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Wall Street History
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07/25/2003
The Federal Reserve, Part I
The following will only be interesting to Fed junkies, and avid
followers of the U.S. economy and the markets, but I have put
together what is undoubtedly the most concise report on the
Federal Reserve and its policy moves over the past few years,
using their own words.
At times, it’s almost comical and it appears there was little
original thinking behind the decision to increase, lower, or keep
interest rates unchanged.
Next week I will add some extra market data to this piece in
order to give you a fuller picture behind the actions taken. The
quotes are taken from the Federal Open Market Committee
statements accompanying each decision.
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11/16/1999 .Fed raises target for federal funds rate 25 basis
points to 5.50%.
“Although cost pressures appear generally contained, risks to
sustainable growth persist. Despite tentative evidence of a
slowing in certain interest-sensitive sectors of the economy and
of accelerating productivity, the expansion of activity continues
in excess of the economy’s growth potential. As a consequence,
the pool of available workers willing to take jobs has been drawn
down further in recent months, a trend that must eventually be
contained if inflationary imbalances are to remain in check and
economic expansion continue.”
*Growth in GDP Q4 ’99 7.1%
2/2/2000 Fed raises 25 bps to 5.75%
“The Committee remains concerned that over time increases in
demand will continue to exceed the growth in potential supply,
even after taking account of the pronounced rise in productivity
growth. Such trends could foster inflationary imbalances that
would undermine the economy’s record economic expansion.”
3/21/2000 Fed raises 25 bps to 6.00%
“Economic conditions and considerations addressed by the
Committee are essentially the same as when the Committee met
in February. The Committee remains concerned that increases in
demand will continue to exceed the growth in potential supply,
which could foster inflationary imbalances that would undermine
the economy’s record economic expansion.”
*Growth in GDP Q1 ’00 2.6%
5/16/2000 Fed raises 50 bps to 6.50%
“Increases in demand have remained in excess of even the rapid
pace of productivity-driven gains in potential supply, exerting
continued pressure on resources. The Committee is concerned
that this disparity in the growth of demand and potential supply
will continue, which could foster inflationary imbalances that
would undermine the economy’s outstanding performance.”
6/28/2000 Fed leaves the funds rate at 6.50%
“Recent data suggest that the expansion of aggregate demand
may be moderating toward a pace closer to the rate of growth of
the economy’s potential to produce. Although core measures of
prices are rising slightly faster than a year ago, continuing rapid
advances in productivity have been containing costs and holding
down underlying price pressures.”
*Growth in GDP Q2 ’00 4.8%
8/22/2000 Fed leaves the funds rate at 6.50%
“Recent data have indicated that the expansion of aggregate
demand is moderating toward a pace closer to the rate of growth
of the economy’s potential to produce. The data also have
indicated that more rapid advances in productivity have been
raising that potential growth rate as well as containing costs and
holding down underlying price pressures.”
*Growth in GDP Q3 ’00 0.6%
10/3/2000 Fed leaves the funds rate at 6.50%
“Recent data have indicated that the expansion of aggregate
demand has moderated to a pace closer to the enhanced rate of
growth of the economy’s potential to produce. The more rapid
advances in productivity also continue to help contain costs and
hold down underlying price pressures.”
11/15/2000 Fed leaves the funds rate at 6.50%
“The utilization of the pool of available workers remains at an
unusually high level, and the increase in energy prices, though
having limited effect on core measures of prices to date, still
harbors the possibility of raising inflation expectations. The
Committee, accordingly, continues to see a risk of heightened
inflation pressures. However, softening in business and
household demand and tightening conditions in financial markets
over recent months suggest that the economy could expand for a
time at a pace below the productivity-enhanced rate of growth of
its potential to produce.”
12/19/2000 Fed leaves the funds rate at 6.50%
“The drag on demand and profits from rising energy costs, as
well as eroding consumer confidence, reports of substantial
shortfalls in sales and earnings, and stress in some segments of
the financial markets suggest that economic growth may be
slowing further. While some inflation risks persist, they are
diminished by the more moderate pace of economic activity and
by the absence of any indication that longer-term inflation
expectations have increased. The Committee will continue to
monitor closely the evolving economic situation.”
*Growth in GDP Q4 ‘00 1.1%
1/3/2001 Fed lowers 50 bps to 6.00%
“These actions were taken in light of further weakening of sales
and production, and in the context of lower consumer
confidence, tight conditions in some segments of financial
markets, and high energy prices sapping household and business
purchasing power. Moreover, inflation pressures remain
contained. Nonetheless, to date there is little evidence to suggest
that longer-term advances in technology and associated gains in
productivity are abating.”
