February 10, 1970 FOMC Record of Policy Actions

FOMC minutes

suggested that, if prevailing The latest staff projections the average level of the money market conditions were maintained, to February and would rise money stock would decline from January March; and that over the equal amount from February to by a roughly the money stock would expand at an annual first quarter as a whole adjusted bank credit proxy, on the rate of 3 to 4 per cent. The to decline over the quarter at an annual other hand, was projected This projection reflected an expectation rate of 2 to 4 per cent. time and savings deposits--particularly consumer-type depositsthat a time, although there was some pros would continue to contract for in late February or early March as pect that the decline would end period approached. It also seemed the quarterly interest-crediting CD's--particularly those possible that by March large-denomination maturity--might become at least marginally competitive of longer with other market securities. set of projections suggested that the money An alternative more rapidly over the first quarter--at an stock would grow slightly 4 to 5 per cent--if money market conditions were eased annual rate of anticipated that with such a change time somewhat at present. It was would be stronger than otherwise in March; and and savings deposits bank credit proxy might advance sufficiently in that the adjusted result in no net decline, or perhaps a slight rise, that month to as a whole. It was noted that any easing of over the first quarter

be expected to have a greater stimulative money market conditions would effect on bank credit in the second quarter than in the first. that, in light of the latest economic The Committee concluded current business outlook, it was appropriate to developments and the less restraint at this time. In partic move gradually toward somewhat decided that money market conditions should be ular, the Committee the direction of less firmness, beginning immediately, with shaded in a view to encouraging moderate growth in money and bank credit over the months ahead. It was agreed that the shift toward less firm money market conditions should be implemented cautiously, with close attention to successive estimates of growth rates in the monetary and credit aggregates; and that operations should be modified promptly if those aggregates appeared to be deviating significantly from a pattern of moderate growth. Some members expressed the view that the longer any relaxation of prevailing money market firmness was postponed the greater the likelihood that developments in the economy would necessitate an unduly large and abrupt move toward monetary ease later on. At the same time, some members noted that caution was needed to avoid cre ating an exaggerated impression of the amount of relaxation contem plated, since widespread misunderstanding on that score could stimulate a new surge of inflationary expectations.

It was also agreed that in the conduct of open market operations account should be taken of the current Treasury refunding and of any regulatory action by the Board of Governors with respect to bank-related commercial paper. The following current economic policy directive was issued to the Federal Reserve Bank of New York: The information reviewed at this meeting suggests that real economic activity, which leveled off in the fourth quarter of 1969, may be weakening further in early 1970. Prices and costs, hoever, are continuing to rise at a rapid pace. Long-term market interest rates recently have fluc tuated under the competing influences of heavy demands for funds and shifts in investor attitudes regarding the outlook for monetary policy. Bank credit declined in January but the money supply increased substantially on average; both had risen slightly in the fourth quarter. Flows of time and savings funds at banks and nonbank thrift institutions have remained generally weak since year-end, and they apparently have been affected little thus far by the recent increases in maximum races payable for such funds. The U.S. foreign trade balance improved somewhat in December, as imports fell off. The over-all balance of payments has been in substantial deficit in recent weeks. In light of the foregoing developments, it is the policy of the Federal Open Market Committee to foster financial conditions conducive to the orderly 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, while taking account of the current Treasury refunding, possible bank regulatory changes and the Committee's desire to see moderate growth in money and bank credit over the months ahead, System open market operations until the next meeting of the Committee shall be conducted with a view to moving gradually toward somewhat less firm conditions in the money market; provided, however, that operations shall be modified promptly to resist any tendency for money and bank credit to deviate significantly from a moderate growth pattern.

Votes for this action: Messrs. Burns, Bopp, Clay, Daane, Maisel, Mitchell, Robertson, Scanlon, and Sherrill. Votes against this action: Messrs. Hayes, Brimmer, and Coldwell. The members who dissented from the policy directive did so primarily because they felt that any overt move toward less firm conditions was premature at this time and could strengthen money market of substantial easing. While recognizing some market expectations weakness in the economy, they were impressed by the strength areas of the continuing increases in prices and of inflationary expectations, for a large volume of capital spending, and the wages, business plans of payments deficit. They were also con prospectively large balance cerned about the prospects for adequate fiscal restraint, even though called for a small surplus. They agreed with the majority the budget that some growth in the monetary and credit aggre of the Committee called for, but in their view this objective could have been gates was Committee had to the one the a directive similar adequately by covered adopted at its January meeting. Thus, they preferred not to relax at this time because of the risk of encouraging resurgent restraint before inflationary pressures and expecta growth in over-all demand tions had been adequately dampened.