Monetary Policy Report

rl Ju/Jllllll':!J mepol'l t/2e ,:::J:°edeml [J/e,fel'()e fJJoaNI L ( /ft~(~ 20, 2000 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis This Executive Summary provides highlights of the Board's Monetary Policy Report to the Congress 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 Conclusion 6 Monetary Policy and the Economic Outlook 8 Monetary Policy, Financial Markets, and the Economy over the First Half of 2000 9 Economic Projections for 2000 and 2001 12 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Testimony of Alan Greenspan Chairman, Federal Reserve Board Mr. Chairman and other slowed noticeably this spring from the unusually rapid pace observed late in members of the Committee, I 1999 and early this year. Some argue appreciate this opportunity to that this slowing is a pause following the surge in demand through the present the Federal Reserve's warmer-than-normal winter months report on monetary policy. and hence a reacceleration can be expected later this year. Certainly, we have seen slowdowns in spending dur ing this near-decade-long expansion The Federal Reserve has been confront that have proven temporary, with ing a complex set of challenges in judg aggregate demand growth subse ing the stance of policy that will best quently rebounding to an unsustain contribute to sustaining the strong able pace. and long-running expansion of our But other analysts point to a number economy. The challenges will be no of factors that may be exerting more less in coming months as we judge persistent restraint on spending. One whether ongoing adjustments in sup they cite is the flattening in equity ply and demand will be sufficient to prices, on net, this year. They attribute prevent distortions that would under much of the slowing of consumer mine the economy's extraordinary spending to this diminution of the performance. wealth effect through the spring and For some time· now, the growth of early summer. This view looks to aggregate demand has exceeded the equity markets as a key influence on expansion of production potential. the trend in consumer spending over Technological innovations have the rest of this year and next. boosted the growth rate of potential, Another factor said by some to but as I noted in my testimony last account for the spending slowdown is February, the effects of this process also the rising debt burden of households. have spurred aggregate demand. It has Interest and amortization as a percent been clear to us that, with labor mar of disposable income have risen mate kets already quite tight, a continuing rially during the past six years, as con disparity between the growth of sumer and especially mortgage debt demand and potential supply would has climbed and, more recently, as produce disruptive imbalances. interest rates have moved higher. A key element in this disparity has In addition, the past year's rise in the been the very rapid growth of con price of oil has amounted to an annual sumption resulting from the effects on $75 billion levy by foreign producers spending of the remarkable rise in on domestic consumers of imported household wealth. However, the oil, the equivalent of a tax of roughly growth in household spending has 1 percent of disposable income. This Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis burden is another likely source of the late. If that slowing were to persist, slowed growth in real consumption some reduction in the rapid pace of outlays in recent months, though one accumulation of household appliances that may prove to be largely transitory. across our more than a hundred million Mentioned less prominently have households would not come as a sur been the effects of the faster increase in prise, nor would a slowdown in vehicle the stock of consumer durable assets demand so often historically associated both household durable goods and with declines in housing demand. houses-in the last several years, a rate Inventories of durable assets in of increase that history tells us is usu households are just as formidable a fac ally followed by a pause. Stocks of tor in new production as inventories at household durable goods, including manufacturing and trade establish motor vehicles, are estimated to have ments. The notion that consumer increased at nearly a 6 percent annual spending and housing construction rate over the past three years, a marked may be slowing because the stock of acceleration from the growth rate of the consumer durables and houses may be previous ten years. The number of cars running into upside resistance is a and light trucks owned or leased by credible addition to the possible expla households, for example, apparently nations of current consumer trends. has continued to rise in recent years This effect on spending would be rein despite having reached nearly 1¾ forced by the waning effects of gains in vehicles per household by the mid- wealth. 