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, December

21, 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. Baxter, Deputy General Counsel

Ms. Johnson, Economist

Mr. Prell, Economist

Ms. Cumming, Messrs. Howard, Hunter, Lang, Rosenblum, Slifman, and Stockton,

Associate Economists

Mr. Fisher, Manager, System Open Market Account

Mr. Winn, Assistant to the Board, Office of Board Members, Board of Governors

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

Ms. Roseman,1 Director, Division of Reserve Bank Operations and Payment

Systems, Board of Governors

Messrs. Dennis1 and Whitesell, Assistant Directors, Divisions of Reserve Bank

Operations and Payment Systems and Monetary Affairs respectively, Board of

Governors

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

Governors

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

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

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

City, St. Louis, and Cleveland respectively

Ms. Perelmuter, Messrs. Rosengren and Weber, Vice Presidents, Federal Reserve

Banks of New York, Boston, and Minneapolis respectively

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

on November 16, 1999, were approved.

The Report of Examination of the System Open Market Account, conducted by the Board's

Division of Reserve Bank Operations and Payment Systems as of the close of business on

September 10, 1999, was accepted.

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 November 16, 1999, through December 20, 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 continued strong expansion of economic

activity. Consumer demand was particularly robust and business fixed investment remained

on a strong upward trend. Housing activity was still at an elevated level despite some recent

slippage. As a consequence, manufacturing production had increased briskly in recent

months, and nonfarm payrolls continued to rise rapidly. Despite very tight labor markets,

labor compensation had been climbing more slowly than last year. Aggregate price increases

had been smaller in recent months, reflecting a flattening in energy prices after a rapid

run-up.

Nonfarm payroll employment rose substantially further in October and November. Job

growth in the services industry remained rapid in the two months, construction hiring

continued buoyant against a backdrop of project backlogs and unseasonably warm weather,

and the pace of job losses in manufacturing slowed further. The civilian unemployment rate

fell to 4.1 percent in October, its low for the year, and remained at that level in November.

Industrial production continued to advance briskly in the October-November period,

reflecting sizable gains in manufacturing and mining output. Within manufacturing, the

production of consumer goods, construction supplies, and materials was up substantially. The

further advance in manufacturing production in the two months boosted the factory operating

rate, but capacity utilization in manufacturing in November was still a little below its

long-term average.

Total nominal retail sales rose appreciably in the first two months of the fourth quarter. Sales

gains were widespread, but purchases of durable goods, especially light vehicles, were

particularly strong. Anecdotal reports suggested that growth in consumer outlays was

remaining brisk in December.

Housing activity, though somewhat softer in recent months, continued at a high level. Total

private housing starts slipped in November after having held steady in October. In addition,

sales of new homes in the September-October period (latest data) were a little below the pace

recorded in the spring and early summer months, and existing home sales registered a fourth

consecutive decline in October.

The available information on orders and shipments suggested some slowing in the very rapid

growth of business spending for capital equipment. Shipments of nondefense capital

equipment recovered only partially in October from a large September decline. Much of the

pickup reflected a surge in shipments of computers and related equipment in October after a

plunge in the preceding two months. Trends in orders suggested that business spending on

capital equipment, notably for high-tech and transportation equipment, probably had

increased further over the balance of the fourth quarter. Outlays and contracts for

nonresidential construction slowed further in October. The pace of office construction in

October was close to its third-quarter average; spending for industrial buildings continued to

drop, and outlays for commercial structures were unchanged from their low September level.

Business inventory investment slowed in October from the third-quarter pace, primarily

reflecting a sizable liquidation of stocks at automotive dealerships. Stockbuilding among

manufacturers stepped up slightly in October, but the stock-sales ratio for the sector was near

the bottom of its range for the last twelve months. At the wholesale level, inventory

accumulation slowed noticeably and the inventory-sales ratio for this sector also was near the

bottom of its range for the last twelve months. Total retail stocks changed little on balance in

October because of the sharp runoff at automotive dealerships. The inventory-sales ratio for

the retail sector as a whole was at the bottom of its range for the last year.

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

average for the third quarter. The value of exports edged up in October from its third-quarter

level but the value of imports rose appreciably more, with much of the increase reflecting

greater imports of consumer goods and machinery. The available information suggested that

economic expansion in the euro area, the United Kingdom, and Canada picked up sharply in

the third quarter. In contrast, economic activity declined in Japan during the third quarter

after a surge in the first half of the year. Among the developing countries, economic activity

continued to expand in emerging Asia and parts of Latin America.

