fomc minutes · June 29, 1999

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, June 29,

1999, at 2:30 p.m. and continued on Wednesday, June 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

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. Alexander, Cecchetti, Hooper, Hunter, Lang, Lindsey, Rolnick, Rosenblum, 1

Slifman, and Stockton, 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

Messrs. Porter 2 and Reinhart, Deputy Associate Directors, Division of Monetary

Affairs, Board of Governors

Mr. Reifschneider, 2 Section Chief, Division of Research and Statistics, Board of

Governors

Mses. Edwards 3 and Mauskopf, 3 and Messrs. Lebow 3 and Orphanides, 2 Senior

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

Statistics, and Monetary Affairs respectively, Board of Governors

Ms. Garrett and Mr. Tetlow, 2 Economists, Divisions of Monetary Affairs and

Research and Statistics respectively, Board of Governors

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

Governors

Mr. Barron, First Vice President, Federal Reserve Bank of Atlanta

Messrs. Beebe, Eisenbeis, Goodfriend, Hakkio, Rasche, and Sniderman, Senior Vice

Presidents, Federal Reserve Banks of San Francisco, Atlanta, Richmond, Kansas

City, St. Louis, and Cleveland respectively

Mr. Fuhrer and Ms. Perelmuter, Vice Presidents, Federal Reserve Banks of Boston

and New York respectively

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

on May 18, 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 May 18, 1999 through June 29, 1999. The Committee ratified these transactions by

unanimous vote.

The Committee then turned to a discussion of the economic and financial outlook, the ranges

for the growth of money and debt in 1999 and 2000, and the implementation of monetary

policy over the intermeeting period ahead.

The information reviewed at this meeting suggested that economic activity continued to

expand vigorously, though at a somewhat slower pace than earlier in the year. Consumer

outlays and construction spending had decelerated somewhat after growing very rapidly in

the first quarter, but the deceleration had been partly offset by a step-up in business purchases

of durable equipment and a smaller decline in net exports. Labor markets remained very

tight, and recent wage and price increases had been a little larger on balance; nonetheless,

longer-term inflation trends continued generally favorable in an environment of robust

improvements in productivity.

Nonfarm payroll employment rose substantially further on balance in April and May, but the

increase was a little below the rate for the first quarter. Growth in employment remained

robust in the service-producing sector in the April-May period, but the number of jobs fell in

the goods-producing sector: payrolls in manufacturing and mining continued to contract, and

construction employment changed little on net after a sizable first-quarter increase. The

civilian unemployment rate edged down in May to 4.2 percent, matching its low for the year

and for the period since 1970.

Industrial production advanced somewhat further in May despite a sharp weather-related

drop in utility services and continued sluggishness in mining activity. Manufacturing output

registered another substantial advance, reflecting a surge in the production of motor vehicles

and parts and persisting strength in the manufacture of many other durable goods. The output

of nondurable goods posted another small increase in May, with the gains being fairly

broadly based. Reflecting the stepped-up pace of manufacturing, the rate of utilization of

capacity edged higher in May but continued to be below its long-run average level.

Growth of consumer spending appeared to have slowed somewhat from its extraordinary

pace of the first quarter; nonetheless, the underlying trend in consumption remained strongly

upward, with household income and wealth continuing to expand rapidly and consumer

sentiment remaining very high. Total retail sales rose substantially in May following large

increases on average earlier in the year. Gains in retail sales were relatively widespread, with

outsized advances in the food, general merchandise, and durable goods categories.

Housing demand remained robust in recent months despite the recent rise in mortgage rates.

However, builders were faced with shortages of workers and some materials and were

hard-pressed to keep pace with the demand for new homes. As a result, both single-family

and multifamily housing starts fell somewhat on balance over April and May.

Information on shipments of nondefense capital goods in April and May suggested that

business investment in durable equipment picked up substantially in the second quarter from

the already brisk pace of the first quarter. Shipments of high-tech equipment, notably

computers, were particularly robust over the April-May period. In addition, business demand

for motor vehicles continued to be strong, particularly for medium and heavy trucks for

which the backlog of unfilled orders was still quite large. By contrast, nonresidential

construction activity weakened in April (latest data) after a rise in the first quarter, and

available information on contracts for future construction pointed to sluggish building

activity for some period ahead.