1990s. Notwithstanding their recent Because the softness in outlay growth slowing, sales of new homes continue is so recent, all of the aforementioned at extraordinarily high levels relative to hypotheses, of course, must be provi new household formations. While we sional. It is certainly premature to make will not know for sure until the 2000 a definitive assessment of either the census is tabulated, the surge in new recent trends in household spending or home sales is strong evidence that the what they mean. But it is clear that, for growth of owner-occupied homes has the time being at least, the increase in accelerated during the past five years. spending on consumer goods and Those who focus on the high and ris houses has come down several notches, ing stocks of durable assets point out albeit from very high levels. that even without the rise in interest In one sense, the more important rates, an eventual leveling out or some question for the longer-term economic tapering off of purchases of durable outlook is the extent of any productiv goods and construction of single ity slowdown that might accompany a family housing would be expected. more subdued pace of production and Reflecting both higher interest rates consumer spending, should it persist. and higher stocks of housing, starts of The behavior of productivity under new housing units have fallen off of such circumstances will be a revealing Digitized for FRASER https://fraser.stlouisfed.org 2 Federal Reserve Bank of St. Louis test of just how much of the rapid ment in the cost structure of many growth of productivity in recent years American businesses. has represented structural change as For the moment, the drop-off in over distinct from cyclical aberrations and, all economic growth to date appears hence, how truly different the develop about matched by reduced growth in ments of the past five years have been. hours, suggesting continued strength At issue is how much of the current in growth in output per hour. The downshift in our overall economic increase of production worker hours growth rate can be accounted for by from March through June, for example, reduced growth in output per hour and was at an annual rate of ½ percent how much by slowed increases in compared with 3¼ percent the previous hours. three months. Of course, we do not So far there is little evidence to have comprehensive measures of out undermine the notion that most of the put on a monthly basis, but available productivity increase of recent years data suggest a roughly comparable has been structural and that structural deceleration. productivity may still be accelerating. A lower overall rate of economic New orders for capital equipment con growth that did not carry with it a sig tinue quite strong-so strong that the nificant deterioration in productivity rise in unfilled orders has actually growth obviously would be a desirable steepened in recent months. Capital outcome. It could conceivably slow or deepening investment in a broad range even bring to a halt the deterioration in of equipment embodying the newer the balance of overall demand and productivity-enhancing technologies potential supply in our economy. remains brisk. As I testified before this committee in To be sure, if current personal con February, domestic demand growth, sumption outlays slow significantly influenced importantly by the wealth further than the pattern now in train effect on consumer spending, has been suggests, profit and sales expectations running 1½ to 2 percentage points at an might be scaled back, possibly induc annual rate in excess of even the higher, ing some hesitancy in moving forward productivity-driven, growth in poten even with capital projects that appear tial supply since late 1997. That gap has quite profitable over the longer run. In been filled both by a marked rise in addition, the direct negative effects of imports as a percent of GDP and by a the sharp recent run-up in energy marked increase in domestic produc prices on profits as well as on sales tion resulting both from significant expectations may temporarily damp immigration and from the employment capital spending. Despite the marked of previously unutilized labor decline over the past decades in the resources. energy requirements per dollar of GDP, I also pointed out in February energy inputs are still a significant ele- that there are limits to how far net Digitized for FRASER https://fraser.stlouisfed.org 3 Federal Reserve Bank of St. Louis imports-or the broader measure, our abroad that could adversely affect the current account deficit-can rise, or propensity of foreigners to invest in our pool of unemployed labor the United States. But obviously, so resources can fall. As a consequence, long as our rates of return appear to be the excess of the growth of domestic unusually high, if not rising, balance of demand over potential supply must be payments trends are less likely to pose closed before the resulting strains and a threat to our prosperity. In addition, imbalances undermine the economic our burgeoning budget surpluses have expansion that now has reached 112 clearly contributed to a fending off, if months, a record for peace or war. only temporarily, of some of the pres The current account deficit is a proxy sures on our balance of payments. The for the increase in net claims against stresses on the global savings pool U.S. residents held by foreigners, resulting from the excess of domestic mainly as debt, but increasingly as private investment demands over equities. So long as foreigners continue domestic private saving have been to seek to hold ever-increasing quanti mitigated by the large federal budget ties of dollar investments in their port surplm,es that have developed of late. folios, as they obviously have been, In addition, by substantially aug the