Monetary Policy Report

1996 MONETARY POLICY OBJECTIVES Summary Report of the Federal Reserve Board July 18, 1996 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 1996 MONETARY POLICY OBJECTIVES This Executive Summary provides highlights of the Board's Midyear Review to Congress on the Full Employment and Balanced Growth Act of 1978. July 18, 1996 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Contents Section Page Testimony of Alan Greenspan Chairman, Federal Reserve Board 1 Monetary Policy and the Economic Outlook 10 Economic Projections for 1996 and 1997 11 Money and Debt Ranges for 1996 and 1997 13 Monetary Policy, Financial Markets, and the Economy over the First Half of 1996 14 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Testimony of Alan Greenspan Chairman, Federal Reserve Board Before I take this opportunity About 1.4 million workers have been added to nonfarm payrolls in the first to discuss the performance of six months of the year, and the the U.S. economy and the unemployment rate fell to 5.3 percent in June. conduct of monetary policy, Even though the U.S. economy is I would first like to thank the using its productive resources inten sively, inflation has remained quies Chairman and the other cent. The core inflation rate, measured members of this Committee for by the consumer price index less food and energy prices, at a 2.8 percent their support during my annual rate over the first six months of confirmation process. I am the year, is about½ percentage point slower than the same period one year grateful for the opportunity ago. While increases in energy prices to serve the nation in this have boosted the overall CPI inflation rate to 3.5 percent thus far in 1996, a capacity for another term. partial reversal of the jump in petro leum product prices observed in the first half appears to be in train. I shall be discussing in greater detail later Review of the First Half of 1996 some possible reasons for this favor able inflation experience and offering Nineteen-ninety-six has been a good some thoughts about how long it year for the American economy. By all might last. indications, spending and production Economic activity thus far this year were robust in the first half of this has turned out to be better than many year. GDP increased at a 2¼ percent annual rate h:t the first quarter. Partial analysts expected. An important supporting factor, as I pointed out in data suggest a significantly stronger February, was favorable conditions in increase in the second quarter as the financial markets in the latter part of economy, as expected, accelerated 1995 and early 1996. Intermediate out of its soft patch around the tum and longer-term interest rates were of the year. During the second quarter, low. Among the influences accounting industrial production rose at an annual for this were optimism about prospec rate of 5½ percent, and manufacturers tive budget-deficit reduction, small are currently running their plant and easings of the stance of monetary equipment at utilization rates that are policy in the second half of 1995 and a touch above their postwar averages. early 1996, and the possibility of a further moderation in credit demands owing to a potentially soft economy. Digitized for FRASER https://fraser.stlouisfed.org 1 Federal Reserve Bank of St. Louis Credit remained readily available, Third, the support to economic with banks and other lenders in growth provided by expenditures on financial markets generally pursuing durable goods, both for household credit opportunities aggressively. And consumption and business fixed a rising stock market reduced the cost investment, is likely to wane in of capital to businesses and bolstered coming quarters. Consumer spending household balance sheets. in the past few years has been boosted Looking forward, there are a as households have made up for the number of reasons to expect demands purchases of big-ticket items that they to moderate and economic activity to had deferred during the recession and settle back toward a more sustainable the early, weaker phase of the recov pace in the months ahead. ery. Five years after the business-cycle First, the bond markets have taken trough, however, we should expect a turn toward restraint this year as that this pent-up demand has been they have responded to incoming largely exhausted. Moreover, many data depicting an economy that was households have built up sizable debt stronger than had been anticipated. burdens in recent years, and coping Intermediate-and longer-term interest with debt repayments could hold rates have risen from 1 to 1¼ percent down their spending. The business age points since January. sector has been adding considerably Second, the value of the dollar on to capacity; opportunities to invest foreign exchange markets has appreci profitably in new capital should be ated significantly on a trade-weighted increasing less rapidly as final demand basis against the currencies of other slows some. industrial countries over the past year While these are all good reasons or so. This appreciation importantly to anticipate that economic growth reflects the market perception that the will moderate some, the