July 15, 1969 FOMC Record of Policy Actions: Full Text
FEDERAL RESERVE press release For immediate release October 13, 1969 The Board of Governors of the Federal Reserve System Federal Open Market Committee today released the attached and the of policy actions taken by the Federal Open Market Committee record 15, 1969. Such records are made available at its meeting on July approximately 90 days after the date of each meeting of the in the Federal Reserve Bulletin and Committee and will be found the Board's Annual Report. Attachment
RECORD OF POLICY ACTIONS OF THE FEDERAL OPEN MARKET COMMITTEE Meeting held on July 15, 1969 Authority to effect transactions in System Account. According to information reviewed at this meeting, real had continued to rise in the second quarter at an GNP apparently annual rate close to that of the first quarter and slightly below the rate of the final quarter of 1968. Average prices, as measured by the GNP deflator, were estimated to have continued upward at the rapid first-quarter pace. There were indications--including further large declines in prices of common stocks--that some attitudes regarding the outlook were beginning to change, but it appeared that inflationary expectations on the whole were still strong. information continued to exhibit the The latest economic been evident in preceding months. Retail crosscurrents that had sales, according to the advance report, declined in June, and revised estimates for May indicated that they had declined in that month also. On the other hand, industrial production was estimated to have risen considerably further in June, and nonfarm employment expanded more rapidly than in the two preceding months. The labor market remained tight, and the unemployment rate edged down to 3.4 per cent from 3.5 per cent in May.
Average wholesale prices rose sharply further from mid-May to mid-June as prices of farm and food products again advanced substantially. However, average prices of industrial commodities were unchanged for the first time since mid-1968, as further increases for a variety of commodities, particularly metals and products, were offset by continued marked declines in prices of lumber and plywood. The consumer price index rose much less in May than in March and April--partly because of a smaller advance in service costs, including mortgage interest charges and property taxes--but it appeared likely that the index for June would show a substantial increase. Average hourly earnings continued to advance rapidly in the first half of 1969, although not so rapidly as in late 1968. In the limited number of wage contracts on which had recently been completed, there had been provision negotiations for large increases in wage rates. of 1969 suggested that for the second half Staff projections expansion of real GNP would slow further--reaching a relatively low that the advance in prices would rate in the fourth quarter--but from the rapid pace of the first half. diminish only moderately Although prospects for congressional action on the administration's were uncertain, the projections assumed that tax recommendations the income tax surcharge would be continued at 10 per cent through the end of 1969 and at 5 per cent in the first half of 1970, and that the investment tax credit would be repealed.
One of the major forces expected to retard economic growth in the second half was a sharp deceleration in the expansion of fixed capital outlays by businesses, as had been suggested by the recent Commerce-SEC survey. In addition, it appeared likely that outlays on residential construction would decline as a result of limited availability of mortgage funds. Growth in consumer spending was expected to be stimulated temporarily in the third quarter by the Federal pay raise and the ending of retroactive payments on 1968 income tax liabilities, but to slow later on in line with smaller increases in employment and income. Apart from the pay raise, Federal expenditures were expected to remain under substantial restraint. With respect to the U.S. balance of payments, tentative estimates for the second quarter indicated that the deficit on the liquidity basis had increased substantially further from the high rate and that there had been another sizable surplus first-quarter on the official settlements basis. The liquidity deficit was swollen by very large capital outflows. These included movements the period of intense speculation on a of funds into Germany during the German mark in late April and early May and flows revaluation of market--especially in June--in response of funds to the Euro-dollar rates there. There was a sharp decline to record high interest securities, a shift from purchases of U.S. corporate in foreign claims on foreigners, and inflow to outflow in bank-reported
apparently some increase in the outflow of direct investment capital. Merchandise exports and imports both increased following the termination of the longshoremen's strike, and in April and May combined there was a very small trade surplus, in contrast to the small deficit of the first quarter. The second-quarter surplus in the payments balance on the official settlements basis reflected the movements of foreign funds out of other currencies into Euro-dollars that accompanied a huge increase in borrowings by U.S. banks from their foreign branches. These developments were concentrated mainly in June; in the 4 weeks ending June 25, Euro-dollar borrowings of U.S. banks rose by $3.6 billion to a new high of $13.6 billion. Some further net increase occurred in early July. weeks interest rates in the Euro-dollar market In recent had fluctuated below the peaks reached on June 10 but had remained high. On June 26 the Board of Governors announced certain proposals designed to moderate the flow of Euro-dollars between U.S. banks and their foreign branches, including a proposal for a 10 per cent reserve requirement on borrowings by U.S. banks from their branchesto the extent that these borrowings exceeded the daily-average amounts outstanding in the 4 weeks ending May 28, 1969. On July 9 and 11 the Treasury auctioned tax-anticipation bills due in December 1969 and March 1970, respectively. Each issue amounted to $1.75 billion, and payment on each was scheduled