1/31/2001 Fed lowers 50 bps to 5.50%
“Consumer and business confidence has eroded further,
exacerbated by rising energy costs that continue to drain
consumer purchasing power and press on business profit
margins. Partly as a consequence, retail sales and business
spending on capital equipment have weakened appreciably. In
response, manufacturing production has been cut back sharply,
with new technologies appearing to have accelerated the
response of production and demand to potential excesses in the
stock of inventories and capital equipment.”
3/20/2001 Fed lowers 50 bps to 5.00%
“Persistent pressures on profit margins are restraining investment
spending and, through declines in equity wealth, consumption.
The associated backup in inventories has induced a rapid
response in manufacturing output and, with spending having
firmed a bit since last year, inventory adjustment appears to be
well underway.”
*Growth in GDP Q1 ’01 -0.6%
4/18/2001 Fed lowers 50 bps to 4.50%
“The FOMC has reviewed prospects for the economy in light of
the information that has become available since its March
meeting. A significant reduction in excess inventories seems
well advanced. Consumption and housing expenditures have
held up reasonably well, though activity in these areas has
flattened recently. Although measured productivity probably
weakened in the first quarter, the impressive underlying rate of
increase that developed in recent years appears to be largely
intact.”
5/15/2001 Fed lowers 50 bps to 4.00%
“A significant reduction in excess inventories seems well
advanced. Consumption and housing expenditures have held up
reasonably well, though activity in these areas has flattened
recently. Investment in capital equipment, however, has
continued to decline. The erosion in current and prospective
profitability, in combination with considerable uncertainty about
the business outlook, seems likely to hold down capital spending
going forward. This potential restraint, together with the
possible effects of earlier reductions in equity wealth on
consumption and the risk of slower growth abroad, continues to
weigh on the economy.”
6/27/2001 Fed lowers 25 bps to 3.75%
“The patterns evident in recent months – declining profitability
and business capital spending, weak expansion of consumption,
and slowing growth abroad – continue to weigh on the economy.
The associated easing of pressures on labor and product markets
is expected to keep inflation contained.”
*Growth in GDP Q2 ’01 -1.6%
8/21/2001 Fed lowers 25 bps to 3.50%
“Household demand has been sustained, but business profits and
capital spending continue to weaken and growth abroad is
slowing, weighing on the U.S. economy. The associated easing
of pressures on labor and product markets is expected to keep
inflation contained.”
9/17/2001 Fed lowers 50 bps to 3.00% [Post 9/11]
“Even before the tragic events of last week, employment,
production, and business spending remained weak, and last
week’s events have the potential to damp spending further.
Nonetheless, the long-term prospects for productivity growth and
the economy remain favorable and should become evident once
the unusual forces restraining demand abate. For the foreseeable
future, the Committee continues to believe that against the
background of its long-run goals of price stability and sustainable
economic growth and of the information currently available, the
risks are weighted mainly toward conditions that may generate
economic weakness.”
*Growth in GDP Q3 ’01 -0.3%
10/2/2001 Fed lowers 50 bps to 2.50%
“The terrorist attacks have significantly heightened uncertainty in
an economy that was already weak. Business and household
spending as a consequence are being further damped.
Nonetheless, the long-term prospects for productivity growth and
the economy remain favorable and should become evident once
the unusual forces restraining demand abate.”
11/6/2001 Fed lowers 50 bps to 2.00%
“Heightened uncertainty and concerns about a deterioration in
business conditions both here and abroad are damping economic
activity. For the foreseeable future, then, the Committee
continues to believe that, against the background of its long-run
goals of price stability and sustainable economic growth and of
the information currently available, the risks are weighted mainly
toward conditions that may generate economic weakness.”
12/11/2001 Fed lowers 25 bps to 1.75%
“Economic activity remains soft, with underlying inflation likely
to edge lower from relatively modest levels. To be sure,
weakness in demand shows signs of abating, but those signs are
preliminary and tentative. The Committee continues to believe
that, against the background of its long-run goals of price
stability and sustainable economic growth and of the information
currently available, the risks are weighted mainly toward
conditions that may generate economic weakness in the
foreseeable future.”
*Growth in GDP Q4 ’01 2.7%
1/30/2002 Fed leaves the funds rate at 1.75%
“Signs that weakness in demand is abating and economic activity
is beginning to firm have become more prevalent. With the
forces restraining the economy starting to diminish, and with the
long-term prospects for productivity growth remaining favorable
and monetary policy accommodative, the outlook for economic
recovery has become more promising.”
3/19/2002 Fed leaves the funds rate at 1.75%
“The information that has become available since the last
meeting of the Committee indicates that the economy, bolstered
by a marked swing in inventory investment, is expanding at a
significant pace. Nonetheless, the degree of the strengthening in
final demand over coming quarters, an essential element in
sustained economic expansion, is still uncertain.”
