MASTERING
THE TRADE
ORIGINAL, INTERACTIVE
SEMINAR ON TRADING USING
TECHNICAL ANALYSIS
EARNINGS
ESTIMATES
U.S.
QUOTES
U.S.
CHARTS
TECHNICAL
OPINION
CANADIAN
CHARTS
SEC FILINGS
BROKER
RESEARCH
FOMC
Minutes February 2nd 2000 Meeting
Minutes of
the Federal Open Market Committee
February 1-2, 2000
A meeting of the Federal Open Market
Committee was held in the offices of the Board of Governors of the
Federal Reserve System in Washington, D.C., on Tuesday, February 1,
2000, at 2:30 p.m. and continued on Wednesday, February 2, 2000, at
9:00 a.m.
Present:
Mr.
Greenspan, Chairman
Mr. McDonough, Vice Chairman
Mr. Broaddus
Mr. Ferguson
Mr. Gramlich
Mr. Guynn
Mr. Jordan
Mr. Kelley
Mr. Meyer
Mr. Parry
Mr. Hoenig, Ms. Minehan, Messrs.
Moskow and Poole, Alternate Members of the Federal Open Market
Committee
Messrs. Boehne, McTeer, and Stern,
Presidents of the Federal Reserve Banks of Philadelphia, Dallas, and
Minneapolis respectively
Mr. Kohn, Secretary and Economist
Mr. Bernard, Deputy Secretary
Ms. Fox, Assistant Secretary
Mr. Gillum, Assistant Secretary
Mr. Mattingly, General Counsel
Mr. Baxter, Deputy General Counsel
Ms. Johnson, Economist
Mr. Prell, Economist
Mr. Beebe, Ms. Cumming, Messrs.
Eisenbeis, Goodfriend, Howard, Lindsey, Reinhart, Simpson, Sniderman,
and Stockton, Associate Economists
Mr. Fisher, Manager, System Open
Market Account
Mr. Winn,1
Assistant to the Board, Office of Board Members, Board of Governors
Mr. Ettin, Deputy Director, Division
of Research and Statistics, Board of Governors
Messrs. Madigan and Slifman,
Associate Directors, Divisions of Monetary Affairs and Research and
Statistics respectively, Board of Governors
Messrs. Oliner and Whitesell,
Assistant Directors, Divisions of Research and Statistics and Monetary
Affairs respectively, Board of Governors
Mr. Small,2
Section Chief, Division of Monetary Affairs, Board of Governors
Messrs. Brayton,2
Morton,3 and
Rosine,3 Senior
Economists, Divisions of Research and Statistics, International
Finance, and Research and Statistics respectively, Board of Governors
Ms. Garrett and Mr. Hooker,3
Economists, Division of Monetary Affairs, Board of Governors
Ms. Low, Open Market Secretariat
Assistant, Division of Monetary Affairs, Board of Governors
Ms. Browne, Messrs. Hakkio and
Hunter, Ms. Krieger, Messrs. Lang, Rasche, Rolnick, and Rosenblum,
Senior Vice Presidents, Federal Reserve Banks of Boston, Kansas City,
Chicago, New York, Philadelphia, St. Louis, Minneapolis, and Dallas
respectively
In the agenda for this meeting, it
was reported that advices of the election of the following members and
alternate members of the Federal Open Market Committee for the period
commencing January 1, 2000, and ending December 31, 2000, had been
received and that these individuals had executed their oaths of
office.
The elected members and alternate
members were as follows:
William J. McDonough, President of
the Federal Reserve Bank of New York, with Jamie B. Stewart, Jr.,
First Vice President of the Federal Reserve Bank of New York, as
alternate
J. Alfred Broaddus, Jr., President
of the Federal Reserve Bank of Richmond, with Cathy E. Minehan,
President of the Federal Reserve Bank of Boston, as alternate
Jerry L. Jordan, President of the
Federal Reserve Bank of Cleveland, with Michael H. Moskow, President
of the Federal Reserve Bank of Chicago, as alternate.
Jack Guynn, President of the Federal
Reserve Bank of Atlanta, with William Poole, President of the Federal
Reserve Bank of St. Louis, as alternate
Robert T. Parry, President of the
Federal Reserve Bank of San Francisco, with Thomas M. Hoenig,
President of the Federal Reserve Bank of Kansas City, as alternate.
By unanimous vote, the following
officers of the Federal Open Market Committee were elected to serve
until the election of their successors at the first meeting of the
Committee after December 31, 2000, with the understanding that in the
event of the discontinuance of their official connection with the
Board of Governors or with a Federal Reserve Bank they would cease to
have any official connection with the Federal Open Market Committee:
Alan Greenspan
Chairman
William J. McDonough
Vice Chairman
Donald L. Kohn
Secretary and
Economist
Normand R. V. Bernard
Deputy
Secretary
Lynn S. Fox
Assistant
Secretary
Gary P. Gillum
Assistant
Secretary
J. Virgil Mattingly, Jr.
General Counsel
Thomas C. Baxter, Jr.
