November 26, 1968 FOMC Record of Policy Actions: Full Text
RESERVE FEDERAL release press February 24, 1969. For immediate release the Federal Reserve System Board of Governors of The Committee today released the attached and the Federal Open Market by the Federal Open Market Committee records of policy actions taken 26 and December 17, 1968. These records at its meetings on November Annual Report for 1968 and in the will be published in the Board's Federal Reserve Bulletin. Attachments
RECORD OF POLICY ACTIONS OF THE FEDERAL OPEN MARKET COMMITTEE Meeting held on November 26, 1968 to effect transactions in System Account. 1. Authority at this meeting suggested that the The information reviewed economic activity, while still strong, was expansion in over-all moderating somewhat further in the fourth quarter from its very rapid pace earlier in the year. In particular, retail sales in than they had been in August--suggesting that October were no higher the surge in consumer spending was subsiding--and the rise in Federal was estimated to be slackening further. Staff projections expenditures of economic expansion would continue to moderate implied that the rate in the first half of 1969. of various kinds indicated that the expansion was Recent data which was now reported to have still strong. Industrial production, in September, advanced again in October, and new orders turned up goods increased sharply. Nonfarm payroll employment rose for durable than in other recent months, and the unemployment more in October the September level of 3.6 per cent. According to rate continued at a private survey taken in October, businesses planned to increase and equipment in 1969 by about 8 per cent, their outlays on new plant or more than the rise currently estimated for 1968.
Average prices of industrial commodities increased slightly in November after advancing at a substantial rate in the two preceding months, In contrast, the consumer price index--which had increased only moderately in September--rose sharply in October. With labor markets remaining firm, sizable further advances in average hourly earnings were widespread among industries. Foreign exchange markets were in turmoil during most of November. Speculative buying of German marks revived on a large scale in early November in response to renewed rumors of an imminent revaluation. Selling pressure on the French franc intensified, and sterling was also subject to pressure, particularly after the publication of figures indicating that the British foreign trade deficit had increased somewhat in October. On November 19 the German Government announced that the mark would not be revalued, but that in order to reduce the German trade surplus the value-added tax rebate would be decreased by 4 percentage points for merchandise exports and the border tax would be reduced by 4 percentage points for most imports. The finance ministers and central bank governors of the Group of Ten met at Bonn November 20 through 22. New credit facilities totaling $2 billion were made available to France, and the German authorities increased to 100 per cent the reserve requirements on additions to German commercial bank liabilities to foreigners.
23, contrary to the expectations of many observers, On November announced that the franc would not be devalued, the French Government day President de Gaulle outlined the policy and on the following In addition to the reimposition of measures that would be adopted. exchange controls, these measures included a sizable reduction in expenditures, a more restrictive policy toward wage French budget increases, and changes in the tax system to favor exports and price and deter imports. Earlier, on November 13, the Bank of France had its discount rate from 5 to 6 per cent and had announced increased measures to limit the expansion of bank credit. Government on November 22 announced new actions The British to restrain domestic demand and to improve the balance of payments. These included a 10 per cent surcharge on existing purchase and excise taxes; requirement of 6-month non-interest-bearing deposits equal to 50 per cent of the value of imports of most manufactured goods; and tighter ceilings on bank loans to the private sector. Official estimates of the U.S. balance of payments indicated that there had been a small surplus in the third quarter on the of calculation, following a moderate deficit in the liquidity basis second quarter. Special official transactions operating to reduce the deficit remained large, but were not so large as in the second quarter. The trade surplus, although still quite small, was larger than in the first two quarters of the year; this resulted partly from acceleration of shipments in September in anticipation of a
