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2001-11-06

Statement

The Federal Open Market Committee decided today to lower its target for the federal funds rate by 50 basis points to 2 percent. In a related action, the Board of Governors approved a 50 basis point reduction in the discount rate to 1-1/2 percent. Heightened uncertainty and concerns about a deterioration in business conditions both here and abroad are damping economic activity. For the foreseeable future, then, the Committee continues to believe that, against the background of its long-run goals of price stability and sustainable economic growth and of the information currently available, the risks are weighted mainly toward conditions that may generate economic weakness. Although the necessary reallocation of resources to enhance security may restrain advances in productivity for a time, the long-term prospects for productivity growth and the economy remain favorable and should become evident once the unusual forces restraining demand abate. In taking the discount rate action, the Federal Reserve Board approved the request submitted by the Board of Directors of the Federal Reserve Bank of Richmond. 2001 Monetary policy Home | News and events Accessibility Last update: November 6, 2001

2001-12-13

Minute

Minutes of the Federal Open Market Committee November 6, 2001 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 6, 2001, at 9:00 a.m. Present:Mr. Greenspan, Chairman Mr. McDonough, Vice Chairman Mr. Ferguson Mr. Gramlich Mr. Hoenig Mr. Kelley Mr. Meyer Ms. Minehan Mr. Moskow Mr. PooleMessrs. Jordan, McTeer, Santomero, and Stern, Alternate Members of the Federal Open Market Committee Messrs. Broaddus, Guynn, and Parry, Presidents of the Federal Reserve Banks of Richmond, Atlanta, and San Francisco respectively Mr. Kohn, Secretary and Economist Mr. Bernard, Deputy Secretary Mr. Gillum, Assistant Secretary Ms. Smith, Assistant Secretary Mr. Mattingly, General Counsel Ms. Johnson, Economist Mr. Reinhart, Economist Mr. Stockton, Economist Ms. Cumming, Messrs. Fuhrer, Hakkio, Howard, Hunter, Lindsey, Slifman, and Wilcox, Associate Economists Mr. Kos, Manager, System Open Market Account Mr. Winn, Assistant to the Board, Office of Board Members, Board of Governors Messrs. Ettin and Madigan, Deputy Directors, Divisions of Research and Statistics and Monetary Affairs respectively, Board of Governors Mr. Simpson, Senior Adviser, Division of Research and Statistics, Board of Governors Messrs. Oliner and Struckmeyer, Associate Directors, Division of Research and Statistics, Board of Governors Messrs. Kamin and Whitesell, Assistant Directors, Divisions of International Finance and Monetary Affairs respectively, Board of Governors Mr. Skidmore, Special Assistant to the Board, Office of Board Members, Board of Governors Ms. Low, Open Market Secretariat Assistant, Office of Board Members, Board of Governors Mr. Stewart, First Vice President, Federal Reserve Bank of New York Messrs. Cox and Goodfriend, Mses. Mester and Perelmuter, Messrs. Rolnick and Sniderman, Senior Vice Presidents, Federal Reserve Banks of Dallas, Richmond, Philadelphia, New York, Minneapolis, and Cleveland respectively Mr. Thornton, Vice President, Federal Reserve Bank of St. Louis Mr. Robertson, Assistant Vice President, Federal Reserve Bank of Atlanta Mr. Rudebusch, Senior Research Advisor, Federal Reserve Bank of San FranciscoBy unanimous vote, the minutes of the meeting of the Federal Open Market Committee held on October 2, 2001, 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 securities issued or fully guaranteed by federal agencies during the period October 2, 2001, through November 5, 2001. By unanimous vote, the Committee ratified these transactions. By notation vote circulated before this meeting, the Committee members unanimously approved the selection of Michelle A. Smith to serve as an assistant secretary of the Committee for the period until the first regularly scheduled meeting in 2002. The Committee then turned to a discussion of the economic and financial outlook and the implementation of monetary policy over the intermeeting period ahead. A summary of the economic and financial information available at the time of the meeting and of the Committee's discussion is provided below. The information reviewed at this meeting indicated that economic activity, already weak in late summer, had softened further after the terrorist attacks. Overall consumer spending faltered, though purchases of motor vehicles reached a near-record level, and the downward trajectory in business capital expenditures steepened. With sales contracting and inventory imbalances still substantial, the manufacturing sector continued its sharp slide, and aggregate employment plunged. Energy prices were moderating somewhat in response to lower worldwide demand, and core price inflation remained subdued. Conditions in the labor market deteriorated sharply further in October, with private nonfarm payroll employment suffering its worst monthly decline since 1975. The largest drop was in manufacturing, but nearly every major sector experienced sizable job losses. Among other job market indicators, the average workweek edged down, initial claims for unemployment insurance remained very high, and the unemployment rate jumped to 5.4 percent, an increase of one-half percentage point. Industrial production recorded another large decrease in September (latest data), and the weakness was spread across most market groups and industries. Motor vehicle assemblies registered a further sharp contraction, and output of high-technology goods plunged still lower. The additional decline in production in September brought the rate of utilization of overall manufacturing capacity to its lowest reading since May 1983. Personal consumption expenditures fell sharply in September; purchases of goods plummeted and consumption of services, particularly transportation and recreation services, declined as well. In October, sales of light vehicles surged to near-record levels in response to special financing packages offered by many automakers, but available information suggested that non-auto spending was weak. Residential building activity edged down during the August-September period, and signs of some further softness had emerged in recent weeks. Nonetheless, in an environment of very low mortgage rates, residential construction had been sustained at a comparatively high level despite a weakening labor market and sluggish growth in personal income. Sales of new and existing homes slipped in September but were not far below the near-record levels of last March. Business capital spending on equipment and software fell sharply further in the third quarter. Moreover, the available information on orders and shipments of nondefense capital goods suggested another steep drop in such spending in the latter part of this year in the current environment of eroding corporate earnings and cash flows and a very uncertain outlook for future sales and earnings. The weakness in demand for durable equipment was spread across almost all categories of equipment but was particularly prominent for high-tech goods, aircraft, automobiles, and trucks. Nonresidential construction activity also declined in the spring and summer. Total business inventories on a book-value basis decreased in July and August (latest data for wholesalers and retailers) at a rate close to that of the second quarter. At the manufacturing level, stocks continued to run off at a brisk pace through September; however, shipments weakened by more in the third quarter, and the aggregate inventory-shipments ratio for the sector reached its highest level in more than five years. Wholesalers also experienced a sizable decline in inventories over July and August that resulted in a slight reduction in their aggregate inventory-sales ratio, but that ratio was still in the upper end of its range for the past two years. Retail inventories climbed somewhat in July and August, but the sector's inventory-sales ratio was little changed in August and was in the lower end of its range for the past year. The U.S. trade deficit in goods and services contracted slightly in August after having changed little in July, and the deficit for July and August combined was considerably smaller than that for the second quarter. The value of exports fell in the July-August period, with most of the drop occurring in capital goods, consumer goods, and industrial supplies. The value of imports was down appreciably more than that of exports, with decreases occurring in almost all major trade categories; automotive products, food, and aircraft were the only exceptions. Recent information indicated that foreign economic activity had changed little in the third quarter, and some forward indicators and anecdotal information pointed to reduced activity later in the year. Economic activity in the euro area and the United Kingdom appeared to be reviving in the summer months, but renewed softening stemming from a downturn in business and consumer confidence seemed to have emerged in September and October. Japan remained the weakest of the major foreign industrial economies; the sharp contraction in economic activity that began early in the year continued in the third quarter, and the unemployment rate reached a record high in September. Most major emerging-market economies, with the notable exception of China, also were continuing to experience an economic slowdown that was related at least in part to weakness in the industrialized world. Core consumer price inflation remained at a relatively subdued pace in August and September; and with energy prices having moderated over the past year, total consumer price inflation had moved down, on a year-over-year basis, to the slower pace of its core component. Both the core consumer price (CPI) index and the personal consumption expenditure (PCE) chain-type index exhibited this general pattern. Core producer price inflation for finished goods also held at a low rate in the August-September period and on a year-over-year basis. With regard to labor costs, total hourly compensation of private industry workers decelerated further in the third quarter, despite a surge in benefit costs, and also slowed noticeably on a year-over-year basis. Average hourly earnings of production or nonsupervisory workers continued to rise in August and September at the relatively moderate rate that had prevailed in earlier months. At its meeting on October 2, 2001, the Committee adopted a directive that called for maintaining conditions in reserve markets consistent with a decrease of 50 basis points in the intended level of the federal funds rate, to about 2-1/2 percent. The members recognized that monetary policy already had been eased substantially this year, but they believed that the increased evidence of a faltering economy and the decidedly downside risks to the outlook called for a further move. The additional rate reduction would help limit the extent of the downturn and later would contribute to an upturn. Moreover, the recent declines in equity prices and widening of risk spreads tended to offset some of the stimulative effects of earlier easings, and the relatively low level of inflation and inflationary expectations provided room to counter downside forces without incurring significant risks of higher inflation. The members also believed that the balance of risks remained weighted toward conditions that could generate economic weakness in the foreseeable future. Federal funds traded at rates near the Committee's target level over the intermeeting period. Most interest rates declined significantly during the period even though the reduction in the target level for the federal funds rate had been anticipated by market participants. They apparently saw the Committee's announcement and the subsequent release of weaker-than-expected data as portending further policy easing. With yields on private debt securities down sharply and investors perhaps becoming more confident about long-tem business prospects, major indexes of equity prices moved higher over the intermeeting period. In foreign exchange markets, the trade-weighted value of the dollar in terms of the major foreign currencies had increased slightly on balance since the October meeting. Incoming data for the foreign industrial economies were weaker than expected, and market interest rates abroad declined in response to reductions in policy interest rates in Canada and the United Kingdom and to market expectations that the European Central Bank would lower its policy rates by year-end. The dollar moved down slightly on balance in terms of an index of the currencies of other important trading partners. The Brazilian real was adversely affected by spillovers from Argentina's financial difficulties, while the Mexican peso rebounded from its decline against the dollar in the wake of the September terrorist attacks. M2 changed little in October after a surge in September that was related in important measure to a temporary bulge in transaction deposits stemming largely from delayed settlements of security trades in the aftermath of the terrorist attacks. On balance, M2 grew rapidly over the September-October period, reflecting the sharp drop in market interest rates and perhaps the deposit of federal tax rebates. M3 also increased rapidly over September and October, largely in conjunction with the expansion of M2. The debt of domestic nonfinancial sectors grew at a moderate pace on balance through August. The staff forecast prepared for this meeting emphasized the continuing wide range of uncertainty surrounding the outlook in the wake of the September attacks. The mild downturn in economic activity in the third quarter was seen as likely to deepen over the remainder of the year and to continue for a time next year. However, the cumulative easing that had occurred in the stance of monetary policy, coupled with the fiscal stimulus already in place and prospective additional measures, would provide support for economic activity. Moreover, the ongoing liquidation of inventories would eventually abate and give a sizable boost to production, while an expected pickup in foreign economies would provide some support for U.S. exports. As a result, economic expansion was projected to resume and gradually gain strength through 2003, reaching a rate around the staff's current estimate of the growth of the economy's potential output. The period of sub-par expansion was expected to foster an appreciable easing of pressures on resources and some moderation in core price inflation. In the Committee's discussion of current and prospective economic conditions, members commented that widespread anecdotal reports supported statistical indications that the economy was contracting, and they saw no significant evidence that overall business conditions were in the process of stabilizing prior to recovering. While the members continued to see a fairly brief and limited decrease in economic activity as the most likely outcome, they also agreed that the risks to such a forecast were strongly tilted to the downside. Business investment expenditures clearly seemed likely to continue to decline over coming months. On the other hand, consumer spending had held up reasonably well thus far, but further job losses could undermine consumer confidence and spending. Looking further ahead, the longer-term prospects for productivity and growth in the U.S. economy remained bright and an upturn during 2002 was a likely prospect. Such a recovery would be fostered by the lagged stimulus from both fiscal and monetary policies interacting with progress by business firms toward completing their adjustments to overhangs in capital resources and excess inventories. However, the strength and timing of the eventual recovery remained subject to question especially in light of the marked degree of uncertainty that surrounded the prospects for further fiscal policy legislation, developments in the war against terrorism, and weakness in foreign economies. In the context of diminished pressures on labor and other resources, the members expected underlying consumer price inflation to remain benign and possibly to drift lower over coming quarters, abetted by the indirect effects of generally weaker energy prices. In their review of developments in key sectors of the economy, members noted that surveys and anecdotal commentary pointed to a considerable decline in consumer confidence, though in the view of some members the decline seemed less than might have been expected given prevailing circumstances. Retail sales, led by a surge in motor vehicles, had improved considerably following a downturn in the weeks after September 11. Even so, retail sales were still generally below their levels prior to the terrorist attacks, and overall spending on consumer services had decelerated considerably, notably reflecting continuing weakness in expenditures on airline travel and related travel activities. The extraordinary increase in sales of light motor vehicles in October clearly was propelled by exceptionally attractive financing incentives, but such inducements were temporary and many of the resulting sales undoubtedly borrowed from the future. Still, the jump in motor vehicle sales was a sign that underlying consumer confidence and willingness to spend had held up reasonably well in this period. Looking ahead, reports from retailer contacts were somewhat mixed; many anticipated relatively depressed holiday sales and where possible were making efforts to limit buildups of holiday merchandise, while other retailers were confident that sales would be reasonably well maintained, albeit generally somewhat below levels or growth rates experienced in previous holiday seasons. Beyond the months immediately ahead, members anticipated that, in addition to a drop in motor vehicle sales to more sustainable levels, consumer spending was likely to be held back by the persistence of widespread caution among households and by the decline in stock market wealth over the last year or so. Consumer confidence was vulnerable to renewed terrorism and to further weakness in labor markets. Housing activity, though still at a relatively elevated level, had displayed signs of some slippage in recent months. There were anecdotal reports of excess inventories of unsold homes in some areas, and members again cited indications of particular softness in the high-price segment of the housing market. Weakness in employment and more generally the rise in uncertainty were having a depressing effect on homebuilding activity, which likely would persist over coming months. Nonetheless, low mortgage interest rates continued to provide important support to homebuilding, and in the absence of a much weaker economy than was currently anticipated or of a further sizable shock to consumer confidence, there appeared to be little basis in ongoing trends and housing finance conditions to expect substantial additional erosion in residential construction. Business fixed investment currently seemed to be declining at an even faster rate than earlier in the year, and the sharp decrease in new orders of capital goods in September pointed to marked additional weakness over the months ahead. According to widespread anecdotal reports, business confidence appeared to have worsened considerably further since late summer in the context of a generally deteriorating outlook for sales and earnings. In these circumstances, business firms were likely to persist in their efforts to reduce what they viewed as excess capacity, notably in high-tech and travel-related industries. Some exceptions related to the expansion of healthcare and security-enhancing facilities. However, the longer-term attractiveness of efficiency-inducing capital investment would at some point promote a robust upturn in such expenditures. The timing remained uncertain, but a number of members saw a reasonable prospect that the decline in expenditures for capital equipment and software would abate early next year and that such spending probably would turn up during the second half of the year as businesses succeeded in better aligning actual and desired capital stocks. With regard to nonresidential construction, widespread increases in vacancy rates around the country suggested that the turnaround in overall activity might be more delayed despite some near-term stimulus from reconstruction activity in New York City. In general and given prevailing wait-and-see business attitudes, members believed that the risks over the forecast horizon remained in the direction of a shortfall in capital expenditures from what were already weak expectations. A key uncertainty in the outlook for investment spending was the outcome of the ongoing Congressional debate relating to tax incentives for investment in equipment and software. Both the passage and the specific contents of such legislation remained in question. Moreover, several members stressed the difficulty of assessing the effectiveness of temporary fiscal policy measures directed at boosting investment expenditures. Though undoubtedly helpful in fostering greater capital spending while the tax incentives remained in place, members expressed reservations about the extent of the favorable effects in the nearer term when marked disincentives existed for many firms to make capital expenditures in the context of excess capacity, weak markets, and poor profit opportunities. More generally, forecasts of a reasonably vigorous rebound in the economy over 2002 depended in part on expectations of added fiscal stimulus, but prospects appeared to have diminished for prompt passage of fiscal policy initiatives that could significantly boost economic activity in the next several quarters. Business firms were continuing to cut back production in efforts to adjust output to faltering demand and to pare excess inventories. Even so, with demand generally tending to be weaker than expected, inventory-sales ratios had remained on the high side for many firms and strong efforts to reduce inventories were persisting, including efforts by many retailers in light of their expectations that holiday sales would prove disappointing. The pace of inventory liquidation was thought likely to moderate in coming quarters and subsequently turn to accumulation as inventories came into better balance with sales, with increasingly positive implications for overall production and economic activity. Weakness in foreign economies was continuing to foster declines in U.S. exports in what appeared to be an increasingly synchronous and mutually reinforcing pattern of economic activity among the world's nations. With recent indications that on the whole foreign economic activity was deteriorating somewhat further and by more than previously anticipated, members viewed the risks for activity in foreign nations and their related demand for U.S. goods and services as tilted decidedly to the downside. The considerable slack in labor markets, evidenced by both statistical and widespread anecdotal reports, was expected to exert appreciable downward pressure on wage increases over the forecast period. Concurrently, however, the favorable impact of wage disinflation on business costs would be offset in part by increasing costs of healthcare insurance, slower gains in structural productivity associated with reduced business capital investment, and by the necessity to divert some resources to enhance security. The passthrough effects of the substantial decline in energy prices over the past year were a favorable factor in the outlook for core inflation. On balance, core consumer price inflation was projected to remain subdued and quite possibly edge lower. In the Committee's discussion of policy for the intermeeting period ahead, all the members indicated that they could support a proposal calling for further easing in reserve conditions consistent with a 50 basis point reduction in the federal funds rate to a level of 2 percent. The heightened degree of uncertainty and risk aversion following the terrorist attacks seemed to be having a pronounced effect on business and household spending. The continued contraction in the economy and marking down of most forecasts of inflation and resource utilization going forward strongly suggested the desirability of further easing in the stance of policy. Although policy had been eased substantially in 2001, the forces restraining demand had been considerable, and a variety of factors had limited the passthrough of lower short-term interest rates into long-term rates, equity prices, bank lending rates, and the foreign exchange value of the dollar. In circumstances in which inflation was already reasonably low and pressures on resources and prices were likely to abate further in coming months, the risks were quite small that additional monetary stimulus aimed at bolstering the economy would foster a pickup in inflation. A number of members noted that the choice between 25 and 50 basis points of easing was a close call. Three favored a smaller move on balance, although they could accept the larger decrease in the current environment of substantial uncertainty about the course of the economy and the appropriate stance of policy. These members noted that policy was already accommodative. Indeed, policy had been eased substantially further in September and October, and the effects of those actions and any added easing at this meeting would be felt mostly during the year ahead when fiscal stimulus and the inherent resilience of the economy should already be boosting growth substantially. Some also were concerned that the more sizable action in combination with an announcement of the Committee's continuing concern about further economic weakness would lead markets to build in inappropriate expectations of even more monetary stimulus. Most members, however, favored a 50 basis point reduction in the Committee's target federal funds rate. These members stressed the absence of evidence that the economy was beginning to stabilize and some commented that indications of economic weakness had in fact intensified. Moreover, it was likely in the view of these members that core inflation, which was already modest, would decelerate further. In these circumstances insufficient monetary policy stimulus would risk a more extended contraction of the economy and possibly even downward pressures on prices that could be difficult to counter with the current federal funds rate already quite low. Should the economy display unanticipated strength in the near term, the emerging need for a tightening action would be a highly welcome development that could be readily accommodated in a timely manner to forestall any potential pickup in inflation. All the members indicated that with the risks to the economy clearly tilted toward further weakness, they could vote in favor of retaining a statement to that effect in the press statement to be released shortly after today's meeting. Several stressed that such a statement did not constitute a commitment by the Committee to ease policy further at the next meeting. While the members agreed that significant further weakness in the economy might indeed warrant additional easing, a decision in that regard would depend entirely on the nature of future economic and financial developments. 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 reducing the federal funds rate to an average of around 2 percent. The vote 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 continue to be weighted mainly toward conditions that may generate economic weakness in the foreseeable future. Votes for this action: Messrs. Greenspan, McDonough, Ferguson, Gramlich, Hoenig, Kelley, Meyer, Ms. Minehan, Messrs. Moskow and Poole. Votes against this action: None. It was agreed that the next meeting of the Committee would be held on Tuesday, December 11, 2001. The meeting adjourned at 1:20 p.m. Donald L. Kohn Secretary

2001-11-08

Minute

Minutes of the Federal Open Market Committee October 2, 2001 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, October 2, 2001, at 9:00 a.m. Present:Mr. Greenspan, Chairman Mr. McDonough, Vice Chairman Mr. Ferguson Mr. Gramlich Mr. Hoenig Mr. Kelley Mr. Meyer Ms. Minehan Mr. Moskow Mr. PooleMessrs. Jordan, McTeer, Santomero, and Stern, Alternate Members of the Federal Open Market Committee Messrs. Broaddus, Guynn, and Parry, Presidents of the Federal Reserve Banks of Richmond, Atlanta, and San Francisco respectively Mr. Kohn, Secretary and Economist Mr. Bernard, Deputy Secretary Ms. Fox, Assistant Secretary Mr. Mattingly, General Counsel Ms. Johnson, Economist Mr. Reinhart, Economist Mr. Stockton, Economist Ms. Cumming, Messrs. Fuhrer, Hakkio, Howard, Lindsey, Rasche, Slifman, and Wilcox, Associate Economists Mr. Kos, Manager, System Open Market Account Ms. Smith, Assistant to the Board, Office of Board Members, Board of Governors Messrs. Ettin and Madigan, Deputy Directors, Divisions of Research and Statistics and Monetary Affairs respectively, Board of Governors Mr. Simpson, Senior Adviser, Division of Research and Statistics, Board of Governors Mr. Connors, Associate Director, Division of International Finance, Board of Governors Messrs. Oliner and Struckmeyer, Associate Directors, Division of Research and Statistics, Board of Governors Mr. Whitesell, Assistant Director, Division of Monetary Affairs, Board of Governors Mr. Kumasaka, Assistant Economist, Division of Monetary Affairs, Board of Governors Ms. Low, Open Market Secretariat Assistant, Office of Board Members, Board of Governors Messrs. Eisenbeis, Goodfriend, Ms. Mester, Messrs. Rolnick, Rosenblum, and Sniderman, Senior Vice Presidents, Federal Reserve Banks of Atlanta, Richmond, Philadelphia, Minneapolis, Dallas, and Cleveland respectively Messrs. Evans, Hilton, and Judd, Vice Presidents, Federal Reserve Banks of Chicago, New York, and San Francisco respectivelyBy unanimous vote, the minutes of the meeting of the Federal Open Market Committee held on August 21, 2001, and the conference calls held on September 13 and 17, 2001, 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 securities issued or fully guaranteed by federal agencies during the period August 21, 2001, through October 1, 2001. By unanimous vote, the Committee ratified these transactions. The Committee expressed its appreciation of the outstanding manner in which the Federal Reserve Bank of New York had carried out its open market operations and other responsibilities under very difficult circumstances after the terrorist attacks on September 11, 2001. The Committee then turned to a discussion of the economic and financial outlook and the implementation of monetary policy over the intermeeting period ahead. A summary of the economic and financial information available at the time of the meeting and of the Committee's discussion is provided below. The information reviewed at this meeting suggested that the attacks of September 11 might well have induced a mild downturn in economic activity after several months of little movement in the level of economic activity. While few nonfinancial economic data were available on developments since the attacks, anecdotal and survey reports suggested that heightened uncertainty and sharply reduced confidence had curtailed consumer spending and had intensified the downward trajectory in business capital expenditures. Consumer price inflation had remained relatively subdued over the summer months. Data for August portrayed some continued softening in overall labor market conditions. Private nonfarm payroll employment fell appreciably further, with the decline more than accounted for by additional job losses in manufacturing. Labor demand remained sluggish in most other sectors, though some pickup was reported in services. The unemployment rate rose to 4.9 percent in August, its highest level in four years. A sharp increase in initial claims for unemployment insurance in recent weeks was suggestive of additional deterioration in labor markets. Industrial production fell substantially further in August after posting monthly losses starting in October of last year. Motor vehicle assemblies were down sharply, reversing a large advance in July, and production of high-tech equipment continued to register large declines. Outside of those two industries, production of business equipment, business supplies, consumer nondurables, and materials also moved appreciably lower. The rate of capacity utilization in manufacturing continued to fall, reaching its lowest level since mid-1983. Growth in consumer spending picked up somewhat in July and August from a reduced pace in the second quarter despite a small drop in sales of new motor vehicles. However, anecdotal reports from around the nation pointed to a downturn in September, largely reflecting marked weakness after the terrorist attacks. Indicators of consumer confidence fell further in September. Despite low mortgage interest rates, residential building activity softened somewhat in August and some indicators of housing demand, including mortgage applications for home purchases, had downshifted a bit further in recent weeks. However, builder backlogs appeared to be large enough to sustain homebuilding activity at a fairly elevated level for several months. Sales of new homes edged up in August but were little changed on balance since April. Business capital spending contracted substantially further over the summer months, and anecdotal information after September 11 pointed to even deeper cutbacks by many firms. The added weakness evidently stemmed from increased concerns about future sales and earnings, which also was reflected in the sharp declines in stock market prices after the equity markets reopened on September 17. Available indicators suggested that expenditures for equipment and software had remained on a sharp downward trajectory into late summer, though the overall decline in such spending was moderated by sizable outlays for aircraft in July and August. New orders for nondefense capital goods edged up in August but were still well below their average for the second quarter. Nonresidential construction activity appeared to be falling appreciably further after a sharp downturn in the second quarter. Business inventory liquidation remained substantial in July, extending the sizable declines since the start of the year. Large drawdowns were recorded in manufacturing and, excluding motor vehicles, in both wholesale and retail trade. The limited data available for August indicated some reduction in dealer stocks of motor vehicles and sizable further liquidation of durable goods by firms in the manufacturing sector. Nonetheless, the aggregate inventory-sales ratio for producers of durable goods edged up in August, led by a further rise in the ratio for computers and electronic products. In the days following the terrorist attacks, anecdotal reports indicated that disruptions in transportation facilities, including the temporary suspension of air cargo service and lengthy trucking delays at the nation's borders, caused some backups in inventories at some firms and shortages at others, but these problems generally seemed to ease within a few days. The U.S. trade deficit in goods and services was about unchanged in July from its June level, but both exports and imports dropped sharply as weakness in worldwide economic activity continued to affect the nation's foreign trade. The reduced value of exports in July was spread among most trade categories but was especially pronounced in machinery, industrial supplies, and automotive products. The reduction in imports was led by declines in oil, semiconductors, other machinery, automotive products, and consumer goods. Data for foreign industrial economies confirmed earlier indications of little or no growth in those economies in the second quarter, and more recent information for the period prior to the terrorist attacks pointed to further weakness, including evidence of declining activity in Japan. Available information on conditions in major developing countries also suggested slowing or negative growth in recent months, in part as a consequence of weakness in their exports to the United States and, notably for some Asian economies, the poor performance of the global high-tech industry. Consumer price inflation remained relatively limited in July and August, with core personal consumption expenditure (PCE) price inflation on an appreciably lower track than core consumer price index (CPI) inflation. For the twelve months ending in August, core PCE prices rose a bit less, and core CPI prices a bit more, than over the previous twelve-month period. Consumer energy prices fell sharply in July and August, but a sizable rebound was anticipated in September as prices of petroleum products moved higher after midsummer in response to refinery disruptions and tightening supplies. In electricity markets, upward price pressures dissipated over the summer, while the sharp run-up of natural gas prices continued to unwind as inventories rose further in the context of persisting high levels of production and sluggish demand. At the producer level, core prices declined in August, notably at the early stages of processing. With regard to labor costs, the rise in average hourly earnings of production or nonsupervisory workers diminished somewhat over July and August, but the year-over-year advance was still appreciably above that for the previous twelve-month period. In addition, large increases in health insurance costs were continuing to add to overall employment costs. At its meeting on August 21, 2001, the Committee adopted a directive that called for implementing conditions in reserve markets consistent with a reduction of 25 basis points in the intended level of the federal funds rate to a level of about 3-1/2 percent. The Committee took this action in light of the absence of firm evidence that the deceleration in the economic expansion had run its course or that a recovery in output was imminent. With increasing slack in labor and product markets and with inflation expectations contained, the members agreed that the balance of risks continued to be weighted toward conditions that could generate economic weakness in the foreseeable future. Subsequently, on September 17, the Committee reduced its target for the federal funds rate by a further � percentage point. This action was taken against the backdrop of heightened concerns and uncertainty created by the recent terrorist attacks and their potentially adverse effects on asset prices and the performance of the economy. In conjunction with this easing move, the Federal Reserve indicated that it would continue to supply unusually large volumes of liquidity, and the Committee recognized that the federal funds rate might fall below its new target until the normal functioning of financial markets was restored. In the period before the terrorist attacks, federal funds traded at rates near the reduced target level established at the August meeting. Most market interest rates edged lower over that period in response to generally downbeat news on the economy, and broad stock market indexes fell appreciably. For a few days after September 11, with federal funds brokerage disrupted, banks generally agreed to trade reserves at the 3-1/2 percent federal funds target rate then prevailing. As more normal functioning resumed in the federal funds market, the rate fell well below the Committee's formal targets, including the reduced rate set on September 17. By the latter part of September and early October, however, the effective rate was fluctuating around the new target level. After the terrorist attacks, rates on short- and intermediate-term Treasury securities fell appreciably further, as did yields on highly rated obligations such as federal agency debt. However, the yield declines did not extend to long-term Treasury bonds, which changed little as investors apparently reacted to the deteriorating outlook for the federal budget surplus and prospectively larger Treasury bond supplies. Yields on investment-grade corporate bonds also were little changed, but rates on high-yield bonds, evidently reflecting increased investor aversion to holding risky securities, rose sharply in very thin markets. In the stock market, broad equity price measures fell considerably further in volatile trading after the markets reopened on September 17, but part of those losses had been recovered by the time of this meeting. The trade-weighted value of the dollar against the other major foreign currencies was about unchanged on average over the period since the August meeting, as modest dollar appreciation early in the period was reversed after September 11. The dollar ended the period somewhat lower against the yen and the euro but registered an advance against the Canadian dollar. The dollar rose over the period against the currencies of other important trading partners. Growth of M2 remained relatively robust in July and August, though below the average pace in the first half of the year, while the expansion of M3 weakened markedly over the two months. More recently, a record surge in M2 components in the week ending September 17, which was largely reversed in the following week, resulted in very rapid growth in both aggregates on a monthly average basis in September. In the immediate aftermath of the terrorist attacks, disruptions to the infrastructure of financial markets, including communications and transportation facilities, led to massive dislocations in the distribution of deposits and reserves. At the same time, greatly heightened demand for safe and liquid assets encouraged shifts from equity markets into deposit assets. These financial disturbances called for and were accommodated by record infusions of Federal Reserve credit through open market operations, the discount window, and other sources. In addition, the Federal Reserve eased its rules for lending securities to dealers and took a number of other steps to facilitate the operation of financial markets. To a considerable extent, more normal functioning was restored to those markets by the latter part of September, and the unusual demand for reserves abated. In the presentation of its forecast to the Committee, the staff indicated that its downward revised outlook was subject to a very wide range of uncertainty regarding the ongoing effects of the tragic events of September 11. A mild downturn in overall economic activity probably was now under way and business conditions would continue to be depressed for some uncertain period by the sharp further deterioration in business and consumer confidence triggered by the terrorist attacks. However, a gradual recovery was anticipated during the first half of 2002, especially against the backdrop of a very accommodative monetary policy and an increasingly stimulative fiscal policy. The recovery would gather momentum during 2002 to a pace late in the year near the staff's current estimate of the growth in the economy's potential. With long-term trends in innovations and business opportunities expected to remain favorable, business fixed investment after the completion of ongoing adjustments likely would return to robust rates of growth, with favorable implications for employment, labor productivity, and consumer spending. The current and prospective slack in resource use over coming quarters, augmented by the pass-through effects of lower oil prices, would result in some modest deceleration in core PCE and CPI inflation. In the Committee's discussion of current and prospective economic developments, the members focused on the shock to consumer and business confidence occasioned by the events of September 11 and the adverse repercussions on an already weak economy. The economy appeared to have been growing very little, if at all, prior to the terrorist attacks, and the dislocations arising from the latter seemed to have induced a downturn in overall economic activity against the backdrop of heightened anxiety and uncertainty about economic prospects and a sharp drop, at least initially, in stock prices after the equity markets reopened on September 17. Looking ahead, the members generally saw a relatively mild and short contraction followed by a gradual recovery next year as a plausible forecast but one that was subject to an unusually wide range of uncertainty, notably in the direction of a potentially much weaker outcome in the nearer term. In the short period since the attacks, anecdotal reports provided indications of a rebound from the sharp cutback in spending that characterized the immediate aftermath of those tragic events, but on balance business activity seemed to be in the process of moving lower. It was especially difficult to assess the outlook for consumer sentiment and spending in the period immediately ahead, which likely would depend to an important extent on the progress of the war against terrorism and reactions to any further terrorist activities. One risk bearing on that outlook was the possibility that prices in equity markets might continue to decline and perhaps even overadjust to lower earnings expectations. The confluence of worldwide economic weakness added to current uncertainties and concerns. In these circumstances a substantial further drop in consumer and business confidence and spending could not be ruled out. The members nonetheless saw favorable prospects for an upturn in business activity next year, though the recovery clearly would be more delayed than they had anticipated before September 11. Major reasons for optimism about the outlook were the substantial easing in monetary policy, whose lagged effects would be felt increasingly in the year ahead, and the fiscal stimulus measures that already had been enacted and might well be supplemented over coming months. Other supportive elements included a likely rebound in business high-tech investment after its sharp retrenchment and a gradual turnaround in inventory investment as stocks became better aligned with expected sales. A sound banking system and low inflation were seen as sources of underlying strength in the economy that would contribute to the eventual pickup in economic activity. Even with a rebound in activity next year, however, consumer price inflation appeared likely to remain subdued or perhaps trend a bit lower in association with reduced pressures on labor and other resources and declining energy prices. The Committee's review of recent and prospective developments in key sectors of the economy underscored the uncertainty that surrounded the overall economic outlook. The major question at this point was the extent to which the recent tragedies would continue to weigh on consumer spending and business investment. In the consumer sector, spending had with some exceptions held up well through late summer, but confidence had begun to deteriorate even before September 11. A factor that seemed to be exerting an increasingly depressing effect on consumer attitudes was the persisting stream of worker layoffs and rising unemployment. The adverse wealth effects stemming from the cumulative declines in stock market prices were a further negative, though one that had been cushioned by continued increases in the value of real estate. Retail sales along with expenditures associated with travel-related services had fallen dramatically in the immediate aftermath of the terrorist attacks. Very recent anecdotal reports suggested some improvement in consumer spending, though not a total recovery, with mixed indications ranging from a rebound to levels near pre-attack norms to still relatively depressed activity. Looking ahead, many retailer contacts anticipated sluggish sales over coming months. There were no historical precedents for judging the likely effects on consumer confidence and spending of the unique recent events, though it seemed likely that prospects for added job losses and the decline in equity wealth already experienced would hold down consumer expenditures over the months ahead. Even so, the members did not rule out a stronger-than-anticipated pickup later, depending in part on the size of additional fiscal policy actions. Housing demand had remained at a relatively elevated level across much of the nation, though signs of some softening were apparent prior to September 11, especially in the high-priced segment of the housing market. The near-term outlook suggested some further waning in housing demand in association with the prospective weakness in employment and income. Some members noted in this regard that they sensed growing caution among homebuilders. However, the outlook for housing activity over the intermediate to longer term remained fairly promising against the backdrop of relatively low mortgage interest rates and a prospective recovery in overall economic activity that would foster rising employment and incomes. The events of September 11 produced a marked increase in uncertainty and anxiety among contacts in the business sector. Spending for equipment and software and for commercial structures had been declining sharply through the summer, with only a few tentative signs that the pace of decline might be about to ebb. According to contacts, intensified concerns about prospects for sales and profits were depressing investment further by fostering an increasingly widespread wait-and-see attitude about undertaking new investment expenditures. While nationwide statistics on expenditures in the period since the terrorist attacks were not yet available, anecdotal reports pointed to especially large cutbacks in planned spending for commercial aircraft and rental cars stemming from the sudden and sharp deterioration of activity in the travel and tourist industries. Reports from banking contacts also indicated a substantial drop in demand for business loans that was attributed in part to the diminished willingness of small businesses in particular to undertake new investments in capital equipment and other production facilities. More generally, the increase in uncertainty and the decline in business confidence and corporate profits along with the currently high levels of excess capacity in many industries pointed to the persistence of poor prospects for capital spending over the short to intermediate term, with declines in outlays for high-tech products expected to remain especially pronounced. Looking further ahead, however, a robust upturn in business capital spending was still a probable outcome. Businesses likely would respond to profit opportunities stemming not only from rising demand resulting in part from fiscal and monetary stimulus but also from ongoing technological improvements and the need for new capital equipment as the process of retrenchment from earlier overinvestments was completed. With a few short-lived exceptions, production on the whole had not been directly disrupted by the effects of the terrorist attacks. Consequently, some unintended accumulation of inventories probably had occurred as a result of sizable and unanticipated declines in the demand for many products. Even so, the pronounced downtrend in overall inventory spending appeared to be continuing, and with many business firms evidently still trying to liquidate what they viewed as excessive stocks, the inventory adjustment process was likely to persist for some time. Nonetheless, as progress was made in reducing unwanted stocks, the rate of inventory liquidation would diminish and an eventual turn toward accumulation would emerge, with positive implications for economic activity. Indeed, this buildup could be larger than previously anticipated if businesses now felt the need to hold larger stocks against the contingency of supply-chain slowdowns and disruptions. The members saw the international sector as contributing to weakness in the domestic economy, especially over the nearer term. Downshifts in the U.S. economy were reinforcing more sluggish performance in many foreign economies, which in association with continued firmness in the dollar was in turn depressing the outlook for U.S. exports to those countries. In this regard, several members cited anecdotal evidence of flagging foreign markets for a variety of U.S. products. On the positive side, weakness in world demand for oil was fostering a significant downtrend in energy prices, albeit with adverse effects on energy producers in this country and abroad. Members viewed the outlook for inflation as favorable. Expectations of greater and longer-lasting slack in labor and product markets than anticipated earlier had led to downward revisions to forecasts of wage and price inflation. This outlook was abetted by substantial declines in oil and other commodity prices. On the negative side, increases in spending on insurance and security and continued upward pressure on costs in the healthcare industry likely would impinge on business margins, limiting the downward adjustment of inflation. In the discussion of policy for the intermeeting period ahead, all the members endorsed a proposal calling for some further easing of reserve conditions consistent with a 50 basis point reduction in the federal funds rate to a level of 2-1/2 percent. While monetary policy had already been eased substantially this year, the increased evidence of a faltering economy and the decidedly downside risks in the outlook called for a further move at this meeting. Easing would help limit the extent of the downturn and later provide impetus to the eventual upturn in economic activity. Further vigorous easing action would tend to support business and household confidence, which a number of members saw as especially important in the current circumstances. Even after a 50 basis point reduction, the federal funds rate would not reflect an unusually accommodative policy stance in that, in real terms, it would still be positive by many measures and above its typical level in most earlier periods of economic weakness. Moreover, the decline in stock market prices and the widening of risk spreads had damped the stimulative financial effects of the Committee's earlier easing actions. The relatively low level of inflation and well-contained inflationary expectations allowed the Committee flexibility to focus on countering the downside risks to the economy without incurring a significant threat of fostering expectations of higher inflation. Monetary policy is a flexible instrument and, with inflation expectations likely to remain relatively benign, policy could be reversed in a timely manner later should stimulative policy measures and the inherent resiliency of the economy begin to foster an unsustainable pace of economic expansion. In keeping with their views about the risks to the economy, all the members supported the retention of the sentence in the press statement indicating that the risks continued to be weighted toward further weakness in the foreseeable future. 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 reducing the federal funds rate to an average of around 2-1/2 percent. The vote 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 continue to be weighted mainly toward conditions that may generate economic weakness in the foreseeable future. Votes for this action: Messrs. Greenspan, McDonough, Ferguson, Gramlich, Hoenig, Kelley, Meyer, Ms. Minehan, Messrs. Moskow and Poole. Votes against this action: None. It was agreed that the next meeting of the Committee would be held on Tuesday, November 6, 2001. The meeting adjourned at 12:30 p.m. Donald L. Kohn Secretary

2001-10-02

Statement

The Federal Open Market Committee decided today to lower its target for the federal funds rate by 50 basis points to 2-1/2 percent. In a related action, the Board of Governors approved a 50 basis point reduction in the discount rate to 2 percent. The terrorist attacks have significantly heightened uncertainty in an economy that was already weak. Business and household spending as a consequence are being further damped. Nonetheless, the long-term prospects for productivity growth and the economy remain favorable and should become evident once the unusual forces restraining demand abate. The Committee continues to believe that, against the background of its long-run goals of price stability and sustainable economic growth and of the information currently available, the risks are weighted mainly toward conditions that may generate economic weakness in the foreseeable future. In taking the discount rate action, the Federal Reserve Board approved requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, Cleveland, Richmond, Atlanta, St. Louis, Kansas City and San Francisco. 2001 Monetary policy Home | News and events Accessibility Last update: October 2, 2001

2001-09-17

Statement

The Federal Open Market Committee decided today to lower its target for the federal funds rate by 50 basis points to 3 percent. In a related action, the Board of Governors approved a 50 basis point reduction in the discount rate to 2-1/2 percent. The Federal Reserve will continue to supply unusually large volumes of liquidity to the financial markets, as needed, until more normal market functioning is restored. As a consequence, the FOMC recognizes that the actual federal funds rate may be below its target on occasion in these unusual circumstances. Even before the tragic events of last week, employment, production, and business spending remained weak, and last week's events have the potential to damp spending further. Nonetheless, the long-term prospects for productivity growth and the economy remain favorable and should become evident once the unusual forces restraining demand abate. For the foreseeable future, the Committee continues to believe that against the background of its long-run goals of price stability and sustainable economic growth and of the information currently available, the risks are weighted mainly toward conditions that may generate economic weakness. In taking the discount rate action, the Federal Reserve Board approved requests submitted by the Boards of Directors of the Federal Reserve Banks of Richmond, Chicago, Minneapolis, Dallas, and San Francisco. 2001 Monetary policy Home | News and events Accessibility Last update: September 17, 2001

