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, February 1,
2000, at 2:30 p.m. and continued on Wednesday, February 2, 2000, at 9:00 a.m.
Present:
Mr. Greenspan, Chairman
Mr. McDonough, Vice Chairman
Mr. Broaddus
Mr. Ferguson
Mr. Gramlich
Mr. Guynn
Mr. Jordan
Mr. Kelley
Mr. Meyer
Mr. Parry
Mr. Hoenig, Ms. Minehan, Messrs. Moskow and Poole, Alternate Members of the
Federal Open Market Committee
Messrs. Boehne, McTeer, and Stern, Presidents of the Federal Reserve Banks of
Philadelphia, Dallas, and Minneapolis 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
Mr. Beebe, Ms. Cumming, Messrs. Eisenbeis, Goodfriend, Howard, Lindsey,
Reinhart, Simpson, Sniderman, and Stockton, Associate Economists
Mr. Fisher, Manager, System Open Market Account
Mr. Winn,1 Assistant to the Board, Office of Board Members, Board of Governors
Mr. Ettin, Deputy Director, Division of Research and Statistics, Board of Governors
Messrs. Madigan and Slifman, Associate Directors, Divisions of Monetary Affairs
and Research and Statistics respectively, Board of Governors
Messrs. Oliner and Whitesell, Assistant Directors, Divisions of Research and
Statistics and Monetary Affairs respectively, Board of Governors
Mr. Small,2 Section Chief, Division of Monetary Affairs, Board of Governors
Messrs. Brayton,2 Morton,3 and Rosine,3 Senior Economists, Divisions of Research
and Statistics, International Finance, and Research and Statistics respectively, Board
of Governors
Ms. Garrett and Mr. Hooker,3 Economists, Division of Monetary Affairs, Board of
Governors
Ms. Low, Open Market Secretariat Assistant, Division of Monetary Affairs, Board of
Governors
Ms. Browne, Messrs. Hakkio and Hunter, Ms. Krieger, Messrs. Lang, Rasche,
Rolnick, and Rosenblum, Senior Vice Presidents, Federal Reserve Banks of Boston,
Kansas City, Chicago, New York, Philadelphia, St. Louis, Minneapolis, and Dallas
respectively
In the agenda for this meeting, it was reported that advices of the election of the following members
and alternate members of the Federal Open Market Committee for the period commencing January
1, 2000, and ending December 31, 2000, had been received and that these individuals had executed
their oaths of office.
The elected members and alternate members were as follows:
William J. McDonough, President of the Federal Reserve Bank of New York, with Jamie B.
Stewart, Jr., First Vice President of the Federal Reserve Bank of New York, as alternate
J. Alfred Broaddus, Jr., President of the Federal Reserve Bank of Richmond, with Cathy E.
Minehan, President of the Federal Reserve Bank of Boston, as alternate
Jerry L. Jordan, President of the Federal Reserve Bank of Cleveland, with Michael H. Moskow,
President of the Federal Reserve Bank of Chicago, as alternate.
Jack Guynn, President of the Federal Reserve Bank of Atlanta, with William Poole, President of the
Federal Reserve Bank of St. Louis, as alternate
Robert T. Parry, President of the Federal Reserve Bank of San Francisco, with Thomas M. Hoenig,
President of the Federal Reserve Bank of Kansas City, as alternate.
By unanimous vote, the following officers of the Federal Open Market Committee were elected to
serve until the election of their successors at the first meeting of the Committee after December 31,
2000, with the understanding that in the event of the discontinuance of their official connection
with the Board of Governors or with a Federal Reserve Bank they would cease to have any official
connection with the Federal Open Market Committee:
Alan Greenspan
Chairman
William J. McDonough
Vice Chairman
Donald L. Kohn
Secretary and Economist
Normand R. V. Bernard
Deputy Secretary
Lynn S. Fox
Assistant Secretary
Gary P. Gillum
Assistant Secretary
J. Virgil Mattingly, Jr.
General Counsel
Thomas C. Baxter, Jr.
Deputy General Counsel
Karen H. Johnson
Economist
Michael J. Prell
Economist
Jack H. Beebe, Christine Cumming,
Robert A. Eisenbeis, Marvin S. Goodfriend,
David H. Howard, David E. Lindsey,
Vincent R. Reinhart, Thomas D. Simpson,
Mark S. Sniderman, and David J. Stockton
Associate Economists
By unanimous vote, the Federal Reserve Bank of New York was selected to execute transactions
for the System Open Market Account until the adjournment of the first meeting of the Committee
after December 31, 2000.
By unanimous vote, Peter R. Fisher was selected to serve at the pleasure of the Committee as
Manager, System Open Market Account, on the understanding that his selection was subject to
being satisfactory to the Federal Reserve Bank of New York.
Secretary's note: Advice subsequently was received that the selection of Mr. Fisher as Manager was
satisfactory to the board of directors of the Federal Reserve Bank of New York.
By unanimous vote, the Committee approved an addition to the Authorization for Domestic Open
Market Operations regarding adjustments to the stance of monetary policy during intermeeting
periods. As had previously been agreed, the temporary authority given to the Federal Reserve Bank
of New York to sell options to counter potential century-data-change pressures in financial markets
was allowed to lapse. Accordingly, the Authorization was adopted, effective February 1, 2000, as
shown below.
