January 30–31, 1996 FOMC Minutes: Full Text
A meeting of the Federal Open Market Committee was held in
the offices of the Board of Governors of the Federal Reserve System in
Washington, D.C., on Tuesday, January 30, 1996, at 2:30 p.m. and
continued on Wednesday, January 31, 1996, at 9:00 a.m.
Present:
Mr. Greenspan, Chairman
Mr. McDonough, Vice Chairman
Mr. Boehne
Mr. Jordan
Mr. Kelley
Mr. Lindsey
Mr. McTeer
Ms. Phillips
Mr. Stern
Ms. Yellen
Messrs. Broaddus, Guynn, Moskow, and Parry, Alternate Members of the Federal Open Market Committee
Messrs. Hoenig, Melzer, and Ms. Minehan, Presidents of the Federal Reserve Banks of Kansas City, St. Louis, and Boston respectively
Mr. Kohn, Secretary and Economist
Mr. Bernard, Deputy Secretary
Mr. Coyne, Assistant Secretary
Mr. Gillum, Assistant Secretary
Mr. Mattingly, General Counsel
Mr. Prell, Economist
Mr. Truman, Economist
Messrs. Lang, Lindsey, Mishkin, Promisel, Rolnick,
Rosenblum, Siegman, Simpson, Sniderman, and Stockton, Associate Economists
Mr. Fisher, Manager, System Open Market Account
Mr. Winn, Assistant to the Board, Office of Board
Members, Board of Governors
Mr. Ettin, Deputy Director, Division of Research
and Statistics, Board of Governors
Mr. Madigan, Associate Director, Division of
Monetary Affairs, Board of Governors
Mr. Slifman, Associate Director, Division of
Research and Statistics, Board of Governors
Mr. Rosine, 1 Senior Economist, Division of
Research and Statistics, Board of Governors
Mr. Reid, 1 Economist, Division of Monetary
Affairs, Board of Governors
Ms. Low, Open Market Secretariat Assistant,
Division of Monetary Affairs, Board of
Governors
Mr. Beebe, Ms. Browne, Messrs. Davis, Dewald,
Goodfriend, and Hunter,
Senior Vice Presidents,
Federal Reserve Banks of San Francisco, Boston,
Kansas City, St. Louis, Richmond, and Chicago
respectively
Mses. Krieger and Rosenbaum,
Vice Presidents
Federal Reserve Banks of New York and Atlanta
respectively
In the agenda for this meeting, it was reported that advices
of the election of the following members and alternate members of the
Federal Open Market Committee for the period commencing January 1,
1996, and ending December 31, 1996, had been received and that the
named individuals had executed their oaths of office.
The elected members and alternate members were as follows:
William J. McDonough, President of the Federal Reserve Bank of New
York, with Ernest T. Patrikis, First Vice President of the Federal
Reserve Bank of New York, as alternate;
Edward G. Boehne, President of the Federal Reserve Bank of
Philadelphia, with J. Alfred Broaddus, Jr., President of the
Federal Reserve Bank of Richmond, as alternate;
Jerry L. Jordan, President of the Federal Reserve Bank of Cleveland,
with Michael H. Moskow, President of the Federal Reserve Bank of
Chicago, as alternate;
Robert D. McTeer, President of the Federal Reserve Bank of Dallas,
with Jack Guynn, President of the Federal Reserve Bank of Atlanta,
as alternate;
Gary H. Stern, President of the Federal Reserve Bank of Minneapolis,
with Robert T. Parry, President of the Federal Reserve Bank of San
Francisco, as alternate.
By unanimous vote, the following officers of the Federal Open
Market Committee were elected to serve until the election of their
successors at the first meeting of the Committee after December 31,
1996, with the understanding that in the event of the discontinuance
of their official connection with the Board of Governors or with a
Federal Reserve Bank, they would cease to have any official connection
with the Federal Open Market Committee:
Alan Greenspan
William J. McDonough
Donald L. Kohn
Normand R. V. Bernard
Joseph R. Coyne
Gary P. Gillum
J. Virgil Mattingly, Jr.
Thomas C. Baxter, Jr.
Michael J. Prell
Edwin M. Truman
Chairman
Vice Chairman
Secretary and Economist
Deputy Secretary
Assistant Secretary
Assistant Secretary
General Counsel
Deputy General Counsel
Economist
Economist
Richard W. Lang, David E. Lindsey,
Frederic S. Mishkin, Larry J. Promisel,
Arthur J. Rolnick, Harvey Rosenblum,
Charles J. Siegman, Thomas D. Simpson,
Mark S. Sniderman, and David J. Stockton
Associate Economists
By unanimous vote, the Federal Reserve Bank of New York was
selected to execute transactions for the System Open Market Account
until the adjournment of the first meeting of the Committee after
December 31, 1996.
By unanimous vote, Peter R. Fisher was selected to serve at
the pleasure of the Committee as Manager, System Open Market Account,
on the understanding that his selection was subject to being
satisfactory to the Federal Reserve Bank of New York.
Secretary's note: Advice subsequently was received
that the selection of
Mr. Fisher as Manager was
satisfactory to the board of directors of the Federal
Reserve Bank of New York.
By unanimous vote, the Authorization for Domestic Open Market
Operations shown below was reaffirmed.
