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, November

17, 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. Bernard, Deputy Secretary

Ms. Fox, Assistant Secretary

Mr. Mattingly, General Counsel

Mr. Prell, Economist

Messrs. Cecchetti, Dewald, 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 Governors

Mr. Ettin, Deputy Director, Division of Research and Statistics, Board of Governors

Ms. Johnson, Director, Division of International Finance, Board of Governors

Messrs. Madigan and Slifman, Associate Directors, Divisions of Monetary Affairs

and Research and Statistics respectively, Board of Governors

Messrs. Alexander and Hooper, Deputy Directors, Division of International Finance,

Board of Governors

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

Governors

Mr. Whitesell, Assistant Director, Division of Monetary Affairs, Board of Governors

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

Mr. Kumasaka, Assistant Economist, Division of Monetary Affairs, Board of

Governors

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

Governors

Mr. Moore, First Vice President, Federal Reserve Bank of San Francisco

Messrs. Beebe, Eisenbeis, Ms. Krieger, Messrs. Lang, and Rosenblum, Senior Vice

Presidents, Federal Reserve Banks of San Francisco, Atlanta, New York,

Philadelphia, and Dallas respectively

Messrs. Evans, Fuhrer, Hetzel, Miller, and Sellon, Vice Presidents, Federal Reserve

Banks of Chicago, Boston, Richmond, Minneapolis, and Kansas City respectively

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

on September 29, 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 September 29, 1998, through November 16, 1998. By unanimous vote, the Committee

ratified these transactions.

The Manager informed the Committee that he planned to initiate outright purchases in the

secondary market of inflation-indexed Treasury securities. In the past, the System had been

acquiring holdings of such securities in Treasury auctions in exchange for maturing nominal

obligations. In the Manager's opinion, secondary market transactions would provide a helpful

addition to the current range of assets that the System normally purchased, especially in a

period of little or no increase in Treasury debt. Some members expressed concern that sizable

purchases of indexed securities by the central bank might impair the liquidity of the market

and limit the usefulness of these obligations as indicators of inflationary expectations. It was

noted, however, that relatively limited System purchases of such securities were

contemplated so that the market was not likely to be significantly affected. Moreover, the

System's participation could contribute to a more active and liquid secondary market.

In further discussion of the wording of the operating paragraph of its directive, the

Committee at this meeting focused on proposals by members to simplify and clarify the

sentence relating to the symmetry or asymmetry of the directive as it applied to possible

future policy changes. Time constraints did not permit the Committee to complete its

deliberations, and it agreed to continue its discussion at a later meeting.

The Committee then turned to 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. Committee decisions to

amend the Authorization for Domestic Open Market Operations and to renew certain swap

line agreements also are summarized below.

The information reviewed at this meeting suggested some moderation in the expansion of

economic activity from a brisk pace during the summer months. Although growth of

economic activity in the third quarter apparently about matched the pace in the first half of

the year, a large buildup of nonfarm inventories had accounted for a significant portion of the

persisting strength of the expansion during the quarter. Growth in consumer spending had

been well maintained during the summer months, and housing activity had remained at a

high level. In other major sectors of the economy, business fixed investment had softened

after having surged in the first half, and net exports had declined further, although at a

reduced pace. Growth in employment had slowed appreciably on balance during the summer

and early fall months, but tight conditions had persisted in most labor markets. Recent wage

and price developments had been mixed.

Growth in nonfarm payroll employment slowed appreciably in September and October. The

slowing partly reflected sizable job losses in manufacturing, which has been substantially

affected since earlier in the year by increasing foreign competition stemming from the crisis

in Asia. Outside of manufacturing, increases in employment in the service-producing

industries moderated somewhat over the two months, although gains in finance, insurance,

and real estate were relatively robust. The civilian unemployment rate remained near 4-1/2

percent during the two months.

