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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, May 16,
2000, at 9:00 a.m.
Present:
Mr. Greenspan, Chairman
Mr. McDonough, Vice Chairman
Mr. Broaddus
Mr. Ferguson
Mr. Gramlich
Mr. Guynn
Mr. Jordan
Mr. Kelley
Mr. Meyer
Mr. Parry
Mr. Hoenig, Ms. Minehan, Messrs. Moskow and Poole, Alternate Members of the
Federal Open Market Committee
Messrs. McTeer and Stern, Presidents of the Federal Reserve Banks of Dallas and
Minneapolis respectively
Mr. Kohn, Secretary and Economist
Mr. Bernard, Deputy Secretary
Ms. Fox, Assistant Secretary
Mr. Gillum, Assistant Secretary
Mr. Mattingly, General Counsel
Mr. Baxter, Deputy General Counsel
Ms. Johnson, Economist
Mr. Prell, Economist
Mr. Beebe, Ms. Cumming, Messrs. Eisenbeis, Howard, Lindsey, Reinhart, Simpson,
Sniderman, and Stockton, Associate Economists
Mr. Fisher, Manager, System Open Market Account
Mr. Winn, Assistant to the Board, Office of Board Members, Board of Governors
Mr. Ettin, Deputy Director, Division of Research and Statistics, Board of Governors
Messrs. Madigan and Slifman, Associate Directors, Divisions of Monetary Affairs
and Research and Statistics respectively, Board of Governors
Messrs. Oliner and Whitesell, Assistant Directors, Divisions of Research and
Statistics and Monetary Affairs respectively, Board of Governors
Ms. Low, Open Market Secretariat Assistant, Division of Monetary Affairs, Board of
Governors
Messrs. Rives and Stone, First Vice Presidents, Federal Reserve Banks of St. Louis
and Philadelphia respectively
Messrs. Hakkio, Hunter, Lacker, Lang, Rasche, Rolnick, and Rosenblum, Senior Vice
Presidents, Federal Reserve Banks of Kansas City, Chicago, Richmond, Philadelphia,
St. Louis, Minneapolis, and Dallas respectively
Messrs. Bentley and Kopcke, Vice Presidents, Federal Reserve Banks of New York
and Boston respectively
By unanimous vote, the minutes of the meeting of the Federal Open Market Committee held
on March 21, 2000, were approved.
The Manager of the System Open Market Account reported on recent developments in
foreign exchange markets. There were no open market operations in foreign currencies for
the System's account in the period since the previous meeting, and thus no vote was required
of the Committee.
The Manager also reported on developments in domestic financial markets and on System
open market transactions in government securities and federal agency obligations during the
period March 21, 2000, through May 15, 2000. The Committee ratified these transactions by
unanimous vote.
With Mr. Broaddus dissenting, the Committee voted to extend for one year beginning in
mid-December 2000 the reciprocal currency ("swap") arrangements with the Bank of Canada
and the Bank of Mexico. The arrangement with the Bank of Canada is in the amount of $2
billion equivalent and that with the Bank of Mexico in the amount of $3 billion equivalent.
Both arrangements are associated with the Federal Reserve's participation in the North
American Framework Agreement, which was established in 1994. Mr. Broaddus dissented
because he believed that the swap lines existed primarily to facilitate foreign exchange
market intervention, and he was opposed to such intervention for the reasons he had
expressed at the February meeting.
The Manager discussed some aspects of a suggested approach to the management of the
System's portfolio over coming quarters prior to the Committee's review of an ongoing study
relating to the conduct of open market operations in a period of substantial declines in
outstanding Treasury debt. During that interim, the management of the System portfolio
should try to satisfy a number of objectives: keeping the maturity of the portfolio from
lengthening materially; meeting long-run reserve needs to the extent possible through
outright purchases of Treasury securities without distorting the yield curve or impairing the
liquidity of the market; and concentrating expansion of the System portfolio in "off-the-run"
securities in the secondary market to help to maintain liquid markets in benchmark securities.
It was important to announce a strategy to allow market participants to take the System's
operations into account as they adapted to the declining Treasury debt levels. While no
specific blueprint could be given at this point regarding future Desk operations, the members
encouraged the Manager to discuss his plans with Treasury officials.
