September 10, 1968 FOMC Record of Policy Actions

FOMC minutes

In August, as in July, banks were heavy buyers in the large offerings of securities undertaken by Federal, State, and local governments. Growth in bank loans to businesses was maintained at about the recent average pace, and loans to brokers and dealers to finance holdings of securities increased moderately further. Total bank credit, as measured by the bank credit proxy--daily-average member bank deposits--expanded at the unusually high annual rate of 21 per cent, after rising at a 9 per cent rate in July. Allowance for changes in the daily average of U.S. bank liabilities to foreign branches would have served to increase the growth rate by about 1/2 of a percentage point in August and 1-1/2 percentage points in July. System open market operations in the period since the Committee's August 19 meeting had been directed mainly at facilitating orderly adjustments in money market conditions to the reduction in Federal Reserve Bank discount rates. As the period progressed less emphasis was placed on the supplementary objective of moderating upward pressures on Treasury bill rates, in light of accumulating evidence that bank credit was growing at a higher rate than that projected at the time of the Committee's previous meeting. The effective rate on Federal funds, which had been mostly in a 6 to 6-1/4 per cent range prior to the discount rate cuts, subsequently fluctuated in a 5-3/4 to 6 per cent range and was at the upper end of that range at the close of the period. Net borrowed reserves

and member bank borrowings averaged about $185 million and $480 million, respectively, in the 3 weeks ending September 4, down from averages of about $290 million and $640 million in the previous 3 weeks. Growth in bank credit was expected to moderate from the high August rate in September and October. The Treasury was not expected to engage in another major cash financing until the latter part of October; and prospects favored some reduction from the current high level of outstanding loans to finance holdings of securities and also a slower growth in business loans, particularly after the mid-September tax date. New staff projections suggested that the bank credit proxy would expand at an annual rate of 7 to 10 per cent in September if prevailing conditions in money and short-term credit markets were maintained. Growth in about the same range was foreseen for October, on the assumption that the Treasury would raise about $3 billion of new cash in the latter part of the month. The projections suggested that expansion in time and savings deposits would moderate in September, and that on the average Government deposits would change little over September and October and the money supply would rise only slightly. The Committee decided that no change in monetary policy was warranted at this time. On the one hand, a relaxation of monetary restraint was not deemed appropriate in light of the current strength of final demands and the persistence of

inflationary pressures; on the other hand, greater restraint was not considered desirable in view of the outlook for slowing in over-all economic activity, although it was noted that firm evidence was lacking thus far on the amount of slowing in prospect. However, a number of members--while not advocating a firming of policyexpressed concern about the rapid rates of bank credit expansion in recent months, and some thought that expansion in September and October at a rate near the upper end of the projected range would be higher than desirable in the current economic environment. At the same time, it was noted that Treasury bill rates might well come under temporary upward pressure as a result of credit demands associated with the September tax date and the large scale sales of bills by the System that were expected to be required in the next week or so to absorb reserves supplied by market factors. A number of members expressed the view that such pressures should be moderated if they proved to be unduly marked or prolonged, in light of the risk that persistent large increases in bill rates might precipitate a change in market expectations that would result in a new general uptrend in market interest rates. The Committee concluded that it would be desirable at present for open market operations to be directed at maintaining about the prevailing conditions in the money and short-term credit markets, on the understanding that increases in Treasury bill rates in the near term, if moderate, would not be considered inconsistent with this

objective. The proviso was added that operations should be modified if bank credit appeared to be deviating significantly from current projections. The following current economic policy directive was issued to the Federal Reserve Bank of New York: The information reviewed at this meeting suggests that, although consumer demands have been strong this summer, reduced rates of inventory accumulation and tapering growth of Government expenditures are being reflected in a slowing of expansion in over-all activity. Industrial prices have been increasing less rapidly in recent months, but consumer prices have continued to rise substantially and wage pressures remain strong. Most market interest rates have changed little on balance following reductions in Federal Reserve Bank discount rates. Growth in bank credit and time and savings deposits has been rapid this summer; growth in the money supply slowed in August as U.S. Government deposits were built up following an extended decline. The earlier improvement in the U.S. balance of payments was not maintained in August, according to preliminary indications, and 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 resis tance to inflationary pressures, and attainment of reasonable equilibrium in the country's balance of payments. System open market operations until the next meeting of the Committee shall be conducted with a view to maintaining about the prevailing conditions in money and short-term credit markets; provided, however, that operations shall be modified if bank credit appears to be deviating significantly from current projections. Votes for this action: Messrs. Martin, Hayes, Brimmer, Daane, Galusha, Hickman, Kimbrel, Maisel, Mitchell, Morris, Robertson, and Sherrill. Votes against this action: None.