Industrial output had declined slightly in recent months after having rebounded in August

when production resumed at General Motors following settlement of the labor strike. Outside

the motor vehicle sector, manufacturing output edged lower in recent months after having

decelerated markedly earlier in the year. Weakness in the manufacturing and mining sectors

was associated in large measure with the fallout from the turmoil in Asia, its repercussions on

a number of U.S. trading partners, and the related softness in world oil markets. The

downward trend in the utilization of capacity in manufacturing left the factory operating rate

appreciably below its level of late last year.

Personal consumption expenditures rose considerably further during the third quarter, though

at a much slower pace than that recorded earlier in the year. Retail sales were down slightly

on balance during the quarter, reflecting a sharp drop in sales of motor vehicles associated

with the work stoppage at General Motors. However, the settlement of that strike and the

resumption of production led to an upturn in overall motor vehicle sales in August and a

sizable advance in September. A large further gain in such sales contributed to a sharp rise in

overall retail sales in October. Consumer confidence retreated further in October, but

according to a major survey it turned up in early November, albeit to a level still somewhat

below its peak earlier in the year.

Available indicators pointed to a pickup in business capital spending after a third quarter lull,

owing to some extent to a recovery from the General Motors strike. Business investment

expenditures during the summer were held down in part by the strike- related decline in fleet

sales of new motor vehicles. In addition, spending for other types of business equipment

grew somewhat more slowly in the third quarter after having expanded at an extraordinary

pace earlier in the year. Orders received by U.S. equipment makers continued to trend up

through September. In contrast, nonresidential building activity apparently fell somewhat

further in the third quarter. While the construction of lodging facilities surged and the

construction of office space persisted at a high level, there was a decline in other commercial

building, which includes retail stores and warehouses, industrial structures, and institutional

buildings. The availability of financing for various types of construction appeared to lessen

substantially in late summer, and financing costs rose for many borrowers.

In the residential sector, housing sales and starts remained quite strong, though below early

summer highs. Housing activity showed signs of dropping off from peak levels during the

latter part of the summer, but the decline in mortgage rates this fall produced an upturn in

several indicators of demand for single-family housing, including a rebound in a survey

index of homebuying conditions. Multifamily housing starts increased considerably in the

third quarter, but since late summer the availability of financing for multifamily building

projects has tended to diminish and interest costs to rise.

Business inventory accumulation was sizable in the third quarter, and stocks-sales ratios rose

to uncomfortable levels in some industries that were being adversely affected by the nation's

growing trade deficit. In manufacturing, however, stockbuilding slowed during the summer

months and the stock-shipment ratio was unchanged at a level just above its average for the

past year. At the wholesale level, a rapid increase during the third quarter lifted the

inventory- sales ratio for this sector to its highest level since 1986; nearly half the rise was

the result of a buildup of farm products that was related in part to an early harvest, but

wholesalers of machinery, chemicals, and metals and minerals also apparently experienced

undesired buildups of stocks. Retail inventories excluding motor vehicles accumulated at a

slow pace during the summer, and the inventory-sales ratio for this category remained well

within the narrow range of the past year.

The nominal deficit on U.S. trade in goods and services widened to some extent in

July-August from its second-quarter average. The value of imports in the July-August period,

though rising appreciably in August, was somewhat below the second-quarter average, with

most of the decline involving automotive products and oil. The value of exports fell

somewhat over the two months, largely reflecting declines in exports of automotive products

and industrial supplies and reduced service transactions. Decreases in exports partly reflected

weakness in foreign economies. In the third quarter, growth in economic activity slowed on

average in the major industrial countries, other than Japan, from the average pace in the first

half of the year and contracted for a fourth consecutive quarter in Japan. There were

widespread indications in the industrial nations, particularly from surveys of business and

consumer confidence, that some slowing was persisting into the fourth quarter. Elsewhere,

the available evidence pointed to some improvement in economic trends in a number of

Asian nations, but the economies of several sizable South American countries appeared to

have weakened. Recent economic indicators for Mexico were mixed.

The performance of various measures of wages and prices was uneven in recent months. The

most recently available employment cost index indicated that hourly compensation of private

industry workers posted a sizable increase in the third quarter. However, gains in average

hourly earnings moderated considerably in September and October. The increase in the

employment cost index over the past year was appreciably larger than in the previous year

while the advance in average hourly earnings moderated somewhat.