The Committee then turned to a discussion of the economic and financial outlook and the
implementation of monetary policy over the intermeeting period ahead.
The information reviewed at this meeting suggested that economic growth had remained
rapid through early spring. Consumer spending and business fixed investment were still
trending upward strongly, and housing demand was holding at a high level. Industrial
production and nonfarm payrolls were expanding briskly in response to burgeoning domestic
demand, but the strength of demand was also showing through in the form of rising imports.
Labor markets continued to be very tight, and some measures of labor costs and price
inflation showed signs that they might be picking up.
Employment surged in March and April. Part of the pickup resulted from a step-up in
government hiring of census workers, but gains in private employment were very large over
the two months. Job growth in retail trade and services was robust, and employment in
manufacturing and construction trended higher. The civilian unemployment rate dropped in
April to 3.9 percent, a thirty-year low.
Industrial production accelerated in April after a strong gain in the first quarter.
Manufacturing, notably in high-tech industries, led the way, but growth in mining and
utilities also was sizable. The pickup in manufacturing lifted the factory operating rate
further, and capacity utilization in April was about equal to its long-term average.
Consumer spending increased very rapidly in the first quarter but apparently decelerated
early in the second quarter. Nominal retail sales were down slightly in April after brisk gains
in February and March. Sales slumped at durable goods stores and changed little at
nondurable goods outlets. However, the underlying trend in spending remained strong as a
result of robust expansion of disposable incomes, the large accumulated gains in household
wealth, and very positive consumer sentiment.
Residential housing activity stayed at an elevated level in April; total private housing starts
edged higher while starts of multifamily units partially reversed a sharp drop in March. Sales
of both new and existing single-family homes rose in March (latest data). The persisting
strong demand for housing during a period of rising mortgage rates apparently was being
underpinned by the rapid growth of jobs and the accumulated gains in stock market wealth.
Business fixed investment was up sharply in the first quarter after a sluggish performance
late last year. The pickup encompassed both durable equipment and software and
nonresidential structures. Shipments of computing and communications equipment surged
following the century rollover, and shipments of other non-aircraft capital goods recorded an
unusually large rise as well. Moreover, the recent strength in orders for many types of
equipment pointed to further advances in capital spending in coming months. Expenditures
for nonresidential structures, which had turned up last autumn, rose rapidly in the first
quarter; unusually favorable weather over the two quarters likely was a contributing factor.
The upturn in nonresidential building activity was spread broadly across the major types of
structures.
The pace of accumulation of manufacturing and trade inventories slowed somewhat in the
first quarter following a sizable buildup in late 1999, and the aggregate inventory-sales ratio
edged down from an already very low level. Stockbuilding by manufacturers and merchant
wholesalers picked up slightly in the first quarter, but stocks remained at low levels in
relation to sales. By contrast, inventory investment slowed among retailers. Part of this
slowdown might have involved a liquidation of precautionary stocks built up in anticipation
of the century date change. The inventory-sales ratio in this sector was at a historically lean
level.
The U.S. trade deficit in goods and services reached another new high in February as the
value of imports rose sharply further and the value of exports changed little. For the JanuaryFebruary period, the moderate rise in exports and the sharp increase in imports from fourthquarter levels were spread across most major trade categories. The available information
suggested that economic expansion remained robust in most foreign industrial economies.
The recent decline in the exchange value of the euro was spurring economic activity in the
euro area, and Canada was benefiting from spillovers from the U.S. economy. For the
Japanese economy, which had been the notable exception among the foreign industrial
economies, there were indications of some strengthening of aggregate demand during the
first five months of the year. Economic activity in the developing countries also continued to
pick up. Key South American countries were recovering from recent recessions, while
several Asian emerging-market countries were settling into growth at more sustainable rates.