N/A

Minute

Minutes of the Federal Open Market Committee August 21, 2001 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 21, 2001, at 9:00 a.m. Present:Mr. Greenspan, Chairman Mr. McDonough, Vice Chairman Mr. Ferguson Mr. Gramlich Mr. Hoenig Mr. Kelley Mr. Meyer Ms. Minehan Mr. Moskow Mr. PooleMessrs. Jordan, McTeer, Santomero, and Stern, Alternate Members of the Federal Open Market Committee Messrs. Broaddus, Guynn, and Parry, Presidents of the Federal Reserve Banks of Richmond, Atlanta, and San Francisco respectively Mr. Kohn, Secretary and Economist Mr. Bernard, Deputy Secretary Mr. Gillum, Assistant Secretary Mr. Mattingly, General Counsel Mr. Baxter, Deputy General Counsel Ms. Johnson, Economist Mr. Reinhart, Economist Mr. Stockton, Economist Ms. Cumming, Messrs. Hakkio, Howard, Hunter, Lindsey, Rasche, Slifman, and Wilcox, Associate Economists Mr. Kos, Manager, System Open Market Account Ms. Smith, 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, Deputy Director, Division of Monetary Affairs, Board of Governors Mr. Simpson, Senior Adviser, Division of Research and Statistics, Board of Governors Messrs. Oliner and Struckmeyer, Associate Directors, Division of Research and Statistics, Board of Governors Mr. Helkie, Assistant Director, Division of International Finance, Board of Governors Mr. Whitesell, Assistant Director, Division of Monetary Affairs, Board of Governors Mr. Skidmore, Special Assistant to the Board, Office of Board Members, Board of Governors Mr. Kumasaka, Assistant Economist, Division of Monetary Affairs, Board of Governors Ms. Low, Open Market Secretariat Assistant, Office of Board Members, Board of Governors Ms. Browne, Executive Vice President, Federal Reserve Bank of Boston Messrs. Eisenbeis, Lacker, Ms. Mester, Messrs. Rosenblum and Sniderman, Senior Vice Presidents, Federal Reserve Banks of Atlanta, Richmond, Philadelphia, Dallas, and Cleveland respectively Ms. Hargraves and Mr. Judd, Vice Presidents, Federal Reserve Banks of New York and San Francisco Mr. Webber, Senior Research Officer, Federal Reserve Bank of MinneapolisBy unanimous vote, the minutes of the meeting of the Federal Open Market Committee held on June 26-27, 2001, were approved. The Manager of the System Open Market Account reported on recent developments relating to 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 U.S. government securities and securities issued or fully guaranteed by federal agencies during the period June 27, 2001, through August 20, 2001. By unanimous vote, the Committee ratified these transactions. The Committee then turned to a discussion of the economic and financial outlook and the implementation of monetary policy over the intermeeting period ahead. A summary of the economic and financial information available at the time of the meeting and of the Committee's discussion is provided below. The information reviewed at this meeting suggested that economic activity exhibited little, if any, upward movement in midsummer. Increases in household expenditures on consumer items and housing appeared to have been relatively well maintained, but business capital expenditures had weakened substantially since early in the year. Efforts to reduce inventories were continuing, and manufacturing activity had decreased further. Employment had declined over recent months. With energy prices having turned down, overall consumer price inflation had eased slightly in recent months, while core measures of consumer prices showed mixed changes on a twelve-month basis. Measures of labor costs had decelerated on balance. Private nonfarm payroll employment, after declining appreciably during the second quarter, fell further in July, led by additional job losses in manufacturing and help-supply services. Labor demand remained weak in other sectors, with employment in most industries flat to down. The unemployment rate edged up to 4.5 percent in June and remained at that level in July. Although initial claims for unemployment insurance had declined in recent weeks, on balance data suggested persisting softening in the labor market. Industrial production edged lower in July after larger drops in each of the previous three months. Motor vehicle assemblies rose markedly, but production of high-tech equipment continued to plummet, registering its largest one-month decline in more than a decade. Outside those two industries, manufacturing production either moved sideways or fell slightly. The rate of utilization of manufacturing capacity was little changed in July and remained well below its long-run average. Growth in consumer spending slowed somewhat in the second quarter, but except for automotive dealers, retailers reported sizable gains in July. Consumer confidence appeared to have stabilized at moderately favorable levels in recent months. Supported by low mortgage rates, residential building activity had held up well this year. In July, single-family starts increased slightly from a strong pace in the first and second quarters, though permits fell marginally. Sales of new homes rose in June (latest data), and sales of existing homes edged down but remained only slightly below their historical peak. Business spending on equipment and software declined substantially in the second quarter after falling somewhat in the preceding two quarters. The weakness stemmed from sluggish growth in business sales, significantly reduced corporate cash flows, and continued uncertainty about prospects for future sales and earnings. Shipments of nondefense capital goods declined in June after a modest increase in May, but for the second quarter as a whole they contracted at more than twice the first-quarter pace. Moreover, orders data for June were extraordinarily weak, led by a steep decline in communications equipment. Those data, as well as numerous anecdotal reports, suggested further weakness in spending for equipment and software going forward. Nonresidential construction, which had held up well in the first quarter, was down substantially in the second quarter, as spending for office, industrial, and lodging facilities contracted sharply. Vacancy rates, particularly in high-tech centers, had increased significantly in recent months, as demand for office space and data centers plunged. In contrast, expenditures for drilling and mining equipment soared further in the second quarter. Business inventory liquidation was sizable in the second quarter, at a pace estimated to be a bit more rapid than in the first quarter. Manufacturing stocks, particularly of computers and electronic products, were reduced substantially; however, shipments of those products also plunged and the inventory-sales ratio in the computer and electronics sector rose further from an already high level. Elsewhere in manufacturing, the ratio of stocks to sales held steady, with stocks remaining high in a number of manufacturing industries despite aggressive production cutbacks. Inventories rose in the wholesale sector and, given sluggish sales of late, the ratio of inventories to sales moved sharply higher in the second quarter. Stocks in the automobile sector declined over the quarter and moved lower in July. Retail inventories, excluding motor vehicles, fell moderately and the sector's inventory-sales ratio edged lower. The U.S. trade deficit in goods and services narrowed over the May-June period and was about $20 billion smaller at an annual rate in the second quarter than in the first. The value of imports dropped sharply in the second quarter. The value of exports also decreased significantly, with most of the decline in capital goods, primarily computers and semiconductors. Recent information on foreign industrial economies suggested that growth weakened further in the second quarter. The Japanese economy contracted in the quarter, and growth in the euro area appeared to have weakened substantially. Among the developing countries, economic and financial conditions had deteriorated further in Argentina. In most other developing countries, the pace of economic growth continued to decline. Consumer price inflation had eased in recent months, as energy prices turned down and increases in core consumer prices subsided after a pickup early in the year. The core consumer price index (CPI) rose in July at about the same pace as in the second quarter, but the twelve-month change in that index had increased slightly. However, revised data indicated that the core personal consumption expenditure (PCE) chain index had decelerated on a year-over-year basis. At the producer level, prices fell in July, leaving the twelve-month change in the producer price index for finished goods somewhat below the twelve-month change of a year earlier. With regard to labor costs, the employment cost index (ECI) increased at a somewhat slower pace in the twelve months ended in June than over the preceding twelve months. At its meeting on June 26-27, 2001, the Committee adopted a directive that called for maintaining conditions in reserve markets consistent with a decrease of 25 basis points in the intended level of the federal funds rate, to about 3� percent. This action was deemed appropriate in light of incoming information indicating somewhat weaker economic performance than most members had anticipated and the absence of firm evidence that the deceleration in the economic expansion had run its course or that output growth was about to rebound. With greater slack in labor and product markets and with inflation expectations contained, the members agreed that the balance of risks continued to be weighted toward conditions that could generate economic weakness in the foreseeable future. Federal funds traded at rates near the Committee's reduced target level over the intermeeting period, and other short-term rates also fell. Market participants became less optimistic regarding the economic outlook over the intermeeting period, inducing widespread declines in longer-term Treasury yields over the period that were most pronounced at the shorter end of the coupon maturity spectrum. Except for the obligations of the most troubled sectors, declines in investment-grade corporate bond yields were about in line with those on Treasury issues of comparable maturity, leaving most risk spreads little changed on balance. A spate of weak second-quarter earnings reports and sizable reductions in analysts' earnings projections for the remainder of the year took a toll on equity markets, however, and broad stock market indexes moved down appreciably over the intermeeting interval. The trade-weighted value of the dollar, after an extended period of strength, fell against most major foreign currencies, with much of the decline occurring in the days just before this meeting. The decline was particularly marked against the yen, the euro, and the Swiss franc. In contrast, the dollar was little changed against the currencies of some major trading partners, including Canada and Mexico. Growth in the broad monetary aggregates remained strong in July but was below the average pace over the first half of the year. Despite some recent slowing, deposit growth was held up by a flight to liquidity and safety in light of the poor performance and substantial volatility in equity markets. Foreign demands for U.S. currency also boosted money growth in July. The staff forecast prepared for this meeting suggested that, after a period of very slow growth associated in large part with very weak business fixed investment and to some extent with an inventory correction, the economic expansion would gradually regain strength over the forecast horizon and move back to a rate around the staff's current estimate of the growth of the economy's potential output. The period of sub-par expansion was expected to foster an appreciable easing of pressures on resources and some moderation in core price inflation. Although substantial monetary easing had already been implemented and fiscal stimulus was in train, the forecast anticipated that the expansion of domestic final demand would continue to be held back by the effects on household net worth of recent and possible future declines in stock market prices and by damped consumer and business sentiment in a weaker job market. With long-term trends in innovation holding up reasonably well, business fixed investment, notably outlays for equipment and software, likely would return to relatively robust growth after a period of adjustment of capital stocks to more desirable levels, and a projected pickup in foreign economies was seen as providing some support for U.S. exports. In the Committee's discussion of current and prospective economic developments, many of the members commented that the anticipated strengthening in economic expansion had not yet occurred and, indeed, that the economy and near-term economic prospects appeared to have deteriorated marginally further in the period since the previous meeting. Several members referred to a number of recently available economic indicators that in their view suggested the possibility that the string of disappointing readings on the economy might be about to end, but those indicators were insufficiently robust and too recent to provide conclusive evidence of emerging stabilization, much less that some overall strengthening might be under way. Among other things, the economy was still adjusting to downward revisions to expected earnings and to perceptions of greater risk and associated declines in wealth. In sum, the timing of the pickup in the growth of the economy had again been pushed back. Even so, the prospects for an upswing over coming quarters remained favorable against the backdrop of the lagged effects of substantial monetary policy easing already implemented this year, the recent passage and initial implementation of stimulative fiscal policy measures, the progress businesses had already achieved toward completing inventory adjustments, and the underlying support for business investments from continued technological innovations. Nonetheless, the members recognized that the recovery in business fixed investment, the major source of weakness in the economy, was likely to follow a more extended period of adjustment than had been anticipated in their earlier forecasts. With regard to the outlook for inflation, members reported on widespread indications of some slackening in what were still generally tight labor markets and also noted that capacity utilization rates had declined substantially in many industries. The reduced pressures on resources along with expectations of some further declines in energy prices were seen by many members as likely to foster a modest deceleration in many measures of wages and prices. Statistical evidence of an ongoing, though gradual, worsening in overall business conditions was supported by anecdotal reports from around the nation. Weakness continued to be concentrated in manufacturing, notably in the high-tech sector and in high-tech service industries. Indications that the softening was spreading more generally were still fairly limited as suggested by employment data and anecdotal reports. At the same time, members cited some still quite tentative signs that declines in manufacturing had slowed or that activity had steadied in some depressed industries. In their review of developments in key sectors of the economy, members again emphasized the ongoing strength in household spending and its vital role in moderating the weakness in overall economic activity. Tax rebates, declining energy prices, and widespread discounting of retail prices were cited as positive factors in support of consumer spending on a wide range of goods and services. In addition, increasingly persuasive evidence indicated that realized capital gains from the sale of homes were a source of fairly significant amounts of consumer purchasing power in the economy. Looking ahead, members expressed some concern about how long the household sector would continue to prop up the economy in the absence of an upturn in business expenditures. While accommodative financial conditions and reduced income tax rates should continue to undergird consumer spending and the data on retail sales for July displayed relatively impressive gains, negative wealth effects from falling stock market prices, declining payrolls, and sluggish income gains--should they persist--might well depress consumer expenditures over coming months. In this regard, some recent anecdotal reports pointed to weaker retail sales, importantly including motor vehicles. There also were some recent indications of declining consumer confidence, and many retailers had become less optimistic about the outlook for sales over the balance of the year. Homebuilding generally had remained robust in recent months, as relatively low mortgage interest rates continued to offset weakness in employment and incomes and the negative effects of declining stock market wealth. Most regions continued to report strong housing markets, albeit with evidence of some weakening in sales of high-priced homes in a number of areas. For now, however, there were few signs that overall housing activity might be softening, though members noted that potentially bearish factors relating to the outlook for consumer spending might at some point also affect housing. With household spending already elevated relative to income and its rate of increase unlikely to strengthen materially, if at all, under foreseeable near-term economic conditions, the anticipated upturn in overall economic expansion would depend critically on business investment spending and in turn on improved prospects for business profits and cash flows. Business capital expenditures appeared to be slowing sharply further after posting large declines earlier in the year in conjunction with the marking down of the expected growth of demand for and profitability of capital equipment, weak sales, the emergence of substantial excess capacity in many industries, notably in high-tech facilities, and the resulting decline in earnings. Market forecasts of business profits were progressively being reduced, and as a consequence members saw little likelihood of a marked turnaround in business capital investment over the months ahead despite some elements of strength such as sizable construction projects involving public utilities, energy, and, in some areas, public works. Indeed, history strongly suggested that capital spending might well fall below sustainable levels for a time as business firms over adjusted on the downside to previously excessive or misdirected buildups of capital resources. While the near-term outlook for business investment was not promising and considerable uncertainty surrounded the timing of the eventual upturn, members remained optimistic about the longer-term prospects for capital expenditures. In the context of a still favorable outlook for continued elevated rates of technological progress, business firms reportedly had not yet exploited many potentially profitable investment opportunities. The persistence of substantial inventory liquidation was another negative factor in the current performance of the economy. While considerable progress reportedly had been made by numerous business firms in reducing their inventories to bring them into better alignment with sales, a rebound to inventory accumulation did not appear imminent for the economy as a whole. Unexpected weakness in final demands would, of course, lead to additional efforts to pare inventories, which would tend to damp and delay the rebound. Even so, leaner inventories had favorable implications for production going forward. Fiscal policy developments were a supportive factor in the economy. The tax rebates currently being distributed undoubtedly were having a limited but positive effect on consumers, which likely would continue over coming months. The impetus could not be measured precisely, but it was reflected in available anecdotal reports. Moreover, the reductions in income tax rates would have an ongoing effect in boosting disposable household incomes. On the negative side, financial difficulties in a number of states were being met in part through higher taxes that implied at least some offset to the federal tax relief. Many of the members expressed concern about what appeared to be cumulating weakness in numerous foreign economies that would feed back to the U.S. economy through reduced demand for U.S. exports and potentially through perceptions of greater risks in financial markets. A number of major industrial economies were growing more slowly than had been expected earlier in the summer. Moreover, severe economic and financial problems in a few developing nations could spill over to their trading partners and other similarly situated countries that could in turn have adverse repercussions more generally on the world economy. The members generally viewed a modest decline in inflation as a reasonable prospect, at least for a while. Reports from around the nation indicated that labor market conditions had eased, though they remained generally tight and workers available to fill a variety of skilled job openings continued to be in short supply. On balance, however, upward pressures on labor compensation appeared to be easing somewhat despite large increases in the costs of medical care. Competitive pressures continued to make it very difficult for business firms to raise their prices and there were no signs that widespread discounting might be coming to an end. An apparent downtrend in the costs of energy was another favorable factor in the outlook for inflation. Some members expressed a degree of concern, however, about the longer-term outlook for inflation. Pressures on resources would rise as the anticipated upturn and possible above-trend growth brought the economy closer to full capacity utilization. An important uncertainty in this regard was the outlook for productivity, whose growth might have moderated from the unusually high growth rates of 1999 and 2000, with possibly adverse implications for labor costs at very low levels of unemployment. In the Committee's discussion of policy for the intermeeting period ahead, all the members endorsed a proposal calling for a slight further easing in reserve conditions consistent with a 25 basis point reduction in the federal funds rate to a level of 3-1/2 percent. No member expressed a preference for leaving policy unchanged or easing by more than 25 basis points. The economy had continued to be weak--indeed, weaker than many had expected--and data and anecdotal reports from around the country had yet to point to persuasive signs of a turnaround. The monetary and fiscal policy stimulus already in train seemed adequate to promote and support an eventual appreciable rise in the growth of business activity to a pace near that of the economy's potential, but the strength and timing of the pickup remained uncertain and further weakness was a distinct threat in the nearer term. In particular, possible faltering in household expenditures at a time when business firms were still adjusting to inventory imbalances and to capital overinvestments would exacerbate the slowdown in the economy and delay its anticipated recovery. Growing concerns about foreign economies added to the current unease about potential near-term developments. Against the considerable forces of restraint on aggregate demand, the federal funds rate had been lowered substantially and the monetary aggregates were growing rapidly, but some members noted that in a number of respects financial conditions did not indicate as much oncoming stimulus. Since the start of the year, long-term interest rates generally had not extended earlier declines, prices in equity markets had fallen substantially further, and the dollar had appreciated in foreign exchange markets. Accordingly, the inflation risks of some further monetary stimulus seemed limited and were outweighed by the need to lean against actual and potential shortfalls in demand and business activity. The members recognized that in light of the lags in the effects of policy, the easing process probably would have to be terminated before available measures of economic activity provided clear evidence of a substantial strengthening trend. In the view of some members, this point might come relatively soon. Beyond the nearer term members also envisaged the desirability of moving preemptively to offset some of the extra monetary stimulus now in the economy in advance of inflation pressures beginning to build. The members were fully prepared to act on a timely basis, but several emphasized the recognition lags that would be involved in stopping and subsequently beginning to reverse the policy easing. Given their views about the risks to the economy, notably over the nearer term, all the members supported the retention of the sentence in the press statement indicating that the risks continued to be weighted toward further weakness in the foreseeable future. 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 reducing the federal funds rate to an average of around 3-1/2 percent. The vote 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 continue to be weighted mainly toward conditions that may generate economic weakness in the foreseeable future. Votes for this action: Messrs. Greenspan, McDonough Ferguson, Gramlich, Hoenig, Kelley, Meyer, Ms. Minehan, Messrs. Moskow and Poole. Votes against this action: None. It was agreed that the next meeting of the Committee would be held on Tuesday, October 2, 2001. The meeting adjourned at 12:40 p.m. Reciprocal Currency Arrangements Following the terrorist attacks on September 11, 2001, the Committee established or enlarged reciprocal currency (swap) arrangements with the European Central Bank, the Bank of Canada, and the Bank of England. The purpose of these arrangements was to facilitate the functioning of U.S. financial markets by providing as necessary through the foreign central banks the liquidity in dollars needed by European, Canadian, and British banks whose U.S. operations had been disrupted by the disturbances in the United States. These central bank arrangements would mature in thirty days unless extended by the Committee. Except for an initial drawing of up to $12 billion by the European Central Bank on September 12, individual drawings were subject to approval by the Foreign Currency Subcommittee of the Federal Open Market Committee. Under the agreements, dollars would be made available in the form of deposits at the Federal Reserve Bank of New York in exchange for deposits in the counterparty central banks of an equivalent amount of their currencies. The individual actions and votes were as follows: On September 12, 2001, available members of the Committee voted unanimously to establish a $50 billion swap line with the European Central Bank with a maturity of thirty days unless renewed. Votes for this action: Messrs. Greenspan, Ferguson, Gramlich, Hoenig, Ms. Minehan, Messrs. Moskow, Poole, and Stewart. Absent and not voting: Messrs. Kelley and Meyer. Mr. Stewart voted as alternate for Mr. McDonough. On September 13, 2001, available members of the Committee voted unanimously to increase the System's swap line with the Bank of Canada from $2 billion to $10 billion, with the added facility to mature in thirty days unless renewed. Votes for this action: Messrs. Greenspan, McDonough, Ferguson, Gramlich, Hoenig, Kelley, Ms. Minehan, Messrs. Moskow and Poole. Absent and not voting: Mr. Meyer. On September 14, 2001, available members of the Committee voted unanimously to establish a $30 billion swap line with the Bank of England, with a maturity of thirty days unless renewed. Votes for this action: Messrs. Greenspan, McDonough, Ferguson, Hoenig, Kelley, Ms. Minehan, Messrs. Moskow and Poole. Absent and not voting: Messrs. Gramlich and Meyer. Intermeeting Policy Action On September 13, 2001, the Committee met by telephone conference to assess economic and financial developments stemming from the terrorist attacks on September 11 and the possible need for a monetary policy response. Banking and other financial market conditions, notably in New York City but also around the nation, were discussed in some detail as well as the outlook for reopening the stock exchanges. While the ongoing reactions to the recent tragedy were undoubtedly a negative factor in the economic outlook, the members agreed that financial markets were still too disrupted and the economic outlook too uncertain to provide an adequate basis for a policy move at this time. However, the members contemplated the need for some policy easing in the very near future. In the interim, the System would continue to stand ready to provide whatever liquidity might be needed to counter unusual strains and help assure the effective functioning of the banking system and restore more normal conditions in financial markets. Subsequently, on September 17, 2001, the Committee members voted unanimously to ease reserve conditions appreciably further, consistent with a reduction in the federal funds rate of 50 basis points to a level of 3 percent. This policy action was associated with the approval by the Board of Governors of a reduction of equal size in the discount rate to a level of 2-1/2 percent. These actions were taken against the backdrop of heightened concerns and uncertainty created by the recent terrorist attacks and their potentially adverse effects on asset prices and the performance of the economy. In conjunction with these policy moves, the Federal Reserve would continue to supply, as needed, an atypically large volume of liquidity to the financial system. As a consequence, the Committee recognized that the federal funds rate might fall below its target on occasion until more normal conditions were restored in the functioning of the financial system. The Committee's vote encompassed the retention of a statement in its press release indicating that the balance of risks remained weighted toward weakness for the foreseeable future. Votes for this action: Messrs. Greenspan, McDonough, Ferguson, Gramlich, Hoenig, Kelley, Meyer, Ms. Minehan, Messrs. Moskow and Poole. Votes against this action: None. Donald L. Kohn Secretary

N/A

Minute

Minutes of the Federal Open Market Committee August 21, 2001 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 21, 2001, at 9:00 a.m. Present:Mr. Greenspan, Chairman Mr. McDonough, Vice Chairman Mr. Ferguson Mr. Gramlich Mr. Hoenig Mr. Kelley Mr. Meyer Ms. Minehan Mr. Moskow Mr. PooleMessrs. Jordan, McTeer, Santomero, and Stern, Alternate Members of the Federal Open Market Committee Messrs. Broaddus, Guynn, and Parry, Presidents of the Federal Reserve Banks of Richmond, Atlanta, and San Francisco respectively Mr. Kohn, Secretary and Economist Mr. Bernard, Deputy Secretary Mr. Gillum, Assistant Secretary Mr. Mattingly, General Counsel Mr. Baxter, Deputy General Counsel Ms. Johnson, Economist Mr. Reinhart, Economist Mr. Stockton, Economist Ms. Cumming, Messrs. Hakkio, Howard, Hunter, Lindsey, Rasche, Slifman, and Wilcox, Associate Economists Mr. Kos, Manager, System Open Market Account Ms. Smith, 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, Deputy Director, Division of Monetary Affairs, Board of Governors Mr. Simpson, Senior Adviser, Division of Research and Statistics, Board of Governors Messrs. Oliner and Struckmeyer, Associate Directors, Division of Research and Statistics, Board of Governors Mr. Helkie, Assistant Director, Division of International Finance, Board of Governors Mr. Whitesell, Assistant Director, Division of Monetary Affairs, Board of Governors Mr. Skidmore, Special Assistant to the Board, Office of Board Members, Board of Governors Mr. Kumasaka, Assistant Economist, Division of Monetary Affairs, Board of Governors Ms. Low, Open Market Secretariat Assistant, Office of Board Members, Board of Governors Ms. Browne, Executive Vice President, Federal Reserve Bank of Boston Messrs. Eisenbeis, Lacker, Ms. Mester, Messrs. Rosenblum and Sniderman, Senior Vice Presidents, Federal Reserve Banks of Atlanta, Richmond, Philadelphia, Dallas, and Cleveland respectively Ms. Hargraves and Mr. Judd, Vice Presidents, Federal Reserve Banks of New York and San Francisco Mr. Webber, Senior Research Officer, Federal Reserve Bank of MinneapolisBy unanimous vote, the minutes of the meeting of the Federal Open Market Committee held on June 26-27, 2001, were approved. The Manager of the System Open Market Account reported on recent developments relating to 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 U.S. government securities and securities issued or fully guaranteed by federal agencies during the period June 27, 2001, through August 20, 2001. By unanimous vote, the Committee ratified these transactions. The Committee then turned to a discussion of the economic and financial outlook and the implementation of monetary policy over the intermeeting period ahead. A summary of the economic and financial information available at the time of the meeting and of the Committee's discussion is provided below. The information reviewed at this meeting suggested that economic activity exhibited little, if any, upward movement in midsummer. Increases in household expenditures on consumer items and housing appeared to have been relatively well maintained, but business capital expenditures had weakened substantially since early in the year. Efforts to reduce inventories were continuing, and manufacturing activity had decreased further. Employment had declined over recent months. With energy prices having turned down, overall consumer price inflation had eased slightly in recent months, while core measures of consumer prices showed mixed changes on a twelve-month basis. Measures of labor costs had decelerated on balance. Private nonfarm payroll employment, after declining appreciably during the second quarter, fell further in July, led by additional job losses in manufacturing and help-supply services. Labor demand remained weak in other sectors, with employment in most industries flat to down. The unemployment rate edged up to 4.5 percent in June and remained at that level in July. Although initial claims for unemployment insurance had declined in recent weeks, on balance data suggested persisting softening in the labor market. Industrial production edged lower in July after larger drops in each of the previous three months. Motor vehicle assemblies rose markedly, but production of high-tech equipment continued to plummet, registering its largest one-month decline in more than a decade. Outside those two industries, manufacturing production either moved sideways or fell slightly. The rate of utilization of manufacturing capacity was little changed in July and remained well below its long-run average. Growth in consumer spending slowed somewhat in the second quarter, but except for automotive dealers, retailers reported sizable gains in July. Consumer confidence appeared to have stabilized at moderately favorable levels in recent months. Supported by low mortgage rates, residential building activity had held up well this year. In July, single-family starts increased slightly from a strong pace in the first and second quarters, though permits fell marginally. Sales of new homes rose in June (latest data), and sales of existing homes edged down but remained only slightly below their historical peak. Business spending on equipment and software declined substantially in the second quarter after falling somewhat in the preceding two quarters. The weakness stemmed from sluggish growth in business sales, significantly reduced corporate cash flows, and continued uncertainty about prospects for future sales and earnings. Shipments of nondefense capital goods declined in June after a modest increase in May, but for the second quarter as a whole they contracted at more than twice the first-quarter pace. Moreover, orders data for June were extraordinarily weak, led by a steep decline in communications equipment. Those data, as well as numerous anecdotal reports, suggested further weakness in spending for equipment and software going forward. Nonresidential construction, which had held up well in the first quarter, was down substantially in the second quarter, as spending for office, industrial, and lodging facilities contracted sharply. Vacancy rates, particularly in high-tech centers, had increased significantly in recent months, as demand for office space and data centers plunged. In contrast, expenditures for drilling and mining equipment soared further in the second quarter. Business inventory liquidation was sizable in the second quarter, at a pace estimated to be a bit more rapid than in the first quarter. Manufacturing stocks, particularly of computers and electronic products, were reduced substantially; however, shipments of those products also plunged and the inventory-sales ratio in the computer and electronics sector rose further from an already high level. Elsewhere in manufacturing, the ratio of stocks to sales held steady, with stocks remaining high in a number of manufacturing industries despite aggressive production cutbacks. Inventories rose in the wholesale sector and, given sluggish sales of late, the ratio of inventories to sales moved sharply higher in the second quarter. Stocks in the automobile sector declined over the quarter and moved lower in July. Retail inventories, excluding motor vehicles, fell moderately and the sector's inventory-sales ratio edged lower. The U.S. trade deficit in goods and services narrowed over the May-June period and was about $20 billion smaller at an annual rate in the second quarter than in the first. The value of imports dropped sharply in the second quarter. The value of exports also decreased significantly, with most of the decline in capital goods, primarily computers and semiconductors. Recent information on foreign industrial economies suggested that growth weakened further in the second quarter. The Japanese economy contracted in the quarter, and growth in the euro area appeared to have weakened substantially. Among the developing countries, economic and financial conditions had deteriorated further in Argentina. In most other developing countries, the pace of economic growth continued to decline. Consumer price inflation had eased in recent months, as energy prices turned down and increases in core consumer prices subsided after a pickup early in the year. The core consumer price index (CPI) rose in July at about the same pace as in the second quarter, but the twelve-month change in that index had increased slightly. However, revised data indicated that the core personal consumption expenditure (PCE) chain index had decelerated on a year-over-year basis. At the producer level, prices fell in July, leaving the twelve-month change in the producer price index for finished goods somewhat below the twelve-month change of a year earlier. With regard to labor costs, the employment cost index (ECI) increased at a somewhat slower pace in the twelve months ended in June than over the preceding twelve months. At its meeting on June 26-27, 2001, the Committee adopted a directive that called for maintaining conditions in reserve markets consistent with a decrease of 25 basis points in the intended level of the federal funds rate, to about 3� percent. This action was deemed appropriate in light of incoming information indicating somewhat weaker economic performance than most members had anticipated and the absence of firm evidence that the deceleration in the economic expansion had run its course or that output growth was about to rebound. With greater slack in labor and product markets and with inflation expectations contained, the members agreed that the balance of risks continued to be weighted toward conditions that could generate economic weakness in the foreseeable future. Federal funds traded at rates near the Committee's reduced target level over the intermeeting period, and other short-term rates also fell. Market participants became less optimistic regarding the economic outlook over the intermeeting period, inducing widespread declines in longer-term Treasury yields over the period that were most pronounced at the shorter end of the coupon maturity spectrum. Except for the obligations of the most troubled sectors, declines in investment-grade corporate bond yields were about in line with those on Treasury issues of comparable maturity, leaving most risk spreads little changed on balance. A spate of weak second-quarter earnings reports and sizable reductions in analysts' earnings projections for the remainder of the year took a toll on equity markets, however, and broad stock market indexes moved down appreciably over the intermeeting interval. The trade-weighted value of the dollar, after an extended period of strength, fell against most major foreign currencies, with much of the decline occurring in the days just before this meeting. The decline was particularly marked against the yen, the euro, and the Swiss franc. In contrast, the dollar was little changed against the currencies of some major trading partners, including Canada and Mexico. Growth in the broad monetary aggregates remained strong in July but was below the average pace over the first half of the year. Despite some recent slowing, deposit growth was held up by a flight to liquidity and safety in light of the poor performance and substantial volatility in equity markets. Foreign demands for U.S. currency also boosted money growth in July. The staff forecast prepared for this meeting suggested that, after a period of very slow growth associated in large part with very weak business fixed investment and to some extent with an inventory correction, the economic expansion would gradually regain strength over the forecast horizon and move back to a rate around the staff's current estimate of the growth of the economy's potential output. The period of sub-par expansion was expected to foster an appreciable easing of pressures on resources and some moderation in core price inflation. Although substantial monetary easing had already been implemented and fiscal stimulus was in train, the forecast anticipated that the expansion of domestic final demand would continue to be held back by the effects on household net worth of recent and possible future declines in stock market prices and by damped consumer and business sentiment in a weaker job market. With long-term trends in innovation holding up reasonably well, business fixed investment, notably outlays for equipment and software, likely would return to relatively robust growth after a period of adjustment of capital stocks to more desirable levels, and a projected pickup in foreign economies was seen as providing some support for U.S. exports. In the Committee's discussion of current and prospective economic developments, many of the members commented that the anticipated strengthening in economic expansion had not yet occurred and, indeed, that the economy and near-term economic prospects appeared to have deteriorated marginally further in the period since the previous meeting. Several members referred to a number of recently available economic indicators that in their view suggested the possibility that the string of disappointing readings on the economy might be about to end, but those indicators were insufficiently robust and too recent to provide conclusive evidence of emerging stabilization, much less that some overall strengthening might be under way. Among other things, the economy was still adjusting to downward revisions to expected earnings and to perceptions of greater risk and associated declines in wealth. In sum, the timing of the pickup in the growth of the economy had again been pushed back. Even so, the prospects for an upswing over coming quarters remained favorable against the backdrop of the lagged effects of substantial monetary policy easing already implemented this year, the recent passage and initial implementation of stimulative fiscal policy measures, the progress businesses had already achieved toward completing inventory adjustments, and the underlying support for business investments from continued technological innovations. Nonetheless, the members recognized that the recovery in business fixed investment, the major source of weakness in the economy, was likely to follow a more extended period of adjustment than had been anticipated in their earlier forecasts. With regard to the outlook for inflation, members reported on widespread indications of some slackening in what were still generally tight labor markets and also noted that capacity utilization rates had declined substantially in many industries. The reduced pressures on resources along with expectations of some further declines in energy prices were seen by many members as likely to foster a modest deceleration in many measures of wages and prices. Statistical evidence of an ongoing, though gradual, worsening in overall business conditions was supported by anecdotal reports from around the nation. Weakness continued to be concentrated in manufacturing, notably in the high-tech sector and in high-tech service industries. Indications that the softening was spreading more generally were still fairly limited as suggested by employment data and anecdotal reports. At the same time, members cited some still quite tentative signs that declines in manufacturing had slowed or that activity had steadied in some depressed industries. In their review of developments in key sectors of the economy, members again emphasized the ongoing strength in household spending and its vital role in moderating the weakness in overall economic activity. Tax rebates, declining energy prices, and widespread discounting of retail prices were cited as positive factors in support of consumer spending on a wide range of goods and services. In addition, increasingly persuasive evidence indicated that realized capital gains from the sale of homes were a source of fairly significant amounts of consumer purchasing power in the economy. Looking ahead, members expressed some concern about how long the household sector would continue to prop up the economy in the absence of an upturn in business expenditures. While accommodative financial conditions and reduced income tax rates should continue to undergird consumer spending and the data on retail sales for July displayed relatively impressive gains, negative wealth effects from falling stock market prices, declining payrolls, and sluggish income gains--should they persist--might well depress consumer expenditures over coming months. In this regard, some recent anecdotal reports pointed to weaker retail sales, importantly including motor vehicles. There also were some recent indications of declining consumer confidence, and many retailers had become less optimistic about the outlook for sales over the balance of the year. Homebuilding generally had remained robust in recent months, as relatively low mortgage interest rates continued to offset weakness in employment and incomes and the negative effects of declining stock market wealth. Most regions continued to report strong housing markets, albeit with evidence of some weakening in sales of high-priced homes in a number of areas. For now, however, there were few signs that overall housing activity might be softening, though members noted that potentially bearish factors relating to the outlook for consumer spending might at some point also affect housing. With household spending already elevated relative to income and its rate of increase unlikely to strengthen materially, if at all, under foreseeable near-term economic conditions, the anticipated upturn in overall economic expansion would depend critically on business investment spending and in turn on improved prospects for business profits and cash flows. Business capital expenditures appeared to be slowing sharply further after posting large declines earlier in the year in conjunction with the marking down of the expected growth of demand for and profitability of capital equipment, weak sales, the emergence of substantial excess capacity in many industries, notably in high-tech facilities, and the resulting decline in earnings. Market forecasts of business profits were progressively being reduced, and as a consequence members saw little likelihood of a marked turnaround in business capital investment over the months ahead despite some elements of strength such as sizable construction projects involving public utilities, energy, and, in some areas, public works. Indeed, history strongly suggested that capital spending might well fall below sustainable levels for a time as business firms over adjusted on the downside to previously excessive or misdirected buildups of capital resources. While the near-term outlook for business investment was not promising and considerable uncertainty surrounded the timing of the eventual upturn, members remained optimistic about the longer-term prospects for capital expenditures. In the context of a still favorable outlook for continued elevated rates of technological progress, business firms reportedly had not yet exploited many potentially profitable investment opportunities. The persistence of substantial inventory liquidation was another negative factor in the current performance of the economy. While considerable progress reportedly had been made by numerous business firms in reducing their inventories to bring them into better alignment with sales, a rebound to inventory accumulation did not appear imminent for the economy as a whole. Unexpected weakness in final demands would, of course, lead to additional efforts to pare inventories, which would tend to damp and delay the rebound. Even so, leaner inventories had favorable implications for production going forward. Fiscal policy developments were a supportive factor in the economy. The tax rebates currently being distributed undoubtedly were having a limited but positive effect on consumers, which likely would continue over coming months. The impetus could not be measured precisely, but it was reflected in available anecdotal reports. Moreover, the reductions in income tax rates would have an ongoing effect in boosting disposable household incomes. On the negative side, financial difficulties in a number of states were being met in part through higher taxes that implied at least some offset to the federal tax relief. Many of the members expressed concern about what appeared to be cumulating weakness in numerous foreign economies that would feed back to the U.S. economy through reduced demand for U.S. exports and potentially through perceptions of greater risks in financial markets. A number of major industrial economies were growing more slowly than had been expected earlier in the summer. Moreover, severe economic and financial problems in a few developing nations could spill over to their trading partners and other similarly situated countries that could in turn have adverse repercussions more generally on the world economy. The members generally viewed a modest decline in inflation as a reasonable prospect, at least for a while. Reports from around the nation indicated that labor market conditions had eased, though they remained generally tight and workers available to fill a variety of skilled job openings continued to be in short supply. On balance, however, upward pressures on labor compensation appeared to be easing somewhat despite large increases in the costs of medical care. Competitive pressures continued to make it very difficult for business firms to raise their prices and there were no signs that widespread discounting might be coming to an end. An apparent downtrend in the costs of energy was another favorable factor in the outlook for inflation. Some members expressed a degree of concern, however, about the longer-term outlook for inflation. Pressures on resources would rise as the anticipated upturn and possible above-trend growth brought the economy closer to full capacity utilization. An important uncertainty in this regard was the outlook for productivity, whose growth might have moderated from the unusually high growth rates of 1999 and 2000, with possibly adverse implications for labor costs at very low levels of unemployment. In the Committee's discussion of policy for the intermeeting period ahead, all the members endorsed a proposal calling for a slight further easing in reserve conditions consistent with a 25 basis point reduction in the federal funds rate to a level of 3-1/2 percent. No member expressed a preference for leaving policy unchanged or easing by more than 25 basis points. The economy had continued to be weak--indeed, weaker than many had expected--and data and anecdotal reports from around the country had yet to point to persuasive signs of a turnaround. The monetary and fiscal policy stimulus already in train seemed adequate to promote and support an eventual appreciable rise in the growth of business activity to a pace near that of the economy's potential, but the strength and timing of the pickup remained uncertain and further weakness was a distinct threat in the nearer term. In particular, possible faltering in household expenditures at a time when business firms were still adjusting to inventory imbalances and to capital overinvestments would exacerbate the slowdown in the economy and delay its anticipated recovery. Growing concerns about foreign economies added to the current unease about potential near-term developments. Against the considerable forces of restraint on aggregate demand, the federal funds rate had been lowered substantially and the monetary aggregates were growing rapidly, but some members noted that in a number of respects financial conditions did not indicate as much oncoming stimulus. Since the start of the year, long-term interest rates generally had not extended earlier declines, prices in equity markets had fallen substantially further, and the dollar had appreciated in foreign exchange markets. Accordingly, the inflation risks of some further monetary stimulus seemed limited and were outweighed by the need to lean against actual and potential shortfalls in demand and business activity. The members recognized that in light of the lags in the effects of policy, the easing process probably would have to be terminated before available measures of economic activity provided clear evidence of a substantial strengthening trend. In the view of some members, this point might come relatively soon. Beyond the nearer term members also envisaged the desirability of moving preemptively to offset some of the extra monetary stimulus now in the economy in advance of inflation pressures beginning to build. The members were fully prepared to act on a timely basis, but several emphasized the recognition lags that would be involved in stopping and subsequently beginning to reverse the policy easing. Given their views about the risks to the economy, notably over the nearer term, all the members supported the retention of the sentence in the press statement indicating that the risks continued to be weighted toward further weakness in the foreseeable future. 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 reducing the federal funds rate to an average of around 3-1/2 percent. The vote 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 continue to be weighted mainly toward conditions that may generate economic weakness in the foreseeable future. Votes for this action: Messrs. Greenspan, McDonough Ferguson, Gramlich, Hoenig, Kelley, Meyer, Ms. Minehan, Messrs. Moskow and Poole. Votes against this action: None. It was agreed that the next meeting of the Committee would be held on Tuesday, October 2, 2001. The meeting adjourned at 12:40 p.m. Reciprocal Currency Arrangements Following the terrorist attacks on September 11, 2001, the Committee established or enlarged reciprocal currency (swap) arrangements with the European Central Bank, the Bank of Canada, and the Bank of England. The purpose of these arrangements was to facilitate the functioning of U.S. financial markets by providing as necessary through the foreign central banks the liquidity in dollars needed by European, Canadian, and British banks whose U.S. operations had been disrupted by the disturbances in the United States. These central bank arrangements would mature in thirty days unless extended by the Committee. Except for an initial drawing of up to $12 billion by the European Central Bank on September 12, individual drawings were subject to approval by the Foreign Currency Subcommittee of the Federal Open Market Committee. Under the agreements, dollars would be made available in the form of deposits at the Federal Reserve Bank of New York in exchange for deposits in the counterparty central banks of an equivalent amount of their currencies. The individual actions and votes were as follows: On September 12, 2001, available members of the Committee voted unanimously to establish a $50 billion swap line with the European Central Bank with a maturity of thirty days unless renewed. Votes for this action: Messrs. Greenspan, Ferguson, Gramlich, Hoenig, Ms. Minehan, Messrs. Moskow, Poole, and Stewart. Absent and not voting: Messrs. Kelley and Meyer. Mr. Stewart voted as alternate for Mr. McDonough. On September 13, 2001, available members of the Committee voted unanimously to increase the System's swap line with the Bank of Canada from $2 billion to $10 billion, with the added facility to mature in thirty days unless renewed. Votes for this action: Messrs. Greenspan, McDonough, Ferguson, Gramlich, Hoenig, Kelley, Ms. Minehan, Messrs. Moskow and Poole. Absent and not voting: Mr. Meyer. On September 14, 2001, available members of the Committee voted unanimously to establish a $30 billion swap line with the Bank of England, with a maturity of thirty days unless renewed. Votes for this action: Messrs. Greenspan, McDonough, Ferguson, Hoenig, Kelley, Ms. Minehan, Messrs. Moskow and Poole. Absent and not voting: Messrs. Gramlich and Meyer. Intermeeting Policy Action On September 13, 2001, the Committee met by telephone conference to assess economic and financial developments stemming from the terrorist attacks on September 11 and the possible need for a monetary policy response. Banking and other financial market conditions, notably in New York City but also around the nation, were discussed in some detail as well as the outlook for reopening the stock exchanges. While the ongoing reactions to the recent tragedy were undoubtedly a negative factor in the economic outlook, the members agreed that financial markets were still too disrupted and the economic outlook too uncertain to provide an adequate basis for a policy move at this time. However, the members contemplated the need for some policy easing in the very near future. In the interim, the System would continue to stand ready to provide whatever liquidity might be needed to counter unusual strains and help assure the effective functioning of the banking system and restore more normal conditions in financial markets. Subsequently, on September 17, 2001, the Committee members voted unanimously to ease reserve conditions appreciably further, consistent with a reduction in the federal funds rate of 50 basis points to a level of 3 percent. This policy action was associated with the approval by the Board of Governors of a reduction of equal size in the discount rate to a level of 2-1/2 percent. These actions were taken against the backdrop of heightened concerns and uncertainty created by the recent terrorist attacks and their potentially adverse effects on asset prices and the performance of the economy. In conjunction with these policy moves, the Federal Reserve would continue to supply, as needed, an atypically large volume of liquidity to the financial system. As a consequence, the Committee recognized that the federal funds rate might fall below its target on occasion until more normal conditions were restored in the functioning of the financial system. The Committee's vote encompassed the retention of a statement in its press release indicating that the balance of risks remained weighted toward weakness for the foreseeable future. Votes for this action: Messrs. Greenspan, McDonough, Ferguson, Gramlich, Hoenig, Kelley, Meyer, Ms. Minehan, Messrs. Moskow and Poole. Votes against this action: None. Donald L. Kohn Secretary

2001-10-04

Minute

Minutes of the Federal Open Market Committee August 21, 2001 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 21, 2001, at 9:00 a.m. Present:Mr. Greenspan, Chairman Mr. McDonough, Vice Chairman Mr. Ferguson Mr. Gramlich Mr. Hoenig Mr. Kelley Mr. Meyer Ms. Minehan Mr. Moskow Mr. PooleMessrs. Jordan, McTeer, Santomero, and Stern, Alternate Members of the Federal Open Market Committee Messrs. Broaddus, Guynn, and Parry, Presidents of the Federal Reserve Banks of Richmond, Atlanta, and San Francisco respectively Mr. Kohn, Secretary and Economist Mr. Bernard, Deputy Secretary Mr. Gillum, Assistant Secretary Mr. Mattingly, General Counsel Mr. Baxter, Deputy General Counsel Ms. Johnson, Economist Mr. Reinhart, Economist Mr. Stockton, Economist Ms. Cumming, Messrs. Hakkio, Howard, Hunter, Lindsey, Rasche, Slifman, and Wilcox, Associate Economists Mr. Kos, Manager, System Open Market Account Ms. Smith, 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, Deputy Director, Division of Monetary Affairs, Board of Governors Mr. Simpson, Senior Adviser, Division of Research and Statistics, Board of Governors Messrs. Oliner and Struckmeyer, Associate Directors, Division of Research and Statistics, Board of Governors Mr. Helkie, Assistant Director, Division of International Finance, Board of Governors Mr. Whitesell, Assistant Director, Division of Monetary Affairs, Board of Governors Mr. Skidmore, Special Assistant to the Board, Office of Board Members, Board of Governors Mr. Kumasaka, Assistant Economist, Division of Monetary Affairs, Board of Governors Ms. Low, Open Market Secretariat Assistant, Office of Board Members, Board of Governors Ms. Browne, Executive Vice President, Federal Reserve Bank of Boston Messrs. Eisenbeis, Lacker, Ms. Mester, Messrs. Rosenblum and Sniderman, Senior Vice Presidents, Federal Reserve Banks of Atlanta, Richmond, Philadelphia, Dallas, and Cleveland respectively Ms. Hargraves and Mr. Judd, Vice Presidents, Federal Reserve Banks of New York and San Francisco Mr. Webber, Senior Research Officer, Federal Reserve Bank of MinneapolisBy unanimous vote, the minutes of the meeting of the Federal Open Market Committee held on June 26-27, 2001, were approved. The Manager of the System Open Market Account reported on recent developments relating to 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 U.S. government securities and securities issued or fully guaranteed by federal agencies during the period June 27, 2001, through August 20, 2001. By unanimous vote, the Committee ratified these transactions. The Committee then turned to a discussion of the economic and financial outlook and the implementation of monetary policy over the intermeeting period ahead. A summary of the economic and financial information available at the time of the meeting and of the Committee's discussion is provided below. The information reviewed at this meeting suggested that economic activity exhibited little, if any, upward movement in midsummer. Increases in household expenditures on consumer items and housing appeared to have been relatively well maintained, but business capital expenditures had weakened substantially since early in the year. Efforts to reduce inventories were continuing, and manufacturing activity had decreased further. Employment had declined over recent months. With energy prices having turned down, overall consumer price inflation had eased slightly in recent months, while core measures of consumer prices showed mixed changes on a twelve-month basis. Measures of labor costs had decelerated on balance. Private nonfarm payroll employment, after declining appreciably during the second quarter, fell further in July, led by additional job losses in manufacturing and help-supply services. Labor demand remained weak in other sectors, with employment in most industries flat to down. The unemployment rate edged up to 4.5 percent in June and remained at that level in July. Although initial claims for unemployment insurance had declined in recent weeks, on balance data suggested persisting softening in the labor market. Industrial production edged lower in July after larger drops in each of the previous three months. Motor vehicle assemblies rose markedly, but production of high-tech equipment continued to plummet, registering its largest one-month decline in more than a decade. Outside those two industries, manufacturing production either moved sideways or fell slightly. The rate of utilization of manufacturing capacity was little changed in July and remained well below its long-run average. Growth in consumer spending slowed somewhat in the second quarter, but except for automotive dealers, retailers reported sizable gains in July. Consumer confidence appeared to have stabilized at moderately favorable levels in recent months. Supported by low mortgage rates, residential building activity had held up well this year. In July, single-family starts increased slightly from a strong pace in the first and second quarters, though permits fell marginally. Sales of new homes rose in June (latest data), and sales of existing homes edged down but remained only slightly below their historical peak. Business spending on equipment and software declined substantially in the second quarter after falling somewhat in the preceding two quarters. The weakness stemmed from sluggish growth in business sales, significantly reduced corporate cash flows, and continued uncertainty about prospects for future sales and earnings. Shipments of nondefense capital goods declined in June after a modest increase in May, but for the second quarter as a whole they contracted at more than twice the first-quarter pace. Moreover, orders data for June were extraordinarily weak, led by a steep decline in communications equipment. Those data, as well as numerous anecdotal reports, suggested further weakness in spending for equipment and software going forward. Nonresidential construction, which had held up well in the first quarter, was down substantially in the second quarter, as spending for office, industrial, and lodging facilities contracted sharply. Vacancy rates, particularly in high-tech centers, had increased significantly in recent months, as demand for office space and data centers plunged. In contrast, expenditures for drilling and mining equipment soared further in the second quarter. Business inventory liquidation was sizable in the second quarter, at a pace estimated to be a bit more rapid than in the first quarter. Manufacturing stocks, particularly of computers and electronic products, were reduced substantially; however, shipments of those products also plunged and the inventory-sales ratio in the computer and electronics sector rose further from an already high level. Elsewhere in manufacturing, the ratio of stocks to sales held steady, with stocks remaining high in a number of manufacturing industries despite aggressive production cutbacks. Inventories rose in the wholesale sector and, given sluggish sales of late, the ratio of inventories to sales moved sharply higher in the second quarter. Stocks in the automobile sector declined over the quarter and moved lower in July. Retail inventories, excluding motor vehicles, fell moderately and the sector's inventory-sales ratio edged lower. The U.S. trade deficit in goods and services narrowed over the May-June period and was about $20 billion smaller at an annual rate in the second quarter than in the first. The value of imports dropped sharply in the second quarter. The value of exports also decreased significantly, with most of the decline in capital goods, primarily computers and semiconductors. Recent information on foreign industrial economies suggested that growth weakened further in the second quarter. The Japanese economy contracted in the quarter, and growth in the euro area appeared to have weakened substantially. Among the developing countries, economic and financial conditions had deteriorated further in Argentina. In most other developing countries, the pace of economic growth continued to decline. Consumer price inflation had eased in recent months, as energy prices turned down and increases in core consumer prices subsided after a pickup early in the year. The core consumer price index (CPI) rose in July at about the same pace as in the second quarter, but the twelve-month change in that index had increased slightly. However, revised data indicated that the core personal consumption expenditure (PCE) chain index had decelerated on a year-over-year basis. At the producer level, prices fell in July, leaving the twelve-month change in the producer price index for finished goods somewhat below the twelve-month change of a year earlier. With regard to labor costs, the employment cost index (ECI) increased at a somewhat slower pace in the twelve months ended in June than over the preceding twelve months. At its meeting on June 26-27, 2001, the Committee adopted a directive that called for maintaining conditions in reserve markets consistent with a decrease of 25 basis points in the intended level of the federal funds rate, to about 3� percent. This action was deemed appropriate in light of incoming information indicating somewhat weaker economic performance than most members had anticipated and the absence of firm evidence that the deceleration in the economic expansion had run its course or that output growth was about to rebound. With greater slack in labor and product markets and with inflation expectations contained, the members agreed that the balance of risks continued to be weighted toward conditions that could generate economic weakness in the foreseeable future. Federal funds traded at rates near the Committee's reduced target level over the intermeeting period, and other short-term rates also fell. Market participants became less optimistic regarding the economic outlook over the intermeeting period, inducing widespread declines in longer-term Treasury yields over the period that were most pronounced at the shorter end of the coupon maturity spectrum. Except for the obligations of the most troubled sectors, declines in investment-grade corporate bond yields were about in line with those on Treasury issues of comparable maturity, leaving most risk spreads little changed on balance. A spate of weak second-quarter earnings reports and sizable reductions in analysts' earnings projections for the remainder of the year took a toll on equity markets, however, and broad stock market indexes moved down appreciably over the intermeeting interval. The trade-weighted value of the dollar, after an extended period of strength, fell against most major foreign currencies, with much of the decline occurring in the days just before this meeting. The decline was particularly marked against the yen, the euro, and the Swiss franc. In contrast, the dollar was little changed against the currencies of some major trading partners, including Canada and Mexico. Growth in the broad monetary aggregates remained strong in July but was below the average pace over the first half of the year. Despite some recent slowing, deposit growth was held up by a flight to liquidity and safety in light of the poor performance and substantial volatility in equity markets. Foreign demands for U.S. currency also boosted money growth in July. The staff forecast prepared for this meeting suggested that, after a period of very slow growth associated in large part with very weak business fixed investment and to some extent with an inventory correction, the economic expansion would gradually regain strength over the forecast horizon and move back to a rate around the staff's current estimate of the growth of the economy's potential output. The period of sub-par expansion was expected to foster an appreciable easing of pressures on resources and some moderation in core price inflation. Although substantial monetary easing had already been implemented and fiscal stimulus was in train, the forecast anticipated that the expansion of domestic final demand would continue to be held back by the effects on household net worth of recent and possible future declines in stock market prices and by damped consumer and business sentiment in a weaker job market. With long-term trends in innovation holding up reasonably well, business fixed investment, notably outlays for equipment and software, likely would return to relatively robust growth after a period of adjustment of capital stocks to more desirable levels, and a projected pickup in foreign economies was seen as providing some support for U.S. exports. In the Committee's discussion of current and prospective economic developments, many of the members commented that the anticipated strengthening in economic expansion had not yet occurred and, indeed, that the economy and near-term economic prospects appeared to have deteriorated marginally further in the period since the previous meeting. Several members referred to a number of recently available economic indicators that in their view suggested the possibility that the string of disappointing readings on the economy might be about to end, but those indicators were insufficiently robust and too recent to provide conclusive evidence of emerging stabilization, much less that some overall strengthening might be under way. Among other things, the economy was still adjusting to downward revisions to expected earnings and to perceptions of greater risk and associated declines in wealth. In sum, the timing of the pickup in the growth of the economy had again been pushed back. Even so, the prospects for an upswing over coming quarters remained favorable against the backdrop of the lagged effects of substantial monetary policy easing already implemented this year, the recent passage and initial implementation of stimulative fiscal policy measures, the progress businesses had already achieved toward completing inventory adjustments, and the underlying support for business investments from continued technological innovations. Nonetheless, the members recognized that the recovery in business fixed investment, the major source of weakness in the economy, was likely to follow a more extended period of adjustment than had been anticipated in their earlier forecasts. With regard to the outlook for inflation, members reported on widespread indications of some slackening in what were still generally tight labor markets and also noted that capacity utilization rates had declined substantially in many industries. The reduced pressures on resources along with expectations of some further declines in energy prices were seen by many members as likely to foster a modest deceleration in many measures of wages and prices. Statistical evidence of an ongoing, though gradual, worsening in overall business conditions was supported by anecdotal reports from around the nation. Weakness continued to be concentrated in manufacturing, notably in the high-tech sector and in high-tech service industries. Indications that the softening was spreading more generally were still fairly limited as suggested by employment data and anecdotal reports. At the same time, members cited some still quite tentative signs that declines in manufacturing had slowed or that activity had steadied in some depressed industries. In their review of developments in key sectors of the economy, members again emphasized the ongoing strength in household spending and its vital role in moderating the weakness in overall economic activity. Tax rebates, declining energy prices, and widespread discounting of retail prices were cited as positive factors in support of consumer spending on a wide range of goods and services. In addition, increasingly persuasive evidence indicated that realized capital gains from the sale of homes were a source of fairly significant amounts of consumer purchasing power in the economy. Looking ahead, members expressed some concern about how long the household sector would continue to prop up the economy in the absence of an upturn in business expenditures. While accommodative financial conditions and reduced income tax rates should continue to undergird consumer spending and the data on retail sales for July displayed relatively impressive gains, negative wealth effects from falling stock market prices, declining payrolls, and sluggish income gains--should they persist--might well depress consumer expenditures over coming months. In this regard, some recent anecdotal reports pointed to weaker retail sales, importantly including motor vehicles. There also were some recent indications of declining consumer confidence, and many retailers had become less optimistic about the outlook for sales over the balance of the year. Homebuilding generally had remained robust in recent months, as relatively low mortgage interest rates continued to offset weakness in employment and incomes and the negative effects of declining stock market wealth. Most regions continued to report strong housing markets, albeit with evidence of some weakening in sales of high-priced homes in a number of areas. For now, however, there were few signs that overall housing activity might be softening, though members noted that potentially bearish factors relating to the outlook for consumer spending might at some point also affect housing. With household spending already elevated relative to income and its rate of increase unlikely to strengthen materially, if at all, under foreseeable near-term economic conditions, the anticipated upturn in overall economic expansion would depend critically on business investment spending and in turn on improved prospects for business profits and cash flows. Business capital expenditures appeared to be slowing sharply further after posting large declines earlier in the year in conjunction with the marking down of the expected growth of demand for and profitability of capital equipment, weak sales, the emergence of substantial excess capacity in many industries, notably in high-tech facilities, and the resulting decline in earnings. Market forecasts of business profits were progressively being reduced, and as a consequence members saw little likelihood of a marked turnaround in business capital investment over the months ahead despite some elements of strength such as sizable construction projects involving public utilities, energy, and, in some areas, public works. Indeed, history strongly suggested that capital spending might well fall below sustainable levels for a time as business firms over adjusted on the downside to previously excessive or misdirected buildups of capital resources. While the near-term outlook for business investment was not promising and considerable uncertainty surrounded the timing of the eventual upturn, members remained optimistic about the longer-term prospects for capital expenditures. In the context of a still favorable outlook for continued elevated rates of technological progress, business firms reportedly had not yet exploited many potentially profitable investment opportunities. The persistence of substantial inventory liquidation was another negative factor in the current performance of the economy. While considerable progress reportedly had been made by numerous business firms in reducing their inventories to bring them into better alignment with sales, a rebound to inventory accumulation did not appear imminent for the economy as a whole. Unexpected weakness in final demands would, of course, lead to additional efforts to pare inventories, which would tend to damp and delay the rebound. Even so, leaner inventories had favorable implications for production going forward. Fiscal policy developments were a supportive factor in the economy. The tax rebates currently being distributed undoubtedly were having a limited but positive effect on consumers, which likely would continue over coming months. The impetus could not be measured precisely, but it was reflected in available anecdotal reports. Moreover, the reductions in income tax rates would have an ongoing effect in boosting disposable household incomes. On the negative side, financial difficulties in a number of states were being met in part through higher taxes that implied at least some offset to the federal tax relief. Many of the members expressed concern about what appeared to be cumulating weakness in numerous foreign economies that would feed back to the U.S. economy through reduced demand for U.S. exports and potentially through perceptions of greater risks in financial markets. A number of major industrial economies were growing more slowly than had been expected earlier in the summer. Moreover, severe economic and financial problems in a few developing nations could spill over to their trading partners and other similarly situated countries that could in turn have adverse repercussions more generally on the world economy. The members generally viewed a modest decline in inflation as a reasonable prospect, at least for a while. Reports from around the nation indicated that labor market conditions had eased, though they remained generally tight and workers available to fill a variety of skilled job openings continued to be in short supply. On balance, however, upward pressures on labor compensation appeared to be easing somewhat despite large increases in the costs of medical care. Competitive pressures continued to make it very difficult for business firms to raise their prices and there were no signs that widespread discounting might be coming to an end. An apparent downtrend in the costs of energy was another favorable factor in the outlook for inflation. Some members expressed a degree of concern, however, about the longer-term outlook for inflation. Pressures on resources would rise as the anticipated upturn and possible above-trend growth brought the economy closer to full capacity utilization. An important uncertainty in this regard was the outlook for productivity, whose growth might have moderated from the unusually high growth rates of 1999 and 2000, with possibly adverse implications for labor costs at very low levels of unemployment. In the Committee's discussion of policy for the intermeeting period ahead, all the members endorsed a proposal calling for a slight further easing in reserve conditions consistent with a 25 basis point reduction in the federal funds rate to a level of 3-1/2 percent. No member expressed a preference for leaving policy unchanged or easing by more than 25 basis points. The economy had continued to be weak--indeed, weaker than many had expected--and data and anecdotal reports from around the country had yet to point to persuasive signs of a turnaround. The monetary and fiscal policy stimulus already in train seemed adequate to promote and support an eventual appreciable rise in the growth of business activity to a pace near that of the economy's potential, but the strength and timing of the pickup remained uncertain and further weakness was a distinct threat in the nearer term. In particular, possible faltering in household expenditures at a time when business firms were still adjusting to inventory imbalances and to capital overinvestments would exacerbate the slowdown in the economy and delay its anticipated recovery. Growing concerns about foreign economies added to the current unease about potential near-term developments. Against the considerable forces of restraint on aggregate demand, the federal funds rate had been lowered substantially and the monetary aggregates were growing rapidly, but some members noted that in a number of respects financial conditions did not indicate as much oncoming stimulus. Since the start of the year, long-term interest rates generally had not extended earlier declines, prices in equity markets had fallen substantially further, and the dollar had appreciated in foreign exchange markets. Accordingly, the inflation risks of some further monetary stimulus seemed limited and were outweighed by the need to lean against actual and potential shortfalls in demand and business activity. The members recognized that in light of the lags in the effects of policy, the easing process probably would have to be terminated before available measures of economic activity provided clear evidence of a substantial strengthening trend. In the view of some members, this point might come relatively soon. Beyond the nearer term members also envisaged the desirability of moving preemptively to offset some of the extra monetary stimulus now in the economy in advance of inflation pressures beginning to build. The members were fully prepared to act on a timely basis, but several emphasized the recognition lags that would be involved in stopping and subsequently beginning to reverse the policy easing. Given their views about the risks to the economy, notably over the nearer term, all the members supported the retention of the sentence in the press statement indicating that the risks continued to be weighted toward further weakness in the foreseeable future. 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 reducing the federal funds rate to an average of around 3-1/2 percent. The vote 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 continue to be weighted mainly toward conditions that may generate economic weakness in the foreseeable future. Votes for this action: Messrs. Greenspan, McDonough Ferguson, Gramlich, Hoenig, Kelley, Meyer, Ms. Minehan, Messrs. Moskow and Poole. Votes against this action: None. It was agreed that the next meeting of the Committee would be held on Tuesday, October 2, 2001. The meeting adjourned at 12:40 p.m. Reciprocal Currency Arrangements Following the terrorist attacks on September 11, 2001, the Committee established or enlarged reciprocal currency (swap) arrangements with the European Central Bank, the Bank of Canada, and the Bank of England. The purpose of these arrangements was to facilitate the functioning of U.S. financial markets by providing as necessary through the foreign central banks the liquidity in dollars needed by European, Canadian, and British banks whose U.S. operations had been disrupted by the disturbances in the United States. These central bank arrangements would mature in thirty days unless extended by the Committee. Except for an initial drawing of up to $12 billion by the European Central Bank on September 12, individual drawings were subject to approval by the Foreign Currency Subcommittee of the Federal Open Market Committee. Under the agreements, dollars would be made available in the form of deposits at the Federal Reserve Bank of New York in exchange for deposits in the counterparty central banks of an equivalent amount of their currencies. The individual actions and votes were as follows: On September 12, 2001, available members of the Committee voted unanimously to establish a $50 billion swap line with the European Central Bank with a maturity of thirty days unless renewed. Votes for this action: Messrs. Greenspan, Ferguson, Gramlich, Hoenig, Ms. Minehan, Messrs. Moskow, Poole, and Stewart. Absent and not voting: Messrs. Kelley and Meyer. Mr. Stewart voted as alternate for Mr. McDonough. On September 13, 2001, available members of the Committee voted unanimously to increase the System's swap line with the Bank of Canada from $2 billion to $10 billion, with the added facility to mature in thirty days unless renewed. Votes for this action: Messrs. Greenspan, McDonough, Ferguson, Gramlich, Hoenig, Kelley, Ms. Minehan, Messrs. Moskow and Poole. Absent and not voting: Mr. Meyer. On September 14, 2001, available members of the Committee voted unanimously to establish a $30 billion swap line with the Bank of England, with a maturity of thirty days unless renewed. Votes for this action: Messrs. Greenspan, McDonough, Ferguson, Hoenig, Kelley, Ms. Minehan, Messrs. Moskow and Poole. Absent and not voting: Messrs. Gramlich and Meyer. Intermeeting Policy Action On September 13, 2001, the Committee met by telephone conference to assess economic and financial developments stemming from the terrorist attacks on September 11 and the possible need for a monetary policy response. Banking and other financial market conditions, notably in New York City but also around the nation, were discussed in some detail as well as the outlook for reopening the stock exchanges. While the ongoing reactions to the recent tragedy were undoubtedly a negative factor in the economic outlook, the members agreed that financial markets were still too disrupted and the economic outlook too uncertain to provide an adequate basis for a policy move at this time. However, the members contemplated the need for some policy easing in the very near future. In the interim, the System would continue to stand ready to provide whatever liquidity might be needed to counter unusual strains and help assure the effective functioning of the banking system and restore more normal conditions in financial markets. Subsequently, on September 17, 2001, the Committee members voted unanimously to ease reserve conditions appreciably further, consistent with a reduction in the federal funds rate of 50 basis points to a level of 3 percent. This policy action was associated with the approval by the Board of Governors of a reduction of equal size in the discount rate to a level of 2-1/2 percent. These actions were taken against the backdrop of heightened concerns and uncertainty created by the recent terrorist attacks and their potentially adverse effects on asset prices and the performance of the economy. In conjunction with these policy moves, the Federal Reserve would continue to supply, as needed, an atypically large volume of liquidity to the financial system. As a consequence, the Committee recognized that the federal funds rate might fall below its target on occasion until more normal conditions were restored in the functioning of the financial system. The Committee's vote encompassed the retention of a statement in its press release indicating that the balance of risks remained weighted toward weakness for the foreseeable future. Votes for this action: Messrs. Greenspan, McDonough, Ferguson, Gramlich, Hoenig, Kelley, Meyer, Ms. Minehan, Messrs. Moskow and Poole. Votes against this action: None. Donald L. Kohn Secretary

