November 25, 1969 FOMC Record of Policy Actions

FOMC minutes

on new corporate bonds were close to peaks that had been reached in early December. On the day before this meeting the market rate on 3-month Treasury bills was at a record level of 7.92 per cent, 50 basis points above its level of 3 weeks earlier. These rate advances had occurred against the background of continued heavy demands for funds, and--in the Treasury bill marketlarge dealer inventories and sustained high financing costs. To an important extent, however, they appeared to reflect expectational factors, including market concern about the possibility that fiscal restraint would be relaxed significantly and the related prospect that the period of severe monetary restraint would be prolonged. System open market operations since the preceding meeting of the Committee had been directed at maintaining prevailing firm con ditions in the money market while taking account of strains in the Treasury bill market as bill rates adjusted sharply upward. The effective rate on Federal funds continued to fluctuate mostly in a range of 8-1/2 to 9-1/2 per cent. Member bank borrowings averaged $1.2 billion in the 3 weeks ending December 10, unchanged from their average in the preceding 4 weeks. At nonbank thrift institutions there were net outflows of savings funds in October, after quarterly interest crediting, and the inflows in November and early December were at a rate well below that usually expected for the season. Moreover, there was widespread concern about the possibility of very heavy outflows at such institu tions around the turn of the year, following year-end interest crediting.

At commercial banks the volume of business loans outstanding changed little over the course of November,and holdings of U.S. Government securities declined somewhat further despite bank under writing of the tax-anticipation bills auctioned by the Treasury late in the month. Holdings of other securities and loans to securities dealers increased sharply, although perhaps only temporarily. From October to November the bank credit proxy--daily-average member bank deposits--expanded on the average at an annual rate of 11 per cent. After adjustment for further growth in the outstanding volume of funds obtained by banks from "nondeposit" sources--including Euro dollar borro;ings and fund, acquired through sales of commercial paper by bank affiliates--the proxy series increased at a rate of about 13.5 per cent. So adjusted, the proxy series had declined at annual rates of 7.5 per cent in October and 4.3 per cent in the third quarter. Private demand deposits and the money stock also expanded on the average in November. The latter grew at an annual rate of about 3.5 per cent, after rising only fractionally in October and remaining unchanged in the third quarter. U.S. Government deposits increased sharply in November, mainly as a result of Treasury financing operations. Outflows of consumer-type time and savings deposits continued, but the net contraction in the volume of large-denomination CD's outstanding remained more moderate than earlier in the year as a result of further sizable increases in foreign official time deposits.

Revised staff projections suggested that if prevailing conditions in the money market were maintained there would be little change in the bank credit proxy from November to December, and a slight rise after adjustment for an expected further increase in funds from nondeposit sources. It was anticipated that total time and savings deposits would increase somewhat on the average, but that U.S. Govern ment deposits and private demand deposits--as well as the money stockwould decline somewhat. Projections for January suggested that the proxy series would decline at an annual rate of 1 to 4 per cent--and less after adjustment for another expected increase in nondeposit fundsand that the money stock would remain about unchanged. The Committee agreed that no relaxation of onetary policy m would be appropriate at this time, in view of the persistence of inflationary pressures and expectations and the high degree of uncer tainty with respect to the extent to which fiscal policy might be relaxed. The members concluded that open market operations should be directed at maintaining the prevailing firm conditions in the money market. It was also agreed that operations should be modified if unusual liquidity pressures should develop. A number of members expressed the view that any tendencies toward lower interest rates that might be produced by market forces should not be resisted.

The following current economic policy directive was issued to the Federal Reserve Bank of New York: The information reviewed at this meeting indicates that real economic activity has expanded only moderately in recent quarters and that a further slowing of growth appears to be in process. Prices and costs, however, are continuing to rise at a rapid pace. Most market interest rates have advanced further in recent weeks partly as a result of expectational factors, including concern about the outlook for fiscal policy. Bank credit rose rapidly in November after declining on average in October, while the money supply increased moderately over the 2-month period; in the third quarter, bank credit had declined on balance and the money supply was about unchanged. The net contraction of outstanding large-denomination CD's has slowed markedly since late summer, apparently reflecting mainly an increase in foreign official time deposits. However, flows of consumer-type time and savings funds at banks and nonbank thrift institutions have remained weak, and there is considerable market concern about the potential size of net outflows expected around the year end. In November the balance of payments deficit on the liquidity basis diminished further and the official settlements balance reverted to surplus, mainly as a result of return flows out of the German mark and renewed borrowing by U.S. banks from their foreign branches. In light of the foregoing developments, it is the policy of the Federal Open Market Committee to foster financal con ditions 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 the money market; provided, however, that operacions shall be modified if bank credit appears to be deviating signif icantly from current projections or if unusual liquidity pressures should develop. Votes for this action: Messrs. Martin, Hayes, Bopp, Brimmer, Clay, Coldwell, Maisel, Mitchell, Robertson, Scanlon, and Sherrill. Votes against this action: None. Absent and not voting: Mr. Daane.