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A meeting of the Federal Open Market Committee was held in the offices of the Board of
Governors of the Federal Reserve System in Washington, D.C., on Tuesday, February 4,
1997 at 2:30 p.m. and continued on Wednesday, February 5, 1997 at 9:00 a.m.
Present:
Mr. Greenspan, Chairman
Mr. McDonough, Vice Chairman
Mr. Broaddus
Mr. Guynn
Mr. Kelley
Mr. Meyer
Mr. Moskow
Mr. Parry
Ms. Phillips
Ms. Rivlin
Messrs. Hoenig, Jordan, Melzer, and Ms. Minehan, Alternate Members of the Federal
Open Market Committee
Messrs. Boehne, McTeer, and Stern, Presidents of the Federal Reserve Banks of
Philadelphia, Dallas, and Minneapolis respectively
Mr. Kohn, Secretary and Economist
Mr. Bernard, Deputy Secretary
Mr. Coyne, Assistant Secretary
Mr. Gillum, Assistant Secretary
Mr. Mattingly, General Counsel
Mr. Baxter, Deputy General Counsel 1
Mr. Prell, Economist
Mr. Truman, Economist
Messrs. Beebe, Eisenbeis, Goodfriend, Hunter, Lindsey, Mishkin, Promisel, Siegman,
Slifman, and Stockton, Associate Economists
Mr. Fisher, Manager, System Open Market Account
Mr. Ettin, Deputy Director, Division of Research and Statistics, Board of Governors
Mr. Winn, Assistant to the Board, Office of Board Members, Board of Governors
Messrs. Madigan and Simpson, Associate Directors, Divisions of Monetary Affairs
and Research and Statistics respectively, Board of Governors
Ms. Johnson, 2Assistant Director, Division of International Finance, Board of
Governors
Messrs. Brady 2 and Reifschneider, 2 Section Chiefs, Divisions of Monetary Affairs
and Research and Statistics respectively, Board of Governors
Messrs. Brayton 2 and Rosine, 2 Senior Economists, Division of Research and
Statistics, Board of Governors
Ms. Garrett, Economist, Division of Monetary Affairs, Board of Governors
Ms. Low, Open Market Secretariat Assistant, Division of Monetary Affairs, Board of
Governors
Ms. Browne, Messrs. Dewald, Hakkio, Lang, Rosenblum, and Sniderman, Senior
Vice Presidents, Federal Reserve Banks of Boston, St. Louis, Kansas City,
Philadelphia, Dallas, and Cleveland respectively
Mr. Miller and Ms. Perelmuter, Vice Presidents, Federal Reserve Banks of
Minneapolis and New York respectively
In the agenda for this meeting, it was reported that advices of the election of the following
members and alternate members of the Federal Open Market Committee for the period
commencing January 1, 1997, and ending December 31, 1997, had been received and that the
named individuals had executed their oaths of office.
The elected members and alternate members were as follows:
William J. McDonough, President of the Federal Reserve Bank of New York,
with Ernest T. Patrikis, First Vice President of the Federal Reserve Bank of New
York, as alternate;
J. Alfred Broaddus, Jr., President of the Federal Reserve Bank of Richmond,
with Cathy E. Minehan, President of the Federal Reserve Bank of Boston, as
alternate;
Michael H. Moskow, President of the Federal Reserve Bank of Chicago, with
Jerry L. Jordan, President of the Federal Reserve Bank of Cleveland, as
alternate;
Jack Guynn, President of the Federal Reserve Bank of Atlanta, with Thomas C.
Melzer, President of the Federal Reserve Bank of St. Louis, as alternate;
Robert T. Parry, President of the Federal Reserve Bank of San Francisco, with
Thomas M. Hoenig, President of the Federal Reserve Bank of Kansas City, as
alternate.
By unanimous vote, the following officers of the Federal Open Market Committee were
elected to serve until the election of their successors at the first meeting of the Committee
after December 31, 1997, with the understanding that in the event of the discontinuance of
their official connection with the Board of Governors or with a Federal Reserve Bank, they
would cease to have any official connection with the Federal Open Market Committee:
Alan Greenspan, Chairman
William J. McDonough, Vice Chairman
Donald L. Kohn, Secretary and Economist
Normand R. V. Bernard, Deputy Secretary
Joseph R. Coyne, Assistant Secretary
Gary P. Gillum, Assistant Secretary
J. Virgil Mattingly, Jr., General Counsel
Thomas C. Baxter, Jr., Deputy General Counsel
Michael J. Prell, Economist
Edwin M. Truman, Economist
Jack H. Beebe, Robert A. Eisenbeis,
Marvin S. Goodfriend, William C. Hunter,
David E. Lindsey, Frederic S. Mishkin,
Larry J. Promisel, Charles J. Siegman,
Lawrence Slifman, and David J. Stockton, Associate Economists
By unanimous vote, the Federal Reserve Bank of New York was selected to execute
transactions for the System Open Market Account until the adjournment of the first meeting
of the Committee after December 31, 1997.
By unanimous vote, Peter R. Fisher was selected to serve at the pleasure of the Committee as
Manager, System Open Market Account, on the understanding that his selection was subject
to being satisfactory to the Federal Reserve Bank of New York.
Secretary's note: Advice subsequently was received that the selection of Mr.
Fisher as Manager was satisfactory to the board of directors of the Federal
Reserve Bank of New York.
By unanimous vote, the Authorization for Domestic Open Market Operations shown below
was reaffirmed.
