fomc minutes · July 2, 1996

FOMC Minutes

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, July 2, 1996,

at 1:00 p.m. and continued on Wednesday, July 3, 1996, at 9:00 a.m.

Present:

Mr. Greenspan, Chairman

Mr. McDonough, Vice Chairman

Mr. Boehne

Mr. Jordan

Mr. Kelley

Mr. Lindsey

Mr. McTeer

Mr. Meyer

Ms. Phillips

Ms. Rivlin

Mr. Stern

Ms. Yellen

Messrs. Broaddus, Guynn, Moskow, and Parry, Alternate Members of the Federal

Open Market Committee

Messrs. Hoenig and Melzer, and Ms. Minehan, Presidents of the Federal Reserve

Banks of Kansas City, St. Louis, and Boston respectively

Mr. Kohn, Secretary and Economist

Mr. Bernard, Deputy Secretary

Mr. Coyne, Assistant Secretary

Mr. Gillum, Assistant Secretary

Mr. Mattingly, General Counsel

Mr. Baxter, Deputy General Counsel

Mr. Prell, Economist

Mr. Truman, Economist

Messrs. D. Lindsey, Mishkin, Promisel, Rolnick, Rosenblum, Siegman, 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

Mr. Brayton, 2 Ms. Johnson, 2 Messrs. Reinhart and Smith, 3 Assistant Directors,

Divisions of Research and Statistics, International Finance, Monetary Affairs, and

International Finance respectively, Board of Governors

Ms. Kusko 2 and Mr. Wilcox, 2 Senior Economists, Divisions of Research and

Statistics and Monetary Affairs respectively, Board of Governors

Ms. Garrett, Economist, Division of Monetary Affairs, Board of Governors

Ms. Low, Open Market Secretariat Assistant, Division of Monetary Affairs, Board of

Governors

Ms. Holcomb, First Vice President, Federal Reserve Bank of Dallas

Mr. Beebe, Ms. Browne, Messrs. Davis, Dewald, Eisenbeis, Goodfriend, and Hunter,

Senior Vice Presidents, Federal Reserve Banks of San Francisco, Boston, Kansas

City, St. Louis, Atlanta, Richmond, and Chicago respectively

Messrs. Kos and Meyer, Vice Presidents, Federal Reserve Banks of New York and

Philadelphia respectively

By unanimous vote, the minutes of the meeting of the Federal Open Market Committee held

on May 21, 1996, were approved.

The Manager of the System Open Market Account reported on recent developments in

foreign exchange markets. There were no open market transactions in foreign currencies for

System account during the period since the meeting on May 21, 1996, and thus no vote was

required of the Committee.

The Manager also reported on recent developments in domestic financial markets and on

System open market transactions in U.S. government securities and federal agency

obligations during the period May 21, 1996, through July 2, 1996. 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 1996 and 1997, and the implementation of monetary

policy over the intermeeting period ahead. A summary of the economic and financial

information available at the time of the meeting and of the Committee's discussion is

provided below, followed by the domestic policy directive that was approved by the

Committee and issued to the Federal Reserve Bank of New York.

The information reviewed at this meeting suggested that economic activity advanced

considerably further in the second quarter, although growth in aggregate final demand

showed some signs of slowing. Consumer spending continued to post sizable gains, but

business investment in equipment and structures apparently was rising less vigorously, and

higher mortgage rates evidently were starting to exert some restraint on housing construction

activity. Business inventories had been brought into better balance with sales, and production

and employment had risen appreciably. Upward pressures on food and energy prices had led

to somewhat larger increases in the consumer price index over recent months.

Nonfarm payroll employment continued to expand briskly over April and May. Job gains

were concentrated in the service-producing and construction industries, while employment in

manufacturing was stable on balance over the April-May period after having declined

somewhat in 1995 and the first quarter of 1996. The civilian unemployment rate rose in May

to 5.6 percent, which was the average rate for the year to date.