Authorization for Domestic Open Market Operations
Reaffirmed January 30, 1996
1. The Federal Open Market Committee authorizes and directs the
Federal Reserve Bank of New York, to the extent necessary to carry out
the most recent domestic policy directive adopted at a meeting of the
Committee:
(a) To buy or sell U.S. Government securities, including
securities of the Federal Financing Bank, and securities that are
direct obligations of, or fully guaranteed as to principal and
interest by, any agency of the United States in the open market, from
or to securities dealers and foreign and international accounts
maintained at the Federal Reserve Bank of New York, on a cash,
regular, or deferred delivery basis, for the System Open Market
Account at market prices, and, for such Account, to exchange maturing
U.S. Government and Federal agency securities with the Treasury or the
individual agencies or to allow them to mature without replacement;
provided that the aggregate amount of U.S. Government and Federal
agency securities held in such Account (including forward commitments)
at the close of business on the day of a meeting of the Committee at
which action is taken with respect to a domestic policy directive
shall not be increased or decreased by more than $8.0 billion during
the period commencing with the opening of business on the day
following such meeting and ending with the close of business on the
day of the next such meeting;
(b) When appropriate, to buy or sell in the open market, from or
to acceptance dealers and foreign accounts maintained at the Federal
Reserve Bank of New York, on a cash, regular, or deferred delivery
basis, for the account of the Federal Reserve Bank of New York at
market discount rates, prime bankers acceptances with maturities of up
to nine months at the time of acceptance that (1) arise out of the
current shipment of goods between countries or within the United
States, or (2) arise out of the storage within the United States of
goods under contract of sale or expected to move into the channels of
trade within a reasonable time and that are secured throughout their
life by a warehouse receipt or similar document conveying title to the
underlying goods; provided that the aggregate amount of bankers
acceptances held at any one time shall not exceed $100 million;
(c) To buy U.S. Government securities, obligations that are
direct obligations of, or fully guaranteed as to principal and
interest by, any agency of the United States, and prime bankers
acceptances of the types authorized for purchase under l(b) above,
from dealers for the account of the Federal Reserve Bank of New York
under agreements for repurchase of such securities, obligations, or
acceptances in 15 calendar days or less, at rates that, unless
otherwise expressly authorized by the Committee, shall be determined
by competitive bidding, after applying reasonable limitations on the
volume of agreements with individual dealers; provided that in the
event Government securities or agency issues covered by any such
agreement are not repurchased by the dealer pursuant to the agreement
or a renewal thereof, they shall be sold in the market or transferred
to the System Open Market Account; and provided further that in the
event bankers acceptances covered by any such agreement are not
repurchased by the seller, they shall continue to be held by the
Federal Reserve Bank or shall be sold in the open market.
2. In order to ensure the effective conduct of open market
operations, the Federal Open Market Committee authorizes and directs
the Federal Reserve Banks to lend U.S. Government securities held in
the System Open Market Account to Government securities dealers and to
banks participating in Government securities clearing arrangements
conducted through a Federal Reserve Bank, under such instructions as
the Committee may specify from time to time.
3. In order to ensure the effective conduct of open market
operations, while assisting in the provision of short-term investments
for foreign and international accounts maintained at the Federal
Reserve Bank of New York, the Federal Open Market Committee authorizes
and directs the Federal Reserve Bank of New York (a) for System Open
Market Account, to sell U.S. Government securities to such foreign and
international accounts on the bases set forth in paragraph l(a) under
agreements providing for the resale by such accounts of those
securities within 15 calendar days on terms comparable to those
available on such transactions in the market; and (b) for New York
Bank account, when appropriate, to undertake with dealers, subject to
the conditions imposed on purchases and sales of securities in
paragraph l(c), repurchase agreements in U.S. Government and agency
securities, and to arrange corresponding sale and repurchase
agreements between its own account and foreign and international
accounts maintained at the Bank. Transactions undertaken with such
accounts under the provisions of this paragraph may provide for a
service fee when appropriate.
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By unanimous vote, the Authorization for Foreign Currency
Operations shown below was reaffirmed.
Authorization for Foreign Currency Operations
Reaffirmed January 30, 1996
1. The Federal Open Market Committee authorizes and directs the
Federal Reserve Bank of New York, for System Open Market Account, to
the extent necessary to carry out the Committee's foreign currency
directive and express authorizations by the Committee pursuant
thereto, and in conformity with such procedural instructions as the
Committee may issue from time to time:
A. To purchase and sell the following foreign currencies in the
form of cable transfers through spot or forward transactions on the
open market at home and abroad, including transactions with the U.S.
Treasury, with the U.S. Exchange Stabilization Fund established by
Section 10 of the Gold Reserve Act of 1934, with foreign monetary
authorities, with the Bank for International Settlements, and with
other international financial institutions:
Austrian schillings
Belgian francs
Canadian dollars
Danish kroner
Pounds sterling
French francs
German marks
Italian lire
Japanese yen
Mexican pesos
Netherlands guilders
Norwegian kroner
Swedish kronor
Swiss francs
B. To hold balances of, and to have outstanding forward contracts
to receive or to deliver, the foreign currencies listed in paragraph A
above.
C. To draw foreign currencies and to permit foreign banks to draw
dollars under the reciprocal currency arrangements listed in paragraph
2 below, provided that drawings by either party to any such
arrangement shall be fully liquidated within 12 months after any
amount outstanding at that time was first drawn, unless the Committee,
because of exceptional circumstances, specifically authorizes a delay.
D. To maintain an overall open position in all foreign currencies
not exceeding $25.0 billion. For this purpose, the overall open
position in all foreign currencies is defined as the sum (disregarding
signs) of net positions in individual currencies. The net position in
a single foreign currency is defined as holdings of balances in that
currency, plus outstanding contracts for future receipt, minus
outstanding contracts for future delivery of that currency, i.e., as
the sum of these elements with due regard to sign.
2. The Federal Open Market Committee directs the Federal Reserve
Bank of New York to maintain reciprocal currency arrangements ("swap"
arrangements) for the System Open Market Account for periods up to a
maximum of 12 months with the following foreign banks, which are among
those designated by the Board of Governors of the Federal Reserve
System under Section 214.5 of Regulation N, Relations with Foreign
Banks and Bankers, and with the approval of the Committee to renew
such arrangements on maturity:
Foreign bank Amount of arrangement
(millions of dollars equivalent)
Austrian National Bank
National Bank of Belgium
Bank of Canada
National Bank of Denmark
Bank of England
Bank of France
German Federal Bank
Bank of Italy
Bank of Japan
Bank of Mexico
Netherlands Bank
Bank of Norway
Bank of Sweden
Swiss National Bank
250
1,000
2,000
250
3,000
2,000
6,000
3,000
5,000
3,000
500
250
300
4,000
Bank for International Settlements:
Dollars against Swiss francs 600
Dollars against authorized European
currencies other than Swiss francs 1,250
Any changes in the terms of existing swap arrangements, and the
proposed terms of any new arrangements that may be authorized, shall
be referred for review and approval to the Committee.
3. All transactions in foreign currencies undertaken under paragraph
1.A. above shall, unless otherwise expressly authorized by the
Committee, be at prevailing market rates. For the purpose of
providing an investment return on System holdings of foreign
currencies, or for the purpose of adjusting interest rates paid or
received in connection with swap drawings, transactions with foreign
central banks may be undertaken at non-market exchange rates.
