January 14, 1969 FOMC Record of Policy Actions

FOMC minutes

measured by the bank credit proxy--daily-average Total bank credit, as 2/ to December at an annual rate deposits- -- rose from November member bank per cent in the previous month and about 13 per cent, compared with 11 of After adjustment for changes in 13 per cent in the second half of 1968. bank liabilities to foreign branches--which the daily average of U.S. but fell sharply in December--the proxy increased slightly in November about 11.5 per cent in both months. expanded at an annual rate of series that if existing Regulation Q Staff projections suggested money market conditions were maintained there ceilings and prevailing in the volume of CD's outstanding and would be further large declines of consumer-type time and savings deposits. a marked slowing of inflows average level of the money stock was expected to be considerably The than in December because of the sharp but largely higher in January in late December and early January. With respect temporary increase projections suggested that the proxy series to bank credit, the staff years the Committee has been making use of daily-average 2/ In recent member bank deposits as a "bank credit proxy"--that is, statistics on total measure, although indirect, of developing movements as the best available can be compiled on a daily basis with a very in bank credit. Because they are more nearly current than available bank short lag, the deposit figures loan and investment data. Moreover, average deposit figures for a calendar month are much less subject to the influence of single-date fluctuations than are the available month-end data on total bank credit, which represent at all commercial banks on one day--the estimates of loans and investments For statistics on daily-average member bank last Wednesday--of each month. deposits, see table in the statistical section of the Federal Reserve Bulletin (on page A-17 of the January 1969 issue). Some brief comments on the relation between the member bank deposit series and the bank credit statistics are given in the note on p. 1460 of the October 1966 Bulletin. As indicated in that note, movements in total member bank deposits and in commercial bank credit can diverge for various reasons, including changes in nondeposit liabilities of banks. Because changes in U.S. bank liabilities to foreign branches recently have been an important source of time to time, an "adjusted" proxy series, taking approximate divergence from such changes, is now also being calculated for Committee use. account of

would expand in January at an annual rate in the range of zero to per cent. After adjustment for the marked increase in U.S. bank liabilities to foreign branches that had already occurred in early January, growth in the credit proxy was projected in a range of 2 to 5 per cent. For February, prospects were for continued run-offs of CD's and no significant increase in the rate of bank credit growth. In the Committee's discussion it was noted that, despite the indications of slowing in the rate of economic expansion, upward pressures on prices persisted and inflationary expectations remained widespread. It also was noted that the recent improvement in the U.S. balance of payments, while encouraging, did not imply that a sustainable equilibrium had been achieved, particularly in view of the marked deterioration in the U.S. trade surplus during 1968. The Committee agreed that under these circumstances it would be desirable at present to maintain the existing degree of monetary restraint. The fact that the Treasury would be announcing a refunding around the end of January also was mentioned as militating in favor of an unchanged policy. The sharp slowing of growth in bank credit pro jected for January and February was generally considered to be appro priate, especially in light of the high growth rates of recent months. The view was expressed, however, that it would be undesirable to curtail bank credit drastically for an extended period. The Committee decided that open market operations should be directed at maintaining the prevailing firm conditions in money and

with the proviso that operations should be short-term credit markets, modified--to the extent permitted by the forthcoming Treasury refundingappeared to be deviating significantly in either if bank credit expansion Comments were made as to the desir direction from current projections. the one hand, of moderating any undue liquidity pressures ability, on that might develop and, on the other hand, of also moderating any toward easing of money market conditions that might be brought tendency about by seasonal forces. The following current economic policy directive was issued to the Federal Reserve Bank of New York: The information reviewed at this meeting suggests that real economic activity has been moderating, with expansion in slower growth in consumer outlays but higher rates of business inventory accumulation and capital expenditures. Upward pressures on prices and costs, however, are persisting. Since the mid-December firming of monetary policy, most interest rates have risen further and, with the outstanding volume of large-denomination CD's declining sharply, bank credit expan sion has slowed. Growth in the money supply moderated somewhat on average in December from its rapid November pace. The U.S. foreign trade surplus remains very small but near the end of the year unusual capital inflows had a markedly favorable effect on the over-all balance of payments. 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 maintaining the prevailing firm conditions in markets; provided, however, that money and short-term credit shall be modified, to the extent permitted by the operations forthcoming Treasury refunding, if bank credit expansion appears to be deviating significantly from current projections.

Votes for this action: Messrs. Martin, Brimmer, Daane, Galusha, Hickman, Kimbrel, Maisel, Mitchell, Robertson, Sherrill, and Treiber. Vote against this action; Mr. Morris. Absent and not voting: Mr. Hayes. (Mr. Treiber voted as his alternate.) Mr. Morris dissented from this action because he thought the directive as adopted could be consistent with an unduly restrictive monetary policy. In his judgment the current state of the economy called for a substantial moderation of bank credit growth from the 13 per cent rate that had prevailed over the second half of 1968, but not for so sharp a change as was implied by the projections for January and February.