exchange rate for the dollar will menting national saving, these budget remain firm. Indeed, the same sharp surpluses have kept real interest rates rise in potential rates of return on new at levels lower than they would have American investments that has been been otherwise. This development has driving capital accumulation and helped foster the investment boom that accelerating productivity in the United in recent years has contributed greatly States has also been inducing foreign to the strengthening of U.S. productiv ers to expand their portfolios of Ameri ity and economic growth. The Con can securities and direct investment. gress and the Administration have The latest data published by the wisely avoided steps that would mate Department of Commerce indicate that rially reduce these budget surpluses. the annual pace of direct plus portfolio Continued fiscal discipline will con investment by foreigners in the U.S. tribute to maintaining robust expan economy during the first quarter was sion of the American economy in the more than two and one-half times its future. rate in 1995. Just as there is a limit to our reliance There has to be a limit as to how on foreign saving, so is there a limit to much of the world's savings our resi the continuing drain on our unused dents can borrow at close to prevailing labor resources. Despite the ever-tight interest and exchange rates. And a nar ening labor market, as yet, gains in rowing of disparities among global compensation per hour are not signifi growth rates could induce a narrowing cantly outstripping gains in productiv of rates of return here relative to those ity. But as I have argued previously, Digitized for FRASER https://fraser.stlouisfed.org 4 Federal Reserve Bank of St. Louis should labor markets continue to may mostly reflect the indirect effects tighten, short of a repeal of the law of of energy prices, but the Federal supply and demand, labor costs even Reserve will need to be alert to the tually would have to accelerate to lev risks that high levels of resource utiliza els threatening price stability and our tion may put upward pressure on continuing economic expansion. inflation. The more modest pace of increase in Moreover, energy prices may pose domestic final spending in recent a challenge to containing inflation. months suggests that aggregate Energy price changes represent a one demand may be moving closer into time shift in a set of important prices, line with the rate of advance in the but by themselves generally cannot economy's potential, given our contin drive an ongoing inflation process. The ued impressive productivity growth. key to whether such a process could get Should these trends toward supply and under way is inflation expectations. To demand balance persist, the ongoing date, survey evidence, as well as read need for ever-rising imports and for a ings from the Treasury's inflation further draining of our limited labor indexed securities, suggests that house resources should ease or perhaps even holds and investors do not view the end. Should this favorable outcome current energy price surge as affecting prevail, the immediate threat to our longer-term inflation. But any deterio prosperity from growing imbalances in ration in such expectations would pose our economy would abate. a risk to the economic outlook. But as I indicated earlier, it is much As the financing requirements for our too soon to conclude that these con ever-rising capital investment needs cerns are behind us. We cannot yet mounted in recent years-beyond be sure that the slower expansion of forthcoming domestic saving-real domestic final demand, at a pace more long-term interest rates rose to address in line with potential supply, will this gap. We at the Federal Reserve, persist. Even if the growth rates of responding to the same economic demand and potential supply move forces, have moved the overnight fed into better balance, there is still uncer eral funds rate up 1¾ percentage points tainty about whether the current level over the past year. To have held to the of labor resource utilization can be federal funds rate of June 1999 would maintained without generating have required a massive increase in increased cost and price pressures. liquidity that would presumably have As I have already noted, to date costs underwritten an acceleration of prices have been held in check by productiv and, hence, an eventual curbing of eco ity gains. But at the same time, inflation nomic growth. has picked up-even the core measures By our meeting this June, the that do not include energy prices appraisal of all the foregoing issues directly. Higher rates of core inflation led the Federal Open Market Commit- Digitized for FRASER https://fraser.stlouisfed.org 5 Federal Reserve Bank of St. Louis tee to conclude that, while some signs in recent years. The unemployment rate of slower growth were evident and jus is likely to remain close to its recent tified standing pat at least for the time very low levels. Energy prices could being, they were not sufficiently com ease somewhat, helping to trim PCE pelling to alter our view that the risks inflation next year to around 2 percent remained more on the side of higher to 2½ percent, somewhat above the inflation. average of recent years. As indicated in their forecasts, FOMC members and nonvoting presidents Conclusion expect that the long period of continu ous economic expansion will be The last decade has been a remarkable extended over the next year and one period of expansion for our economy. half, but with growth at a somewhat Federal Reserve policy through this slower pace than over the past several period has been required to react to a years. For the current year, the central constantly evolving set of economic tendency of Board members' and forces, often at variance with historical Reserve Bank presidents' forecasts is relationships, changing federal funds for real GDP to increase 4 percent to rates when events appeared to threaten 4½ percent, suggesting a noticeable our prosperity, and refraining from deceleration over the second half of action when that appeared warranted. 