FOMC Minutes

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

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

15, 2000, at 9:00 a.m.

Present:

Mr. Greenspan, Chairman

Mr. McDonough, Vice Chairman

Mr. Broaddus

Mr. Ferguson

Mr. Gramlich

Mr. Guynn

Mr. Kelley

Mr. Meyer

Mr. Parry

Mr. Hoenig, Ms. Minehan, Messrs. Moskow and Poole, Alternate Members of the

Federal Open Market Committee

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

Dallas, Minneapolis, and Philadelphia respectively

Mr. Kohn, Secretary and Economist

Mr. Bernard, Deputy Secretary

Mr. Gillum, Assistant Secretary

Ms. Fox, Assistant Secretary

Mr. Mattingly, General Counsel

Ms. Johnson, Economist

Mr. Stockton, Economist

Ms. Cumming, Messrs. Eisenbeis, Goodfriend, Howard, Lindsey, Reinhart, Simpson,

and Sniderman, Associate Economists

Mr. Fisher, Manager, System Open Market Account

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

Mr. Ettin, Deputy Director, Division of Research and Statistics, Board of Governors

Mr. Madigan, Associate Director, Division of Monetary Affairs, Board of Governors

Messrs. Oliner, Slifman, and Struckmeyer, Associate Directors, Division of Research

and Statistics, Board of Governors

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

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

Governors

Mr. Barron and Ms. Pianalto, First Vice Presidents, Federal Reserve Banks of Atlanta

and Cleveland respectively

Messrs. Hakkio, Hunter, Ms. Mester, Messrs. Rasche, Rolnick, and Rosenblum,

Senior Vice Presidents, Federal Reserve Banks of Kansas City, Chicago,

Philadelphia, St. Louis, Minneapolis, and Dallas respectively

Messrs. Fuhrer, Judd, and Ms. Perelmuter, Vice Presidents, Federal Reserve Banks of

Boston, San Francisco, and New York respectively

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

on October 3, 2000, 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.

The Manager also reported on developments in domestic financial markets and on System

open market transactions in government securities and federal agency obligations during the

period October 3, 2000, through November 14, 2000. By unanimous vote, the Committee

ratified these transactions.

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

implementation of monetary policy over the intermeeting period ahead.

The information reviewed at this meeting suggested that economic growth had slowed

appreciably from the rapid pace in the first half of the year. The slowdown was most apparent

in housing construction and business investment in equipment and software, while consumer

spending remained on a relatively solid upward trend. With expansion of aggregate demand

less robust, industrial production and employment were rising at appreciably slower rates,

though unemployment remained very low. Core inflation appeared to be increasing, but very

gradually and in part reflecting the indirect effects of higher energy costs.

Growth in private nonfarm payroll employment slowed in October from the moderate

September rate; since midyear, employment growth had been considerably lower than earlier

in the year. The falloff in growth was concentrated in the manufacturing, retail trade, and

temporary help services industries. By contrast, the pace of hiring was brisk in real estate and

construction and slowed only slightly in services industries other than temporary help. The

civilian unemployment rate held at its current cyclical low of 3.9 percent in October.

Industrial production edged down in October, after its growth had dropped abruptly in the

third quarter to a pace well below that recorded during the first half of the year.

Manufacturing output was unchanged in October; a further sharp decline in production of

motor vehicles followed on the heels of a third-quarter slump, and the manufacture of other

durables also fell. Expansion of output of high-tech equipment, which had been

extraordinarily rapid earlier in the year, slowed somewhat in October. With production

unchanged in October, the rate of capacity utilization in manufacturing fell to a level slightly

below its long-term average.

Nominal retail sales edged up in October after rising substantially in the third quarter.

Nondurable goods stores, notably apparel, registered a sizable increase in October sales, but

that gain was more than offset by declines in outlays for durable goods, particularly motor

vehicles. Consumer spending for services continued to grow at a moderate rate through

September (latest data). Recent consumer buying patterns seemed to reflect moderate growth

of real disposable income in recent quarters and still generally buoyant consumer sentiment.

