FOMC Minutes
February 1-2, 2005
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, 2005, at 1:30 p.m. and
continued on Wednesday, February 2, 2005, at 9:00 a.m.
Present:
Mr. Greenspan, Chairman
Mr. Geithner, Vice Chairman
Mr. Bernanke
Ms. Bies
Mr. Ferguson
Mr. Gramlich
Mr. Kohn
Mr. Moskow
Mr. Olson
Mr. Santomero
Mr. Stern
Messrs. Guynn, Lacker, Mses. Pianalto and Yellen, Alternate Members of the Federal
Open Market Committee
Mr. Hoenig, Ms. Minehan, and Mr. Poole, Presidents of the Federal Reserve Banks of
Kansas City, Boston, and St. Louis, respectively
Ms. Holcomb, First Vice President, Federal Reserve Bank of Dallas
Mr. Reinhart, Secretary and Economist
Ms. Danker, Deputy Secretary
Ms. Smith, Assistant Secretary
Mr. Alvarez, General Counsel
Mr. Baxter, 1 Deputy General Counsel
Ms. Johnson, Economist
Mr. Stockton, Economist
Messrs. Connors, Evans, Howard, Madigan, Oliner, Rolnick, Tracy, and Wilcox,
Associate Economists
Mr. Kos, Manager, System Open Market Account
Mr. Ettin, Deputy Director, Division of Research and Statistics, Board of Governors
Messrs. Slifman and Struckmeyer, Associate Directors, Division of Research and
Statistics, Board of Governors
Messrs. Clouse, Reifschneider, 2 and Whitesell, Deputy Associate Directors,
Divisions of Monetary Affairs, Research and Statistics, and Monetary Affairs,
respectively, Board of Governors
Messrs. Elmendorf, 2 English, Faust, 2 and Leahy, 2 Assistant Directors, Divisions of
Research and Statistics, Monetary Affairs, International Finance, and International
Finance, respectively, Board of Governors
Mr. Simpson, Senior Adviser, Division of Research and Statistics, Board of
Governors
Mr. Skidmore, Special Assistant to the Board, Office of Board Members, Board of
Governors
Mr. Small, Project Manager, Division of Monetary Affairs, Board of Governors
Messrs. Bassett, Lebow, 3 Ms. Lindner, 2 Messrs. Rudd, 2 Tetlow, 2 and Wood, 3
Senior Economists, Divisions of Monetary Affairs, Research and Statistics, Research
and Statistics, Research and Statistics, Research and Statistics, and International
Finance, respectively, Board of Governors
Mr. Durham, 3 Economist, Division of Monetary Affairs, Board of Governors
Mr. Luecke, Senior Financial Analyst, Division of Monetary Affairs, Board of
Governors
Ms. Low, Open Market Secretariat Assistant, Division of Monetary Affairs, Board of
Governors
Mr. Moore, First Vice President, Federal Reserve Bank of Cleveland
Mr. Judd, Executive Vice President, Federal Reserve Bank of San Francisco
Messrs. Eisenbeis, Fuhrer, Goodfriend, Hakkio, and Rasche, Senior Vice Presidents,
Federal Reserve Banks of Atlanta, Boston, Richmond, Kansas City, and St. Louis,
respectively
Messrs. Altig, Dotsey, Ms. Hargraves, and Mr. Wynne, Vice Presidents, Federal
Reserve Banks of Cleveland, Philadelphia, New York, 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, 2005 had been received and that these individuals had executed their
oaths of office.
The elected members and alternate members were as follows:
Timothy F. Geithner, President of the Federal Reserve Bank of New York, with Christine M.
Cumming, First Vice President, Federal Reserve Bank of New York as alternate.
Anthony M. Santomero, President of the Federal Reserve Bank of Philadelphia, with Jeffrey
M. Lacker, President of the Federal Reserve Bank of Richmond, as alternate.
Michael H. Moskow, President of the Federal Reserve Bank of Chicago, with Sandra
Pianalto, President of the Federal Reserve Bank of Cleveland, as alternate.
Jack Guynn, President of the Federal Reserve Bank of Atlanta as alternate, voting pending
the election of the President of the Federal Reserve Bank of Dallas.
Gary H. Stern, President of the Federal Reserve Bank of Minneapolis, with Janet L. Yellen,
President of the Federal Reserve Bank of San Francisco, as alternate.
