Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, December 21, 1999 : Transcript

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

Meeting of the Federal Open Market Committee
December 21, 1999
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 21,
1999, at 9:00 a.m.
PRESENT: 	Mr. Greenspan, Chairman 

Mr. McDonough, Vice Chairman 

Mr. Boehne 

Mr. Ferguson 

Mr. Gramlich 

Mr. Kelley 

Mr. McTeer 

Mr. Meyer 

Mr. Moskow 

Mr. Stern 

Messrs. Broaddus, Guynn, Jordan, and Parry, Alternate Members of the 

Federal Open Market Committee 

Mr. Hoenig, Ms. Minehan, and Mr. Poole, Presidents of the Federal 

Reserve Banks of Kansas City, Boston, and St. Louis respectively 

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 

Ms. Cumming, Messrs. Howard, Hunter, Lang, Rosenblum, 

Slifman, and Stockton, Associate Economists 

Mr. Fisher, Manager, System Open Market Account 

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

Board of Governors 

Messrs. Ettin and Reinhart, Deputy Directors, Divisions of Research and 

Statistics and International Finance respectively, Board of Governors 


12/21/99

2
Messrs. Madigan and Simpson, Associate Directors, Divisions of
Monetary Affairs and Research and Statistics respectively,
Board of Governors
Ms. Roseman, 1/ Director, Division of Reserve Bank Operations and
Payment Systems, Board of Governors
Messrs. Dennis 1/ and Whitesell, Assistant Directors, Divisions of Reserve
Bank Operations and Payment Systems and Monetary Affairs
respectively, Board of Governors
Ms. Low, Open Market Secretariat Assistant, Division of Monetary
Affairs, Board of Governors
Mr. Moore, First Vice President, Federal Reserve Bank of San Francisco
Messrs. Beebe, Eisenbeis, Goodfriend, Hakkio, Rasche, and Sniderman,
Senior Vice Presidents, Federal Reserve Banks of San Francisco,
Atlanta, Richmond, Kansas City, St. Louis, and Cleveland respectively
Ms. Perelmuter, Messrs. Rosengren and Weber, Vice Presidents, Federal
Reserve Banks of New York, Boston, and Minneapolis respectively

______________________
1/ Attended portion of meeting relating to the Committee’s consideration of the Report of
Examination of the System Open Market Account.

Transcript of the Federal Open Market Committee Meeting of
December 21, 1999
CHAIRMAN GREENSPAN. Good morning, everyone. Would somebody like to
move approval of the minutes for the November 16th meeting?
VICE CHAIRMAN MCDONOUGH. Move approval.
CHAIRMAN GREENSPAN. Without objection. Peter Fisher, you wanted to
discuss the report of examination, I understand?
MR. FISHER. Yes. I wanted to elaborate a little on Louise Roseman’s memo to
Don Kohn about the unresolved difference between the internal accounting records of the
Markets Group Accounting and Control Unit and those reflected in the Integrated
Accounting System regarding the System’s net interest accruals on foreign currency
investments. I thought it would be helpful if I gave a couple minutes of background, if you
will bear with me.
Last spring, as members of the Committee will recall, we entered into a series of
transactions with the ESF to re-balance our euro and yen holdings so we could come to a
better split both in terms of total holdings and the currency mix. This involved a number of
transfers of ownership of a series of investments and resulted in quite a significant amount
of accounting activity. In the course of reviewing that, our own accounting staff identified
an error that had been introduced in the prior year in our treatment of the premium on bonds
held in the accrual account, overstating the accrual account by about $5 million. In the
course of confirming that, they identified an additional $26.6 million overstatement in the
accrual account for interest on foreign currency investments. We have had a number of staff
members working full time trying to trace the source of that $26.6 million overstatement.
They have worked back through the records to December 1994, before which detailed
records at the transaction level just no longer exist due to the routine and appropriate
destruction of documents.
The Board examiners were at our Bank to conduct an examination of the System
Open Market Account in September and PricewaterhouseCoopers also has looked over our
methodology to try to trace this overstatement back through time and find its source.
PricewaterhouseCoopers is confident that we have traced it back as far as we can. They

12/21/99

2

have tested our work papers and agree with our conclusion that we simply can’t go back any
further.
There are two possible causes of this overstatement that we have to confront. One is
the diversion of funds and the other is error. Now, we cannot rule out the possibility of a
diversion of funds. But people from our own audit function and from PricewaterhouseCoopers have reviewed the control procedures we’ve had in place for the last decade and are
very comfortable with the conclusion that these control procedures are sufficiently robust
that the likelihood of diversion is remote. It cannot be ruled out, but for diversion to have
occurred it would have had to involve the collusion of many people--just an extraordinary
number of people--on several different staffs. If anything, our control procedures run a little
to the “belt and suspenders” direction in regard to control of the flow. So, there is
reasonable confidence that no diversion of funds occurred. The much more likely cause is a
simple accounting error. The failure to credit the accrual account when cash was received
would have left this account overstated. But we have worked the accounting back as far as
we can take it and cannot find the erroneous entry or entries.
Dave Sheehy, the New York Fed’s General Auditor, and I are both looking into a
fundamental reappraisal of our control procedures. We have introduced an additional
mechanical check to maintain detailed records of the accrual stream by instrument, so that
when a final principal payment is received we can trace the record all the way back on each
instrument and double check the accounting.
More fundamentally and more importantly, what troubles us is how we could have
gone for so many years without scrubbing this account more vigorously. That is something
we are looking into and we are going to be revising our control procedures--both the audit
procedures and those in our own Markets Group. The Board’s staff and our accounting
function at the New York Fed have worked out an accounting treatment to correct for both
the $5 million and the $26.6 million errors. That involves reducing the accrued interest
asset account by the entire $31.6 million, with an offsetting reduction in interest income on
foreign currency investments. We will make that adjustment before the end of the year and
spread it among all the Reserve Banks. Of course, for all of us with responsibilities for
SOMA this is an embarrassing, indeed humbling, event. As a technical matter, though, I
understand that PricewaterhouseCoopers is comfortable with the conclusion of both our

12/21/99

3

accounting and audit function and the Board staff that this is not a material event for
purposes of disclosure for any Reserve Bank. I would be happy to try to answer any
questions.
CHAIRMAN GREENSPAN. Is there any evidence of a surprising rise in standards
of living of key people involved?
MR. FISHER. No, there is not.
CHAIRMAN GREENSPAN. Has somebody looked?
MR. FISHER. Yes, we have looked into that. Many of the staff people are still at
the Bank, though others are not. But we have found nothing of that nature.
CHAIRMAN GREENSPAN. Were it an embezzlement, prior to what period would
it have occurred?
MR. FISHER. We only know that the difference existed prior to December 1994.
CHAIRMAN GREENSPAN. It could have been any time prior to that? Is there a
beginning point, other than 1914?
MR. FISHER. The details certainly don’t exist for pre-December1994 records, so I
don’t know how we could determine the beginning point--in 1973 or 1963 or where. Prior
to 1994, the only interest income we were receiving in that account was coming from the
BIS, the Bundesbank, and the Bank of Japan. So the source of the income was official
institutions. It was really a very simple accounting process to bring that income in at that
point; the complexities have been introduced since that time. So, as I say, PricewaterhouseCoopers and our audit function are confident in looking over the control procedures we have
had in place that it’s implausible that a diversion could have occurred. But we cannot rule it
out.
CHAIRMAN GREENSPAN. Other questions on this issue? Let us go forward to
your regular report.
MR. FISHER. Turning to the packet of colored charts,1/ page 1 depicts
the rates implied by forward rate agreements. As you can see in the top
panel, in the period since your last meeting forward rates rose steadily
until the release of the employment report on December 3rd when the
market reacted to a lower-than-expected average hourly earnings figure,
and the forward rates came off a little. The rates then bounced backed up
again on the release of retail sales data, reaching highs for the year.
1

/ A copy of the material used by Mr. Fisher is appended to the transcript. (Appendix 1)

12/21/99

4

In the middle panel you can see that euro forward rates continued to
follow the movement in dollar forward rates. I think I have been harping
on this all year, but let me say it one more time: To me, the most
unnerving thing in markets today is not the state of equity markets, the
dollar/yen relationship, or the weakness of the euro, but rather the extent
to which European interest rates at the short end follow the peaks and
valleys of U.S. forward rates. I find it, as I say, unnerving that those rates
fall even as the ECB raises rates and rise when we raise rates. It is really
very odd and hard to understand.
In Japan, as you can see in the bottom panel, the forward rates backed
up in mid-November. But this time the Nikkei was rallying and there was
increasing anticipation of a strengthening recovery. By mid-November
the 9-month forward 3-month rate, which as of now covers the fourth
quarter of next year, had doubled since October. But with the release of
third-quarter GDP numbers and the Tankan Survey, those rates began to
wind down a bit. However, I should note that Bank of Japan officials have
been candid, if muted, in explaining that they are beginning to look for an
exit strategy from their zero interest rate policy, and that is seeping out
into the markets a bit. So there is still a bit of lift in the Japanese forward
rates.
Turning to our extraordinary year-end operations, on the next page
you can see that we have completed the auctions of options on repos, with
the final auction held on December 1st. If you scan down the page in the
columns labeled “total propositions,” “bid-to-cover ratio” and “awards/
stop-out rate,” you can see that those numbers were generally declining
over the course of the auctions. In our view that reflected the fact that we
did what we said we were going to do: We tried to meet demand--maybe
not each and every last bid, but the serious bids for these options. The one
exception to the general decline in these numbers was the last auction of
the January 6 strip, as can be seen in the very bottom line. Total
propositions jumped up from $36 billion in the prior week to $43 billion,
the bid-to-cover ratio backed up, and the stop-out rate backed up a little
from 2½ to 4 basis points. I don’t want to make too much of that, but I
think it reflects an epiphany of something going on in the markets. The
closer we come to the end of the year, the more the anxieties and
uncertainties seem to be about the first two weeks of January--what will be
on the other side of the great divide of the millennium--and less about
liquidity in late December. That is progress at least in one sense.
Turning to the next page, in the top panel you can see the cumulative
reserve drain from currency in circulation. The two red dot-dash lines
reflect the same projections--labeled “high” and “moderate”--I showed
you last time. In the middle line I’ve shown the actual experience to date

12/21/99

5

and our current projection. That current projection is running a little
closer to the high end than to the low end of our previous range of
projections. Most of this still reflects growth in vault cash, although we
do see some outflows to meet consumer demand that is higher than in
prior years. We don’t know whether to attribute that to Y2K or not, but
we are beginning to see a little of the cash seeping out.
In the middle panel are the New York Bank staff’s estimates of free
reserves or reserve needs through year-end, including yesterday’s
operations but not yesterday’s actual performance. As you can see, this
produces about a $42 billion need from here to year-end, not including
whatever excess reserves we may need to put in on the last day, which
might be around $10 billion. So, from this point to year-end in our current
forecast it looks as if we will need to provide about $52 billion more.
This past August, I suggested to you that we might face reserve needs
from then forward of about $100 billion, with a band of uncertainty of
$100 billion--$50 billion on either side of that estimate. At that point in
August we had an underlying need of about $8 billion. Since then we
have purchased just under $10 billion outright and have done $60 billion
in term operations through the turn of the year. So on the present course,
dating back to August and adding in the $50 billion for uncertainty, we are
at about $120 billion. That’s roughly our estimate of reserve needs from
where we were in August through year-end.
Looking toward the end of the year, some of the market estimates of
year-end financing for mortgage-backed collateral that we were hearing
about--and we were calculating ourselves--were coming close to and
sometimes over 7 percent, which is the strike price for our options. That
began to catch our attention. After thinking about it, we executed two
forward transactions for the turn-of-the-year weekend. We thought we
would take on in advance some of the mortgage-backed collateral that
might be looking for financing over the century date change. Our
reasoning was as follows: If it was going to be exercised as an option
around the turn-of-the-year, we would have been taking it on anyway, so
why not do it in advance? Also, as we thought more about it, we decided
this would be an opportunity for price discovery both for us and for the
market.
Let me take you through this bottom panel on page 3, which
represents a bit of the evolution of estimates of term financing. On the far
left, you can see that the implied turn-of-the-year repo rates from our term
operations on October 8th were about 7 to 7½ percent for Treasuries, 10 to
12 percent for agency securities, and 11½ to almost 14 percent for
mortgage-backed securities. Now, I want to be clear that a lot of heroic
assumptions are built in here. There were uncertainties about Committee

12/21/99

6

policy and one had to make estimates of where other financing rates would
be. But these are fairly typical of where most people in the market
thought turn-of- the-year financing rates were, understanding they might
be a little overstated. In the second column you can see the comparable
implied rates from our longer-term operations on December 17th.
The next two columns are the bid and offer rates taken off broker
screens yesterday for Treasury and agency collateral. And on the far right
are the rates, taking the high proposition and the low proposition, in the
two turn-of-the-year RPs we executed. Both came in a little lower than
the rates on broker screens. The high bid was 6.27 percent and the low bid
was 4.5 percent on the first five-day RP we did for the turn-of-the-year
period; 6.38 and 5.25 percent were the comparable rates on the second
one. I think the tightening up in the second operation actually just
reflected the market coming to a sense of the pricing. The low bidders in
the first operation were wishful thinkers, hoping financing would be that
low. So, I view it as a sort of healthy bunching up. But looking at these
rates again does suggest to me that more of the uncertainty the market is
pricing for is in the early days in January, not just the century rollover
date. Some of the assumptions we have been making are probably in
error, in that they attribute much of the premium just to December 23rd;
more of it is probably an uncertainty premium for the initial days in
January. One way to put it is that the market may believe that we can
keep financing rates low on any one day in light of our operations, but it
may be harder to believe that for the first two weeks of January.
Finally, the last page depicts how the fed funds rate has traded since
your last meeting. The upper right section shows the maintenance period
surrounding Thanksgiving. In that period we had a slightly elevated funds
rate as we faced pressures typical of the turn of the month and of
Thanksgiving, especially when it comes so close to the beginning of
December.
In the next maintenance period, from December 2nd to 15th, we leaned
rather heavily in the direction of generosity, with the 15th being the end of
the maintenance period and a tax payment date. We wanted to be very
certain not to have firm rates on that day, which might set us up for the
end of the year. So we were quite generous in providing excess reserves
from the early through the middle part of the period. Then we worked
down the period average excess to just $1.1 billion, as you can see, but
that gave us some soft rates over the last few days of the interval. That
was intentional on our part.
That is all I have to report. We conducted no foreign exchange
operations in the period. I would be happy to answer any questions.

12/21/99

7

CHAIRMAN GREENSPAN. Questions for Peter?
MS. MINEHAN. I have one little question.
CHAIRMAN GREENSPAN. I’m sorry. We have not yet approved the
Examination Report of the System Open Market Account. That requires a motion.
MR. FERGUSON. I move that we approve the SOMA Examination Report.
CHAIRMAN GREENSPAN. Without objection. President Minehan.
MS. MINEHAN. You mentioned a couple of times, Peter, that you think anxieties
about Y2K have shifted from the actual turn-of-the-year period of 12/31/99 to 1/1/00 to the
first couple of weeks in January. Is there anything more substantial to it than that? Are
there particular concerns in the market? I know there is a lot of concern, at least among
some financial institutions I know of, about having more liquidity than they want coming
into the end of the year. Do you think that concern is going to disappear quickly at the
beginning of the year, or is there anything more to it than that?
MR. FISHER. It may just be a relative issue in that anxieties about the last few days
of the year, when people thought markets would be most illiquid, have gone away. So
relatively speaking, the state of anxiety, whatever it may be, is now about the first ten days
of January.
MS. MINEHAN. It just got pushed out?
MR. FISHER. Yes, it was just shifted out into the new year. There are certainly a
number of people who are more worried about the state of settlements and heavy volume
after an accumulation of slow days. If the whole system gets as sticky as molasses, the
problem is not going to be on January 3rd and 4th; it is going to be on the 6th or the 10th if
everyone is being a little too cautious. I think that is where a lot of anxieties are focused.
There are a number of other markets in the world where, notwithstanding when banks are
closed for holidays, the authorities have not been as vigilant as we have tried to be in
making sure the banks do not de facto close down the markets. Some small non-euro
European countries have allowed their banks simply to declare the first ten days not good
value days for foreign exchange transactions, for example, even though the banks are going
to be open. So their retail customers can walk in the door and take out money, but their
corporate customers can’t get their foreign exchange trades settled. That’s the sort of thing
that is gnawing at confidence about those first ten days.

12/21/99

8

MS. MINEHAN. Thank you.
VICE CHAIRMAN MCDONOUGH. I move approval of the domestic operations.
CHAIRMAN GREENSPAN. Without objection they are approved. Mike Prell and
Karen Johnson.
MR. PRELL. Thank you, Mr. Chairman.
If I were to put the Greenbook in a seasonal nutshell, I suppose I
would say that we’ve brought you tidings of great joy, but maybe not great
comfort.
In broad macro terms, the economy has been performing splendidly.
Though we can’t be especially confident at this point, it looks as if real
GDP growth in the current quarter will be close to 5 percent, at an annual
rate. If so, 1999 would be the fourth year running of growth of 4 percent
or more. With job gains still strong, we’ve now enjoyed three straight
years of average unemployment rates below 5 percent. The chain index
for GDP prices has increased less than 2 percent for four consecutive
years.
Moreover, the outlook as described in our baseline forecast is almost
as good. GDP growth is projected to fall a little short of the 4 percent
mark over the next two years. But the unemployment rate is expected to
remain near 4 percent and GDP price increases below 2 percent. This is
among the most upbeat forecasts for the U.S. economy that you’ll find
today.
So, if we’re right, the basis for joy is pretty clear. You’ve entered
Humphrey-Hawkins heaven. Unfortunately, you haven’t been granted
unconditional permanent residency there, and this is where the comfort
side of the story comes in. We believe that the economy may be getting
seriously overheated and in some ways significantly distorted.
This Committee has, of course, announced its focus on the mounting
pressures in the labor market as the most likely potential source of
deteriorating inflation performance and thus cyclical instability. But,
though there’s a near consensus among employers that qualified workers
are terribly scarce, the official data actually show decelerating wages. I’ll
make just three quick comments on this dissonance.
First, we continue to think that the wage deceleration this year owes
considerably to the downside surprise in price inflation that occurred last
year when oil prices plummeted; on this view, this year’s pickup in prices
should be showing through in wages over coming quarters. Second,
judging by the nonfarm compensation figures--though not by the less
inclusive ECI--real wages (deflated by product prices) have been

12/21/99

9

increasing quite substantially even this year. But, third, none of the
official pay series seems equipped to provide an accurate reading on labor
costs in today’s world where plain vanilla wages are becoming less
important relative to many other components, including deferred--and less
certain--compensation in the form of stock and stock options. This latter
point is underscored by the stream of stories about people passing up big
salaries to go to young firms offering equity lottery tickets and about
established companies restructuring themselves so that they can compete
on those terms. This suggests that the linkage between compensation
changes and price pressures--never an especially tight and predictable one
--has become even more problematic.
Given these vagaries of the wage picture and its interpretation, and on
the thought that the proof of the inflation pudding might be in the eating,
perhaps we should simply ask whether there’s any evidence that prices
themselves are beginning to accelerate. I would say that there is some
evidence, though it may not yet be compelling.
Certainly, we’ve seen an upturn in core PPI crude and intermediate
goods prices. At the same time, and helping to explain the acceleration of
the PPI pipeline measures, the prices of non-oil imports (ex computers and
semiconductors) have begun inching up as the dollar has stopped
appreciating on a broad basis and as foreign economies have recovered.
At the final goods and services level, with some greater firmness in the
monthly figures of late, the core CPI has edged a couple of tenths above
its low on a twelve-month change basis.
And, of course, as I’ve noted repeatedly, overall consumer prices
have accelerated noticeably this year with the run-up in the cost of crude
oil, something that may provide some momentum to inflation in the near
term. One way in which that could occur is via expectations, and
households’ short-term inflation expectations do appear to have risen
some this year. It might also be noted that the latest semi-annual NAPM
survey showed purchasing managers expressing somewhat greater concern
about increasing costs and inflation in 2000.
All of this may well be stretching the point statistically, but I think
it’s worth sounding a note of caution that strong productivity gains and
intense competition--even accelerating productivity and intensifying
competition--do not by themselves ensure that there can be no step-up in
inflation. Unless supply is completely elastic, which seems unlikely in the
short run, demand can become excessive.
That, we fear, is the current situation, with the rising stock market
overriding the effects of monetary tightening. Once again in recent weeks,
the market has defied our notions of valuation gravity by posting an

