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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, January 30,
1996, at 2:30 p.m. and continued on Wednesday, January 31, 1996, at 9:00 a.m.
Present:
Mr. Greenspan, Chairman
Mr. McDonough, Vice Chairman
Mr. Boehne
Mr. Jordan
Mr. Kelley
Mr. Lindsey
Mr. McTeer
Ms. Phillips
Mr. Stern
Ms. Yellen
Messrs. Broaddus, Guynn, Moskow, and Parry, Alternate Members of the Federal
Open Market Committee
Messrs. Hoenig, Melzer, and Ms. Minehan, Presidents of the Federal Reserve Banks
of Kansas City, St. Louis, and Boston respectively
Mr. Kohn, Secretary and Economist
Mr. Bernard, Deputy Secretary
Mr. Coyne, Assistant Secretary
Mr. Gillum, Assistant Secretary
Mr. Mattingly, General Counsel
Mr. Prell, Economist
Mr. Truman, Economist
Messrs. Lang, Lindsey, Mishkin, Promisel, Rolnick, Rosenblum, Siegman, 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
Mr. Madigan, Associate Director, Division of Monetary Affairs, Board of Governors
Mr. Slifman, Associate Director, Division of Research and Statistics, Board of
Governors
Mr. Rosine, 1 Senior Economist, Division of Research and Statistics, Board of
Governors
Mr. Reid, 1 Economist, Division of Monetary Affairs, Board of Governors
Ms. Low, Open Market Secretariat Assistant, Division of Monetary Affairs, Board of
Governors
Mr. Beebe, Ms. Browne, Messrs. Davis, Dewald, Goodfriend, and Hunter, Senior
Vice Presidents, Federal Reserve Banks of San Francisco, Boston, Kansas City, St.
Louis, Richmond, and Chicago respectively
Mses. Krieger and Rosenbaum, Vice Presidents Federal Reserve Banks of New York
and Atlanta respectively
In the agenda for this meeting, it was reported that advices of the election of the
following members and alternate members of the Federal Open Market
Committee for the period commencing January 1, 1996, and ending December
31, 1996, had been received and that the named 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 Ernest T. Patrikis, First Vice President of the Federal
Reserve Bank of New York, as alternate;
Edward G. Boehne, President of the Federal Reserve Bank of
Philadelphia, with J. Alfred Broaddus, Jr., President of the Federal
Reserve Bank of Richmond, 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;
Robert D. McTeer, President of the Federal Reserve Bank of Dallas,
with Jack Guynn, President of the Federal Reserve Bank of Atlanta,
as alternate;
Gary H. Stern, President of the Federal Reserve Bank of
Minneapolis, with Robert T. Parry, President of the Federal Reserve
Bank of San Francisco, 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, 1996, 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
William J. McDonough
Chairman
Vice Chairman
Donald L. Kohn
Normand R. V. Bernard
Joseph R. Coyne
Gary P. Gillum
J. Virgil Mattingly, Jr.
Thomas C. Baxter, Jr.
Michael J. Prell
Edwin M. Truman
Secretary and Economist
Deputy Secretary
Assistant Secretary
Assistant Secretary
General Counsel
Deputy General Counsel
Economist
Economist
Richard W. Lang, David E. Lindsey,
Frederic S. Mishkin, Larry J. Promisel,
Arthur J. Rolnick, Harvey Rosenblum,
Charles J. Siegman, 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, 1996.
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 Authorization for Domestic Open Market Operations shown below
was reaffirmed.
Authorization for Domestic Open Market Operations
Reaffirmed January 30, 1996
1. The Federal Open Market Committee authorizes and directs the Federal Reserve Bank of
New York, to the extent necessary to carry out the most recent domestic policy directive
adopted at a meeting of the Committee:
(a) To buy or sell U.S. Government securities, including securities of the Federal
Financing Bank, and securities that are direct obligations of, or fully guaranteed as to
principal and interest by, any agency of the United States in the open market, from or
to securities dealers and foreign and international accounts maintained at the Federal
Reserve Bank of New York, on a cash, regular, or deferred delivery basis, for the
System Open Market Account at market prices, and, for such Account, to exchange
maturing U.S. Government and Federal agency securities with the Treasury or the
individual agencies or to allow them to mature without replacement; provided that the
aggregate amount of U.S. Government and Federal agency securities held in such
Account (including forward commitments) at the close of business on the day of a
meeting of the Committee at which action is taken with respect to a domestic policy
directive shall not be increased or decreased by more than $8.0 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) When appropriate, to buy or sell in the open market, from or to acceptance dealers
and foreign accounts maintained at the Federal Reserve Bank of New York, on a cash,
regular, or deferred delivery basis, for the account of the Federal Reserve Bank of New
York at market discount rates, prime bankers acceptances with maturities of up to nine
months at the time of acceptance that (1) arise out of the current shipment of goods
between countries or within the United States, or (2) arise out of the storage within the
United States of goods under contract of sale or expected to move into the channels of
trade within a reasonable time and that are secured throughout their life by a
warehouse receipt or similar document conveying title to the underlying goods;
provided that the aggregate amount of bankers acceptances held at any one time shall
not exceed $100 million;
(c) To buy U.S. Government securities, obligations that are direct obligations of, or
fully guaranteed as to principal and interest by, any agency of the United States, and
prime bankers acceptances of the types authorized for purchase under l(b) above, from
dealers for the account of the Federal Reserve Bank of New York under agreements for
repurchase of such securities, obligations, or acceptances in 15 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; and provided further that in the
event bankers acceptances covered by any such agreement are not repurchased by the
seller, they shall continue to be held by the Federal Reserve Bank or shall be sold in
the open market.
2. In order to ensure the effective conduct of open market operations, the Federal Open
Market Committee authorizes and directs the Federal Reserve Banks to lend U.S.
