By unanimous vote, the minutes of
the meeting of the Federal Open Market Committee held on October 5,
1999, were approved.
The Manager of the System Open
Market Account reported on recent developments in foreign exchange
markets. There were no open market transactions 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 October 5, 1999, through November 15, 1999. By
unanimous vote, the Committee ratified these transactions.
The Committee then turned to a
discussion of recent and prospective economic and financial
developments, and the implementation of monetary policy over the
intermeeting period ahead.
The information reviewed at this
meeting suggested that economic activity continued to expand briskly.
The limited data on aggregate demand that had become available since
the summer pointed to some moderation in the growth of consumer
spending and of business investment in capital equipment and software.
Residential construction appeared to have weakened somewhat. However,
industrial production was trending up, job growth was still solid, and
the unemployment rate had edged down. Despite tight job markets, labor
compensation had been rising more slowly than last year. Inflation
remained moderate, though at a pace above that in 1998 because of a
sharp rebound in energy prices.
A large increase in nonfarm payroll
employment in October followed a small rise in September; the average
gain for the two months was appreciable but somewhat below the pace of
earlier in the year. Job growth rebounded strongly in most employment
categories, but further small losses were posted in manufacturing and
retail trade. The robust expansion in the demand for workers in
October led to a small decline in the civilian unemployment rate, to
4.1 percent, a new low for the year.
Industrial production recorded a
strong gain in October after having fallen slightly in September as a
result of the adverse effects of Hurricane Floyd. Manufacturing and
utilities output advanced strongly in October, while mining activity
edged up. The increases in manufacturing were widely spread; however,
production of transit equipment, particularly aircraft and parts, and
farm equipment continued to decline. The utilization of total
industrial capacity rebounded in October from the hurricane-related
production losses of the previous month but remained somewhat below
its long-run average level.
Growth of consumer spending
apparently had moderated somewhat further recently, but surveys
indicated that consumer confidence continued to be high and personal
income rose briskly in the third quarter. Total nominal retail sales
changed little in September and October, with purchases at auto
dealerships falling in both months and sales at other stores growing
less rapidly on balance. Housing activity weakened somewhat over the
summer but was still at a high level. Some of the drop in housing
starts in September probably was attributable to unusually heavy rains
in parts of the South and Northeast. In addition, sales of both new
and existing homes declined appreciably in September.
The expansion of business fixed
investment picked up sharply in the third quarter, as a marked
acceleration in outlays for durable equipment and computer software
more than offset a further weakening of nonresidential construction
activity. The strength in spending for durable equipment was
concentrated in computer hardware and transportation equipment; the
latter included medium and heavy trucks, fleet sales of light
vehicles, and commercial aircraft. Outlays for computer software and
communications equipment also were up appreciably. Trends in orders
suggested that the buoyancy in business spending for capital equipment
had continued into the fourth quarter. Weakness in nonresidential
building activity in the third quarter was widespread, though office
construction remained on a solid upward trend.
Business inventory investment in
book value terms picked up somewhat in the third quarter, but with
sales increasing rapidly, stock-sales ratios generally remained quite
low. Manufacturers added slightly to their stocks after two quarters
of inventory liquidation. However, the buildup of stocks in the third
quarter did not keep pace with the rise in shipments, and the sector's
stock-shipments ratio was near the bottom of its range over the
preceding twelve months. Wholesalers also added to their inventories
in the third quarter, and with stockbuilding keeping pace with sales,
the inventory-sales ratio for the sector remained in the lower portion
of its range over the past year. In the retail sector, the pace of
inventory accumulation slowed noticeably in the third quarter,
reflecting a runoff of stocks at auto dealerships. Excluding autos,
the rate of retail inventory accumulation changed little from that of
the second quarter, and with sales rising rapidly the aggregate
inventory-sales ratio fell to its lowest quarterly level since 1980.
