By unanimous vote, the minutes of the
meeting of the Federal Open Market Committee held on June 29-30, 1999,
were approved.
By unanimous vote, Christine Cumming
and David Howard were elected to serve as associate economists until the
first meeting of the Committee after December 31, 1999, with the
understanding that in the event of the discontinuance of their official
connection with a Federal Reserve Bank or with the Board of Governors,
they would cease to have any official connection with the Committee.
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 June 30, 1999, through August 23, 1999. By unanimous
vote, the Committee ratified these transactions.
At this meeting, the Committee
considered a number of proposals whose purpose was to enhance the
Manager's ability to counter potential liquidity strains in money and
financing markets in the period surrounding the century date change and
in the process help to assure the effective implementation of the
Committee's monetary policy objectives. The members believed that the
prospects for major liquidity problems associated with the century date
change were remote, but some strains were already in evidence, and they
agreed that it would be prudent to provide the Manager with added leeway
and flexibility for a limited period. Because the plans of market
participants were likely to be influenced by the Federal Reserve's
contemplated action and because detailed preparations with market
participants needed to begin promptly, the Committee decided to put the
new authorizations in place at this meeting.
The new authority encompassed three
policy instruments that, unless renewed, would expire during the early
part of 2000 and one permanent change. The temporary authorizations
included (1) the expansion of collateral that could be accepted in
System open market transactions, (2) authority to use reverse repurchase
agreements in addition to the currently available matched sales purchase
transactions to absorb reserves on a temporary basis, and (3) a standby
financing facility involving the auction of options on repurchase
agreements, reverse repurchase agreements, and matched sale purchase
transactions that could be exercised in the period surrounding the
year-end. The permanent change, which also might prove useful during the
year-end period, involved the extension of the maximum maturity on
regular repurchase and matched sale purchase transactions from 60 days
to 90 days.
The broader range of collateral
approved by the Committee for repurchase transactions included mainly
pass--through mortgage securities of GNMA, FHLMC, and FNMA, STRIP
securities of the U.S. Treasury, and "stripped" securities of
other federal government agencies. The expanded pool would facilitate
the Manager's task of addressing what potentially could be very large
needs to supply reserves in the months ahead, especially in the weeks
surrounding the year-end. Such transactions would have to be undertaken
at a time of likely heightened demand for U.S. government securities
that would diminish the available pool of currently authorized
securities for System open market operations. The Federal Reserve Bank
of New York would need to establish custody arrangements with commercial
banks to manage the clearing of the newly authorized securities on a
tri-party basis. Some time would be needed to make these arrangements
and inform other market participants, and it was anticipated that the
new arrangements would not be in place before early October. To
implement this decision, the Committee voted unanimously to suspend
until April 30, 2000, several provisions of the "Guidelines for the
Conduct of System Operations in Federal Agency Issues" that impose
limits on transactions in federal agency transactions. The
"Guidelines" as temporarily amended now read as follows:
- System open market operations in
Federal agency issues are an integral part of total System open
market operations designed to influence bank reserves, money market
conditions, and monetary aggregates.
- System open market operations in
Federal agency issues are not designed to support individual sectors
of the market or to channel funds into issues of particular
agencies.
The Committee's decision to authorize
the use of reverse repurchase agreements until April 30 was intended to
facilitate temporary reserve draining operations. These agreements are
fundamentally equivalent to matched sale purchase transactions, which
the Manager already has the authority to employ. However, the latter are
not a common instrument in financial markets. Partly as a consequence,
they lack the flexibility for use to drain reserves late during the
business day, a flexibility that might be particularly desirable to have
in place during the upcoming year-end period. Accordingly, the Committee
voted unanimously to add reverse repurchase agreements to its
"Authorization for Domestic Open Market Operations," as shown
in new paragraph 1(c) below.