AUTHORIZATION FOR DOMESTIC OPEN MARKET OPERATIONS
1. The Federal Open Market Committee authorizes and directs the Federal Reserve Bank of
New York, to the extent necessary to carry out the most recent domestic policy directive
adopted at a meeting of the Committee:
(a) To buy or sell U.S. Government securities, including securities of the Federal
Financing Bank, and securities that are direct obligations of, or fully guaranteed as to
principal and interest by, any agency of the United States in the open market, from or
to securities dealers and foreign and international accounts maintained at the Federal
Reserve Bank of New York, on a cash, regular, or deferred delivery basis, for the
System Open Market Account at market prices, and, for such Account, to exchange
maturing U.S. Government and Federal agency securities with the Treasury or the
individual agencies or to allow them to mature without replacement; provided that the
aggregate amount of U.S. Government and Federal agency securities held in such
Account (including forward commitments) at the close of business on the day of a
meeting of the Committee at which action is taken with respect to a domestic policy
directive shall not be increased or decreased by more than $12.0 billion during the
period commencing with the opening of business on the day following such meeting
and ending with the close of business on the day of the next such meeting;
(b) To buy U.S. Government securities and obligations that are direct obligations of, or
fully guaranteed as to principal and interest by, any agency of the United States, from
dealers for the account of the Federal Reserve Bank of New York under agreements for
repurchase of such securities or obligations in 90 calendar days or less, at rates that,
unless otherwise expressly authorized by the Committee, shall be determined by
competitive bidding, after applying reasonable limitations on the volume of
agreements with individual dealers; provided that in the event Government securities
or agency issues covered by any such agreement are not repurchased by the dealer
pursuant to the agreement or a renewal thereof, they shall be sold in the market or
transferred to the System Open Market Account.
(c) To sell U.S. Government securities and obligations that are direct obligations of, or
fully guaranteed as to principal and interest by, any agency of the United States to
dealers for System Open Market Account under agreements for the resale by dealers of
such securities or obligations in 90 calendar days or less, at rates that, unless otherwise
expressly authorized by the Committee, shall be determined by competitive bidding,
after applying reasonable limitations on the volume of agreements with individual
dealers.
2. In order to ensure the effective conduct of open market operations, the Federal Open Market
Committee authorizes the Federal Reserve Bank of New York to lend on an overnight basis
U.S. Government securities held in the System Open Market Account to dealers at rates that
shall be determined by competitive bidding but that in no event shall be less than 1.0 percent
per annum of the market value of the securities lent. The Federal Reserve Bank of New York
shall apply reasonable limitations on the total amount of a specific issue that may be
auctioned, and on the amount of securities that each dealer may borrow. The Federal Reserve
Bank of New York may reject bids which could facilitate a dealer's ability to control a single
issue as determined solely by the Federal Reserve Bank of New York.
3. In order to ensure the effective conduct of open market operations, while assisting in the
provision of short-term investments for foreign and international accounts maintained at the
Federal Reserve Bank of New York, the Federal Open Market Committee authorizes and
directs the Federal Reserve Bank of New York (a) for System Open Market Account, to sell
U.S. Government securities to such foreign and international accounts on the bases set forth
in paragraph l(a) under agreements providing for the resale by such accounts of those
securities within 90 calendar days on terms comparable to those available on such
transactions in the market; and (b) for New York Bank account, when appropriate, to
undertake with dealers, subject to the conditions imposed on purchases and sales of securities
in paragraph l(b), repurchase agreements in U.S. Government and agency securities, and to
arrange corresponding sale and repurchase agreements between its own account and foreign
and international accounts maintained at the Bank. Transactions undertaken with such
accounts under the provisions of this paragraph may provide for a service fee when
appropriate.
4. In the execution of the Committee's decision regarding policy during any intermeeting
period, the Committee authorizes and directs the Federal Reserve Bank of New York, upon
the instruction of the Chairman of the Committee, to adjust somewhat in exceptional
circumstances the degree of pressure on reserve positions and hence the intended federal
funds rate. Any such adjustment shall be made in the context of the Committee's discussion
and decision at its most recent meeting and the Committee's long-run objectives for price
stability and sustainable economic growth, and shall be based on economic, financial, and
monetary developments during the intermeeting period. Consistent with Committee practice,
the Chairman, if feasible, will consult with the Committee before making any adjustment.
With Mr. Broaddus dissenting, the Authorization for Foreign Currency Operations, in the form
shown below, was reaffirmed.
AUTHORIZATION FOR FOREIGN CURRENCY OPERATIONS
1. The Federal Open Market Committee authorizes and directs the Federal Reserve Bank of
New York, for System Open Market Account, to the extent necessary to carry out the
Committee's foreign currency directive and express authorizations by the Committee
pursuant thereto, and in conformity with such procedural instructions as the Committee may
issue from time to time:
A. To purchase and sell the following foreign currencies in the form of cable transfers
through spot or forward transactions on the open market at home and abroad, including
transactions with the U.S. Treasury, with the U.S. Exchange Stabilization Fund
established by Section 10 of the Gold Reserve Act of 1934, with foreign monetary
authorities, with the Bank for International Settlements, and with other international
financial institutions:
Canadian dollars
Danish kroner
Euro
Pounds sterling
Japanese yen
Mexican pesos
Norwegian kroner
Swedish kronor
Swiss francs
B. To hold balances of, and to have outstanding forward contracts to receive or to
deliver, the foreign currencies listed in paragraph A above.