By unanimous vote, the following officers of the Federal Open Market Committee were
selected to serve until the selection of their successors at the first regularly scheduled meeting
after December 31, 2005, 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
Timothy F. Geithner
Vice Chairman
Vincent R. Reinhart
Secretary and
Economist
Deborah J. Danker
Deputy Secretary
Michelle A. Smith
Assistant Secretary
Scott G. Alvarez
General Counsel
Thomas C. Baxter, Jr.
Deputy General
Counsel
Karen H. Johnson
Economist
David J. Stockton
Economist
Thomas A. Connors,
Charles L. Evans,
David H. Howard,
Brian F. Madigan,
Loretta J. Mester,
Stephen D. Oliner,
Arthur J. Rolnick,
Harvey Rosenblum,
Joseph S. Tracy,
and David W. Wilcox
Associate
Economists
As customarily occurs at the first regularly scheduled meeting of the year, the Committee
reviewed a range of organizational items, covered below.
By unanimous vote, the Federal Reserve Bank of New York was selected to execute
transactions for the System Open Market Account.
By unanimous vote, Dino Kos 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. 4
By unanimous vote, the Authorization for Foreign Currency Operations was reaffirmed in
the form shown below.
AUTHORIZATION FOR FOREIGN CURRENCY OPERATIONS
(Reaffirmed February 1, 2005)
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
Amount of arrangement
(millions of dollars equivalent)
Bank of Canada
2,000
Bank of Mexico
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 1.A. 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 3G(1) of the Board of Governors' Statement
of Procedure with Respect to Foreign Relationships of Federal Reserve Banks dated
January 1, 1944.
By unanimous vote, the Foreign Currency Directive was reaffirmed in the form shown
below.
FOREIGN CURRENCY DIRECTIVE
(Reaffirmed February 1, 2005)
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 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 IMF Article IV.
By unanimous vote, the Procedural Instructions with Respect to Foreign Currency
Operations were reaffirmed in the form shown below.
PROCEDURAL INSTRUCTIONS WITH RESPECT TO FOREIGN CURRENCY
OPERATIONS
(Reaffirmed February 1, 2005)
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.
By unanimous vote, the Authorization for Domestic Open Market Operations was
amended and approved in the form shown below. The amendment involved removing from
paragraph 1(a) the reference to the limit on the amount by which the System Open Market
Account holdings of securities can change between FOMC meetings. This limit had
become outdated, as it had been superseded by other, more effective mechanisms for the
Committee to oversee Desk operations.
AUTHORIZATION FOR DOMESTIC OPEN MARKET OPERATIONS
(Amended February 1, 2005)
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;
(b) To buy U.S. Government securities, 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 65 business 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 65 business 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. The Federal Reserve Bank
of New York shall set a minimum lending fee consistent with the objectives of the program
and 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 and accounts maintained at the Federal Reserve
Bank of New York as fiscal agent of the United States pursuant to Section 15 of the
Federal Reserve Act, 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 accounts on the bases set forth in paragraph l(a) under
agreements providing for the resale by such accounts of those securities in 65 business
days or less 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 such foreign, international, and
fiscal agency 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.
By unanimous vote, the Committee made several amendments to its rules, statements, and
resolutions, including to align the starting dates of Committee membership terms of
Presidents with those of Committee officers, and to authorize the Secretary of the
Committee, with the concurrence of the General Counsel, to make technical changes to the
rules in the future.
By unanimous vote, the Committee amended its Program for Security of FOMC
Information on February 1, 2005, to reflect an updating and streamlining of the document.
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 December 14, 2004
to February 1, 2005. By unanimous vote, the Committee ratified these transactions.
At this meeting the Committee engaged in a broad-ranging discussion of the pros and cons
of formulating a numerical definition of the price-stability objective of monetary policy. A
staff presentation on the topic included a review of the potential costs and benefits of
introducing such a definition as well as of other countries’ experiences. In the subsequent
discussion, meeting participants uniformly agreed that price stability provided the best
environment for maximizing sustainable economic growth in the long run, but expressed a
range of views on whether it would be helpful for the Committee to articulate a specific
numerical definition for the Federal Reserve's price-stability objective--either a single
figure or a range. Those who believed such a move would be on balance beneficial cited,
for example, its usefulness as an anchor for long-term inflation expectations, as a vehicle
for enhanced clarity of Committee deliberations, and as an additional tool for
communications. Several of those who saw greater potential drawbacks were concerned
that such a shift might appear to be inconsistent with the Committee’s dual mandate of
fostering maximum employment as well as price stability or that it might inappropriately
bias or constrain policy at times; in any case, with inflation expectations well-contained
over recent years, the benefits of announcing a specific inflation objective were not likely
to be large. The Committee decided to defer further discussion.
