and August. Increases in sales were spread across all
major categories, with spending for nondurable goods and motor
vehicles notably strong. Expenditures on services rose moderately in
the two-month period. There were mixed signals with regard to the
housing sector. Construction was at a high level, the inventory of
unsold homes remained quite low, and starts of multifamily units rose
over the July-August period. However, single-family housing starts
edged lower on balance over July and August, and sales of existing
homes weakened.
The available information suggested
that business capital spending continued to climb rapidly. Shipments
of nondefense capital goods posted further large gains in July and
August, with outlays for high-tech machinery and transportation
equipment particularly strong. In addition, new orders for durable
equipment turned up sharply in the two months. Nonresidential
construction activity changed little on balance in July as continued
strength in the office and an increase in the lodging and
miscellaneous categories offset reductions in the industrial and
non-office commercial categories.
Manufacturing and trade inventories,
outside of motor vehicles, picked up sharply in July after posting a
small increase in the first half of the year, but inventories remained
lean in relation to sales. In manufacturing, stocks rebounded from a
substantial June decline; however, the aggregate stocks-shipments
ratio remained at the bottom of its range for the past twelve months.
Wholesalers also increased their inventories in July; while the
inventory-shipments ratio for this sector rose, it was in the low end
of its range for the past year. In the retail sector, inventories
contracted somewhat in July, and the inventory-sales ratio for this
sector also was near the bottom of its range over the past year.
The nominal deficit on U.S. trade in
goods and services widened in July from its second-quarter average,
with the value of imports rising by more than the value of exports.
The increase in imports was concentrated in aircraft, consumer goods,
industrial supplies, and oil. The step-up in exports occurred
primarily in industrial machinery and semiconductors. Among the major
foreign industrial countries, the limited available information
suggested that economic activity was strengthening in Europe and the
United Kingdom in the third quarter while economic indicators for
Japan were mixed after the strong advance in the first half of the
year. Economic growth in Canada seemed to be continuing at a robust
pace, and economic recovery in most of the Asian emerging-market
economies was proceeding briskly.
Inflation remained relatively
moderate, though somewhat above the pace of 1998 because of a sharp
rebound in energy prices. Overall consumer prices increased in July
and August at about the second-quarter rate. Abstracting from the
sharp advances in energy prices and the mild increases in food prices,
consumer inflation continued to be relatively subdued over the two
months. In the past twelve months, the core CPI rose less than in the
previous twelve-month period. At the producer level, prices of
finished goods other than food and energy were essentially unchanged
over the two months; moreover, the change in core producer prices in
the past year was about the same as in the year-earlier period. At
earlier stages of processing, however, producer prices of crude and
intermediate materials excluding food and energy had firmed noticeably
over recent months. Average hourly earnings continued to grow at a
moderate pace over July and August, and the rise over the past year
was considerably smaller than that for the year-earlier period.
At its meeting on August 24, 1999,
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
5-1/4 percent. The members noted that this move, together with the
firming in June, should help to keep inflation subdued and to promote
sustainable economic expansion. The Committee also agreed that the
directive should be symmetric. A possible rise in inflation remained
the main threat to sustained economic expansion, but it was not
anticipated that further tightening would be needed in the near term
and there would be time to gather substantially more information about
the balance of risks relating to trends in aggregate demand and
supply.
Open market operations after the
meeting were directed toward implementing and maintaining the desired
slight tightening of pressure on reserve positions, and the federal
funds rate averaged very close to the Committee's 5-1/4 percent
target. Most other short-term market interest rates posted small mixed
changes on balance, because the policy action was widely anticipated
and the FOMC's policy announcement after the August 24 meeting
referenced markedly diminished inflation risks. However, longer-term
yields rose somewhat over the intermeeting period in response to the
receipt of new information indicating both surprisingly strong
spending at home and abroad and higher commodity prices. Most measures
of share prices in equity markets registered sizable declines over the
intermeeting period, apparently reflecting not only higher interest
rates but also concerns that U.S. stocks might be overvalued and that
foreign equities were becoming relatively more attractive as economic
prospects brightened abroad.