Business inventory accumulation slowed a bit in April from the relatively subdued firstquarter pace, and total business stocks remained at fairly low levels in relation to sales. In

manufacturing, inventories continued to decline in April, and the aggregate inventoryshipment ratio for this sector stayed at the bottom of its range for the past twelve months.

Wholesale stocks rose in April at about their average pace for the early months of the year,

and the ratio of stocks to sales in this sector stayed in the lower end of its range for the past

year. Retail inventory accumulation slowed in April after a relatively large gain in the first

quarter, and the aggregate inventory-sales ratio also remained in the lower end of its range

for the past twelve months.

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

first-quarter average. The value of exports increased slightly from its first-quarter average,

primarily reflecting greater exports of computers and semiconductors, motor vehicles, and

industrial supplies. The value of imports rose somewhat more, principally owing to larger

imports of oil. The available information suggested that economic activity had picked up

somewhat on balance in the major foreign industrial countries. The Japanese economy was

reported to have expanded markedly in the first quarter, recording its first quarterly rise in the

past year and a half. In Europe, economic growth rebounded in Germany but slowed

somewhat in France and the United Kingdom. Signs of an improved economic performance

also were evident in Latin America and Southeast Asia.

The consumer price index was unchanged in May following a sizable increase in April that

was associated in part with a jump in energy prices. Excluding the effects of movements in

food and energy prices, though, consumer inflation was a little higher in the April-May

period than in the first quarter; for the twelve months ended in May, core consumer prices

rose slightly less than in the previous twelve-month period. Producer prices of finished goods

also were affected by the volatility of energy prices in April and May, but core producer

prices recorded only a small rise in each month. However, for the twelve months ended in

May, core producer inflation was up noticeably compared with the year-earlier period, owing

in important part to sharp increases in the prices of tobacco products. With regard to labor

costs, average hourly earnings grew a little faster in May than in April, but they rose less in

the twelve months ended in May than in the previous twelve-month period.

At its meeting on May 18, 1999, the Committee adopted a directive that called for

maintaining conditions in reserve markets that would be consistent with an unchanged

federal funds rate of about 4-3/4 percent, but the directive also contained a bias toward a

possible tightening of policy. The members' concerns about inflation had increased

appreciably since the meeting in late March, but the members nonetheless felt that the current

stance of policy could remain consistent with subdued inflation for some time, especially if

productivity gains continued robust and, as projected, the growth of aggregate demand

moderated somewhat in the months ahead.

Open market operations were directed throughout the intermeeting period toward

maintaining the federal funds rate at around 4-3/4 percent, and the average rate for the period

was very close to the Committee's target. Other interest rates rose somewhat over the period

since the May meeting in response to the combined effects of the Committee's announcement

of an asymmetric directive, economic data that generally were stronger than expected, and

reported comments of Federal Reserve officials. With the market effects of higher interest

rates roughly offset by brighter second-quarter earnings prospects, broad indexes of share

prices in equity markets changed little on balance over the intermeeting period.

In foreign exchange markets, the trade-weighted value of the dollar edged up over the

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

partners. The dollar appreciated against the euro, partly reflecting the contrast between

continuing robust growth in the United States and generally sub-par activity in euro-area

economies. The dollar also rose against the pound in association with slower growth in the

United Kingdom and a reduction in the Bank of England's repo rate. By contrast, the dollar

weakened against the yen as yields on Japanese government debt increased sharply relative

to rates on U.S. Treasury securities. Among other important trading partners, the dollar fell

against the currencies of many emerging Asian economies, whose financial markets had

generally improved, but appreciated in terms of the Brazilian real in association with periods

of particular stress in Brazil's financial markets.