timing and U.S. economy has been performing extent of that downshift are uncer better than those of many of our major tain. We have not, as yet, seen much trading partners. The rise in the dollar effect of the rise in interest rates on, helps to keep down price pressures, for example, the housing market. but it also tends to divert domestic In many other aspects, financial demand toward imported goods and market conditions remain quite damp exports some. supportive to domestic spending, and the economies of many for eign countries are showing signs of achieving more solid growth, Digitized for FRASER https://fraser.stlouisfed.org 2 Federal Reserve Bank of St. Louis which should help support our Yet, the recent evidence of such export sales. Moreover, and perhaps pressures is scant. I have already noted of most relevance, a desire to build the lack of a distinct trend in the inventories could add significantly growth rate of the so-called core CPI. to production in the near term. Increases in more comprehensive, and Data available for 1996 through May perhaps more representative, chain show that inventories were reduced weighted measures of consumer relative to sales and are now fairly prices, based on the national income lean in many important industries. and product accounts, actually have Although the use of just-in-time continued to edge lower. The same is inventory and production systems true of a still broader measure of price encourages purchasing managers to change, the chain-weighted price keep stocks lean, any evidence that index for gross domestic purchases, deliveries of previously ordered goods which covers both consumers and are being delayed for extended periods businesses. Although nominal wage would quickly alert companies to the rates have accelerated recently, the need for higher safety stocks. Indeed, rate of increase has been lagging indications of some mounting delivery significantly behind that predicted on delays in June do raise warning flags the basis of historical relationships in this regard. The reversal of earlier with unemployment and past infla draw-downs in inventories, of course, tion. And domestic profit margins could potentially impart an important have held up far later into this boost to incomes and production as we economic expansion than is the norm. enter the second half of the year. The Have we moved into a new environ economy is already producing at a ment where inflation imbalances no high level-and some early signs of longer threaten the stability and pressures on resources are emerging, growth of our economy in ways they especially in the labor market. once did? The simple answer, in our judgment, is no. But the issue is not The Recent Behavior of Inflation a simple one. As we have discussed before, There are, to be sure, legitimate powerful forces have evolved questions about how much margin in the past few years to help contain in resource utilization currently exists. inflationary tendencies. An ever Historically, current levels of slack, increasing share of our nation's measured in terms of either the workforce uses the tools of new unemployment rate or capacity technologies. Microchips embodied utilization, have often been asso in physical capital make it work ciated with a gradual strengthening more efficiently, and sophisticated of price and wage pressures. software adds to intellectual capital. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 3 The consequent waves of improve The growth of wages will then again ments in production techniques have be more responsive to tightness of quickly altered the economic viability labor markets, potentially putting of individual firms and sometimes pressure on profit margins and ulti even entire industries, as well as the mately prices. Moreover, the reduc market value of workers' skills. With tions in unit costs that are a conse such fast and changeable currents, it is quence of the ever expanding global ·not surprising that workers may be reach of many companies must less willing to test the waters of job ultimately be bound by the limits of change. Indeed, voluntary job leaving geography. To be sure, production and to seek other employment appears to sales will continue to be diversified be quite subdued despite evidence of a across geographic areas, but the world tight labor market. Because workers can only figuratively shrink so far. are more worried about their own job At some point, possibly well into the security and their marketability if future, incr~asing returns from ever forced to change jobs, they are greater globalization must also ebb. apparently accepting smaller increases Perhaps reflecting these unusual in their compensation at any given influences, we have yet to see early level of labor market tightness. signs in prices themselves of intensify Moreover, a growing share of all ing pressures, despite anecdotal and output competes in an increasingly statistical evidence that the amount global marketplace, allowing fixed of operating slack in our economy costs to be spread over ever broader has been at low levels by historic markets, promoting greater specializa standards for some time. Among the tion and