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 depreciated against the currencies of the major
foreign industrial countries, especially the Japanese yen, in response
to generally stronger-than-expected incoming data on spending and
production in those countries. However, the dollar rose against the
currencies of the other important trading partners in the broad group,
reflecting sizable declines in the currencies of several countries in
Latin America and Asia.
Despite a further rise in
opportunity costs, M2 and M3 continued to grow at moderate rates in
August and evidently in September as well. Expansion of these two
monetary aggregates was supported by further rapid expansion in the
demand for currency and stronger inflows to retail money market funds
at a time of weakness in U.S. bond and equity markets. In addition,
growth of M3 was sustained by large flows into institution-only money
market funds as the yields on those funds caught up to earlier
increases in short-term market rates. For the year through September,
M2 was estimated to have increased at a rate somewhat above the
Committee's annual range and M3 at a rate just above the upper end of
its range. Total domestic nonfinancial debt continued to expand at a
pace somewhat above the middle of its range.
The staff forecast prepared for this
meeting suggested that the expansion would gradually moderate to a
rate around or perhaps a little below the growth of the economy's
estimated potential. The growth 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; the
slower growth of spending on consumer durables, houses, and business
equipment 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 a better balance between
aggregate demand and aggregate supply. The lagged effects of the
earlier rise in the foreign exchange value of the dollar were expected
to place continuing, but substantially diminishing, restraint on U.S.
exports for some period ahead. Core price inflation was projected to
rise somewhat over the forecast horizon, in part 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 not be
fully offset by rising productivity growth.
In the Committee's discussion of
current and prospective economic conditions, members commented that
the incoming information suggested that the expansion had been
considerably stronger in recent months than many had anticipated,
while most measures of inflation had remained subdued. The economy's
substantial momentum seemed likely to persist over the balance of the
year, but the members continued to expect some slackening during the
year ahead. This outlook was supported by the emergence of somewhat
less accommodative conditions in financial markets, including the
increases that had occurred in interest rates over the past several
months and the steadying of stock market prices over the same period.
On the other hand, foreign economies were strengthening more quickly
than anticipated and rising exports were likely to offset part of the
slowdown in domestic demand.
The implications of continued robust
growth for the inflation outlook depended critically on judgments
about the supply side of the economy. Productivity and economic
potential seemed to have been growing at an increasingly rapid rate in
recent years. That acceleration had itself tended to boost consumption
and investment demand--in complex interactions of aggregate supply and
demand--but it also had held down increases in unit costs and prices.
A great deal of uncertainty surrounded the behavior of productivity
growth going forward, but some further pickup, and the associated
ability of the economy to accommodate more rapid growth without added
inflation, was a possibility that could not be overlooked. However, a
further pickup in productivity growth was by no means assured, and a
number of other favorable developments in supply and prices that had
acted to restrain inflation in recent years had already begun to
dissipate or reverse. These included the substantial upturn in energy
prices, the ebbing of import price declines, and the pickup in health
care costs; adverse trends in the latter two factors in particular
were likely to be extended. In these circumstances, members generally
saw some risk of rising inflation going forward, but they also
recognized that similar forecasts in recent years had proved wrong and
that considerable uncertainty surrounded expectations of somewhat
higher core inflation.
In their review of developments
across the nation, members reported continued high levels of activity
in all regions and few indications of moderating growth, though
agriculture remained relatively depressed in many areas. The anecdotal
information from around the nation clearly supported the overall
statistical evidence of persisting strength in key components of
domestic demand. Consumer spending, notably for light motor vehicles,
was continuing to rise at a brisk pace. Some of the strength in
consumer durables was related to purchases associated with
homebuilding, which, though likely to slacken a little owing to the
rise in mortgage interest rates, seemed to be staying at a high level.
While consumer spending probably would be sustained by further
anticipated growth in employment and incomes, the pause in the stock
market, should it persist, and the attendant effects on financial
wealth were expected with some lag to damp further gains in consumer
expenditures.
Business fixed investment appeared
to have accelerated to a surprising extent in the third quarter from
an already robust pace earlier in the year. Further noteworthy gains
were recorded in business expenditures for computing and
communications equipment, evidently reflecting ongoing efforts to take
advantage of declining prices and improving technology. Some of the
rise in such spending could represent accelerated purchases in advance
of the century date change and might well tend to be offset in early
2000. Over time, however, ongoing efforts to enhance productivity for
competitive reasons suggested further vigorous growth in spending for
such equipment. Forecasts of other business investment expenditures
were much less ebullient and on the whole pointed to little change.