Authorization for Domestic Open Market Operations
1. The Federal Open Market Committee authorizes and directs the Federal Reserve Bank of
New York, to the extent necessary to carry out the most recent domestic policy directive
adopted at a meeting of the Committee:
(a) To buy or sell U.S. Government securities, including securities of the Federal
Financing Bank, and securities that are direct obligations of, or fully guaranteed
as to principal and interest by, any agency of the United States in the open
market, from or to securities dealers and foreign and international accounts
maintained at the Federal Reserve Bank of New York, on a cash, regular, or
deferred delivery basis, for the System Open Market Account at market prices,
and, for such Account, to exchange maturing U.S. Government and Federal
agency securities with the Treasury or the individual agencies or to allow them
to mature without replacement; provided that the aggregate amount of U.S.
Government and Federal agency securities held in such Account (including
forward commitments) at the close of business on the day of a meeting of the
Committee at which action is taken with respect to a domestic policy directive
shall not be increased or decreased by more than $8.0 billion during the period
commencing with the opening of business on the day following such meeting
and ending with the close of business on the day of the next such meeting;
(b) When appropriate, to buy or sell in the open market, from or to acceptance
dealers and foreign accounts maintained at the Federal Reserve Bank of New
York, on a cash, regular, or deferred delivery basis, for the account of the Federal
Reserve Bank of New York at market discount rates, prime bankers acceptances
with maturities of up to nine months at the time of acceptance that (1) arise out
of the current shipment of goods between countries or within the United States,
or (2) arise out of the storage within the United States of goods under contract of
sale or expected to move into the channels of trade within a reasonable time and
that are secured throughout their life by a warehouse receipt or similar document
conveying title to the underlying goods; provided that the aggregate amount of
bankers acceptances held at any one time shall not exceed $100 million;
(c) To buy U.S. Government securities, obligations that are direct obligations of,
or fully guaranteed as to principal and interest by, any agency of the United
States, and prime bankers acceptances of the types authorized for purchase under
l(b) above, from dealers for the account of the Federal Reserve Bank of New
York under agreements for repurchase of such securities, obligations, or
acceptances in 15 calendar days or less, at rates that, unless otherwise expressly
authorized by the Committee, shall be determined by competitive bidding, after
applying reasonable limitations on the volume of agreements with individual
dealers; provided that in the event Government securities or agency issues
covered by any such agreement are not repurchased by the dealer pursuant to the
agreement or a renewal thereof, they shall be sold in the market or transferred to
the System Open Market Account; and provided further that in the event bankers
acceptances covered by any such agreement are not repurchased by the seller,
they shall continue to be held by the Federal Reserve Bank or shall be sold in the
open market.
2. In order to ensure the effective conduct of open market operations, the Federal Open
Market Committee authorizes and directs the Federal Reserve Banks to lend U.S.
Government securities held in the System Open Market Account to Government securities
dealers and to banks participating in Government securities clearing arrangements conducted
through a Federal Reserve Bank, under such instructions as the Committee may specify from
time to time.
3. In order to ensure the effective conduct of open market operations, while assisting in the
provision of short-term investments for foreign and international accounts maintained at the
Federal Reserve Bank of New York, the Federal Open Market Committee authorizes and
directs the Federal Reserve Bank of New York (a) for System Open Market Account, to sell
U.S. Government securities to such foreign and international accounts on the bases set forth
in paragraph l(a) under agreements providing for the resale by such accounts of those
securities within 15 calendar days on terms comparable to those available on such
transactions in the market; and (b) for New York Bank account, when appropriate, to
undertake with dealers, subject to the conditions imposed on purchases and sales of securities
in paragraph l(c), repurchase agreements in U.S. Government and agency securities, and to
arrange corresponding sale and repurchase agreements between its own account and foreign
and international accounts maintained at the Bank. Transactions undertaken with such
accounts under the provisions of this paragraph may provide for a service fee when
appropriate.
With Mr. Broaddus dissenting, the Authorization for Foreign Currency Operations shown
below was reaffirmed.
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Authorization for Foreign Currency Operations
1. The Federal Open Market Committee authorizes and directs the Federal Reserve Bank of
New York, for System Open Market Account, to the extent necessary to carry out the
Committee's foreign currency directive and express authorizations by the Committee
pursuant thereto, and in conformity with such procedural instructions as the Committee may
issue from time to time:
A. To purchase and sell the following foreign currencies in the form of cable
transfers through spot or forward transactions on the open market at home and
abroad, including transactions with the U.S. Treasury, with the U.S. Exchange
Stabilization Fund established by Section 10 of the Gold Reserve Act of 1934,
with foreign monetary authorities, with the Bank for International Settlements,
and with other international financial institutions:
Austrian schillings
Belgian francs
Canadian dollars
Danish kroner
Pounds sterling
French francs
German marks
Italian lire
Japanese yen
Mexican pesos
Netherlands guilders
Norwegian kroner
Swedish kronor
Swiss francs
B. To hold balances of, and to have outstanding forward contracts to receive or
to deliver, the foreign currencies listed in paragraph A above.
C. To draw foreign currencies and to permit foreign banks to draw dollars under
the reciprocal currency arrangements listed in paragraph 2 below, provided that
drawings by either party to any such arrangement shall be fully liquidated within
12 months after any amount outstanding at that time was first drawn, unless the
Committee, because of exceptional circumstances, specifically authorizes a
delay.
D. To maintain an overall open position in all foreign currencies not exceeding
$25.0 billion. For this purpose, the overall open position in all foreign currencies
is defined as the sum (disregarding signs) of net positions in individual
currencies. The net position in a single foreign currency is defined as holdings of
balances in that currency, plus outstanding contracts for future receipt, minus
outstanding contracts for future delivery of that currency, i.e., as the sum of these
elements with due regard to sign.
