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, September

29, 1998, at 9:00 a.m.

Present:

Mr. Greenspan, Chairman

Mr. McDonough, Vice Chairman

Mr. Ferguson

Mr. Gramlich

Mr. Hoenig

Mr. Jordan

Mr. Kelley

Mr. Meyer

Ms. Minehan

Mr. Poole

Ms. Rivlin

Messrs. Boehne, McTeer, Moskow, and Stern, Alternate Members of the Federal

Open Market Committee

Messrs. Broaddus, Guynn, and Parry, Presidents of the Federal Reserve Banks of

Richmond, Atlanta, and San Francisco 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

Mr. Truman, Economist

Messrs. Cecchetti, Dewald, Hakkio, Lindsey, Simpson, Sniderman, and Stockton,

Associate Economists

Mr. Fisher, Manager, System Open Market Account

Mr. Winn, Assistant to the Board, Office of Board Members, Board of Governors1

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. Alexander, Hooper, and Ms. Johnson, Associate Directors, Division of

International Finance, Board of Governors

Mr. Reinhart, Deputy Associate Director, Division of Monetary Affairs, Board of

Governors

Mr. Struckmeyer, Assistant Director, Division of Research and Statistics, Board of

Governors

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

Governors

Messrs. Spillenkothen and Parkinson,2 Director, Division of Supervision and

Regulation, and Associate Director, Division of Research and Statistics respectively,

Board of Governors

Mr. Connolly, First Vice President, Federal Reserve Bank of Boston

Messrs. Eisenbeis, Goodfriend, Hunter, Kos, Lang, and Rolnick, Senior Vice

Presidents, Federal Reserve Banks of Atlanta, Richmond, Chicago, New York,

Philadelphia, and Minneapolis respectively

Messrs. Judd and Rosengren, Vice Presidents, Federal Reserve Banks of San

Francisco and Boston respectively

Ms. Yucel, Research Officer, Federal Reserve Bank of Dallas

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

on August 18, 1998, 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 August 18, 1998, through September 28, 1998. By unanimous vote, the Committee

ratified these transactions.

The Committee then turned to a discussion of the economic and financial outlook, 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 was expanding at

a moderate rate. Growth of private domestic final demand had slowed from its pace in the

first half of the year, though it was still relatively robust, and reduced spending on U.S.

exports and rising import competition were exerting appreciable restraint on overall activity,

as was a slowing in inventory investment. Reflecting the moderation in growth from the first

half of the year, total payroll employment was trending up at a somewhat slower pace.

Despite the pressures on labor resources associated with still-tight labor markets, trends in

wages and prices remained stable.

Growth in nonfarm payroll employment slowed somewhat over the July-August period. The

deceleration reflected further job losses in the manufacturing sector, notably in the apparel

and electronic components industries on which the crisis in Asia was having a sizable

adverse effect. Outside of manufacturing, employment increases remained strong in the

service-producing industries, and even though anecdotal reports continued to indicate

shortages of skilled workers, further sizable job gains were recorded in construction. The

civilian unemployment rate stayed at 4.5 percent in August.

Industrial output rebounded in August as production at General Motors resumed following

the settlement of the labor strike. Outside the motor vehicle sector, however, output had

changed little on balance over recent months in association with the erosion in net exports

stemming from the turmoil in Asia and its repercussions on a number of other U.S. trading

partners; production of consumer goods edged down on balance in July and August, and the

growth of output of business equipment slowed. The rise in industrial production in August

boosted the rate of utilization of manufacturing capacity, but the factory operating rate

remained somewhat below the level of late last year.

Total retail sales were held down in July and August by a sharp contraction in spending for

motor vehicles, but non-auto sales continued to rise at a brisk pace. The gains were

widespread, with increases in spending on furniture and appliances, apparel, and

miscellaneous nondurables especially strong. Purchases of services also were up appreciably

further in July and August after a rapid second-quarter rise. Sales and construction of

residential buildings remained quite strong on balance, reflecting very favorable homebuying

conditions. Housing starts slipped in August but were still above the high level of the first

half of the year. Sales of existing homes dropped back in August from the record high

registered in July, while sales of new homes were slightly higher in July (latest data) than in

the first half of the year.