The deficit in U.S. trade in goods
and services widened on balance over July and August from its average
for the second quarter. The value of exports picked up considerably
over the two months, with increases widely spread across major trade
categories. The value of imports surged, with large increases recorded
in all the major trade categories except food. The available
information indicated that economic expansion in the foreign
industrial countries strengthened further in the third quarter.
Economic recovery continued in Japan, though there were signs that
consumer demand was lagging somewhat. In the euro area, the United
Kingdom, and Canada, economic activity appeared to have accelerated in
the third quarter. Among the developing countries, economic activity
continued to expand in emerging Asia and parts of Latin America.
Consumer prices increased at a
slightly faster rate in September, with a further large rise in energy
prices a contributing factor. Core consumer inflation also picked up
in September, in part because of a sharp jump in tobacco prices.
Nonetheless, core consumer prices rose less over the twelve months
ended in September than over the preceding twelve-month period. At the
producer level, price inflation for finished goods other than food and
energy items slowed appreciably in October from the elevated September
rate, which had been boosted by the tobacco price increase. For the
year ended in October, core producer prices rose appreciably more than
in the preceding year. Measured on a year-over-year basis, labor
compensation rose more slowly in the year ending in the third quarter
than it had in the preceding year. However, the increase in the third
quarter was a little larger than the subdued average pace for the
first half of the year; the step-up was entirely attributable to
larger increases in benefits. Average hourly earnings edged up in
October after a large rise in September. For the twelve months ended
in October, average hourly earnings decelerated slightly from the
previous twelve months.
At its meeting on October 5, the
Committee adopted a directive that called for maintaining conditions
in reserve markets consistent with an unchanged federal funds rate of
around 5-1/4 percent. The members noted that the behavior of prices
had continued to be relatively subdued and that the risk of a
substantial worsening in inflation and inflation expectations over
coming months seemed to be small. Nonetheless, they saw some pickup in
inflation as a distinct possibility under anticipated economic
conditions and concluded that the directive should indicate that
prospective developments were more likely to warrant an increase than
a decrease in the funds rate objective in the near term.
Open market operations throughout
the intermeeting period were directed toward maintaining the federal
funds rate at around 5-1/4 percent, and the rate averaged close to the
Committee's target. On balance, most market interest rates posted
small mixed changes over the intermeeting interval. The Committee's
announcement of a bias toward tightening surprised many market
participants, and interest rates rose somewhat after the meeting.
Yields climbed further in response to incoming data on producer prices
and retail sales that boosted market concerns about unsustainable
growth, higher inflation, and further monetary tightening. Over the
second half of the intermeeting period, however, rates largely
retraced their increases in reaction to the release of data indicating
low wage and consumer price inflation. Most measures of share prices
in equity markets registered sizable gains over the intermeeting
period, apparently reflecting stronger-than-expected earnings reports
and greater optimism about the prospects for continued robust output
growth and low inflation.
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. A small appreciation against the currencies of the major
foreign industrial countries offset a comparable depreciation in
relation to the currencies of other important trading partners. Among
the major currencies, the dollar rose against the euro and the pound
sterling despite a tightening of European monetary policy in response
to the implications for future inflation of indications of a strong
pickup in economic activity. The dollar fell further against the
Japanese yen, whose strength presumably reflected evidence of
continued economic recovery in Japan and the prospect of another
substantial fiscal stimulus package. The dollar's drop in terms of the
currencies of other important trading partners reflected in part
optimism about continued recovery in Asian emerging economies as well
as signs of renewed political stability in some Latin American and
Asian countries.
M2 continued to grow at a moderate
rate in October. The recent performance of this aggregate likely was
associated, at least in part, with the rise in market interest rates
earlier in the year that boosted the opportunity cost of holding
liquid balances. The expansion of M3 picked up over September and
October, reflecting a strong acceleration in its non-M2 component that
was associated with strong inflows to institutional money market funds
and stepped-up issuance of large time deposits to meet credit demands.
