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To: Roderick Francey who wrote (16236)	8/20/1998 4:58:00 PM
From: Alex	Respond to of 116764

FOMC VOTED 10 TO 1 IN JULY TO KEEP TIGHTENING BIAS By Steven K. Beckner ÿÿÿÿÿMarket News International - The Federal Reserve's policymaking Federal Open Market Committee voted 10 to 1 to retain its assymetric policy directive with a tightening bias at its June 30-July 1 meeting, as Cleveland Fed President Jerry Jordan again dissented in favor of immediate tightening, according to minutes released Thursday. ÿÿÿÿÿAlthough the economy had slowed in the second quarter and was expected to remain somewhat slower than the torrid first quarter pace, and although the Asian crisis had worsened, the minutes show that FOMC members still regarded accelerating inflation as the greater risk. ÿÿÿÿÿIt was noted that inflation had picked up and could accelerate further if and when special factors restraining inflation unwind and labor compensation gains begin to outpace productivity improvements. Financial conditions, including rapid money growth, were viewed as "accommodative" of demand and tending to put pressure on wages and prices. ÿÿÿÿÿIt was on these grounds that Jordan advocated immediate tightening. He was not joined in dissent this time by St. Louis Fed President William Poole, as he was at the May FOMC meeting. But the minutes show that others advised seeking "any early opportunity to tighten." ÿÿÿÿÿHowever, there was concern voiced that raising rates at that time might elicit an "outsized reaction" in financial markets, so it was decided that a "cautious 'wait and see' policy stance" was warranted. ÿÿÿÿÿThere was little in the minutes to indicate that the seeds had been planted at the July meeting for a shift in the policy directive at the August meeting. ÿÿÿÿÿ"Although recent developments had increased both the upside and the downside uncertainties in the economic outlook, most of the members felt that the risks continued to point on balance toward rising inflation," the minutes state. ÿÿÿÿÿ"While the available evidence suggested that the economic expansion had in fact slowed considerably in the second quarter, largely because of reduced inventory accumulation against the backdrop of weakness in the foreign trade sector, the retarding effects of those factors were seen likely to wane over coming quarters and there were only limited indications of any softening in domestic final demand." ÿÿÿÿÿ"Moreover, the persistence of accommodative financial conditions, as evidenced by the ample availability of financing on favorable terms to business and household borrowers and by robust monetary growth, might well continue to support relatively strong domestic spending," the minutes continue. "As a consequence, many of the members expressed concern that the expansion in demand might continue at a fast enough pace to raise pressures on wages and prices over time." ÿÿÿÿÿDespite these concerns, the FOMC decided that "the substantial uncertainties relating to prospective developments argued, as they had at recent meetings, in favor of a cautious 'wait and see' policy stance." ÿÿÿÿÿWhat's more, there was fear that "a tightening move would involve the risk of outsized reactions and consequent destabilizing effects on financial markets in the growing number of countries abroad that were experiencing severe financial difficulties." While ultimately the domestic economy had to be the Fed's main focus, members felt that the foreign "repercussions could be quite severe" from a rate hike and that "because there did not seem to be any urgency to tighten current policy for domestic reasons, given the likelihood that inflation would remain subdued for a while, important weight should be given to potential reactions abroad." ÿÿÿÿÿHowever, the minutes reveal that a number of members "emphasized ... that they continued to see a high probability that some tightening of monetary policy would be needed later to curb rising inflationary pressures" and that the FOMC "should take advantage of any early opportunity to tighten policy in order to improve the prospects of containing inflation and prolonging the economic expansion." ÿÿÿÿÿIn his dissent, Jordan argued that "the unsustainably rapid growth of domestic demand -- fueled by the acceleration of money and credit growth in the past year -- was reflected in the recent sharp increase in imports and rising trade deficits. As U.S. output growth slows significantly from the rapid pace of 1997 and early 1998, it will be essential that domestic demand also slow ... . Allowing domestic demand to continue to exceed domestic production would run the risk that corrosive effects of rising inflation would undermine future growth prospects ... . Modest monetary restraint at this time might prevent either the buildup of inflationary imbalances that would eventually necessitate future policy restraint or unsustainable capital flows." ÿÿÿÿÿThe Fed staff forecast prepared for the meeting foresaw that "economic activity would expand more slowly over the projection period than it had in recent years," aided by moderation in business inventory investment, slow growth abroad and the lagged effects of dollar appreciation. It anticipated "brisk, though gradually diminishing, increases in consumer spending," continued high demand for housing, more moderate business fixed investment and somewhat diminished labor market pressures. At the same time, the staff forecast underlying inflation would "pick up gradually as gains in compensation increasingly outpaced improvements in productivity." ÿÿÿÿÿThe Fed governors and presidents agreed the expansion would become "relatively moderate over coming quarters, and that such growth would be consistent with some limited increase in inflation from the current unusually low level." Already, FOMC members saw "signs of modestly rising inflation." It was agreed that "signs of a continuing acceleration, should they become evident, would be a matter of growing concern." ÿÿÿÿÿThough productivity gains had prevented rising labor compensation from driving up unit labor costs, FOMC members expressed concern that at some point "the advance in labor compensation would exceed likely improvements in productivity by an increasing margin unless the expansion in overall demand, and hence in labor demand, moderated significantly." What's more, inflation could be "reinforced for a time by the unwinding of a number of special factors that had tended to hold inflation down," such as declining energy prices and the rising dollar. ÿÿÿÿÿFOMC members did not seem alarmed by the pullback in inventory building then in progress. Several members said they saw "no broad indications of an inventory overhang," and "many of the members saw little reason to anticipate a further sizable drop in nonfarm inventory investment." ÿÿÿÿÿThere was greater concern about Asian turmoil, which was judged by some members to be "more severe and long lasting than they had anticipated earlier." Market News International Washington Bureau: (202) 371-2121 14:58 EDT 08/20 economeister.com