Inflation remained subdued in recent months. Consumer price inflation edged down in

October and November as energy prices steadied after having increased rapidly earlier in the

year. Moreover, excluding the volatile food and energy components, consumer prices rose

slightly less in the twelve months ended in November than in the previous twelve-month

period. At the producer level, prices of finished goods other than food and energy were

unchanged in November after a moderate increase in October. For the year ended in

November, core producer prices rose somewhat more than in the preceding year. However,

producer prices at earlier stages of processing continued to register increases somewhat

larger than those for finished goods. With regard to labor costs, the rise in compensation per

hour in the nonfarm business sector over the four quarters ending in September was down

considerably from the advance in the preceding four-quarter period. In addition, average

hourly earnings rose moderately in the October-November period and in the twelve months

ended in November.

At its meeting on November 16, 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 5-1/2 percent. The members noted that the

slight tightening would enhance the chances for containing inflation and forestalling the

emergence of inflationary imbalances that could undermine the economy's highly favorable

performance. The members also agreed on a symmetric directive. The special situation in

financial markets over the year-end, along with uncertainty about the economy's response to

the firming already undertaken in 1999, suggested that the Committee would want to assess

further developments through early next year before considering additional policy action.

Open market operations during the intermeeting period were directed toward implementing

the desired slightly greater pressure on reserve positions, and the federal funds rate averaged

close to the Committee's 5-1/2 percent target. However, with the economic expansion still

quite strong and in the context of the expression of concern about the inflationary

implications of unsustainably fast growth in the Committee's announcement of its decision at

the November meeting, incoming economic data were viewed by market participants as

increasing, on balance, the chances of further monetary tightening in 2000. As a result, most

market interest rates rose somewhat in the period after the November 16 meeting. Despite the

appreciable increase in Treasury bond yields, most broad stock market indexes advanced

further during the intermeeting period.

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 appreciated against the euro and the Canadian dollar, but those movements were

largely counterbalanced by declines against the Japanese yen and the currencies of other

important trading partners.

M2 continued to grow at a moderate rate in November despite strong currency demand that

likely was associated with a combination of robust holiday spending and precautionary

stockpiling for the century rollover. Higher opportunity costs and currency demand

apparently damped growth in holdings of liquid deposits. By contrast, M3 surged in

November, reflecting heavy issuance of large time deposits to fund increases in bank credit

and vault cash and large inflows to institution-only money market funds. For the year

through November, M2 and M3 were estimated to have increased at rates somewhat above

the Committee's annual ranges for 1999. Total domestic nonfinancial debt continued to

expand at a pace in the upper portion of its range.

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

moderate from its currently elevated pace 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 large earlier 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. However, continued

solid economic expansion abroad was expected to boost the growth of U.S. exports for some

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

partly 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 increasingly outpace even

continued rapid productivity growth.

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

commented that the most recent statistical and anecdotal information provided further

evidence of persisting strength in the expansion and of relatively subdued wage and price

inflation. The economy clearly would carry substantial expansionary momentum into the new

year, quite possibly in excess of growth in the economy's long-run potential, and the key

issue for the Committee was whether growth in aggregate demand would slow to a more

sustainable pace without further tightening in the stance of monetary policy. Members noted

in this regard that evidence of a slowdown in the expansion was quite marginal at this point

and seemed to be limited largely to some softening in housing activity. Looking beyond the

near term, members continued to anticipate some moderation in the growth of domestic

demand, though the extent of the moderation remained subject to a wide range of uncertainty

related in part to the difficulty of anticipating trends in stock market prices and their effects

on business and consumer sentiment and spending. Members also noted that prospective

slowing in domestic demand was likely to be offset, at least to some extent, by further growth

in exports should foreign economies as a group continue to strengthen as many forecasters

anticipated.

Uncertainties about the level and growth of potential output and the dynamics of the inflation

process made it difficult to relate with confidence projections of demand and activity to

prospects for inflation. Members observed that they saw no indications that the impressive

gains in productivity might be moderating and, indeed, the most recent data suggested some

further acceleration. Moreover, persistent disparities between the household and

establishment series on employment growth might be reconciled by higher immigration than

previously estimated, further boosting potential growth. Nonetheless, the increase in

aggregate demand had been exceeding even the now-higher sustainable rate of growth in

aggregate supply, as indicated by declines in the pool of available but unemployed workers to

a very low level and by the rise in imports. This difference between the growth of demand

and potential supply could well persist unless demand moderated. Absent a possible

moderation, an upturn in unit labor costs was seen as a likely possibility, with eventual

adverse implications for price inflation. Inflation pressures might also be augmented over

time by a number of special factors such as the rise in energy prices, the effects on import

prices of the dollar's depreciation and strengthening foreign economies, and faster increases

in medical costs. While several of these factors implied limited price level adjustments, they

could become embedded to a degree in ongoing inflation through their effects on wage

increases and inflation expectations. Over the nearer term, however, subdued inflation

expectations were likely to damp any incipient uptrend in the rate of price inflation.