Deputy General
Counsel
Karen H. Johnson
Economist
Michael J. Prell
Economist
Jack H. Beebe, Christine
Cumming,
Robert A. Eisenbeis, Marvin S. Goodfriend,
David H. Howard, David E. Lindsey,
Vincent R. Reinhart, Thomas D. Simpson,
Mark S. Sniderman, and David J. Stockton
Associate
Economists
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, 2000.
By unanimous vote, Peter R. Fisher
was selected to serve at the pleasure of the Committee as Manager,
System Open Market Account, on the understanding that his selection
was subject to being satisfactory to the Federal Reserve Bank of New
York.
Secretary's note: Advice
subsequently was received that the selection of Mr. Fisher as Manager
was satisfactory to the board of directors of the Federal Reserve Bank
of New York.
By unanimous vote, the Committee
approved an addition to the Authorization for Domestic Open Market
Operations regarding adjustments to the stance of monetary policy
during intermeeting periods. As had previously been agreed, the
temporary authority given to the Federal Reserve Bank of New York to
sell options to counter potential century-data-change pressures in
financial markets was allowed to lapse. Accordingly, the Authorization
was adopted, effective February 1, 2000, as shown below.
AUTHORIZATION FOR DOMESTIC OPEN
MARKET OPERATIONS
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:
(a) To buy or sell U.S.
Government securities, including securities of the Federal
Financing Bank, and securities that are direct obligations of,
or fully guaranteed as to principal and interest by, any
agency of the United States in the open market, from or to
securities dealers and foreign and international accounts
maintained at the Federal Reserve Bank of New York, on a cash,
regular, or deferred delivery basis, for the System Open
Market Account at market prices, and, for such Account, to
exchange maturing U.S. Government and Federal agency
securities with the Treasury or the individual agencies or to
allow them to mature without replacement; provided that the
aggregate amount of U.S. Government and Federal agency
securities held in such Account (including forward
commitments) at the close of business on the day of a meeting
of the Committee at which action is taken with respect to a
domestic policy directive shall not be increased or decreased
by more than $12.0 billion during the period commencing with
the opening of business on the day following such meeting and
ending with the close of business on the day of the next such
meeting;
(b) To buy U.S. Government
securities and 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 and obligations 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.
In order to ensure the effective
conduct of open market operations, the Federal Open Market
Committee authorizes the Federal Reserve Bank of New York to lend
on an overnight basis U.S. Government securities held in the
System Open Market Account to dealers at rates that shall be
determined by competitive bidding but that in no event shall be
less than 1.0 percent per annum of the market value of the
securities lent. The Federal Reserve Bank of New York shall apply
reasonable limitations on the total amount of a specific issue
that may be auctioned, and on the amount of securities that each
dealer may borrow. The Federal Reserve Bank of New York may reject
bids which could facilitate a dealer's ability to control a single
issue as determined solely by the Federal Reserve Bank of New
York.
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.
In the execution of the
Committee's decision regarding policy during any intermeeting
period, the Committee authorizes and directs the Federal Reserve
Bank of New York, upon the instruction of the Chairman of the
Committee, to adjust somewhat in exceptional circumstances the
degree of pressure on reserve positions and hence the intended
federal funds rate. Any such adjustment shall be made in the
context of the Committee's discussion and decision at its most
recent meeting and the Committee's long-run objectives for price
stability and sustainable economic growth, and shall be based on
economic, financial, and monetary developments during the
intermeeting period. Consistent with Committee practice, the
Chairman, if feasible, will consult with the Committee before
making any adjustment.
With Mr. Broaddus dissenting, the
Authorization for Foreign Currency Operations, in the form shown
below, was reaffirmed.
AUTHORIZATION FOR FOREIGN
CURRENCY OPERATIONS
The Federal Open Market Committee
authorizes and directs the Federal Reserve Bank of New York, for
System Open Market Account, to the extent necessary to carry out
the Committee's foreign currency directive and express
authorizations by the Committee pursuant thereto, and in
conformity with such procedural instructions as the Committee may
issue from time to time:
A. To purchase and sell the
following foreign currencies in the form of cable transfers
through spot or forward transactions on the open market at home
and abroad, including transactions with the U.S. Treasury, with
the U.S. Exchange Stabilization Fund established by Section 10
of the Gold Reserve Act of 1934, with foreign monetary
authorities, with the Bank for International Settlements, and
with other international financial institutions:
Canadian dollars
Danish kroner
Euro
Pounds sterling
Japanese yen
Mexican pesos
Norwegian kroner
Swedish kronor
Swiss francs
B. To hold balances of, and to
have outstanding forward contracts to receive or to deliver, the
foreign currencies listed in paragraph A above.
C. To draw foreign currencies
and to permit foreign banks to draw dollars under the reciprocal
currency arrangements listed in paragraph 2 below, provided that
drawings by either party to any such arrangement shall be fully
liquidated within 12 months after any amount outstanding at that
time was first drawn, unless the Committee, because of
exceptional circumstances, specifically authorizes a delay.
D. To maintain an overall open
position in all foreign currencies not exceeding $25.0 billion.
For this purpose, the overall open position in all foreign
currencies is defined as the sum (disregarding signs) of net
positions in individual currencies. The net position in a single
foreign currency is defined as holdings of balances in that
currency, plus outstanding contracts for future receipt, minus
outstanding contracts for future delivery of that currency,
i.e., as the sum of these elements with due regard to sign.