on October 1. Available data for possible strike of longshoremen of November suggested that a sizable October and the first 2 weeks deficit on the liquidity basis had again emerged. data confirmed the earlier expectation that a Official moderate payments surplus had been recorded in the third quarter settlements basis, largely because of a further on the official increase in borrowings of U.S. banks through their branches abroad. The outstanding volume of such borrowings changed little after in October the balance on the official mid-September, however, and settlements basis probably was in deficit. In its November refunding the Treasury offered 2 notes in exchange for securities maturing in mid-November and mid-December. Of the $5.6 billion of these issues held by the public, $2.5 billion were exchanged for a new 18-month, 5-5/8 per cent note (priced to yield 5.73 per cent), and $1.3 billion were exchanged for a reopened 6-year, 5-3/4 per cent note (priced at par). On November 19 the Treasury announced that it would auction $2 billion of tax-anticipation bills due in June, for payment on December 2, mainly to raise cash to redeem the $1.8 billion of maturing securities not exchanged in the November refunding. This offering was expected to be the Treasury's last financing in the calendar year, and its size was near the lower end of the range that had been anticipated by market participants. With the Treasury refunding under way, recent System open market operations had been directed at maintaining generally steady
and short-term credit markets. Operations were conditions in money by shifts in the distribution of reservescomplicated, however, in the money centers and then back again--and first away from banks by the effects on total reserves of a sharp decline in Treasury balances at the Federal Reserve Banks and of large-scale international The effective rate on Federal funds was 6 per cent or transactions. higher on most days in the first half of November, but it subsequently around 5-3/4 per cent. Member bank borrowings averaged fluctuated about $520 million in the 4 weeks ending November 20, above the average of about $450 million in the preceding 4 weeks. Excess on the average but less than borrowings, and reserves also increased net borrowed reserves were slightly larger. on Treasury, corporate, and State and local government Yields weeks, partly because of continuing bonds had risen further in recent the capital markets. The volume of corporate and heavy demands on bond offerings in November, while less than in October, municipal relatively large. The upward rate pressures also reflected was on the part of investors, against the background cautious attitudes strength in the economy, widespread expectations of indications of and growing anticipations of a firmer monetary policy. of inflation, other hand, there was relatively little reaction in capital On the markets to either the late-October announcement of a halt in the or the recent turbulence in foreign exchange bombing of North Vietnam markets.
on various types of short-term instruments Interest rates in response to some of the same factors also had risen recently, affecting longer-term rates as well as to seasonal pressures. there was little net change in yields on shorter-term However, supplies of which had become limited Treasury bills, the market domestic and foreign demands. The market rate at a time of strong bills, at 5.42 per cent on the day before this on 3-month Treasury was 4 basis points below its level of 4 weeks earlier. meeting, of deposits to nonbank financial intermediaries Net inflows in October. Yields on home mortgages again increased only moderately secondary market, which had been declining for several months, in the edged up in Octcber and apparently also in the first half of November. Rates paid by banks on large-denomination CD's also had in recent weeks. Most banks were now paying the advanced further Regulation Q ceiling rate of 6 per cent on certificates with maturities days, and some reportedly were paying the 6-1/4 per cent of 90 to 179 ceiling rate on longer-term certificates. According to tentative estimates, growth from October to November in the volume of outstanding CD's, and of other time and savings deposits as well, was slower than it had been in other recent months. On the other hand, the expansion in private demand deposits and the money supply accelerated--the latter to an estimated annual rate of more than 10 per cent, the highest since July. Bank credit, as measured by the proxy seriesdaily-average member bank deposits--was tentatively estimated to have
