FOMC Minutes

A meeting of the Federal Open Market Committee was held in the offices of the Board of

Governors of the Federal Reserve System in Washington, D.C., on Tuesday, November

16, 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

Ms. Johnson, Economist

Mr. Prell, Economist

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

Stockton, Associate Economist

Mr. Fisher, Manager, System Open Market Account

Messrs. Ettin and Reinhart, Deputy Directors, Divisions 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

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

Governors

Messrs. Stewart and Stone, First Vice President, Federal Reserve Banks of New York

and Philadelphia respectively

Messrs. Beebe, Eisenbeis, Lacker, Rasche, and Sniderman, Senior Vice Presidents,

Federal Reserve Banks of San Francisco, Atlanta, Richmond, St. Louis, and

Cleveland respectively

Messrs. Bentley, Fuhrer, and Kahn, Vice Presidents, Federal Reserve Banks of New

York, Boston, and Kansas City respectively

Mr. Wynne, Research Officer, Federal Reserve Bank of Dallas

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

on October 5, 1999, were approved.

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

foreign exchange markets. There were no open market transactions 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 October 5, 1999, through November 15, 1999. By unanimous vote, the Committee

ratified these transactions.

The Committee then turned to a discussion of recent and prospective economic and financial

developments, and the implementation of monetary policy over the intermeeting period

ahead.

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

expand briskly. The limited data on aggregate demand that had become available since the

summer pointed to some moderation in the growth of consumer spending and of business

investment in capital equipment and software. Residential construction appeared to have

weakened somewhat. However, industrial production was trending up, job growth was still

solid, and the unemployment rate had edged down. Despite tight job markets, labor

compensation had been rising more slowly than last year. Inflation remained moderate,

though at a pace above that in 1998 because of a sharp rebound in energy prices.

A large increase in nonfarm payroll employment in October followed a small rise in

September; the average gain for the two months was appreciable but somewhat below the

pace of earlier in the year. Job growth rebounded strongly in most employment categories,

but further small losses were posted in manufacturing and retail trade. The robust expansion

in the demand for workers in October led to a small decline in the civilian unemployment

rate, to 4.1 percent, a new low for the year.

Industrial production recorded a strong gain in October after having fallen slightly in

September as a result of the adverse effects of Hurricane Floyd. Manufacturing and utilities

output advanced strongly in October, while mining activity edged up. The increases in

manufacturing were widely spread; however, production of transit equipment, particularly

aircraft and parts, and farm equipment continued to decline. The utilization of total industrial

capacity rebounded in October from the hurricane-related production losses of the previous

month but remained somewhat below its long-run average level.

Growth of consumer spending apparently had moderated somewhat further recently, but

surveys indicated that consumer confidence continued to be high and personal income rose

briskly in the third quarter. Total nominal retail sales changed little in September and

October, with purchases at auto dealerships falling in both months and sales at other stores

growing less rapidly on balance. Housing activity weakened somewhat over the summer but

was still at a high level. Some of the drop in housing starts in September probably was

attributable to unusually heavy rains in parts of the South and Northeast. In addition, sales of

both new and existing homes declined appreciably in September.

The expansion of business fixed investment picked up sharply in the third quarter, as a

marked acceleration in outlays for durable equipment and computer software more than

offset a further weakening of nonresidential construction activity. The strength in spending

for durable equipment was concentrated in computer hardware and transportation equipment;

the latter included medium and heavy trucks, fleet sales of light vehicles, and commercial

aircraft. Outlays for computer software and communications equipment also were up

appreciably. Trends in orders suggested that the buoyancy in business spending for capital

equipment had continued into the fourth quarter. Weakness in nonresidential building activity

in the third quarter was widespread, though office construction remained on a solid upward

trend.

Business inventory investment in book value terms picked up somewhat in the third quarter,

but with sales increasing rapidly, stock-sales ratios generally remained quite low.