The Committee also approved a
temporary financing facility authorizing the Federal Reserve Bank of New
York to sell options on repurchase agreements, reverse repurchase
agreements, and matched sale purchase transactions. The members hoped
that the availability of such a System facility would reduce concerns
about year-end financial conditions and thus help avert the emergence of
the illiquid markets that were feared by an apparently growing number of
market participants and that would complicate the conduct of open market
operations. The sales would be made on a competitive basis to the
primary government securities dealers who are regular counterparties in
the System's open market operations. The details of these transactions
would be worked out during the weeks ahead.
Members agreed that there was some
risk of unintended consequences in implementing these untried
transactions. Nonetheless, the costs stemming from a dysfunctional
financing market at year-end, in the unlikely event that it
materializes, were immeasurably greater. The members did not question
the desirability of addressing the latter risks and providing greater
assurance that financing markets would retain sufficient depth and
liquidity to permit market participants including the Federal Reserve to
make necessary portfolio adjustments at year-end. Accordingly, the
Committee voted unanimously to authorize the sale of options on
temporary transactions for exercise though January 2000. This authority
is indicated in the temporary addition of paragraph 4, shown below, to
the Authorization for Domestic Open Market Operations.
The decision to extend the maximum
maturity on repurchase and sales-purchase transactions was intended to
bring the terms of such transactions into conformance with market
practice and the pattern of market demand, thereby enhancing the
Manager's ability to use these instruments. This maturity extension,
which the Committee decided to make permanent, was likely to prove
particularly useful in the period of unusually large reserve operations
over the months ahead. The new authority is incorporated in paragraphs
1(b), 1(c), and 3 below.
The paragraphs of the Authorization
for Domestic Open Market Operations that were amended or added by the
Committee, all by unanimous vote, read as follows:
Authorization for Domestic Open
Market Operations
1. The Federal Open Market Committee authorizes and directs the
Federal Reserve Bank of New York, to the extent necessary to carry out
the most recent domestic policy directive adopted at a meeting of the
Committee:
(b) To buy U.S. Government
securities, obligations that are direct obligations of, or fully
guaranteed as to principal and interest by, any agency of the United
States, from dealers for the account of the Federal Reserve Bank of
New York under agreements for repurchase of such securities or
obligations in 90 calendar days or less, at rates that, unless
otherwise expressly authorized by the Committee, shall be determined
by competitive bidding, after applying reasonable limitations on the
volume of agreements with individual dealers; provided that in the
event Government securities or agency issues covered by any such
agreement are not repurchased by the dealer pursuant to the agreement
or a renewal thereof, they shall be sold in the market or transferred
to the System Open Market Account.
(c) To sell U.S. Government
securities that are direct obligations of, or fully guaranteed as to
principal and interest by, any agency of the United States to dealers
for System Open Market Account under agreements for the resale by
dealers of such securities or obligations in 90 calendar days or less,
at rates that, unless otherwise expressly authorized by the Committee,
shall be determined by competitive bidding, after applying reasonable
limitations on the volume of agreements with individual dealers.
3. In order to ensure the effective
conduct of open market operations, while assisting in the provision of
short-term investments for foreign and international accounts
maintained at the Federal Reserve Bank of New York, the Federal Open
Market Committee authorizes and directs the Federal Reserve Bank of
New York (a) for System Open Market Account, to sell U.S. Government
securities to such foreign and international accounts on the bases set
forth in paragraph l(a) under agreements providing for the resale by
such accounts of those securities within 90 calendar days on terms
comparable to those available on such transactions in the market; and
(b) for New York Bank account, when appropriate, to undertake with
dealers, subject to the conditions imposed on purchases and sales of
securities in paragraph l(b), repurchase agreements in U.S. Government
and agency securities, and to arrange corresponding sale and
repurchase agreements between its own account and foreign and
international accounts maintained at the Bank. Transactions undertaken
with such accounts under the provisions of this paragraph may provide
for a service fee when appropriate.
