By unanimous vote, the minutes of
the meeting of the Federal Open Market Committee held on November 15,
2000, were approved.
The Manager reported on developments
in domestic financial markets and on System open market transactions
in government securities and federal agency obligations during the
period November 15, 2000, through December 18, 2000. By unanimous
vote, the Committee ratified these transactions.
The Manager of the System Open
Market Account also 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 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 provided evidence that economic activity, which had expanded
at an appreciably lower pace since midyear, might have slowed further
in recent months. Consumer spending and business purchases of
equipment and software had decelerated markedly after having
registered extraordinary gains in the first half of the year. Housing
construction, though still relatively firm, was noticeably below its
robust pace of earlier in the year. With final spending rising at a
reduced rate, inventory overhangs had emerged in a number of
goods-producing industries, most visibly in the motor vehicle sector.
Manufacturing production had declined as a consequence, and the rate
of expansion in employment had moderated further. Evidence on core
price inflation was mixed; by one measure, it appeared to be
increasing very gradually, in part reflecting the indirect effects of
higher energy costs, but by another it had remained at a relatively
subdued level.
Growth in private nonfarm payroll
employment moderated a little further on balance in October and
November. Manufacturing payrolls changed little over the two months,
and job gains in the construction, retail trade, and services
industries were smaller than those of earlier in the year. By
contrast, the pace of hiring remained relatively brisk in the finance,
insurance, and real estate sectors. With growth in the demand for
labor slowing, initial claims for unemployment insurance continued to
trend upward, and the civilian unemployment rate edged up to 4 percent
in November, its average thus far this year.
Industrial production declined
slightly in October and November following a moderate third-quarter
increase that was well below the pace of expansion recorded during the
first half of the year. Utilities output surged in November in
response to unseasonably cold weather across much of the country while
mining activity changed little. In manufacturing, motor vehicle output
was scaled back further in November, and there also were widespread
declines in industries not directly affected by conditions in the
motor vehicle sector. Although the production of high-tech equipment
was still trending up, growth continued to slow from the
extraordinarily rapid increases of earlier in the year. The weakening
of factory output in November was reflected in a further decline in
the rate of capacity utilization in manufacturing to a point somewhat
below its long-term average.
Consumer spending appeared to be
decelerating noticeably further in the fourth quarter in an
environment of diminished consumer confidence, smaller job gains, and
lower stock prices. Retail sales were down somewhat on balance in
October and November after a substantial third-quarter increase; sales
of light vehicles dropped over the two months, and growth in
expenditures on other consumer goods slowed. Outlays on services
continued to grow at a moderate rate through October (latest data).
Against the backdrop of declining
interest rates on fixed-rate mortgages, residential building activity
had leveled out since midyear, and October starts remained at the
third-quarter level. Sales of new homes edged down in October, though
they were still slightly above their third-quarter level; sales of
existing homes slipped somewhat in October but were near the middle of
their range over the past year. In the multifamily sector, starts
moved up slightly further in October, though they remained appreciably
below their elevated level during the first half of the year.
Continuing relatively low vacancy rates for multifamily units
suggested that the prospects for additional construction were
favorable.
Business investment in equipment and
software increased at a sharply lower, though still relatively robust,
rate in the third quarter, and information on shipments of nondefense
capital goods indicated another moderate increase in business
investment in October. Shipments of communications, computing, and
office equipment were well above their third-quarter averages, and
shipments of non-high-tech equipment turned up in October after having
fallen appreciably in earlier months. On the downside, sales of medium
and heavy trucks declined further over October and November, and new
orders for such trucks remained weak. Investment in nonresidential
structures continued to rise briskly in October, and all the major
subcategories of construction put in place were up substantially on a
year-over-year basis. Market fundamentals, including rising property
values and low vacancy rates, suggested that further expansion of
nonresidential building activity, particularly office construction,
was likely.
Inventory investment on a book-value
basis picked up in October from the third-quarter pace, and the
aggregate inventory-sales ratio edged up to its highest level in the
past twelve months. In manufacturing, sizable increases in stocks were
led by large accumulations at producers of industrial and electrical
machinery. As a result, the stock-sales ratio for manufacturing
reached its highest level in a year; advances in stock-sales ratios
were widespread among makers of durable goods while ratios remained
high for a number of categories of nondurable products. At the
wholesale level, inventory accumulation inched up from its
third-quarter rate, and the sector's inventory-sales ratio was at the
top of its range for the past twelve months. Total retail stocks rose
in line with sales in October, and the inventory-sales ratio for this
sector also remained at the upper end of its range over the past year.