Manufacturers added slightly to their stocks after two quarters of inventory liquidation.

However, the buildup of stocks in the third quarter did not keep pace with the rise in

shipments, and the sector's stock-shipments ratio was near the bottom of its range over the

preceding twelve months. Wholesalers also added to their inventories in the third quarter, and

with stockbuilding keeping pace with sales, the inventory-sales ratio for the sector remained

in the lower portion of its range over the past year. In the retail sector, the pace of inventory

accumulation slowed noticeably in the third quarter, reflecting a runoff of stocks at auto

dealerships. Excluding autos, the rate of retail inventory accumulation changed little from

that of the second quarter, and with sales rising rapidly the aggregate inventory-sales ratio

fell to its lowest quarterly level since 1980.

The deficit in U.S. trade in goods and services widened on balance over July and August

from its average for the second quarter. The value of exports picked up considerably over the

two months, with increases widely spread across major trade categories. The value of imports

surged, with large increases recorded in all the major trade categories except food. The

available information indicated that economic expansion in the foreign industrial countries

strengthened further in the third quarter. Economic recovery continued in Japan, though there

were signs that consumer demand was lagging somewhat. In the euro area, the United

Kingdom, and Canada, economic activity appeared to have accelerated in the third quarter.

Among the developing countries, economic activity continued to expand in emerging Asia

and parts of Latin America.

Consumer prices increased at a slightly faster rate in September, with a further large rise in

energy prices a contributing factor. Core consumer inflation also picked up in September, in

part because of a sharp jump in tobacco prices. Nonetheless, core consumer prices rose less

over the twelve months ended in September than over the preceding twelve-month period. At

the producer level, price inflation for finished goods other than food and energy items slowed

appreciably in October from the elevated September rate, which had been boosted by the

tobacco price increase. For the year ended in October, core producer prices rose appreciably

more than in the preceding year. Measured on a year-over-year basis, labor compensation

rose more slowly in the year ending in the third quarter than it had in the preceding year.

However, the increase in the third quarter was a little larger than the subdued average pace

for the first half of the year; the step-up was entirely attributable to larger increases in

benefits. Average hourly earnings edged up in October after a large rise in September. For the

twelve months ended in October, average hourly earnings decelerated slightly from the

previous twelve months.

At its meeting on October 5, the Committee adopted a directive that called for maintaining

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

5-1/4 percent. The members noted that the behavior of prices had continued to be relatively

subdued and that the risk of a substantial worsening in inflation and inflation expectations

over coming months seemed to be small. Nonetheless, they saw some pickup in inflation as a

distinct possibility under anticipated economic conditions and concluded that the directive

should indicate that prospective developments were more likely to warrant an increase than a

decrease in the funds rate objective in the near term.

Open market operations throughout the intermeeting period were directed toward

maintaining the federal funds rate at around 5-1/4 percent, and the rate averaged close to the

Committee's target. On balance, most market interest rates posted small mixed changes over

the intermeeting interval. The Committee's announcement of a bias toward tightening

surprised many market participants, and interest rates rose somewhat after the meeting.

Yields climbed further in response to incoming data on producer prices and retail sales that

boosted market concerns about unsustainable growth, higher inflation, and further monetary

tightening. Over the second half of the intermeeting period, however, rates largely retraced

their increases in reaction to the release of data indicating low wage and consumer price

inflation. Most measures of share prices in equity markets registered sizable gains over the

intermeeting period, apparently reflecting stronger-than-expected earnings reports and greater

optimism about the prospects for continued robust output growth and low inflation.

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. A

small appreciation against the currencies of the major foreign industrial countries offset a

comparable depreciation in relation to the currencies of other important trading partners.

Among the major currencies, the dollar rose against the euro and the pound sterling despite a

tightening of European monetary policy in response to the implications for future inflation of

indications of a strong pickup in economic activity. The dollar fell further against the

Japanese yen, whose strength presumably reflected evidence of continued economic recovery

in Japan and the prospect of another substantial fiscal stimulus package. The dollar's drop in

terms of the currencies of other important trading partners reflected in part optimism about

continued recovery in Asian emerging economies as well as signs of renewed political

stability in some Latin American and Asian countries.

