December 17, 1968 FOMC Record of Policy Actions

FOMC minutes

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.