4. In order to help ensure the
effective conduct of open market operations during the transition
period surrounding the century date change, the Committee authorizes
the Federal Reserve Bank of New York to sell options on repurchase
agreements, reverse repurchase agreements, and matched sale purchase
transactions for exercise no later than January 2000.
The Committee then turned to a
discussion of the economic and financial outlook, and the implementation
of monetary policy over the intermeeting period ahead.
The information reviewed at this
meeting suggested that expansion of economic activity remained solid.
The growth of consumer spending and business outlays for durable
equipment had moderated somewhat after increasing rapidly earlier in the
year. Residential construction activity had weakened a little from the
level of last winter but was still elevated. Job growth was quite
strong, however, and industrial production appeared to be picking up.
Labor markets remained very tight, and recent wage and price increases
had been a little larger on balance, though price inflation continued
subdued.
Nonfarm payroll employment increased
sharply in June and July. Job growth in the service-producing industries
soared in both months, and construction employment remained on an upward
trend. In manufacturing, the number of jobs turned up in July. The
civilian unemployment rate was 4.3 percent in July, matching its average
for the first half of the year.
Industrial production recorded a large
increase in July after having edged up in June. Part of the July advance
reflected a surge in the output of electric utilities associated with
the heat wave in the eastern United States and an upturn in mining
production after a weak first half of the year. In manufacturing,
production advanced briskly over the June-July period. While production
of motor vehicles and aircraft fell on balance over the two months,
output of high-tech products continued to expand at a rapid pace, and
the manufacture of other goods rebounded strongly in July after
declining a bit in June. Utilization of manufacturing capacity edged up
in July but remained below its long-run average rate.
Growth of consumer spending slowed
appreciably in the second quarter after having surged earlier in the
year; still, the underlying trend in spending remained relatively strong
as a result of continuing robust expansion of disposable incomes and
household wealth thus far this year and very positive consumer
sentiment. Retail sales had increased moderately recently--a small
decline in June was more than offset by a July rebound--while consumer
outlays for services were buoyant in the second quarter (latest data).
Housing activity remained strong in the June-July period; housing starts
were only a little below the very high levels of earlier months of the
year, and home sales remained at an elevated level in June (latest
data).
The limited available information
suggested that the pace of expansion in business fixed investment had
moderated somewhat after advancing rapidly in the second quarter. Demand
for high-tech equipment remained strong overall, even though growth of
outlays for computers appeared to have eased a little recently; spending
for motor vehicles and aircraft seemed to be leveling out after
increasing markedly in the first half of the year; and expenditures on
other types of durable equipment remained sluggish. Nonresidential
construction activity slipped in the second quarter after sizable gains
last year and the early part of this year.
The book value of business inventories
increased moderately in the second quarter, and in many industries the
levels of inventory stocks were lean in relation to sales. In
manufacturing, inventories continued to edge down in the second quarter,
and the aggregate inventory-sales ratio for the sector at the end of the
quarter was slightly below the lower end of its range for the preceding
twelve months. Wholesale stocks recorded another modest gain in the
second quarter, and the stock-shipments ratio for this sector at
quarter's end was below the bottom of its narrow range for the past
year. Inventory accumulation in the retail sector slowed in the second
quarter, but stocks kept pace with sales, and the aggregate stock-sales
ratio was in the middle of its range for the past twelve months.
The nominal deficit on U.S. trade in
goods and services widened substantially in the second quarter, as the
value of imports increased much more than that of exports. The rise in
imports was spread widely across the major trade categories; sharply
higher prices for imported oil, along with a moderate addition in the
quantity imported, accounted for much of the rise, but there also were
sizable step-ups in imports of computers, semiconductors, and industrial
supplies--notably building materials. The increase in exports was
concentrated in agricultural goods, automotive products, industrial
supplies, computers, and semiconductors. Recent information suggested
that economic recovery in Europe was continuing to gain momentum through
the second quarter while the Japanese economy was showing some signs of
having bottomed out over the first half of the year. Economic activity
had remained on a strong upward trend in Canada in recent months, and
economic growth picked up during the spring in the United Kingdom after
having stagnated over the previous two quarters. The recent economic
performance of the developing countries had been mixed. Most Asian
economies grew robustly in the first half of the year, but economic
activity in a number of Latin American economies, with the notable
exceptions of Brazil and Mexico, remained weak.