M2 continued to grow at a moderate rate in October. The recent performance of this

aggregate likely was associated, at least in part, with the rise in market interest rates earlier in

the year that boosted the opportunity cost of holding liquid balances. The expansion of M3

picked up over September and October, reflecting a strong acceleration in its non-M2

component that was associated with strong inflows to institutional money market funds and

stepped-up issuance of large time deposits to meet credit demands. For the year through

October, M2 and M3 were estimated to have increased at rates somewhat above their annual

ranges for 1999. 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 moderate

gradually to a rate around, or perhaps a little below, the growth of the economy's estimated

potential. The expansion 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

and software 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 sustainable, noninflationary

growth. The lagged effects of the earlier rise in the foreign exchange value of the dollar were

expected to place continuing, though substantially diminishing, restraint on U.S. exports for

some period ahead. Core price inflation was projected to rise somewhat over the forecast

horizon, partly as a result of the passthrough 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 developments, members

commented that the statistical and anecdotal information that had become available since the

October meeting continued to point to robust growth in overall economic activity, despite

some indications of softening in interest-sensitive sectors of the economy. Although

productivity developments remained quite favorable, the faster rise in productivity itself

apparently had tended to bolster demand more than supply through its effects on equity

prices and consumption and on the demand for capital equipment. While real interest rates

had risen to some extent to restore balance between supply and demand, they evidently had

not risen enough or had not been high for long enough, and growth at an unsustainable pace

continued to ratchet up pressures in labor markets. Abstracting from possible temporary

fluctuations associated with the upcoming century date change, the members saw few signs

of significant slowing in aggregate demand over the next few months. Over a somewhat

longer horizon, however, they believed that growth in aggregate demand was likely to

moderate to a more sustainable pace that would bring it into closer balance with the

expansion in aggregate supply. Key factors cited by the members in support of their

expectations of slower growth in overall domestic spending were the lagged and to some

extent already evident effects of the rise that had occurred in long-term interest rates,

including mortgage rates, and the effects on business and consumer sentiment of a less

buoyant stock market, should the latter persist. However, the recent depreciation of the dollar

and the ongoing strengthening of many foreign economies would stimulate rising export

demand and perhaps substantially reduce the drag exerted on the economy by the foreign

trade sector. The members acknowledged that their forecasts were subject to a substantial

degree of uncertainty, but the risks on balance were seen as tilted toward growth strong

enough to put added pressures on already tight labor markets. Increasing pressures on labor

resources, should they materialize, would at some point foster larger increases in labor costs,

with potentially adverse implications for price inflation over time.

With regard to the prospective performance of key sectors of the economy, forecasts of

somewhat slower growth in consumer spending appeared to be supported by recent reports of

some moderation in sales of motor vehicles from extraordinarily high levels. Anecdotal

reports relating to recent retail sales around the country were mixed, but members indicated

that their contacts in the retail industry were uniformly optimistic about the outlook for sales

during the holiday season and recent surveys suggested a very high level of consumer

confidence. Retail sales might be also augmented during the closing weeks of the year by

precautionary purchases related to century date change concerns. Looking ahead, and

abstracting from the unwinding in the early part of 2000 of some transitory stockpiling of

consumer goods, growth in consumer spending seemed likely to moderate over time. In part,

forecasts of a less ebullient consumer sector reflected expectations of reduced demand for

household goods associated with a mild downturn in housing activity and the previous

slowdown in mortgage refinancings that had lowered household debt servicing burdens and

frequently had made accumulated housing equity available for consumer expenditures. A

potentially more important factor in the outlook for consumer spending, however, was the

prospect that the wealth effects from sharp earlier increases in the value of stock market

holdings would wane in the absence of a new upsurge in stock market prices.

