October 24, 1967 FOMC Record of Policy Actions

FOMC minutes

before this meeting, was 18 basis points higher than 3 weeks earlier. In part this increase reflected the shift in the maturity dates of 3-month bills to January from the December dates that are attractive to many investors. It also reflected the increased bill supplies resulting from the Treasury's tax-anticipation bill offering in early October and the continued $100 million additions to the weekly bill offerings. Bond yields had risen significantly further in recent weeks; yields on municipal bonds had advanced to their highest levels since the early 1930's, and those on corporate and long-term Treasury bonds to levels not reached since the early 1920's. These developments reflected diminishing confidence in financial markets that a tax increase would be enacted and a related heightening of expectations that monetary policy would become firmer. In this atmosphere investors were becoming more reluctant to acquire long-term securities and bor rowers were increasingly tending to anticipate later needs. The volume of new corporate securities offered publicly in October was to be considerably larger than the reduced offerings of now expected and the November calendar was growing rapidly. Flotations September, were expected to decline in October--partly of municipal securities had been postponed or reduced in sizebecause a number of issues volume of such issues would increase but it appeared likely that the again in November. mortgages on new homes remained Interest rates on conventional August level in September, and secondary-market at their advanced mortgages rose for the fifth con yields on Federally underwritten inflows of funds to nonbank depositary secutive month. Although

continued large, in the third quarter as a whole they institutions were below the record volume of the second quarter, after allowance for seasonal influences. loans on securities and loans to nonbank At commercial banks, financial institutions increased markedly in September and apparently also in early October. Growth in business loans appeared to have stepped up somewhat in recent weeks from its earlier slow pace, but to a large extent the increased demands for such loans probably reflected needs to finance payments to the Treasury of corporate income taxes in September and of withheld taxes in early October. As to total bank credit, estimates of recent and current growth rates had been revised upward somewhat since the preceding meeting of the Committee. The bank credit proxy--daily-average member bank deposits--now was estimated to have risen at about a 10-1/2 per cent annual rate from August to September and was projected to rise at a rate in the range of 12 to 15 per cent from September to October. The money supply, which earlier had been expected to grow relatively little in October, was now projected to rise in that month at an annual rate in the 7 to 9 per cent range. Growth in both the bank credit proxy and the money supply was expected to moderate somewhat in November--to annual rates in the ranges of 7 to 10 per cent and 4 to 6 per cent, respectivelyif money market conditions were unchanged. Although the outlook for business loan demands was particularly uncertain at present, on balance such demands appeared likely to remain moderate in both November and December.

The Committee decided that the forthcoming Treasury financing precluded any change in monetary policy at this time. Some members favored no policy change on other grounds also, including the continu ing uncertainties regarding the probable outcome of the current congressional debate on fiscal policy measures. Also cited in this connection was the judgment that a considerable degree of restraint was already being imposed on potential borrowing and spending by the high levels to which long-term interest rates had risen. In addition, it was noted that further increases in market interest rates at this time might well have undesired effects on flows of intermediaries and on the position of sterling in funds to financial foreign exchange markets. Other members indicated that in the absence of Treasury financing activity they would have been inclined to advocate some firming of monetary policy in an effort to slow the rapid growth of bank credit and the money supply. In their judgment, current and prospective inflationary pressures and the continued large deficits in the balance of payments argued strongly for such a course. 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, apart from the effects of strikes in the automobile and other industries, underlying economic conditions continue strong and prospects favor more rapid growth in the months ahead. 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 underlying deficit. Bank credit expansion has continued large. The volume of new security issues is expanding again and interest rates have risen further, reflecting in part increased uncertainties in financial markets concerning enactment of the President's fiscal program. In this situation, it is the policy of the Open Market Committee to foster financial conditions, Federal including bank credit growth, conducive to sustainable economic expansion, recognizing 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 Committee shall be conducted with a view to maintaining about the prevailing conditions in the money market; but operations shall be modified, by Treasury financing, to moderate any to the extent permitted apparent tendency for bank credit to expand significantly more than currently expected. Votes for this action: Messrs. Martin, Brimmer, Maisel, Mitchell, Robertson, Scanlon, Sherrill, Swan, Wayne, and Treiber. Vote against this action: Mr. Francis. Mr. Francis dissented from this action because he favored seeking whatever degree of firming in money market conditions would be required to moderate substantially the growth in bank credit and the money supply by the end of the year. He agreed that Treasury would have to be taken into account to some financing operations Nevertheless, he thought that extent in implementing such a policy. the national interest called for greater monetary restraint now to curb to protect the foreign trade component of inflationary pressures and the U.S. balance of payments.