C. To draw foreign currencies and to permit foreign banks to draw dollars under the
reciprocal currency arrangements listed in paragraph 2 below, provided that drawings
by either party to any such arrangement shall be fully liquidated within 12 months after
any amount outstanding at that time was first drawn, unless the Committee, because of
exceptional circumstances, specifically authorizes a delay.
D. To maintain an overall open position in all foreign currencies not exceeding $25.0
billion. For this purpose, the overall open position in all foreign currencies is defined
as the sum (disregarding signs) of net positions in individual currencies. The net
position in a single foreign currency is defined as holdings of balances in that currency,
plus outstanding contracts for future receipt, minus outstanding contracts for future
delivery of that currency, i.e., as the sum of these elements with due regard to sign.
2. The Federal Open Market Committee directs the Federal Reserve Bank of New York to
maintain reciprocal currency arrangements ("swap" arrangements) for the System Open
Market Account for periods up to a maximum of 12 months with the following foreign
banks, which are among those designated by the Board of Governors of the Federal Reserve
System under Section 214.5 of Regulation N, Relations with Foreign Banks and Bankers, and
with the approval of the Committee to renew such arrangements on maturity:
Foreign bank
Bank of Canada
Bank of Mexico
Amount of arrangement
(millions of dollars equivalent)
2,000
3,000
Any changes in the terms of existing swap arrangements, and the proposed terms of any new
arrangements that may be authorized, shall be referred for review and approval to the
Committee.
3. All transactions in foreign currencies undertaken under paragraph 1A. above shall, unless
otherwise expressly authorized by the Committee, be at prevailing market rates. For the
purpose of providing an investment return on System holdings of foreign currencies, or for
the purpose of adjusting interest rates paid or received in connection with swap drawings,
transactions with foreign central banks may be undertaken at non-market exchange rates.
4. It shall be the normal practice to arrange with foreign central banks for the coordination of
foreign currency transactions. In making operating arrangements with foreign central banks
on System holdings of foreign currencies, the Federal Reserve Bank of New York shall not
commit itself to maintain any specific balance, unless authorized by the Federal Open Market
Committee. Any agreements or understandings concerning the administration of the accounts
maintained by the Federal Reserve Bank of New York with the foreign banks designated by
the Board of Governors under Section 214.5 of Regulation N shall be referred for review and
approval to the Committee.
5. Foreign currency holdings shall be invested to ensure that adequate liquidity is maintained to
meet anticipated needs and so that each currency portfolio shall generally have an average
duration of no more than 18 months (calculated as Macaulay duration). When appropriate in
connection with arrangements to provide investment facilities for foreign currency holdings,
U.S. Government securities may be purchased from foreign central banks under agreements
for repurchase of such securities within 30 calendar days.
6. All operations undertaken pursuant to the preceding paragraphs shall be reported promptly to
the Foreign Currency Subcommittee and the Committee. The Foreign Currency
Subcommittee consists of the Chairman and Vice Chairman of the Committee, the Vice
Chairman of the Board of Governors, and such other member of the Board as the Chairman
may designate (or in the absence of members of the Board serving on the Subcommittee,
other Board members designated by the Chairman as alternates, and in the absence of the
Vice Chairman of the Committee, his alternate). Meetings of the Subcommittee shall be
called at the request of any member, or at the request of the Manager, System Open Market
Account ("Manager"), for the purposes of reviewing recent or contemplated operations and
of consulting with the Manager on other matters relating to his responsibilities. At the request
of any member of the Subcommittee, questions arising from such reviews and consultations
shall be referred for determination to the Federal Open Market Committee.
7. The Chairman is authorized:
A. With the approval of the Committee, to enter into any needed agreement or
understanding with the Secretary of the Treasury about the division of responsibility
for foreign currency operations between the System and the Treasury;
B. To keep the Secretary of the Treasury fully advised concerning System foreign
currency operations, and to consult with the Secretary on policy matters relating to
foreign currency operations;
C. From time to time, to transmit appropriate reports and information to the National
Advisory Council on International Monetary and Financial Policies.
8. Staff officers of the Committee are authorized to transmit pertinent information on System
foreign currency operations to appropriate officials of the Treasury Department.
9. All Federal Reserve Banks shall participate in the foreign currency operations for System
Account in accordance with paragraph 3 G(1) of the Board of Governors' Statement of
Procedure with Respect to Foreign Relationships of Federal Reserve Banks dated January 1,
1944.
With Mr. Broaddus dissenting, the Foreign Currency Directive, in the form shown below, was
reaffirmed.
FOREIGN CURRENCY DIRECTIVE
1. System operations in foreign currencies shall generally be directed at countering disorderly
market conditions, provided that market exchange rates for the U.S. dollar reflect actions and
behavior consistent with the IMF Article IV, Section 1.
2. To achieve this end the System shall:
A. Undertake spot and forward purchases and sales of foreign exchange.
B. Maintain reciprocal currency ("swap") arrangements with selected foreign central
banks.
C. Cooperate in other respects with central banks of other countries and with
international monetary institutions.
