October 3, 1967 FOMC Record of Policy Actions

FOMC minutes

of market anticipations of additional Treasury bill financing. The bill rate had subsequently declined, however, and on the day before this meeting it was 4.40 per cent, only 6 basis points above its level 3 weeks earlier. Rates on other short-term market instruments increased further or remained at advanced levels. In capital markets the volume of new securities offered to the public had moderated recently. Although flotations by State and local governments in September and those in prospect for October were con siderably above their reduced August level, the presently estimated volume of new corporate offerings in September and October was only about half the extraordinarily large volume of July and August. Never theless, bond yields were subject to renewed upward pressures, with yields on long-term Treasury bonds rising to levels above their 1966 highs. In part, the pressures in capital markets reflected apprehension over the large cash needs of the Treasury in prospect for the near term. They also reflected concern about developing inflationary pressures, growing doubts about the prospects for congressional enactment of the proposed income tax surcharge, and accompanying uncertainties concerning the course of monetary policy. In August interest rates on conventional mortgages on new homes edged up, and secondary-market yields on Federally underwritten mortgages increased. Inflows of funds to nonbank depositary-type institutions remained large--although not quite so large in August, after seasonal adjustment, as in the spring and early summer.

Demands for business loans at commercial banks were relatively light in early September but they appeared to have picked up around the midmonth tax-payment period. Growth in total time and savings deposits moderated considerably, mainly because of a sizable reduction in the volume of negotiable CD's outstanding. Private demand deposits and the money supply changed little, but U.S. Government demand deposits increased further from their June low. According to preliminary estimates, daily-average member bank deposits--the bank credit proxyrose at an annual rate of 9-1/2 per cent from August to September, well below the rate of more than 15 per cent earlier in the summer. Staff projections suggested that if money market conditions remained unchanged the bank credit proxy would rise at an annual rate in the 10 to 13 per cent range from September to October. About half of the expansion was expected to be in U.S. Government deposits, as a result of heavy borrowing by the Treasury during October. Growth in time and savings deposits appeared likely to be at a some what more rapid rate than in the preceding month, but less rapid than the average rate earlier in the year. Private demand deposits--and the money supply--were expected to rise only slightly. Many members of the Committee thought that current and prospective inflationary pressures and the rapid rate of bank credit growth in recent months offered strong grounds for seeking somewhat greater monetary restraint at this time. Some members also pointed to the unsatisfactory balance of payments situation as arguing for a firming of monetary policy. The majority believed, however, that

these considerations were outweighed by others militating against a change in policy at present. The latter included the desirability of awaiting firmer indications of the probable actions by Congress with respect to Federal taxes and expenditures; the uncertainties regarding the extent and duration of the automobile industry strike; and the risk that under present financial market conditions any firming action at this time would lead to sharply higher interest rates, with possible undesired effects on financial intermediaries domestically and on the position of sterling in foreign exchange markets. The Treasury's financing and, more importantly, the November refunding current bill soon to follow also were cited as considerations arguing against a change in monetary policy at this juncture. The Committee concluded that open market operations should be directed at maintaining about the prevailing conditions in the money market, but that operations should be modified, to the extent permitted by Treasury financing, to moderate any apparent tendency for bank credit to expand more than currently expected. The following current economic policy directive was issued to the Federal Reserve Bank of New York: and financial developments reviewed at The economic this meeting indicate that, apart from the effects of the strike in the automobile industry, underlying economic conditions have strengthened and prospects favor more rapid growth later in the year. Upward pressures on costs persist, average prices of industrial commodities have risen further, and the rate of increase in consumer prices remains high. While there recently have been large inflows of liquid funds from abroad through foreign branches of U.S. banks, the balance of payments continues to reflect a substantial under lying deficit. Bank credit expansion has continued large,

although there was some moderation in September from the rapid July-August rate. The volume of corporate bond flotations has slackened, but Federal and State and local government financing demands remain large and most interest rates have on balance moved up somewhat further. The President's new fiscal program is still pending before Congress. In this situation, it is the policy of the Federal Open Market Committee to foster financial conditions, including bank credit growth, conducive to sustain able economic expansion, recognizing 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 with a view to maintaining about the prevailing conditions in the money market; but operations shall be modified, to the extent permitted by Treasury financing, to moderate any appar ent tendency for bank credit to expand significantly more than currently expected. Votes for this action: Messrs. Hayes, Brimmer, Daane, Maisel, Mitchell, Robertson, Sherrill, Swan, and Wayne. Votes against this action: Messrs. Francis and Scanlon. Messrs. Francis and Scanlon dissented from this action because they assessed the balance of considerations at issue differently from the majority and favored seeking greater monetary restraint. In their judgment, in view of the prospects for further price inflation the risks in not acting at this time to moderate the rapid growth of bank credit outweighed the various considerations seen as militating against a firmer monetary policy.