Single-family housing starts declined further in the third quarter as a whole. Nevertheless, the

drop in interest rates on fixed-rate mortgages since mid-May might have sparked the slight

increase, on balance, in single-family housing starts in August and September and the upturn

in new home sales in the third quarter. After a strong first half, multifamily starts dropped in

the third quarter despite low vacancy rates and rising apartment rents.

Business investment in durable equipment and software decelerated sharply in the third

quarter. In the high-tech area, spending on computers and related equipment as well as

software recorded further robust gains. However, expenditures on communications

equipment declined after a half-year of very strong increases, and outlays for other types of

equipment also softened; investment in aircraft, autos, trucks, and construction and mining

equipment fell, while growth of spending on agricultural and industrial equipment slowed.

Despite the third-quarter weakness in expenditures, recent data on orders for nondefense

capital goods suggested that spending for many types of equipment remained on an upward

trend. Data on construction put in place indicated that nonresidential building activity picked

up considerably in the third quarter, with the institutional, industrial, and office categories

recording solid gains. Market fundamentals, including rising property values and low

vacancy rates, suggested that further expansion of office building was likely. Other

commercial construction, by contrast, remained weak, partly reflecting the already

substantial stock of large retail stores and regional malls.

The pace of inventory investment slowed considerably in the third quarter. However, for a

second consecutive quarter, the book value of inventories rose faster than sales, and

inventory overhangs were evident in some industries. In manufacturing, stock accumulation

edged up and the aggregate stock-shipments ratio in September, though still quite low by

historic norms, was just above the middle of its range over the preceding twelve months. In

the wholesale sector, inventory accumulation dropped in the third quarter; however, sales

declined and the aggregate inventory-sales ratio for the sector was at the top of its narrow

range over the past year. Retail stockbuilding also slowed in the third quarter, with much of

the drop reflecting reductions in motor vehicle inventories at auto dealers. The aggregate

inventory-sales ratio for this sector edged lower and was near the middle of its range over the

past year.

The U.S. trade deficit in goods and services narrowed in August after having widened

considerably in July; on balance, the trade deficit increased somewhat from its secondquarter level. The value of exports grew in the July-August period at about the same strong

pace as that recorded for the second quarter. The value of imports also rose briskly over the

two months, but at a slightly lower rate than that of the second quarter. The available

information indicated that, on average, economic expansion in the foreign industrial

countries slowed appreciably in the third quarter from the elevated pace during the first half

of the year and that the slowdown importantly reflected little or no growth in Japan. In

addition, economic activity appeared to have decelerated in many developing countries in the

third quarter but remained solid in most of those nations.

Incoming data continued to indicate that price inflation had picked up somewhat. Consumer

prices, as measured by the CPI, rose considerably in September (latest data) after having

edged down in August; a sizable step-up in energy prices and a noticeable increase in core

inflation contributed about equally to the acceleration. Although the core measure of CPI

prices accelerated noticeably in the twelve months ended in September compared with the

previous twelve-month period, PCE price inflation had been about steady. By contrast, core

producer prices dropped a little in October and decelerated somewhat on a year-over-year

basis, though the deceleration was more than accounted for by a surge in tobacco prices

during the year ended in October 1999. With regard to labor costs, the third-quarter rise in

the employment cost index (ECI) for hourly compensation of private industry workers was

smaller than the elevated increase of the previous quarter. However, ECI compensation

advanced considerably more during the year ended in September than in the previous year,

with larger increases in benefits accounting for much of the rise. Average hourly earnings of

production or nonsupervisory workers increased at a slightly higher rate in both October and

the twelve months ended in October.