2000 from its likely pace over the first Early in the expansion, for example, half. The unemployment rate is pro we kept rates unusually low for an jected to remain close to 4 percent. This extended period, when financial sector outlook is a little stronger than antici fragility held back the economy. Most pated last February, no doubt owing recently we have needed to raise rates primarily to the unexpectedly strong to relatively high levels in real terms jump in output in the first quarter. in response to the side effects of acceler Mainly reflecting higher prices of ating growth and related demand energy products than had been fore supply imbalances. Variations in the seen, the central tendency for inflation stance of policy-or keeping it the this year in prices for personal con same-in response to evolving forces sumption expenditures also has been are made in the framework of an revised up somewhat, to the vicinity of unchanging objective-to foster as best 2½ percent to 2¾ percent. we can those financial conditions most Given the firmer financial conditions likely to promote sustained economic that have developed over the past expansion at the highest rate possible. eighteen months, the Committee Maximum sustainable growth, as his expects economic growth to moderate tory so amply demonstrates, requires somewhat next year. Real output is price stability. Irrespective of the com anticipated to expand 3¼ percent to plexities of economic change, our pri 3¾ percent, somewhat less rapidly than mary goal is to find those policies that Digitized for FRASER https://fraser.stlouisfed.org 6 Federal Reserve Bank of St. Louis best contribute to a non-inflationary environment and hence to growth. The Federal Reserve, I trust, will always remain vigilant in pursuit of that goal. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Monetary Policy and the Economic Outlook The impressive performance of the with the pool of available labor already U.S. economy persisted in the first half at an unusually low level, the contin of 2000 with economic activity expand ued expansion of aggregate demand in ing at a rapid pace. Overall rates of excess of the growth in potential sup inflation were noticeably higher, ply increasingly threatened to set off largely as a result of steep increases in greater price pressures. Because price energy prices. The remarkable wave of stability is essential to achieving maxi new technologies and the associated mum sustainable economic growth, surge in capital investment have con heading off these pressures has been tinued to boost potential s_upply and to critical to extending the extraordinary help contain price pressures at high performance of the U.S. economy. levels of labor resource use. At the To promote balance between aggre same time, rising productivity gate demand and potential supply and growth-working through its effects to contain inflation pressures, the Fed on wealth and consumption, as well eral Open Market Committee (FOMC) as on investment spending-has been took additional firming actions this one of the important factors contribut year, raising the benchmark federal ing to rapid increases in aggregate funds rate 1 percentage point between demand that have exceeded even the February and May. The tighter stance stepped-up increases in potential sup of monetary policy, along with the ply. Under such circumstances, and ongoing strength of credit demands, has led to less accommodative finan- cial conditions: On balance, since the Change in Real GDP beginning of the year, real interest rates Percent, annual rate have increased, equity prices have ---------------- changed little after a sizable run-up in 1999, and lenders have become more cautious about extending credit, espe Ql 6 cially to marginal borrowers. Still, households and businesses have con tinued to borrow at a rapid pace, and 4 the growth of M2 remained relatively robust, despite the rise in market inter est rates. The favorable outlook for the 2 U.S. economy has contributed to a I further strengthening of the dollar, despite tighter monetary policy and rising interest rates in most other 1994 1995 1996 1997 1998 1999 2000 industrial countries. Note. Changes are measured to the final Perhaps partly reflecting firmer quarter of the period indicated, from the final quarter of the previous period. financial conditions, the incoming eco- Digitized for FRASER https://fraser.stlouisfed.org 8 Federal Reserve Bank of St. Louis nomic data since May have suggested Change in PCE Chain-Type Price some moderation in the growth of Index aggregate demand. Nonetheless, labor Percent, annual