Growth of business spending for equipment and software was expected to moderate in the

current quarter, largely in conjunction with what was seen as a temporary slowdown in

purchases of computers in the period before the century date change. However, the members

saw no significant evidence that the strong uptrend in spending on capital equipment might

otherwise be weakening. In contrast to the pattern for business fixed investment, nonfarm

inventory investment was projected to rise in the current quarter in connection with a

temporary bulge related to the century date change but also to bring lean inventories into

better alignment with anticipated sales. Once the perturbations related to the century date

change had run their course, inventory growth was expected to return to a more normal pace

during 2000.

In the housing market, rising mortgage rates had fostered some declines from recent peaks in

starts and sales, and persisting softness in housing activity was anticipated. This expectation

tended to be supported by anecdotal reports of moderating homebuilding activity in several

parts of the country. Nonetheless, the members cited a number of factors that should tend to

sustain overall housing activity at a fairly elevated level. These included continuing though

diminishing backlogs of unbuilt homes, rising incomes, and high levels of consumer

confidence. In any event, the outlook for housing was subject to considerable uncertainty as

reflected in recent surveys that had produced mixed results with regard to the near-term

prospects for housing activity.

Members anticipated that the dollar's recent depreciation and the strengthening of foreign

economies would foster a significant further pickup in exports. Indeed, available data and

anecdotal reports from around the country indicated that foreign demand already had

improved markedly for some U.S. products. In these circumstances, domestic demand would

need to decelerate considerably for growth to proceed at a sustainable pace.

Concerning the outlook for inflation, members noted that despite the long duration of very

tight labor markets across the nation, labor compensation had increased at a slightly lower

rate this year while consumer price inflation had remained moderate, albeit above year-earlier

levels owing to a sharp rise in energy prices. The deceleration in labor compensation may

have been induced in large measure by the low level of consumer price inflation in 1998. In

addition, a major factor underlying the persistence of generally subdued price inflation in a

period of robust economic expansion was the continued acceleration in productivity, which

clearly was holding down increases in unit production costs. The latter contributed to

ongoing competitive pressures that severely limited the ability of firms to raise prices,

helping to this point to keep inflation at a low level.

The members nonetheless remained concerned about the outlook for inflation. They

continued to focus especially on the possibility that the anticipated moderation in the growth

of aggregate demand, taking into account the outlook for rising foreign demand for U.S.

goods and services, might not be sufficient to avoid added pressures on labor and other

resources. To be sure, the economy's potential output appeared to be expanding briskly, with

much of the impetus provided by accelerating productivity. Even so, the pool of unemployed

workers willing to take a job had continued to be drawn down, and it seemed likely to many

members that prospective growth in aggregate demand might generate increasing pressures

on the economy's ability to produce goods and services and thus add to inflationary pressures

over time. This concern was heightened by the prospect that a number of developments that

had tended to contain inflation in the last few years were now reversing. Members mentioned

in particular the likelihood that increases in labor compensation might be headed higher in

lagged response to the pickup in consumer price inflation this year. Also likely adding to

labor cost pressures were relatively large advances in the cost of health care benefits and the

possibility of a higher minimum wage. Moreover, the turnaround in energy and import prices

could tend to feed through more directly into the prices of U.S.-produced goods by raising

costs and reducing competitive pressures to hold down prices. Strengthening demand around

the world already seemed to be contributing to higher prices of materials and other nonlabor

inputs in the production "pipeline." In general, however, the members anticipated that any

pickup in inflation was likely to be gradual, with cost pressures quite possibly continuing to

be held largely in check for some time by improving productivity trends. They recognized

that forecasts of rising inflation had failed to materialize in recent years, raising questions

about their understanding of the empirical specification of the relationships that currently

underlie the inflation process. On balance, though, the unsustainable pace of economic

expansion along with the reversal of factors that previously had held down overall price

increases suggested a significant risk that inflation would strengthen over time given

prevailing financial conditions.