Building activity currently displayed substantial strength in some
major cities, largely involving office and hotel structures, but
nonresidential construction activity more generally was relatively
sluggish. It seemed likely that commercial building activity would be
damped later as new capacity was completed and financing became less
attractive in response to the rise that had occurred in market
interest rates.
The prospects for business
inventories over coming months were difficult to evaluate, with the
usual uncertainties accentuated by century date change effects.
According to fragmentary information, inventory investment picked up
during the summer months from a very low pace in the second quarter.
To some extent, the recent strengthening may have reflected
precautionary stockbuilding as insurance against potential supply
disruptions relating to the century date change. Such stockbuilding
might well intensify during the closing months of the year and be
reversed early next year, with effects of uncertain magnitude on
overall economic activity in that period. Looking beyond such a swing,
business inventories, which currently appeared to be near desired
levels in most industries, were projected to grow at a moderate pace
broadly in line with the expansion in final sales.
The strengthening of many economies
around the world was seen as a harbinger of increasing demand for U.S.
exports, a view that was reinforced by growing anecdotal indications
of improving foreign markets for a wide range of U.S. products. An
aspect of that improvement was more attractive investment
opportunities abroad and some associated weakening in the foreign
exchange value of the dollar that implied upward pressure on the
prices of imports and to an uncertain extent on those of competing
domestically produced products. Moreover, some members saw the
possibility of a steeper drop in the dollar--under pressure from
burgeoning foreign dollar portfolios as a consequence of very large
U.S. current account deficits--as an added source of risk to the
maintenance of sustainable growth and low inflation in the United
States.
In the Committee's discussion of the
outlook for inflation, a number of members emphasized that the
behavior of prices had remained surprisingly benign for an extended
period, confounding earlier forecasts of appreciable acceleration
stemming from tight labor markets and rising labor costs. That
experience argued forcefully in their view for the need to regard
forecasts of increasing inflation with considerable caution. Most
members nonetheless continued to view some increase in core price
inflation as a definite possibility. This view reflected their
expectations that the current expansion, even if it did moderate to a
pace approximating the economy's trend potential growth, would do so
at a level of resource use that based on the historical record
exceeded the economy's sustainable capacity--perhaps by even more than
at present, given the evident strength of aggregate demand. Such an
outcome seemed likely to generate further pressures on unit labor
costs, which had tended in recent years to be contained by
accelerating productivity. There was no evidence that the acceleration
was coming to an end, but the members saw a clear risk that upward
pressures on labor costs could at some point outpace gains in
productivity. Members also mentioned that labor compensation would
come under greater pressures as a result of rising healthcare benefit
costs and possible increases in the minimum wage.
Other factors cited as pointing to a
less benign inflation performance involved the waning or reversal of a
number of temporary influences that had exerted a beneficial effect on
prices in recent years. In particular, the decline of the dollar from
its recent high in July, especially if it were to continue, would mean
higher import prices and reduced price competition for a wide range of
domestic goods. In this regard, several members observed that they
were hearing noticeably fewer comments by business contacts about
their inability to raise prices. Members also noted that, in the
context of apparently strengthening economic activity worldwide,
non-oil commodity prices seemed poised to turn upward, though they had
risen only slightly thus far. While oil prices, which had increased
sharply this year, had changed relatively little recently and could
move down in the future, secondary effects of the earlier increase on
costs and prices in other sectors of the economy seemed likely.
Nonetheless, considerable uncertainty surrounded expectations of
rising inflation. Labor cost increases had not turned up and core
inflation continued to edge lower. Further improvements in
productivity growth could keep price pressures in check for some time.