Industrial production increased appreciably further in May. In contrast to April's advance,

much of which had resulted from the resumption of operations at a major motor vehicle

manufacturer after the settlement of a strike, the May rise largely reflected gains in a wide

range of non-auto-related manufacturing industries as well as a weather-related jump in

electricity generation. The surge in overall output lifted total utilization of industrial capacity

somewhat above the average rate recorded during the previous two quarters.

Total nominal retail sales surged in May after having changed little in April; the increase in

sales, coupled with available information on prices, suggested that real consumer spending

on goods had risen substantially on balance since the first quarter. Recent data (available

through April) indicated that spending on services had increased moderately on balance in

recent months. Single-family housing starts fell considerably in May from the relatively high

April level. The decline suggested that the rise in mortgage rates in recent months had begun

to damp construction activity, but indicators of housing demand, such as sales of new and

existing homes, remained relatively robust.

Growth in business expenditures on durable equipment and nonresidential structures

appeared to be slowing following a surge in outlays in the first quarter. In May, shipments of

nondefense capital goods rebounded from the substantial decline in April; however,

excluding movements in the volatile aircraft category, shipments were down on balance over

the two months. Among the major components, shipments of both computing and

communications equipment fell sharply in April and retraced only part of that decline in

May. Recent data on new orders pointed to more modest increases in spending on business

equipment over the months ahead. Nonresidential building activity increased considerably

further in April (latest data available), but incoming information on contracts suggested that

growth in nonresidential construction would weaken somewhat in coming months.

Businesses had made considerable progress in recent months in bringing their inventories

into better alignment with sales. In manufacturing, stocks rose moderately in April after a

decline in March. The stock-to-shipments ratio dropped further in April and was at a low

level. At the wholesale trade level, inventory accumulation was appreciable in April after

several months of modest growth. The inventory-to-sales ratio for this sector edged up in

April but remained well below the elevated levels of last fall. Retail inventories increased

slightly in April after a large decline in March associated with a substantial liquidation of

motor vehicle stocks. The aggregate ratio of inventories to sales for retail establishments was

around the lower end of its range in recent years.

The nominal deficit on U.S. trade in goods and services widened in April from its rate in the

first quarter, reflecting a slightly larger increase in the value of imports than in that of

exports. The expansion in imports was concentrated in oil as U.S. refiners sought to meet

growing domestic demand and rebuild their inventories. The rise in exports was broadly

based, although exports of computers, semiconductors, and automotive products edged off.

Economic activity in the major foreign industrial countries appeared to have expanded

moderately on balance since the beginning of the year. In the first quarter, economic

performance ranged from unexpectedly robust in Japan to further weakness in Germany; the

limited data available for the second quarter suggested a slowdown in Japan, a bounceback in

Germany, and moderate growth in other major trading partners.

Although upward pressures on energy prices continued to boost overall consumer prices in

April and May, price increases for nonfood, non-energy items remained small. Over the

twelve months ended in May, the increase in core consumer prices was appreciably smaller

than in the previous twelve-month period; much of the deceleration reflected swings in

automobile finance charges. At the producer level, higher prices for finished energy goods

over April and May were partially offset by slightly lower prices for finished foods; prices

for nonfood, non-energy finished goods were little changed over the two-month period and

rose less over the twelve months ended in May than in the comparable year-earlier period.

Data on average hourly earnings of production and nonsupervisory workers indicated that

this measure of labor costs had increased by a somewhat larger amount in the year ended in

May than in the comparable year-earlier period.

At its meeting on May 21, 1996, the Committee adopted a directive that called for

maintaining the existing degree of pressure on reserve positions and that did not include a

presumption about the likely direction of any adjustments to policy during the intermeeting

period. The directive stated that in the context of the Committee's long-run objectives for

price stability and sustainable economic growth, and giving careful consideration to

economic, financial, and monetary developments, slightly greater reserve restraint or slightly

lesser reserve restraint would be acceptable during the intermeeting period. The reserve

conditions associated with this directive were expected to be consistent with moderate

growth in M2 and M3 over coming months.