The U.S. trade deficit in goods and
services reached a new record high in September and on a quarterly
average basis was up appreciably further in the third quarter. The
value of exports continued to grow strongly in the latest quarter, led
by advances in exported machinery and industrial supplies. The value
of imports rose at an even faster rate than exports, with increases in
all major trade categories, especially industrial supplies,
semiconductors, and services. Economic growth in the foreign
industrial countries slowed moderately in the third quarter, and the
available information suggested a further reduction in the fourth
quarter. Economic expansion eased in the euro area despite continued
strong growth of investment and exports, as consumer spending appeared
to be damped by earlier interest rate increases and by the drain on
spendable income of higher prices for oil and imported goods more
generally. In addition, weak consumption appeared to be an important
factor in continued sluggish economic growth in Japan. Economic
activity also decelerated in some developing countries in the third
quarter, with recent indicators suggesting a slowdown in expansion in
many parts of East Asia.
Incoming data indicated that, on
balance, price inflation had picked up only a little, if at all.
Consumer prices, as measured by the consumer price index (CPI) on a
total and a core basis, rose mildly in October and November after a
sizable September increase, but on a year-over-year basis core CPI
prices increased noticeably more in the twelve months ended in
November than in the previous twelve-month period. When measured by
the personal consumption expenditure (PCE) chain-type index, however,
consumer price inflation was modest in both October (latest data) and
the twelve months ended in October, with little change year over year.
At the producer level, core prices edged down on balance in October
and November; moreover, producer inflation eased somewhat on a
year-over-year basis, though the deceleration was more than accounted
for by an earlier surge in tobacco prices during the year ended in
November 1999. With regard to labor costs, average hourly earnings of
production or nonsupervisory workers increased in November at the
slightly higher rate recorded in October. For the twelve months ended
in October, average hourly earnings rose somewhat more than in the
previous twelve months.
At its meeting on November 15, 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 despite clear indications of a more moderate expansion in
economic activity, persisting risks of heightened inflation pressures
remained a concern, particularly in the context of a gradual upward
trend in core inflation. In these circumstances, a steady monetary
policy was the best means to promote price stability and sustainable
economic expansion. While recognizing that growth was slowing more
than had been anticipated and that developments might be moving in a
direction that would require a shift to a balanced risk statement,
members agreed that such a change would be premature. 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 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 remained close to the intended level. Against the
background of deteriorating conditions in some segments of financial
markets, slower economic expansion, and public comments by Federal
Reserve officials about the implications of those developments, market
expectations about the future course of the federal funds rate were
revised down appreciably over the intermeeting period, and market
interest rates on Treasury and private investment-grade securities
declined somewhat over the intermeeting interval. The weaker outlook
for economic growth, coupled with growing market concerns about
corporate earnings, weighed down equity prices and boosted risk
spreads on lower-rated investment-grade and high-yield bonds. Equity
prices were quite volatile during the intermeeting period and,
reflecting numerous dour reports on corporate earnings and incoming
information indicating slower growth in economic activity in the
United States, broad indexes of stock market prices dropped
considerably on balance over the intermeeting period.
In foreign exchange markets, the
trade-weighted value of the dollar edged lower 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
fell moderately against the euro but moved up to a roughly comparable
extent in terms of the yen. The dollar's decline against the euro
reflected a growing perception that economic expansion in the euro
area would cool comparatively less than in the United States.
Correspondingly, the slide of the yen seemed to be related to weak
economic data, stagnant business sentiment, and political
uncertainties in Japan. The dollar posted a small gain against an
index of the currencies of other important trading partners, largely
reflecting weaker financial conditions in some emerging economies.
The broad monetary aggregates
decelerated further in November. The slowing growth of M2 in October
and November following strong expansion in August and September
apparently reflected the moderating rates of increase in nominal
income and spending in recent months and perhaps some persisting
effects of the rise in opportunity costs earlier in the year. M3
growth slowed less than that of M2 in November, in part because of
stepped-up issuance of large time deposits as banks reduced their
reliance on funding from overseas offices. The growth of domestic
nonfinancial debt slowed in October (latest data), reflecting a larger
further paydown of federal debt and a reduced pace of private
borrowing.