For the year through October, M2 and M3 were estimated to have
increased at rates somewhat above their annual ranges for 1999. 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 moderate gradually 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;
the slower growth of spending on consumer durables, houses, and
business equipment and software in the wake of the prolonged buildup
in the stocks of these items; and the higher intermediate- and
longer-term interest rates that had evolved as markets came to expect
that a rise in short-term interest rates would be needed to achieve
sustainable, noninflationary growth. The lagged effects of the earlier
rise in the foreign exchange value of the dollar were expected to
place continuing, though substantially diminishing, restraint on U.S.
exports for some period ahead. Core price inflation was projected to
rise somewhat over the forecast horizon, partly as a result of the
passthrough 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 developments, members commented that
the statistical and anecdotal information that had become available
since the October meeting continued to point to robust growth in
overall economic activity, despite some indications of softening in
interest-sensitive sectors of the economy. Although productivity
developments remained quite favorable, the faster rise in productivity
itself apparently had tended to bolster demand more than supply
through its effects on equity prices and consumption and on the demand
for capital equipment. While real interest rates had risen to some
extent to restore balance between supply and demand, they evidently
had not risen enough or had not been high for long enough, and growth
at an unsustainable pace continued to ratchet up pressures in labor
markets. Abstracting from possible temporary fluctuations associated
with the upcoming century date change, the members saw few signs of
significant slowing in aggregate demand over the next few months. Over
a somewhat longer horizon, however, they believed that growth in
aggregate demand was likely to moderate to a more sustainable pace
that would bring it into closer balance with the expansion in
aggregate supply. Key factors cited by the members in support of their
expectations of slower growth in overall domestic spending were the
lagged and to some extent already evident effects of the rise that had
occurred in long-term interest rates, including mortgage rates, and
the effects on business and consumer sentiment of a less buoyant stock
market, should the latter persist. However, the recent depreciation of
the dollar and the ongoing strengthening of many foreign economies
would stimulate rising export demand and perhaps substantially reduce
the drag exerted on the economy by the foreign trade sector. The
members acknowledged that their forecasts were subject to a
substantial degree of uncertainty, but the risks on balance were seen
as tilted toward growth strong enough to put added pressures on
already tight labor markets. Increasing pressures on labor resources,
should they materialize, would at some point foster larger increases
in labor costs, with potentially adverse implications for price
inflation over time.
With regard to the prospective
performance of key sectors of the economy, forecasts of somewhat
slower growth in consumer spending appeared to be supported by recent
reports of some moderation in sales of motor vehicles from
extraordinarily high levels. Anecdotal reports relating to recent
retail sales around the country were mixed, but members indicated that
their contacts in the retail industry were uniformly optimistic about
the outlook for sales during the holiday season and recent surveys
suggested a very high level of consumer confidence. Retail sales might
be also augmented during the closing weeks of the year by
precautionary purchases related to century date change concerns.
Looking ahead, and abstracting from the unwinding in the early part of
2000 of some transitory stockpiling of consumer goods, growth in
consumer spending seemed likely to moderate over time. In part,
forecasts of a less ebullient consumer sector reflected expectations
of reduced demand for household goods associated with a mild downturn
in housing activity and the previous slowdown in mortgage refinancings
that had lowered household debt servicing burdens and frequently had
made accumulated housing equity available for consumer expenditures. A
potentially more important factor in the outlook for consumer
spending, however, was the prospect that the wealth effects from sharp
earlier increases in the value of stock market holdings would wane in
the absence of a new upsurge in stock market prices.
Growth of business spending for
equipment and software was expected to moderate in the current
quarter, largely in conjunction with what was seen as a temporary
slowdown in purchases of computers in the period before the century
date change. However, the members saw no significant evidence that the
strong uptrend in spending on capital equipment might otherwise be
weakening. In contrast to the pattern for business fixed investment,
nonfarm inventory investment was projected to rise in the current
quarter in connection with a temporary bulge related to the century
date change but also to bring lean inventories into better alignment
with anticipated sales. Once the perturbations related to the century
date change had run their course, inventory growth was expected to
return to a more normal pace during 2000.