increased from October to November at an annual rate of 10.5 per cent, compared with 12.5 per cent from September to October. In mid-November prime lending rates were raised to the generally prevailing level of 6-1/4 per cent by the few large banks that had reduced such rates from 6-1/2 to 6 per cent in late September. Staff projections suggested that the bank credit proxy would increase from November to December at an annual rate of 5 to 8 per cent if prevailing conditions were maintained in money and short-term credit markets. The projections assumed that the volume of large-denomination CD's outstanding would decline seasonally and that growth in other time and savings deposits would slow somewhat further. An anticipated reduction in the average level of U.S. Government deposits was expected to contribute to expansion in private demand deposits and the money supply at a rapid rate, although not so rapid as in November. Committee members differed in their views on the appropriate course for monetary policy under current circumstances, with a minority favoring operations directed at attaining somewhat firmer money market conditions. The majority thought that, although it would be advisable to resist any easing of money market conditions that might be produced by market forces, a shift to a firmer policy stance was not warranted at this time. Members of the majority shared the concern expressed about the persistence of inflationary pressures, and some indicated that
policy to be close. On had found the question of appropriate they that domestic economic considerations balance, however, they believed a clear and unequivocal need for a firmer policy at did not suggest judgment, despite the unexpected strength of the present. In their economy since enactment of fiscal restraint legislation at midyear, in the rate of expansion were likely to become evidences of slowing more pronounced in coming months. Other considerations cited as militating against a policy change at present were the recent turbulence and the continuing uncertainties in foreign exchange markets, and the fact that in financial markets the peak seasonal pressures of the year were to be expected in the period just ahead. Several members expressed the view that a slight firming of policy at this time would not be effectual in combatting the prevailing inflationary psychology, and that a more marked firming would be undesirable on the other grounds cited. The Committee concluded that open market operations should be directed at maintaining about the prevailing conditions in money and short-term credit markets, with the proviso that operations should be modified if bank credit expansion appeared to be exceeding 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 the expansion in over-all economic activity, while still strong, is moderating somewhat further from its very rapid pace earlier in the year. Upward pressures on prices and costs are persisting. Most market interest rates have risen further in recent weeks. Bank credit has continued to expand rapidly. Growth in the money supply has accelerated from the low average rate of recent months, while expansion
in commercial bank time and savings deposits has slowed. Savings inflows to thrift institutions increased somewhat further in October but remained moderate. Following dis cussions among leading industrial countries, France, Germany, and Britain have acted to combat the recent speculation in their currencies by taking steps designed to reduce imbalances in their external payments. The U.S. foreign trade balance and over-all balance of payments improved in the third quarter but partial data for recent weeks suggest that the improvement is not being sustained, and the underlying U.S. payments position remains a serious problem. 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 about the prevailing conditions in money and short-term credit markets; provided, however, that operations shall be modified if bank credit expansion appears to be exceeding current projections. Votes for this action: Messrs. Martin, Brimmer, Daane, Galusha, Maisel, Mitchell, Robertson, and Sherrill. Votes against this action: Messrs. Hayes, Hickman, Kimbrel, and Morris. In dissenting from this action, Messrs. Hayes, Hickman, Kimbrel, and Morris indicated that they favored seeking somewhat firmer money market conditions in an effort to slow the rate of bank credit growth, which in their view had been excessive for several months. They thought such action was required in light of prevailing inflationary pressures and expectations. In their judgment, the latest information on the domestic economy lent support to the view that the rate of expansion, while perhaps moderating somewhat in coming months, was likely to remain excessive under the current stance of fiscal and monetary policies. The view also was expressed that a firmer monetary policy was desirable to help maintain the strength of the dollar in foreign exchange markets.
