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, March 30,

1999, at 9:00 a.m.

Present:

Mr. Greenspan, Chairman

Mr. McDonough, Vice Chairman

Mr. Boehne

Mr. Ferguson

Mr. Gramlich

Mr. Kelley

Mr. McTeer

Mr. Meyer

Mr. Moskow

Ms. Rivlin

Mr. Stern

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

Market Committee

Mr. Hoenig, Ms. Minehan, and Mr. Poole, Presidents of the Federal Reserve Banks of

Kansas City, Boston, and St. Louis respectively

Mr. Kohn, Secretary and Economist

Mr. Bernard, Deputy Secretary

Ms. Fox, Assistant Secretary

Mr. Gillum, Assistant Secretary

Mr. Mattingly, General Counsel

Mr. Prell, Economist Ms. Johnson, Economist

Messrs. Cecchetti, Hooper, Hunter, Lang, Lindsey, Slifman, Stockton, and

Rosenblum, Associate Economists

Mr. Fisher, Manager, System Open Market Account

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

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

and Research and Statistics respectively, Board of Governors

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

Governors

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

Governors

Ms. Pianalto, First Vice President, Federal Reserve Bank of Cleveland

Ms. Browne, Messrs. Eisenbeis, Goodfriend, Hakkio, Kos, Rasche, and Sniderman,

Senior Vice Presidents, Federal Reserve Banks of Boston, Atlanta, Richmond,

Kansas City, New York, St. Louis, and Cleveland respectively

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

and Minneapolis respectively

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

on February 2-3, 1999, were approved.

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

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

the System's account in the period since the previous meeting, and thus no vote was required

of the Committee.

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

open market transactions in government securities and federal agency obligations during the

period February 3, 1999, through March 29, 1999. 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. The domestic policy directive that was approved

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

The information reviewed at this meeting suggested that the economic expansion remained

robust early in the year. Consumer spending was particularly strong, and housing starts

climbed higher. While growth of business capital spending moderated somewhat after a

fourth-quarter surge, it was still quite rapid. Heavy competition from imports damped the rise

of industrial production; however, employment expansion remained brisk and labor markets

tight. Price inflation was still low.

Nonfarm payroll employment posted sizable further gains in January and February. Hiring in

construction and retail trade was notably strong, and employment in the service industries

continued to trend higher. By contrast, manufacturing suffered further job losses. The civilian

unemployment rate, at 4.4 percent in February, stayed in the narrow 4-1/4 to 4-1/2 percent

range that had prevailed since spring 1998.

Total industrial production was unchanged in January and rose slightly in February. Gas and

oil extraction slumped in January, and mild weather restrained utility output in February.

Manufacturing production increased modestly in both months, reflecting strong increases in

the output of high-tech industries that more than offset declines in the production of aircraft

and of motor vehicles and parts. The factory operating rate fell further in the JanuaryFebruary period, as the growth in manufacturing capacity continued to outpace the rise in

production.

Consumer spending surged in the early months of 1999, supported by rapidly rising

disposable personal income, soaring household net worth, and buoyant consumer sentiment.

Attractive pricing and the favorable trends in income and wealth contributed to strong

underlying demand for motor vehicles, and substantial gains were recorded in most other

categories of retail sales as well. Expenditures on services in January (latest available data)

also exhibited strength, most notably in spending for energy services, which picked up after

an unseasonably warm December.

Housing demand remained elevated. Single-family home sales were still at a very strong

level in January (latest data), despite a drop from their recent record high. Housing starts

increased appreciably in the January-February period as builders took advantage of good

weather to try to catch up with backlogged demand.

Business fixed investment appeared to have decelerated noticeably from the very fast pace of

the fourth quarter. Data on shipments of nondefense capital goods in January and February

suggested that business outlays for computers and motor vehicles were growing less rapidly,

and purchases of most other types of durable equipment seemed to be slowing somewhat.

Nonresidential construction activity was down on balance in January, though the construction

of office buildings trended still higher and the building of lodging facilities picked up.