The Federal Open Market Committee
directs the Federal Reserve Bank of New York to maintain
reciprocal currency arrangements ("swap" arrangements)
for the System Open Market Account for periods up to a maximum of
12 months with the following foreign banks, which are among those
designated by the Board of Governors of the Federal Reserve System
under Section 214.5 of Regulation N, Relations with Foreign Banks
and Bankers, and with the approval of the Committee to renew such
arrangements on maturity:
Foreign
bank
Amount
of arrangement (millions of dollars equivalent)
Bank of
Canada
2,000
Bank of
Mexico
3,000
Any changes in the terms of
existing swap arrangements, and the proposed terms of any new
arrangements that may be authorized, shall be referred for review
and approval to the Committee.
All transactions in foreign
currencies undertaken under paragraph 1A. above shall, unless
otherwise expressly authorized by the Committee, be at prevailing
market rates. For the purpose of providing an investment return on
System holdings of foreign currencies, or for the purpose of
adjusting interest rates paid or received in connection with swap
drawings, transactions with foreign central banks may be
undertaken at non-market exchange rates.
It shall be the normal practice
to arrange with foreign central banks for the coordination of
foreign currency transactions. In making operating arrangements
with foreign central banks on System holdings of foreign
currencies, the Federal Reserve Bank of New York shall not commit
itself to maintain any specific balance, unless authorized by the
Federal Open Market Committee. Any agreements or understandings
concerning the administration of the accounts maintained by the
Federal Reserve Bank of New York with the foreign banks designated
by the Board of Governors under Section 214.5 of Regulation N
shall be referred for review and approval to the Committee.
Foreign currency holdings shall
be invested to ensure that adequate liquidity is maintained to
meet anticipated needs and so that each currency portfolio shall
generally have an average duration of no more than 18 months
(calculated as Macaulay duration). When appropriate in connection
with arrangements to provide investment facilities for foreign
currency holdings, U.S. Government securities may be purchased
from foreign central banks under agreements for repurchase of such
securities within 30 calendar days.
All operations undertaken
pursuant to the preceding paragraphs shall be reported promptly to
the Foreign Currency Subcommittee and the Committee. The Foreign
Currency Subcommittee consists of the Chairman and Vice Chairman
of the Committee, the Vice Chairman of the Board of Governors, and
such other member of the Board as the Chairman may designate (or
in the absence of members of the Board serving on the
Subcommittee, other Board members designated by the Chairman as
alternates, and in the absence of the Vice Chairman of the
Committee, his alternate). Meetings of the Subcommittee shall be
called at the request of any member, or at the request of the
Manager, System Open Market Account ("Manager"), for the
purposes of reviewing recent or contemplated operations and of
consulting with the Manager on other matters relating to his
responsibilities. At the request of any member of the
Subcommittee, questions arising from such reviews and
consultations shall be referred for determination to the Federal
Open Market Committee.
The Chairman is authorized:
A. With the approval of the
Committee, to enter into any needed agreement or understanding
with the Secretary of the Treasury about the division of
responsibility for foreign currency operations between the
System and the Treasury;
B. To keep the Secretary of
the Treasury fully advised concerning System foreign currency
operations, and to consult with the Secretary on policy matters
relating to foreign currency operations;
C. From time to time, to
transmit appropriate reports and information to the National
Advisory Council on International Monetary and Financial
Policies.
Staff officers of the Committee
are authorized to transmit pertinent information on System foreign
currency operations to appropriate officials of the Treasury
Department.
All Federal Reserve Banks shall
participate in the foreign currency operations for System Account
in accordance with paragraph 3 G(1) of the Board of Governors'
Statement of Procedure with Respect to Foreign Relationships of
Federal Reserve Banks dated January 1, 1944.
With Mr. Broaddus dissenting, the
Foreign Currency Directive, in the form shown below, was reaffirmed.
FOREIGN CURRENCY DIRECTIVE
System operations in foreign
currencies shall generally be directed at countering disorderly
market conditions, provided that market exchange rates for the
U.S. dollar reflect actions and behavior consistent with the IMF
Article IV, Section 1.
To achieve this end the System
shall:
A. Undertake spot and forward
purchases and sales of foreign exchange.
B. Maintain reciprocal
currency ("swap") arrangements with selected foreign
central banks.
C. Cooperate in other respects
with central banks of other countries and with international
monetary institutions.
Transactions may also be
undertaken:
A. To adjust System balances in
light of probable future needs for currencies.
B. To provide means for
meeting System and Treasury commitments in particular currencies
and to facilitate operations of the Exchange Stabilization Fund.
C. For such other purposes as
may be expressly authorized by the Committee.
System foreign currency
operations shall be conducted:
A. In close and continuous
consultation and cooperation with the United States Treasury;
B. In cooperation, as
appropriate, with foreign monetary authorities; and
C. In a manner consistent with
the obligations of the United States in the International
Monetary Fund regarding exchange arrangements under the IMF
Article IV.
