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, August 22,

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. McTeer, Santomero, and Stern, Presidents of the Federal Reserve Banks of

Dallas, Philadelphia, and Minneapolis respectively

Mr. Kohn, Secretary and Economist

Mr. Bernard, Deputy Secretary

Ms. Fox, Assistant Secretary

Mr. Mattingly, General Counsel

Ms. Johnson, Economist

Mr. Stockton, Economist

Mr. Beebe, Ms. Cumming, Messrs. Goodfriend, Howard, Lindsey, Reinhart,

Simpson, and Sniderman, Associate Economists

Mr. Fisher, Manager, System Open Market Account

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

and Research and Statistics respectively, Board of Governors

Mr. Whitesell, Assistant Director, Division of Monetary Affairs, Board of Governors

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

Governors

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

Governors

Mr. Kumasaka, Assistant Economist, Division of Monetary Affairs, Board of

Governors

Mr. Connolly, First Vice President, Federal Reserve Bank of Boston

Ms. Browne, Mr. Hakkio, Ms. Krieger, Messrs. Lang, Rasche, Rolnick, and

Rosenblum, Senior Vice Presidents, Federal Reserve Banks of Boston, Kansas City,

New York, Philadelphia, St. Louis, Minneapolis, and Dallas respectively

Mr. Sullivan, Vice President, Federal Reserve Bank of Chicago

Mr. Tallman, Assistant Vice President, Federal Reserve Bank of Atlanta

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

on June 27-28, 2000, 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 June 28, 2000, through August 21, 2000. By unanimous vote, the Committee ratified

these transactions.

The Committee then turned to a discussion of the economic outlook and the implementation

of monetary policy over the intermeeting period ahead.

The information reviewed at this meeting suggested that economic activity was expanding at

a more moderate pace than earlier in the year. Growth in consumer spending had slowed

from the outsized gains seen earlier, and sales of new homes and motor vehicles were down

appreciably from their earlier highs. However, business spending on equipment and software

had continued to surge, and industrial production was still trending upward. Even though

expansion in employment had slowed considerably in recent months, labor markets remained

extremely tight by historical standards, and some measures of labor compensation had

accelerated. With productivity also continuing to accelerate, unit labor costs had changed

little and measures of core price inflation had increased only mildly.

Total nonfarm payroll employment dropped appreciably in July after a small increase in June.

Much of the weakness over the two months reflected substantial declines in the number of

temporary Census workers. In the private sector, payroll gains had diminished somewhat on

balance since the first quarter. The slowdown was particularly large in the usually robust

services sector. Manufacturing employment, by contrast, had risen on net since the early

spring after a lengthy decline. The civilian unemployment rate remained at 4.0 percent in

July.

Industrial production registered further gains in June and July. Persisting strength in

manufacturing output was accompanied by brisk increases in mining activity and sizable

declines in utilities services associated with cooler-than-normal temperatures. In

manufacturing, production of high-tech equipment and most other types of business

equipment remained robust, but the manufacture of motor vehicles and parts dropped

substantially in July after a small June decline. The further step-up in overall manufacturing

activity lifted capacity utilization to a rate around its long-term average.

Growth of nominal retail sales picked up appreciably in July after having slowed noticeably

in the second quarter. Sales rose sharply at general merchandisers, furniture and appliance

stores, and outlets for other durable goods. However, outlays at automotive dealers declined

substantially. Growth in household expenditures for services eased somewhat in the second

quarter (latest available data), with a drop in spending for brokerage services more than

accounting for the slowdown. The recent deceleration in consumer spending occurred against

the background of moderate growth of real disposable income in recent quarters and little net

change in stock market valuations thus far this year. Nevertheless, consumer sentiment

continued to be very buoyant.

With mortgage rates at levels well above their average for last year, total private housing

starts fell further in June and July, reaching their lowest level since late 1997. Sales of new

single-family homes also were weaker in June (latest data). By contrast, sales of existing

homes picked up somewhat in June. Consumers' assessments of homebuying conditions and

builders' ratings of new home sales remained soft.