12/21/99

10

appreciable further advance. Moreover, it has done so in a way that seems
to highlight the risk that it will continue doing so. I refer to the incredible
run-up in “tech” and e-commerce stocks, some of which have entered the
big-cap realm without ever earning a buck.
To illustrate the speculative character of the market, let me cite an
excerpt from a recent IPO prospectus: “We incurred losses of $14.5
million in fiscal 1999 primarily due to expansion of our operations, and
we had an accumulated deficit of $15.0 million as of July 31, 1999. We
expect to continue to incur significant...expenses, particularly as a result of
expanding our direct sales force…. We do not expect to generate sufficient
revenues to achieve profitability and, therefore, we expect to continue to
incur net losses for at least the foreseeable future. If we do achieve
profitability, we may not be able to sustain it.” Based on these prospects,
the VA Linux IPO recorded a first-day price gain of about 700 percent and
has a market cap of roughly $9 billion. Not bad for a company that some
analysts say has no hold on any significant technology.
The warning language I’ve just read is at least an improvement in
disclosure compared to the classic prospectus of the South Sea Bubble era,
in which someone offered shares in “A company for carrying on an
undertaking of great advantage, but nobody to know what it is.” But, I
wonder whether the spirit of the times isn’t becoming similar to that of the
earlier period. Among other things, it may be noteworthy that the tech
stocks have done so well of late in the face of rising interest rates. Earlier
this year, those stocks supposedly were damaged when rates rose, because,
people said, quite logically, that the present values of their distant earnings
were greatly affected by the rising discount factor. At this point, those
same people are abandoning all efforts at fundamental analysis and talking
about momentum as the only thing that matters.
If this speculation were occurring on a scale that wasn’t lifting the
overall market, it might be of concern only for the distortions in resource
allocation it might be causing. But it has in fact been giving rise to
significant gains in household wealth and thereby contributing to the rapid
growth of consumer demand--something reflected in the internal and
external saving imbalances that are much discussed in some circles.
Whether our assumed 75 basis point increase in the fed funds rate would
be a sufficient shock to halt this financial locomotive is open to question.
A model simulation in the Greenbook gave some sense of what might
happen if the stock market shrugged off that further tightening and
continued rising. But another factor that will help determine just how
much policy restraint is needed is what happens in the rest of the world
economy, and Karen has a few words to say about the risks in that regard.

12/21/99

11

MS. JOHNSON. In my remarks I will first say a few words about the
October trade data that were released after the Greenbook was completed
and then will review what we perceive to be some of the risks confronting
the global economy.
In October, the U.S. nominal trade deficit in goods and services
reached $25.9 billion, a new monthly record. Exports were about
unchanged from their level in the previous two months, as increased
exports of industrial materials about offset decreased exports of
machinery, including computers. The value of imports jumped in
October, with the largest increases registered in consumer goods and
machinery.
The October number was very close to that embedded in the
Greenbook forecast. By themselves, these data suggest a fourth-quarter
outcome of real net exports that is slightly weaker than in the Greenbook.
However, in combination with small adjustments to some domestic
components of GDP in response to these data, they imply little net change
in our estimate of current-quarter GDP growth.
Once again we have slightly revised upward our Greenbook
projection for real output growth abroad during 2000 and 2001. This
brings the total revision for 2000 to about plus ¾ percentage point since
June and plus 1¼ percentage points since last December. Our stronger
outlook for the coming two years rests in part on the positive surprises in
recent months for economic activity during this year for most regions of
the world. It rests also on the likelihood that fiscal policy will be less
contractionary in several regions while monetary policy remains generally
accommodative abroad. The one major exception to the generally bright
picture I am painting has been Japan, where although we have revised
upward our forecast for next year, projected growth remains quite low,
and we are somewhat pessimistic.
Together with the stronger view for the U. S. economy that Mike just
reviewed, the staff forecast now calls for a substantially more robust
global economy over the coming eight quarters than seemed probable a
year ago. One risk to this upbeat picture is that we, and other forecasters,
are still not fully taking into account the mutually reinforcing positive
impulses that can be shared across countries during a simultaneous
expansion. We may be underestimating the upward momentum in
individual countries that can come from the interaction of improved
confidence, higher capacity utilization, and wealth effects. For the global
economy, we may be failing to allow for generally stronger export demand
everywhere as spare capacity is reduced in many economies at the same
time.

12/21/99

12

One class of markets where early indications of such growing
momentum might become evident is global non-oil commodity markets.
As yet, we do not see an indication that demand is putting severe pressure
on supply in those markets. While prices have begun rising, it is from
previously very low levels. Going forward, we will need to pay particular
attention to those markets for signs of incipient inflationary pressures.
At the same time, we need to be open to the possibility that the
factors causing accelerating productivity in the U.S. economy are
beginning to have similar effects in other economies, especially the other
industrial economies. In that event, the global economy would be capable
of faster growth without inflation risk than was previously the case.
Provided foreign officials do not unnecessarily limit output growth from
achieving its new potential, such a development could result in stronger
demand for U.S. exports and more balanced growth in the global
economy. Such a scenario is one version of a so-called soft landing.
It now seems very likely that 2000 will see higher interest rates and
more profitable investment opportunities abroad that could decrease
demand for U.S. assets and raise the risk of downward pressure on the
dollar. Such developments could in turn cause disturbances in other
global financial markets as well. However, for the first time since the
Asian crisis began in 1997, we need to be alert to the possibility of
generalized global upside economic pressures and the challenges for
policy that such a development would pose.
CHAIRMAN GREENSPAN. Questions for either of our colleagues? President
Moskow.
MR. MOSKOW. Thank you, Mr. Chairman. I want to ask Mike a question about
the outlook for automobile sales next year. The Greenbook projection for sales of light
vehicles is 16.6 million, and I am sure you know that the auto companies are estimating
around 15.9 million. We had a symposium at our Bank a few weeks ago with a group of
forecasters from the region, and they were coming in around that same level--15.9 or 15.8
million even. I am just curious as to why the Greenbook is so much higher than the
consensus forecast and the forecast of the auto companies themselves at this point.
MR. PRELL. Well, no one has had a particularly good track record on forecasting
auto sales this year. Even the automobile manufacturers themselves, I think, have been
quite surprised by the high level of sales. Our forecast of overall economic activity is, as I
suggested, in the upper brackets of forecasts that one would find at this point and auto sales

12/21/99

13

are a cyclically sensitive sector of the economy. I think therein lies a very important
element of explanation. I don’t think there is much more that I can say on this. We consult
a number of models, and they give somewhat different results about the likely pattern of
auto demand over the next couple of years. But as we look back at recent experience--at
how much sales seemed to be above reasonable trends in the past two or three years--we
don’t see a compelling case for a precipitous decline from here, especially in a
fundamentally strong economic environment.
MR. PARRY. Mike, I thought the section in the Greenbook on alternative
simulations was particularly interesting, especially the comparison between the baseline and
the flat funds rate scenario. It seems to me, if one compares the effects of monetary policy
actions on inflation expectations in the economy, that there is a greater sensitivity now than
may have been the case a couple of years ago. And that makes sense to me. We are
basically saying that markets are learning and responding to policy actions. But what is a
bit confusing is that there is also, I would assume, considerable sensitivity to developments
in equity markets as well. If one looks at those two Greenbook alternatives, there is a big
impact on expectations as a result of the effect of a change in rates on equity prices. Could
you talk a little about how expectations enter into the model now versus how they used to?
Is there a greater sensitivity now to policy actions?
MR. PRELL. I’m not sure that I can provide a very good direct answer to the
question of sensitivity to policy actions. We have looked to see whether the responses--in
terms of long-term rate movements and so on--to changes in the funds rate are different
now. I think there may be some small amount of evidence supporting that thesis.
MR. STOCKTON. The most important change in the model, relative to where it
was a few years ago, is the reaction of the economy and the agents in the economy when we
don’t tighten in a period when the economy is strong. In that case, people think we have
revised up our inflation target, whereas in the past our model basically assumed that all
agents were backward-looking. People just looked at where inflation had been; and the way
that monetary policy influenced the inflation outlook going forward was simply through its
effect on aggregate demand. Now there is some independent effect through forward-looking
expectations that leads to a more rapid adjustment of inflation expectations. I think that is
the principal difference. In looking at the response of the economy to changes in the funds

12/21/99

14

rate, we were unable to convince ourselves that there had been a significant change in either
the economic structure or the model’s response to monetary policy at some deeper level.
But I think the way the model is now constructed does make it more sensitive to the conduct
of monetary policy. It wasn’t even a question that arose in our old MPS model.
MR. PRELL. I should say that one of the nice features of our model is the ability to
change the expectations formation mechanisms. And the one that we have used in doing
these simulations is a very simple, small model that is supposed to capture the way people
will react to a certain set of variables. It isn’t a fully consistent model of expectations in that
we are not taking a full rational expectations kind of approach. That would be another way
of doing this. This is one of the areas of active continuing research, and conceivably there
could be some changes in this small model in the not-too-distant future that would perhaps
enrich that a bit. One of the things that we have pointed out repeatedly in the presentation
of our simulations is the difference in the effect of lower interest rates versus higher stock
prices for the inflation outcome. That’s because the interest rate change induced by
monetary policy is affecting people’s inflation expectations to a greater degree than the
higher stock prices, even though they both create more aggregate demand. So, this is one of
the areas that I think we need to work on a bit further in an effort to come up with something
that would be a little more realistic.
MR. STOCKTON. One other area where over time there has been some structural
change in the economy that has tended to increase the sensitivity of output to interest rates
has been through the increasing openness of the economy and the exchange rate mechanism.
MR. PARRY. Thank you.
CHAIRMAN GREENSPAN. President Broaddus.
MR. BROADDUS. Mike, on the top of page 7 of the first part of the Greenbook,
you say that you are expecting hours in the nonfarm sector to increase at a 2¼ percent rate
this quarter. And you say that if we get nonfarm productivity increasing at a 3¼ percent rate
we will get the 4.8 percent GDP forecast. That doesn’t seem to add up. Does that imply
that agricultural productivity is declining?
MR. PRELL. We have a government sector to account for and I think that is
probably the--

12/21/99

15

CHAIRMAN GREENSPAN. The government and household sectors overwhelm it.
Agricultural productivity is still accelerating according to the data that we have.
MR. BROADDUS. Yes, that’s why I couldn’t figure out-­
CHAIRMAN GREENSPAN. Although agricultural productivity might slump if
genetically modified organisms were made illegal.
MR. POOLE. On wages, is there any way to sort out the forward-looking
expectations effects from the backward-looking effects of recent changes in the CPI, which I
think you were using as a part of your outlook for wages?
MR. PRELL. I don’t think there is a particularly good way. And I’m not sure, in
fact, whether in the real world we don’t have a mixture of both occurring. In a mechanical
way we have cost of living adjustments in various contracts, so that is clearly backwardlooking. I would think that in many informal wage adjustment systems people are looking
at what has happened to the CPI over the past year or some other recent period to get a sense
of what might be an appropriate wage increase. In other instances, people may be more
forward-looking and the question is how they shape those expectations. We have tried to
capture that econometrically in various ways by using lagged prices, survey measures, and
so on. I don’t think we can really separate the two in a clear way.
MR. STOCKTON. If you enter both the Michigan Survey’s forward-looking
expectations and lagged prices into a wage equation, typically both will have some
explanatory power. Whether you really and truly have identified those two separate effects,
given their co-linearities, would be a tough call.
CHAIRMAN GREENSPAN. As you know, we are getting some preliminary
evidence that the wealth effect may be larger than the 3 or 4 percent stemming from capital
gains that basic distributed lagged econometric analysis produces. As a general proposition
is it true that because of the random noise in the system any very significant reduced form
type of calculation that you’re currently making to pick up the wealth effect is biased
downward by the nature of the construction of the test? Or do you have ways to filter out
whatever noise there may be to come up with cleaner coefficients? For example, suppose
that in the real world there is an exact 10 percent coefficient and that if you could measure it
in every detail you would get that number. But to the extent there is random noise in the
data, of necessity the estimated coefficient will be biased downward, and if there is enough

12/21/99

16

noise in the system, at the limit it will go to zero. Do we have any sense, having looked
only at one major upswing in stock prices to judge this, whether that 3 to 4 percent
coefficient is realistic? Do we have actual useful evidence in the other direction? In other
words, in the few periods of really significant declines in stock prices is there any evidence
regarding the robustness of that coefficient?
MR. PRELL. We have looked at how robust those estimates are, examining
different estimation periods and so on, and one would find some variation in that respect.
On a priori grounds, one might think that this effect would not necessarily be perfectly
stable over time as the demographic distribution of wealth changes. If more of the wealth
was held by people with shorter expected remaining life spans and there was not a strong
bequest motive, one would think the coefficient would go up because people would be
spending that wealth more quickly. If younger people are getting wealthy and they spread
the spending over a lifetime, one would expect the coefficient to go down. I think there are
any number of reasons to expect that the coefficient is not going to be perfectly stable.
CHAIRMAN GREENSPAN. I’m not even raising the issue of stability. I am
raising strictly the question of the size. It is perfectly possible to have all the things you are
mentioning but for the bias to be there as a function of the data themselves. I’m just
questioning whether or not--other than by disaggregating the data--we have any indication
that we may be underestimating that coefficient. If you disaggregate the data, you clearly
reduce the noise. That’s the purpose of disaggregation. We have already started some
modest disaggregation and we see some rather startlingly different results. I was just
curious as to whether there was concern about that because if we are underestimating that
coefficient on both the upside and the downside, it could be more destabilizing than even the
less-than-optimistic appraisal of the overall outlook that you just gave.
MR. STOCKTON. There is one piece of evidence, though, suggesting that our
estimated wealth effect is not too far off base. And that is that the decline in the saving rate
we have seen has been roughly consistent with what the consumption equation uses--that is,
what a 3 to 4 cents on the dollar wealth effect would suggest should be the case. You are
absolutely right that the hard part in estimating these effects is that we know we are
estimating ultimately the consumption effect from changes in stock prices. Those are very
noisy. What people are really reacting to, in essence, is their perception of the persistence of

12/21/99

17

those stock prices. And what the distributed lag picks up is the fact that because the data are
noisy we do not see an immediate response to every movement in stock prices. That’s
because many people, in making their decisions, are trying to determine how much of that
movement in stock prices is, in fact, going to persist and how much is transitory. So the
distributed lag would pick up smaller coefficients, let’s say, of the effect of the stock price
change in the first quarter simply because many people are uncertain as to whether or not
that change will be permanent or transitory. If they knew for sure, the lagged coefficient
would be biased down because they would, in fact, respond more strongly to that movement
in stock prices.
In terms of the disaggregated data, we have a lot of work yet to do. We have a
variety of different data sets and projects that we are pursuing to try to pin down better the
size of this wealth effect. I would feel more comfortable if I saw micro level evidence that
supported our hypothesis that we are actually experiencing a wealth effect of the size that
the time series evidence is purporting to pick up. I say that because, as our colleagues in
New York have pointed out, there is uncertainty in these estimates for sure.
CHAIRMAN GREENSPAN. Have you tried at all to capture potential stock price
volatility as a factor that would delay the sense of persistence of the gains? Or is the period
just too short to provide any useful insight?
MR. STOCKTON. I’ve asked our consumption experts that question. They claim
that there has not been much success thus far in their effort to work the volatility in stock
prices into those consumption functions. It may be a function of the fact that, when we are
using the aggregate time series data, we are asking far too much from those data and more
than they are going to be able to return. The micro level evidence may provide some better
fix on that.
CHAIRMAN GREENSPAN. Thank you. Any further questions? If not, who
would like to start the roundtable discussion? President Parry.
MR. PARRY. Mr. Chairman, economic activity in the Twelfth District has
continued to expand rapidly in recent months, with the expansion broadly based across
major District states. Every major sector in the District added jobs in recent months, with
construction posting some of the largest gains. And manufacturing has been a new source
of job growth in recent months despite a continued loss of aerospace jobs. A rebound is

12/21/99

18

particularly evident for manufacturers of high-tech equipment, who recently have benefited
from improved exports to Asian countries that had suffered recessions in the 1997-1998
period.
High-tech firms have created a lot of jobs and wealth recently in the District,
especially in California. This year a record-breaking amount of venture capital has been
invested in California firms, particularly those in the Bay Area that are developing Internet
applications. Proceeds from initial public offerings also have surged this year, following
moderate amounts of IPO activity in 1997 and 1998. The strong performance of technology
stocks is boosting spending not only in California but in other District states as well. For
example, one of our directors reported that Californians are using their newfound riches to
bid up the price of beachfront real estate in Hawaii. Analysis done by our staff suggests that
successful IPOs have made a large number of employees wealthy, at least on paper. More
than 150,000 persons are employed in the roughly 300 California- headquartered firms that
have made IPOs in the last three years. About 125,000 of these employees probably have
received stock or stock options as part of their compensation, giving them as a group about
15 percent ownership in their firms. Given the strong stock price performance this year, the
aggregate market capitalization of these 300 firms recently jumped to about $450 billion
dollars. As a result, about 125,000 Californians have seen the value of their stock or stock
options jump to an average level of more than $300,000 per employee. Just as this newly
created wealth is boosting demand, especially in California, it is clear that a collapse in
market values would impose obvious downside risks.
Turning to the national economy, recent data continue to show the rapid growth in
economic activity and moderate inflation that we have seen for four years now. These data
serve to reinforce the impression that the supply side of the economy is expanding rapidly.
Our forecast under an unchanged federal funds rate and flat stock market shows growth of
just under 3¾ percent and 3½ percent respectively over the next two years.
With regard to inflation, tight labor markets are expected to impart an upward trend
to the ECI, which rises in our forecast to 4¼ percent by 2001. However, the acceleration of
productivity in recent years can be expected to counteract part of this pressure on goods
prices. Moreover, corporate profit margins remain high, providing a further cushion
between wages and prices. Balancing these factors, our staff forecast shows a slight upward

12/21/99

19

trend in core CPI from 2.1 percent this year to 2.3 and 2.4 percent in the next two years,
considerably below the forecast in the Greenbook constant funds rate scenario.
There are significant risks on both sides of the forecast. The evidence of a
continuing supply shock represents a downside risk for inflation. This shock has proven to
be difficult to model, and inflation, once again, could come in lower than expected. In
addition, the possibility of a significant stock market correction cannot by any means be
ruled out, and that also would reduce inflationary risks. However, labor market tightness
could begin to show through to price inflation in a more dramatic way, as would be
expected from historical experience. This risk is illustrated rather forcefully by the
Greenbook with its forecast that CPI inflation would rise to 3.2 percent in 2001 with no
further tightening of monetary policy.
The key policy issues appear to remain the same. Accelerating productivity and
actual results for inflation suggest room for guarded optimism, while labor market tightness
implies problems ahead for inflation. While I am perhaps not as pessimistic as the
Greenbook, I must admit that it has shifted my focus a bit toward the inflationary risks that
we face with an unchanged federal funds rate. Thank you.
CHAIRMAN GREENSPAN. Incidentally, parenthetically, President Parry has
suggested a disaggregation of the wealth effect by regions. [Laughter] President Hoenig.
MR. HOENIG. Thank you, Mr. Chairman. The underlying trends in the Tenth
District economy have not materially changed since our last meeting. The economy remains
healthy, with manufacturing actually showing some continued rebound. I am hearing more
comments throughout the District that higher interest rates have slowed some construction
sectors, especially residential building. Growth in home sales in the District was about 3
percent third quarter over third quarter this year compared with about 10 percent last year.
At the same time, we are hearing from several of our business contacts that increases in
public works construction such as roads--actually jails for the most part--are offsetting the
falloff in other construction.
While private construction is slowing, manufacturing is continuing to show good
signs of strength. Our Beigebook contacts reported high levels of capacity utilization last
month. The recently released data on third-quarter manufacturing exports also showed
continued improvement in foreign demand for District factory goods. Based on reports

