September 12, 1967 FOMC Record of Policy Actions: Full Text
FEDERAL RESERVE press release For immediate release December 11, 1967 The Board of Governors of the Federal Reserve System and the Federal Open Market Committee today released the attached record of policy actions taken by the Federal Open Market Commit tee at its meeting on September 12, 1967. Such records are made available approximately 90 days after the date of each meeting of the Committee and are also published in the monthly Federal Reserve Bulletin and in the Board's Annual Report. Attachment
RECORD OF POLICY ACTIONS OF THE FEDERAL OPEN MARKET COMMITTEE Meeting held on September 12, 1967 Authority to effect transactions in System Account. Economic activity had strengthened recently and the prospect was for more rapid growth in coming months. It appeared that industrial production had advanced in August at about the July rate and since June had recovered much of the decline experienced earlier in the year. Non farm employment also rose further in August, and the unemployment rate again edged down--to 3.8 per cent from 3.9 per cent in July. Housing starts, which had fallen slightly in June, rebounded in July. Real GNP was expected to rise at a substantial rate in the third quarter as a whole, despite a strike that began in early September at a major automobile producer. appeared likely that growth in real GNP would accelerate It further in the fourth quarter to a rate that would reinforce existing upward pressures on costs and prices. This expectation was premised were necessarily uncertain--that work stop on the assumptions--which the automobile industry would be of relatively short duration pages in extent, and that a surcharge on Federal income taxes, which and limited by Congress, would not go into effect before was now under consideration the end of the year. With growth in personal incomes accelerating as rapid increases in both employment and wage rates, a result of more was expected to rise substantially, accounting for consumer spending foreseen for the fourth quarter. of the large advance in GNP about half sizable increases in Federal and State Also anticipated were continued
and local government spending, a moderate further rise in residential construction outlays, and some net growth in business inventories following the small decline expected for the third quarter. A Commerce SEC survey taken in August indicated that businesses planned slightly smaller expenditures on plant and equipment during 1967 than had been reported in April and May, but the latest survey still suggested that such outlays would be slightly higher in the second half of the year than in the first half. Prices of industrial commodities increased appreciably from mid-July to mid-August, according to preliminary estimates, although the total wholesale price index declined because of a downturn in prices of farm products and foods following 3 months of advance. Price increases were being announced for a wide variety of industrial materials and products as producers sought to pass on, at a time of strengthening demands, the increases in costs they had incurred industrial prices from July to August represented earlier. The rise in a departure from the pattern of stability that had prevailed over the 5 months, when a downdrift in prices of materials had offset preceding moderate advances in prices of industrial products. The consumer price index rose substantially further in July, partly because of seasonal increases in food prices. With respect to the balance of payments, U.S. banks borrowed heavily through foreign branches during July and August, a period deposits were unusually low relative in which rates on Euro-dollar to rates offered by U.S. banks on domestic CD's. As a result, a
after midyear in the payments balance substantial surplus developed the "official reserve transactions" basis of calculation. on that the payments deficit on the Tentative data suggested a somewhat lower rate in July and August "liquidity" basis was at than in the first half of 1967, but that it was still undesirably large. The surplus on merchandise trade was about unchanged in July at a level below the average for the first 5 months of the year. Thus imports had remained unexpectedly high and exports had far in 1967 shown no tendency to grow, in part because of continued stagnation of business activity in most industrial countries abroad. Moderately stimulative monetary and fiscal measures had been taken in some countries; the most recent of these measures was a further reduction in Germany of minimum reserve requirements of commercial banks, effective September 1. However, the use of expansionary public policies had been restrained in many countries by concern over actual or prospective inflationary pressures or, as in the United Kingdom, by balance of payments problems. On August 17, shortly after completing its mid-August refunding, the Treasury announced an offering of a 3-1/2 year, 5-3/8 per cent note (priced to yield 5.40 per cent), to raise $2.5 billion of new money. The payment date for the note, which carried full tax and-loan-account privileges, was August 30. It was reported that the Treasury was tentatively planning to obtain part of the new cash it would require in the fourth quarter by auctioning about $4.5 billion of tax-anticipation bills in early October. On Friday,
September 8, the Treasury replenished its balances by selling a special certificate of indebtedness in the amount of $153 million to the Federal Reserve. The certificate was redeemed 3 days later. Recent System open market operations had been directed at maintaining generally steady conditions in the money market while the Treasury's note financing was under way. In the 4 weeks ending September 6 free reserves of member banks averaged about $285 million and member bank borrowings about $75 million, both little changed of the previous 4 weeks. In the latter part of from the averages rate on Federal funds fell to a level generally August the interest rate, and rates on bank loans to Govern below the 4 per cent discount also frequently dropped below the discount ment securities dealers however, rates of both types moved back rate. In early September, to 4 per cent and above. Market rates on Treasury bills had the preceding meeting of the Committee, fluctuated rather widely since 3-month bills rising 18 basis points on balance to with the rate on meeting. Yields on most other cent on the day before this 4.34 per fluctuated near their highs for the types of short-term securities year. under pressure in the latter part Capital markets remained of August as a result of continued heavy corporate bond flotations and Treasury financing activity, and longer-term yields advanced near or above the peaks reached earlier in the summer. to levels The atmosphere in markets for U.S. Government notes and bonds and subsequently improved, however, as the volume corporate securities
of publicly offered corporate bonds appeared to be moderating. In contrast, pressures persisted in markets for municipal securities, where the volume of new offerings in prospect for September was considerably above the reduced August level. Business loans outstanding at commercial banks, which had risen sharply in July, declined by nearly as much in August. These changes probably were related in large part to delays in loan repay ments relative to the usual seasonal pattern, because of the need in July of this year to finance accelerated payments to the Treasury of taxes withheld on individual incomes. Despite the contraction in business loans, total bank credit expanded rapidly in August, as it had in July. Banks again acquired a substantial volume of Treasury securities and they increased their loans to newly issued further. According to Government securities dealers considerably estimates the bank credit proxy--daily-average deposits preliminary of member banks--rose at an annual rate of 17 per cent from July slightly more than had been anticipated. Most of this to August, increase in the proxy series occurred in late July and early August; growth slackened markedly in the last 3 weeks of August. Among deposit categories, total time and savings deposits continued to grow rapidly from July to August as the volume of outstanding negotiable CD's increased sharply further and inflows of other time and savings deposits remained large. Private demand deposits--and the money supply--again rose substantially on average, although growth ceased in the latter part of August when credit demands abated. U.S. Government deposits increased somewhat.
