June 20, 1967 FOMC Record of Policy Actions

FOMC minutes

recent increases in short-term interest rates appeared The related in part to pressures associated with the mid-June to have been tax and dividend dates. Conditions in financial markets generally, however, were influenced by the continuing heavy volume of flotations of corporate and municipal securities, and by prospects for a very large volume of Federal debt financing in the second half of the year. Public offerings of new corporate bonds in June appeared likely to be about one-fourth larger than the previous monthly record set in March, and an unusually large volume of offerings was already scheduled for the third quarter. It appeared that the Treasury would need to raise a substantial amount of new cash later in the year, although the magnitude of the Federal deficit in the second half of 1967 would depend in large part on the course of defense spending and on the size and effective date of any increase in income taxes, all of which were uncertain at this time. The Treasury was expected to undertake a short-term cash financing in July, but the size, terms, and date of the offering had not been determined as of the date of this meeting. In May contract interest rates on conventional mortgages on new homes advanced slightly following six consecutive months of decline, and secondary-market yields on Federally-underwritten home mortgages rose fairly sharply. Inflows of funds to depositary-type institutions remained large, but the share of these funds used to expand mortgage holdings continued low. Thrift institutions reportedly were still rebuilding liquidity primarily because of a relative scarcity of mortgages available for immediate acquisition.

At commercial banks business loans outstanding declined in May, but holdings of Treasury and municipal securities increased markedly. With offering rates on negotiable CD's rising, large city banks recovered much of the CD run-off they had experienced in April. Inflows of other time and savings deposits continued large at banks generally, and total time and savings deposits expanded almost as rapidly from April to May as they had earlier in the year. Private demand deposits and the money supply, which had declined from March to April, rose substantially in May. As a result of sharp declines in Government deposits at banks, however, daily-average member bank deposits--the bank credit proxy--increased at an annual rate of only 2 per cent. of May--rapid increases in In general, the deposit trends time and savings and private demand deposits and sharp declines in Government deposits--appeared to be persisting in June. On balance, however, the bank credit proxy was expected to increase from May to rate in the 7 to 8 per cent range. This was faster June at an annual to May, but considerably slower than in the first 3 than from April of the year. The probable growth rate of member bank deposits months July depended in large measure on the size and timing from June to of the expected Treasury financing. On the assumption that the Treasury would sell, primarily to the banking system, about $4 billion of new securities shortly after mid-July, the bank credit proxy was projected to rise at an annual rate in the 10 to 12 per cent range if money market conditions were unchanged. Continued

rapid growth was projected in private demand deposits, as were some inflows of time and savings deposits and little change slackening in in Government deposits. decided that it would be appropriate at this The Committee time to maintain about the same conditions in the money market as had prevailed since the preceding meeting, partly because of the expected Treasury financing. Various other reasons were advanced by individual members against seeking firmer money market conditions at present. Among these were the current pressures in capital markets, the pros pect- -which some members thought had been enhanced recently- -that action to raise Federal income taxes might be taken soon, and the absence to date of firm evidence that the widely expected upsurge in economic activity had already begun. While none of the members advocated seeking easier money market conditions, a number expressed concern about the continued uptrend in long-term interest rates, particularly in light of the risk that higher rates might slow the recovery in the housing industry and in the economy generally. Partly for this reason, the Committee agreed that purchases of coupon issues should continue to be utilized in meeting a portion of the needs for reserves that were expected to develop in coming weeks, although some reservations were again expressed concerning the possible adverse effects in the longer run of such purchases on the functioning of the market for coupon issues. Some members favored purchases of coupon issues on other grounds. These included considerations relating to the balance of payments,

currently limited market supplies of Treasury bills, and the composition of the System's portfolio of Government securities. current economic policy directive was issued to The following the Federal Reserve Bank of New York: financial developments reviewed at The economic and this meeting suggest that economic activity is rising modestly, and that prospects for economic expansion later in the year have strengthened. Output is still being retarded by adjustments of excessive inventories, but growth in final demands continues strong, reflecting substantial further increases in Government expenditures and also some strengthening of consumer buying. Prices of farm products have turned up recently, but average prices of industrial commodities have remained stable. of bank credit expansion has increased in recent The pace weeks, but is still well below the rapid rate of earlier in the year. Most long-term interest rates have tended rise further under the influence of heavy securities to market financing, and most short-term yields have also increased. The balance of payments deficit has remained substantial despite some improvement in the foreign trade surplus. In this situation, it is the Federal Open Market Committee's policy to foster money and credit conditions, including bank credit growth, conducive to renewed economic expansion, while recognizing the need for progress toward reasonable equilibrium in the country's balance of payments. To implement this policy, while taking account of expected Treasury financing activity, the timing and quantity of which are still uncertain, System open market operations until the next meeting of the Committee shall be conducted with a view to maintaining about the same conditions in the money market as have prevailed since the preceding meeting of the Committee, while continuing to utilize operations in coupon issues in supplying part of reserve needs. Votes for this action: Messrs. Martin, Hayes, Brimmer, Maisel, Mitchell, Robertson, Scanlon, Sherrill, Swan, Wayne, and Patterson. Votes against this action: None.