<http://www.bog.frb.fed.us/BoardDocs/Press/General/1999/19990518/default.htm>
Release Date: May 18, 1999
For immediate release
The Federal Reserve released the following statement after today's Federal Open Market Committee meeting:
While the FOMC did not take action today to alter the stance of monetary policy, the Committee was concerned about the potential for a buildup of inflationary imbalances that could undermine the favorable performance of the economy and therefore adopted a directive that is tilted toward the possibility of a firming in the stance of monetary policy. Trend increases in costs and core prices have generally remained quite subdued. But domestic financial markets have recovered and foreign economic prospects have improved since the easing of monetary policy last fall. Against the background of already-tight domestic labor markets and ongoing strength in demand in excess of productivity gains, the Committee recognizes the need to be alert to developments over coming months that might indicate that financial conditions may no longer be consistent with containing inflation.
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May 18, 1999
Fed Leaves Interest Rates Steady, But Changes Bias Toward a Rise
An INTERACTIVE JOURNAL News Roundup
WASHINGTON -- Federal Reserve policy makers left interest rates steady Tuesday. However, in their first use of a new procedure, they prepared the markets for a rate increase later this year by switching from a neutral stance to a bias in favor a raising rates in the future.
Fed officials left the target for the federal-funds rate, the rate at which banks lend to each other overnight, at 4.75%. The discount rate, at which the Fed lends to banks, remains at 4.5%.
At these meetings Fed officials also debate their so-called policy directive, a consensus statement that declares whether the next rate move is more likely to be an increase or a decrease. This time, in a much watched move, the group embraced a bias toward higher rates in the future, given the appropriate global and domestic economic conditions.
Given the fast rate at which the economy continues to grow this year, along with a surprising rise in consumer prices last month, some analysts were relieved. "The economy may be over the speed limit, but the Fed let us off with a warning," said Barry Evans, senior vice president of John Hancock Funds in Boston. In its brief statement, the Fed policy committee said that while it didn't "take action today to alter the stance of monetary policy, [it] was concerned about the potential for a buildup of inflationary imbalances."
It said, therefore, that it had "adopted a directive that is tilted toward the possibility of a firming in the stance of monetary policy."
The announcement of its shift in stance follows a much-deliberated decision, announced last February, to "communicate to the public a major shift in its views about the balance of risks or the likely direction of future policy." In its statement after its meeting, the Federal Open Market Committee, composed of Fed board members and regional bank presidents, said that "domestic financial markets have recovered and foreign economic prospects have improved since the easing of monetary policy last fall."
In late 1998 the panel cut the federal-funds rate three times to shield the U.S. from overseas financial turmoil and ease liquidity fears in the markets.
This time, however, the committee cited tight U.S. labor markets and an economy that appears to be growing faster than its productivity gains, as reasons to be "alert to developments over coming months that might indicate that financial conditions may no longer be consistent with containing inflation."
U.S. Treasurys surrendered their modest advance after the Fed released its announcement of a firmer bias. The Dow Jones Industrial Average, which had been trimming gains during the session, moved into negative territory.
The credit markets have been running scared since Friday, when the Labor Department reported that consumer prices in April rose by a surprising 0.7%, boosted by fuel prices, which had surged in the wake of an agreement by oil producers in late March to cut back on production.
The consumer-price report, the most widely used barometer of overall inflation, was particularly noteworthy, because its core reading of inflation, which excludes the volatile food and energy sectors, rose 0.4% in an advance that caught economists off guard.
Many economists blamed the April surge in prices on one-time factors that they said overstated inflation pressures. They noted that other indicators of inflation, including wage pressures, had shown no signs of trouble.
But while analysts had expected the Fed to leave rates alone, many had forecast that the Fed would for the first time use its new signaling tool to put financial markets on notice that the central bank was leaning toward raising rates in the future.
"The countdown is really on for a future tightening move by the Fed," David Jones, chief economist at Aubrey G. Lanston & Co. in New York, said Monday. "It is no longer a matter of whether they will tighten, but when."
However, evidence that the economy might be slowing on its own came earlier Tuesday. The Commerce Department reported that construction of new homes and apartments fell for the third straight month with the 10.1% April decline the biggest monthly drop in more than five years. Analysts said this showed that the economy is already beginning to slow on its own, lessening the urgency for the Fed to act.
Some Fed officials have been pointing to the incessant growth in the U.S. economy -- which expanded at a as reason to raise interest rates before the economy overheats. Those members, however, have been confronted by evidence of a "new economy," in which the productivity gains of the electronic revolution are disrupting the old links between growth and inflation as well as high employment and inflation.
Fed Chairman Alan Greenspan sent markets into a tailspin earlier this month by referring to the old-style inflationary risks of high employment. In a speech on May 6 he emphasized the favorable effects of computer technology on productivity. But he touched a raw nerve in the market when he referred to the possibility that inflationary wage increases may soon emerge as a byproduct of tight labor markets.
The Fed's policy makers next meet on June 29-30. While some economists believe that Fed officials could raise rates then, many believe the central bank will wait until its August meeting to start raising rates if the economy hasn't slowed enough on its own and inflationary pressures are building.