2001-08-21

Statement

The Federal Open Market Committee at its meeting today decided to lower its target for the federal funds rate by 25 basis points to 3-1/2 percent. In a related action, the Board of Governors approved a 25 basis point reduction in the discount rate to 3 percent. Today's action by the FOMC brings the decline in the target federal funds rate since the beginning of the year to 300 basis points. Household demand has been sustained, but business profits and capital spending continue to weaken and growth abroad is slowing, weighing on the U.S. economy. The associated easing of pressures on labor and product markets is expected to keep inflation contained. Although long-term prospects for productivity growth and the economy remain favorable, the Committee continues to believe that against the background of its long-run goals of price stability and sustainable economic growth and of the information currently available, the risks are weighted mainly toward conditions that may generate economic weakness in the foreseeable future. In taking the discount rate action, the Federal Reserve Board approved requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, Philadelphia, Richmond, Chicago, Kansas City and Dallas. 2001 Monetary policy Home | News and events Accessibility Last update: August 21, 2001

2001-08-23

Minute

Minutes of the Federal Open Market Committee June 26-27, 2001 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., beginning on Tuesday, June 26, 2001, at 2:00 p.m. and continuing on Wednesday, June 27, 2001, at 9:00 a.m. Present:Mr. Greenspan, Chairman Mr. McDonough, Vice Chairman Mr. Ferguson Mr. Gramlich Mr. Hoenig Mr. Kelley Mr. Meyer Ms. Minehan Mr. Moskow Mr. PooleMessrs. Jordan, McTeer, Santomero, and Stern, Alternate Members of the Federal Open Market Committee Messrs. Broaddus, Guynn, and Parry, Presidents of the Federal Reserve Banks of Richmond, Atlanta, and San Francisco respectively Mr. Kohn, Secretary and Economist Mr. Bernard, Deputy Secretary Mr. Gillum, Assistant Secretary Ms. Fox, Assistant Secretary Mr. Mattingly, General Counsel Mr. Baxter, Deputy General Counsel Ms. Johnson, Economist Mr. Stockton, Economist Messrs. Fuhrer, Hakkio, Howard, Hunter, Lindsey, Rasche, Reinhart, Slifman, and Wilcox, Associate Economists Mr. Kos, Manager, System Open Market Account Ms. Smith and Mr. Winn, Assistants to the Board, Office of Board Members, Board of Governors Mr. Ettin, Deputy Director, Division of Research and Statistics, Board of Governors Mr. Simpson, Senior Adviser, Division of Research and Statistics, Board of Governors Mr. Madigan, Associate Director, Division of Monetary Affairs, Board of Governors Messrs. Oliner and Struckmeyer, Associate Directors, Division of Research and Statistics, Board of Governors Messrs. Freeman1 and Whitesell, Assistant Directors, Divisions of International Finance and Monetary Affairs, Board of Governors Ms. Kusko1 and Mr. Sichel2, Senior Economists, Division of Research and Statistics, Board of Governors Mr. Nelson, Senior Economist1, and Ms. Garrett, Economist, Division Monetary Affairs, Board of Governors Mr. Fleischman2, Economist, Division of Research and Statistics, Board of Governors Ms. Low, Open Market Secretariat Assistant, Division of Monetary Affairs, Board of Governors Ms. Pianalto, First Vice President, Federal Reserve Bank of Cleveland Messrs. Beebe, Eisenbeis, and Goodfriend, Mses. Krieger and Mester, Messrs. Rolnick, Rosenblum, and Steindel, Senior Vice Presidents, Federal Reserve Banks of San Francisco, Atlanta, Richmond, New York, Philadelphia, Minneapolis, Dallas, and New York respectively Mr. Altig, Vice President, Federal Reserve Bank of Cleveland Mr. Fernald3, Economist, Federal Reserve Bank of ChicagoBy unanimous vote, the minutes of the meeting of the Federal Open Market Committee held on May 15, 2001, were approved. The Manager of the System Open Market Account reported on recent developments relating to 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 May 15, 2001, through June 26, 2001. By unanimous vote, the Committee ratified these transactions. The Committee then turned to a discussion of the economic and financial outlook and the implementation of monetary policy over the intermeeting period ahead. A summary of the economic and financial information available at the time of the meeting and of the Committee's discussion is provided below, followed by the domestic policy directive that was approved by the Committee and issued to the Federal Reserve Bank of New York. The information reviewed at this meeting suggested that economic activity continued to grow little, if at all, in the second quarter. Employment fell somewhat over the first two months of the quarter, industrial output dropped sharply, and the limited available information suggested that both probably continued to decline in June. Expansion in consumer spending appeared to have slowed and business purchases of equipment and software had fallen appreciably, though homebuilding had been well maintained. Energy prices had been relatively flat recently, at a high level, and core price inflation had moderated a little. Private nonfarm payroll employment fell slightly further in May after a sharp drop in April and lackluster growth in the first quarter. Manufacturing recorded additional widespread job losses in May, and there were signs that weakness in employment was spreading to related sectors, notably wholesale trade and help-supply services. By contrast, construction employment rebounded in May, retracing part of its large April loss, and hiring in finance, insurance, and real estate remained brisk. The unemployment rate edged lower in May, to 4.4 percent, but initial unemployment insurance claims and other data suggested persisting softening in the labor market in that month. The rapid contraction in industrial production continued unabated in May, with manufacturing output registering an eighth consecutive monthly drop. Moreover, output from electric utility plants fell, and mining activity slowed further in May following a strong first-quarter gain. Within manufacturing, decreases in output were widely spread across sectors, and the production of high-tech equipment continued to plummet. The motor vehicle industry was one of the few sectors to record a rise in production. The further contraction in production in May brought the rate of utilization of manufacturing capacity to its lowest level since 1983. Growth of consumer spending seemed to have slowed in the second quarter, reflecting the deceleration in personal income, the rise in unemployment, and the earlier decline in household net worth. Nominal retail sales were up only slightly in May after a brisk rise in April, and the average rate of increase over the two months was somewhat slower than that of the first quarter. Low mortgage rates continued to provide support to residential building activity in April and May despite a weakening labor market and sluggish growth in personal income. Total housing starts in April-May remained at the high first-quarter level, as stronger single-family starts offset a slower pace of multifamily starts. Sales of new and existing homes slipped in April (latest data) after both reached near-record levels in March. Business spending on equipment and software declined further early in the second quarter in response to sluggish sales, an erosion of earnings and corporate cash flows, and an uncertain outlook for future sales and earnings. Shipments of nondefense capital goods slumped in April, and the weakness in incoming orders suggested that shipments would fall further in coming months. Fleet sales of cars and trucks, which had been among the few areas of strength in business equipment expenditures in the first quarter, also slowed. By contrast, nonresidential construction remained robust, though the level of activity slipped a little in April and slightly higher vacancy rates and smaller increases in rents suggested that the profitability of new nonresidential investment might be lessening. Strength was particularly evident in outlays for industrial structures, partly reflecting construction of electric power plants and facilities for cogeneration of power by industrial companies, and in continuing strong oil and gas exploration activity. Business inventories on a book-value basis edged higher in April after a sizable runoff in the first quarter. Excluding motor vehicles, manufacturing stocks were little changed in April, but shipments were down sharply and the aggregate inventory-shipments ratio for the sector remained on a steep upward trend, with many industries facing sizable inventory overhangs. In the wholesale sector, inventories rose in step with sales; the sector's inventory-sales ratio was unchanged in April and remained at the top of its range for the past twelve months. Retail inventories continued to decline in April, and the sector's inventory-sales ratio decreased further and was near the middle of its range for the past twelve months. The U.S. trade deficit in goods and services continued to shrink in April. The value of exports fell, with most of the drop occurring in capital goods, notably computers and semiconductors. The value of imports also decreased but by slightly more than exports, reflecting sizable declines in capital and consumer goods that were partly offset by increases in oil and automotive products. Recent information indicated that economic growth in the euro area and the United Kingdom in the first quarter was at about the reduced pace seen in the fourth quarter, and growth likely stayed relatively slow more recently. Expansion in Canada appeared to have weakened recently after a slight pickup in the first quarter. In Japan, the contraction in economic activity that began early in the year appeared to have continued into the second quarter. Most of the developing countries, with the notable exception of China, also were experiencing an economic slowdown that was related at least in part to weaker external demand. Core price inflation had moderated a little recently after a pickup earlier in the year. The core consumer price index (CPI) rose relatively slowly in April and May, and the increase in that index during the past twelve months was about the same as that during the previous twelve-month period. The core personal consumption expenditure (PCE) chain-type price index presented a similar picture, with inflation in April and May a little lower than earlier in the year and no change in inflation on a year-over-year basis. Core producer price inflation for finished goods also was subdued in the April-May period but edged higher on a year-over-year basis. There also were indications that upward pressures on energy prices had abated somewhat. In particular, the return of some domestic refineries to operation after maintenance or breakdowns and a surge in imports had replenished gasoline stocks, and as a result wholesale and retail gasoline prices had retreated recently. With regard to labor costs, average hourly earnings of production or nonsupervisory workers continued to rise in April and May at the relatively brisk rate that had prevailed over the past year. At its meeting on May 15, 2001, the Committee adopted a directive that called for maintaining conditions in reserve markets consistent with a decrease of 50 basis points in the intended level of the federal funds rate, to about 4 percent. The members generally agreed that this action was necessary in light of the continuing weakness of the economic expansion and the lack of evidence that output growth had stabilized or was about to rebound, coupled with a climate of fragile business and consumer confidence. In addition, the members believed that the balance of risks remained weighted toward conditions that could generate economic weakness in the foreseeable future. Federal funds traded at rates near the Committee's target level over the intermeeting period. Other short-term market rates declined somewhat following the Committee's announcement of the easing action and subsequently moved down noticeably further in response to weaker-than-expected news on economic activity and corporate earnings. Yields on long-term Treasury and investment-grade corporate securities fell appreciably during the intermeeting interval, but rates on speculative-grade bonds rose sharply in response to the adverse earnings news. The pessimistic earnings reports also weighed on equity prices, which edged lower on balance. In foreign exchange markets, the trade-weighted value of the dollar in terms of many of the major foreign currencies increased slightly over the intermeeting interval, as the dollar's appreciation against euro and other European currencies more than offset the U.S. dollar's further decline against the Canadian dollar. European currencies weakened in response to disappointing data on economic activity, with inflation concerns seen as constraining countervailing monetary easing actions. The dollar also was up slightly on net in terms of an index of the currencies of other important trading partners. The real was adversely affected by Brazil's internal problems and spillovers from Argentina's financial difficulties, while the Mexican peso benefited from continued foreign interest in Mexican investments and from high oil prices. The broad monetary aggregates continued to grow rapidly in the second quarter, reflecting the effects of lower opportunity costs of holding liquid deposits and money market mutual funds, a buildup in deposits associated with extensive mortgage financing activity, and a flight to liquidity and safety from volatile equity markets. The debt of domestic nonfinancial sectors expanded at a moderate pace on balance through May. The staff forecast prepared for this meeting suggested that after a period of very slow growth associated in large part with an inventory correction, a sizable decline in capital spending, and a related sharp contraction in manufacturing output, the economic expansion would gradually regain strength over the forecast horizon and move back to a rate around the staff's current estimate of the growth of the economy's potential output. The period of sub-par expansion was expected to foster an appreciable easing of pressures on resources and some moderation in core price inflation. Despite the substantial monetary easing that had been implemented already and the fiscal stimulus, including federal tax rebates, that was in train, the forecast anticipated that sluggish hiring and the decline in household wealth would restrain the growth of both consumer spending and housing demand. Business fixed investment, notably outlays for equipment and software, would be weaker for a while but would return to relatively robust growth after a period of adjustment of capital stocks to more desirable levels. The gradual strengthening of investment, together with a projected improvement in foreign economies that was seen as providing some support for U.S. exports, would foster the pickup in growth of demand and output. In the Committee's discussion of current and prospective economic developments, members noted that by some measures overall economic activity remained at a reasonably high level. However, recent data indicated that growth of spending and output was quite sluggish and below the pace many members had anticipated at the time of the previous meeting. Weakness in business spending for equipment and software, efforts to reduce excess inventories, and the ongoing adaptation to lower equity prices in the United States and around the world were likely to hold back economic activity in the short run. Nonetheless, the members continued to anticipate a strengthening as the year progressed and during 2002, fostered to a large extent by the lagged effects on spending of the substantial easing in monetary policy since early this year, the stimulus from recently enacted tax cuts, and the positive effects on household and business purchasing power of some recent reductions in energy prices. In addition, the abatement and eventual turnaround of the downward adjustments to capital spending and inventories would add impetus to economic growth going forward. It was noted, however, that the unique characteristics of the current cyclical experience, including the heavy concentration of weakness in business expenditures and manufacturing output, increased the uncertainty that surrounded any forecast. Most of the members believed that the risks to the expansion, notably for the nearer term, remained to the downside of current forecasts. Potential sources of shortfalls included the effects of possible further increases in unemployment on consumer and business confidence; the risks of disappointing business earnings that could damp investment and, through lower equity prices, consumption; and the growing indications of weakness in foreign economies that could limit demand for exports. In an environment of diminished pressures in product and labor markets and of lower energy costs, members commented that price pressures were likely to remain contained, at least over the near to intermediate term. In preparation for the mid-year monetary policy report to Congress, the members of the Board of Governors and the presidents of the Federal Reserve Banks provided individual projections of the growth of GDP, the rate of unemployment, and the rate of inflation for the years 2001 and 2002. The forecasts of the rate of expansion in real GDP had central tendencies of 1-1/4 to 2 percent for 2001, suggesting at least a little acceleration in the second half of the year, and 3 to 3-1/4 percent for 2002. The civilian rates of unemployment associated with these forecasts had central tendencies of 4-3/4 to 5 percent in the fourth quarter of 2001 and 4-3/4 to 5-1/4 percent in the fourth quarter of 2002. Forecasts of the rate of inflation, as measured by the chain price index for personal consumption expenditures, were centered on a range of 2 to 2-1/2 percent for this year and 1-3/4 to 2-1/2 percent in 2002. Continuing softness in the expansion of economic activity was mirrored in anecdotal reports of business conditions in much of the nation. Typical regional reports referred to slowing increases in economic activity from an already reduced pace or to the persistence of sluggish business activity and generally downbeat business sentiment. Manufacturing continued to display particular weakness. However, actions to reduce excess inventories or to address problems relating to overcapacity in some sectors of the economy, including telecommunications and other high-tech industries, were under way and were likely to exert a decreasing drag on economic activity over coming quarters as corrective adjustments were completed. Financial conditions, while generally supportive of greater spending, presented a mixed picture in some respects. Short- and intermediate-term interest rates had fallen substantially this year, and long-term yields had moved down late last year. But equity prices were only holding their own after a substantial decline earlier and the dollar had appreciated. Though lenders were cautious about marginally creditworthy firms, most businesses were finding ample credit available at attractive terms. In their comments about developments in key sectors of the economy, members noted that overall business activity had been supported, at least to this point, by the relative strength of household demand. Growth in consumer spending for goods and services, while moderating appreciably since earlier in the year, had nonetheless held up unexpectedly well given the adverse wealth effects associated with the declines in stock market prices, relatively high levels of consumer indebtedness, and job losses in a growing number of industries. Members referred in particular to the persisting strength in demand for light motor vehicles, which evidently was boosted by continuing sales incentives and attractive financing terms. Looking ahead, the outlook for consumer spending was subject to a number of downside risks that included the possibility of rising unemployment and further weakness in the stock market, which could damp consumer confidence as well as income and wealth. However, some further growth in consumer spending remained the most likely prospect for the balance of the year in light of the impetus provided by monetary and fiscal policy and the apparent stabilization in consumer sentiment in recent months after its earlier decline. Housing activity remained at a high level as attractive mortgage interest rates evidently continued to counterbalance the negative effects on consumer attitudes of somewhat weaker labor markets and reduced stock market wealth. While housing activity in a number of areas continued to be described as fairly robust, members noted that residential sales and construction had slipped in some parts of the nation. Even so, given existing backlogs and the continued availability of attractive mortgage rates, nationwide housing construction was expected to remain near its currently elevated level. The near-term outlook for business fixed investment seemed less promising. The weakness in spending for new equipment and software had played a key role in the softening of the overall expansion of economic activity in recent quarters, and a material pickup in such expenditures did not appear likely until the latter part of this year or early next year. Indeed, anecdotal reports from many business firms indicated that they were delaying at least some equipment and software outlays until evidence of an upturn in their sales and earnings began to accumulate. Caution was especially pronounced among high-tech firms, many of which had experienced major cutbacks in the demand for their products and services. An analysis prepared for this meeting suggested that in the aggregate the apparent overhang of excess capital might not be large, but the dimensions and duration of the adjustment in spending on capital goods were a major source of uncertainty in the outlook, and there was some risk of substantially greater weakness in investment spending than was forecast for coming months. Beyond the nearer term, however, the prospects for an upturn in investment outlays seemed favorable in the context of profit opportunities associated with expectations of continued elevated rates of technological progress and rapid declines in the prices of new equipment. In this regard the members reviewed several staff reports that generally concluded that the growth of productivity in the years ahead was highly likely to remain appreciably stronger than it had been from the mid-1970s to the mid-1990s, though how much stronger was an open question. With regard to the outlook for nonresidential construction activity, members referred to signs of developing weakness in some commercial real estate markets, but there were few reports of overbuilding and the construction of commercial facilities was being well maintained in other parts of the country. On balance, further modest growth in nonresidential construction, though well below the average pace in recent quarters, was seen as a likely prospect. Business efforts to bring their inventories into better alignment with sales were a key factor in the deceleration of overall economic activity in recent quarters and in forecasts that the upturn in economic activity would be relatively limited over the balance of the year. Net inventory liquidation appeared to have diminished in the current quarter from its pace earlier in the year, but inventory-sales ratios had risen further in recent months, especially for high-tech equipment. Accordingly, liquidation was not likely to abate substantially further for some time. With regard to the foreign sector of the economy, members commented that economic activity had softened more than anticipated in many nations that were important trading partners, with clearly negative implications for U.S. exports. Major Latin American countries were experiencing particularly severe economic difficulties, but growth was slowing or economic activity declining in many industrial countries as well. At the same time, a number of important U.S. industries were subject to increased domestic competition from foreign imports. While growth abroad could be expected to rebound next year, responding in part to faster expansion in the U. S. economy, the nearer-term outlook for U.S. and indeed world trade was less favorable. In their review of the outlook for inflation, members generally anticipated that increases in consumer prices would remain relatively subdued over the next several quarters. Factors underlying that assessment included the emergence of less taut conditions in labor markets, relatively low capacity utilization rates in manufacturing, and the persistence of highly competitive conditions in most product markets that made it very difficult for business firms to preserve or increase their profit margins by raising prices. Moreover, energy prices recently had declined appreciably, and the earlier inflationary effects of energy price increases on a broad range of costs and prices appeared to have begun to subside as a result. Inflation expectations that currently appeared by various measures and survey results to be essentially flat or even to have declined a bit were reinforcing the factors holding down price increases. Some negatives in the inflation outlook also were noted, such as some increase in labor compensation including rapid advances in health care costs, and a consequent squeeze on profit margins that was exacerbated by a cyclical decline in productivity gains. Labor pressures on business costs might persist for a time in lagged response to earlier advances in headline consumer price inflation and labor productivity, but their effects would tend to diminish or to be offset over time if, in line with the members' forecasts, pressures on labor resources continued to ease. Some members expressed concern about the longer-run prospects for wages and prices if the stimulative stance of monetary policy was maintained too long and allowed demand pressures to outrun the economy's potential. In the Committee's discussion of policy for the intermeeting period ahead, all but one of the members supported both some further easing of reserve conditions consistent with a 25 basis point reduction in the target federal funds rate and the retention of the Committee's public statement that the risks were weighted toward excessively soft economic performance. The information received since the May meeting suggested a somewhat weaker economic performance than most had anticipated, and the members were persuaded that in the absence of firm evidence that the deceleration in the economic expansion had run its course a further easing action was needed at this point to help stabilize the economy. With greater slack in labor and product markets, and with inflation expectations contained, an added easing ran very little risk of exacerbating price pressures, provided the Committee was prepared to firm the stance of policy promptly if and when demand pressures threatened to intensify. One member was persuaded that policy had already become so expansionary that further easing ran an unacceptable risk of exacerbating inflation over time. A smaller easing move than those the Committee had been making earlier this year was deemed desirable by the members in light of the substantial easing that already had been implemented since the start of this year. By a number of measures--including the level of real federal funds rates, the robust growth of the monetary aggregates, and the ready availability of finance to most borrowers--policy had become stimulative. Such a policy stance was appropriate for a time to counter the various forces holding back economic expansion. But much of the lagged effects of the Committee's earlier easing actions had not yet been felt in the economy, and they would be supplemented in coming quarters by the implementation of the recently legislated tax cut stimulus. In these circumstances, a smaller move than those undertaken earlier this year would have the advantage of reducing the odds on adding to inflation pressures later and of underlining the Committee's assessment of its policy stance. In the view of a number of members, the Committee might well be near the end of its easing cycle. At the same time, several emphasized that they did not want to rule out further easing later if warranted by the tenor of incoming economic information. All except one of the members accepted a proposal to retain the Committee's press statement that the risks would continue to be weighted toward economic weakness after today's easing move. The member who opposed additional policy easing expressed strong reservations about such a statement because in his view it likely would be interpreted as an intention to ease policy further, which was contrary to his own assessment that a more neutral outlook regarding the future course of policy was desirable. In the view of most members, however, the weakness of the recent information relating to the performance of the economy was consistent with unbalanced risks at least insofar as it pertained to the outlook for the rest of this year, and their primary policy concern at this point remained the strength of economic activity rather than potentially worsening inflation over the longer term. 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 reducing the federal funds rate to an average of around 3-3/4 percent. The vote 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 continue to be weighted mainly toward conditions that may generate economic weakness in the foreseeable future. Votes for this action: Messrs. Greenspan, McDonough, Ferguson, Gramlich, Hoenig, Kelley, Meyer, Ms. Minehan, and Mr. Moskow. Votes against this action: Mr. Poole. Mr. Poole dissented because he believed that FOMC actions this year had already established a highly stimulative monetary policy stance. The M2 and MZM measures of money had risen at annual rates in excess of 10 percent and 20 percent respectively over the past six months, and the real federal funds rate was very likely below its equilibrium level. Other more qualitative information on financial conditions pointed in the same direction. Economic forecasts were that the economy's growth would resume later this year and the fact that long-term interest rates had not declined since December also indicated that the market anticipated a revival of faster economic growth before long. Given the lags in monetary processes, he believed that adding further monetary policy stimulus raised an undue risk of fostering higher inflation in the future. Moreover, against this background, he was especially concerned that a statement that the Committee continued to view the balance of risks as weighted toward weakness would be read in the market as a sign that the Committee was likely to ease further in the near term. He thought future developments were equally likely to warrant an action in either direction, and he did not think the Committee should take a step that probably would cause expectations of further easing to become embedded in market interest rates. It was agreed that the next meeting of the Committee would be held on Tuesday, August 21, 2001. The meeting adjourned at 12:25 p.m. NOTATION VOTE By notation vote completed on August 16, 2001, the Committee members voted unanimously to elect Vincent R. Reinhart to the position of economist for the period until the first regularly scheduled meeting in 2002, with the understanding that in the event of the discontinuance of his official connection with the Board of Governors he would cease to have any official connection with the Federal Open Market Committee Donald L. Kohn SecretaryFootnotes 1. Attended portion of meeting relating to staff presentations. Return to text 2. Attended portion of meeting relating to productivity developments. Return to text 3. Attended Tuesday's session only. Return to text

2001-06-27

Statement

The Federal Open Market Committee at its meeting today decided to lower its target for the federal funds rate by 25 basis points to 3-3/4 percent. In a related action, the Board of Governors approved a 25 basis point reduction in the discount rate to 3-1/4 percent. Today's action by the FOMC brings the decline in the target federal funds rate since the beginning of the year to 275 basis points. The patterns evident in recent months--declining profitability and business capital spending, weak expansion of consumption, and slowing growth abroad--continue to weigh on the economy. The associated easing of pressures on labor and product markets is expected to keep inflation contained. Although continuing favorable trends bolster long-term prospects for productivity growth and the economy, the Committee continues to believe that against the background of its long-run goals of price stability and sustainable economic growth and of the information currently available, the risks are weighted mainly toward conditions that may generate economic weakness in the foreseeable future. In taking the discount rate action, the Federal Reserve Board approved requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, Philadelphia, Atlanta, Chicago, Dallas and San Francisco. 2001 Monetary policy Home | News and events Accessibility Last update: June 27, 2001

2001-05-15

Statement

For immediate release The Federal Open Market Committee at its meeting today decided to lower its target for the federal funds rate by 50 basis points to 4 percent. In a related action, the Board of Governors approved a 50 basis point reduction in the discount rate to 3-1/2 percent. A significant reduction in excess inventories seems well advanced. Consumption and housing expenditures have held up reasonably well, though activity in these areas has flattened recently. Investment in capital equipment, however, has continued to decline. The erosion in current and prospective profitability, in combination with considerable uncertainty about the business outlook, seems likely to hold down capital spending going forward. This potential restraint, together with the possible effects of earlier reductions in equity wealth on consumption and the risk of slower growth abroad, continues to weigh on the economy. With pressures on labor and product markets easing, inflation is expected to remain contained. Although measured productivity growth stalled in the first quarter, the impressive underlying rate of increase that developed in recent years appears to be largely intact, supporting longer-term prospects. The Committee continues to believe that against the background of its long-run goals of price stability and sustainable economic growth and of the information currently available, the risks are weighted mainly toward conditions that may generate economic weakness in the foreseeable future. In taking the discount rate action, the Federal Reserve Board approved requests submitted by the Boards of Directors of the Federal Reserve Banks of New York, Richmond, Chicago, St. Louis and San Francisco.

2001-06-28

Minute

Minutes of the Federal Open Market Committee May 15, 2001 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, May 15, 2001, starting at 9:00 a.m. Present:Mr. Greenspan, Chairman Mr. McDonough, Vice Chairman Mr. Ferguson Mr. Gramlich Mr. Hoenig Mr. Kelley Mr. Meyer Ms. Minehan Mr. Moskow Mr. PooleMessrs. Jordan, McTeer, Santomero, and Stern, Alternate Members of the Federal Open Market Committee Messrs. Broaddus, Guynn, and Parry, Presidents of the Federal Reserve Banks of Richmond, Atlanta, and San Francisco respectively Mr. Kohn, Secretary and Economist Mr. Gillum, Assistant Secretary Ms. Fox, Assistant Secretary Mr. Mattingly, General Counsel Ms. Johnson, Economist Mr. Stockton, Economist Ms. Cumming, Messrs. Fuhrer, Hakkio, Howard, Lindsey, Rasche, Reinhart, Slifman, and Wilcox, Associate Economists Mr. Kos, Manager, System Open Market Account Mr. Ettin, Deputy Director, Division of Research and Statistics, Board of Governors Mr. Simpson, Senior Adviser, Division of Research and Statistics, Board of Governors Messrs. Connors, 1 Madigan, Oliner, and Struckmeyer, Associate Directors, Divisions of International Finance, Monetary Affairs, Research and Statistics, and Research and Statistics, Board of Governors Mr. Whitesell, Assistant Director, Division of Monetary Affairs, Board of Governors Mr. Skidmore, Special Assistant to the Board, Office of Board Members, Board of Governors Mr. Kumasaka, Assistant Economist, Division of Monetary Affairs, Board of Governors Ms. Low, Open Market Secretariat Assistant, Division of Monetary Affairs, Board of Governors Mr. Connolly, First Vice President, Federal Reserve Bank of Boston Messrs. Beebe, Eisenbeis, and Goodfriend, Mses. Mester and Perelmuter, Messrs. Rosenblum and Sniderman, Senior Vice Presidents, Federal Reserve Banks of San Francisco, Atlanta, Richmond, Philadelphia, New York, Dallas, and Cleveland respectively Mr. Sullivan, Vice President, Federal Reserve Bank of Chicago Mr. Weber, Senior Research Officer, Federal Reserve Bank of MinneapolisBy unanimous vote, the minutes of the meeting of the Federal Open Market Committee held on March 20, 2001, 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 March 20, 2001, through May 14, 2001. By unanimous vote, the Committee ratified these transactions. By unanimous vote, the Committee approved the extension for one year beginning in December 2001 of the System's reciprocal currency ("swap") arrangements with the Bank of Canada and the Bank of Mexico. The arrangement with the Bank of Canada is in the amount of $2 billion equivalent and that with the Bank of Mexico in the amount of $3 billion equivalent. Both arrangements are associated with the Federal Reserve's participation in the North American Framework Agreement. The early vote to renew the System's participation in the swap arrangements maturing in December relates to the provision that each party must provide six months prior notice of an intention to terminate its participation. The Committee then turned to a discussion of the economic and financial outlook and the implementation of monetary policy over the intermeeting period ahead. A summary of the economic and financial information available at the time of the meeting and of the Committee's discussion is provided below, followed by the domestic policy directive that was approved by the Committee and issued to the Federal Reserve Bank of New York. The information reviewed at this meeting suggested that the economic expansion remained very sluggish. Household spending, especially for housing and motor vehicles, had held up relatively well, but business investment was quite weak and appeared to be decreasing further. Persistent inventory overhangs in a number of sectors had led to additional substantial cuts in manufacturing production. Reflecting in part the downtrend in manufacturing output, labor demand had weakened considerably and unemployment had risen. Price inflation had picked up a little but, abstracting from energy, had remained relatively subdued. Private nonfarm payroll employment fell sharply in April after a small drop in March. Manufacturing, construction, and the service sector recorded large payroll declines in April, and gains elsewhere were small. The unemployment rate increased further, to 4.5 percent in April, and initial claims for unemployment insurance averaged over the four weeks ended April 28 were at their highest level since 1993. Industrial production declined appreciably further in April. Manufacturing output registered a seventh consecutive monthly drop, while a robust boost to mining activity associated with strong gains in crude oil and gas production was offset by a decrease in utilities output in a period of unusually warm weather. In manufacturing, the production of motor vehicles and parts was unchanged in April after having surged in February and March, but the output of high-tech equipment continued to trend steeply downward, and there was widespread weakness in the manufacture of other industrial products. Reflecting the production cutbacks, the rate of utilization of manufacturing capacity fell even further below its long-run average. Consumer spending had held up relatively well thus far this year despite the deceleration in personal incomes, reduced household net worth, and deterioration in consumer sentiment since last autumn. After a solid first-quarter gain, nominal retail sales rose briskly in April, reflecting strong outlays at general merchandise and apparel stores, building and material outlets, and automotive dealers. Growth of spending on services slowed in the first quarter (latest data), partly because of a weather-related drop in consumption of energy services. Low mortgage rates continued to provide support to residential building activity. The first-quarter average for total housing starts was the strongest quarterly reading in a year despite a March decline in starts that might have been exaggerated by unusual weather patterns. In addition, sales of new and existing homes remained brisk through March. New home sales reached a new high in March, and sales of existing homes were only a little below their record high in June 1999. Against the background of a sluggish economy and deteriorating earnings, business capital spending on equipment and software declined somewhat further in the first quarter. Increased purchases of cars and trucks were among the few areas of strength in business equipment expenditures; elsewhere, outlays for high-tech equipment decreased on a quarterly basis for the first time since the 1990 recession, and spending for equipment such as industrial machinery changed little. Moreover, recent data on orders for nondefense capital goods suggested that some further slippage in future spending for equipment was likely. By contrast, nonresidential construction continued to expand briskly; expenditures for oil and gas exploration surged in the first quarter, and nonresidential building activity continued at a rapid pace, with sizable gains recorded for most major categories of buildings. Business inventories on a book-value basis fell steeply further in March, with roughly half of the decline reflecting a runoff of motor vehicle stocks at the wholesale and retail levels. Despite the sharp liquidation of inventories in the manufacturing sector in February and March, the aggregate inventory-shipments ratio for that sector edged higher in March to a level well above that of a year ago. In the wholesale trade sector, aggregate stocks dropped somewhat on balance in the first quarter and the sector's stock-sales ratio edged lower; nonetheless, the sector's ratio in March also was above its level of a year earlier. Retail inventories ran off in February and March after a small January rise, and the sector's inventory-sales ratio decreased somewhat on balance to around the middle of its range for the past twelve months. The U.S. trade deficit in goods and services narrowed considerably in February, reflecting a further rise in the value of exports and a sharp drop in the value of imports. The average deficit for the first two months of the year was smaller than that for the fourth quarter. Nonetheless, exports for the January-February period were below the fourth-quarter average, with notable declines occurring in automotive products, industrial supplies, and semiconductors. The slowdown in imports in January-February was broadly spread across trade categories, with the largest decreases occurring in automotive products, high-tech goods, and oil. Recent information indicated that economic activity in the foreign industrial countries had decelerated since the fourth quarter. Expansion in the euro area, the United Kingdom, and Canada appeared to have slowed significantly, while the Japanese economy seemed to have faltered after a brief rebound late last year. In addition, economic growth in the major developing countries had softened markedly, with the slowdown in most of those countries reflecting weaker external demand. Overall inflation had been held down thus far this year by a deceleration in energy prices, but by some measures core price inflation had picked up a bit. The total consumer price index (CPI) increased moderately in February and March (latest data), and the increase in that index during the past twelve months was smaller than that during the previous twelve-month period, reflecting reduced increases in energy prices. By contrast, core CPI inflation picked up slightly in the February-March period and on a year-over-year basis. However, inflation as measured by the core personal consumption expenditure (PCE) chain-type price index, though also running a little higher in February-March, recorded a small decline on a year-over-year basis. At the producer level, core finished goods inflation was subdued in March and April but moved up somewhat on a year-over-year basis. With regard to labor costs, growth in the employment cost index (ECI) for hourly compensation picked up noticeably in the first quarter of this year; however, the gain in compensation for the four quarters ended in March was a little below the large increase for the four-quarter period ended in March 2000. By contrast, average hourly earnings of production or nonsupervisory workers rose more briskly in April and on a year-over-year basis. At its meeting on March 20, 2001, the Committee adopted a directive that called for maintaining conditions in reserve markets consistent with a decrease of 50 basis points in the intended level of the federal funds rate, to about 5 percent. This action, in conjunction with a further easing of � percentage point on April 18, was intended to help promote a more satisfactory economic expansion going forward. Under then-current conditions, the members agreed that the balance of risks remained weighted toward conditions that could generate economic weakness in the foreseeable future. Federal funds traded at rates near the Committee's target levels over the intermeeting period. Other short-term interest rates generally fell somewhat less than the reduction in the federal funds rate because the markets had anticipated the easing in policy, though only in part. In contrast to the declines in short-term rates, longer-term yields rose on balance as investors apparently became more confident of a pickup in output growth, supported in part by improved prospects for substantial federal tax reductions. The more optimistic assessment of the economic outlook and the unexpected intermeeting easing action apparently contributed to a narrowing of risk premiums on lower-grade private debt obligations and to a rise in equity prices. Better-than-expected first-quarter earnings also boosted stock prices, and broad indexes of U.S. stock market prices moved substantially higher. In foreign exchange markets, the trade-weighted value of the dollar in terms of many of the major foreign currencies changed little on balance over the intermeeting interval. A number of major foreign central banks cut their policy rates during the period, but by less than the two easing steps in the United States. The dollar's appreciation against the euro was offset by its decline in terms of the yen and the Canadian dollar. The dollar also was essentially unchanged in terms of an index of the currencies of other important trading partners. The value of the Mexican peso rose appreciably against the dollar as monetary authorities maintained their tight policy stance and as spreads on Mexican debt narrowed. In contrast, concerns about potential spillovers from Argentina's worsening financial difficulties depressed the value of the Brazilian real relative to the dollar. The broad monetary aggregates continued to grow rapidly in March and April. In addition to the effects of lower market interest rates, extensive mortgage financing activity and a flight to safety from volatile equity markets likely added to M2's strong upward trend. The expansion of M3 was bolstered by robust growth of institution-only money funds and by greater issuance of managed liabilities included in this aggregate to help finance faster growth of bank credit and a shift in bank funding from foreign to U.S. sources. The debt of domestic nonfinancial sectors had grown at a moderate pace on balance through April. The staff forecast prepared for this meeting suggested that, after a period of slow growth associated in part with an inventory correction, the economic expansion would gradually regain strength over the next two years and move back toward a rate near the staff's current estimate of the growth of the economy's potential output. The period of subpar expansion was expected to foster an easing of pressures on resources and some moderation in core price inflation. Despite the substantial easing in the stance of monetary policy, the forecast anticipated that the expansion of domestic final demand would be held back to an extent by some of the developments in financial markets-in particular, the decline in household net worth associated with the earlier downturn in equity prices, the continuation of relatively stringent terms and conditions on some types of loans by financial institutions, and the appreciation of the dollar. Partly as a result of the decline in household wealth, growth of consumer spending was expected to remain relatively low for some time, and housing demand would increase only a little from its recent level. However, business fixed investment, notably outlays for equipment and software, would resume relatively good growth after a period of adjustment of capital stocks to more desirable levels; a projected recovery in the growth of foreign economies was seen as providing increased support for U.S. exports; and fiscal policy was assumed to become more expansionary. In the Committee's discussion of current and prospective economic developments, members commented that the slowdown in the expansion to a now quite sluggish pace was likely to be more prolonged than they had anticipated earlier and indeed, with the economy displaying some signs of fragility and inventories still appearing excessive in some sectors, it was not entirely clear that the slowing in the growth of the economy had bottomed out. Despite the crosscurrents and uncertainties that were involved, members saw an upturn in the economic expansion by later in the year as the most likely outlook. This view was premised in large measure on the lagged effects of the Committee's relatively aggressive easing actions this year, including any further easing that might be adopted at this meeting, growing prospects of some fiscal policy stimulus later in the year, and more generally the favorable effects of still substantial productivity gains on profit opportunities and income growth and hence on business and household demands for goods and services. As business profits stabilized and final demand firmed, inventory liquidation would come to an end, adding to the upward momentum of economic activity. The members were uncertain as to the degree and timing of the strengthening in final demand, and although a relatively prompt and strong rebound could not be ruled out, many saw a variety of factors that pointed to the possibility that the upturn could be weaker or more delayed than the central tendencies of their expectations. With regard to the outlook for inflation, a number of members expressed concern about a tendency for some measures of inflation to edge higher this year, but many members expected that the easing of pressures in labor and product markets that already had occurred and were likely to continue in the months ahead would damp inflation going forward. In their review of developments across the nation, members referred to quite sluggish economic conditions in many parts of the country. Weakness remained especially pronounced in manufacturing, but as reflected in the employment data for April and in widespread anecdotal reports, softening had spread to other sectors of the economy as well. At the same time, pockets of strength could be found in a number of industries, notably in energy and construction, and overall business activity continued to display considerable vigor in a number of regions. Members noted that business confidence had deteriorated, but some also observed that the pessimism tended to be limited to the nearer term and was accompanied by favorable expectations regarding the outlook later in the year and in 2002. With regard to the outlook for key sectors of the economy, a number of members commented that consumer spending had held up reasonably well in recent months despite a variety of adverse developments including the negative wealth effects of stock market declines, widely publicized job cutbacks, heavy consumer debt loads, and previous overspending by many consumers. A recent survey had indicated that consumer sentiment had firmed a little, but the survey results had yet to be confirmed by additional surveys and the level of consumer confidence was still well below earlier highs. As in the past, consumer spending attitudes likely would depend importantly on trends in employment and income, and further increases in unemployment in the period just ahead along with the negative wealth effects of earlier stock market price declines and the persistence of high energy costs were likely to constrain the growth in consumer expenditures over coming quarters. Household expenditures on home construction had been maintained at a relatively robust level in recent months, evidently reflecting the cushioning effects of very attractive mortgage interest rates. Housing activity was described as a source of strength in many regions. Housing prices had tended to edge higher across the nation, though there were signs that the price appreciation had eased in some parts of the country, notably on the West Coast. While the prevailing negative influences on household spending might spill over a bit more to housing activity over the year ahead, there were few current developments in housing markets that might be read as signaling any marked weakening in this sector of the economy. A softening in business demand for capital equipment had accounted for much of the slowdown in the growth of final demand in late 2000 and early 2001. The latest available data on new orders pointed to further, and possibly larger, declines in business spending on equipment and software over the months ahead. Members cited anecdotal and survey reports that indicated many business firms were canceling, cutting back, or stretching out planned capital expenditures. It was difficult to see any signs of a significant near-term turnaround in business spending for equipment and software, and the timing and strength of a subsequent rebound would depend importantly on the outlook for sales and profits. With regard to profit expectations, the most recent data showed continued markdowns, but the pace of downward revisions was diminishing. It was too early to conclude that the outlook for profits might be approaching a degree of stability or be near the point of turning up, and in any event it was clear that business sentiment currently was quite gloomy. Looking to the future, however, members anticipated that continuing gains in efficiency engendered by new technologies would provide substantial profit opportunities and likely strengthen investment spending during the course of the year ahead. In the meantime, nonresidential construction and energy-related investments were a source of some support to investment spending, but they provided only a very partial offset to widespread weakness in other business spending. Ongoing efforts to reduce excess inventories were continuing to curb output in manufacturing industries and to restrain growth in overall economic activity. A number of members commented that anecdotal and other evidence suggested that considerable progress already had been made in scaling down unwanted inventories, notably of motor vehicles, but substantial further progress probably would be needed in high-tech industries where sales were still falling. How long inventory cutbacks would continue to exert a significant drag on the economic expansion remained a key uncertainty in the economic outlook. In the view of many members, the adjustment process might not be substantially completed until much later in the year and could take even longer for high-tech firms. This evaluation assumed continued sluggish growth in final demand during the period immediately ahead. Stronger growth, which could not be ruled out, would of course bring inventory-sales ratios to desired levels more quickly. Members also expressed concern about the potential implications for U.S. expansion from developments abroad. To some extent, economic difficulties in foreign nations had occurred in concert with softening activity in the United States, and notable weakness in world high-tech markets along with the downward adjustment in equity prices globally represented a downside risk factor worldwide. The anticipated recovery in this country would help to strengthen many foreign economies and in turn improve prospects for U.S. exports. Members noted, however, that in some nations persisting structural problems presented threats to national economic prosperity and international trade. On balance, while the external risks to the U.S. economy clearly were to the downside, at least over the nearer term, the prospective rebound in U.S. economic activity and stimulative macroeconomic policies abroad were expected to contribute to strengthening growth worldwide and to improving prospects for exports during the year ahead. The nation's fiscal outlook was seen as supportive of aggregate demand. While the exact structure of tax cuts was still being negotiated, passage of new fiscal measures seemed imminent and likely would help bolster consumption spending beginning later in the year. Whatever its precise timing, the expansionary fiscal package would undoubtedly join at some point in coming quarters with the lagged effects of the System's policy easing actions to foster strengthening economic expansion. A number of members commented that the persisting updrift in some key measures of core inflation had become increasingly worrisome. In this regard, they noted that some of the recent increases in bond yields could represent a rise in long-term inflation expectations. Such a rise would not be entirely unexpected in the context of improving sentiment about the strength of the expansion, the potentially adverse implications for costs of the cyclical weakness in productivity, and the possibility that high energy prices and their passthrough effects might persist longer than had been anticipated earlier. To a considerable extent, however, any uptick in inflation expectations likely represented a reversal of anticipated declines in inflation earlier this year when economic prospects had seemed weaker and survey data did not confirm any increase in long-term inflation expectations. Moreover, not all measures of core inflation had accelerated; in particular, core PCE price inflation had been quite stable on a twelve-month basis for some time. Looking ahead, most members did not foresee a significant rise in inflation as a likely prospect. They cited the prevalence of highly competitive conditions in most markets, which continued to make it very difficult for business firms to raise prices despite pressures to do so in a period of rising labor, energy, and other costs. Widespread evidence of some lessening of pressures in most labor markets across the nation had not yet resulted in lower wage inflation, but the members expected that recent and anticipated ebbing of pressures on labor and other resources and associated slack in product markets in a period of continuing subpar economic growth, along with projected declines in energy prices, would hold down inflation over the forecast horizon. Nonetheless, there were some risks of rising inflation. An unexpectedly strong rebound in economic growth could begin to put added upward pressure on prices at a time when labor markets were still tight by historical standards and accelerating productivity no longer held down increases in unit labor costs. Given the lags in the effectiveness of monetary policy, such pressure might materialize before the effects of countervailing actions by the Committee had a chance to take hold. In the Committee's discussion of policy for the forthcoming intermeeting period, all but one of the members indicated that they could support a proposal calling for further easing of reserve conditions consistent with a 50 basis point reduction in the federal funds rate to a level of 4 percent. One member expressed a strong preference for a 25 basis point reduction and two others indicated that they could have accepted that more limited easing move. Despite their somewhat differing preferences, all the members agreed that further easing was desirable in light of what they viewed as the continuing weakness in the economy, the absence of evidence that growth had stabilized or was about to rebound, and still decidedly downside risks to the economic expansion. Some members noted that, although policy had been eased substantially, it might still be considered to be only marginally accommodative in relation to the forces that were damping aggregate demand. Accordingly, the action contemplated for today was needed to provide adequate stimulus to an economy whose outlook for significant strengthening remained tenuous in a climate of fragile business and consumer confidence. Members noted that the lagged effects of the monetary policy easing implemented earlier this year were still very hard to discern, though they should be felt increasingly over the year ahead. In this regard the risks of rising inflation could not be dismissed, and while those risks appeared to be quite limited for the nearer term, excessive monetary stimulus had to be avoided to avert rising inflation expectations and added inflation pressures over time. Members who preferred or could support a 25 basis point easing action gave particular emphasis to the desirability at this point of taking and signaling a more cautious approach to policy, relative to the 50 basis point federal funds rate reductions the Committee had been implementing, given the lagged effects of the substantial reduction in the federal funds rate to date, the accompanying buildup in liquidity, and the related risk that a further aggressive easing action would increase the odds of an overly accommodative policy stance and rising inflationary pressures in the future. All the members accepted a proposal to include in the press statement to be released after this meeting a sentence indicating that the Committee continued to regard the risks to the economic outlook as being tilted toward weakness even after today's easing action. Forecasts of growth in business earnings and spending continued to be revised down, and until that process ended, weakness in demand seemed to be the main threat to satisfactory economic performance. At the same time the members anticipated that a neutral balance of risks statement could be appropriate before long, probably well before substantial evidence had emerged that economic growth had strengthened appreciably, once the Committee could see that policy had eased enough to promote a future return to maximum sustainable economic growth. Indeed, it was not clear how much more the federal funds rate might have to be reduced after today in the absence of further significantly adverse shocks, and some members noted that the end of the easing process might be near. Even so, with the economy perhaps still in the midst of a process of weakening growth in aggregate demand of unknown persistence and dimension, the members generally agreed that, given prevailing uncertainties, it would be premature for the Committee to shift its balance of risks statement at this time. 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 reducing the federal funds rate to an average of around 4 percent. The vote 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 continue to be weighted mainly toward conditions that may generate economic weakness in the foreseeable future. Votes for this action: Messrs. Greenspan, McDonough, Ferguson, Gramlich, Kelley, Meyer, Ms. Minehan, Messrs. Moskow and Poole. Votes against this action: Mr. Hoenig. Mr. Hoenig dissented because he preferred a less aggressive easing action involving a reduction of 25 basis points in the federal funds rate. While the risks of weaker economic growth still tended to dominate those of rising inflation and called for some further easing, the Committee had added significant liquidity to the economy this year through its cumulatively large easing actions. The lagged effects of those actions should be felt increasingly over time. Moreover, following the rapid and aggressive policy actions already taken, a more cautious policy move at this point would in his view appropriately limit the risks of producing an overly accommodative policy stance and rising inflation over time. The Chairman called for a recess after this vote and convened a meeting of the Board of Governors to consider one-half percentage point reductions in the discount rate that had been proposed by a number of Federal Reserve Banks. After the recess, the Chairman informed the Committee that the pending reductions had been approved. It was agreed that the next meeting of the Committee would be held on Tuesday-Wednesday, June 26-27, 2001. The meeting adjourned at 1:15 p.m. Donald L. Kohn SecretaryFootnotes 1. Attended portion of meeting relating to staff briefings. Return to text

2001-04-18

Statement

The Federal Open Market Committee decided today to lower its target for the federal funds rate by 50 basis points to 4-1/2 percent. In a related action, the Board of Governors approved a 50 basis point reduction in the discount rate to 4 percent. The FOMC has reviewed prospects for the economy in light of the information that has become available since its March meeting. A significant reduction in excess inventories seems well advanced. Consumption and housing expenditures have held up reasonably well, though activity in these areas has flattened recently. Although measured productivity probably weakened in the first quarter, the impressive underlying rate of increase that developed in recent years appears to be largely intact. Nonetheless, capital investment has continued to soften and the persistent erosion in current and expected profitability, in combination with rising uncertainty about the business outlook, seems poised to dampen capital spending going forward. This potential restraint, together with the possible effects of earlier reductions in equity wealth on consumption and the risk of slower growth abroad, threatens to keep the pace of economic activity unacceptably weak. As a consequence, the Committee agreed that an adjustment in the stance of policy is warranted during this extended intermeeting period. The Committee continues to believe that against the background of its long-run goals of price stability and sustainable economic growth and of the information currently available, the risks are weighted mainly toward conditions that may generate economic weakness in the foreseeable future. In taking the discount rate action, the Federal Reserve Board approved requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, Philadelphia, Cleveland, Atlanta, Minneapolis, Dallas, and San Francisco.

