November 14, 1967 FOMC Record of Policy Actions: Full Text
FEDERAL RESERVE press release For immediate release February 12, 1968 of the Federal Reserve System The Board of Governors and the Federal Open Market Committee today released the attached taken by the Federal Open Market Committee record of policy actions on November 14, 1967. Such records are made avail at its meeting after the date of each meeting of the able approximately 90 days in the Federal Reserve Bulletin and Committee and will be found the Board's Annual Report. Attachment
RECORD OF POLICY ACTIONS OF THE FEDERAL OPEN MARKET COMMITTEE Meeting held on November 14, 1967 1. Authority to effect transactions in System Account. Although strikes recently had been retarding activity in some areas of the economy, real GNP was expected to increase more rapidly in the current quarter than it had in the third quarter. A still higher rate of economic growth and continued upward pres sures on prices and costs appeared to be in prospect for early 1968, particularly if an income tax surcharge as proposed by the President were not enacted. in various broad measures of business activity Recent weakness was largely a consequence, directly or indirectly, of work stoppages in the automobile industry and in some other industries. Industrial production was estimated to have declined slightly further in October. Retail sales decreased appreciably, according to the advance estimate, mainly because of a sharp reduction in automobile sales attributable to the limited availability of new cars. Total nonfarm employment rose relatively little; the net increase in manufacturing employment was held down by strikes, and Federal Government employment declined slightly because of a curb on hiring. With the labor force increasing more rapidly than usual, the unemployment rate rose further, to 4.3 per cent from 4.1 per cent in September. Residential construction activity, however, continued to rise strongly in October. that final sales to both the private and It appeared likely Government sectors of the economy would increase more rapidly in the
fourth quarter than in the third, but that the rate of business inventory accumulation would remain low. Growth in output, employ ment, and incomes was expected to be quickened in the early months of 1968 by business efforts to rebuild inventories depleted by strikes and by efforts of steel users to accumulate stocks as a hedge against a possible steel strike in the summer. Moreover, it appeared that consumer spending would be stimulated in early 1968 by liberalization of social security benefits and by a Federal employee pay raise, as well as by continued sizable advances in industrial wage rates--including increases resulting from the rise in minimum wage rates on February 1, 1968, as provided by existing legislation. commodities increased further Wholesale prices of industrial from mid-September to mid-October, according to preliminary estimates, of farm products and foods declined, and the total whole but prices price index edged down. The consumer price index rose somewhat sale less in September than it had in other recent months as food prices declined. confirmed earlier estimates that the Further information U.S. balance of payments on the "liquidity" basis of deficit in the somewhat higher in the third quarter than calculation was at a rate and another large deficit appeared to in the first half of the year, The merchandise trade surplus be in prospect for the fourth quarter. rate, as imports increased in September from the high August declined
while exports fell; in the third quarter as a whole the trade surplus was about the same as in the second quarter. On the "official reserve transactions" basis, a sizable surplus was recorded in the third quarter following substantial deficits in the first half of the year. This surplus was due primarily to large inflows of liquid funds to through their foreign branches. Net inflows of such funds U.S. banks continued after the end of September. Sterling was under heavy pres exchange markets and on November 9, for the second sure in foreign time in 3 weeks, the Bank of England raised its discount rate by 1/2 of a percentage point, to 6-1/2 per cent. In its November financing--for which subscription books were open October 30--the Treasury refunded securities maturing November 15, including $2.6 billion held by the public, and raised $2.2 billion of new money. Two issues were offered--a 15-month, 5-5/8 per cent note, and a 7-year, 5-3/4 per cent note--of which private investors were allotted $3.2 billion and $1.6 billion, respectively. While the two notes were well-received initially--with the longer maturity, in particular, heavily oversubscribed--selling pressures developed soon after the books had closed and on the day before this meeting prices of both were quoted at discounts. It was announced on November 10 that $650 million of participation certificates of the Federal National Mortgage Association would be offered to the public on November 28. Apart from the continuing addition of $100 million to each weekly and monthly bill auction, this was expected to be the Government's last new cash financing in the calendar year 1967.