of amendment to authorization for System foreign 2. Ratification currency operations. The Committee ratified an action taken by members on November 22, 1968, effective on that date, to increase the System's swap arrangement with the Bank of France from $700 million to $1 billion, equivalent, and to make the corresponding amendment to 2 of the authorization for System foreign currency opera paragraph tions. As a result of this action, paragraph 2 read as follows: The Federal Open Market Committee directs the Federal Reserve Bank of New York to maintain reciprocal currency arrangements ("swap" arrangements) for System Open Market Account for periods up to a maximum of 12 months with the following foreign banks, which are among those designated by the Board of Governors of the Federal Reserve System under Section 214.5 of Regulation N, relations with foreign banks and bankers, and with the approval of the Committee to renew such arrangements on maturity: Amount of arrangement (millions of Foreign bank dollars equivalent) Austrian National Bank 100 National Bank of Belgium 225 Bank of Canada 1,000 National Bank of Denmark 100 Bank of England 2,000 Bank of France 1,000 German Federal Bank 1,000 Bank of Italy 1,000 Bank of Japan 1,000 Bank of Mexico 130 Netherlands Bank 400 Bank of Norway Bank of Sweden Swiss National Bank Bank for International Settlements: System drawings in Swiss francs 600 System drawings in authorized European currencies other than Swiss francs 1,000
Votes for ratification of this action: Messrs. Martin, Hayes, Brimmer, Daane, Galusha, Hickman, Kimbrel, Maisel, Mitchell, Morris, Robertson, and Sherrill. Votes against ratification of this action: None. This increase in the Federal Reserve swap line with the Bank of France represented part of the U.S. share of the $2 billion in new credit facilities to France that had been announced in Bonn on November 22, following the meeting of the finance ministers and central bank governors. In addition, the U.S. Treasury made a $200 million credit facility available to France, so total U.S. partic ipation in the new facilities was $500 million.
OF POLICY ACTIONS RECORD OF THE FEDERAL OPEN MARKET COMMITTEE Meeting held on December 17, 1968 Authority to effect transactions in System Account. of expansion in over-all economic activity The current rate higher than has been projected earlier, according was significantly variety of economic information that had become available to a broad the preceding meeting of the Committee. New staff projections since terms would increase about as suggested that GNP in current-dollar fourth quarter as it had in the third. Average prices, rapidly in the as measured by the "GNP deflator," were estimated to be rising at a faster pace again in the fourth quarter, and growth in real GNP was further from the very high rates recorded expected to moderate somewhat in the first two quarters of the year. Expectations of continued inflationary pressures appeared to be widespread. of GNP in both the fourth and first The staff projections quarters had been revised upward from those of 3 weeks earlier largely because of the indication, from the Commerce-SEC survey of taken in November, that outlays on new plant and business plans equipment were rising sharply. Other evidences of strength in the current business situation were reflected in November data on production, employment, and retail sales. A sizable further advance in industrial production in November brought the index
above the previous high recorded in July, when output of steel had been substantially larger. Nonfarm payroll employment again rose sharply, and the unemployment rate declined to 3.3 per cent--its lowest level in 15 years--from 3.6 per cent in October. Average hourly earnings continued to advance at the rapid pace of recent months. Retail sales, according to the advance estimate, rose in November after edging down in September and October. It appeared, however, that consumer expenditures would expand considerably less fourth quarter as a whole than they had in the third quarter. in the The staff projections still implied that the rate of increase in real GNP would moderate considerably in the first half of 1969, partly because of a marked swing from deficit to surplus that was already under way in the Federal fiscal position. In addition, it was expected that expansion in consumer expenditures would slow further as a result of slackened growth in disposable income and that the increase in residential construction outlays would be limited by tight conditions in mortgage markets. Against the back ground of prospects in these sectors, the resurgence of business capital outlays and the report that inventories had risen markedly in October suggested that imbalances could be developing in the economy as a result of inflationary expectations. In foreign exchange markets, earlier speculative movements of funds were partly reversed following the actions taken in late