Recent information suggested that price inflation might be picking up slightly and only partly
as a direct result of increases in energy prices. Although consumer prices were unchanged in
April, they recorded sizable step-ups in February and March; moreover, while the rise in core
consumer prices over the twelve months ended in April was the same as the change in the
year-earlier twelve-month period, core consumer price inflation was up slightly in the
March-April period compared with other recent months. At the producer level, prices of
finished goods other than food and energy edged higher in March and April, but the increase
over the twelve months ended in February was a little smaller than the rise over the preceding
twelve months. With regard to labor costs, the employment cost index for hourly
compensation of private industry workers registered a larger advance in the first quarter than
in previous quarters, and the rate of increase in compensation over the year ended in March
was substantially larger than the rise over the year-earlier period. Faster growth in benefits
accounted for more than half of the acceleration. Average hourly earnings of production or
nonsupervisory workers grew at a slightly faster rate in April than in March, and the increase
for the twelve months ended in April was larger than for the previous twelve-month period.
At its meeting on March 21, 2000, the Committee adopted a directive that called for a slight
tightening of conditions in reserve markets consistent with an increase of ¼ percentage point
in the federal funds rate to an average of about 6 percent. The members saw substantial risks
of rising pressures on labor and other resources and of higher inflation, and they agreed that
the tightening action would help bring the growth of aggregate demand into better alignment
with the sustainable expansion of aggregate supply. They also noted that even with this
additional firming the risks were still weighted mainly in the direction of rising inflation
pressures and that more tightening might be needed.
Open market operations during the intermeeting period were directed toward implementing
the desired slightly tighter pressure on reserve positions, and the federal funds rate averaged
very close to the Committee's 6 percent target. The Committee's action and its announcement
were widely anticipated and had little initial effect on financial markets. Later in the week,
however, market interest rates moved up in response to the release of the minutes of the
February meeting and the mention therein of some sentiment for a larger policy tightening
than had been undertaken. Subsequently, interest rates fell as stock prices tumbled over the
first half of April, when investors seemed to revise downward their assessments of equity
valuations, especially those of more speculative technology shares that previously had risen
considerably. Interest rates more than reversed those declines, however, when stock prices
began to level out and incoming data suggested that aggregate demand continued to expand
faster than potential supply and that wage and price developments were becoming more
worrisome. On balance over the intermeeting period, private interest rates moved up
appreciably while Treasury yields increased somewhat less. Most major indexes of equity
prices declined significantly over the intermeeting period.
In foreign exchange markets, the trade-weighted value of the dollar appreciated considerably
over the intermeeting period against a basket of major currencies, reflecting in part the larger
intermeeting increase in U.S. long-term yields relative to rates in most foreign industrial
countries. The dollar's rise against the euro was sizable, but the dollar also made moderate
gains against the British pound, the Japanese yen, and the Canadian dollar. The dollar also
appreciated somewhat against the currencies of a group of other important trading partners,
notably the Mexican peso and the Brazilian real.
Growth of M2 picked up further in April from its already strong pace in March, as
households boosted their liquid balances to meet higher-than-usual levels of final payments
on 1999 taxes. In contrast, M3 growth slowed considerably in April after a robust March
advance. From the fourth quarter of 1999 through April, M2 and M3 expanded at rates well
above the upper ends of their annual ranges for 2000. Total domestic nonfinancial debt
continued to expand at a pace in the upper portion of its range.
The staff forecast prepared for this meeting continued to suggest that the expansion would
gradually moderate from its currently elevated pace to a rate around, or perhaps a little
below, the growth of the economy's estimated potential. The expansion of domestic final
demand increasingly would be held back by the anticipated waning of positive wealth effects
associated with earlier large gains in equity prices and by higher interest rates. As a result,
the growth of spending on consumer durables and houses was expected to slow; in contrast,
however, overall business investment in equipment and software was projected to remain
robust, partly because of the upward trend in replacement demand, especially for computers
and software. In addition, continued solid economic growth abroad was expected to boost the
growth of U.S. exports for some period ahead. Core price inflation was projected to rise
noticeably over the forecast horizon, partly as a result of higher import prices and some
firming of gains in nominal labor compensation in persistently tight labor markets that would
not be fully offset by productivity growth.