efficiency, and enhancing encouraging indicators, industrial price competition. commodity prices have remained As I indicated in February, these roughly flat and the list of reported forces, to the extent that they ~e shortages of materials has been operative, exert a transitory, not per exceptionally small. This pattem'is manent, effect in reducing wage and consistent with the view that Ameri price inflation. These trends leave the can businesses, by and large, have felt level of both wages and prices lower comfortable that inflation has been than historical relationships would subdued and offers little evidence of predict. But, at some point, greater job the advance buying and expanded security will no longer be worth the commitments that would come if further sacrifice of gains in real wages. businesses were expecting significant price pressures in the reasonably near future. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 4 Nonetheless, there are early indica Clearly, in this environment, the tions that this episode of favorable Federal Reserve has had to become inflation developments, especially especially vigilant to incipient infla with regard to labor markets, may tion pressures that could ultimately be drawing to a close. The surprising threaten the health of the expansion. strength in the employment cost index The relatively good inflation perfor for wages and salaries in the first mance of the past few years, as best quarter raises the possibility that we can judge, owes in part to transi workers' willingness to surrender tional forces that are only temporarily wage gains for job security may be damping the wage-price inflation lessening. Wage data since March process. We cannot be confident that have been somewhat difficult to read. we can ascertain when that process Average hourly earnings clearly will come to an end. This makes policy accelerated in the second quarter. responses more difficult than usual, However, in looking at those figures, because, as always, the impact of one must be mindful that they can policy will be felt with a significant reflect not only changes in wage rates lag. Of course, if the economy grows but also shifts in the composition of so strongly as to strain available employment. And in recent months, a resources, transitional forces notwith significant part, although not all of the standing, history persuasively indi pickup, has been accounted for by a cates that imbalances will develop that tendency for employment to shift to will bring the expansion to a halt. relatively high-pay industries, such as durable goods manufacturing. The FOMC's Outlook for the Whether such shifts also imply a Remainder of 1996 and 1997 correspondingly higher level of output The forecasts of the governors of the per worker will determine whether Federal Reserve Board and presidents unit labor costs also accelerated to of the Federal Reserve Banks for impart upward pressures to price economic performance over the inflation. Increases in pay, of course, remainder of this year and the next are not inflationary so long as they are reflect the view that sustainable matched by gains in productivity. economic growth is likely in store. Without question,-we would applaud The growth rate of real GDP is most such trends, which increase standards commonly seen as between 2½ and of living. However, wage gains that 2¾ percent over the four quarters increase unit costs and are eaten up by of 1996 and 1¾ to 2¼ percent in inflation help no one, and ultimately 1997. Given the strong performance place economic growth in jeopardy. of real GDP in the last two quarters, this outcome implies slower growth in the second half of this year. Digitized for FRASER https://fraser.stlouisfed.org 5 Federal Reserve Bank of St. Louis Nonetheless, for the remainder of this Price stability is an appropriate and year and the next in these projections, desirable goal for policy, not only the unemployment rate remains in the because it allows financial markets and range of the past 1½ years. Inflation, the economy to work most efficiently, as measured by the four-quarter but also because it most likely raises percent change in the consumer price productivity and living standards in index, is expected to be 3 to 3¼ per the long run. Specifically, in an cent in 1996. The governors and bank inflationary ehvironment, business presidents, however, view the pros managers are distracted from their pects for inflation to be more favorable basic function of building profits going forward. The expected reversal through prudent investment and cost of some of the recent run-up in energy control. My own observation of prices would contribute to that result, business practices over the years but policy makers' forecasts also suggests that the inability to pass reflect their determination to hold the cost increases through to higher prices line on inflation. The central tendency provides a powerful incentive to firms of their inflation forecasts for 1997 is to increase profit margins through 2¾ to 3 percent, returning to the range innovation and greater efficiency, from 1991 to 1995. which boosts productivity and ultimately standards of living over The Pursuit of