March 4, 1969 FOMC Record of Policy Actions: Full Text
FEDERAL RESERVE press release release June 2, 1969. For immediate of Governors of the Federal Reserve System The Board Market Committee today released the attached and the Federal Open taken by the Federal Open Market Committee record of policy actions Such records are made available at its meeting on March 4, 1969. the date of each meeting of the Com approximately 90 days after the Federal Reserve Bulletin and the mittee and will be found in Board's Annual Report. Attachment
RECORD OF POLICY ACTIONS OF THE FEDERAL OPEN MARKET COMMITTEE Meeting held on March 4, 1969 Authority to effect transactions in System Account. was now estimated by the Commerce Department Growth in real GNP more in the fourth quarter of 1968 than to have moderated somewhat staff projections suggested that it would indicated earlier, and further in the first half of 1969. However, upward pressures moderate and costs were persisting, and it appeared that expectations on prices inflation were still an important factor underlying of continuing business spending decisions. to available weekly data, retail sales In February, according from January--when, in turn, they had risen to a were about unchanged of the preceding November. Tentative estimates level close to that that industrial production continued to increase at a slower indicated In January nonfarm employment rose substan rate than in late 1968. rate was unchanged at the low tially further, and the unemployment of 3.3 per cent. The labor market remained tight, and average level hourly earnings of production workers continued upward at a rapid rate. Average wholesale prices of industrial commodities increased considerably further from mid-January to mid-February, but by less
than in the preceding month when,according to revised data, the largest monthly increase in more than 13 years had been recorded. In January average consumer prices continued to advance at a rapid pace, particularly after allowance for the usual seasonal declines in prices of some major commodities. Revised Commerce Department estimates indicated that growth in real GNP had moderated from an annual rate of 5.0 per cent in the third quarter of 1968 to 3.4 per cent in the fourth quarter, rather than to 3.8 per cent as had been shown in the preliminary report. The slackening in the fourth quarter was attributable largely to a marked slowing of the rise in consumer and Federal expenditures on goods and services; business outlays on plant and equipment and on inventory accumulation had increased considerably, as had residential construction activity. The staff projections for the first half of 1969 suggested that growth in disposable income would be held down by the increase in social security tax rates that became effective January 1, and by retroactive payments on 1968 personal income tax liabilities. It was expected that the rate of personal saving would decline from its high fourth-quarter level and that consumer spending would rise at a pace moderately faster than in the fourth quarter. Federal purchases were projected to remain close to the fourth-quarter level. The projections also implied that as the first half of the year progressed residential construction activity would be increasingly limited by the
reduced availability of mortgage funds; that the rapid current expansion in business capital outlays would slow; and that the rate of inventory accumulation would be reduced. Preliminary data indicated that there had been a substantial deficit in the U.S. balance of payments on the liquidity basis in the first 2 months of 1969. But the extent to which both payments and receipts had been affected by the longshoremen's strike- -which began on December 20 and ended in mid-February in New York and later at certain other Atlantic and Gulf Coast ports--was not clear. On the official settlements basis a large surplus was recorded in January, as liabilities of U.S. banks to their foreign branches rose sharply to a new high. In February, however, a deficit apparently developed on the official settlements basis, as net inflows of Euro-dollars through foreign branches uere substantially smaller. Interest rates in the Euro-dollar market advanced considerably further to new record levels in February. On February 27 the Bank of England raised its discount rate by I percentage point to the 8 per cent level that had been main tained for about 4 months after the devaluation of sterling in November 1967. This action was taken to reinforce Britain's policy of severe domestic credit restraint and was officially described as consistent with the recent marked increases in short-term interest rates in international financial markets. Shortly thereafter,