Government securities held in the System Open Market Account to Government securities
dealers and to banks participating in Government securities clearing arrangements conducted
through a Federal Reserve Bank, under such instructions as the Committee may specify from
time to time.
3. In order to ensure the effective conduct of open market operations, while assisting in the
provision of short-term investments for foreign and international accounts maintained at the
Federal Reserve Bank of New York, the Federal Open Market Committee authorizes and
directs the Federal Reserve Bank of New York (a) for System Open Market Account, to sell
U.S. Government securities to such foreign and international accounts on the bases set forth
in paragraph l(a) under agreements providing for the resale by such accounts of those
securities within 15 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(c), 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.
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By unanimous vote, the Authorization for Foreign Currency Operations shown below was
reaffirmed.
Authorization for Foreign Currency Operations
Reaffirmed January 30, 1996
1. The Federal Open Market Committee authorizes and directs the Federal Reserve Bank of
New York, for System Open Market Account, to the extent necessary to carry out the
Committee's foreign currency directive and express authorizations by the Committee
pursuant thereto, and in conformity with such procedural instructions as the Committee may
issue from time to time:
A. To purchase and sell the following foreign currencies in the form of cable transfers
through spot or forward transactions on the open market at home and abroad, including
transactions with the U.S. Treasury, with the U.S. Exchange Stabilization Fund
established by Section 10 of the Gold Reserve Act of 1934, with foreign monetary
authorities, with the Bank for International Settlements, and with other international
financial institutions:
Austrian schillings
Belgian francs
Canadian dollars
Danish kroner
Pounds sterling
French francs
German marks
Italian lire
Japanese yen
Mexican pesos
Netherlands guilders
Norwegian kroner
Swedish kronor
Swiss francs
B. To hold balances of, and to have outstanding forward contracts to receive or to
deliver, the foreign currencies listed in paragraph A above.
C. To draw foreign currencies and to permit foreign banks to draw dollars under the
reciprocal currency arrangements listed in paragraph 2 below, provided that drawings
by either party to any such arrangement shall be fully liquidated within 12 months after
any amount outstanding at that time was first drawn, unless the Committee, because of
exceptional circumstances, specifically authorizes a delay.
D. To maintain an overall open position in all foreign currencies not exceeding $25.0
billion. For this purpose, the overall open position in all foreign currencies is defined
as the sum (disregarding signs) of net positions in individual currencies. The net
position in a single foreign currency is defined as holdings of balances in that currency,
plus outstanding contracts for future receipt, minus outstanding contracts for future
delivery of that currency, i.e., as the sum of these elements with due regard to sign.
2. The Federal Open Market Committee directs the Federal Reserve Bank of New York to
maintain reciprocal currency arrangements ("swap" arrangements) for the System Open
Market Account for periods up to a maximum of 12 months with the following foreign
banks, which are among those designated by the Board of Governors of the Federal Reserve
System under Section 214.5 of Regulation N, Relations with Foreign Banks and Bankers, and
with the approval of the Committee to renew such arrangements on maturity:
Foreign bank
Austrian National Bank
National Bank of Belgium
Bank of Canada
National Bank of Denmark
Bank of England
Bank of France
German Federal Bank
Bank of Italy
Bank of Japan
Bank of Mexico
Netherlands Bank
Bank of Norway
Bank of Sweden
Swiss National Bank
Bank for International Settlements:
Dollars against Swiss francs
Dollars against authorized European
currencies other than Swiss francs
Amount of
arrangement
(millions of
dollars
equivalent)
250
1,000
2,000
250
3,000
2,000
6,000
3,000
5,000
3,000
500
250
300
4,000
600
1,250
Any changes in the terms of existing swap arrangements, and the proposed terms of any new
arrangements that may be authorized, shall be referred for review and approval to the
Committee.
3. All transactions in foreign currencies undertaken under paragraph 1.A. above shall, unless
otherwise expressly authorized by the Committee, be at prevailing market rates. For the
purpose of providing an investment return on System holdings of foreign currencies, or for
the purpose of adjusting interest rates paid or received in connection with swap drawings,
transactions with foreign central banks may be undertaken at non-market exchange rates.
4. It shall be the normal practice to arrange with foreign central banks for the coordination of
foreign currency transactions. In making operating arrangements with foreign central banks
on System holdings of foreign currencies, the Federal Reserve Bank of New York shall not
commit itself to maintain any specific balance, unless authorized by the Federal Open Market
Committee. Any agreements or understandings concerning the administration of the accounts
maintained by the Federal Reserve Bank of New York with the foreign banks designated by
the Board of Governors under Section 214.5 of Regulation N shall be referred for review and
approval to the Committee.
5. Foreign currency holdings shall be invested insofar as practicable, considering needs for
minimum working balances. Such investments shall be in liquid form, and generally have no
more than 12 months remaining to maturity. When appropriate in connection with
arrangements to provide investment facilities for foreign currency holdings, U.S.
Government securities may be purchased from foreign central banks under agreements for
repurchase of such securities within 30 calendar days.
6. All operations undertaken pursuant to the preceding paragraphs shall be reported promptly
to the Foreign Currency Subcommittee and the Committee. The Foreign Currency
Subcommittee consists of the Chairman and Vice Chairman of the Committee, the Vice
Chairman of the Board of Governors, and such other member of the Board as the Chairman
may designate (or in the absence of members of the Board serving on the Subcommittee,
other Board members designated by the Chairman as alternates, and in the absence of the
Vice Chairman of the Committee, his alternate). Meetings of the Subcommittee shall be
called at the request of any member, or at the request of the Manager, System Open Market
Account ("Manager"), for the purposes of reviewing recent or contemplated operations and
of consulting with the Manager on other matters relating to his responsibilities. At the request
of any member of the Subcommittee, questions arising from such reviews and consultations
shall be referred for determination to the Federal Open Market Committee.
