January 9, 1968 FOMC Record of Policy Actions

FOMC minutes

to limit their takings of municipal securities. Growth in time and savings deposits was expected to continue moderating in light of the high yields available to investors on competing market instruments. Little or no increase was anticipated in private demand deposits and the money supply, but Government deposits were projected to rise substantially. Concern was expressed in the Committee's discussion about the inflationary environment and outlook, on both domestic grounds and in light of the recent contraction in the surplus on U.S. mer chandise trade. The new balance of payments program was expected to result in a substantial reduction in the over-all deficit in 1968. It was observed, however, that the various elements of the program directed at improving the balance on specific types of international flows did not obviate the fundamental need for slowing the rise in domestic prices. It was noted in the discussion that since mid-November the System had employed all three of the major instruments of monetary policy--discount rates, open market operations, and reserve require ments--in shifting toward a posture of somewhat greater restraint, that the effects of these policy actions were still unfolding, and that growth in bank credit and the money supply had slowed appre ciably in recent months. It also was noted that forthcoming Presidential messages and further congressional hearings on an income tax surcharge would soon be providing new information on

and the prospects for a tax increase. planned Federal expenditures the Committee decided to make no further change in Accordingly, this decision was the possibility policy at present. Reinforcing interest rates resulting from a further firming of that higher at this time might have undesired effects on flows monetary policy of funds to financial intermediaries. The Committee agreed that it would be appropriate to firmer conditions in the money market that maintain the somewhat had developed as a result of recent System open market operations and the announced action with respect to reserve requirements. noted in this connection that a slightly lower average Some members marginal reserves might be required after the effective level of of the increase in reserve requirements in order to maintain dates prevailing money market conditions in other respects. The Committee also agreed that operations should be modified as needed to moderate any apparently significant deviations of bank credit from current expectations. The following current economic policy directive was issued to the Federal Reserve Bank of New York: The information reviewed at this meeting indicates that over-all economic activity has been expanding vigorously, with both industrial and consumer prices continuing to rise at a substantial rate, and that prospects are for further rapid growth and persisting inflationary pressures in the period ahead. The imbalance in U.S. international trans actions worsened further in late 1967, but the new program announced by the President should result in a considerable reduction in the deficit this year. Following announcement of the program, foreign purchases of gold slackened abruptly and the dollar strengthened in foreign exchange markets.

Long-term bond yields have declined in recent weeks but some short-term interest rates have risen further. Bank credit has changed little on balance recently as banks have disposed of Government securities to accommodate strengthened loan demands. Growth in the money supply has slackened and flows into time and savings accounts at bank and nonbank financial intermediaries have continued to moderate. In this situation, it is the policy of the Federal Open Market Committee to foster financial conditions conducive to resistance of infla tionary pressures and progress toward reasonable equilibrium in the country's balance of payments. To implement this policy, System open market operations until the next meeting of the Committee shall be conducted with a view to maintaining the somewhat firmer conditions that have developed in the money market in recent weeks, partly as a result of the increase in reserve requirements announced to become effective in mid-January; provided, however, that operations shall be modified as needed to moderate any appar ently significant deviations of bank credit from current expectations. Votes for this action: Messrs. Martin, Hayes, Brimmer, Daane, Francis, Maisel, Mitchell, Robertson, Scanlon, Sherrill, Swan, and Wayne. Votes against this action: None. 2. Ratification of amendment to authorization for System foreign currency operations. At this meeting the Committee ratified the action taken by members on December 14, 1967, amending paragraph 2 of the authoriza tion for System foreign currency operations to change (1) the size of the swap arrangement with 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. As indicated in the policy record for the meeting held on December 12, 1967, these

supplemented the enlargements of the System's swap network increases that had been approved on November 27 and November 30. Votes for ratification of this action: Messrs. Hayes, Brimmer, Francis, Maisel, Mitchell, Scanlon, Sherrill, Swan, and Wayne. Votes against ratification of this action: None. Absent at this point in meeting and not voting: Messrs. Martin, Robertson, and Daane.