2. The Federal Open Market Committee directs the Federal Reserve Bank of New York to
maintain reciprocal currency arrangements ("swap" arrangements) for the System Open
Market Account for periods up to a maximum of 12 months with the following foreign
banks, which are among those designated by the Board of Governors of the Federal Reserve
System under Section 214.5 of Regulation N, Relations with Foreign Banks and Bankers, and
with the approval of the Committee to renew such arrangements on maturity:
Foreign bank
Austrian National Bank
Amount of arrangement (millions of
dollars equivalent)
250
National Bank of Belgium
1,000
Bank of Canada
2,000
National Bank of Denmark
250
Bank of England
3,000
Bank of France
2,000
German Federal Bank
6,000
Bank of Italy
3,000
Bank of Japan
5,000
Bank of Mexico
3,000
Netherlands Bank
500
Bank of Norway
250
Bank of Sweden
300
Swiss National Bank
4,000
Bank for International Settlements:
Dollars against Swiss francs
Dollars against authorized European currencies
other than Swiss francs
600
1,250
Any changes in the terms of existing swap arrangements, and the proposed terms of any new
arrangements that may be authorized, shall be referred for review and approval to the
Committee.
3. All transactions in foreign currencies undertaken under paragraph 1.A. above shall, unless
otherwise expressly authorized by the Committee, be at prevailing market rates. For the
purpose of providing an investment return on System holdings of foreign currencies, or for
the purpose of adjusting interest rates paid or received in connection with swap drawings,
transactions with foreign central banks may be undertaken at non-market exchange rates.
4. It shall be the normal practice to arrange with foreign central banks for the coordination of
foreign currency transactions. In making operating arrangements with foreign central banks
on System holdings of foreign currencies, the Federal Reserve Bank of New York shall not
commit itself to maintain any specific balance, unless authorized by the Federal Open Market
Committee. Any agreements or understandings concerning the administration of the accounts
maintained by the Federal Reserve Bank of New York with the foreign banks designated by
the Board of Governors under Section 214.5 of Regulation N shall be referred for review and
approval to the Committee.
5. Foreign currency holdings shall be invested to ensure that adequate liquidity is maintained
to meet anticipated needs and so that each currency portfolio shall generally have an average
duration of no more than 18 months (calculated as Macaulay duration). When appropriate in
connection with arrangements to provide investment facilities for foreign currency holdings,
U.S. Government securities may be purchased from foreign central banks under agreements
for repurchase of such securities within 30 calendar days.
6. All operations undertaken pursuant to the preceding paragraphs shall be reported promptly
to the Foreign Currency Subcommittee and the Committee. The Foreign Currency
Subcommittee consists of the Chairman and Vice Chairman of the Committee, the Vice
Chairman of the Board of Governors, and such other member of the Board as the Chairman
may designate (or in the absence of members of the Board serving on the Subcommittee,
other Board members designated by the Chairman as alternates, and in the absence of the
Vice Chairman of the Committee, his alternate). Meetings of the Subcommittee shall be
called at the request of any member, or at the request of the Manager, System Open Market
Account ("Manager"), for the purposes of reviewing recent or contemplated operations and
of consulting with the Manager on other matters relating to his responsibilities. At the request
of any member of the Subcommittee, questions arising from such reviews and consultations
shall be referred for determination to the Federal Open Market Committee.
7. The Chairman is authorized:
A. With the approval of the Committee, to enter into any needed agreement or
understanding with the Secretary of the Treasury about the division of
responsibility for foreign currency operations between the System and the U.S.
Treasury;
B. To keep the Secretary of the Treasury fully advised concerning System
foreign currency operations, and to consult with the Secretary on policy matters
relating to foreign currency operations;
C. From time to time, to transmit appropriate reports and information to the
National Advisory Council on International Monetary and Financial Policies.
8. Staff officers of the Committee are authorized to transmit pertinent information on System
foreign currency operations to appropriate officials of the U.S. Treasury Department.
9. All Federal Reserve Banks shall participate in the foreign currency operations for System
Account in accordance with paragraph 3 G(1) of the Board of Governors' Statement of
Procedure with Respect to Foreign Relationships of Federal Reserve Banks dated January 1,
1944.
With Mr. Broaddus dissenting, the Foreign Currency Directive shown below was reaffirmed.
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Foreign Currency Directive
1. System operations in foreign currencies shall generally be directed at countering disorderly
market conditions, provided that market exchange rates for the U.S. dollar reflect actions and
behavior consistent with the IMF Article IV, Section 1.
2. To achieve this end the System shall:
A. Undertake spot and forward purchases and sales of foreign exchange.
B. Maintain reciprocal currency ("swap") arrangements with selected foreign
central banks and with the Bank for International Settlements.
C. Cooperate in other respects with central banks of other countries and with
international monetary institutions.
3. Transactions may also be undertaken:
A. To adjust System balances in light of probable future needs for currencies.
B. To provide means for meeting System and U.S. Treasury commitments in
particular currencies, and to facilitate operations of the Exchange Stabilization
Fund.
C. For such other purposes as may be expressly authorized by the Committee.
4. System foreign currency operations shall be conducted:
A. In close and continuous consultation and cooperation with the U.S. Treasury;
B. In cooperation, as appropriate, with foreign monetary authorities; and
C. In a manner consistent with the obligations of the United States in the
International Monetary Fund regarding exchange arrangements under the IMF
Article IV.
Mr. Broaddus dissented in the votes on the Authorization and the Directive because they
provide the foundation for foreign exchange market intervention. He believed that the
Federal Reserve's participation in foreign exchange market intervention compromises its
ability to conduct monetary policy effectively. Because sterilized intervention cannot have
sustained effects in the absence of conforming monetary policy actions, Federal Reserve
participation in foreign exchange operations in his view risks one of two undesirable
outcomes. First, the independence of monetary policy is jeopardized if the System adjusts its
policy actions to support short-term foreign exchange objectives set by the Treasury.