4. It shall be the normal practice to arrange with foreign central
banks for the coordination of foreign currency transactions. In
making operating arrangements with foreign central banks on System
holdings of foreign currencies, the Federal Reserve Bank of New York
shall not commit itself to maintain any specific balance, unless
authorized by the Federal Open Market Committee. Any agreements or
understandings concerning the administration of the accounts
maintained by the Federal Reserve Bank of New York with the foreign
banks designated by the Board of Governors under Section 214.5 of
Regulation N shall be referred for review and approval to the
Committee.
5. Foreign currency holdings shall be invested insofar as
practicable, considering needs for minimum working balances. Such
investments shall be in liquid form, and generally have no more than
12 months remaining to maturity. When appropriate in connection with
arrangements to provide investment facilities for foreign currency
holdings, U.S. Government securities may be purchased from foreign
central banks under agreements for repurchase of such securities
within 30 calendar days.
6. All operations undertaken pursuant to the preceding paragraphs
shall be reported promptly to the Foreign Currency Subcommittee and
the Committee. The Foreign Currency Subcommittee consists of the
Chairman and Vice Chairman of the Committee, the Vice Chairman of the
Board of Governors, and such other member of the Board as the Chairman
may designate (or in the absence of members of the Board serving on
the Subcommittee, other Board members designated by the Chairman as
alternates, and in the absence of the Vice Chairman of the Committee,
his alternate). Meetings of the Subcommittee shall be called at the
request of any member, or at the request of the Manager, System Open
Market Account ("Manager"), for the purposes of reviewing recent or
contemplated operations and of consulting with the Manager on other
matters relating to his responsibilities. At the request of any
member of the Subcommittee, questions arising from such reviews and
consultations shall be referred for determination to the Federal Open
Market Committee.
7. The Chairman is authorized:
A. With the approval of the Committee, to enter into any needed
agreement or understanding with the Secretary of the Treasury about
the division of responsibility for foreign currency operations between
the System and the Treasury;
B. To keep the Secretary of the Treasury fully advised concerning
System foreign currency operations, and to consult with the Secretary
on policy matters relating to foreign currency operations;
C. From time to time, to transmit appropriate reports and
information to the National Advisory Council on International Monetary
and Financial Policies.
8. Staff officers of the Committee are authorized to transmit
pertinent information on System foreign currency operations to
appropriate officials of the Treasury Department.
9. All Federal Reserve Banks shall participate in the foreign
currency operations for System Account in accordance with paragraph 3
G(1) of the Board of Governors' Statement of Procedure with Respect to
Foreign Relationships of Federal Reserve Banks dated January 1, 1944.
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By unanimous vote, the Foreign Currency Directive shown below
was reaffirmed.
Foreign Currency Directive
Reaffirmed January 30, 1996
1. System operations in foreign currencies shall generally be
directed at countering disorderly market conditions, provided that
market exchange rates for the U.S. dollar reflect actions and behavior
consistent with the IMF Article IV, Section 1.
2. To achieve this end the System shall:
A. Undertake spot and forward purchases and sales of foreign
exchange.
B. Maintain reciprocal currency ("swap") arrangements with
selected foreign central banks and with the Bank for International
Settlements.
C. Cooperate in other respects with central banks of other
countries and with international monetary institutions.
3. Transactions may also be undertaken:
A. To adjust System balances in light of probable future needs
for currencies.
B. To provide means for meeting System and Treasury commitments
in particular currencies, and to facilitate operations of the Exchange
Stabilization Fund.
C. For such other purposes as may be expressly authorized by the
Committee.
4. System foreign currency operations shall be conducted:
A. In close and continuous consultation and cooperation with the
United States Treasury;
B. In cooperation, as appropriate, with foreign monetary
authorities; and
C. In a manner consistent with the obligations of the United
States in the International Monetary Fund regarding exchange
arrangements under the IMF Article IV.
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By unanimous vote, the Procedural Instructions with Respect
to Foreign Currency Operations shown below were reaffirmed.
Procedural Instructions with Respect to
Foreign Currency Operations
Reaffirmed January 30, 1996
In conducting operations pursuant to the authorization and
direction of the Federal Open Market Committee as set forth in the
Authorization for Foreign Currency Operations and the Foreign Currency
Directive, the Federal Reserve Bank of New York, through the Manager,
System Open Market Account ("Manager"), shall be guided by the
following procedural understandings with respect to consultations and
clearances with the Committee, the Foreign Currency Subcommittee, and
the Chairman of the Committee. All operations undertaken pursuant to
such clearances shall be reported promptly to the Committee.
1. The Manager shall clear with the Subcommittee (or with the
Chairman, if the Chairman believes that consultation with the
Subcommittee is not feasible in the time available):
A. Any operation that would result in a change in the System's
overall open position in foreign currencies exceeding $300 million on
any day or $600 million since the most recent regular meeting of the
Committee.
B. Any operation that would result in a change on any day in the
System's net position in a single foreign currency exceeding $150
million, or $300 million when the operation is associated with
repayment of swap drawings.
C. Any operation that might generate a substantial volume of
trading in a particular currency by the System, even though the change
in the System's net position in that currency might be less than the
limits specified in 1.B.
D. Any swap drawing proposed by a foreign bank not exceeding the
larger of (i) $200 million or (ii) 15 percent of the size of the swap
arrangement.
2. The Manager shall clear with the Committee (or with the
Subcommittee, if the Subcommittee believes that consultation with the
full Committee is not feasible in the time available, or with the
Chairman, if the Chairman believes that consultation with the
Subcommittee is not feasible in the time available):
A. Any operation that would result in a change in the System's
overall open position in foreign currencies exceeding $1.5 billion
since the most recent regular meeting of the Committee.
B. Any swap drawing proposed by a foreign bank exceeding the
larger of (i) $200 million or (ii) 15 percent of the size of the swap
arrangement.
3. The Manager shall also consult with the Subcommittee or the
Chairman about proposed swap drawings by the System and about any
operations that are not of a routine character.
