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, October 5,

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

Ms. Fox, Assistant Secretary

Mr. Gillum, Assistant Secretary

Mr. Mattingly, General Counsel

Mr. Prell, Economist

Ms. Johnson, Economist

Ms. Cumming, Messrs. Howard, Lang, Lindsey, Rolnick, Rosenblum, Slifman, and

Stockton, Associate Economists

Mr. Fisher, Manager, System Open Market Account

Messrs. Ettin and Reinhart, Deputy Directors, Division of Research and Statistics and

International Finance respectively, Board of Governors

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

and Research and Statistics respectively, Board of Governors

Mr. Whitesell, Assistant Director, 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

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

Vice Presidents, Federal Reserve Banks of Boston, Atlanta, Richmond, New York, St.

Louis, and Cleveland respectively

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

and Chicago respectively

Mr. Filardo, Assistant Vice President, Federal Reserve Bank of Kansas City

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

on August 24, 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 August 24, 1999, through October 4, 1999. By unanimous vote, the Committee

ratified these transactions.

The information reviewed at this meeting suggested that the expansion of economic activity

was substantial in the quarter just ended. Consumer spending and business investment in

durable equipment remained strong, and inventory investment picked up from the sluggish

pace of the second quarter, while residential housing activity showed some signs of

deceleration. To meet aggregate demand, industrial production increased further and

employment gains continued to be relatively robust, keeping labor markets taut. Inflation was

moderate, but somewhat above that in 1998, owing to a sharp rebound in energy prices.

Although private nonfarm payroll employment expanded relatively slowly in August, the

slowdown had followed a surge in July, and growth for the two months was very close to the

brisk pace of the first half of the year. Job gains in the service-producing sector remained

strong in the July-August period, while employment in the goods-producing sector continued

to decline, though at a slightly slower rate than earlier in the year. The civilian

unemployment rate dropped back to 4.2 percent in August, matching its low for the year.

Industrial production was up appreciably further on balance in July and August. Mining

activity rose markedly, utility output increased moderately on balance, and manufacturing

production recorded a further sizable advance over the two months. Within manufacturing,

high-tech goods and motor vehicles were sources of particular strength, while the production

of nondurable goods changed little. The rate of utilization of manufacturing capacity climbed

over the two months but remained well below its long-term average.

Total retail sales posted strong gains over July and August. Increases in sales were spread

across all major categories, with spending for nondurable goods and motor vehicles notably

strong. Expenditures on services rose moderately in the two-month period. There were mixed

signals with regard to the housing sector. Construction was at a high level, the inventory of

unsold homes remained quite low, and starts of multifamily units rose over the July-August

period. However, single-family housing starts edged lower on balance over July and August,

and sales of existing homes weakened.

The available information suggested that business capital spending continued to climb

rapidly. Shipments of nondefense capital goods posted further large gains in July and August,

with outlays for high-tech machinery and transportation equipment particularly strong. In

addition, new orders for durable equipment turned up sharply in the two months.

Nonresidential construction activity changed little on balance in July as continued strength in

the office and an increase in the lodging and miscellaneous categories offset reductions in the

industrial and non-office commercial categories.

Manufacturing and trade inventories, outside of motor vehicles, picked up sharply in July

after posting a small increase in the first half of the year, but inventories remained lean in

relation to sales. In manufacturing, stocks rebounded from a substantial June decline;

however, the aggregate stocks-shipments ratio remained at the bottom of its range for the past

twelve months. Wholesalers also increased their inventories in July; while the inventoryshipments ratio for this sector rose, it was in the low end of its range for the past year. In the

retail sector, inventories contracted somewhat in July, and the inventory-sales ratio for this

sector also was near the bottom of its range over the past year.

The nominal deficit on U.S. trade in goods and services widened in July from its secondquarter average, with the value of imports rising by more than the value of exports. The

increase in imports was concentrated in aircraft, consumer goods, industrial supplies, and oil.

The step-up in exports occurred primarily in industrial machinery and semiconductors.

Among the major foreign industrial countries, the limited available information suggested

that economic activity was strengthening in Europe and the United Kingdom in the third

quarter while economic indicators for Japan were mixed after the strong advance in the first

half of the year. Economic growth in Canada seemed to be continuing at a robust pace, and

economic recovery in most of the Asian emerging-market economies was proceeding briskly.