After recording sizable increases in April that apparently were associated with tax-related

buildups in liquid accounts, the growth of M2 and M3 slowed sharply in May, as tax

payments cleared, and appeared to have remained moderate in June. The expansion of these

aggregates also seemed to have been damped in recent months by the rise in their opportunity

costs associated with earlier increases in interest rates. M2 was estimated to have increased

for the year through June at a rate somewhat above the Committee's annual range and M3 at

a rate near the upper end of its range. Although growth of total domestic nonfinancial debt

had moderated a little recently, it 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. 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. The increase of private final demand would be restrained by the anticipated

waning of positive wealth effects associated with earlier large increases in equity prices; by

slower growth of spending on consumer durables, houses, and business equipment in the

wake of the prolonged buildup in the stocks of these items; and by the rise that had already

occurred in market interest rates, especially for intermediate and longer maturities, in the

expectation that higher interest rates would be needed to achieve a better balance between

aggregate demand and aggregate supply. Price inflation was projected to rise somewhat over

the projection horizon, in large part as a result of some upturn in import prices and a slight

firming of gains in nominal labor compensation that would not be fully offset by rising

productivity.

In the Committee's discussion of the outlook for economic activity and inflation, members

commented that the incoming information continued to suggest a vigorous expansion but

also subdued inflation despite very tight labor markets. Growth in aggregate demand was

estimated to have slowed somewhat in the second quarter from outsized advances in the two

previous quarters, largely as a result of less ebullient though still robust growth in consumer

spending. The members questioned, however, whether the limited indications of some

moderation in the expansion in recent months were a harbinger of a more sustainable pace of

economic activity that would be consistent with the economy's estimated output potential and

low inflation. Indeed, in the absence of some policy firming most of the members saw

tightening labor markets and an updrift in measured inflation as a significant risk. They

acknowledged that the timing and extent of a potential rise in inflation were subject to

considerable uncertainty. In particular, as the experience of recent years had amply

demonstrated, strengthening advances in productivity had reduced increases in unit costs to

very low or even slightly negative levels despite growing scarcities of labor and some rise in

the growth of labor compensation and in profit margins. Rising productivity growth had not

been sufficient, however, to keep labor markets from tightening, given the extraordinary

strength in final U.S. demands, which if continued would show through into higher inflation.

Moreover, it remained unclear how long faster gains in productivity could continue to offset

increases in labor costs and avert an intensification of price inflation.

In keeping with the practice at meetings just before the Federal Reserve's semiannual

monetary policy report to the Congress and the Chairman's associated testimony, the

members of the Committee and the Federal Reserve Bank presidents not currently serving as

members had provided individual projections of the growth in nominal and real GDP, the rate

of unemployment, and the rate of inflation for the years 1999 and 2000. With regard to the

growth of nominal GDP, most of the forecasts were in ranges of 5 to 5-1/2 percent for 1999

as a whole and 4 to 5 percent for 2000. The forecasts of the rate of expansion in real GDP for

1999 had a central tendency of 3-1/2 to 3-3/4 percent and for 2000 they were centered on a

range of 2-1/2 to 3 percent, below the increases experienced over the last three years. The

civilian rate of unemployment associated with these forecasts had central tendencies of 4 to

4-1/4 percent in the fourth quarter of 1999 and 4-1/4 to 4-1/2 percent in the fourth quarter of

2000. Projections of the rate of inflation, as measured by the consumer price index, pointed

to an appreciable increase in 1999, largely reflecting a swing in the price of energy, and little

further change in 2000; specifically, the projections converged on CPI inflation rates of 2-1/4

to 2-1/2 percent in 1999 and 2 to 2-1/2 percent in 2000. The members anticipated that the

effects of the century date change on economic activity would, on balance, be limited or

negligible over the forecast period, possibly adding somewhat to growth later this year and

temporarily reducing growth early next year.

Key factors underlying the members' forecasts of appreciable moderation in the trend of real

GDP growth included a waning of the financial stimulus that had boosted domestic demand

in recent years and the buildup of stocks of consumer durables, housing, and business

equipment after an extended period of rapidly expanding purchases. The members

acknowledged that the signs of slower growth in household and business spending were still

quite limited. In the household sector, further substantial increases in income and financial

wealth and high levels of consumer confidence had fostered continued robust growth in

consumer spending in recent months, but apart from exceptional strength in purchases of

motor vehicles, growth in real spending for durable consumer goods appeared to have

moderated recently from a very rapid pace earlier in the year. How long the favorable factors

that continued to stimulate substantial growth in consumer expenditures would persist was

uncertain, notably with regard to the outlook for stock market prices and their effects on

consumer resources and willingness to spend. The stimulus to household spending from

rapidly rising stock market wealth obviously would diminish should prices in the stock

market tend to level out as many expected. In that event, growth in consumer spending might

be expected to moderate to a pace more in line with the expansion in disposable incomes.