November by Germany, France, and Britain to reduce imbalances in their external payments. The pound was again subject to selling pressure in early December, however, and the market for sterling remained uneasy even after publication of figures indicating that Britain's foreign trade balance had improved sharply in November. Available information on the U.S. balance of payments in October and November suggested that sizable deficits had again emerged on both the liquidity and official settlements bases of calculation, following the surpluses--small in the case of the liquidity balance--that had been recorded in the third quarter. Since mid-September there had been relatively little net change in borrowings by U.S. banks through their foreign branches; in the spring and summer, increases in such borrowings had resulted in the payments surpluses recorded then on the official settlements basis. U.S. merchandise exports declined sharply in October after rising considerably in September in anticipation of a longshoremen's strike on October 1. Imports also declined in October, but more moderately than exports; for September and October together there was a small surplus in U.S. foreign trade. With the current Taft Hartley Act injunction against the strike scheduled to expire on December 20, continued marked fluctuations in monthly foreign trade figures appeared likely. Treasury auctioned $2 billion of tax-anticipa In late November the tion bills due in June 1969, for payment on December 2. Banks, which were
allowed to pay for the bills through credits to Treasury tax and loan accounts, successfully bid for the bulk of the issue. Despite this cash financing, however, Treasury cash balances at banks were drawn down to very low levels prior to the quarterly corporate tax date in mid-December, and the Treasury temporarily replenished its in the period December 10-17 by selling special certificates balances of indebtedness to the Federal Reserve. The volume of such certificates outstanding was $92 million on December 10, none on December 11, $45 million on December 12, $430 million from December 13 through 15, $447 million on December 16, and $596 million on December 17. (Certificates outstanding on December 17 were redeemed the following day.) Interest rates on market securities of all maturities had risen sharply further in recent weeks as the steady stream of statistics reflecting strength in the economy heightened concern about inflationary pressures and enhanced expectations of a firmer monetary policy. Increases in yields were particularly rapid in early December after commercial banks increased their prime lending rates from 6-1/4 per cent to the 6-1/2 per cent level that had pre vailed before the reductions of late September. Yields on most long-term securities rose to levels above the peaks that had been reached in the spring, and unsettled conditions in the capital markets led to the postponement or cancellation of a number of scheduled corporate and municipal bond offerings. Conditions in the secondary market for home mortgages continued to tighten in early December.
for short-term securities, yield advances were In markets for Treasury bills; on the day before this particularly pronounced market rate on 3-month bills was 5.94 per cent, 52 basis meeting the of 3 weeks earlier. Upward pressures on bill points above its level by seasonal forces, sales of bills by foreign yields were augmented and sales by domestic commercial banks of monetary authorities, they had acquired in the Treasury's recent tax-anticipation bills auction. Rates paid by commercial banks on large-denomination CD's had increased further in recent weeks, and most of longer maturity large banks were now paying the Regulation Q ceiling rates for all maturities. The volume of CD's outstanding rose substantially in November, particularly after midmonth. Largely as a consequence, the expansion in total time and savings deposits from October to November was more rapid than earlier tentative estimates had although somewhat less rapid than in other recent months. indicated, Estimates of November growth rates also had been revised upward somewhat for bank credit, as measured by the proxy seriesdaily-average member bank deposits--and for the money supply; both to have increased from October to November at an were now estimated annual rate. Since midyear, bank credit and the money 11.5 per cent at annual rates of about 13 and 6 per cent, supply had expanded compared with rates of about 4 and 6.5 per cent in respectively, half of the year. In November banks increased the volume the first
of business loans outstanding considerably further and continued to acquire municipal securities at a rapid pace, while reducing their holdings of U.S. Government securities. To a large extent, the accelerated growth in the money supply in November reflected a rise in private demand deposits in the last half of the month, when U.S. Government deposits declined markedly. System open market operations in the first part of the period since the Committee's preceding meeting were directed at maintaining about the prevailing conditions in money and short-term credit markets, and reserves were supplied partly in an effort to cushion the sharp reaction of short-term market interest rates to the rise in the prime rate. Operations subsequently were shifted in the direction of reserve absorption when market factors began to supply a large volume of reserves and when estimates indicated that bank credit was expanding at a rate in excess of the range projected at the time of the previous meeting. These operations were tempered, however, in view of the continuing increases in short-term rates. During the period as a whole, the effective rate on Federal funds fluctuated mostly in a range of 5-3/4 to 6 per cent. Member bank borrowings averaged $515 million in the 3 weeks ending December 11, little changed from the previous 4 weeks. With excess reserves lower on the average, net borrowed reserves rose in the period. suggested that if prevailing conditions New staff projections and short-term credit markets were maintained, on balance, in money