Growth of business fixed investment, while still robust, slowed considerably in the second

quarter after having surged in the first quarter. Business spending on equipment and software

continued to expand at its very rapid first-quarter pace; investment in high-tech equipment

(notably computers and communications equipment), software, and industrial machinery was

particularly strong. By contrast, outlays for nonresidential structures weakened in the second

quarter after a first-quarter burst.

The book value of manufacturing and trade inventories jumped in the second quarter. Part of

the pickup reflected large increases in stocks of motor vehicles at wholesalers and

automotive dealerships that left inventory-sales ratios in the motor vehicle sector at relatively

high levels. Elsewhere, stockbuilding was only a bit stronger than sales, and inventory-sales

ratios generally remained within their relatively low ranges for the preceding twelve months.

The U.S. trade deficit in goods and services changed little in June from its May level, but the

deficit for the second quarter as a whole was appreciably larger than its average for the first

quarter. Both exports and imports grew rapidly last quarter, though the dollar value of

imports increased significantly more than the value of exports. The available information

indicated that economic expansion was vigorous in both foreign industrial countries and

major developing countries in the second quarter, but recent information pointed to some

slowing of growth in these countries.

Recent data suggested that price inflation had picked up slightly. Consumer prices, as

measured in the CPI, jumped in June in response to a surge in energy prices but climbed only

modestly further in July when energy prices changed little. Excluding the food and energy

components, consumer prices rose moderately in both months. For the twelve months ended

in July, core CPI prices increased somewhat more than in the previous twelve-month period.

When measured by the PCE chain-price index, however, the acceleration in core consumer

prices during the last four quarters was very small. Producer prices exhibited a pattern that

was generally similar to that of consumer prices. Prices of all finished goods jumped in June

and were unchanged in July, and core producer prices were unchanged on balance in the

June-July period. For the twelve months ended in July, core producer prices rose slightly

more than in the previous twelve-month period. With regard to labor compensation, recent

data suggested an acceleration, on balance, over the past year. Growth in hourly

compensation for private industry workers slowed somewhat in the second quarter after

having risen sharply in the first quarter. Over the four quarters ended in June, however, the

change in compensation rates was substantially larger than the change over the previous

four-quarter period. By contrast, the advance of average hourly earnings of production or

nonsupervisory workers for the twelve months ended in July was about the same as that for

the previous twelve-month period.

At its meeting on June 27-28, 2000, the Committee adopted a directive that called for

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

about 6-1/2 percent. In reaching this decision, the members cited increasing though still

tentative indications of some slowing in aggregate demand from an unsustainably elevated

pace and the likelihood that the policy tightening actions implemented earlier had not yet

exerted their full retarding effects on spending. The members agreed, however, that the

statement accompanying the announcement of their decision should continue to underscore

their view that the risks remained weighted mainly in the direction of rising inflation.

Open market operations were directed throughout the intermeeting period toward

maintaining the federal funds rate at the Committee's target level of 6-1/2 percent, and the

rate averaged close to the intended level. Other interest rates generally moved lower over the

period, extending declines that had begun during the spring. Factors contributing to the most

recent reductions included economic data releases that were viewed, on balance, as

confirming earlier indications that demand growth was slowing to a more sustainable pace

and that price pressures would remain damped, thereby lessening or potentially obviating

further tightening of monetary policy. Most broad indexes of stock market prices rose

somewhat over the period since the June meeting.

In foreign exchange markets, the trade-weighted value of the dollar increased on net against

an index of major currencies, even though interest rate differentials moved against assets

denominated in dollars relative to those of other industrial countries. At least in part, the

dollar's appreciation reflected heightened market perceptions that economic growth in the

United States, though evidently moderating from its rapid pace in recent quarters, was likely

to continue to exceed that in most other industrial nations. The foreign exchange value of the

dollar dropped slightly against the currencies of other important trading partners, paced by a

substantial rise in the value of the Mexican peso in response to brightening political and

economic prospects in Mexico.