3. Transactions may also be undertaken:
A. To adjust System balances in light of probable future needs for currencies.
B. To provide means for meeting System and Treasury commitments in particular
currencies and to facilitate operations of the Exchange Stabilization Fund.
C. For such other purposes as may be expressly authorized by the Committee.
4. System foreign currency operations shall be conducted:
A. In close and continuous consultation and cooperation with the United States
Treasury;
B. In cooperation, as appropriate, with foreign monetary authorities; and
C. In a manner consistent with the obligations of the United States in the International
Monetary Fund regarding exchange arrangements under the IMF Article IV.
Mr. Broaddus dissented in the votes on the Authorization and the Directive because they provide
the foundation for foreign exchange market intervention. He continued to believe that the Federal
Reserve's participation in foreign exchange market intervention compromises its ability to conduct
monetary policy effectively. Because sterilized intervention cannot have sustained effects in the
absence of conforming monetary policy actions, Federal Reserve participation in foreign exchange
operations in his view risks one of two undesirable outcomes. First, the independence of monetary
policy is jeopardized if the System adjusts its policy actions to support short-term foreign exchange
objectives set by the U.S. Treasury. Alternatively, the credibility of monetary policy is damaged if
the System does not follow interventions with compatible policy actions, the interventions
consequently fail to achieve their objectives, and the System is associated in the mind of the public
with the failed operations.
By unanimous vote, the Procedural Instructions with Respect to Foreign Currency Operations, in
the form shown below, were reaffirmed.
PROCEDURAL INSTRUCTIONS WITH RESPECT TO FOREIGN CURRENCY
OPERATIONS
In conducting operations pursuant to the authorization and direction of the Federal Open Market
Committee as set forth in the Authorization for Foreign Currency Operations and the Foreign
Currency Directive, the Federal Reserve Bank of New York, through the Manager, System Open
Market Account ("Manager"), shall be guided by the following procedural understandings with
respect to consultations and clearances with the Committee, the Foreign Currency Subcommittee,
and the Chairman of the Committee. All operations undertaken pursuant to such clearances shall be
reported promptly to the Committee.
1. The Manager shall clear with the Subcommittee (or with the Chairman, if the Chairman
believes that consultation with the Subcommittee is not feasible in the time available):
A. Any operation that would result in a change in the System's overall open position in
foreign currencies exceeding $300 million on any day or $600 million since the most
recent regular meeting of the Committee.
B. Any operation that would result in a change on any day in the System's net position
in a single foreign currency exceeding $150 million, or $300 million when the
operation is associated with repayment of swap drawings.
C. Any operation that might generate a substantial volume of trading in a particular
currency by the System, even though the change in the System's net position in that
currency might be less than the limits specified in 1.B.
D. Any swap drawing proposed by a foreign bank not exceeding the larger of (i) $200
million or (ii) 15 percent of the size of the swap arrangement.
2. The Manager shall clear with the Committee (or with the Subcommittee, if the Subcommittee
believes that consultation with the full Committee is not feasible in the time available, or
with the Chairman, if the Chairman believes that consultation with the Subcommittee is not
feasible in the time available):
A. Any operation that would result in a change in the System's overall open position in
foreign currencies exceeding $1.5 billion since the most recent regular meeting of the
Committee.
B. Any swap drawing proposed by a foreign bank exceeding the larger of (i) $200
million or (ii) 15 percent of the size of the swap arrangement.
3. The Manager shall also consult with the Subcommittee or the Chairman about proposed swap
drawings by the System and about any operations that are not of a routine character.
On January 19, 2000, the continuing rules, regulations, and other instructions of the Committee
were distributed with the advice that, in accordance with procedures approved by the Committee,
they were being called to the Committee's attention before the February 1-2 organization meeting to
give members an opportunity to raise any questions they might have concerning them. Members
were asked to indicate if they wished to have any of the instruments in question placed on the
agenda for consideration at this meeting.
The Rules of Procedure were placed on the agenda and by unanimous vote the Committee
approved updating changes to its Rules of Procedure, effective upon publication in the Federal
Register. The changes relate to electronic and telephone communications.
Secretary's note: The revised Rules of Procedure were published in the Federal Register on
February 9, 2000.
By unanimous vote, the Program for Security of FOMC Information was amended with regard to
certain security classifications and staff access to confidential FOMC information.
By unanimous vote, the minutes of the meeting of the Federal Open Market Committee held on
December 21, 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
December 21, 1999, to February 1, 2000. By unanimous vote, the Committee ratified these
transactions.
The Committee then turned to a discussion of the economic and financial outlook, the ranges for
the growth of money and debt in 2000, and the implementation of monetary policy over the
intermeeting period ahead.
The information reviewed at this meeting suggested that economic activity had expanded rapidly in
recent months. Consumer spending had remained very brisk, business fixed investment had
continued on a strong upward trend, and housing demand was still at a relatively high level despite
some slippage recently. The growth of domestic demand had been met in part through further
advances in imports. Domestically, industrial production and nonfarm payrolls had continued to
increase briskly. Despite very tight labor markets, labor costs had been climbing more slowly than
in 1998. Consumer price inflation had stayed moderate over the past few months, despite a recent
resurgence in energy prices.
