By unanimous vote, the minutes of
the meeting of the Federal Open Market Committee held on October 3,
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.
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 October 3, 2000, through November 14, 2000. By
unanimous vote, the Committee ratified these transactions.
The Committee then turned to a
discussion of the economic situation and outlook and the
implementation of monetary policy over the intermeeting period ahead.
The information reviewed at this
meeting suggested that economic growth had slowed appreciably from the
rapid pace in the first half of the year. The slowdown was most
apparent in housing construction and business investment in equipment
and software, while consumer spending remained on a relatively solid
upward trend. With expansion of aggregate demand less robust,
industrial production and employment were rising at appreciably slower
rates, though unemployment remained very low. Core inflation appeared
to be increasing, but very gradually and in part reflecting the
indirect effects of higher energy costs.
Growth in private nonfarm payroll
employment slowed in October from the moderate September rate; since
midyear, employment growth had been considerably lower than earlier in
the year. The falloff in growth was concentrated in the manufacturing,
retail trade, and temporary help services industries. By contrast, the
pace of hiring was brisk in real estate and construction and slowed
only slightly in services industries other than temporary help. The
civilian unemployment rate held at its current cyclical low of 3.9
percent in October.
Industrial production edged down in
October, after its growth had dropped abruptly in the third quarter to
a pace well below that recorded during the first half of the year.
Manufacturing output was unchanged in October; a further sharp decline
in production of motor vehicles followed on the heels of a
third-quarter slump, and the manufacture of other durables also fell.
Expansion of output of high-tech equipment, which had been
extraordinarily rapid earlier in the year, slowed somewhat in October.
With production unchanged in October, the rate of capacity utilization
in manufacturing fell to a level slightly below its long-term average.
Nominal retail sales edged up in
October after rising substantially in the third quarter. Nondurable
goods stores, notably apparel, registered a sizable increase in
October sales, but that gain was more than offset by declines in
outlays for durable goods, particularly motor vehicles. Consumer
spending for services continued to grow at a moderate rate through
September (latest data). Recent consumer buying patterns seemed to
reflect moderate growth of real disposable income in recent quarters
and still generally buoyant consumer sentiment.
Single-family housing starts
declined further in the third quarter as a whole. Nevertheless, the
drop in interest rates on fixed-rate mortgages since mid-May might
have sparked the slight increase, on balance, in single-family housing
starts in August and September and the upturn in new home sales in the
third quarter. After a strong first half, multifamily starts dropped
in the third quarter despite low vacancy rates and rising apartment
rents.
Business investment in durable
equipment and software decelerated sharply in the third quarter. In
the high-tech area, spending on computers and related equipment as
well as software recorded further robust gains. However, expenditures
on communications equipment declined after a half-year of very strong
increases, and outlays for other types of equipment also softened;
investment in aircraft, autos, trucks, and construction and mining
equipment fell, while growth of spending on agricultural and
industrial equipment slowed. Despite the third-quarter weakness in
expenditures, recent data on orders for nondefense capital goods
suggested that spending for many types of equipment remained on an
upward trend. Data on construction put in place indicated that
nonresidential building activity picked up considerably in the third
quarter, with the institutional, industrial, and office categories
recording solid gains. Market fundamentals, including rising property
values and low vacancy rates, suggested that further expansion of
office building was likely. Other commercial construction, by
contrast, remained weak, partly reflecting the already substantial
stock of large retail stores and regional malls.
The pace of inventory investment
slowed considerably in the third quarter. However, for a second
consecutive quarter, the book value of inventories rose faster than
sales, and inventory overhangs were evident in some industries. In
manufacturing, stock accumulation edged up and the aggregate
stock-shipments ratio in September, though still quite low by historic
norms, was just above the middle of its range over the preceding
twelve months. In the wholesale sector, inventory accumulation dropped
in the third quarter; however, sales declined and the aggregate
inventory-sales ratio for the sector was at the top of its narrow
range over the past year. Retail stockbuilding also slowed in the
third quarter, with much of the drop reflecting reductions in motor
vehicle inventories at auto dealers. The aggregate inventory-sales
ratio for this sector edged lower and was near the middle of its range
over the past year.
The U.S. trade deficit in goods and
services narrowed in August after having widened considerably in July;
on balance, the trade deficit increased somewhat from its
second-quarter level. The value of exports grew in the July-August
period at about the same strong pace as that recorded for the second
quarter. The value of imports also rose briskly over the two months,
but at a slightly lower rate than that of the second quarter. The
available information indicated that, on average, economic expansion
in the foreign industrial countries slowed appreciably in the third
quarter from the elevated pace during the first half of the year and
that the slowdown importantly reflected little or no growth in Japan.