Alternatively, the credibility of monetary policy is damaged if the System does not follow
interventions with compatible policy actions, the interventions consequently fail to achieve
their objectives, and the System is associated in the mind of the public with the failed
operations.
By unanimous vote, the Procedural Instructions with Respect to Foreign Currency Operations
shown below were reaffirmed.
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Procedural Instructions with Respect to Foreign Currency Operations
In conducting operations pursuant to the authorization and direction of the Federal Open
Market Committee as set forth in the Authorization for Foreign Currency Operations and the
Foreign Currency Directive, the Federal Reserve Bank of New York, through the Manager,
System Open Market Account ("Manager"), shall be guided by the following procedural
understandings with respect to consultations and clearances with the Committee, the Foreign
Currency Subcommittee, and the Chairman of the Committee. All operations undertaken
pursuant to such clearances shall be reported promptly to the Committee.
1. The Manager shall clear with the Subcommittee (or with the Chairman, if the Chairman
believes that consultation with the Subcommittee is not feasible in the time available):
A. Any operation that would result in a change in the System's overall open
position in foreign currencies exceeding $300 million on any day or $600
million since the most recent regular meeting of the Committee.
B. Any operation that would result in a change on any day in the System's net
position in a single foreign currency exceeding $150 million, or $300 million
when the operation is associated with repayment of swap drawings.
C. Any operation that might generate a substantial volume of trading in a
particular currency by the System, even though the change in the System's net
position in that currency might be less than the limits specified in 1.B.
D. Any swap drawing proposed by a foreign bank not exceeding the larger of (i)
$200 million or (ii) 15 percent of the size of the swap arrangement.
2. The Manager shall clear with the Committee (or with the Subcommittee, if the
Subcommittee believes that consultation with the full Committee is not feasible in the time
available, or with the Chairman, if the Chairman believes that consultation with the
Subcommittee is not feasible in the time available):
A. Any operation that would result in a change in the System's overall open
position in foreign currencies exceeding $1.5 billion since the most recent
regular meeting of the Committee.
B. Any swap drawing proposed by a foreign bank exceeding the larger of (i)
$200 million or (ii) 15 percent of the size of the swap arrangement.
3. The Manager shall also consult with the Subcommittee or the Chairman about proposed
swap drawings by the System and about any operations that are not of a routine character.
By unanimous vote, the Committee reduced from $20 billion to $5 billion the amount of
eligible foreign currencies that the System was prepared to "warehouse" for the U.S.
Treasury and the Exchange Stabilization Fund (ESF). Warehousing involves spot purchases
of foreign currencies from the U.S. Treasury or the ESF and simultaneous forward sales of
the same currencies to the U.S. Treasury or the ESF at the then-current forward market rates.
The effect of warehousing is to supplement the U.S. dollar resources of the U.S. Treasury and
the ESF for financing the purchase of foreign currencies and related international operations.
The agreement had been enlarged from $5 billion to $20 billion in early 1995 to facilitate
United States participation in the Multilateral Program to Restore Financial Stability in
Mexico. No use of the warehousing facility had been made by the U.S. Treasury or the ESF
during this period, and in light of Mexico's repayment to the U.S. Treasury of all the
financing provided under the Program and the termination of that Program, the Committee
agreed that the size of the warehousing arrangement should revert to $5 billion.
The Report of Examination of the System Open Market Account, conducted by the Board's
Division of Reserve Bank Operations and Payment Systems as of the close of business on
October 31, 1996, was accepted.
By unanimous vote, the Program for Security of FOMC Information was amended to update
the document with regard to certain security classifications, access to FOMC information,
and attendance at FOMC meetings.
On January 23, 1997, the continuing rules and other standing instructions of the Committee
had been distributed with the advice that, in accordance with procedures approved by the
Committee, they were being called to the Committee's attention before the February 4-5
organization meeting to give members an opportunity to raise any questions they might have
concerning them. Members were asked to indicate if they wished to have any of the
documents in question placed on the agenda for consideration at this meeting, and no
requests for consideration were received.
By unanimous vote, the minutes of the meeting of the Federal Open Market Committee held
on December 17, 1996, were approved. The Committee also discussed its long-standing
practice of releasing the minutes a few days after the meeting at which they were approved,
usually on the following Friday. The members agreed with a proposal to advance the normal
release to Thursday to facilitate the dissemination and public understanding of these
decisions.
The Manager of the System Open Market Account reported on developments in foreign
exchange markets since the meeting on December 17, 1996. There were no transactions in
foreign currencies for System account during this period, and thus no vote was required of
the Committee.
The Manager also reported on developments in domestic financial markets and on System
open market transactions in government securities and federal agency obligations during the
period December 18, 1996, through February 4, 1997. By unanimous vote, the Committee
ratified these transactions.
The Manager advised the Committee that the anticipated pattern of reserve needs was such
that he might want to add considerably to the System's outright holdings of U.S. government
securities over the coming intermeeting period. By unanimous vote, the Committee amended
paragraph 1(a) of the Authorization for Domestic Open Market Operations to raise the limit
on intermeeting changes in such holdings from $8 billion to $12 billion for the period ending
with the close of business on the date of the next meeting, March 25, 1997.
The Committee then turned to a discussion of the economic and financial outlook, the ranges
for the growth of money and debt in 1997, and the implementation of monetary policy over
the intermeeting period ahead. A summary of the economic and financial information
available at the time of the meeting and of the Committee's discussion is provided below,
followed by the domestic policy directive that was approved by the Committee and issued to
the Federal Reserve Bank of New York.
The information reviewed at this meeting suggested that the growth of the economy had
strengthened markedly in the fourth quarter of 1996. To a large extent the gain in final
demand during the quarter reflected a surge in exports, but consumer spending also increased
substantially after having risen at a much reduced pace in the third quarter. Despite some
slowing in the growth of business fixed investment and some easing in housing activity, the
overall economy had expanded briskly as reflected in data on production and employment.