the bank credit proxy would expand at an annual rate of 8 to 11 per to December and at a rate of 4 to 7 per cent from cent from November Given the current relationships between short December to January. rates and Regulation Q ceiling rates, it was expected term interest that banks would experience a larger-than-seasonal run-off of CD's a contraseasonal run-off in January, and that inflows in December and time and savings deposits would begin to moderate. of consumer-type supply was expected to slow considerably in Growth in the money December--and perhaps to taper off further in January, particularly if demands for business loans were reduced. An alternative projection suggested that a firming of money market conditions would have relatively little effect on bank credit growth in December but would result in a slower rate of growth in annual rate of perhaps 2 to 5 per cent--mainly as a January--an result of a larger run-off of CD's. For purposes of the projections it was assumed that the Treasury would not engage in any new cash borrowing through the end of January. Prior to this meeting the boards of directors of nine Federal Reserve Banks had acted, subject to the approval of the Board of Governors, to increase discount rates from the present level of 5-1/4 per cent. It was reported to the Committee that the Board of Governors planned shortly after this meeting to take action with respect to discount rates and also to consider the desirability of a moderate increase in member bank reserve requirements. unanimously of the view that greater monetary The Committee was this time in light of the unexpected strength restraint was required at
economic activity, the persistence of inflationary pressures of current recent rapid rate of growth in bank credit. and expectations, and the agreed that one element of the shift to greater monetary The members be a firmer open market policy. There also was general restraint should sentiment at the meeting that discount rates should be increased, although there were some differences of view with respect to the amount; and divergent opinions were expressed about the desirability of action now to raise reserve requirements. A number of members expressed the view that the combination of a firmer open market policy and an increase of one-quarter of a percentage point in discount rates would be appropriate to the current economic situation. Some of these members added that, while additional measures could be taken later if deemed necessary, various considerations--including the continuing uncertainties with respect to foreign exchange markets, as well as the sensitive state of conditions in domestic financial markets with the attendant risks of unduly large market reactions--militated against also increasing reserve requirements at this time or raising discount rates by as much as one-half point. The basic argument advanced by those who favored a broader combination of policy actions now was that more limited actions were likely to be inadequate to dampen the prevailing inflationary psychology, particularly since it appeared that an increase of at least one-quarter point in the discount rate was already widely anticipated in financial markets. At the conclusion of the discussion the Committee agreed that open market operations should be directed at attaining firmer conditions in money and short-term credit markets, while taking account of the
other monetary policy actions that might be taken. effects of any operations should be modified if bank The proviso was added that expansion appeared to be deviating significantly from current credit The following current economic policy directive was projections. issued to the Federal Reserve Bank of New York: The information reviewed at this meeting suggests that over-all economic activity is expanding rapidly and that upward pressures on prices and costs are persisting. Market interest rates have risen consid erably further in recent weeks. Bank credit growth has been sustained by continuing strong expansion of time and savings deposits, while growth in the money supply has accelerated and U.S. Government deposits have declined. The U.S. foreign trade surplus remains very small and the over-all balance of payments apparently worsened in October and November. In this situation, it is the policy of the Federal Open Market Committee to foster financial conditions conducive to the reduction of inflationary pressures, with a view to encouraging a more sustainable rate of economic growth and attaining 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 attaining firmer conditions in money and short-term credit markets, taking account of the effects of other possible monetary policy action; provided, however, that operations shall be modified if bank credit expan sion appears to be deviating significantly from current projections. Votes for this action: Messrs. Hayes, Brimmer, Daane, Galusha, Hickman, Kimbrel, Maisel, Mitchell, Morris, Robertson, and Sherrill. Votes against this action: None. Absent and not voting: Mr. Martin.