In addition, economic activity appeared to have decelerated in many
developing countries in the third quarter but remained solid in most
of those nations.
Incoming data continued to indicate
that price inflation had picked up somewhat. Consumer prices, as
measured by the CPI, rose considerably in September (latest data)
after having edged down in August; a sizable step-up in energy prices
and a noticeable increase in core inflation contributed about equally
to the acceleration. Although the core measure of CPI prices
accelerated noticeably in the twelve months ended in September
compared with the previous twelve-month period, PCE price inflation
had been about steady. By contrast, core producer prices dropped a
little in October and decelerated somewhat on a year-over-year basis,
though the deceleration was more than accounted for by a surge in
tobacco prices during the year ended in October 1999. With regard to
labor costs, the third-quarter rise in the employment cost index (ECI)
for hourly compensation of private industry workers was smaller than
the elevated increase of the previous quarter. However, ECI
compensation advanced considerably more during the year ended in
September than in the previous year, with larger increases in benefits
accounting for much of the rise. Average hourly earnings of production
or nonsupervisory workers increased at a slightly higher rate in both
October and the twelve months ended in October.
At its meeting on October 3, 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 taking that action, the members
noted that the growth of aggregate demand had moderated appreciably,
the prospects for a significant rise in inflation seemed quite limited
for the near term, and previous policy tightening actions and the
earlier rise in energy prices had not yet exerted their full
restraining effects on demand. Nevertheless, in the context of
continuing substantial pressures on labor resources and the potential
effects of the previous rise in energy prices on inflation
expectations, members believed it was necessary to remain on guard for
signs of rising inflation over the intermediate term. As a result,
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 were directed
throughout the intermeeting period toward maintaining the federal
funds rate at the Committee's targeted level of 6-1/2 percent, and the
average rate remained close to the intended level. Short- and
intermediate-term market interest rates registered small mixed changes
over the intermeeting interval. At longer maturities, Treasury coupon
yields drifted slightly lower, and rates on high-grade corporate
securities changed little. However, growing market concerns about the
outlook for corporate earnings led to substantial increases in
interest rates on lower-rated investment-grade and high-yield bonds,
and the early November survey of senior loan officers indicated that
banks had tightened further their standards and terms for business
loans. The mixed reports on corporate earnings, incoming information
indicating slower growth in economic activity in the United States,
and wide swings in and uncertainty about the price of oil contributed
to a sharp drop in broad indexes of stock market prices over the
period in volatile trading.
In foreign exchange markets, the
trade-weighted value of the dollar increased slightly further on
balance over the intermeeting interval in terms of the currencies of a
broad group of U.S. trading partners. Among the major foreign
currencies, the dollar moved up against the euro and the Canadian and
Australian dollars but edged down a bit in terms of the yen. The
dollar rose to a record level against the euro in the weeks following
the FOMC meeting, but the release of weaker-than-expected U.S.
economic growth data in late October was seen as possibly marking a
shift in the relative growth rates, and the dollar subsequently gave
up much of its intermeeting gains in terms of the euro. The dollar
also posted gains against an index of the currencies of other
important trading partners, largely reflecting conditions in some
emerging economies. Concerns about Argentina's recent economic and
fiscal performance and its external financing situation spilled over
to other Latin American countries, notably Brazil and Mexico, and
political developments in Indonesia and the Philippines depressed the
currencies of those countries.
The broad monetary aggregates
decelerated in October. The slower growth of M2 followed strong
expansion in August and September, however, and growth since midyear
was at about the same pace as in the first half of the year. M3 also
increased at a slower rate in October, partly reflecting weakness in
bank lending and declines in bank holdings of securities. The growth
of domestic nonfinancial debt picked up in September in association
with an increase in the pace of private borrowing and a less rapid
paydown of federal debt.
The staff forecast prepared for this
meeting suggested that the economic expansion, having slowed
considerably, would be sustained over the forecast horizon 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 waning influence of
the positive wealth effects associated with past outsized gains in
equity prices but also by some firming of conditions in credit
markets. As a result, growth of spending on consumer durables was
expected to be appreciably below that in recent quarters and housing
demand to trend slightly downward. By contrast, business fixed
investment--notably, outlays for equipment and software--was projected
to remain relatively robust, and brisk growth abroad would undergird
the expansion of U.S. exports. Core 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 conditions, members commented that
the information that had become available since the previous meeting
had reinforced earlier indications of appreciable slowing in the
expansion of economic activity. The cumulating evidence of moderating
expansion seemed especially clear in the information on employment
growth and manufacturing output. Aggregate demand currently appeared
to be growing at a pace a little below the rate of increase in the
economy's output potential, a configuration that could well persist in
coming quarters. Actual and expected shortfalls in business
profitability had led to tighter credit conditions for many borrowers
and lower equity prices, which would continue to restrain spending;
moreover, further pressure on profit margins, with adverse effects on
financial markets, business investment, and consumer spending, was a
distinct possibility. Members observed, however, that economic growth
had rebounded sharply from temporary slowdowns previously in the
current expansion, and several noted the possibility that a less
restrictive fiscal policy stance would be bolstering demand in the
years ahead.