Available indicators pointed to more moderate growth in business fixed investment after the

surge in capital spending during the first half of the year. Shipments of nondefense capital

goods declined in July and August, retracing much of June's large increase, while sales of

medium and heavy trucks continued to increase at a rapid pace. Nonresidential construction

weakened in July, extending a pattern of sluggish building activity; construction of industrial

structures remained in a downtrend, and office building activity changed little on balance

over June and July.

Business inventory accumulation eased further in July after having slowed sharply in the

second quarter, and inventory-sales ratios remained moderate. Stockbuilding in

manufacturing was at a somewhat lower rate in July than in the second quarter, and the stockshipments ratio for the sector stayed a little above the low level that had prevailed over the

past year. At the wholesale level, a further decline in inventories reflected additional

reductions in motor vehicles; the inventory-shipments ratio remained in the upper part of its

narrow range for the past year. In the retail sector, a sharp drop in stocks at automotive

dealerships more than offset a rise in stocks of other goods. The aggregate inventory-sales

ratio for the retail sector was at a relatively low level.

The nominal deficit on U.S. trade in goods and services narrowed slightly in July from its

second-quarter average, with the value of imports falling more than the value of exports.

Much of the decline in imports and exports involved trade in automotive products with

Canada and Mexico. Economic activity in the major foreign industrial countries other than

Japan decelerated on average in the second quarter, with a deterioration in net exports

partially offsetting continued strength in domestic final demand. In Japan, activity contracted

for a third consecutive quarter; net exports made a large positive contribution as imports

dropped sharply, but domestic demand, most notably business fixed investment, fell steeply.

Both the overall and the core CPI again rose moderately in August; a further increase in food

prices was offset by a sizable decrease in energy prices. For the twelve months ended in

August, core consumer prices rose slightly more than they had in the year-earlier period. At

the producer level, prices of finished goods dropped appreciably in August, largely reflecting

declines in the prices of finished foods and, notably, energy goods. Producer prices of

finished goods other than food and energy moved slightly higher in the twelve months ended

in August after having edged down in the year- earlier period. Producer prices at earlier

stages of production were under strong downward pressure; prices of intermediate materials

fell during the year ended in August by slightly more than they had risen in the year-earlier

period, and prices of crude materials plunged further in the twelve months ended in August.

Average hourly earnings of production or nonsupervisory workers continued to increase at a

relatively moderate pace in the July-August period, and for the twelve months ended in

August, they rose slightly more than in the year-earlier period.

At its meeting on August 18, 1998, the Committee adopted a directive that called for

maintaining conditions in reserve markets that would be consistent with the federal funds rate

continuing to average around 5-1/2 percent. However, in light of mounting financial strains

abroad, their potential implications for the U.S. economy, and less accommodative conditions

in domestic financial markets, the Committee concluded that the risks to the outlook were no

longer tilted toward rising inflation but had become more balanced. Accordingly, the

Committee adopted a directive that did not include a presumption about the likely direction

of any adjustment to policy during the intermeeting period. The reserve conditions associated

with this directive were expected to be consistent with moderate growth of M2 and M3 over

coming months.

Open market operations were directed throughout the intermeeting period toward

maintaining the existing degree of pressure on reserve positions, and the federal funds rate

remained close to its intended level of 5-1/2 percent. In an atmosphere of greatly increased

volatility in financial asset values worldwide and a reduced appetite for risk among many

investors, interest rates on U.S. Treasury securities, and to a much smaller extent on

investment-grade corporate debt, fell appreciably during the intermeeting period; in contrast,

yields on the bonds of lower-rated firms increased sharply, and a number of large banks

tightened terms and standards for making business loans to sizable firms. Credit conditions

also tightened in Europe, Asia, and Latin America. Share prices in U.S. and foreign equity

markets remained volatile during the intermeeting period, and major U.S. equity price

indexes declined considerably further on balance.

In foreign exchange markets, the trade-weighted value of the dollar depreciated substantially

over the intermeeting period in relation to other major currencies. A spreading perception

that the United States was more vulnerable than either Europe or Japan to an economic

downturn in Latin America, increasing expectations of monetary easing in the United States,

and shifts into yen associated with the end of the fiscal half-year in Japan and the unwinding

of some investment positions financed in yen were factors that weighed on the dollar. By

contrast, the dollar appreciated slightly in terms of an index of currencies that includes the

developing countries of Latin America and Asia that are important trading partners of the

United States.