Price Stability time. Holding the line on inflation, thus, does not impose a speed limit We at the Federal Reserve would on economic growth. On the contrary, welcome faster economic growth, it induces the private sector to focus provided that it were sustainable. As more on efforts that yield faster I emphasized last February, we do not long-term economic growth. have firm judgments on the specific In this context, we can readily level or growth rate of output that understand why financial markets would engender economic strains. welcome sustained low inflation. Instead, we respond to evidence that Uncertainty about future inflation those strains themselves are develop raises the risks associated with ing. Whatever the long-run potential investing for that future. Lowering for sustainable growth, we believe that that uncertainty by keeping inflation a necessary condition for achieving it down diminishes those risks, so that is low inflation. As a consequence, the all commitments concerning future Federal Reserve remains committed income become more valuable. to preventing a sustained pickup in inflation and ultimately achieving and preserving price stability. Digitized for FRASER https://fraser.stlouisfed.org 6 Federal Reserve Bank of St. Louis During periods of low inflation, stock Similarly, I am confident that the and bond prices tend to reflect the Federal Open Market Committee higher valuation that comes from would move to tighten reserve market harnessing our physical plant more conditions should the weight of efficiently to provide improved incoming evidence persuasively opportunities in the future, including suggest an oncoming intensification higher wages and profits. What of inflation pressures that would investors fear, what all Americans jeopardize the durability of the should fear, are inflationary instabili economic expansion. ties. They diminish our ability to provide the wherewithal for the The Ranges for the Debt and standards of living of the next genera Monetary Aggregates tion and the retirement incomes of our The Committee selected provisional current work force. The interests of ranges for the monetary aggregates in investors as expressed in bond and 1997 that once again encompass the stock markets do not conflict with growth rates associated with condi those of average Americans-they tions of approximate price stability, coincide. provided that these aggregates act in In order to realize the benefits of accord with their historical relation low and declining inflation, Federal ships with nominal income and Reserve policy has, for some time now, interest rates. These ranges are been designed to act preemptively identical to those endorsed for 1996- as I indicated earlier-to look beyond 1 to 5 percent for M2 and 2 to 6 per current data readings and base cent for M3. The Committee reaf action on its assessment of where firmed its range of 3 to 7 percent for the economy is headed. Policy the debt of the domestic nonfinancial restraint initiated in February 1994 sectors for this year and chose the followed from the judgment that same range provisionally for next year. unchanged policy would encour- The Committee's expectations for age subsequent inflationary imbal inflation and nominal GDP expansion ances that would ultimately cut short in 1996 and 1997 suggest growth of the the economic expansion. The three monetary aggregates at the upper ends easing steps in the past year were of their benchmark ranges as a distinct instituted when we anticipated that possibility this year and next, though inflationary imbalances would be debt should be in the middle portion less threatening and that lower rates of its range. would be compatible with promoting sustainable economic expansion. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 7 The experience of the first part of the Higher national saving would help to 1990s-when money growth diverged lower real interest rates, spurring from historical relationships with spending on capital goods so as to put income and interest rates-severely set cutting-edge technology in the hands ba~k most analysts' confidence in the of more American workers. With a usefulness of M2. Recently, there have greater volume of modern equipment been tentative signs that the historical at their disposal, American workers relationship linking the velocity of will be able to produce goods that M2-or the ratio of nominal GDP to compete even more effectively on the money stock-to the cost of world markets. holding M2 assets has reasserted itself. The rally in capital markets last year For now, though, the Committee is that trimmed as much as two percent satisfied with watching these develop age points from longer-term Treasury ments carefully, waiting for more yields was almost surely, in part, a compelling evidence that M2 has some response to the developing positive predictive content in forecasting dialogue on deficit reduction. While current and prospective spending. the backup in intermediate-and Such evidence, however, at best will longer-term market interest rates this only accumulate gradually over time. year has mostly reflected the unex pected vigor of economic activity, Budgetary Policy