Labor demand remained robust through year-end, as nonfarm payroll employment posted a further
large increase in December. Job growth in the services industry was brisk, construction hiring rose
somewhat further against a backdrop of good weather and project backlogs, and manufacturing
employment was essentially unchanged. The civilian unemployment rate held at 4.1 percent in
December, its low for the year, and initial claims for unemployment insurance persisted at a very
low level through late January.
Industrial production recorded a sharp advance in the fourth quarter. Manufacturing and mining
output rose briskly, but utilities output was held down by lackluster demand during a period of
unseasonably warm weather in several parts of the country. Output gains in manufacturing were
widespread and the factory operating rate rose further, though capacity utilization was still a little
below its long-term average.
Consumer spending apparently was very robust in the fourth quarter. Total nominal retail sales rose
sharply further in December, with outlets for durable and nondurable goods recording substantial
gains in sales. Spending related to Y2K concerns appeared to have been relatively limited. Outlays
for services in October and November (latest data) were strong, even though spending for heating
was down in response to the unseasonably warm weather.
Housing activity was still at a relatively high level at year-end, buoyed by continuing strong gains
in jobs and incomes despite the rise that had occurred in mortgage interest rates. Total private
housing starts rebounded sharply in December from a decline in November, although part of the
December pickup might have been associated with favorable weather patterns. Sales of new homes
fell in November (latest data), reversing much of the sizable October rise, but average sales for the
two-month period were only slightly below their strong rate of the first half of the year. Sales of
existing homes were down in December, but they also were only a little below their elevated
first-half pace.
The available information suggested that growth of business spending for durable equipment
slowed abruptly in the fourth quarter and that investment in nonresidential structures fell further. At
least some of the deceleration in spending for capital equipment reflected a hesitancy to spend on
computers and other high-tech equipment just in advance of the century rollover. The weakness in
the nonresidential sector was evidenced by further declines in construction outlays and new
building contracts in October and November. Office construction appeared to be leveling off in
response to the higher cost of financing and to perceptions that the office space currently coming on
line would be sufficient to meet demand.
The book value of manufacturing and trade inventories surged in November after having climbed
moderately on balance earlier in the year. Even though the rise might have been related to concerns
about supply disruptions around year-end, inventory-sales ratios generally declined a little in
association with very strong increases in sales, and the ratios were at or near the bottom of their
ranges for the previous twelve months.
The U.S. trade deficit in goods and services widened significantly over the October-November
period from its average for the third quarter. The value of exports rose appreciably over the two
months, largely reflecting growth in industrial supplies and service receipts, but the value of
imports increased noticeably more, with some of the rise reflecting increases in import prices. The
available information suggested that economic expansion remained robust in most foreign
industrial nations. In Japan, however, economic activity was sluggish, with a seemingly small rise
in the fourth quarter following a third-quarter decline. Economic activity in the developing
countries apparently continued to pick up in recent months, although the pace of recovery varied
widely. Economic growth appeared to have been brisk in Mexico, Korea, China, Hong Kong, and
Taiwan but was mixed among the ASEAN countries and slower in Brazil.
Price inflation had remained moderate in recent months. Consumer price inflation was subdued in
December in spite of a sizable increase in energy prices; however, for the year as a whole, sharp
increases in energy prices noticeably boosted overall consumer inflation. Excluding the volatile
energy component, consumer price inflation slowed somewhat in 1999. By contrast, the subdued
rise in the core PCE chain price index in 1999 was essentially the same as in 1998. At the producer
level, prices of finished goods other than food and energy changed little in December and registered
a considerably reduced increase in 1999. At earlier stages of processing, however, core producer
prices recorded somewhat larger advances than those for finished goods in December and for the
year. With regard to labor costs, average hourly earnings rose by a larger amount in December than
in November, but the increase in this measure in 1999 was about the same as for 1998.
At its meeting on December 21, the Committee adopted a directive that called for maintaining
conditions in reserve markets consistent with an unchanged federal funds rate of about 5-1/2
percent and that did not contain any bias relating to the direction of possible adjustments to policy
during the intermeeting period. The members noted that such a directive, which suggested that they
did not expect a further change in policy before the February meeting, should foster steady
conditions in financial markets during the sensitive century-date-change period. The Committee
also agreed, however, that the statement accompanying the announcement of its decision would
note that the Committee was especially concerned about the potential for inflation pressures to
increase and would want to consider at its February meeting whether policy action would be
needed to contain such pressures.
Open market operations during the intermeeting period were directed toward maintaining the
federal funds rate at around 5-1/2 percent. The funds rate averaged close to the Committee's target
over the intermeeting interval despite very strong demands for additional currency and market
liquidity through the year-end and a rapid unwinding thereafter. Against the background of the
Committee's announced concern about the inflationary implications of unsustainably rapid
economic growth, incoming information suggesting that aggregate demand retained considerable
momentum led to upward pressure on market interest rates once the century-date-change period
had passed without incident. The effects of higher interest rates apparently offset those of
unexpectedly high corporate earnings, and most broad stock market indexes fell slightly on balance
over the intermeeting period.
In foreign exchange markets, the trade-weighted value of the dollar was up on balance over the
intermeeting interval in relation to indexes of major foreign currencies and those of other important
U.S. trading partners. Reflecting market expectations of substantial Federal Reserve tightening, the
dollar appreciated considerably against the yen and the euro while depreciating somewhat against
the Canadian dollar.