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Agreement to "Warehouse" Foreign Currencies
At its meeting on January 31-February 1, 1995, the Committee
had approved an increase from $5 billion to $20 billion in the amount
of eligible foreign currencies that the System was prepared to
"warehouse" for the Treasury and the Exchange Stabilization Fund
(ESF). The purpose of the warehousing facility, which has been in
place for many years, is to supplement the U.S. dollar resources of
the Treasury and the ESF for financing purchases of foreign currencies
and related international operations. The enlargement of the
warehousing agreement was intended to facilitate U.S. participation in
the Multilateral Program to Restore Financial Stability in Mexico,
announced by President Clinton on January 31, 1995, by warehousing up
to $20 billion in German marks and Japanese yen held by the Treasury
through the ESF. The Committee had agreed that it would review each
year the need to maintain this level of warehousing authority in light
of the progress and requirements of the Program.
The Treasury and the Exchange Stabilization Fund had made no
use of the warehousing facility over the past year. Nevertheless,
consistent with Federal Reserve support for the program of assistance
to Mexico, the members agreed that it was appropriate to postpone
consideration of an adjustment in the overall size of the facility at
least until the end of the disbursement phase of the Mexican program
currently scheduled for August 1996. Accordingly, the Committee
reaffirmed the warehousing authority by unanimous vote.
By unanimous vote, the Program for Security of FOMC
Information was amended to conform it to the treatment of transcripts
of FOMC meetings and the procedures that the Committee had been
following for some time in regard to redactions of confidential
information in transcripts and other documents that are released to
the public after five years. In addition, the Committee agreed to
amend the Program so that the automatic extension of Federal Reserve
staff access to confidential material after six months could be
suspended for certain particularly sensitive documents.
On January 23, 1996, the continuing rules, resolutions, and
other instruments of the Committee had been distributed with the
advice that, in accordance with procedures approved by the Committee,
they were being called to the Committee's attention before the January
30-31 organization meeting to give members an opportunity to raise any
questions they might have concerning them. Members were asked to
indicate if they wished to have any of the instruments in question
placed on the agenda for consideration at this meeting, and no
requests for such consideration were received.
By unanimous vote, the minutes of the meeting of the Federal
Open Market Committee held on December 19, 1995, were approved.
The Manager of the System Open Market Account reported on
recent developments in foreign exchange markets. He indicated that
the swap line drawing by the Bank of Mexico had been repaid in full on
January 29, 1996. The Committee ratified that transaction by
unanimous vote.
The Manager also reported on recent developments in domestic
financial markets and on System open market transactions in U.S.
government securities and federal agency obligations during the period
December 19, 1995, through January 30, 1996. By unanimous vote, the
Committee ratified these transactions.
The Committee then turned to a discussion of the economic and
financial outlook, the ranges for the growth of money and debt in
1996, and the implementation of monetary policy over the intermeeting
period ahead. A summary of the economic and financial information
available at the time of the meeting and of the Committee's discussion
is provided below, followed by the domestic policy directive that was
approved by the Committee and issued to the Federal Reserve Bank of
New York.
Only a limited amount of new information was available for
this meeting because of delays in government releases; that which was
available, along with anecdotal commentary, suggested that the economy
had been growing relatively slowly in recent months. Consumer
spending had expanded modestly on balance, growth in business invest-
ment in capital goods appeared to have slackened somewhat recently,
and housing demand seemed to have leveled out. Slower growth in final
sales was leading to inventory buildups in a few industries and these
buildups, together with the disruptions from government shutdowns and
severe weather, were having a restraining effect on economic activity.
The demand for labor was still growing at a moderate pace, though, and
the unemployment rate remained relatively low. The recent data on
prices and wages had been mixed, but there was no firm evidence of a
change in underlying inflation trends.
Nonfarm payroll employment continued to expand moderately in
December; the gain was in line with the average monthly increase for
1995. Employment in manufacturing, boosted by the settlement of a
strike at a major aircraft manufacturer, reversed the declines of
October and November. Construction payrolls rose further in December,
despite unfavorable weather in some parts of the country. Job growth
remained solid in much of the services industry, although employment
at personnel supply firms was little changed. The civilian unemploy-
ment rate remained at 5.6 percent in December.
Industrial production edged up in December and for the fourth
quarter as a whole advanced only slightly; industrial activity
remained sluggish in January according to the limited statistical
information that was available. In December, manufacturing output
rose a bit in association with an increase in motor vehicle assemblies
and aircraft production. Elsewhere in manufacturing, the growth of
output of office and computing equipment slowed somewhat from the
rapid pace of previous months, and the production of defense and space
equipment and of nondurable consumer goods registered sizable
declines. The output of utilities was boosted somewhat in December by
the effect of colder-than-average temperatures on the demand for
heating services. Utilization of total industrial capacity fell
slightly but remained at a moderately elevated level.
Retail sales continued to grow at a relatively modest rate in
December, and the fourth-quarter increase was considerably smaller
than those of the previous two quarters. In the fourth quarter, lower
spending at general merchandisers offset much of the sales gains
registered at automotive dealerships, furniture and appliance stores,
and building and supply outlets. Consumer surveys indicated some
deterioration in consumer confidence in January. Recent indicators
of housing demand and activity were mixed. Sales of new homes edged
still lower in November (latest data available), and sales of existing
homes declined by a larger amount in December than in November.
However, housing starts rebounded in November from a sizable October
decline, and conditions in mortgage markets remained quite favorable,
led by a further decline in rates.
The sparse statistical data available on business fixed
investment, along with anecdotal information, suggested a moderation
recently in the expansion of business spending on capital goods,
including some slowing of investment in computers. Investment in
transportation equipment, however, apparently had held up well in the
fourth quarter. Incoming data on construction contracts pointed to
some slowing in the growth of nonresidential building activity from a
relatively brisk pace during most of 1995.
The information available on business inventories suggested
that inventory imbalances might have emerged in a few sectors in
association with weaker-than-expected sales. Motor vehicle
inventories were at elevated levels compared with sales in late 1995,
and manufacturers responded by offering incentive packages on new cars
and trucks and by adjusting downward their January production
schedules. Data on manufacturing and retail trade inventories for
November had been delayed, but published information on inventories
held by wholesale distributors indicated a decline in that month,
reversing part of October's sizable run-up. Much of the decline
occurred in nondurable goods, although machinery distributors also
reported a sizable liquidation. The inventory-sales ratio for the
wholesale trade sector edged down in November but remained near the
high end of its range in recent years.
The nominal deficit on U.S. trade in goods and services
narrowed in October from its average rate in the third quarter. The
value of imports declined by more than the value of exports. Much of
the contraction in imports reflected reductions in oil and automotive
products that more than offset another strong rise in computer goods.