Consumer prices rose moderately in
July after having been unchanged in May and June; a rebound in energy
prices contributed to the July increase. The strong upturn in energy
prices this year accounted for all of the uptick in consumer price
inflation in the twelve months ended in July compared with the previous
twelve-month period. Excluding food as well as the volatile energy
components, core consumer price inflation had remained subdued thus far
in 1999 and during the twelve months ended in July. Inflation was modest
at the producer level as well, as prices of finished goods other than
food and energy edged lower over the June-July period. Core producer
prices rose more in the twelve months ended in July than in the
year-earlier period, but that pickup resulted in important part from
sharp increases in the prices of tobacco products. At earlier stages of
processing, producer prices of crude and intermediate materials other
than food and energy had firmed noticeably in recent months. While the
source of some of those increases had been the pass--through of higher
crude oil prices, improved worldwide growth, especially in Asia, also
contributed. With labor markets very tight, increases in wages and total
compensation had been somewhat larger recently. The employer cost index
for hourly compensation of private industry workers jumped in the second
quarter after an unusually small gain in the first quarter, and
increases in average hourly earnings of production or nonsupervisory
workers picked up in June and July. Nonetheless, year-over-year changes
in some measures of nominal compensation continued to decline.
At its meeting on June 29-30, 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
percent. The members noted at that meeting that there were few current
indications of rising inflation; nonetheless, with financial markets and
foreign economies recovering since the Committee had eased policy last
fall, the persisting strength of demand was enough to put added pressure
over time on already very tight labor markets and at some point lead to
a pickup in inflation that could threaten the sustainability of the
economy's expansion. Because there was substantial uncertainty relating
to the extent and timing of prospective inflationary pressures and thus
the possibility that further firming of policy might not be needed in
the very near term, the directive did not contain any bias relating to
the direction of possible adjustments to policy in the intermeeting
period.
Open market operations immediately
after the meeting were directed toward implementing the desired,
slightly greater pressure on reserve positions, and the federal funds
rate averaged very close to the Committee's 5 percent target over the
intermeeting period. Treasury coupon yields fell early in the
intermeeting interval as market participants apparently adjusted
downward their expectations regarding further monetary tightening in
response to the generally unexpected move to a neutral directive and,
subsequently, the receipt of favorable data on inflation. Yields later
retraced their declines, however, in reaction to the semi-annual
monetary policy report and the Chairman's associated testimony and to
the release of data indicating an acceleration of labor costs, growing
signs of a firming of activity abroad, and a weaker dollar. On net, most
interest rates were about unchanged over the intermeeting interval. Key
measures of share prices in equity markets, buoyed early in the period
by lower interest rates and better-than-anticipated quarterly earnings
reports, largely reversed those gains when rates backed up, and share
prices ended the period with mixed results.
In foreign exchange markets, the
trade-weighted value of the dollar depreciated slightly over the
intermeeting period in relation to the currencies of a broad group of
important U.S. trading partners. The dollar declined against the
currencies of the major industrial countries in response to indications
of improved economic performances in Europe and Japan and to higher
long-term interest rates in many of those countries. However, this
depreciation was partially offset by a rise in relation to the
currencies of other important trading partners, reflecting increased
uncertainty in financial markets in many Asian and Latin American
countries that was associated in part with concerns about rising U.S.
interest rates.
The expansion of broad measures of
money had moderated in recent months. The slower growth of nominal GDP
and the rise in market interest rates in the spring and summer likely
had restrained increases in both M2 and M3. In addition, M3's expansion
probably had been held down by a sharp slowing in the growth of bank
credit in July. For the year through July, M2 was estimated to have
increased at a rate somewhat above the Committee's annual range and M3
at a rate approximating the upper end of its range. Total domestic
nonfinancial debt had continued to expand at a pace somewhat above the
middle of its range, though borrowing by nonfinancial sectors had slowed
in recent months.