7. The Chairman is authorized:
A. With the approval of the Committee, to enter into any needed agreement or
understanding with the Secretary of the Treasury about the division of responsibility
for foreign currency operations between the System and the Treasury;
B. To keep the Secretary of the Treasury fully advised concerning System foreign
currency operations, and to consult with the Secretary on policy matters relating to
foreign currency operations;
C. From time to time, to transmit appropriate reports and information to the National
Advisory Council on International Monetary and Financial Policies.
8. Staff officers of the Committee are authorized to transmit pertinent information on System
foreign currency operations to appropriate officials of the Treasury Department.
9. All Federal Reserve Banks shall participate in the foreign currency operations for System
Account in accordance with paragraph 3 G(1) of the Board of Governors' Statement of
Procedure with Respect to Foreign Relationships of Federal Reserve Banks dated January 1,
1944.
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By unanimous vote, the Foreign Currency Directive shown below was reaffirmed.
Foreign Currency Directive
Reaffirmed January 30, 1996
1. System operations in foreign currencies shall generally be directed at countering disorderly
market conditions, provided that market exchange rates for the U.S. dollar reflect actions and
behavior consistent with the IMF Article IV, Section 1.
2. To achieve this end the System shall:
A. Undertake spot and forward purchases and sales of foreign exchange.
B. Maintain reciprocal currency ("swap") arrangements with selected foreign central
banks and with the Bank for International Settlements.
C. Cooperate in other respects with central banks of other countries and with
international monetary institutions.
3. Transactions may also be undertaken:
A. To adjust System balances in light of probable future needs for currencies.
B. To provide means for meeting System and Treasury commitments in particular
currencies, and to facilitate operations of the Exchange Stabilization Fund.
C. For such other purposes as may be expressly authorized by the Committee.
4. System foreign currency operations shall be conducted:
A. In close and continuous consultation and cooperation with the United States
Treasury;
B. In cooperation, as appropriate, with foreign monetary authorities; and
C. In a manner consistent with the obligations of the United States in the International
Monetary Fund regarding exchange arrangements under the IMF Article IV.
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By unanimous vote, the Procedural Instructions with Respect to Foreign Currency Operations
shown below were reaffirmed.
Procedural Instructions with Respect to
Foreign Currency Operations
Reaffirmed January 30, 1996
In conducting operations pursuant to the authorization and direction of the Federal Open
Market Committee as set forth in the Authorization for Foreign Currency Operations and the
Foreign Currency Directive, the Federal Reserve Bank of New York, through the Manager,
System Open Market Account ("Manager"), shall be guided by the following procedural
understandings with respect to consultations and clearances with the Committee, the Foreign
Currency Subcommittee, and the Chairman of the Committee. All operations undertaken
pursuant to such clearances shall be reported promptly to the Committee.
1. The Manager shall clear with the Subcommittee (or with the Chairman, if the Chairman
believes that consultation with the Subcommittee is not feasible in the time available):
A. Any operation that would result in a change in the System's overall open position in
foreign currencies exceeding $300 million on any day or $600 million since the most
recent regular meeting of the Committee.
B. Any operation that would result in a change on any day in the System's net position
in a single foreign currency exceeding $150 million, or $300 million when the
operation is associated with repayment of swap drawings.
C. Any operation that might generate a substantial volume of trading in a particular
currency by the System, even though the change in the System's net position in that
currency might be less than the limits specified in 1.B.
D. Any swap drawing proposed by a foreign bank not exceeding the larger of (i) $200
million or (ii) 15 percent of the size of the swap arrangement.
2. The Manager shall clear with the Committee (or with the Subcommittee, if the
Subcommittee believes that consultation with the full Committee is not feasible in the time
available, or with the Chairman, if the Chairman believes that consultation with the
Subcommittee is not feasible in the time available):
A. Any operation that would result in a change in the System's overall open position in
foreign currencies exceeding $1.5 billion since the most recent regular meeting of the
Committee.
B. Any swap drawing proposed by a foreign bank exceeding the larger of (i) $200
million or (ii) 15 percent of the size of the swap arrangement.
3. The Manager shall also consult with the Subcommittee or the Chairman about proposed
swap drawings by the System and about any operations that are not of a routine character.
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Agreement to "Warehouse" Foreign Currencies
At its meeting on January 31-February 1, 1995, the Committee had approved an increase
from $5 billion to $20 billion in the amount of eligible foreign currencies that the System
was prepared to "warehouse" for the Treasury and the Exchange Stabilization Fund (ESF).
The purpose of the warehousing facility, which has been in place for many years, is to
supplement the U.S. dollar resources of the Treasury and the ESF for financing purchases of
foreign currencies and related international operations. The enlargement of the warehousing
agreement was intended to facilitate U.S. participation in the Multilateral Program to Restore
Financial Stability in Mexico, announced by President Clinton on January 31, 1995, by
warehousing up to $20 billion in German marks and Japanese yen held by the Treasury
through the ESF. The Committee had agreed that it would review each year the need to
maintain this level of warehousing authority in light of the progress and requirements of the
Program.
The Treasury and the Exchange Stabilization Fund had made no use of the warehousing
facility over the past year. Nevertheless, consistent with Federal Reserve support for the
program of assistance to Mexico, the members agreed that it was appropriate to postpone
consideration of an adjustment in the overall size of the facility at least until the end of the
disbursement phase of the Mexican program currently scheduled for August 1996.
Accordingly, the Committee reaffirmed the warehousing authority by unanimous vote.