For exports, an advance in machinery exports to record levels was
outweighed by a reduction in shipments of agricultural and automotive
products. Available data on economic activity in the major foreign
industrial countries suggested that the pace of expansion in Europe
had slowed further on average while growth in Japan had picked up a
little.
Recent data suggested little change in underlying inflation
trends. Consumer prices increased slightly in December after being
unchanged in November; food prices were quiescent over the two-month
period while energy prices rose on balance, with a December rebound
more than offsetting a sizable November drop. Excluding food and
energy items, consumer prices were up modestly over the November-
December period and for all of 1995 advanced slightly more than in
1994. Producer prices of finished goods were up considerably in
November and December after having risen slowly in earlier months; in
large part, the price increases late in the year reflected sharp
upward movements in both finished foods and finished energy prices.
For 1995, producer prices of finished goods other than food and energy
rose at a subdued pace, though somewhat more than in 1994. Commodity
prices had been mixed recently after trending down earlier. Average
hourly earnings of production and nonsupervisory workers increased
somewhat in December after having been unchanged in November.
Increases in average hourly earnings had been trending up over the
past several years.
At its meeting on December 19, 1995, the Committee adopted a
directive that called for some slight easing in the degree of pressure
on reserve positions, which was expected to result in a decline in the
federal funds rate from around 5-3/4 percent to around 5-1/2 percent.
The directive did not include a presumption about the likely direction
of any adjustments to policy during the intermeeting period.
Accordingly, the directive stated that in the context of the
Committee's long-run objectives for price stability and sustainable
economic growth, and giving careful consideration to economic,
financial, and monetary developments, slightly greater reserve
restraint or slightly lesser reserve restraint would be acceptable
during the intermeeting period. The reserve conditions associated
with this directive were expected to be consistent with moderate
growth of M2 and M3 over coming months.
After the meeting, open market operations were directed
initially toward implementing the slight easing in the degree of
reserve pressure that had been adopted by the Committee and thereafter
toward maintaining this new reserve posture. Operations were
complicated by large swings in reserve demands associated with year-
end pressures and the adverse effects of unusually severe winter
weather on check clearings. Although the federal funds rate exhibited
somewhat greater volatility than normal over the period, it
nonetheless averaged close to the expected level of 5-1/2 percent.
The occasional periods of firmness in reserve market conditions
contributed to higher adjustment plus seasonal borrowing, on average,
over the period.
Most market interest rates had declined somewhat further over
the period after the December 19 meeting. Rates moved lower
immediately after the policy easing action, and most fell still more
on balance over the remainder of the intermeeting interval in response
to incoming information about the economy and the prospects for fiscal
policy, at least in the near term. Both were seen as suggesting
slower economic expansion for a time and an increased likelihood of
additional easing of monetary policy in coming months. With bond
yields down on balance, and occasionally approaching two-year lows,
major indexes of equity prices advanced sharply further.
The trade-weighted value of the dollar in terms of the other
G-10 currencies continued to rise over the intermeeting period despite
the decline in U.S. interest rates. The dollar's upward movement
against the German mark and other European currencies was associated
with increasing indications of further weakening of economic expansion
in key European countries and greater declines in interest rates in
those countries than in the United States. The dollar's appreciation
relative to the Japanese yen appeared to be related in part to a
narrowing of Japan's trade and current account surpluses. The dollar
was unchanged on balance against the Canadian dollar, while the
Mexican peso rose considerably in relation to the dollar.
Growth of M2 and M3 strengthened in December and January.
The pickup in M2 growth partly reflected the effect of recent declines
in short-term interest rates; those declines had made money market
instruments less attractive relative to household savings accounts in
M2, whose offering rates tend to be adjusted downward with a
considerable lag. In addition, the flattening of the term structure
of interest rates had lessened the comparative attractiveness of bond
mutual funds, which had continued to experience only light inflows.
Faster growth of M3 in December and January was associated with both
the pickup in M2 expansion and the issuance of additional large time
deposits to help finance a noticeable step-up in bank loan demand in
January. The expansion of M2 from the fourth quarter of 1994 to the
fourth quarter of 1995 was in the upper half of the Committee's annual
range, and M3 grew at the upper end of its range. Growth of total
domestic nonfinancial debt had been moderate in recent months, and for
the year was near the midpoint of this aggregate's monitoring range.
The staff forecast prepared for this meeting suggested that
economic activity would expand at a relatively slow pace over the near
term. This forecast was not materially different from that prepared
for the December meeting, except for a slightly weaker outlook for the
current quarter that was related in part to an inventory correction
and the effects of unusually severe winter weather on spending and
output. Over the remainder of the two-year forecast horizon, the
economy was expected to grow generally along its estimated potential.
Consumer spending was anticipated to keep pace with the growth of
disposable income; concerns about job security remained and consumer
debt burdens had risen further, but the still-ample availability of
credit and the substantial rise in the value of household equity
holdings would support further increases in consumption. The further
decline in mortgage rates recently from already-favorable levels would
help to sustain homebuilding activity at a relatively high level.
With sales and profits projected to grow more slowly, and with
utilization of existing capacity having eased considerably, business
investment in new equipment and structures was expected to expand at a
more moderate rate. In light of the recent strengthening of the
dollar, the external sector was expected to exert a small restraining
influence on real activity over the projection period as a whole.
Much uncertainty still surrounded the fiscal outlook, but the recent
impasse in the budget negotiations between the Administration and the
Congress suggested a lower degree of fiscal restraint over coming
years than had been assumed in the previous forecast. Given the
projected outlook, rates of utilization of labor and capital resources
and of inflation were not expected to change materially.
In the Committee's discussion of current and prospective
economic activity, members noted a number of temporary factors that
were retarding the expansion. The weakness in business activity this
winter was to some extent the result of the partial shutdown of the
federal government and the severe storms in a number of regions; both
clearly were transitory influences on the economy. Growth of economic
activity also was being constrained by production cutbacks stemming
from efforts to bring stocks into better alignment with disappointing
sales in a number of industries. Even so, in the absence of major
overhangs in inventories of business equipment and consumer durables,
and given favorable conditions in financial markets, members believed
that a resumption of moderate, sustainable growth after a relatively
brief period of weakness was the most likely outlook for the economy.