In their review of economic conditions across the nation, several members noted that high

levels of business activity were severely taxing available labor resources and appeared to be

constraining growth in a number of industries and parts of the country. Rising employment

and incomes along with the advance in stock market prices to new highs in recent weeks

were fostering elevated levels of consumer confidence and would be supporting consumer

spending going forward. Anecdotal reports pointed to notably brisk retail sales during the

current holiday season in many parts of the country. Sales of new automobiles had rebounded

recently after moderating somewhat from an exceptionally rapid pace earlier. While recent

developments provided little basis for anticipating slower growth in consumer spending,

members commented that such spending could be vulnerable to adverse developments in the

stock market and the attendant effects on consumer wealth and confidence; and spending for

household durables could be damped by the anticipated softness in housing activity.

The capital goods markets also displayed very little evidence of any weakening. They

continued to be characterized by disproportionately large investments in high-tech business

equipment, although demand for more conventional equipment, apart from farm equipment,

also was relatively robust. Assessments of the outlook for overall business capital investment

pointed to further rapid growth led by outlays for equipment. Business spending on

construction was expected to change little on the whole, with strength in some sectors, such

as warehouse facilities, offset by softness in sectors such as industrial structures and office

buildings. Some members noted, however, that public works projects would help to support

overall construction activity.

Recent data along with anecdotal reports indicated some loss of vigor in the nation's housing

markets, though overall activity was still at a high level. The recent pace of homebuilding

was somewhat uneven, with relative strength in some areas supported by seasonally

favorable weather conditions or large backlogs. Rising mortgage rates were cited as a key

factor underlying the limited moderation in residential construction, but other factors

included the scarcity of skilled construction workers, with some diverted to nonresidential

construction projects, and indications of overbuilding in some areas. Looking ahead, the

members anticipated that further growth in incomes and the ready availability financing for

most homebuyers would sustain overall housing activity at a relatively high level.

Forecasts indicated that while real net exports would continue to decline over the next several

quarters, the rate of decline would moderate substantially. The solid further expansion

expected in many foreign economies, the slower growth of domestic demand in the United

States, and the effects of the slippage of the foreign exchange value of the dollar on the

relative prices of U.S. goods and services were all seen as contributing to this outcome. In the

course of their comments, members cited a number of examples of already-improved export

markets for a variety of U.S. products. While expanding foreign demand for U.S. goods and

services was a welcome development from the perspective of numerous business firms, such

demand might add to pressures on U.S. resources with potentially inflationary implications,

depending on the extent to which the growth in domestic demand would slow going forward.

Several members indicated their concern about the burgeoning current account deficit and the

potential that it could lead to a considerable weakening of the dollar at some point, which

would tend to add to upward pressure on prices and demand.

In their comments regarding the outlook for inflation, a number of members expressed

concern that the anticipated moderation in overall demand might not be large enough or soon

enough to forestall added pressures on already-taut labor markets. Although wage growth

had remained moderate to date and unit labor costs damped, at some point tightening labor

markets would begin to generate wage gains increasingly in excess of productivity gains.

Indeed, a few members were concerned that unit labor costs could begin to accelerate even at

existing labor utilization levels. In addition, some of the forces that had been restraining

inflation--declining oil, import, and commodity prices, and subdued increases in the costs of

health care--had already reversed. Even so, resulting acceleration in price inflation might be

held down and possibly averted for a time by the economy's buoyant upward trend in

productivity, which could support profit margins and help maintain the highly competitive

conditions in many markets that made it difficult or impossible for most business firms to

raise their prices. In addition, there had been no evidence of any erosion in the widespread

expectation that inflation would remain subdued over the long run.

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

endorsed a proposal to maintain an unchanged policy stance consistent with a target for the

federal funds rate centering on 5-1/2 percent. The members agreed that the Committee's

primary near-term objective was to foster steady conditions in financial markets during the

period of the century date change and to avoid any action that might erode the markets'

confidence that the Federal Reserve was fully prepared to provide whatever liquidity would

be needed in this period. The members generally agreed that, if necessary, their concerns

about rising inflation could be addressed at the meeting in early February. They saw little risk

of a significant acceleration in inflation over the near term, given recent price trends and the

absence of indications that inflationary expectations might be deteriorating, and thus little

cost in deferring consideration of a policy tightening action. Moreover, the Committee would

be in a better position by early February to assess the delayed effects of its earlier tightening

actions.