12/21/99

20

throughout the District, holiday shopping centers are quite busy; seasonal sales are very
strong and many retailers are reporting the best season that they have had in five years.
While the number of business contacts reporting labor shortages increased slightly last
month, it was probably not a significant increase. Moreover, most of the increase came in
the manufacturing sector, which has been expanding production in the last couple of
months. The District’s unemployment rate is about 3¼ percent. Except for New Mexico
and Wyoming, all District states have unemployment rates below 3¼ percent, and some are
much below that. District contacts report that wage and price pressures remain subdued,
however; that is no different from what I have been hearing for some time and have reported
in past meetings.
Our energy sector has actually strengthened with the increase in prices and there are
some signs now of wells being uncapped but very few new starts at this stage. The farm
economy remains fundamentally weak, although there is some improvement in cattle prices.
But for now that sector will continue to rely on transfer payments for its health.
Turning to the national economy, my view of the outlook has not changed
fundamentally since the November FOMC meeting. The economy obviously continues to
grow well, with few signs right now of rising inflation. I expect economic growth to slow
over the forecast horizon based on our actions earlier this year. And, frankly, I find it highly
unlikely that with an unchanged funds rate we would have growth in the 4 to 5 percent
range as suggested by the Greenbook. My view of the Greenbook right now is that it
provides a reasonable description of the upside risks to the outlook rather than the most
likely outcome. In my mind the risks are balanced. We do have upward pressures; there’s
no question about it. But there are some other factors, such as our last three funds rate
increases, that I think need to play out.
I agree with most people that core inflation is likely to rise to about 2¼ percent or
maybe 2½ percent in the year 2000 and beyond. However, at this point I am not convinced
that it will rise to a rate higher than 2½ percent in 2001. So in that sense, I think we do have
some time to look at how things develop in the near future. Thank you.
CHAIRMAN GREENSPAN. President Jordan.
MR. JORDAN. Thank you. In recent reports from directors, the focus has been as
much on the outlook for the next year as it has on current or recent conditions, especially

12/21/99

21

among those people who indicated they were in their profit-planning cycles or putting
together business plans. We questioned them about the specifics they were putting in their
business plans. One company that owns newspapers throughout the country said they
expect ad revenue to be significantly stronger in 2000 than in the current year. But they are
budgeting a 10 percent increase in newsprint costs and an 18 percent increase in corporatewide medical costs. And they expect the rise in their total labor costs to be in the 6 to 7
percent range. A communications company reported what they refer to as an “explosion” of
demand for communications equipment. Growth in data transmissions is currently running
10 times that of voice transmissions, and for the year 2000 they are budgeting for a 40
percent increase in fiber mileage that they expect to put into place. Previously, for the
current year they had expected a fourth-quarter slowdown in orders and shipments because
of the so-called lockdown effect. They said it did not occur. The quote is: “If there was a
lockdown effect, it only delayed a further acceleration in telecommunications equipment
shipments.” And they will be watching for early signs to confirm that next year.
A company that basically makes items out of specialty metals--they supply the
aerospace industry and the medical profession--said it expects most of its growth in the next
few years to be in exports to Asia and Europe. Some recent signs of such growth proved of
interest compared to what they had been seeing over the last couple of years. A major
supplier worldwide of safety equipment had an abysmal summer but reported that exports
from September to November were great and they do not believe the improvement was
Y2K-related. They said that they had been concerned that the improvement could be a blip,
but they don’t think so now. Their foreign orders were picking up nicely and they expect
next year to be even better.
The outlook for construction spending and employment in the region is reported to
be one of continued strength but it involves mostly public spending on the highway
infrastructure and the kinds of projects that Tom Hoenig also mentioned. It has been
asserted by some of our contacts that the recent leveling in residential construction in the
region reflects the lack of available labor, not the increase in mortgage rates. They feel it is
really a deferral of residential construction because workers are not available. In unionized
activity, our contacts say booming nonresidential construction has reduced the pool of
available residential construction workers. They are simply being bid off to other kinds of

12/21/99

22

projects. We hear more reports of companies delaying or canceling expansion plans for
warehouse facilities or for other distribution operations, mainly because of the lack of labor.
We are told that some fast food restaurants in central Ohio have now gone to a weekendsonly policy because they simply do not have the staff to operate in the middle of the week.
A western Pennsylvania company that produces air curtains reports that overall 1999
will be a record year. They are now expecting the fourth quarter to be the strongest single
quarter they have ever had; the strength is in both domestic and foreign markets but the
pickup has been in foreign markets recently. They think most of the growth in demand that
they are seeing stems from retro-fit projects, not new construction.
Another company that is engaged in specialty food processing and distribution said
that they estimate their December sales will turn out to be 25 percent above last
December’s. Over the course of this year their catalog sales have risen 20 percent and the
share that is from the Internet has accelerated dramatically. In January of this year Internet
sales were 2 percent of catalog sales and in November they were 10 percent. Their
corporate sales--pastries and other packaged foods that I would call luxury food items--rose
30 percent this year. Most of that is for gifts to employees, customers, and suppliers.
In the steel sector, the orders for the first quarter are reported to be good. Price
increases in the range of $10 to $20 a ton were put into effect in the fourth quarter. And
price increases ranging from $15 to $30 a ton have been announced for the first half of the
year; that would be about a 7 to 10 percent increase. If they are fully implemented--some of
them don’t take effect until April 1st--that would leave the average level of steel prices about
5 percent below where they were a year and a half ago in July of 1998.
Export demand for plastic-manufacturing equipment has recently picked up, and it is
expected that demand in 2000 will be stronger. Again, it is said that most of the growth in
new orders is going to be from foreign markets. They think Europe is picking up very
nicely and are hopeful about Asia.
In the sports and entertainment sector, the average price of a ticket to an NBA game
on opening day this year was up 11 percent versus a year ago on opening day. The average
ticket price for entertainment events this year at Gund Arena in Cleveland--mostly for music
performances--was 10 percent above 1998. Finally, let me cite one report on the labor
markets in the region: We were told that in Pittsburgh this year the starting salary for a

12/21/99

23

worker with a bachelor’s degree in biology and with computer proficiency was $90,000.
Thank you.
CHAIRMAN GREENSPAN. President Broaddus.
MR. BROADDUS. Mr. Chairman, I would like to say a few words about the
directive when we get to that later in the meeting, so I’ll try to compensate by being
especially brief here. In any event, I don’t have any great insights on the economic outlook.
In short, I don’t detect a lot of change in conditions either in our District or in the
national economy since the November FOMC meeting. Activity in our region continued to
advance at a solid pace in November and early December according to our contacts and the
surveys that we conduct. Consumer spending remains strong. Our retail contacts are
looking for nominal increases in sales over last year in the range of 5 to 6 percent. Outside
of the textile industry which, of course, is still declining, manufacturing continues to
rebound. Prospects going forward look pretty good, with new orders rising in a large
number of industries. There are a few signs of some deceleration in residential sales and
construction in some local markets, but there is, of course, a lot of noise in the short-term
housing data, especially at the regional and local levels. Activity remains at a high level in
any event. Labor markets are still very tight in our area. We have heard a few reports
recently of quite sharp wage increases in some service industries, but increases in the
manufacturing sector remain fairly moderate. And many of our business contacts continue
to report a lack of pricing power.
The same kind of story seems to hold true at the national level. As I see it,
projections of a deceleration in the growth of demand continue to be pushed forward not
only by the Board’s staff but by other forecasters as well. I think the continuing momentum
in consumer spending is particularly striking, although not terribly surprising, given strong
growth in jobs and personal income. As I mentioned earlier, the Greenbook projects growth
in hours worked at a 2¼ percent annual rate this quarter. It is hard to see how that kind of
growth can be sustained without at some point generating inflation and inflationary wage
demands, especially if the core CPI is accelerating as the Greenbook is projecting going
forward.
One final point of interest: A teenage daughter of one of our Baltimore officers is
reported to have been offered $250 to baby sit for a local dentist on New Year’s Eve. She

12/21/99

24

turned it down in order to go out with friends. We’re not sure what that implies for the
funds rate [laughter] but we still think the risks are on the upside and that we may be at least
a little behind the curve. We’re still working on it and we’ll let you know when we figure it
out!
CHAIRMAN GREENSPAN. I think you’ve stopped this meeting cold! That’s a
new statistic, which we had better absorb! President Guynn.
MR. GUYNN. Mr. Chairman, I’m not sure I want to follow that! And I would also
like to reserve a little time for the later discussion, but I won’t trade away all of my time.
The beat goes on. Growth in our region remains strong and relatively balanced, and
our contacts across almost all of our geographic areas and industries are expecting more of
the same in the period ahead. Consumer spending during the important Christmas buying
season is now reported to be quite strong after a slow start prior to Thanksgiving. High-end
items, including expensive jewelry, are reported to be hot. Big Box and other discounters
are reporting sales increases of more than 5 percent on a year-over-year basis. As has been
the pattern in recent years, sales at traditional department stores are not quite as strong.
As I’ve reported at other recent meetings, real estate activity in our region has
flattened noticeably. While current inventories of unsold units are at reasonable levels, one
major builder in whose judgment I have a great deal of confidence told us recently that he
expects to begin to see the first signs of overbuilding in some of our markets in coming
months.
Manufacturing in the region continues to increase at a modest pace, except for
apparel, which is experiencing a long secular decline. Our latest manufacturing survey did
suggest some caution in investment spending plans in manufacturing in coming months.
International trade from our region continues to suffer from the weak growth in Japan and
Latin America, which account for 10 percent and 40 percent, respectively, of our region’s
total exports. Our examiners report that loan growth, except for mortgages, continues to be
strong. There is more evidence of credit quality problems in health care lending, and
substantial loan loss provisions have been made by several of our large lenders recently. It
has also been suggested that after the year-end liquidity concerns abate, we could see a pop
in investment and credit extensions as that money is put back to work.

12/21/99

25

The major threat to continuation of strong growth in our region is the availability of
labor, which historically has been very dependent upon substantial in-migration to support
our above national trend growth. And the pool of additional workers has dried up. The
most notable price pressure points remain the same: health care, pharmaceuticals, and some
commodities.
At the national level, I continue to be amazed at the raw strength of the continued
expansion. Clearly, the consumption numbers and the anecdotal information indicate that
the economy is carrying significant momentum into the first quarter. Like the Greenbook,
both our judgmental and our VAR model forecasts show some slowing in the coming year-­
for somewhat different reasons--but upside surprises have become the norm. While we may
have some unusual patterns over the Y2K year-end period, there now appears to be enough
momentum and perhaps pent-up investment spending to counter the early 2000 slowing we
expected earlier. If anything, the economy looks even more resource constrained now on
the labor side and is likely on a unsustainable growth path regardless of one’s views of
productivity and the NAIRU. Moreover, there are few signs that our previous rate hikes
have yet begun to bite except for the moderation in housing. As others have suggested,
higher real rates may be necessary to get a comparable degree of monetary restraint in the
current environment.
Like the Greenbook, our inflation forecast shows some gradual rise in measured
inflation in 2000 and beyond. Like others, I find myself re-calibrating my expectations for
productivity gains and reassessing other developments such as expanded world trade and its
implications for the supply side and for pricing power. While I am comfortable building
into my outlook and policy thinking some new views about sustainable increases in the
potential for the economy to grow, I am not comfortable betting that all of the new-era
phenomena are everlasting. Were it not for the special year-end considerations this year, I
would be trying to develop the case more fully this morning for another snugging policy
move. In my view, such a move would improve our chances of staying ahead of
unsustainable developments that could threaten our gains against inflation and lead to a
deterioration in inflation expectations. Thank you, Mr. Chairman.
CHAIRMAN GREENSPAN. President Boehne.

12/21/99

26

MR. BOEHNE. Thank you, Mr. Chairman. The regional economy in the
Philadelphia District continues to operate at high levels, with a general sense that the good
times will roll on. Retail sales are robust throughout the District. Some high-end car
dealers are having trouble getting deliveries, not because the manufacturers can’t produce
the cars but because there aren’t enough truckers and trucks to get the cars to the customer.
Home sales are unusually brisk for December, in part, realtors say, because of the unusually
mild weather. In commercial real estate, the demand for properties is strong, and I am
hearing reports here and there of some speculative building; it’s not a lot, but I haven’t
heard much about speculative building for a number of years. Labor markets are very tight.
We hear of some examples of large increases in compensation and special perks, but the
general pattern is still one of modest gains. The report from bankers around the District is
that they believe that Y2K will be a non-event. They have lots of cash in their vaults but
few customers requesting unusually large withdrawals.
The national economy is clearly showing strong demand growth, with pressures
evident on the supply side even with outsized productivity gains, and still generally benign
inflation. Some further increases in interest rates to temper demand growth are highly likely
as the new year unfolds. Our primary objective during the coming weeks, however, is to get
into the new year with financial markets as settled as we can make them. We have gone to a
lot of effort to do just that, and our decisions today should be consistent with those efforts.
CHAIRMAN GREENSPAN. President Minehan.
MS. MINEHAN. Thank you, Mr. Chairman. New England continues its recent
pattern of moderate growth, at least as measured by the increase in employment levels,
which have been a full percentage point below the nation for some time. For most of the
region, however, labor force growth has also been slower. And it has been slower than the
growth in the number of jobs, which is giving rise to declining rates of unemployment in all
states in the region. This also gives credence to the numerous anecdotes that it is the labor
constraint itself that is preventing higher rates of regional job growth. Nonetheless, the
region’s employment growth does exceed the nation’s in two areas--construction job
increases and the moderation in manufacturing job losses.
In the construction area, job growth reflects very good residential and commercial
real estate markets in Boston and elsewhere. We continue to ask ourselves whether

12/21/99

27

construction job growth could be a precursor to a 1980s type real estate boom. But so far,
construction jobs do not comprise nearly as large a fraction of total employment as they did
in the 1980s, and there is very little, though some, speculative construction going on.
On the manufacturing side, regional job losses are more moderate than those for the
nation as a whole, probably reflecting a turnaround in merchandise exports. Recent reports
indicate that new orders for manufacturing goods in the region accelerated in recent months,
led by a rebound in exports. Year over year New England exports grew fastest to South
Korea, Mexico, and the Netherlands, though exports to South Korea are still not back to precrisis levels.
As compared with earlier this year, contacts noted a somewhat increased willingness
to pay higher wages and to raise prices, at least for retail goods. Consumer confidence is
high and growing, with surveys pointing to especially strong gains in expectations about
future economic conditions. This is in marked contrast to earlier this year when such
expectations were more moderate. To the extent that expectations were affected earlier by
Y2K uncertainties--and I am not really positive that they were--the apparent lack of concern
in this area may be feeding into higher levels of consumer confidence. It is hard to find any
Y2K panic or even deep worries out there, and believe me we’ve tried to find it.
In looking around for signs of slowing in the region, I must admit I’ve had a hard
time finding any. Bankers do report that mortgage originations are off. And while loans in
general have been growing at a better pace than earlier this year, they are rising at only
about half the pace for the nation as a whole. Aside from that, however, just about
everything else seems to be going great. Stores are packed. The highways are jammed.
Help in retail stores is extremely hard to come by. We held a series of bankers’ forums this
fall and the conversations among those present as well as among the bankers on our board
were very upbeat. New England may be growing more slowly than the nation, at least as
measured by overall employment, but our regional economy seems to have a very solid
foundation for the foreseeable future.
Turning to the nation, I am struck, as others have been, by the fact that even in the
few weeks since the last meeting things seem to have gotten that much hotter in the overall
economy. Growth this quarter will be somewhere close to 5 percent. Labor markets are, if
anything, tighter. The stock market continues to surprise on the upside, and financial

12/21/99

28

market conditions in general seem quite accommodative, notwithstanding our recent
tightening. Foreign growth, despite the weakness in Japan, continues to be stronger than
expected. And reflecting all of this, oil and other commodity prices continue on the
upswing. True, there seem to be a few signs at the national level of slowing in interestsensitive sectors; but we have seen these signs before and they’ve simply been pauses.
On the broad wage and price front, the total CPI has leveled off and the core is rising
to fill the gap between the two of them. The one thing that remains somewhat puzzling, to
me anyway, is why, given labor market pressures, we haven’t seen much escalation in
overall wages and in fact actually have seen some reduction in the rate of growth. If one
believes that is because overall prices were lower last year due to the impact of declining oil
prices, then I think there is reason to assume that the reverse will happen in the coming
months and we will begin to see more wage pressures. One has to remain agnostic because
we have expected to see that for some time now. But it does give one pause, in light of
everything that has happened--given the stock market and the wealth effect, the change in
overall price levels, and the increase in labor market pressures. Even given productivity
changes, one has to wonder when compensation levels are going to be such that they will
outstrip the growth in productivity and start to be a factor in terms of overall prices.
In that regard, as we prepared our forecast in Boston, we had some trouble accepting
that trend productivity growth might be somewhere north of 2½ percent and that potential
might be 3.8 percent or so. We are also a little less bullish, especially with regard to PCE
spending. But overall, if we look at our forecast with an assumption of no policy change
and compare it to the Greenbook’s flat policy alternative, the differences are not substantial.
We are in agreement with the staff that policy does need to be tighter to keep inflation from
rising above 3 percent by late 2000 or early 2001. The questions are by how much--75 basis
points or more--and when. It is hard to know the answer to how much since it is difficult to
know what will happen when we make the next move and step on the brakes. In my view
anyway, the next move may be seen differently than the last three. After all, it could be
argued that those three tightenings were simply taking monetary policy back to where it was
before the Asian crisis. The next move would bring short-term rates higher than they were
in the spring of 1998 when we first adopted a bias toward tightening. There is at least a bit
of a risk that the market will overreact, particularly given how frothy it has been of late.

