| 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 ¼ 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.
Donald L. Kohn
Secretary
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