Growth of M2 and M3 picked up considerably in August and apparently strengthened further

in September. The acceleration was the result of unusually large inflows to money market

funds that in part reflected households' preference for relatively safe, liquid placements for

funds shifted out of equities and lower-rated corporate debt. For the year through September,

both aggregates recorded growth rates well above the Committee's ranges for the year.

Expansion of total domestic nonfinancial debt had moderated somewhat in recent months

after picking up earlier in the year.

The staff forecast prepared for this meeting incorporated a considerably weaker assessment

of underlying aggregate demand, owing to downward revisions to growth abroad and to the

less accommodative conditions that were evolving in U.S. financial markets. The staff

projected that the expansion of economic activity would slow for a time to a pace appreciably

below the estimated growth of the economy's potential and then would pick up to a rate more

in line with that potential. Damped expansion of foreign economic activity and the lagged

effects of the earlier rise in the foreign exchange value of the dollar were expected to place

considerable restraint on the demand for U.S. exports for a period ahead and to lead to further

substitution of imports for domestic products. Domestic production also would be held back

for a while by the efforts of firms to bring inventories into better balance with the anticipated

moderation in the trajectory of final sales. In addition, private final demand would be

restrained by tighter lending terms and conditions as well as the drop that had occurred in

equity prices. Pressures on labor resources were likely to ease somewhat as the expansion of

economic activity slowed, but inflation was projected to pick up gradually in association with

a partial reversal of the decline in energy prices this year.

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

focused on developments that pointed to the potential for a significant weakening in the

growth of spending. They recognized that there were at present few statistical indications that

the economy was on a significantly slower growth track. Indeed, the available data suggested

that consumer expenditures and business investment retained considerable strength. At the

same time, however, investors' perceptions of risks and their aversion to taking on more risk

had increased markedly in financial markets around the world. That change in sentiment was

exacerbating financial and economic problems in a number of important trading partners of

the United States. In addition, it was generating lower equity prices and tightening credit

availability in U.S. financial markets. As a consequence, the downside risks to the domestic

expansion appeared to have risen substantially in recent weeks. Though labor markets were

expected to remain relatively tight for some time, the members saw little prospect that

inflation would gather significant momentum in coming quarters. Declining commodity and

other import prices would be restraining prices and inflation expectations for a while. Overall

consumer prices might rise a little more rapidly next year as the effects of a number of

favorable factors, such as falling energy prices, diminished or reversed, but underlying

inflation was expected to stay quite subdued as inflation expectations remained damped and

pressures in labor markets became less pronounced.

The intensification and further spread of turmoil in international financial markets, notably

since the outbreak of a financial crisis in Russia in mid-August, had spilled over into U.S.

financial markets. Strong demands for safety and liquidity had driven down yields on U.S.

Treasury securities, but spreads of private rates over Treasury rates had gapped higher.

Increases in risk spreads were especially large for lower-grade borrowers and on bonds below

investment grade, whose rates had increased considerably since mid-August. In addition,

many banks had tightened their credit standards and terms. Prices in U.S. equity markets,

which had weakened appreciably before the crisis in Russia, had declined substantially

further. These market developments strongly suggested, and anecdotal reports tended to

confirm, the emergence of widespread perceptions of greater risks in a broad range of

financial investment activities and of considerably greater reluctance to put capital at risk.

The members did not believe that the tightness in credit markets and strong demand for

safety and liquidity were likely to lead to a "credit crunch," though some members expressed

the view that such an outcome could not be ruled out. At a time when business balance sheets

already indicated a significant softening of cash flows owing to weaker profits, many

business firms were experiencing increased difficulty and costs in their efforts to raise funds

in debt or equity markets or to borrow from lending institutions; if these conditions were to

persist, the sustainability of the current strength in business capital expenditures would come

into question. The decline in stock market prices also appeared likely to damp the growth of

consumer spending over time, with added implications for business capital expenditures.