Open market operations were directed toward maintaining the existing degree of pressure on

reserve positions throughout the intermeeting period. The federal funds rate averaged near

5-1/4 percent, the level expected to be associated with the unchanged policy stance. Because

the Committee's decision had been largely anticipated in financial markets, other market

interest rates also were little changed during the early part of the period. However, market

rates increased appreciably following the release of a strong employment report in early June,

though most of that rise was later retraced as expectations of near-term tightening of

monetary policy diminished. On balance, most market rates were up a little over the

intermeeting period. Major indexes of stock prices were down on balance over the period.

In foreign exchange markets, the trade-weighted value of the dollar in terms of the other

G-10 currencies depreciated slightly over the intermeeting period. The dollar declined against

the German mark and other European currencies as growing indications of a recent pickup in

economic activity in Germany damped market expectations of any further easing of monetary

policy by the Bundesbank. By contrast, the dollar rose against the yen in apparent response to

a series of statements by Japanese officials suggesting that there would be no near-term

firming of Japanese monetary policy.

The broad monetary aggregates were weak in May: M2 declined, and M3 expanded

relatively sluggishly. The weakness in M2 and M3 was associated in part with the adverse

effects of the earlier rise in market interest rates on the opportunity costs of holding deposits.

Deposit balances also may have been drawn down to meet unusually large individual tax

liabilities on the April 15 tax date. Partial data for June pointed to a rebound in both

aggregates. For the year through June, these aggregates were estimated to have grown at rates

around the upper bounds of their respective annual ranges. Expansion of total domestic

nonfinancial debt had slowed somewhat in recent months, but the debt aggregate had

remained in the middle portion of its annual range.

The staff forecast prepared for this meeting suggested that, after a sizable advance in

economic activity in the second quarter, growth would moderate and the economy would

expand around or perhaps a little above its estimated potential. Consumer spending was

projected to expand at a more moderate pace, in line with disposable income; the favorable

effect of higher equity prices on household wealth and the still-ample availability of credit

were expected to balance persisting consumer concerns about job and retirement security and

the restraining effect of high household debt burdens. Homebuilding was forecast to slow

somewhat in response to the back-up in residential mortgage rates but was expected to

remain at a relatively high level in the context of sustained income growth and the stillfavorable cash-flow affordability of home ownership. Business spending on equipment and

structures was projected to grow less rapidly in light of the anticipated moderate growth of

sales and profits and the reduced rate of utilization of production capacity now prevailing.

The external sector was expected to exert a small restraining influence on economic activity

over the projection period, even though an anticipated firming of economic activity abroad

would bolster demand for U.S. exports. Little further fiscal contraction was forecast over the

projection period. Inflation recently had been lifted by adverse developments in energy

markets and was projected to remain above the levels of recent years, given the still-high

level of resource utilization and the effects of tight grain supplies on food prices.

In the Committee's discussion of current and prospective economic developments, members

commented on the stronger-than-expected expansion in overall economic activity in recent

months, but for a variety of reasons they anticipated that growth would slow appreciably over

the second half of the year to a pace more in line with the growth in the economy's potential.

Key factors bearing on this outlook included the prospective effects of the rise in interest

rates and the dollar that had occurred since earlier in the year and the waning influence of

transitory factors that had stimulated economic activity in the second quarter. The members

generally agreed, however, that, apart from evidence of some moderation in the growth of

business investment expenditures from a very rapid pace, there were few hard indications of

a slowing in the expansion and the risks were clearly to the upside of their current forecasts.

Against that background, they were concerned that inflation could begin to rise. Cost and

price pressures had been surprisingly well contained at high levels of resource utilization, but

this unusually favorable performance might not be sustained, and in any event even greater

resource utilization, as would occur if growth did not moderate appreciably, carried

substantial inflation risk. There were some scattered indications in statistical and anecdotal

reports that tended to suggest that wage inflation might be trending higher, although key

measures of price inflation, excluding their food and energy components, continued to

display a flat or even a declining trend.