Against this background, all the members supported raising the Committee's target for the

federal funds rate by 25 basis points at this meeting. Views differed to an extent on the

outlook for inflation and policy going forward. However, with tightening resource constraints

indicating unsustainable growth, only tentative signs that growth might be slowing, and

various factors that had been damping prices now turning around, all the members agreed on

the need for a slight tightening at this meeting to raise the odds on containing inflation and

forestalling the inflationary imbalances that would undercut the very favorable performance

of the economy. This view was reinforced by the prospect that the Committee might not find

it desirable to adjust policy at its December meeting when a tightening action could add to

the potential financial uncertainties and unsettlement surrounding the century date change.

Accordingly, any action might have to wait until the meeting in early February, and the

members agreed that the risks of waiting for such an extended period were unacceptably

high.

All the members accepted a proposal to adopt a symmetric directive. Such a directive was

viewed as consistent with the Committee's current expectation that no further policy move

was likely to be considered before the Committee's meeting in February. In the

circumstances, a Committee decision to retain the existing asymmetry toward tightening

could well send a misleading signal about the probability of near-term action and have an

unsettling effect on financial markets at a time when concerns relating to the century date

change might be adding to normal year-end pressures. As noted previously, however, views

differed to some degree regarding the subsequent outlook for policy. On the basis of currently

available information, a number of members indicated that they were quite uncertain about

the possible need for further tightening action over coming months to keep inflation within

acceptable limits. Continued favorable price and unit cost data, driven in part by improving

productivity, suggested that any further action should depend on incoming information about

economic activity, pressures on resources, and inflation. Other members, emphasizing the

persistently strong growth in economic activity and the unusually high level of labor resource

utilization, suggested that additional firming of the stance of policy probably would be

necessary to keep inflation in check and hence maintain the favorable backdrop for

maximum economic growth. However, in view of the questions surrounding the outlook, the

amount of firming already undertaken by the Committee this year including at this meeting

and its uncertain effects, and the special situation in financial markets over the year-end, they

supported the adoption of a symmetric directive.

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 directive:

The information reviewed at this meeting suggests continued solid expansion of

economic activity. Nonfarm payroll employment increased appreciably on

average over September and October, and the civilian unemployment rate

dropped to 4.1 percent in October, its low for the year. Industrial production

recorded a strong gain in October after having been depressed in September by

the effects of hurricane Floyd. Total retail sales were flat in September and

October owing to a drop in sales at auto dealers; sales at other stores were fairly

robust. Housing activity softened somewhat over the summer but has remained

at a high level. Trends in orders suggest that business spending on capital

equipment has continued to increase. The July-August deficit in U.S. trade in

goods and services was higher than its average in the second quarter, as further

growth in imports exceeded the rise in exports. Inflation has continued at a

moderate pace, though above that in 1998 owing to a sharp rebound in energy

prices. Labor compensation rates have been rising more slowly than last year.

Most market interest rates have posted small mixed changes since the meeting

on October 5, 1999. However, measures of share prices in equity markets have

registered sizable increases 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 continued to grow at a moderate pace in October while M3 accelerated. For

the year through October, M2 and M3 are estimated to have increased at rates

somewhat above the Committee's annual ranges for 1999. 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 increasing the federal funds rate to

an average of around 5-1/2 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, McTeer, Meyers, Moskow, Kelley, and Stern.

Votes against this action: None.

At this meeting, the working group chaired by Mr. Ferguson provided an interim report on its

work to date concerning the wording of the Committee's directives, the Committee's

announcements after each meeting, and related issues. The members expressed broad

agreement with the direction of the working group's tentative recommendations and provided

feedback on specific issues and wording. It was contemplated that the Committee would

consider the working group's final report at a meeting in the near future.

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

21, 1999.

The meeting adjourned at 1:40 p.m.

Donald L. Kohn

Secretary

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