Full Text: FOMC Minutes

The following is the text of the minutes from the Federal Open Market Committee's meeting of March 18, issued on Tuesday:

"The Manager of the System Open Market Account reported on recent developments in foreign exchange markets. There were no open market operations in foreign currencies for the System's account in the period since the previous meeting. The Manager also reported on developments in domestic financial markets and on System open market operations in government securities and federal agency obligations during the period since the previous meeting. By unanimous vote, the Committee ratified these transactions.

The Federal Reserve headquarters in Washington, DC.

The information reviewed at the March meeting indicated that economic activity had continued to decelerate in recent months. The contraction in homebuilding intensified, consumer spending appeared to be weakening, and survey measures of both consumer and business sentiment were at depressed levels. Industrial production fell in February, and private payroll employment posted a third consecutive monthly decline. After having increased in recent months through January, both headline and core inflation as measured by the consumer price index (CPI) dropped noticeably in February. In early March, however, prices of oil and other commodities rose sharply.

Labor demand softened markedly in recent months. The decline in private payroll employment that began last December steepened through February. Although employment by firms in the nonbusiness services sector and in state and local governments continued to rise, declines elsewhere were widespread. Losses were greatest in the manufacturing, construction, and retail trade sectors. Aggregate hours of private production or nonsupervisory workers fell slightly in the first two months of the year. The unemployment rate edged down to 4.8 percent in February, but was still up from the 4.5 percent rate of a year earlier. The labor force participation rate declined in February.

Industrial production declined in February after edging up slightly in the previous two months. The output of utilities dropped back after a weather-related surge in January, while mining output fell somewhat in the first two months of the year on average. Manufacturing production edged down after having flattened out in January. The motor vehicle and construction-related industries continued to hold down overall manufacturing output even as high-tech production posted moderate increases. The factory utilization rate edged down in February to a level noticeably below its recent high in the third quarter of 2007.

Real consumer spending appeared to have stalled in recent months. Real outlays for nondurable and durable consumer goods, including automobiles, were estimated to have declined, on average, in January and February. Real disposable personal income was unchanged in the fourth quarter, held down by higher food and energy prices, and moved up only slightly in January. Further declines in house prices led to a noticeable decrease in the ratio of household wealth to disposable income in the fourth quarter. The downturn in equity prices since December further reduced household wealth in the first quarter.

Readings on consumer sentiment dropped sharply in February from already low levels, and the Reuters/University of Michigan survey remained at a depressed level in early March.

The contraction in residential construction continued into early 2008. Single-family housing starts fell in both January and February. After having dropped especially sharply in December, multifamily housing starts rebounded somewhat in the first two months of the year. New home sales declined again in January, thereby pushing inventories of unsold homes to even higher levels relative to sales. Sales of existing homes held roughly steady in January, and the index of pending sales agreements in that month was consistent with flat sales in February and March. Overall, demand for housing continued to be restrained by tight financing conditions for jumbo and nonprime mortgages.

Real spending on equipment and software rose at a sluggish rate in the fourth quarter. In January, orders and shipments of nondefense capital goods excluding aircraft were above their fourth-quarter levels. However, the overall outlook for capital spending in the first quarter was weak in light of the deterioration in surveys of business conditions and attitudes and the worsening situation in markets for business finance. On the heels of robust gains during most of last year, nominal spending on nonresidential structures decelerated in December and posted an outright decline in January. Although spending in this sector is often volatile, the recent deceleration was consistent with mounting indications of slowing demand for nonresidential buildings and tightening credit conditions.

Real investment in nonfarm inventories excluding motor vehicles remained at a steady pace in the fourth quarter of 2007, but motor vehicle inventories fell sharply. After declining in November, the ratio of manufacturing and trade book-value inventories (excluding motor vehicles) to sales ticked up in December and held steady in January, but this ratio remained well below its average value in 2007.

The U.S. international trade deficit narrowed substantially in December and was about unchanged in January. Exports rose sharply in both months, while imports dipped in December before recovering in January. Increases in exports were broadly based except for automotive exports, which dropped sharply in December and remained low in January. Imports of services were up moderately. Oil imports soared, reflecting increases in both prices and volumes. Most other categories of imports dropped in December and January on net, with especially large declines in imports of automotive and consumer goods.

In the major advanced foreign economies, the rate of growth of real gross domestic product (GDP) generally declined in the fourth quarter. The source of the slowdown varied substantially across economies. In the euro area and in the United Kingdom, output was restrained by a softening in domestic demand. In contrast, Canadian domestic demand continued to increase at a very strong pace, but because of an offsetting steep decline in net exports, real GDP rose only modestly. Japan was the exception among the advanced foreign economies to the pattern of slower growth; real GDP there strengthened in the fourth quarter with higher domestic spending and continued strength in exports. Japanese exports to the United States, however, declined. Available first-quarter economic indicators for the advanced foreign economies were mixed, but, on balance, they pointed to slowing growth. Real activity also appeared to have slowed a bit in emerging markets, though it continued to advance at a fairly strong rate. In emerging Asia, the pace of real GDP growth picked up in the fourth quarter in China and South Korea, but it softened in most other countries. The rate of increase in economic activity slowed in Brazil, Mexico, and several other countries in Latin America in the fourth quarter, but remained generally strong.

In the United States, the headline CPI continued to rise rapidly in January but was flat in February. For those two months on average, the rate of headline inflation was down significantly from its elevated level in the fourth quarter of 2007, as retail energy prices stopped rising and core inflation moderated a bit; these two factors more than offset an acceleration of food prices. However, the increase in world petroleum prices in early March pointed to a renewed burst of energy price inflation in the near term. Available information, including producer prices for February, suggested that prices of core personal consumption expenditures (PCE) moved up a bit more slowly than the core CPI in January and somewhat faster than the core CPI in February.

Household survey measures of expectations for year-ahead inflation jumped in March to their highest levels in about two years; in contrast, survey measures of longer-term inflation expectations were unchanged or up slightly. Average hourly earnings increased at a somewhat slower rate in January and February than they had in November and December. Over the twelve months that ended in February, this wage measure rose a bit more slowly than in the previous twelve months.

CONTINUED: January Federal Funds Rate Cut

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