12/21/99

29

When to move is also an issue largely because of Y2K. I, for one, don’t see us putting at
risk all the efforts we have made toward keeping markets calm and liquid through the
century date change by making a policy change now that could just as easily be made early
in 2000. Nonetheless, if it is risky to move now, which it might be, it is also risky to wait
much longer. Thank you.
CHAIRMAN GREENSPAN. President McTeer.
MR. MCTEER. Economic growth in the Eleventh District has accelerated slightly
over the last couple of months. Thanks to higher oil and natural gas prices, the energy
sector has picked up somewhat, with the result that overall economic activity and optimism
in Houston and the Gulf Coast area more generally have improved significantly. Houston
had been the only spot of softness among our major metropolitan areas. Growth in our
manufacturing industries has been robust of late. Higher interest rates combined with some
overbuilding have acted to put a dent in the pace of new home and commercial construction
activity. In spite of continued widespread talk about tight labor markets, retailers in the
District report that, surprisingly, they were able to find a good supply of workers for the
holiday season, contrary to Cathy Minehan’s report on New England. Employers in the
high-tech field continue to innovate in their practice of boosting non-base pay so that their
overall increases in compensation are held within the boundaries necessary to maintain
profit margins.
The national economy, if anything, seems stronger--and uniformly stronger--than
even the most optimistic forecasters had anticipated. I understand that the variance in state
employment growth rates is at its lowest level ever recorded, which reflects a national
economy without any significant regional shocks and an economy with very low frictional
unemployment associated with the need for labor mobility.
As forecasts are revised upward so, too, is the outlook for productivity gains and
reduced unit labor costs. We seem to remain in the virtuous cycle of supply expanding in
tandem with increased demand or vice versa. The improved growth prospects around the
world do not seem to alter the situation. The Blue Chip median forecasts for the fifteen
largest economies are uniformly positive--and significantly in all of them economic activity
increased between March and November--consistent with Karen Johnson’s report earlier
regarding the staff’s forecast for the rest of the world. But the strong performance of world

12/21/99

30

equity markets suggests that growing world demand can be accommodated without higher
inflation.
In the coming weeks, the Fed should do nothing that will alter the markets’
confidence that we stand ready to provide liquidity and stability to financial markets. After
Y2K events are clearly behind us, we can address the longer-term policy issues at our
February meeting. In my judgment, any public discussion of a bias in our thinking at this
time can only cause disruption and should be avoided.
CHAIRMAN GREENSPAN. President Moskow.
MR. MOSKOW. Thank you, Mr. Chairman. The Seventh District economy
continues to be strong. Many of our retailers indicate that sales have been ahead of
expectations since Thanksgiving. There are always some retailers who are nervous and, as
one major retailer noted late last week, the play is at the plate. The light vehicles market
continues to boom. We are seeing a modest shift in the composition of sales away from
light trucks back toward passenger cars, and this shift bodes well for our District as we have
a relatively higher concentration in the production of passenger cars than light trucks.
The situation in the farm economy is unchanged, with large grain inventories and
low commodity prices. Even so, bankers we have talked to in the agricultural areas are
feeling more comfortable because of the government subsidy checks that have recently gone
out to farmers; those checks have added substantially to total farm income.
Our directors and other business contacts also continue to cite very tight labor
markets and increasing wage pressures. Some restaurant chains that we look at have had
substantial gains in productivity negated at least in part by increases in overtime costs. Ed
Boehne mentioned the shortage of truck drivers. One of our former directors who runs a
large trucking company noted that the shortage of truck drivers has led his firm to cut back
on new truck orders. He maintains that he could use 500 more drivers if he could get them.
In a similar vein, a major construction equipment manufacturer observed that his firm
expects no growth in near-term sales because of the labor shortages facing construction
contractors. Prices continue to be subdued; still, the pricing environment seems to be
changing. Contacts in the steel industry reported some upward movement in prices. As
Jerry Jordan mentioned before, not only have steel scrap prices gone up, so have contract
prices for steel deliveries in the year 2000. These contract prices are up about 1 percent

12/21/99

31

relative to a year ago. This compares with contract prices that were down 5 percent in 1999
relative to 1998. We are also getting reports that advertising prices are moving up. To give
some idea of the high volume of advertising, one large magazine printer mentioned to me
that several major business magazines, including Forbes and Fortune, are now limiting the
amount of advertising pages they can accept because they have reached a binding constraint
on their maximum page count.
The Chicago Purchasing Managers’ report indicates that the overall index as well as
the prices paid and the supply and delivery components moved down in December, but all
three components remained well above the 50 percent level. I would remind you that these
data should be treated confidentially, as they won’t be released until December 30th.
Jerry Jordan, as for basketball tickets, I can assure you that the price of tickets for the
Chicago Bulls games did not go up this year. [Laughter] They are still $80.
Y2K remains a question mark in the near term. Firms in our District indicate that
they have made extensive preparation and they are ready. Many have set up centralized
Y2K communication centers. In fact, a large temporary help firm in our District indicated
that it has seen a heavy demand for temporary workers to staff these centers.
Finally, in response to a question about inventory building, the head of a national
trucking firm observed that there was no need to worry about a buildup in retail inventories
for Y2K. Business for his customers was so strong that they couldn’t build inventories if
they wanted to.
Turning to the national economy, our views have changed little since we last met.
We remain in broad agreement with the general contours of the Greenbook forecast. Final
domestic demand continues to run quite strong, as consumers and businesses spend their
way to the end of the year. Given this momentum in final demand, labor markets may
tighten slightly more in the next few months even as output growth decelerates to trend.
Despite this, incoming labor compensation data have remained benign as productivity
growth has repeatedly exceeded our expectations. However, the data now in hand suggest
that the deceleration in our price measures has ended. Indeed, it seems likely that price and
wage movements will worsen in the year ahead as we see the lagged effects of previous oil
price hikes and changes in the dollar exchange rate.

12/21/99

32

Consequently, as has been true for some time, we are concerned that core
inflationary pressures are likely to increase markedly over the next few quarters. Of course,
I recognize that several key aspects of the outlook are quite uncertain. First, as we discussed
earlier, we can’t predict with any confidence the future path of stock prices or the wealth
effects that they may induce. And I continue to be concerned about high valuation levels for
the stock market, particularly for the Internet stocks. Second, we don’t really know whether
productivity growth will slow, remain high, or continue to accelerate. Third, although the
futures market points to declining oil prices in the year ahead, the oil market has surprised
us before, and consumer confidence may be quite vulnerable to such shocks. Despite these
considerations, I believe the risks to the outlook are on the upside. However, given the
uncertainties associated with the upcoming century rollover, this is not the time to be
aggressive.
CHAIRMAN GREENSPAN. President Stern.
MR. STERN. Thank you, Mr. Chairman. The District economy remains in good
shape and I will only comment on a few things that have changed relative to previous
discussions. Agriculture, it turns out, has had a somewhat better year than many had feared.
A lot of that is due to government payments. But in addition crops turned out to be large,
which helped, and the cattle market has improved a bit. Commercial construction has been
strong in the District for quite some time and a number of new office buildings will be
coming on stream in the Twin Cities market over the next one to three years. It is now
anticipated that as a consequence vacancy rates will probably double or triple in the Twin
Cities. But that really doesn’t seem to have caused any alarm. It is, I guess, the other side
of the coin when a lot of buildings are built in a short period of time. Employment gains in
the District have slowed; that appears to reflect mostly just a lack of unemployed workers.
Labor markets remain very tight. Wage gains start at 3 or 4 percent and go up from there;
but the distribution is skewed and most of the increases really are in the 3 to 4 percent range.
But, of course, that leaves out all of the other extras that might go into compensation. There
is still a general lack of broad inflationary pressures. And overall I would say that most of
our contacts are quite positive about the economic outlook for the year ahead.
As far as the national economy is concerned, I have a fair amount of conviction
about the outlook for economic expansion. Our model forecast is for growth of 3½ to 4

12/21/99

33

percent in real terms over the next two years. That’s actually a little below the Greenbook
forecast but it seems to me that conditions are right for a continuation of pretty solid real
growth.
I have a lot less conviction about the inflation outlook. The Greenbook, of course,
has a story of accelerating inflation. This is a familiar story and it has a certain logic to it.
But the surprises to inflation over the last several years have been on the downside. There is
a danger in extrapolating that kind of performance. On the other hand, we have been trying
to do some serious statistical work on the unemployment/inflation/NAIRU relationship, and
it looks as if that relationship really deteriorates a lot beginning in the mid-1980s. We are
skeptical that there is any real relationship between unemployment and inflation if one
concentrates on the period since about the mid-1980s. Now, I wouldn’t bet the farm on this
work just yet. We have more analysis to do. But our work thus far does suggest that we
may want to look elsewhere for insights about inflation.
CHAIRMAN GREENSPAN. Vice Chair.
VICE CHAIRMAN MCDONOUGH. Mr. Chairman, the Second District’s economy
continues to grow at a moderate pace. Despite continued widespread evidence of price
increases for manufacturing inputs and housing, overall inflation remains subdued at the
consumer level.
You have all no doubt heard of the drama of the possible New York City transit
strike. The Transit Authority reached an eleventh hour agreement with the transit workers
union. The settlement calls for a 5 percent wage hike in the first year, 3 percent in the
second year, and 4 percent in the third. That actually follows very much the pattern of the
Long Island Railroad settlement about a year ago. Because the pension plan is well funded,
employee pension deductions are being reduced substantially, boosting the average worker’s
take-home pay by an estimated additional 2.3 percent. The City’s Transit Authority is
actually funded through the State government. The Mayor is trying very hard to tell all the
municipal workers whom he pays that the rather attractive settlement for transit workers
should not confuse them into thinking that he is going to give them the same deal. So we
may have some additional Sturm und Drang in New York on the labor front.
There has been much discussion, and I won’t repeat it, on the levels of national and
international economic activity. But why should one be concerned? I think foreign growth,

12/21/99

34

as Karen Johnson and others have said, is likely to be stronger. That will increase the
demand for commodities and, ceteris paribus, increase their prices. It will also increase the
demand for American exports, thus increasing overall demand in an economy in which
demand already exceeds even the increased capacity of the supply side of the economy to
provide goods and services. Despite probably higher exports, the current account deficit
will still be very high. And, therefore, we are likely to have either a stable or somewhat
weaker dollar. That will mean that we will not have the benefit in the next year or two of
the very substantial help to core CPI that has come from import prices being significantly
less strong than domestic prices. Our analysis, using a passthrough of about 0.4 of the
exchange rate to import prices, tells us that the core CPI would have been 0.6 percent higher
over recent years if we hadn’t had that benefit from import prices, and I don’t think we will
continue to have it. Thus, we don’t have to be concerned solely about whether we are going
to run out of laborers, even though I think that is a valid concern.
The mere things that I’ve cited--essentially the effect on the United States of
international developments--leads us to believe that the core CPI will start creeping up and,
left to its own devices, will hit about 2.8 percent in 2001. I don’t think that is something
that the Committee should wish to see happen. But I feel very strongly that we have done
such a good job of defusing Y2K tensions that the time to interest ourselves in that problem,
which I believe is a very real one, is on February 1st and 2nd and not today. Thank you.
CHAIRMAN GREENSPAN. Governor Gramlich.
MR. GRAMLICH. Thank you, Mr. Chairman. Let me use my time to make some
longer-term suggestions about how we should be operating, elaborating on some comments
that I made earlier. Herb Stein once said something that comes close to capturing the
essence of economics: “Things that can’t go on, won’t.” What economists are good at, if
anything, is putting together different logical postulates: demand, supply, arbitrage
conditions, relationships between stocks and flows, and predictions of the way economies
are likely to operate. In the end, economic forecasts rely on interactions between such basic
logical assumptions.
As I think about my two years on this Committee, much of what has happened
refutes Stein’s quote. Things that couldn’t go on, have gone right on! [Laughter] They
may not do so forever, but they have continued much longer than anybody has forecast. The

12/21/99

35

first example is labor markets. Since I’ve been here we have been talking about very tight
labor markets as indicated by the unemployment rate, other measures of labor tightness, and
Beigebook reports. We have all felt that at some point wages would start to accelerate but
as yet they really haven’t--apart from some of the caveats that Mike Prell gave earlier. The
second example is the stock market. Again, it has been seemingly overvalued since I’ve
been here, but to this point stock prices have risen on balance. The third example is the
dollar, which for a while now has seemingly been overvalued, if there is any limit at all on
the accumulation by foreigners of dollar-denominated assets. But it is not yet falling. At
the intellectual level we should, of course, keep studying these matters to see if we can
improve our understanding of how the economy is operating. But studying and learning
take time and in the meantime we have to know how to set monetary policy.
As I mentioned last time, an approach that may help us in these particular
circumstances is inflation targeting, which is being adopted on a pervasive basis around the
world. Last time--I suppose in a fit of exuberance--I reported being told that the number of
countries now using inflation targeting was 44. I have since tried to verify that total and
could only come up with 30. And even that number counts the EU as 11. [Laughter]
SPEAKER(?). So, it’s only 20!
MR. GRAMLICH. That’s right. Perhaps it’s only 20. The adoption of inflation
targeting is not as widespread as I said earlier, but it’s still widespread. And it has worked
well where it has been tried, as documented by a number of research papers. Perhaps more
telling, no country that I know of has tried inflation targeting and then abandoned it.
What many academics like about inflation targeting is that it gives policy a nominal
anchor and improves transparency and credibility. Those are important values. But I’d like
to put inflation targeting on our table for a different reason. It seems to me that it would
work well when we are facing just the sort of economic uncertainties that I mentioned
above. First of all, when there are either productivity or competitive shocks in labor
markets and wages just don’t seem to be rising in the way forecast, inflation targeting
permits us to follow the policy of watchful waiting we often talk about. Just what are we
waiting for? It is really to see signs of an acceleration of inflation, in which case we can
react by making appropriate policy changes.

12/21/99

36

Another uncertainty that inflation targeting permits us to finesse is that of deciding
just what our target rate of inflation is. Around the world, most inflation-targeting countries
do have fairly specific quantitative targets. I’m not sure that this group could agree on a
precise inflation target, but I don’t think we have to agree. What I think we can all agree on
is that we should move against an acceleration of inflation. In effect, this pragmatic form of
inflation targeting, where we move against an acceleration of inflation, may provide us a
reasonable framework for thinking about monetary policy in the presence of either
productivity or competitive shocks.
But even this pragmatic form of inflation targeting has one important difficulty. The
big difficulty I see is in acting preemptively, which I think is necessary if we really are to
stabilize inflation at present low levels. In order to act preemptively we must be able to
forecast inflation, and that can present a problem. We could rely on modeling approaches to
forecast inflation, but these have not been very successful precisely because of the supply
shocks that have made the inflation-targeting approach attractive. We could rely on leading
indicators, but there aren’t many reliable leading indicators that are not already considered
in models. We could rely on the forecasts of inflation of others, but those other forecasters
may have the same trouble with their models or their leading indicators that we have.
I do think we could make some headway here, but it’s not easy to do so. If we were
to go through a pragmatic inflation-targeting exercise today, I think we would find that
some added tightening might soon become necessary, though we might be able to delay for
a short time. But stepping back from these specifics, I think an important early challenge
for us is to learn how to deal effectively with the economic uncertainties, perhaps by
inflation targeting or perhaps in some other way. Thank you.
CHAIRMAN GREENSPAN. President Poole.
MR. POOLE. Mr. Chairman, the comment that I hear around the Eighth District is
that there is absolutely nothing new. That can’t be quite absolute, but it is very close. After
all, we met only five weeks ago and not all that much happens ordinarily in five weeks. In
summary, our labor market continues to be tight but not impossible, pricing power remains
limited for most firms, and there are small but noticeable effects in the housing industry
from the increase in interest rates.

12/21/99

37

On the Y2K front

notes that
Apparently

were planning to curtail operations on those two days.

had

st

planned not to operate on the 31 but had so many requests from customers that it will be
operating, though it will not

My sense of it is that

are finding the capacity--that the industry has responded and there
is really nothing more to be said about it. I’m guessing that at the end of the day we will
find virtually all of this Y2K effect lost in the rounding error and we are not going to see
much effect.
On the national economy, I would make just one comment, namely that as far as I
can tell there is no significant restraint from any quarter. Everything we’re looking at is
solid, strong. I don’t see anything on the downside. I still react negatively to the term
“drag” in terms of net exports. That term continues to annoy me. It seems to me that net
exports are about as much of a drag as a Styrofoam boat anchor. [Laughter] Thank you.
SPEAKER(?). A true sailor!
CHAIRMAN GREENSPAN. Governor Ferguson.
MR. FERGUSON. Thank you, Mr. Chairman. I think we are entering a period, as
others have said, that is going to be somewhat challenging for us. In the short run, we
clearly do not want to destabilize markets as we go into the Y2K period. One always hates
to see a marathon runner trip up at the end, and we certainly don’t want to be the person
from the stands who runs out and trips that runner up. In the longer run, obviously, as
others have indicated, we don’t want to lose our ongoing battle with inflation expectations
and inflation, or risk any damage to our own credibility.
During the intermeeting period, which has been short, we have received a variety of
data, some benign and some more troubling. On the benign side, the latest reports do show
that the rate of increase in core inflation has moderated even a bit more from that
experienced over the previous 12-month period. Additionally, productivity seems to have
ticked up again and growth in unit labor costs seems to be, if anything, slowing as opposed
to picking up. All of this is, as others have admitted, somewhat puzzling.
On the more troubling side, there are clearly growing signs of imbalances in our
economy. Others have touched on a number of them. I will emphasize just one, which is

12/21/99

38

the large and growing external deficit, a development I view as a sign of imbalance. As
Karen Johnson indicated, there is a significant possibility that we will see interactions as a
number of economies start to grow simultaneously. While our external balance will, I think,
tend to be redressed as foreign economies return to health, there will be an increased
demand for our exports, which might not be totally welcome from a price stability
standpoint. Indeed, taking account of likely Y2K impacts, foreign demand for our goods
does appear to be increasing already. As this happens, we can obviously expect some
upward pressure on resource utilization, not just in labor markets but also in terms of
capacity utilization. And I think the recent uptick in the latter measure may be just a
precursor.
While I recognize that there are some uncertainties in these international forecasts, I
do think the risks internationally are more on the upside than the downside. Clearly, there
are some difficulties in Japan. But it is instructive to note that comments by individual
members of the Monetary Policy Committee of Japan and the most recent monthly
economic report coming out of Japan both seem to have a much firmer tone to them than
had been the case even a month or two ago. Certainly the European economies seem to be
firming. There is a possibility that they may start to enjoy some of the productivity
surprises that we’ve experienced, but that is not entirely certain.
So, given this changing configuration, I think we would be well served to extend our
cautious and prudent approach to policy. We should continue to recognize the benign
effects of productivity improvements on unit cost structures, but we also should not be
afraid to act in a well-modulated fashion in order to maintain our hard fought victory over
inflation and also our credibility. Thank you very much.
CHAIRMAN GREENSPAN. Governor Kelley.
MR. KELLEY. Thank you, Mr. Chairman. I raised my hand this morning mainly to
be recorded as present and participating in this section of the meeting. [Laughter] That’s
because little seems to have changed in recent weeks. The economy apparently continues to
have a strong head of steam, the inflation news continues favorable, and productivity growth
remains strong. Barring a significant shift in momentum or some external shock from Y2K
or elsewhere, it appears likely that more tightening could well be required over the forecast
period, with the Committee focused more heavily on how much and when. That outlook is

12/21/99

39

juxtaposed against the substantial tightening of recent months that has not yet had its full
impact on the economy, and which could possibly provide all or most of the restraint
necessary in this episode. Consequently, it is fortunate that the challenging millennium
rollover period, which is now at hand, is also on its merits an appropriate time to rest on our
oars just a bit and assume as low a profile as possible. Thank you.
CHAIRMAN GREENSPAN. Governor Meyer.
MR. MEYER. Thank you, Mr. Chairman. There is clearly strong momentum in
private domestic demand and at the same time few signs of rising core inflation. So far so
good. The issue is sustainability. The Greenbook weighs in with an assessment that the
current state is not sustainable--not at the current monetary policy setting or even with the
75 basis point increase in the funds rate assumed in the Greenbook forecast. This, we all
understand, is only a forecast and just one forecast at that. And as several speakers this
morning have noted, there are many elements of uncertainty surrounding the outlook,
especially about inflation dynamics, NAIRU, and productivity.
But I buy into the qualitative story of the Greenbook. I buy into the balance of risks
that it identifies and into the message that I think it conveys about the challenges we may be
facing next year. From my perspective the challenges are especially great because I think
we face two reinforcing elements of unsustainability. We have an unsustainably rapid pace
of growth on top of an already unsustainably high labor utilization rate. So, in short, I think
we have our work cut out for us.
I believe next year will be an especially key one for monetary policy. Even if we do
move to tighten policy next year, the overall picture of growth and inflation might still look
quite favorable, particularly if the staff is correct that we will face declining oil prices after
the peak in the first quarter. But in the coming year we will have the opportunity to take the
steps that will improve the prospects of containing inflation going forward and, by doing so,
hopefully extend even further this remarkable expansion. Thank you.
CHAIRMAN GREENSPAN. Thank you very much. Is coffee available?
MR. BERNARD. Yes.
CHAIRMAN GREENSPAN. Coffee is served.
[Coffee break]
CHAIRMAN GREENSPAN. Let’s turn now to Don Kohn for his report.