M2 growth picked up appreciably during December and January, evidently reflecting extra
demands for liquidity and safety during the century-date-change period. M3 accelerated by even
more than M2 in December. Its non-M2 component ballooned as banks issued substantial volumes
of large time deposits to meet very high credit demands and as institutional money market funds
became recipients of some of their customers' precautionary liquid balances. From the fourth
quarter of 1998 through the fourth quarter of 1999, M2 and M3 increased at rates somewhat above
the Committee's annual ranges for 1999. Total domestic nonfinancial debt expanded in 1999 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 earlier large gains in
equity prices and by higher interest rates. As a result, growth of spending on consumer durables and
houses was expected to slow; in contrast, however, overall business investment in equipment and
software was projected to strengthen in response to the upward trend in replacement demand,
especially for computers and software; also, continued solid economic growth 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 import prices and some firming
of gains in nominal labor compensation in persistently tight labor markets that would not be fully
offset by productivity growth.
In the Committee's review of current and prospective economic developments, members
commented that the economy still seemed to be growing very vigorously as it entered the new year,
while core inflation remained subdued. The members were concerned, however, that recent trends
in economic activity, if they continued, might undermine the economy's remarkable performance.
The economy's potential to produce goods and services had been accelerating over time, but the
demand for output had been growing even more strongly. If this imbalance continued, inflationary
pressures were likely to build that would interfere with the economy's performance and could lead
to a disruptive adjustment in economic activity. Accelerating productivity, although adding to the
growth of the economy's potential output, also had induced expectations of rapidly accelerating
business earnings that in turn had generated sharp increases in stock market wealth and lifted the
growth of purchasing power and spending above that in incomes. Relatively high real interest rates
that reflected the increased productivity and damped the rise in asset values would be needed to
help restore balance. In that regard, members questioned whether rates would be high enough
without policy tightening to bring the growth of demand in line with that of supply and contain
pressures in labor markets. In the view of some members, taut labor markets together with a
turnaround in some of the factors that had been temporarily damping inflation, such as oil and
import prices, already lent an upward bias to the inflation outlook, and all agreed that a significant
further tightening of labor resource utilization would appreciably raise the risk of deterioration in
the underlying inflation picture over time.
In keeping with the practice at meetings preceding the Federal Reserve's semiannual report to
Congress on the economy and monetary policy and the Chairman's associated testimony, the
members of the Committee and the Federal Reserve Bank presidents not currently serving as
members had prepared individual projections of the growth in nominal and real GDP, the rate of
unemployment, and the rate of inflation for the year 2000. The forecasts of the growth of nominal
GDP were concentrated in a range of 5-1/4 to 5-1/2 percent, and for the rate of expansion in real
GDP they had a central tendency of 3-1/2 to 3-3/4 percent. Growth at these rates was expected to
hold the civilian unemployment rate in a range of 4 to 4-1/4 percent in the fourth quarter of 2000.
The central tendency of the projections of inflation for 2000-as measured by the chain price index
for personal consumption expenditures-encompassed a range of 1-3/4 to 2 percent, on the low side
of the 2 percent rise in this index experienced in 1999 when energy prices had surged.
Mirroring developments in the overall economy, reports of economic conditions in the individual
Federal Reserve districts continued to display broad-based strength, apart from softness in
construction activity in some areas and weakness in agriculture. Retail sales appeared to have
strengthened further during the opening weeks of the new year after a surge during the holiday
season. Motor vehicle sales in particular had continued to hold up at a remarkably high level.
Consumption was being supported by robust growth in jobs and incomes, very high levels of
consumer confidence, and the lagged wealth effects from earlier advances in stock market prices.
Even so, growth in consumer spending was thought likely to moderate over time to a pace more in
line with the expansion in consumer incomes, unless the stock market posted large further increases
from current levels. As the experience of recent years had amply demonstrated, however, the future
course of stock market prices was highly uncertain, and equity markets had shown a remarkable
resilience to higher interest rates as earning prospects continued to be marked up in association
with the acceleration in productivity.
Opportunities to enhance profits by using new technology were likely to lead to robust further
growth in business fixed investment, boosted mainly by spending for equipment and software over
the year ahead. While the huge amount of capital deepening already accomplished in recent years
and the projected deceleration in aggregate demand were negative factors in the outlook for
business capital spending, they were likely to be overridden by persisting declines in the prices of
high-tech equipment and the rising importance of replacement demand that was associated with
relatively short-lived investments in high-tech equipment and computer software that had tended to
characterize the buildup in business equipment in recent years. With regard to other types of
investment, spending on nonresidential business structures appeared to be softening in many areas
and would tend to hold down the growth in overall business expenditures for capital. However,
spending by state and local governments on roadbuilding and other projects appeared to be on a
robust uptrend.
Housing construction was expected to remain at a relatively elevated level, albeit below recent
peaks, as a consequence of moderating demand stemming from higher mortgage interest rates and
indications of overbuilding in some areas. Members also noted, however, that building activity in
some parts of the country was still being held back by shortages of skilled construction workers and
scarcities of some building supplies. The resulting backlogs along with low inventories of houses in
some areas were factors that should limit the expected decline in residential construction this year.
Moreover, many homebuyers were shifting from fixed-rate long-term mortgages to currently
lower-cost adjustable rate mortgages. More fundamentally, however, the income and wealth effects
that were boosting household expenditures generally should help to sustain a perhaps somewhat
diminished but still high level of homebuilding activity for a while, despite higher mortgage
financing costs.