By unanimous vote, the Program for Security of FOMC Information was amended to
conform it to the treatment of transcripts of FOMC meetings and the procedures that the
Committee had been following for some time in regard to redactions of confidential
information in transcripts and other documents that are released to the public after five years.
In addition, the Committee agreed to amend the Program so that the automatic extension of
Federal Reserve staff access to confidential material after six months could be suspended for
certain particularly sensitive documents.
On January 23, 1996, the continuing rules, resolutions, and other instruments 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, and
no requests for such consideration were received.
By unanimous vote, the minutes of the meeting of the Federal Open Market Committee held
on December 19, 1995, were approved.
The Manager of the System Open Market Account reported on recent developments in
foreign exchange markets. He indicated that the swap line drawing by the Bank of Mexico
had been repaid in full on January 29, 1996. The Committee ratified that transaction by
unanimous vote.
The Manager also reported on recent developments in domestic financial markets and on
System open market transactions in U.S. government securities and federal agency
obligations during the period December 19, 1995, through January 30, 1996. 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 1996, 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.
Only a limited amount of new information was available for this meeting because of delays
in government releases; that which was available, along with anecdotal commentary,
suggested that the economy had been growing relatively slowly in recent months. Consumer
spending had expanded modestly on balance, growth in business invest- ment in capital
goods appeared to have slackened somewhat recently, and housing demand seemed to have
leveled out. Slower growth in final sales was leading to inventory buildups in a few
industries and these buildups, together with the disruptions from government shutdowns and
severe weather, were having a restraining effect on economic activity. The demand for labor
was still growing at a moderate pace, though, and the unemployment rate remained relatively
low. The recent data on prices and wages had been mixed, but there was no firm evidence of
a change in underlying inflation trends.
Nonfarm payroll employment continued to expand moderately in December; the gain was in
line with the average monthly increase for 1995. Employment in manufacturing, boosted by
the settlement of a strike at a major aircraft manufacturer, reversed the declines of October
and November. Construction payrolls rose further in December, despite unfavorable weather
in some parts of the country. Job growth remained solid in much of the services industry,
although employment at personnel supply firms was little changed. The civilian unemployment rate remained at 5.6 percent in December.
Industrial production edged up in December and for the fourth quarter as a whole advanced
only slightly; industrial activity remained sluggish in January according to the limited
statistical information that was available. In December, manufacturing output rose a bit in
association with an increase in motor vehicle assemblies and aircraft production. Elsewhere
in manufacturing, the growth of output of office and computing equipment slowed somewhat
from the rapid pace of previous months, and the production of defense and space equipment
and of nondurable consumer goods registered sizable declines. The output of utilities was
boosted somewhat in December by the effect of colder-than-average temperatures on the
demand for heating services. Utilization of total industrial capacity fell slightly but remained
at a moderately elevated level.
Retail sales continued to grow at a relatively modest rate in December, and the fourth-quarter
increase was considerably smaller than those of the previous two quarters. In the fourth
quarter, lower spending at general merchandisers offset much of the sales gains registered at
automotive dealerships, furniture and appliance stores, and building and supply outlets.
Consumer surveys indicated some deterioration in consumer confidence in January. Recent
indicators of housing demand and activity were mixed. Sales of new homes edged still lower
in November (latest data available), and sales of existing homes declined by a larger amount
in December than in November. However, housing starts rebounded in November from a
sizable October decline, and conditions in mortgage markets remained quite favorable, led by
a further decline in rates.
The sparse statistical data available on business fixed investment, along with anecdotal
information, suggested a moderation recently in the expansion of business spending on
capital goods, including some slowing of investment in computers. Investment in
transportation equipment, however, apparently had held up well in the fourth quarter.
Incoming data on construction contracts pointed to some slowing in the growth of
nonresidential building activity from a relatively brisk pace during most of 1995.
The information available on business inventories suggested that inventory imbalances might
have emerged in a few sectors in association with weaker-than-expected sales. Motor vehicle
inventories were at elevated levels compared with sales in late 1995, and manufacturers
responded by offering incentive packages on new cars and trucks and by adjusting downward
their January production schedules. Data on manufacturing and retail trade inventories for
November had been delayed, but published information on inventories held by wholesale
distributors indicated a decline in that month, reversing part of October's sizable run-up.
Much of the decline occurred in nondurable goods, although machinery distributors also
reported a sizable liquidation. The inventory-sales ratio for the wholesale trade sector edged
down in November but remained near the high end of its range in recent years.
The nominal deficit on U.S. trade in goods and services narrowed in October from its
average rate in the third quarter. The value of imports declined by more than the value of
exports. Much of the contraction in imports reflected reductions in oil and automotive
products that more than offset another strong rise in computer goods. For exports, an advance
in machinery exports to record levels was outweighed by a reduction in shipments of
agricultural and automotive products. Available data on economic activity in the major
foreign industrial countries suggested that the pace of expansion in Europe had slowed
further on average while growth in Japan had picked up a little.
Recent data suggested little change in underlying inflation trends. Consumer prices increased
slightly in December after being unchanged in November; food prices were quiescent over
the two-month period while energy prices rose on balance, with a December rebound more
than offsetting a sizable November drop. Excluding food and energy items, consumer prices
were up modestly over the November- December period and for all of 1995 advanced
slightly more than in 1994. Producer prices of finished goods were up considerably in
November and December after having risen slowly in earlier months; in large part, the price
increases late in the year reflected sharp upward movements in both finished foods and
finished energy prices. For 1995, producer prices of finished goods other than food and
energy rose at a subdued pace, though somewhat more than in 1994. Commodity prices had
been mixed recently after trending down earlier. Average hourly earnings of production and
nonsupervisory workers increased somewhat in December after having been unchanged in
November. Increases in average hourly earnings had been trending up over the past several
years.