The information reviewed at this meeting suggested that the economy expanded at a solid
pace in recent months. Consumer spending and the housing market continued to exhibit
strength, and business fixed investment grew robustly in the fourth quarter. The pace of
inventory accumulation picked up and industrial production accelerated. The labor market
showed further signs of improvement. Core consumer prices rose moderately over the past
few months, and measures of inflation expectations remained well-anchored.
Moderate increases in payroll employment during November and December pushed the
average monthly advance in the quarter well above that of the third quarter. Employment
gains were fairly widespread, with hiring in business services, health care, financial
activities, and wholesale trade more than offsetting continued sluggishness in
manufacturing and a seasonally adjusted decline in retail services during December.
Surveys of employers’ hiring plans and job openings pointed to continued moderate gains
in employment early this year. The average workweek during the fourth quarter was
unchanged from the third quarter, and as a result aggregate hours decelerated despite the
pickup in employment growth. The unemployment rate held steady at 5.4 percent in
December.
Industrial activity accelerated noticeably during the fourth quarter. The pickup of industrial
production in December owed largely to increased motor vehicle assemblies and a
turnaround in the output of utilities associated with cold weather across the northeast.
Production of high-tech goods slowed slightly in the fourth quarter. Available weekly
physical product data suggested that manufacturing production would increase moderately
in January. Capacity utilization continued to climb through the end of the year but
remained below its longer-run average.
Real consumer spending expanded briskly in December and in the fourth quarter as a
whole, with retail sales exhibiting widespread strength across categories. Expenditures on
consumer services also continued to post solid increases. A surge in light vehicle sales in
December pulled the average rate of sales during the fourth quarter slightly above the
third-quarter pace. Real disposable personal income increased at a rapid rate at the end of
the year--boosted in part by the special dividend payment by Microsoft; excluding this
payment, real disposable personal income rose at a more moderate rate. Measures of
consumer confidence remained favorable and consistent with sustained increases in
spending.
Residential housing activity remained buoyant in the fourth quarter. A rebound in singlefamily housing starts in December from a disappointing November brought the
fourthquarter pace about in line with that earlier in the year. Sales of new and existing
homes slipped some late in the year but remained robust. Mortgage rates had changed little
since August and continued to support demand. Construction activity in the multifamily
sector weakened a bit in November and December, but indicators of underlying demand
pointed to a rebound in starts in January.
Business fixed investment continued to be bolstered by favorable fundamentals, including
sustained expansion of business output, the flush cash position of many firms, readily
available credit, and a still-favorable cost of capital. Equipment and software spending
grew at a solid rate in the fourth quarter, though not quite as briskly as in the third quarter
owing to a deceleration in spending outside the high-tech sector. By contrast, investment in
nonresidential structures had edged down in recent months, with expenditures only for
drilling and mining operations showing some strength amid flat outlays for manufacturing
facilities and a decline in spending on office buildings.
Nonfarm inventories increased a bit more in the fourth quarter than they had in the third
quarter. The buildup of inventories was widespread across manufacturers, wholesalers, and
retailers as well as across stages of production. Motor vehicle inventories were an
exception, as motor vehicle manufacturers sought to reduce stocks of unsold light vehicles.
The aggregate inventory-sales ratio outside of motor vehicles likely edged up in the fourth
quarter but remained within the range that had prevailed since the middle of last year.
The most recent data suggested that the U.S. international trade deficit widened in the
fourth quarter as a result of a broad-based decline in exports of goods and increase in
imports of oil and consumer goods. The expansion in economic activity in the major
foreign industrialized economies appeared to remain sluggish in the fourth quarter, but the
growth of real GDP in Latin America and emerging Asia likely stepped up.
