May 28, 1968 FOMC Record of Policy Actions

FOMC minutes

interest rates were expected to continue as relatively high market in consumer-type time and savings deposits and to to curtail growth in outstanding CD's for which scheduled result in a sizable decline maturities were large in June. a restrictive monetary policy was The Committee agreed that in view of the strength of domestic demands and persisting appropriate as well as of the deterioration in the U.S. inflationary pressures, that was contributing to continuation of an foreign trade balance over-all payments position. At the same time, however, unsatisfactory there was general agreement that a number of considerations against any additional tightening at present. An important militated consideration was the possibility that in the near future Congress enact the pending fiscal-restraint legislation. Furthermore, would a considerable degree of monetary restraint had already been achieved; the banking system was being subjected to increasing over-all expansion of bank credit appeared to liquidity pressures; have halted in April and May; and market rates of interest had advanced sharply to levels that could give rise to a substantial amount of disintermediation. concluded that open market operations should The Committee at maintaining about the prevailing firm conditions in be directed the money market, but that operations should be modified if bank appeared to be deviating significantly from current projections credit

or if unusual pressures should develop in financial markets. The policy directive was issued to the following current economic Federal Reserve Bank of New York: reviewed at this meeting indicates The information that the very rapid increase in over-all economic activity is being accompanied by persisting inflationary pressures. There has been little or no growth on average in bank credit and time and savings deposits over the past 2 months, although the money supply has expanded considerably as U.S. Government deposits have declined. In recent weeks both short- and long-term interest rates have risen sharply on balance from their earlier advanced levels, partly in reaction to shifting expectations with regard to the likelihood of fiscal restraint. There has been some revival of speculative activity in the private gold market and in foreign exchange markets. The U.S. foreign trade balance and over-all payments position continue to be a matter of serious concern. 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 attainment of reasonable equilibrium in the country's balance of payments, while taking account of the potential for severe pressures in financial markets if fiscal restraint is not forthcoming. To implement this policy, System open market operations until the next meeting of the Committee shall be conducted with a view to maintaining firm 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 pressures should develop in financial markets. Votes for this action: Messrs. Martin, Hayes, Brimmer, Daane, Ellis, Galusha, Hickman, Kimbrel, Maisel, Mitchell, Robertson, and Sherrill. Votes against this action: None. 2. Authority to purchase and sell foreign currencies. The Committee amended paragraph 1B(3) of the authorization for System foreign currency operations to increase, from $250

to $300 million, the limit on authorized System Account million sterling purchased on a covered or guaranteed basis. holdings of Votes for this action: Messrs. Martin, Hayes, Brimmer, Daane, Ellis, Galusha, Hickman, Kimbrel, Maisel, Mitchell, Robertson, and Sherrill. Votes against this action: None. meeting the Committee had increased the At its previous $200 million to $250 million. That action limit in question from taken on grounds that it would be helpful in connection had been specific arrangements, including a drawing by with discussions of on its $1.4 billion standby facility with the International Britain Monetary Fund, for repayment by the Bank of England of outstanding swap line with the Federal Reserve; and it had drawings under its that initial use of the enlarged authority would be been understood the approval of Chairman Martin in light of developments subject to in those discussions. Today's action was taken on similar grounds and subject to the same understanding. The Committee also amended paragraph 4 of the foreign directive, by adding the words "and to facilitate operations currency of the Stabilization Fund" to clause (iv). With this amendment, paragraph 4 of the directive read as follows: expressly authorized by the Unless otherwise Committee, transactions in forward exchange, either outright or in conjunction with spot transactions, may be undertaken only (i) to prevent forward premiums or discounts from giving rise to disequi librating movements of short-term funds; (ii) to minimize speculative disturbances; (iii) to supple ment existing market supplies of forward cover,

directly or indirectly, as a means of encouraging the retention or accumulation of dollar holdings by private foreign holders; (iv) to allow greater flexibility in covering System or Treasury commit ments, including commitments under swap arrangements, and to facilitate operations of the Stabilization Fund; (v) to facilitate the use of one currency for the settlement of System or Treasury commitments denominated in other currencies; and (vi) to provide cover for System holdings of foreign currencies. Votes for this actions Messrs. Martin, Hayes, Brimmer, Daane, Ellis, Galusha, Hickman, Kimbrel, Maisel, Mitchell, Robertson, and Sherrill. Votes against this action: None. On November 14, 1967, at a time when an increase in System Account and Stabilization Fund holdings of sterling was under consideration, the Committee had amended paragraph 1C(1) of the authorization for System foreign currency operations to enable the System Account to "warehouse" part of the Stabilization Fund's holdings of sterling if the Fund's resources should prove inadequate to meet all demands upon them from time to time in the future. Since such "warehousing" operations--none of which had been under taken to date--would involve forward transactions, the Committee concluded that it was desirable to make a conforming change in the list of purposes, given in paragraph 4 of the foreign currency directive, for which forward transactions were authorized.