discount rates were raised by the Bank of Sweden from 5 to 6 per cent, and by the Bank of Canada from 6-1/2 to 7 per cent. The Treasury refunding of notes and bonds maturing in mid February was accorded an unenthusiastic reception by the market. billion of maturing issues held by the public, about $2 Of the $5.4 billion, or 36 per cent, were redeemed for cash; $2.6 billion were exchanged for the new 15-month, 6-3/8 per cent note; and $885 million were exchanged for the new 7-year, 6-1/4 per cent note. Subsequently, on February 25, the Treasury auctioned a $1 billion strip of bills consisting of five issues maturing in 1 to 5 months. Banks, which were allowed to pay for the new bills through credits to Treasury tax and loan accounts, successfully bid for the bulk of the issue. Most interest rates had risen on balance since the previous meeting of the Committee. To a large extent the advances reflected growing expectations--particularly after recent congressional tes timony by Federal Reserve and administration officials--that monetary restraint would be maintained in an effort to contain inflationary pressures. The higher rates also reflected anticipations of a possible near-term increase in the prime lending rate of banks and perhaps also in the Federal Reserve discount rate. Yields in capital markets moved up to or above their earlier peaks, despite the somewhat smaller volumes of new corporate and municipal issues offered in February and scheduled for March. In the mortgage market interest rates rose further to new postwar highs, as demands for mortgage loans remained strong and, according to available data for
net inflows of funds to thrift institutions continued early February, to moderate. interest rates also rose in the period, but Most short-term bills maturing within 6 months changed little on rates on Treasury balance. For example, the market rate on 3-month Treasury bills was cent on the day before this meeting, compared with 6.19 per 6.17 per earlier. During the interval the 3-month bill rate had cent 4 weeks per cent--reflecting substantial liquidity declined to around 6.00 demands for shorter-term bills and relatively limited dealer inven tories--but it subsequently rose again, particularly after the increase in the discount rate of the Bank of England. System open market operations since the previous meeting of the Committee had been directed at maintaining firm conditions in the money and short-term credit markets. Conditions in the money market tended to tighten during the period as a result of the cumu lative reduction in bank liquidity and a seasonal shift in reserves away from the major money market banks. This tendency was not fully offset by System action, however, because shorter-term bill rates were under downward pressure for much of the period. Federal funds traded mainly in a range around 6-3/4 per cent, up from a range centering closer to 6-1/2 per cent in the previous period. Member bank borrowings averaged $835 million in the 4 weeks ending February 26, compared with about $790 million in the previous 3 weeks.
reserves were little changed, so net borrowed reserves Average excess also increased. market interest rates remaining high relative With short-term to maximum rates payable by banks on large-denomination CD's, the volume of such CD's outstanding declined considerably further in February--although by less than in January when the amount maturing was larger. During the first 2 months of the year the rate of expansion in consumer-type time and savings deposits was well below that in comparable periods of other recent years, and in both months total time and savings deposits contracted at an annual rate in the neighborhood of 10 per cent. Growth in private demand deposits and in the money stock moderated further in February; for January and February together the money stock rose at an annual rate of less than 3 per cent, about half the rate of the second half of 1968. U.S. Government deposits increased sharply further in February to their highest average level in several months. Although moderating in February, growth in business loans remained rapid. Other loans, which had declined slightly in January, increased substantially. In accommodating the large loan demand, banks stepped up the rate at which they had been liquidating holdings of Treasury securities, and for the first time since April 1968, they failed to increase their holdings of municipal securities. In February total bank credit, as measured by the adjusted proxy