The staff forecast prepared for this
meeting suggested that the expansion would gradually moderate to a rate
commensurate with 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, though diminishing, restraint on U.S.
exports for some period ahead. Price inflation was projected to rise
somewhat over the forecast horizon, in part as a result of higher 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.
In the Committee's discussion of
current and prospective economic developments, members commented that
the expansion of economic activity continued to display substantial
underlying strength with few indications of slowing in the growth of
consumer and business expenditures. While the information for the second
quarter pointed to a marked deceleration from the pace in other recent
quarters, the slowdown was induced to an important extent by sharply
reduced inventory investment that partly offset robust further growth in
consumer and housing expenditures and a surge in spending by business
for equipment. The members generally anticipated a rebound in the rate
of economic expansion over the balance of the year and in 2000, possibly
to a pace averaging around the economy's long-run potential. Growth at
this rate would represent a noticeable slowing from the pace that had
prevailed in recent years, and its realization depended importantly on
the damping effects on domestic demand of the less accommodative
financial conditions that had developed in recent months--higher
long-term interest rates and a flattening of equity prices. Given the
persistent strength of domestic demand and improving economies abroad,
many members saw the risks to this outlook as tilted to the upside,
especially if short-term interest rates were to remain at their current
levels. Against this background, the risks in the outlook for prices
also seemed to be tilted toward somewhat higher inflation. Price
inflation had been held in check by accelerating productivity and
declines in oil and other import prices. Evidence was mixed on whether
the acceleration in productivity was persisting, but the earlier
favorable developments in import prices were already dissipating, adding
to the inflation risk posed by the possibility of further tightening in
labor markets should domestic demand fail to moderate.
In their comments about regional
economic developments, the members reported generally favorable business
conditions and further growth in all regions, with variations ranging
from some acceleration in a number of Federal Reserve Districts to
modest deceleration in some others. Several indicated that economic
activity in some parts of the country was being held down by shortages
of labor. Most industries continued to exhibit strength, but weakness
was reported in agriculture and related businesses and in manufacturing
industries such as textiles.
With regard to the outlook for key
sectors of the economy, members referred to the favorable prospects for
continued robust growth in employment and incomes that likely would
sustain appreciable further expansion in consumer expenditures. However,
substantial uncertainty surrounded the outlook for stock market prices
whose sharp rise and the associated increase in wealth over the course
of recent years had helped to foster a high level of consumer confidence
and willingness to spend. The absence of further large gains in stock
prices, should recent trends persist, would remove this stimulus and
probably induce some moderation in the growth of consumer spending.
However, as the experience of recent years had amply demonstrated, stock
market trends were very difficult to predict. Concerning the prospects
for business capital investment, members saw indications that outlays
might rise more moderately after a surge in the second quarter. Weak
trends in orders for many types of equipment and softness in
nonresidential construction pointed to a considerable deceleration in
total business investment. At the same time, however, further advances
in technology and declining prices were likely to underpin continued
very strong expenditures for computer and communications equipment,
thereby sustaining still robust if reduced increases in overall business
investment.
Residential construction activity was
expected to moderate a bit over coming quarters as the rise that had
occurred in mortgage interest rates exerted its lagged effects. The
deceleration was likely to be limited in the near term, however, as the
backlogs that had built up earlier in the year and associated shortages
in inventories of new homes were worked down. Indeed, anecdotal reports
indicated currently strong housing markets in several areas of the
country. Over time, the outlook for employment and incomes should
provide support to the housing market, but likely at a modestly
diminished level.