The staff forecast prepared for this
meeting suggested that the economic expansion had slowed considerably,
to a rate somewhat below the staff's current estimate of the growth of
the economy's potential output, but that it would gradually gain
strength over the next two years. The forecast anticipated that the
expansion of domestic final demand would be held back to some extent
by the diminishing influence of the wealth effects associated with
past outsized gains in equity prices but also by the relatively high
interest rates and the somewhat stringent credit terms and conditions
on some types of loans by financial institutions. As a result, growth
of spending on consumer durables was expected to be appreciably below
that in recent quarters, and housing demand to be slightly weaker.
Business fixed investment, notably outlays for equipment and software,
was projected to remain relatively robust; growth abroad would support
the expansion of U.S. exports; and fiscal policy was assumed to
continue its moderate expansionary trend. Core price inflation was
projected to rise only slightly over the forecast horizon, partly as a
result of higher import prices but also as a consequence of some
further increases in nominal labor compensation gains that would not
be fully offset by the expected growth of productivity.
In the Committee's discussion of
current and prospective economic developments, members commented that
recent statistical and anecdotal information provided clear
indications of significant slowing in the expansion of business
activity and also pointed to appreciable erosion in business and
consumer confidence. The deceleration in the economy had occurred from
an unsustainably high growth rate in the first half of the year, and
the resulting containment in demand pressures on resources already had
improved the outlook for inflation. The question at this juncture was
whether the expansion would remain near its recent pace or continue to
moderate. While the former still seemed to be the most likely outcome,
the very recent information on labor markets, sales and production,
business and consumer confidence, developments in financial markets,
and growth in foreign economies suggested that the risks to the
economy had shifted rapidly and perceptibly to the downside.
Concerning the outlook for inflation, members commented that the
upside risks clearly had diminished in the wake of recent developments
and that, with pressures on resources likely to abate at least a
little, subdued inflation was a reasonable prospect.
Weakening trends in production and
employment were most apparent in the manufacturing sector. There were
widespread anecdotal reports of production cutbacks, notably in
industries related to motor vehicles, and of associated declines in
manufacturing employment. However, many of the factory workers losing
their jobs were readily finding employment elsewhere in what generally
continued to be characterized as very tight labor markets across the
country. The softening in manufacturing reflected weak sales and
prompt efforts to limit unwanted buildups in inventories. Even so,
business contacts reported currently undesired levels of inventories
in a range of industries, not only in motor vehicles. In the
aggregate, cutbacks in inventory investment or runoffs of existing
inventories accounted for a significant part of the recent moderation
in the growth of the overall economy.
The slowing in the growth of
consumer spending that had prompted much of the backup in inventories
was evident from a wide variety of information, including anecdotal
reports from various parts of the country. Consumer sentiment seemed
to have deteriorated appreciably in recent weeks, though from a very
high level, and retail sales were widely indicated to have softened
after a promising spurt early in the holiday season. Factors cited to
account for the relatively sudden emergence of this weakness, and also
as possible harbingers of developments in coming quarters, were the
negative wealth effects of further declines in stock market prices,
the impact of very high energy costs on disposable incomes, and some
increase in caution about the outlook for employment opportunities and
incomes. The extent to which such developments would persist and
perhaps foster more aggressive retrenchment in consumer spending
clearly was uncertain, but the members nonetheless anticipated that
over time underlying employment and income trends would be consistent
with further expansion in consumer expenditures, though at a pace well
below that of earlier in the year.
Growth in business expenditures for
equipment and software had moderated substantially in recent months
from very high rates of increase over an extended period. The slowdown
reflected a mix of interrelated developments including flagging growth
in demand and tightening financial conditions in the form of declining
equity prices and stricter credit terms for many business borrowers.
The re-evaluation of prospects was most pronounced in the high-tech
industries. The profitability of using and producing such software and
equipment had been overestimated to a degree, and disappointing sales
and a better appreciation of risks had resulted in much slower growth
in production of such equipment and sharp deterioration in the equity
prices of high-tech companies. At the same time, nonresidential
construction activity appeared to have been well maintained in many
parts of the country, though there were reports of softening in some
regions and of some reductions or delays in planned projects. Against
this background, risks of further retrenchment in capital spending
persisted, but to date there was no evidence to suggest that the
underlying pace of advances in technology and related productivity
growth had abated. Over time, further increases in productivity would
undergird continuing growth in demand for high-tech equipment. In the
nonresidential construction area, members noted that high occupancy
rates and high rents were supportive elements in the construction
outlook.