In the housing market, rising
mortgage rates had fostered some declines from recent peaks in starts
and sales, and persisting softness in housing activity was
anticipated. This expectation tended to be supported by anecdotal
reports of moderating homebuilding activity in several parts of the
country. Nonetheless, the members cited a number of factors that
should tend to sustain overall housing activity at a fairly elevated
level. These included continuing though diminishing backlogs of
unbuilt homes, rising incomes, and high levels of consumer confidence.
In any event, the outlook for housing was subject to considerable
uncertainty as reflected in recent surveys that had produced mixed
results with regard to the near-term prospects for housing activity.
Members anticipated that the
dollar's recent depreciation and the strengthening of foreign
economies would foster a significant further pickup in exports.
Indeed, available data and anecdotal reports from around the country
indicated that foreign demand already had improved markedly for some
U.S. products. In these circumstances, domestic demand would need to
decelerate considerably for growth to proceed at a sustainable pace.
Concerning the outlook for
inflation, members noted that despite the long duration of very tight
labor markets across the nation, labor compensation had increased at a
slightly lower rate this year while consumer price inflation had
remained moderate, albeit above year-earlier levels owing to a sharp
rise in energy prices. The deceleration in labor compensation may have
been induced in large measure by the low level of consumer price
inflation in 1998. In addition, a major factor underlying the
persistence of generally subdued price inflation in a period of robust
economic expansion was the continued acceleration in productivity,
which clearly was holding down increases in unit production costs. The
latter contributed to ongoing competitive pressures that severely
limited the ability of firms to raise prices, helping to this point to
keep inflation at a low level.
The members nonetheless remained
concerned about the outlook for inflation. They continued to focus
especially on the possibility that the anticipated moderation in the
growth of aggregate demand, taking into account the outlook for rising
foreign demand for U.S. goods and services, might not be sufficient to
avoid added pressures on labor and other resources. To be sure, the
economy's potential output appeared to be expanding briskly, with much
of the impetus provided by accelerating productivity. Even so, the
pool of unemployed workers willing to take a job had continued to be
drawn down, and it seemed likely to many members that prospective
growth in aggregate demand might generate increasing pressures on the
economy's ability to produce goods and services and thus add to
inflationary pressures over time. This concern was heightened by the
prospect that a number of developments that had tended to contain
inflation in the last few years were now reversing. Members mentioned
in particular the likelihood that increases in labor compensation
might be headed higher in lagged response to the pickup in consumer
price inflation this year. Also likely adding to labor cost pressures
were relatively large advances in the cost of health care benefits and
the possibility of a higher minimum wage. Moreover, the turnaround in
energy and import prices could tend to feed through more directly into
the prices of U.S.-produced goods by raising costs and reducing
competitive pressures to hold down prices. Strengthening demand around
the world already seemed to be contributing to higher prices of
materials and other nonlabor inputs in the production
"pipeline." In general, however, the members anticipated
that any pickup in inflation was likely to be gradual, with cost
pressures quite possibly continuing to be held largely in check for
some time by improving productivity trends. They recognized that
forecasts of rising inflation had failed to materialize in recent
years, raising questions about their understanding of the empirical
specification of the relationships that currently underlie the
inflation process. On balance, though, the unsustainable pace of
economic expansion along with the reversal of factors that previously
had held down overall price increases suggested a significant risk
that inflation would strengthen over time given prevailing financial
conditions.
Against this background, all the
members supported raising the Committee's target for the federal funds
rate by 25 basis points at this meeting. Views differed to an extent
on the outlook for inflation and policy going forward. However, with
tightening resource constraints indicating unsustainable growth, only
tentative signs that growth might be slowing, and various factors that
had been damping prices now turning around, all the members agreed on
the need for a slight tightening at this meeting to raise the odds on
containing inflation and forestalling the inflationary imbalances that
would undercut the very favorable performance of the economy. This
view was reinforced by the prospect that the Committee might not find
it desirable to adjust policy at its December meeting when a
tightening action could add to the potential financial uncertainties
and unsettlement surrounding the century date change. Accordingly, any
action might have to wait until the meeting in early February, and the
members agreed that the risks of waiting for such an extended period
were unacceptably high.