The growth of domestic nonfinancial debt moderated slightly in the second quarter as a result

of an accelerated paydown in federal debt while private borrowing remained brisk. However,

partial data for the period since midyear suggested that the overall growth in household and

business borrowing might also be slowing somewhat. The expansion of M2 had declined

substantially since late spring, apparently in part as a result of the widening opportunity costs

of holding assets in M2 stemming from higher market interest rates and possibly also from

slackening growth in household incomes. Sluggish currency flows were another contributing

factor. At the same time, M3 accelerated in July and partial data pointed to further robust

growth in August. The advance in this broader aggregate seemed to be driven by interestsensitive inflows to M3's institutional money fund component.

The staff forecast prepared for this meeting suggested that the economic expansion, after

slowing appreciably from its elevated pace of recent quarters, would be sustained at a rate a

little below that of the staff's upwardly revised estimate of the economy's potential output.

The forecast anticipated that the expansion of domestic final demand would be held back to

some extent by the waning and eventual disappearance of positive wealth effects associated

with outsized earlier gains in equity prices and by higher interest rates. As a result, growth of

spending on consumer durables was expected to stay well below that in recent quarters and

housing demand to stabilize at a level below recent highs. By contrast, the expansion of

business fixed investment, notably in equipment and software, was projected to remain

robust, and further solid economic growth abroad was expected to boost the expansion of

U.S. exports for some period ahead. Core consumer price inflation was projected to rise

somewhat over the forecast horizon, in part as a result of higher import prices but largely as a

consequence of some further increases in nominal labor compensation gains that would not

be fully offset by growth in productivity.

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

agreed that the information available since midyear provided increased evidence that the

growth of aggregate demand and that of aggregate supply were coming into closer balance.

The statistical evidence reviewed by the Committee, which was supported by widespread

anecdotal reports, pointed to a noticeable slowing in the expansion of demand and economic

activity. The slowdown was led by a moderation in consumer spending and some decline in

housing expenditures that were occurring even before the full effects of earlier tightening in

financial conditions had been felt. At the same time, an apparent continued acceleration in

underlying productivity was boosting the economy's potential output growth and, in the

context of the leveling out of the broadest measures of equity prices this year, was doing so

without the full feedback on demand of previous such accelerations. While prices were rising

somewhat more than a year ago, most of this pickup seemed to reflect the direct and indirect

effects of higher energy prices, and the increase in productivity growth had kept unit labor

costs well contained despite more rapid gains in compensation. These developments had

much improved the prospects for a sustainable economic expansion at the prevailing stance

of monetary policy. Even so, the members anticipated that labor markets would remain

exceptionally tight, and with labor compensation already accelerating and higher energy

prices potentially raising inflation expectations, they agreed that the risks remained weighted

toward rising inflation.

In the Committee's discussion of the outlook for the economy, members focused considerable

attention on the growth rate of the economy's supply potential--its ability to satisfy further

growth in demand on a sustainable basis. The widespread application of technological

advances and the associated surge in outlays for capital equipment had been fostering an

acceleration in labor productivity that seemed to be ongoing. Data on productivity and capital

accumulation that had become available in recent months had tended to confirm these trends,

and the statistical evidence was reinforced by comments from many business executives and

by persistent upward revisions to long-term profit forecasts, which had yet to suggest a

leveling out of productivity growth.