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Minute

Minutes of the Federal Open Market Committee March 20, 2001 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., beginning at 9:00 a.m. on Tuesday, March 20, 2001. Present:Mr. Greenspan, Chairman Mr. McDonough, Vice Chairman Mr. Ferguson Mr. Gramlich Mr. Hoenig Mr. Kelley Mr. Meyer Ms. Minehan Mr. Moskow Mr. PooleMessrs. Jordan, McTeer, Santomero, Stern, and Stewart, Alternate Members of the Federal Open Market Committee Messrs. Broaddus, Guynn, and Parry, Presidents of the Federal Reserve Banks of Richmond, Atlanta, and San Francisco respectively Mr. Kohn, Secretary and Economist Mr. Bernard, Deputy Secretary Mr. Gillum, Assistant Secretary Ms. Fox, Assistant Secretary Mr. Baxter, Deputy General Counsel Ms. Johnson, Economist Mr. Stockton, Economist Ms. Cumming, Messrs. Fuhrer, Hakkio, Howard, Hunter, Lindsey, Rasche, Reinhart, Slifman, and Wilcox, Associate Economists Mr. Kos, Manager, System Open Market Account Ms. Smith and Mr. Winn, Assistants to the Board, Office of Board Members, Board of Governors Mr. Ettin, Deputy Director, Division of Research and Statistics, Board of Governors Mr. Simpson, Senior Adviser, Division of Research and Statistics, Board of Governors Messrs. Madigan, Oliner, and Struckmeyer, Associate Directors, Divisions of Monetary Affairs, Research and Statistics, and 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, First Vice President, Federal Reserve Bank of Atlanta Messrs. Eisenbeis and Goodfriend, Mses. Krieger and Mester, and Mr. Rolnick, Senior Vice Presidents, Federal Reserve Banks of Atlanta, Richmond, New York, Philadelphia, and Minneapolis respectively Ms. Orrenius, Economist, Federal Reserve Bank of Dallas Mr. Trehan, Research Advisor, Federal Reserve Bank of San Francisco Mr. Haubrich, Consultant, Federal Reserve Bank of ClevelandBy unanimous vote, the minutes of the meeting of the Federal Open Market Committee held on January 30-31, 2001, were approved. By unanimous vote, David Wilcox was elected to serve as an Associate Economist for the period until the first regularly scheduled meeting of the Committee after December 31, 2001. The Manager of the System Open Market Account reported on developments in foreign exchange markets. There had been no operations in foreign currencies for the System's account since the previous meeting. The Manager also reported on developments in domestic financial markets and on System open market transactions in U.S. government securities and federal agency obligations during the period January 31, 2001, through March 19, 2001. By unanimous vote, the Committee ratified these transactions. The Committee then turned to a discussion of the economic and financial outlook and the implementation of monetary policy over the intermeeting period ahead. A summary of the economic and financial information available at the time of the meeting and of the Committee's discussion is provided below, followed by the domestic policy directive that was approved by the Committee and issued to the Federal Reserve Bank of New York. The information reviewed at this meeting suggested that economic activity continued to expand very slowly in the first quarter. Growth of final spending apparently picked up slightly, with consumer expenditures recording another moderate gain, business purchases of equipment and software increasing sluggishly after a fourth-quarter decline, and homebuilding remaining relatively firm. However, inventory overhangs were still apparent in some industries, and manufacturing production was cut sharply further. Overall employment gains were relatively well maintained, and labor markets were still tight though showing signs of softening. Price inflation had picked up a little but, abstracting from energy, had remained relatively subdued. After a sluggish fourth quarter, private nonfarm payroll employment rose at a slightly higher rate on average in January and February, though still considerably below the pace of the first three quarters of 2000. Manufacturing and related industries, notably help-supply and wholesale trade, experienced further large declines in payrolls in the January-February period. However, hiring elsewhere held up relatively well, especially in construction, which recorded a surge in employment in January. While the labor market remained tight on balance, the unemployment rate increased to 4.2 percent in February, and other indicators such as initial claims for unemployment insurance suggested that pressures in labor markets had begun to abate. The contraction in industrial production that began in October accelerated and broadened in the first two months of the year. In manufacturing, output fell further in the motor vehicle sector, and production continued to decelerate in high-tech industries. The rate of capacity utilization in manufacturing dropped noticeably in January and February to a level further below its long-run average. Against a background of slowing income gains and a sizable pullback in consumer sentiment since last autumn, consumer spending evidently grew only moderately on balance in January and February. Purchases of motor vehicles picked up in response to increased marketing incentives put in place by Chrysler and General Motors, and retail sales of items other than motor vehicles climbed moderately. Spending on services was held down in January (latest data) by reduced expenditures for heating services as winter temperatures returned to more seasonal levels following unusually cold weather late last year; excluding heating, however, spending on other services rose slowly. The decline in mortgage rates that began around the middle of last year continued to provide support to residential building activity. Total housing starts rose somewhat further in January and February, reflecting net increases in both single-family and, especially, multifamily units. Sales of new homes dropped sharply in January (latest data), after having surged in December, but remained quite robust by historical standards. Sales of existing homes rebounded in January after having fallen considerably in December and were up slightly on balance over the two months. The limited available information suggested that business fixed investment was firming early this year after a decline in the fourth quarter of last year. Nominal shipments of nondefense capital goods other than aircraft and parts changed little on balance in December and January, while prices of high-tech equipment continued to fall. Moreover, orders for nondefense capital goods turned up briskly in January after a sharp fourth-quarter drop. Nonresidential construction activity continued its robust rise early in the year. Strength in building activity was widespread across the sector, most notably in new office construction. Business inventories on a book-value basis increased in January at about the rapid fourth-quarter pace; inventory positions appeared to be especially large for construction materials, metals, electrical equipment, paper, chemicals, and textiles. In the manufacturing sector, overall stocks jumped in January while shipments fell, and the aggregate inventory-shipments ratio rose to its highest level in two years. In the wholesale trade sector, aggregate stocks fell again in January and the sector's inventory-sales ratio edged down to the middle of its very narrow range for the past year. Retail stocks continued to climb in January, but sales rose by more; the sector's inventory-sales ratio also edged lower, but it remained near the top of its range for the past twelve months. The U.S. trade deficit in goods and services changed little in December but posted a new record high for the fourth quarter. The value of exports dropped substantially in that quarter, with notable declines occurring in agricultural products, aircraft, automotive products, computers and semiconductors, consumer goods, and telecommunications equipment. The value of imports remained at the high level recorded in the third quarter. Lower imports of automotive products, chemicals, computers and semiconductors, and steel were offset by higher imports of consumer goods and telecommunications equipment and smaller increases in other categories of trade. Economic growth in the foreign industrial countries was at a moderate rate on average in the fourth quarter. Expansion in the euro area picked up, while growth in Canada and the United Kingdom slowed significantly. The Japanese economy rebounded in the fourth quarter but was little changed on balance over the second half of the year, and recent indicators suggested a sharply weaker performance in the early part of this year. In addition, growth in the major developing countries slowed markedly in the fourth quarter, with the slowdown in most of those countries reflecting weaker demand for their exports. Price inflation had picked up a bit recently. The consumer price index (CPI) jumped in January (latest data), reflecting a surge in energy prices; moreover, the index increased considerably more during the twelve months ending in January than it did during the previous twelve months. The core component of the CPI also accelerated in January and on a year-over-year basis, but by lesser amounts than did the total index. The increase in the core personal consumption expenditure (PCE) chain-type price index in January matched that of the core CPI; on a year-over-year basis, however, the pickup in core PCE inflation was a little smaller than that for the core CPI. At the producer level, core finished goods retraced in February only part of the sizable step-up in prices recorded in January, and core producer price inflation was up somewhat on a year-over-year basis. With regard to labor costs, recent data also pointed to some acceleration. Compensation per hour in the nonfarm business sector advanced appreciably more rapidly in the fourth quarter of 2000 and for the year as a whole. That trend also showed through to the average hourly earnings of production or nonsupervisory workers through February, which exhibited a roughly similar acceleration. At its meeting on January 30-31, 2001, the Committee adopted a directive that called for maintaining conditions in reserve markets consistent with a decrease of 50 basis points in the intended level of the federal funds rate, to about 5-1/2 percent. This move, in conjunction with the easing on January 3, was intended to help guard against cumulative weakness in economic activity and to provide some support to a rebound in growth later in the year. In the existing circumstances, the members agreed that the balance of risks remained weighted toward conditions that could generate economic weakness in the foreseeable future. Though rapid advances in underlying productivity were expected to continue, the adjustments to stocks of capital, consumer goods, and inventories to more sustainable levels were only partly completed, and financial markets remained unsettled. Open market operations were directed throughout the intermeeting period toward maintaining the federal funds rate at the Committee's reduced target level of 5-1/2 percent, and the funds rate stayed close to that target. However, incoming economic data, a steady flow of disappointing corporate earnings reports, related sharp declines in stock prices, and a notable drop in consumer confidence led market participants to conclude that more monetary easing would be required. Yields on Treasury securities, both short- and long-term, moved appreciably lower. However, rates on high-yield private debt obligations fell only a little, and banks further tightened standards and terms on business loans, given the weakening outlook for profits. Broad indexes of U.S. stock market prices moved sharply lower, with the tech-heavy Nasdaq experiencing an especially large drop. Nonetheless, the trade-weighted value of the dollar rose somewhat over the intermeeting interval in terms of many of the major foreign currencies. The dollar strengthened most against the currencies of countries that were seen to have the greatest potential for economic weakening, notably Japan. The dollar also posted a small gain against an index of the currencies of other important trading partners. The broad monetary aggregates continued to grow rapidly in February, though at slightly lower rates than in January. The strength in M2 was concentrated in its liquid components, apparently in response to the further narrowing of opportunity costs, the yield advantage of money funds relative to longer-term investments, and the appeal of a safe haven from volatile equity markets. M3 grew somewhat less rapidly than M2; a pullback in the issuance of bank-managed liabilities, particularly large time deposits, was associated with slower expansion of bank credit. Growth of domestic nonfinancial debt decelerated noticeably in January (latest data), reflecting reduced expansion of debt in the nonfederal sectors coupled with a larger contraction in the amount of federal debt outstanding. The staff forecast prepared for this meeting suggested that, after a period of slow growth associated in part with an inventory correction, the economic expansion would gradually regain strength over the next two years and move toward a rate near the staff's current estimate of the growth of the economy's potential output. The period of sub-par expansion was expected to foster an appreciable easing of pressures on resources and some moderation in core price inflation. The forecast anticipated that the expansion of domestic final demand would be held back to an extent by the decline in household net worth associated with the downturn that had occurred in equity prices, the lingering effects of last year's relatively high interest rates, and the continuation of relatively stringent terms and conditions on some types of loans by financial institutions. As a result, growth of spending on consumer durables was expected to be appreciably below the rapid pace in the first half of last year, and housing demand would increase only a little from its recent level. Business fixed investment, notably outlays for equipment and software, was projected to resume relatively robust growth after a period of adjustment of capital stocks to more desirable levels; growth abroad was seen as supporting the expansion of U.S. exports; and fiscal policy was assumed to become more expansionary. In the Committee's discussion of current and prospective economic developments, members commented that the recent statistical and anecdotal information had been mixed, but they viewed evolving business conditions as consistent on the whole with a continued softness in economic activity. Members noted that consumer spending had strengthened early in the year and housing activity had remained at a relatively high level. These positive developments needed to be weighed against an appreciable weakening in business investment spending and the near-term restraining effects of a drawdown in inventories. Looking ahead, while sales and production data suggested that excess inventories were being worked off, the adjustment did not appear to have been completed. Beyond the inventory correction, the members continued to anticipate an acceleration of the expansion over time, though likely on a more delayed basis and at a more gradual pace than they had forecast earlier. They noted a number of favorable underlying factors that would tend to support a rebound, including solid productivity growth, stable low inflation, generally sound financial institutions, lower interest rates, and relatively robust expansion in many measures of money. However, the members saw clear downside risks in the outlook for consumer and investment spending in the context of the marked decline that had occurred in equity prices and consumer confidence, and in expected business profitability, and they were concerned that weaker exports might also hold down the expansion of economic activity. With regard to the outlook for inflation, some recent measures of increases in core prices had fluctuated on the high side of earlier expectations, but apart from energy prices and medical costs, inflation was still relatively quiescent. With the growth in output likely to remain below the expansion of the economy's potential for a while, members anticipated that inflation would remain subdued. Mirroring the statistics for the nation as a whole, business conditions in different parts of the country displayed mixed industry patterns, but members reported that overall business activity currently appeared to be growing at a sluggish pace in most regions, and business contacts were exhibiting a heightened sense of caution, or even concern, in some industries. In their review of developments in key sectors of the economy, members indicated that they saw favorable prospects for continued moderate growth in consumer expenditures, though considerable uncertainty surrounded this outlook. Downside risks cited by the members included the substantial declines that had already occurred in measures of consumer confidence and equity wealth, and the possibility that consumer sentiment might be undermined even further by continued volatility and additional declines in the stock market and by rising concerns about job losses amid persistent announcements of layoffs. Members also referred to the retarding effects on consumer expenditures of elevated levels of household debt and high energy costs. Against this background, consumers might well endeavor to boost their savings, and even a fairly small increase in what currently was a quite low saving rate would have large damping effects on aggregate demand that could weaken, if not abort, the expansion. To date, however, overall consumer spending had remained relatively strong and seemingly at odds with measures of consumer confidence and reduced equity wealth. How this divergence might eventually be resolved was a significant source of uncertainty and downside risk. On balance, while there were reasons to be concerned about the outlook for consumer spending, members believed that recent spending trends and the outlook for further growth in employment and incomes pointed to continued expansion in this key sector of the economy, though likely at a relatively sluggish pace. Another major source of downside risk to the expansion was business fixed investment. Spending for equipment and software declined in the fourth quarter, and the available statistical and anecdotal reports pointed to weakness during the first half of this year, largely reflecting developments in high-tech industries. Substantial downward adjustments to expected near-term business earnings had persisted, suggesting that firms saw investment as much less profitable than they had before and that cash flows would be constrained. Many businesses also were inhibited in their investment activities by less accommodative financial conditions associated with weaker equity markets and tighter credit terms and conditions imposed by banking institutions. As a consequence, a substantial volume of planned investment was being postponed, if not cancelled. The capital stock had grown at an unsustainable pace for a time, so some downshifting in investment was inevitable. Moreover, those earlier very substantial investment outlays seemed to have created excess capacity in a number of industries, and how large an adjustment in spending for business equipment might now be underway was still unclear, especially with regard to high-tech industries. At the same time, the information available for the first quarter indicated considerable strength in nonresidential construction activity, including large outlays on public sector infrastructure projects in some areas. On balance, business spending for plant and equipment was likely to pick up only gradually this year. Over the longer term, however, a return to more robust business investment seemed likely, and indeed business earnings forecasts beyond the nearer term had not declined very much, reflecting continuing expectations of substantial profit opportunities related to persisting strong gains in productivity. Housing activity was generally holding up well across the country as the effects of appreciably reduced mortgage interest rates apparently compensated for the negative effects of declining financial wealth on the demand for housing. While housing construction was generally described as elevated, some members referred to overbuilding or weakness in some local housing markets. It was noted that homebuilders were generally optimistic about the prospects for the year ahead, given their current backlogs and expectations of further growth in employment and incomes. The ongoing adjustments in business inventories had played a significant role in curbing the growth of economic activity in recent months, but such adjustments seemed likely gradually to become a more neutral factor over the balance of this year. In the motor vehicle industry, inventory liquidation had been especially pronounced and the process now seemed largely completed. However, the inventory-correction process in high-tech industries apparently was not as far along. In the absence of renewed weakness in overall final demand, which could not be ruled out given current consumer and business confidence, production would need to pick up at some point to accommodate ongoing final demand. Some members observed that the adjustment in inventories might require more time than they had anticipated earlier. In any event, completion of the process clearly would foster an upturn in manufacturing activity. Members commented on the downside risks to U.S. exports and the U.S. expansion from what appeared to be softening economic conditions in a number of important foreign economies. In some countries, the risks were exacerbated by the apparent inability or unwillingness of government officials to address underlying structural problems in their economies and financial systems. Members noted anecdotal reports of weakening business conditions in a number of Asian and South American nations. The potential impact on exports of less vigor in the global economy would be augmented, of course, by the strength of the dollar in foreign exchange markets. Although labor markets in general remained tight throughout the nation, anecdotal reports of less scarce labor resources were becoming more frequent in some areas or occupations. Some price increases had been noted; however, apart from the energy and health care sectors, price inflation had remained relatively subdued, evidently reflecting the combination of diminished growth in overall demand and strong competitive pressures in most markets. With regard to the outlook for wages and prices, members commented that the prospects for an extended period of growth in demand at a pace below the economy's potential should ease pressures on labor and other resources and help to contain inflation. In the Committee's discussion of policy for the intermeeting period ahead, most of the members preferred and all could support a further easing of reserve conditions consistent with a 50 basis point reduction in the federal funds rate, to 5 percent. The members agreed that a strengthening in the economic expansion over coming quarters was a reasonable expectation, but absent further easing in monetary policy that pickup was unlikely to bring growth to an acceptable pace in the foreseeable future. Business investment would be held back by lower earnings expectations and a capital overhang of unknown dimensions; consumption was subject to downside risks from previous decreases in equity wealth and declining confidence; and the strong dollar and weaker foreign growth would constrain exports. Inflation was likely to be damped by ebbing pressures on labor and product markets. While many of the members generally believed that additional policy easing might well prove to be necessary at some time, the easing favored by most members incorporated what they viewed as an adequate degree of stimulus under current economic conditions and represented an appropriately calibrated step given the uncertainties in the economic outlook. It was noted in this regard that in combination with the two easing actions earlier this year, the Committee would have implemented in a relatively short period a considerable amount of monetary easing whose economic effects would be felt over time. However, some commented that the amount of financial stimulus was much smaller than might otherwise be expected from policy easing of this cumulative amount because it had been accompanied by further declines in stock market prices, more stringent financing terms for many business borrowers, and a stronger dollar, all of which would be holding down domestic spending and production. Indeed, financial markets had come to place some odds on a larger move of 75 basis points in recent days, importantly reflecting the possibility of a presumed policy response to the sizable declines in equity prices that had occurred as earnings prospects proved disappointing. Most members agreed, however, that in the context of their focus on the economy, smaller, possibly more frequent, policy adjustments were appropriate to afford them the opportunity to recalibrate policy in rapidly changing and highly uncertain circumstances. A few members expressed a preference for a 75 basis point reduction in the federal funds rate. In their view, a more forceful action was justified by current and prospective economic conditions. The members agreed that even with a further 50 basis point reduction in the federal funds rate, the risks to the economy would remain decidedly to the downside. This conclusion would be reflected in the press statement to be released after today's meeting. The statement also would emphasize the need for close monitoring of rapidly evolving economic conditions. The members anticipated that in the relatively long interval before the next regularly scheduled meeting on May 15, 2001, economic developments might suggest the desirability of a Committee conference call to assess business conditions across the nation and to consider the possible need for a further policy adjustment. 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 reducing the federal funds rate to an average of around 5 percent. The vote 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 economic weakness in the foreseeable future. Votes for this action: Messrs. Greenspan, McDonough, Ferguson, Gramlich, Hoenig, Kelley, Meyer, Ms. Minehan, Messrs. Moskow and Poole. Votes against this action: None. The Chairman called for a recess after this vote and convened a meeting of the Board of Governors to consider reductions of one-half percentage point in the discount rate that had been proposed by all the Federal Reserve Banks. After the recess, the Chairman informed the Committee that the pending reductions had been approved. It was agreed that the next meeting of the Committee would be held on Tuesday, May 15, 2001. The meeting adjourned at 1:15 p.m. Telephone Conferences On April 11, 2001, the Committee reviewed economic and financial developments since its last meeting and discussed the possible need for some further easing of monetary policy. The data and anecdotal information were mixed: They did not indicate that the economy had been weakening further, but they raised questions about the potential strength of a rebound in growth over coming quarters. In particular, heightened business concerns about future sales and further downward revisions to expected earnings threatened to restrain capital spending for some time. In the circumstances, the members could see the need for a further easing of policy at some point, though some had a strong preference for taking such actions at regularly scheduled meetings. They all agreed that an easing on this date would not be advisable, inasmuch as the attendant surprise to most outside observers risked unpredictable reactions in financial markets that had been especially volatile in recent days, and additional important data would become available over the near term. A week later, on April 18, 2001, the Committee held a telephone conference meeting for the purpose of considering a policy easing action. The members noted that the statistical and anecdotal information received since the last conference call had supported their view that an easing of policy would be appropriate. In addition to the continuing concerns about business plans for capital investment, consumer spending had leveled out and confidence had fallen further. In these circumstances, lower interest rates were likely to be necessary to foster more satisfactory economic expansion. With financial markets more settled, and with nearly a month until the Committee's May meeting, an easing move was called for at this time. Although a few preferred to wait until the next scheduled meeting, all the members supported or could accept a proposal for an easing of reserve conditions consistent with a reduction of 50 basis points in the federal funds rate to a level of 4-1/2 percent. 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 reducing the federal funds rate to an average of around 4-1/2 percent. The vote 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 economic weakness in the foreseeable future. Votes for this action: Messrs. Greenspan, McDonough, Ferguson, Gramlich, Hoenig, Kelley, Meyer, Ms. Minehan, Messrs. Moskow and Poole. Votes against this action: None. Chairman Greenspan indicated that shortly after this meeting the Board of Governors would consider pending requests of eight Federal Reserve Banks to reduce the discount rate by 50 basis points. Donald L. Kohn Secretary

N/A

Minute

Minutes of the Federal Open Market Committee March 20, 2001 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., beginning at 9:00 a.m. on Tuesday, March 20, 2001. Present:Mr. Greenspan, Chairman Mr. McDonough, Vice Chairman Mr. Ferguson Mr. Gramlich Mr. Hoenig Mr. Kelley Mr. Meyer Ms. Minehan Mr. Moskow Mr. PooleMessrs. Jordan, McTeer, Santomero, Stern, and Stewart, Alternate Members of the Federal Open Market Committee Messrs. Broaddus, Guynn, and Parry, Presidents of the Federal Reserve Banks of Richmond, Atlanta, and San Francisco respectively Mr. Kohn, Secretary and Economist Mr. Bernard, Deputy Secretary Mr. Gillum, Assistant Secretary Ms. Fox, Assistant Secretary Mr. Baxter, Deputy General Counsel Ms. Johnson, Economist Mr. Stockton, Economist Ms. Cumming, Messrs. Fuhrer, Hakkio, Howard, Hunter, Lindsey, Rasche, Reinhart, Slifman, and Wilcox, Associate Economists Mr. Kos, Manager, System Open Market Account Ms. Smith and Mr. Winn, Assistants to the Board, Office of Board Members, Board of Governors Mr. Ettin, Deputy Director, Division of Research and Statistics, Board of Governors Mr. Simpson, Senior Adviser, Division of Research and Statistics, Board of Governors Messrs. Madigan, Oliner, and Struckmeyer, Associate Directors, Divisions of Monetary Affairs, Research and Statistics, and 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, First Vice President, Federal Reserve Bank of Atlanta Messrs. Eisenbeis and Goodfriend, Mses. Krieger and Mester, and Mr. Rolnick, Senior Vice Presidents, Federal Reserve Banks of Atlanta, Richmond, New York, Philadelphia, and Minneapolis respectively Ms. Orrenius, Economist, Federal Reserve Bank of Dallas Mr. Trehan, Research Advisor, Federal Reserve Bank of San Francisco Mr. Haubrich, Consultant, Federal Reserve Bank of ClevelandBy unanimous vote, the minutes of the meeting of the Federal Open Market Committee held on January 30-31, 2001, were approved. By unanimous vote, David Wilcox was elected to serve as an Associate Economist for the period until the first regularly scheduled meeting of the Committee after December 31, 2001. The Manager of the System Open Market Account reported on developments in foreign exchange markets. There had been no operations in foreign currencies for the System's account since the previous meeting. The Manager also reported on developments in domestic financial markets and on System open market transactions in U.S. government securities and federal agency obligations during the period January 31, 2001, through March 19, 2001. By unanimous vote, the Committee ratified these transactions. The Committee then turned to a discussion of the economic and financial outlook and the implementation of monetary policy over the intermeeting period ahead. A summary of the economic and financial information available at the time of the meeting and of the Committee's discussion is provided below, followed by the domestic policy directive that was approved by the Committee and issued to the Federal Reserve Bank of New York. The information reviewed at this meeting suggested that economic activity continued to expand very slowly in the first quarter. Growth of final spending apparently picked up slightly, with consumer expenditures recording another moderate gain, business purchases of equipment and software increasing sluggishly after a fourth-quarter decline, and homebuilding remaining relatively firm. However, inventory overhangs were still apparent in some industries, and manufacturing production was cut sharply further. Overall employment gains were relatively well maintained, and labor markets were still tight though showing signs of softening. Price inflation had picked up a little but, abstracting from energy, had remained relatively subdued. After a sluggish fourth quarter, private nonfarm payroll employment rose at a slightly higher rate on average in January and February, though still considerably below the pace of the first three quarters of 2000. Manufacturing and related industries, notably help-supply and wholesale trade, experienced further large declines in payrolls in the January-February period. However, hiring elsewhere held up relatively well, especially in construction, which recorded a surge in employment in January. While the labor market remained tight on balance, the unemployment rate increased to 4.2 percent in February, and other indicators such as initial claims for unemployment insurance suggested that pressures in labor markets had begun to abate. The contraction in industrial production that began in October accelerated and broadened in the first two months of the year. In manufacturing, output fell further in the motor vehicle sector, and production continued to decelerate in high-tech industries. The rate of capacity utilization in manufacturing dropped noticeably in January and February to a level further below its long-run average. Against a background of slowing income gains and a sizable pullback in consumer sentiment since last autumn, consumer spending evidently grew only moderately on balance in January and February. Purchases of motor vehicles picked up in response to increased marketing incentives put in place by Chrysler and General Motors, and retail sales of items other than motor vehicles climbed moderately. Spending on services was held down in January (latest data) by reduced expenditures for heating services as winter temperatures returned to more seasonal levels following unusually cold weather late last year; excluding heating, however, spending on other services rose slowly. The decline in mortgage rates that began around the middle of last year continued to provide support to residential building activity. Total housing starts rose somewhat further in January and February, reflecting net increases in both single-family and, especially, multifamily units. Sales of new homes dropped sharply in January (latest data), after having surged in December, but remained quite robust by historical standards. Sales of existing homes rebounded in January after having fallen considerably in December and were up slightly on balance over the two months. The limited available information suggested that business fixed investment was firming early this year after a decline in the fourth quarter of last year. Nominal shipments of nondefense capital goods other than aircraft and parts changed little on balance in December and January, while prices of high-tech equipment continued to fall. Moreover, orders for nondefense capital goods turned up briskly in January after a sharp fourth-quarter drop. Nonresidential construction activity continued its robust rise early in the year. Strength in building activity was widespread across the sector, most notably in new office construction. Business inventories on a book-value basis increased in January at about the rapid fourth-quarter pace; inventory positions appeared to be especially large for construction materials, metals, electrical equipment, paper, chemicals, and textiles. In the manufacturing sector, overall stocks jumped in January while shipments fell, and the aggregate inventory-shipments ratio rose to its highest level in two years. In the wholesale trade sector, aggregate stocks fell again in January and the sector's inventory-sales ratio edged down to the middle of its very narrow range for the past year. Retail stocks continued to climb in January, but sales rose by more; the sector's inventory-sales ratio also edged lower, but it remained near the top of its range for the past twelve months. The U.S. trade deficit in goods and services changed little in December but posted a new record high for the fourth quarter. The value of exports dropped substantially in that quarter, with notable declines occurring in agricultural products, aircraft, automotive products, computers and semiconductors, consumer goods, and telecommunications equipment. The value of imports remained at the high level recorded in the third quarter. Lower imports of automotive products, chemicals, computers and semiconductors, and steel were offset by higher imports of consumer goods and telecommunications equipment and smaller increases in other categories of trade. Economic growth in the foreign industrial countries was at a moderate rate on average in the fourth quarter. Expansion in the euro area picked up, while growth in Canada and the United Kingdom slowed significantly. The Japanese economy rebounded in the fourth quarter but was little changed on balance over the second half of the year, and recent indicators suggested a sharply weaker performance in the early part of this year. In addition, growth in the major developing countries slowed markedly in the fourth quarter, with the slowdown in most of those countries reflecting weaker demand for their exports. Price inflation had picked up a bit recently. The consumer price index (CPI) jumped in January (latest data), reflecting a surge in energy prices; moreover, the index increased considerably more during the twelve months ending in January than it did during the previous twelve months. The core component of the CPI also accelerated in January and on a year-over-year basis, but by lesser amounts than did the total index. The increase in the core personal consumption expenditure (PCE) chain-type price index in January matched that of the core CPI; on a year-over-year basis, however, the pickup in core PCE inflation was a little smaller than that for the core CPI. At the producer level, core finished goods retraced in February only part of the sizable step-up in prices recorded in January, and core producer price inflation was up somewhat on a year-over-year basis. With regard to labor costs, recent data also pointed to some acceleration. Compensation per hour in the nonfarm business sector advanced appreciably more rapidly in the fourth quarter of 2000 and for the year as a whole. That trend also showed through to the average hourly earnings of production or nonsupervisory workers through February, which exhibited a roughly similar acceleration. At its meeting on January 30-31, 2001, the Committee adopted a directive that called for maintaining conditions in reserve markets consistent with a decrease of 50 basis points in the intended level of the federal funds rate, to about 5-1/2 percent. This move, in conjunction with the easing on January 3, was intended to help guard against cumulative weakness in economic activity and to provide some support to a rebound in growth later in the year. In the existing circumstances, the members agreed that the balance of risks remained weighted toward conditions that could generate economic weakness in the foreseeable future. Though rapid advances in underlying productivity were expected to continue, the adjustments to stocks of capital, consumer goods, and inventories to more sustainable levels were only partly completed, and financial markets remained unsettled. Open market operations were directed throughout the intermeeting period toward maintaining the federal funds rate at the Committee's reduced target level of 5-1/2 percent, and the funds rate stayed close to that target. However, incoming economic data, a steady flow of disappointing corporate earnings reports, related sharp declines in stock prices, and a notable drop in consumer confidence led market participants to conclude that more monetary easing would be required. Yields on Treasury securities, both short- and long-term, moved appreciably lower. However, rates on high-yield private debt obligations fell only a little, and banks further tightened standards and terms on business loans, given the weakening outlook for profits. Broad indexes of U.S. stock market prices moved sharply lower, with the tech-heavy Nasdaq experiencing an especially large drop. Nonetheless, the trade-weighted value of the dollar rose somewhat over the intermeeting interval in terms of many of the major foreign currencies. The dollar strengthened most against the currencies of countries that were seen to have the greatest potential for economic weakening, notably Japan. The dollar also posted a small gain against an index of the currencies of other important trading partners. The broad monetary aggregates continued to grow rapidly in February, though at slightly lower rates than in January. The strength in M2 was concentrated in its liquid components, apparently in response to the further narrowing of opportunity costs, the yield advantage of money funds relative to longer-term investments, and the appeal of a safe haven from volatile equity markets. M3 grew somewhat less rapidly than M2; a pullback in the issuance of bank-managed liabilities, particularly large time deposits, was associated with slower expansion of bank credit. Growth of domestic nonfinancial debt decelerated noticeably in January (latest data), reflecting reduced expansion of debt in the nonfederal sectors coupled with a larger contraction in the amount of federal debt outstanding. The staff forecast prepared for this meeting suggested that, after a period of slow growth associated in part with an inventory correction, the economic expansion would gradually regain strength over the next two years and move toward a rate near the staff's current estimate of the growth of the economy's potential output. The period of sub-par expansion was expected to foster an appreciable easing of pressures on resources and some moderation in core price inflation. The forecast anticipated that the expansion of domestic final demand would be held back to an extent by the decline in household net worth associated with the downturn that had occurred in equity prices, the lingering effects of last year's relatively high interest rates, and the continuation of relatively stringent terms and conditions on some types of loans by financial institutions. As a result, growth of spending on consumer durables was expected to be appreciably below the rapid pace in the first half of last year, and housing demand would increase only a little from its recent level. Business fixed investment, notably outlays for equipment and software, was projected to resume relatively robust growth after a period of adjustment of capital stocks to more desirable levels; growth abroad was seen as supporting the expansion of U.S. exports; and fiscal policy was assumed to become more expansionary. In the Committee's discussion of current and prospective economic developments, members commented that the recent statistical and anecdotal information had been mixed, but they viewed evolving business conditions as consistent on the whole with a continued softness in economic activity. Members noted that consumer spending had strengthened early in the year and housing activity had remained at a relatively high level. These positive developments needed to be weighed against an appreciable weakening in business investment spending and the near-term restraining effects of a drawdown in inventories. Looking ahead, while sales and production data suggested that excess inventories were being worked off, the adjustment did not appear to have been completed. Beyond the inventory correction, the members continued to anticipate an acceleration of the expansion over time, though likely on a more delayed basis and at a more gradual pace than they had forecast earlier. They noted a number of favorable underlying factors that would tend to support a rebound, including solid productivity growth, stable low inflation, generally sound financial institutions, lower interest rates, and relatively robust expansion in many measures of money. However, the members saw clear downside risks in the outlook for consumer and investment spending in the context of the marked decline that had occurred in equity prices and consumer confidence, and in expected business profitability, and they were concerned that weaker exports might also hold down the expansion of economic activity. With regard to the outlook for inflation, some recent measures of increases in core prices had fluctuated on the high side of earlier expectations, but apart from energy prices and medical costs, inflation was still relatively quiescent. With the growth in output likely to remain below the expansion of the economy's potential for a while, members anticipated that inflation would remain subdued. Mirroring the statistics for the nation as a whole, business conditions in different parts of the country displayed mixed industry patterns, but members reported that overall business activity currently appeared to be growing at a sluggish pace in most regions, and business contacts were exhibiting a heightened sense of caution, or even concern, in some industries. In their review of developments in key sectors of the economy, members indicated that they saw favorable prospects for continued moderate growth in consumer expenditures, though considerable uncertainty surrounded this outlook. Downside risks cited by the members included the substantial declines that had already occurred in measures of consumer confidence and equity wealth, and the possibility that consumer sentiment might be undermined even further by continued volatility and additional declines in the stock market and by rising concerns about job losses amid persistent announcements of layoffs. Members also referred to the retarding effects on consumer expenditures of elevated levels of household debt and high energy costs. Against this background, consumers might well endeavor to boost their savings, and even a fairly small increase in what currently was a quite low saving rate would have large damping effects on aggregate demand that could weaken, if not abort, the expansion. To date, however, overall consumer spending had remained relatively strong and seemingly at odds with measures of consumer confidence and reduced equity wealth. How this divergence might eventually be resolved was a significant source of uncertainty and downside risk. On balance, while there were reasons to be concerned about the outlook for consumer spending, members believed that recent spending trends and the outlook for further growth in employment and incomes pointed to continued expansion in this key sector of the economy, though likely at a relatively sluggish pace. Another major source of downside risk to the expansion was business fixed investment. Spending for equipment and software declined in the fourth quarter, and the available statistical and anecdotal reports pointed to weakness during the first half of this year, largely reflecting developments in high-tech industries. Substantial downward adjustments to expected near-term business earnings had persisted, suggesting that firms saw investment as much less profitable than they had before and that cash flows would be constrained. Many businesses also were inhibited in their investment activities by less accommodative financial conditions associated with weaker equity markets and tighter credit terms and conditions imposed by banking institutions. As a consequence, a substantial volume of planned investment was being postponed, if not cancelled. The capital stock had grown at an unsustainable pace for a time, so some downshifting in investment was inevitable. Moreover, those earlier very substantial investment outlays seemed to have created excess capacity in a number of industries, and how large an adjustment in spending for business equipment might now be underway was still unclear, especially with regard to high-tech industries. At the same time, the information available for the first quarter indicated considerable strength in nonresidential construction activity, including large outlays on public sector infrastructure projects in some areas. On balance, business spending for plant and equipment was likely to pick up only gradually this year. Over the longer term, however, a return to more robust business investment seemed likely, and indeed business earnings forecasts beyond the nearer term had not declined very much, reflecting continuing expectations of substantial profit opportunities related to persisting strong gains in productivity. Housing activity was generally holding up well across the country as the effects of appreciably reduced mortgage interest rates apparently compensated for the negative effects of declining financial wealth on the demand for housing. While housing construction was generally described as elevated, some members referred to overbuilding or weakness in some local housing markets. It was noted that homebuilders were generally optimistic about the prospects for the year ahead, given their current backlogs and expectations of further growth in employment and incomes. The ongoing adjustments in business inventories had played a significant role in curbing the growth of economic activity in recent months, but such adjustments seemed likely gradually to become a more neutral factor over the balance of this year. In the motor vehicle industry, inventory liquidation had been especially pronounced and the process now seemed largely completed. However, the inventory-correction process in high-tech industries apparently was not as far along. In the absence of renewed weakness in overall final demand, which could not be ruled out given current consumer and business confidence, production would need to pick up at some point to accommodate ongoing final demand. Some members observed that the adjustment in inventories might require more time than they had anticipated earlier. In any event, completion of the process clearly would foster an upturn in manufacturing activity. Members commented on the downside risks to U.S. exports and the U.S. expansion from what appeared to be softening economic conditions in a number of important foreign economies. In some countries, the risks were exacerbated by the apparent inability or unwillingness of government officials to address underlying structural problems in their economies and financial systems. Members noted anecdotal reports of weakening business conditions in a number of Asian and South American nations. The potential impact on exports of less vigor in the global economy would be augmented, of course, by the strength of the dollar in foreign exchange markets. Although labor markets in general remained tight throughout the nation, anecdotal reports of less scarce labor resources were becoming more frequent in some areas or occupations. Some price increases had been noted; however, apart from the energy and health care sectors, price inflation had remained relatively subdued, evidently reflecting the combination of diminished growth in overall demand and strong competitive pressures in most markets. With regard to the outlook for wages and prices, members commented that the prospects for an extended period of growth in demand at a pace below the economy's potential should ease pressures on labor and other resources and help to contain inflation. In the Committee's discussion of policy for the intermeeting period ahead, most of the members preferred and all could support a further easing of reserve conditions consistent with a 50 basis point reduction in the federal funds rate, to 5 percent. The members agreed that a strengthening in the economic expansion over coming quarters was a reasonable expectation, but absent further easing in monetary policy that pickup was unlikely to bring growth to an acceptable pace in the foreseeable future. Business investment would be held back by lower earnings expectations and a capital overhang of unknown dimensions; consumption was subject to downside risks from previous decreases in equity wealth and declining confidence; and the strong dollar and weaker foreign growth would constrain exports. Inflation was likely to be damped by ebbing pressures on labor and product markets. While many of the members generally believed that additional policy easing might well prove to be necessary at some time, the easing favored by most members incorporated what they viewed as an adequate degree of stimulus under current economic conditions and represented an appropriately calibrated step given the uncertainties in the economic outlook. It was noted in this regard that in combination with the two easing actions earlier this year, the Committee would have implemented in a relatively short period a considerable amount of monetary easing whose economic effects would be felt over time. However, some commented that the amount of financial stimulus was much smaller than might otherwise be expected from policy easing of this cumulative amount because it had been accompanied by further declines in stock market prices, more stringent financing terms for many business borrowers, and a stronger dollar, all of which would be holding down domestic spending and production. Indeed, financial markets had come to place some odds on a larger move of 75 basis points in recent days, importantly reflecting the possibility of a presumed policy response to the sizable declines in equity prices that had occurred as earnings prospects proved disappointing. Most members agreed, however, that in the context of their focus on the economy, smaller, possibly more frequent, policy adjustments were appropriate to afford them the opportunity to recalibrate policy in rapidly changing and highly uncertain circumstances. A few members expressed a preference for a 75 basis point reduction in the federal funds rate. In their view, a more forceful action was justified by current and prospective economic conditions. The members agreed that even with a further 50 basis point reduction in the federal funds rate, the risks to the economy would remain decidedly to the downside. This conclusion would be reflected in the press statement to be released after today's meeting. The statement also would emphasize the need for close monitoring of rapidly evolving economic conditions. The members anticipated that in the relatively long interval before the next regularly scheduled meeting on May 15, 2001, economic developments might suggest the desirability of a Committee conference call to assess business conditions across the nation and to consider the possible need for a further policy adjustment. 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 reducing the federal funds rate to an average of around 5 percent. The vote 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 economic weakness in the foreseeable future. Votes for this action: Messrs. Greenspan, McDonough, Ferguson, Gramlich, Hoenig, Kelley, Meyer, Ms. Minehan, Messrs. Moskow and Poole. Votes against this action: None. The Chairman called for a recess after this vote and convened a meeting of the Board of Governors to consider reductions of one-half percentage point in the discount rate that had been proposed by all the Federal Reserve Banks. After the recess, the Chairman informed the Committee that the pending reductions had been approved. It was agreed that the next meeting of the Committee would be held on Tuesday, May 15, 2001. The meeting adjourned at 1:15 p.m. Telephone Conferences On April 11, 2001, the Committee reviewed economic and financial developments since its last meeting and discussed the possible need for some further easing of monetary policy. The data and anecdotal information were mixed: They did not indicate that the economy had been weakening further, but they raised questions about the potential strength of a rebound in growth over coming quarters. In particular, heightened business concerns about future sales and further downward revisions to expected earnings threatened to restrain capital spending for some time. In the circumstances, the members could see the need for a further easing of policy at some point, though some had a strong preference for taking such actions at regularly scheduled meetings. They all agreed that an easing on this date would not be advisable, inasmuch as the attendant surprise to most outside observers risked unpredictable reactions in financial markets that had been especially volatile in recent days, and additional important data would become available over the near term. A week later, on April 18, 2001, the Committee held a telephone conference meeting for the purpose of considering a policy easing action. The members noted that the statistical and anecdotal information received since the last conference call had supported their view that an easing of policy would be appropriate. In addition to the continuing concerns about business plans for capital investment, consumer spending had leveled out and confidence had fallen further. In these circumstances, lower interest rates were likely to be necessary to foster more satisfactory economic expansion. With financial markets more settled, and with nearly a month until the Committee's May meeting, an easing move was called for at this time. Although a few preferred to wait until the next scheduled meeting, all the members supported or could accept a proposal for an easing of reserve conditions consistent with a reduction of 50 basis points in the federal funds rate to a level of 4-1/2 percent. 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 reducing the federal funds rate to an average of around 4-1/2 percent. The vote 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 economic weakness in the foreseeable future. Votes for this action: Messrs. Greenspan, McDonough, Ferguson, Gramlich, Hoenig, Kelley, Meyer, Ms. Minehan, Messrs. Moskow and Poole. Votes against this action: None. Chairman Greenspan indicated that shortly after this meeting the Board of Governors would consider pending requests of eight Federal Reserve Banks to reduce the discount rate by 50 basis points. Donald L. Kohn Secretary