With regard to the prospects for
housing activity, members provided anecdotal reports of some softening
in a number of regions, though homebuilding was holding up well in
others. Housing demand was, of course, responding to many of the same
factors that were affecting consumer spending, including the negative
wealth effects of declining stock market prices. On the positive side,
further growth in incomes and declines in mortgage rates were key
elements of underlying strength for the housing sector. On balance,
housing construction at a pace near current levels appeared to be a
reasonable prospect in association with forecasts of moderate growth
in the overall economy.
Growth in foreign economic activity
likely would continue to foster expansion in U.S. exports, though
members noted that there were signs of softer business conditions in
some foreign nations. In addition, members referred to some anecdotal
evidence of increasing concern among business contacts about future
prospects for exports of manufactured goods. On the other hand, any
depreciation in the foreign exchange value of the dollar as the
economy slowed would help to bolster exports.
Against the backdrop of slowing
economic growth, core inflation had remained quiescent. Views
regarding the outlook for inflation were somewhat mixed, though all
the members agreed that the risks of higher inflation had diminished
materially. Nonetheless, some members noted that while recent
anecdotal reports pointed to a modest reduction in labor market
strains in some areas and industries, labor markets in general were
still very tight and likely would remain taut relative to historical
experience. In such circumstances, if structural productivity growth
leveled out, worker efforts to catch up to past increases in
productivity could put pressures on labor compensation costs. The
latter could well be augmented by sharply rising medical costs and by
attempts to protect the purchasing power of wages from the erosion
caused by the rise in energy prices. Further depreciation of the
dollar in relation to major foreign currencies would add to import
prices and domestic inflation pressures. But there were also a number
of reasons for optimism about the outlook for consumer prices over
coming quarters. Growth in economic activity at a pace somewhat below
that of the economy's output potential would lessen pressures on labor
and other resources from levels that had, in the past few years, been
associated with at most a small uptick in core inflation. Indications
that rapid growth in structural productivity would persist and
widespread reports that strong competitive pressures in most markets
continued to inhibit business efforts to increase prices in the face
of rising costs also were favorable factors in the outlook. Further
declines in oil prices, as evidenced by quotations in futures markets,
would if realized have effects not only on so-called headline
inflation but would help hold down core prices over time. Despite
previous increases in headline inflation, survey and other measures of
inflation expectations continued to suggest that long-run inflation
expectations had not risen and might even have fallen a bit of late as
the economy softened.
In the Committee's discussion of
policy for the intermeeting period ahead, all the members indicated
that they could support an unchanged policy stance, consistent with a
federal funds rate averaging about 6-1/2 percent. However, they also
endorsed a proposal calling for a shift in the balance of risks
statement to be issued after this meeting to express the view that
most members believed the risks were now weighted toward conditions
that could generate economic weakness in the foreseeable future. In
their evaluation of the appropriate policy for these changing
circumstances, the members agreed that the critical issue was whether
the expansion would stabilize near its recent growth rate or was
continuing to slow. In the view of almost all the members, the
currently available information bearing on this issue was not
sufficient to warrant an easing at this point. Much of the usual
aggregative data on spending and employment, although to be sure
available only with a lag, continued to suggest moderate economic
expansion. The information pointing to further weakness was very
recent and to an important extent anecdotal. As a consequence, most of
the members were persuaded that a prudent policy course would be to
await further confirmation of a weakening expansion before easing,
particularly in light of the high level of resource utilization and
the experience of recent years when several lulls in the growth of the
economy had been followed by a resumption of very robust economic
expansion. Additional evidence of slowing economic growth might well
materialize in the weeks immediately ahead--from the regular
aggregated monthly data releases, but also from weekly readings on the
labor market and reports from businesses on the strength of sales and
production--and the members agreed that the Committee should be
prepared to respond promptly to indications of further weakness in the
economy. Those few members who expressed a preference for easing at
this meeting believed that, with unit labor costs and inflation
expectations contained, enough evidence of further weakness already
existed to warrant an immediate action. Nonetheless, they could accept
a delay in light of prevailing uncertainties about the prospective
performance of the economy and the intention of the Committee to act
promptly in coming weeks, including the possibility of an easing move
early in the intermeeting period, should confirming information on
weakening trends in the economy emerge.
