July 18, 1967 FOMC Record of Policy Actions: Full Text
FEDERAL RESERVE press release release October 16, 1967 For immediate The Board of Governors of the Federal Reserve System released the attached Committee today Federal Open Market and the Open Market Commit taken by the Federal of policy actions record Such records are made on July 18, 1967. tee at its meeting the date of each meeting 90 days after available approximately the monthly Federal published in and are also of the Committee Board's Annual Report. and in the Reserve Bulletin Attachment
RECORD OF POLICY ACTIONS OF THE FEDERAL OPEN MARKET COMMITTEE Meeting held on July 18, 1967 1. Authority to effect transactions in System Account. Real GNP rose modestly in the second quarter, according to preliminary Department of Commerce figures. Final expenditures expanded substantially further and the downdrag from inventory adjustments was considerably reduced. Staff projections continued to suggest that real GNP would grow at a faster rate in the third quarter, when it was expected that final sales would rise somewhat and that the depressant influence of inventory adjust more rapidly ments would be reduced still more. private sector accounted for a much larger proportion The in final sales in the second quarter than in the of the expansion contributed substantially to the expansion, first. Consumer spending of automobiles especially strong. Residential construc with sales activity increased significantly further but business outlays tion declined slightly. The rise in defense outlays for fixed capital in the first quarter, but State and local was much smaller than government purchases maintained their steady expansion. inventories at a low rate in the Businesses accumulated Department estimates, and the second quarter, according to Commerce for some net liquidation in the third prospect appeared to be again edged down in June. However, quarter. Industrial production somewhat following 4 months of manufacturing employment advanced
decline, and total nonfarm employment rose strongly. The unemploy ment rate increased to 4.0 per cent from 3.8 per cent in May, mainly because of an exceptionally large expansion in the labor force. Prospects appeared favorable for another large increase in consumer spending in the third quarter, when rising employment was expected to result in a more rapid advance in wage incomes than in the spring quarter. Further gains in residential construction activity were suggested by a rise in building permits and a signifi cant increase in lender mortgage commitments through May. Prospects for a modest advance in business spending for fixed capital were supported not only by the latest Commerce-SEC survey but also by recent increases in new orders for machinery and equipment. Little new information was available on prospective defense spending but the staff projection assumed that such spending would rise in the third quarter by about as much as it had in the second quarter. The wholesale price index in June was officially estimated to have risen for the second consecutive month--reflecting a further increase in prices of farm products and foods. The average of industrial prices continued stable. In May the consumer price index rose again and was 2.7 per cent above a year earlier. Bene in recently negotiated wage contracts suggested further fits provided costs in manufacturing in the months upward pressure on unit labor ahead. indicated that the balance of payments Tentative estimates calculation was about as large on the "liquidity" basis of deficit
in the second quarter as in the first, despite an increase in official foreign acquisitions of long-term deposits. An improvement in the trade surplus apparently was more than offset by a turn from inflow to outflow of U.S. short-term bank credit. The deficit on the "official reserve transactions" basis was much smaller in the second quarter than in the first, as repayments of borrowings by U.S. banks from their foreign branches tapered off. Abroad, economic activity remained sluggish in most industrial countries, but expansion continued in Italy and Japan. operations since the last meeting of the System open market Committee had been directed toward maintaining about the same con ditions in the money market as had prevailed during the preceding A large volume of reserves was provided to meet seasonal 4 weeks. needs, mainly through purchases of bills but partly through acquisi tions of coupon securities. reserves of member banks slowed further Growth in nonborrowed in June but total reserves increased moderately following the slight reserves and member bank borrowings fluctuated decline of May. Free over a wide range in the 4 weeks ending July 12, reflecting in large patterns that regularly develop around the midyear bank part seasonal statement date and the July 4 holiday. Free reserves averaged $295 little changed from the $285 million average of the preced million, and borrowings averaged about $165 million compared with ing 4 weeks, prior period. The Federal funds rate remained about $70 million in the to 4 per cent, and rates on bank loans to Government securities close dealers also changed little.
sharply from late June to early Treasury bill rates rose rates on other short-term market instruments July, and interest less than did bill rates. The market also moved up generally, but had reached a low for the year of rate on 3-month Treasury bills by July 5, the rate had advanced to a 3.33 per cent on June 23; cent. Subsequently the rate receded somewhat, peak of 4.29 per before this meeting it was 4.17 per cent, almost but on the day 4 weeks earlier. To some extent the 60 basis points higher than but for the most part it was rise reflected seasonal influences, and prospective Treasury cash borrowing related to the large recent in the bill area. on June 28, the Treasury auctioned Following an announcement March and April 1968 tax anticipation bills on July 5 $4 billion of average issuing rates of 4.86 and 4.90 per cent, respectively, at 11. The Treasury also indicated that it would for payment July $2.2 billion of new money by adding $100 million raise an additional its regular weekly and monthly bill auctions. Virtually to each of bills, which carried 100 per cent tax all of the tax anticipation privileges, were acquired by commercial banks, and and-loan-account bank sales of the bills following the auction were relatively light. The Treasury was expected to announce in late July the terms on which it would refund coupon-bearing securities maturing in mid August, of which the public held $3.6 billion.