Consumer energy prices rose appreciably in October, but they were still down sharply from a

year earlier and on balance limited the increase of overall consumer prices over the past year.

Core consumer prices moved up at a faster pace than overall consumer prices in recent

months and over the past year, reflecting sizable increases in the prices of tobacco, used cars

and trucks, and services. At the producer level, prices of finished goods edged up in recent

months but were down on balance over the past year; excluding food and energy items,

producer prices rose somewhat over the past year.

At its meeting on September 29, 1998, the Committee adopted a directive that called for

implementing conditions in reserve markets that were consistent with a one-quarter

percentage point decrease in the federal funds rate to an average of around 5-1/4 percent. The

Committee also decided to adopt an asymmetric directive that was tilted toward ease to

highlight its view that the risks to the economic expansion were mainly on the downside and

to underscore its readiness to respond promptly to developments that threatened the

sustainability of the expansion. The reserve conditions associated with this directive were

expected to be consistent with some moderation in the growth of M2 and M3 over

subsequent months.

Following the meeting, open market operations were directed initially toward implementing a

slight easing in the degree of pressure on reserve positions. The federal funds rate,

responding to quarter-end pressures and uncertainties created by shifting funding patterns in

volatile financial markets, tended at first to average somewhat above the intended rate of

5-1/4 percent despite a relatively liberal provision of reserves by the System. Strains in

financial markets continued to mount, with intermediaries and final investors much more

cautious about risks and leverage and much more eager to hold very liquid assets. These

developments in turn disrupted flows of funds in a number of financial markets. On October

15, the Committee discussed these developments and their implications for the domestic

economy, and the members supported the Chairman's suggestion that, in keeping with the

directive issued at the September 29 meeting, he instruct the Federal Reserve Bank of New

York to reduce the intended federal funds rate by a further 25 basis points to around 5

percent. On the same day, the Board of Governors approved a reduction in the discount rate

from 5 percent to 4-3/4 percent. These actions were taken in the light of growing indications

of caution by lenders and unsettled conditions in financial markets more generally that were

deemed likely to restrain aggregate demand in the future. Subsequently, trading in the federal

funds market remained relatively volatile but the federal funds rate averaged close to its

lower intended level. In financial markets more generally, strains gradually moderated after

mid-October and sizable issuance of securities resumed in a number of key markets, but

uncertainty remained high and relatively illiquid conditions persisted. In the stock market,

share prices dropped in the weeks following the September meeting, but the market rallied

strongly after mid-October and key market indexes posted sizable gains on balance over the

intermeeting period.

In foreign exchange markets, the trade-weighted value of the dollar fell moderately over the

period in relation to other major currencies. The largest decline occurred in relation to the

Japanese yen and appeared to reflect efforts to reduce speculative exposure to that currency;

changes in the value of the dollar against other major currencies were mixed, likely fostered

by disparate interest rate and economic developments. The dollar also fell somewhat in terms

of a broad index of currencies of other countries that are important trading partners of the

United States, including the developing nations of Latin America and Asia.

M2 and M3 posted very large increases in September and October. The gains appeared to be

induced to an important extent by increased demand for safe and liquid assets in a period of

substantial turmoil in financial markets that led to shifts of funds by households out of

investments in equities and lower-rated corporate debt. The advance in M2 during October

probably also was boosted by the decline in its opportunity cost resulting from the effects of

the System's easing actions on market interest rates and the unusual softness in Treasury bill

rates during much of the month. The even faster increase in M3 in October also reflected

both inflows to institution- only money market mutual funds that were stimulated by declines

in short-term market rates and bank efforts to fund heavy demand for loans arising in part

from the deflection of demand for funding from securities markets. For the year through

October, both aggregates rose at rates well above the Committee's ranges for the year.

Expansion of total domestic nonfinancial debt moderated slightly in recent months after

picking up earlier in the year.