Quickening productivity had been the fundamental factor behind the economy's remarkable

performance in recent years. Members noted, however, that historical episodes involving

major changes in productivity trends had been rare and the past therefore provided a limited

basis for evaluating the course of future productivity developments. Accordingly,

considerable caution needed to be exercised in assessing the outlook for productivity and in

relying on projections of the economy and prices, which necessarily embodied judgments

about this outlook, in making monetary policy. Another source of uncertainty related to the

interactions of rising productivity and aggregate demand. Over the course of recent years,

accelerating productivity gains had tended to boost aggregate demand by even more than

potential aggregate supply owing to the effects of stronger profits on investment spending

and, through the rising stock market, on consumption as well. However, the leveling out in

stock prices this year suggested that recent increases in productivity growth had been built

into market expectations and prices some time ago and were not likely to provide the same

impetus to demand going forward as had past productivity acceleration. Members cautioned

nonetheless that the possibility that long-term interest rates and equity prices did not yet

adequately reflect ongoing productivity gains could not be ruled out, with attendant effects

boosting demand. Finally, rising productivity clearly had been a major force in containing

inflation in a period of unusually low unemployment rates, and while some of the

interactions between productivity growth and wages and prices could be adduced, these

interactions involved complex processes that were very difficult to assess given the paucity

of prior experience. As a consequence, judgments about labor market pressures, productivity,

and inflation had to be viewed with care on the basis of evolving developments.

In their review of the outlook for expenditures in key sectors of the economy, members

observed that growth in consumer spending had moderated substantially after a period of

exceptional gains in late 1999 and early 2000. The clearest evidence of softening consumer

demand tended to be concentrated in sales of motor vehicles and in housing-related durable

goods. Available data on reduced growth in consumer spending were supported by anecdotal

reports of some slippage in retail sales below expectations in several parts of the country.

Factors underlying these developments included diminishing wealth effects after several

months of limited changes in equity prices, the cumulative buildup in the stock of motor

vehicles and other consumer durables owned by the public, and the constraining effects of

higher energy prices on incomes available to be spent on other goods and services. While

these factors might well continue to damp the growth of consumer spending going forward,

members noted that consumer confidence remained at a high level, consumer incomes were

rising, and no anecdotal or other evidence pointed to any marked deterioration in consumer

spending that would pose a potential threat to the sustainability of the economic expansion.

The housing sector provided the clearest indication of a response of aggregate demand to

firming interest rates, affecting industries producing construction materials and household

furnishings. Anecdotal reports from much of the country tended to confirm the statistical

evidence of a downward trend in housing starts and home sales. Factors helping to explain

the softness in housing, which included the rise that had occurred in mortgage interest rates

and reported overbuilding in some metropolitan areas, were expected to continue to exert

some downward pressure on housing activity. However, reference also was made to

indications that wealth effects were continuing to boost housing demand and prices in parts

of the country.

In sharp contrast to developments in the consumer and housing sectors, business outlays for

capital equipment and software had continued to rise at exceptional rates, even after several

years of rapid growth. The persistence of dramatic expansion evidently reflected expectations

that such capital investments would continue to earn very high rates of return. Although the

extraordinary rates of increase in investment outlays currently displayed little or no sign of

abating, historical patterns indicated that even dramatic surges or shifts in technology

invariably lost momentum once the new technology was widely adopted, and rates of return

on further investments tended to diminish. There was no reliable way to anticipate the timing

of such a downturn and indeed little reason to expect a turnaround over the nearer term in the

current investment boom. Members noted, however, that the investment outlook for the

nonresidential construction sector presented a much more mixed picture. While such business

investment continued to exhibit considerable vigor in many areas, it clearly had weakened in

others and for the nation as a whole seemed poised for a relatively subdued advance in

coming quarters. One factor pointing in the latter direction was evidence of more cautious

attitudes on the part of many business executives and especially their lending institutions.

The strengthening economies of many U.S. trading partners were fostering rising demand for

U.S. exports, a trend that seemed likely to persist according to reports from many domestic

business contacts. Nonetheless, the nation's current account deficit apparently continued to

increase, a development about which members expressed concern in view of the risks that it

posed for the foreign exchange value of the dollar and domestic inflation over time. Still, the

experience of the last few years clearly demonstrated that the dollar was likely to remain

strong as long as foreign investors continued to see attractive investment opportunities in the

United States. Past experience also suggested that international capital flows can quickly

reverse themselves, but the timing of a major turnaround in the dollar, if any, could not be

predicted with any degree of confidence.