Core consumer prices decelerated over the past few months, while overall consumer prices
were buffeted by movements in energy prices. The rate of increase in core prices in the
twelve months ending in December was somewhat higher than the very low rate that
prevailed during the year-earlier period; the overall index also accelerated, with about half
of its advance accounted for by a sharp rise in energy prices. Measures of inflation
expectations were little changed over the intermeeting period. With regard to labor costs,
the employment cost index decelerated in the fourth quarter; the slowdown was attributable
to wages, which gained only slightly, while benefit costs rose a bit faster than in the third
quarter.
At its meeting on December 14, 2004, the Federal Open Market Committee decided to
increase its target for the federal funds rate 25 basis points to 2-1/4 percent. In its
announcement of this decision, the Committee indicated that the upside and downside risks
to the attainment of both sustainable growth and price stability were roughly equal. The
Committee also noted that output appeared to be growing at a moderate pace and labor
market conditions continued to improve gradually, while inflation and inflation
expectations remained well-contained. As a result, the Committee again judged that policy
accommodation could be removed at a pace that was likely to be measured, although the
path of policy would depend importantly on evolving economic prospects.
The Committee’s decision at its December meeting to increase the federal funds rate had
been fully anticipated in financial markets, and reaction to the attendant statement was
muted. The release of the minutes of the December meeting on January 4, however,
triggered a significant upward revision in the anticipated path of monetary policy:
Investors apparently read them as expressing more widespread concern among Committee
members about inflation pressures than had been the case previously. Market participants
viewed the generally favorable incoming data on economic activity as consistent with their
expectations of firmer policy. Interest rates on intermediate-term Treasury securities rose in
response to the revision to policy expectations, but longer-term yields were little changed
over the intermeeting period. As yields on inflation-indexed Treasury securities rose
roughly in line with their nominal counterparts, longer-term inflation compensation
remained about unchanged. Risk spreads on corporate bonds were stable at relatively low
levels, consistent with favorable indicators of corporate credit quality. Broad stock indexes
declined a bit over the intermeeting period. In foreign exchange markets, the dollar ended
the period little changed on a trade-weighted basis, appreciating against the major
European currencies but falling vis-à-vis other important trading partners.
M2 grew moderately in recent months, its expansion restrained by rising opportunity costs
associated with monetary policy tightening. Because changes in interest rates on liquid
deposits typically lag those in market interest rates, the growth of that component slowed
in the second half of 2004. By contrast, growth of small time deposits, whose yields
closely track market rates, picked up. Currency growth was about flat in December.
In the staff forecast prepared for this meeting, the economy was seen as likely to expand at
a pace a little above that of its longer-run potential over this year and next, while hiring
was expected to firm some more, resulting in a further decrease in the unemployment rate.
Household spending was projected to grow at a fairly solid rate, supported by higher
employment and somewhat lower energy prices but damped somewhat by lessened
stimulus from gains in wealth and the need for households to rebuild savings. After a
temporary dip in the level of business investment this quarter related to the expiration of
the partial-expensing tax provision, investment outlays were seen as likely to resume
vigorous growth in response to steadily rising sales, strong corporate balance sheets,
supportive financial conditions, and an ongoing need to replace or upgrade aging
equipment and software. Real net exports were projected to be roughly stable for several
quarters, held up by the lagged effect of the lower foreign exchange value of the dollar and
some strengthening in foreign demand. Measures of total consumer price inflation were
expected to decline over the forecast horizon as energy prices receded, while core inflation
was seen as remaining stable in the staff forecast. Tendencies for core inflation to increase
because of slightly higher trend unit labor costs and a narrowing margin of resource slack
were expected to be offset by the waning contribution of elevated prices for energy and
imported goods.
In their discussion of the economic outlook, the meeting participants regarded incoming
data since the last meeting as supporting their expectations that, with the further removal of
monetary accommodation, GDP would likely grow at a moderate pace consistent with a
gradual reduction of remaining economic slack, and inflation would probably continue to
be low. Domestic demand had stayed strong through the fourth quarter and should continue
to be bolstered by favorable financial conditions. Recent data indicated low and stable rates
of core consumer inflation and apparently well-anchored inflation expectations. Against
this backdrop, the risks to the outlook for both output and inflation relative to the
Committee's goals appeared to remain well-balanced.