At its meeting on December 19, 1995, the Committee adopted a directive that called for some
slight easing in the degree of pressure on reserve positions, which was expected to result in a
decline in the federal funds rate from around 5-3/4 percent to around 5-1/2 percent. The
directive did not include a presumption about the likely direction of any adjustments to
policy during the intermeeting period. Accordingly, the directive stated that in the context of
the Committee's long-run objectives for price stability and sustainable economic growth, and
giving careful consideration to economic, financial, and monetary developments, slightly
greater reserve restraint or slightly lesser reserve restraint would be acceptable during the
intermeeting period. The reserve conditions associated with this directive were expected to
be consistent with moderate growth of M2 and M3 over coming months.
After the meeting, open market operations were directed initially toward implementing the
slight easing in the degree of reserve pressure that had been adopted by the Committee and
thereafter toward maintaining this new reserve posture. Operations were complicated by
large swings in reserve demands associated with year- end pressures and the adverse effects
of unusually severe winter weather on check clearings. Although the federal funds rate
exhibited somewhat greater volatility than normal over the period, it nonetheless averaged
close to the expected level of 5-1/2 percent. The occasional periods of firmness in reserve
market conditions contributed to higher adjustment plus seasonal borrowing, on average,
over the period.
Most market interest rates had declined somewhat further over the period after the December
19 meeting. Rates moved lower immediately after the policy easing action, and most fell still
more on balance over the remainder of the intermeeting interval in response to incoming
information about the economy and the prospects for fiscal policy, at least in the near term.
Both were seen as suggesting slower economic expansion for a time and an increased
likelihood of additional easing of monetary policy in coming months. With bond yields down
on balance, and occasionally approaching two-year lows, major indexes of equity prices
advanced sharply further.
The trade-weighted value of the dollar in terms of the other G-10 currencies continued to rise
over the intermeeting period despite the decline in U.S. interest rates. The dollar's upward
movement against the German mark and other European currencies was associated with
increasing indications of further weakening of economic expansion in key European
countries and greater declines in interest rates in those countries than in the United States.
The dollar's appreciation relative to the Japanese yen appeared to be related in part to a
narrowing of Japan's trade and current account surpluses. The dollar was unchanged on
balance against the Canadian dollar, while the Mexican peso rose considerably in relation to
the dollar.
Growth of M2 and M3 strengthened in December and January. The pickup in M2 growth
partly reflected the effect of recent declines in short-term interest rates; those declines had
made money market instruments less attractive relative to household savings accounts in M2,
whose offering rates tend to be adjusted downward with a considerable lag. In addition, the
flattening of the term structure of interest rates had lessened the comparative attractiveness of
bond mutual funds, which had continued to experience only light inflows. Faster growth of
M3 in December and January was associated with both the pickup in M2 expansion and the
issuance of additional large time deposits to help finance a noticeable step-up in bank loan
demand in January. The expansion of M2 from the fourth quarter of 1994 to the fourth
quarter of 1995 was in the upper half of the Committee's annual range, and M3 grew at the
upper end of its range. Growth of total domestic nonfinancial debt had been moderate in
recent months, and for the year was near the midpoint of this aggregate's monitoring range.
The staff forecast prepared for this meeting suggested that economic activity would expand
at a relatively slow pace over the near term. This forecast was not materially different from
that prepared for the December meeting, except for a slightly weaker outlook for the current
quarter that was related in part to an inventory correction and the effects of unusually severe
winter weather on spending and output. Over the remainder of the two-year forecast horizon,
the economy was expected to grow generally along its estimated potential. Consumer
spending was anticipated to keep pace with the growth of disposable income; concerns about
job security remained and consumer debt burdens had risen further, but the still-ample
availability of credit and the substantial rise in the value of household equity holdings would
support further increases in consumption. The further decline in mortgage rates recently from
already-favorable levels would help to sustain homebuilding activity at a relatively high
level. With sales and profits projected to grow more slowly, and with utilization of existing
capacity having eased considerably, business investment in new equipment and structures
was expected to expand at a more moderate rate. In light of the recent strengthening of the
dollar, the external sector was expected to exert a small restraining influence on real activity
over the projection period as a whole. Much uncertainty still surrounded the fiscal outlook,
but the recent impasse in the budget negotiations between the Administration and the
Congress suggested a lower degree of fiscal restraint over coming years than had been
assumed in the previous forecast. Given the projected outlook, rates of utilization of labor
and capital resources and of inflation were not expected to change materially.
In the Committee's discussion of current and prospective economic activity, members noted a
number of temporary factors that were retarding the expansion. The weakness in business
activity this winter was to some extent the result of the partial shutdown of the federal
government and the severe storms in a number of regions; both clearly were transitory
influences on the economy. Growth of economic activity also was being constrained by
production cutbacks stemming from efforts to bring stocks into better alignment with
disappointing sales in a number of industries. Even so, in the absence of major overhangs in
inventories of business equipment and consumer durables, and given favorable conditions in
financial markets, members believed that a resumption of moderate, sustainable growth after
a relatively brief period of weakness was the most likely outlook for the economy. At the
same time, many observed that the risks to such an outcome did not seem balanced. A
number of concerns, including the extent of the damping effects of high debt loads and
employment uncertainty on consumption and questions about the sources of further export
growth, suggested the possibility of sluggish expansion, while possible developments on the
upside were more difficult to identify. With resource use unlikely to vary appreciably, the
members generally expected no significant change in the underlying inflation picture over the
year ahead. The recent performance of inflation had some encouraging aspects, and the odds
on greater price pressures seemed relatively small at this time.
In keeping with the practice at meetings when the Committee establishes its long-run ranges
for growth of the money and debt aggregates, the members of the Committee and the Federal
Reserve Bank presidents not currently serving as members had prepared individual
projections of economic activity, the rate of unemployment, and inflation for the year 1996.