In the Committee's discussion of
policy for the intermeeting period ahead, all the members indicated
that they favored or could accept an unchanged policy stance. Members
commented that they saw little risk of a surge in inflation over
coming months, though some pickup from the currently subdued level of
core price inflation was a distinct possibility under prospective
economic conditions. It was noted that expanding aggregate supply,
boosted by accelerating productivity, had remained in reasonable
balance with rapidly growing aggregate demand despite an already high
level of economic activity; however, substantial uncertainty
surrounded the outlook for aggregate supply and aggregate demand going
forward and it was unclear how their interaction would affect the
behavior of inflation. In light of the uncertainties surrounding these
developments, the members agreed that it would be desirable to await
more evidence on the performance of the economy, and in this regard
considerable new information on the behavior of the economy and the
outlook for inflation would become available during the intermeeting
period. The risks of waiting seemed small at this juncture, in part
because inflation and inflation expectations were not likely to worsen
substantially in the near term, and the Committee had demonstrated its
willingness to take needed anticipatory action to curb rising
inflationary pressures that could threaten the overall performance of
the economy. They also agreed that century date change concerns were
not likely to be of a kind or magnitude that would preclude a policy
tightening move at the November meeting, should such an action seem
warranted at that time.
On the issue of the tilt in the
Committee's directive, a majority of the members favored associating
an unchanged policy stance with a directive that was biased toward
restraint. These members did not anticipate that intermeeting
developments would require policy to be tightened during the weeks
immediately ahead, but they believed that the Committee probably would
need to move to a less accommodative policy stance in the relatively
near future, possibly at the November meeting. They also believed
that, given the Committee's recently adopted practice of immediately
announcing its decisions to change the symmetry of the directive, an
asymmetrical directive would help convey the message that policy
adjustments might not yet be completed for the balance of this year
and that the Committee remained concerned about potential inflationary
developments in coming months. Other members, while generally agreeing
that the risks pointed on balance to some rise in inflation over time,
nonetheless were quite uncertain about the timing of any additional
firming in monetary policy and preferred to leave the Committee's
possible future course of action more open. Even so, they could accept
an asymmetric directive in light of the consensus that had emerged at
this meeting in favor of an unchanged policy stance.
With regard to the Committee's
announcement of its decision to adopt an asymmetric directive, members
observed that the recent practice of making such announcements had led
to some misinterpretations of the Committee's intentions and seemed to
have added to volatility in financial markets. As a consequence,
Committee members briefly considered alternative treatments of
symmetry and disclosure for this meeting. Because the Committee had
begun a process for examining the wording of its directive and its
announcement policy, most of the members concluded that the most
satisfactory alternative for now, though it was not fully
satisfactory, was to continue with the Committee's recent announcement
practice. However, the working group chaired by Governor Ferguson was
requested to expedite its report, if possible.
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 information reviewed at this
meeting suggests that the expansion of economic activity was
substantial in the quarter just ended. Nonfarm payroll employment
increased briskly through August, and the civilian unemployment rate
dropped back to 4.2 percent, matching its low for the year.
Industrial production was up appreciably further in July and August.
Total retail sales posted sizable gains over the two months. Housing
construction apparently has slowed somewhat but has remained at a
high level. Available indicators suggest that the expansion in
business capital spending has continued to be rapid. The nominal
deficit on U.S. trade in goods and services widened in July from its
average in the second quarter. Inflation has continued at a moderate
pace, albeit somewhat above that in 1998 owing to a sharp rebound in
energy prices.
Most short-term interest rates
have posted small mixed changes since the meeting on August 24,
1999, while longer-term yields have risen somewhat. Most measures of
share prices in equity markets have registered sizable declines 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 and M3 have continued to grow
at a moderate pace. For the year through September, M2 is estimated
to have increased at a rate somewhat above the Committee's annual
range and M3 at a rate just above the upper end of its range. Total
domestic nonfinancial debt has continued to expand at a pace
somewhat above the middle 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
continued 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 5-1/4 percent. In view of the evidence
currently available, the Committee believes that prospective
developments are more likely to warrant an increase than a decrease
in the federal funds rate operating objective during the
intermeeting period.
Votes for this action:
Messrs. Greenspan, McDonough, Boehne, Ferguson, Gramlich, McTeer,
Meyers, Moskow, Kelley, and Stern.
Votes against this action:
None.
It was agreed that the next meeting
of the Committee would be held on Tuesday, November 16, 1999.
The meeting adjourned at 1:25 p.m.