2001-05-17

Minute

Minutes of the Federal Open Market Committee March 20, 2001 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., beginning at 9:00 a.m. on Tuesday, March 20, 2001. Present:Mr. Greenspan, Chairman Mr. McDonough, Vice Chairman Mr. Ferguson Mr. Gramlich Mr. Hoenig Mr. Kelley Mr. Meyer Ms. Minehan Mr. Moskow Mr. PooleMessrs. Jordan, McTeer, Santomero, Stern, and Stewart, Alternate Members of the Federal Open Market Committee Messrs. Broaddus, Guynn, and Parry, Presidents of the Federal Reserve Banks of Richmond, Atlanta, and San Francisco respectively Mr. Kohn, Secretary and Economist Mr. Bernard, Deputy Secretary Mr. Gillum, Assistant Secretary Ms. Fox, Assistant Secretary Mr. Baxter, Deputy General Counsel Ms. Johnson, Economist Mr. Stockton, Economist Ms. Cumming, Messrs. Fuhrer, Hakkio, Howard, Hunter, Lindsey, Rasche, Reinhart, Slifman, and Wilcox, Associate Economists Mr. Kos, Manager, System Open Market Account Ms. Smith and Mr. Winn, Assistants to the Board, Office of Board Members, Board of Governors Mr. Ettin, Deputy Director, Division of Research and Statistics, Board of Governors Mr. Simpson, Senior Adviser, Division of Research and Statistics, Board of Governors Messrs. Madigan, Oliner, and Struckmeyer, Associate Directors, Divisions of Monetary Affairs, Research and Statistics, and 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, First Vice President, Federal Reserve Bank of Atlanta Messrs. Eisenbeis and Goodfriend, Mses. Krieger and Mester, and Mr. Rolnick, Senior Vice Presidents, Federal Reserve Banks of Atlanta, Richmond, New York, Philadelphia, and Minneapolis respectively Ms. Orrenius, Economist, Federal Reserve Bank of Dallas Mr. Trehan, Research Advisor, Federal Reserve Bank of San Francisco Mr. Haubrich, Consultant, Federal Reserve Bank of ClevelandBy unanimous vote, the minutes of the meeting of the Federal Open Market Committee held on January 30-31, 2001, were approved. By unanimous vote, David Wilcox was elected to serve as an Associate Economist for the period until the first regularly scheduled meeting of the Committee after December 31, 2001. The Manager of the System Open Market Account reported on developments in foreign exchange markets. There had been no operations in foreign currencies for the System's account since the previous meeting. The Manager also reported on developments in domestic financial markets and on System open market transactions in U.S. government securities and federal agency obligations during the period January 31, 2001, through March 19, 2001. By unanimous vote, the Committee ratified these transactions. The Committee then turned to a discussion of the economic and financial outlook and the implementation of monetary policy over the intermeeting period ahead. A summary of the economic and financial information available at the time of the meeting and of the Committee's discussion is provided below, followed by the domestic policy directive that was approved by the Committee and issued to the Federal Reserve Bank of New York. The information reviewed at this meeting suggested that economic activity continued to expand very slowly in the first quarter. Growth of final spending apparently picked up slightly, with consumer expenditures recording another moderate gain, business purchases of equipment and software increasing sluggishly after a fourth-quarter decline, and homebuilding remaining relatively firm. However, inventory overhangs were still apparent in some industries, and manufacturing production was cut sharply further. Overall employment gains were relatively well maintained, and labor markets were still tight though showing signs of softening. Price inflation had picked up a little but, abstracting from energy, had remained relatively subdued. After a sluggish fourth quarter, private nonfarm payroll employment rose at a slightly higher rate on average in January and February, though still considerably below the pace of the first three quarters of 2000. Manufacturing and related industries, notably help-supply and wholesale trade, experienced further large declines in payrolls in the January-February period. However, hiring elsewhere held up relatively well, especially in construction, which recorded a surge in employment in January. While the labor market remained tight on balance, the unemployment rate increased to 4.2 percent in February, and other indicators such as initial claims for unemployment insurance suggested that pressures in labor markets had begun to abate. The contraction in industrial production that began in October accelerated and broadened in the first two months of the year. In manufacturing, output fell further in the motor vehicle sector, and production continued to decelerate in high-tech industries. The rate of capacity utilization in manufacturing dropped noticeably in January and February to a level further below its long-run average. Against a background of slowing income gains and a sizable pullback in consumer sentiment since last autumn, consumer spending evidently grew only moderately on balance in January and February. Purchases of motor vehicles picked up in response to increased marketing incentives put in place by Chrysler and General Motors, and retail sales of items other than motor vehicles climbed moderately. Spending on services was held down in January (latest data) by reduced expenditures for heating services as winter temperatures returned to more seasonal levels following unusually cold weather late last year; excluding heating, however, spending on other services rose slowly. The decline in mortgage rates that began around the middle of last year continued to provide support to residential building activity. Total housing starts rose somewhat further in January and February, reflecting net increases in both single-family and, especially, multifamily units. Sales of new homes dropped sharply in January (latest data), after having surged in December, but remained quite robust by historical standards. Sales of existing homes rebounded in January after having fallen considerably in December and were up slightly on balance over the two months. The limited available information suggested that business fixed investment was firming early this year after a decline in the fourth quarter of last year. Nominal shipments of nondefense capital goods other than aircraft and parts changed little on balance in December and January, while prices of high-tech equipment continued to fall. Moreover, orders for nondefense capital goods turned up briskly in January after a sharp fourth-quarter drop. Nonresidential construction activity continued its robust rise early in the year. Strength in building activity was widespread across the sector, most notably in new office construction. Business inventories on a book-value basis increased in January at about the rapid fourth-quarter pace; inventory positions appeared to be especially large for construction materials, metals, electrical equipment, paper, chemicals, and textiles. In the manufacturing sector, overall stocks jumped in January while shipments fell, and the aggregate inventory-shipments ratio rose to its highest level in two years. In the wholesale trade sector, aggregate stocks fell again in January and the sector's inventory-sales ratio edged down to the middle of its very narrow range for the past year. Retail stocks continued to climb in January, but sales rose by more; the sector's inventory-sales ratio also edged lower, but it remained near the top of its range for the past twelve months. The U.S. trade deficit in goods and services changed little in December but posted a new record high for the fourth quarter. The value of exports dropped substantially in that quarter, with notable declines occurring in agricultural products, aircraft, automotive products, computers and semiconductors, consumer goods, and telecommunications equipment. The value of imports remained at the high level recorded in the third quarter. Lower imports of automotive products, chemicals, computers and semiconductors, and steel were offset by higher imports of consumer goods and telecommunications equipment and smaller increases in other categories of trade. Economic growth in the foreign industrial countries was at a moderate rate on average in the fourth quarter. Expansion in the euro area picked up, while growth in Canada and the United Kingdom slowed significantly. The Japanese economy rebounded in the fourth quarter but was little changed on balance over the second half of the year, and recent indicators suggested a sharply weaker performance in the early part of this year. In addition, growth in the major developing countries slowed markedly in the fourth quarter, with the slowdown in most of those countries reflecting weaker demand for their exports. Price inflation had picked up a bit recently. The consumer price index (CPI) jumped in January (latest data), reflecting a surge in energy prices; moreover, the index increased considerably more during the twelve months ending in January than it did during the previous twelve months. The core component of the CPI also accelerated in January and on a year-over-year basis, but by lesser amounts than did the total index. The increase in the core personal consumption expenditure (PCE) chain-type price index in January matched that of the core CPI; on a year-over-year basis, however, the pickup in core PCE inflation was a little smaller than that for the core CPI. At the producer level, core finished goods retraced in February only part of the sizable step-up in prices recorded in January, and core producer price inflation was up somewhat on a year-over-year basis. With regard to labor costs, recent data also pointed to some acceleration. Compensation per hour in the nonfarm business sector advanced appreciably more rapidly in the fourth quarter of 2000 and for the year as a whole. That trend also showed through to the average hourly earnings of production or nonsupervisory workers through February, which exhibited a roughly similar acceleration. At its meeting on January 30-31, 2001, the Committee adopted a directive that called for maintaining conditions in reserve markets consistent with a decrease of 50 basis points in the intended level of the federal funds rate, to about 5-1/2 percent. This move, in conjunction with the easing on January 3, was intended to help guard against cumulative weakness in economic activity and to provide some support to a rebound in growth later in the year. In the existing circumstances, the members agreed that the balance of risks remained weighted toward conditions that could generate economic weakness in the foreseeable future. Though rapid advances in underlying productivity were expected to continue, the adjustments to stocks of capital, consumer goods, and inventories to more sustainable levels were only partly completed, and financial markets remained unsettled. Open market operations were directed throughout the intermeeting period toward maintaining the federal funds rate at the Committee's reduced target level of 5-1/2 percent, and the funds rate stayed close to that target. However, incoming economic data, a steady flow of disappointing corporate earnings reports, related sharp declines in stock prices, and a notable drop in consumer confidence led market participants to conclude that more monetary easing would be required. Yields on Treasury securities, both short- and long-term, moved appreciably lower. However, rates on high-yield private debt obligations fell only a little, and banks further tightened standards and terms on business loans, given the weakening outlook for profits. Broad indexes of U.S. stock market prices moved sharply lower, with the tech-heavy Nasdaq experiencing an especially large drop. Nonetheless, the trade-weighted value of the dollar rose somewhat over the intermeeting interval in terms of many of the major foreign currencies. The dollar strengthened most against the currencies of countries that were seen to have the greatest potential for economic weakening, notably Japan. The dollar also posted a small gain against an index of the currencies of other important trading partners. The broad monetary aggregates continued to grow rapidly in February, though at slightly lower rates than in January. The strength in M2 was concentrated in its liquid components, apparently in response to the further narrowing of opportunity costs, the yield advantage of money funds relative to longer-term investments, and the appeal of a safe haven from volatile equity markets. M3 grew somewhat less rapidly than M2; a pullback in the issuance of bank-managed liabilities, particularly large time deposits, was associated with slower expansion of bank credit. Growth of domestic nonfinancial debt decelerated noticeably in January (latest data), reflecting reduced expansion of debt in the nonfederal sectors coupled with a larger contraction in the amount of federal debt outstanding. The staff forecast prepared for this meeting suggested that, after a period of slow growth associated in part with an inventory correction, the economic expansion would gradually regain strength over the next two years and move toward a rate near the staff's current estimate of the growth of the economy's potential output. The period of sub-par expansion was expected to foster an appreciable easing of pressures on resources and some moderation in core price inflation. The forecast anticipated that the expansion of domestic final demand would be held back to an extent by the decline in household net worth associated with the downturn that had occurred in equity prices, the lingering effects of last year's relatively high interest rates, and the continuation of relatively stringent terms and conditions on some types of loans by financial institutions. As a result, growth of spending on consumer durables was expected to be appreciably below the rapid pace in the first half of last year, and housing demand would increase only a little from its recent level. Business fixed investment, notably outlays for equipment and software, was projected to resume relatively robust growth after a period of adjustment of capital stocks to more desirable levels; growth abroad was seen as supporting the expansion of U.S. exports; and fiscal policy was assumed to become more expansionary. In the Committee's discussion of current and prospective economic developments, members commented that the recent statistical and anecdotal information had been mixed, but they viewed evolving business conditions as consistent on the whole with a continued softness in economic activity. Members noted that consumer spending had strengthened early in the year and housing activity had remained at a relatively high level. These positive developments needed to be weighed against an appreciable weakening in business investment spending and the near-term restraining effects of a drawdown in inventories. Looking ahead, while sales and production data suggested that excess inventories were being worked off, the adjustment did not appear to have been completed. Beyond the inventory correction, the members continued to anticipate an acceleration of the expansion over time, though likely on a more delayed basis and at a more gradual pace than they had forecast earlier. They noted a number of favorable underlying factors that would tend to support a rebound, including solid productivity growth, stable low inflation, generally sound financial institutions, lower interest rates, and relatively robust expansion in many measures of money. However, the members saw clear downside risks in the outlook for consumer and investment spending in the context of the marked decline that had occurred in equity prices and consumer confidence, and in expected business profitability, and they were concerned that weaker exports might also hold down the expansion of economic activity. With regard to the outlook for inflation, some recent measures of increases in core prices had fluctuated on the high side of earlier expectations, but apart from energy prices and medical costs, inflation was still relatively quiescent. With the growth in output likely to remain below the expansion of the economy's potential for a while, members anticipated that inflation would remain subdued. Mirroring the statistics for the nation as a whole, business conditions in different parts of the country displayed mixed industry patterns, but members reported that overall business activity currently appeared to be growing at a sluggish pace in most regions, and business contacts were exhibiting a heightened sense of caution, or even concern, in some industries. In their review of developments in key sectors of the economy, members indicated that they saw favorable prospects for continued moderate growth in consumer expenditures, though considerable uncertainty surrounded this outlook. Downside risks cited by the members included the substantial declines that had already occurred in measures of consumer confidence and equity wealth, and the possibility that consumer sentiment might be undermined even further by continued volatility and additional declines in the stock market and by rising concerns about job losses amid persistent announcements of layoffs. Members also referred to the retarding effects on consumer expenditures of elevated levels of household debt and high energy costs. Against this background, consumers might well endeavor to boost their savings, and even a fairly small increase in what currently was a quite low saving rate would have large damping effects on aggregate demand that could weaken, if not abort, the expansion. To date, however, overall consumer spending had remained relatively strong and seemingly at odds with measures of consumer confidence and reduced equity wealth. How this divergence might eventually be resolved was a significant source of uncertainty and downside risk. On balance, while there were reasons to be concerned about the outlook for consumer spending, members believed that recent spending trends and the outlook for further growth in employment and incomes pointed to continued expansion in this key sector of the economy, though likely at a relatively sluggish pace. Another major source of downside risk to the expansion was business fixed investment. Spending for equipment and software declined in the fourth quarter, and the available statistical and anecdotal reports pointed to weakness during the first half of this year, largely reflecting developments in high-tech industries. Substantial downward adjustments to expected near-term business earnings had persisted, suggesting that firms saw investment as much less profitable than they had before and that cash flows would be constrained. Many businesses also were inhibited in their investment activities by less accommodative financial conditions associated with weaker equity markets and tighter credit terms and conditions imposed by banking institutions. As a consequence, a substantial volume of planned investment was being postponed, if not cancelled. The capital stock had grown at an unsustainable pace for a time, so some downshifting in investment was inevitable. Moreover, those earlier very substantial investment outlays seemed to have created excess capacity in a number of industries, and how large an adjustment in spending for business equipment might now be underway was still unclear, especially with regard to high-tech industries. At the same time, the information available for the first quarter indicated considerable strength in nonresidential construction activity, including large outlays on public sector infrastructure projects in some areas. On balance, business spending for plant and equipment was likely to pick up only gradually this year. Over the longer term, however, a return to more robust business investment seemed likely, and indeed business earnings forecasts beyond the nearer term had not declined very much, reflecting continuing expectations of substantial profit opportunities related to persisting strong gains in productivity. Housing activity was generally holding up well across the country as the effects of appreciably reduced mortgage interest rates apparently compensated for the negative effects of declining financial wealth on the demand for housing. While housing construction was generally described as elevated, some members referred to overbuilding or weakness in some local housing markets. It was noted that homebuilders were generally optimistic about the prospects for the year ahead, given their current backlogs and expectations of further growth in employment and incomes. The ongoing adjustments in business inventories had played a significant role in curbing the growth of economic activity in recent months, but such adjustments seemed likely gradually to become a more neutral factor over the balance of this year. In the motor vehicle industry, inventory liquidation had been especially pronounced and the process now seemed largely completed. However, the inventory-correction process in high-tech industries apparently was not as far along. In the absence of renewed weakness in overall final demand, which could not be ruled out given current consumer and business confidence, production would need to pick up at some point to accommodate ongoing final demand. Some members observed that the adjustment in inventories might require more time than they had anticipated earlier. In any event, completion of the process clearly would foster an upturn in manufacturing activity. Members commented on the downside risks to U.S. exports and the U.S. expansion from what appeared to be softening economic conditions in a number of important foreign economies. In some countries, the risks were exacerbated by the apparent inability or unwillingness of government officials to address underlying structural problems in their economies and financial systems. Members noted anecdotal reports of weakening business conditions in a number of Asian and South American nations. The potential impact on exports of less vigor in the global economy would be augmented, of course, by the strength of the dollar in foreign exchange markets. Although labor markets in general remained tight throughout the nation, anecdotal reports of less scarce labor resources were becoming more frequent in some areas or occupations. Some price increases had been noted; however, apart from the energy and health care sectors, price inflation had remained relatively subdued, evidently reflecting the combination of diminished growth in overall demand and strong competitive pressures in most markets. With regard to the outlook for wages and prices, members commented that the prospects for an extended period of growth in demand at a pace below the economy's potential should ease pressures on labor and other resources and help to contain inflation. In the Committee's discussion of policy for the intermeeting period ahead, most of the members preferred and all could support a further easing of reserve conditions consistent with a 50 basis point reduction in the federal funds rate, to 5 percent. The members agreed that a strengthening in the economic expansion over coming quarters was a reasonable expectation, but absent further easing in monetary policy that pickup was unlikely to bring growth to an acceptable pace in the foreseeable future. Business investment would be held back by lower earnings expectations and a capital overhang of unknown dimensions; consumption was subject to downside risks from previous decreases in equity wealth and declining confidence; and the strong dollar and weaker foreign growth would constrain exports. Inflation was likely to be damped by ebbing pressures on labor and product markets. While many of the members generally believed that additional policy easing might well prove to be necessary at some time, the easing favored by most members incorporated what they viewed as an adequate degree of stimulus under current economic conditions and represented an appropriately calibrated step given the uncertainties in the economic outlook. It was noted in this regard that in combination with the two easing actions earlier this year, the Committee would have implemented in a relatively short period a considerable amount of monetary easing whose economic effects would be felt over time. However, some commented that the amount of financial stimulus was much smaller than might otherwise be expected from policy easing of this cumulative amount because it had been accompanied by further declines in stock market prices, more stringent financing terms for many business borrowers, and a stronger dollar, all of which would be holding down domestic spending and production. Indeed, financial markets had come to place some odds on a larger move of 75 basis points in recent days, importantly reflecting the possibility of a presumed policy response to the sizable declines in equity prices that had occurred as earnings prospects proved disappointing. Most members agreed, however, that in the context of their focus on the economy, smaller, possibly more frequent, policy adjustments were appropriate to afford them the opportunity to recalibrate policy in rapidly changing and highly uncertain circumstances. A few members expressed a preference for a 75 basis point reduction in the federal funds rate. In their view, a more forceful action was justified by current and prospective economic conditions. The members agreed that even with a further 50 basis point reduction in the federal funds rate, the risks to the economy would remain decidedly to the downside. This conclusion would be reflected in the press statement to be released after today's meeting. The statement also would emphasize the need for close monitoring of rapidly evolving economic conditions. The members anticipated that in the relatively long interval before the next regularly scheduled meeting on May 15, 2001, economic developments might suggest the desirability of a Committee conference call to assess business conditions across the nation and to consider the possible need for a further policy adjustment. 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 reducing the federal funds rate to an average of around 5 percent. The vote 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 economic weakness in the foreseeable future. Votes for this action: Messrs. Greenspan, McDonough, Ferguson, Gramlich, Hoenig, Kelley, Meyer, Ms. Minehan, Messrs. Moskow and Poole. Votes against this action: None. The Chairman called for a recess after this vote and convened a meeting of the Board of Governors to consider reductions of one-half percentage point in the discount rate that had been proposed by all the Federal Reserve Banks. After the recess, the Chairman informed the Committee that the pending reductions had been approved. It was agreed that the next meeting of the Committee would be held on Tuesday, May 15, 2001. The meeting adjourned at 1:15 p.m. Telephone Conferences On April 11, 2001, the Committee reviewed economic and financial developments since its last meeting and discussed the possible need for some further easing of monetary policy. The data and anecdotal information were mixed: They did not indicate that the economy had been weakening further, but they raised questions about the potential strength of a rebound in growth over coming quarters. In particular, heightened business concerns about future sales and further downward revisions to expected earnings threatened to restrain capital spending for some time. In the circumstances, the members could see the need for a further easing of policy at some point, though some had a strong preference for taking such actions at regularly scheduled meetings. They all agreed that an easing on this date would not be advisable, inasmuch as the attendant surprise to most outside observers risked unpredictable reactions in financial markets that had been especially volatile in recent days, and additional important data would become available over the near term. A week later, on April 18, 2001, the Committee held a telephone conference meeting for the purpose of considering a policy easing action. The members noted that the statistical and anecdotal information received since the last conference call had supported their view that an easing of policy would be appropriate. In addition to the continuing concerns about business plans for capital investment, consumer spending had leveled out and confidence had fallen further. In these circumstances, lower interest rates were likely to be necessary to foster more satisfactory economic expansion. With financial markets more settled, and with nearly a month until the Committee's May meeting, an easing move was called for at this time. Although a few preferred to wait until the next scheduled meeting, all the members supported or could accept a proposal for an easing of reserve conditions consistent with a reduction of 50 basis points in the federal funds rate to a level of 4-1/2 percent. 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 reducing the federal funds rate to an average of around 4-1/2 percent. The vote 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 economic weakness in the foreseeable future. Votes for this action: Messrs. Greenspan, McDonough, Ferguson, Gramlich, Hoenig, Kelley, Meyer, Ms. Minehan, Messrs. Moskow and Poole. Votes against this action: None. Chairman Greenspan indicated that shortly after this meeting the Board of Governors would consider pending requests of eight Federal Reserve Banks to reduce the discount rate by 50 basis points. Donald L. Kohn Secretary

2001-03-20

Statement

The Federal Open Market Committee at its meeting today decided to lower its target for the federal funds rate by 50 basis points to 5 percent. In a related action, the Board of Governors approved a 50 basis point reduction in the discount rate to 4-1/2 percent. Persistent pressures on profit margins are restraining investment spending and, through declines in equity wealth, consumption. The associated backup in inventories has induced a rapid response in manufacturing output and, with spending having firmed a bit since last year, inventory adjustment appears to be well underway. Although current developments do not appear to have materially diminished the prospects for long-term growth in productivity, excess productive capacity has emerged recently. The possibility that this excess could continue for some time and the potential for weakness in global economic conditions suggest substantial risks that demand and production could remain soft. In these circumstances, when the economic situation could be evolving rapidly, the Federal Reserve will need to monitor developments closely. The Committee continues to believe that against the background of its long-run goals of price stability and sustainable economic growth and of the information currently available, the risks are weighted mainly toward conditions that may generate economic weakness in the foreseeable future. In taking the discount rate action, the Federal Reserve Board approved requests submitted by the Boards of Directors of all twelve Reserve Banks.

2001-03-22

Minute

Minutes of the Federal Open Market Committee January 30-31, 2001 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., beginning on Tuesday, January 30, 2001, at 9:00 a.m. and continuing on Wednesday, January 31, 2001, at 9:00 a. m. Present:Mr. Greenspan, Chairman Mr. McDonough, Vice Chairman Mr. Ferguson Mr. Gramlich Mr. Hoenig Mr. Kelley Mr. Meyer Ms. Minehan Mr. Moskow Mr. PooleMessrs. Jordan, McTeer, Santomero, and Stern, Alternate Members of the Federal Open Market Committee Messrs. Broaddus, Guynn, and Parry, Presidents of the Federal Reserve Banks of Richmond, Atlanta, and San Francisco respectively Mr. Kohn, Secretary and Economist Mr. Bernard, Deputy Secretary Ms. Fox, Assistant Secretary Mr. Gillum, Assistant Secretary Mr. Mattingly, General Counsel Mr. Baxter, Deputy General Counsel Ms. Johnson, Economist Mr. Stockton, Economist Ms. Cumming, Messrs. Fuhrer, Hakkio, Howard, Hunter, Lindsey, Rasche, Reinhart, and Slifman, Associate Economists Mr. Fisher, Manager, System Open Market Account Mr. Winn, 1Assistant to the Board, Office of Board Members, Board of Governors Ms. Johnson, 2 Secretary of the Board, Office of the Secretary, Board of Governors, Mr. Simpson, Senior Adviser, Division of Research and Statistics, Board of Governors Mr. Madigan, Associate Director, Division of Monetary Affairs, Board of Governors Messrs. Oliner, Struckmeyer, and Whitesell, Assistant Directors, Divisions of Research and Statistics, Research and Statistics, and Monetary Affairs respectively, Board of Governors Messrs. Morton, 1 Rosine, 1 and Sack, 1 Senior Economists, Divisions of International Finance, Research and Statistics, and Monetary Affairs respectively, Board of Governors Mr. Reifschneider, 3 Section Chief, Division of Research and Statistics, Board of Governors Ms. Garrett, 3 Economist, Division of Monetary Affairs, Board of Governors Ms. Low, Open Market Secretariat Assistant, Division of Monetary Affairs, Board of Governors Mr. Lang, Executive Vice President, Federal Reserve Bank of Philadelphia Messrs. Beebe, Eisenbeis, Goodfriend, Kos, Ms. Krieger, Messrs. Rosenblum, and Sniderman, Senior Vice Presidents, Federal Reserve Banks of San Francisco, Atlanta, Richmond, New York, New York, Dallas, and Cleveland respectively Mr. Weber, Vice President, Federal Reserve Bank of MinneapolisIn 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, 2001, and ending December 31, 2001, had been received and that these individuals had executed their oaths of office. The elected members and alternate members were as follows: William J. McDonough, President of the Federal Reserve Bank of New York, with Jamie B. Stewart, Jr., First Vice President of the Federal Reserve Bank of New York, as alternate Cathy E. Minehan, President of the Federal Reserve Bank of Boston, with Anthony M. Santomero, President of the Federal Reserve Bank of Philadelphia, as alternate Michael H. Moskow, President of the Federal Reserve Bank of Chicago, with Jerry L. Jordan, President of the Federal Reserve Bank of Cleveland, as alternate William Poole, President of the Federal Reserve Bank of St. Louis, with Robert D. McTeer, Jr., President of the Federal Reserve Bank of Dallas, as alternate Thomas M. Hoenig, President of the Federal Reserve Bank of Kansas City, with Gary H. Stern, President of the Federal Reserve Bank of Minneapolis, as alternate. By unanimous vote, the following officers of the Federal Open Market Committee were elected to serve until the election of their successors at the first regularly scheduled meeting of the Committee after December 31, 2001, with the understanding that in the event of the discontinuance of their official connection with the Board of Governors or with a Federal Reserve Bank, they would cease to have any official connection with the Federal Open Market Committee: Alan Greenspan Chairman William J. McDonough Vice Chairman Donald L. Kohn Secretary and Economist Normand R. V. Bernard Deputy Secretary Lynn S. Fox and Gary P. Gillum Assistant Secretaries J. Virgil Mattingly, Jr. General Counsel Thomas C. Baxter, Jr. Deputy General Counsel Karen H. Johnson and David J. Stockton Economists Christine M. Cumming, Jeffrey C. Fuhrer, Craig S. Hakkio, William C. Hunter, David H. Howard, David E. Lindsey, Robert H. Rasche, Vincent R. Reinhart, and Lawrence Slifman Associate Economists By unanimous vote, Peter R. Fisher was selected to serve at the pleasure of the Committee as Manager, System Open Market Account, on the understanding that his selection was subject to being satisfactory to the Federal Reserve Bank of New York. Secretary's note: Advice subsequently was received that the selection of Mr. Fisher as Manager was satisfactory to the board of directors of the Federal Reserve Bank of New York. By unanimous vote, the minutes of the meetings of the Federal Open Market Committee held on December 19, 2000, and January 3, 2001, were approved. The next item on the agenda encompassed issues relating in part to the discount window and other matters that are within the legal purview of the Board of Governors. Accordingly, a Board meeting was formally convened and this item was considered in a joint Board-Federal Open Market Committee session. The Board members voted unanimously at the outset to close the Board meeting. At its meeting in March 2000, the Committee asked the staff to undertake a broad study of alternative approaches to the management of the System asset portfolio in the current and prospective environment of large budget surpluses and rapid associated declines in the amount of Treasury debt outstanding. Such paydowns were having favorable effects on the macroeconomy and would not impair the Committee's ability to pursue its overall economic objectives. But the FOMC's historical reliance on purchases and sales of Treasury securities to implement monetary policy would be difficult to maintain if steep paydowns of debt were, as seemed likely, to continue. To prepare for such a contingency, the Committee needed to identify and explore alternative instruments for the conduct of monetary policy. In their discussion at this meeting, the members agreed that continuing paydowns of Treasury debt outstanding could create complications for the implementation of monetary policy well before the full repayment of marketable federal debt. In particular, the Treasury market could be expected to become less liquid over time, making it more difficult for the Federal Reserve to accommodate the trend growth of currency through outright purchases of Treasuries without unduly affecting market prices. Reduced activity in the Treasury repurchase agreement (RP) market could complicate the use of such obligations to respond to seasonal and unexpected variations in the aggregate supply of reserves. In reviewing the possibilities, the members noted that relative to investments in Treasury securities, all of the options could entail significant drawbacks, including increases in credit risk, reductions in liquidity, and potentially distorting effects on relative prices in financial markets. In light of these potential issues, the Committee agreed that it should proceed cautiously and maintain the current emphasis on Treasury securities in the SOMA portfolio, especially the portion of the portfolio held outright, for as long as practicable. In that regard, some members suggested that the Committee look carefully at whether it could loosen the limits it currently imposes on holdings of individual Treasury issues without causing undue market distortions. Some felt it would be desirable to consider buying and holding Ginnie Mae mortgage-backed securities, which are guaranteed by the full faith and credit of the United States. A few members suggested that consideration might be given to the possibility of continuing to rely on Treasury securities, even as the publicly held debt is paid down, by acquiring such securities through special arrangements with the Treasury. In the near term, the members agreed that it would be useful to extend for at least another year the temporary authority, in effect since late August 1999, of the Manager to supplement repurchase agreements in Treasuries and direct agency debt with repurchase transactions in mortgage-backed securities guaranteed by a federal agency or a government-sponsored enterprise. They also asked the staff to investigate the possibility of authorizing the Desk to engage in RP operations using assets that could be purchased under existing legal authority but were not currently authorized by the Committee--specifically, certain debt obligations of U.S. state and local governments and of foreign governments. Making a wider range of assets available for RP operations would reduce the potential for distortions to the pricing of instruments collateralizing RPs, but would entail resolving a number of issues. The Congress and market participants would need to be consulted before the Committee decided to undertake any such operations. From a somewhat longer-term perspective, Committee members identified several alternative issues for further study. One involved the appropriate degree of reliance on outright purchases of a broader array of assets relative to greater use of temporary short-term transactions undertaken through intermediaries. A number of members saw advantages to the greater reliance on the latter--RPs with security dealers and discount window loans to depository institutions--especially when they involved a wide range of underlying assets. It was noted that such instruments would afford the Federal Reserve considerable protection against credit risks, could be structured to provide substantial liquidity to respond to unanticipated changes in the supply or demand for reserves, and, relative to outright purchases of the underlying collateral, could help to mitigate potential distortions to asset pricing and credit allocation. Many members indicated that a potentially attractive approach to expanding the role of the discount window might involve auctioning such credit to financially sound depository institutions. Some members expressed reservations about this option, noting that such a program would have to be carefully structured in order to avoid situations in which some institutions become heavily dependent on such credit or engage in excessive risk taking. But extremely heavy reliance on temporary transactions could itself influence credit flows, suggesting that approaches to staying longer with Treasury securities or adding new assets not currently allowed by law to the permanent portfolio would also need to be studied. The use of private securities for temporary transactions or permanent portfolio holdings had a number of risk management and accounting implications that would need to be carefully examined. Another aspect that required further examination was the approach to diversification of the System portfolio in order to minimize any effects on credit conditions. In this context, the members compared the merits of an incremental approach in which classes of private securities were gradually added to the RP pool or the permanent portfolio, with the safest and most liquid being used first, to an alternative approach in which very broad diversification was sought quickly through investment in diverse pools of assets. In view of the importance of these issues and their complexity, the Committee determined to explore various means to seek the input of the public and the Congress to develop and refine alternatives and to investigate all the associated policy issues. By unanimous vote, the Committee approved amendments to paragraphs 1(b), 1(c), and 3 of the Authorization for Domestic Open Market Operations to permit temporary operations with a maturity limit of 65 business days. AUTHORIZATION FOR DOMESTIC OPEN MARKET OPERATIONS (Amended January 30, 2001) The Federal Open Market Committee authorizes and directs the Federal Reserve Bank of New York, to the extent necessary to carry out the most recent domestic policy directive adopted at a meeting of the Committee: (a) To buy or sell U.S. Government securities, including securities of the Federal Financing Bank, and securities that are direct obligations of, or fully guaranteed as to principal and interest by, any agency of the United States in the open market, from or to securities dealers and foreign and international accounts maintained at the Federal Reserve Bank of New York, on a cash, regular, or deferred delivery basis, for the System Open Market Account at market prices, and, for such Account, to exchange maturing U.S. Government and Federal agency securities with the Treasury or the individual agencies or to allow them to mature without replacement; provided that the aggregate amount of U.S. Government and Federal agency securities held in such Account (including forward commitments) at the close of business on the day of a meeting of the Committee at which action is taken with respect to a domestic policy directive shall not be increased or decreased by more than $12.0 billion during the period commencing with the opening of business on the day following such meeting and ending with the close of business on the day of the next such meeting; (b) To buy U.S. Government securities and obligations that are direct obligations of, or fully guaranteed as to principal and interest by, any agency of the United States, from dealers for the account of the Federal Reserve Bank of New York under agreements for repurchase of such securities or obligations in 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. In order to ensure the effective conduct of open market operations, the Federal Open Market Committee authorizes the Federal Reserve Bank of New York to lend on an overnight basis U.S. Government securities held in the System Open Market Account to dealers at rates that shall be determined by competitive bidding but that in no event shall be less than 1.0 percent per annum of the market value of the securities lent. The Federal Reserve Bank of New York shall apply reasonable limitations on the total amount of a specific issue that may be auctioned, and on the amount of securities that each dealer may borrow. The Federal Reserve Bank of New York may reject bids which could facilitate a dealer's ability to control a single issue as determined solely by the Federal Reserve Bank of New York. In order to ensure the effective conduct of open market operations, while assisting in the provision of short-term investments for foreign and international accounts maintained at the Federal Reserve Bank of New York, the Federal Open Market Committee authorizes and directs the Federal Reserve Bank of New York (a) for System Open Market Account, to sell U.S. Government securities to such foreign and international accounts on the bases set forth in paragraph l(a) under agreements providing for the resale by such accounts of those securities 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 foreign and international accounts maintained at the Bank. Transactions undertaken with such accounts under the provisions of this paragraph may provide for a service fee when appropriate. 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 approved until the Committee's first scheduled meeting in 2002 an extension of the temporary suspension of paragraphs 3 to 6 of the Guidelines for the Conduct of System Operations in Federal Agency Issues. For the year ahead, the Guidelines therefore continued to read as follows: GUIDELINES FOR THE CONDUCT OF SYSTEM OPEN MARKET OPERATIONS IN FEDERAL AGENCY ISSUES (Reaffirmed January 30, 2001) System open market operations in Federal agency issues are an integral part of total System open market operations designed to influence bank reserves, money market conditions, and monetary aggregates. System open market operations in Federal agency issues are not designed to support individual sectors of the market or to channel funds into issues of particular agencies. By unanimous vote, the Foreign Currency Authorization was reaffirmed in the form shown below. AUTHORIZATION FOR FOREIGN CURRENCY OPERATIONS (Reaffirmed January 30, 2001) 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. 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. 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. 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. 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. 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. 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. Staff officers of the Committee are authorized to transmit pertinent information on System foreign currency operations to appropriate officials of the Treasury Department. All Federal Reserve Banks shall participate in the foreign currency operations for System Account in accordance with paragraph 3 G(1) of the Board of Governors' Statement of Procedure with Respect to Foreign Relationships of Federal Reserve Banks dated January 1, 1944. By unanimous vote, the Foreign Currency Directive was reaffirmed in the form shown below. FOREIGN CURRENCY DIRECTIVE (Reaffirmed January 30, 2001) System operations in foreign currencies shall generally be directed at countering disorderly market conditions, provided that market exchange rates for the U.S. dollar reflect actions and behavior consistent with the IMF Article IV, Section 1. 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. 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. System foreign currency operations shall be conducted: A. In close and continuous consultation and cooperation with the United States Treasury; B. In cooperation, as appropriate, with foreign monetary authorities; and C. In a manner consistent with the obligations of the United States in the International Monetary Fund regarding exchange arrangements under the IMF Article IV. 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 January 30, 2001) 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. 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. 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. The Manager shall also consult with the Subcommittee or the Chairman about proposed swap drawings by the System and about any operations that are not of a routine character. On January 22, 2001, the continuing rules, regulations, and other instructions of the Committee had been distributed with the advice that, in accordance with procedures approved by the Committee, they were being called to the Committee's attention before the January 30-31 organization meeting to give members an opportunity to raise any questions they might have concerning them. Members were asked to indicate if they wished to have any of the instruments in question placed on the agenda for consideration at this meeting. The Guidelines for the Conduct of System Operations in Federal Agency Issues were placed on the agenda and an extension of their temporary amendment was approved as noted above. 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 20, 2000, through January 30, 2001. By unanimous vote, the Committee ratified these transactions. The Committee then turned to a discussion of the economic and financial outlook and the implementation of monetary policy over the intermeeting period ahead. A summary of the economic and financial information available at the time of the meeting and of the Committee's discussion is provided below, followed by the domestic policy directive that was approved by the Committee and issued to the Federal Reserve Bank of New York. The information reviewed at this meeting indicated that the expansion of economic activity had slowed appreciably over the fourth quarter. Consumer and business spending decelerated further, with outlays for consumer durables and business equipment particularly weak. Housing construction remained relatively firm, though significantly below its brisk pace of earlier in the year. The slower growth of final spending resulted in inventory overhangs in a number of industries, most notably those related to the motor vehicle sector. Manufacturing production declined sharply as a result, and overall employment gains moderated further. Price inflation was still relatively subdued. Labor demand softened further in December, with private nonfarm payroll employment continuing to increase slowly and the average workweek to decline. Nonetheless, the labor market remained very tight and the unemployment rate held at 4 percent, its average for the year. Reduced labor demand in manufacturing accounted for much of the slowdown in nonfarm payroll gains in the fourth quarter, with factory payrolls falling sharply further in December, but in addition sizable cuts in net new hires were recorded in the help-supply and construction industries. The contraction in industrial production that began in October, largely in the motor vehicle sector, deepened and broadened in November and December. For the fourth quarter as a whole, the drop in production was concentrated in manufacturing; mining activity fell by less while utilities output surged late in the year in response to unseasonably cold weather. Most of the initial weakness in manufacturing output was related directly or indirectly to the slowing in the motor vehicle sector, but by year-end all major market groups had registered steep declines in production. Weaker factory activity in December resulted in a sizable drop in the rate of capacity utilization in manufacturing to a level further below its long-run average. Against a background of slowing growth of disposable personal income and abrupt declines in consumer sentiment, consumer spending decelerated substantially in the fourth quarter. Purchases of motor vehicles slumped and outlays for other goods increased only a little. However, spending on services picked up somewhat in November (latest data), reflecting at least in part higher expenditures for heating services owing to unseasonably cold weather. The decline in mortgage rates since the middle of last year had provided some support to residential building activity. Total housing starts increased slightly further in December, with single-family starts recording a brisk rise that might have been, in part, a response to the lower mortgage rates. By contrast, multifamily starts slowed, more than reversing November's run-up. Sales of new homes jumped in December to a very high level, but sales of existing homes dropped considerably. Business fixed investment contracted slightly in the fourth quarter, reflecting a sizable decline in business spending on equipment and software that was offset in part by a large increase in nonresidential construction. Data on nominal shipments of nondefense capital goods in the fourth quarter indicated a drop in office and computing equipment, only a small gain in communications equipment, and a decline, on net, in non-high-tech equipment. By contrast, investment in nonresidential structures increased briskly further in October and November (latest data). While spending for new office buildings was rising less rapidly, outlays for other commercial structures picked up, and investment in industrial structures remained robust. Business inventories on a book-value basis mounted further in October and November. Despite production cutbacks, stockbuilding in manufacturing remained rapid and sizable inventory overhangs had emerged in some industries, particularly those related to the motor vehicle sector. As a result, the aggregate stock-sales ratio for the manufacturing sector continued its upward drift that began early last year. Sizable inventory buildups and associated overhangs also were apparent in portions of the retail sector, and the aggregate inventory-sales ratio for the sector remained at the upper end of its range over the past year. At the wholesale level, inventory accumulation was moderate in October and November, but the sector's inventory-sales ratio continued to be at the top of its range for the last twelve months. The U.S. trade deficit in goods and services fell slightly in October and November after having posted a new record high in September. Nevertheless, the average deficit for October and November was larger than the rate for the third quarter. The value of exports declined in both months, and the average value for the two-month period was below the third-quarter level; the weakness in exports was spread across a number of trade categories. The value of imports for the first two months of the fourth quarter was slightly above the third-quarter average. Economic growth in foreign industrial countries moderated in the second half of last year. The pace of economic expansion in the euro area softened somewhat further in the fourth quarter, as consumer spending remained weak. In Japan, available indicators suggested that economic activity had stagnated in the fourth quarter. Economic growth in Canada and the United Kingdom seemed to have slowed somewhat in the fourth quarter. In addition, the latest data for the major developing countries pointed to reduced expansion in many of those countries. By most measures, price inflation had remained moderate in recent months. Judging by the consumer price index (CPI), total and core consumer prices rose mildly over November and December, but both accelerated somewhat on a year-over-year basis. In terms of the personal consumption expenditure (PCE) chain-type price index, however, core consumer price inflation was modest in both November (latest data) and the twelve months ended in November, and there was essentially no change year over year. At the producer level, core prices edged up over the November-December period, and the rise in core prices over the year was minimal as well. With regard to labor costs, the employment cost index of hourly compensation for private industry workers (ECI) decelerated noticeably in the fourth quarter, with both the wage and benefit components recording smaller gains. However, growth of ECI compensation picked up somewhat in 2000 from 1999, probably owing in large part to the upward trend in productivity growth. Productivity improvements also showed through to the average hourly earnings of production or nonsupervisory workers, which exhibited a roughly similar acceleration. At its meeting on December 19, 2000, the Committee adopted a directive that continued to call for maintaining conditions in reserve markets consistent with an unchanged federal funds rate of about 6-1/2 percent. At the same time, however, the members concluded that the balance of risks had shifted sufficiently that they were now weighted toward conditions that could generate economic weakness in the foreseeable future. Indeed, very recent information seemed to signal sudden further weakness, but it was largely anecdotal and most of the aggregate data on spending and employment suggested continued economic expansion, albeit at a relatively slow rate. As a result, most members believed that it would be prudent to await further confirmation of a noticeably weaker expansion before implementing any monetary easing, particularly given the current high level of resource utilization and the record over the last several years of strong rebounds from brief lulls in growth. If, however, incoming data were to reinforce the recent anecdotal indications, the Committee would be prepared to respond promptly. Open market operations during the intermeeting period were initially directed toward maintaining the federal funds rate at the Committee's targeted level of 6-1/2 percent. However, information that became available in the weeks after the December meeting tended to confirm the earlier indications of weakness in spending, and at a telephone conference on January 3, 2001, the Committee approved a 1/2 percentage point reduction in the federal funds rate, to 6 percent, and also agreed that the risks remained weighted toward economic weakness. The federal funds rate remained close to the Committee's targets over the intermeeting period, and interest rates on short-term Treasury securities and high-quality private debt obligations declined over the period almost as much as the funds rate. The Committee's action seemed to help ease some concerns about the longer-term outlook, and risk spreads on lower-grade bonds fell substantially while broad indexes of U.S. stock market prices rose on balance over the intermeeting period. In foreign exchange markets, the trade-weighted value of the dollar changed little on balance over the intermeeting interval in terms of an index of major foreign currencies. The dollar lost ground against the euro as market participants took note of the deterioration of near-term prospects for economic growth in the United States relative to those for Europe. However, that decline was roughly counterbalanced by a rise in the dollar against the yen, reflecting continuing economic stagnation in Japan. The dollar posted a small gain against an index of the currencies of other important trading partners, largely reflecting expectations that some emerging economies might be adversely affected by slower growth in the United States. The broad monetary aggregates accelerated sharply in December and apparently strengthened further in January. The pickup in M2 growth evidently reflected a flight from heightened equity market volatility late last year to the safety and liquidity of M2 assets along with a recent narrowing of the opportunity costs of holding funds in M2 accounts. M3 grew even faster than M2, boosted in part by stepped-up issuance of large time deposits to fund a pickup in bank credit. The expansion of domestic nonfinancial debt increased in November and December (latest data), reflecting greater business borrowing, perhaps to finance growing inventories and smaller contractions in the amount of federal debt outstanding. The staff forecast prepared for this meeting suggested that, after a pause associated in part with an inventory correction, the economic expansion would regain strength over the next two years and gradually move to a rate near the staff's current estimate of the growth of the economy's potential output. The period of sub-par activity was expected to foster an appreciable slackening of resource utilization and some moderation in core price inflation. The forecast anticipated that the expansion of domestic final demand would be held back to some extent by the decline in household net worth associated with the downturn that had occurred in equity prices, the remaining effects of prior monetary restraint, and the continuation of somewhat stringent credit terms and conditions on some types of loans by financial institutions. As a result, growth of spending on consumer durables was expected to be appreciably below that of the first half of last year and housing demand to be about unchanged from its recent level. Business fixed investment, notably outlays for equipment and software, was projected to resume relatively robust growth after a comparatively brief period of adjustment of capital stocks to more desirable levels; growth abroad was seen as supporting the expansion of U.S. exports; and fiscal policy was assumed to become more expansionary. In the Committee's discussion of current and prospective economic developments, members commented that while a slowdown in the expansion over the second half of 2000 was not unexpected in light of the previously unsustainable rate of increase in output, the speed and extent of the slowdown were much more pronounced than they had anticipated. Consumer spending and business capital investment had decelerated markedly, partly in association with a sharp decline in consumer and business confidence. This weakening, which was especially evident in durable goods producing industries, had led to large cutbacks in manufacturing output as numerous business firms attempted to pare what they now viewed as excessive inventories. The eventual degree and duration of the softening in economic conditions were difficult to predict. In particular, it was unclear whether the pause in the economic expansion would be largely limited to a relatively short inventory correction or would involve a more extensive cyclical adjustment. In general, members saw favorable prospects for an appreciable recovery in overall business activity as the year progressed. Members referred to indications that both residential and nonresidential construction activity had remained relatively robust and to fragmentary data and anecdotal reports suggesting that consumer spending had steadied or possibly turned up early this year. Several commented that the sound condition of the banking system was another supportive factor. Some also observed that, counter to the experience generally associated with the onset of earlier recessions, monetary growth had been well maintained in recent months, and a few noted that long-term interest rates currently were appreciably below their peaks of the past year. The prospect that fiscal policy might begin to move in an expansionary direction later in the year was cited as another factor in the outlook for stronger economic activity. A decline in energy prices, should it materialize as anticipated in futures markets, would have a positive effect on both business and consumer spending by lowering business costs and raising disposable consumer incomes adjusted for energy costs. Perhaps the most critical element in this outlook was the persistence of elevated growth in structural labor productivity, which seemed likely to play a vital role in supporting growth in incomes and aggregate demand while also helping to limit inflation pressures. At the same time, members also saw considerable downside risks to the economic expansion. Energy prices remained elevated and were continuing to depress business and household purchasing power; the overhang of excess capital stocks in some sectors could turn out to be sizable, depressing investment spending for some time; consumer confidence could worsen appreciably more in the face of weaker expansion of incomes and higher job layoffs; and investor concerns about earnings could increase further, sparking lower equity prices and tighter standards and terms on credit. Except for prices of energy and medical services, the currently available information indicated relatively subdued rates of inflation, and recent surveys pointed to little change in inflation expectations. Looking ahead, members anticipated that somewhat reduced pressures in labor and product markets would foster some softening in consumer price inflation over coming quarters, a development that would be abetted should prices of oil and natural gas ease during the year in line with current market expectations. In preparation for a semi-annual report to Congress, the members of the Board of Governors and the presidents of the Federal Reserve Banks provided individual projections of the growth in nominal and real GDP, the rate of unemployment, and the rate of inflation for the year 2001. The forecasts were concentrated in ranges of 4 to 5 percent for the growth in nominal GDP and 2 to 2-1/2 percent for the expansion in real GDP, implying some strengthening of economic activity as the year progressed. With growth in business activity falling short of the expansion in the economy's potential, the rate of unemployment was expected to rise somewhat to an average of about 4-1/2 percent by the fourth quarter of the year. Forecasts of the rate of inflation, as measured by the chain-type price index for personal consumption expenditures, were centered in a range of 1-3/4 to 2-1/4 percent, reflecting declines from the inflation rate last year largely stemming from the projected reductions in energy prices. The marked deceleration in final sales experienced late last year was concentrated in consumer spending for motor vehicles and other durable goods and in business expenditures for equipment and software. In the household sector, rapidly declining consumer confidence, apparently associated in important measure with increasing worker layoffs and growing concerns about future job prospects, had contributed to generally disappointing retail sales during the holiday season. There was some evidence that sales had stabilized and possibly risen slightly in January, though a part of the improvement could reflect steep price discounts for the purpose of reducing inventories. Other negative factors cited by the members included the adverse wealth effects of the decrease in stock market valuations, relatively high consumer debt service burdens, and possible retrenchment by consumers after an extended period of large increases in purchases and related buildups of consumer durables. Nonetheless, in the absence of possible developments leading to further deterioration in consumer sentiment, the members saw reasonable prospects for strengthening consumer spending this year even assuming some decline in such expenditures relative to income. An important factor in this outlook was the expectation of some reduction in energy prices, which would boost disposable incomes available for non-energy expenditures and likely provide a fillip to consumer sentiment in the process. Moreover, with the relatively high rate of growth in structural productivity showing little or no signs of waning, the longer-run prospects for household incomes remained positive. On balance, the various factors weighing on the outlook for consumer spending later this year seemed favorable, though substantial downside risks clearly would persist for some interim period of uncertain duration. The depressing effects of lagging final sales on business investment spending, notably for equipment and software, were reinforced by deterioration in the financial balance sheets of some business firms, tighter supply conditions in segments of the credit markets, and a buildup in excess capacity that had eroded profitability. In this regard, members referred to earlier unsustainable rates of investment by many high-tech firms that were now obliged to retrench despite still high rates of growth in the demand for their products and services. With regard to the nonresidential construction sector, members provided anecdotal reports of continued high levels of activity in several parts of the country and little evidence of the substantial overbuilding that had characterized the construction industry in earlier periods of developing economic weakness. On balance, while the business investment outlook seemed vulnerable to somewhat greater than projected weakness in the short run, the members were persuaded that, against the background of large continuing gains in structural productivity and cost savings from further investment in equipment and software, business firms were likely to accelerate their spending for new capital after a period of adjustment. Concerning the outlook for housing activity, recent statistical and anecdotal reports indicated that housing sales and construction were being well maintained and indeed were a bright spot in several regions. Reduced mortgage interest rates appeared to be largely offsetting the marked decline in consumer confidence. Accordingly, and contrary to the experience in earlier periods of softening economic activity, the stabilization of housing activity at a pace near its current fairly high level was seen as a reasonable expectation. The outlook for inventory investment was more uncertain. The drop in final sales during late 2000 evidently was much faster than generally expected, and inventories rose considerably over the fourth quarter as a whole despite sharp downward adjustments in manufacturing output. In keeping with just-in-time inventory policies, which had been furthered in recent years by advances in technology that allowed faster and more complete readings on sales and adjustments in orders, efforts to reduce inventories were continuing in recent weeks and net inventory liquidation was anticipated in the current quarter. Looking further ahead, a number of members commented that they expected a period of inventory correction that would be relatively sharp but short by historical standards. Improvements in inventory management and related indications that inventory overhangs were small compared to earlier historical experience were factors in this assessment. At the same time, members recognized that the inventory correction had just begun and its duration would depend importantly on the ongoing strength of final sales. In this regard, developments bearing on business and consumer confidence and willingness to spend would play a crucial, though at this point uncertain, role. Members expressed some divergence of views regarding the outlook for foreign economic activity and the implications for the domestic economy. Some emphasized that most of the nation's important trading partners had growing economies that were likely to provide support for expanding U.S. exports. Other members were concerned about indications of growing weakness in a number of foreign economies that might increasingly inhibit U.S. exports and add to competitive pressures on U.S. producers in domestic markets. The large current account deficit was seen as a factor pointing to potential depreciation of the dollar over time, with adverse repercussions on domestic inflation albeit favorable effects on exports. In their comments about the outlook for inflation, members noted that current indicators continued on the whole to point to subdued price increases, with lagging demand and strong competitive pressures in many markets severely limiting the ability of business firms to raise their prices. Labor markets were described as still tight across the nation, but reports of layoffs in specific industries were increasing and numerous business contacts indicated that openings were now much easier to fill in many job markets. There were some related indications that wage pressures might be easing. Against the background of a sluggish economy in the near term and forecasts of only moderate economic growth, the members anticipated that inflation would remain contained over the forecast horizon. A key factor in this assessment continued to be their outlook for rapid further gains in structural productivity that would help to hold down increases in unit labor costs. Other factors included the prospect of some decline in energy prices and the persistence of generally benign inflation expectations. On balance, with pressures in labor and product markets ebbing, the outlook for inflation was a source of diminished though persisting concern. In the Committee's discussion of policy for the intermeeting period ahead, all the members endorsed a proposal calling for a further easing in reserve conditions consistent with a 50 basis point decrease in the federal funds rate to a level of 5-1/2 percent. Such a policy move in conjunction with the 50 basis point reduction in early January would represent a relatively aggressive policy adjustment in a short period of time, but the members agreed on its desirability in light of the rapid weakening in the economic expansion in recent months and associated deterioration in business and consumer confidence. The extent and duration of the current economic correction remained uncertain, but the stimulus provided by the Committee's policy easing actions would help guard against cumulative weakness in economic activity and would support the positive factors that seemed likely to promote recovery later in the year. Several members observed that the evolving nature of the domestic economy, including the ongoing improvements in inventory management and the increase in managerial flexibility to alter the level and mix of capital equipment, associated in part with the greater availability of information, appeared to have fostered relatively prompt adjustments by businesses to changing economic conditions. As a consequence, monetary policy reactions to shifts in economic trends needed in this view to be undertaken more aggressively and completed sooner than in the past. In current circumstances, members saw little inflation risk in such a "front-loaded" easing policy, given the reduced pressures on resources stemming from the sluggish performance of the economy and relatively subdued expectations of inflation. All the members agreed that the balance of risks sentence in the press statement to be released shortly after this meeting should continue to indicate that the risks would remain tilted toward economic weakness even after today's easing action. The members saw substantial underlying strength and resilience in the economy and they remained optimistic about its prospects beyond the near term in light of the monetary policy stimulus that was being implemented and the persistence of rapid advances in productivity. In this regard, some members commented that the upside risks could not be totally dismissed. But with the adjustments to the stock of capital, consumer durable goods, and inventories to more sustainable levels likely only partly completed and with investors in financial markets remaining skittish, the risks that growth would persist below that of the economy's productivity-enhanced potential continued to dominate the outlook. 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 reducing the federal funds rate to an average of around 5-1/2 percent. The vote 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 economic weakness in the foreseeable future. Votes for this action: Messrs. Greenspan, McDonough, Ferguson, Gramlich, Hoenig, Kelley, Meyer, Minehan, Moskow, and Poole. Vote against this action: None. By notation vote completed on March 15, 2001, the Federal Open Market Committee voted unanimously to select Dino Kos as Manager for Domestic and Foreign Operations of the System Open Market Account to serve in that capacity until the first regularly scheduled meeting after December 31, 2001, subject to the understanding that in the event of the discontinuance of his official connection with the Federal Reserve Bank of New York he would cease to have any official connection with the Federal Open Market Committee. It also was understood that this selection needed to be satisfactory to the Federal Reserve Bank New York. Advice subsequently was received that the selection of Mr. Kos as Manager was satisfactory to the board of directors of that Bank. It was agreed that the next meeting of the Committee would be held on Tuesday, March 20, 2001. The meeting adjourned at 10:50 a.m. on January 31, 2001. Donald L. Kohn SecretaryAlan Greenspan Chairman William J. McDonough Vice Chairman Donald L. Kohn Secretary and Economist Normand R. V. Bernard Deputy Secretary Lynn S. Fox and Gary P. Gillum Assistant Secretaries J. Virgil Mattingly, Jr. General Counsel Thomas C. Baxter, Jr. Deputy General Counsel Karen H. Johnson and David J. Stockton Economists Christine M. Cumming, Jeffrey C. Fuhrer, Craig S. Hakkio, William C. Hunter, David H. Howard, David E. Lindsey, Robert H. Rasche, Vincent R. Reinhart, and Lawrence Slifman Associate EconomistsForeign bank Amount of arrangement (millions of dollars equivalent) Bank of Canada 2,000 Bank of Mexico 3,000Footnotes 1 Attended Tuesday session only. 2 Attended portion of meeting relating to a staff study of the Federal Reserve asset portfolio. 3 Attended Wednesday session only.

2001-01-31

Statement

The Federal Open Market Committee at its meeting today decided to lower its target for the federal funds rate by 50 basis points to 5-1/2 percent. In a related action, the Board of Governors approved a 50 basis point reduction in the discount rate to 5 percent. Consumer and business confidence has eroded further, exacerbated by rising energy costs that continue to drain consumer purchasing power and press on business profit margins. Partly as a consequence, retail sales and business spending on capital equipment have weakened appreciably. In response, manufacturing production has been cut back sharply, with new technologies appearing to have accelerated the response of production and demand to potential excesses in the stock of inventories and capital equipment. Taken together, and with inflation contained, these circumstances have called for a rapid and forceful response of monetary policy. The longer-term advances in technology and accompanying gains in productivity, however, exhibit few signs of abating and these gains, along with the lower interest rates, should support growth of the economy over time. Nonetheless, the Committee continues to believe that against the background of its long-run goals of price stability and sustainable economic growth and of the information currently available, the risks are weighted mainly toward conditions that may generate economic weakness in the foreseeable future. In taking the discount rate action, the Federal Reserve Board approved requests submitted by the Boards of Directors of the Federal Reserve Banks of New York, Philadelphia, Cleveland, Atlanta, Chicago, St. Louis, Minneapolis, Dallas and San Francisco.