Measured on the basis of chain-weighted indexes, the forecasts of the growth in real GDP
had a central tendency of 2 to 2-1/4 percent and a full range of 1-1/2 to 2-1/2 percent for the
period from the fourth quarter of 1995 to the fourth quarter of 1996. The members and
nonmember presidents generally anticipated that economic expansion in line with their
forecasts would be associated with employment growth close to that of the labor force.
Accordingly, their forecasts of the civilian rate of unemployment in the fourth quarter of
1996 were near the current level, with a central tendency of 5-1/2 to 5-3/4 percent and a full
range of 5-1/2 to 6 percent. Projections of the rate of inflation, as reflected in the consumer
price index, had a central tendency of 2-3/4 to 3 percent; that central tendency was on the
high side of the outcome for 1995-- when the rise in the index was held down by damped
increases in food prices and declines in energy prices--but a few of the forecasts anticipated a
slightly lower rate of inflation.
In their review of developments across the nation, the Federal Reserve Bank presidents
reported modest growth in most major areas of the country. Many referred, however, to an
admixture of strengths and weaknesses in their local economies, and a majority observed that
on balance growth in regional business activity appeared to have slowed in the last few
months. In keeping with the data available for the nation as a whole, the slowing seemed to
be concentrated in manufacturing and especially at firms producing motor vehicles and parts.
Some presidents referred to relatively negative, or at least cautious, sentiment among many
of their business contacts.
Much of the recent softening in economic activity appeared to arise from production
cutbacks in various sectors of the economy where involuntary accumulation of inventories
seemed to have occurred as a result of weaker sales trends in the past few months. The
members expected this inventory adjustment process to have a relatively pronounced effect
on production and overall business activity in the current quarter and perhaps to some extent
in the second. While a greater-than-expected inventory adjustment with spreading effects
through the economy could not be ruled out, the underlying strength of demand was likely to
be sufficient to restore and sustain moderate growth in overall economic activity as the
current inventory and production adjustments subsided.
With regard to consumer spending, members referred to overall indications of lackluster
retail sales during the holiday season and into January. The anecdotal commentary on retail
sales attributed some of the recent weakness in a number of areas to the clearly temporary
effects of unusually severe winter weather and the partial shutdown of the federal
government. The members anticipated that moderate growth in retail sales would resume,
though some felt that the consumer sector might remain vulnerable on the downside. The
consumer spending outlook was complicated by a number of crosscurrents. Negative factors
cited by the members included ongoing concerns about job security that were being sustained
by a continuing stream of workforce reduction announcements by major business concerns,
increased consumer debt burdens that were showing up in rising delinquency rates on some
types of loans, and the apparent satisfaction of much of the earlier pent-up demand for
consumer durables. On the positive side, reduced interest rates, still readily available credit,
and the accumulation of financial wealth from the sharp rise in stock and bond prices were
seen as likely to support continuing gains in consumer spending.
Further increases in business fixed investment were viewed as a likely prospect for the year
ahead, though the growth of such investment probably would be well below the strong pace
experienced earlier in the current cyclical expansion. Anecdotal reports indicated continuing
strength in nonresidential construction in some parts of the country, but declining rates of
capacity utilization augured reduced growth going forward. The expansion of investment in
producers' durable equipment also was expected to slow, but from a pace that had seemed
unsustainable. While appreciable further growth could be expected in expenditures for
high-tech equipment as business firms continued to focus on improving the efficiency of
their operations in a highly competitive environment, spending for other types of equipment
was likely to be sluggish. Members noted in particular the prospects for weaker business
spending for motor vehicles, especially for heavy trucks. However, the fundamental
determinants of investment in business equipment, including the reduced cost of financing
such investment, remained positive and this sector of the economy should continue to
provide considerable impetus to the expansion.
The members also viewed the considerable decline that had occurred in mortgage interest
rates and the ample availability of housing finance as key factors in their forecasts of
sustained residential construction at relatively high levels. Adverse weather conditions
appeared to have retarded home building activity in a number of areas in recent weeks, but
several members commented that underlying trends in housing demand were favorable and
that residential construction had remained relatively strong in several parts of the country.
The outlook for fiscal policy was uncertain, especially with regard to whether longer-term
spending and taxation measures would be enacted to implement the goal of a balanced
federal budget by the year 2002. For the year immediately ahead, however, the members
continued to anticipate considerable restraint in federal spending, partly as a byproduct of the
current budget debate between the Congress and the Administration. With regard to the
external sector of the economy, prospects for economic growth in major trading partners--led
by developments in Europe--appeared to have weakened, and the recent appreciation of the
dollar in the foreign exchange markets also might tend to damp net exports. Consequently,
several members saw downside risks in the foreign trade sector over the year ahead.
The members anticipated that inflation would remain contained in 1996, but they did not
expect significant progress toward more stable prices. They referred to crosscurrents bearing
on the outlook for wages and prices in the year ahead. Factors pointing to potentially higher
inflation included increased pressures on food prices stemming from disappointing harvests
in some areas and relatively low grain supplies. More generally, resource utilization was
expected to remain high and greater pressures could emerge in labor and product markets.
Members noted that one broad measure of wages had picked up and that there was a small
rise in the number of anecdotal reports indicating that labor shortages were contributing to
higher wages in some parts of the country. In addition, unusually muted increases in the costs
of worker benefits had been holding down overall compensation costs, and this pattern might
not persist. On the other hand, high levels of resource utilization had been associated for
some time with lower rates of growth in costs than would have been anticipated on the basis
of historical experience. In particular, a general sense of job insecurity in a period of major
business restructurings was holding down increases in labor compensation. In an
environment of strong competition, which was preventing many businesses from passing on
rising costs through higher prices, firms continued to focus on efforts to control costs by
improving the efficiency of their operations, and this was helping to hold down inflation. An
apparent decline in inflationary expectations also would provide a moderating influence on
inflation trends in the period ahead. While most of the members saw little reason to anticipate
appreciably lower inflation over the year ahead, they also viewed the odds on a pickup in
inflation as fairly low; they could see possible reasons for optimism on the long-run trend in
inflation; and they generally remained confident that further progress toward price stability
would be made over the longer term.