The staff forecast prepared for this meeting continued to point to considerable slowing in the

expansion of economic activity to a pace appreciably below the estimated growth of the

economy's potential, but the expansion was expected to pick up later to a rate more in line

with that potential. Subdued 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, albeit diminishing, restraint on the demand for U.S. exports for some period

ahead and to lead to further substitution of imports for domestic products. Domestic

production also would be held back for a time 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 a bit by the tighter terms and conditions that were

now imposed by many types of lenders and by the anticipated waning of positive wealth

effects stemming from earlier increases in equity prices. Pressures on labor resources were

likely to ease somewhat as the expansion of economic activity moderated, but inflation was

projected to rise considerably over the year ahead in association with a partial reversal of the

decline in energy prices this year.

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

observed that indications of some moderation in the pace of the economic expansion were

still quite limited, but they generally agreed that the economy appeared to be headed toward

slower growth. Relatively tight profit margins and less ebullient growth in wealth were

among the factors expected to be damping investment and consumption. In addition, even

apart from the possibility of further financial contagion in Latin America, the weakness in

foreign economies continued to be seen as a persistent source of restraint on demand in a

number of domestic sectors, notably manufacturing, agriculture, and some extractive

businesses. Although the financial markets had improved substantially in recent weeks,

overall credit conditions were still relatively unsettled and a possible reintensification of

difficulties in credit markets constituted an important downside risk to the expansion. The

members recognized that not all the risks were in one direction, however. The economy had

demonstrated remarkable resilience and strength over recent years, and in the view of some

members the rapid growth of liquidity and bank credit suggested that financial conditions

were not excessively tight. With regard to the outlook for inflation, members noted that while

statistical and anecdotal information pointed to persistently tight labor markets in much of

the nation, price inflation remained subdued. Indeed, even though the recent evidence

relating to prices was somewhat mixed, several broad measures of prices suggested that

inflation might be on a declining trend.

In the course of the Committee's discussion, the members gave considerable attention to

recent financial developments and their implications for the economic outlook. Financial

markets clearly had calmed markedly since the System's easing actions in mid-October,

though they were still atypically volatile. Risk spreads had narrowed substantially and other

measures of financial market performance also suggested that risk aversion and the related

desire for liquidity had diminished appreciably. Markets for new issues had reopened for

many borrowers, and stock market prices had posted large gains. Nonetheless, strains and

weaknesses in financial markets had not disappeared--many risk spreads were still at

unusually high levels-- and the markets remained quite sensitive to unanticipated

developments. Members also noted that the improvement in debt markets appeared to have

come to a halt most recently and indeed that renewed strains had emerged in some short-term

debt markets, though the latter probably were related in large measure to concerns about

year-end pressures in the money markets. Indeed, efforts by lenders and borrowers to

position for year-end financial statements were likely to contribute considerably to keeping

market conditions unsettled over coming weeks. Lending activity at banks had increased

sharply in recent months as many borrowers found other sources of funds less receptive or

unavailable and turned to backup lines for credit, but banks also had tightened their credit

terms and standards for most new loans and lines of credit. As a result, financing generally

had become less available and more expensive for higher-risk business borrowers. In light of

these developments, members believed that the continuing fragility of financial markets and

the increased scrutiny of the credit quality of borrowers, though the latter was in some

respects a welcome development, posed a considerable downside risk to the expansion. The

very recent behavior of equity prices was difficult to explain satisfactorily, and potential

movements in those prices posed risks on both sides of the most likely forecast: A future

substantial increase would bolster wealth and spending, but a sharp decline also could not be

ruled out--especially if, as seemed quite possible, added increases in prices were not

supported by robust increases in profits.