The tightness in labor markets had persisted and was evidenced by some continued
acceleration in labor compensation in the fourth quarter. There was no discernible change in
the underlying trend in price inflation, although a spurt in energy prices had resulted in faster
increases in overall consumer and producer prices than in the third quarter.
Private payroll employment rose appreciably further in December after recording sizable
increases over October and November. The gains remained widespread among employment
categories and continued to be led by large advances in the services and trade industries.
Aggregate hours of private production workers and the average workweek edged higher in
the fourth quarter. The civilian unemployment rate was unchanged in December at 5.3
percent, its average level for the second half of the year.
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Industrial production increased sharply in November and December. The gains in December
were widely distributed across manufacturing industries, but were held down by a steep
decline in the output of utilities after a surge in November. The production of aircraft and
parts extended a strong uptrend. The utilization of total manufacturing capacity rose
considerably further in December, to a level slightly above its long-term average.
Consumer spending registered a sizable increase over the fourth quarter after having grown
little during the summer. In December total nominal retail sales rose considerably following a
small decline in November. The December increases were spread across all major categories
except for some further decline in sales of building materials and supplies. The most recent
data on services expenditures pointed to moderate advances in October and November.
Surveys indicated that consumer confidence had remained elevated in late 1996 and early
1997.
Housing starts fell appreciably in December, evidently reflecting unusually adverse weather
conditions in several parts of the country, and were down somewhat for the fourth quarter as
a whole. The declines were concentrated in single-family units. Permits for new home
construction were little changed in December but edged lower for the fourth quarter as a
whole. Available data indicated a somewhat slower pace of sales of new and existing homes
in the fourth quarter.
Growth of business fixed investment moderated considerably in the fourth quarter after
advancing sharply in the previous quarter. The slowdown reflected a small decline in
spending on producer durable equipment that was more than offset by an apparent surge in
outlays for nonresidential structures. Growth in spending on office, computing, and
communications equipment slowed somewhat from the third-quarter pace but remained on a
steep uptrend. Business investment in transportation equipment was weak in the fourth
quarter, as sales of heavy trucks fell further and work stoppages at a major manufacturer
prompted cuts in fleet auto sales in October and November.
Business inventory investment picked up somewhat on average in October and November,
with most of the increase occurring in manufacturing. Trade inventories increased
moderately on balance over the two-month period. Reflecting considerable strength in
shipments and sales, however, inventory-sales ratios for most industries and trade groupings
edged lower from their third-quarter levels.
The nominal deficit on U.S. trade in goods and services narrowed considerably in October
and November from its rate in the third quarter. Nearly all the improvement was accounted
for by a very large increase in exports of goods and services. The rise was spread among all
major trade categories except for automotive products. Economic activity in the major
foreign industrial countries appeared to have continued to expand at a moderate rate on
average in the fourth quarter. Available indicators suggested relatively strong economic
performances in Japan, Canada, and the United Kingdom and slower growth in the major
continental European countries. Further expansion was reported for several large Latin
American and some Asian economies.
Recent data pointed to little change in underlying inflation trends. Overall consumer prices
had continued under upward pressure in November and December, boosted by large
advances in energy prices. Excluding food and energy items, consumer prices rose modestly
over the two months and increased less over the twelve months ending in December than
over the previous twelve months. At the producer level, a similar pattern prevailed in prices
of finished goods, and there was no evidence of increased price pressures at earlier stages of
production. Worker compensation as measured by the employment cost index (ECI) and
average hourly earnings of production and nonsupervisory workers rose considerably further
during the closing months of 1996. For the year, both measures were up appreciably more
than in 1995, though much of the acceleration in the ECI occurred in the first half of the year.
At its meeting on December 17, 1996, the Committee issued a directive that called for
maintaining the existing degree of pressure on reserve positions. The directive included a
bias toward the possible firming of reserve conditions to reflect a consensus among the
members that the risks remained biased toward higher inflation and that the next policy move
was more likely to be toward some tightening than toward easing. In this regard, the directive
stated that in the context of the Committee's long-run objectives for price stability and
sustainable economic growth, and giving careful consideration to economic, financial, and
monetary developments, somewhat greater reserve restraint would be acceptable and slightly
lesser reserve restraint might be acceptable during the intermeeting period. The reserve
conditions associated with this directive were expected to be consistent with some slowing of
the growth of M2 and M3 over coming months.
Open market operations during the intermeeting period continued to be directed toward
maintaining the existing degree of pressure on reserve positions. The federal funds rate rose
briefly in response to year-end pressures, but it otherwise tended to remain close to the 5-1/4
percent level expected with an unchanged policy stance. Other short-term interest rates
generally were unchanged to slightly higher over the intermeeting period. Rates on
intermediate- and long-term securities edged higher on balance in reaction to incoming data
on economic activity that were on the firm side of market expectations; the increases in such
rates appeared to be tempered, however, by favorable market reactions to new data on wages
and prices. The generally positive news on economic growth and inflation along with
favorable reports on earnings appeared to reinforce the optimism of equity market investors,
and major indexes of stock prices increased markedly further over the intermeeting period.
In foreign exchange markets, the trade-weighted value of the dollar in terms of the other
G-10 currencies rose substantially over the intermeeting period. The rise, which was most
pronounced against the Japanese yen and continental European currencies, appeared to
reflect market perceptions of unexpectedly strong economic growth in the United States and
a risk of faltering growth in the other countries. The dollar appreciated less against sterling
and declined somewhat against the Canadian dollar in apparent response to expectations of
relative strength in the economies of those countries.