rate markets remained tight at the time of Ql the FOMC meeting in June, and it was unclear whether the slowdown represented a decisive shift to more 2 sustainable growth or just a pause. The Committee left the stance of policy unchanged but saw the balance of risks to the economic outlook as still + 0 weighted toward rising inflation. Measures of Labor Utilization 1994 1996 1998 2000 Percent Note. Changes are measured to the final ----------------- quarter of the period indicated, from the final quarter of the previous period. Augmented unemployment rate Monetary Policy, Financial 12 Markets, and the Economy over the First Half of 2000 When the FOMC convened for its first two meetings of the year, in February 6 and March, economic conditions in the United States were pointing toward an increasingly taut labor market as a con sequence of a persistent imbalance between the growth rates of aggregate demand and potential aggregate sup '70 1975 1980 1985 1990 1995 2000 ply. Reflecting the underlying strength Note. The augmented unemployment rate is in spending and expectations of tighter the number of unemployed plus those who are monetary policy, market interest rates not in the labor force and want a job, divided by were rising, especially after the century the civilian labor force plus those who are not in the labor force and want a job. The break in data date change passed without incident. at January 1994 marks the introduction of a But, at the same time, equity prices redesigned survey; data from that point on are were still posting appreciable gains on not directly comparable with those of earlier periods. The data extend through June 2000. net. Knowing that the two safety Digitized for FRASER https://fraser.stlouisfed.org 9 Federal Reserve Bank of St. Louis Selected Interest Rates i 1scowr-t 4 feleral funds rate I I I I " 2/4 3/31 5/19 7/1 8/18 9/29 11/17 12/22 2/3 3/30 5/18 6/30 8/24 10/5 11/1612/21 2/3 3/21 5/16 6/28 10/15 1998 1999 2000 Note. The data are daily. Vertical lines indicate FOMC held a scheduled meeting or a policy the days on which the Federal Reserve announced action was announced. Last observations are for a change in the intended funds rate. The dates on July 17, 2000. the horizontal axis are those on which either the valves that had been keeping underly sion of aggregate demand in relation to ing inflation from picking up until that of aggregate supply, including the then-the economy's ability to draw timing and strength of the economy's on the pool of available workers and to response to earlier monetary policy expand its trade deficit on reasonable tightenings, warranted a more limited terms-could not be counted on indefi policy action. Still, noting that there nitely, the FOMC voted for a further had been few signs that the rise in tightening in monetary policy at both interest rates over recent quarters had its February and its March meetings, begun to bring demand in line with raising the target for the overnight fed potential supply, the Committee eral funds rate 25 basis points on each decided in both instances that the bal occasion. In related actions, the Board ance of risks going forward was of Governors also approved quarter weighted mainly in the direction of point increases in the discount rate in rising inflation pressures. In particular, both February and March. it was becoming increasingly clear that The FOMC considered larger policy the Committee would need to move moves at its first two meetings of 2000 more aggressively at a later meeting but concluded that significant uncer if imbalances continued to build and tainty about the outlook for the expan- inflation and inflation expectations, Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis which had remained relatively sub May had been influenced by the dued until then, began to pick up.1 buildup in expectations of more policy Some readings between the March tightening as market participants rec and May meetings of the FOMC on ognized the need for higher short-term labor costs and prices suggested a pos interest rates. Given all these circum sible increase of inflation pressures. stances, the FOMC decided in May to Moreover, aggregate demand had con raise the target for the overnight fed tinued to grow at a fast clip, and mar eral funds rate 50 basis points, to 6½ kets for labor and other resources were percent. The Committee saw little risk showing signs of further tightening. in the more forceful action given the Financial market conditions had strong momentum of the economic firmed in response to these develop expansion and widespread market ments; the substantial rise in private expectations of such an action. Even borrowing rates between March and after taking into account its latest action, however, the FOMC saw the l. At its March and May meetings, the FOMC strength in spending and pressures in took a number of actions that were aimed at labor markets as indicating that the adjusting the implementation of monetary policy balance of risks remained tilted toward to actual and prospective reductions in the stock of Treasury debt securities. rising inflation. Growth of Domestic Nonfinancial Debt Percent, annual rate - - - Hl - -- .___ .___ ,.... 8 - r - - - - ..