At the same time, many observed that the risks to such an outcome did
not seem balanced. A number of concerns, including the extent of the
damping effects of high debt loads and employment uncertainty on
consumption and questions about the sources of further export growth,
suggested the possibility of sluggish expansion, while possible
developments on the upside were more difficult to identify. With
resource use unlikely to vary appreciably, the members generally
expected no significant change in the underlying inflation picture
over the year ahead. The recent performance of inflation had some
encouraging aspects, and the odds on greater price pressures seemed
relatively small at this time.
In keeping with the practice at meetings when the Committee
establishes its long-run ranges for growth of the money and debt
aggregates, the members of the Committee and the Federal Reserve Bank
presidents not currently serving as members had prepared individual
projections of economic activity, the rate of unemployment, and
inflation for the year 1996. Measured on the basis of chain-weighted
indexes, the forecasts of the growth in real GDP had a central
tendency of 2 to 2-1/4 percent and a full range of 1-1/2 to 2-1/2
percent for the period from the fourth quarter of 1995 to the fourth
quarter of 1996. The members and nonmember presidents generally
anticipated that economic expansion in line with their forecasts would
be associated with employment growth close to that of the labor force.
Accordingly, their forecasts of the civilian rate of unemployment in
the fourth quarter of 1996 were near the current level, with a central
tendency of 5-1/2 to 5-3/4 percent and a full range of 5-1/2 to 6
percent. Projections of the rate of inflation, as reflected in the
consumer price index, had a central tendency of 2-3/4 to 3 percent;
that central tendency was on the high side of the outcome for 1995--
when the rise in the index was held down by damped increases in food
prices and declines in energy prices--but a few of the forecasts
anticipated a slightly lower rate of inflation.
In their review of developments across the nation, the
Federal Reserve Bank presidents reported modest growth in most major
areas of the country. Many referred, however, to an admixture of
strengths and weaknesses in their local economies, and a majority
observed that on balance growth in regional business activity appeared
to have slowed in the last few months. In keeping with the data
available for the nation as a whole, the slowing seemed to be
concentrated in manufacturing and especially at firms producing motor
vehicles and parts. Some presidents referred to relatively negative,
or at least cautious, sentiment among many of their business contacts.
Much of the recent softening in economic activity appeared to
arise from production cutbacks in various sectors of the economy where
involuntary accumulation of inventories seemed to have occurred as a
result of weaker sales trends in the past few months. The members
expected this inventory adjustment process to have a relatively
pronounced effect on production and overall business activity in the
current quarter and perhaps to some extent in the second. While a
greater-than-expected inventory adjustment with spreading effects
through the economy could not be ruled out, the underlying strength of
demand was likely to be sufficient to restore and sustain moderate
growth in overall economic activity as the current inventory and
production adjustments subsided.
With regard to consumer spending, members referred to overall
indications of lackluster retail sales during the holiday season and
into January. The anecdotal commentary on retail sales attributed
some of the recent weakness in a number of areas to the clearly
temporary effects of unusually severe winter weather and the partial
shutdown of the federal government. The members anticipated that
moderate growth in retail sales would resume, though some felt that
the consumer sector might remain vulnerable on the downside. The
consumer spending outlook was complicated by a number of
crosscurrents. Negative factors cited by the members included ongoing
concerns about job security that were being sustained by a continuing
stream of workforce reduction announcements by major business
concerns, increased consumer debt burdens that were showing up in
rising delinquency rates on some types of loans, and the apparent
satisfaction of much of the earlier pent-up demand for consumer
durables. On the positive side, reduced interest rates, still readily
available credit, and the accumulation of financial wealth from the
sharp rise in stock and bond prices were seen as likely to support
continuing gains in consumer spending.
Further increases in business fixed investment were viewed as
a likely prospect for the year ahead, though the growth of such
investment probably would be well below the strong pace experienced
earlier in the current cyclical expansion. Anecdotal reports
indicated continuing strength in nonresidential construction in some
parts of the country, but declining rates of capacity utilization
augured reduced growth going forward. The expansion of investment in
producers' durable equipment also was expected to slow, but from a
pace that had seemed unsustainable. While appreciable further growth
could be expected in expenditures for high-tech equipment as business
firms continued to focus on improving the efficiency of their
operations in a highly competitive environment, spending for other
types of equipment was likely to be sluggish. Members noted in
particular the prospects for weaker business spending for motor
vehicles, especially for heavy trucks. However, the fundamental
determinants of investment in business equipment, including the
reduced cost of financing such investment, remained positive and this
sector of the economy should continue to provide considerable impetus
to the expansion.
The members also viewed the considerable decline that had
occurred in mortgage interest rates and the ample availability of
housing finance as key factors in their forecasts of sustained
residential construction at relatively high levels. Adverse weather
conditions appeared to have retarded home building activity in a
number of areas in recent weeks, but several members commented that
underlying trends in housing demand were favorable and that
residential construction had remained relatively strong in several
parts of the country.
The outlook for fiscal policy was uncertain, especially with
regard to whether longer-term spending and taxation measures would be
enacted to implement the goal of a balanced federal budget by the year
2002. For the year immediately ahead, however, the members continued
to anticipate considerable restraint in federal spending, partly as a
byproduct of the current budget debate between the Congress and the
Administration. With regard to the external sector of the economy,
prospects for economic growth in major trading partners--led by
developments in Europe--appeared to have weakened, and the recent
appreciation of the dollar in the foreign exchange markets also might
tend to damp net exports. Consequently, several members saw downside
risks in the foreign trade sector over the year ahead.
The members anticipated that inflation would remain contained
in 1996, but they did not expect significant progress toward more
stable prices. They referred to crosscurrents bearing on the outlook
for wages and prices in the year ahead. Factors pointing to
potentially higher inflation included increased pressures on food
prices stemming from disappointing harvests in some areas and
relatively low grain supplies. More generally, resource utilization
was expected to remain high and greater pressures could emerge in
labor and product markets. Members noted that one broad measure of
wages had picked up and that there was a small rise in the number of
anecdotal reports indicating that labor shortages were contributing to
higher wages in some parts of the country. In addition, unusually
muted increases in the costs of worker benefits had been holding down
overall compensation costs, and this pattern might not persist. On
the other hand, high levels of resource utilization had been
associated for some time with lower rates of growth in costs than
would have been anticipated on the basis of historical experience. In
particular, a general sense of job insecurity in a period of major
business restructurings was holding down increases in labor
compensation. In an environment of strong competition, which was
preventing many businesses from passing on rising costs through higher
prices, firms continued to focus on efforts to control costs by
improving the efficiency of their operations, and this was helping to
hold down inflation. An apparent decline in inflationary expectations
also would provide a moderating influence on inflation trends in the
period ahead. While most of the members saw little reason to
anticipate appreciably lower inflation over the year ahead, they also
viewed the odds on a pickup in inflation as fairly low; they could see
possible reasons for optimism on the long-run trend in inflation; and
they generally remained confident that further progress toward price
stability would be made over the longer term.