Despite the emergence of decidedly less hospitable financial conditions, there were few

indications in the data available to the Committee of any weakening as yet in consumer and

business spending. Consumer expenditures, though temporarily held back by shortages of

new motor vehicles stemming from the work stoppage at General Motors, had remained on a

solid uptrend, with overall growth in recent months apparently slipping only a little from a

remarkably rapid pace in the first half of the year. Strong growth in jobs and incomes along

with substantial further increases in stock market prices through mid-July had fostered a high

level of consumer confidence and spending. Members commented that the more recent

weakness in the stock market and the related decline in household net worth had removed an

important support for the growth of consumer spending, but they noted that recent surveys

indicated only a slight deterioration in consumer sentiment and that the stimulus from earlier

stock market gains probably would dissipate only gradually. Looking further ahead,

consumer spending could be expected to expand at a pace that was more in line with the

growth of household incomes than it had been in recent years.

Growth in business investment spending, while apparently moderating from an extraordinary

pace during the first half of the year, likewise seemed to have been little affected to date by

the tightening in credit conditions and the increased aversion to risktaking. Data on

shipments of capital equipment continued to display a clear uptrend and members reported

very strong construction activity in many parts of the country. Declining relative prices and

rapid technological advances were likely to generate appreciable further growth in spending

for computer and office equipment over the projection horizon. Moreover, new orders for

capital equipment did not suggest any general weakening, though such orders had declined

dramatically in the steel industry under the weight of intense foreign competition. Even so,

the members anticipated that the pronounced increase in investor and lender perceptions of

risk would result in considerable moderation in the growth of overall business investment,

especially in light of concurrent expectations of reduced gains in sales and profits and

evidence of some diminution in both internal and external sources of financing. Reports from

nearly every Federal Reserve District suggested that executives had become considerably

more concerned about business prospects. In a number of cases they already had seen a

substantial downturn in their exports or a surge in competing imports at prices they found

difficult to match. In other cases they were anticipating such developments or were reacting

to the general sense of unease and uncertainty evident in financial markets. Forthcoming data

on capital spending including new orders and contracts were likely to point to a weaker

uptrend in business fixed investment. How much weaker was a major uncertainty in the

economic outlook and a key to determining the extent to which financial market turmoil was

likely to affect the real economy.

Very favorable underlying factors, including a strong job market and declining mortgage

rates, had helped to sustain homebuilding activity at an elevated level. The large further

advance in stock market prices earlier in the year also appeared to have been a positive factor

in the strong performance of the housing market. While anecdotal reports suggested that

softening was confined to only a few areas, the delayed effects of the drop in stock market

prices and forecasts of slower employment and income growth suggested some moderation in

housing activity at some point. Even so, the continued affordability of new homes for many

households was likely to sustain housing demand at a relatively high albeit diminished level,

and homebuilding activity would be bolstered for a time as backlogs created by shortages of

skilled construction workers in many areas were worked off.

Net exports, while subject to a great deal of uncertainty, were seen as likely to continue to

restrain demand and production to a substantial extent over coming quarters. Members cited

examples from across the country of business firms, notably in the manufacturing sector but

also in energy, agriculture, forest products, and some other industries, that already were being

adversely affected by weaker export markets and increased competition from lower-priced

imports. Moreover, the intensification of turmoil in international financial markets since the

Russian devaluation and debt moratorium had led to tighter financial conditions in key U.S.

trading partners--especially in the Americas--a development that was likely to weaken

growth in those markets and demand for U.S. products. Of potentially greater importance for

the domestic economic outlook, however, was the spread of international financial

unsettlement to U.S. financial markets and the attendant deterioration in business and

investor confidence. It was clear that the contagious effects of international economic and

financial turmoil had markedly increased the downside threat to the domestic expansion.

In their comments about the outlook for inflation, members referred to the persistence of very

tight labor markets across the nation and to indications of escalating increases in labor

compensation in a number of areas. At the same time, price inflation generally had remained

subdued, with little evidence of acceleration. As had been true for an extended period,

competitive pressures were widely reported to be preventing employers from passing through

rising labor costs to consumer prices. Looking ahead, members cited a variety of factors

bearing on the prospects for inflation that on the whole suggested that the risks of an

inflationary uptrend had receded. Favorable factors in the outlook for prices included the

lingering effects of the dollar's earlier appreciation, ample industrial capacity, generally

declining commodity and other import prices, and an apparently more rapid trend of

productivity gains. Over time, some slowing in economic growth and less intense pressures

on labor resources would hold down increases in labor costs. Developments that might tend

to offset these positive factors, at least in part, included a possible turnaround in energy

prices after sizable declines over the past year and an upturn in the costs of worker benefits,

notably for medical expenses. A few members also observed that the rapid growth of key

monetary aggregates, including M2, over a period of several quarters was a worrisome

element in the outlook for inflation, though the most recent surge in M2 probably was

induced in large measure by a flight to quality and liquidity.