12/21/99

40

MR. KOHN. The discussion in the Bluebook assumed that you would
rule out a tightening at this meeting. While you might be troubled about
the inflation outlook, a firming would come as a complete surprise to
market participants. In the unusually illiquid conditions leading up to the
century date change, such a surprise could have unintended consequences,
including market disruptions. Moreover, any inflation threat would not
seem so pressing that waiting six weeks to address it would make the
problem materially worse. Neither surveys nor TIPS-nominal yield
spreads indicate an upcreep in long-run inflation expectations; and these
results suggest that economists, households, and market participants
remain confident that the Federal Reserve will contain any emerging
inflation pressures.
If the Committee agrees with this judgment about the inadvisability of
tightening at this meeting, what remains on the table is how to assess the
risks to the economy going forward and their implications for future
policy, and how to convey that assessment to the markets.
Economic data over the last month followed the now-familiar pattern:
Upward revisions to estimates and projections of economic growth in the
second half of 1999 have been accompanied by mostly favorable
indicators of cost and price pressures. In the latter category, CPI increases
in the fourth quarter have been in line with staff expectations, and
estimates of unit labor cost increases in the second half have been reduced
noticeably, accentuating the deceleration in this measure from the first half
of the year. The downward revision to unit labor cost increases, which
occurred despite a small upward revision to the growth of compensation,
owed to productivity gains that, again, seem to be coming in above
projections. Faster productivity growth has helped to explain the limited
drop in the unemployment rate this year; the unemployment rate and the
pool of available workers cited in recent announcements were essentially
unchanged last month despite the unexpected strength in the expansion of
economic activity.
If stable labor utilization over the last month along with continuing
uncertainties about the level and growth of aggregate supply implied by
recent cost and price data make the Committee no more convinced than it
was at its last meeting that it will need to firm policy in the near term, it
might want to consider retaining a symmetric directive. With broad
measures of core inflation still subdued, the Committee may wish to see
more and firmer indicators that price pressures are likely to intensify
before it gives serious consideration to raising rates further.
But one rationale for the symmetric directive at the last meeting was
to allow the Committee time to gauge whether the cumulative tightening
this year would begin to damp the expansion of the economy. Such a

12/21/99

41

slowing is needed because, despite rapid productivity increases, a
widening output gap and falling unemployment rate in the second half of
1999 clearly indicate that the economy has been expanding at a rate in
excess of the growth of its potential. However, in that regard, the
incoming data on the real economy have not been encouraging.
Moreover, the Greenbook forecast has growth remaining a little above
trend in the first half of next year abstracting from Y2K effects, and Mike
noted the upward risks to the outlook beyond that from the impetus to
consumption from rising wealth. While one might guess that the
increasingly narrow base and speculative character of the stock market
advance carries the seeds of its own correction, the assumption of such a
correction would seem to be a risky basis for making monetary policy.
Even if the Committee is agnostic for now about whether an
unemployment rate in its recent range of 4 to 4¼ percent can be sustained
without rising inflation, it may be particularly concerned about a potential
further decline in that rate. If temporary factors played any role in
damping core inflation in 1999 while the unemployment rate held in this
range, the NAIRU is more likely to be higher than lower than the current
unemployment rate. In that case, failing to resist a possible further
tightening in labor markets runs a considerable risk of building in the need
for larger and more disruptive adjustments later.
The persistent strength of domestic demand suggests that avoiding a
further decline in the unemployment rate may well require at least the
current degree of restraint in long-term interest rates. Forward-looking
financial markets have built in expectations of substantial policy
tightening in 2000, without any pickup in inflation. Although supply-side
uncertainties complicate the conduct of policy, markets are presuming that
the Committee will be preemptive, at least when it comes to inflation risks
that might arise from possible further increases in labor resource
utilization. Any signal that the Committee was significantly less
concerned about potential inflation than the market perceived it to be
would probably produce a considerable decrease in interest rates and rise
in stock prices. Hence, if the Committee did see the risks as significantly
tilted toward higher inflation, it would be important to convey that view to
the markets.
An announcement that the Committee was asymmetrical in its
outlook for the economy and policy next year would be unlikely to have a
major effect on interest rates. Market prices have already built in a near
certainty of a tightening at the next meeting--much higher odds than have
normally followed the announcement of an asymmetric directive. And
when surveyed, two-thirds of primary dealer economists indicated that
they expect such a directive. But concerns about the sensitivity of thin and
illiquid markets around the century date change may complicate how the

12/21/99

42

Committee communicates its assessment. Presumably, the Committee
would not want to add unnecessarily to market volatility at this time by
leaving open the possibility that an intermeeting tightening was on the
table. Moreover, it especially might not want to convey the impression
that it might be sluggish in responding to a market disruption that looked
like more than a transitory event.
This suggests that the Committee might have three straightforward
messages to convey to markets at 2:15 today: First, that it did not change
the stance of policy; second, that it was concerned about inflation risks
and would be giving serious consideration to the extent of the risks and the
appropriate policy response at its next meeting; but third, that owing to
uncertain market conditions around year-end it did not intend to respond
to those risks before the next meeting and would be flexible over the
century date change period.
Unfortunately, the choice of bias in the directive to associate with
those messages is much less straightforward than the messages
themselves. Simply stated, there is a disconnect between the language the
Committee votes on in its directive, which specifically references the
intermeeting period only, and the meaning that has come to be attached to
that language. That meaning is that the bias applies less to the
intermeeting period than to the period encompassing the next few FOMC
meetings.
All of the options the Committee has to deal with this problem have
more than a bit of improvisation in them, in that you would be skirting
between what the words literally mean and the market conventions that
have settled around them. For example, the Committee could couple an
unbiased, that is symmetric, directive with a biased announcement that
made it clear that the symmetry applied only to the intermeeting period.
The Committee would count on the wording of the announcement to
express its concerns about inflation risks and its intention to consider at its
next meeting how to deal with those risks. A problem with this approach
is that it could foster further confusion about the Committee’s
interpretation of the current directive. But so long as the announcement
was clear about the Committee’s present intentions and judgments, such
confusion would not matter much since this is likely the last meeting that
the current directive wording will be used.
The second option would be to adopt an asymmetric, that is biased,
directive based on the meaning it has come to have with respect to future
meetings, but to use the announcement to clarify that in light of the
century date change the Committee did not intend to tighten over the
intermeeting period and recognized the need to be ready to respond
flexibly to any developments in coming weeks. While this approach

12/21/99

43

would be more consistent with recent uses of asymmetries, it would have
the disadvantage that the Committee would be adopting words in the
directive about the intermeeting period that it did not mean literally. And
thus the media and markets might focus more on the choice of asymmetry
than on the caveats in the announcement. In that sense transparency about
your choice of bias might mislead markets about your very near-term
intentions.
Thank you, Mr. Chairman. That concludes my briefing.
CHAIRMAN GREENSPAN. Questions for Don?
MR. HOENIG. Don, just listening to you tells me how difficult it will be to craft
any kind of asymmetric announcement today. Wouldn’t it seem practical to have this be
one of those announcements where we say as little as possible--something along the lines of
we met, we didn’t do anything, and we’ll see you next year?
MR. KOHN. That’s an option we talked about a bit in the Bluebook. The issue in
my mind was whether the Committee was really intent on keeping the current degree of
tightening in the markets. There would be a risk if you did what you propose, it seems to
me, though it very well might work: The markets might say the FOMC is symmetric, or
unbiased, and it’s because of Y2K. They are not telling us anything else, so we will assume
that that is the only reason they are unbiased. But I think you can’t rule out the possibility,
however small, that the market would say the FOMC is unbiased because of Y2K and,
because they didn’t tell us anything about their expectations for the future, maybe they are
not quite as worried about inflation as we thought they were. With two-thirds of market
economists expecting an asymmetric directive and with about 80 or 90 percent tightening
built in, that’s a dilemma. The Committee’s objective might be to leave the markets at 2:30
today where they were before our announcement at 2:15. It’s just very hard to craft the set
of statements and votes that will do that. I’m not sure that a terse announcement would do
it. It’s possible that it would, but there is a risk that it wouldn’t.
CHAIRMAN GREENSPAN. Governor Meyer.
MR. MEYER. Don, I thought that was a particularly outstanding presentation
except for the last sentence. In the very last sentence you expressed some concern that even
if we were transparent and honest--if we told the market very clearly that our priority was to
assure liquidity over the century date change and that we wouldn’t be taking up the balance-

12/21/99

44

of-risks issue until the February meeting--an asymmetric directive could, nevertheless,
mislead the market. Do you really think so?
MR. KOHN. I think either approach is likely to work: symmetry, but we’re really
asymmetric for the next meeting; or asymmetry, but we’re really symmetric until the next
meeting. It’s a question of weighing, if you’ll pardon the expression, the balance of risks-­
[laughter]--not with respect to the economy but with respect to the market reaction. I was
trying to point out that I think there is a risk, perhaps a small risk, that the initial headline
will be “Fed goes asymmetric” rather than “Fed goes asymmetric but with a number of
caveats.” An unqualified headline could provoke a little market reaction. There is no
perfect way to do this. The risk on the other side is that the headline will be “Fed goes
symmetric,” and the market doesn’t read the announcement and begins to rally. I think
probably after a day, after people have had a chance to read the announcement and
newspapers have printed it, we would probably be in roughly the same place either way. It
is just a question of what best represents what you intend and the clearest way to get that
across. The other thing that bothers me a little about asymmetry is that the words in the
directive literally say “over the intermeeting period,” and the announcement would literally
have to say “but we don’t mean it.”
MR. MEYER. There’s nothing new there! [Laughter]
MR. KOHN. I think either way would work, or at least I hope so. Either way would
be intended to produce the same result.
CHAIRMAN GREENSPAN. President Minehan.
MS. MINEHAN. You said one of the goals, and I totally agree with you, is to try to
leave the market at 2:30 today the same way it was at 2:15.
MR. KOHN. Right.
MS. MINEHAN. In that regard, since there is a heavy degree of expectation that we
will be asymmetric, it seems to me that asymmetry would be more likely than symmetry to
produce that kind of stability in the market. If symmetry is going to be a surprise and gives
an extra boost to the market, isn’t that where the greater risk lies?
MR. KOHN. As I indicated in answer to Governor Meyer, I think the risk of
publishing asymmetry is that it could produce a little more volatility. The risk of publishing

12/21/99

45

symmetry is that the markets might rally a bit. Maybe the 2:30 comparison isn’t the right
one; maybe it’s really where the markets are by close of business the next day.
MS. MINEHAN. But if the expectations are that we see the same risks that the
market sees and that we are alive and functioning here despite Y2K-MR. KOHN. I think you could make that clear under either approach. It depends on
the announcement and where you want to put the emphasis. If your emphasis is on the fact
that you will be providing liquidity and you will be flexible over the intermeeting period-­
and that’s the near-term focus--then maybe symmetry is better. If your emphasis is more on
the fact that there is a good chance that you’ll be giving serious consideration to tightening
at the next meeting, then asymmetry may be better, with less focus on the intermeeting
period.
CHAIRMAN GREENSPAN. Further questions? If not, let me begin.
I think the evidence of a slowdown is quite marginal at this stage. It is showing up
in the housing industry at the edges, where we are seeing some slippage or at least a
flattening of activity. However, anything resembling a contraction induced by interest rates
strikes me as not even remotely visible as yet. Motor vehicles, which also are supposed to
be interest-sensitive, weakened significantly a month or two ago, but they have come back
fairly substantially. And if we look across the spectrum of the capital goods markets, there
is very little evidence of any weakening. Obviously, we still have disproportionately large
orders for high-tech equipment versus other types of equipment; but orders for conventional
equipment are still substantial, with farm equipment being an obvious exception.
In my view, what we have is a problem of whether to interpret developments as
supply-side driven or demand-side driven. On the supply side, there is no evidence of any
slowing in productivity growth. What we do have is some evidence from the industrial
production numbers for October and November and from the hours data that is pointing to
gangbuster gains in productivity for the fourth quarter.
The notion that when we see this strong demand we are looking at the old classical
case of an economy that is heating up is, I submit, the wrong view. We don’t know that the
economy is heating up unless by “heating up” we mean anything that raises the GDP growth
rate. At this stage we have a very unusual situation. There are very evident imbalances in
demand over supply, and indeed one can readily argue that virtually all of the problems stem

12/21/99

46

from a wealth effect. Were it not for a significant rise in wealth-to-household income, we
probably would find that the propensities to save would be relatively stable, that the
unemployment rate would be very low but also stable, and that the current account deficit,
while large, would not be increasing. All in all, the fact that underlying price inflation was
not accelerating would argue against a scenario of an economy that is heating up. It would
be a scenario of very strong growth--indeed, one credibly involving accelerating growth-­
but all of it stemming from the productivity numbers.
All I’m saying at this point is that one could not argue that this economy is heating
up were it not for the gradual decline in the pool of people who are willing to work and an
increasing share of overall demand being met from the import side. The heat, if any, is
coming from the wealth effect. And that clearly is something that cannot go on indefinitely.
The bottom line is that the wealth effect--in line with Herb Stein’s remark--cannot
continue and, therefore, will not continue. The reason is that it creates a fundamental
instability in that it fosters more effective demand than supply. The two must be balanced in
some manner. They currently are being balanced, as I indicated last month and previously,
by more domestic production coming from previously unemployed workers and by
increased imports as a share of total demand. Neither of those two sources of supply can
continue to satisfy rising demand without limit. Obviously, on the import side it is not
credible that our economy can continuously attract investments to fund the current account
deficit in our balance of payments. And on the labor side there is a level, called zero, where
the availability of added employees disappears. The one caveat with regard to the
availability of workers is immigration, which I will get to shortly.
The reason I raise this issue is essentially to say that the wealth effect cannot
continue to stimulate excess demand indefinitely. By wealth effect, I mean a rise in the
value of assets in relation to income. Such a rise does accommodate higher equity values
but it cannot continue at the pace we have been seeing. There are only two ways in which
such a rise can be thwarted, as indeed it must. One is a decline in long-term expected
earnings, for which I find no evidence. Indeed, if anything, it is the other way around. The
other is a rise in the discount factor. This is basically true by definition when we
disaggregate equity market values. To talk in terms of momentum, or price/sales ratios, or,
even better, how much in losses a firm has experienced as reasons for higher stock prices is

12/21/99

47

clearly just nonsense. The fundamental consideration is that a buyer is purchasing claims
against future cash. If neither lower expectations of future cash nor a higher discount
occurs, then stock prices presumably will continue to rise, maybe in excess of the rate of
increase in household incomes.
The crucial consideration here is that, while we may not be seeing a change in
earnings expectations, we very clearly are seeing the beginnings of a significant rise in
discount factors. Yields on BBB-rated corporates, which are very close proxies for the
average corporate cost of capital, have been rising quite appreciably in real terms since late
1997. They have risen more than yields on U.S. Treasuries, as evidenced by widening
spreads. One can evaluate the discount factors on equities in terms of risk, the rate of
interest on corporate bonds, and then derive an equity premium. But it is far more useful to
look at the bond equivalent rates in real terms to get a judgment of what type of discount
factors are showing up. I think that discounting process is appreciably under way at this
stage. Therefore, at the end of the day, I think the Greenbook has to be right that the
Wilshire 5000 will flatten out despite continuous revisions in the data underlying that
projection. It is only a question of how much of a bubble there is in this process.
I think we have to be wary, however, of our disinclination to recognize that what is
going on in this economy is really quite unprecedented in the post-World War II period in
that productivity growth continues to rise. And it is rising to a very substantial extent in the
multifactor productivity component--the residual in growth accounting. So, it is not solely
increased capital investment that is driving up the productivity numbers. There is a very
substantial rise in productivity growth--in fact it is almost 2 percentage points--which is not
attributable to capital deepening. Cyclically adjusted, this rivals what went on in the 1950s
and 1960s and through the oil embargo of early 1973. This basically suggests that we are
getting increases in multifactor productivity on the order of magnitude that was occurring
after World War II, but without the catch-ups of the earlier period. In one sense, the recent
experience is far more significant than the labor productivity gains in earlier periods, which
as you may recall were at fairly attractive rates of around 3 percent for quite a period of
time. Part of that acceleration came from the move out of agriculture into industry; but what
we are beginning to observe now is something beyond that.

12/21/99

48

Acrophobia is a problem that confronts every statistician. The concern about putting
down on paper a number that is larger than has been seen historically is very inhibiting.
What I am saying is that that is happening. So, while we do have these extraordinary
imbalances, I don’t think we ought to be looking at demand and saying it’s unbelievable and
the economy is heating up. The point is that we do not have solely a demand-driven
phenomenon here. The demand phenomenon stems from a wealth effect, and that should
concern us because it has obvious repercussions. But we cannot look merely at demand and
say that housing sales are high, capital goods orders are high, and consumption expenditures
are high. Of course they are high. They had better be high or we are mismeasuring what is
going on because gross domestic income is rising even faster than its conceptually
equivalent counterpart, gross domestic product.
It may well be that if we had better estimates we could resolve the question of which
of these two is the relevant measure of economic growth. My own suspicion is that gross
domestic income may be giving a better reading. The reason I say that is that gross
domestic income is consistent with the data we see on prices, profit margins, and the
underlying acceleration in productivity. And that is really saying that our estimates of retail
sales are biased downward in one way or another or that some of the measures we have in
other product areas are biased downward. If we had more accurate numbers, we would be
inclined to say “Wow!” and it would be “Wow!” squared. What I want to say essentially is
that we have to be careful about looking only at the demand side rather than the gap
between effective demand on the one hand and supply on the other. The two taken together
are what the widening current account deficit and the declining unemployment rate basically
reflect.
We need to know precisely what is causing our good fortune because when it
changes, and it is certainly going to change at some point, our basic analysis will matter.
And I am concerned that we might misread contractions in the economy or rates of growth,
and as a consequence misunderstand where the forces in the economy are leading us. I
don’t think it matters in the current context because I believe the notion that at the end of the
day we are going to need to tighten more comes out of any type of evaluation. It’s when we
are on the other side that I think we will have to be very careful.

12/21/99

49

I mentioned previously that I see no overheating other than in the stock market. The
price indexes are really quite benign. In this regard, I think we ought to set aside the
consumer price index. The reason I say that is that the PCE deflator is far more usable for
analyzing what is really going on. The owners’ equivalent rent component in the CPI is 20
percent of the total index. Now, owners’ equivalent rent is going to start to accelerate unless
I misread how asset prices interact with consumer prices. The reason is that the ratio of
owners’ equivalent rent to the value of housing has been going down continuously, and the
implicit rate of return that that is suggesting cannot credibly be expected to continue on a
prolonged basis. So the little “pop” we saw in owners’ equivalent rent in the most recent
CPI is probably a harbinger of a slightly stronger number there.
The reason the PCE deflator is a better indicator in my view is that it incorporates a
far more accurate estimate of the weight of housing in total consumer prices than the CPI.
The latter is based upon a survey of consumer expenditures, which as we all know very
dramatically underestimates the consumption of alcohol and tobacco, just to name a couple
of its components. It also depends on people’s recollections of what they spent, and we
have much harder evidence of that in the retail sales data, which is where the PCE deflator
comes from. Why we should look at data based on a distorted sample when we have a
universe whose data are more accurate is beyond me. The reasons that are given
theoretically are that we want to measure urban or suburban consumer prices and that’s not
what gets picked up in the total. It would be so easy to make a simple adjustment in the
aggregate data to cover only the urban component by using appropriate ratios if we want to
do that. That is, we could use the base universe of what is consumed to give us our weights,
but that is not what the CPI does. So if I had my way, the CPI would be abolished for all
uses other than labor union contracts, Social Security benefits, and all the other uses that
would create an undue amount of political noise if we tried to change them. It’s not
statistical noise that I am talking about at the moment. In sum, I think we have to be careful
about any reading of inflation trends from the CPI.
What I hear from everybody in business I talk to is that pricing power, if anything,
has gotten tougher rather than easier. And while it is certainly the case, as Mike Prell points
out, that a number of prices are going up, it is by no means clear how significant those
increases are as yet.