Mr. Broaddus dissented in the votes
on the Authorization and the Directive because they provide the
foundation for foreign exchange market intervention. He continued to
believe that the Federal Reserve's participation in foreign exchange
market intervention compromises its ability to conduct monetary policy
effectively. Because sterilized intervention cannot have sustained
effects in the absence of conforming monetary policy actions, Federal
Reserve participation in foreign exchange operations in his view risks
one of two undesirable outcomes. First, the independence of monetary
policy is jeopardized if the System adjusts its policy actions to
support short-term foreign exchange objectives set by the U.S.
Treasury. Alternatively, the credibility of monetary policy is damaged
if the System does not follow interventions with compatible policy
actions, the interventions consequently fail to achieve their
objectives, and the System is associated in the mind of the public
with the failed operations.
By unanimous vote, the Procedural
Instructions with Respect to Foreign Currency Operations, in the form
shown below, were reaffirmed.
PROCEDURAL INSTRUCTIONS WITH
RESPECT TO FOREIGN CURRENCY OPERATIONS
In conducting operations pursuant to
the authorization and direction of the Federal Open Market Committee
as set forth in the Authorization for Foreign Currency Operations and
the Foreign Currency Directive, the Federal Reserve Bank of New York,
through the Manager, System Open Market Account ("Manager"),
shall be guided by the following procedural understandings with
respect to consultations and clearances with the Committee, the
Foreign Currency Subcommittee, and the Chairman of the Committee. All
operations undertaken pursuant to such clearances shall be reported
promptly to the Committee.
The Manager shall clear with the
Subcommittee (or with the Chairman, if the Chairman believes that
consultation with the Subcommittee is not feasible in the time
available):
A. Any operation that would
result in a change in the System's overall open position in
foreign currencies exceeding $300 million on any day or $600
million since the most recent regular meeting of the Committee.
B. Any operation that would
result in a change on any day in the System's net position in a
single foreign currency exceeding $150 million, or $300 million
when the operation is associated with repayment of swap
drawings.
C. Any operation that might
generate a substantial volume of trading in a particular
currency by the System, even though the change in the System's
net position in that currency might be less than the limits
specified in 1.B.
D. Any swap drawing proposed
by a foreign bank not exceeding the larger of (i) $200 million
or (ii) 15 percent of the size of the swap arrangement.
The Manager shall clear with the
Committee (or with the Subcommittee, if the Subcommittee believes
that consultation with the full Committee is not feasible in the
time available, or with the Chairman, if the Chairman believes
that consultation with the Subcommittee is not feasible in the
time available):
A. Any operation that would
result in a change in the System's overall open position in
foreign currencies exceeding $1.5 billion since the most recent
regular meeting of the Committee.
B. Any swap drawing proposed
by a foreign bank exceeding the larger of (i) $200 million or
(ii) 15 percent of the size of the swap arrangement.
The Manager shall also consult
with the Subcommittee or the Chairman about proposed swap drawings
by the System and about any operations that are not of a routine
character.
On January 19, 2000, the continuing
rules, regulations, and other instructions of the Committee were
distributed with the advice that, in accordance with procedures
approved by the Committee, they were being called to the Committee's
attention before the February 1-2 organization meeting to give members
an opportunity to raise any questions they might have concerning them.
Members were asked to indicate if they wished to have any of the
instruments in question placed on the agenda for consideration at this
meeting.
The Rules of Procedure were placed
on the agenda and by unanimous vote the Committee approved updating
changes to its Rules of Procedure, effective upon publication in the
Federal Register. The changes relate to electronic and telephone
communications.
Secretary's note: The revised
Rules of Procedure were published in the Federal Register on February
9, 2000.
By unanimous vote, the Program for
Security of FOMC Information was amended with regard to certain
security classifications and staff access to confidential FOMC
information.
By unanimous vote, the minutes of
the meeting of the Federal Open Market Committee held on December 21,
1999, were approved.
The Manager of the System Open
Market Account reported on recent developments in foreign exchange
markets. There were no open market operations in foreign currencies
for the System's account in the period since the previous meeting, and
thus no vote was required of the Committee.
The Manager also reported on
developments in domestic financial markets and on System open market
transactions in government securities and federal agency obligations
during the period December 21, 1999, to February 1, 2000. By unanimous
vote, the Committee ratified these transactions.
The Committee then turned to a
discussion of the economic and financial outlook, the ranges for the
growth of money and debt in 2000, and the implementation of monetary
policy over the intermeeting period ahead.
The information reviewed at this
meeting suggested that economic activity had expanded rapidly in
recent months. Consumer spending had remained very brisk, business
fixed investment had continued on a strong upward trend, and housing
demand was still at a relatively high level despite some slippage
recently. The growth of domestic demand had been met in part through
further advances in imports. Domestically, industrial production and
nonfarm payrolls had continued to increase briskly. Despite very tight
labor markets, labor costs had been climbing more slowly than in 1998.
Consumer price inflation had stayed moderate over the past few months,
despite a recent resurgence in energy prices.
Labor demand remained robust through
year-end, as nonfarm payroll employment posted a further large
increase in December. Job growth in the services industry was brisk,
construction hiring rose somewhat further against a backdrop of good
weather and project backlogs, and manufacturing employment was
essentially unchanged. The civilian unemployment rate held at 4.1
percent in December, its low for the year, and initial claims for
unemployment insurance persisted at a very low level through late
January.