A record volume of publicly offered corporate bonds and a continuing large volume of municipal bonds were issued in June, and the calendar of offerings for July and August was heavy. Yields on long-term securities generally rose further in the second half of June and early July and then declined. Before turning down, yields on intermediate- and long-term Treasury bonds had reached new highs for the year, while those on new corporate issues in some cases had exceeded their highs of August 1966. Yields on municipal issues also reached new 1967 highs and then tended to level off in the first half of July. To some extent the recent improvement in the tone of longer-term securities markets reflected both enhanced expectations of a tax increase and diminished expecta tions of a large further build-up of troops in Vietnam. Yields on Treasury bonds apparently also were influenced by the low volume of dealer inventories and by System purchases of coupon issues. stocks, trading was heavy and there appeared In markets for common to have been an increase in speculative activity. In June contract rates on conventional first mortgages on homes edged up for the second consecutive month, and secondary home mortgages fose further. market yields on Federally-underwritten The inflow of savings to nonbank depositary-type institutions was maintained in record volume. banks, credit demands were heavy during the At commercial tax and dividend period in June, and business loans increased sharply during the month. Banks liquidated sizable amounts of Treasury securities and increased their holdings of municipal securities at a less rapid rate than in other recent months.
Bank offering rates on negotiable CD's rose further in June and the outstanding volume of these deposits increased moderately. Inflows of other time and savings deposits continued large and total time and savings deposits increased about as fast as in earlier months of the year. The money supply rose at a 13 per cent annual rate, almost as sharply as it had in May. Government deposits at banks declined somewhat less than in May, and daily-average member bank deposits--the bank credit proxy--increased at an annual rate of almost 9 per cent. In the 6 months through June, time deposits had risen at an annual rate of 17 per cent; the money supply, almost 7 per cent; and the bank credit proxy, 12 per cent. Banks were expected to reduce their holdings of the new tax bills in July, and repayments of business loans appeared likely to result in liquidation of some private deposits. Nevertheless, the latest staff projections suggested that total bank credit, as measured by the proxy series, would rise from June to July at an annual rate in the 13 to 15 per cent range and the money supply at a rate in the 5 to 7 per cent range if money market conditions were unchanged. Government deposits were expected to increase following the declines of May and June, and time and savings deposits were projected to grow nearly as rapidly as they had in June. business loans of banks were expected to increase In August, relatively little on balance, as a result of repayment of the tax related borrowings of late June and early July and continued small
needs for financing inventories. On the assumption that the Treasury would not raise new cash until early September, the rate of bank credit expansion was expected to be considerably slower in August than in July. For the 2 months together, the bank credit proxy was projected to grow at an annual rate in the 10 to 12 per cent range. In the course of the Committee's discussion considerable concern was expressed about the recent high rates of growth of bank credit and the money supply, particularly in view of the prospects for more rapid economic expansion later in the year. It was gen erally agreed, however, that the Treasury's forthcoming financing militated against seeking a change in money market conditions at present. Moreover, even apart from the Treasury financing, most members felt that it would be premature to seek firmer money market conditions at a time when resumption of expansion in over-all economic activity was in a fairly early stage; and some also referred in this connection to the growing expectations that the Administra tion would press for measures of fiscal restraint. In addition, some members expressed concern about the possibility that any significant further increases in market interest rates might reduce the flows of funds into mortgages and slow the recovery under way in residential construction activity. The Committee concluded that it would be appropriate at present to maintain about the prevailing conditions in the money market, although the members agreed that operations should be
modified, insofar as permitted by "even keel" considerations Treasury financing, if there was a tendency for associated with the and the money supply to expand more than currently bank credit the growth rates in bank credit and expected. It was noted that expected rested on particular assumptions regarding money currently Treasury financing activity and were the pattern of forthcoming differed from that assumed. revision if the actual pattern subject to the full text of the current economic Prior to the vote on policy directive to be issued at this meeting, a preliminary vote was taken on the question of whether a reference to operations in coupon issues for supplying part of reserve needs, such as had appeared in the second paragraph of the directives issued on May 23 and June 20, 1967, should be included in today's directive. Votes for including such a reference: Messrs. Brimmer, Maisel, and Mitchell. Votes against: Messrs. Hayes, Robertson, Scanlon, Sherrill, Swan, Wayne, and Patterson. The majority favored omitting the reference in question for a number of reasons, including the imminent Treasury refunding, the small volume of net reserve needs projected for the interval up to the next meeting of the Committee, the substantial decrease in the market availability of coupon issues, and the recently more settled conditions in longer-term securities markets. It was stressed by members of the majority that operations in coupon issues from time to time were a normal part of open market operations, and