12/21/99

50

The one area where we may be underestimating supply-side potential is in
population growth and the underlying expansion of the working-age population. We
recently made an effort to find out why increases in household employment are running
50,000 a month less than those in payroll employment. We were trying to get a sense of
which measure is giving us the better picture. If we look at the only really significant
independent estimate of the number of households, measured by the number of electric
meter accounts excluding the double accounts that a lot of people have, we should be able to
get a reasonably good estimate of the number of households. Indeed, if we take the utility
account numbers literally, they suggest that the CPS household estimates, which are based
on population estimates, have been underestimated on a cumulative basis by something in
the area of 1 percent since the 1990 Census. If that is in fact the case, given that we have
some reasonably accurate numbers on the average size of households--remember, we
estimate the average size of households from samples of 50,000--we can then apply that
average to the population estimate extrapolated from the 1990 data. In doing that we must
take account of estimates of births minus deaths plus immigrations, both legal and
otherwise. A key question here is whether births and deaths are underestimated or biased.
That is a possibility, but surely the immigration numbers are a real guess. If we take the
household electrical connections numbers seriously, then the issue of closing the gap in the
household employment data versus the payroll data moves forward a pace.
The Census Bureau, which does not use the electric utility data to make its
aggregated overall estimates but does use them for some of its local area estimates, argues
that if we are getting a big increase in immigration we should see it in the births and the
deaths data. But I wonder if many illegal immigrants have babies that are born in hospitals
where somebody records the babies’ names. If the parents are illegal immigrants, the last
thing they want to do is to have births recorded. Clearly, deaths are another issue, but if
there has been an acceleration of immigration, that should affect the death rate in 2010, not
now. So there is a reasonable expectation that when the 2000 Census comes out, it’s going
to revise upward the population numbers, the household numbers, and the household
employment growth numbers. I might say that it will also explain why housing starts are as
high as they are with household formation being as low as it is.

12/21/99

51

This hypothesis fits a number of holes in the data, but it also tells us that potential
working-age population growth is higher. And, therefore, since our productivity numbers
are based on payroll data, raising the working-age population will obviously also raise the
long-term potential for economic growth. We won’t know until we see the preliminary
numbers coming out of the 2000 Census, which I guess we will get in 2002 or 2003. Mike,
do you remember offhand when they will come out? Who knows how quickly that will get
done with the computers they are working with now!
MR. PRELL. They have to find some workers to do the census! [Laughter]
CHAIRMAN GREENSPAN. We may have it sooner than I suggested. Who
knows! All in all, my point is that I think we have some statistical problems that are not
irrelevant to intermediate- and longer-term monetary policy.
Having said all that, my view on policy is, if I may reference Governor Kelley’s
comment about raising his hand and saying present, that I almost think the best way we
could have gotten through this period would have been somehow to cancel this meeting.
The reason is that markets, as far as I can see, seem to be pretty much where we as a
Committee would like them to be. I don’t know whether we will want the numbers in the
markets at 2:30 to be the same as they are before our announcement at 2:15, but I think they
currently are at appropriate levels.
The crucial issue for this meeting, as Don Kohn very clearly pointed out, is to
recognize that we have a Y2K problem. It is a problem about which we do not want to
become complacent and presume that it doesn’t matter. We want to communicate as
effectively as we can that we have no intention of doing anything through the year-end and
maybe for a short period thereafter. But we also don’t want to remove the general view in
the market that we retain an upward bias and have not completed the tightening that we
think needs to be done. We therefore face a tricky problem of trying to find a way to
communicate all of that, taking into account what we think the market perceives about what
we may or may not do, if our purpose is not to disturb the markets one way or the other.
With that in mind, we have endeavored to craft two possible announcements. One, as Don
mentioned, would accompany a “B” symmetric decision and the other a “B” asymmetric
decision. Both incorporate language that tries to produce precisely the same result in either
case.

12/21/99

52

Accordingly, in what is a rather unusual procedure for us, I would like to distribute
both of these drafts. 2/ The evaluation of what we perceive the outlook to be is the same in
both, but it is positioned in different paragraphs. And rather than request your comments on
specific wording preferences, I would appreciate it if you would confine your comments to
the alternative you feel more comfortable with, symmetry or asymmetry. I assume that
nobody here wants to raise rates at this time. At least I didn’t hear that view expressed in
any of the comments today. So, if we are going to vote “B,” I would appreciate a judgment
as to which of the two versions you feel most comfortable with. In this regard I switch back
and forth between the two every 10 minutes! It just depends on what time I happen to be
expressing an opinion. At the moment I feel slightly more inclined toward asymmetry; but
by the time we vote it is just as likely, knowing how my view on this has changed frequently
over the last day or two, that I will be on the other side. Frankly, I don’t think our decision
on this issue today matters one way or the other. It’s only a question of one’s judgment on
minor issues, and I would appreciate any great insights.
I might just note parenthetically in reference to what Don said about the issue of the
intermeeting bias, that this will be the last directive that incorporates a sentence on
symmetry on the old basis. However, this directive won’t be published until after the next
meeting and is very likely to be an anachronism by then, so it is not going to matter terribly
much which alternative we choose. But there is the question, as Don correctly points out,
about how we want to state our consensus. So let us take a few minutes to look at both of
these versions and then I’ll open the meeting up for discussion. I might note that both of
these drafts are saying, in effect, that we are very likely to move rates at the next meeting.
[Pause] Vice Chairman.
VICE CHAIRMAN MCDONOUGH. Thank you, Mr. Chairman. For somebody
who likes to have firm views on most subjects, it’s difficult to have a firm view on this
unless one is a theologian rather than a central banker. I think both draft statements make it
clear, as you’ve said, that we will have a serious discussion about policy at the February 1st
and 2nd meeting and that there is presently a bias toward tightening at that meeting. And
both texts make it clear that we will not change the funds rate until then.

2

/ The language of the two drafts is provided in Appendix 2.

12/21/99

53

What I read in the marketplace now is a conviction that the Fed will tighten but that
the tightening will be sensible and realistic. I am a bit concerned that if we put out an
asymmetric directive, the marketplace would pick up not so much what we think but what
some observers think we think. That could increase the likelihood of a tightening in
markets--markets that may be very illiquid over the rest of this year--with possible
difficulties in settlement systems in the first two weeks of next year.
On the other hand, if we put out the draft with the symmetric language--which is
probably the most hawkish symmetric language any human being has ever seen--I believe
there is very little likelihood that the markets would think the Fed is somehow kinder, nicer
and gentler so let’s rally. Even if they did that for five minutes, market participants would
read the text very quickly and the markets would settle down, maybe not within five minutes
but rather quickly. I’m basing my view, frankly, on this being my 33rd year of very active
involvement in financial markets. I think that the balance of risks is such that the symmetric
language is very unlikely to have any negative result for us. With asymmetric language
there is a possibility--I’m not stating that it’s a certainty--that the market would price in
additional Fed tightening over the course of 2000. And in my view the markets are just too
slim and we’ve invested too much in the effort to ensure that the Y2K transition is a smooth
one to take that risk.
Where do I stand on it? I’m probably leaning 55/45, 60/40 at most, toward the view
that symmetric is better than asymmetric. I certainly am not even remotely thinking of
dissenting if there is a majority in the other direction. But I do have 33 years invested in
looking at markets and that’s my assessment of it.
CHAIRMAN GREENSPAN. President Jordan.
MR. JORDAN. Thank you. My first choice would be that at 2:15 p.m. today we
issue a statement that says “Happy Holidays,” as I think Tom Hoenig was suggesting. It
seems likely that in the very near future our directive language will no longer refer to likely
future policy actions but rather to the balance of risks in the economy. If that is the case, I
don’t know why we would want to move from symmetry to asymmetry with respect to
future policy actions when we will never do that again. To put out a symmetric directive
today does no harm. I doubt that there is anybody in the world who doesn’t think that we
will have a very serious discussion at our meeting on February 1st and 2nd. I cannot imagine

12/21/99

54

that that would be a surprise to anyone. Everyone knows that meeting will be a tough one.
There will be a lot of new information, and maybe even some reliable information, although
I don’t know about that. So, I see nothing to be gained by putting out an asymmetric
directive. I see potential negatives. And I don’t see any negatives in putting out a
symmetric directive.
CHAIRMAN GREENSPAN. President Broaddus.
MR. BROADDUS. I guess I’ll take the opposite position, Mr. Chairman. I can live
with either of these statements. But the way I heard our discussion today, this Committee
essentially is asymmetric and pretty clearly so except for concerns about the century date
change. And I think we ought to say so. It seems to me that the last sentence in the main
paragraph of the draft with asymmetric language says it very well. The whole tone of it and
the way it’s structured make that point very clearly. I wouldn’t expect that to result in a
market overreaction or concerns from a Y2K perspective. So, I think asymmetry is the best
way to go.
CHAIRMAN GREENSPAN. President Poole.
MR. POOLE. Mr. Chairman, I agree with Al Broaddus that the Committee is clearly
anticipating, on the basis of what we know now, that we will make a policy move in
February, provided that in the interim no data come in that would disconfirm that
expectation. That is what I think is the sense around the table. And I believe that the
asymmetric directive draft provides a better sense of that view.
CHAIRMAN GREENSPAN. President Moskow.
MR. MOSKOW. Mr. Chairman, I agree it is a close call. I think both drafts
accomplish the same objective. I happen to prefer the symmetric one. First of all, it’s
technically accurate, as you pointed out, whereas the asymmetric one is not technically
accurate. If the markets don’t understand it in 15 minutes, clearly they are going to
understand the language as soon as they read it. I think it’s very clear. And I agree with
Jerry Jordan that, hopefully, we are going to change to a new announcement policy as of the
February meeting, so I just wouldn’t muddy the waters by using an asymmetric directive at
this point.
CHAIRMAN GREENSPAN. President Parry.

12/21/99

55

MR. PARRY. I favor, by a small margin, the symmetric directive as well. When I
read the two, the symmetric one seems to speak a little more clearly about our thoughts and
concerns. I don’t see big differences, but if I had to state a preference it would be for the
symmetric alternative.
CHAIRMAN GREENSPAN. Governor Gramlich.
MR. GRAMLICH. I’m for asymmetry. It is a close call and I could live with either.
But I think asymmetry is a more honest description of where the Committee is at this point.
I find the grammar of the asymmetric language a little simpler. There are fewer words like
“however,” “nonetheless,” and so forth. It’s a little more direct and I like that. I’m also
persuaded by the fact that it is more in line with what economists think we will do. And if
our objective is to not change markets, that wording is telling them that.
I know you said we shouldn’t make wording changes, but let me suggest just one. I
would say a smooth transition “into” rather than “to” the year 2000 to show that we are not
holding steady only for another nine days.
CHAIRMAN GREENSPAN. I will accept that. Does anybody disagree? We
accept your apology! President Stern.
MR. STERN. I have a mild preference for the symmetric version. I’ve been struck
in recent weeks by the fact that market participants seem to have been tracking right along
with us. They have been interpreting the incoming data pretty much as we have. I doubt
that anybody will be misled or surprised by the language of the symmetric directive and I
think they will continue to do what they have been doing. And given that we do face
uncertainties associated with Y2K and have invested a lot in avoiding Y2K-related
disruptions, I don’t see any particular advantage to an asymmetric directive at this stage.
CHAIRMAN GREENSPAN. Governor Kelley.
MR. KELLEY. Mr. Chairman, I can certainly live with either. In my view they are
almost as broad as they are long. I do favor the symmetric language because I think it is our
clear intention at this point not to change policy, and symmetry is the way to say we are not
going to raise the funds rate. I do have one concern--with apologies, I think! It does seem
possible that this Committee might feel forced into an intermeeting move as we get into
January--well after the Y2K experience but before the February meeting. If that is a
possibility, then the language of the symmetric directive tends to foreclose that when it says,

12/21/99

56

“At its next scheduled meeting the Committee will assess….” I think we could fix that,
again with apologies.
CHAIRMAN GREENSPAN. How would you fix it?
MR. KELLEY. I’d simply remove the word “scheduled.”
SPEAKER(?). That’s right. We could have an unscheduled meeting.
MR. KELLEY. Then it would read “at its next meeting.”
CHAIRMAN GREENSPAN. Governor Ferguson.
MR. FERGUSON. Like everyone else, I think I could live with either. I have a
slight preference for the symmetric one because in my mind it really does put the horse
before the cart in that it says quite clearly that first we have the rollover to the year 2000 and
then we have next year. And I think it’s important to keep reinforcing that sense of priority
of getting into the year 2000 and focusing then on the next move.
CHAIRMAN GREENSPAN. President Boehne.
MR. BOEHNE. I prefer the symmetric directive. This is a meeting that in many
ways we didn’t need to have and I think the symmetric approach essentially reaffirms where
we are. And it comes closest to having perceptions after the meeting stay exactly where
they were before the meeting.
CHAIRMAN GREENSPAN. President Hoenig.
MR. HOENIG. I prefer the symmetric one, Mr. Chairman. After all we have
invested in Y2K preparations, with options and special liquidity programs, changing our
bias as we get to this point near the end does not seem to me to be the best thing to do. To
my mind the symmetric language makes clear to the market that a smooth Y2K transition is
still our priority and that we will get through that period before we take up the issue of
tightening again. So, I much prefer the symmetric directive.
CHAIRMAN GREENSPAN. President Guynn.
MR. GUYNN. I prefer symmetry as well. I hope that won’t be interpreted as any
lack of enthusiasm for getting back to our work after the first of the year. I think all the
arguments have been made. To change from symmetry at this point and give people even
six weeks to try to figure out why we did it and whether we anticipate doing something
different soon after the first of the year is, in my view, a distraction that we just don’t need.

12/21/99

57

I’m part of the “Happy Holidays” camp as well. If we could get by with doing that, I would
like it very much.
CHAIRMAN GREENSPAN. President Minehan.
MS. MINEHAN. I could have gotten by with “Happy Holidays” as well. But given
this choice--and not wanting to go into any on-the-fly editing of language--I would feel, for
a lot of reasons, that asymmetry is marginally the better way to go. First of all, I don’t like
the additional words in the language for symmetry nor the focus on policy in the
intermeeting period, which is after all very long. I believe the asymmetric language is more
honest, as Governor Gramlich said, about where we feel things are. I think it is reflective of
where the market is and where the market thinks we are. And it gives us the opportunity to
do something after Y2K and before the next meeting if we want to, whereas the third
paragraph of the symmetric press release I think forecloses that a bit. I’d be worried about
that. I could go either way, but my concern about the symmetric directive is the wording “in
order to indicate the focus of policy in the intermeeting period.” That’s a long period of
time.
CHAIRMAN GREENSPAN. President McTeer.
MR. MCTEER. Symmetric.
CHAIRMAN GREENSPAN. Governor Meyer.
MR. MEYER. As I was thinking about this decision coming into this meeting, my
inclination was for an asymmetric directive with language that during the intermeeting
period we would be focused on insuring liquidity in financial markets. Basically I thought
that would be the most transparent and honest approach we could take. But I must say that
the symmetric directive draft is extremely well done and I would be very comfortable with
that. I feel that’s honest and transparent as well. I’m 51/49 asymmetric, but I’m quite
comfortable with the symmetric one, too, because I think it is extremely well crafted.
VICE CHAIRMAN MCDONOUGH. It’s the most hawkish symmetric directive in
history!
CHAIRMAN GREENSPAN. The arguments for symmetry have won the day. I
think that is what we ought to read and vote upon. May I say before I conclude that I just
raised the barrier a little: The two changes suggested were worthwhile getting. I think they
both are very helpful. Now, the last sentence on each of the drafts is bracketed because

12/21/99

58

whether we include that will depend on our subsequent discussion. The one thing I do not
think it is advisable for us to say is that the Committee plans to make a public
announcement in January, if for some reason we are not absolutely sure that that is going to
happen. If we’re not sure, saying it is, shall I say, a less than thoughtful thing to do.
Inclusion of that sentence does have the advantage of indicating that we will be altering our
policy perspective and it reinforces the fact that the symmetry issue is not a significant
policy matter. But we have to be a little careful about forecasting that we will do something
if it turns out that we are going to be unable to accomplish that. So let’s leave the bracketed
issue for judgment later; that judgment should be reasonably easy to make after we have our
discussion. Please read the directive accordingly.
MR. BERNARD. The wording is on page 14 of the Bluebook: “To promote 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
maintaining the federal funds rate at an average of around 5½ percent. In view of the
evidence currently available, the Committee believes that prospective developments are
equally likely to warrant an increase or a decrease in the federal funds rate operating
objective during the intermeeting period.”
CHAIRMAN GREENSPAN. Call the roll.
MR. BERNARD.
Chairman Greenspan

Vice Chairman McDonough 

President Boehne


Governor Ferguson


Governor Gramlich


Governor Kelley


President McTeer


Governor Meyer


President Moskow


President Stern


Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes

CHAIRMAN GREENSPAN. Let us move on to consider the directive
language and disclosure policy. Governor Ferguson, would you lead us as you have in the
past?

12/21/99

59

MR. FERGUSON. Thank you, Mr. Chairman. I’d like to refer to the memo that I
sent to the Committee dated December 17, 1999. Let me start by simply reviewing the state
of play, if you will.
At our last meeting the principal issues we discussed related to whether or not we
wanted to do two things: (1) change the directive language used to describe the
Committee’s assessment of prospective developments; and (2) define more precisely the
Chairman’s latitude for making an intermeeting move. On the first point, the issue was
whether we wanted to move more toward language about the balance of risks to describe the
Committee’s view of the future and move away from what we call “symmetry/asymmetry”
today. And the consensus, though there were objecting points of view, was that we did want
to make that move. You sent your Working Group back to consider that language in a more
detailed way, and revised language is now in this memo starting on page 5. That is one
point that we need to discuss further.
The second thing you asked the Working Group to do was to consider how best to
express the Chairman’s latitude for an intermeeting move. We took a look at the language
that we had suggested and made some slight adjustments. That is on page 5, section B.
A third question emerged, involving a couple of other recommendations from Cathy
Minehan on how to handle the directive wording. That is on page 6. The fourth issue that
emerged as we proceeded was an expectation that we would have some form of public
announcement of this change in January. And the latter two pages of the memo describe
what would go into an announcement, though it is not a draft.
Let me also remind you that at our November meeting we looked at nine other areas
on which there was a strong consensus within our Working Group, and I got no sense that
there was any change from what we agreed on then. That is the state of play.
Now, what I would like to do is as follows: Though a general consensus emerged in
the FOMC and there was a clear majority in the Working Group that we wanted to move
toward this language that focuses more on the balance of risks and is more tied to our
legislative goals, a few people still clearly felt that we needed to make sure we are
comfortable with that decision. So first I’d like to ask President Poole to give his
perspective on why he as a member of the Working Group still feels uncomfortable with the
balance-of-risks language. I just want to make sure we have thought this through carefully

12/21/99

60

because, as pleasant as this experience was, I don’t look forward to repeating it again next
year! [Laughter] So, careful thought is important here. Then, I would like to call on the
other members of the Working Group to give their perspectives on this issue. Also, as we
go around to others, I’d like to hear your thoughts not just on the balance-of-risks language
but on the other elements in our memo, including the language on intermeeting moves,
Cathy Minehan’s proposals on the directive language, and how we should communicate all
this publicly. I hope that is reasonably clear. Bill Poole, let me turn it over to you; I see Bill
has handed out a memo.
MR. POOLE. I think I have enough copies to go around if you’ll keep passing them
on. I wanted to put my thoughts down on paper because that allows me to state things more
concisely. The Working Group’s proposal on the balance-of-risks language, what I am
calling Option 1, has been slightly modified since we last discussed it. But my major
concern has to do with the last part of it involving a statement by the Committee on its
views about future economic conditions, and that is what I want to focus on. Let me go
through my points.
First, I think it is going to be much easier for us to agree on a possible policy action
than on a statement concerning possible future economic conditions. Second, I believe that
the Option 1 language has an implicit Phillips curve analytic framework behind it and in my
view not every member of the Committee will be comfortable with that framework. Third, I
think that many in the market will view the Option 1 language as essentially a code for the
existing tilt language--that, in fact, it will be read as a Committee view about future policy.
And it is important for us not to allow perceptions to develop that we’re talking in code.
Another issue, my point four, is why we would be talking about economic conditions rather
than future policy action. If we are truly talking about economic conditions, why do we take
a Committee vote on the matter--a statement about our forecast, if you will. So, I think the
markets will tend to view our language about economic conditions as really code for future
policy.
Furthermore, I am concerned about the way in which the general public may
interpret this language. I think we are inviting headlines that say “Fed sees economic
weakness ahead” if we vote on a directive that says we see possible economic weakness. I
don’t think that is going to be helpful to us.

