April 2, 1968 FOMC Record of Policy Actions

FOMC minutes

for shorter-term certificates had been below the ceiling. Nevertheless, banks experienced a substantial decline in outstanding CD's during March. The pace of growth in consumer-type time and savings deposits increased somewhat, however, and total time and savings deposits rose slightly more in March than in the preceding month. Government deposits declined, and private demand deposits increased by a relatively small amount. The money supply grew at a faster rate than in February, with more than half of the expansion reflecting an increase in currency holdings of the public. In the 4 months through March, time and savings deposits and the money supply had grown at annual rates of about 6.5 and 3.5 per cent, respectively, and the bank credit proxy at a rate of about 5.5 per centin each case less than half the rate of the preceding 7 months. Inflows of funds to savings and loan associations and mutual savings banks also had been substantially curtailed in recent months. Bank credit was projected to change little in April and to expand moderately in May--on the assumptions that the Treasury would raise a substantial volume of new cash in connection with its May refunding but would not undertake a major financing earlier, and that money market conditions would remain unchanged. In an alternative projection, in which a slight firming of money market conditions was assumed, the annual rate of change in the bank credit proxy in April was estimated in a range of +1 to -3 per cent. It was expected that at the currently higher levels of market rates banks would find it more difficult in April to attract interest consumer-type time and savings deposits and that the banks would

CD's of greater than seasonal a further run-off of experience time and savings deposits were dimensions. As a result, total rate in April. On the expand at a relatively low projected to supply was expected to be more other hand, growth in the money a consequence of a sizable decline rapid than in March, largely as anticipated in Government deposits. continued firming of monetary The Committee agreed that light of present and prospective infla policy was desirable in the highly unfavorable developments of recent tionary pressures, months in U.S. foreign trade, the persisting uncertainties in markets, and the still uncertain outlook international financial members expressed the view that circum for fiscal action. Some stances might soon require consideration by the System of a further increase in the discount rate. At the same time, various reasons were advanced for moving cautiously in firming further through open market operations at present. These included some improvement in prospects for restric tive fiscal action by Congress; it appeared likely that the Senate would take affirmative action shortly on a measure providing for an increase in taxes and a reduction in budgeted Federal expenditures. In addition, it was noted that a considerable degree of monetary restraint had already been achieved, the effects of which were still unfolding, and that there had been insufficient time as yet to determine the economic implications of various recent events, including the de-escalation of bombing in North Vietnam. It also

was noted that a marked further firming of monetary policy at this time might have undesirably large adverse effects on flows of funds to financial intermediaries. In this connection, some members foresaw a possible need at a later point for the Board to raise ceiling rates on large-denomination CD's, although none indicated that he thought such action was desirable immediately. of the discussion the Committee agreed At the conclusion that slightly firmer money market conditions should be sought, but that operations should be modified if unusual liquidity pressures developed or if the change in bank credit appeared to be deviating direction from the projection. The follow significantly in either ing 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 expanded at a very rapid pace in early 1968, with prices rising substantially, and that prospects are for a continuing rapid advance in activity and persisting inflationary pressures in the period ahead. Since late fall, growth rates of bank credit, the money supply, and time and savings accounts at financial institutions have moderated considerably. Speculative activity in gold and foreign exchange markets, which was intense in early March, abated after the midmonth agree ment on gold policy by gold pool members and appears to have slackened further following the Stockholm agreement regarding Special Drawing Rights. The foreign trade surplus, however, has remained at a sharply reduced level in recent months and the imbalance in U.S. international payments continues to be a matter of serious concern. Most market interest rates have fluctuated widely, although rising on balance, in reaction to international financial developments, the firming of monetary policy, and uncertain ties regarding military and fiscal prospects. In this policy of the Federal Open Market Com situation, it is the mittee to foster financial conditions conducive to resistance of inflationary pressures and attainment of equilibrium in the country's balance of payments. reasonable

System open market operations To implement this policy, the next meeting of the Committee shall be conducted until with a view to attaining slightly firmer conditions in the money market; provided, however, that operations shall be modified if bank credit appears to be deviating significantly from current projections or if unusual liquidity pressures should develop. Votes for this action: Messrs. Martin, Hayes, Brimmer, Daane, Ellis, Galusha, Hickman, Kimbrel, Maisel, Mitchell, Robertson, and Sherrill. Votes against this action: None. 2. Ratification of amendments to authorization for System foreign currency operations. At this meeting the Committee ratified the actions taken by members on March 16 and 17, relating to the System's swap arrange ments with the German Federal Bank and the Bank of England. As indicated in the policy record for March 14, 1968, the members authorized the Special Manager to undertake negotiations looking toward increases of $250 million equivalent and $500 million respectively, in the two arrangements, on the understand equivalent, ing that any such increases and the corresponding amendments to paragraph 2 of the authorization for System foreign currency opera tions would become effective upon a determination by Chairman Martin that they were in the national interest. The Chairman made such a determination on March 17, 1968. Votes for ratification of these actions: Messrs. Martin, Hayes, Brimmer, Daane, Ellis, Galusha, Hickman, Kimbrel, Maisel, Mitchell, Robertson, and Sherrill. Votes against ratification of these actions: None.