In preparation for the Federal Reserve’s semi-annual report to the Congress on the
economy and monetary policy, the members of the Board of Governors and the presidents
of the Federal Reserve Banks submitted individual projections of the growth of GDP, the
rate of unemployment, and core consumer price inflation for the years 2005 and 2006. As
part of its continuing effort to improve its communications, the Committee had earlier
decided to add one year to the forecast period so as to make the projections more useful to
the public. The forecasts of the rate of expansion in real GDP were concentrated in the
upper part of a 3-1/2 to 4 percent range for 2005; for 2006 the forecasts were in a slightly
lower range of 3-1/4 to 3-3/4 percent, with a central tendency at 3-1/2 percent. These rates
of growth were associated with a civilian unemployment rate in the range of 5 to 5-1/2
percent and a central tendency of 5-1/4 percent in the fourth quarter of 2005 and 5 to 5-1/4
percent in the fourth quarter of 2006. The rate of inflation, as measured by the core PCE
price index, was expected to remain fairly stable, with forecasts concentrated in the lower
portion of a 1-1/2 to 2 percent range for both this year and next.
In their comments about developments in key sectors of the economy, meeting participants
noted that, relative to several months ago, many firms now seemed somewhat more
confident about the economic outlook. The anticipation of increased sales relative to
existing production capacity and also desires to upgrade technology and improve
competitiveness were leading firms to increase spending on equipment and software. Gains
in capital spending had been quite strong last year, and while some of that spending might
have been motivated by the year-end expiration of the partial-expensing provisions of the
tax code, participants had seen little evidence to date that there would be a significant
slowdown in the growth of spending in the early part of 2005. Low longer-term interest
rates on corporate borrowing--reflecting in part narrow credit risk spreads--along with
strong corporate profitability and improved balance sheets were continuing to support
fairly brisk growth of capital expenditures. Low longer-term nominal interest rates were
partly attributable to well-contained inflation expectations, but low real interest rates, along
with slight declines in equity prices so far this year, might reflect lingering caution on the
part of businesses about the outlook. Nevertheless, narrow credit spreads and risk
premiums, along with abundant liquidity in financing markets, suggested that markets now
assigned fairly low odds to significant downside risks.
Solid income gains, low interest rates, and consumer confidence were seen by participants
as helping to sustain strong growth of household spending. Some firms had reported that
holiday sales were higher than a year earlier and better than expected, while auto sales had
responded strongly to incentives in December. The current low measured saving rate
seemed mostly explainable by the strength of expected income gains, low interest rates,
and the increase in household wealth resulting from the rise in equity and housing prices.
Although the saving rate might well drift up over the next couple of years, participants
generally thought it likely that consumer spending would continue growing at a strong
pace. However, a marked slowing in home price appreciation and possible increases in
longer-term interest rates, which would raise financing costs and reduce opportunities to
extract equity from homes through refinancings and home equity loans, were seen as
downside risks to the prospects for consumption spending and for housing construction.
Several participants mentioned that the low level of measured national saving, which
implied a continued need for foreign financing of U.S. investment, and imbalances in the
external sector imparted additional uncertainty to the longer-term economic outlook. The
extent to which the federal budget deficit would decline over coming years was an open
question. As regards the current account balance, some participants noted that the sharp
drop in net exports in November probably reflected transitory factors in large part, as well
as reported measurement errors. However, there has been little hard evidence as yet of a
strengthening in the growth of spending in our foreign trading partners or of substantial
effects on net exports from previous dollar declines. As a result, the external imbalance
seemed likely to remain elevated, with a high level of uncertainty surrounding the
prospects for and path of adjustment.
A number of participants noted continued modest gains in employment, though some
commented that, based on anecdotal information, job growth seemed to have picked up of
late. The increase in aggregate demand was expected to be sufficient over coming quarters
to allow the rate of unemployment to continue to edge lower even as more people return to
the labor force. Participants noted considerable uncertainty about the sustainable rate of
resource utilization and about structural productivity growth. One participant suggested
that, given the range of uncertainty, output might already be at or close to potential. Others
commented that recent studies did not on balance support a conclusion that structural labor
market shifts had caused resource slack to be lower than commonly estimated and that the
flat pattern of growth in wages and compensation suggested an absence of pressures in
labor markets. However, unit labor costs had accelerated over 2004 owing to a tapering off
in productivity growth. If that slowing reflected a moderation in structural productivity
growth and if firms believed that the associated increases in the growth rate of labor costs
were permanent, these cost pressures might be passed through to consumer prices fairly
quickly to preserve profit margins. While participants generally felt that the pace of
underlying productivity growth remained robust, careful attention would need to be paid to
developments regarding unit labor costs and profit margins.
