Wednesday, April 13, 2005

March FOMC Minutes

Key Information:

Over the intermeeting period, however, the Chairman's semiannual testimony on monetary policy, higher oil prices, and incoming data that showed a pickup in price inflation led market participants to mark up their expectations for the trajectory of the target federal funds rate. Consistent with the upward revision to policy expectations, yields on Treasury securities rose significantly. Some of the increase in nominal rates likely owed to higher inflation expectations, as inflation compensation, measured from the spread between Treasury nominal debt and comparable inflation-indexed securities, rose. However, staff analysis suggested that the increases were concentrated over the next few years and that long-term inflation expectations were little changed.

Business spending on equipment and software increased sharply in the fourth quarter and, excluding motor vehicles, appeared to be growing briskly in the first quarter. The expiration at the end of 2004 of the special tax provisions that permitted partial expensing of investment expenditures seemed not to be retarding capital spending. Presumably contributing to the vigor of capital spending were further increases in business output, strong cash positions of corporations, and an attractive cost of capital amid generally low interest rates. Shipments and orders for high-tech equipment remained strong in January. Outside the high-tech sector, shipments posted a sizable and broad-based increase in January, and the rising backlog of orders pointed to further gains in the near future. Spending on nonresidential construction was subdued, as it had been for some time.

In the staff forecast prepared for this meeting, the economy was seen as likely to expand at a rate above the growth of potential this year and next, led by strong business demand for equipment and software. Consequently, labor markets were expected to continue to firm and the unemployment rate to decline gradually. In light of the robust expansion of capital spending thus far this year, the outlook for business investment spending was revised up appreciably, as more of the strength over the latter part of 2004 was attributed to underlying demand and less to the effects of the partial-expensing tax provision. Steadily rising sales, an ongoing need to replace and upgrade software and equipment, and favorable financing costs were all expected to continue to buoy business spending this year and next. Household spending, supported by rising disposable income and, to a lesser degree, by increasing wealth, was projected to expand at a solid rate. Net exports were seen as exerting less of an arithmetic drag on economic growth than in 2004. Measures of overall consumer price inflation were expected to be lower this year than last and to step down again next year as energy prices retreated. Inflation in core consumer prices was seen as being boosted a bit by the effects of higher import and energy costs in the near term but still largely contained by continued strong growth in underlying labor productivity and remaining slack in resource markets.


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