In keeping with the practice at meetings when the Committee sets its long-run ranges for the

money and debt aggregates, the members of the Committee and the Federal Reserve Bank

presidents not currently serving as members provided individual projections of the growth in

real and nominal GDP, the rate of unemployment, and the rate of inflation for the years 1996

and 1997. (The ranges in this paragraph take into account minor revisions made by a few

members subsequent to the meeting.) The forecasts of the rate of expansion in real GDP for

1996 as a whole had a central tendency of 2-1/2 to 2-3/4 percent, reflecting expectations of

considerable moderation in the rate of economic growth over the second half of the year; for

1997, the projections centered on continued moderate growth of GDP in a range of 1-3/4 to

2-1/4 percent. With regard to the expansion of nominal GDP, the forecasts were concentrated

in growth ranges of 5 to 5-1/2 percent for 1996 and 4-1/4 to 5 percent for 1997. The civilian

rate of unemployment associated with these forecasts was expected by most members to

remain around 5-1/2 percent this year and to be in a range of 5-1/2 to 5-3/4 percent in 1997.

This level of resource utilization was expected to be associated with a slightly higher rate of

inflation in 1996, as measured by the consumer price index, than that recorded in 1995 owing

to developments in the food and energy sectors, but a decline was anticipated in 1997.

Specifically, the projections converged on rates of 3 to 3-1/4 percent in 1996 and 2-3/4 to 3

percent in 1997. The projections for both 1996 and 1997 were based on individual views

concerning what would be an appropriate monetary policy over the projection horizon.

In their assessment of factors bearing on the outlook for final demand, members commented

that growth in consumer spending was likely to moderate in coming quarters from its pace

thus far this year. This moderation would reflect the projected slowing in income growth.

While overall employment conditions, the buildup of household net worth, and access to

financing would bolster consumer expendi- tures, members also cited a number of limiting

factors. The latter included the increase in consumer indebtedness, satisfaction of earlier

pent-up demand for consumer durable goods, and continuing concern about job security.

Higher interest rates also were expected to exert an inhibiting effect on purchases of

consumer durables, including those related to housing. Some members observed that while

slower growth in consumer spending was the most probable forecast, they saw an upside risk

from the wealth effects of the large rise that had occurred in the value of stock market

holdings.

Business expenditures for plant and equipment were expected to grow at a slower though still

appreciable pace. Indeed, such spending already appeared to be moderating. Contract data

suggested that nonresidential construction activity was on a slowing growth trajectory and

expansion of outlays for producers' durable equipment also appeared to have softened. Given

the outlook for slower growth in final demand, many businesses would not have to add

significantly to capacity. However, spending for computing equipment, while perhaps

moderating from the exceptional pace of recent quarters, was thought likely to remain

buoyant as continuing innovations and declining prices stimulated further solid gains in this

segment of business spending.

Housing was seen as another important sector of the economy that was likely to exert a

retarding effect on the expansion as the rise that had occurred in mortgage interest rates was

felt increasingly in housing markets. The anecdotal information from around the nation and

the available statistics suggested, however, that those markets generally had remained

surprisingly ebullient thus far, and there were only limited indications of some softening in

home construction activity.

Business inventory investment was viewed as a key upside risk in the economic outlook for

coming quarters. An inventory overhang at the end of last year had been corrected in the first

quarter, and inventory investment was indicated to have turned positive again in the second

quarter. However, current inventory-to-sales ratios appeared to be relatively lean, and final

sales that exceeded current expectations might well induce a sharp upward adjustment in

inventory accumulation, especially if lead times were to lengthen and producers perceived

shortfalls in their safety stocks.

Members viewed the outlook for inflation as a source of substantial uncertainty in their

forecasts, though many saw reasonable prospects that a rate of economic expansion in line

with their forecasts and associated levels of capacity utilization would prove to be consistent

with little change in the core rate of inflation. Some important measures of price inflation,

after adjustment to exclude their volatile food and energy components, had shown a flat or

even a declining trend in recent quarters. The outlook for overall price increases would

remain contingent in part on food and energy price developments, but more importantly on

underlying cost pressures in the economy.