Despite some pickup in costs, participants thought that the rate of core inflation likely
would remain low and stable, assuming further removal of policy accommodation.
Elevated price markups and profits, as well as slack in resource use, had helped absorb cost
increases and put downward pressure on inflation and would likely continue to do so.
Indeed, core inflation measures had eased off, both in the latest readings and on balance
over the second half of 2004 relative to the first half. However, several participants
suggested the possibility of an upward skew to the distribution of inflation outcomes,
especially if there were appreciable further declines in the foreign exchange value of the
dollar or in structural productivity growth; already some participants were hearing
anecdotal reports from firms of an increased ability to pass cost increases through to
product prices, perhaps because of increasing confidence in the outlook for the economic
expansion.
In the Committee's discussion of policy for the intermeeting period, all of the members
favored raising the target for the federal funds rate by 25 basis points to 2-1/2 percent at
this meeting. All members judged that a further quarter-point firming in the target federal
funds rate was appropriate in light of current overall accommodative financial conditions
and the continuing outlook for solid economic growth and diminished slack in resource
utilization. A higher nominal federal funds rate was seen as needed to contain risks of
increased cost and price pressures, but even with this action, the real federal funds rate was
generally seen as remaining below levels that might reasonably be associated with
maintaining a stable inflation rate over the medium run. The pace of policy moves at
upcoming meetings, however, would depend on incoming data.
With regard to the Committee's announcement to be released after the meeting, members
concurred that overall economic prospects were similar to those prevailing at the time of
the December meeting and that consequently the statement should be altered only to the
minor extent required to reflect recent economic developments. They concurred that the
statement should note that output appeared to be growing at a moderate pace despite the
rise in energy prices, that labor market conditions continued to improve gradually, and that
inflation and longer-term inflation expectations remained well-contained. They also agreed
again to characterize the risks to sustainable growth and price stability as balanced. All
members agreed that the FOMC statement for this meeting should again indicate that
policy accommodation could be removed at a pace that was likely to be measured but that
the Committee would respond to changes in economic prospects as needed to maintain
price stability.
At the conclusion of the 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 increasing the
federal funds rate at an average of around 2-1/2 percent."
The vote encompassed approval of the paragraph below for inclusion in the statement to be
released shortly after the meeting:
"The Committee perceives the upside and downside risks to the attainment of
both sustainable growth and price stability for the next few quarters to be
roughly equal. With underlying inflation expected to be relatively low, the
Committee believes that policy accommodation can be removed at a pace that
is likely to be measured. Nonetheless, the Committee will respond to changes
in economic prospects as needed to fulfill its obligation to maintain price
stability."
Votes for this action: Messrs. Greenspan, Geithner, Bernanke, Ms. Bies, Messrs.
Ferguson, Gramlich, Guynn, Kohn, Moskow, Olson, Santomero, and Stern.
Vote against this action: None.
Mr. Guynn voted as alternate member.
It was agreed that the next meeting of the Committee would be held on Tuesday, March 22,
2005.
The meeting adjourned at 12:35 p.m. on February 2, 2005.
Notation Vote
By notation vote completed on December 31, 2004, the Committee unanimously approved
the minutes of the meeting of the Federal Open Market Committee held on December 14,
2004.
Vincent R. Reinhart
Secretary
Footnotes
1. Attended Tuesday’s session only.Return to text
2. Attended portion of meeting relating to special topic of a numerical definition of the pricestability objective for monetary policy.Return to text
3. Attended portion of meeting related to the economic outlook.Return to text
4. Secretary's note: Advice subsequently was received that the selection of Mr. Kos as
Manager was satisfactory to the board of directors of the Federal Reserve Bank of New
York.Return to text
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Cite this document
Federal Reserve (2005, February 1). FOMC Minutes. Fomc Minutes, Federal Reserve. https://whenthefedspeaks.com/doc/fomc_minutes_20050202
@misc{wtfs_fomc_minutes_20050202,
author = {Federal Reserve},
title = {FOMC Minutes},
year = {2005},
month = {Feb},
howpublished = {Fomc Minutes, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/fomc_minutes_20050202},
note = {Retrieved via When the Fed Speaks corpus}
}