Inflation remained relatively moderate, though somewhat above the pace of 1998 because of

a sharp rebound in energy prices. Overall consumer prices increased in July and August at

about the second-quarter rate. Abstracting from the sharp advances in energy prices and the

mild increases in food prices, consumer inflation continued to be relatively subdued over the

two months. In the past twelve months, the core CPI rose less than in the previous

twelve-month period. At the producer level, prices of finished goods other than food and

energy were essentially unchanged over the two months; moreover, the change in core

producer prices in the past year was about the same as in the year-earlier period. At earlier

stages of processing, however, producer prices of crude and intermediate materials excluding

food and energy had firmed noticeably over recent months. Average hourly earnings

continued to grow at a moderate pace over July and August, and the rise over the past year

was considerably smaller than that for the year-earlier period.

At its meeting on August 24, 1999, the Committee adopted a directive that called 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 5-1/4 percent. The members noted that this

move, together with the firming in June, should help to keep inflation subdued and to

promote sustainable economic expansion. The Committee also agreed that the directive

should be symmetric. A possible rise in inflation remained the main threat to sustained

economic expansion, but it was not anticipated that further tightening would be needed in the

near term and there would be time to gather substantially more information about the balance

of risks relating to trends in aggregate demand and supply.

Open market operations after the meeting were directed toward implementing and

maintaining the desired slight tightening of pressure on reserve positions, and the federal

funds rate averaged very close to the Committee's 5-1/4 percent target. Most other short-term

market interest rates posted small mixed changes on balance, because the policy action was

widely anticipated and the FOMC's policy announcement after the August 24 meeting

referenced markedly diminished inflation risks. However, longer-term yields rose somewhat

over the intermeeting period in response to the receipt of new information indicating both

surprisingly strong spending at home and abroad and higher commodity prices. Most

measures of share prices in equity markets registered sizable declines over the intermeeting

period, apparently reflecting not only higher interest rates but also concerns that U.S. stocks

might be overvalued and that foreign equities were becoming relatively more attractive as

economic prospects brightened abroad.

In foreign exchange markets, the trade-weighted value of the dollar changed little over the

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

dollar depreciated against the currencies of the major foreign industrial countries, especially

the Japanese yen, in response to generally stronger-than-expected incoming data on spending

and production in those countries. However, the dollar rose against the currencies of the other

important trading partners in the broad group, reflecting sizable declines in the currencies of

several countries in Latin America and Asia.

Despite a further rise in opportunity costs, M2 and M3 continued to grow at moderate rates in

August and evidently in September as well. Expansion of these two monetary aggregates was

supported by further rapid expansion in the demand for currency and stronger inflows to

retail money market funds at a time of weakness in U.S. bond and equity markets. In

addition, growth of M3 was sustained by large flows into institution-only money market

funds as the yields on those funds caught up to earlier increases in short-term market rates.

For the year through September, M2 was estimated to have increased at a rate somewhat

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

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 around or perhaps a little below the growth of the economy's estimated

potential. The growth of domestic final demand increasingly would be held back by the

anticipated waning of positive wealth effects associated with earlier large gains in equity

prices; the 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 the higher

intermediate- and longer-term interest rates that had evolved as markets came to expect that a

rise in short-term interest rates would be needed to achieve a better balance between

aggregate demand and aggregate supply. The lagged effects of the earlier rise in the foreign

exchange value of the dollar were expected to place continuing, but substantially

diminishing, restraint on U.S. exports for some period ahead. Core price inflation was

projected to rise somewhat over the forecast horizon, in part as a result of higher non-oil

import prices and some firming of gains in nominal labor compensation in persistently tight

labor markets that would not be fully offset by rising productivity growth.

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

commented that the incoming information suggested that the expansion had been

considerably stronger in recent months than many had anticipated, while most measures of

inflation had remained subdued. The economy's substantial momentum seemed likely to

persist over the balance of the year, but the members continued to expect some slackening

during the year ahead. This outlook was supported by the emergence of somewhat less

accommodative conditions in financial markets, including the increases that had occurred in

interest rates over the past several months and the steadying of stock market prices over the

same period. On the other hand, foreign economies were strengthening more quickly than

anticipated and rising exports were likely to offset part of the slowdown in domestic demand.

The implications of continued robust growth for the inflation outlook depended critically on

judgments about the supply side of the economy. Productivity and economic potential

seemed to have been growing at an increasingly rapid rate in recent years. That acceleration

had itself tended to boost consumption and investment demand--in complex interactions of

aggregate supply and demand--but it also had held down increases in unit costs and prices. A

great deal of uncertainty surrounded the behavior of productivity growth going forward, but

some further pickup, and the associated ability of the economy to accommodate more rapid

growth without added inflation, was a possibility that could not be overlooked. However, a

further pickup in productivity growth was by no means assured, and a number of other

favorable developments in supply and prices that had acted to restrain inflation in recent

years had already begun to dissipate or reverse. These included the substantial upturn in

energy prices, the ebbing of import price declines, and the pickup in health care costs;

adverse trends in the latter two factors in particular were likely to be extended. In these

circumstances, members generally saw some risk of rising inflation going forward, but they

also recognized that similar forecasts in recent years had proved wrong and that considerable

uncertainty surrounded expectations of somewhat higher core inflation.