Open market operations since the preceding meeting of the had continued to be directed at maintaining steady condi Committee tions in the money market. Net free reserves of member banks averaged about $200 million during the 3 weeks ending November 8, compared with figure of about $240 million for the preceding 3 weeks. a revised Excess reserves of member banks declined, particularly at country banks; borrowings also declined, to an average of $90 million from about $170 million in the preceding period. Average rates on Federal funds and on bank loans to Government securities dealers were a little lower than in September and the early weeks of October. Interest rates on short-term market instruments remained generally unchanged or rose slightly from their levels at the time of the preceding meeting of the Committee. The market rate on 3-month Treasury bills was 4.62 per cent on the day before this meeting, up 4 basis points from its level 3 weeks earlier. After a brief interruption in late October, bond yields resumed their advance in all sectors of the capital market. Yields on long-term Government bonds at the time of this meeting were significantly above both the levels prevailing 3 weeks earlier and the highs reached in 1966, and those on intermediate-term Government issues were up sharply. Yields on new corporate and municipal issues also advanced, the former to levels exceeding the previous peaks reached in mid-October. The renewal of upward pressures on bond yields reflected in part a heavy prospective volume of new offerings of corporate and municipal securities in November and anticipations of the
large FNMA offering. Also contributing to the pressures were inflationary developments and growing expectations in prospects of financial markets that a tax increase would not be enacted this year policy would become firmer. On the day before this and that monetary meeting, a major corporate bond offering was postponed as a result of congestion and uncertainties in the capital market. incomplete data available suggested that secondary-market The yields on Federally underwritten mortgages rose further in Octoberapproaching the record level reached toward the end of 1966. It that net inflows of funds to nonbank depositary institutions appeared continued to moderate in October on a seasonally adjusted basis. By the end of September outstanding mortgage commitments of private lenders were virtually back to the postwar high of January 1966, but weeks some individual lenders were reported to have reduced in recent their new commitments. Commercial bank holdings of Treasury and other securities considerably in October. Security loans and loans to nonbank rose financial institutions also increased relatively fast, but the in business loans was again quite moderate. The bank credit advance member bank deposits--increased at an annual rate proxy--daily-average of 12 per cent, a little faster than in the preceding month. Time deposits expanded at an annual rate of 13 per cent in October, and savings September rate but well below the average rate of slightly above the the first 8 months of the year. The money more than 17 per cent for unchanged in September, increased at supply, which had been virtually an annual rate of about 6.5 per cent in October.
was expected to slow in rate of expansion in bank credit The the year if prevailing money market conditions the last 2 months of It appeared likely that demands for business loans were maintained. remain moderate in view of prospects that changes in business would spending on inventories and fixed capital would be small. The bank credit proxy was still projected to rise at an annual rate in the 7 to 10 per cent range in November, and a somewhat lower growth rate was anticipated for December. In November the money supply was expected to increase at an annual rate in the range of 6 to 8 per time and savings deposits in the range of 9 to 11 per cent. cent and At this meeting the Committee heard reports on negotiations relating to international credit assistance to the United Kingdom in addition to reviewing conditions and prospects with respect to the domestic economy, the U.S. balance of payments, and the foreign After discussion the Committee agreed that no change exchange markets. in monetary policy at this time, in view of the sensitive should be made of conditions in foreign exchange markets and of the international state negotiations now under way. The following current economic policy direc tive was issued to the Federal Reserve Bank of New York: The information reviewed at this meeting indicates that, while the direct and indirect effects of strikes have been retarding activity in some areas of the economy, prospects still favor more rapid economic growth in the months ahead. Although prices of farm foods have declined recently, upward pres products and persist on industrial prices and costs. While sures there recently have been further 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 private secur ity issues has expanded further and interest rates remain under upward pressure, reflecting in part
in financial markets concerning enact increased doubts ment of the President's fiscal program. In this situation, of the Federal Open Market Committee to it is the policy financial conditions, including bank credit growth, foster conducive to sustainable economic expansion, recognizing price stability for both domestic the need for reasonable and balance of payments purposes. this policy, System open market To implement 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 as necessary to moderate any apparent tendency for bank credit to expand signif icantly more than currently expected. Votes for this action: Messrs. Martin, Hayes, Brimmer, Daane, Francis, Maisel, Mitchell, Robertson, Scanlon, Sherrill, Swan, and Wayne. Votes against this action: None. 2. Amendment to authorization for System foreign currency operations. The Committee amended paragraphs 1B(3) and 1C(1) of the authorization for System foreign currency operations, in each case of the date of a determination by Chairman Martin that such effective as accordance with the position of the United States in the action was in current international negotiations concerning credit assistance to the In the amendment to paragraph 1B(3) the limit on United Kingdom. System Account holdings of sterling purchased on a covered authorized or guaranteed basis was increased from $200 million to $300 million the amendment to paragraph 1C(1) the limit on out equivalent. In to deliver foreign currencies to the standing forward commitments Stabilization Fund was increased from $200 million to $350 million and language restricting the foreign currencies covered equivalent, to currencies "in which the U.S.Treasury has outstanding by the paragraph indebtedness" was deleted.