Staff projections now suggested that the bank credit proxy would rise at an annual rate in the range of 9 to 12 per cent from August to September if money market conditions were unchanged. Loan demands appeared likely to be relatively moderate in September, and with U.S. Government deposits expected to rise slightly on average, it was anticipated that there would be little or no growth in private demand deposits and in the money supply. The rate of expansion in total time and savings deposits was expected to slacken considerably, were expected to become less aggres primarily because banks sive in issuing negotiable CD's. Considerable concern was expressed in the course of the Committee's discussion about the evidences of developing inflationary pressures in the economy and the prospects for overly rapid growth in aggregate demands later in the year. The members agreed that congressional enactment of the surcharge on income taxes recommended by the President would make a needed contribution to balanced economic growth. Many members also indicated that they were disturbed by the of increase in bank credit and the money supply in recent rapid rates was divided, however, with regard to the months. The Committee course for monetary policy under current circumstances. appropriate open market operations should be directed The majority concluded that in the money market, with the at maintaining prevailing conditions be modified as necessary to moderate proviso that operations should bank credit to expand significantly more any apparent tendency for than currently expected.
Members of the majority advanced various reasons in support of this course, including the desirability of waiting for firmer indications of the likely nature of action by Congress with regard to the President's tax proposals. Other considerations cited were the risks that under present conditions in financial markets even a modest move toward greater monetary restraint at this time might have an exaggerated impact on market expectations and result in sharp further increases in interest rates, with attendant adverse effects on depositary-type financial intermediaries and on the position of sterling in foreign exchange markets. Also noted were existing uncertainties with respect to the extent, duration, and ultimate economic effects of the strike in the automobile industry. At the conclusion of the discussion the following current economic policy directive was issued to the Federal Reserve Bank of New York: The economic and financial developments reviewed at this meeting indicate that economic activity has strengthened and, despite the strike in the automobile industry, that prospects favor more rapid growth later in the year. Upward pressures on costs persist and average prices of industrial commodities have turned up following several months of stability. While there recently have been large inflows of liquid funds from abroad, the balance of payments continues to reflect a substantial underlying deficit. Bank credit expansion has continued large, while most short- and long-term interest rates have fluctuated close to their highs of the year, under the conbined pressure of heavy private security market financ ing and of recent and prospective Federal financing. The President's new fiscal program calling for a sizable increase in income taxes, which would make a substantial contribution to balanced economic growth, is now before Congress. In this situation, it is the policy of the Federal Open Market Commit tee to foster financial conditions, including bank credit growth, conducive to sustainable economic expansion, recogniz ing the need for reasonable price stability for both domestic and balance of payments purposes.
To implement this policy, System open market operations until the next meeting of the Committee shall be conducted to maintaining about the prevailing conditions with a view in the money market; but operations shall be modified as necessary to moderate any apparent tendency for bank credit to expand significantly more than currently expected. Votes for this action: Messrs. Martin, Brimmer, Daane, Maisel, Mitchell, Robertson, Sherrill, Swan, and Wayne. Votes against this action: Messrs. Hayes, Francis, and Scanlon. Francis, and Scanlon dissented from this action Messrs. Hayes, because they thought that greater monetary restraint was required in light of recent rates of growth in bank credit, present and prospective inflationary pressures, and the unsatisfactory balance of payments situation. They considered it particularly important to modify mone tary policy at this time because they felt that Treasury financing operations would limit the opportunities for such action later in the members differed, however, with respect to the year. The dissenting degree of restraint they thought was appropriate under present circum stances. favored seeking significantly firmer money market Mr. Francis conditions, and firming still further if growth in bank credit did not moderate substantially. In his judgment, both monetary policy and fiscal policy were characterized by excessive ease at present, the lagged effects of which would magnify the pressures on the economy expected in the months ahead. He observed that fiscal policy was extraordinarily stimulative even if the President's likely to remain tax proposals were enacted in the form recommended. He expressed limitation by appropriate monetary action of the view that the
excessive demand, inflation, speculation, and further deterioration in the U.S. balance of payments appeared to be more crucial than any temporary hardships on the Treasury, financial intermediaries, and long-term borrowers resulting from higher interest rates. Messrs. Hayes and Scanlon, on the other hand, agreed with members of the majority that there were risks in moving toward firmer money market conditions at present. In their judgment, however, those risks argued not for maintaining prevailing money market conditions but for exercising caution in probing toward moderately less easy conditions.