In their review of developments across the nation, members reported continued high levels of

activity in all regions and few indications of moderating growth, though agriculture remained

relatively depressed in many areas. The anecdotal information from around the nation clearly

supported the overall statistical evidence of persisting strength in key components of

domestic demand. Consumer spending, notably for light motor vehicles, was continuing to

rise at a brisk pace. Some of the strength in consumer durables was related to purchases

associated with homebuilding, which, though likely to slacken a little owing to the rise in

mortgage interest rates, seemed to be staying at a high level. While consumer spending

probably would be sustained by further anticipated growth in employment and incomes, the

pause in the stock market, should it persist, and the attendant effects on financial wealth were

expected with some lag to damp further gains in consumer expenditures.

Business fixed investment appeared to have accelerated to a surprising extent in the third

quarter from an already robust pace earlier in the year. Further noteworthy gains were

recorded in business expenditures for computing and communications equipment, evidently

reflecting ongoing efforts to take advantage of declining prices and improving technology.

Some of the rise in such spending could represent accelerated purchases in advance of the

century date change and might well tend to be offset in early 2000. Over time, however,

ongoing efforts to enhance productivity for competitive reasons suggested further vigorous

growth in spending for such equipment. Forecasts of other business investment expenditures

were much less ebullient and on the whole pointed to little change. Building activity

currently displayed substantial strength in some major cities, largely involving office and

hotel structures, but nonresidential construction activity more generally was relatively

sluggish. It seemed likely that commercial building activity would be damped later as new

capacity was completed and financing became less attractive in response to the rise that had

occurred in market interest rates.

The prospects for business inventories over coming months were difficult to evaluate, with

the usual uncertainties accentuated by century date change effects. According to fragmentary

information, inventory investment picked up during the summer months from a very low

pace in the second quarter. To some extent, the recent strengthening may have reflected

precautionary stockbuilding as insurance against potential supply disruptions relating to the

century date change. Such stockbuilding might well intensify during the closing months of

the year and be reversed early next year, with effects of uncertain magnitude on overall

economic activity in that period. Looking beyond such a swing, business inventories, which

currently appeared to be near desired levels in most industries, were projected to grow at a

moderate pace broadly in line with the expansion in final sales.

The strengthening of many economies around the world was seen as a harbinger of

increasing demand for U.S. exports, a view that was reinforced by growing anecdotal

indications of improving foreign markets for a wide range of U.S. products. An aspect of that

improvement was more attractive investment opportunities abroad and some associated

weakening in the foreign exchange value of the dollar that implied upward pressure on the

prices of imports and to an uncertain extent on those of competing domestically produced

products. Moreover, some members saw the possibility of a steeper drop in the dollar--under

pressure from burgeoning foreign dollar portfolios as a consequence of very large U.S.

current account deficits--as an added source of risk to the maintenance of sustainable growth

and low inflation in the United States.

In the Committee's discussion of the outlook for inflation, a number of members emphasized

that the behavior of prices had remained surprisingly benign for an extended period,

confounding earlier forecasts of appreciable acceleration stemming from tight labor markets

and rising labor costs. That experience argued forcefully in their view for the need to regard

forecasts of increasing inflation with considerable caution. Most members nonetheless

continued to view some increase in core price inflation as a definite possibility. This view

reflected their expectations that the current expansion, even if it did moderate to a pace

approximating the economy's trend potential growth, would do so at a level of resource use

that based on the historical record exceeded the economy's sustainable capacity--perhaps by

even more than at present, given the evident strength of aggregate demand. Such an outcome

seemed likely to generate further pressures on unit labor costs, which had tended in recent

years to be contained by accelerating productivity. There was no evidence that the

acceleration was coming to an end, but the members saw a clear risk that upward pressures

on labor costs could at some point outpace gains in productivity. Members also mentioned

that labor compensation would come under greater pressures as a result of rising healthcare

benefit costs and possible increases in the minimum wage.

Other factors cited as pointing to a less benign inflation performance involved the waning or

reversal of a number of temporary influences that had exerted a beneficial effect on prices in

recent years. In particular, the decline of the dollar from its recent high in July, especially if it

were to continue, would mean higher import prices and reduced price competition for a wide

range of domestic goods. In this regard, several members observed that they were hearing

noticeably fewer comments by business contacts about their inability to raise prices.