Total business inventories changed little in January and stocks generally were at comfortable

levels, though conditions varied across industries. Manufacturing stocks fell in January,

largely reflecting further reductions in inventories of aircraft and parts, and the aggregate

stock-sales ratio for the sector was at the bottom of its range over the past twelve months. In

the wholesale sector, a reduction in inventories in January was concentrated in motor

vehicles. The decline in stocks was closely paralleled by a drop in sales, and the aggregate

inventory-sales ratio for the sector stayed around the top of its range over the past twelve

months. Retail inventories increased considerably in January, but with sales growing rapidly,

the aggregate inventory-sales ratio remained at the bottom of its range over the past year.

The U.S. trade deficit in goods and services widened substantially in January from its fourthquarter average. The value of exports fell for a third straight month and reached its lowest

level since last August; half of the drop was in agricultural products. The value of imports

retraced in January most of its December decline, with sizable increases recorded for

imported consumer goods, computers, and motor vehicles from Canada. The economies of

many of the major foreign industrial countries faltered in the fourth quarter. Japan recorded a

fifth straight quarterly decline in economic activity, and growth in real output weakened in

the euro area and remained sluggish in the United Kingdom. By contrast, economic activity

rebounded in Canada. Elsewhere, while economic activity continued to decline in Latin

America and Russia, there were indications that some Asian economies might be bottoming

out and that recovery might be under way in Korea.

Inflation remained subdued in early 1999. Both the total and core measures of consumer

prices increased only slightly in January and February, and core inflation for the twelve

months ended in February was somewhat lower than for the year-earlier period. At the

producer level, prices of finished goods other than food and energy changed little over

January and February. For the twelve months ended in February, core producer price inflation

was somewhat higher than for the year-earlier period, but the pickup partly reflected the large

increase in tobacco prices that resulted from the settlement of the lawsuit brought by state

attorneys general. Average hourly earnings of private production or nonsupervisory workers

increased moderately on balance over the January-February period. The rise in average

hourly earnings for the year ended in February was noticeably smaller than that for the

year-earlier period.

At its meeting on February 2-3, 1999, the Committee adopted a directive that called for

maintaining conditions in reserve markets consistent with an unchanged federal funds rate of

about 4-3/4 percent and that did not contain any bias relating to the direction of possible

adjustments to policy during the intermeeting period. The Committee judged this policy

stance to be consistent with its objectives of fostering high employment and sustained low

inflation and, over the near term at least, viewed the risks to this outlook as reasonably well

balanced.

Open market operations throughout the intermeeting period were directed toward

maintaining the federal funds rate at around 4-3/4 percent. Market interest rates changed little

immediately after the February meeting because market participants had expected the

Committee's decision. Subsequently, however, Treasury yields moved up significantly in

response to incoming data suggesting further robust growth in aggregate spending, and then

retraced much of the rise after the receipt of favorable news on inflation. Short-term interest

rates changed little on balance over the intermeeting interval, and longer-term rates rose

somewhat. Key indexes of stock market prices recorded mixed changes.

The trade-weighted value of the dollar in foreign exchange markets increased somewhat over

the intermeeting period in relation to the currencies of a broad group of important U.S.

trading partners. Much of the dollar's upward movement came against a subset of major

currencies. A large rise in terms of the yen occurred in response to an easing of monetary

policy by the Bank of Japan that reduced the overnight call rate to an extremely low level and

fostered a considerable decline in Japanese bond yields. The dollar also rose substantially

against the euro, which was weighed down by signs of continued weakness in Germany and,

late in the period, by the outbreak of hostilities in the Balkans. Among the emerging

countries, the Brazilian real depreciated on balance against the dollar, although it firmed late

in the period as overall financial conditions in that country stabilized somewhat, and the

Mexican peso appreciated against the dollar in association with a rebound in oil prices.

Expansion of M2 and M3 moderated considerably on balance in the early months of 1999

from the rapid increases of the fourth quarter. The deceleration of these aggregates apparently

reflected the waning effects of the policy easings of last autumn in narrowing the opportunity

cost of holding M2 assets, a slowdown in mortgage refinancing activity, and a bounceback in

household purchases of stock mutual funds as conditions in financial markets brightened.

Both aggregates were estimated to have increased over the first quarter at rates somewhat

above the Committee's annual ranges. Total domestic nonfinancial debt continued to expand

at a pace somewhat above the middle of its range.