After growing at a considerably faster rate in the fourth quarter, M2 and M3 apparently
increased at a more moderate but still brisk pace in January. The expansion of both
aggregates likely was boosted by strong income growth, and the relatively rapid expansion of
M3 reflected heavy bank reliance on the managed liabilities in M3 to fund robust loan
growth. From the fourth quarter of 1995 to the fourth quarter of 1996, M2 was estimated to
have grown at a rate near the upper end of the Committee's annual range and M3 at a rate
appreciably above the top of its range. Total domestic nonfinancial debt had expanded
moderately on balance over recent months and was estimated to have grown last year at a
rate near the midpoint of its range.
The staff forecast prepared for this meeting suggested that the expansion would be sustained
at a rate a bit above the economy's estimated growth potential. The increase in consumer
spending was projected to moderate somewhat from its pace in the fourth quarter to a rate
generally in line with the expected rise in disposable income. Homebuilding was forecast to
decline somewhat but to stabilize at a relatively high level in the context of continued income
growth and the generally favorable cash-flow affordability of home ownership. Business
spending on equipment and structures was projected to expand less rapidly in light of some
anticipated slowing in the growth of sales and profits. Fiscal policy and the external sector
were expected to exert small restraining influences on economic activity over the year ahead.
With resource utilization high and rising, consumer price inflation, as measured by the CPI
excluding the relatively volatile food and energy components of the index, was forecast to
increase slightly this year in the context of some further pickup in the growth of labor
compensation that would include another legislated rise in the federal minimum wage.
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In the Committee's discussion of current and prospective economic developments, members
commented that the robust performance of the economy in the fourth quarter partly reflected
some sources of strength, notably a surge in exports, that were evidently temporary, and they
anticipated substantial moderation in the pace of the expansion over the period ahead. The
outlook was subject to considerable uncertainty, but as they assessed the numerous factors
bearing on prospective developments, the members generally concluded as they had at
previous meetings that further growth in aggregate demand at a rate averaging near or a bit
above the economy's potential remained a reasonable expectation. Many observed, however,
that the risks to such an outlook appeared to be tilted to the upside. The strength of the
expansion in the fourth quarter, and in fact over 1996 as a whole, had heightened concerns
that the economy had considerable forward momentum at a time when it was already
operating at a level, especially with regard to labor resources, that could tend to generate
rising inflationary pressures. Indeed, in the view of at least some members, growth of
aggregate demand in line with increases in potential output posed a risk of rising price
inflation because the recent relatively favorable price performance was seen in this view as
reflecting at least in part the behavior of special factors that could dissipate over the
projection horizon.
In keeping with the practice at meetings when the Committee establishes its long-run ranges
for the growth of money and debt aggregates, the members of the Committee and the Federal
Reserve Bank presidents not currently serving as members had provided individual
projections of the growth in real and nominal GDP, the rate of unemployment, and the rate of
inflation for the year 1997. The forecasts of the rate of expansion in real GDP had a central
tendency of 2 to 2-1/4 percent and a full range of 2 to 2-1/2 percent. The projections of the
civilian unemployment rate associated with these growth expectations were all in a range of
5-1/4 to 5-1/2 percent for the fourth quarter of the year. With regard to nominal GDP growth
in 1997, the forecasts were mainly in a range of 4-1/4 to 4-3/4 percent, with an overall range
of 4-1/4 to 5-1/4 percent. Nearly all the members anticipated a small decline in the rate of
inflation in 1997, as measured by the consumer price index, from that recorded in 1996.
Specifically, the projections converged on rates of 2-3/4 to 3 percent and a full range of 2-3/4
to 3-1/2 percent in 1997. These forecasts took account of expected developments in the food
and energy sectors and further technical improvements in the index by the Bureau of Labor
Statistics, both of which were expected to trim the reported rate. The projections were based
on individual views concerning what would be an appropriate policy over the projection
horizon to further progress toward the Committee's goals.
In their review of developments in key sectors of the economy, members observed that the
available data and anecdotal information indicated considerable strength in consumer
spending in recent months, and they referred to a number of underlying factors that should
help to sustain at least moderate further growth in such spending. The latter included the
solid expansion in employment and incomes, the increased financial wealth of many
consumers, and the high level of consumer confidence as indicated by recent surveys.
However, members also cited some factors that would tend to restrain the growth in
consumer spending. Among these factors were the effects of the high level of consumer debt
and rising repayment problems on both the willingness of households to borrow and of
financial intermediaries to lend, the likely absence of pent-up demands after an extended
period of expansion, and the possibility of a setback in the stock market. It was difficult to
evaluate how these differing factors would on balance affect consumer spending, but the
members concluded that the consumer sector was likely to provide important support for
sustained economic expansion.
The growth in business capital spending was expected to moderate somewhat in 1997 in
association with slower growth in sales, profits, and cash flows. It also seemed likely after
several years of robust investment expenditures that many business firms now had high
levels of up-to-date capital stock relative to planned production. Members referred, however,
to a number of favorable factors that should continue to support at least moderate further
growth in business investment, including the attractive pricing of and ongoing rapid
technological improvements in computer and communications equipment and the wide
availability of equity and debt financing on favorable terms to business firms. Members also
reported that commercial building activity had improved in many areas. Some noted a
tendency to underestimate the strength of overall business investment in recent years,
including the stimulus provided by efforts to improve productivity in highly competitive
markets.
While indicators of housing activity had been somewhat erratic over the past several months,
members sensed a somewhat softer tone on balance in this sector of the economy. This
assessment was supported by anecdotal observations in several regions across the country.
Against the background of the increase that had occurred earlier in mortgage financing costs
and forecasts of some slowing in the growth of jobs and incomes, the housing sector was
likely to weaken slightly over the coming year, but some members commented that surprises
on the upside of current forecasts, as in 1996, could not be ruled out.