12/21/99

61

I’m also concerned that the language in Option 1 has an analytical weakness. If we
are successful in being preemptive, then the changing economic conditions we see will lead
us to take a policy action and will not at the end of the day create either economic weakness
or inflation. That’s the whole idea we’re trying to get across: We see the possibility of
economic conditions that, if not offset by policy action, would generate economic weakness
or inflation. We want to preempt the changes in the economy that we don’t want to occur.
So, I think the language proposed in Option 2 is really more accurate. The change in
economic conditions that we see developing is going to generate policy action and will not,
in fact, generate economic weakness or inflation.
Lastly, I think the majority on the Working Group overreacted to the market’s
response to our announcement in May. We had explicitly told the market that we would
disclose the tilt when the Committee wished “to communicate to the public a major shift in
its views about the balance of risks or the likely direction of future policy.” So it is not
surprising to me that the market reacted when we first used that device because we said we
would announce the tilt when we had something major to say. In fact, since May, I think
the market has understood that we were using this device on a much more routine basis.
And in my view the responses since May when we have used an asymmetric directive have
been helpful and have not reflected an overreaction.
So, those are my seven reasons for having a strong preference for what I’m calling
Option 2. I must say that I wish I had had this all straight in my mind 10 or 12 weeks ago
when I started to think about it, but my views have evolved as we’ve gone along. My initial
view was one of a mild preference for what I’m calling Option 2 over Option 1. The more
I’ve thought about it, the more I have become concerned about the Option 1 approach.
MR. FERGUSON. Thank you. Let me just quickly summarize what I think the
majority of our Working Group believes on this. I won’t go point by point, but in general I
think the majority is concerned that if we don’t make a clear break away from the current
language, we still risk the possibility that market participants will overreact, even though
they are perhaps beginning to understand a little better what we are trying to convey.
The majority of our Working Group does not suggest that the balance-of-risks
language has no implications for future interest rates or policy moves. But we believe that
language more accurately reflects what the Committee actually anticipates about the future

12/21/99

62

because we all recognize that, indeed, the decisions about policy moves have not yet been
made when we talk about the balance of risks. They aren’t actually made until the vote
occurs at a meeting or conference call, whichever it may be. Therefore, we don’t want to
leave too strong an implication that anything is baked in the cake. I think the majority felt
that the existing language does leave too much of that implication.
There was, just so you know, some exchange of views on the analytics. We ended
up among Bill Poole, Don Kohn, Dave Lindsey, and myself in disagreement on the
analytics. I’ll spare all of you the details, unless you want to hear them, but let me just note
that there is some disagreement on whether President Poole has the analytics exactly right.
With that brief summary of the majority perspective, let me go to my Working Group
colleagues first--just in the order in which they are sitting--and then we will go round robin.
Mike Kelley.
MR. KELLEY. Yes, I’ll start, Roger. I don’t know that I can add much either to
Roger’s excellent memo or the summary he just gave or to Bill’s very cogent disagreement,
which everyone has given an enormous amount of attention to. I’m in the majority that
favors Option 1. First of all, I would like to say relative to the analytics and other concerns
that there are sophisticated market analysts who make a very good living--I carefully do not
say earn a good living--opining, criticizing, and questioning the Fed. Some are academics
and they have academic purposes, and others are either speculating or doing the intellectual
work for speculators on the basis of the way they read the Fed. I doubt that any language
exists anywhere that will foreclose this process completely. I don’t think either of these
options or anything else anybody would be able to craft can achieve that end, much as I
wish we could.
I believe that our objective here is to be as informative as we can while ensuring to
the best of our ability that we are accurate and clear about what we actually say. We want to
take care not to mislead the public, either explicitly by saying more than we intend to say or
implicitly by opening up possibilities that we could be misunderstood through the
implications that somebody could draw from what we say. I think all of our discussions
have been focused on how best to do that. The facts are that at each meeting where we
adopt a tilt, bias, or asymmetry or whatever you want to call it--or decide not to do so--it
doesn’t mean any more than what our proclivity is at the time of that meeting. It can’t mean

12/21/99

63

any more than that because conditions always change, as we know, and considerations
always change. That’s why we have a zero-based review at every meeting that we have.
And the record will show, I think, that the tilt evaluation has very little or no predictive
power concerning future policy moves over any particular time period. And in my view, we
should be very careful not to leave any impression that it does.
In my opinion, the best way to do that is simply to place the weight of the evidence
on the scales as it relates to our two objectives, which we have in this proposed statement-­
price stability on the one hand and sustainable growth on the other. Then we should
articulate how those scales read at the time we are looking at them. They will either be
balanced or they will be weighted toward a danger in one direction or the other. If we feel
that we have to expound further on that, it can be done through a statement released to the
press. That is where I come down.
MR. FERGUSON. Thank you. Larry Meyer.
MR. MEYER. Thank you. It was clear at the last meeting, as it has been during the
deliberations of the Working Group, that I am part of a very small minority on this issue-­
maybe it’s just Bill Poole and I. Nevertheless, I thank you for the opportunity to talk a little
about my views because I am strongly in favor of language in the tilt that refers directly to
prospective policy actions.
I believe the best way to think about this is to reflect on why we are engaged in this
process and what we are trying to accomplish. In my view, two concerns led to this
reconsideration of our directive and disclosure practices. First, we became uncomfortable
with the market’s reaction to our announcements, particularly with its assessment of the
immediacy and the certainty of a policy move whenever we announced a shift to an
asymmetric directive. Second, there was an additional uncertainty engendered by the
absence of a consistent interpretation of the tilt by members of the Committee. Now, the
second problem is easy to deal with. We have a process under way to develop a consensus,
and I think we have an agreement around the table that whatever that consensus is we are all
going to be bound by it going forward, whether we agreed with it or not.
But the first problem, which I’m going to call the immediacy/certainty problem,
resulted in large part from the decisions we made when we adopted this disclosure policy
last December. First, we decided only to announce a change in the tilt when the change was

12/21/99

64

significant and important for the public to know. In retrospect, I think that was a mistake. It
was as if we had said: “If we are going to have a significant change in the directive, we
want to have it flashing on that big neon sign in Times Square.” And then we were
surprised about how intense the market response was! Second, by explicitly tying the tilt to
the intermeeting language of the directive, we reinforced the presumption that the bias
referred to a very short-term policy horizon. So, I think we unintentionally created the
problems that we are trying to respond to today.
Now what do we do? We have already reached consensus on three constructive
steps to alleviate these problems. First, we are always going to announce changes in the tilt,
thus removing the special sense of immediacy and certainty of announced tilts. Second, we
are going to remove the tilt from the directive and not tie it to the intermeeting period
language. And third, as I noted above, we are going to agree to be bound by the consensus
interpretation. What more do we need to do? Here is where we differ.
The majority also wants to change the language to focus on the balance of risks in
the forecast in order to detach it from an explicit reference to policy. Two quite different
reasons have been put forth for why we should not explicitly refer to the policy direction in
expressing the tilt. The first is that by not linking the tilt directly to future policy prospects
we are taking a further effective step toward resolving the immediacy and certainty problem.
The logic is that if we don’t mention policy, the markets will be less likely to infer from the
announcement of a tilt a sense of immediacy and certainty of a subsequent policy action.
That may be the case. But I’m not sure it will be.
The second argument is that we can legitimately have an assessment of the balance
of risks to the forecast, but that it makes no sense to have a policy bias because we can’t
commit a future FOMC to a policy decision. The view is that somehow the balance of risks
is accurate, but we can’t have an accurate policy bias. I don’t understand it. I’ll give you an
example. We sat around this table today and discussed the outlook, and I think we all were
talking as if it was very likely that we would have to tighten policy even at our next meeting
in February. Does that mean when February comes along that we won’t start afresh with a
zero-based review of the data and the forecast? Of course not. Of course we will start
afresh, as we are required to do. So I would reject that notion. I don’t think that’s a good
argument.

12/21/99

65

But there is a legitimate question as to whether or not the balance-of-risks language
will deal with this certainty/immediacy problem. The markets really want to know about
our policy bias and they will infer that policy bias however we express the tilt. We would
be deluding ourselves to think otherwise. We can couch this bias in the language of the
forecast, but the market will read right through it to our policy intention. Therefore, I prefer
the direct, transparent approach. Specifically, I’d use the language we’ve been using rather
than this alternative language that Bill Poole has suggested. And I would use the press
release to set out our interpretation of the tilt--specifically, that we don’t intend it to indicate
a precommitment to action at the next meeting, but to indicate a greater likelihood of
moving in one direction rather than the other over a longer time frame.
If the majority view is nevertheless in favor of the balance-of-risks language, I
would strongly urge that we not assume that this language alone will convey the message
we want to send in terms of immediacy and certainty of subsequent policy action. We
should make these points explicitly in the press release in exactly the same way we would
do if we used the policy bias language. Thank you.
MR. FERGUSON. Before we continue, let me ask if any other members of the
Working Group want to give their perspectives or elaborate on a majority or minority point
of view. Mike Moskow.
MR. MOSKOW. I’ll be very brief. I just want to add a couple of points. I am in the
majority here; I prefer the language that is in the Ferguson memo. I just want to point out
that we discussed this at great length in the Working Group. Memos have been exchanged,
e-mails have been exchanged, and I forget the number of meetings we’ve had but it has been
many. So we have discussed it at great length already. The key here, as I see it, is that we
are trying to educate the public; we are trying to get away from the notion that we are
automatically going to move at the next meeting and that we have our finger on the trigger
and are ready to act. That is really, from my standpoint, our key objective. And what the
Ferguson language does is to take a step back and put the balance of risks on the table rather
than the possible need for a change in the stance of policy. Larry Meyer said that the
markets are going to read right through this to our “true intentions.” I’m not sure that is
going to happen because over time they are going to see that it isn’t a good predictor of what
we will do. If history is any guide, it predicts what we are going to do only half of the time.

12/21/99

66

So, I think we may be able to educate the market over time. At least this takes a step back
from the notion that we are automatically going to change our policy at the next meeting.
That was driving my thinking on this issue from the beginning and I think the way the
proposed language is phrased now follows through on that point.
MR. FERGUSON. Bob Parry, do you want to add something?
MR. PARRY. I started out at a position that was very close to Bill Poole’s, although
I indicated that I probably could live with either option. I’ve moved a bit more in the
direction of Option 1 recently. The advantage of Option 2, of course, is that it’s very direct.
To me the disadvantage is that it may not accurately convey the probabilities of a change in
policy. Clearly, we were using the tilt language in the past in a way that very often did not
lead to a change in policy after we had adopted an asymmetric directive. And I even worry
about the possibility that markets may almost force us to make a move if we’ve indicated
asymmetry, as has been the case once in the recent past.
With regard to Option 1, what I like about it is that it seems to capture how I’ve
interpreted symmetry in the past: I concluded what I thought was appropriate with regard to
the funds rate and then considered the question of where the balance of risks, in terms of the
economic outcomes, was likely to be in the period ahead, knowing full well that things
could change very quickly. So it seems to me that perhaps Option 1 would provide a little
more flexibility than Option 2.
MR. FERGUSON. Thanks. Ned Gramlich is next, and then we will open up the
discussion to the rest of you.
MR. GRAMLICH. I’ve been for Option 1 by a close margin all along and I still am.
I think Bill Poole and Larry Meyer have put their case very well, but I still like Option 1.
Let me make three points.
To me the biggest point all along has been what we are calling the “trigger” issue.
That involves our standing back from policy changes a bit--being understated and letting the
market make its interpretation but not predicting future developments that will not
necessarily materialize. That has been the major issue to me throughout these deliberations.
On Bill Poole’s point 2, regarding an implied Phillips curve framework, I don’t think
this language means at all that the FOMC is a captive of Phillips curves. The wording that
Mike Kelley worked out, which is on page 5 of Roger’s memo, tries to make it a little

12/21/99

67

clearer that the issue is not so much that we believe the Phillips curve but that price stability
and sustainable economic growth are our mandates.
On the “talking in code” issue, I don’t consider it speaking in code if we say exactly
what we’re thinking at any particular point. In fact, that’s one thing I find attractive about
the balance-of-risks language. So I am still in the Option 1 camp, though Bill and Larry
have weakened my resolve a bit.
MR. FERGUSON. I’d like to open up the discussion now and we’ll use the usual
approach. I would remind you that there are a number of different elements in the memo
and I would appreciate it if you would indicate places where you agree or disagree. I will be
assuming that if you don’t indicate a disagreement that you are basically agreeing with
what’s in the memo. First on my list is Jerry Jordan.
MR. JORDAN. Thank you. We know, of course, that what matters from this point
forward over the next two years or longer is what we do, not what we say. Whatever box
one wants to run monetary policy through, it’s our actions that influence economic activity,
inflation, growth, and so on, not the words that we use. But it seems to me that we’ve
gotten ourselves in a situation this year where more and more focus has been on our words
and the transitory market reactions to our words and that has taken attention away from
what we do. What mattered in 1998 was that we lowered the funds rate three times; what
mattered this year was that we raised the funds rate three times. The reason I don’t like
Option 1 is the stress on both goals and the way that has been rephrased in the bracketed
expression to imply more strongly that the goals are separable, which I do not believe. At a
time when we would vote for asymmetry toward tightening, I would want the directive to
say “weighted mainly toward conditions that may generate heightened inflationary
pressures, which would cause economic weakness.” It is increases in inflation that send
false signals to market participants, producers, and households, and weakens economic
growth. The other option, to leave out any reference to inflation at all and say “weighted
mainly toward conditions that may generate economic weakness”--that’s asymmetry toward
ease, I guess--I don’t know when we would use this option. I can’t imagine that we would
adopt that kind of directive unless we foresaw something like the Asian crisis, the Russian
default, or some other adverse shock. In such a case I think we’d do what we believe is the
right thing to do--cut rates, as we did in 1998--rather than announce that we’ll think hard

12/21/99

68

about it at the next meeting. I don’t see any benefit at all in trying to give these kinds of
signals about future meetings and future actions.
MR. FERGUSON. Bob McTeer.
MR. MCTEER. I’m persuaded by Bill Poole’s arguments. The argument he made
that is most significant to me is point 2, having to do with the Phillips curve. In the
language of Option 1, the opposite of economic weakness is inflation. That’s a built-in
Phillips curve, and for that reason I would go with Option 2.
MR. FERGUSON. Ed Boehne.
MR. BOEHNE. Roger, I think you and your associates have done a first-rate job on
this and I support the majority recommendations. To me the balance-of-risks approach is
the preferred course and, separately, I think the language laying out the Chairman’s
authority is much improved. And if it’s on the table, Cathy Minehan’s editorial suggestions
also have merit, in my judgment.
MR. FERGUSON. That is on the table. Al Broaddus.
MR. BROADDUS. Roger, first, I would second Ed Boehne’s compliments to you
and your colleagues on the Working Group. You’ve done a lot of hard work. You’ve done
a great job, I think, in framing the issues and getting them on the table. But I continue to
have reservations about two aspects of the proposals: the balance-of-risks language and also
the amendment to the Authorization for Domestic Open Market Operations, which has not
been focused on so far. Let me just run through my views on these issues as quickly as I
can.
On the balance-of-risks issue, I’m very much in the same camp as Bill Poole and
Larry Meyer, and I guess Bob Parry as well. Inevitably, in my view, this language is going
to have the effect of reinforcing the short-term Phillips curve tradeoff mentality that
pervades public discussion of monetary policy in particular and of economic policy
generally. I recognize that the recommended language, if read and analyzed carefully, does
not necessarily imply that the Committee in its decisions assumes such a tradeoff, although
the language is certainly consistent with that assumption. But to most readers and to most
reporters in particular, the language will almost certainly still seem to posit a choice
between fighting inflation on the one hand and stimulating growth on the other. Again,
while it doesn’t necessarily follow, I think a lot of people will infer that we are implying that

12/21/99

69

addressing one of these two objectives necessarily means neglecting the other. I think this is
really important. The notion of a tradeoff between resisting inflation and stimulating growth
is deeply ingrained in Americans, or at least among those people who think about policy. I
believe it’s arguably the single biggest obstacle that we face in communicating clearly to the
public about policy. And I would hate to see us reinforce this perverse idea with the
recommended new language, which to my mind inevitably it would do. I would much
prefer something like Option 2 in Bill Poole’s memorandum. In fact, I had written down
wording that’s amazingly close to that; it’s almost identical. I don’t think anything is lost by
referring candidly and directly to prospects for policy. As I think Larry Meyer said at our
previous meeting, people are not interested in our views on the balance of risks per se. They
are interested in them only from the standpoint of their implications for policy. I don’t think
we are going to change that by avoiding the “P” word. And the risk is that we will tend to
reinforce the popular notion that the Fed is not able to speak clearly and in a straightforward
manner about policy.
Let me shift now to the proposed amendment to the Authorization. This is obviously
a tough subject to discuss here. We have a great Chairman currently, one who takes most of
the heat that is directed at the Fed, and no one, including me, wants to seem to be
advocating restrictions on his authority to act, especially in a crisis. But I have to tell you
that I have tried to think this through and I’m still uncomfortable with the proposal. It
represents a significant and, most importantly for me at least, permanent institutional change
that could serve us poorly in the long run. The idea, as it has been presented, seems to be
that we are simply codifying current practice or our current understanding about this. But if
that’s the case, I think it’s fair to ask if we are all clearly on the same page with respect to
exactly what the understanding is, how we arrived at it, and whether it’s firmly grounded.
When the amendment is made public, I think informed people are going to ask those kinds
of questions as they try to figure out what we are really trying to do and what we really
mean. At the present time at least, I’m not sure we have crisp and convincing answers to
these questions. To be candid, I’m not sure that the current understanding has a firm basis.
I’m not sure I’m clear on exactly what the understanding is, though I may be the only one
here who feels that way. But that is where I am. More broadly, it seems to me to run
counter to our federal structure.

