June 24, 1969 FOMC Record of Policy Actions

FOMC minutes

projected to resume in June and to accelerate in July. In the 2 months together, U.S. Government deposits were expected to decline on the average by an amount roughly twice the projected increase in private demand deposits. In the Committee's discussion it was noted that, while there had been some moderation in the rate of growth of real economic activity, inflationary pressures and expectations re mained strong. A few members commented that the continuing inflationary environment might offer grounds for a slight further firming of money market conditions, or at least the resolution of any doubts arising in the conduct of open market operations in that direction. But the consensus of the Committee was that open market policy should remain unchanged at present. In this connection, some members noted the extent to which growth of money and bank credit had already been curtailed, the strains evident in finan cial markets, and the possibility of unusual liquidity pressures in the weeks ahead. Comments also were made in the discussion about the desirability of System policy actions in areas other than open market operations--including increases in discount rates, increases in Regulation Q ceiling rates on large-denomination CD's, and actions to limit bank access to various nondeposit sources of funds. While there were some differences of view on these matters, the majority of those commenting thought that increases in discount rates or

Regulation Q ceiling rates would not be appropriate at this time but that it would be desirable for the Board to consider some actions with respect to nondeposit sources of funds. With respect to open market policy, the Committee agreed that operations should be directed at maintaining the firm con ditions currently prevailing in the money and short-term credit markets. The proviso was added that operations should be modified if bank credit appeared to be deviating significantly from current projections or if unusual liquidity pressures should develop. 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 is continuing to moderate slightly, but that substantial upward pres sures on prices and costs are persisting. Most market interest rates have risen considerably on balance in recent weeks, as credit demands continued strong against the background of considerable restraint on the banking system. Growth in bank credit and the money supply thus far in 1969 has been limited, and both declined somewhat on average in May. Large-denomination CD's have continued to run off at a rapid pace recently, and net inflows of consumer-type time and savings deposits have remained small. At nonbank tnrift in stitutions, savings inflows slowed somewhat on average in April and May. Very heavy Euro-dollar borrowing by U.S. banks through their foreign branches produced a large surplus in the balance of payments on the official settlements basis after mid-May. On the other hand, high Euro-dollar interest rates apparently also stimulated outflows of funds from the United States that contributed to a large deficit on the liquidity basis thus far in June. In light of the foregoing developments, 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 firm conditions currently prevailing in money and short-term credit markets; provided, however, that operations shall be modified if bank credit appears to be deviating significantly from current projec tions or if unusual liquidity pressures should develop. Votes for this action: Messrs. Martin, Bopp, Brimmer, Clay, Coldwell, Daane, Mitchell, Robertson, Scanlon, Sherrill, and Treiber. Vote against this action: Mr. Maisel. Absent and not voting: Mr. Hayes. (Mr. Treiber voted as his alternate.) In dissenting from this action, Mr. Maisel observed that in money and short-term credit markets were on balance conditions firmer than at the end of April while the monetary now considerably had been declining. He was concerned that further aggregates tightening to an undesirable degree might occur under the directive favored by the majority today, since the language of the second paragraph was similar to that of the directives the Committee had issued on April 29 and May 27. In addition, he noted that the staff projections suggested that the bank credit proxy, before adjustment for Euro-dollar borrowings, and total reserves of member banks might fall at an annual rate of 10 to 12 per cent in June and July together even if conditions in money and short-term

credit markets were unchanged. In his judgment, moderate positive rates of growth in bank credit were appropriate under current circumstances, and he thought it would be desirable for the Committee to act now to bring about a transition to maintainable financial conditions. Accordingly, he preferred a directive calling for maintenance of the money and short-term credit market conditions that had prevailed on the average in the second quarter rather than the tighter conditions currently prevailing.