that omission of the reference to them from the directive did not preclude such operations under appropriate circumstances. Members of the minority noted that the heavy calendar of prospective corporate issues could result in renewed upward pres sures on long-term yields, with possibly adverse effects on mortgage markets. They expressed the view that recent operations in coupon issues had had some moderating effect on long-term rates by affecting both market supplies and expectations of market par ticipants, and that such operations could continue to serve a constructive purpose in dealing selectively with capital market pressures. Mr. Maisel thought that there remained a broad demand in the economy, and that helping to meet that demand for liquidity of coupon issues represented an appropriate System by purchases portfolio policy. that appropriate circumstances for Mr. Brimmer observed might not arise in the coming period, and along coupon operations he agreed that omission of the with Messrs. Maisel and Mitchell reference from the directive would not preclude them if the need these members felt that the reference should arose. Nevertheless, the present directive to clarify the Committee's be retained in intent. voted to issue the following current The Committee then Reserve Bank of New York: policy directive to the Federal economic
economic and financial developments reviewed The at this meeting indicate that economic activity has been rising modestly and that prospects are for further expansion. Output is still being retarded by adjust ments of excessive inventories, but growth in final demands continues strong, reflecting some strengthening in consumer expenditures for durable goods and housing, and also further increases in Government outlays. The over-all indexes of both wholesale and retail prices have risen further, although wholesale prices of indus trial commodities have remained stable. Bank credit expansion has been large in recent weeks. Most short and long-term interest rates, after reaching advanced levels under the influence of heavy public and private securities market financing, have declined somewhat recently. 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, con ducive to continuing economic expansion, while recogniz ing the need for reasonable price stability for both domestic and balance of payments purposes. To implement this policy, while taking account of forthcoming Treasury financing activity, System open market operations until the next meeting of the Commit tee shall be conducted with a view to maintaining about the prevailing conditions in the money market; but operations shall be modified insofar as the Treasury financing permits to moderate any apparent tendency for bank credit and money to expand more than currently expected. Votes for this action: Messrs. Hayes, Brimmer, Maisel, Mitchell, Robertson, Scanlon, Sherrill, Swan, Wayne, and Patterson. Votes against this action: None. 2. Amendments to authorization for System foreign currency operations. At this meeting the Committee ratified an action taken by members on June 29, 1967, effective June 30, 1967, amending paragraph 2 of the Committee's authorization for System foreign currency
operations to change the maximum period authorized for the reciprocal currency (swap) arrangement with the Netherlands Bank from 3 to 6 months. Votes for ratification of this action: Messrs. Hayes, Brimmer, Maisel, Mitchell, Robertson, Scanlon, Sherrill, Swan, Wayne, and Patterson. Votes against ratification of this action: None. Subsequently in the course of the meeting the Committee amended paragraph 2 of the authorization in certain other respects. In the text of the paragraph the phrase "for periods up to a maximum of 12 months" was added following the direction to the Federal Reserve Bank of New York to maintain swap arrangements with indicated foreign banks; and the column in the table contained in the paragraph that specified a maximum maturity for each of the existing arrangements--12 months in 10 cases and 3 or 6 months in the others--was deleted. These changes, which were in line with the Committee's interest in moving toward 12-month maturities for swap arrangements where agreeable with the foreign bank con eliminated the necessity for amending the authorization cerned, each time the maturity of an arrangement was changed. In addition, the paragraph was amended to reflect approval of increases (a) from $200 million to $250 million in the swap the Swiss National Bank, (b) from $200 million to arrangement with $250 million in the arrangement with the Bank for International Settlements covering System drawings in Swiss francs, and (c) from
$200 million to $300 million in the arrangement with the Bank for International Settlements covering System drawings in authorized European currencies other than Swiss francs. These increases were considered desirable to provide broader margins of safety to deal with unforeseeable contingencies. Votes for these actions: Messrs. Hayes, Brimmer, Maisel, Mitchell, Robertson, Scanlon, Sherrill, Swan, Wayne, and Patterson. Votes against these actions: None. paragraph 2 of the authorization Reflecting these amendments, foreign currency operations read as follows: for System directs the Federal Federal Open Market Committee The to maintain reciprocal currency Reserve Bank of New York for System Open Market arrangements ("swap" arrangements) of 12 months with the for periods up to a maximum Account are among those designated foreign banks, which following the Federal Reserve System Board of Governors of by the of Regulation N, Relations with under Section 214.5 approval of the and with the Banks and Bankers, Foreign such arrangements on maturity: Committee to renew Amount of arrangement (millions of dollars equivalent) Foreign bank National Bank Austrian National Bank of Belgium Bank of Canada Bank of Denmark National 1,350 Bank of England Bank of France Federal Bank German Bank of Italy Bank of Japan Bank of Mexico Netherlands Bank Bank of Norway Bank of Sweden National Bank Swiss for International Settlements Bank in Swiss francs System drawings System drawings in authorized European francs 300 other than Swiss currencies