market participants must also have been struck by the dying out of serious Monetary policy is, of course, only one discussions that might lead to a factor shaping the macroeconomic bipartisan agreement to eliminate the environment. I thus would be remiss if budget deficit over time. I did not again emphasize the critical importance to our nation's economic Conclusion welfare of continuing to reduce our federal budget deficit. We have made Mr. Chairman, our economy is now in significant and welcome progress on its sixth year of economic expansion. · this score in recent years. But unless The staying power of the expansion further legislative steps are taken, that has owed importantly to the initial progress will be reversed. Inevitably, small size and rapid correction of such changes will require addressing emerging imbalances, reflected in part the consequences for entitlement in the persistence of low inflation. spending of the anticipated shift in the nation's demographics in the first few decades of the next century. Lower budget deficits are the surest and most direct way to increase national saving. Digitized for FRASER https://fraser.stlouisfed.org 8 Federal Reserve Bank of St. Louis To be sure, the economy is not free of millions of people, who have been of problems. But as we address those given the scope to express themselves problems, policy makers also need to in free and open markets. In this, we recognize the limitations of our are a model for the rest of the world, influence and the wellspring of our which has come to appreciate the success. The good performance of power of market economies to provide the American economy in the most for the public's long-term welfare. fundamental sense rests on the actions Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 9 Monetary Policy and the Economic Outlook The U.S. economy performed well in Change in Consumer Prices the first half of 1996. In early February, Percent, Dec. to Dec. when the Federal Reserve prepared its last report on monetary policy, there was some concern about the strength and durability of the current economic ------------6 expansion: The economy was operat ing at a relatively high level of resource utilization, but it was not ------------4 exhibiting a great deal of forward momentum. As the year has unfolded, however, economic activity has proven -i--- 2 quite robust. After rising only fraction ally in the fourth quarter of 1995, real gross domestic product posted a solid 1990 1992 1994 1996 gain over the first half of 1996, pro viding a considerable lift to job Note. Consumer price index for all urban consumers. Value for 1996 is measured from December 1995 to June growth. Looking ahead, the members 1996, at an annual rate. of the Federal Open Market Commit tee (FOMC) anticipate that economic Although overall consumer price activity will grow more moderately, inflation was boosted by higher on average, in coming quarters and energy prices during the first half that the unemployment rate will of the year, the underlying trend of remain around the level it has aver prices still appears to have been well aged over the past year and a half. contained. Over the past twelve months, the consumer price index Change in Real GDP excluding food and energy items has risen 2¾ percent-near the lower end Percent, annual rate of the narrow range that has prevailed since early 1994. Moreover, the deflator for personal consumption -------------- 4 expenditures on items other than food and energy derived from data reported in the national income and ------------------ 2 product accounts has continued to show a slowing trend. + ------------------------- 0 1991 1992 1993 1994 1995 1996 Digitized for FRASER https://fraser.stlouisfed.org 10 Federal Reserve Bank of St. Louis The combination of brisk growth The civilian unemployment rate, and favorable underlying inflation so which averaged around 5½ percent far this year has, of course, been in the second quarter of 1996, is welcome. Nonetheless, mounting expected to stay near this level pressures on resources are apparent in through the end of this year and some segments of the economy-most perhaps to edge higher during 1997. notably in the labor market-and these Economic activity clearly retains pressures must be monitored closely. considerable momentum. The trend Allowing inflationary forces to inten in final demand is positive, and sify would ultimately disrupt the inventories appear to be well aligned growth process. The Federal Reserve with the current pace of sales recognizes that its contribution to perhaps even a bit lean. Accordingly, promoting the optimal performance the members of the FOMC recognize of the economy involves containing the possibility that growth could the rate of inflation and, over time, remain elevated a while, with the moving toward price stability. potential for putting greater pressure on resources. Nonetheless, most Economic Projections members think that some slowing for 1996 and 1997 from the rapid growth pace recorded, on average, in the first half is the most As noted previously, the members of likely outcome. Housing construction the Board of Governors and the and other interest-sensitive