__ 0---- 4 I I - + 0 ■ Total - - D Federal ■ Nonfederal 4 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Note. Total debt consists of the outstanding fourth quarter of year indicated. Growth in the first credit market debt of the U.S. government, state half of 2000 is computed from average for fourth and local governments, households and nonprofit quarter of 1999 to average for the second quarter of organizations, nonfinancial businesses, and farms. 2000 and expressed at an annual rate. The growth Annual growth rates are computed from average rate for 2000:Hl is currently based on partially for fourth quarter of preceding year to average for estimated data. Digitized for FRASER https://fraser.stlouisfed.org 11 Federal Reserve Bank of St. Louis By the June FOMC meeting, the the Federal Reserve probably would incoming data were suggesting that be able to hold inflation in check with the expansion of aggregate demand out much additional policy firming. might be moderating toward a more However, whether aggregate demand sustainable pace: Consumers had had moved decisively onto a more increased their outlays for goods mod moderate expansion track was not yet estly during the spring; home pur clear, and labor resource utilization chases and starts appeared to have remained unusually elevated. Thus, softened; and readings on the labor although the FOMC decided to defer market suggested that the pace of hir any policy action in June, it indicated ing might be cooling off. Moreover, that the balance of risks was still on the much of the effects on demand of pre side of rising inflation in the foresee vious policy firmings, including the 50 able future. 2 basis point tightening in May, had not yet been fully realized. Financial mar Economic Projections for ket participants interpreted signs of 2000 and 2001 economic slowing as suggesting that The members of the Board of Gover nors and the Federal Reserve Bank presidents expect the current economic M2 Growth Rate expansion to continue through next Percent, annual rate year, but at a more moderate pace than the average over recent quarters. For 2000 as a whole, the central tendency 8 of their forecasts for the rate of increase in real gross domestic product (GDP) is Hl 4 percent to 4½ percent, measured as 6 the change between the fourth quarter of 1999 and the fourth quarter of 2000. 4 Over the four quarters of 2001, the cen tral tendency forecasts of real GDP are 2 2. At its June meeting, the FOMC did not establish ranges for growth of money and debt in 2000 and 2001. The legal requirement to 1990 1992 1994 1996 1998 2000 establish and to announce such ranges had Note. M2 consists of currency, travelers checks, expired, and owing to uncertainties about the demand deposits, other checkable deposits, behavior of the velocities of debt and money, savings deposits (including money market these ranges for many years have not provided deposit accounts), small-denomination time useful benchmarks for the conduct of monetary deposits, and balances in retail money market policy. Nevertheless, the FOMC believes that the funds. See footnote under the domestic nonfinan behavior of money and credit will continue to cial debt chart for details on the computation of have value for gauging economic and financial growth rates. conditions. Digitized for FRASER https://fraser.stlouisfed.org 12 Federal Reserve Bank of St. Louis in the 3¼ percent to 3¾ percent range. 2001 than in 1999, and the Committee With this pace of expansion, the civil will need to be alert to the possibility ian unemployment rate should remain that financial conditions may need to near its recent level of 4 percent. Even be adjusted further to balance aggre with the moderation in the pace of eco gate demand and potential supply and nomic activity, the Committee mem to keep inflation low. bers and nonvoting Bank presidents Considerable uncertainties attend expect that inflation may be higher in estimates of potential supply-both Economic Projections for 2000 and 2001 Percent Federal Reserve governors and Reserve Bank presidents Administration Central 2000 Range tendency Change, Nominal GDP 6-7¼ 6¼-6¾ 6.0 fourth quarter to fourth Real GDP2 3¾-5 4-4½ 3.9 quarter:1 PCE prices 2-2¾ 2½-2¾ 3.23 Average level, fourth Civilian unemployment rate 4-4¼ About 4 4.1 quarter: Central 2001 Range Tendency Change, Nominal GDP 5-6¼ 5½-6 5.3 fourth quarter to fourth Real GDP2 2½-4 31/4-3¾ 3.2 quarter:1 PCE prices 1¾-3 2-2½ 2.53 Average level, fourth Civilian unemployment rate 4-4½ 4-4¼ 4.2 quarter: 1. Change from average for fourth quarter of 2. Chain-weighted. previous year to average for fourth quarter of 3. Projection for the consumer price index. year indicated. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 13 the rate of growth and the level of the Wealth and Saving economy's ability to produce on a sus- Ratio Percent tained non-inflationary basis. Business investment in new equipment and 12 software has been exceptionally high, and given the rapid pace of technologi 10 cal change, firms will continue to 8 exploit opportunities to implement more-efficient processes and to speed 6 the flow of information across markets. 