The staff forecast prepared for this meeting suggested that the expansion would gradually

moderate to a rate commensurate with the growth of the economy's estimated potential.

Growth of private final demand would be damped by the anticipated waning of positive

wealth effects stemming from earlier large increases in equity prices and by slower growth of

spending on consumer durables, housing units, and business equipment after the earlier

buildup in the stocks of these items. The lagged effects of the earlier rise in the foreign

exchange value of the dollar were expected to place continuing, though diminishing, restraint

on the demand for U.S. exports for some period ahead and to lead to further substitution of

imports for domestic products. Pressures on labor resources were likely to remain substantial.

Price inflation was projected to rise somewhat over the projection horizon, largely as a result

of an expected upward trend in energy prices.

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

commented that for an extended period most forecasters had been projecting slower

economic growth and higher inflation than actually had materialized. With regard to output,

current indicators provided little evidence of any moderation in the pace of the expansion

from the robust growth experienced on average over the last few years. Even so, most

members viewed a slowing to a rate closer to most estimates of the growth of the economy's

potential as a reasonable expectation. They agreed, however, that the timing and extent of

such moderation were subject to a wide range of uncertainty. Factors expected to foster

slower growth in key demand sectors of the economy included the buildup of large stocks of

business equipment, housing units, and durable goods by households and an assumption that

the stock market would play a more neutral role than in recent years. The effects of domestic

demand on domestic production would continue to be damped by further increases in the

trade deficit, though the offset from this source might well diminish if financial markets and

economies in key developing nations were to exhibit more signs of stabilization or

improvement. Given the persistence of robust growth in domestic demand and the continuing

forward momentum in U.S. economic activity, many of the members commented that the

risks to their forecasts were tilted toward the eventual emergence of somewhat greater

inflation pressures. Despite the persistence of very tight labor markets across the nation,

however, there currently were only scattered indications of more rapid increases in wages

and no evidence of rising price inflation. The reasons underlying this remarkable economic

performance were potentially transitory but also possibly of a longer-term nature. Lower oil

and other input prices had played a role. However, it also seemed likely that accelerating

productivity helped to account for the economy's ability to sustain not only higher rates of

growth of output but also relatively low levels of unemployment, at least for a time, without

generating higher inflation.

In their review of developments across the nation, the members reported sustained, and in

some areas rising, overall growth in regional economic activity. At the same time, some

sectors were continuing to experience varying degrees of softness, notably those most

affected by developments abroad such as manufacturing, agriculture, and energy. A number

of members referred, however, to signs of recent improvement in manufacturing that

appeared to be associated primarily with the strength of domestic demand but to some extent

also with increased demand from some developing countries.

With regard to developments in key expenditure sectors of the economy, the members

anticipated that growth in consumer spending would retain considerable upward momentum,

given their expectations of favorable fundamentals such as further expansion in employment

and incomes, the rise in financial wealth that had continued through the first quarter, and

ready access to consumer credit. Some also referred to the currently elevated level of

consumer confidence. As time went on, however, it seemed unlikely that growth in consumer

spending would be sustained at its recent exceptional pace. The accumulation of durable

goods by consumers in recent years should at some point inhibit further large increases in

spending for such goods. Moreover, the favorable effect of the extended run-up in stock

market wealth evidently had been a factor in bolstering consumer confidence and willingness

to spend. While the course of stock market prices could not reliably be predicted, the

market's stimulative effect on spending was likely to wane over time in the absence of further

appreciable advances in prices. Current indications of some softening in home sales and

reduced mortgage refinancing activity, should they persist, also augured less stimulus to

consumer spending in coming quarters.

The extraordinary expansion in business fixed investment in recent years, fueled to a major

extent by purchases of new equipment, was also expected to moderate over time as a result of

the large buildup and reduced utilization of capacity and the forecasted slower growth in final

sales. While the prospect of further declines in the prices of some equipment would

encourage continued growth in spending, the lower prices were not expected to outweigh the

effects of relatively low capacity usage and more moderate growth in overall demand in

coming quarters. In this regard, some signs of deceleration could be detected in the currently

available data, though from extremely rapid rates of growth. With respect to commercial

building, members reported strong construction activity in many areas, but some also noted

that such construction appeared to have reached a peak, as evidenced in part by signs of

overbuilding in a few areas. Moreover, current data suggested little or no growth in overall

expenditures on nonresidential structures.