Rapid increases in U.S. exports in conjunction with the strengthening of foreign economies were
likely to add to demands on domestic producers. Consistent with this outlook, several members
cited anecdotal reports of improving foreign markets, notably in East Asian countries. At the same
time, despite some expected deceleration in imports as domestic demand moderated, the nation's
trade deficit was projected to increase somewhat further over the year ahead. There was a risk that,
as global portfolios came to be increasingly weighted toward dollar assets, expected returns on
those assets would need to rise to attract world savings, with much of the adjustment potentially
occurring through a decline in the exchange rate of the dollar that would add to pressures on U.S.
prices.
Concerning the outlook for inflation, the members continued to see the risks as primarily tilted
toward rising inflationary pressures, though they anticipated that further gains in productivity
would hold down increases in unit labor costs and prices, at least over the nearer term. A key issue
was whether growth in aggregate demand would moderate sufficiently to at least avoid greater
pressures on what were already very tight labor markets. In this regard, several cited recent
statistical and anecdotal evidence of larger increases in labor compensation, although unit labor
costs did not appear to be trending higher at this point. However, some nonlabor input prices
already were rising faster. The prospects for energy prices were very difficult to predict, but even if
such prices were to stabilize, the passthrough of the large earlier increases into inflation and wage
expectations, as well as into the prices of products that were heavily energy dependent, was likely
to exert some upward pressure on prices throughout the economy.
On the positive side for the near-term inflation outlook, there was no evidence that the acceleration
in productivity was coming to an end. Members commented in this regard that business firms
across the country were continuing to improve the efficiency of their operations in a variety of
ways in order to hold down costs. These efforts included persistingly large investments in new
equipment, rationalization of business organizations, and training or retraining existing workers for
more demanding or new tasks. Members also noted that longer-run inflation expectations generally
did not appear to be worsening, though there had been a slight widening of the spread between
nominal and inflation-indexed Treasury bond yields. While there seemed to be an increasing
number of exceptions, business contacts continued to report that raising their prices was very
difficult to carry out successfully and often impossible. On balance, the outlook for inflation
remained subject to a marked degree of uncertainty. Given current levels of resource use and the
strength of the economic expansion relative to the growth of the economy's long-run potential,
however, the members expected that inflation pressures would gather some momentum over time
unless financial conditions became tighter.
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 on a tentative basis in June 1999. The tentative
ranges approved in June for the period from the fourth quarter of 1999 to the fourth quarter of 2000
included growth of 1 to 5 percent for M2, 2 to 6 percent for M3, and 3 to 7 percent for total
domestic nonfinancial debt.
All but one of the members favored the adoption of the ranges that had been selected on a tentative
basis at the meeting in June. They noted that for some years the ranges for monetary growth had
been chosen to encompass rates of increase that would be expected under conditions of price
stability, assuming historical velocity relationships. This approach had been adopted partly as a
result of the substantial unreliability of the linkage between the growth of the broad monetary
aggregates and economic performance. Since the current benchmark ranges had first been adopted
in the mid-1990s, however, structural productivity growth had increased substantially, raising the
expected rate of growth of money at price stability, other things equal. One member supported a
proposal to adjust the monetary growth ranges upward by at least enough to reflect this
development. However, other members emphasized the uncertainties about the dimensions of this
new trend in productivity growth, the measured rate of increase in prices that would be consistent
with reasonable price stability, and the long-run behavior of velocity. They felt that raising the
benchmark ranges risked misleading the public about the Committee's confidence in the implied
values for these variables going forward, about the Committee's determination to pursue its
fundamental objectives of price stability and sustainable economic expansion, and about the very
low weight most Committee members continued to place on the monetary aggregates in policy
deliberations owing to the uncertainties surrounding them.
At the conclusion of this discussion, the Committee voted to approve without change the ranges for
2000 that it had established on a tentative basis on June 30, 1999. With Mr. Meyer dissenting, the
following statement of longer-run policy and growth ranges for 2000 was approved for inclusion in
the 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 at this meeting established ranges for growth of M2 and M3
of 1 to 5 percent and 2 to 6 percent respectively, measured from the fourth quarter of
1999 to the fourth quarter of 2000. The range for growth of total domestic nonfinancial
debt was set at 3 to 7 percent for the year. The behavior of the monetary aggregates
will continue to be evaluated in the light of movements in their velocities and
developments in prices, the economy, and financial markets.
Votes for this action: Messrs. Greenspan, McDonough, Broaddus, Ferguson,
Gramlich, Guynn, Jordan, Kelley, and Parry.
Vote against this action: Mr. Meyer.
In dissenting, Mr. Meyer noted that although the money growth ranges do not play an important
role in the conduct of monetary policy today, Congress has mandated that the FOMC set and report
ranges for money and credit growth. In recent years, the money ranges have been set to be
consistent with price stability and normal velocity behavior. The rate of money growth consistent
with price stability depends on the average growth of real GDP. Therefore, when there is a
significant increase in the projected average growth rate in real GDP, money growth ranges should
be adjusted upward so that they remain consistent with price stability. While considerable
uncertainty remains about the average rate of growth in real GDP, there is a strong consensus that it
is significantly higher today than when the target ranges were set at their current values. The failure
to adjust monetary aggregate ranges makes them less useful signals of Federal Reserve intentions.