All the members accepted a proposal
to adopt a symmetric directive. Such a directive was viewed as
consistent with the Committee's current expectation that no further
policy move was likely to be considered before the Committee's meeting
in February. In the circumstances, a Committee decision to retain the
existing asymmetry toward tightening could well send a misleading
signal about the probability of near-term action and have an
unsettling effect on financial markets at a time when concerns
relating to the century date change might be adding to normal year-end
pressures. As noted previously, however, views differed to some degree
regarding the subsequent outlook for policy. On the basis of currently
available information, a number of members indicated that they were
quite uncertain about the possible need for further tightening action
over coming months to keep inflation within acceptable limits.
Continued favorable price and unit cost data, driven in part by
improving productivity, suggested that any further action should
depend on incoming information about economic activity, pressures on
resources, and inflation. Other members, emphasizing the persistently
strong growth in economic activity and the unusually high level of
labor resource utilization, suggested that additional firming of the
stance of policy probably would be necessary to keep inflation in
check and hence maintain the favorable backdrop for maximum economic
growth. However, in view of the questions surrounding the outlook, the
amount of firming already undertaken by the Committee this year
including at this meeting and its uncertain effects, and the special
situation in financial markets over the year-end, they supported the
adoption of a symmetric directive.
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 directive:
The information reviewed at this
meeting suggests continued solid expansion of economic activity.
Nonfarm payroll employment increased appreciably on average over
September and October, and the civilian unemployment rate dropped to
4.1 percent in October, its low for the year. Industrial production
recorded a strong gain in October after having been depressed in
September by the effects of hurricane Floyd. Total retail sales were
flat in September and October owing to a drop in sales at auto
dealers; sales at other stores were fairly robust. Housing activity
softened somewhat over the summer but has remained at a high level.
Trends in orders suggest that business spending on capital equipment
has continued to increase. The July-August deficit in U.S. trade in
goods and services was higher than its average in the second
quarter, as further growth in imports exceeded the rise in exports.
Inflation has continued at a moderate pace, though above that in
1998 owing to a sharp rebound in energy prices. Labor compensation
rates have been rising more slowly than last year.
Most market interest rates have
posted small mixed changes since the meeting on October 5, 1999.
However, measures of share prices in equity markets have registered
sizable increases over the intermeeting period. In foreign exchange
markets, the trade-weighted value of the dollar has changed little
over the period in relation to the currencies of a broad group of
important U.S. trading partners.
M2 continued to grow at a moderate
pace in October while M3 accelerated. For the year through October,
M2 and M3 are estimated to have increased at rates somewhat above
the Committee's annual ranges for 1999. 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
continue to be evaluated in the light of progress toward price level
stability, movements in their velocities, and developments in the
economy and financial markets.
To promote the Committee's
long-run objectives of price stability and sustainable economic
growth, the Committee in the immediate future seeks conditions in
reserve markets consistent with increasing the federal funds rate to
an average of around 5-1/2 percent. In view of the evidence
currently available, the Committee believes that prospective
developments are equally likely to warrant an increase or a decrease
in the federal funds rate operating objective during the
intermeeting period.
Votes for this action:
Messrs. Greenspan, McDonough. Boehne, Ferguson, Gramlich, McTeer,
Meyers, Moskow, Kelley, and Stern.
Votes against this action:
None.
At this meeting, the working group
chaired by Mr. Ferguson provided an interim report on its work to date
concerning the wording of the Committee's directives, the Committee's
announcements after each meeting, and related issues. The members
expressed broad agreement with the direction of the working group's
tentative recommendations and provided feedback on specific issues and
wording. It was contemplated that the Committee would consider the
working group's final report at a meeting in the near future.
It was agreed that the next meeting
of the Committee would be held on Tuesday, December 21, 1999.
The meeting adjourned at 1:40 p.m.