In keeping with the requirements of the Full Employment and
Balanced Growth Act of 1978 (the Humphrey-Hawkins Act), the Committee
reviewed the ranges for growth of the monetary and debt aggregates in
1996 that it had established on a tentative basis at its meeting in
July 1995. The tentative ranges included expansion of 1 to 5 percent
for M2 and 2 to 6 percent for M3, measured from the fourth quarter of
1995 to the fourth quarter of 1996. The monitoring range for growth
of total domestic nonfinancial debt was provisionally set at 3 to 7
percent for 1996. The tentative ranges for 1996 were unchanged from
the actual ranges for 1995. In July, the range for M3 had been raised
by two percentage points to reflect developments that seemed to be
fostering a return to the historical pattern of somewhat faster growth
in M3 than in M2.
In their discussion, the members took note of a staff
analysis which indicated that monetary expansion consistent with the
moderate growth of nominal GDP that the members were projecting for
1996 most likely would be around the upper ends of the tentative
ranges adopted last July. M2 and M3 velocity over the past couple of
years had conformed more closely on balance with historical patterns,
and the projections assumed that this behavior would continue in
1996. In light of the experience of earlier years, however, when the
velocities of these aggregates had exhibited pronounced atypical
behavior, substantial uncertainty still surrounded any projections of
monetary expansion and the linkage between particular rates of money
growth and the basic objectives of monetary policy.
Most members endorsed a proposal to adopt the relatively low
ranges for growth of M2 and M3 in 1996 that the Committee had set on a
tentative basis in July 1995. These members favored retention of the
tentative ranges because they could be viewed as benchmarks for money
growth that would be associated with price stability, assuming
behavior of velocity in line with historical experience, and a
reaffirmation of those ranges would underscore the Committee's
commitment to a policy of achieving price stability over the longer
term. Some members also noted that any adjustment of these ranges to
align them more fully with projections of money growth consistent with
the Committee's expectations for expansion of the economy and prices
in 1996 could be misinterpreted. Such an action might be seen as
suggesting that the Committee had a greater degree of confidence in
the relationship between money growth and broad measures of economic
performance than was warranted by its current understanding of that
relationship or that the Committee was now placing greater emphasis on
the broad monetary aggregates as a gauge of the thrust of monetary
policy.
Two members favored somewhat higher growth ranges for M2 and
M3 in 1996. They noted that the expansion of these broad aggregates
was anticipated to be around the upper ends of their tentative ranges,
and perhaps even higher, given the Committee's expectations for the
performance of the economy and prices. In their view, the higher
ranges would be more consistent with what they saw as the Committee's
obligations under the Federal Reserve Act to set ranges consistent
with expected or desired economic outcomes for the year, and the
reasons for establishing those ranges could easily be set forth and
understood as an appropriate technical adjustment that would not imply
any lessened commitment to the Committee's price stability goal.
The Committee unanimously preferred to retain the 3 to 7
percent range for total domestic nonfinancial debt in 1996. This
position took account of a staff projection indicating that the debt
aggregate was likely to continue to grow at a rate generally in line
with the expansion of nominal GDP, although some moderation in private
credit demands was anticipated and there were indications that lenders
were no longer easing their terms and conditions for granting credit
to consumers and businesses.
At the conclusion of its discussion, the Committee voted to
approve without change the tentative ranges for 1996 that it had
established in July of last year. In keeping with its usual procedures under the Humphrey-Hawkins Act, the Committee would review its
ranges at midyear, or sooner if interim conditions warranted, in light
of the growth and velocity behavior of the aggregates and ongoing
economic and financial developments. Accordingly, the following
longer-run policy statement for 1995 was approved for inclusion in
the domestic policy directive:
The Federal Open Market Committee seeks monetary
and financial conditions that will foster price
stability and promote sustainable growth in output.
In furtherance of these objectives, the Committee at
this meeting established ranges for growth of M2 and
M3 of 1 to 5 percent and 2 to 6 percent respectively,
measured from the fourth quarter of 1995 to the fourth
quarter of 1996. The monitoring range for growth of
total domestic nonfinancial debt was set at 3 to 7
percent for the year. The behavior of the monetary
aggregates will continue to be evaluated in the light
of progress toward price level stability, movements in
their velocities, and developments in the economy and
financial markets.
Votes for this action: Messrs. Greenspan,
McDonough, Boehne, Jordan, Kelley, McTeer, Ms.
Phillips, and Mr. Stern.
Votes against this action: Mr. Lindsey and
Ms. Yellen.
Mr. Lindsey and Ms. Yellen dissented because they preferred
somewhat higher ranges for M2 and M3. They recognized that the
relationships between the ranges for the monetary aggregates and broad
measures of economic performance were subject to substantial
uncertainty, but ranges higher than those adopted on a tentative basis
in July 1995 were more likely to encompass monetary expansion
consistent with the central tendency of members' current forecasts of
nominal GDP growth for 1996. Raising the ranges for M2 and M3 would
in their view conform those ranges more closely with the provisions in
the Federal Reserve Act that require the System to communicate to the
Congress its objectives and plans for the growth of the aggregates for
the calendar year. They believed the Committee could readily explain
that such an adjustment to the ranges did not represent a lessened
commitment to its price stability goal or an increased emphasis on the
monetary aggregates in policy formulation.
The Committee also discussed alternatives to the monetary
aggregates for communicating its intentions with regard to the course
of inflation over the longer run. Some members thought that explicit
numerical goals or forecasts for inflation over a period of years
would have several important benefits, including enhanced credibility
that could reduce the costs of achieving price stability and greater
flexibility to respond to the emergence of economic weakness by easing
policy for a limited period of time without arousing inflation
concerns. Other members, while endorsing fully the long-term goal of
price stability, had a number of reservations about implementing such
proposals, especially at this time. Based on experience in the United
States and elsewhere, many were skeptical about the payoff in terms of
greater credibility or flexibility in policy implementation.