2001-01-03

Statement

The Federal Open Market Committee decided today to lower its target for the federal funds rate by 50 basis points to 6 percent. In a related action, the Board of Governors approved a 25-basis-point decrease in the discount rate to 5-3/4 percent, the level requested by seven Reserve Banks. The Board also indicated that it stands ready to approve a further reduction of 25 basis points in the discount rate to 5-1/2 percent on the requests of Federal Reserve Banks. These actions were taken in light of further weakening of sales and production, and in the context of lower consumer confidence, tight conditions in some segments of financial markets, and high energy prices sapping household and business purchasing power. Moreover, inflation pressures remain contained. Nonetheless, to date there is little evidence to suggest that longer-term advances in technology and associated gains in productivity are abating. The Committee continues to believe that, against the background of its long-run goals of price stability and sustainable economic growth and of the information currently available, the risks are weighted mainly toward conditions that may generate economic weakness in the foreseeable future. In taking the discount rate action, the Federal Reserve Board approved requests submitted by the Boards of Directors of the Federal Reserve Banks of New York, Cleveland, Atlanta, St. Louis, Kansas City, Dallas and San Francisco.

N/A

Minute

Minutes of the Federal Open Market Committee December 19, 2000 A meeting of the Federal Open Market Committee was held in the offices of the Board of Governors of the Federal Reserve System in Washington, D.C., on Tuesday, December 19, 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. ParryMr. 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. Gillum, Assistant Secretary Mr. Mattingly, General Counsel Mr. Baxter, Deputy 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 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. Lyon, First Vice President, Federal Reserve Bank of Minneapolis Ms. Browne, Messrs. Hakkio, Hunter, Kos, Ms. Mester, Messrs. Rolnick and Rosenblum, Senior Vice Presidents, Federal Reserve Banks of Boston, Kansas City, Chicago, New York, Philadelphia, Minneapolis, and Dallas respectively Messrs. Cunningham and Gavin, Vice Presidents, Federal Reserve Banks of Atlanta and St. Louis respectivelyBy unanimous vote, the minutes of the meeting of the Federal Open Market Committee held on November 15, 2000, were approved. The Manager reported on developments in domestic financial markets and on System open market transactions in government securities and federal agency obligations during the period November 15, 2000, through December 18, 2000. By unanimous vote, the Committee ratified these transactions. The Manager of the System Open Market Account also 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 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 provided evidence that economic activity, which had expanded at an appreciably lower pace since midyear, might have slowed further in recent months. Consumer spending and business purchases of equipment and software had decelerated markedly after having registered extraordinary gains in the first half of the year. Housing construction, though still relatively firm, was noticeably below its robust pace of earlier in the year. With final spending rising at a reduced rate, inventory overhangs had emerged in a number of goods-producing industries, most visibly in the motor vehicle sector. Manufacturing production had declined as a consequence, and the rate of expansion in employment had moderated further. Evidence on core price inflation was mixed; by one measure, it appeared to be increasing very gradually, in part reflecting the indirect effects of higher energy costs, but by another it had remained at a relatively subdued level. Growth in private nonfarm payroll employment moderated a little further on balance in October and November. Manufacturing payrolls changed little over the two months, and job gains in the construction, retail trade, and services industries were smaller than those of earlier in the year. By contrast, the pace of hiring remained relatively brisk in the finance, insurance, and real estate sectors. With growth in the demand for labor slowing, initial claims for unemployment insurance continued to trend upward, and the civilian unemployment rate edged up to 4 percent in November, its average thus far this year. Industrial production declined slightly in October and November following a moderate third-quarter increase that was well below the pace of expansion recorded during the first half of the year. Utilities output surged in November in response to unseasonably cold weather across much of the country while mining activity changed little. In manufacturing, motor vehicle output was scaled back further in November, and there also were widespread declines in industries not directly affected by conditions in the motor vehicle sector. Although the production of high-tech equipment was still trending up, growth continued to slow from the extraordinarily rapid increases of earlier in the year. The weakening of factory output in November was reflected in a further decline in the rate of capacity utilization in manufacturing to a point somewhat below its long-term average. Consumer spending appeared to be decelerating noticeably further in the fourth quarter in an environment of diminished consumer confidence, smaller job gains, and lower stock prices. Retail sales were down somewhat on balance in October and November after a substantial third-quarter increase; sales of light vehicles dropped over the two months, and growth in expenditures on other consumer goods slowed. Outlays on services continued to grow at a moderate rate through October (latest data). Against the backdrop of declining interest rates on fixed-rate mortgages, residential building activity had leveled out since midyear, and October starts remained at the third-quarter level. Sales of new homes edged down in October, though they were still slightly above their third-quarter level; sales of existing homes slipped somewhat in October but were near the middle of their range over the past year. In the multifamily sector, starts moved up slightly further in October, though they remained appreciably below their elevated level during the first half of the year. Continuing relatively low vacancy rates for multifamily units suggested that the prospects for additional construction were favorable. Business investment in equipment and software increased at a sharply lower, though still relatively robust, rate in the third quarter, and information on shipments of nondefense capital goods indicated another moderate increase in business investment in October. Shipments of communications, computing, and office equipment were well above their third-quarter averages, and shipments of non-high-tech equipment turned up in October after having fallen appreciably in earlier months. On the downside, sales of medium and heavy trucks declined further over October and November, and new orders for such trucks remained weak. Investment in nonresidential structures continued to rise briskly in October, and all the major subcategories of construction put in place were up substantially on a year-over-year basis. Market fundamentals, including rising property values and low vacancy rates, suggested that further expansion of nonresidential building activity, particularly office construction, was likely. Inventory investment on a book-value basis picked up in October from the third-quarter pace, and the aggregate inventory-sales ratio edged up to its highest level in the past twelve months. In manufacturing, sizable increases in stocks were led by large accumulations at producers of industrial and electrical machinery. As a result, the stock-sales ratio for manufacturing reached its highest level in a year; advances in stock-sales ratios were widespread among makers of durable goods while ratios remained high for a number of categories of nondurable products. At the wholesale level, inventory accumulation inched up from its third-quarter rate, and the sector's inventory-sales ratio was at the top of its range for the past twelve months. Total retail stocks rose in line with sales in October, and the inventory-sales ratio for this sector also remained at the upper end of its range over the past year. The U.S. trade deficit in goods and services reached a new record high in September and on a quarterly average basis was up appreciably further in the third quarter. The value of exports continued to grow strongly in the latest quarter, led by advances in exported machinery and industrial supplies. The value of imports rose at an even faster rate than exports, with increases in all major trade categories, especially industrial supplies, semiconductors, and services. Economic growth in the foreign industrial countries slowed moderately in the third quarter, and the available information suggested a further reduction in the fourth quarter. Economic expansion eased in the euro area despite continued strong growth of investment and exports, as consumer spending appeared to be damped by earlier interest rate increases and by the drain on spendable income of higher prices for oil and imported goods more generally. In addition, weak consumption appeared to be an important factor in continued sluggish economic growth in Japan. Economic activity also decelerated in some developing countries in the third quarter, with recent indicators suggesting a slowdown in expansion in many parts of East Asia. Incoming data indicated that, on balance, price inflation had picked up only a little, if at all. Consumer prices, as measured by the consumer price index (CPI) on a total and a core basis, rose mildly in October and November after a sizable September increase, but on a year-over-year basis core CPI prices increased noticeably more in the twelve months ended in November than in the previous twelve-month period. When measured by the personal consumption expenditure (PCE) chain-type index, however, consumer price inflation was modest in both October (latest data) and the twelve months ended in October, with little change year over year. At the producer level, core prices edged down on balance in October and November; moreover, producer inflation eased somewhat on a year-over-year basis, though the deceleration was more than accounted for by an earlier surge in tobacco prices during the year ended in November 1999. With regard to labor costs, average hourly earnings of production or nonsupervisory workers increased in November at the slightly higher rate recorded in October. For the twelve months ended in October, average hourly earnings rose somewhat more than in the previous twelve months. At its meeting on November 15, 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 despite clear indications of a more moderate expansion in economic activity, persisting risks of heightened inflation pressures remained a concern, particularly in the context of a gradual upward trend in core inflation. In these circumstances, a steady monetary policy was the best means to promote price stability and sustainable economic expansion. While recognizing that growth was slowing more than had been anticipated and that developments might be moving in a direction that would require a shift to a balanced risk statement, members agreed that such a change would be premature. 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 throughout the intermeeting period were directed 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. Against the background of deteriorating conditions in some segments of financial markets, slower economic expansion, and public comments by Federal Reserve officials about the implications of those developments, market expectations about the future course of the federal funds rate were revised down appreciably over the intermeeting period, and market interest rates on Treasury and private investment-grade securities declined somewhat over the intermeeting interval. The weaker outlook for economic growth, coupled with growing market concerns about corporate earnings, weighed down equity prices and boosted risk spreads on lower-rated investment-grade and high-yield bonds. Equity prices were quite volatile during the intermeeting period and, reflecting numerous dour reports on corporate earnings and incoming information indicating slower growth in economic activity in the United States, broad indexes of stock market prices dropped considerably on balance over the intermeeting period. In foreign exchange markets, the trade-weighted value of the dollar edged lower 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 fell moderately against the euro but moved up to a roughly comparable extent in terms of the yen. The dollar's decline against the euro reflected a growing perception that economic expansion in the euro area would cool comparatively less than in the United States. Correspondingly, the slide of the yen seemed to be related to weak economic data, stagnant business sentiment, and political uncertainties in Japan. The dollar posted a small gain against an index of the currencies of other important trading partners, largely reflecting weaker financial conditions in some emerging economies. The broad monetary aggregates decelerated further in November. The slowing growth of M2 in October and November following strong expansion in August and September apparently reflected the moderating rates of increase in nominal income and spending in recent months and perhaps some persisting effects of the rise in opportunity costs earlier in the year. M3 growth slowed less than that of M2 in November, in part because of stepped-up issuance of large time deposits as banks reduced their reliance on funding from overseas offices. The growth of domestic nonfinancial debt slowed in October (latest data), reflecting a larger further paydown of federal debt and a reduced pace of private borrowing. The staff forecast prepared for this meeting suggested that the economic expansion had slowed considerably, to a rate somewhat below the staff's current estimate of the growth of the economy's potential output, but that it would gradually gain strength over the next two years. The forecast anticipated that the expansion of domestic final demand would be held back to some extent by the diminishing influence of the wealth effects associated with past outsized gains in equity prices but also by the relatively high interest rates and the somewhat stringent credit terms and conditions on some types of loans by financial institutions. As a result, growth of spending on consumer durables was expected to be appreciably below that in recent quarters, and housing demand to be slightly weaker. Business fixed investment, notably outlays for equipment and software, was projected to remain relatively robust; growth abroad would support the expansion of U.S. exports; and fiscal policy was assumed to continue its moderate expansionary trend. Core price inflation was projected to rise only slightly over the forecast horizon, partly as a result of higher import prices but also as a consequence of some further increases in nominal labor compensation gains that would not be fully offset by the expected growth of productivity. In the Committee's discussion of current and prospective economic developments, members commented that recent statistical and anecdotal information provided clear indications of significant slowing in the expansion of business activity and also pointed to appreciable erosion in business and consumer confidence. The deceleration in the economy had occurred from an unsustainably high growth rate in the first half of the year, and the resulting containment in demand pressures on resources already had improved the outlook for inflation. The question at this juncture was whether the expansion would remain near its recent pace or continue to moderate. While the former still seemed to be the most likely outcome, the very recent information on labor markets, sales and production, business and consumer confidence, developments in financial markets, and growth in foreign economies suggested that the risks to the economy had shifted rapidly and perceptibly to the downside. Concerning the outlook for inflation, members commented that the upside risks clearly had diminished in the wake of recent developments and that, with pressures on resources likely to abate at least a little, subdued inflation was a reasonable prospect. Weakening trends in production and employment were most apparent in the manufacturing sector. There were widespread anecdotal reports of production cutbacks, notably in industries related to motor vehicles, and of associated declines in manufacturing employment. However, many of the factory workers losing their jobs were readily finding employment elsewhere in what generally continued to be characterized as very tight labor markets across the country. The softening in manufacturing reflected weak sales and prompt efforts to limit unwanted buildups in inventories. Even so, business contacts reported currently undesired levels of inventories in a range of industries, not only in motor vehicles. In the aggregate, cutbacks in inventory investment or runoffs of existing inventories accounted for a significant part of the recent moderation in the growth of the overall economy. The slowing in the growth of consumer spending that had prompted much of the backup in inventories was evident from a wide variety of information, including anecdotal reports from various parts of the country. Consumer sentiment seemed to have deteriorated appreciably in recent weeks, though from a very high level, and retail sales were widely indicated to have softened after a promising spurt early in the holiday season. Factors cited to account for the relatively sudden emergence of this weakness, and also as possible harbingers of developments in coming quarters, were the negative wealth effects of further declines in stock market prices, the impact of very high energy costs on disposable incomes, and some increase in caution about the outlook for employment opportunities and incomes. The extent to which such developments would persist and perhaps foster more aggressive retrenchment in consumer spending clearly was uncertain, but the members nonetheless anticipated that over time underlying employment and income trends would be consistent with further expansion in consumer expenditures, though at a pace well below that of earlier in the year. Growth in business expenditures for equipment and software had moderated substantially in recent months from very high rates of increase over an extended period. The slowdown reflected a mix of interrelated developments including flagging growth in demand and tightening financial conditions in the form of declining equity prices and stricter credit terms for many business borrowers. The re-evaluation of prospects was most pronounced in the high-tech industries. The profitability of using and producing such software and equipment had been overestimated to a degree, and disappointing sales and a better appreciation of risks had resulted in much slower growth in production of such equipment and sharp deterioration in the equity prices of high-tech companies. At the same time, nonresidential construction activity appeared to have been well maintained in many parts of the country, though there were reports of softening in some regions and of some reductions or delays in planned projects. Against this background, risks of further retrenchment in capital spending persisted, but to date there was no evidence to suggest that the underlying pace of advances in technology and related productivity growth had abated. Over time, further increases in productivity would undergird continuing growth in demand for high-tech equipment. In the nonresidential construction area, members noted that high occupancy rates and high rents were supportive elements in the construction outlook. With regard to the prospects for housing activity, members provided anecdotal reports of some softening in a number of regions, though homebuilding was holding up well in others. Housing demand was, of course, responding to many of the same factors that were affecting consumer spending, including the negative wealth effects of declining stock market prices. On the positive side, further growth in incomes and declines in mortgage rates were key elements of underlying strength for the housing sector. On balance, housing construction at a pace near current levels appeared to be a reasonable prospect in association with forecasts of moderate growth in the overall economy. Growth in foreign economic activity likely would continue to foster expansion in U.S. exports, though members noted that there were signs of softer business conditions in some foreign nations. In addition, members referred to some anecdotal evidence of increasing concern among business contacts about future prospects for exports of manufactured goods. On the other hand, any depreciation in the foreign exchange value of the dollar as the economy slowed would help to bolster exports. Against the backdrop of slowing economic growth, core inflation had remained quiescent. Views regarding the outlook for inflation were somewhat mixed, though all the members agreed that the risks of higher inflation had diminished materially. Nonetheless, some members noted that while recent anecdotal reports pointed to a modest reduction in labor market strains in some areas and industries, labor markets in general were still very tight and likely would remain taut relative to historical experience. In such circumstances, if structural productivity growth leveled out, worker efforts to catch up to past increases in productivity could put pressures on labor compensation costs. The latter could well be augmented by sharply rising medical costs and by attempts to protect the purchasing power of wages from the erosion caused by the rise in energy prices. Further depreciation of the dollar in relation to major foreign currencies would add to import prices and domestic inflation pressures. But there were also a number of reasons for optimism about the outlook for consumer prices over coming quarters. Growth in economic activity at a pace somewhat below that of the economy's output potential would lessen pressures on labor and other resources from levels that had, in the past few years, been associated with at most a small uptick in core inflation. Indications that rapid growth in structural productivity would persist and widespread reports that strong competitive pressures in most markets continued to inhibit business efforts to increase prices in the face of rising costs also were favorable factors in the outlook. Further declines in oil prices, as evidenced by quotations in futures markets, would if realized have effects not only on so-called headline inflation but would help hold down core prices over time. Despite previous increases in headline inflation, survey and other measures of inflation expectations continued to suggest that long-run inflation expectations had not risen and might even have fallen a bit of late as the economy softened. In the Committee's discussion of policy for the intermeeting period ahead, all the members indicated that they could support an unchanged policy stance, consistent with a federal funds rate averaging about 6-1/2 percent. However, they also endorsed a proposal calling for a shift in the balance of risks statement to be issued after this meeting to express the view that most members believed the risks were now weighted toward conditions that could generate economic weakness in the foreseeable future. In their evaluation of the appropriate policy for these changing circumstances, the members agreed that the critical issue was whether the expansion would stabilize near its recent growth rate or was continuing to slow. In the view of almost all the members, the currently available information bearing on this issue was not sufficient to warrant an easing at this point. Much of the usual aggregative data on spending and employment, although to be sure available only with a lag, continued to suggest moderate economic expansion. The information pointing to further weakness was very recent and to an important extent anecdotal. As a consequence, most of the members were persuaded that a prudent policy course would be to await further confirmation of a weakening expansion before easing, particularly in light of the high level of resource utilization and the experience of recent years when several lulls in the growth of the economy had been followed by a resumption of very robust economic expansion. Additional evidence of slowing economic growth might well materialize in the weeks immediately ahead--from the regular aggregated monthly data releases, but also from weekly readings on the labor market and reports from businesses on the strength of sales and production--and the members agreed that the Committee should be prepared to respond promptly to indications of further weakness in the economy. Those few members who expressed a preference for easing at this meeting believed that, with unit labor costs and inflation expectations contained, enough evidence of further weakness already existed to warrant an immediate action. Nonetheless, they could accept a delay in light of prevailing uncertainties about the prospective performance of the economy and the intention of the Committee to act promptly in coming weeks, including the possibility of an easing move early in the intermeeting period, should confirming information on weakening trends in the economy emerge. With regard to the consensus in favor of moving from an assessment of risks weighted toward rising inflation to one that was weighted toward economic weakness, with no intermediate issuance of a balanced risks assessment, some members observed that such a change was likely to be viewed as a relatively rapid shift by some observers. The revised statement of risks, even though it would not be associated with an easing move, could strengthen expectations regarding future monetary policy easing to an extent that was difficult to predict and could generate sizable reactions in financial markets. At the same time, it might raise questions about why the Committee did not alter the stance of policy. Nonetheless, the Committee's reasons for not easing today were deemed persuasive by most members, while shifting its statement about economic risks seemed clearly justified by recent developments. In one view, even though the risks of a weakening economy had increased, a statement of balanced risks would be preferable because further moderation in the expansion might well fail to materialize. 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 economic weakness 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. This meeting adjourned at 1:35 p.m. with the understanding that the next regularly scheduled meeting of the Committee would be held on Tuesday-Wednesday, January 30-31, 2001. Telephone Conference Meeting A telephone conference meeting was held on January 3, 2001, for the purpose of considering a policy easing action. In keeping with the Committee's Rules of Organization, the members at the start of the meeting unanimously re-elected Alan Greenspan as Chairman of the Federal Open Market Committee and William J. McDonough as Vice Chairman. Their terms of office were extended for one year until the first meeting of the Committee after December 31, 2001. By unanimous vote, the Federal Reserve Bank of New York was selected to execute transactions for the System Open Market Account until the adjournment of the first meeting of the Committee after December 31, 2001. At its meeting on December 19, 2000, the Committee had contemplated the possibility that ongoing economic and financial developments might warrant a reassessment of the stance of monetary policy prior to the next scheduled meeting in late January. Information that had become available since the December meeting tended to confirm that the economic expansion had continued to weaken. The manufacturing sector was especially soft, reflecting apparent efforts in a number of industries to readjust inventories that were now deemed to be too high, notably those related to motor vehicles. Retail sales were appreciably below business expectations for the holiday season despite some pickup in the latter half of December, apparently largely induced by price discounting, and sales of motor vehicles evidenced significant further weakness as the month progressed. Business confidence appeared to have deteriorated further since the December meeting amid widespread reports of reductions in planned production and capital spending. Elevated energy costs were continuing to drain consumer purchasing power and were adding to the costs of many business firms, with adverse effects on profits and stock market valuations. Interacting with these developments were forecasts of further declines in business profits over coming quarters. On the more positive side, housing activity appeared to be responding to lower mortgage interest rates, and on the whole nonresidential construction activity seemed to be reasonably well maintained. Moreover, while the expansion had weakened and economic activity might remain soft in the near term, the longer-term outlook for reasonably sustained economic expansion, supported by easier financial conditions and the response of investment and consumption to rising productivity and living standards, was still quite good. Inflation expectations appeared to be declining, with businesses continuing to encounter marked and even increased resistance to their efforts to raise prices. On balance, the information already in hand indicated that the expansion clearly was weakening and by more than had been anticipated. In the circumstances, prompt and forceful policy action sooner and larger than expected by financial markets seemed called for. Against this background, all the members supported a proposal for an easing of reserve conditions consistent with a reduction of 50 basis points in the federal funds rate to a level of 6 percent. 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 a reduction in the federal funds rate to an average of around 6 percent. The vote 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 economic weakness in the foreseeable future. Votes for this action: Messrs. Greenspan, McDonough, Ferguson, Gramlich, Hoenig, Kelley, Meyer, Minehan, Moskow, and Poole. Votes against this action: None. Chairman Greenspan indicated that shortly after this meeting the Board of Governors would consider pending requests by several Federal Reserve Banks to reduce the discount rate by 25 basis points. At the time of this conference call meeting, no pending requests for a 50 basis point reduction were outstanding, but the press release would indicate that the Board would be prepared to consider requests for further reductions of 25 basis points if they were received. Donald L. Kohn Secretary

2001-02-01

Minute

Minutes of the Federal Open Market Committee December 19, 2000 A meeting of the Federal Open Market Committee was held in the offices of the Board of Governors of the Federal Reserve System in Washington, D.C., on Tuesday, December 19, 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. ParryMr. 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. Gillum, Assistant Secretary Mr. Mattingly, General Counsel Mr. Baxter, Deputy 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 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. Lyon, First Vice President, Federal Reserve Bank of Minneapolis Ms. Browne, Messrs. Hakkio, Hunter, Kos, Ms. Mester, Messrs. Rolnick and Rosenblum, Senior Vice Presidents, Federal Reserve Banks of Boston, Kansas City, Chicago, New York, Philadelphia, Minneapolis, and Dallas respectively Messrs. Cunningham and Gavin, Vice Presidents, Federal Reserve Banks of Atlanta and St. Louis respectivelyBy unanimous vote, the minutes of the meeting of the Federal Open Market Committee held on November 15, 2000, were approved. The Manager reported on developments in domestic financial markets and on System open market transactions in government securities and federal agency obligations during the period November 15, 2000, through December 18, 2000. By unanimous vote, the Committee ratified these transactions. The Manager of the System Open Market Account also 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 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 provided evidence that economic activity, which had expanded at an appreciably lower pace since midyear, might have slowed further in recent months. Consumer spending and business purchases of equipment and software had decelerated markedly after having registered extraordinary gains in the first half of the year. Housing construction, though still relatively firm, was noticeably below its robust pace of earlier in the year. With final spending rising at a reduced rate, inventory overhangs had emerged in a number of goods-producing industries, most visibly in the motor vehicle sector. Manufacturing production had declined as a consequence, and the rate of expansion in employment had moderated further. Evidence on core price inflation was mixed; by one measure, it appeared to be increasing very gradually, in part reflecting the indirect effects of higher energy costs, but by another it had remained at a relatively subdued level. Growth in private nonfarm payroll employment moderated a little further on balance in October and November. Manufacturing payrolls changed little over the two months, and job gains in the construction, retail trade, and services industries were smaller than those of earlier in the year. By contrast, the pace of hiring remained relatively brisk in the finance, insurance, and real estate sectors. With growth in the demand for labor slowing, initial claims for unemployment insurance continued to trend upward, and the civilian unemployment rate edged up to 4 percent in November, its average thus far this year. Industrial production declined slightly in October and November following a moderate third-quarter increase that was well below the pace of expansion recorded during the first half of the year. Utilities output surged in November in response to unseasonably cold weather across much of the country while mining activity changed little. In manufacturing, motor vehicle output was scaled back further in November, and there also were widespread declines in industries not directly affected by conditions in the motor vehicle sector. Although the production of high-tech equipment was still trending up, growth continued to slow from the extraordinarily rapid increases of earlier in the year. The weakening of factory output in November was reflected in a further decline in the rate of capacity utilization in manufacturing to a point somewhat below its long-term average. Consumer spending appeared to be decelerating noticeably further in the fourth quarter in an environment of diminished consumer confidence, smaller job gains, and lower stock prices. Retail sales were down somewhat on balance in October and November after a substantial third-quarter increase; sales of light vehicles dropped over the two months, and growth in expenditures on other consumer goods slowed. Outlays on services continued to grow at a moderate rate through October (latest data). Against the backdrop of declining interest rates on fixed-rate mortgages, residential building activity had leveled out since midyear, and October starts remained at the third-quarter level. Sales of new homes edged down in October, though they were still slightly above their third-quarter level; sales of existing homes slipped somewhat in October but were near the middle of their range over the past year. In the multifamily sector, starts moved up slightly further in October, though they remained appreciably below their elevated level during the first half of the year. Continuing relatively low vacancy rates for multifamily units suggested that the prospects for additional construction were favorable. Business investment in equipment and software increased at a sharply lower, though still relatively robust, rate in the third quarter, and information on shipments of nondefense capital goods indicated another moderate increase in business investment in October. Shipments of communications, computing, and office equipment were well above their third-quarter averages, and shipments of non-high-tech equipment turned up in October after having fallen appreciably in earlier months. On the downside, sales of medium and heavy trucks declined further over October and November, and new orders for such trucks remained weak. Investment in nonresidential structures continued to rise briskly in October, and all the major subcategories of construction put in place were up substantially on a year-over-year basis. Market fundamentals, including rising property values and low vacancy rates, suggested that further expansion of nonresidential building activity, particularly office construction, was likely. Inventory investment on a book-value basis picked up in October from the third-quarter pace, and the aggregate inventory-sales ratio edged up to its highest level in the past twelve months. In manufacturing, sizable increases in stocks were led by large accumulations at producers of industrial and electrical machinery. As a result, the stock-sales ratio for manufacturing reached its highest level in a year; advances in stock-sales ratios were widespread among makers of durable goods while ratios remained high for a number of categories of nondurable products. At the wholesale level, inventory accumulation inched up from its third-quarter rate, and the sector's inventory-sales ratio was at the top of its range for the past twelve months. Total retail stocks rose in line with sales in October, and the inventory-sales ratio for this sector also remained at the upper end of its range over the past year. The U.S. trade deficit in goods and services reached a new record high in September and on a quarterly average basis was up appreciably further in the third quarter. The value of exports continued to grow strongly in the latest quarter, led by advances in exported machinery and industrial supplies. The value of imports rose at an even faster rate than exports, with increases in all major trade categories, especially industrial supplies, semiconductors, and services. Economic growth in the foreign industrial countries slowed moderately in the third quarter, and the available information suggested a further reduction in the fourth quarter. Economic expansion eased in the euro area despite continued strong growth of investment and exports, as consumer spending appeared to be damped by earlier interest rate increases and by the drain on spendable income of higher prices for oil and imported goods more generally. In addition, weak consumption appeared to be an important factor in continued sluggish economic growth in Japan. Economic activity also decelerated in some developing countries in the third quarter, with recent indicators suggesting a slowdown in expansion in many parts of East Asia. Incoming data indicated that, on balance, price inflation had picked up only a little, if at all. Consumer prices, as measured by the consumer price index (CPI) on a total and a core basis, rose mildly in October and November after a sizable September increase, but on a year-over-year basis core CPI prices increased noticeably more in the twelve months ended in November than in the previous twelve-month period. When measured by the personal consumption expenditure (PCE) chain-type index, however, consumer price inflation was modest in both October (latest data) and the twelve months ended in October, with little change year over year. At the producer level, core prices edged down on balance in October and November; moreover, producer inflation eased somewhat on a year-over-year basis, though the deceleration was more than accounted for by an earlier surge in tobacco prices during the year ended in November 1999. With regard to labor costs, average hourly earnings of production or nonsupervisory workers increased in November at the slightly higher rate recorded in October. For the twelve months ended in October, average hourly earnings rose somewhat more than in the previous twelve months. At its meeting on November 15, 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 despite clear indications of a more moderate expansion in economic activity, persisting risks of heightened inflation pressures remained a concern, particularly in the context of a gradual upward trend in core inflation. In these circumstances, a steady monetary policy was the best means to promote price stability and sustainable economic expansion. While recognizing that growth was slowing more than had been anticipated and that developments might be moving in a direction that would require a shift to a balanced risk statement, members agreed that such a change would be premature. 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 throughout the intermeeting period were directed 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. Against the background of deteriorating conditions in some segments of financial markets, slower economic expansion, and public comments by Federal Reserve officials about the implications of those developments, market expectations about the future course of the federal funds rate were revised down appreciably over the intermeeting period, and market interest rates on Treasury and private investment-grade securities declined somewhat over the intermeeting interval. The weaker outlook for economic growth, coupled with growing market concerns about corporate earnings, weighed down equity prices and boosted risk spreads on lower-rated investment-grade and high-yield bonds. Equity prices were quite volatile during the intermeeting period and, reflecting numerous dour reports on corporate earnings and incoming information indicating slower growth in economic activity in the United States, broad indexes of stock market prices dropped considerably on balance over the intermeeting period. In foreign exchange markets, the trade-weighted value of the dollar edged lower 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 fell moderately against the euro but moved up to a roughly comparable extent in terms of the yen. The dollar's decline against the euro reflected a growing perception that economic expansion in the euro area would cool comparatively less than in the United States. Correspondingly, the slide of the yen seemed to be related to weak economic data, stagnant business sentiment, and political uncertainties in Japan. The dollar posted a small gain against an index of the currencies of other important trading partners, largely reflecting weaker financial conditions in some emerging economies. The broad monetary aggregates decelerated further in November. The slowing growth of M2 in October and November following strong expansion in August and September apparently reflected the moderating rates of increase in nominal income and spending in recent months and perhaps some persisting effects of the rise in opportunity costs earlier in the year. M3 growth slowed less than that of M2 in November, in part because of stepped-up issuance of large time deposits as banks reduced their reliance on funding from overseas offices. The growth of domestic nonfinancial debt slowed in October (latest data), reflecting a larger further paydown of federal debt and a reduced pace of private borrowing. The staff forecast prepared for this meeting suggested that the economic expansion had slowed considerably, to a rate somewhat below the staff's current estimate of the growth of the economy's potential output, but that it would gradually gain strength over the next two years. The forecast anticipated that the expansion of domestic final demand would be held back to some extent by the diminishing influence of the wealth effects associated with past outsized gains in equity prices but also by the relatively high interest rates and the somewhat stringent credit terms and conditions on some types of loans by financial institutions. As a result, growth of spending on consumer durables was expected to be appreciably below that in recent quarters, and housing demand to be slightly weaker. Business fixed investment, notably outlays for equipment and software, was projected to remain relatively robust; growth abroad would support the expansion of U.S. exports; and fiscal policy was assumed to continue its moderate expansionary trend. Core price inflation was projected to rise only slightly over the forecast horizon, partly as a result of higher import prices but also as a consequence of some further increases in nominal labor compensation gains that would not be fully offset by the expected growth of productivity. In the Committee's discussion of current and prospective economic developments, members commented that recent statistical and anecdotal information provided clear indications of significant slowing in the expansion of business activity and also pointed to appreciable erosion in business and consumer confidence. The deceleration in the economy had occurred from an unsustainably high growth rate in the first half of the year, and the resulting containment in demand pressures on resources already had improved the outlook for inflation. The question at this juncture was whether the expansion would remain near its recent pace or continue to moderate. While the former still seemed to be the most likely outcome, the very recent information on labor markets, sales and production, business and consumer confidence, developments in financial markets, and growth in foreign economies suggested that the risks to the economy had shifted rapidly and perceptibly to the downside. Concerning the outlook for inflation, members commented that the upside risks clearly had diminished in the wake of recent developments and that, with pressures on resources likely to abate at least a little, subdued inflation was a reasonable prospect. Weakening trends in production and employment were most apparent in the manufacturing sector. There were widespread anecdotal reports of production cutbacks, notably in industries related to motor vehicles, and of associated declines in manufacturing employment. However, many of the factory workers losing their jobs were readily finding employment elsewhere in what generally continued to be characterized as very tight labor markets across the country. The softening in manufacturing reflected weak sales and prompt efforts to limit unwanted buildups in inventories. Even so, business contacts reported currently undesired levels of inventories in a range of industries, not only in motor vehicles. In the aggregate, cutbacks in inventory investment or runoffs of existing inventories accounted for a significant part of the recent moderation in the growth of the overall economy. The slowing in the growth of consumer spending that had prompted much of the backup in inventories was evident from a wide variety of information, including anecdotal reports from various parts of the country. Consumer sentiment seemed to have deteriorated appreciably in recent weeks, though from a very high level, and retail sales were widely indicated to have softened after a promising spurt early in the holiday season. Factors cited to account for the relatively sudden emergence of this weakness, and also as possible harbingers of developments in coming quarters, were the negative wealth effects of further declines in stock market prices, the impact of very high energy costs on disposable incomes, and some increase in caution about the outlook for employment opportunities and incomes. The extent to which such developments would persist and perhaps foster more aggressive retrenchment in consumer spending clearly was uncertain, but the members nonetheless anticipated that over time underlying employment and income trends would be consistent with further expansion in consumer expenditures, though at a pace well below that of earlier in the year. Growth in business expenditures for equipment and software had moderated substantially in recent months from very high rates of increase over an extended period. The slowdown reflected a mix of interrelated developments including flagging growth in demand and tightening financial conditions in the form of declining equity prices and stricter credit terms for many business borrowers. The re-evaluation of prospects was most pronounced in the high-tech industries. The profitability of using and producing such software and equipment had been overestimated to a degree, and disappointing sales and a better appreciation of risks had resulted in much slower growth in production of such equipment and sharp deterioration in the equity prices of high-tech companies. At the same time, nonresidential construction activity appeared to have been well maintained in many parts of the country, though there were reports of softening in some regions and of some reductions or delays in planned projects. Against this background, risks of further retrenchment in capital spending persisted, but to date there was no evidence to suggest that the underlying pace of advances in technology and related productivity growth had abated. Over time, further increases in productivity would undergird continuing growth in demand for high-tech equipment. In the nonresidential construction area, members noted that high occupancy rates and high rents were supportive elements in the construction outlook. With regard to the prospects for housing activity, members provided anecdotal reports of some softening in a number of regions, though homebuilding was holding up well in others. Housing demand was, of course, responding to many of the same factors that were affecting consumer spending, including the negative wealth effects of declining stock market prices. On the positive side, further growth in incomes and declines in mortgage rates were key elements of underlying strength for the housing sector. On balance, housing construction at a pace near current levels appeared to be a reasonable prospect in association with forecasts of moderate growth in the overall economy. Growth in foreign economic activity likely would continue to foster expansion in U.S. exports, though members noted that there were signs of softer business conditions in some foreign nations. In addition, members referred to some anecdotal evidence of increasing concern among business contacts about future prospects for exports of manufactured goods. On the other hand, any depreciation in the foreign exchange value of the dollar as the economy slowed would help to bolster exports. Against the backdrop of slowing economic growth, core inflation had remained quiescent. Views regarding the outlook for inflation were somewhat mixed, though all the members agreed that the risks of higher inflation had diminished materially. Nonetheless, some members noted that while recent anecdotal reports pointed to a modest reduction in labor market strains in some areas and industries, labor markets in general were still very tight and likely would remain taut relative to historical experience. In such circumstances, if structural productivity growth leveled out, worker efforts to catch up to past increases in productivity could put pressures on labor compensation costs. The latter could well be augmented by sharply rising medical costs and by attempts to protect the purchasing power of wages from the erosion caused by the rise in energy prices. Further depreciation of the dollar in relation to major foreign currencies would add to import prices and domestic inflation pressures. But there were also a number of reasons for optimism about the outlook for consumer prices over coming quarters. Growth in economic activity at a pace somewhat below that of the economy's output potential would lessen pressures on labor and other resources from levels that had, in the past few years, been associated with at most a small uptick in core inflation. Indications that rapid growth in structural productivity would persist and widespread reports that strong competitive pressures in most markets continued to inhibit business efforts to increase prices in the face of rising costs also were favorable factors in the outlook. Further declines in oil prices, as evidenced by quotations in futures markets, would if realized have effects not only on so-called headline inflation but would help hold down core prices over time. Despite previous increases in headline inflation, survey and other measures of inflation expectations continued to suggest that long-run inflation expectations had not risen and might even have fallen a bit of late as the economy softened. In the Committee's discussion of policy for the intermeeting period ahead, all the members indicated that they could support an unchanged policy stance, consistent with a federal funds rate averaging about 6-1/2 percent. However, they also endorsed a proposal calling for a shift in the balance of risks statement to be issued after this meeting to express the view that most members believed the risks were now weighted toward conditions that could generate economic weakness in the foreseeable future. In their evaluation of the appropriate policy for these changing circumstances, the members agreed that the critical issue was whether the expansion would stabilize near its recent growth rate or was continuing to slow. In the view of almost all the members, the currently available information bearing on this issue was not sufficient to warrant an easing at this point. Much of the usual aggregative data on spending and employment, although to be sure available only with a lag, continued to suggest moderate economic expansion. The information pointing to further weakness was very recent and to an important extent anecdotal. As a consequence, most of the members were persuaded that a prudent policy course would be to await further confirmation of a weakening expansion before easing, particularly in light of the high level of resource utilization and the experience of recent years when several lulls in the growth of the economy had been followed by a resumption of very robust economic expansion. Additional evidence of slowing economic growth might well materialize in the weeks immediately ahead--from the regular aggregated monthly data releases, but also from weekly readings on the labor market and reports from businesses on the strength of sales and production--and the members agreed that the Committee should be prepared to respond promptly to indications of further weakness in the economy. Those few members who expressed a preference for easing at this meeting believed that, with unit labor costs and inflation expectations contained, enough evidence of further weakness already existed to warrant an immediate action. Nonetheless, they could accept a delay in light of prevailing uncertainties about the prospective performance of the economy and the intention of the Committee to act promptly in coming weeks, including the possibility of an easing move early in the intermeeting period, should confirming information on weakening trends in the economy emerge. With regard to the consensus in favor of moving from an assessment of risks weighted toward rising inflation to one that was weighted toward economic weakness, with no intermediate issuance of a balanced risks assessment, some members observed that such a change was likely to be viewed as a relatively rapid shift by some observers. The revised statement of risks, even though it would not be associated with an easing move, could strengthen expectations regarding future monetary policy easing to an extent that was difficult to predict and could generate sizable reactions in financial markets. At the same time, it might raise questions about why the Committee did not alter the stance of policy. Nonetheless, the Committee's reasons for not easing today were deemed persuasive by most members, while shifting its statement about economic risks seemed clearly justified by recent developments. In one view, even though the risks of a weakening economy had increased, a statement of balanced risks would be preferable because further moderation in the expansion might well fail to materialize. 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 economic weakness 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. This meeting adjourned at 1:35 p.m. with the understanding that the next regularly scheduled meeting of the Committee would be held on Tuesday-Wednesday, January 30-31, 2001. Telephone Conference Meeting A telephone conference meeting was held on January 3, 2001, for the purpose of considering a policy easing action. In keeping with the Committee's Rules of Organization, the members at the start of the meeting unanimously re-elected Alan Greenspan as Chairman of the Federal Open Market Committee and William J. McDonough as Vice Chairman. Their terms of office were extended for one year until the first meeting of the Committee after December 31, 2001. By unanimous vote, the Federal Reserve Bank of New York was selected to execute transactions for the System Open Market Account until the adjournment of the first meeting of the Committee after December 31, 2001. At its meeting on December 19, 2000, the Committee had contemplated the possibility that ongoing economic and financial developments might warrant a reassessment of the stance of monetary policy prior to the next scheduled meeting in late January. Information that had become available since the December meeting tended to confirm that the economic expansion had continued to weaken. The manufacturing sector was especially soft, reflecting apparent efforts in a number of industries to readjust inventories that were now deemed to be too high, notably those related to motor vehicles. Retail sales were appreciably below business expectations for the holiday season despite some pickup in the latter half of December, apparently largely induced by price discounting, and sales of motor vehicles evidenced significant further weakness as the month progressed. Business confidence appeared to have deteriorated further since the December meeting amid widespread reports of reductions in planned production and capital spending. Elevated energy costs were continuing to drain consumer purchasing power and were adding to the costs of many business firms, with adverse effects on profits and stock market valuations. Interacting with these developments were forecasts of further declines in business profits over coming quarters. On the more positive side, housing activity appeared to be responding to lower mortgage interest rates, and on the whole nonresidential construction activity seemed to be reasonably well maintained. Moreover, while the expansion had weakened and economic activity might remain soft in the near term, the longer-term outlook for reasonably sustained economic expansion, supported by easier financial conditions and the response of investment and consumption to rising productivity and living standards, was still quite good. Inflation expectations appeared to be declining, with businesses continuing to encounter marked and even increased resistance to their efforts to raise prices. On balance, the information already in hand indicated that the expansion clearly was weakening and by more than had been anticipated. In the circumstances, prompt and forceful policy action sooner and larger than expected by financial markets seemed called for. Against this background, all the members supported a proposal for an easing of reserve conditions consistent with a reduction of 50 basis points in the federal funds rate to a level of 6 percent. 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 a reduction in the federal funds rate to an average of around 6 percent. The vote 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 economic weakness in the foreseeable future. Votes for this action: Messrs. Greenspan, McDonough, Ferguson, Gramlich, Hoenig, Kelley, Meyer, Minehan, Moskow, and Poole. Votes against this action: None. Chairman Greenspan indicated that shortly after this meeting the Board of Governors would consider pending requests by several Federal Reserve Banks to reduce the discount rate by 25 basis points. At the time of this conference call meeting, no pending requests for a 50 basis point reduction were outstanding, but the press release would indicate that the Board would be prepared to consider requests for further reductions of 25 basis points if they were received. Donald L. Kohn Secretary

2000-12-19

Statement

The Federal Open Market Committee at its meeting today decided to maintain the existing stance of monetary policy, keeping its target for the federal funds rate at 6-1/2 percent. The drag on demand and profits from rising energy costs, as well as eroding consumer confidence, reports of substantial shortfalls in sales and earnings, and stress in some segments of the financial markets suggest that economic growth may be slowing further. While some inflation risks persist, they are diminished by the more moderate pace of economic activity and by the absence of any indication that longer-term inflation expectations have increased. The Committee will continue to monitor closely the evolving economic situation. Against the background of its long-run goals of price stability and sustainable economic growth and of the information currently available, the Committee consequently believes that the risks are weighted mainly toward conditions that may generate economic weakness in the foreseeable future.

2000-11-15

Statement

The Federal Open Market Committee at its meeting today decided to maintain the existing stance of monetary policy, keeping its target for the federal funds rate at 6-1/2 percent. The utilization of the pool of available workers remains at an unusually high level, and the increase in energy prices, though having limited effect on core measures of prices to date, still harbors the possibility of raising inflation expectations. The Committee, accordingly, continues to see a risk of heightened inflation pressures. However, softening in business and household demand and tightening conditions in financial markets over recent months suggest that the economy could expand for a time at a pace below the productivity-enhanced rate of growth of its potential to produce. Nonetheless, to date the easing of demand pressures has not been sufficient to warrant a change in the Committee's judgment that against the background of its long-run goals of price stability and sustainable economic growth and of the information currently available, the risks continue to be weighted mainly toward conditions that may generate heightened inflation pressures in the foreseeable future.

2000-12-21

Minute

Minutes of the Federal Open Market Committee November 15, 2000 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. ParryMr. 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 respectivelyBy 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 second-quarter 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

2000-11-16

Minute

Minutes of the Federal Open Market Committee October 3, 2000 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, October 3, 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. ParryMr. 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. Gillum, Assistant Secretary Ms. Fox, Assistant Secretary Mr. Mattingly, General Counsel Mr. Baxter, Deputy General Counsel Ms. Johnson, Economist Mr. Stockton, Economist Mr. Beebe, Ms. Cumming, Messrs. Eisenbeis, 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. Winn, Assistant to the Board, Office of Board Members, Board of Governors Mr. Ettin, Deputy Director, Division of Research and Statistics, Board of Governors Messrs. Oliner and Struckmeyer, Associate Directors, Division of Research and Statistics, Board of Governors Mr. Porter, Deputy Associate Director, Division of Monetary Affairs, Board of Governors Mr. Whitesell, Assistant Director, Division Monetary Affairs, Board of Governors Mr. Ramm, Section Chief, Division of Research and Statistics, Board of Governors Messrs. Reeve and Sack, Economists, Divisions of International Finance and Monetary Affairs respectively, 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 Messrs. Hakkio, Kos, Lacker, Ms. Mester, Messrs. Rasche, Rolnick, and Rosenblum, Senior Vice Presidents, Federal Reserve Banks of Kansas City, New York, Richmond, Philadelphia, St. Louis, Minneapolis, and Dallas respectively Messrs. Evans and Rosengren, Vice Presidents, Federal Reserve Banks of Chicago and Boston respectively Mr. Tallman, Senior Economist, Federal Reserve Bank of AtlantaBy unanimous vote, the minutes of the meeting of the Federal Open Market Committee held on August 22, 2000, were approved. The Manager of the System Open Market Account reported on recent developments in foreign exchange markets and on System transactions in those markets during the period August 22, 2000, through October 2, 2000. By unanimous vote, the Committee ratified these transactions. In ratifying these transactions, members emphasized that the action was not intended to signal an increased willingness by the Committee to intervene in foreign exchange markets. In the current instance, the intervention transactions were undertaken in a spirit of cooperation with the international financial community and at the express request of the European Central Bank (ECB). Members commented that historical experience suggested that foreign exchange market interventions generally had not had lasting effects when not accompanied by supporting changes in macroeconomic policies. 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 August 22, 2000, through October 2, 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 in the first half of the year. The moderation reflected lower growth in most major expenditure sectors. As a result of the deceleration in aggregate demand, expansion of employment and industrial production had slowed. Rising energy prices had boosted overall price inflation considerably, but core measures of consumer inflation had increased substantially less. Total nonfarm payroll employment dropped further in August, in part reflecting additional large declines in the number of temporary Census workers. In the private sector, a labor strike held down the August rise in payroll employment, but even after adjusting for the effects of the strike, the pace of private job gains in the July-August period fell considerably from the rate for the first half of the year. The slowdown was particularly pronounced in the construction, manufacturing, and services sectors. The civilian unemployment rate edged up to 4.1 percent in August. Total industrial production rose only slightly on balance during July and August after having registered strong gains earlier in the year. The pace of production of high-tech equipment remained rapid, though not at the extraordinary rates posted earlier in the year, and softer conditions had emerged in a number of manufacturing industries, including steel, trucks, motor vehicles, and construction supplies. Because of the weakness in production, the rate of capacity utilization in manufacturing edged down to a level slightly below its long-term average. Consumer spending picked up somewhat in July and August from a moderate rate of increase in the second quarter. Real personal consumption expenditures on durable goods surged in the July-August period, spending on nondurable goods picked up somewhat less, and consumption of services decelerated a little. The recent strengthening of consumer spending occurred against the background of moderate growth of real disposable income in recent quarters but generally buoyant consumer sentiment. With interest rates on fixed-rate mortgages having fallen significantly since mid-May and consumers' assessments of homebuying conditions having risen recently, single-family housing starts picked up somewhat in August. However, such starts were still sharply below their levels of early in the year, likely reflecting in part the recent smaller gains in income and employment and the flattening out of equity prices thus far this year. New home sales picked up in July (latest data), though that gain might have been overstated as a result of problems with estimation procedures, and existing home sales bounced back in August, roughly offsetting a drop in July. Multifamily starts, by contrast, declined further in August even though vacancy rates remained low and apartment rents continued to rise. The available information suggested that business investment in durable equipment and software increased substantially further in the third quarter. Data on shipments of nondefense capital goods in July and August indicated that outlays for high-tech equipment, notably computing and communications equipment, remained quite strong. For other types of equipment, spending growth seemed to be have moderated somewhat after the substantial gains of the first half of the year. Information on orders for nondefense capital goods pointed to further slowing in the pace of spending increases in coming months. Nonresidential construction activity fell in July but market fundamentals, including rising property values and lower vacancy rates, suggested the likelihood of further expansion in nonresidential investment, particularly in office buildings. Business inventory investment decreased sharply in July after a large second-quarter advance. Much of the slowdown was associated with a runoff of stocks of motor vehicles at wholesalers and automotive dealerships. Elsewhere, stockbuilding eased a little and sales decelerated somewhat. Inventory-sales ratios generally were within their ranges for the preceding twelve months, and there seemed to be only a few scattered indications of inventory imbalances at the industry level. The U.S. trade deficit in goods and services widened considerably in July from its June level, with the dollar value of exports retracing part of its extraordinary June increase and the value of imports rising further. The drop in exports was concentrated in aircraft and automotive products while the advance in imports was largely in industrial supplies, automotive products, and services. The available information indicated that economic expansion in the foreign industrial countries had slowed somewhat in the third quarter from the robust growth during the first half of the year, primarily reflecting reduced economic expansion in Japan. Growth appeared to be somewhat uneven among the developing countries in the third quarter but remained solid on balance. Recent information continued to indicate a slight pickup in price inflation. Consumer prices edged up on balance over July and August, despite a net drop in energy prices; excluding the food and energy components, consumer price inflation remained moderate in both months. On a year-over-year basis, however, core consumer prices increased somewhat more in the twelve months ended in August than in the previous twelve-month period. Core producer prices edged up over the July-August period and decelerated a little on a year-over-year basis. With regard to labor costs, average hourly earnings of production or nonsupervisory workers rose moderately in July and August. The advance for the twelve months ended in August was slightly larger than that for the previous twelve-month period. At its meeting on August 22, 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 their decision, the members noted that decelerating demand and surging productivity seemed to have narrowed the gap between the growth rates of aggregate demand and potential supply, even though previous policy tightening actions had not yet exerted their full restraining effects. The members emphasized, however, that unusually taut labor markets could result in greater upward pressures on unit costs and prices, especially if productivity growth were to level out or edge lower in the future, and 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 throughout the intermeeting period were directed toward maintaining the federal funds rate at the Committee's targeted level of 6-1/2 percent, and the average rate was close to the intended level. Most short- and intermediate-term interest rates moved lower over the interval, though long-term yields changed little or drifted slightly higher. Market expectations about the near-term prospects for interest rates were revised downward in response to both the Committee's statement after the August meeting, which was interpreted as expressing greater confidence that growth rates of aggregate demand and aggregate supply were coming into better alignment, and to subsequent data releases, which were seen as confirming earlier indications of some slowing in the economic expansion. Against a background of some upward pressure on long-term Treasury yields and of growing concerns about corporate earnings, most broad indexes of stock market prices declined somewhat over the intermeeting period. In foreign exchange markets, the trade-weighted value of the dollar increased somewhat further on balance in terms of an index of major foreign currencies. The dollar's net appreciation against the euro occurred despite a small policy tightening by the ECB on August 31 as sentiment toward that currency remained negative, in part because of concerns about capital flows out of the euro area. The major industrial countries undertook joint foreign exchange intervention late in the period, on September 22, to stem the euro's slide. The intervention was at the initiative of the ECB and was joined by the United States and other nations because of shared concern about the potential implications of recent movements in the euro. The dollar also posted gains against the currencies of a number of other important trading partners, notably the Brazilian real and the Mexican peso. The broad monetary aggregates had expanded relatively briskly in recent months. The growth of M2, perhaps reflecting the recent vigor of consumer spending, picked up considerably in August and September after having increased slowly in June and July. Averaged across the past four months, however, M2 increased at a pace noticeably below that of earlier in the year, with the slowdown partly reflecting a lagged response to a widening, during the first half of the year, of the opportunity costs of holding M2 assets. M3 expansion remained robust in August and September, though somewhat below the pace in the first half of the year. The growth of domestic nonfinancial debt slowed somewhat in July and August in association with some moderation in the brisk pace of private borrowing that was offset in part by a less rapid paydown of federal debt. The staff forecast prepared for this meeting suggested that the economic expansion, after slowing considerably from its elevated pace of recent quarters, would be sustained 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 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 remain appreciably below that in recent quarters and housing demand would trend slightly downward. By contrast, business fixed investment, notably outlays for equipment and software, was projected to remain robust, and brisk growth abroad would boost the expansion of U.S. exports for some period ahead. Core consumer 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 developments, members referred to recent statistical and anecdotal information that tended to confirm earlier indications of appreciable slowing in the pace of the expansion from the outsized increases experienced in the latter part of 1999 and the first half of this year. Several commented that growth of aggregate demand now appeared to be closer to, and perhaps slightly below, the rate of expansion in the nation's output potential. Looking ahead, they generally anticipated that the softening in equity prices and the rise in interest rates that had occurred earlier in the year would contribute to keeping growth in demand at a more subdued but still relatively robust pace. The members recognized that marked uncertainties surrounded any forecast in present circumstances. Those uncertainties had been augmented by recent developments in world oil markets and continued to include questions about the extent of further gains in productivity, the effects of such gains on the growth of aggregate demand as well as supply, and the associated degree of prospective pressures on resources and inflation. In the latter regard, members anticipated that even assuming reduced economic growth in line with their forecasts and further impressive gains in productivity, conditions in labor markets were likely to remain relatively tight, and risks persisted that at some point such tightness could exert upward pressures on labor costs and prices. Developments in world oil markets also might exert continued upward pressure on inflation, while at the same time posing a downward risk to economic activity. Uncertainties relating to political events in the Middle East superimposed on limited available inventories of oil products held by producers and refiners had fostered recent "spikes" in oil prices. While price quotations in futures markets pointed to a decline in oil prices over time, such prices might well remain relatively elevated for a extended period, with negative effects on spending and inflation. There already were scattered signs that higher energy prices, by reducing income available for discretionary purchases, might be damping retail sales. Moreover, to the extent that relatively high oil prices persisted, they were likely to have increasing passthrough effects on core measures of inflation as well as on "headline" inflation, especially if the energy price increases began to affect inflation expectations. However, the course of oil prices was very difficult to predict not only because of political and market uncertainties but in part also because of the lack of information about the extent of what appeared to be a precautionary buildup of fuel supplies by households and retail businesses. In their review of the outlook for household spending, members cited a number of developments that pointed to slower but continuing growth. With some exceptions, anecdotal reports from various parts of the country suggested a recent softening in retail sales, and some industry contacts indicated that they were marking down their forecasts of retail sales. A flat and volatile stock market and the rise in energy costs appeared to be key factors currently tending to inhibit growth in consumer spending at least to some extent. On the positive side, continuing gains in consumer incomes and a high level of consumer confidence could be expected to foster sustained growth in such spending, albeit probably at a pace below recent trends. With regard to the outlook for residential construction, anecdotal reports indicated some softening in housing activity in many parts of the country, though some members cited regional evidence of a partial rebound recently that was attributed to declines in mortgage interest rates. However, financial factors, including mortgage interest rates at levels still appreciably above earlier lows and the sideways performance of the stock market, were expected to constrain housing activity somewhat over coming quarters, though such activity likely would remain on a relatively high plateau. In their comments about the prospects for business fixed investment, members cited some indications that the expansion in business spending for equipment and software might be moderating from the extraordinary pace of recent years, though growth in such expenditures probably would remain robust. Retarding influences bearing on the outlook for investment expenditures included forecasts of slower growth in final demand and less favorable financial conditions, notably weakness in the equity prices of numerous "new economy" firms and tightening credit availability for business firms that did not enjoy investment-grade credit ratings or favorable earnings prospects. Evidence of overbuilding in some areas of commercial and other nonresidential real estate also was mentioned. Against this background, some members referred to a growing sense of caution among business- and financial-sector executives about undertaking or financing business investments. At the same time, the incentive to take advantage of increasingly efficient high-tech equipment and software typically available at declining prices would continue to provide an important underpinning for further large gains in investment spending, with favorable implications for continued rapid growth in productivity. In their assessment of the outlook for inflation, members agreed that although forecasts of more moderate growth in aggregate demand at a pace around potential output had substantially reduced the odds on rising inflation, the risks still were pointed in that direction on balance. Even so, any increase in inflation was likely to be modest and gradual and was subject to substantial uncertainty for a variety of reasons. As noted previously, the behavior of oil prices was one highly uncertain source of potentially greater inflation pressures. Another major source of uncertainty was the prospective performance of productivity. Largely as a consequence of rapidly expanding "new economy" investments, gains in productivity had occurred at remarkable rates in recent years. However, the anticipated moderation in the expansion of economic activity and the related softening in expected returns on such investments might well restrain the further expansion of investment spending and limit the associated pickup in productivity. Once productivity growth tended to level out, employers would find it more difficult to offset the rise in their costs that might occur should tight labor markets persist. Finally, a decline in the dollar from its current level, should that happen, might add to inflation pressures going forward. On the more positive side, there were no signs that the pace of productivity gains was currently leveling out and no evidence of rising longer-term inflation expectations. Moreover, cost pressures and price inflation had remained subdued for an extended period despite low rates of unemployment that in the past had been associated with increasing inflation. Against the backdrop of these uncertainties and the current performance of the economy, all the Committee members indicated that they favored an unchanged policy stance for the intermeeting period ahead. In support of this view, they placed considerable weight on widespread indications, reinforced by developments since the August meeting, that growth in aggregate demand had moderated appreciably to a pace that improved the prospects for containing pressures on resources. Moreover, the tightening that had occurred in financial conditions through the spring and the rise in energy prices since the fall of 1998 had not yet exerted their full effects on aggregate demand, and members expected these effects to contribute to a more sustainable rate of growth in aggregate spending. Although inflation had picked up, a decline in energy prices, should it materialize in line with market expectations, clearly would have favorable implications for inflation expectations and cost pressures in the economy. Questions nonetheless remained regarding the extent and duration of the slowdown in the economic expansion and the other factors bearing on the outlook for inflation, especially against the backdrop of substantial pressures on labor resources. All the members agreed that their views regarding the outlook for inflation were consistent with retaining the press release sentence indicating that the risks remained weighted toward higher inflation over time. Some expressed the opinion that those risks were now less decidedly tilted to the upside and that a reconsideration of the sentence might be warranted over the next several months, but they believed that a change at this point would be premature. While the prospects of a significant rise in inflation seemed quite limited for the nearer term, the members agreed on the need to remain especially vigilant for signs of potentially rising inflation over the intermediate term, particularly since any increase in inflation would occur from a level that in the view of many members was already on the high side of an acceptable range. At the conclusion of this discussion, the Committee voted to authorize and direct the Federal Reserve Bank of New York, until it is 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 Wednesday, November 15, 2000. The meeting adjourned at 12:05 p.m. Donald L. Kohn Secretary