Members also noted that, in the context of apparently strengthening economic activity

worldwide, non-oil commodity prices seemed poised to turn upward, though they had risen

only slightly thus far. While oil prices, which had increased sharply this year, had changed

relatively little recently and could move down in the future, secondary effects of the earlier

increase on costs and prices in other sectors of the economy seemed likely. Nonetheless,

considerable uncertainty surrounded expectations of rising inflation. Labor cost increases had

not turned up and core inflation continued to edge lower. Further improvements in

productivity growth could keep price pressures in check for some time.

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

indicated that they favored or could accept an unchanged policy stance. Members

commented that they saw little risk of a surge in inflation over coming months, though some

pickup from the currently subdued level of core price inflation was a distinct possibility

under prospective economic conditions. It was noted that expanding aggregate supply,

boosted by accelerating productivity, had remained in reasonable balance with rapidly

growing aggregate demand despite an already high level of economic activity; however,

substantial uncertainty surrounded the outlook for aggregate supply and aggregate demand

going forward and it was unclear how their interaction would affect the behavior of inflation.

In light of the uncertainties surrounding these developments, the members agreed that it

would be desirable to await more evidence on the performance of the economy, and in this

regard considerable new information on the behavior of the economy and the outlook for

inflation would become available during the intermeeting period. The risks of waiting

seemed small at this juncture, in part because inflation and inflation expectations were not

likely to worsen substantially in the near term, and the Committee had demonstrated its

willingness to take needed anticipatory action to curb rising inflationary pressures that could

threaten the overall performance of the economy. They also agreed that century date change

concerns were not likely to be of a kind or magnitude that would preclude a policy tightening

move at the November meeting, should such an action seem warranted at that time.

On the issue of the tilt in the Committee's directive, a majority of the members favored

associating an unchanged policy stance with a directive that was biased toward restraint.

These members did not anticipate that intermeeting developments would require policy to be

tightened during the weeks immediately ahead, but they believed that the Committee

probably would need to move to a less accommodative policy stance in the relatively near

future, possibly at the November meeting. They also believed that, given the Committee's

recently adopted practice of immediately announcing its decisions to change the symmetry of

the directive, an asymmetrical directive would help convey the message that policy

adjustments might not yet be completed for the balance of this year and that the Committee

remained concerned about potential inflationary developments in coming months. Other

members, while generally agreeing that the risks pointed on balance to some rise in inflation

over time, nonetheless were quite uncertain about the timing of any additional firming in

monetary policy and preferred to leave the Committee's possible future course of action more

open. Even so, they could accept an asymmetric directive in light of the consensus that had

emerged at this meeting in favor of an unchanged policy stance.

With regard to the Committee's announcement of its decision to adopt an asymmetric

directive, members observed that the recent practice of making such announcements had led

to some misinterpretations of the Committee's intentions and seemed to have added to

volatility in financial markets. As a consequence, Committee members briefly considered

alternative treatments of symmetry and disclosure for this meeting. Because the Committee

had begun a process for examining the wording of its directive and its announcement policy,

most of the members concluded that the most satisfactory alternative for now, though it was

not fully satisfactory, was to continue with the Committee's recent announcement practice.

However, the working group chaired by Governor Ferguson was requested to expedite its

report, if possible.

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 of

economic activity was substantial in the quarter just ended. Nonfarm payroll

employment increased briskly through August, and the civilian unemployment

rate dropped back to 4.2 percent, matching its low for the year. Industrial

production was up appreciably further in July and August. Total retail sales

posted sizable gains over the two months. Housing construction apparently has

slowed somewhat but has remained at a high level. Available indicators suggest

that the expansion in business capital spending has continued to be rapid. The

nominal deficit on U.S. trade in goods and services widened in July from its

average in the second quarter. Inflation has continued at a moderate pace, albeit

somewhat above that in 1998 owing to a sharp rebound in energy prices.

Most short-term interest rates have posted small mixed changes since the

meeting on August 24, 1999, while longer-term yields have risen somewhat.

Most measures of share prices in equity markets have registered sizable declines

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

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.

M2 and M3 have continued to grow at a moderate pace. For the year through

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

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

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 reaffirmed at its meeting in June

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 in June to retain 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.

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 5-1/4 percent. In view of the evidence currently

available, the Committee believes that prospective developments are more likely

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

objective during the intermeeting period.

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

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

Votes against this action: None.

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

16, 1999.

The meeting adjourned at 1:25 p.m.

Donald L. Kohn

Secretary

Return to top

Home | FOMC

Accessibility

To comment on this site, please fill out our feedback form.

Last update: November 18, 1999, 2:00 PM