activity Reserve Bank presidents, all of whom should be restrained to some participate in the deliberations of the degree by the rise in long-term Federal Open Market Committee, interest rates over the past several generally think it likely that economic months. And, although some of the activity will return to a moderate lagging economies abroad are growth path in the second half of 1996 expected to perform better this and in 1997 after the larger gains in the year, there are still concerns about first half of this year. For 1996 as a the solidity of that acceleration and whole, this would result in an increase the associated lift to U.S. exports. In in real gross domestic product in the addition, growth in real business fixed range of 2½ to 2¾ percent, somewhat investment appears to be tapering off, above the forecasts in the February although spending will likely remain report on monetary policy. For 1997, buoyant, owing to the rapid rate of the central tendency of the forecasts product innovation and dramatic spans a range of 1¾ to 2¼ percent. price declines in the computer area. Digitized for FRASER https://fraser.stlouisfed.org 11 Federal Reserve Bank of St. Louis Economic Projections for 1996 and 1997 Percent Federal Reserve Governors and Reserve Bank Presidents Administration Central 1996 Range Tendency Change, Nominal GDP 4¾to5¾ 5to5½ 5.0 fourth quarter to fourth Real GDP 2½ to3 2½ to2¾ 2.6 quarter:1 Consumer price index2 3to3¼ 3to3¼ 3.2 Average level in Civilian unemployment rate 5¼to5¾ About5½ 5.6 the fourth quarter: Central 1997 Range Tendency Change, Nominal GDP 4to5½ 4¼to5 5.1 fourth quarter ------- ------------- to fourth Real GDP 1½ to2½ l¾to2¼ 2.3 quarter:1 Consumer price index2 2½ to3¼ 2¾to3 2.8 Average level in Civilian unemployment rate 5½to6 5½to5¾ 5.7 the fourth quarter: 1. Change from average for fourth quarter of 2. All urban consumers. previous year to average for fourth quarter of year indicated. Consumer spending is also expected debt burdens have risen significantly to grow less rapidly in coming in recent years and may represent a quarters. Household wealth has been constraint on purchases of big-ticket boosted substantially by the runup items. in stock prices over the past year and a half, but, for many households, Digitized for FRASER https://fraser.stlouisfed.org 12 Federal Reserve Bank of St. Louis Most members of the FOMC expect Thus, it will continue to monitor a the rise in the consumer price index variety of alternative measures of price over the four quarters of 1996 to be change as it attempts to gauge in the range of 3 to 3¼ percent, about progress toward the long-run goal of ¼ percentage point higher than they price stability. predicted last winter. The projected The Administration has just released increase in the CPI is also somewhat its midyear update to its economic and larger than that recorded in 1995. budgetary projections. Its forecasts for However, that stepup would mainly real growth and inflation in 1996 and reflect developments in the food and 1997 are broadly in line with the energy sectors, which are likely to add central tendencies of the forecasts of to overall inflation in 1996 after having Federal Reserve policymakers. damped it in 1995. Apart from these volatile sectors, inflation has remained Money and Debt Ranges in check so far this year despite high for 1996 and 1997 levels of resource utilization and At its meeting earlier this month, the reports that tightness in some parts of Committee reaffirmed the ranges for the labor market is placing upward 1996 growth of money and debt pressure on wages. Assuming no that it had established in February: further adverse shocks to food and 1 percent to 5 percent for M2, energy prices, and in the context of the 2 percent to 6 percent for M3, and Federal Reserve' s intent to keep trend 3 percent to 7 percent for the debt inflation well contained, the Commit of the domestic nonfinancial sectors. tee believes that overall CPI inflation should recede. Accordingly, the central tendency of the FOMC's fore Ranges for Growth of Monetary and casts shows CPI inflation dropping Debt Aggregates back to the range of 2¾ to 3 percent Percent in 1997. The Committee's inflation projec Provisional tions incorporate the technical Aggregate 1995 1996 for 1997 improvements the Bureau of Labor Statistics is making to the CPI M2 1-5 1-5 1-5 in 1996 and 1997; they are expected to shave a little from inflation in M3 2-6 2-6 2-6 both years. The Committee also recognizes that the remaining biases Debt1 3-7 3-7 3-7 in the CPI are non-negligible and Note. Change from average for fourth quarter may not be stable over time. of preceding year to average for fourth quarter of year indicated. 1. Monitoring range for debt of domestic nonfinancial sectors. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 13 In addition, the Committee set Monetary Policy, Financial provisional growth ranges for 1997 at Markets, and the Economy over the same levels. the First Half of 1996 In setting the ranges for M2 and M3, Information available around the tum the Committee intended to communi of the year suggested that the econ cate its expectation as to the growth of omy had downshifted after posting a these monetary aggregates that would strong gain in the third quarter of result under conditions of approxi 1995. The growth of final demand mate price stability, assuming that ~ppeared to have slowed, reflecting the aggregates exhibit the same rmportantly a deceleration of con trends relative to nominal spending sumer spending. In addition, hesitant that prevailed for many years growth abroad and a strengthening until the early 1990s and that seem in the foreign exchange value of the to have reemerged after an interven doll~ relative to the levels prevailing ing period of marked deviation. at rmd-1995 were seen as limiting the Based on that reemergence and on prospects for further growth in Committee members' expectations for exports. The slowdown in the growth the growth of nominal GDP in 1996 of final demand had given rise to and 1997, the Committee anticipates inventory buildups in some industries; t~~t both M2 and M3 will probably finish near the upper boundaries of their respective ranges each year. The Exchange Value of the U.S. Dollar Committee expects the debt of the Index, March 1973 = 100 domestic nonfinancial sectors to Nominal remain near the middle of its monitor ing range in 1996 and 1997. In light of the rapid pace of technological change ------------- 100 and innovation still occurring in the financial sector-and the attending uncertainty about the future behavior of the aggregates-the Committee will continue to rely on a wide range of other information in determining its policy stance. 1991 1992 1993 1994 1995 1996 Note. In terms of the currencies of the other G-IO countries. Weights are based on 1972-76 global trade of each of the ten countries. Digitized for FRASER https://fraser.stlouisfed.org 14 Federal Reserve Bank of St. Louis Change in Real Nonfarm Most participants in financial Business Inventories markets were unsurprised by these Percent, annual rate policy adjustments, given the eco nomic backdrop. Moreover, they anticipated that there would be scope for additional easing steps in the coming months. Thus, between ---------1------ 4 mid-December and the end of January, interest rates on Treasury securities generally moved lower, especially + at short and intermediate maturities, __. ......... ...-.....-........-...'""""'"°'. ........ ~. .......... ------- o and stock price indexes edged higher on balance. The dollar strengthened slightly on net against the currencies of the other G-10 countries, reflecting in part disappointing news about the 1991 1992 1993 1994 1995 1996 pace of activity in Europe and conse quently larger declines in interest rates in turn, the production cutbacks there than in the United States. undertaken in response to those buildups were having a further Major Stock Price Indexes damping effect on economic activi ty.Meanwhile, data on prices and Index (December 29, 1995 = 100) wages suggested that inflation performance continued to be fairly satisfactory-indeed, better than many members of the FOMC had expected as of midyear 1995. To keep the stance of monetary policy from becoming effectively more restrictive owing to the slowdown in inflation in the second half of last year, and to promote sustainable growth, the Committee eased the stance of policy in December 1995 and again at the end of January 1996, bringing the federal J FMAMJ JASONDJ FMAMJ J funds rate down a half percentage 1995 1996 point in total, to 5¼ percent. Note. Last observations are for July 16, 1996. Digitized for FRASER https://fraser.stlouisfed.org 15 Federal Reserve Bank of St. Louis The underlying trends in the Civilian Unemployment Rate economy early in the year were Percent obscured to a degree by extraor dinarily adverse weather that affected a significant part of the country. ---------------8 Change in Real Income and Consumption ~\_ 6 Percent, annual rate ✓~June D Disposable personal income B_J _Pers_ona_l co_nsu_ m__.p_ _ti on_ ex_pe_nd,it'u-re-s -------- 6 ---------------4 ----+Wl--,d;il---------++---- 4 1990 1992 1994 1996 Note. The break in data at January 1994 marks the Ql + introduction of a redesigned survey; data from that point -..J...+,,,,.J.4......I....Wu...r.aL...,-P~Ll...Ji;lL..L.J.L.J....lil~i1..W...--- 0 on are not directly comparable with the data of earlier - periods. ---------------2 Inflation during the first half of the year was generally well behaved. Energy prices surged, mainly in 1991 1992 1993 1994 1995 1996 response to a runup in the world price Through the course of the next few of oil, and bad news about grain crops months, however, it became increas raised the prospect of higher food ingly clear that the economy had prices down the road. However, price regained vitality. Consumer spending inflation for consumer items other perked up after a lackluster holiday than food and energy held steady season, and was only temporarily or moved a bit lower. Labor costs depressed by the severe winter. presented a mixed picture. The Business demand for equipment increase in total hourly compen proved quite strong, as did housing sation over the first three months demand. The strengthening in sales of the year, as measured by the facilitated businesses' efforts