Business investment spending, which featured exceptional growth in expenditures for

producers' durable equipment, appeared to have picked up in recent months from an already

rapid pace earlier in the year. Nonetheless, business firms were expected to trim the growth

in their outlays for equipment as forecasts of moderating expansion in aggregate demand

materialized. Such a cutback would be abetted to an extent by the somewhat higher levels of

market interest rates that business borrowers now faced. While growth in spending for

high-technology equipment and related products probably would remain rapid in light of the

accelerated pace of innovations and declining prices for such equipment, a significant

deceleration or slowdown in spending for other types of capital equipment seemed likely

under projected economic conditions, especially given currently reduced rates of capacity

utilization in many manufacturing industries. In the nonresidential construction sector,

business expenditures were expected to remain near current levels, reflecting ongoing

strength in many parts of the country but also some signs of overbuilding in other areas.

A number of recent indicators suggested that on a seasonally adjusted basis residential

building activity had slowed a bit in the second quarter from an elevated level earlier in the

year. However, homebuilding apparently was held back to some extent recently by scarcities

of labor and some building supplies, and sizable backlogs evidently had built up. Looking

ahead, the members expected residential construction expenditures to hold near current levels

in the second half of this year as backlogs were worked lower, but they anticipated some

softening subsequently. Factors bearing on this outlook included the large additions to the

stock of housing in recent years and to some extent the backup that had occurred in mortgage

rates. At some point the higher financing costs would begin to show through to housing

demand.

The available information indicated that U.S. exports of goods and services had declined on

balance thus far this year, while imports had posted very strong gains in line with continuing

strength in U.S. domestic spending. However, improving economies in a number of the

nation's important trading partners and the slower expansion forecast for the U.S. economy

were expected to have a favorable effect on exports and to moderate increases in imports

over the next several quarters. Indeed, recent data suggested that U.S. exports had advanced

slightly after posting sizable declines during the first quarter while imports had continued to

grow strongly. On net, the members anticipated that the nation's trade balance would

continue to worsen, although more slowly and with a less negative effect on the U.S.

economy over the forecast period.

Members commented that inflation as reflected in a wide range of statistical measures and

anecdotal reports remained remarkably subdued despite the persisting strength of the

expansion and very tight labor markets across the nation. It seemed likely that rising

productivity, which appeared to have accelerated markedly of late, accounted for much of the

surprising combination of rapid growth in economic activity and low inflation. In particular,

accelerating labor productivity clearly had curbed the rise in unit labor costs and damped

pressures on prices. Very recent data on underlying productivity trends were not yet

available, but the fact that profit forecasts had continued to be marked up suggested that it

might still be accelerating and holding down costs. Such increases in productivity along with

slack in foreign economies contributed to the very strong competition in most markets that

was continuing generally to suppress efforts to raise prices. Other factors constraining

inflation cited by the members included the ample availability of capacity in most industries

and the declines that had occurred in non-oil import prices. Despite these favorable

developments, most members had become increasingly worried about the risks of an

overheating economy and rising inflation over time.

The concerns about the outlook for inflation tended to focus on the risk that, in the absence of

an appreciable moderation in overall demands, very tight labor markets would at some point

foster significantly faster increases in labor compensation that could no longer be offset by

stronger productivity growth. Indeed, at recent rates of increase in output, labor utilization

was likely to continue to rise, adding to pressures on costs. The higher labor cost increases

would in turn generate more rapid price inflation. Members noted in this regard that the trend

in average hourly earnings appeared to have tilted up in recent months. While this relatively

recent development was not yet conclusive evidence of accelerating labor costs, especially

without further information about productivity, anecdotal reports of faster increases in labor

compensation also appeared to have multiplied. In addition, improving economic conditions

abroad, among other factors, had induced a firming in oil and other commodity prices, and

had supported the foreign exchange value of other currencies relative to the dollar. As a

consequence, the declines in commodity and other import prices that had helped to suppress

inflation and inflation expectations over the last two years were not likely to be repeated.