Residential sales and construction were described as very strong in many parts of the country

and indeed were being held down in some areas by low inventories of housing available for

sale and a limited supply of qualified construction workers. Some members commented that

housing construction backlogs and unusually mild winter weather in many areas had

sustained a high level of housing construction in recent months. Looking ahead, however,

members observed that residential building activity appeared to have peaked in some areas

and an oversupply of apartments was reported in a few major cities. More generally, the rise

in mortgage rates since last fall and some softening of demand indicators pointed to less

strength in the housing sector. Even so, the outlook for jobs and income and the buildup of

financial wealth constituted favorable home affordability factors that appeared likely to

support a continuing high level of housing demand, especially in the single-family sector.

Relatively heavy spending on imports owing to strong domestic demand and low prices

likely would exert a continuing negative effect on net exports over the next several quarters.

Nevertheless, demand for U.S. exports could begin to pick up, given what now appeared to

be improved prospects for economic activity in several emerging market economies.

Financial market conditions had become more settled in a number of these economies, and

contagion from developments in Brazil now seemed to present a reduced threat to that

nation's trading partners. Even so, foreign-sector forecasts--for industrial as well as emerging

market economies--remained subject to considerable downside risk, including uncertainties

stemming from the recent flare-up of hostilities in the Balkans.

In the Committee's discussion of the outlook for inflation, members commented that they

saw no evidence of any acceleration in price inflation despite the continuing strength of the

economic expansion and the tightness of labor markets. Anecdotal reports from around the

nation continued to underscore the difficulty or inability of most business firms to raise

prices in highly competitive markets. There were a limited number of reports of relatively

sizable increases in wages paid to workers with skills in especially short supply, but on the

whole employers were successful in holding down increases in labor compensation and

offsetting them through improvements in productivity. Indeed, increases in unit labor costs,

at least in the nonfinancial corporate sector and perhaps more widely as well, had declined to

a very low rate over the past year.

The members saw little reason to anticipate any significant, continuing increase in inflation

in the near term. Inflation was expected to rise, owing to the recent hikes in oil prices, but the

increase should be limited. And with little evidence of rising pressures on prices at early

stages of production or on nominal wages, inflation should remain contained for a time.

However, some members were concerned about the risk that sustained rapid growth in

aggregate demand would stretch markets even more. Even presuming that growth in

economic activity would moderate to a pace close to the economy's potential, labor markets

would remain relatively taut and at some point could trigger faster increases in labor

compensation and, in turn, rising price inflation. Moreover, the dissipation or reversal of

favorable supply factors--including, for example, in addition to energy prices the waning

effects of the dollar's earlier appreciation--could contribute to higher inflation expectations

and faster nominal compensation increases. In the view of some others, though, the impact

on prices of the unwinding of the favorable factors might well be muted or offset by a

possible further uptick in productivity growth. Accelerating productivity had been spurring

investment in capacity and intense competition among businesses, and had been holding

down labor costs. Furthermore, optimism about improving productivity was evident in

projections of business profits and the high level of equity prices. In any event, it was clear

that forecasts in recent years typically had overstated the rise in inflation, and a great deal of

uncertainty surrounded the extent to which productivity gains and other factors, some

unspecified, might continue to hold down inflation in a period of robust economic growth

and relatively tight labor markets.

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

indicated that they favored an unchanged policy stance. Several commented that they saw no

significant changes in the tenor of recent statistical and anecdotal reports that would

constitute the basis for an adjustment to policy or a greater presumption that policy might

need to be changed soon. Many referred in particular to the absence of any warning signs of

accelerating inflation over the near term as a major consideration in support of a steady

policy at this time. In the view of some, however, the next policy action was more likely to

be a firming than an easing. They saw a greater likelihood that tight--and perhaps

tightening--labor markets would add to price pressures than that demand would falter or that

inflation would decrease further. Yet they recognized that such forecasts were subject to a

substantial degree of uncertainty. This argued for a cautious approach to any policy change,

especially in light of an economic performance that had not conformed to historical patterns

in recent years. While a number of members noted that a case might be made for unwinding