The outlook for inventory investment
remained characteristically uncertain, though the members commented that
there were reasons to anticipate some pickup in such investment
following the shortfall in the second quarter. While the long-run trend
undoubtedly remained in the direction of declining inventory-sales
ratios, the shortfall of inventory investment during the spring probably
had on the whole lowered holdings at least temporarily below intended
levels as evidenced in part by anecdotal reports that lean inventories
had reduced sales in some areas. Moreover, some buildup relating to
century date change concerns seemed likely; in this regard, anecdotal
reports suggested that some businesses planned to accumulate inventories
in the form of imports because of questions about the availability of
such goods around the year-end. Members acknowledged that available
survey and anecdotal evidence did not point to any widespread perception
of a significant need to build up inventories, and indeed there were
indications of overstocking in some industries. Even so, appreciable
inventory accumulation was seen as the most likely prospect for the
balance of the year. While such a forecast was subject to substantial
risks in both directions, it implied, if realized, a significant boost
to GDP growth over the second half of the year.
The government sector was now expected
to exert somewhat less restraint on overall demand in the economy, as
burgeoning budget surpluses seemed to be weakening restraints on federal
government outlays and tax cuts were a possibility. In addition, export
growth was projected to strengthen in conjunction with an improving
economic outlook in a number of important U.S. trading partners, and
import growth seemed likely to moderate over the next several quarters,
reflecting the projected deceleration in the U.S. economy and the waning
effects of the past appreciation of the dollar. A number of members
commented, however, that they saw downside risks to the trade outlook
despite the improving economic performance in many countries. Adverse
developments in those countries remained a worrisome concern in light of
unsettled political conditions that made it very difficult for
government authorities in many of them to implement the measures that
were needed to solve underlying economic problems.
In the course of the Committee's
discussion of the outlook for inflation, members commented that there
was no persuasive evidence in recent statistical measures that price
inflation was currently picking up or that inflation expectations were
rising, though the declines in both inflation and expectations
experienced over the course of recent years no longer seemed to be
occurring. Members nonetheless expressed concern about the risks of some
acceleration under foreseeable economic circumstances. They cited a
variety of statistical and anecdotal signs that could be viewed as
harbingers of rising price inflation. Those included an upturn in
commodity prices, notably that of oil whose effects tended over time to
spread relatively widely through the economy, and the direct and
indirect effects of the dollar's depreciation. Members also reported
some indications of reduced discounting by business firms and plans for,
or actual implementation of, higher prices that businesses now saw as
less likely than earlier to be reversed for competitive reasons.
However, these reports were still relatively scattered.
The members' basic concern about the
outlook for inflation related to the possibility that continued strength
in demand might not be accommodated without placing greater pressures on
labor compensation and prices. The greatest risks would come from a
further tightening of labor markets, but many members were also
concerned about the possibility of accelerating costs even at current
levels of labor resource utilization. The major uncertainty was the
extent to which labor productivity would continue to accelerate and hold
down the rise in unit labor costs. Recent data from the product side of
the national income and product accounts suggested some slowing in
productivity growth and pressure on unit labor costs, but these
tendencies were not confirmed by a close reading of income side data. In
these circumstances, the outlook for price inflation remained subject to
considerable uncertainty.
In the Committee's discussion of
policy for the period ahead, the members with one exception favored a
proposal for a slight tightening of conditions in reserve markets that
would be consistent with an increase in the federal funds rate to an
average of about 5-1/4 percent. In the view of these members, a limited
policy move at this time would appropriately supplement the small
firming action taken at midyear and at least for now would position
monetary policy where it needed to be to foster continued subdued
inflation and good economic performance. It would tend to validate the
appreciable firming in financial markets that had occurred in recent
months, to some extent in anticipation of Committee tightening. That
firming was important to hold the expansion of economic activity to a
sustainable pace, especially as improving foreign economies boosted the
demand for U.S. exports. While key measures of prices did not at this
point suggest any upturn in inflation, a failure to act would incur a
substantial risk of increasing pressure on already tight labor markets
and higher inflation. During the discussion, some members observed that
today's action would reduce further the stimulus provided during the
autumn of last year to counter the global financial turmoil and related
risks to the U.S. economy. While not all vestiges of that turmoil had
disappeared, financial conditions had improved markedly, foreign
economies had strengthened on balance, and downside risks to economic
performance in the United States were generally reduced. One member
indicated that in light of the persistence of low inflation a policy
tightening move was not warranted at this time and would in fact incur
some risk of unnecessarily curbing the expansion in economic activity.