Moreover, they believed that substantially more study and deliberation
were required to explore fully the alternatives and the consequences
of changes in the way the Committee formulated and communicated its
objectives. They also thought that any such assessment would need to
take account of the prospects for, or disposition of, closely related
legislation that was now being considered in the Congress. The
Committee did not take any action on this issue at this meeting, but
it recognized that the matter would need to be revisited from time to
time.
In the Committee's discussion of policy for the intermeeting
period ahead, the members supported a proposal calling for some slight
easing in reserve conditions. Although a pickup to an acceptable rate
of expansion was seen as the most likely course for the economy in
coming quarters, the risks of a shortfall in growth were believed to
be significant. At the same time, while most members were forecasting
high levels of resource use and little change in the rate of inflation
this year, they saw only a very limited risk that a slight easing move
might foster higher inflation under prevailing circumstances, and some
felt that there were favorable prospects for a slightly improved
inflation performance. Under the circumstances, a slight decrease was
warranted in the real federal funds rate from a level that a number of
members considered still a bit to the firm side--a stance that seemed
less appropriate in light of the reduced threat over the last year of
a pickup in inflation. One member pointed out that such a decrease
would tend to counter the effects on aggregate demand of the recent
rise in the foreign exchange value of the dollar, which might continue
to move higher if interest rate declines expected by the markets were
not forthcoming. It was noted that postponing a decision in this
uncertain economic climate could be defended on the ground that more
evidence was needed to ascertain whether the weakness in the economy
was quite temporary or more lasting; if it was the former,
inflationary pressures could re-emerge at lower interest rates. On
the other hand, a few members commented that the currently sluggish
performance of the economy could be read as calling for a more
pronounced easing move, but they preferred a cautious approach to
policy in light of current inflation trends and the uncertainties that
surrounded their forecasts of some strengthening in the economy.
The Chairman informed the Committee that he had asked the
members of the Board of Governors to convene immediately after this
meeting to consider a reduction of 1/4 percentage point in the
discount rate. Such a reduction had been proposed by a total of six
Federal Reserve Banks at this point. Given the easing in reserve
markets favored by the Committee and the possibility of a lower
discount rate, the members did not believe that a further policy move
was likely to be needed during the intermeeting period. Accordingly,
they favored an unbiased directive that did not incorporate a
presumption about the likely direction of any adjustments to policy
during the next several weeks. In keeping with its usual practice,
the Committee did not rule out the possibility of an intermeeting
policy change on the basis of unanticipated economic or financial
developments.
At the conclusion of the Committee's discussion, all the
members supported a directive that called for a slight reduction in
the degree of pressure on reserve positions and that did not include a
bias about the likely direction of an adjustment to policy during the
intermeeting period, should unanticipated developments warrant a
change in policy. Accordingly, the Committee decided that in the
context of its long-run objectives for price stability and sustainable
economic growth, and giving careful consideration to economic,
financial, and monetary developments, slightly greater or slightly
lesser reserve restraint would be acceptable during the intermeeting
period. The reserve conditions contemplated at this meeting were
expected to be consistent with moderate growth in M2 and M3 over
coming months.
At the conclusion of the meeting, the Federal Reserve Bank of
New York was authorized and directed, until instructed otherwise by
the Committee, to execute transactions in the System Account in
accordance with the following domestic policy directive:
The information reviewed at this meeting suggests
that the economy has been growing rather slowly in
recent months. Nonfarm payroll employment continued to
expand moderately in December, and the civilian
unemployment rate remained at 5.6 percent. Industrial
production increased only slightly further in the
fourth quarter. Growth of consumer spending was
modest, on balance, over the past several months.
Housing starts rebounded in November from a sizable
October decline. Orders for nondefense capital goods
point to a moderation in the expansion of spending on
business equipment, and nonresidential construction has
risen appreciably further. The nominal deficit on U.S.
trade in goods and services narrowed in October from
its average rate in the third quarter. There has been
no clear change in underlying inflation trends.
Most market interest rates have declined somewhat
since the Committee meeting on December 19. In foreign
exchange markets, the trade-weighted value of the
dollar in terms of the other G-10 currencies has risen
further over the intermeeting period.
Growth of M2 and M3 strengthened in December and
January. From the fourth quarter of 1994 to the fourth
quarter of 1995, M2 expanded in the upper half of its
range and M3 grew at the upper end of its range.
Growth in total domestic nonfinancial debt has been
moderate in recent months, placing this aggregate near
the midpoint of its monitoring range for the year.
The Federal Open Market Committee seeks monetary
and financial conditions that will foster price stabil-
ity and promote sustainable growth in output. In
furtherance of these objectives, the Committee at this
meeting established ranges for growth of M2 and M3 of
1 to 5 percent and 2 to 6 percent respectively,
measured from the fourth quarter of 1995 to the fourth
quarter of 1996. The monitoring range for growth of
total domestic nonfinancial debt was set at 3 to 7
percent for the year. The behavior of the monetary
aggregates will continue to be evaluated in the light
of progress toward price level stability, movements in
their velocities, and developments in the economy and
financial markets.
In the implementation of policy for the immediate
future, the Committee seeks to decrease slightly the
existing degree of pressure on reserve positions,
taking account of a possible reduction in the discount
rate. In the context of the Committee's long-run
objectives for price stability and sustainable economic
growth, and giving careful consideration to economic,
financial, and monetary developments, slightly greater
reserve restraint or slightly lesser reserve restraint
would be acceptable in the intermeeting period. The
contemplated reserve conditions are expected to be
consistent with moderate growth in M2 and M3 over
coming months.
Votes for short-run policy: Messrs.
Greenspan, McDonough, Boehne, Jordan, Kelley,
Lindsey, McTeer, Ms. Phillips, Mr. Stern and Ms.
Yellen.
Votes against this action: None.
It was agreed that the next meeting of the Committee would be held on
Tuesday, March 26, 1996.
The meeting adjourned at 12:00 p.m.
Donald L. Kohn
Secretary
Footnotes
1-Attended portions of meeting relating to the Committee's review of
the economic outlook and establishment of its monetary and debt
ranges for 1996.
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