In the Committee's discussion of the outlook for inflation, members noted that overall

measures of price inflation had picked up to fairly high levels by the standards of recent

years, largely as a result of higher energy costs. Moreover, supply factors in major energy

markets--petroleum, gas, and electricity generating capacity--did not point to significant

relief for some considerable period of time. Still, core consumer price indices remained

relatively damped and had risen only a little over the last year, especially when measured by

the PCE chain-price index, and that suggested underlying price pressures remained largely

contained. Nonetheless, a number of members were concerned that unusually taut labor

markets could begin at some point to show through to increases in labor compensation in

excess of productivity gains, pressuring unit costs and prices. Evidence of this had yet to

emerge, perhaps because productivity continued to accelerate, but a flattening out of the rate

of increase in productivity, even at a high level, could well pose at some point a risk to

continued favorable inflation performance. To be sure, there were a number of positive

factors in the outlook for inflation, including highly competitive conditions in many markets,

stable and relatively favorable expectations with regard to the longer-run inflation outlook,

and signs that the remarkable acceleration in productivity was continuing. On balance,

however, the members saw a mild upward trend in key measures of inflation as a distinct

possibility, albeit one that was subject to considerable uncertainty.

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

endorsed a proposal to retain the current stance of policy, consistent with a federal funds rate

continuing to average about 6-1/2 percent. In their assessment of factors leading to this

decision, the members focused on the further evidence that moderating demand and

accelerating productivity were closing the gap between the growth of aggregate demand and

potential supply, even before earlier Committee tightening actions had exerted their full

restraining effects. While the recent rally in domestic financial markets could be viewed as

having partially eroded the degree of monetary restraint implemented earlier, real interest

rates for private borrowers were still at relatively elevated levels, banking institutions were

continuing to report further tightening of their standards and terms for business loans, equity

prices had risen only modestly, and the dollar had firmed over recent months. In addition, the

last few readings on core inflation had not suggested a further upward drift, unit labor costs

were not increasing, and longer-term inflation expectations had been stable for some time.

Accordingly, the Committee incurred little risk in leaving the stance of policy unchanged at

this meeting and waiting to see how the various factors affecting both supply and demand in

the economy unfolded and influenced the prospects for economic activity and prices.

At the same time, many members emphasized that the Committee needed to be prepared to

act promptly should inflationary pressures appear to be intensifying, and in the Committee's

discussion of the balance-of-risks sentence to be included in the press statement that would

be issued after this meeting, all the members agreed that the sentence should continue to

indicate that the risks to the economy remained weighted toward higher inflation in the

foreseeable future. While the members did not expect underlying inflation to intensify

materially, especially over the nearer term, the statement was intended to express their views

about the longer term, and over that horizon they agreed that the risks lay in the direction of

price acceleration. The risks of higher inflation over time were seen importantly to stem from

the unusually taut conditions in labor markets, which could place upward pressures on unit

costs and prices, especially once productivity growth leveled out in the future. But members

also cited the potential for persistently higher energy prices to affect longer-run inflation

expectations, and the possibility that, taking into consideration recent declines in long-term

interest rates, financial conditions might not yet be tight enough to balance aggregate demand

and potential supply in the face of optimism about the growth of labor and capital income in

association with accelerating productivity.

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

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

System Account in accordance with the following domestic policy directive:

The Federal Open Market Committee seeks monetary and financial conditions

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

further its long-run objectives, the Committee in the immediate future seeks

conditions in reserve markets consistent with maintaining the federal funds rate

at an average of around 6-1/2 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 that 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.

It was agreed that the next meeting of the Committee would be held on Tuesday, October 3,

2000.

The meeting adjourned at 12:50 p.m.

Donald L. Kohn

Secretary

Return to top

Home | FOMC

Accessibility

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

Last update: October 5, 2000, 2:00 PM