August 23, 1966 FOMC Minutes

FOMC minutes

Mr. Mitchell said it was his thinking that the Manager would be expected to "skate close to the edge" if the credit proxy seemed to be going up faster than expected. He thought that in the light of today's discussion the Manager knew that the Committee wanted to achieve a little firming if it could do so. Mr. Holmes said he assumed that what was wanted was as much restraint as could be achieved without leading to a financial crisis. It was his understanding that a 6 per cent rate of growth in the credit proxy would be acceptable to those at the table. That was what was presently expected for September, but it might turn out to be far different. If it did turn out different and the expansion was greater than 6 per cent, then he would move toward deeper net and tighter money market conditions, to the extent, borrowed reserves pressures such as to require that there were no liquidity however, attention. Manager evidently felt that Hayes commented that the Mr. paying adequate attention would not prevent his the proviso clause Holmes replied that he thought market conditions and Mr. to orderly it, the reference to liquidity it would not. As he understood directive. He whole flavor of the carried through the pressures closer to the edge" if credit he would "skate a little added that expansion rose sharply.

Mr. Ellis said he did not want it on record that everyone around the table accepted a 6 per cent rate of credit growth for September. Such a rate was not acceptable to him. Mr. Shepardson agreed. Mr. Hayes said he felt sure there were differences of opinion on the exact figure, but something on that order was what he thought people had in mind as the consensus. Mr. Bopp suggested that the policy record entry for today's meeting should make clear that that did not mean that the Committee was prepared to tolerate disorderly conditions if bank credit expanded more than anticipated. Mr. Brimmer recalled that he had expressed a rather strong preference for alternative B. He hesitated to dissent from the consensus, but he would like the record to show that he was not happy about the prospect of a 6 per cent increase. If the increase fell short of that figure, he would feel better, and he would encourage the Manager to "skate a little closer to the edge." He was unhappy that the word "firming" had been lost from the directive. Mr. Daane said he preferred alternative A to alternative B, even in the amended version, but he would not record a dissent from the directive. Thereupon, upon motion duly made and seconded, and by unanimous vote, the Federal Reserve Bank of New York was authorized and directed, until otherwise

directed by the Committee, to execute transactions in the System Account in accordance with the following current economic policy directive: The economic and financial developments reviewed at this meeting indicate that over-all domestic economic activity is expanding more rapidly than in the second quarter, despite further weakening in residential con struction. Recent wage and price developments suggest that inflationary pressures are becoming more intense. Credit demands continue strong, financial markets have tightened further, and interest rates have risen sub stantially in an atmosphere of great uncertainty. The balance of payments continues to reflect a sizable under lying deficit. In this situation, it is the Federal Open Market Committee's policy to resist inflationary pressures and to strengthen efforts to restore reasonable equilibrium in the country's balance of payments, by restricting the growth in the reserve base, bank credit, and the money supply. To implement this policy, System open market operations until the next meeting of the Committee shall be conducted with a view to supplying the minimum amount of reserves consistent with the maintenance of orderly money market conditions and the moderation of unusual liquidity pressures; provided, however, that if bank credit expands more rapidly than expected, operations shall be conducted with a view to seeking still greater reliance on borrowed reserves. It was agreed that the next meeting of the Committee would be held on Tuesday, September 13, 1966, at 9:30 a.m. Thereupon the meeting adjourned. Secretary

ATTACHMENT A CONFIDENTIAL (FR) August 22, 1966. Drafts of Current Economic Policy Directive for Consideration by the Federal Open Market Committee at its Meeting on August 23, 1966. First paragraph The economic and financial developments reviewed at this meeting indicate that over-all domestic economic activity is expanding more rapidly than in the second quarter, despite further weakening in residential construction. Recent wage and price developments suggest that inflationary pressures are becoming more intense. Credit demands continue strong, financial markets have tightened further, and interest rates have risen substantially. The balance of payments continues to reflect a sizable underlying deficit. In this situation, it is the Federal Open Market Com mittee's policy to resist inflationary pressures and to strengthen efforts to restore reasonable equilibrium in the country's balance of payments, by restricting the growth in the reserve base, bank credit, and the money supply. Second paragraph Alternative A (no change, with qualification) To implement this policy, while taking account of potential liquidity pressures within the banking system, System open market operations until the next meeting of the Committee shallbe conducted with a view to supplying the minimum amount of reserves consistent with maintenance of the current state of money market conditions; provided, however, that if bank credit expands more rapidly than expected, operations shall be conducted with a view to requiring greater reliance on borrowed reserves. Alternative B (firming, with qualification) To implement this policy, System open market operations until the next meeting of the Committee shall be conducted with a view to supplying the minimum amount of reserves consistent with gradual firming of money market conditions, except as attaining a changes may be needed to moderate unusual liquidity pressures within the banking system; provided, however, that if bank credit more rapidly than expected, operations shall be conducted expands with a view to requiring still greater reliance on borrowed reserves.