Members acknowledged that the prospects for rising inflation, including the potential timing

of an acceleration, if any, remained uncertain, given the questions surrounding both the

ongoing strength of aggregate demand and the outlook for productivity, but they viewed the

risks of added price pressures as having risen further.

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

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

of the monetary and debt ranges that it had established in February for 1999 and it set

tentative ranges for those aggregates for 2000. The current ranges approved in February for

the period from the fourth quarter of 1998 to the fourth quarter of 1999, which were

unchanged from those for the last several years, included growth of 1 to 5 percent for M2 and

2 to 6 percent for M3. An unchanged range of 3 to 7 percent also was set in February for

growth of total domestic nonfinancial debt in 1999.

All the members favored retaining the current ranges for this year and extending them on a

provisional basis to 2000. The members recognized that the growth of both M2 and M3,

while decelerating markedly from 1998, might still exceed the ranges for the current year and

be near the upper ends of the ranges in 2000, assuming economic and financial conditions

approximating their current expectations. However, as had been the case for many years, the

members remained concerned that forecasts of money growth were still subject to a wide

range of error in terms of the anticipated relationships between money growth and aggregate

economic performance. Accordingly, they agreed that those ranges should not reflect or be

centered on forecasts of money growth under projected economic and financial conditions,

but should be regarded as anchors or benchmarks for money growth that would be associated

with approximate price stability and sustained economic expansion, assuming behavior of

velocity in line with historical experience. A reaffirmation of those ranges for 1999 and their

extension to 2000 would therefore underscore the Committee's commitment to achieving and

maintaining price stability over time and thereby fostering maximum sustainable economic

growth. It was noted during this discussion that the apparent pickup in productivity, if it

persisted, suggested that somewhat higher ranges than those adopted in recent years might

more accurately reflect money growth under conditions of price stability and historically

typical velocity trends. However, the members agreed that the marked degree of uncertainty

in the outlook for productivity as well as velocity argued against any increases in the ranges

at this point.

The Committee members were unanimously in favor of retaining the current range of 3 to 7

percent for growth of total domestic nonfinancial debt in 1999 and extending that range on a

provisional basis to 2000. They took account of a staff projection indicating that growth of

the debt aggregate was likely to be around the middle of this range, perhaps somewhat above

in 1999 and somewhat below in 2000. Unlike the ranges for the monetary aggregates,

selection of the range for debt did not reflect a price stability and sustainable economic

growth rationale but was based on forecasts of actual growth in this measure.

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

of M2, M3, and total domestic nonfinancial debt that it had established in February for 1999

and to extend these ranges on a tentative basis to 2000. In keeping with its usual procedures

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

2000 early next year. Accordingly, the Committee voted to incorporate the following

statement regarding the 1999 and 2000 ranges in its domestic policy directive:

The Federal Open Market Committee seeks monetary and financial conditions

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

furtherance of these objectives, the Committee reaffirmed at this meeting the

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

and 2 to 6 percent respectively, measured from the fourth quarter of 1998 to the

fourth quarter of 1999. The range for growth of total domestic nonfinancial debt

was maintained at 3 to 7 percent for the year. For 2000, the Committee agreed on

a tentative basis to set the same ranges for growth of the monetary aggregates

and debt, measured from the fourth quarter of 1999 to the fourth quarter of 2000.

The behavior of the monetary aggregates will continue to be evaluated in the

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

developments in the economy and financial markets.

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

Gramlich, McTeer, Meyers, Moskow, Kelley, and Stern.

Votes against this action: None.