Industrial production recorded a
sharp advance in the fourth quarter. Manufacturing and mining output
rose briskly, but utilities output was held down by lackluster demand
during a period of unseasonably warm weather in several parts of the
country. Output gains in manufacturing were widespread and the factory
operating rate rose further, though capacity utilization was still a
little below its long-term average.
Consumer spending apparently was
very robust in the fourth quarter. Total nominal retail sales rose
sharply further in December, with outlets for durable and nondurable
goods recording substantial gains in sales. Spending related to Y2K
concerns appeared to have been relatively limited. Outlays for
services in October and November (latest data) were strong, even
though spending for heating was down in response to the unseasonably
warm weather.
Housing activity was still at a
relatively high level at year-end, buoyed by continuing strong gains
in jobs and incomes despite the rise that had occurred in mortgage
interest rates. Total private housing starts rebounded sharply in
December from a decline in November, although part of the December
pickup might have been associated with favorable weather patterns.
Sales of new homes fell in November (latest data), reversing much of
the sizable October rise, but average sales for the two-month period
were only slightly below their strong rate of the first half of the
year. Sales of existing homes were down in December, but they also
were only a little below their elevated first-half pace.
The available information suggested
that growth of business spending for durable equipment slowed abruptly
in the fourth quarter and that investment in nonresidential structures
fell further. At least some of the deceleration in spending for
capital equipment reflected a hesitancy to spend on computers and
other high-tech equipment just in advance of the century rollover. The
weakness in the nonresidential sector was evidenced by further
declines in construction outlays and new building contracts in October
and November. Office construction appeared to be leveling off in
response to the higher cost of financing and to perceptions that the
office space currently coming on line would be sufficient to meet
demand.
The book value of manufacturing and
trade inventories surged in November after having climbed moderately
on balance earlier in the year. Even though the rise might have been
related to concerns about supply disruptions around year-end,
inventory-sales ratios generally declined a little in association with
very strong increases in sales, and the ratios were at or near the
bottom of their ranges for the previous twelve months.
The U.S. trade deficit in goods and
services widened significantly over the October-November period from
its average for the third quarter. The value of exports rose
appreciably over the two months, largely reflecting growth in
industrial supplies and service receipts, but the value of imports
increased noticeably more, with some of the rise reflecting increases
in import prices. The available information suggested that economic
expansion remained robust in most foreign industrial nations. In
Japan, however, economic activity was sluggish, with a seemingly small
rise in the fourth quarter following a third-quarter decline. Economic
activity in the developing countries apparently continued to pick up
in recent months, although the pace of recovery varied widely.
Economic growth appeared to have been brisk in Mexico, Korea, China,
Hong Kong, and Taiwan but was mixed among the ASEAN countries and
slower in Brazil.
Price inflation had remained
moderate in recent months. Consumer price inflation was subdued in
December in spite of a sizable increase in energy prices; however, for
the year as a whole, sharp increases in energy prices noticeably
boosted overall consumer inflation. Excluding the volatile energy
component, consumer price inflation slowed somewhat in 1999. By
contrast, the subdued rise in the core PCE chain price index in 1999
was essentially the same as in 1998. At the producer level, prices of
finished goods other than food and energy changed little in December
and registered a considerably reduced increase in 1999. At earlier
stages of processing, however, core producer prices recorded somewhat
larger advances than those for finished goods in December and for the
year. With regard to labor costs, average hourly earnings rose by a
larger amount in December than in November, but the increase in this
measure in 1999 was about the same as for 1998.
At its meeting on December 21, the
Committee adopted a directive that called for maintaining conditions
in reserve markets consistent with an unchanged federal funds rate of
about 5-1/2 percent and that did not contain any bias relating to the
direction of possible adjustments to policy during the intermeeting
period. The members noted that such a directive, which suggested that
they did not expect a further change in policy before the February
meeting, should foster steady conditions in financial markets during
the sensitive century-date-change period. The Committee also agreed,
however, that the statement accompanying the announcement of its
decision would note that the Committee was especially concerned about
the potential for inflation pressures to increase and would want to
consider at its February meeting whether policy action would be needed
to contain such pressures.
Open market operations during the
intermeeting period were directed toward maintaining the federal funds
rate at around 5-1/2 percent. The funds rate averaged close to the
Committee's target over the intermeeting interval despite very strong
demands for additional currency and market liquidity through the
year-end and a rapid unwinding thereafter. Against the background of
the Committee's announced concern about the inflationary implications
of unsustainably rapid economic growth, incoming information
suggesting that aggregate demand retained considerable momentum led to
upward pressure on market interest rates once the century-date-change
period had passed without incident. The effects of higher interest
rates apparently offset those of unexpectedly high corporate earnings,
and most broad stock market indexes fell slightly on balance over the
intermeeting period.
In foreign exchange markets, the
trade-weighted value of the dollar was up on balance over the
intermeeting interval in relation to indexes of major foreign
currencies and those of other important U.S. trading partners.
Reflecting market expectations of substantial Federal Reserve
tightening, the dollar appreciated considerably against the yen and
the euro while depreciating somewhat against the Canadian dollar.