4 In such an environment, a further pickup in productivity growth is a dis 4 2 tinct possibility. However, a portion of Personal savi-ng- r-at.e + 0 the very rapid rise in measured pro- Ql ductivity in recent quarters may be a result of the cyclical characteristics of 1980 1985 1990 1995 2000 this expansion rather than an indica Note. The wealth-to-income ratio is the ratio tion of structural rates of increase of net worth of households to disposable personal income. consistent with holding the level of resource utilization unchanged. Cur rent levels of labor resource utilization are already unusually high. To date, this has not led to escalating unit labor costs, but whether such a favorable Change in Output per Hour for the performance in the labor market can N onfarm Business Sector be sustained is one of the important ---------------- Percent, Q4 to Q4 uncertainties in the outlook. O n the demand side, the adjust- ments in financial markets that have Ql accompanied expected and actual 4 tighter monetary conditions may be beginning to moderate the rise in domestic demand. As that process 2 evolves, the substantial impetus that household spending has received in _.___. _____ i recent years from rapid gains in equity - wealth should subside. The higher cost of business borrowing and more restrictive credit supply conditions probably will not exert substantial 1991 1993 1995 1997 1999 restraint on investment decisions, par Note. The value for 2000:Ql is the percent change from a year earlier. ticularly as long as the costs and poten- Digitized for FRASER https://fraser.stlouisfed.org 14 Federal Reserve Bank of St. Louis Major Stock Price Indexes Nominal U.S. Dollar Exchange Rate Index, June 30, 1999=100 First week 1999=100 160 120 100 80 JJASONDJFMAMJJASONDJFMAMJJ 1999 2000 1998 1999 2000 Note. The data are weekly. Indexes are trade Note. The data are daily. Last observations are weighted averages of the exchange value of the for July 17, 2000. dollar against major currencies and against the currencies of a broad group of important U.S. trading partners. Last observations are for the week ending July 12, 2000. tial productivity payoffs of new equip ment and software remain attractive. The slowing in domestic spending will four quarters of 2000 and 2 percent to not be fully reflected in a more moder 2½ percent during 2001. Shaping the ate expansion of domestic production. contour of this inflation forecast is the Some of the slowing will be absorbed expectation that the direct and indirect in smaller increases in imports of effects of the boost to domestic infla goods and services, and given contin tion this year from the rise in the price ued recovery in economic activity of world crude oil will be partly abroad, domestic firms are expected to reversed next year if, as futures mar continue seeing a boost to demand and kets suggest, crude oil prices retrace to production from rising exports. this year's run-up by next year. None Regarding inflation, FOMC partici theless, these forecasts show consumer pants believe that the rise in consumer price inflation in 2001 to have moved prices will be noticeably larger this above the rates that prevailed over the year than in 1999 and that inflation will 1997-98 period. Such a trend, were it then drop back somewhat in 2001. The not to show signs of quickly stabilizing central tendency of their forecasts for or reversing, would pose a consider the increase in the chain-type index able risk to the continuation of the for personal consumption expenditures extraordinary economic performance is 2½ percent to 2¾percent over the of recent years. Digitized for FRASER https://fraser.stlouisfed.org 15 Federal Reserve Bank of St. Louis Prices for Oil and Other Commodities The economic forecasts of the FOMC Index, January 1999=100 Dollars per barrel are similar to those recently released by ---------------- the Administration in its Mid- Oil Session Review of the Budget. Com ~ pared with the forecasts available in - 30 February, the Administration raised its projections for the increase in real GDP in 2000 and 2001 to rates that lie at the - 20 low end of the current range of central tendencies of Federal Reserve policy makers. The Administration also . N _ on- _ oil commodities - 10 expects that the unemployment rate will remain close to 4 percent. Like the FOMC, the Administration sees con sumer price inflation rising this year 1999 2000 and falling back in 2001. After account Note. The oil price is the spot price of West Texas intermediate crude oil. The price for non ing for the differences in the construc oil commodities is a weighted average of thirty tion of the alternative measures of con nine non-fuel primary-commodity prices from sumer prices, the Administration's the International Monetary Fund. The data are monthly. The last observation for non-oil com projections of increases in the consumer modities is May; for oil, July average through price index of 3.2 percent in 2000 and July 12, 2000. 2.5 percent in 2001 are broadly consis tent with the Committee's expectations for the chain-type price index for per sonal consumption expenditures. FRBl-16000-0700-C Digitized for FRASER https://fraser.stlouisfed.org 16 Federal Reserve Bank of St. Louis

Federal Reserve (2000, July 19). Monetary Policy Report. Monetary Policy Reports, Federal Reserve. https://whenthefedspeaks.com/doc/monetary_policy_report_20000720

@misc{wtfs_monetary_policy_report_20000720,
  author = {Federal Reserve},
  title = {Monetary Policy Report},
  year = {2000},
  month = {Jul},
  howpublished = {Monetary Policy Reports, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/monetary_policy_report_20000720},
  note = {Retrieved via When the Fed Speaks corpus}
}