In keeping with the requirements of the Full Employment and Balanced Growth Act of 1978
(the Humphrey-Hawkins Act), the Committee reviewed the ranges for growth of the
monetary and debt aggregates in 1996 that it had established on a tentative basis at its
meeting in July 1995. The tentative ranges included expansion of 1 to 5 percent for M2 and 2
to 6 percent for M3, measured from the fourth quarter of 1995 to the fourth quarter of 1996.
The monitoring range for growth of total domestic nonfinancial debt was provisionally set at
3 to 7 percent for 1996. The tentative ranges for 1996 were unchanged from the actual ranges
for 1995. In July, the range for M3 had been raised by two percentage points to reflect
developments that seemed to be fostering a return to the historical pattern of somewhat faster
growth in M3 than in M2.
In their discussion, the members took note of a staff analysis which indicated that monetary
expansion consistent with the moderate growth of nominal GDP that the members were
projecting for 1996 most likely would be around the upper ends of the tentative ranges
adopted last July. M2 and M3 velocity over the past couple of years had conformed more
closely on balance with historical patterns, and the projections assumed that this behavior
would continue in 1996. In light of the experience of earlier years, however, when the
velocities of these aggregates had exhibited pronounced atypical behavior, substantial
uncertainty still surrounded any projections of monetary expansion and the linkage between
particular rates of money growth and the basic objectives of monetary policy.
Most members endorsed a proposal to adopt the relatively low ranges for growth of M2 and
M3 in 1996 that the Committee had set on a tentative basis in July 1995. These members
favored retention of the tentative ranges because they could be viewed as benchmarks for
money growth that would be associated with price stability, assuming behavior of velocity in
line with historical experience, and a reaffirmation of those ranges would underscore the
Committee's commitment to a policy of achieving price stability over the longer term. Some
members also noted that any adjustment of these ranges to align them more fully with
projections of money growth consistent with the Committee's expectations for expansion of
the economy and prices in 1996 could be misinterpreted. Such an action might be seen as
suggesting that the Committee had a greater degree of confidence in the relationship between
money growth and broad measures of economic performance than was warranted by its
current understanding of that relationship or that the Committee was now placing greater
emphasis on the broad monetary aggregates as a gauge of the thrust of monetary policy.
Two members favored somewhat higher growth ranges for M2 and M3 in 1996. They noted
that the expansion of these broad aggregates was anticipated to be around the upper ends of
their tentative ranges, and perhaps even higher, given the Committee's expectations for the
performance of the economy and prices. In their view, the higher ranges would be more
consistent with what they saw as the Committee's obligations under the Federal Reserve Act
to set ranges consistent with expected or desired economic outcomes for the year, and the
reasons for establishing those ranges could easily be set forth and understood as an
appropriate technical adjustment that would not imply any lessened commitment to the
Committee's price stability goal.
The Committee unanimously preferred to retain the 3 to 7 percent range for total domestic
nonfinancial debt in 1996. This position took account of a staff projection indicating that the
debt aggregate was likely to continue to grow at a rate generally in line with the expansion of
nominal GDP, although some moderation in private credit demands was anticipated and there
were indications that lenders were no longer easing their terms and conditions for granting
credit to consumers and businesses.
At the conclusion of its discussion, the Committee voted to approve without change the
tentative ranges for 1996 that it had established in July of last year. In keeping with its usual
procedures under the Humphrey-Hawkins Act, the Committee would review its ranges at
midyear, or sooner if interim conditions warranted, in light of the growth and velocity
behavior of the aggregates and ongoing economic and financial developments. Accordingly,
the following longer-run policy statement for 1995 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 1995 to the fourth quarter of 1996. The
monitoring 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 progress toward price level stability, movements in their
velocities, and developments in the economy and financial markets.
Votes for this action: Messrs. Greenspan, McDonough, Boehne, Jordan, Kelley,
McTeer, Ms. Phillips, and Mr. Stern.
Votes against this action: Mr. Lindsey and Ms. Yellen.
Mr. Lindsey and Ms. Yellen dissented because they preferred somewhat higher ranges for M2
and M3. They recognized that the relationships between the ranges for the monetary
aggregates and broad measures of economic performance were subject to substantial
uncertainty, but ranges higher than those adopted on a tentative basis in July 1995 were more
likely to encompass monetary expansion consistent with the central tendency of members'
current forecasts of nominal GDP growth for 1996. Raising the ranges for M2 and M3 would
in their view conform those ranges more closely with the provisions in the Federal Reserve
Act that require the System to communicate to the Congress its objectives and plans for the
growth of the aggregates for the calendar year. They believed the Committee could readily
explain that such an adjustment to the ranges did not represent a lessened commitment to its
price stability goal or an increased emphasis on the monetary aggregates in policy
formulation.
The Committee also discussed alternatives to the monetary aggregates for communicating its
intentions with regard to the course of inflation over the longer run. Some members thought
that explicit numerical goals or forecasts for inflation over a period of years would have
several important benefits, including enhanced credibility that could reduce the costs of
achieving price stability and greater flexibility to respond to the emergence of economic
weakness by easing policy for a limited period of time without arousing inflation concerns.