All the members who supported a
tightening action also favored the retention of a symmetric directive.
These members agreed that the Committee should keep its options open
with regard to the next policy move, whose direction and timing would
depend on evolving economic and financial conditions. In this regard,
while agreeing that inflation risks had been substantially reduced by
the actions taken in June and contemplated at today's meeting, many
members continued to see a possible increase in inflation pressures as
the main threat to sustained economic expansion. However, they did not
anticipate that further tightening would be needed in the near term,
allowing the Committee time to gather substantial additional information
about the balance of aggregate supply and demand. The members all agreed
that a symmetric directive would not preclude a tightening move if
warranted by developments over the months ahead.
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 continued solid expansion of economic activity.
Nonfarm payroll employment has increased rapidly in recent months, and
the civilian unemployment rate, at 4.3 percent in July, matched its
average for the first half of the year. Manufacturing output continued
to grow moderately on average in June and July. Total retail sales
have grown less rapidly in recent months, while housing activity has
remained robust. Available indicators suggest that the expansion in
business capital spending has slackened somewhat after a surge this
spring. The nominal deficit on U.S. trade in goods and services
widened substantially in the second quarter. Consumer price inflation
has been boosted in recent months by an appreciable rise in energy
prices; against the background of very tight labor markets, increases
in wages and total compensation have been somewhat larger.
Most interest rates are little
changed on balance since the meeting on June 29-30, 1999. Key measures
of share prices in equity markets have posted mixed changes over the
intermeeting period. In foreign exchange markets, the trade-weighted
value of the dollar has declined slightly over the period in relation
to the currencies of a broad group of important U.S. trading partners.
M2 and M3 have grown at a moderate
pace in recent months. For the year through July, M2 is estimated to
have increased at a rate somewhat above the Committee's annual range
and M3 at a rate approximating 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 increasing the federal funds rate to an average of
around 5-1/4 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, Meyers,
Moskow, Kelley, and Stern.
Vote against this action: Mr.
McTeer.
Mr. McTeer dissented for essentially the
same reasons he did at the June 30 meeting: low inflation and, except
for energy, minimal inflation in the pipeline. He believes that positive
supply-side forces will continue to damp the impact of strong demand on
output prices and that productivity gains will continue to damp the
effect of higher wages on unit labor costs.
Establishment of Subcommittee
Chairman Greenspan announced the formation of a subcommittee to review
the wording of the directive, its meaning, and what the Committee
announces shortly after its meetings. He noted that the sentence
relating to the symmetry of the directive was subject to differing
interpretations, and the Committee's decision to announce immediately
significant changes in the symmetry or asymmetry in the directive had
made it desirable to clarify its meaning. Members also had expressed
some discomfort with the way these announcements had been interpreted.
While the Committee did not contemplate retreating from its policy of
immediate announcements, it might want to examine whether some
adjustment in its procedures would be helpful. The Chairman did not feel
that the Committee was prepared to come to a decision on these issues
before more experience was gained with the current announcement
approach, but he believed it was advisable to form a subcommittee at
this time to study the various questions that were involved. He
anticipated that the subcommittee would come back to the Committee no
later than next spring with recommendations or at least some
alternatives for Committee consideration. He asked Mr. Ferguson to serve
as its chairman and to select other members after consultation with his
colleagues on the Committee.
It was agreed that the next meeting of
the Committee would be held on Tuesday, October 5, 1999.
The meeting adjourned at 1:40 p.m.