Although the softening in aggregate
demand moved in the direction of containing potential inflation
pressures, the members continued to be concerned about the possibility
that inflation would edge higher. Even with demand growth slower,
labor markets were likely to remain unusually tight for some time, and
in such circumstances labor costs could begin to rise increasingly in
excess of even elevated gains in productivity. Some members also
commented that energy prices might not trend lower as soon as, or to
the extent, now expected by market analysts, and a few raised the
prospect that the dollar might depreciate from its currently elevated
level and add to potential upward pressures on domestic prices over
the forecast horizon.
A key factor underlying the economic
outlook was the emergence in recent months of less accommodative
financial conditions for many businesses, including some further
tightening since the meeting in early October, and decreases in the
wealth of households. The slowdown in the pace of the expansion and
disappointing business earnings had fostered more cautious attitudes
on the part of lending institutions and investors. Anecdotal comments
from around the country supported the indications from surveys of
tightening terms and standards at banks for business borrowers. At the
same time, spreads in securities markets had widened, most sharply on
obligations of borrowers rated below investment grade, and as a result
those borrowers faced higher credit costs. Lender caution and less
receptive markets probably had contributed to considerable weakening
recently in overall growth of credit to nonfinancial businesses.
Rising interest and energy costs in conjunction with restraint on the
prices of final output had depressed the earnings and stock market
valuations of many firms, notably in the high-tech area, with adverse
repercussions on their ability to borrow and willingness to invest and
on the financial position of the households holding their equity
shares.
Less hospitable conditions in
financial markets for a number of borrowers and deteriorating profit
margins had contributed to a substantial moderation in the growth of
business fixed investment in recent months, and anecdotal reports of
reductions in capital spending plans were consistent with continued
more moderate expansion in such outlays. The recent deceleration was
especially pronounced in expenditures for high-tech equipment and
software, though such spending was still growing at a robust pace. It
was suggested that the weakening expansion of expenditures in these
capital goods might reflect a surfeit in capacity following a period
of extraordinary growth in many industries--for example, those related
to fiber optics. The available evidence did not indicate any material
decrease in the optimism of equity market analysts as a group
regarding the outlook for earnings over the long term. This suggested
that their contacts among business executives remained fundamentally
upbeat about the long-term prospects for productivity and earnings. In
these circumstances, appreciable further growth in investment spending
seemed to be in prospect for coming quarters, though undoubtedly at a
slower pace than had been experienced on average in recent quarters.
Even limited slowing in the
expansion of investment expenditures could be expected to have
retarding effects on the growth of consumer income and spending. While
such spending had held up well in the third quarter, the limited
information available on more recent developments suggested some
softening, though the data were not conclusive. Factors cited in
support of a somewhat weaker trajectory in consumer spending included
the impact of elevated energy costs, the high debt burdens of many
households, and the ebbing of the wealth effects from strong earlier
gains in stock market prices. Even so, anticipated increases in
employment and income and still relatively high levels of consumer
confidence were likely to support appreciable further growth in
consumer spending, albeit probably at a rate somewhat below the brisk
pace of the past few years.
Key indicators of housing activity
had fluctuated considerably this year, but the evidence of recent
months pointed on balance to a mild softening in such activity, a
perception that was supported by anecdotal reports from several areas
around the country. In general, housing demand was expected to edge
lower in response to the same income and wealth effects that were
influencing consumer durables expenditures and to the increase in
mortgage interest rates that had occurred on net over the past year.
Current forecasts of appreciable
growth in foreign economic activity had favorable implications for
U.S. exports and the nation's trade balance, but some members
expressed concern about financial and economic weakness in a number of
foreign economies. Failure to remedy structural and other problems in
some countries incurred the risk of economic and financial distress,
with possible spillover effects on other economies and financial
markets. While those risks seemed small, they might be difficult to
contain. The exchange value of the dollar was another source of
uncertainty for the outlook. In the view of some members, the dollar
could well come under downward pressure as the nation's current
account deficits continued to cumulate. A lower dollar would tend to
have a favorable effect on the trade deficit but also would add to
inflationary pressures in the domestic economy.