member bank deposits, adjusted to include series--daily-average changes in the daily average of U.S. bank liabilities to foreign 2 per cent from January, at an annual rate, and was branches--rose about unchanged from December. that if prevailing money market Staff projections suggested conditions and existing Regulation Q ceilings were maintained the CD's outstanding was likely to decline volume of large-denomination at about the same pace in March as in February. It was expected that total time and savings deposits would contract further from a slower rate than in the previous month. February to March, but at Growth in the money stock was projected to accelerate temporarily on the average in March, when it was anticipated that U.S. Government deposits would be drawn down sharply. bank credit, the projections suggested that With respect to the adjusted proxy series would decline at an annual rate of 3 to 6 per cent from February to March, if U.S. bank liabilities to were unchanged on the average in March from the foreign branches level to which they had risen by the end of February. It appeared likely that loan demands would remain strong, and banks were expected to continue to liquidate holdings of U.S. Government and to limit their participation in the market for securities municipal securities. that, in light of the persistence of The Committee agreed inflationary pressures and expectations, the existing degree of should be continued at present. The members monetary restraint
that open market operations should be directed at maintaining decided on balance about the prevailing firm conditions in money and short term credit markets, subject to the proviso that operations should be modified if bank credit appeared to be deviating significantly from current projections. Some concern was expressed about the projection that the bank credit proxy would decline in March after 2 months of no net growth, and about the risks that undue liquidity pressures might develop. The Committee agreed that the proviso clause should be implemented in the direction of firmer money market conditions only if bank credit appeared to be growing at more than a moderate rate. It also agreed that the clause should be implemented in the direction of less firm conditions if bank credit appeared to be contracting any more rapidly than projected, so long as such action did not tend to create the stance of monetary policy had been relaxed. impression that the basic The following current economic policy directive was issued to the Federal Reserve Bank of New York: The information reviewed at this meeting suggests that expansion in real economic activity has been moderating, but that upward pressures on prices and costs are persisting. Prospects are for some further slowing in economic expansion in the period ahead. Most market interest rates have edged up on balance in recent weeks. In the first two months of the year bank credit changed little on average, as investments contracted while loan demands, especially from busi nesses, remained strong. The outstanding volume of large-denomination CD's continued to decline sharply and inflows of other time and savings deposits slowed. Growth in the money supply moderated as U.S. Government
deposits rose considerably. It appears that a sizable in the U.S. balance of payments on deficit reemerged in January and February and, with the liquidity basis a deficit also reappeared Euro-dollar inflows moderating, official settlements basis in in the balance on the it is the policy of the February. In this situation, to foster financial condi Federal Open Market Committee the reduction of inflationary pressures, tions conducive to a more sustainable rate of with a view to encouraging growth and attaining reasonable equilibrium in economic the country's balance of payments. this policy, System open market To implement until the next meeting of the Committee operations shall be conducted with a view to maintaining on balance about the prevailing firm 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, Bopp, Brimmer, Clay, Coldwell, Daane, Maisel, Mitchell, Robertson, Scanlon, and Sherrill. Votes against this action: None. to authorization for System foreign currency operations. 2. Amendments The Committee amended paragraphs 1 and 2 of the authorization for System foreign currency operations in a number of respects at this meeting. On recommendation of the Special Manager, the limit on outright of authorized foreign currencies specified in the holdings by the System paragraph previously numbered as 1B(2)--but, after other amendments made at this meeting, renumbered as 1B(3)--was increased from $150 million to $250 million equivalent. In addition, clarifying amendments were made in the introductory text to paragraph 1, in paragraphs 1B and 1C(1), and in paragraph 2. Except for the changes resulting from these amendments, the Committee renewed the authorization in the form outstanding at the beginning of the year 1969.
