October 28, 1969 FOMC Record of Policy Actions

FOMC minutes

October of the bank credit proxy--daily-average member bank depositsshortly after the middle of the month indicated a that were prepared significantly larger decline than had been projected at the time of the previous meeting. However, the objectives of operations were modified only marginally, and near the close of the period--when new estimates indicated that the proxy series was not so weak as it had appeared for a time--operations were again directed at maintaining firm conditions. Over the period as a whole the effective rate on Federal funds, while fluctuating in a fairly wide range, averaged slightly more than 9 per cent--little changed from the previous period. Member bank borrowings averaged about $1.1 billion in the 3 weeks ending October 22, about the same as in the preceding 4 weeks, but net borrowed reserves increased somewhat as excess reserves declined. The latest staff estimates suggested that the bank credit proxy was declining on the average in October at an annual rate of 7 to 9 per cent. It appeared that the total outstanding of funds obtained by banks from "nondeposit" sources was increasing; Euro-dollar borrowings of U.S. banks and funds obtained through sales of commercial paper by bank affiliates, taken together, evidently were rising by more than enough to offset further reductions in funds obtained by sales of loans to nonbank customers under repurchase agreements. After adjustment for these developments the proxy series was estimated to be declining on the average in October at an annual rate of 5.5 to 7.5 per cent. In

the third quarter as a whole the proxy series so adjusted had declined at an annual rate of 4.3 per cent. The money stock, which had changed little on balance in the third quarter, was now estimated to be rising on the average in October at an annual rate of 1 to 4 per cent. Both U.S. Government deposits and total time and savings deposits were estimated to be decliningthe latter slightly faster than in September but much more slowly than in preceding months. Net outflows of large-denomination CD's had diminished markedly in recent weeks, apparently in large part because of an increase in foreign official deposits. There were rather sizable net outflows of consumer-type time and savings funds at banks--and at nonbank thrift institutions as well--following quarterly interest crediting. Staff projections suggested that, if prevailing conditions in money and short-term credit markets were maintained, the average level of member bank deposits would rise from October to November at an annual rate of 5 to 8 per cent but would change little in December. All of the growth anticipated for November reflected an expected rise in U.S. Government deposits, in large part as a result of bank under writing of the Treasury's bill financing in late October; private demand deposits and the money stock were projected to remain about unchanged on the average in November, and further declines in time and savings deposits appeared to be in prospect. It seemed likely

that there would be some further net increase in November in funds obtained from nondeposit sources, primarily through sales of commercial After adjustment for such an increase, the paper by bank affiliates. proxy series was projected to rise at a rate of 6 to 10 per cent from October to November. The Committee agreed that no change in monetary policy would be appropriate at this time. It was noted in the discussion that prices were still rising rapidly and, despite the indications of further slowing in the economic expansion, expectations of continued inflation remained widespread. It was also noted that fiscal policy was likely to become less restrictive in 1970, and some members expressed concern about the possibility that the shift in the stance of fiscal policy might be marked. The Committee concluded that open market operations should be directed at maintaining 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 signif icantly from current projections. A number of members expressed the view that operations should not be undertaken to resist tendencies toward lower interest rates that might be produced by market forces. The following current economic policy directive was issued to the Federal Reserve Bank of New York: The information reviewed at this meeting indicates that the pace of expansion in real economic activity was sustained in the third quarter by an acceleration of inventory invest ment, which about offset a further slackening in growth of

private final sales. Slower over-all growth is projected for the fourth quarter, although some crosscurrents have been evident in the recent behavior of monthly economic measures. Prices and costs are continuing to rise at a rapid pace. Most market interest rates have declined considerably on balance from their recent highs, in large part because of changing expectations. In the third quarter, average monthly bank credit declined and the money supply changed little; in October it appears that bank credit is decreasing further on average but that the money supply is growing somewhat. In recent weeks the net contraction of outstanding large denomination CD's slowed markedly, apparently reflecting mainly an increase in foreign official time deposits, but flows of consumer-type time and savings funds at banks and nonbank thrift institutions appear to have remained relatively weak. The U.S. foreign trade surplus increased further in September, but the deficit in the over-all balance of payments was still large on the liquidity basis and even larger on the official settlements basis. The appreciation of the German mark since the end of September, culminating in the revalua tion of the official parity, has led to a partial reversal of speculative flows, and conditions in the Euro-dollar market have eased. 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 sustainable 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 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.