2000-10-03

Statement

The Federal Open Market Committee at its meeting today decided to maintain the existing stance of monetary policy, keeping its target for the federal funds rate at 6-1/2 percent. Recent data have indicated that the expansion of aggregate demand has moderated to a pace closer to the enhanced rate of growth of the economy's potential to produce. The more rapid advances in productivity also continue to help contain costs and hold down underlying price pressures. However, the utilization of the pool of available workers remains at an unusually high level. Moreover, the increase in energy prices, though having limited effect on core measures of prices to date, poses a risk of raising inflation expectations. The subdued behavior of those expectations so far has contributed importantly to maintaining an environment conducive to maximum sustainable growth. Against the background of its long-term goals of price stability and sustainable economic growth and of the information currently available, the Committee believes the risks continue to be weighted mainly toward conditions that may generate heightened inflation pressures in the future.

2000-10-05

Minute

Minutes of the Federal Open Market Committee August 22, 2000 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. ParryMr. 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 AtlantaBy 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 interest-sensitive 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

2000-08-22

Statement

The Federal Open Market Committee at its meeting today decided to maintain the existing stance of monetary policy, keeping its target for the federal funds rate at 6-1/2 percent. Recent data have indicated that the expansion of aggregate demand is moderating toward a pace closer to the rate of growth of the economy's potential to produce. The data also have indicated that more rapid advances in productivity have been raising that potential growth rate as well as containing costs and holding down underlying price pressures. Nonetheless, the Committee remains concerned about the risk of a continuing gap between the growth of demand and potential supply at a time when the utilization of the pool of available workers remains at an unusually high level. Against the background of its long-term goals of price stability and sustainable economic growth and of the information currently available, the Committee believes the risks continue to be weighted mainly toward conditions that may generate heightened inflation pressures in the foreseeable future.

2000-08-24

Minute

Minutes of the Federal Open Market Committee June 27-28, 2000 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, June 27, 2000, at 2:30 p.m. and continued on Wednesday, June 28, 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. ParryMr. Hoenig, Ms. Minehan, Messrs. Moskow, and Poole, Alternate Members of the Federal Open Market Committee Messrs. McTeer and Stern, Presidents of the Federal Reserve Banks of Dallas and Minneapolis respectively Mr. Kohn, Secretary and Economist Mr. Bernard, Deputy Secretary Ms. Fox, Assistant Secretary Mr. Gillum, Assistant Secretary Mr. Mattingly, General Counsel Mr. Baxter, Deputy General Counsel Ms. Johnson, Economist Mr. Stockton, Economist Ms. Cumming, Messrs. Eisenbeis, Goodfriend, Howard, Lindsey, Reinhart, and Simpson, 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 Messrs. Madigan and Slifman, Associate Directors, Divisions of Monetary Affairs and Research and Statistics respectively, Board of Governors Mr. Porter1, Deputy Associate Director, Division of Monetary Affairs, Board of Governors Messrs. Freeman,2 Oliner,3 Struckmeyer, Whitesell, and Ms. Zickler,2 Assistant Directors, Divisions of International Finance, Research and Statistics, Research and Statistics, Monetary Affairs, and Research and Statistics respectively, Board of Governors Mr. Reifschneider,1 Section Chief, Division of Research and Statistics, Board of Governors Mr. Bomfim2 and Ms. Garrett, Economists, Division of Monetary Affairs, Board of Governors Ms. Low, Open Market Secretariat Assistant, Division of Monetary Affairs, Board of Governors Ms. Pianalto and Mr. Stone, First Vice Presidents, Federal Reserve Banks of Cleveland and Philadelphia respectively Messrs. Hakkio, Hunter, Lang, Rasche, and Rosenblum, Senior Vice Presidents, Federal Reserve Banks of Kansas City, Chicago, Philadelphia, St. Louis, and Dallas respectively Messrs. Altig, Fuhrer, Judd, Ms. Perelmuter, and Mr. Weber, Vice Presidents, Federal Reserve Banks of Cleveland, Boston, San Francisco, New York, and Minneapolis respectivelyBy unanimous vote, the minutes of the meeting of the Federal Open Market Committee held on May 16, 2000, were approved. By unanimous vote, David J. Stockton was elected to serve as economist until the election of his successor at the first meeting of the Committee after December 31, 2000, with the understanding that in the event of the discontinuance of his official connection with the Board of Governors he would cease to have any official connection with the Federal Open Market Committee. The Manager of the System Open Market Account reported on recent developments in foreign exchange markets. There were no open market operations in foreign currencies for the System's account in the period since the previous meeting, and thus no vote was required of the Committee. The Manager also reported on developments in domestic financial markets and on System open market transactions in government securities and federal agency obligations during the period May 16, 2000, through June 27, 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 the economic expansion was moderating somewhat from a very rapid pace in the first quarter. Consumer spending was increasing only modestly after large gains earlier, housing activity was down somewhat, and growth of business spending on capital equipment, while still quite vigorous, was slowing a little after a first-quarter surge. As a consequence, industrial production and employment were rising at somewhat reduced rates. Core consumer prices continued to evidence some acceleration, to an important extent reflecting some indirect effects of the sharp increase in oil prices over the past year. Nonfarm payroll employment increased further in May, although the rise was associated with a surge in government hiring of census workers that more than offset a considerable contraction in private payrolls. The drop in private employment following very large gains in March and April seemed, in the absence of other signs of weakening labor demand, to be attributable at least to some extent to statistical noise and seasonal adjustment problems. Averaging over the three months, private nonfarm employment advanced at about the rate of the previous twelve months. The civilian unemployment rate averaged 4.0 percent over April and May. Industrial production continued to rise in May after a brisk increase in April, but the average gain for April and May was somewhat below the average monthly advance during the two previous quarters. Manufacturing output climbed at a slower rate in the April-May period, reflecting less rapid growth in the production of high-tech equipment and sluggish output of other non-automotive equipment. The further step-up in manufacturing activity lifted capacity utilization a little further, bringing it still closer to its long-term average. Growth of consumer spending apparently slowed considerably in the second quarter after outsized gains in several previous quarters. Nominal retail sales declined in both April and May; outlays fell at durable goods outlets and edged up at nondurable goods stores. Despite the recent weakness, however, continued solid expansion of disposable incomes, the large accumulated gains in household wealth, and very positive consumer sentiment suggested that underlying fundamentals behind household spending remained favorable. Higher mortgage rates apparently were exerting a restraining effect on residential housing activity. Total private housing starts fell in May to their lowest level since the middle of last year. Moreover, while sales of new single-family homes had not yet slackened appreciably through April (latest data), sales of existing homes through May were running below their 1999 average. In addition, consumers' assessments of homebuying conditions and builders' ratings of new home sales had weakened significantly. Business fixed investment appeared to be on track for another rapid increase in the second quarter. Shipments of nondefense capital goods, notably computing and communications equipment, continued on a strong uptrend in May, and the persisting strength in orders for many types of equipment pointed to further advances in coming months. Outlays for nonresidential structures, which had been weak in 1999, rose sharply in the first quarter and recorded a further appreciable gain in April. The book value of manufacturing and trade inventories increased in April at about the first-quarter pace. Stockbuilding was generally in line with sales, and aggregate inventory-sales ratios for the manufacturing, wholesale, and retail sectors remained near the bottom of their ranges for the preceding twelve months. There were few indications across industries of significant inventory imbalances. The U.S. trade deficit in goods and services for April was very close to its March level. However, the deficit was up appreciably from its average for the first quarter, with the value of imports increasing substantially more than the value of exports. The available information indicated robust economic growth in all major regions of the world thus far this year. Economic activity in the foreign industrial countries expanded vigorously in the first quarter, and growth generally appeared to be continuing at a strong pace in the second quarter. In addition, the available information suggested that a number of emerging-market economies had registered very rapid expansion thus far this year. Recent information continued to indicate that consumer price inflation had picked up, while producer price inflation was essentially unchanged. Consumer prices edged up in May after having been unchanged in April; excluding the price and energy components, consumer prices rose moderately further in May. For the twelve months ended in May, both total and core consumer prices increased somewhat more than in the previous twelve-month period. At the producer level, prices of finished goods other than food and energy edged higher in April and May and rose during the twelve months ended in May by the same moderate amount recorded for the previous twelve-month period. With regard to labor costs, average hourly earnings of production or nonsupervisory workers registered only a slight increase in May after a somewhat larger rise in April. The advance for the twelve months ended in April was about the same as that for the previous twelve-month period. At its meeting on May 16, 2000, the Committee adopted a directive that called for a tightening of conditions in reserve markets sufficient to raise the federal funds rate 1/2 percentage point, to a level of 6-1/2 percent. The members noted that the relatively forceful move was necessary given the persisting growth of aggregate demand in excess of the expansion of potential supply, which was creating rising pressures in already tight markets for labor and other resources. In their view, this action would help bring aggregate demand into better alignment over time with potential supply and thereby work to forestall the emergence of inflationary expectations and the buildup of inflationary pressures. They also noted that even with this additional firming the risks were still weighted mainly in the direction of rising inflationary pressures. Open market operations during the intermeeting period were directed toward implementing the desired increased pressure on reserve positions, and the federal funds rate averaged very close to the Committee's 6-1/2 percent target. The Committee's action and its announcement surprised markets only a little, and bond and stock prices edged a bit lower. Markets grew increasingly uneasy over the next few weeks as incoming data suggested the possible need for further substantial policy tightening, which could have adverse effects on corporate earnings. These concerns apparently contributed to sharp further declines in equity prices and to widening risk spreads on corporate bonds. Subsequently, debt and equity markets rebounded in response to a series of U.S. economic data releases that were viewed as signaling a moderation in aggregate demand and a continuation of limited cost and price pressures, and thus a reduced probability of additional monetary tightening. On balance over the intermeeting interval, yields on longer-term Treasury securities and investment-grade corporate bonds declined appreciably, and most broad stock price indexes ended the period little changed. In foreign exchange markets, the trade-weighted value of the dollar depreciated somewhat over the intermeeting period against an index of major currencies. Decreases in longer-term U.S. interest rates weighed on the dollar, and the dollar's decline against the euro also occurred against the background of indicators of accelerating activity in the euro area and possible further monetary tightening. Frequent hints that the Bank of Japan might abandon its zero policy rate might have contributed to the dollar's weakness against the yen. By contrast, the dollar strengthened a little against the currencies of a group of other important trading partners, notably the currencies of Mexico, Indonesia, and the Philippines. M2 and M3 appeared to have rebounded in June following the clearing in May of unusually large final personal tax payments for 1999. The expansion of these aggregates likely had been held down somewhat this year by sluggish currency growth in the aftermath of the century date change and by the increase in the opportunity cost of their liquid components associated with rising market interest rates. Nevertheless, supported by rapid growth in nominal spending and income, M2 evidently had expanded over the first half of the year at a rate close to that in 1999, and M3 had expanded at a faster rate than last year. Strong demands for bank credit, funded by the issuance of large time deposits and other liabilities not included in M2, underlaid the acceleration in M3. The staff forecast prepared for this meeting continued to suggest that the economic expansion would moderate gradually from its currently elevated pace to a rate around or perhaps a little below the growth of the economy's estimated potential. The expansion of domestic final demand increasingly would be held back by the anticipated waning of positive wealth effects associated with earlier large gains in equity prices and by higher interest rates; as a result, growth of spending on consumer durables and houses was expected to slow further. By contrast, business fixed investment, notably purchases of equipment and software, was projected to remain robust, and continued solid economic growth abroad would boost the growth of U.S. exports for some period ahead. Core price inflation was projected to rise noticeably over the forecast horizon, partly as a result of higher import prices and some firming of gains in nominal labor compensation in persistently tight labor markets that would not be fully offset by productivity growth. In the Committee's discussion of current and prospective economic developments, members cited evidence of slower expansion in economic activity in recent months. In particular, consumer spending had decelerated noticeably, especially for housing and motor vehicles, but the members agreed that the eventual extent and duration of the slowing in overall economic growth were subject to substantial uncertainty. A number of factors supported a projection of considerably more moderate expansion going forward in relation to the overly rapid pace in the second half of 1999 and early 2000, including the likelihood that much of the effect on spending of the rise in interest rates and leveling out in equity prices this year had not yet been felt. Nevertheless, the indications of slowing economic expansion were still tentative. Some sectors of the economy such as business fixed investment continued to display substantial vigor, and the members could not be confident that growth would not rebound to a clearly unsustainable pace, as had occurred previously in this expansion. With regard to inflation, members observed that steep increases in energy prices had boosted overall rates of inflation somewhat, and in addition the higher energy prices likely had contributed indirectly to the rise in core measures of inflation. A number of members also were concerned that rising core inflation could be generated increasingly from unsustainably tight labor markets, and they noted that labor costs would need to be monitored closely even if growth in demand slowed sufficiently to keep levels of resource utilization about unchanged. To date, however, rising productivity growth had contained labor cost pressures, and despite the moderation in the expansion of activity, there were no early signs of any slowing in the growth of productivity. In preparation for a report to Congress, the members of the Board of Governors and the presidents of the Federal Reserve Banks provided individual projections of the growth of nominal and real GDP, the rate of unemployment, and the rate of inflation for the years 2000 and 2001. With regard to the growth of nominal GDP, most of the forecasts were in ranges of 6-1/4 to 6-3/4 percent for 2000 as a whole and 5-1/2 to 6 percent for 2001. The forecasts of the rate of expansion in real GDP had a central tendency of 4 to 4-1/2 percent for 2000, suggesting a noticeable deceleration in the second half of the year, and were centered on a range of 3-1/4 to 3-3/4 percent for 2001. The civilian rates of unemployment associated with these forecasts had central tendencies of about 4 percent in the fourth quarter of 2000 and 4 to 4-1/4 percent in the fourth quarter of 2001. Forecasts of the rate of inflation were shaped importantly by the projected pattern of energy prices; for this year the forecasts, as measured by the chain price index for personal consumption expenditures, were centered on a range of 2-1/2 to 2-3/4 percent before dropping back to a range of 2 to 2-1/2 percent in 2001. In their assessment of business conditions in different parts of the country, the presidents of the Federal Reserve Banks commented on indications of some slowing in the expansion of regional economic activity in a majority of the districts, though several emphasized that the available information pointed to only slight moderation to date. This slowing and the cumulative effects of the firming in financial conditions this year had been accompanied by an increasing number of anecdotal reports of more cautious business sentiment. In their comments on developments in key sectors of the economy nationwide, the members reported on statistical and anecdotal indications that growth in consumer spending had slowed appreciably in recent months from the unusually robust pace seen in late 1999 and early this year. A number of factors that might account for the moderation could also point to the possible extension of the less robust trend. Those factors included gradually waning wealth effects associated with the absence of further large gains in stock market prices; rising levels of consumer debt; the loss of consumer purchasing power stemming from higher energy prices; and the large cumulative buildup of consumer stocks of motor vehicles and other durables. Still, the data on retail sales were volatile and often revised significantly; some of the recent moderation in spending might have reflected a pause following the surge in demand during atypically favorable weather conditions over the winter months; and the pace of purchases could pick up again. While the course of consumer spending remained uncertain, members concluded that, in the context of relatively high levels of consumer confidence and sizable projected gains in jobs and incomes, slower but still solid expansion in consumer expenditures was most likely to occur over coming quarters. The housing market also provided clear evidence of weakening demand. The slowdown evidently reflected the effects of higher mortgage interest rates on a growing number of homebuyers and probably also the diminishing wealth effects of the earlier run-up in stock prices and the cumulatively large additions to the stock of housing in the economy. The sluggish tone of the housing data was confirmed by anecdotal reports of slowing residential sales and building activity in most parts of the country. Despite these developments, sizable building backlogs in many areas, the outlook for continuing growth in consumer incomes, and still favorable consumer sentiment were likely to support substantial homebuilding activity, albeit at a reduced level. At least in some parts of the country, firms supplying building materials and home furnishings were beginning to feel the retarding effects of the slowdown in the housing market. After a surge early in the year that evidently reflected in part investment spending delayed by Y2K concerns, growth in business fixed investment had moderated in recent months but was expected to remain quite robust over the next several quarters. New orders for many types of business equipment had remained strong, order backlogs had continued to build, and it was clear that business executives still anticipated high rates of return on their new investments. As a result, business investment spending could be expected to remain elevated, at least over the nearer term and especially for high-tech equipment and software. At the same time, members cited anecdotal indications of the emergence of a more cautious tone in the business community, evidently associated in part with less favorable financial conditions in debt and equity markets and possibly auguring more substantial cutbacks in business investment over time should growth in personal consumption outlays be sustained on a considerably slower trend. Strengthening economic activity in many of the nations that are important U.S. trading partners was reflected in expanding exports, and several members provided anecdotal confirmation of growing foreign markets for many U.S. goods and services. While expanding export markets were a welcome development from the perspective of many domestic businesses, they would add to overall demand pressures on U.S. producer resources at a time when the latter were already operating at very high levels. With regard to the outlook for inflation, members gave considerable attention to the somewhat faster increases in broad price measures over the past year, but they differed to some extent regarding the prospects for further increases in inflation. It was generally agreed that developments relating to energy would continue to exert upward pressure on prices over the near term, including the passthrough or indirect effects of higher oil prices on core measures of inflation. Looking beyond the near term, a number of members, noting that core measures of consumer prices had been rising more rapidly this year, were concerned that these prices might well continue to accelerate gradually, even assuming that economic expansion would be sustained at a pace close to the economy's potential. In this view, labor markets were already operating at levels of utilization that were likely eventually to produce rising labor costs that would be passed through to market prices even if productivity growth remained high or rose somewhat further. Other members were more optimistic that core inflation might be contained near current levels. The recent increase in core inflation could largely reflect the indirect effects of the rise in energy prices. To date, unit labor costs had been quite subdued, leaving open the question of what was a sustainable level of labor resource use. Rising productivity was likely to continue to restrain unit labor costs to a degree, and product markets remained highly competitive. However, even these members saw considerable inflation risks should the slowdown in aggregate demand fail to be sustained, and the members generally agreed that for the foreseeable future possible increases in underlying inflation remained the principal risk to the continued good performance of the U.S. economy. In contrast to its earlier practice, the Committee at this meeting did not establish ranges for growth of money and debt in 2000 and 2001. The legal requirement to set and announce such ranges recently had expired, and the members did not view the ranges as currently serving a useful role in the formulation of monetary policy. Owing to uncertainties about the behavior of the velocities of money and debt, these ranges had not provided reliable benchmarks for the conduct of monetary policy for some years. Nevertheless, the Committee believed that the behavior of these aggregates retained value for gauging economic and financial conditions and that such behavior should continue to be monitored. Moreover, Committee members emphasized that they would continue to consider periodically issues related to their long-run strategy for monetary policy, even if they were no longer setting ranges for the money and debt aggregates. 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 a federal funds rate averaging about 6-1/2 percent. The increasing though still tentative indications of some slowing in aggregate demand, together with the likelihood that the earlier policy tightening actions had not yet exerted their full retarding effects on spending, were key factors in this decision. The uncertainties surrounding the outlook for the economy, notably the extent and duration of the recent moderation in spending and the effects of the appreciable tightening over the past year, including the � percentage point increase in the intended federal funds rate at the May meeting, reinforced the argument for leaving the stance of policy unchanged at this meeting and weighting incoming data carefully. Several members commented that a considerable amount of new information bearing on the prospective strength of the economy and the outlook for inflation would become available during the relatively long interval before the next meeting in August. Members generally saw little risk in deferring any further policy tightening move, particularly since the possibility that underlying inflation would worsen appreciably seemed remote under prevailing circumstances. Among other factors, inflation expectations had been remarkably stable despite rising energy prices, and real interest rates were already relatively elevated. In their discussion of the balance-of-risks sentence in the press statement to be issued shortly after this meeting, all the members agreed that the latter should continue to express, as it had for every meeting earlier this year, their belief that the risks remained weighted toward rising inflation. Indications that growth in aggregate demand was moderating to a pace closer to that of potential supply were still partial and tentative, and labor markets remained unusually tight. Many Committee members noted that, based on the currently available information, additional firming of policy could well be needed at some point in the future, though a number also expressed the opinion that less tightening probably would be required than they had thought at the time of the May meeting. Several emphasized that the press release should not convey the impression that the Committee now viewed further policy tightening moves as an unlikely prospect. 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, August 22, 2000. The meeting adjourned at 10:35 a.m. Notation Vote By notation vote completed on July 18, 2000, the Committee authorized Vice Chairman McDonough to accept the Legion of Honor to be awarded by the French government pursuant to a decision by the President of the French Republic. Votes for this action: Messrs. Greenspan, Broaddus, Ferguson, Gramlich, Guynn, Jordan, Kelley, Meyer, and Parry. Votes against this action: None. Abstention: Mr. McDonough. In conformance with regulations of the Board of Governors of the Federal Reserve System pertaining to foreign decorations, the Board's Vice Chairman, Mr. Ferguson, authorized Chairman Greenspan to accept the same award from the French government. Donald L. Kohn SecretaryFootnotes 1 Attended portion of meeting relating to the Committee's discussion of the economic outlook. 2 Attended portion of meeting relating to the Committee's long-run policy. 3 Attended Wednesday session only.

2000-06-28

Statement

The Federal Open Market Committee at its meeting today decided to maintain the existing stance of monetary policy, keeping its target for the federal funds rate at 6-1/2 percent. Recent data suggest that the expansion of aggregate demand may be moderating toward a pace closer to the rate of growth of the economy's potential to produce. Although core measures of prices are rising slightly faster than a year ago, continuing rapid advances in productivity have been containing costs and holding down underlying price pressures. Nonetheless, signs that growth in demand is moving to a sustainable pace are still tentative and preliminary, and the utilization of the pool of available workers remains at an unusually high level. In these circumstances, and against the background of its long-term goals of price stability and sustainable economic growth and of the information currently available, the Committee believes the risks continue to be weighted mainly toward conditions that may generate heightened inflation pressures in the foreseeable future.

2000-06-29

Minute

Minutes of the Federal Open Market Committee May 16, 2000 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, May 16, 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. ParryMr. Hoenig, Ms. Minehan, Messrs. Moskow and Poole, Alternate Members of the Federal Open Market Committee Messrs. McTeer and Stern, Presidents of the Federal Reserve Banks of Dallas and Minneapolis respectively Mr. Kohn, Secretary and Economist Mr. Bernard, Deputy Secretary Ms. Fox, Assistant Secretary Mr. Gillum, Assistant Secretary Mr. Mattingly, General Counsel Mr. Baxter, Deputy General Counsel Ms. Johnson, Economist Mr. Prell, Economist Mr. Beebe, Ms. Cumming, Messrs. Eisenbeis, Howard, Lindsey, Reinhart, Simpson, Sniderman, and Stockton, 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 Messrs. Madigan and Slifman, Associate Directors, Divisions of Monetary Affairs and Research and Statistics respectively, Board of Governors Messrs. Oliner and Whitesell, Assistant Directors, Divisions of Research and Statistics and Monetary Affairs respectively, Board of Governors Ms. Low, Open Market Secretariat Assistant, Division of Monetary Affairs, Board of Governors Messrs. Rives and Stone, First Vice Presidents, Federal Reserve Banks of St. Louis and Philadelphia respectively Messrs. Hakkio, Hunter, Lacker, Lang, Rasche, Rolnick, and Rosenblum, Senior Vice Presidents, Federal Reserve Banks of Kansas City, Chicago, Richmond, Philadelphia, St. Louis, Minneapolis, and Dallas respectively Messrs. Bentley and Kopcke, Vice Presidents, Federal Reserve Banks of New York and Boston respectivelyBy unanimous vote, the minutes of the meeting of the Federal Open Market Committee held on March 21, 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, 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 March 21, 2000, through May 15, 2000. The Committee ratified these transactions by unanimous vote. With Mr. Broaddus dissenting, the Committee voted to extend for one year beginning in mid-December 2000 the reciprocal currency ("swap") arrangements with the Bank of Canada and the Bank of Mexico. The arrangement with the Bank of Canada is in the amount of $2 billion equivalent and that with the Bank of Mexico in the amount of $3 billion equivalent. Both arrangements are associated with the Federal Reserve's participation in the North American Framework Agreement, which was established in 1994. Mr. Broaddus dissented because he believed that the swap lines existed primarily to facilitate foreign exchange market intervention, and he was opposed to such intervention for the reasons he had expressed at the February meeting. The Manager discussed some aspects of a suggested approach to the management of the System's portfolio over coming quarters prior to the Committee's review of an ongoing study relating to the conduct of open market operations in a period of substantial declines in outstanding Treasury debt. During that interim, the management of the System portfolio should try to satisfy a number of objectives: keeping the maturity of the portfolio from lengthening materially; meeting long-run reserve needs to the extent possible through outright purchases of Treasury securities without distorting the yield curve or impairing the liquidity of the market; and concentrating expansion of the System portfolio in "off-the-run" securities in the secondary market to help to maintain liquid markets in benchmark securities. It was important to announce a strategy to allow market participants to take the System's operations into account as they adapted to the declining Treasury debt levels. While no specific blueprint could be given at this point regarding future Desk operations, the members encouraged the Manager to discuss his plans with Treasury officials. The Committee then turned to a discussion of the economic and financial outlook and the implementation of monetary policy over the intermeeting period ahead. The information reviewed at this meeting suggested that economic growth had remained rapid through early spring. Consumer spending and business fixed investment were still trending upward strongly, and housing demand was holding at a high level. Industrial production and nonfarm payrolls were expanding briskly in response to burgeoning domestic demand, but the strength of demand was also showing through in the form of rising imports. Labor markets continued to be very tight, and some measures of labor costs and price inflation showed signs that they might be picking up. Employment surged in March and April. Part of the pickup resulted from a step-up in government hiring of census workers, but gains in private employment were very large over the two months. Job growth in retail trade and services was robust, and employment in manufacturing and construction trended higher. The civilian unemployment rate dropped in April to 3.9 percent, a thirty-year low. Industrial production accelerated in April after a strong gain in the first quarter. Manufacturing, notably in high-tech industries, led the way, but growth in mining and utilities also was sizable. The pickup in manufacturing lifted the factory operating rate further, and capacity utilization in April was about equal to its long-term average. Consumer spending increased very rapidly in the first quarter but apparently decelerated early in the second quarter. Nominal retail sales were down slightly in April after brisk gains in February and March. Sales slumped at durable goods stores and changed little at nondurable goods outlets. However, the underlying trend in spending remained strong as a result of robust expansion of disposable incomes, the large accumulated gains in household wealth, and very positive consumer sentiment. Residential housing activity stayed at an elevated level in April; total private housing starts edged higher while starts of multifamily units partially reversed a sharp drop in March. Sales of both new and existing single-family homes rose in March (latest data). The persisting strong demand for housing during a period of rising mortgage rates apparently was being underpinned by the rapid growth of jobs and the accumulated gains in stock market wealth. Business fixed investment was up sharply in the first quarter after a sluggish performance late last year. The pickup encompassed both durable equipment and software and nonresidential structures. Shipments of computing and communications equipment surged following the century rollover, and shipments of other non-aircraft capital goods recorded an unusually large rise as well. Moreover, the recent strength in orders for many types of equipment pointed to further advances in capital spending in coming months. Expenditures for nonresidential structures, which had turned up last autumn, rose rapidly in the first quarter; unusually favorable weather over the two quarters likely was a contributing factor. The upturn in nonresidential building activity was spread broadly across the major types of structures. The pace of accumulation of manufacturing and trade inventories slowed somewhat in the first quarter following a sizable buildup in late 1999, and the aggregate inventory-sales ratio edged down from an already very low level. Stockbuilding by manufacturers and merchant wholesalers picked up slightly in the first quarter, but stocks remained at low levels in relation to sales. By contrast, inventory investment slowed among retailers. Part of this slowdown might have involved a liquidation of precautionary stocks built up in anticipation of the century date change. The inventory-sales ratio in this sector was at a historically lean level. The U.S. trade deficit in goods and services reached another new high in February as the value of imports rose sharply further and the value of exports changed little. For the January-February period, the moderate rise in exports and the sharp increase in imports from fourth-quarter levels were spread across most major trade categories. The available information suggested that economic expansion remained robust in most foreign industrial economies. The recent decline in the exchange value of the euro was spurring economic activity in the euro area, and Canada was benefiting from spillovers from the U.S. economy. For the Japanese economy, which had been the notable exception among the foreign industrial economies, there were indications of some strengthening of aggregate demand during the first five months of the year. Economic activity in the developing countries also continued to pick up. Key South American countries were recovering from recent recessions, while several Asian emerging-market countries were settling into growth at more sustainable rates. Recent information suggested that price inflation might be picking up slightly and only partly as a direct result of increases in energy prices. Although consumer prices were unchanged in April, they recorded sizable step-ups in February and March; moreover, while the rise in core consumer prices over the twelve months ended in April was the same as the change in the year-earlier twelve-month period, core consumer price inflation was up slightly in the March-April period compared with other recent months. At the producer level, prices of finished goods other than food and energy edged higher in March and April, but the increase over the twelve months ended in February was a little smaller than the rise over the preceding twelve months. With regard to labor costs, the employment cost index for hourly compensation of private industry workers registered a larger advance in the first quarter than in previous quarters, and the rate of increase in compensation over the year ended in March was substantially larger than the rise over the year-earlier period. Faster growth in benefits accounted for more than half of the acceleration. Average hourly earnings of production or nonsupervisory workers grew at a slightly faster rate in April than in March, and the increase for the twelve months ended in April was larger than for the previous twelve-month period. At its meeting on March 21, 2000, the Committee adopted a directive that called for a slight tightening of conditions in reserve markets consistent with an increase of � percentage point in the federal funds rate to an average of about 6 percent. The members saw substantial risks of rising pressures on labor and other resources and of higher inflation, and they agreed that the tightening action would help bring the growth of aggregate demand into better alignment with the sustainable expansion of aggregate supply. They also noted that even with this additional firming the risks were still weighted mainly in the direction of rising inflation pressures and that more tightening might be needed. Open market operations during the intermeeting period were directed toward implementing the desired slightly tighter pressure on reserve positions, and the federal funds rate averaged very close to the Committee's 6 percent target. The Committee's action and its announcement were widely anticipated and had little initial effect on financial markets. Later in the week, however, market interest rates moved up in response to the release of the minutes of the February meeting and the mention therein of some sentiment for a larger policy tightening than had been undertaken. Subsequently, interest rates fell as stock prices tumbled over the first half of April, when investors seemed to revise downward their assessments of equity valuations, especially those of more speculative technology shares that previously had risen considerably. Interest rates more than reversed those declines, however, when stock prices began to level out and incoming data suggested that aggregate demand continued to expand faster than potential supply and that wage and price developments were becoming more worrisome. On balance over the intermeeting period, private interest rates moved up appreciably while Treasury yields increased somewhat less. Most major indexes of equity prices declined significantly over the intermeeting period. In foreign exchange markets, the trade-weighted value of the dollar appreciated considerably over the intermeeting period against a basket of major currencies, reflecting in part the larger intermeeting increase in U.S. long-term yields relative to rates in most foreign industrial countries. The dollar's rise against the euro was sizable, but the dollar also made moderate gains against the British pound, the Japanese yen, and the Canadian dollar. The dollar also appreciated somewhat against the currencies of a group of other important trading partners, notably the Mexican peso and the Brazilian real. Growth of M2 picked up further in April from its already strong pace in March, as households boosted their liquid balances to meet higher-than-usual levels of final payments on 1999 taxes. In contrast, M3 growth slowed considerably in April after a robust March advance. From the fourth quarter of 1999 through April, M2 and M3 expanded at rates well above the upper ends of their annual ranges for 2000. Total domestic nonfinancial debt continued to expand at a pace in the upper portion of its range. The staff forecast prepared for this meeting continued to suggest that the expansion would gradually moderate from its currently elevated pace to a rate around, or perhaps a little below, the growth of the economy's estimated potential. The expansion of domestic final demand increasingly would be held back by the anticipated waning of positive wealth effects associated with earlier large gains in equity prices and by higher interest rates. As a result, the growth of spending on consumer durables and houses was expected to slow; in contrast, however, overall business investment in equipment and software was projected to remain robust, partly because of the upward trend in replacement demand, especially for computers and software. In addition, continued solid economic growth abroad was expected to boost the growth of U.S. exports for some period ahead. Core price inflation was projected to rise noticeably over the forecast horizon, partly as a result of higher import prices and some firming of gains in nominal labor compensation in persistently tight labor markets that would not be fully offset by productivity growth. In the Committee's review of current and prospective economic and financial developments, members focused on persisting indications that aggregate demand was expanding more rapidly than potential supply and that pressures on labor and other producer resources were continuing to increase. While there were tentative signs that the growth in demand might be moderating in some key sectors of the economy, such as retail sales and housing, clear-cut evidence of any significant deceleration in the rapid growth of aggregate demand was lacking. Bond yields and other financial conditions had firmed to some extent recently, but those adjustments had been influenced by the buildup in market expectations of more monetary policy tightening. In the absence of further monetary restraint, any slowing over coming quarters was not viewed as likely to be sufficient to avert increasing pressures on the economy's already strained resources and rising inflation rates that would undermine the economy's remarkable performance. Adding to concerns about heightened inflation pressures was statistical and anecdotal evidence that could be read as suggesting that underlying inflation already was beginning to pick up. Unit costs, however, were still remarkably subdued and members saw no developments at this stage that might augur a sharp near-term deterioration in price inflation. In their assessment of business conditions across the country, members commented on continuing indications of robust economic activity in all regions and widely increasing pressures on labor and other resources. Indeed, economic activity appeared to have grown appreciably further from already elevated levels in numerous parts of the country, although the latest regional data and anecdotal reports provided scattered indications that business conditions might be starting to soften in some areas. In this regard, members referred to the emergence of slightly more cautious attitudes on the part of some business executives concerning the prospects for their industries. With respect to developments in key expenditure sectors of the economy, growth in consumer spending was expected to slow from the exceptional pace of the first quarter, though still likely to be relatively robust. Retail sales had edged lower in April, but members commented that it was too early to gauge whether this softening was a harbinger of a more moderate trend. Consumer sentiment had remained upbeat in the context of an extended period of sizable expansion in employment and incomes and the sharp rise in stock market prices over the course of recent years. Some members observed that the slightly less ebullient consumer behavior recently might have been influenced to some extent by the volatility and downward movement in the stock market over the course of the past several weeks. Higher financing costs probably also were beginning to play a role. Looking ahead, the experience of recent years amply demonstrated the difficulty of forecasting the performance of the stock market. The failure of further large increases to materialize, should that occur, would over time imply a more neutral or even a negative net impact from wealth once the positive effects of the earlier advance had played themselves out, but the latter would take some time. The same background factors were likely to govern the prospective behavior of housing activity. The evidence of a downturn in homebuilding was still quite marginal, but some anecdotal reports suggested that higher mortgage rates were starting to exert a retarding influence on housing demand. Even so, members continued to identify areas of remarkable strength across the nation, and overall housing construction remained at an elevated level. On the assumption of further growth in jobs and incomes in line with current forecasts and absent markedly higher mortgage financing costs, housing activity might reasonably be expected to settle at a level a bit below recent highs. Business investment spending retained strong upward momentum, though it had exhibited an uneven growth pattern in recent quarters that importantly reflected Y2K effects. Looking ahead, further rapid growth was expected in spending for business equipment and software in light of likely ongoing efforts to hold down costs by substituting capital embodying advanced technology for scarce labor resources. Recent order trends and rising capacity utilization rates were consistent with this expectation. Expenditures on nonresidential structures and other construction generally had strengthened in recent months, and members expected them to be well maintained in part because of heavy spending on roads and other public projects by state and local governments. The foreign trade sector of the economy was projected to provide less of a safety valve for the accommodation of domestic demand going forward. Although a number of foreign nations continued to face political and economic problems, the strengthening economies of many U.S. trading partners would tend to limit the availability of excess foreign production capacity to help meet the growth in U. S. demand. At the same time, foreign demand for U.S. goods and services would be expanding, thereby adding to demand pressures on U.S. producer resources, other things equal. In the latter regard, several members mentioned anecdotal evidence of growing export demand for a variety of domestic products. In their discussion of the outlook for inflation, the members focused on statistical and anecdotal indications of further tightening of labor resources, acceleration in some measures of labor compensation, and early signs of a possible upturn in underlying price inflation. Data on employment, reinforced by anecdotal commentary from around the country, continued to provide evidence of extremely tight labor markets, which at least in some parts of the country appeared to have tightened further since early in the year. Business contacts spoke of spending a great deal of time and expense to attract and retain workers while concomitantly persisting in efforts to improve the productivity of their operations to accommodate burgeoning growth in demand in the face of labor force constraints. There were more reports that rising wages and benefits and increasing costs of nonlabor inputs could no longer be fully offset by improvements in productivity, and more business firms appeared to be attempting or considering increases in their selling prices to maintain or improve their profit margins. However, their ability to set higher prices, or at least to raise them significantly, continued to be severely constrained by the persistence of strong competition across much of the economy. Indeed, examples of successful efforts to mark up prices, which tended to be concentrated in products using oil-related inputs, were still the exception. Even so, the members believed that the risks of acceleration in core prices were now appreciably higher given current trends in aggregate demand, pressures on resources, and developments in foreign economies. In the Committee's discussion of policy for the intermeeting period ahead, all the members endorsed a proposal to tighten reserve conditions sufficiently to raise the federal funds rate by � percentage point to a level of 6-1/2 percent. A more forceful policy move than the 25 basis point increases that had been implemented since mid-1999 was desirable in light of the extraordinary and persisting strength of overall demand, exceeding even the increasingly rapid growth of potential supply, and the attendant indications of growing pressures in already tight markets for labor and other resources. The strength in demand might itself be, at least in part, the result of the ongoing acceleration of productivity, with the latter feeding back on demand through higher equity prices and profitable investment opportunities. Financial markets seemed to have recognized the need for real interest rates to rise further under these circumstances, and while market assessments were not always correct, the evidence suggested that a more substantial tightening at this meeting was needed to limit inflation pressures. The members saw little risk in a relatively aggressive policy move, given the strong momentum of the expansion and widespread market expectations of such a move. The greater risk to the economic expansion at this point was for policy to be too sluggish in adjusting, thereby allowing inflationary disturbances and dislocations to build. A 50 basis point adjustment was more likely to help forestall a rise in inflationary expectations that, at least in the opinion of some members, already showed signs of worsening. A widespread view that the Federal Reserve would take whatever steps were needed to hold down inflation over time probably had contributed to the persistence of subdued long-run inflation expectations during an extended period when rapidly rising demand was pressing on limited supply resources. Today's policy move would undergird such relatively benign expectations and help assure the success of the Committee's policy. The members agreed that the balance of risks sentence that would be included in the press statement to be released shortly after this meeting should indicate, as it had for other recent meetings, that even after today's tightening action the members believed the risks would remain tilted toward rising inflation. This view of the risks was based primarily on the persisting momentum of aggregate demand growth and the unusually high level of labor resource utilization. At the same time, a number of the members commented that they did not want to prejudge the potential extent or pace of future policy tightening and that the Committee should continue to assess the need for further policy moves in the light of evolving economic conditions to be reviewed on a meeting-by-meeting basis. 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 increasing the federal funds rate to 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 the risks are weighted mainly toward conditions that may generate heightened inflation pressure 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-Wednesday, June 27-28, 2000. The meeting adjourned at 1:05 p.m. Donald L. Kohn Secretary

2000-05-16

Statement

The Federal Open Market Committee voted today to raise its target for the federal funds rate by 50 basis points to 6-1/2 percent. In a related action, the Board of Governors approved a 50 basis point increase in the discount rate to 6 percent. Increases in demand have remained in excess of even the rapid pace of productivity-driven gains in potential supply, exerting continued pressure on resources. The Committee is concerned that this disparity in the growth of demand and potential supply will continue, which could foster inflationary imbalances that would undermine the economy's outstanding performance. Against the background of its long-term goals of price stability and sustainable economic growth and of the information already available, the Committee believes the risks are weighted mainly toward conditions that may generate heightened inflation pressures in the foreseeable future. In taking the discount rate action, the Federal Reserve Board approved requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, Cleveland, Richmond, and San Francisco. The discount rate is the rate charged depository institutions when they borrow short-term adjustment credit from their district Federal Reserve Banks.

