August 13, 1968 FOMC Record of Policy Actions

FOMC minutes

might have been expected in view of the additional corporate tax payments required under the new fiscal legislation. Bank investments expanded sharply, however, as did loans to finance holdings. Total bank credit, as measured by the bank securities credit proxy--daily-average member bank deposits--grew at an annual rate of 9 per cent, compared with rates of 1 per cent in the second quarter and 7 per cent in the first. Allowance for changes in the daily average of U.S. bank liabilities to foreign branches would have served to increase the growth rate by 2 percentage points in July and slightly more in the second quarter. System open market operations in the early part of the interval following the preceding meeting of the Committee had been directed at accommodating the tendencies for short-term interest rates to decline. Later in the period, however, when it became apparent that bank credit was increasing at a rate significantly above that projected at the time of the previous meeting, operations were modified to the extent permitted by the Treasury financing. Member bank borrowings, which had averaged $555 million in the 2 weeks ending July 24, rose to an average of $670 million in the following 2 weeks; and average net borrowed reserves increased from $215 million to $320 million. Since the preceding meeting, the effective rate on Federal funds had fluctuated mostly in a 6 to 6-1/4 per cent range and bank rates on loans to Government securities dealers, whose financing needs were heavy, also had remained high.

New staff projections suggested that the bank credit proxy would increase from July to August at an annual rate of 16 to 18 per cent if the prevailing stance of monetary policy were maintained. About three-fourths of the estimated growth reflected an expected increase in average Government deposits from July to August as a result of Treasury cash borrowing. Much slower growthat an annual rate of 5 to 7 per cent--was anticipated for September, when the Treasury was not expected to engage in new borrowing except in connection with its regular bill offerings. was projected to remain about unchanged in The money supply August and to grow moderately in September when a decline in Government deposits was anticipated. Expansion in time and savings deposits was expected to moderate somewhat in August and September. The Committee agreed that the rate of economic growth was likely to slow during the second half of the year. Several members noted, however, that some moderation in the recent rapid pace of expansion would be desirable in light of prevailing inflationary pressures, and that the evidence available to date was not sufficient to indicate the amount of slowing in prospect. Considerable concern was expressed about the rapid rates of increase in bank credit experienced in July and projected for August, even though it was noted that the spurt was projected to be temporary. At the same time, it was thought generally that undesirable for short-term interest rates, which had it would be been advancing in recent days, to rise substantially further.

concluded that it would be appropriate at The Committee this time to maintain, on balance, about the prevailing conditions in money and short-term credit markets, with some easing in day-to-day money market rates to be permitted if Treasury bill and other short-term rates remained under marked upward pressure. It was also agreed, however, that operations should be modified if bank credit growth in August and September appeared to be significantly exceeding current projections. Several members expressed the view that in light of the marked net decline in short-term interest rates since the enactment of fiscal legislation, a near-term reduction in the discount rate would be appropriate to bring it into better alignment with current market rates. These members noted that a cut in the discount rate might have the effect of moderating further upward pressures on short-term rates without requiring reserve injections of the size that might otherwise be needed for that purpose. 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 some elements of economic activity continued to expand vigorously in early summer. Expansion in over-all activity, however, is projected to slow considerably in coming months as a result of the new fiscal restraint measures and a marked reduction in inventory accumulation. Industrial prices have been increasing less rapidly in

but consumer prices have continued to rise recent months, Wage pressures remain strong, and the substantially. in the steel industry was followed recent wage settlement price increases. Both short- and by announcements of steel long-term interest rates have declined considerably, in large part as a result of expectations of easier credit conditions. Bank time and savings deposits, particularly large-denomination CD's, have expanded sharply in early summer; growth in the money supply has continued large as deposits have been drawn down further on U.S. Government average; and growth in total bank credit has been unusually rapid. Although the U.S. balance of payments has recently shown a marked improvement, the foreign trade balance and underlying payments position continue to be matters of serious concern. In this situation, it is the policy of the Federal Open Market Committee to foster financial conditions conducive to sustainable economic growth, continued resistance to inflationary pressures, and attainment of 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, on balance, about the prevailing conditions in money and short-term credit markets; provided, however, that operations shall be modified if bank credit appears to be significantly exceeding current projections. Votes for this action: Messrs. Martin, Brimmer, Daane, Galusha, Hickman, Kimbrel, Maisel, Mitchell, Robertson, Sherrill, Bopp, and Treiber. Votes against this action: None. Absent and not voting: Mr. Hayes. (Mr. Treiber voted as his alternate. Also, Mr. Bopp voted as an alternate member in place of Mr. Ellis, whose membership on the Committee had terminated on June 30, 1968, the effective date of his resignation as President of the Federal Reserve Bank of Boston.)