Several members commented that the levels of utilization of capital and labor resources that

had prevailed over the past couple of years would have been expected, on the basis of past

historical patterns, to foster rising cost pressures and greater inflation. However, labor

compensation gains had been subdued in relation to earlier cyclical experience, likely as a

consequence of increased worker concerns about job security and job opportunities. Despite

the continued low rate of unemployment and widespread anecdotal reports of tight labor

markets across the country, there were only limited indications in national data that wage

inflation might be increasing. Whether greater labor cost pressures would emerge in the

context of the members' consensus forecast for economic activity was a critical issue in the

outlook for prices, though it was noted that at least some of the rising costs were likely to be

absorbed in shrinking profit margins. Even if greater price inflation were averted under that

scenario, the members saw a substantial risk that if economic growth did not slow in line

with their current forecasts, the resulting added pressures on resources would at some point

translate into higher price inflation. Accordingly, the factors bearing on the outlook for

resource use and inflation needed to be monitored with special care in this period.

With regard to inflation over the long run, the members agreed that it was essential for the

Committee to continue to focus on reducing inflation over time because the achievement of

an even less inflationary economic environment would foster a more productive economy

and maximum sustainable economic expansion. The members acknowledged that as inflation

diminished to very low levels, questions about the measurement of the overall price level

presented difficult problems for assessing progress toward price stability. Some also observed

that the precise level of average price inflation that might be compatible with the optimal

functioning of the economy was an unsettled issue owing, for example, to potential rigidities

in labor markets. Thus far, such rigidities had not impeded the economy from functioning at a

very high level as inflation came down, and continued adaptation to even lower inflation

rates was very likely. However, the Committee would need to pay careful attention to these

potential problems as inflation fell further. For now, the members agreed that some additional

progress in reducing inflation was very likely to improve the ultimate performance of the

economy, and that it was particularly important at this juncture to resist firmly any tendency

for inflation to worsen.

In keeping with the requirements of the Full Employment and Balanced Growth Act of 1978

(the Humphrey-Hawkins Act), the Committee at this meeting reviewed the ranges for growth

of the monetary and debt aggregates that it had established in January for 1996 and it decided

on tentative ranges for those aggregates for 1997. The current ranges set in January for the

period from the fourth quarter of 1995 to the fourth quarter of 1996 were unchanged from the

ranges for 1995 and included expansion of 1 to 5 percent for M2 and 2 to 6 percent for M3.

An unchanged monitoring range of 3 to 7 percent was set in January for growth of total

domestic nonfinancial debt in 1996.

A majority of the members favored retaining the current ranges for this year and extending

them on a provisional basis to 1997. They anticipated that growth of M2 and M3 probably

would continue at rates close to the upper limit of their respective ranges in both years, given

the Committee's expectations for the performance of the economy and prices. However,

despite a degree of concern about setting ranges that did not more comfortably encompass

expected growth, these members preferred not to change the ranges for a variety of reasons.

The current ranges for the broad monetary aggregates could be viewed as anchors or

benchmarks for money growth that would be associated with approximate price stability and

sustained economic growth, assuming behavior of velocity in line with historical experience.

Accordingly, a reaffirmation of those ranges would underscore the Committee's commitment

to a policy of achieving price stability over time; and in the view of some members, higher

ranges could raise questions in this regard. Moreover, a change in the ranges might be

misinterpreted as a signal of greater reliance on the broad monetary aggregates in the

formulation and conduct of monetary policy. In this connection, the members noted that the

behavior of M2 in relation to nominal GDP and interest rates had displayed a pattern over the

past two years or so that was in line with historical norms prior to the 1990s. However, in

light of difficulties in the early 1990s and changes in financial markets, the prospective

growth of M2 and its velocity remained subject to considerable uncertainty and the members

felt that it would be premature for the Committee to place increased reliance on M2 at this

point.