part of the Committee's easing actions during the fall of last year, given the recovery in

financial markets and the improvement in the economic outlook since then, they argued that

the incoming data and prospects for sustained favorable economic performance did not

support such an action. The members concluded that the Committee was in a position to wait

for developments to unfold, especially given the absence of any evidence of an impending

acceleration of underlying inflation. If the risks of higher inflation intensified, it would still

have time to take action to head off price pressures in order to foster sustained economic

growth and a high level of employment. Many of the members emphasized, however, that in

such circumstances the Committee might need to act promptly to forestall a buildup of

inflationary forces that could destabilize the expansion.

All the members endorsed a proposal to retain the existing symmetry of the directive with

respect to possible adjustments to policy during the intermeeting period. While many

believed that the next policy move likely would be in the direction of some tightening, such

an outcome was not a foregone conclusion, and in any event the timing of the next policy

action was highly uncertain. It also was noted that a biased directive would not be consistent

with the members' view that a policy adjustment was unlikely in the period just ahead.

Moreover, while the Committee's disclosure procedures do not always require the immediate

announcement of a shift in symmetry, the members agreed that were they to announce a shift

to a tightening bias, it would likely have in current circumstances a relatively pronounced

and undesired effect on financial markets. In particular, the markets might well build in

higher odds of a policy tightening move at the May or June meetings than currently was

consistent with the members' thinking. It also seemed desirable to defer any change in the

directive and await further developments relating to the hostilities in the Balkans.

At the conclusion of this discussion, the Committee voted to authorize and direct the Federal

Reserve Bank of New York, until it was instructed otherwise, to execute transactions in the

System Account in accordance with the following domestic policy directive:

The information reviewed at this meeting suggests that the expansion in

economic activity is still robust. Nonfarm payroll employment posted sizable

further gains in January and February, and the civilian unemployment rate

remained below 4-1/2 percent. Total industrial production edged higher over the

first two months of the year. Total retail sales rose sharply further over the two

months, and housing starts increased appreciably from an already elevated level.

Available indicators suggest that business capital spending decelerated in early

1999 but growth was still relatively rapid. The nominal deficit on U.S. trade in

goods and services widened substantially in January from its fourth-quarter

average. Inflation has remained subdued despite very tight labor markets.

Short-term interest rates have changed little since the meeting on February 2-3,

1999, while longer-term rates have risen somewhat on balance. Key measures of

share prices in equity markets have registered mixed changes over the

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

the dollar has risen somewhat over the period in relation to the currencies of a

broad group of important U.S. trading partners, and the appreciation has been a

bit larger against a subset of major currencies.

M2 and M3 continued to record large increases in January and February, but

available data pointed to substantial moderation in March. Both aggregates are

estimated to have increased over the first quarter at rates somewhat above the

Committee's annual ranges. Total domestic nonfinancial debt has continued to

expand at a pace somewhat above the middle of its range.

The Federal Open Market Committee seeks monetary and financial conditions

that will foster price stability and promote sustainable growth in output. In

furtherance of these objectives, the Committee at its meeting in February

established ranges for growth of M2 and M3 of 1 to 5 percent and 2 to 6 percent

respectively, measured from the fourth quarter of 1998 to the fourth quarter of

1999. The range for growth of total domestic nonfinancial debt was set at 3 to 7

percent for the year. The behavior of the monetary aggregates will continue to be

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

velocities, and developments in the economy and financial markets.

To promote the Committee's long-run objectives of price stability and

sustainable economic growth, the Committee in the immediate future seeks

conditions in reserve markets consistent with maintaining the federal funds rate

at an average of around 4-3/4 percent. In view of the evidence currently

available, the Committee believes that prospective developments are equally

likely to warrant an increase or a decrease in the federal funds rate operating

objective during the intermeeting period.

Votes for this action: Messrs. Greenspan, McDonough, Boehne, Ferguson,

Gramlich, Kelley, McTeer, Meyer, Moskow, Ms. Rivlin, and Mr. Stern.

Votes against this action: None

It was agreed that the next meeting of the Committee would be held on Tuesday, May 18,

1999.

The meeting adjourned at 12:35 p.m.

Donald L. Kohn

Secretary

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