*Growth in GDP Q1 ’02 5.0%
5/7/2002 Fed leaves the funds rate at 1.75%
“The information that has become available since the last
meeting of the Committee confirms that economic activity has
been receiving considerable upward impetus from a marked
swing in inventory investment. Nonetheless, the degree of the
strengthening in final demand over coming quarters, an essential
element in sustained economic expansion, is still uncertain.”
6/26/2002 Fed leaves the funds rate at 1.75%
“The information that has become available since the last
meeting of the Committee confirms that economic activity is
continuing to increase. However, both the upward impetus from
the swing in inventory investment and the growth in final
demand appear to have moderated. The Committee expects the
rate of increase of final demand to pick up over coming quarters,
supported in part by robust underlying growth in productivity,
but the degree of the strengthening remains uncertain.”
*Growth in GDP Q2 ’02 1.3%
8/13/2002 Fed leaves the funds rate at 1.75%
“The softening in the growth of aggregate demand that emerged
this spring has been prolonged in large measure by weakness in
financial markets and heightened uncertainty related to problems
in corporate reporting and governance.
“The current accommodative stance of monetary policy, coupled
with still-robust underlying growth in productivity, should be
sufficient to foster an improving business climate over time.”
9/25/2002 Fed leaves the funds rate at 1.75%
“Over time, the current accommodative stance of monetary
policy, coupled with still-robust underlying growth in
productivity, should be sufficient to foster an improving business
climate. However, considerable uncertainty persists about the
extent and timing of the expected pickup in production and
employment owing in part to the emergence of heightened
geopolitical risks.”
*Growth in GDP Q3 ’02 4.0%
11/6/2002 Fed lowers 50 bps to 1.25%
“The Committee continues to believe that an accommodative
stance of monetary policy, coupled with still-robust underlying
growth in productivity, is providing important ongoing support to
economic activity. However, incoming economic data have
tended to confirm that greater uncertainty, in part attributable to
heightened geopolitical risks, is currently inhibiting spending,
production, and employment. Inflation and inflation
expectations remain well contained.”
12/10/2002 Fed leaves the funds rate at 1.25%
“The Committee continues to believe that this accommodative
stance of monetary policy, coupled with still-robust underlying
growth in productivity, is providing important ongoing support to
economic activity. The limited number of incoming economic
indicators since the November meeting, taken together, are not
inconsistent with the economy working its way through its
current soft spot.”
*Growth in GDP Q4 ’02 1.4%
1/29/2003 Fed leaves the funds rate at 1.25%
“Oil price premiums and other aspects of geopolitical risks have
reportedly fostered continued restraint on spending and hiring by
businesses. However, the Committee believes that as those risks
lift, as most analysts expect, the accommodative stance of
monetary policy, coupled with ongoing growth in productivity,
will provide support to an improving economic climate over
time.”
3/18/2003 Fed leaves the funds rate at 1.25%
“While incoming economic data since the January meeting have
been mixed, recent labor market indicators have proven
disappointing. However, the hesitancy of the economic
expansion appears to owe importantly to oil price premiums and
other aspects of geopolitical uncertainties. The Committee
believes that as those uncertainties lift, as most analysts expect,
the accommodative stance of monetary policy, coupled with
ongoing growth in productivity, will provide support to
economic activity sufficient to engender an improving economic
climate over time.”
*Growth in GDP Q1 ’03 1.4%
5/6/2003 Fed leaves the funds rate at 1.25%
“Recent readings on production and employment, though mostly
reflecting decisions made before the conclusion of hostilities,
have proven disappointing. However, the ebbing of geopolitical
tensions has rolled back oil prices, bolstered consumer
confidence, and strengthened debt and equity markets. These
developments, along with the accommodative stance of monetary
policy and ongoing growth in productivity, should foster an
improving economic climate over time.”
6/25/2003 Fed lowers 25 bps to 1.00%
“The Committee continues to believe that an accommodative
stance of monetary policy, coupled with still robust underlying
growth in productivity, is providing important ongoing support to
economic activity. Recent signs point to a firming in spending,
markedly improved financial conditions, and labor and product
markets that are stabilizing. The economy, nonetheless, has yet
to exhibit sustainable growth. With inflationary expectations
subdued, the Committee judged that a slightly more expansive
monetary policy would add further support for an economy
which it expects to improve over time.”
Sources:
Federal Reserve [federalreserve.gov]
National Bureau of Economic Research [nber.org]
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Wall Street History will return August 1. I will be adding more
data to the above piece.
Brian Trumbore
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