Foreign economic and financial developments were another important source of downside

risk and uncertainty. The economic and financial turmoil in Asia had spread to numerous

other nations around the world and to an extent to the United States. While economic

weakness in many U.S. trading partners likely would continue to have adverse effects on net

U.S. exports, the potential extent of such weakness was subject to considerable uncertainty as

were the associated repercussions on financial markets. As they had at previous meetings,

members referred to numerous anecdotal reports of heightened competition from foreign

producers that was curbing the sales of many domestic manufacturers, notably in the steel

industry, and in some other industries and agriculture. Moreover, the low level of world oil

prices, which appeared to be importantly associated with diminished demand from Asian

countries, was retarding production and reducing revenues in the U.S. energy and related

industries. On the positive side, members commented that economic and financial conditions

appeared to have stabilized or improved a bit in a number of Asian nations, though the

recession in Japan showed little evidence of coming to an end, and the outlook for Brazil

seemed a little more promising. However, economic and financial conditions in Brazil and a

number of other countries remained very fragile. The recent depreciation of the dollar, while

perhaps putting some upward pressure on prices, would damp the deterioration in net U.S.

exports.

In their review of recent and prospective developments across the nation and in key sectors

of the economy, members referred to scattered indications of some slowing in private

domestic final demands. In the important consumer sector, however, evidence of weakening

growth in expenditures was quite limited. The most recent anecdotal reports pointed to solid

growth in most though not all regions of the country, and retail sales posted a strong advance

in October. Moreover, consumer sentiment remained at a high level, albeit below its peak

earlier in the year according to a recent survey. Members commented, however, that the more

moderate growth in employment and incomes experienced recently likely would persist and

should result in reduced gains in consumer expenditures next year, but they also noted that

the extent of the deceleration was subject to considerable uncertainty. Some members

referred to reports from contacts in the retailing industry who expressed some concern about

the potential for weaker retail sales after the holiday season. A significant factor bearing on

consumer spending would be the performance of the stock market. The impetus from the

wealth effects of rapidly rising share prices would wane if such prices were to stabilize near

current levels.

With regard to business fixed investment, anecdotal evidence was accumulating that many

business firms, notably in manufacturing, were scaling back their planned capital outlays for

the year ahead. Factors contributing to the prospective deceleration in business capital

expenditures included a weaker trend in profits over the past several quarters, a related

deterioration in business cash flows, and a large buildup in capacity over the course of recent

years. Members also referred to indications of curtailed availability and more costly

financing for some businesses, notably for relatively speculative construction projects. A

number of members observed that the latter was a healthy development in that it would tend

to hold down overbuilding in some areas. Overall, capital expenditures would undoubtedly

recover from their slight decline during the summer months, but the outlook was for growth

next year at a pace well below that experienced for an extended period before mid-1998.

Housing construction was expected to remain at a high level, buttressed by attractive terms

on new home mortgages, but housing activity appeared to have peaked or declined slightly in

some regions.

The rapid buildup in inventories during the third quarter was not likely to continue, but the

timing and extent of the expected moderation were largely unpredictable. It was noted in this

regard that while inventories appeared to have risen to uncomfortable levels in some

industries, there was no evidence of a general inventory overhang. Looking ahead, the

projected slowing in the growth of final sales, including the effects of weak export markets,

likely would reinforce business efforts to bring the growth of their inventories into better

alignment with that of their sales, and such a development should contribute to the projected

slowing in overall economic activity in coming quarters. It was unclear at this point to what

extent year 2000 concerns might stimulate extra inventory investment prior to the end of

1999.

In their review of developments bearing on the outlook for inflation, members commented

that labor markets remained exceptionally tight, though there was little evidence that they

had tightened further in recent weeks. Employers were continuing to resist pressures to grant

unusually large wage increases, and the persistence of vigorous competition, including that

from Asian imports, was preventing most business firms from passing cost increases through

to prices. Indeed, the declining trend in profits in recent quarters suggested that many firms

were absorbing some of their rising labor costs to the extent that the latter were not offset by

improvements in productivity. Looking ahead, slower growth in economic activity would

tend to hold down pressures on wages and prices during 1999 and imports from Asian and

other depressed economies would continue to generate intense competition in many markets;

but labor markets remained tight, energy and commodity prices could well turn up after

substantial declines, and the recent depreciation of the dollar would lessen pressures from

foreign competition. A number of members expected that, on balance, inflation might be less

favorable next year, though any deterioration in underlying trends should be relatively

limited; others anticipated little change in and possibly some further ebbing of price inflation,

extending the subdued behavior of a number of comprehensive measures of prices.