paragraphs 1 and 2 of the authorization read as As amended, follows: 1. The Federal Open Market Committee authorizes and directs the Federal Reserve Bank of New York, for System Open to the extent necessary to carry out the Market Account, foreign currency directive and express authoriza Committee's tions by the Committee pursuant thereto: purchase and sell the following foreign A. To the form of cable transfers through spot currencies in or forward transactions on the open market at home and abroad, including transactions with the U.S. Stabilization Fund established by Section 10 of the Gold Reserve Act of monetary authorities, and with the Bank 1934, with foreign for International Settlements: Austrian schillings Belgian francs Canadian dollars Danish kroner Pounds sterling French francs German marks Italian lire Japanese yen Mexican pesos Netherlands guilders Norwegian kroner Swedish kronor Swiss francs B. To hold foreign currencies listed in paragraph A above, up to the following limits: (1) Currencies purchased spot, including currencies purchased from the Stabilization Fund, and sold forward to the Stabilization Fund, up to $1 billion equivalent; (2) Currencies purchased spot or forward, up to the amounts necessary to fulfill other forward commitments;
(3) Additional currencies purchased spot or forward, up to the amount necessary for System oper ations to exert a market influence but not exceeding $250 million equivalent; and Sterling purchased on a covered or guaranteed (4) basis in terms of the dollar, under agreement with the Bank of England, up to $300 million equivalent. C. To have outstanding forward commitments undertaken under paragraph A above to deliver foreign currencies, up to the following limits: (1) Commitments to deliver foreign currencies to the Stabilization Fund, up to the limit specified in paragraph 1B(1) above; (2) Commitments to deliver Italian lire, under special arrangements with the Bank of Italy, up to $500 million equivalent; and Other forward commitments to deliver foreign (3) currencies, up to $550 million equivalent. D. To draw foreign currencies and to permit foreign banks to draw dollars under the reciprocal currency arrangements listed in paragraph 2 below, provided that drawings by either party to any such arrangement shall be fully liquidated within 12 months after any amount outstanding at that time was first drawn, unless the Committee, because of exceptional circumstances, specifically authorizes a delay. 2. The Federal Open Market Committee directs the Federal Reserve Bank of New York to maintain reciprocal currency arrange ments ("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 bank dollars equivalent) Foreign Austrian National Bank 100 National Bank of Belgium 225 Bank of Canada 1,000 National Bank of Denmark 100 England 2,000 Bank of 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 100 Bank of Sweden 250 Swiss National Bank 600 Bank for International Settlements: Dollars against Swiss francs 600 Dollars against authorized European currencies other than Swiss francs 1,000 Votes for this action: Messrs. Martin, Hayes, Bopp, Brimmer, Clay, Coldwell, Daane, Maisel, Mitchell, Robertson, Scanlon, and Sherrill. Votes against this action: None. With respect to the increase in the limit on outright holdings of foreign currencies, the System's current holdings were close to the of $150 million. That limit had been established in previous limit 1963, at a time when the foreign exchange operations of the Federal Reserve had not yet assumed the scale of more recent years. The judgment of the Special Manager that more Committee concurred in the to permit acquisitions from time to time of leeway was now desirable to prove useful in future operaforeign currencies that were likely tions.
to the introductory text of paragraph 1 consisted The amendment after the words "to the extent necessary to carry out of the addition, foreign currency directive," of the phrase "and express the Committee's by the Committee pursuant thereto." This amendment was authorizations for the purpose of making clear that the language of the authorization extended not only to operations undertaken under the specific language of the foreign currency directive but also to those undertaken under express authorities given by the Committee, for which provision was made at a number of points in the directive. to paragraph 1B involved a clarification of The main amendment the form of authorization for foreign currency transactions undertaken with System "warehousing" operations for the Stabilization in connection Fund. While the forward commitments associated with such warehousing operations were separately authorized in paragraph 1C(1), the spot holdings had been subsumed under general language in 1B authorizing holdings "up to the amounts necessary to fulfill outstanding forward commitments." As amended, the authorization contained a new paragraph 1B(1) separately covering the spot holdings in question. Concurrently, a number of other conforming and clarifying changes were made in 1B and in 1C(1). The amendment to paragraph 2, which affected the table contained in that paragraph listing authorized swap arrangements, involved the incorporation of more precise descriptions of the System's two swap arrangements with the Bank for International Settlements.
3. Review of continuing authorizations. This being the first meeting of the Federal Open Market Committee following the election of new members from the Federal Reserve Banks to serve for the year beginning March 1, 1969, and their assumption of duties, the Committee followed its customary practice of reviewing all of its continuing authorizations and directives. The action taken with respect to the authorization for System foreign currency operations has been described in the preceding portion of the record for this date. The Committee reaffirmed its continuing authority directive for domestic open market operations and its foreign currency directive in the forms in which both were outstanding at the beginning of the year 1969. Votes for these actions: Messrs. Martin, Hayes, Bopp, Brimmer, Clay, Coldwell, Daane, Maisel, Mitchell, Robertson, Scanlon, and Sherrill. Votes against these actions: None.