Members continued to be concerned
about the outlook for inflation. Measured increases in
"headline" consumer prices could be explained mostly as a
result of sharp advances in energy prices, which many observers
expected to be reversed at some point. However, core consumer price
measures also displayed a gradual uptrend, perhaps only in part as a
consequence of the passthrough effects of persistently high energy
prices. Measures of labor compensation appeared to be accelerating,
partly as a result of sharply rising health benefit costs. To be sure,
unit labor costs in the nonfinancial corporate sector had changed
little over the past year, undoubtedly reflecting impressive further
gains in productivity. Even so, higher interest rates and increased
energy and other input costs were adding to overall production
expenses. To date, competitive pressures were continuing to inhibit
the ability of many firms to pass on those costs, although a
significant exception was a number of successful efforts to impose
energy surcharges.
Looking to the future, however, the
members generally agreed that the risks were in the direction of a
heightening in inflation pressures despite their belief that growth in
overall demand now seemed to have declined to a more sustainable pace
and probably would continue to expand for a time at a rate below that
of the economy's output potential. The members believed that growth in
labor compensation was likely to remain under upward pressure from the
anticipated persistence of very tight conditions in labor markets that
would enable wages to catch up to earlier gains in labor productivity.
Whether offsetting increases in the growth of labor productivity would
materialize was open to question, in part because productivity growth
might tend to level out in the context of less ebullient expansion in
business investment. Another key factor in the outlook for inflation
was the course of oil and other energy prices. Thus far, increases in
energy costs had been reflected only marginally in core consumer
prices, and while there were widespread market expectations of
declining oil prices in coming quarters, a great deal of uncertainty,
including the potential for more difficulties in the Middle East,
surrounded the timing and extent of such an outcome. The longer
relatively high energy prices persisted, of course, the greater might
be their imprint on both inflation expectations and core prices. In
sum, the moderation in economic expansion, the persistence of highly
competitive conditions in most domestic markets, the outlook for
continued robust gains in productivity, and relatively subdued
inflation expectations were favorable factors in the inflation
outlook, but the members continued to view the prospects as weighted
on balance in the direction of a gradual uptrend in core inflation.
In the Committee's discussion of
policy for the intermeeting period ahead, all the members supported a
proposal to maintain an unchanged policy stance consistent with the
federal funds rate continuing to average about 6-1/2 percent. Despite
clear indications of a more moderate expansion in economic activity,
persisting risks of heightened inflation pressures remained a policy
concern, particularly in the context of an evident, if gradual,
uptrend in key measures of core inflation. Indeed, a few members
commented that measures of core inflation already were near or
slightly above levels that they viewed as acceptable for the longer
run. Although overall financial conditions had tightened over the
course of recent months and currently appeared to be holding down the
growth in spending, this added restraint was likely to be necessary to
contain inflation pressures. In these circumstances, all the members
saw the maintenance of a steady policy as the best course at this
juncture to promote the Committee's longer-run objectives of price
stability and sustainable economic expansion.
Still, growth had slowed more
quickly than many members had anticipated, and financial market and
other developments now seemed more likely to keep pressures on
resources from mounting over coming quarters. Under the circumstances,
the members focused at this meeting on the potential desirability of
moving from a statement of risks weighted toward rising inflation to
one that indicated a balanced view of the risks to the Committee's
goals of price stability and sustainable economic growth. The members
agreed that a stronger case could be made for a shift to a balanced
risk statement than at the previous meeting. A few indicated that the
decision was a close call for them, and several commented that
developments might be moving in a direction that would make a shift
advisable in the relatively near future. Even so, they were unanimous
in concluding that such a change would be premature at this time.
Concerns about the possibility of rising inflation persisted. And
while the members could see an increased risk of a marked slowing of
growth relative to the rapid rate of expansion of the economy's
potential, the degree to which growth in demand might remain
sufficiently damped to contain and offset those inflation pressures
was quite uncertain. Moreover, a shift in the Committee's published
views might induce an undesirable softening in overall financial
market conditions, which in itself would tend to add to inflation
pressures. The members concluded that retaining a risk statement
weighted toward more inflation pressures would best represent their
current thinking, but they believed it was desirable to provide some
recognition of the emergence of increased downside risks to the
economic expansion in the statement to be released after this meeting.
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 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,
Kelley, Meyer, Moskow, and Parry.
Votes against this action:
None.
Mr. Moskow voted as alternate member
for Mr. Jordan.
It was agreed that the next meeting
of the Committee would be held on Tuesday, December 19, 2000.
The meeting adjourned at 1:00 p.m.
