August 12, 1969 FOMC Record of Policy Actions

FOMC minutes

Regulations D and M, among other things to place a 10 per cent reserve requirement on borrowings by U.S. banks from their foreign branches, to the extent that these borrowings exceeded the daily-average amounts outstanding in the 4 weeks ending May 28, 1969; and a proposal to amend Regulations D and Q to bring a member bank's liability on certain Federal funds transactions within the coverage of those regulations. The staff projections suggested that the adjusted bank credit proxy would decline at an annual rate of 9 to 12 per cent from July to August if prevailing conditions were maintained in money and short term credit markets. The projections allowed for only a small further rise in the average level of Euro-dollar borrowings of U.S. banks. While no specific allowance was made in the projections for possible changes in the extent to which banks were utilizing funds from other nondeposit sources, it was noted that the outstanding volume of funds obtained from such sources probably would grow less rapidly than in July. Among deposit categories, private demand deposits--and the projected to decline moderately from July to August, money stock--were further reduction in the average level of U.S. Government and a Given prevailing levels of market interest deposits was anticipated. large-denomination CD's would continue to rates, it was expected that run off, although less rapidly than earlier because the volume of maturing CD's was smaller. And it appeared unlikely that consumer type time and savings deposits would show a marked expansion after the large net outflows of July.

account was taken of the In the Committee's discussion indications that the rate of expansion of over-all economic activity was moderating somewhat, of the recent legislation extending the 10 per cent income tax surcharge through the end of the year, and of the substantial degree of monetary restraint already in effect. The Committee agreed that no further increase in monetary restraint would be warranted at present. In particular, it agreed that any tendencies toward firmer money market conditions that might result from recent regulatory actions by the Board of Governors or from other causes should be resisted through open market operations. At the same time, a majority of the members thought that action to ease money market conditions would not be warranted now, in view of the persistence of inflationary pressures and the risk that such action would encourage a new surge of inflationary expectations. Some members of the majority expressed the view that System opera tions should not necessarily be undertaken to offset fully any easing tendencies that might be produced by market forces. On the other hand, it was suggested that the implementation of policy should not be unduly influenced by temporary swings in market psychology. The Committee concluded that open market operations should be directed at maintaining the prevailing firm conditions in money and short term credit markets. The proviso was added that operations should be mod ified if bank credit appeared to be deviating significantly from current projections. It was also agreed that operations should be modified if pressures arose in the aftermath of the devaluation of the French franc or in connection with the regulatory actions taken by the Board of Governors.

policy directive was issued to The following current economic the Federal Reserve Bank of New York: The information reviewed at this meeting indicates that expansion in real economic activity slowed somewhat in the and some further moderation is projected. first half of 1969 Substantial upward pressures on prices and costs are per Most market interest rates recently have receded sisting. slightly from their earlier highs. In July the money supply expanded as U.S. Government deposits decreased further; bank credit declined on average, after adjusting for an increase in assets sold to affiliates and to customers with bank guarantees. The run-off of large-denomination CD's which began in mid-December continued without abatement in July, there apparently were net outflows from consumer-type and time and savings accounts at banks and nonbank thrift institutions combined. The over-all balance of payments deficit on the liquidity basis remained very large in July; the balance on the official settlements basis was still in surplus in the first half of the month but subsequently shifted toward deficit as U.S. banks' borrowings of Euro dollars leveled off. Foreign exchange markets appear initially to be adjusting in an orderly fashion to the announced devaluation of the French franc. In light of developments, it is the policy of the Federal the foregoing Committee to foster financial conditions con Open Market of inflationary pressures, with a ducive to the reduction view to encouraging sustainable economic growth and equilibrium in the country's balance attaining reasonable of payments. implement this policy, System open market operations To the next meeting of the Committee shall be conducted until the prevailing firm conditions with a view to maintaining and short-term credit markets; provided, however, in money shall be modified if bank credit appears to that operations be deviating significantly from current projections or if with foreign exchange develop pressures arise in connection ments or with bank regulatory changes. Votes for this action: Messrs. Hayes, Bopp, Brimmer, Coldwell, Martin, Daane, Robertson, Scanlon, Sherrill, and Swan. Votes against this action: Messrs. Maisel and Mitchell. Absent and not voting: Mr. Clay. (Mr. Swan voted as his alternate.)

In dissenting from this action Messrs. Maisel and Mitchell indicated that they did not advocate lessening monetary and credit restraint. However, they did not want monetary policy to become more and more restrictive. It appeared to them that trends in monetary aggregates and the availability of credit were indicative of increased tightening that would be heightened if money market conditions were maintained at the levels called for in the directive favored by the majority. In order to guard against an undesired further tightening,they favored a directive calling for operations to moderate such contractive tendencies, if prospective declines in monetary aggregates should in fact occur, while maintaining the position of over-all monetary and credit restraint.