On the issue of the intermeeting tilt in the Committee's directive, most of the members

expressed a preference for retaining the symmetry adopted at the November meeting. While a

preemptive tightening move might be warranted in the not-too-distant future to help contain

inflationary pressures in the economy, these members believed that a symmetrical directive

would best convey the message that no tightening action was contemplated for the weeks

immediately ahead. Such a directive would therefore be more consistent with their desire to

avoid any misinterpretations of their policy intentions that might unsettle financial markets

during the sensitive century-date-change period. In this view, longer-run concerns about

rising inflation could be addressed in the press statement that would be issued after this

meeting. A few members indicated a marginal preference for an asymmetric directive that

focused on the possibility of an eventual rise in interest rates. In their view, an asymmetric

directive would be more consistent with the consensus among the Committee members

regarding the most likely course of monetary policy over the next few meetings and the use

of the bias statement that had come to encompass this longer horizon and was understood as

such by financial market participants and the public. Moreover, such a directive was widely

anticipated in financial markets and hence would incur little risk in their view of a market

disturbance in the weeks immediately ahead. However, they could readily accept a

symmetrical directive in light of the contemplated press announcement.

At the conclusion of this discussion, the members 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 strong expansion

of economic activity. Nonfarm payroll employment increased substantially

further in October and November, and the civilian unemployment rate stayed at

4.1 percent in November, its low for the year. Manufacturing output recorded

sizable gains in October and November. Total retail sales rose appreciably over

the two months. Housing activity has softened somewhat over recent months but

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

capital equipment has increased further. The U.S. nominal trade deficit in goods

and services rose in October from its average in the third quarter. Aggregate

price increases have been smaller in the past two months, reflecting a flattening

in energy prices; labor compensation rates have been rising more slowly than

last year.

Most market interest rates are up somewhat since the meeting on November 16,

1999. Measures of share prices in equity markets have risen further 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 November while M3 surged. For

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

somewhat above the Committee's annual ranges for 1999. Total domestic

nonfinancial debt has expanded at a pace in the upper end 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 5-1/2 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, Kelley, McTeer, Meyer, Moskow, and Stern.

Votes against this action: None.

Disclosure Policy

The members of the Committee agreed at this meeting to adopt a number of proposals

offered by the Working Group on the Directive and Disclosure Policy chaired by Mr.

Ferguson, effective with the first meeting in 2000. One proposal was to issue a press

statement after every meeting even when the Committee decided to maintain its existing

policy stance and did not change its view of future developments in a major way.

Another proposal was to change the way the Committee characterized its view of future

developments. A few members wanted to retain the current focus on the possible future

stance of policy, because they thought that the Committee would more readily be able to

reach agreement on the likelihood of future actions than on the potential reasons such actions

might be considered. The consensus opinion, however, was to replace the Committee's

judgment about the likelihood of an increase or decrease in the intended federal funds rate

with a description of the Committee's perception of the risks in the foreseeable future to the

attainment of its long-run goals of price stability and sustainable economic growth. Although

the Committee would vote on this assessment of the risks together with its policy stance, the

Committee would no longer include its view of future developments in the domestic policy

directive to the Federal Reserve Bank of New York, because the new wording did not refer to

an operational matter. The Committee's new directive would contain only a general statement

of its policy objectives, its specific operating instructions for the intermeeting period, and in

February and July a paragraph on the yearly money and debt ranges. To inform the public

about these decisions, the members agreed that an explanatory press release should be issued

before the February meeting.

The Committee also accepted a proposal to codify current practice regarding policy moves in

the intermeeting period by amending the Authorization for Domestic Open Market

Operations in February. The amendment was made necessary by the change in the language

of the directive. Intermeeting moves, authorized by the Chairman, would remain possible but,

as in recent years, would be made only in exceptional circumstances. One member expressed

reservations about the proposed amendment, questioning its need in light of the instruments

already in place to deal with liquidity emergencies and its appropriateness since it could

potentially allow policy moves to be made, however rarely, without necessarily drawing on

the benefits of full Committee participation. The other members, however, noted that the

practices in place had worked well over the years, proving themselves a useful adjunct to the

regular Committee decision-making process; that the new language would maintain those

practices, clarifying that latitude to change policy was to be exercised against the background

of the Committee's previous discussions and only in unusual circumstances; and that, if

necessary, adjustments to the Authorization could be made in the future.

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

February 1-2, 2000.

The meeting adjourned at 1:30 p.m.

Donald L. Kohn

Secretary

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Footnotes

1 Attended portion of meeting relating to the Committee's consideration of the Report of

Examination of the System Open Market Account.

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