In their discussion of policy for the intermeeting period ahead, all the members endorsed a

proposal calling for a slight easing in reserve markets to produce a decline of 1/4 percentage

point in the federal funds rate to an average of about 5-1/4 percent. In their view, such an

action was desirable to cushion the likely adverse consequences on future domestic economic

activity of the global financial turmoil that had weakened foreign economies and of the

tighter conditions in financial markets in the United States that had resulted in part from that

turmoil. At a time of abnormally high volatility and very substantial uncertainty, it was

impossible to predict how financial conditions in the United States would evolve. In the view

of many members, equity prices and risk spreads in U.S. financial markets previously had

embodied an overly optimistic assessment of business prospects and they saw some

correction in these markets as a positive development. Moreover, they expected markets to

become much more settled once the initial adjustments to new risk assessments had been

made. On balance, however, credit conditions were likely to remain tighter and equity prices

lower than earlier, and in the context of continued damped inflation, monetary policy had the

room to adjust to these new circumstances. In any event, an easing policy action at this point

could provide added insurance against the risk of a further worsening in financial conditions

and a related curtailment in the availability of credit to many borrowers.

The members agreed that the decrease in the federal funds rate should be limited to 25 basis

points. Several emphasized in this regard that although the risk of rising inflation might have

receded, it was still present, especially in light of the persistence to date of very tight labor

markets and relatively robust economic growth. In these circumstances, while an easing

move was warranted to provide some insurance against undesirably tight domestic financial

conditions, many members saw the need for a cautious policy action. A more sizable policy

move at this point might convey an exaggerated impression of the Committee's current

thinking regarding the extent of downside risks in the economy.

The members were divided over whether to retain the current symmetrical directive or to

adopt an asymmetrical directive that would be tilted toward ease. A small majority favored

moving to asymmetry on the grounds that it seemed more consistent with the increased

downside risks to the economy that they believed would exist even after the contemplated

policy action and that it would underscore the Committee's readiness to respond promptly to

conditions that might threaten the sustainability of the expansion. Other members expressed a

preference for a symmetric directive but indicated that they could accept a directive that was

tilted toward ease. In their opinion, the uncertainties relating to the direction of the next

policy move were sufficiently great on both sides to justify a neutral directive. Some

commented that unanticipated developments were likely in any event to provide the principal

basis for future policy actions. They suggested that the Committee would undoubtedly confer

by telephone should such developments materialize during the intermeeting period, and the

symmetry or asymmetry of the directive would have little bearing on whatever policy

decision might be reached.

At the conclusion of the Committee's discussion, all the members supported a directive that

called for conditions in reserve markets that would be consistent with a slight decrease in the

federal funds rate to an average of about 5-1/4 percent. All the members also indicated that

they could accept a change in the directive to include a bias toward easing. 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 a slightly higher federal funds rate might be

acceptable or a somewhat lower federal funds rate would be acceptable during the

intermeeting period. The reserve conditions contemplated at this meeting were expected to be

consistent with some moderation in the growth of M2 and M3 over the months ahead.

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 the economy has been

growing at a moderate rate, paced by brisk, albeit slowing, increases in spending

by businesses and households, while expansion in overall economic activity has

continued to be restrained by developments abroad. Nonfarm payroll

employment grew somewhat more slowly over July and August, mostly

reflecting job losses in the manufacturing sector; the civilian unemployment rate

was unchanged at 4.5 percent in August. Industrial production has changed little

on balance over recent months. Total retail sales over July and August were held

down by a sharp contraction in spending for motor vehicles. Residential sales

and construction have remained quite strong in recent months. Available

indicators point to continued growth in business capital spending, but at a more

moderate pace than in the first half of the year. Business inventory accumulation

slowed further in July. The nominal deficit on U.S. trade in goods and services

narrowed slightly in July from its second-quarter average. Trends in wages and

prices have remained stable in recent months.

Most interest rates have fallen appreciably since the meeting on August 18,

though yields on the bonds of lower-rated firms have increased and a number of

large banks have tightened terms and standards for making business loans.