Fiscal policy and foreign trade also were seen as likely to exert some modest restraint on
overall economic activity. Federal purchases of goods and services still appeared to be on a
declining trend. Although fiscal policy negotiations were likely to be difficult and their
outcome was uncertain, members felt that there was some basis for anticipating the
enactment of further legislation this year to help bring the federal budget into eventual
balance. The large increase in exports in the fourth quarter clearly was associated with
temporary developments, and net exports were expected to weaken this year, reflecting both
some reversal of recent developments and the earlier appreciation of the dollar. Some
members reported that business contacts had already communicated concerns about increased
competitive pressures from imports because of the rise in the foreign exchange value of the
dollar.
Members commented that inflation had remained remarkably subdued, but they expressed
considerable concern about the risks of rising inflation in the context of high levels of
resource use. They referred in particular to statistical indications, supported by anecdotal
reports from around the nation, of very tight conditions in labor markets and some upward
pressures on wages. Thus far, the rise in compensation had been held down by diminishing
increases in worker benefit costs, and productivity gains also appeared to have had a
favorable effect on unit labor costs. In addition, the increases in wages themselves had
continued to be restrained by apparent worker concerns about job security. To date, there was
no evidence that pressures stemming from tight labor markets had been passed through to a
measurable extent to higher prices.
While the absence of increasing price inflation was a welcome development, members were
concerned that the break with historical patterns might not persist. If labor markets remained
under pressure, nominal compensation costs were likely to pick up at some point as one-time
savings in worker benefit costs ran out and as workers became less willing to trade off lower
wages for increased security; such a development would foster increases in labor costs that
ultimately would feed through to higher prices. The members did not anticipate a sudden
surge in inflation, but many expressed concern about the possibility of a gradual upcreep in
coming quarters that might become more considerable later. They generally expected a small
decline in overall price inflation this year, reflecting favorable developments in food and
energy and, for the CPI, further technical improvements by the Bureau of Labor Statistics;
however, they believed that the risks to their forecasts were in the direction of greater
inflation and several noted in particular that projected declines in energy prices might not
materialize as soon or to the extent assumed in many forecasts.
In keeping with the requirements of the Full Employment and Balanced Growth Act of 1978
(the Humphrey-Hawkins Act), the Committee reviewed the ranges for growth of the
monetary and debt aggregates in 1997 that it had established on a tentative basis at its
meeting in July 1996. Those ranges included expansion of 1 to 5 percent for M2 and 2 to 6
percent for M3, measured from the fourth quarter of 1996 to the fourth quarter of 1997. The
monitoring range for growth of total domestic nonfinancial debt was provisionally set at 3 to
7 percent for 1997. The tentative ranges for 1997 were unchanged from the actual ranges
adopted for 1995 (in July of that year for M3) and 1996.
In reviewing the tentative ranges, the members took note of a staff projection indicating that
M2 and M3 likely would grow in 1997 at rates close to the upper limit of those ranges, given
the Committee's expectations for the performance of the economy and prices and assuming
no major changes in interest rates. The staff analysis anticipated that the velocities of the
broad monetary aggregates would continue to behave in the relatively stable and predictable
manner that had re-emerged in the last few years and that was closer to historical norms than
had been the case in the early 1990s.
The greater measure of predictability in velocity recently was an encouraging development,
but in view of the substantial changes in financial markets and the increased availability of
investment alternatives it would be premature to assume that the pattern would necessarily
continue going forward. Given the substantial uncertainty still attached to projections of
money growth consistent with the Committee's basic objectives for monetary policy, the
members agreed that there was no firm basis for changing the tentative ranges set in July
1996. Adopting higher ranges, which would be more closely centered on money growth
thought likely to be consistent with the Committee's expectations for economic activity and
prices, could be misinterpreted as indicating that the Committee had become much more
confident of the predictability of velocity and was placing greater emphasis on M2 and M3 as
gauges of the thrust of monetary policy. One member, while agreeing with this assessment,
emphasized that a continuation of a stable and predictable pattern of velocity behavior would
raise the question as to whether the Committee should return to setting ranges consistent with
its expectations for economic developments. Nonetheless, from a longer-run perspective, the
tentative ranges readily encompass rates of growth of M2 and M3 that, if velocity were to
behave in line with historical experience, could be expected to be associated with
approximate price stability and a sustainable rate of real economic growth. In that regard,
they continue to serve the useful purpose of benchmarking money growth consistent with the
Committee's long-run goal of price stability.
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At the conclusion of its discussion, the Committee voted to approve without change the
tentative ranges for 1997 that it had established in July of last year. In keeping with its usual
procedures under the Humphrey-Hawkins Act, the Committee would review its ranges at
midyear, or sooner if interim conditions warranted, in light of the growth and velocity
behavior of the aggregates and ongoing economic and financial developments. Accordingly,
the following statement of longer-run policy for 1997 was approved for inclusion in the
domestic policy directive:
The Federal Open Market Committee seeks monetary and financial conditions
that will foster price stability and promote sustainable growth in output. In
furtherance of these objectives, the Committee at this meeting established ranges
for growth of M2 and M3 of 1 to 5 percent and 2 to 6 percent respectively,
measured from the fourth quarter of 1996 to the fourth quarter of 1997. The
monitoring range for growth of total domestic non- financial debt was set at 3 to
7 percent for the year. The behavior of the monetary aggregates will continue to
be evaluated in the light of progress toward price level stability, movements in
their velocities, and developments in the economy and financial markets.
Votes for this action: Messrs. Greenspan, McDonough, Broaddus, Guynn,
Kelley, Meyer, Moskow, Parry, Mses. Phillips and Rivlin.
Votes against this action: None.
Absent and not voting: Mr. Lindsey and Ms. Yellen.