to control employment cost index, was in line their inventories, and as that situation with its recent moderate trend. improved, industrial production However, within total compensation, rebounded smartly. Overall employ the wage and salary component of the ment growth was brisk, and by June ECI surged in the first quarter, the unemployment rate reached its lowest level in six years. Digitized for FRASER https://fraser.stlouisfed.org 16 Federal Reserve Bank of St. Louis Change in Consumer Prices Against the backdrop of stronger Excluding Food and Energy activity but subdued inflation trends, Percent, Dec. to Dec. the Federal Reserve made no adjust ments to its policy stance after January. With economic activity more clearly on the upswing, however, and ----------------6 prospects for a breakthrough on the federal budget seeming to fade, intermediate-and long-term interest ----------- 4 rates reversed course in February and trended up over subsequent months. Since the end of December, the yield -t--- 2 on the 30-year Treasury bond has increased about 1 percentage point, Selected Treasury Rates 1990 1992 1994 1996 Percent Note. Consumer price index for all urban consumers. Value for 1996 is measured from December 1995 to June Monthly 1996, at an annual rate. and further signals of wage accelera 15 tion came from a more rapid increase in average hourly earnings in the second quarter. 10 Change in Real Federal Expenditures on Consumption and Investment 5 I\ I Percent, annual rate h Three-month Seasonally adjusted Treasury Ql 1965 1975 1985 1995 Note. The twenty-year Treasury bond rate is shown until the first issuance of the thirty-year Treasury bond + in February 1977. ----..,,,r---o,,,......-"'""'---,,,,....-,,,,,.....-,__,_ _. .,,,,-....,,.......___ _ 0 on net, while the yield on the 5-year note has risen about 1¼ per centage points over the same period. The rate on three-month --------------- 10 bills has edged up only slightly. 1991 1992 1993 1994 1995 1996 Digitized for FRASER https://fraser.stlouisfed.org 17 Federal Reserve Bank of St. Louis Despite the backup in bond yields, The debt of all domestic nonfinancial major stock-price indexes rose consid sectors combined expanded at about a erably further through the first half of 4¾ percent annual pace, placing this the year; most of those gains were aggregate near the middle of its erased in late June and the first half of monitoring range. M2 and M3 are July, however, as company reports currently near the 5 and 6 percent raised questions about the pace of upper boundaries of their respective earnings growth. The rise in bond growth ranges, in line with the yields has boosted the dollar in foreign FOMC's expectation as of last Febru exchange markets; since mid-April, the ary. In contrast to the experience of the dollar has generally traded against an early 1990s, growth in the monetary average of the currencies of the other aggregates relative to nominal GDP major industrial countries about has been broadly in line with historical 4 percent above its level at the end relationships, given the structure of of December. interest rates. During the first half of the year, credit remained easily available to most household and business appli cants. Interest-rate spreads on private debt over Treasury securities remained narrow. In response to the recent increase in delinquencies on credit card accounts, many banks have tightened their standards for approval of new accounts, but this appears to have only partially reversed a marked relaxation of such standards earlier this decade, and banks overall remain aggressive in the pursuit of new borrowers, especially business clients. Digitized for FRASER https://fraser.stlouisfed.org 18 Federal Reserve Bank of St. Louis Growth of Money and Debt Percent Domestic Period Ml M2 M3 Nonfinancial Debt Annual1 1980 7.5 8.7 9.6 9.5 1981 5.4 (2.5)2 9.0 12.4 10.2 1982 8.8 8.8 9.7 9.8 1983 10.3 11.8 9.5 11.9 1984 5.4 8.1 10.8 14.6 1985 12.0 8.6 7.7 14.4 1986 15.5 9.2 9.0 13.3 1987 6.3 4.2 5.9 10.0 1988 4.3 5.7 6.3 8.8 1989 0.6 5.2 4.0 7.9 1990 4.1 4.1 1.8 6.8 1991 7.9 3.1 1.2 4.6 1992 14.3 1.8 0.6 4.7 1993 10.5 1.4 1.0 5.2 1994 2.4 0.6 1.6 5.2 1995 -1.8 4.0 5.9 5.6 1995 Ql -0.1 1.0 4.5 5.4 Quarter (annual rate)3 Q2 -0.5 3.8 6.3 7.1 Q3 -1.5 6.9 7.9 4.9 Q4 -5.1 4.1 4.5 4.7 1996 Ql -2.7 5.9 7.2 4.7 Quarter (annual rate)3 Q2 -0.5 4.1 5.3 n.a. 1. From average for fourth quarter of preced- 3. From average for preceding quarter to ing year to average for fourth quarter of year average for quarter indicated. indicated. 2. Adjusted for shifts to NOW accounts in 1981. FRBl-43000-0796 Digitized for FRASER https://fraser.stlouisfed.org 19 Federal Reserve Bank of St. Louis

Federal Reserve (1996, July 17). Monetary Policy Report. Monetary Policy Reports, Federal Reserve. https://whenthefedspeaks.com/doc/monetary_policy_report_19960718

@misc{wtfs_monetary_policy_report_19960718,
  author = {Federal Reserve},
  title = {Monetary Policy Report},
  year = {1996},
  month = {Jul},
  howpublished = {Monetary Policy Reports, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/monetary_policy_report_19960718},
  note = {Retrieved via When the Fed Speaks corpus}
}