Chairman Martin made the indicated determination on November 21, 1967, for the amendment to paragraph 1B(3) and on November 22, 1967, for the amendment to paragraph 1C(1). Accordingly, the respective amendments became effective on those dates. Uith these two amendments, the first paragraph of the authorization read as follows: The Federal Open Market Committee authorizes and directs the Federal Reserve Bank of New York, for System Open Market Account, to the extent necessary to carry out the Committee's foreign currency directive: A. To purchase and sell the following foreign currencies in the form of cable transfers through spot or forward transactions on the open market at home and abroad, including transactions with the U.S. Stabilization Fund established by Section 10 of the Gold Reserve Act of 1934, with foreign monetary authorities, and with the Bank for International Settlements: Austrian schillings Belgian francs Canadian dollars Danish kroner Pounds sterling French francs German marks Italian lire Japanese yen Mexican pesos Netherlands guilders Norwegian kroner Swedish kronor Swiss francs B. To hold foreign currencies listed in paragraph A above, up to the following limits: (1) Currencies held spot or purchased forward, up to the amounts necessary to fulfill outstanding forward commitments; (2) Additional currencies held spot or purchased forward, up to the amount necessary for System operations to exert a market influence but not exceeding $150 million equivalent; and
(3) Sterling purchased on a covered or basis in terms of the dollar, under agree guaranteed ment with the Bank of England, up to $300 million equivalent. C. To have outstanding forward commitments undertaken under paragraph A above to deliver foreign currencies, up to the following limits: Commitments to deliver foreign currencies (1) to the Stabilization Fund, up to $350 million equivalent; Commitments to deliver Italian lire, under (2) special arrangements with the Bank of Italy, up to $500 million equivalent; and commitments to deliver foreign (3) Other forward currencies, up to $275 million equivalent. currencies and to permit foreign D. To draw foreign banks to draw dollars under the reciprocal currency arrange ments listed in paragraph 2 below, provided that drawings by either party to any such arrangement shall be fully liquidated within 12 months after any amount outstanding at that time was first drawn, unless the Committee, because of exceptional circumstances, specifically authorizes a delay. Votes for this action: Messrs. Martin, Hayes, Brimmer, Daane, Francis, Maisel, Mitchell, Robertson, Scanlon, Sherrill, Swan, and Wayne. Votes against this action: None. In his report on the negotiations now in process concerning international credit assistance to the United Kingdom, the Special Manager for foreign currency operations noted that one possible form of U.S. participation in such assistance was an undertaking by U.S. monetary authorities to acquire additional sterling. The previous authority to acquire sterling, including the authorization to acquire up to $200 million for System Account, had proved useful at times in the past in market operations undertaken by the Special Manager for purposes specified in the Committee's foreign currency directive.
The Special Manager indicated that in his judgment an increase of $100 million in the limit on such holdings by the System was justified in light of possible future needs for similar market operations. Accordingly, he recommended that if in the current negotiations the United States were to undertake to acquire additional sterling, $100 million should be acquired for System account and the remainder for Stabilization Fund account. The Special Manager also indicated that if the arrangements were concluded on the basis he had suggested the resources of the Stabilization Fund might be inadequate to meet all demands upon them from time to time in the future. Accordingly, he recommended the amendments to paragraph 1C(1) of the authorization described above to enable the System Account to "warehouse" part of the Treasury's holdings of sterling if that should prove desirable. Past operations undertaken under the terms of paragraph 1C(1) had been limited to the purpose of facilitating repayment by the Treasury of maturing bonded debt denominated in foreign currencies. After discussion, the Committee concurred in the recommendations of the Special Manager and took the actions indicated.