December 12, 1967 FOMC Record of Policy Actions

FOMC minutes

It was for these reasons that the Committee decided to seek firmer money market conditions at present. The decisions to move toward only slightly firmer conditions--and to provide for modi fication of operations in the event that unusual liquidity pressures developed--reflected in part continuing concerns about possible adverse effects of higher interest rates on financial intermediaries, especially around the year-end dividend and interest crediting periods when such institutions were particularly exposed to withdrawals of funds. Various other considerations were cited as grounds for caution in increasing monetary restraint at this time. These included the fact that the growth rate of bank credit had moderated in November and was expected to decline further in December; the judgment that the current high levels of interest rates were already imposing a considerable degree of restraint on borrowing and spending; and the fact that pressures on sterling had not completely dissipated following the devaluation. In the course of the Committee's discussion a number of the view that serious consideration should be members expressed given to an increase at an early date in member bank reserve requirements against demand deposits, as a further step in a gradual and orderly firming of monetary policy. At the conclusion of the discussion the following current economic policy directive was issued to the Federal Reserve Bank of New York:

The information reviewed at this meeting indicates that industrial output and employment have rebounded settlements in the automobile and other following strike industries, and that prospects have heightened for more rapid expansion of over-all economic activity in the months ahead. Both industrial and consumer prices have continued to rise at a substantial rate. The imbalance in U.S. international transactions has worsened, partly of weakening in the export surplus since midyear. because Foreign purchases of gold have been large following the devaluation of the pound sterling. Bank credit expansion has lessened, with diminished bank buying of Government securities and continued moderate loan growth. Most interest rates have risen further in reaction to the British devaluation and Bank rate increase, the rise in Federal Reserve discount rates, and waning expectations of enactment of the President's fiscal program. In this situation, it is the policy of the Federal Open Market Committee to foster financial conditions conducive to resistance of inflationary pressures and progress toward reasonable equilibrium in the country's balance of payments. To implement this policy, System open market opera tions until the next meeting of the Committee shall be conducted with a view to moving slightly beyond the firmer conditions that have developed in money markets partly as a result of the increase in Federal Reserve discount rates; provided, however, that operations shall be modified as needed to moderate any apparently signif icant deviations of bank credit from current expectations or any unusual liquidity pressures. Votes for this action: Messrs. Martin, Hayes, Brimmer, Francis, Mitchell, Robertson, Scanlon, Sherrill, Swan, and Wayne. Vote against this action: Mr. Maisel. Mr. Maisel dissented from this action in part because he thought the directive was susceptible to an interpretation under which growth in member bank reserves and bank deposits would be slowed too abruptly, and perhaps succeeded by contraction. He favored seeking growth rates in reserves, deposits, and bank credit

below the average rates thus far in 1967, but still considerably high enough to facilitate expansion in GNP at a somewhat faster rate than had prevailed on average in the first three quarters of the year. He noted that whether or not interest rates would rise further under the course he advocated would depend upon the strength of for funds in relation to the supplies that would be market demands available under such a Committee policy. that the statement of the Committee's Mr. Maisel also thought general policy stance contained in today's directive had far too narrow a focus; in particular, he objected to the omission of refer ence to the basic policy goal of facilitating sustainable economic expansion. This omission resulted from the substitution of language stating that it was the Committee's policy "to foster financial conditions conducive to resistance of inflationary pressures and progress toward reasonable equilibrium in the country's balance of for the language of other recent directives stating that payments" it was the Committee's policy "to foster financial conditions, including bank credit growth, conducive to sustainable economic recognizing the need for reasonable price stability for expansion, both domestic and balance of payments purposes." to authorization for System foreign currency operations. 2. Amendments At this meeting the Committee ratified the action taken by members on November 30, amending paragraph 2 of the authorization for System foreign currency operations to change the size of the swap arrangement with the Bank of Canada from $500 million to $750 million equivalent.

Votes for ratification of this action: Messrs. Martin, Hayes, Brimmer, Francis, Maisel, Mitchell, Robertson, Scanlon, Swan, and Wayne. Votes against ratification of this action: None. Subsequent to this meeting, on December 14, 1967, the recommended that paragraph 2 of the authorization be Special Manager to change (1) the size of the swap arrangement with further amended the Bank for International Settlements providing for System drawings in Swiss francs, and (2) the size of the arrangement with the Swiss National Bank, each from $250 million to $400 million equivalent, effective immediately, to supplement the enlargements of the System's swap network that had been approved on November 27 and November 30. The recommendation was unanimously approved by available members of namely, Messrs. Martin, Hayes, Brimmer, Daane, Francis, the Committee, Mitchell, Robertson, Scanlon, Swan, and Wayne. (This action Maisel, Committee at its following meeting, on January 9, was ratified by the 1968.)