2000-05-18

Minute

Minutes of the Federal Open Market Committee March 21, 2000 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, March 21, 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. ParryMr. Hoenig, Ms. Minehan, Messrs. Moskow, Poole, and Stewart, Alternate Members of the Federal Open Market Committee Messrs. Boehne, McTeer, and Stern, Presidents of the Federal Reserve Banks of Philadelphia, Dallas, and Minneapolis respectively Mr. Kohn, Secretary and Economist Mr. Bernard, Deputy Secretary Ms. Fox, Assistant Secretary Mr. Gillum, Assistant Secretary Mr. Mattingly, General Counsel Ms. Johnson, Economist Mr. Prell, Economist Ms. Cumming, Messrs. Eisenbeis, Goodfriend, Howard, Lindsey, Reinhart, Simpson, and Stockton, 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 Messrs. Madigan and Slifman, Associate Directors, Divisions of Monetary Affairs and Research and Statistics respectively, Board of Governors Messrs. Struckmeyer and Whitesell, Assistant Directors, Divisions of Research and Statistics and Monetary Affairs respectively, Board of Governors Ms. Low, Open Market Secretariat Assistant, Division of Monetary Affairs, Board of Governors Ms. Browne, Messrs. Hakkio and Hunter, Ms. Krieger, Messrs. Lang, Rasche, and Rosenblum, Senior Vice Presidents, Federal Reserve Banks of Boston, Kansas City, Chicago, New York, Philadelphia, St. Louis, and Dallas respectively Mr. Bryan, Assistant Vice President, Federal Reserve Bank of Cleveland Mr. Weber, Senior Research Officer, Federal Reserve Bank of Minneapolis Mr. Rudebusch, Senior Research Officer, Federal Reserve Bank of San FranciscoBy unanimous vote, the minutes of the meeting of the Federal Open Market Committee held on February 1-2, 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, 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 February 2, 2000, through March 20, 2000. By unanimous vote, the Committee ratified these transactions. At its meeting in August 1999, the Committee had voted to expand the collateral that could be accepted in System repurchase transactions and had authorized the use of reverse repurchase agreements. These authorizations were scheduled to expire at the end of April 2000. At this meeting the Manager proposed that the authority to use the broader range of collateral be extended until the first meeting in 2001 and that the authority to engage in reverse repurchase agreements be made permanent. The principal effect of the expanded collateral authorized last August, together with the use of tri-party repurchase agreements, was to allow passthrough mortgage securities of GNMA, FNMA, and FHLMC and "stripped" securities of the U.S. Treasury and federal government agencies to be taken as collateral for repurchase transactions. Direct Treasury obligations remained the preferred means for meeting the System's needs, but anticipated paydowns of marketable federal debt associated with projected budget surpluses were likely to limit the System's ability in the future to continue to add substantially to holdings, even on a temporary basis, without generating undesirable market repercussions. In this setting, the Manager recommended that a broad-gauge study be undertaken to consider alternative asset classes and selection criteria that could be appropriate for the System Open Market Account (SOMA), with particular attention to alternatives to the current reliance on net additions to outright holdings of Treasury securities as the sole means of effectuating the upward trend in the asset side of the System's balance sheet. Pending the completion of that study and the Committee's consideration of alternative asset allocations, the Manager suggested that the Desk could rely on temporary operations with relatively long maturities to meet the growth in underlying reserve needs that could not comfortably be met by further outright purchases of Treasury securities. In implementing these temporary operations, the Manager expressed a preference to distribute the System's demand for collateral as broadly as possible in order to minimize the impact on spread relationships in the financing market. This preference motivated his recommendation to extend temporarily the authority to operate in the broader range of collateral. The required size of the longer-term temporary operations would depend on how much of the permanent reserve need could be met by outright purchases of Treasury securities. The Manager noted that the desirability of maintaining a liquid bill portfolio suggested that System holdings of any bill issue should be limited to 35-40 percent of the outstanding amount. With issue sizes declining, such limits might mean that from time to time some portion of the System's maturing bill holdings would be redeemed rather than rolled over in Treasury auctions. The Manager also intended to roll over maturing holdings of Treasury coupon issues in auctions and to add to the System's portfolio to meet permanent reserve needs by purchasing coupon securities in the secondary market. However, the amount that could be added through outright purchases without disturbing the Treasury market would have to be gauged over time relative to conditions in the market as Treasury issuance patterns evolved in response to System purchases and Treasury buybacks of coupon securities. All the members endorsed the proposal for a study of the issues associated with the System's asset allocation in light of declining Treasury debt. They noted that the requested temporary expansion of authority, pending the Committee's consideration of the completed study, should not be read as indicating in any way how the Committee might ultimately choose to allocate the portfolio, and any interim operations in the broader range of collateral should be capable of being unwound without adverse market consequences. At the conclusion of this discussion, the Committee voted unanimously to extend the suspension of several provisions of the "Guidelines for the Conduct of System Operations in Federal Agency Issues" until the first regularly scheduled meeting in 2001. The Committee also accepted a proposal by the Manager to make permanent the authority to use reverse repurchase agreements in the conduct of open market operations. Such agreements are equivalent to matched sale-purchase transactions, which the Manager has long been authorized to use, but reverse RPs have the advantage of much greater flexibility because they are the common practice in financial markets. The Manager indicated that he did not expect to use reverse RPs on a regular basis until the System's new trading system became operational, but in conjunction with existing tri-party arrangements there might be occasions in the interim when the timing of open market operations would make it desirable to use them instead of matched sale-purchase transactions. The members voted unanimously to adopt on a permanent basis, subject to the annual review required for all the Committee's instruments, paragraph 1 (c) of the Authorization for Domestic Open Market Operations in the form reproduced below. 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: (c) To sell U.S. Government securities and securities that are direct obligations of, or fully guaranteed as to principal and interest by, any agency of the United States to dealers for System Open Market Account under agreements for the resale by dealers of such securities or obligations in 90 calendar days or less, at rates that, unless otherwise expressly authorized by the Committee, shall be determined by competitive bidding, after applying reasonable limitations on the volume of agreements with individual dealers. The Committee then turned to a discussion of the economic and financial outlook and the implementation of monetary policy over the intermeeting period ahead. The information reviewed at this meeting suggested that the expansion of economic activity remained rapid. Consumer spending and business fixed investment were still trending upward strongly, and housing demand was holding at a high level. Although the growth in domestic demand was being met partly through rising imports, industrial production and nonfarm payrolls were expanding briskly. Labor markets continued to be very tight, but there were few signs of any acceleration in labor costs. Price inflation was still moderate, except for the upturn in energy prices in recent months. Labor demand remained robust in January and February, with the average increase in private nonfarm payroll employment over the two months only a little below the strong pace of 1999. Job growth in manufacturing and construction was solid, while hiring in the services sector slowed appreciably. The civilian unemployment rate, at 4.1 percent in February, was just above its 1999 low, and initial claims for unemployment insurance were at an extremely low level in early March. Industrial production was up sharply in the early months of the year, reflecting large gains in the manufacturing and utilities sectors. Within manufacturing, output of high-tech equipment was notably strong, but production of motor vehicles and parts also recorded a sizable advance on balance over the January-February period. By contrast, output of aircraft and parts weakened again. The continuing strength in manufacturing lifted the factory operating rate further, but capacity utilization stayed a little below its long-term average. Retail sales continued to increase rapidly in January and February against the backdrop of strong growth in disposable income and household wealth and elevated consumer confidence. Sales of light vehicles surged over the January-February period. Purchases of goods other than motor vehicles picked up substantially further, with gains widespread across most major categories. Outlays for services rose briskly in January (latest data); part of the gain resulted from higher spending for heating as temperatures in many parts of the country dropped to more seasonable levels. Residential housing activity remained strong in the first two months of the year. Total private housing starts in January and February held at the high December level, as a surge in starts of multifamily units offset a downturn in starts of single-family homes. The demand for housing, associated with continuing gains in jobs and incomes, had remained ebullient despite an appreciable increase in mortgage rates. Although sales of new single-family homes fell in January (latest data), the decline followed a December pace that was the highest monthly rate in more than twenty years. Sales of existing homes also declined in January, continuing a trend that had begun last July, but inventories of existing homes for sale evidently were at very low levels. Business spending on durable equipment and software and on nonresidential structures increased sharply in January. Shipments of computing and communications equipment surged after the century rollover, and shipments of other non-aircraft goods rose moderately. Deliveries of aircraft continued to be held down by the labor strike at Boeing. The recent strength in orders for many types of equipment pointed to further advances in spending in coming months. Expenditures for nonresidential structures turned up last autumn and rose rapidly in January. Office and other commercial construction activity was robust, while industrial building was little changed. The pace of accumulation of manufacturing and trade inventories slowed somewhat in January from the elevated rate in the fourth quarter; however, sales grew briskly and the aggregate inventory-sales ratio edged down from an already very low level. In manufacturing, stocks increased moderately further in January; however, shipments grew by more, and the aggregate stock-shipments ratio for the sector declined to a new low. Both wholesale and retail inventories increased in line with sales, and inventory-sales ratios for these sectors stayed at the bottom of their respective ranges over the past twelve months. The U.S. trade deficit in goods and services climbed to a new high in January, with the value of exports retreating from the peak reached in December and the value of imports rising sharply. The drop in exports was concentrated in computers, semiconductors, aircraft, chemicals, and consumer goods, while the increase in imports was primarily in oil and automotive products. The available information suggested that economic expansion continued to be robust in most foreign industrial economies. The Japanese economy was still the notable exception, though some favorable signs were evident. Economic activity in the developing countries also picked up further, with Asian countries registering the largest gains. Price inflation had remained moderate in recent months, with the exception of higher energy prices. Consumer prices jumped in February as energy prices surged. Abstracting from energy prices, however, consumer price inflation was moderate in January and February. Moreover, the increase in consumer prices of items other than food and energy during the twelve months ended in February was the same as the change during the previous twelve-month period. At the producer level, prices of finished goods other than food and energy changed little in January and February, and their rise during the twelve months ended in February was somewhat smaller than the advance during the previous twelve-month period. At earlier stages of processing, however, producer prices registered somewhat larger increases than those for finished goods in both the January-February period and the twelve months ended in February. With regard to labor costs, average hourly earnings grew at a slightly faster rate in January and February than they had in the fourth quarter of last year. However, the advance in this earnings measure in the twelve months ended in February was about the same as that in the previous twelve-month period. At its meeting on February 1-2, 2000, the Committee adopted a directive that called for a slight tightening of conditions in reserve markets consistent with an increase of � percentage point in the federal funds rate to an average of about 5-3/4 percent. The members agreed that this action was needed to help bring the growth of aggregate demand into better alignment with the expansion of potential aggregate supply and thereby help avert rising inflationary pressures. The members also agreed that the risks remained weighted mainly in the direction of greater inflation pressures and that further tightening actions might be necessary to bring about financial conditions that were sufficiently firm to contain upward pressures on labor costs and prices. Open market operations during the intermeeting period were directed toward implementing the desired slightly greater pressure on reserve positions, and the federal funds rate averaged very close to the Committee's 5-3/4 percent target. The Committee's action and its announcement that the risks were weighted in the direction of rising inflation were widely anticipated and had little immediate effect on market yields. Subsequently, market rates moved up in response to the receipt of data that signaled persisting strength of the economy, but they turned back down in response to new information indicating continued low inflation and to greater volatility in equity prices. On balance over the intermeeting period, interest rates on private instruments registered small mixed changes while yields on longer-term Treasury securities declined significantly. Most major indexes of equity prices moved up appreciably on net over the intermeeting period. In foreign exchange markets, the trade-weighted value of the dollar changed little over the intermeeting period against a basket of major currencies. The dollar rose against the Australian dollar, British pound, Canadian dollar, and the euro as investors apparently revised down their expectations of the extent of monetary tightening in those countries. By contrast, the dollar declined against the Japanese yen and the currencies of a number of other important trading partners, notably the Mexican peso and the Brazilian real. The growth of M2 and M3 slowed in February, partly reflecting an unwinding of Y2K effects and rising opportunity costs of holding liquid balances. In addition, the surging prices of technology-related equities might have spurred depositors to shift some of their M2 balances into equity mutual funds. The growth of total domestic nonfinancial debt slowed early in the year as large federal debt paydowns resumed following the sharp buildup of Treasury balances prior to year-end. The staff forecast prepared for this meeting suggested that the economic expansion would moderate gradually from its currently elevated pace to a rate around, or perhaps a little below, the growth of the economy's estimated potential. The expansion of domestic final demand increasingly would be held back by the anticipated waning of positive wealth effects associated with large earlier gains in equity prices and by higher interest rates. As a result, the growth of spending on consumer durables and houses was expected to slow; in addition, business investment in equipment and software was projected to decelerate following a first-quarter surge that partly reflected information technology expenditures that had been postponed until after the century rollover. In addition, solid economic expansion abroad was expected to boost the growth of U.S. exports for some period ahead. Core price inflation was projected to increase somewhat over the forecast horizon, partly as a result of rising import prices and some firming of gains in nominal labor compensation in persistently tight labor markets that would not be fully offset by productivity growth. In the Committee's discussion of current and prospective economic developments, members commented, as they had at earlier meetings, that they saw little evidence of any slowing in the rapid expansion of domestic economic activity, but they also saw few signs to date of significant acceleration in inflation. The growth in aggregate demand continued to display remarkable vigor, evidently driven by high levels of consumer and business confidence and accommodative financial markets. Large increases in imports were helping to satisfy the impressive growth in demand. At the same time, aggregate supply also continued to record strong gains amid indications of further acceleration in productivity. Looking ahead, however, members reiterated earlier concerns that aggregate demand could continue to grow faster than potential aggregate supply, even under optimistic assumptions regarding future productivity gains. Contributing to that continuing imbalance, the strengthening of most foreign industrial economies and the diminishing effects of the earlier appreciation of the dollar were likely to boost further foreign demand for U.S. output. The experience of recent years amply demonstrated, however, that the extent to which prospective growth in demand might exceed further expansion in the economy's potential and the implications for inflation were subject to a wide range of uncertainty as to both degree and timing. Nonetheless, given the persistence of rapid growth in aggregate demand beyond growth in aggregate supply and very tight conditions in labor markets, the members continued to be concerned about the risks of rising inflation. In their comments about economic conditions across the nation, members referred to anecdotal and other evidence of widespread strength in business activity, which in many areas appeared to be rising appreciably further from already high levels. Agriculture continued to be a notable exception, though members also reported signs of softening in housing and other construction activity in some areas. With regard to developments in key sectors of the economy, consumer spending had remained particularly robust thus far this year according to reports from most parts of the nation. Some moderation in such spending to a pace more in line with the growth in household incomes was cited as a reasonable expectation, given underlying factors such as the large buildup of durable goods in consumer hands, the rise in consumer debt loads, and the effects of higher oil prices. Of key importance was the prospective performance of the stock market, whose robust gains in recent years had undoubtedly boosted consumer confidence and spending. The members noted that equity prices generally had posted further gains during the intermeeting period, but in their view the large increases of recent years were not likely to be repeated, and an absence of such gains would have a restraining effect on consumer expenditures over time. Even so, further increases in household incomes along with the lagged wealth effects of the sharp earlier advances in stock market prices seemed likely to sustain relatively strong consumer spending for some period of time. After moderating toward the end of 1999, in part because of caution ahead of the century date change, business fixed investment again appeared to be expanding at a vigorous pace. The advance included not only notable strength in the high-tech sector but brisk spending in a number of other areas as well. Factors underlying business optimism included robust growth in revenues and profits and the ready availability of both debt and equity financing. The divergence, at least until recently, in the stock market between the valuations of high-tech firms and those of more traditional, established firms was inducing a redirection of investment funds to business activities that were perceived to be more productive. While the associated capital investments undoubtedly had contributed to the acceleration in productivity, some members expressed concern that the historically elevated valuations of many high-tech stocks were subject to a sizable market adjustment at some point. That risk was underscored by the increased volatility of the stock market. In the housing sector, building activity generally remained at a high level, though slipping a bit in some parts of the country, and there were only limited indications that the rise in mortgage interest rates was holding down residential construction. On the other hand, housing and other construction activity reportedly was being retarded by shortages of labor and, in some areas, of materials as well. On balance, recent developments did not augur any significant changes in homebuilding. The improved economic outlook for most of the nation's important trading partners, in association with the fading effects of the dollar's earlier appreciation, pointed to faster expansion in exports and recent anecdotal reports were broadly consistent with such a development. Growth in imports was expected to moderate over time, though imports currently were still rising rapidly. Even so, prospective developments in the foreign trade sector were not likely to provide much relief to demand pressures on the U.S. economy. With regard to the outlook for inflation, members saw little evidence to date of any acceleration in core inflation, and unit costs for nonfinancial corporations were unchanged in the fourth quarter. Despite such welcome developments, members expressed concern about indications of a less benign inflation climate. The direct and indirect effects of higher fuel prices, the rise in other import prices, increasing medical costs, and some deterioration in surveys of inflation expectations could begin to show through to higher underlying inflation. More fundamentally, however, the members believed that current growth in aggregate demand, should it persist, would continue to exceed the expansion of potential output and, by putting added pressure on already tight labor markets, would at some point foster inflationary imbalances that would undermine the economic expansion. In the Committee's discussion of policy for the intermeeting period ahead, all the members endorsed a proposal to tighten reserve conditions by a slight amount consistent with an increase in the federal funds rate to a level of 6 percent. Persisting strength in aggregate domestic demand had been accommodated thus far without a pickup in underlying inflation because of the remarkable acceleration in productivity and because of two safety valves--the economy's ability to draw on the pool of available workers and to finance the rapid growth in imports relative to exports. However, a further acceleration in productivity was unlikely to boost the economy's growth potential sufficiently to satisfy the expansion in aggregate demand without some slowing in the latter. In addition, the two safety valves could not be counted on to work indefinitely. In these circumstances, the members saw substantial risks of rising pressures on labor and other resources and of higher inflation that called for some further firming of monetary policy at this meeting. They agreed, though, that because a significant acceleration in inflation did not appear to be imminent and because uncertainties continued to surround the economic outlook, a gradual approach to policy adjustments was warranted. Some members commented that, although a more forceful policy move of 50 basis points might be needed at some point, measured and predictable policy tightening moves, such as the one contemplated today, still were desirable in current circumstances, which included somewhat unsettled financial markets. Looking ahead, the Committee would continue to assess the need for further tightening to contain inflation. Even after taking account of the lagged effects of the considerable tightening that already had been implemented since mid-1999, additional tightening might well be needed to ensure that financial conditions would adjust sufficiently to bring aggregate demand into better balance with potential supply and thereby counter a possible escalation of pressures on labor costs and prices. The members agreed that the press statement to be issued shortly after this meeting should continue to highlight their view that even after today's tightening move the risks would remain tilted toward heightened inflation pressures. At the conclusion of this discussion, the Committee voted to authorize and direct the Federal Reserve Bank of New York, until it was instructed otherwise, to execute transactions in the System account in accordance with the following policy directive: 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 to an average of around 6 percent. The vote also encompassed approval of the sentence below for inclusion in the press statement to be released shortly after the meeting: Against the background of its long-run goals of price stability and sustainable economic growth and of the information currently available, the Committee believes the risks are weighted mainly toward conditions that may generate heightened inflation pressures in the foreseeable future. Votes for this action: Messrs. Greenspan, McDonough, Broaddus, Ferguson, Gramlich, Guynn, Jordan, Kelley, Meyer, and Parry. Votes against this action: None. The meeting was recessed briefly after this vote and the members of the Board of Governors left the room to vote on increases in the discount rate that were pending at several Federal Reserve Banks. On the Board members' return, Chairman Greenspan announced that the Board had approved a � percentage point increase in the discount rate to a level of 5-1/2 percent. The Committee concluded its meeting with a review of the press release announcing the joint policy action. It was agreed that the next meeting of the Committee would be held on Tuesday, May 16, 2000. The meeting adjourned at 12:50 p.m. Donald L. Kohn Secretary

2000-03-21

Statement

The Federal Open Market Committee voted today to raise its target for the federal funds rate by 25 basis points to 6 percent. In a related action, the Board of Governors approved a 25 basis point increase in the discount rate to 5-1/2 percent. Economic conditions and considerations addressed by the Committee are essentially the same as when the Committee met in February. The Committee remains concerned that increases in demand will continue to exceed the growth in potential supply, which could foster inflationary imbalances that would undermine the economy's record economic expansion. Against the background of its long-run goals of price stability and sustainable economic growth and of the information currently available, the Committee believes the risks are weighted mainly toward conditions that may generate heightened inflation pressures in the foreseeable future. In taking the discount rate action, the Federal Reserve Board approved requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City and San Francisco. The discount rate is the rate charged depository institutions when they borrow short-term adjustment credit from their district Federal Reserve Banks.

2000-03-23

Minute

Minutes of the Federal Open Market Committee February 1-2, 2000 A meeting of the Federal Open Market Committee was held in the offices of the Board of Governors of the Federal Reserve System in Washington, D.C., on Tuesday, February 1, 2000, at 2:30 p.m. and continued on Wednesday, February 2, 2000, at 9:00 a.m. Present:Mr. Greenspan, Chairman Mr. McDonough, Vice Chairman Mr. Broaddus Mr. Ferguson Mr. Gramlich Mr. Guynn Mr. Jordan Mr. Kelley Mr. Meyer Mr. ParryMr. Hoenig, Ms. Minehan, Messrs. Moskow and Poole, Alternate Members of the Federal Open Market Committee Messrs. Boehne, McTeer, and Stern, Presidents of the Federal Reserve Banks of Philadelphia, Dallas, and Minneapolis respectively Mr. Kohn, Secretary and Economist Mr. Bernard, Deputy Secretary Ms. Fox, Assistant Secretary Mr. Gillum, Assistant Secretary Mr. Mattingly, General Counsel Mr. Baxter, Deputy General Counsel Ms. Johnson, Economist Mr. Prell, Economist Mr. Beebe, Ms. Cumming, Messrs. Eisenbeis, Goodfriend, Howard, Lindsey, Reinhart, Simpson, Sniderman, and Stockton, Associate Economists Mr. Fisher, Manager, System Open Market Account Mr. Winn,1 Assistant to the Board, Office of Board Members, Board of Governors Mr. Ettin, Deputy Director, Division of Research and Statistics, Board of Governors Messrs. Madigan and Slifman, Associate Directors, Divisions of Monetary Affairs and Research and Statistics respectively, Board of Governors Messrs. Oliner and Whitesell, Assistant Directors, Divisions of Research and Statistics and Monetary Affairs respectively, Board of Governors Mr. Small,2 Section Chief, Division of Monetary Affairs, Board of Governors Messrs. Brayton,2 Morton,3 and Rosine,3 Senior Economists, Divisions of Research and Statistics, International Finance, and Research and Statistics respectively, Board of Governors Ms. Garrett and Mr. Hooker,3 Economists, Division of Monetary Affairs, Board of Governors Ms. Low, Open Market Secretariat Assistant, Division of Monetary Affairs, Board of Governors Ms. Browne, Messrs. Hakkio and Hunter, Ms. Krieger, Messrs. Lang, Rasche, Rolnick, and Rosenblum, Senior Vice Presidents, Federal Reserve Banks of Boston, Kansas City, Chicago, New York, Philadelphia, St. Louis, Minneapolis, and Dallas respectivelyIn the agenda for this meeting, it was reported that advices of the election of the following members and alternate members of the Federal Open Market Committee for the period commencing January 1, 2000, and ending December 31, 2000, had been received and that these individuals had executed their oaths of office. The elected members and alternate members were as follows: William J. McDonough, President of the Federal Reserve Bank of New York, with Jamie B. Stewart, Jr., First Vice President of the Federal Reserve Bank of New York, as alternate J. Alfred Broaddus, Jr., President of the Federal Reserve Bank of Richmond, with Cathy E. Minehan, President of the Federal Reserve Bank of Boston, as alternate Jerry L. Jordan, President of the Federal Reserve Bank of Cleveland, with Michael H. Moskow, President of the Federal Reserve Bank of Chicago, as alternate. Jack Guynn, President of the Federal Reserve Bank of Atlanta, with William Poole, President of the Federal Reserve Bank of St. Louis, as alternate Robert T. Parry, President of the Federal Reserve Bank of San Francisco, with Thomas M. Hoenig, President of the Federal Reserve Bank of Kansas City, as alternate. By unanimous vote, the following officers of the Federal Open Market Committee were elected to serve until the election of their successors at the first meeting of the Committee after December 31, 2000, with the understanding that in the event of the discontinuance of their official connection with the Board of Governors or with a Federal Reserve Bank they would cease to have any official connection with the Federal Open Market Committee: Alan Greenspan Chairman William J. McDonough Vice Chairman Donald L. Kohn Secretary and Economist Normand R. V. Bernard Deputy Secretary Lynn S. Fox Assistant Secretary Gary P. Gillum Assistant Secretary J. Virgil Mattingly, Jr. General Counsel Thomas C. Baxter, Jr. Deputy General Counsel Karen H. Johnson Economist Michael J. Prell Economist Jack H. Beebe, Christine Cumming, Robert A. Eisenbeis, Marvin S. Goodfriend, David H. Howard, David E. Lindsey, Vincent R. Reinhart, Thomas D. Simpson, Mark S. Sniderman, and David J. Stockton Associate Economists By unanimous vote, the Federal Reserve Bank of New York was selected to execute transactions for the System Open Market Account until the adjournment of the first meeting of the Committee after December 31, 2000. By unanimous vote, Peter R. Fisher was selected to serve at the pleasure of the Committee as Manager, System Open Market Account, on the understanding that his selection was subject to being satisfactory to the Federal Reserve Bank of New York. Secretary's note: Advice subsequently was received that the selection of Mr. Fisher as Manager was satisfactory to the board of directors of the Federal Reserve Bank of New York. By unanimous vote, the Committee approved an addition to the Authorization for Domestic Open Market Operations regarding adjustments to the stance of monetary policy during intermeeting periods. As had previously been agreed, the temporary authority given to the Federal Reserve Bank of New York to sell options to counter potential century-data-change pressures in financial markets was allowed to lapse. Accordingly, the Authorization was adopted, effective February 1, 2000, as shown below. AUTHORIZATION FOR DOMESTIC OPEN MARKET OPERATIONS The Federal Open Market Committee authorizes and directs the Federal Reserve Bank of New York, to the extent necessary to carry out the most recent domestic policy directive adopted at a meeting of the Committee: (a) To buy or sell U.S. Government securities, including securities of the Federal Financing Bank, and securities that are direct obligations of, or fully guaranteed as to principal and interest by, any agency of the United States in the open market, from or to securities dealers and foreign and international accounts maintained at the Federal Reserve Bank of New York, on a cash, regular, or deferred delivery basis, for the System Open Market Account at market prices, and, for such Account, to exchange maturing U.S. Government and Federal agency securities with the Treasury or the individual agencies or to allow them to mature without replacement; provided that the aggregate amount of U.S. Government and Federal agency securities held in such Account (including forward commitments) at the close of business on the day of a meeting of the Committee at which action is taken with respect to a domestic policy directive shall not be increased or decreased by more than $12.0 billion during the period commencing with the opening of business on the day following such meeting and ending with the close of business on the day of the next such meeting; (b) To buy U.S. Government securities and obligations that are direct obligations of, or fully guaranteed as to principal and interest by, any agency of the United States, from dealers for the account of the Federal Reserve Bank of New York under agreements for repurchase of such securities or obligations in 90 calendar days or less, at rates that, unless otherwise expressly authorized by the Committee, shall be determined by competitive bidding, after applying reasonable limitations on the volume of agreements with individual dealers; provided that in the event Government securities or agency issues covered by any such agreement are not repurchased by the dealer pursuant to the agreement or a renewal thereof, they shall be sold in the market or transferred to the System Open Market Account. (c) To sell U.S. Government securities and obligations that are direct obligations of, or fully guaranteed as to principal and interest by, any agency of the United States to dealers for System Open Market Account under agreements for the resale by dealers of such securities or obligations in 90 calendar days or less, at rates that, unless otherwise expressly authorized by the Committee, shall be determined by competitive bidding, after applying reasonable limitations on the volume of agreements with individual dealers. In order to ensure the effective conduct of open market operations, the Federal Open Market Committee authorizes the Federal Reserve Bank of New York to lend on an overnight basis U.S. Government securities held in the System Open Market Account to dealers at rates that shall be determined by competitive bidding but that in no event shall be less than 1.0 percent per annum of the market value of the securities lent. The Federal Reserve Bank of New York shall apply reasonable limitations on the total amount of a specific issue that may be auctioned, and on the amount of securities that each dealer may borrow. The Federal Reserve Bank of New York may reject bids which could facilitate a dealer's ability to control a single issue as determined solely by the Federal Reserve Bank of New York. In order to ensure the effective conduct of open market operations, while assisting in the provision of short-term investments for foreign and international accounts maintained at the Federal Reserve Bank of New York, the Federal Open Market Committee authorizes and directs the Federal Reserve Bank of New York (a) for System Open Market Account, to sell U.S. Government securities to such foreign and international accounts on the bases set forth in paragraph l(a) under agreements providing for the resale by such accounts of those securities within 90 calendar days on terms comparable to those available on such transactions in the market; and (b) for New York Bank account, when appropriate, to undertake with dealers, subject to the conditions imposed on purchases and sales of securities in paragraph l(b), repurchase agreements in U.S. Government and agency securities, and to arrange corresponding sale and repurchase agreements between its own account and foreign and international accounts maintained at the Bank. Transactions undertaken with such accounts under the provisions of this paragraph may provide for a service fee when appropriate. In the execution of the Committee's decision regarding policy during any intermeeting period, the Committee authorizes and directs the Federal Reserve Bank of New York, upon the instruction of the Chairman of the Committee, to adjust somewhat in exceptional circumstances the degree of pressure on reserve positions and hence the intended federal funds rate. Any such adjustment shall be made in the context of the Committee's discussion and decision at its most recent meeting and the Committee's long-run objectives for price stability and sustainable economic growth, and shall be based on economic, financial, and monetary developments during the intermeeting period. Consistent with Committee practice, the Chairman, if feasible, will consult with the Committee before making any adjustment. With Mr. Broaddus dissenting, the Authorization for Foreign Currency Operations, in the form shown below, was reaffirmed. AUTHORIZATION FOR FOREIGN CURRENCY OPERATIONS 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. 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. All transactions in foreign currencies undertaken under paragraph 1A. above shall, unless otherwise expressly authorized by the Committee, be at prevailing market rates. For the purpose of providing an investment return on System holdings of foreign currencies, or for the purpose of adjusting interest rates paid or received in connection with swap drawings, transactions with foreign central banks may be undertaken at non-market exchange rates. 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. 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. 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. 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. Staff officers of the Committee are authorized to transmit pertinent information on System foreign currency operations to appropriate officials of the Treasury Department. All Federal Reserve Banks shall participate in the foreign currency operations for System Account in accordance with paragraph 3 G(1) of the Board of Governors' Statement of Procedure with Respect to Foreign Relationships of Federal Reserve Banks dated January 1, 1944. With Mr. Broaddus dissenting, the Foreign Currency Directive, in the form shown below, was reaffirmed. FOREIGN CURRENCY DIRECTIVE System operations in foreign currencies shall generally be directed at countering disorderly market conditions, provided that market exchange rates for the U.S. dollar reflect actions and behavior consistent with the IMF Article IV, Section 1. 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. 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. System foreign currency operations shall be conducted: A. In close and continuous consultation and cooperation with the United States Treasury; B. In cooperation, as appropriate, with foreign monetary authorities; and C. In a manner consistent with the obligations of the United States in the International Monetary Fund regarding exchange arrangements under the IMF Article IV. Mr. Broaddus dissented in the votes on the Authorization and the Directive because they provide the foundation for foreign exchange market intervention. He continued to believe that the Federal Reserve's participation in foreign exchange market intervention compromises its ability to conduct monetary policy effectively. Because sterilized intervention cannot have sustained effects in the absence of conforming monetary policy actions, Federal Reserve participation in foreign exchange operations in his view risks one of two undesirable outcomes. First, the independence of monetary policy is jeopardized if the System adjusts its policy actions to support short-term foreign exchange objectives set by the U.S. Treasury. Alternatively, the credibility of monetary policy is damaged if the System does not follow interventions with compatible policy actions, the interventions consequently fail to achieve their objectives, and the System is associated in the mind of the public with the failed operations. By unanimous vote, the Procedural Instructions with Respect to Foreign Currency Operations, in the form shown below, were reaffirmed. PROCEDURAL INSTRUCTIONS WITH RESPECT TO FOREIGN CURRENCY OPERATIONS In conducting operations pursuant to the authorization and direction of the Federal Open Market Committee as set forth in the Authorization for Foreign Currency Operations and the Foreign Currency Directive, the Federal Reserve Bank of New York, through the Manager, System Open Market Account ("Manager"), shall be guided by the following procedural understandings with respect to consultations and clearances with the Committee, the Foreign Currency Subcommittee, and the Chairman of the Committee. All operations undertaken pursuant to such clearances shall be reported promptly to the Committee. 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. 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. The Manager shall also consult with the Subcommittee or the Chairman about proposed swap drawings by the System and about any operations that are not of a routine character. On January 19, 2000, the continuing rules, regulations, and other instructions of the Committee were distributed with the advice that, in accordance with procedures approved by the Committee, they were being called to the Committee's attention before the February 1-2 organization meeting to give members an opportunity to raise any questions they might have concerning them. Members were asked to indicate if they wished to have any of the instruments in question placed on the agenda for consideration at this meeting. The Rules of Procedure were placed on the agenda and by unanimous vote the Committee approved updating changes to its Rules of Procedure, effective upon publication in the Federal Register. The changes relate to electronic and telephone communications. Secretary's note: The revised Rules of Procedure were published in the Federal Register on February 9, 2000. By unanimous vote, the Program for Security of FOMC Information was amended with regard to certain security classifications and staff access to confidential FOMC information. By unanimous vote, the minutes of the meeting of the Federal Open Market Committee held on December 21, 1999, were approved. The Manager of the System Open Market Account reported on recent developments in foreign exchange markets. There were no open market operations in foreign currencies for the System's account in the period since the previous meeting, and thus no vote was required of the Committee. The Manager also reported on developments in domestic financial markets and on System open market transactions in government securities and federal agency obligations during the period December 21, 1999, to February 1, 2000. By unanimous vote, the Committee ratified these transactions. The Committee then turned to a discussion of the economic and financial outlook, the ranges for the growth of money and debt in 2000, and the implementation of monetary policy over the intermeeting period ahead. The information reviewed at this meeting suggested that economic activity had expanded rapidly in recent months. Consumer spending had remained very brisk, business fixed investment had continued on a strong upward trend, and housing demand was still at a relatively high level despite some slippage recently. The growth of domestic demand had been met in part through further advances in imports. Domestically, industrial production and nonfarm payrolls had continued to increase briskly. Despite very tight labor markets, labor costs had been climbing more slowly than in 1998. Consumer price inflation had stayed moderate over the past few months, despite a recent resurgence in energy prices. Labor demand remained robust through year-end, as nonfarm payroll employment posted a further large increase in December. Job growth in the services industry was brisk, construction hiring rose somewhat further against a backdrop of good weather and project backlogs, and manufacturing employment was essentially unchanged. The civilian unemployment rate held at 4.1 percent in December, its low for the year, and initial claims for unemployment insurance persisted at a very low level through late January. Industrial production recorded a sharp advance in the fourth quarter. Manufacturing and mining output rose briskly, but utilities output was held down by lackluster demand during a period of unseasonably warm weather in several parts of the country. Output gains in manufacturing were widespread and the factory operating rate rose further, though capacity utilization was still a little below its long-term average. Consumer spending apparently was very robust in the fourth quarter. Total nominal retail sales rose sharply further in December, with outlets for durable and nondurable goods recording substantial gains in sales. Spending related to Y2K concerns appeared to have been relatively limited. Outlays for services in October and November (latest data) were strong, even though spending for heating was down in response to the unseasonably warm weather. Housing activity was still at a relatively high level at year-end, buoyed by continuing strong gains in jobs and incomes despite the rise that had occurred in mortgage interest rates. Total private housing starts rebounded sharply in December from a decline in November, although part of the December pickup might have been associated with favorable weather patterns. Sales of new homes fell in November (latest data), reversing much of the sizable October rise, but average sales for the two-month period were only slightly below their strong rate of the first half of the year. Sales of existing homes were down in December, but they also were only a little below their elevated first-half pace. The available information suggested that growth of business spending for durable equipment slowed abruptly in the fourth quarter and that investment in nonresidential structures fell further. At least some of the deceleration in spending for capital equipment reflected a hesitancy to spend on computers and other high-tech equipment just in advance of the century rollover. The weakness in the nonresidential sector was evidenced by further declines in construction outlays and new building contracts in October and November. Office construction appeared to be leveling off in response to the higher cost of financing and to perceptions that the office space currently coming on line would be sufficient to meet demand. The book value of manufacturing and trade inventories surged in November after having climbed moderately on balance earlier in the year. Even though the rise might have been related to concerns about supply disruptions around year-end, inventory-sales ratios generally declined a little in association with very strong increases in sales, and the ratios were at or near the bottom of their ranges for the previous twelve months. The U.S. trade deficit in goods and services widened significantly over the October-November period from its average for the third quarter. The value of exports rose appreciably over the two months, largely reflecting growth in industrial supplies and service receipts, but the value of imports increased noticeably more, with some of the rise reflecting increases in import prices. The available information suggested that economic expansion remained robust in most foreign industrial nations. In Japan, however, economic activity was sluggish, with a seemingly small rise in the fourth quarter following a third-quarter decline. Economic activity in the developing countries apparently continued to pick up in recent months, although the pace of recovery varied widely. Economic growth appeared to have been brisk in Mexico, Korea, China, Hong Kong, and Taiwan but was mixed among the ASEAN countries and slower in Brazil. Price inflation had remained moderate in recent months. Consumer price inflation was subdued in December in spite of a sizable increase in energy prices; however, for the year as a whole, sharp increases in energy prices noticeably boosted overall consumer inflation. Excluding the volatile energy component, consumer price inflation slowed somewhat in 1999. By contrast, the subdued rise in the core PCE chain price index in 1999 was essentially the same as in 1998. At the producer level, prices of finished goods other than food and energy changed little in December and registered a considerably reduced increase in 1999. At earlier stages of processing, however, core producer prices recorded somewhat larger advances than those for finished goods in December and for the year. With regard to labor costs, average hourly earnings rose by a larger amount in December than in November, but the increase in this measure in 1999 was about the same as for 1998. At its meeting on December 21, the Committee adopted a directive that called for maintaining conditions in reserve markets consistent with an unchanged federal funds rate of about 5-1/2 percent and that did not contain any bias relating to the direction of possible adjustments to policy during the intermeeting period. The members noted that such a directive, which suggested that they did not expect a further change in policy before the February meeting, should foster steady conditions in financial markets during the sensitive century-date-change period. The Committee also agreed, however, that the statement accompanying the announcement of its decision would note that the Committee was especially concerned about the potential for inflation pressures to increase and would want to consider at its February meeting whether policy action would be needed to contain such pressures. Open market operations during the intermeeting period were directed toward maintaining the federal funds rate at around 5-1/2 percent. The funds rate averaged close to the Committee's target over the intermeeting interval despite very strong demands for additional currency and market liquidity through the year-end and a rapid unwinding thereafter. Against the background of the Committee's announced concern about the inflationary implications of unsustainably rapid economic growth, incoming information suggesting that aggregate demand retained considerable momentum led to upward pressure on market interest rates once the century-date-change period had passed without incident. The effects of higher interest rates apparently offset those of unexpectedly high corporate earnings, and most broad stock market indexes fell slightly on balance over the intermeeting period. In foreign exchange markets, the trade-weighted value of the dollar was up on balance over the intermeeting interval in relation to indexes of major foreign currencies and those of other important U.S. trading partners. Reflecting market expectations of substantial Federal Reserve tightening, the dollar appreciated considerably against the yen and the euro while depreciating somewhat against the Canadian dollar. M2 growth picked up appreciably during December and January, evidently reflecting extra demands for liquidity and safety during the century-date-change period. M3 accelerated by even more than M2 in December. Its non-M2 component ballooned as banks issued substantial volumes of large time deposits to meet very high credit demands and as institutional money market funds became recipients of some of their customers' precautionary liquid balances. From the fourth quarter of 1998 through the fourth quarter of 1999, M2 and M3 increased at rates somewhat above the Committee's annual ranges for 1999. Total domestic nonfinancial debt expanded in 1999 at a pace in the upper portion of its range. The staff forecast prepared for this meeting suggested that the expansion would gradually moderate from its currently elevated pace to a rate around or perhaps a little below the growth of the economy's estimated potential. The expansion of domestic final demand increasingly would be held back by the anticipated waning of positive wealth effects associated with earlier large gains in equity prices and by higher interest rates. As a result, growth of spending on consumer durables and houses was expected to slow; in contrast, however, overall business investment in equipment and software was projected to strengthen in response to the upward trend in replacement demand, especially for computers and software; also, continued solid economic growth abroad was expected to boost the growth of U.S. exports for some period ahead. Core price inflation was projected to rise somewhat over the forecast horizon, partly as a result of higher import prices and some firming of gains in nominal labor compensation in persistently tight labor markets that would not be fully offset by productivity growth. In the Committee's review of current and prospective economic developments, members commented that the economy still seemed to be growing very vigorously as it entered the new year, while core inflation remained subdued. The members were concerned, however, that recent trends in economic activity, if they continued, might undermine the economy's remarkable performance. The economy's potential to produce goods and services had been accelerating over time, but the demand for output had been growing even more strongly. If this imbalance continued, inflationary pressures were likely to build that would interfere with the economy's performance and could lead to a disruptive adjustment in economic activity. Accelerating productivity, although adding to the growth of the economy's potential output, also had induced expectations of rapidly accelerating business earnings that in turn had generated sharp increases in stock market wealth and lifted the growth of purchasing power and spending above that in incomes. Relatively high real interest rates that reflected the increased productivity and damped the rise in asset values would be needed to help restore balance. In that regard, members questioned whether rates would be high enough without policy tightening to bring the growth of demand in line with that of supply and contain pressures in labor markets. In the view of some members, taut labor markets together with a turnaround in some of the factors that had been temporarily damping inflation, such as oil and import prices, already lent an upward bias to the inflation outlook, and all agreed that a significant further tightening of labor resource utilization would appreciably raise the risk of deterioration in the underlying inflation picture over time. In keeping with the practice at meetings preceding the Federal Reserve's semiannual report to Congress on the economy and monetary policy and the Chairman's associated testimony, the members of the Committee and the Federal Reserve Bank presidents not currently serving as members had prepared individual projections of the growth in nominal and real GDP, the rate of unemployment, and the rate of inflation for the year 2000. The forecasts of the growth of nominal GDP were concentrated in a range of 5-1/4 to 5-1/2 percent, and for the rate of expansion in real GDP they had a central tendency of 3-1/2 to 3-3/4 percent. Growth at these rates was expected to hold the civilian unemployment rate in a range of 4 to 4-1/4 percent in the fourth quarter of 2000. The central tendency of the projections of inflation for 2000-as measured by the chain price index for personal consumption expenditures-encompassed a range of 1-3/4 to 2 percent, on the low side of the 2 percent rise in this index experienced in 1999 when energy prices had surged. Mirroring developments in the overall economy, reports of economic conditions in the individual Federal Reserve districts continued to display broad-based strength, apart from softness in construction activity in some areas and weakness in agriculture. Retail sales appeared to have strengthened further during the opening weeks of the new year after a surge during the holiday season. Motor vehicle sales in particular had continued to hold up at a remarkably high level. Consumption was being supported by robust growth in jobs and incomes, very high levels of consumer confidence, and the lagged wealth effects from earlier advances in stock market prices. Even so, growth in consumer spending was thought likely to moderate over time to a pace more in line with the expansion in consumer incomes, unless the stock market posted large further increases from current levels. As the experience of recent years had amply demonstrated, however, the future course of stock market prices was highly uncertain, and equity markets had shown a remarkable resilience to higher interest rates as earning prospects continued to be marked up in association with the acceleration in productivity. Opportunities to enhance profits by using new technology were likely to lead to robust further growth in business fixed investment, boosted mainly by spending for equipment and software over the year ahead. While the huge amount of capital deepening already accomplished in recent years and the projected deceleration in aggregate demand were negative factors in the outlook for business capital spending, they were likely to be overridden by persisting declines in the prices of high-tech equipment and the rising importance of replacement demand that was associated with relatively short-lived investments in high-tech equipment and computer software that had tended to characterize the buildup in business equipment in recent years. With regard to other types of investment, spending on nonresidential business structures appeared to be softening in many areas and would tend to hold down the growth in overall business expenditures for capital. However, spending by state and local governments on roadbuilding and other projects appeared to be on a robust uptrend. Housing construction was expected to remain at a relatively elevated level, albeit below recent peaks, as a consequence of moderating demand stemming from higher mortgage interest rates and indications of overbuilding in some areas. Members also noted, however, that building activity in some parts of the country was still being held back by shortages of skilled construction workers and scarcities of some building supplies. The resulting backlogs along with low inventories of houses in some areas were factors that should limit the expected decline in residential construction this year. Moreover, many homebuyers were shifting from fixed-rate long-term mortgages to currently lower-cost adjustable rate mortgages. More fundamentally, however, the income and wealth effects that were boosting household expenditures generally should help to sustain a perhaps somewhat diminished but still high level of homebuilding activity for a while, despite higher mortgage financing costs. Rapid increases in U.S. exports in conjunction with the strengthening of foreign economies were likely to add to demands on domestic producers. Consistent with this outlook, several members cited anecdotal reports of improving foreign markets, notably in East Asian countries. At the same time, despite some expected deceleration in imports as domestic demand moderated, the nation's trade deficit was projected to increase somewhat further over the year ahead. There was a risk that, as global portfolios came to be increasingly weighted toward dollar assets, expected returns on those assets would need to rise to attract world savings, with much of the adjustment potentially occurring through a decline in the exchange rate of the dollar that would add to pressures on U.S. prices. Concerning the outlook for inflation, the members continued to see the risks as primarily tilted toward rising inflationary pressures, though they anticipated that further gains in productivity would hold down increases in unit labor costs and prices, at least over the nearer term. A key issue was whether growth in aggregate demand would moderate sufficiently to at least avoid greater pressures on what were already very tight labor markets. In this regard, several cited recent statistical and anecdotal evidence of larger increases in labor compensation, although unit labor costs did not appear to be trending higher at this point. However, some nonlabor input prices already were rising faster. The prospects for energy prices were very difficult to predict, but even if such prices were to stabilize, the passthrough of the large earlier increases into inflation and wage expectations, as well as into the prices of products that were heavily energy dependent, was likely to exert some upward pressure on prices throughout the economy. On the positive side for the near-term inflation outlook, there was no evidence that the acceleration in productivity was coming to an end. Members commented in this regard that business firms across the country were continuing to improve the efficiency of their operations in a variety of ways in order to hold down costs. These efforts included persistingly large investments in new equipment, rationalization of business organizations, and training or retraining existing workers for more demanding or new tasks. Members also noted that longer-run inflation expectations generally did not appear to be worsening, though there had been a slight widening of the spread between nominal and inflation-indexed Treasury bond yields. While there seemed to be an increasing number of exceptions, business contacts continued to report that raising their prices was very difficult to carry out successfully and often impossible. On balance, the outlook for inflation remained subject to a marked degree of uncertainty. Given current levels of resource use and the strength of the economic expansion relative to the growth of the economy's long-run potential, however, the members expected that inflation pressures would gather some momentum over time unless financial conditions became tighter. In keeping with the requirements of the Full Employment and Balanced Growth Act of 1978 (the Humphrey-Hawkins Act), the Committee reviewed at this meeting the ranges for growth of the monetary and debt ranges that it had established on a tentative basis in June 1999. The tentative ranges approved in June for the period from the fourth quarter of 1999 to the fourth quarter of 2000 included growth of 1 to 5 percent for M2, 2 to 6 percent for M3, and 3 to 7 percent for total domestic nonfinancial debt. All but one of the members favored the adoption of the ranges that had been selected on a tentative basis at the meeting in June. They noted that for some years the ranges for monetary growth had been chosen to encompass rates of increase that would be expected under conditions of price stability, assuming historical velocity relationships. This approach had been adopted partly as a result of the substantial unreliability of the linkage between the growth of the broad monetary aggregates and economic performance. Since the current benchmark ranges had first been adopted in the mid-1990s, however, structural productivity growth had increased substantially, raising the expected rate of growth of money at price stability, other things equal. One member supported a proposal to adjust the monetary growth ranges upward by at least enough to reflect this development. However, other members emphasized the uncertainties about the dimensions of this new trend in productivity growth, the measured rate of increase in prices that would be consistent with reasonable price stability, and the long-run behavior of velocity. They felt that raising the benchmark ranges risked misleading the public about the Committee's confidence in the implied values for these variables going forward, about the Committee's determination to pursue its fundamental objectives of price stability and sustainable economic expansion, and about the very low weight most Committee members continued to place on the monetary aggregates in policy deliberations owing to the uncertainties surrounding them. At the conclusion of this discussion, the Committee voted to approve without change the ranges for 2000 that it had established on a tentative basis on June 30, 1999. With Mr. Meyer dissenting, the following statement of longer-run policy and growth ranges for 2000 was approved for inclusion in the domestic policy directive: The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. In furtherance of these objectives, the Committee at this meeting established ranges for growth of M2 and M3 of 1 to 5 percent and 2 to 6 percent respectively, measured from the fourth quarter of 1999 to the fourth quarter of 2000. The range for growth of total domestic nonfinancial debt was set at 3 to 7 percent for the year. The behavior of the monetary aggregates will continue to be evaluated in the light of movements in their velocities and developments in prices, the economy, and financial markets. Votes for this action: Messrs. Greenspan, McDonough, Broaddus, Ferguson, Gramlich, Guynn, Jordan, Kelley, and Parry. Vote against this action: Mr. Meyer. In dissenting, Mr. Meyer noted that although the money growth ranges do not play an important role in the conduct of monetary policy today, Congress has mandated that the FOMC set and report ranges for money and credit growth. In recent years, the money ranges have been set to be consistent with price stability and normal velocity behavior. The rate of money growth consistent with price stability depends on the average growth of real GDP. Therefore, when there is a significant increase in the projected average growth rate in real GDP, money growth ranges should be adjusted upward so that they remain consistent with price stability. While considerable uncertainty remains about the average rate of growth in real GDP, there is a strong consensus that it is significantly higher today than when the target ranges were set at their current values. The failure to adjust monetary aggregate ranges makes them less useful signals of Federal Reserve intentions. As long as the Federal Reserve is required to set and report ranges for money and debt growth, it should update them as appropriate. In the Committee's discussion of policy for the upcoming intermeeting period, all the members supported a proposal to tighten reserve conditions by a modest amount consistent with an increase in the federal funds rate of � percentage point to a level of 5-3/4 percent. The Committee's decision to tighten its policy stance was intended to help bring the growth of aggregate demand into better alignment with the expansion of sustainable aggregate supply in an effort to avert rising inflationary pressures in the economy. Relatively high real interest rates would be required to accomplish this objective, given the effects of increasing productivity and profits on the demand for capital goods and, through the wealth effect, on consumption spending. Private long-term rates already had risen considerably, but whether they had reached a level that would lead to a rebalancing of demand and supply was an open question. Moreover, these rates already encompassed expectations of a tightening of monetary policy at this and several subsequent meetings. For a number of reasons, including uncertainties about the outlook for the expansion of aggregate demand in relation to that of potential supply, the economy's response to the Committee's earlier policy actions, and the recently somewhat unsettled conditions in financial markets, a majority of the members expressed a preference for a limited policy move at this time. As long as inflation and inflation expectations remained damped, these members saw little risk in a gradual approach to policy tightening and considerable advantage to preserving the possibility of calibrating those actions to the emerging situation. A few members expressed a preference for an increase of 50 basis points in the federal funds rate in order to provide greater assurance against a buildup of inflationary expectations and inflation over coming months. Other members acknowledged that the Committee might need to move more aggressively at a later meeting should imbalances continue to build and inflation and inflation expectations clearly begin to pick up. The members agreed that the statement to be issued after this meeting should highlight their view that even after their firming today the risks remained weighted mainly in the direction of rising inflation pressures. There were few signs thus far that the rise in interest rates over recent quarters was restraining demand in line with potential supply, and the members generally agreed that further tightening actions might well be needed to ensure that financial conditions had adjusted sufficiently to rising productivity growth to forestall escalating pressures on labor costs and prices. With the cushion of unutilized labor resources having dwindled over recent years and with the willingness of global investors to continue to acquire dollar assets to finance major further increases in imports at current interest and exchange rates in question, the need to achieve the appropriate financial and economic balance had become more pressing. In the circumstances, it was important for the public to understand that the Committee saw inflation risks as persisting even after today's action. At the conclusion of this discussion, members who favored a 50 basis point increase indicated that, in light of the clear intention of the Committee to act, if necessary, in a timely manner to contain inflation, the contemplated inclusion of a statement about the risks of higher inflation in the press release for this meeting, and the likelihood that the Board of Governors would approve a 25 basis point increase in the discount rate later in the day, they could accept a 25 basis point rise in the federal funds rate. At the conclusion of this discussion, the Committee voted to authorize and direct the Federal Reserve Bank of New York, until it was instructed otherwise, to execute transactions in the System Account in accordance with the following policy directive: To further the Committee's long-run objectives of price stability and sustainable economic growth, the Committee in the immediate future seeks conditions in reserve markets consistent with increasing the federal funds rate to an average of around 5-3/4 percent. The vote also encompassed approval of the sentence below for inclusion in the press statement to be released shortly after the meeting: Against the background of its long-run goals of price stability and sustainable economic growth and of the information currently available, the Committee believes the risks are weighted mainly toward conditions that may generate heightened inflation pressures in the foreseeable future. Votes for this action: Messrs. Greenspan, McDonough, Broaddus, Ferguson, Gramlich, Guynn, Jordan, Kelley, Meyer, and Parry. Votes against this action: None. The meeting was recessed briefly after this vote and the members of the Board of Governors left the room to vote on pending increases in the discount rate at several Federal Reserve Banks. On the Board members' return, Chairman Greenspan announced that the Board had approved a � percentage point increase in the discount rate. The Committee concluded its meeting with a review of the press release announcing the joint policy action. The members noted with deep regret the recent death of Frank E. Morris, former president of the Federal Reserve Bank of Boston and a member of the Committee over the course of 20 years before his retirement at the end of 1988. Mr. Morris is remembered as a highly respected colleague and friend who made outstanding contributions to the work of the Committee, the Federal Reserve Bank of Boston, and the Federal Reserve System more generally. It was agreed that the next meeting of the Committee would be held on Tuesday, March 21, 2000. The meeting adjourned at 11:50 a.m. on February 2, 2000. Donald L. Kohn SecretaryAlan Greenspan Chairman William J. McDonough Vice Chairman Donald L. Kohn Secretary and Economist Normand R. V. Bernard Deputy Secretary Lynn S. Fox Assistant Secretary Gary P. Gillum Assistant Secretary J. Virgil Mattingly, Jr. General Counsel Thomas C. Baxter, Jr. Deputy General Counsel Karen H. Johnson Economist Michael J. Prell Economist Jack H. Beebe, Christine Cumming, Robert A. Eisenbeis, Marvin S. Goodfriend, David H. Howard, David E. Lindsey, Vincent R. Reinhart, Thomas D. Simpson, Mark S. Sniderman, and David J. Stockton Associate EconomistsForeign bank Amount of arrangement (millions of dollars equivalent) Bank of Canada 2,000 Bank of Mexico 3,000Footnotes 1 Attended Tuesday's session only. 2 Attended portion of meeting relating to the staff presentation of policy alternatives. 3 Attended portion of meeting relating to the Committee's review of the economic outlook and consideration of its money and debt ranges for 2000.

2000-02-02

Statement

The Federal Open Market Committee voted today to raise its target for the federal funds rate by 25 basis points to 5-3/4 percent. In a related action, the Board of Governors approved a 25 basis point increase in the discount rate to 5-1/4 percent. The Committee remains concerned that over time increases in demand will continue to exceed the growth in potential supply, even after taking account of the pronounced rise in productivity growth. Such trends could foster inflationary imbalances that would undermine the economy's record economic expansion. Against the background of its long-run goals of price stability and sustainable economic growth and of the information currently available, the Committee believes the risks are weighted mainly toward conditions that may generate heightened inflation pressures in the foreseeable future. In taking the discount rate action, the Federal Reserve Board approved requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Kansas City and San Francisco. The discount rate is the rate charged depository institutions when they borrow short-term adjustment credit from their district Federal Reserve Banks.