A few members preferred somewhat higher growth ranges for M2 and M3 because such

ranges would more comfortably surround the Committee's expectations for monetary growth.

The higher ranges would be more informative for the Congress and the public as to the

money growth likely to be associated with the Committee's expected economic outcomes for

the period covered by the ranges. They believed that the reasons for establishing the higher

ranges could readily be explained and understood as appropriate technical adjustments that

did not imply any lessened commitment to the Committee's price stability goal. For example,

such an explanation appeared to have been accepted with little or no comment by the public

when the range for M3 was increased in July 1995.

The Committee members were unanimously in favor of retaining the current monitoring

range of 3 to 7 percent for growth of total domestic nonfinancial debt in 1996 and extending

that range on a provisional basis to 1997. They took account of a staff projection indicating

that growth of the debt aggregate was likely to slow somewhat from its pace earlier this year

in line with some moderation in the expansion of nominal income. According to the staff

projection, growth in the debt measure would be near the midpoint of the existing range over

the period through 1997.

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At the conclusion of this discussion, the Committee voted to reaffirm the ranges for growth

of M2 and M3 and the monitoring range for expansion of total domestic nonfinancial debt

that it had established in January for 1996. For the year 1997, the Committee approved

provisional ranges for M2 and M3 and a provisional monitoring range for total domestic

nonfinancial debt that were unchanged from the 1996 ranges. In keeping with its usual

procedure under the Humphrey-Hawkins Act, the Committee would review its preliminary

ranges for 1997 early next year, or sooner if interim conditions warranted, in light of their

growth and velocity behavior and ongoing economic and financial developments.

Accordingly, the Committee voted to incorporate the following statement regarding the 1996

and 1997 ranges in its 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 reaffirmed at this meeting the

ranges it had established in January for growth of M2 and M3 of 1 to 5 percent

and 2 to 6 percent respectively, measured from the fourth quarter of 1995 to the

fourth quarter of 1996. The monitoring range for growth of total domestic

nonfinancial debt was maintained at 3 to 7 percent for the year. For 1997 the

Committee agreed on tentative ranges for monetary growth, measured from the

fourth quarter of 1996 to the fourth quarter of 1997, of 1 to 5 percent for M2 and

2 to 6 percent for M3. The Committee provisionally set the associated

monitoring range for growth of total domestic nonfinancial debt at 3 to 7 percent

for 1997. The behavior of the monetary aggregates will continue to be evaluated

in the light of progress toward price level stability, movements in their velocities,

and developments in the economy and financial markets.

Votes for this action: Messrs. Greenspan, McDonough, Boehne, Jordan, Kelley,

McTeer, Meyer, Mses. Phillips and Rivlin, and Mr. Stern.

Votes against this action: Mr. Lindsey and Ms. Yellen.

Mr. Lindsey and Ms. Yellen dissented because they preferred somewhat higher ranges for M2

and M3 growth in 1996 and 1997. The central tendencies of the members' forecasts of

nominal GDP for the two years were likely to be associated with growth of the broad

monetary aggregates at rates around the top of the current ranges. Somewhat higher ranges

would more comfortably encompass the anticipated growth of the monetary aggregates and

in their view would conform more closely with the provisions and intent of the Federal

Reserve Act that require the System to communicate its objectives and plans for monetary

growth to the Congress. They believed the reasons for raising the ranges could easily be

explained and understood as a technical adjustment that did not represent a reduced

commitment to the goal of price stability or an increased emphasis on the monetary

aggregates in policy formulation.