M2 growth picked up appreciably
during December and January, evidently reflecting extra demands for
liquidity and safety during the century-date-change period. M3
accelerated by even more than M2 in December. Its non-M2 component
ballooned as banks issued substantial volumes of large time deposits
to meet very high credit demands and as institutional money market
funds became recipients of some of their customers' precautionary
liquid balances. From the fourth quarter of 1998 through the fourth
quarter of 1999, M2 and M3 increased at rates somewhat above the
Committee's annual ranges for 1999. Total domestic nonfinancial debt
expanded in 1999 at a pace in the upper portion of its range.
The staff forecast prepared for this
meeting suggested that the expansion would gradually moderate from its
currently elevated pace 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 and by higher interest rates. As a result, growth of
spending on consumer durables and houses was expected to slow; in
contrast, however, overall business investment in equipment and
software was projected to strengthen in response to the upward trend
in replacement demand, especially for computers and software; also,
continued solid economic growth abroad was expected to boost the
growth of U.S. exports for some period ahead. Core price inflation was
projected to rise somewhat over the forecast horizon, partly 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 productivity growth.
In the Committee's review of current
and prospective economic developments, members commented that the
economy still seemed to be growing very vigorously as it entered the
new year, while core inflation remained subdued. The members were
concerned, however, that recent trends in economic activity, if they
continued, might undermine the economy's remarkable performance. The
economy's potential to produce goods and services had been
accelerating over time, but the demand for output had been growing
even more strongly. If this imbalance continued, inflationary
pressures were likely to build that would interfere with the economy's
performance and could lead to a disruptive adjustment in economic
activity. Accelerating productivity, although adding to the growth of
the economy's potential output, also had induced expectations of
rapidly accelerating business earnings that in turn had generated
sharp increases in stock market wealth and lifted the growth of
purchasing power and spending above that in incomes. Relatively high
real interest rates that reflected the increased productivity and
damped the rise in asset values would be needed to help restore
balance. In that regard, members questioned whether rates would be
high enough without policy tightening to bring the growth of demand in
line with that of supply and contain pressures in labor markets. In
the view of some members, taut labor markets together with a
turnaround in some of the factors that had been temporarily damping
inflation, such as oil and import prices, already lent an upward bias
to the inflation outlook, and all agreed that a significant further
tightening of labor resource utilization would appreciably raise the
risk of deterioration in the underlying inflation picture over time.
In keeping with the practice at
meetings preceding the Federal Reserve's semiannual report to Congress
on the economy and monetary policy and the Chairman's associated
testimony, the members of the Committee and the Federal Reserve Bank
presidents not currently serving as members had prepared individual
projections of the growth in nominal and real GDP, the rate of
unemployment, and the rate of inflation for the year 2000. The
forecasts of the growth of nominal GDP were concentrated in a range of
5-1/4 to 5-1/2 percent, and for the rate of expansion in real GDP they
had a central tendency of 3-1/2 to 3-3/4 percent. Growth at these
rates was expected to hold the civilian unemployment rate in a range
of 4 to 4-1/4 percent in the fourth quarter of 2000. The central
tendency of the projections of inflation for 2000-as measured by the
chain price index for personal consumption expenditures-encompassed a
range of 1-3/4 to 2 percent, on the low side of the 2 percent rise in
this index experienced in 1999 when energy prices had surged.
Mirroring developments in the
overall economy, reports of economic conditions in the individual
Federal Reserve districts continued to display broad-based strength,
apart from softness in construction activity in some areas and
weakness in agriculture. Retail sales appeared to have strengthened
further during the opening weeks of the new year after a surge during
the holiday season. Motor vehicle sales in particular had continued to
hold up at a remarkably high level. Consumption was being supported by
robust growth in jobs and incomes, very high levels of consumer
confidence, and the lagged wealth effects from earlier advances in
stock market prices. Even so, growth in consumer spending was thought
likely to moderate over time to a pace more in line with the expansion
in consumer incomes, unless the stock market posted large further
increases from current levels. As the experience of recent years had
amply demonstrated, however, the future course of stock market prices
was highly uncertain, and equity markets had shown a remarkable
resilience to higher interest rates as earning prospects continued to
be marked up in association with the acceleration in productivity.
Opportunities to enhance profits by
using new technology were likely to lead to robust further growth in
business fixed investment, boosted mainly by spending for equipment
and software over the year ahead. While the huge amount of capital
deepening already accomplished in recent years and the projected
deceleration in aggregate demand were negative factors in the outlook
for business capital spending, they were likely to be overridden by
persisting declines in the prices of high-tech equipment and the
rising importance of replacement demand that was associated with
relatively short-lived investments in high-tech equipment and computer
software that had tended to characterize the buildup in business
equipment in recent years. With regard to other types of investment,
spending on nonresidential business structures appeared to be
softening in many areas and would tend to hold down the growth in
overall business expenditures for capital. However, spending by state
and local governments on roadbuilding and other projects appeared to
be on a robust uptrend.