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

members indicated that they could accept a proposal to reduce the federal funds rate by a

further 25 basis points to an average of 4-3/4 percent. This policy decision was viewed as a

close call by several members. While the growth of the economy was expected to slow

appreciably over the year ahead, the expansion currently displayed only modest signs of

moderating from what seemed to be an unsustainable pace. Moreover, many members saw

some risk that an easing move at this point might trigger a strong further advance in stock

market prices that would not be justified on the basis of likely future earnings and could

therefore lead to a relatively sharp and disruptive market adjustment later. The members were

more concerned, however, about the risks stemming from the still sensitive state of financial

markets, and in that regard many believed that a prompt policy easing would help to ensure

against a resurgence of severe financial strains. A further easing move would complete the

policy adjustment to the changed economic and financial climate that had emerged since

midsummer and would provide some insurance against any unexpectedly severe weakening

of the expansion. Most members saw little risk that a modest easing would ignite inflationary

pressures in the economy, given the subdued behavior of inflation and their outlook for

economic activity. Moreover, the easing could readily be reversed if unexpected

circumstances should call for such an action. In this view, the risks of inaction were greater in

terms of the potential financial consequences and also could materialize much sooner than

the risks of stimulating greater inflation through the slight easing that was contemplated.

Some members indicated that in light of continued robust economic growth, tight labor

markets, and improving financial conditions they had a preference for awaiting further

developments that might provide a stronger basis for an easing action. Some of these

members expressed concern that easier reserve conditions would accommodate a step-up in

monetary growth that was already quite rapid, with potentially inflationary consequences

later. Nonetheless, all but one of these members could endorse the decision to ease, given the

evident downside risks in the international situation, financial market uncertainty, the

likelihood that inflation would still be quite low, and the possibility of reversing the action

reasonably promptly should circumstances warrant.

Given its decision to ease policy, the Committee favored a change to symmetry from the

asymmetry toward ease in its recent directives. A symmetrical directive was now felt to be

appropriate in light of the Committee's expectation that further easing was not likely to be

needed over the months ahead unless ongoing developments pointed to a more substantial

decline in the growth of economic activity or further ebbing of inflation than was currently

anticipated. The members recognized that the possible emergence of severe year-end

pressures in the money market might require some temporary easing in reserve conditions,

but such a development did not seem to have a high probability and could in any event be

readily and properly accommodated regardless of the bias in the directive.

At the conclusion of the Committee's discussion, all except one member 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 4-3/4 percent. These members also

accepted a proposal to remove the bias toward easing that had been adopted at the previous

meeting. 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 or a slightly lower federal funds rate would be acceptable during the the

intermeeting period. A staff analysis prepared for this meeting suggested that the reserve

conditions contemplated by the Committee were likely to be consistent with some

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

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 some moderation in the

expansion of economic activity from a brisk pace during the summer months.

Growth in nonfarm payroll employment slowed appreciably in September and

October; the civilian unemployment rate remained near 4-1/2 percent. Industrial

production has declined slightly in recent months. Business inventory

accumulation was sizable in the third quarter, and stock- sales ratios rose to

uncomfortable levels in some sectors strongly affected by the nation's trade

deficit. The nominal deficit on U.S. trade in goods and services widened

somewhat in July-August from its second-quarter average. Total retail sales rose

sharply in October after increasing only moderately in August and September.

Residential sales and building starts have remained quite strong, but below

recent peaks. Available indicators point to a pickup in business capital spending

after a lull in the third quarter, owing in part to a recovery from the summer

strike in the motor vehicle industry. Trends in various measures of wages and

prices have been mixed in recent months.

Most market interest rates have risen on balance since the meeting on September

29, though yields on the bonds of lower-rated firms have declined. The Board of

Governors approved a reduction in the discount rate from 5 to 4-3/4 percent on

October 15. Share prices in U.S. and global equity markets have remained

volatile but have posted sizable gains on balance over the intermeeting period. In

foreign exchange markets, the trade-weighted value of the dollar declined

moderately over the period in relation to other major currencies; it also fell

somewhat in terms of an index of the currencies of other countries that are

important trading partners of the United States.