In the Committee's discussion of policy for the intermeeting period ahead, all but one of the

members supported a proposal to maintain an unchanged policy stance. These members also

indicated that they preferred or could accept an asymmetric directive that was biased toward

restraint. In their view, the most likely outcome was a slowing of the expansion to a more

sustainable pace and a continuation of subdued inflation. Nevertheless, they were concerned

that the risks to that outcome were tilted toward higher inflation, While a strong economy

generally was a welcome development, at current levels of resource use a continuation of

rapid growth was not likely to be sustainable because it would have the potential for adding

significantly to inflation pressures. However, inflation had remained relatively damped thus

far and the rise in interest rates among other factors was expected to curb demand. Moreover,

any tendency for price pressures to mount was likely to emerge only gradually and be

reversible through a relatively limited policy adjustment. The current stance of monetary

policy could not be described in this view as clearly accommodative. While the federal funds

rate had been reduced appreciably in nominal terms over the past year, its current level on an

inflation-adjusted basis seemed to be only marginally below its peak prior to mid-1995. In

the circumstances, the Committee could afford to wait for more evidence to see whether

additional inflation pressures were likely to develop. A number of key economic data would

become available over the next several weeks that would provide a much better basis for

assessing the economy's momentum over the second half of the year and the outlook for

inflation.

A differing view gave more emphasis to prospects for rising inflation and the need for

immediate action to forestall a buildup of cost and price pressures before they undermined

the expansion. There was little firm evidence that economic growth was slowing and reports

of appreciable wage pressures were increasing. Inflation expectations persisted in financial

markets, and probably in product and labor markets as well; if they were allowed to worsen,

the Committee's long-run goal of price stability would become much more difficult to

achieve. Delaying action risked the need for a greater adjustment in policy at a later date with

possible disruption to the economy.

Members observed that an asymmetric directive would represent a shift from the symmetric

directives that had been adopted over the past year but would be in keeping with their

assessments of the risks of higher inflation. Several commented that an asymmetric directive

did not imply a commitment to tighten monetary policy at some point, whether during the

intermeeting period or at a future meeting, but it did imply the need for special vigilance.

Some noted that a policy tightening action could tend to have a more pronounced effect than

usual because it would indicate a shift in the direction of policy and might generate

expectations of further tightening. Under the circumstances, the Committee would consult in

some way before any policy tightening was undertaken.

At the conclusion of the Committee's discussion, all but one member indicated that they

supported a directive that called for maintaining the existing degree of pressure on reserve

positions and that included a bias toward the possible firming of reserve conditions during

the intermeeting period. Accordingly, in the context of the Committee's long-run objectives

for price stability and sustainable economic growth, and giving careful consideration to

economic, financial, and monetary developments, the Committee decided that somewhat

greater reserve restraint would be acceptable and slightly lesser reserve restraint might be

acceptable during the intermeeting period. The reserve conditions contemplated at this

meeting were expected to be consistent with moderate growth of M2 and M3 over coming

months.

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At the conclusion of the meeting, the Federal Reserve Bank of New York was authorized and

directed, until instructed otherwise by the Committee, to execute transactions in the System

Account in accordance with the following domestic policy directive:

The information reviewed at this meeting suggests that economic activity

advanced considerably further in the second quarter, but increases in final

demand showed some signs of moderation. Nonfarm payroll employment was

up substantially in April and May; the civilian unemployment rate rose to 5.6

percent in May. Industrial production increased appreciably further in May,

reflecting gains across a wide range of industries. Real consumer spending rose

substantially on balance over April and May. Single-family housing starts fell

considerably in May from a relatively high level in April. Orders and contracts

point to some deceleration in spending on business equipment and nonresidential

structures after a very rapid expansion earlier in the year. The nominal deficit on

U.S. trade in goods and services widened in April from its rate in the first

quarter. Upward pressures on food and energy prices have led to somewhat

larger increases in the consumer price index over recent months.

Most market interest rates have edged higher since the Committee meeting on

May 21. In foreign exchange markets, the trade-weighted value of the dollar in

terms of the other G-10 currencies has depreciated slightly over the intermeeting

period.

M2 declined in May, though partial data for June pointed to a rebound. Growth

of M3 was relatively sluggish in May but also appears to have turned up in June.

For the year through June, both aggregates are estimated to have grown at rates

around the upper bounds of their respective ranges for the year. Expansion in

total domestic nonfinancial debt has been moderate on balance over recent

months and has remained in the middle portion of its range.