Housing construction was expected to
remain at a relatively elevated level, albeit below recent peaks, as a
consequence of moderating demand stemming from higher mortgage
interest rates and indications of overbuilding in some areas. Members
also noted, however, that building activity in some parts of the
country was still being held back by shortages of skilled construction
workers and scarcities of some building supplies. The resulting
backlogs along with low inventories of houses in some areas were
factors that should limit the expected decline in residential
construction this year. Moreover, many homebuyers were shifting from
fixed-rate long-term mortgages to currently lower-cost adjustable rate
mortgages. More fundamentally, however, the income and wealth effects
that were boosting household expenditures generally should help to
sustain a perhaps somewhat diminished but still high level of
homebuilding activity for a while, despite higher mortgage financing
costs.
Rapid increases in U.S. exports in
conjunction with the strengthening of foreign economies were likely to
add to demands on domestic producers. Consistent with this outlook,
several members cited anecdotal reports of improving foreign markets,
notably in East Asian countries. At the same time, despite some
expected deceleration in imports as domestic demand moderated, the
nation's trade deficit was projected to increase somewhat further over
the year ahead. There was a risk that, as global portfolios came to be
increasingly weighted toward dollar assets, expected returns on those
assets would need to rise to attract world savings, with much of the
adjustment potentially occurring through a decline in the exchange
rate of the dollar that would add to pressures on U.S. prices.
Concerning the outlook for
inflation, the members continued to see the risks as primarily tilted
toward rising inflationary pressures, though they anticipated that
further gains in productivity would hold down increases in unit labor
costs and prices, at least over the nearer term. A key issue was
whether growth in aggregate demand would moderate sufficiently to at
least avoid greater pressures on what were already very tight labor
markets. In this regard, several cited recent statistical and
anecdotal evidence of larger increases in labor compensation, although
unit labor costs did not appear to be trending higher at this point.
However, some nonlabor input prices already were rising faster. The
prospects for energy prices were very difficult to predict, but even
if such prices were to stabilize, the passthrough of the large earlier
increases into inflation and wage expectations, as well as into the
prices of products that were heavily energy dependent, was likely to
exert some upward pressure on prices throughout the economy.
On the positive side for the
near-term inflation outlook, there was no evidence that the
acceleration in productivity was coming to an end. Members commented
in this regard that business firms across the country were continuing
to improve the efficiency of their operations in a variety of ways in
order to hold down costs. These efforts included persistingly large
investments in new equipment, rationalization of business
organizations, and training or retraining existing workers for more
demanding or new tasks. Members also noted that longer-run inflation
expectations generally did not appear to be worsening, though there
had been a slight widening of the spread between nominal and
inflation-indexed Treasury bond yields. While there seemed to be an
increasing number of exceptions, business contacts continued to report
that raising their prices was very difficult to carry out successfully
and often impossible. On balance, the outlook for inflation remained
subject to a marked degree of uncertainty. Given current levels of
resource use and the strength of the economic expansion relative to
the growth of the economy's long-run potential, however, the members
expected that inflation pressures would gather some momentum over time
unless financial conditions became tighter.
In keeping with the requirements of
the Full Employment and Balanced Growth Act of 1978 (the
Humphrey-Hawkins Act), the Committee reviewed at this meeting the
ranges for growth of the monetary and debt ranges that it had
established on a tentative basis in June 1999. The tentative ranges
approved in June for the period from the fourth quarter of 1999 to the
fourth quarter of 2000 included growth of 1 to 5 percent for M2, 2 to
6 percent for M3, and 3 to 7 percent for total domestic nonfinancial
debt.
All but one of the members favored
the adoption of the ranges that had been selected on a tentative basis
at the meeting in June. They noted that for some years the ranges for
monetary growth had been chosen to encompass rates of increase that
would be expected under conditions of price stability, assuming
historical velocity relationships. This approach had been adopted
partly as a result of the substantial unreliability of the linkage
between the growth of the broad monetary aggregates and economic
performance. Since the current benchmark ranges had first been adopted
in the mid-1990s, however, structural productivity growth had
increased substantially, raising the expected rate of growth of money
at price stability, other things equal. One member supported a
proposal to adjust the monetary growth ranges upward by at least
enough to reflect this development. However, other members emphasized
the uncertainties about the dimensions of this new trend in
productivity growth, the measured rate of increase in prices that
would be consistent with reasonable price stability, and the long-run
behavior of velocity. They felt that raising the benchmark ranges
risked misleading the public about the Committee's confidence in the
implied values for these variables going forward, about the
Committee's determination to pursue its fundamental objectives of
price stability and sustainable economic expansion, and about the very
low weight most Committee members continued to place on the monetary
aggregates in policy deliberations owing to the uncertainties
surrounding them.
At the conclusion of this
discussion, the Committee voted to approve without change the ranges
for 2000 that it had established on a tentative basis on June 30,
1999. With Mr. Meyer dissenting, the following statement of longer-run
policy and growth ranges for 2000 was approved for inclusion in the
domestic policy directive:
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 at this meeting established
ranges for growth of M2 and M3 of 1 to 5 percent and 2 to 6 percent
respectively, measured from the fourth quarter of 1999 to the fourth
quarter of 2000. The range for growth of total domestic nonfinancial
debt was set at 3 to 7 percent for the year. The behavior of the
monetary aggregates will continue to be evaluated in the light of
movements in their velocities and developments in prices, the
economy, and financial markets.