In the Committee's review of current and prospective economic and financial developments,
members focused on persisting indications that aggregate demand was expanding more
rapidly than potential supply and that pressures on labor and other producer resources were
continuing to increase. While there were tentative signs that the growth in demand might be
moderating in some key sectors of the economy, such as retail sales and housing, clear-cut
evidence of any significant deceleration in the rapid growth of aggregate demand was
lacking. Bond yields and other financial conditions had firmed to some extent recently, but
those adjustments had been influenced by the buildup in market expectations of more
monetary policy tightening. In the absence of further monetary restraint, any slowing over
coming quarters was not viewed as likely to be sufficient to avert increasing pressures on the
economy's already strained resources and rising inflation rates that would undermine the
economy's remarkable performance. Adding to concerns about heightened inflation pressures
was statistical and anecdotal evidence that could be read as suggesting that underlying
inflation already was beginning to pick up. Unit costs, however, were still remarkably
subdued and members saw no developments at this stage that might augur a sharp near-term
deterioration in price inflation.
In their assessment of business conditions across the country, members commented on
continuing indications of robust economic activity in all regions and widely increasing
pressures on labor and other resources. Indeed, economic activity appeared to have grown
appreciably further from already elevated levels in numerous parts of the country, although
the latest regional data and anecdotal reports provided scattered indications that business
conditions might be starting to soften in some areas. In this regard, members referred to the
emergence of slightly more cautious attitudes on the part of some business executives
concerning the prospects for their industries.
With respect to developments in key expenditure sectors of the economy, growth in
consumer spending was expected to slow from the exceptional pace of the first quarter,
though still likely to be relatively robust. Retail sales had edged lower in April, but members
commented that it was too early to gauge whether this softening was a harbinger of a more
moderate trend. Consumer sentiment had remained upbeat in the context of an extended
period of sizable expansion in employment and incomes and the sharp rise in stock market
prices over the course of recent years. Some members observed that the slightly less ebullient
consumer behavior recently might have been influenced to some extent by the volatility and
downward movement in the stock market over the course of the past several weeks. Higher
financing costs probably also were beginning to play a role. Looking ahead, the experience of
recent years amply demonstrated the difficulty of forecasting the performance of the stock
market. The failure of further large increases to materialize, should that occur, would over
time imply a more neutral or even a negative net impact from wealth once the positive effects
of the earlier advance had played themselves out, but the latter would take some time.
The same background factors were likely to govern the prospective behavior of housing
activity. The evidence of a downturn in homebuilding was still quite marginal, but some
anecdotal reports suggested that higher mortgage rates were starting to exert a retarding
influence on housing demand. Even so, members continued to identify areas of remarkable
strength across the nation, and overall housing construction remained at an elevated level. On
the assumption of further growth in jobs and incomes in line with current forecasts and
absent markedly higher mortgage financing costs, housing activity might reasonably be
expected to settle at a level a bit below recent highs.
Business investment spending retained strong upward momentum, though it had exhibited an
uneven growth pattern in recent quarters that importantly reflected Y2K effects. Looking
ahead, further rapid growth was expected in spending for business equipment and software in
light of likely ongoing efforts to hold down costs by substituting capital embodying advanced
technology for scarce labor resources. Recent order trends and rising capacity utilization
rates were consistent with this expectation. Expenditures on nonresidential structures and
other construction generally had strengthened in recent months, and members expected them
to be well maintained in part because of heavy spending on roads and other public projects
by state and local governments.
The foreign trade sector of the economy was projected to provide less of a safety valve for
the accommodation of domestic demand going forward. Although a number of foreign
nations continued to face political and economic problems, the strengthening economies of
many U.S. trading partners would tend to limit the availability of excess foreign production
capacity to help meet the growth in U. S. demand. At the same time, foreign demand for U.S.
goods and services would be expanding, thereby adding to demand pressures on U.S.
producer resources, other things equal. In the latter regard, several members mentioned
anecdotal evidence of growing export demand for a variety of domestic products.