At its meeting on October 3, 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 taking that action, the members noted that the growth of aggregate

demand had moderated appreciably, the prospects for a significant rise in inflation seemed

quite limited for the near term, and previous policy tightening actions and the earlier rise in

energy prices had not yet exerted their full restraining effects on demand. Nevertheless, in the

context of continuing substantial pressures on labor resources and the potential effects of the

previous rise in energy prices on inflation expectations, members believed it was necessary to

remain on guard for signs of rising inflation over the intermediate term. As a result, they

agreed that the statement accompanying the announcement of their decision should continue

to indicate 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 targeted level of 6-1/2 percent, and the

average rate remained close to the intended level. Short- and intermediate-term market

interest rates registered small mixed changes over the intermeeting interval. At longer

maturities, Treasury coupon yields drifted slightly lower, and rates on high-grade corporate

securities changed little. However, growing market concerns about the outlook for corporate

earnings led to substantial increases in interest rates on lower-rated investment-grade and

high-yield bonds, and the early November survey of senior loan officers indicated that banks

had tightened further their standards and terms for business loans. The mixed reports on

corporate earnings, incoming information indicating slower growth in economic activity in

the United States, and wide swings in and uncertainty about the price of oil contributed to a

sharp drop in broad indexes of stock market prices over the period in volatile trading.

In foreign exchange markets, the trade-weighted value of the dollar increased slightly further

on balance over the intermeeting interval in terms of the currencies of a broad group of U.S.

trading partners. Among the major foreign currencies, the dollar moved up against the euro

and the Canadian and Australian dollars but edged down a bit in terms of the yen. The dollar

rose to a record level against the euro in the weeks following the FOMC meeting, but the

release of weaker-than-expected U.S. economic growth data in late October was seen as

possibly marking a shift in the relative growth rates, and the dollar subsequently gave up

much of its intermeeting gains in terms of the euro. The dollar also posted gains against an

index of the currencies of other important trading partners, largely reflecting conditions in

some emerging economies. Concerns about Argentina's recent economic and fiscal

performance and its external financing situation spilled over to other Latin American

countries, notably Brazil and Mexico, and political developments in Indonesia and the

Philippines depressed the currencies of those countries.

The broad monetary aggregates decelerated in October. The slower growth of M2 followed

strong expansion in August and September, however, and growth since midyear was at about

the same pace as in the first half of the year. M3 also increased at a slower rate in October,

partly reflecting weakness in bank lending and declines in bank holdings of securities. The

growth of domestic nonfinancial debt picked up in September in association with an increase

in the pace of private borrowing and a less rapid paydown of federal debt.

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

slowed considerably, would be sustained over the forecast horizon at a rate a little below the

staff's current 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

influence of the positive wealth effects associated with past outsized gains in equity prices

but also by some firming of conditions in credit markets. As a result, growth of spending on

consumer durables was expected to be appreciably below that in recent quarters and housing

demand to trend slightly downward. By contrast, business fixed investment--notably, outlays

for equipment and software--was projected to remain relatively robust, and brisk growth

abroad would undergird the expansion of U.S. exports. Core price inflation was projected to

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

a consequence of 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, members

commented that the information that had become available since the previous meeting had

reinforced earlier indications of appreciable slowing in the expansion of economic activity.

The cumulating evidence of moderating expansion seemed especially clear in the information

on employment growth and manufacturing output. Aggregate demand currently appeared to

be growing at a pace a little below the rate of increase in the economy's output potential, a

configuration that could well persist in coming quarters. Actual and expected shortfalls in

business profitability had led to tighter credit conditions for many borrowers and lower

equity prices, which would continue to restrain spending; moreover, further pressure on

profit margins, with adverse effects on financial markets, business investment, and consumer

spending, was a distinct possibility. Members observed, however, that economic growth had

rebounded sharply from temporary slowdowns previously in the current expansion, and

several noted the possibility that a less restrictive fiscal policy stance would be bolstering

demand in the years ahead.

Although the softening in aggregate demand moved in the direction of containing potential

inflation pressures, the members continued to be concerned about the possibility that

inflation would edge higher. Even with demand growth slower, labor markets were likely to

remain unusually tight for some time, and in such circumstances labor costs could begin to

rise increasingly in excess of even elevated gains in productivity. Some members also

commented that energy prices might not trend lower as soon as, or to the extent, now

expected by market analysts, and a few raised the prospect that the dollar might depreciate

from its currently elevated level and add to potential upward pressures on domestic prices

over the forecast horizon.