Absent and not voting: Ms. Rivlin

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

member supported a proposal for a slight tightening of conditions in reserve markets

consistent with an increase of ¼ percentage point in the federal funds rate to an average of

around 5 percent. In the view of most members, such a policy move represented a desirable

and cautious preemptive step in the direction of reducing what they saw as a significant risk

of rising inflation. While current indications of accelerating inflation were quite limited, the

economy had been expanding rapidly enough to put added pressure on labor markets over

time, and many members expressed growing concern that, given the current stance of

monetary policy, the persisting strength of domestic demand augmented by increasing

demand from abroad would show through at some point to even tighter labor markets and

higher inflation, which would impinge over time on the economy's ability to realize its full

growth potential. In these circumstances, a small preemptive move at this time would provide

a degree of insurance against worsening inflation later. Members commented that the action

in question would reverse a portion of the easing actions implemented during the fall of 1998

that had been undertaken in part to protect against the possibility that unsettled global

markets would place even greater constraints on foreign and domestic economic activity than

were then evident. As financial markets and foreign economies stabilized and recovered, that

added protection was no longer required and policy needed to move to a less accommodative

stance to promote sustainable growth in spending. One member did not agree that any

tightening of policy was necessary to contain inflation, given the persistence of low inflation,

accelerating productivity, and what in his view was an already sufficiently restrictive

monetary policy stance.

The members were divided over whether to retain the current asymmetrical directive tilted

toward restraint or to adopt a symmetrical directive in conjunction with the contemplated

tightening action. A majority endorsed a proposal to shift to a symmetrical directive. They

agreed that following today's limited policy move the risks would still remain tilted toward

rising inflation, and they expected that the announcement of a change in policy shortly after

the meeting would include a reference to the Committee's ongoing concerns in that regard.

But in light of the marked degree of uncertainty relating to the extent and timing of

prospective inflationary pressures, they believed that further firming of policy might not be

necessary in the near term and in any case would depend importantly on future

developments. Some of these members were concerned that retention of asymmetry might be

interpreted as an indication that the Committee was relatively certain that it would need to

take further tightening action fairly soon, a view that tended to be reinforced by the behavior

of expectations in the period after the announcement of a shift to asymmetry at the May

meeting.

Members who preferred to retain an asymmetrical directive agreed that, although there was

little likelihood of a further policy change during the intermeeting period, such a directive

was the best way to convey their concerns about the risks of rising inflation and the potential

need for policy tightening over time. A number of those in favor of asymmetry were

concerned that a symmetrical directive would not capture the Committee's thinking with

regard to the most likely policy course over an extended period of time and could foster the

misleading conclusion that the Committee no longer believed a further adjustment to policy

might be warranted at some point later this year. They saw the odds as reasonably high that

further tightening would be needed before the end of the year to gain adequate assurance that

inflation would be contained. Despite their differing preferences, all the members who

supported a policy tightening move also indicated that they could accept a symmetrical

directive because the announcement to be released after this meeting along with the

Chairman's Humphrey-Hawkins testimony during the latter part of July could serve to correct

possible misinterpretations.

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

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

System Account in accordance with the following domestic policy directive:

The information reviewed at this meeting suggests continued vigorous expansion

in economic activity. Nonfarm payroll employment has increased at a relatively

rapid pace in recent months and the civilian unemployment rate, at 4.2 percent in

May, matched its low for the year. Manufacturing output rose substantially

further in May. Total retail sales increased briskly last month after recording

large gains on average earlier in the year. Housing activity has remained robust

in recent months. Available indicators suggest that business capital spending,

especially for information technology, has accelerated this spring. The nominal

deficit on U.S. trade in goods and services widened somewhat in April from its

first-quarter average. Consumer price inflation was up somewhat on balance in

April and May, boosted by a sharp increase in energy prices; improving

productivity has held down increases in unit labor costs despite very tight labor

markets.

Interest rates have risen somewhat since the meeting on May 18, 1999. Key

measures of share prices in equity markets are unchanged to somewhat lower on

balance over the intermeeting period. In foreign exchange markets, the tradeweighted value of the dollar has changed little over the period in relation to the

currencies of a broad group of important U.S. trading partners.

After recording sizable increases in April, apparently owing to a tax- related

buildup in liquid accounts, growth of M2 and M3 slowed in May as tax

payments cleared and appears to have remained moderate in June. For the year

through June, M2 is estimated to have increased at a rate somewhat above the

Committee's annual range and M3 at a rate near the upper end of its range. Total

domestic nonfinancial debt has continued to expand at a pace somewhat above

the middle of its range.