for July 18. Commercial banks, which were permitted to pay for full through credits to Treasury tax and loan accounts, the bills in successfully bid for the bulk of the issues. The Treasury was at the end of July the terms on which it would expected to announce refund $3.4 billion of notes maturing in mid-August, of which $3.2 held by the public. Current estimates suggested that billion were the Treasury also would need to raise some additional new cash during August. With the banking system remaining under considerable restraint, short-term interest rates recently had risen further on balance. Treasury bill rates fluctuated over an unusually wide range as shifting demand and supply pressures impinged on a market in which dealers were attempting to hold inventories to minimal levels. The market rate on 3-month bills, for example, declined from around 6.50 per cent at the time of the previous meeting of to about 6.10 per cent in late June in response to the Committee strong seasonal demands; the rate then advanced to a range around cent in reaction to the Treasury's offering of tax-anticipation 7 per bills and a large prospective volume of Federal agency financing. markets, yields on municipal bonds had declined In capital as a result of a sharply reduced volume of current in recent weeks offerings and light dealer inventories. Yields on and prospective
long-term Treasury and corporate bonds--particularly the latteralso declined for a time in the latter part of June but they turned up near the end of the month, partly because of sizable additions to an already large calendar of corporate offerings. Also contribut ing to the weakening in the market atmosphere were the delays in congressional action on extension of the income tax surcharge and the announcement by the Federal Reserve of two proposed regulatory actions. These were the proposal on June 26 regarding reserve requirements on Euro-dollar borrowings by U.S. banks and a proposal on June 27 to bring certain Federal funds transactions within the coverage of Regulations D and Q. However, the Government bond market rallied sharply on the Friday before this meeting, following the announcement by a major automobile manufacturer that it had cut capital investment program. On balance, Treasury and back on its corporate bond yields at the time of this meeting were little changed from their levels of 3 weeks earlier. market yields on federally underwritten new-home Secondary mortgages reached a new high in early July, and the available evidence suggested that mortgage lenders were following highly lending policies. Net savings inflows to nonbank thrift selective slackened considerably in June and for the second quarter institutions as a whole were well below earlier quarters. According to preliminary thrift institutions experienced substantial net outflows indications, in early July, following quarterly interest and dividend of savings crediting.
System open market operations since the previous meeting of the Committee had been directed at maintaining the firm conditions prevailing in the money and short-term credit markets. Day-to-day variations in the Federal funds rate were more pronounced than earlier, but the average effective rate--approximately 9 per cent--was about the same as in the preceding interval. Member bank borrowings averaged $1,325 million in the 3 weeks ending July 9, little changed from the previous 4 weeks, and average net borrowed reserves also remained close to their earlier level. Commercial bank holdings of securities declined slightly Business loans outstanding were unchanged over the month in June. after rising rapidly earlier in the year, and total loans declined reported as outstanding at the end of slightly. The volume of loans by sizable sales of loans during the June was reduced significantly affiliates, but there apparently had also been some month to bank borrowers' demands to the commercial paper market diversion of prime lending rate of banks on June 9. following the increase in the Total bank credit, as measured by the adjusted proxy seriesmember bank deposits, adjusted to include changes in daily-average bank liabilities to foreign branches--was the daily average of U.S. rate of about 3 per cent from estimated to have declined at an annual proxy series reflected a to June. The decline in the adjusted May bank deposits and a partly compensating large reduction in member of domestic banks to their in the Euro-dollar liabilities expansion
foreign branches. Rough estimates suggested that, if a further adjustment were made for assets sold to affiliates and to customers with bank guarantees, the proxy series would be about unchanged in June. The money stock was estimated to have increased at an annual rate of about 1 per cent from May to June after declining at a 3 per cent rate in the previous month. The resumption of growth in money reflected an expansion in currency; private demand deposits 1/ declined slightly. U.S. Government deposits were reduced considerably on the average in June. The run-off of large-denomination CD's continued without abatement; since mid-December the outstanding volume of such CD's at weekly reporting banks had contracted by about $9 billion, or nearly 40 per cent. Other time and savings deposits of banks changed little on the average in June and--as at nonbank thrift apparently were substantial net outflows from institutions--there consumer-type accounts in early July. that the adjusted bank staff projections suggested Revised at an annual rate of 5 to 8 per cent from credit proxy would decline conditions were maintained in money and June to July if prevailing that, under present accounting It was reported at the meeting 1/ by Euro-dollar transactions of U.S. procedures for cash items generated items appeared to be producing the recent growth in such cash banks, demand deposits--and hence bias in measures of private some downward a relatively smaller extent, the money stock and, to in measures of was studying methods for correcting bank credit proxy. The staff the recent and projected changes The information on the bias in question. and included in this presented at the meeting in these variables record does not include such corrections. policy