A key factor underlying the economic outlook was the emergence in recent months of less

accommodative financial conditions for many businesses, including some further tightening

since the meeting in early October, and decreases in the wealth of households. The slowdown

in the pace of the expansion and disappointing business earnings had fostered more cautious

attitudes on the part of lending institutions and investors. Anecdotal comments from around

the country supported the indications from surveys of tightening terms and standards at banks

for business borrowers. At the same time, spreads in securities markets had widened, most

sharply on obligations of borrowers rated below investment grade, and as a result those

borrowers faced higher credit costs. Lender caution and less receptive markets probably had

contributed to considerable weakening recently in overall growth of credit to nonfinancial

businesses. Rising interest and energy costs in conjunction with restraint on the prices of

final output had depressed the earnings and stock market valuations of many firms, notably

in the high-tech area, with adverse repercussions on their ability to borrow and willingness to

invest and on the financial position of the households holding their equity shares.

Less hospitable conditions in financial markets for a number of borrowers and deteriorating

profit margins had contributed to a substantial moderation in the growth of business fixed

investment in recent months, and anecdotal reports of reductions in capital spending plans

were consistent with continued more moderate expansion in such outlays. The recent

deceleration was especially pronounced in expenditures for high-tech equipment and

software, though such spending was still growing at a robust pace. It was suggested that the

weakening expansion of expenditures in these capital goods might reflect a surfeit in capacity

following a period of extraordinary growth in many industries--for example, those related to

fiber optics. The available evidence did not indicate any material decrease in the optimism of

equity market analysts as a group regarding the outlook for earnings over the long term. This

suggested that their contacts among business executives remained fundamentally upbeat

about the long-term prospects for productivity and earnings. In these circumstances,

appreciable further growth in investment spending seemed to be in prospect for coming

quarters, though undoubtedly at a slower pace than had been experienced on average in

recent quarters.

Even limited slowing in the expansion of investment expenditures could be expected to have

retarding effects on the growth of consumer income and spending. While such spending had

held up well in the third quarter, the limited information available on more recent

developments suggested some softening, though the data were not conclusive. Factors cited

in support of a somewhat weaker trajectory in consumer spending included the impact of

elevated energy costs, the high debt burdens of many households, and the ebbing of the

wealth effects from strong earlier gains in stock market prices. Even so, anticipated increases

in employment and income and still relatively high levels of consumer confidence were

likely to support appreciable further growth in consumer spending, albeit probably at a rate

somewhat below the brisk pace of the past few years.

Key indicators of housing activity had fluctuated considerably this year, but the evidence of

recent months pointed on balance to a mild softening in such activity, a perception that was

supported by anecdotal reports from several areas around the country. In general, housing

demand was expected to edge lower in response to the same income and wealth effects that

were influencing consumer durables expenditures and to the increase in mortgage interest

rates that had occurred on net over the past year.

Current forecasts of appreciable growth in foreign economic activity had favorable

implications for U.S. exports and the nation's trade balance, but some members expressed

concern about financial and economic weakness in a number of foreign economies. Failure to

remedy structural and other problems in some countries incurred the risk of economic and

financial distress, with possible spillover effects on other economies and financial markets.

While those risks seemed small, they might be difficult to contain. The exchange value of the

dollar was another source of uncertainty for the outlook. In the view of some members, the

dollar could well come under downward pressure as the nation's current account deficits

continued to cumulate. A lower dollar would tend to have a favorable effect on the trade

deficit but also would add to inflationary pressures in the domestic economy.

Members continued to be concerned about the outlook for inflation. Measured increases in

"headline" consumer prices could be explained mostly as a result of sharp advances in energy

prices, which many observers expected to be reversed at some point. However, core

consumer price measures also displayed a gradual uptrend, perhaps only in part as a

consequence of the passthrough effects of persistently high energy prices. Measures of labor

compensation appeared to be accelerating, partly as a result of sharply rising health benefit

costs. To be sure, unit labor costs in the nonfinancial corporate sector had changed little over

the past year, undoubtedly reflecting impressive further gains in productivity. Even so, higher

interest rates and increased energy and other input costs were adding to overall production

expenses. To date, competitive pressures were continuing to inhibit the ability of many firms

to pass on those costs, although a significant exception was a number of successful efforts to

impose energy surcharges.