12/21/99

70

Of course, the fundamental question involved is whether a chairman should have the
authority, either implicitly through some sort of understanding or explicitly through the
Authorization, to act unilaterally even in clearly delimited circumstances--that is, whether
it’s wise and desirable for the Committee to confer that authority. Obviously, we always
can. I recognize that I’m swimming upstream here and that some people--maybe everybody
else at the table here--believe it is wise to do this. I don’t pretend to be all knowing on this
and I acknowledge that that may be true. But I have to tell you I’m still not convinced, after
having tried to assess the benefits and the risks.
It seems to me that the gains of doing something like this, either explicitly or
implicitly, are small at best. Presumably we’re talking here mainly about emergency or
crisis situations. But under our current operating procedures, we can already accommodate
increased demands for currency and reserves and the interest rate implications of that in a
crisis by amending our funds rate target. The Chairman and other senior System people can
and will--as they have historically--continue to exert strong leadership in managing a crisis,
using the discount window and other tools at our disposal. Also in such circumstances, I
think markets would generally expect us to move fairly promptly, so that is going to get
reflected in the yield curve rather quickly in any event. And importantly, in a crisis I think
it’s really important for the public to understand that the whole Committee is fully behind
any action that is taken and will follow through on it. It is hard to imagine that they
wouldn’t think that with Chairman Greenspan at the helm, but we don’t know who is going
to be Chairman in the year 2050, for example, and what the attitude might be.
Finally, at just a practical level, with today’s technology--we’ve been talking about
that a lot around this table--it’s pretty easy to get the Committee together quickly. So it’s
not clear to me that we buy a lot by conferring this authority. And I think the longer-term
risks of doing so--I mean the real long-term risks, the permanent institutional risks--are not
inconsequential. Most importantly, it seems to me that it is precisely in a crisis situation that
a Chairman is most exposed to external political pressure. Full Committee deliberation and
participation in a situation like that I think is a protection for the System and for the
Chairman. If the President calls, the Chairman can say, “I have to talk to the Committee”
and, of course, benefit from any deliberation that takes place. Also, full Committee

12/21/99

71

participation ensures a detailed public record of what occurs, which I think is consistent
with our very appropriate drift toward greater transparency and greater accountability.
The bottom line--again, I realize I’m swimming upstream on this--is that I would
urge the Committee to think very carefully about this. Before we do it, we should be really
confident that this is in the best interests of the Committee and the Chairman in particular as
well as the System and the country.
MR. FERGUSON. Thank you. Cathy Minehan.
MS. MINEHAN. Wow, it’s hard to follow that! Let me start with first things first.
I’ve long been of the opinion that we should announce something after every meeting. And
if it’s the bias discussion or the tilt discussion that gets us to the point where we are at the
end of the meeting, I believe some reflection of that should be incorporated in the public
announcement that will be made after every meeting. In fact, at one point or another I think
I was the one who suggested the balance-of-risks language. Nevertheless, I must say that a
couple of Bill Poole’s arguments really resonate with me: point 5, the possible headline
“Fed sees economic weakness ahead;” and point 6, the idea that we are supposed to be
preemptive. If we see economic weakness ahead, shouldn’t we try to do something about it
or shouldn’t we anticipate that we could alter policy so as to offset it, along the lines
President Jordan talked about? So, I thought I’d be firmly in the Option 1 camp, but I can
see some benefits to Option 2, frankly. Option 2 still talks about risks. And I don’t think it
commits us to any more than what the market thinks we’re committed to--or not committed
to as the case may be--because time will determine what we’re going to do. Whether or not
we in fact move with any greater frequency than we have to date after we change our
language is what ultimately is going to decide how the market accepts this. I also believe
that the basic thrust of President Poole’s point 7 is right as well. When we started this
announcement policy, we led the market to have unrealistic assumptions about what we
meant by the language. And they overreacted. We encouraged them to overreact. We
didn’t mean to, but we did. I think the situation has gotten better since then and there’s an
improved understanding of our consensus on where we are going. So, I’m really on the
fence and I could be a marginal Option 2 person.
Before I get to Al Broaddus’ second comment, let me just say a few words on my
suggested modifications to the directive language. I assume that nobody has major

12/21/99

72

objections, or you would have said so already, about what ends up being just an editorial
perspective about shortening the directive. What I tried to do when I was analyzing the
issues for this discussion was to go through all of our public announcements for the year and
rewrite them the way they would have been written under the proposals made at the last
meeting and in Roger Ferguson’s subsequent memo. And as I tried to rewrite the directive, I
found that all I was rewriting every month was a paragraph that focused on the monetary
aggregates, which we really don’t talk about at our meetings. Well, Don Kohn does--excuse
me, Don. I felt that that kind of laser focus on that subject each and every month really
didn’t serve us well. So, that was basically where my suggestions for shortening the
directive came from.
Finally, turning to what Al was just saying, I am a firm believer that FOMC
decisions ought to be Committee decisions. We have a responsibility; making policy
decisions is what we are here for, for all the reasons that Al articulated much better than I
ever could. My understanding in terms of this paragraph was that it was codifying an
accepted position of the Committee that has changed over a period of years, but that this
wording basically reflected current Committee practice. I had not really asked myself some
of the questions that Al raised in his discussion, and I must admit they bear thinking about.
So, I’m a little on the fence in that area, too.
MR. FERGUSON. Okay, that’s an acceptable place to be. Let me propose the
following. It is now 1:00 p.m. Perhaps some food would be helpful as a way to make sure
that we’re still feeling our best. Is food available?
MR. BERNARD. Yes.
CHAIRMAN GREENSPAN. We can just break for lunch and continue the
discussion during lunch.
MR. FERGUSON. Yes, let’s take a brief recess and continue over lunch.
[Lunch recess]
MR. FERGUSON. Bill McDonough, may I ask you to interrupt your eating to give
us your perspective on the issues on the table?
VICE CHAIRMAN MCDONOUGH. I am in support of the recommendations in
the Ferguson memo in all areas. Let me direct myself, however, to the discussion of the
Chairman’s intermeeting authority. We are not establishing anything new. If a member of

12/21/99

73

the Committee doesn’t know what the current practice is, I would think it is a matter of
having failed to ask. When I joined the Committee, I asked what the understanding was and
somebody told me--probably Don Kohn--so I knew what it was. So, we are codifying that
which already exists--much against my wishes I should tell you, because I didn’t think it
was appropriate for the matter to be discussed since it already existed. The General Counsel
thought it would be better to codify a practice that already existed, and that is why we have
a General Counsel. So rather than practice law, I very reluctantly came to the view that we
had to discuss this.
The idea that we would take away the intermeeting authority from this Chairman is
to me unthinkable. As for the question of whether a future chairman would deserve that
confidence: If somebody were nominated for Chairman and I were still here and thought
the person didn’t merit that confidence, I would resign so I could go up to the Hill and
testify about why the person shouldn’t be approved by the Senate. Robert’s Rules of Order
dictate the way this Committee works. If at some stage the Committee decided that its
Chairman had abused this authority, at the next meeting of the Committee we could say we
hereby disapprove of the Chairman’s action. And we could change the Authorization if we
thought the Chairman at the time was capable of abusing the authority again. That is
absolutely just a “no-brainer” application of Robert’s Rules. So I think we should recognize
that it is on the advice of the General Counsel that we are codifying a practice that already
exists. And I can’t imagine why we would think of doing anything else. Thank you.
MR. FERGUSON. Thank you. Gary Stern.
MR. STERN. Thank you, Roger. Let me comment first on the intermeeting
authority issue that Bill McDonough just mentioned. I share Al Broaddus’ concerns and
perspectives on this, but I am persuaded when I look at this language that it is satisfactory. I
think it does protect us adequately and I am not troubled by what has been proposed.
With regard to the bias language, originally I was in favor of the recommendation in
the memo, Option 1. As I’ve thought about it some more, I have to say--and I realize this is
not the world’s most constructive observation--I’m not entirely happy with either option.
The reason is that staying with something close to the asymmetry wording we have been
using does imply I think some presumption about a move at the next meeting, which history
suggests often has not materialized. In Option 1, the option in the memo, I don’t think this

12/21/99

74

is necessarily a fatal flaw. But my reservation is that we could find ourselves from time to
time in a somewhat awkward position of having changed policy but not changed where we
think the risks lie. That is quite likely and in some cases appropriate. But it may also raise
the question: If the Committee thinks that’s where the risks are, why didn’t we move more
aggressively? Maybe that can be handled in subsequent statements or in other ways. If I
had to vote, I would vote in favor of Option 1. But I must say I have some reservations
about both options.
MR. FERGUSON. May I speak to that? I think the general consensus of the
majority in our Working Group is that, just as Gary has indicated, even if we adopt the new
language in Option 1 we would provide an explanation of a vote for a bias if we thought that
was necessary. There was a clear expectation that we may need to have a sentence or two
that would flesh out our reasoning just to avoid that risk. So, I think that was thoroughly
considered by the Working Group. Tom Hoenig is next and then Jack Guynn.
MR. HOENIG. Governor Ferguson, I’ve listened to all of the arguments, and they
are all good arguments. When I sort through them, I’m back with the original
recommendations of your Working Group. We can fool with this language to the nth degree
and something is going to be wrong with it. Your draft language talks about risks and I feel
more comfortable personally talking to the public about risks than I do talking about which
way we are going to move the next time we take a policy action.
The issue of the Chairman’s authority to make intermeeting policy moves is a tough
one, Al, and I have some sympathy for your point of view. But it is related to a
longstanding practice and this amendment to the Authorization does codify that practice. To
my mind, in some ways it sets the boundaries more clearly. If some future chair abuses the
authority, that is something the Committee will have to deal with. But the way the
Authorization reads now gives me a sense of confidence that it would be used only in the
most dire circumstances, and I think the Chairman has to have some flexibility to act in a
crisis. So, I can generally accept the Working Group’s recommendations.
MR. FERGUSON. Jack Guynn.
MR. GUYNN. Roger, of the two options presented, I rather strongly prefer Option 1
as recommended by the majority in your Working Group. In fact, I’m very uncomfortable

12/21/99

75

forecasting policy actions, which the second option implies, as Mike Kelly, Ed Boehne, and
others have commented.
What Bill Poole’s dissection of Option 1 did for me was not so much talk me out of
it but expose what I would refer to as fundamental flaws--Gary Stern used the term fatal
flaw--or shortcomings in what we are trying to do here, even in my preferred option. And
those flaws relate to Bill’s point number 2--that we come here with forecasts, on which we
base our judgment of the risks, from very different models. And if nothing else, that’s going
to lead to continued debate, the Chairman allowing it, about the statements we put out and
the language we use to further describe the balance of risks.
Actually, more fundamentally troublesome is the fact that each of our respective
outlooks is conditional on the assumptions we have made about the stance of policy and
future policy actions. That has been demonstrated very vividly in our Humphrey-Hawkins
discussions; we have made very different assumptions at this table about future policy that
are embedded in the forecasts we provide at Humphrey-Hawkins meetings. It always
troubles me to see those added up and averaged to come up with numbers that purportedly
reflect the Committee’s outlook, when we admit that we have made very different
assumptions.
The final fundamental flaw or shortcoming in Option 1, which I still prefer, is that
we have no formal target--no formal inflation target or GDP target or whatever--along the
lines of Ned Gramlich’s comments today. That leaves open the question of risks related to
what. We have not been able or willing to answer that question. So, in my view, there are
some fundamental problems--fundamental may be too strong a word--with even the good
work that the Working Group has done. I, for one, think there is a high probability that,
even after these repairs, people are going to find the repaired process still substantially
flawed. In fact, I feel so strongly about it that I think we may want to re-open the question-­
either at this point or after we’ve tried these repairs--of whether at the end of the day we
have made a contribution, as we were trying to do, in terms of transparency. I think it is still
an open question.
Finally, I have just a couple of quick comments on Al Broaddus’ remarks. I want to
swim upstream a bit with Al on that issue. I, too, share the thought that we are all trying to
understand exactly what authority we have delegated to the Chairman. Even though the

12/21/99

76

Working Group has responded to one of my comments and tried to fix the language to
address my concerns, I still would like to see the circle drawn a bit tighter around that
delegation. It’s very likely that if the Chairman were acting between meetings he would be
responding to developments we could not possibly foresee at our previous meeting or, in
fact, we would have dealt with them. I suggested words like “extraordinary,” or some other
term to emphasize that this authority would only apply when something very out of the
ordinary--some very short-term problem not related to the long-term objectives of the
Committee--had emerged. I would be most comfortable with a delegation of that kind as
opposed to a more open-ended delegation, which I’m less than completely certain could be
fixed after the fact. I just think it would be better to do that. Thank you for the chance to
comment.
MR. FERGUSON. Thank you. Let me tell you where we are and then we have to
decide two or three issues.
MR. JORDAN. May I ask a question just for clarification?
MR. FERGUSON. Sure.
MR. JORDAN. Suppose we had been operating under Option 1 at the October
meeting and had adopted an upward tilt--using the balance-of-risks language--and then at
the November meeting raised rates as we did. Do you think we would have retained that tilt
with the balance-of-risks language or taken it off as we did under the old approach?
MR. FERGUSON. I’m not terribly comfortable speculating about that.
MR. JORDAN. But to raise rates and then take off the balance of risks toward
higher inflation would seem peculiar.
MR. FERGUSON. I think there are two ways we might have handled it. Again, this
is speculation; what we would have done, I’m not sure. We might have decided that the
balance of risks was still tilted toward greater inflation but decided to take a “wait and see”
approach because we already would have made three moves. So it is quite conceivable,
Jerry, that we could have said at that meeting that we were not sure about the likely
direction of our next move. The risks might be in the direction of greater inflation, but we
would have wanted to be quite clear that we were waiting to see because we already had
made three moves. Or we might have taken the view at that time that we had now done
three moves and, in effect, we thought we were out of this for some time and in a wait-and-

12/21/99

77

see posture. Therefore, we really thought that after these moves the risks were balanced.
Now, where we would have ended up would have depended very much on how close that
call was about where we thought the economy was going to be after the third move. That’s
why it’s hard to say. One could have made a case either way, if I recall the meeting. That’s
one of the complications here.
MR. KELLEY. And one would have to try to do that within the context of what we
knew at that time-MR. FERGUSON. Absolutely.
MR. KELLEY. --not what we know today, which is considerably more. More
weight has been given to the risk of inflation than we knew would be the case at the time
that statement would have been made.
MR. FERGUSON. Yes. In hindsight, obviously, we’d know somewhat more.
Let me summarize what I have heard and where I think we are. In some sense not
surprisingly--though there are some caveats and a few people are in between--we still seem
to have, as we did the last time, four people who feel on the core question of the balance of
risks that the current language is clearly preferable. We have one person actually who
would prefer neither. Then everybody else seems to feel, though they see some faults or
have some concerns, that the balance-of-risks language is a step forward. We have two
alternative courses of action. One alternative is simply to vote today on the
recommendations in the memo--and this in some sense depends on the strength of our
convictions on this--which will then set the ground rules for next year. That strikes me as a
reasonable alternative, knowing that we have four people who will probably be
uncomfortable about it but that everyone else, generally speaking, is ready to vote. The only
other choice, frankly, is to say--and the Working Group may disagree because we have put
in as many hours as we can on this to get the issues on the table--that we don’t want to move
forward on this. But if the Committee as a whole thinks we should not, recognizing that
there are four people who clearly agree and don’t want to move forward, then that is a
Committee decision. I would be concerned about that decision because, effectively, it
would mean that we are stuck with the status quo, and I’m not sure that that’s terribly
attractive. And frankly, after working on this for several months, I’m not sure that further
discussion either in January or at the February meeting is going to help us go any further.

12/21/99

78

The only other thing that makes this question complex is that we have to handle what goes
into today’s announcement. But I think we should leave that question to one side. Larry
Meyer.
MR. MEYER. We have gone through a process here and we have reached a
consensus. It’s a quite overwhelming consensus, though it’s not 100 percent. So I’m
perfectly satisfied that the process has worked. I got the chance to try to persuade others to
my viewpoint and I was unsuccessful. And I would certainly consider myself bound by this
consensus, so I think we ought to vote.
SEVERAL. Agreed.
MR. FERGUSON. Well, Larry Meyer has proven himself to be not just a great
economist, but a diplomat.
VICE CHAIRMAN MCDONOUGH. And a gentleman on top of that!
MR. FERGUSON. Well, we knew he was that! If that’s the case, Mr. Chairman,
could you ask for a motion on this?
MR. KOHN. In the past, Governor Ferguson, we haven’t actually had formal
Committee votes on matters such as these. But, obviously, you might want to see a show of
hands to make sure that people could “live with” the decisions. Among other things, the
Committee has often wanted to include everybody, even nonvoting members, on these kinds
of decisions since they have to live with the consequences.
CHAIRMAN GREENSPAN. Yes, on a matter like this, it’s everybody.
MR. FERGUSON. It’s clearly everybody. I was thinking more of just a show of
hands from all, not dividing it by members and nonmembers.
MR. GRAMLICH. I think it might be helpful to take each of the matters separately.
MR. FERGUSON. Fine. We will go through the memo and basically have a show
of hands on each issue, still being quite democratic. Section one dealt with nine general
points on which there was consensus. I heard no one dispute those, but let me just ask for a
show of hands on Section one, which deals with the nine points. Is there general agreement
for those? There seems to be no objection on that.
In Section two, I will turn your attention to the balance-of-risks language at the top
of page 5, which has been the focus of most of our conversation. All in favor of adopting

12/21/99

79

that as the way to deal with our perspective on the future, please raise your hand. Okay.
And those opposed? There are four opposed.
At the bottom of page 5 in Section B is language dealing with the Chairman’s
latitude for intermeeting moves. All in favor of handling the intermeeting latitude that way
and making it a part of the Authorization when we vote on that in February raise your hand.
Any opposed?
MR. KELLEY. Two opposed.
MR. FERGUSON. In Section C on page 6, Cathy Minehan has proposed a slight
rewording of the directive. Although Cathy referred to it in our go-around, we did not have
much discussion on it. Let me just ask for a show of hands on the language, which is
actually on the top of page 7 in Section C. All in favor of that approach? Those opposed? I
see none opposed.
I think we are clear on what we are going to do with respect to the directive when we
get to February. We have a new approach that I think has been determined democratically.
Let me talk about the next step and then give some guidance. The plan, as you can
see on pages 7 and 8, is that we will issue a press release some time in January that
describes the major substantive changes that we have made. The expectation is that
everyone will have a chance to look at a draft of that press release and send comments back
to me or Dave Lindsey or Don Kohn. So, everyone will have a chance to review it. That
will be the way we communicate to the public what our intentions were in making these
changes. Then in February we will start using this new procedure. Are there any objections
to that approach? Hearing none, I assume there are no objections.
Now we can turn to the next issue, which is the announcement for today. You may
recall that the Chairman pointed out the bracketed language at the bottom of the draft press
release. Lynn Fox has now taken away all the copies of that announcement. Lynn, could
you just read that bracketed language?
MS. FOX. The last sentence was: “Separately, the Committee indicated that it plans
in January to make a public announcement about future adjustments to its disclosure policy
and the so-called ‘bias’ statement.”
MR. FERGUSON. Does anyone have an objection to including that sentence in
today’s announcement? Yes, go ahead Peter.

12/21/99

80

MR. FISHER. Could I just give a perspective from the market? In my view, if you
put out that statement, it’s like putting up a neon sign that says. “Coming soon: A big
change in our bias!” I just don’t think the market is going wait and give you a chance to
draft a well crafted press release. The crescendo of interest in that, I think, is going to be
extraordinary.
MS. MINEHAN. That’s a good point.
VICE CHAIRMAN MCDONOUGH. I think that’s a good point. Let’s just put out
the press release when it’s ready in January.
MR. FERGUSON. Does anyone have a counterpoint to that?
MS. FOX. One reason to include it in today’s statement was to make sure that the
market understood that there had been no change in policy today and that the changes would
be announced later.
CHAIRMAN GREENSPAN. I don’t think that’s really necessary. The press release
on our vote today was pretty clear. It’s unambiguous. That issue could surface, but I don’t
think it will.
MS. FOX. Our stance then, when we’re asked about the Committee’s decision, is to
say that we have nothing to announce, period?
VICE CHAIRMAN MCDONOUGH. Right. At least the truth will set you free!
CHAIRMAN GREENSPAN. That brings us to the end of our agenda, except for the
pro forma announcement that our next meeting--as I’m sure you’re all acutely aware--is
scheduled for February 1st and 2nd. Merry Christmas everybody and hopefully a Happy
New Year!
END OF MEETING