short-term credit markets. The projections allowed for some further borrowings of U.S. banks from the high level growth in Euro-dollar they did not include any allowance for possible of early July, but in the extent to which banks were utilizing funds from changes It was noted, however, that banks were other nondeposit sources. continue to increase their reliance on funds from such likely to sources. to the various categories of deposits, it was With respect that private demand deposits--and the money stock--would expected expand moderately from June to July and that U.S. Government would decline sharply. Also anticipated were a continuing deposits in large-denomination CD's and a reduction in the rapid run-off average level of consumer-type time and savings deposits. for August suggested only a slight further Projections decline in the average level of member bank deposits. Credit in that month were expected to be influenced by dealer demands of Treasury financing operations. In addition, and bank support with maturities of CD's in August less than in earlier months, it appeared likely that the run-off would moderate; and prospects seemed to favor some net inflow of consumer-type time and savings deposits. In the Committee's discussion a number of members commented that the response of the economy to existing monetary and fiscal restraints was as yet inadequate. Considerable concern was
expressed about the persistence of inflationary pressures and and about the uncertain prospects for congressional expectations action on extension of the income tax surcharge. members agreed that the forthcoming Treasury refunding The against any appreciable change in open market policy at militated however, expressed the opinion that a slight shift this time. Some, toward greater restraint might be warranted. A contrary view was also advanced, favoring a shading toward slightly less restraint in light of the projections for slackened growth in real GNP, recent and prospective changes in bank credit, and the risk that maintenance of current tight money market conditions for an extended period might lead to developments that would necessitate an undesirably large adjustment toward ease later on. Other members took the intermediate position that further firming would not be appropriate in view of the high degree of restraint already in effect but that, at the same time, the infla tionary environment and the uncertain status of tax legislation militated against even a slight move toward easing. In the latter connection, it was noted that any indications that monetary restraint was being relaxed might reinforce inflationary expectations just at a time when signs were beginning to appear that some attitudes about the outlook were changing. At the conclusion of the discussion the Committee agreed that open market operations should be directed at maintaining the currently prevailing firm conditions in money and short-term credit markets, with the proviso that operations should be modified, to the
extent permitted by the Treasury refunding, if bank credit appeared to be deviating significantly from current projections. The following policy directive was issued to the Federal Reserve current economic Bank of New York: The information reviewed at this meeting suggests that expansion in real economic activity, after moderating slightly in the first quarter, has continued at about the same pace since then. Substantial upward pressures on prices and costs are persisting. Market interest rates have fluctuated widely recently, partly because of varying expectations, although credit demands remain relatively strong. Short-term rates on balance have continued under upward pressure, against the background of considerable restraint on the banking system. In June bank credit showed little change, after allowance for assets sold to affiliates and to customers with bank guarantees. Growth in the money supply resumed at a slow pace, and the run-off of large-denomination CD's which began in mid-December continued without abatement. There apparently were sub stantial net outflows from consumer-type time and savings accounts at banks and nonbank thrift institutions around midyear, following a period of slackened growth. The over-all balance of payments deficit on the liquidity basis rose sharply in the second quarter; there were large outflows into German marks and into Euro-dollar deposits, and there was no significant improvement in net exports. In contrast, there was another large surplus on the official settlements basis as U.S. banks borrowed heavily in the Euro-dollar market. 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 encour aging a more sustainable rate of economic growth and attaining reasonable equilibrium in the country's balance of payments. To implement this policy, while taking account of the forthcoming Treasury refunding, System open market opera tions until the next meeting of the Committee shall be conducted with a view to maintaining the currently pre vailing firm conditions in money and short-term credit
markets; provided, however, that operations shall be modified, to the extent permitted by the Treasury refunding, if bank credit appears to be deviating significantly from current projections. Votes for this action: Messrs. Martin, Bopp, Brimmer, Clay, Coldwell, Daane, Maisel, Robertson, Scanlon, Sherrill, and Treiber. Votes against this action: None. Absent and not voting: Messrs. Hayes and Mitchell. (Mr. Treiber voted as Mr. Hayes' alternate.)