Looking to the future, however, the members generally agreed that the risks were in the

direction of a heightening in inflation pressures despite their belief that growth in overall

demand now seemed to have declined to a more sustainable pace and probably would

continue to expand for a time at a rate below that of the economy's output potential. The

members believed that growth in labor compensation was likely to remain under upward

pressure from the anticipated persistence of very tight conditions in labor markets that would

enable wages to catch up to earlier gains in labor productivity. Whether offsetting increases

in the growth of labor productivity would materialize was open to question, in part because

productivity growth might tend to level out in the context of less ebullient expansion in

business investment. Another key factor in the outlook for inflation was the course of oil and

other energy prices. Thus far, increases in energy costs had been reflected only marginally in

core consumer prices, and while there were widespread market expectations of declining oil

prices in coming quarters, a great deal of uncertainty, including the potential for more

difficulties in the Middle East, surrounded the timing and extent of such an outcome. The

longer relatively high energy prices persisted, of course, the greater might be their imprint on

both inflation expectations and core prices. In sum, the moderation in economic expansion,

the persistence of highly competitive conditions in most domestic markets, the outlook for

continued robust gains in productivity, and relatively subdued inflation expectations were

favorable factors in the inflation outlook, but the members continued to view the prospects as

weighted on balance in the direction of a gradual uptrend in core inflation.

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

supported a proposal to maintain an unchanged policy stance consistent with the federal

funds rate continuing to average about 6-1/2 percent. Despite clear indications of a more

moderate expansion in economic activity, persisting risks of heightened inflation pressures

remained a policy concern, particularly in the context of an evident, if gradual, uptrend in key

measures of core inflation. Indeed, a few members commented that measures of core

inflation already were near or slightly above levels that they viewed as acceptable for the

longer run. Although overall financial conditions had tightened over the course of recent

months and currently appeared to be holding down the growth in spending, this added

restraint was likely to be necessary to contain inflation pressures. In these circumstances, all

the members saw the maintenance of a steady policy as the best course at this juncture to

promote the Committee's longer-run objectives of price stability and sustainable economic

expansion.

Still, growth had slowed more quickly than many members had anticipated, and financial

market and other developments now seemed more likely to keep pressures on resources from

mounting over coming quarters. Under the circumstances, the members focused at this

meeting on the potential desirability of moving from a statement of risks weighted toward

rising inflation to one that indicated a balanced view of the risks to the Committee's goals of

price stability and sustainable economic growth. The members agreed that a stronger case

could be made for a shift to a balanced risk statement than at the previous meeting. A few

indicated that the decision was a close call for them, and several commented that

developments might be moving in a direction that would make a shift advisable in the

relatively near future. Even so, they were unanimous in concluding that such a change would

be premature at this time. Concerns about the possibility of rising inflation persisted. And

while the members could see an increased risk of a marked slowing of growth relative to the

rapid rate of expansion of the economy's potential, the degree to which growth in demand

might remain sufficiently damped to contain and offset those inflation pressures was quite

uncertain. Moreover, a shift in the Committee's published views might induce an undesirable

softening in overall financial market conditions, which in itself would tend to add to inflation

pressures. The members concluded that retaining a risk statement weighted toward more

inflation pressures would best represent their current thinking, but they believed it was

desirable to provide some recognition of the emergence of increased downside risks to the

economic expansion in the statement to be released after this meeting.

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, Kelley, Meyer, Moskow, and Parry.

Votes against this action: None.

Mr. Moskow voted as alternate member for Mr. Jordan.

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

19, 2000.

The meeting adjourned at 1:00 p.m.

Donald L. Kohn

Secretary

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