In the Committee's discussion of policy for the intermeeting period ahead, all the members
favored or could support a proposal to maintain an unchanged policy stance; the members
also strongly supported the retention of a bias toward restraint. An unchanged policy seemed
appropriate with inflation still quiescent, with few signs of emerging price pressures, with
growth in economic activity seen as likely to moderate appreciably from the unexpectedly
strong and unsustainable pace of the fourth quarter, and with considerable uncertainty about
future inflationary developments. However, the members emphasized that the extent of the
slowdown in economic expansion was unclear and that the persisting, or even greater,
tightness of labor markets, coupled with potentially faster growth in worker benefits and
diminishing worker insecurity, could put added upward pressure on labor costs and induce
some increase in price inflation over time. Even so, most members thought that inflation
likely would remain contained for some period ahead and that any strengthening in inflation
pressures probably would be gradual, allowing the Committee to respond in a timely manner.
Several also commented that a tightening policy action was not generally anticipated in
financial markets, and a move at this time could have exaggerated repercussions. A few
members emphasized, however, that the recent surge in economic activity had raised the
probability that the level of economic output was now above the economy's long-run
potential, and without a significant slowing in economic growth, inflationary pressures were
more likely to increase over the forecast horizon. While an immediate tightening of policy
would help to forestall such a buildup of pressures, the members agreed that current
uncertainties about the outlook for both the rate of expansion and inflation warranted a
continuing "wait and see" policy stance, or at least made such a policy acceptable at this
juncture.
In their discussion of possible adjustments to policy during the intermeeting period, the
members recognized that an asymmetric directive tilted toward tightening was consistent
with their general view that the risks were now more clearly in the direction of an upward
trend in inflation. They agreed that the current environment called for careful monitoring of
new developments and for prompt action by the Committee to counter any tendency for price
inflation to rise and for higher inflation expectations to become embedded in financial
markets and economic decision-making more generally. Indeed, in the interest of fostering a
continuation of sustainable growth of the economy, it would be desirable to tighten before
any sign of actual higher inflation were to become evident.
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At the conclusion of the Committee's discussion, all the members indicated that they
supported a directive that called for maintaining the existing degree of pressure on reserve
positions and that retained a bias toward the possible firming of reserve conditions during the
intermeeting period. Accordingly, in the context of the Committee's long-run objectives for
price stability and sustainable economic growth, and giving careful consideration to
economic, financial, and monetary developments, the Committee decided that somewhat
greater reserve restraint would be acceptable and slightly lesser reserve restraint might be
acceptable during the intermeeting period. The reserve conditions contemplated at this
meeting were expected to be consistent with some moderation in the expansion of M2 and
M3 over coming months.
The Federal Reserve Bank of New York was authorized and directed, until instructed
otherwise by the Committee, to execute transactions in the System Account in accordance
with the following domestic policy directive:
The information reviewed at this meeting suggests that the economic expansion
strengthened markedly in the fourth quarter. Private nonfarm payroll
employment increased appreciably further in December after sizable gains over
October and November. The civilian unemployment rate remained at 5.3 percent
in December. Industrial production rose sharply in November and December.
Consumer spending posted a large increase in the fourth quarter after a summer
lull. Housing activity moderated somewhat over the closing months of the year.
Growth in business fixed investment slowed substantially in the fourth quarter
after a sharp rise in the third quarter. The nominal deficit on U.S. trade in goods
and services narrowed considerably in October and November from its rate in
the third quarter. Advances in labor compensation trended up in 1996, but price
inflation generally diminished apart from enlarged increases in food and energy
prices.
Most market interest rates have changed little or risen slightly since the
Committee meeting on December 17, 1996. In foreign exchange markets, the
trade-weighted value of the dollar in terms of the other G-10 currencies has
increased substantially over the intermeeting period.
Growth of M2 and M3 strengthened considerably in the fourth quarter and
appeared to have continued at a fairly brisk, though diminished, pace in January.
From the fourth quarter of 1995 to the fourth quarter of 1996, M2 is estimated to
have grown near the upper end of the Committee's annual range and M3 well
above the top of its range. Total domestic nonfinancial debt has expanded
moderately on balance over recent months and is estimated to have grown last
year near the midpoint of its range.
The Federal Open Market Committee seeks monetary and financial conditions
that will foster price stability and promote sustainable growth in output. In
furtherance of these objectives, the Committee at this meeting established ranges
for growth of M2 and M3 of 1 to 5 percent and 2 to 6 percent respectively,
measured from the fourth quarter of 1996 to the fourth quarter of 1997. The
monitoring range for growth of total domestic nonfinancial debt was set at 3 to 7
percent for the year. The behavior of the monetary aggregates will continue to be
evaluated in the light of progress toward price level stability, movements in their
velocities, and developments in the economy and financial markets.
In the implementation of policy for the immediate future, the Committee seeks
to maintain the existing degree of pressure on reserve positions. In the context of
the Committee's long-run objectives for price stability and sustainable economic
growth, and giving careful consideration to economic, financial, and monetary
developments, somewhat greater reserve restraint would or slightly lesser
reserve restraint might be acceptable in the intermeeting period. The
contemplated reserve conditions are expected to be consistent with some
moderation in the expansion of M2 and M3 over coming months.
Votes for this action: Messrs. Greenspan, McDonough, Broaddus, Guynn,
Kelley, Meyer, Moskow, Parry, Mses. Phillips and Rivlin.
Votes against this action: None.
Absent and not voting: Mr. Lindsey and Ms. Yellen.
It was agreed that the next meeting of the Committee would be held on Tuesday, March 25,
1997.
The meeting adjourned at 11:35 a.m.
Donald L. Kohn
Secretary
Footnotes
1Attended Tuesday session only.
2Attended portions of meeting relating to the Committee's review of the economic outlook
and establishment of its monetary and debt ranges for 1997.
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