As long as the Federal Reserve is required to set and report ranges for money and debt growth, it
should update them as appropriate.
In the Committee's discussion of policy for the upcoming intermeeting period, all the members
supported a proposal to tighten reserve conditions by a modest amount consistent with an increase
in the federal funds rate of ¼ percentage point to a level of 5-3/4 percent. The Committee's decision
to tighten its policy stance was intended to help bring the growth of aggregate demand into better
alignment with the expansion of sustainable aggregate supply in an effort to avert rising
inflationary pressures in the economy. Relatively high real interest rates would be required to
accomplish this objective, given the effects of increasing productivity and profits on the demand for
capital goods and, through the wealth effect, on consumption spending. Private long-term rates
already had risen considerably, but whether they had reached a level that would lead to a
rebalancing of demand and supply was an open question. Moreover, these rates already
encompassed expectations of a tightening of monetary policy at this and several subsequent
meetings. For a number of reasons, including uncertainties about the outlook for the expansion of
aggregate demand in relation to that of potential supply, the economy's response to the Committee's
earlier policy actions, and the recently somewhat unsettled conditions in financial markets, a
majority of the members expressed a preference for a limited policy move at this time. As long as
inflation and inflation expectations remained damped, these members saw little risk in a gradual
approach to policy tightening and considerable advantage to preserving the possibility of
calibrating those actions to the emerging situation. A few members expressed a preference for an
increase of 50 basis points in the federal funds rate in order to provide greater assurance against a
buildup of inflationary expectations and inflation over coming months. Other members
acknowledged that the Committee might need to move more aggressively at a later meeting should
imbalances continue to build and inflation and inflation expectations clearly begin to pick up.
The members agreed that the statement to be issued after this meeting should highlight their view
that even after their firming today the risks remained weighted mainly in the direction of rising
inflation pressures. There were few signs thus far that the rise in interest rates over recent quarters
was restraining demand in line with potential supply, and the members generally agreed that further
tightening actions might well be needed to ensure that financial conditions had adjusted sufficiently
to rising productivity growth to forestall escalating pressures on labor costs and prices. With the
cushion of unutilized labor resources having dwindled over recent years and with the willingness of
global investors to continue to acquire dollar assets to finance major further increases in imports at
current interest and exchange rates in question, the need to achieve the appropriate financial and
economic balance had become more pressing. In the circumstances, it was important for the public
to understand that the Committee saw inflation risks as persisting even after today's action. At the
conclusion of this discussion, members who favored a 50 basis point increase indicated that, in
light of the clear intention of the Committee to act, if necessary, in a timely manner to contain
inflation, the contemplated inclusion of a statement about the risks of higher inflation in the press
release for this meeting, and the likelihood that the Board of Governors would approve a 25 basis
point increase in the discount rate later in the day, they could accept a 25 basis point rise in the
federal funds rate.
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 policy directive:
To further 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 5-3/4
percent.
The vote also encompassed approval of the sentence below for inclusion in the press statement to
be released shortly after the meeting:
Against the background of its long-run goals of price stability and sustainable
economic growth and of the information currently available, the Committee believes
the risks are weighted mainly toward conditions that may generate heightened inflation
pressures in the foreseeable future.
Votes for this action: Messrs. Greenspan, McDonough, Broaddus, Ferguson,
Gramlich, Guynn, Jordan, Kelley, Meyer, and Parry.
Votes against this action: None.
The meeting was recessed briefly after this vote and the members of the Board of Governors left
the room to vote on pending increases in the discount rate at several Federal Reserve Banks. On the
Board members' return, Chairman Greenspan announced that the Board had approved a ¼
percentage point increase in the discount rate. The Committee concluded its meeting with a review
of the press release announcing the joint policy action.
The members noted with deep regret the recent death of Frank E. Morris, former president of the
Federal Reserve Bank of Boston and a member of the Committee over the course of 20 years
before his retirement at the end of 1988. Mr. Morris is remembered as a highly respected colleague
and friend who made outstanding contributions to the work of the Committee, the Federal Reserve
Bank of Boston, and the Federal Reserve System more generally.
It was agreed that the next meeting of the Committee would be held on Tuesday, March 21, 2000.
The meeting adjourned at 11:50 a.m. on February 2, 2000.
Donald L. Kohn
Secretary
Return to top
Footnotes
1 Attended Tuesday's session only.
2 Attended portion of meeting relating to the staff presentation of policy alternatives.
3 Attended portion of meeting relating to the Committee's review of the economic outlook
and consideration of its money and debt ranges for 2000.
Home | FOMC
Accessibility
To comment on this site, please fill out our feedback form.
Last update: March 23, 2000, 2:00 PM
Cite this document
Federal Reserve (2000, February 1). FOMC Minutes. Fomc Minutes, Federal Reserve. https://whenthefedspeaks.com/doc/fomc_minutes_20000202
@misc{wtfs_fomc_minutes_20000202,
author = {Federal Reserve},
title = {FOMC Minutes},
year = {2000},
month = {Feb},
howpublished = {Fomc Minutes, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/fomc_minutes_20000202},
note = {Retrieved via When the Fed Speaks corpus}
}