Votes for this action:
Messrs. Greenspan, McDonough, Broaddus, Ferguson, Gramlich, Guynn,
Jordan, Kelley, and Parry.
Vote against this action:
Mr. Meyer.
In dissenting, Mr. Meyer noted that
although the money growth ranges do not play an important role in the
conduct of monetary policy today, Congress has mandated that the FOMC
set and report ranges for money and credit growth. In recent years,
the money ranges have been set to be consistent with price stability
and normal velocity behavior. The rate of money growth consistent with
price stability depends on the average growth of real GDP. Therefore,
when there is a significant increase in the projected average growth
rate in real GDP, money growth ranges should be adjusted upward so
that they remain consistent with price stability. While considerable
uncertainty remains about the average rate of growth in real GDP,
there is a strong consensus that it is significantly higher today than
when the target ranges were set at their current values. The failure
to adjust monetary aggregate ranges makes them less useful signals of
Federal Reserve intentions. As long as the Federal Reserve is required
to set and report ranges for money and debt growth, it should update
them as appropriate.
In the Committee's discussion of
policy for the upcoming intermeeting period, all the members supported
a proposal to tighten reserve conditions by a modest amount consistent
with an increase in the federal funds rate of � percentage point to a
level of 5-3/4 percent. The Committee's decision to tighten its policy
stance was intended to help bring the growth of aggregate demand into
better alignment with the expansion of sustainable aggregate supply in
an effort to avert rising inflationary pressures in the economy.
Relatively high real interest rates would be required to accomplish
this objective, given the effects of increasing productivity and
profits on the demand for capital goods and, through the wealth
effect, on consumption spending. Private long-term rates already had
risen considerably, but whether they had reached a level that would
lead to a rebalancing of demand and supply was an open question.
Moreover, these rates already encompassed expectations of a tightening
of monetary policy at this and several subsequent meetings. For a
number of reasons, including uncertainties about the outlook for the
expansion of aggregate demand in relation to that of potential supply,
the economy's response to the Committee's earlier policy actions, and
the recently somewhat unsettled conditions in financial markets, a
majority of the members expressed a preference for a limited policy
move at this time. As long as inflation and inflation expectations
remained damped, these members saw little risk in a gradual approach
to policy tightening and considerable advantage to preserving the
possibility of calibrating those actions to the emerging situation. A
few members expressed a preference for an increase of 50 basis points
in the federal funds rate in order to provide greater assurance
against a buildup of inflationary expectations and inflation over
coming months. Other members acknowledged that the Committee might
need to move more aggressively at a later meeting should imbalances
continue to build and inflation and inflation expectations clearly
begin to pick up.
The members agreed that the
statement to be issued after this meeting should highlight their view
that even after their firming today the risks remained weighted mainly
in the direction of rising inflation pressures. There were few signs
thus far that the rise in interest rates over recent quarters was
restraining demand in line with potential supply, and the members
generally agreed that further tightening actions might well be needed
to ensure that financial conditions had adjusted sufficiently to
rising productivity growth to forestall escalating pressures on labor
costs and prices. With the cushion of unutilized labor resources
having dwindled over recent years and with the willingness of global
investors to continue to acquire dollar assets to finance major
further increases in imports at current interest and exchange rates in
question, the need to achieve the appropriate financial and economic
balance had become more pressing. In the circumstances, it was
important for the public to understand that the Committee saw
inflation risks as persisting even after today's action. At the
conclusion of this discussion, members who favored a 50 basis point
increase indicated that, in light of the clear intention of the
Committee to act, if necessary, in a timely manner to contain
inflation, the contemplated inclusion of a statement about the risks
of higher inflation in the press release for this meeting, and the
likelihood that the Board of Governors would approve a 25 basis point
increase in the discount rate later in the day, they could accept a 25
basis point rise in the federal funds rate.
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 policy directive:
To further 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 5-3/4 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
the risks are weighted mainly toward conditions that may generate
heightened inflation pressures in the foreseeable future.
Votes for this action:
Messrs. Greenspan, McDonough, Broaddus, Ferguson, Gramlich, Guynn,
Jordan, Kelley, Meyer, and Parry.
Votes against this action:
None.
The meeting was recessed briefly
after this vote and the members of the Board of Governors left the
room to vote on pending increases in the discount rate at several
Federal Reserve Banks. On the Board members' return, Chairman
Greenspan announced that the Board had approved a � percentage point
increase in the discount rate. The Committee concluded its meeting
with a review of the press release announcing the joint policy action.
The members noted with deep regret
the recent death of Frank E. Morris, former president of the Federal
Reserve Bank of Boston and a member of the Committee over the course
of 20 years before his retirement at the end of 1988. Mr. Morris is
remembered as a highly respected colleague and friend who made
outstanding contributions to the work of the Committee, the Federal
Reserve Bank of Boston, and the Federal Reserve System more generally.
It was agreed that the next meeting
of the Committee would be held on Tuesday, March 21, 2000.
The meeting adjourned at 11:50 a.m.
on February 2, 2000.
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