M2 and M3 have posted very large gains in recent months, reflecting the effects

of recent System easing actions on market interest rates and shifts of funds by

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

year through October, both aggregates rose at rates well above the Committee's

ranges for the year. Expansion of total domestic nonfinancial debt has moderated

slightly 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 4-3/4 percent. In the context of the Committee's long-run

objectives for price stability and sustainable economic growth, and giving

careful consider- ation to economic, financial, and monetary developments, a

slightly higher federal funds rate or a slightly lower federal funds rate would be

acceptable in the inter- meeting 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, Kelley, Meyer, Ms. Minehan, Mr. Poole, and Ms. Rivlin.

Votes against this action: Mr. Jordan.

Mr. Jordan dissented because he believed that the two recent reductions in the Federal funds

rate were sufficient responses to the stresses in financial markets that had emerged suddenly

in late August. An additional rate reduction risked fueling an unsustainably strong growth

rate of domestic demand. He expressed concern that the excessively rapid rates of growth of

the monetary and credit aggregates were inconsistent with continued low inflation. Moreover,

any further monetary expansion in response to economic weakness abroad could ultimately

have a disrupting influence on domestic prosperity if policy were forced to reverse course at

a later date to defend the purchasing power of the dollar.

Renewal of Reciprocal Currency Arrangements with the Banks of Canada and Mexico

The Committee voted unanimously to re-authorize Federal Reserve participation in the North

American Framework Agreement, established in 1994, and the associated bilateral reciprocal

currency ("swap") arrangements with the Bank of Canada and the Bank of Mexico. These

arrangements, which predated the North American Framework Agreement, were linked into

a trilateral facility in connection with the establishment of the North American Financial

Group in 1994 to facilitate consultation and cooperation among the three countries in the area

of macroeconomic policy as an outgrowth of the increasing integration of those economies

expected to result from the North American Free Trade Agreement.

Owing to the formation of the European Central Bank and in light of 15 years of disuse, the

bilateral swap arrangements of the Federal Reserve with the Austrian National Bank, the

National Bank of Belgium, the Bank of France, the German Federal Bank, the Bank of Italy

and the Netherlands Bank were jointly deemed no longer to be necessary in view of the well

established present-day arrangements for international monetary cooperation. Accordingly, it

was agreed by all the bilateral parties to allow them to lapse. Similarly, it was jointly agreed

to allow the bilateral swap arrangements between the Federal Reserve and the National Bank

of Denmark, the Bank of England, the Bank of Japan, the Bank of Norway, the Bank of

Sweden, the Swiss National Bank, and the Bank for International Settlements to lapse in light

of their disuse and present day arrangements for international monetary cooperation.

Authorization for Domestic Open Market Operations

On the recommendation of the Manager, the Committee voted unanimously to amend the

authorization for domestic open market operations to extend the maximum maturity of

System repurchase agreements from 15 calendar days to 60 calendar days. The purpose of

the expanded authority was to enhance the flexibility of the Manager in meeting reserve

supplying objectives during periods of pronounced seasonal needs, notably those associated

with the year-end. Subject to the Committee's approval, the Manager would initiate the

System's use of extended-term repurchase agreements ahead of the coming year-end, and he

anticipated that such use could prove to be especially advantageous in late 1999 to the extent

that year 2000 concerns generated accentuated seasonal demand for currency. In addition, the

availability of the extended funding could help to allay concerns in the federal funds market

about the cost of financing during periods of peak seasonal pressures, with favorable effects

on the market's functioning.

Accordingly, effective November 17, 1998, paragraphs 1(b) and 3 of the authorization for

domestic open market operations were amended to read as follows:

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 60 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.

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 60 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.

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

22, 1998.

The meeting adjourned at 1:25 p.m.

Normand Bernard

Deputy Secretary

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