Other members, while endorsing fully the long-term goal of price stability, had a number of
reservations about implementing such proposals, especially at this time. Based on experience
in the United States and elsewhere, many were skeptical about the payoff in terms of greater
credibility or flexibility in policy implementation. Moreover, they believed that substantially
more study and deliberation were required to explore fully the alternatives and the
consequences of changes in the way the Committee formulated and communicated its
objectives. They also thought that any such assessment would need to take account of the
prospects for, or disposition of, closely related legislation that was now being considered in
the Congress. The Committee did not take any action on this issue at this meeting, but it
recognized that the matter would need to be revisited from time to time.
In the Committee's discussion of policy for the intermeeting period ahead, the members
supported a proposal calling for some slight easing in reserve conditions. Although a pickup
to an acceptable rate of expansion was seen as the most likely course for the economy in
coming quarters, the risks of a shortfall in growth were believed to be significant. At the
same time, while most members were forecasting high levels of resource use and little
change in the rate of inflation this year, they saw only a very limited risk that a slight easing
move might foster higher inflation under prevailing circumstances, and some felt that there
were favorable prospects for a slightly improved inflation performance. Under the
circumstances, a slight decrease was warranted in the real federal funds rate from a level that
a number of members considered still a bit to the firm side--a stance that seemed less
appropriate in light of the reduced threat over the last year of a pickup in inflation. One
member pointed out that such a decrease would tend to counter the effects on aggregate
demand of the recent rise in the foreign exchange value of the dollar, which might continue
to move higher if interest rate declines expected by the markets were not forthcoming. It was
noted that postponing a decision in this uncertain economic climate could be defended on the
ground that more evidence was needed to ascertain whether the weakness in the economy
was quite temporary or more lasting; if it was the former, inflationary pressures could
re-emerge at lower interest rates. On the other hand, a few members commented that the
currently sluggish performance of the economy could be read as calling for a more
pronounced easing move, but they preferred a cautious approach to policy in light of current
inflation trends and the uncertainties that surrounded their forecasts of some strengthening in
the economy.
The Chairman informed the Committee that he had asked the members of the Board of
Governors to convene immediately after this meeting to consider a reduction of 1/4
percentage point in the discount rate. Such a reduction had been proposed by a total of six
Federal Reserve Banks at this point. Given the easing in reserve markets favored by the
Committee and the possibility of a lower discount rate, the members did not believe that a
further policy move was likely to be needed during the intermeeting period. Accordingly,
they favored an unbiased directive that did not incorporate a presumption about the likely
direction of any adjustments to policy during the next several weeks. In keeping with its
usual practice, the Committee did not rule out the possibility of an intermeeting policy
change on the basis of unanticipated economic or financial developments.
At the conclusion of the Committee's discussion, all the members supported a directive that
called for a slight reduction in the degree of pressure on reserve positions and that did not
include a bias about the likely direction of an adjustment to policy during the intermeeting
period, should unanticipated developments warrant a change in policy. Accordingly, the
Committee decided that in the context of its long-run objectives for price stability and
sustainable economic growth, and giving careful consideration to economic, financial, and
monetary developments, slightly greater or slightly lesser reserve restraint would be
acceptable during the intermeeting period. The reserve conditions contemplated at this
meeting were expected to be consistent with moderate growth in M2 and M3 over coming
months.
At the conclusion of the meeting, the Federal Reserve Bank of New York was authorized and
directed, until instructed otherwise by the Committee, to execute transactions in the System
Account in accordance with the following domestic policy directive:
The information reviewed at this meeting suggests that the economy has been
growing rather slowly in recent months. Nonfarm payroll employment continued
to expand moderately in December, and the civilian unemployment rate
remained at 5.6 percent. Industrial production increased only slightly further in
the fourth quarter. Growth of consumer spending was modest, on balance, over
the past several months. Housing starts rebounded in November from a sizable
October decline. Orders for nondefense capital goods point to a moderation in
the expansion of spending on business equipment, and nonresidential
construction has risen appreciably further. The nominal deficit on U.S. trade in
goods and services narrowed in October from its average rate in the third quarter.
There has been no clear change in underlying inflation trends.
Most market interest rates have declined somewhat since the Committee meeting
on December 19. In foreign exchange markets, the trade-weighted value of the
dollar in terms of the other G-10 currencies has risen further over the
intermeeting period.
Growth of M2 and M3 strengthened in December and January. From the fourth
quarter of 1994 to the fourth quarter of 1995, M2 expanded in the upper half of
its range and M3 grew at the upper end of its range. Growth in total domestic
nonfinancial debt has been moderate in recent months, placing this aggregate
near the midpoint of its monitoring range for the year.
The Federal Open Market Committee seeks monetary and financial conditions
that will foster price stabil- ity 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 1995 to the fourth quarter of 1996. The
monitoring 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 progress toward price level stability, movements in their
velocities, and developments in the economy and financial markets.
In the implementation of policy for the immediate future, the Committee seeks
to decrease slightly the existing degree of pressure on reserve positions, taking
account of a possible reduction in the discount rate. In the context of the
Committee's long-run objectives for price stability and sustainable economic
growth, and giving careful consideration to economic, financial, and monetary
developments, slightly greater reserve restraint or slightly lesser reserve restraint
would be acceptable in the intermeeting period. The contemplated reserve
conditions are expected to be consistent with moderate growth in M2 and M3
over coming months.
Votes for short-run policy: Messrs. Greenspan, McDonough, Boehne, Jordan,
Kelley, Lindsey, McTeer, Ms. Phillips, Mr. Stern and Ms. Yellen.
Votes against this action: None.
It was agreed that the next meeting of the Committee would be held on
Tuesday, March 26, 1996.
The meeting adjourned at 12:00 p.m.
Donald L. Kohn
Secretary
Footnotes
1-Attended portions of meeting relating to the Committee's review of the economic outlook
and establishment of its monetary and debt ranges for 1996.
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