In their discussion of the outlook for inflation, the members focused on statistical and
anecdotal indications of further tightening of labor resources, acceleration in some measures
of labor compensation, and early signs of a possible upturn in underlying price inflation. Data
on employment, reinforced by anecdotal commentary from around the country, continued to
provide evidence of extremely tight labor markets, which at least in some parts of the country
appeared to have tightened further since early in the year. Business contacts spoke of
spending a great deal of time and expense to attract and retain workers while concomitantly
persisting in efforts to improve the productivity of their operations to accommodate
burgeoning growth in demand in the face of labor force constraints. There were more reports
that rising wages and benefits and increasing costs of nonlabor inputs could no longer be
fully offset by improvements in productivity, and more business firms appeared to be
attempting or considering increases in their selling prices to maintain or improve their profit
margins. However, their ability to set higher prices, or at least to raise them significantly,
continued to be severely constrained by the persistence of strong competition across much of
the economy. Indeed, examples of successful efforts to mark up prices, which tended to be
concentrated in products using oil-related inputs, were still the exception. Even so, the
members believed that the risks of acceleration in core prices were now appreciably higher
given current trends in aggregate demand, pressures on resources, and developments in
foreign economies.
In the Committee's discussion of policy for the intermeeting period ahead, all the members
endorsed a proposal to tighten reserve conditions sufficiently to raise the federal funds rate
by ½ percentage point to a level of 6-1/2 percent. A more forceful policy move than the 25
basis point increases that had been implemented since mid-1999 was desirable in light of the
extraordinary and persisting strength of overall demand, exceeding even the increasingly
rapid growth of potential supply, and the attendant indications of growing pressures in
already tight markets for labor and other resources. The strength in demand might itself be, at
least in part, the result of the ongoing acceleration of productivity, with the latter feeding
back on demand through higher equity prices and profitable investment opportunities.
Financial markets seemed to have recognized the need for real interest rates to rise further
under these circumstances, and while market assessments were not always correct, the
evidence suggested that a more substantial tightening at this meeting was needed to limit
inflation pressures. The members saw little risk in a relatively aggressive policy move, given
the strong momentum of the expansion and widespread market expectations of such a move.
The greater risk to the economic expansion at this point was for policy to be too sluggish in
adjusting, thereby allowing inflationary disturbances and dislocations to build. A 50 basis
point adjustment was more likely to help forestall a rise in inflationary expectations that, at
least in the opinion of some members, already showed signs of worsening. A widespread
view that the Federal Reserve would take whatever steps were needed to hold down inflation
over time probably had contributed to the persistence of subdued long-run inflation
expectations during an extended period when rapidly rising demand was pressing on limited
supply resources. Today's policy move would undergird such relatively benign expectations
and help assure the success of the Committee's policy.
The members agreed that the balance of risks sentence that would be included in the press
statement to be released shortly after this meeting should indicate, as it had for other recent
meetings, that even after today's tightening action the members believed the risks would
remain tilted toward rising inflation. This view of the risks was based primarily on the
persisting momentum of aggregate demand growth and the unusually high level of labor
resource utilization. At the same time, a number of the members commented that they did not
want to prejudge the potential extent or pace of future policy tightening and that the
Committee should continue to assess the need for further policy moves in the light of
evolving economic conditions to be reviewed on a meeting-by-meeting basis.
At the conclusion of this discussion, the Committee voted to authorize and direct the Federal
Reserve Bank of New York, until it was instructed otherwise, to execute transactions in the
System Account in accordance with the following domestic policy directive:
The Federal Open Market Committee seeks monetary and financial conditions
that will foster price stability and promote sustainable growth in output. To
further its long-run objectives, the Committee in the immediate future seeks
conditions in reserve markets consistent with increasing the federal funds rate to
an average of around 6-1/2 percent.
The vote also encompassed approval of the sentence below for inclusion in the press
statement to be released shortly after the meeting:
Against the background of its long-run goals of price stability and sustainable
economic growth and of the information currently available, the Committee
believes the risks are weighted mainly toward conditions that may generate
heightened inflation pressure in the foreseeable future.
Votes for this action: Messrs. Greenspan, McDonough, Broaddus, Ferguson,
Gramlich, Guynn, Jordan, Kelley, Meyer, and Parry.
Votes against this action: None.
It was agreed that the next meeting of the Committee would be held on Tuesday-Wednesday,
June 27-28, 2000.
The meeting adjourned at 1:05 p.m.
Donald L. Kohn
Secretary
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