With regard to the consensus in
favor of moving from an assessment of risks weighted toward rising
inflation to one that was weighted toward economic weakness, with no
intermediate issuance of a balanced risks assessment, some members
observed that such a change was likely to be viewed as a relatively
rapid shift by some observers. The revised statement of risks, even
though it would not be associated with an easing move, could
strengthen expectations regarding future monetary policy easing to an
extent that was difficult to predict and could generate sizable
reactions in financial markets. At the same time, it might raise
questions about why the Committee did not alter the stance of policy.
Nonetheless, the Committee's reasons for not easing today were deemed
persuasive by most members, while shifting its statement about
economic risks seemed clearly justified by recent developments. In one
view, even though the risks of a weakening economy had increased, a
statement of balanced risks would be preferable because further
moderation in the expansion might well fail to materialize.
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 economic weakness 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.
This meeting adjourned at 1:35 p.m.
with the understanding that the next regularly scheduled meeting of
the Committee would be held on Tuesday-Wednesday, January 30-31, 2001.
Telephone
Conference Meeting
A telephone conference meeting was
held on January 3, 2001, for the purpose of considering a policy
easing action. In keeping with the Committee's Rules of Organization,
the members at the start of the meeting unanimously re-elected Alan
Greenspan as Chairman of the Federal Open Market Committee and William
J. McDonough as Vice Chairman. Their terms of office were extended for
one year until the first meeting of the Committee after December 31,
2001. By unanimous vote, the Federal Reserve Bank of New York was
selected to execute transactions for the System Open Market Account
until the adjournment of the first meeting of the Committee after
December 31, 2001.
At its meeting on December 19, 2000,
the Committee had contemplated the possibility that ongoing economic
and financial developments might warrant a reassessment of the stance
of monetary policy prior to the next scheduled meeting in late
January. Information that had become available since the December
meeting tended to confirm that the economic expansion had continued to
weaken. The manufacturing sector was especially soft, reflecting
apparent efforts in a number of industries to readjust inventories
that were now deemed to be too high, notably those related to motor
vehicles. Retail sales were appreciably below business expectations
for the holiday season despite some pickup in the latter half of
December, apparently largely induced by price discounting, and sales
of motor vehicles evidenced significant further weakness as the month
progressed. Business confidence appeared to have deteriorated further
since the December meeting amid widespread reports of reductions in
planned production and capital spending. Elevated energy costs were
continuing to drain consumer purchasing power and were adding to the
costs of many business firms, with adverse effects on profits and
stock market valuations. Interacting with these developments were
forecasts of further declines in business profits over coming
quarters. On the more positive side, housing activity appeared to be
responding to lower mortgage interest rates, and on the whole
nonresidential construction activity seemed to be reasonably well
maintained. Moreover, while the expansion had weakened and economic
activity might remain soft in the near term, the longer-term outlook
for reasonably sustained economic expansion, supported by easier
financial conditions and the response of investment and consumption to
rising productivity and living standards, was still quite good.
Inflation expectations appeared to be declining, with businesses
continuing to encounter marked and even increased resistance to their
efforts to raise prices. On balance, the information already in hand
indicated that the expansion clearly was weakening and by more than
had been anticipated. In the circumstances, prompt and forceful policy
action sooner and larger than expected by financial markets seemed
called for.
Against this background, all the
members supported a proposal for an easing of reserve conditions
consistent with a reduction of 50 basis points in the federal funds
rate to a level of 6 percent. 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 a reduction in the
federal funds rate to an average of around 6 percent.
The vote 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 economic weakness in the foreseeable future.
Votes for this action:
Messrs. Greenspan, McDonough, Ferguson, Gramlich, Hoenig, Kelley,
Meyer, Minehan, Moskow, and Poole.
Votes against this action:
None.
Chairman Greenspan indicated that
shortly after this meeting the Board of Governors would consider
pending requests by several Federal Reserve Banks to reduce the
discount rate by 25 basis points. At the time of this conference call
meeting, no pending requests for a 50 basis point reduction were
outstanding, but the press release would indicate that the Board would
be prepared to consider requests for further reductions of 25 basis
points if they were received.
Donald L. Kohn
Secretary
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