Broadly similar developments have occurred in major foreign markets. Share

prices in U.S. and global equity markets have remained volatile and major

indexes have declined considerably further on balance over the intermeeting

period. In foreign exchange markets, the trade-weighted value of the dollar

declined substantially over the intermeeting period in relation to other major

currencies; it was up slightly in terms of an index of the currencies of the

developing countries of Latin America and Asia that are important trading

partners of the United States.

Growth of M2 and M3 strengthened considerably in August and appeared to

have picked up further in September, partly reflecting shifts of funds by

households out of investments in equities and lower-rated corporate debt. For the

year through September, both aggregates rose at rates well above the

Committee's ranges for the year. Expansion of total domestic nonfinancial debt

has moderated somewhat in recent months after a pickup earlier in the year.

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 on June

30-July 1 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 1997 to the fourth quarter of 1998. The range for growth of total domestic

nonfinancial debt was maintained at 3 to 7 percent for the year. For 1999, the

Committee agreed on a tentative basis to set the same ranges for growth of the

monetary aggregates and debt, measured from the fourth quarter of 1998 to the

fourth quarter of 1999. 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.

In the implementation of policy for the immediate future, the Committee seeks

conditions in reserve markets consistent with decreasing the federal funds rate to

an average of around 5-1/4 percent. 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, a

slightly higher federal funds rate might or a somewhat lower federal funds rate

would be acceptable in the intermeeting period. The contemplated reserve

conditions are expected to be consistent with some moderation in the growth in

M2 and M3 over coming months.

Votes for this action: Messrs. Greenspan, McDonough, Ferguson, Gramlich, Hoenig,

Jordan, Kelley, Meyer, Ms. Minehan, Mr. Poole, and Ms. Rivlin.

Votes against this action: None.

Release of Information about FOMC Meetings

At this meeting, the Committee reviewed its current practices relating to its policy

announcements, meeting minutes, and directive wording. This discussion was part of an

ongoing appraisal of the Committee's disclosure policies. The Committee took no action at

this meeting but agreed that further review of some of these issues would be appropriate.

Financial Problems of a Large Hedge Fund

The Committee discussed the limited role of the Federal Reserve Bank of New York in

facilitating a private-sector resolution of the severe financial problems encountered in the

portfolio managed by Long-Term Capital Management L.P. The size and nature of the

positions of this fund were such that their sudden liquidation in already unsettled financial

markets could well have induced further financial dislocations around the world that could

have impaired the economies of many nations, including that of the United States. Against

this background, the Federal Reserve Bank of New York had brought together key interested

parties with the aim of increasing the probability of an orderly private-sector solution to the

hedge fund's difficulties.

Conference Call

In a telephone conference held on October 15, 1998, the Committee members discussed

recent economic and financial developments and their implications for monetary policy. Risk

aversion in financial markets had increased further since the Committee's meeting in

September, raising volatility and risk spreads even more, eroding market liquidity, and

constraining borrowing and lending in a number of sectors of the financial markets. Although

indications of any softening in the pace of the economic expansion across the country

remained sparse, the widespread signs of deteriorating business confidence and evidence of

less accommodative domestic financial conditions suggested that the downside risks to the

expansion had continued to mount.

Against this background, a consensus emerged in favor of a 1/4 percentage point reduction in

the federal funds rate that would accompany a reduction in the discount rate that the Board of

Governors was expected to approve at a meeting following this telephone conference. Some

members were concerned that a policy move so soon after the late September action might be

misread as indicative of a degree of concern about prospective developments in financial

markets or the economic outlook that did not represent the Committee's thinking. However,

the members generally concluded that the risk of adverse market reactions was worth taking

and that the easing actions under consideration were more likely to help settle volatile

financial markets and cushion the effects of more restrictive financial conditions on the

ongoing expansion. At the conclusion of this discussion, the Chairman indicated that he

would instruct the Federal Reserve Bank of New York to lower the intended federal funds

rate by 25 basis points, consistent with the Committee's directive issued at the meeting on

September 29, 1998.

It was agreed that the next meeting of the Committee would be held on Tuesday, November

17, 1998.

The meeting on September 29 adjourned at 2:40 p.m.

Donald L. Kohn

Secretary

Footnotes

1 Attended portion of the meeting relating to the Committee's disclosure policies.

2 Attended portion of meeting relating to developments stemming from the financial

difficulties of a large hedge fund.

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