February 10, 1970 FOMC Record of Policy Actions: Full Text
FEDERAL RESERVE press release For immediate release May 11, 1970 The Board of Governors of the Federal Reserve System and the Federal Open Market Committee today released the attached record of policy actions taken by the Federal Open Market Committee at its meeting on February 10, 1970. Such records are made avail able approximately 90 days after the date of each meeting of the Committee and will be found in the Federal Reserve Bulletin and the Board's Annual Report. Attachment
RECORD OF POLICY ACTIONS OF THE FEDERAL OPEN MARKET COMMITTEE Meeting held on February 10, 1970 Authority to effect transactions in System Account. According to information reviewed at this meeting, over-all economic activity apparently was weakening further in early 1970 but prices and costs were continuing to rise rapidly. Staff projections suggested that real GNP, which had leveled off in the fourth quarter of 1969, would decline slightly in the first half of 1970 but would begin growing again in the second half. Some moderation in the rate of price advance was expected over the course of the year. Industrial production was tentatively estimated to have declined in January for the sixth consecutive month. There were various indications that the demand for labor was continuing to ease: Total nonfarm employment was about unchanged in January at the level reached 3 months earlier, the average length of the workweek in manufacturing had declined sharply, and the over-all unemployment rate had risen to 3.9 per cent after 2 months at the (revised) level of 3.5 per cent. Retail sales estimates for November and December had been revised downward to levels below October, and weekly sales data for January suggested only a slight advance in that month. Private housing starts declined again in December, reaching their lowest level since June 1967, and the downtrend had apparently con tinued in January.
to rise at a rapid pace wholesale prices continued Average to mid-January; the increase was exceptionally from mid-December The consumer price index again for farm products and foods. sharp advanced rapidly in December. budget estimates recently released by the admin Federal in both the 1970 and the 1971 fiscal istration showed small surpluses the reduction of the income tax surcharge from 10 to years, despite its scheduled expiration on July 1. 5 per cent on January 1, 1970, and The budget document implied tight controls over expenditures; it of goods and services would decline suggested that Federal purchases course of the 1970 calendar year, with substantial cutbacks over the in defense expenditures. However, a sharp rise in transfer payments was in prospect for the second quarter, reflecting an increase in payments--and a retroactive payment for the social security benefit period since January 1--under legislation that had been enacted earlier. The staff's GNP projections for the first half of 1970 sug gested further reductions in business inventory accumulation and in residential construction outlays as well as in defense spending. Only moderate increases in consumer spending were projected--despite the reduction in the surtax in the first quarter and the anticipated increase in social security benefit payments in the second--because it appeared likely that smaller gains in employment and shorter workweeks would tend to slow the growth in personal income and that
the personal saving rate would rise somewhat. It was expected, that business capital spending would increase substantially however, further in the first half. The projections of resumed groth in real GNP in the second half of 1970 were based in part on expectations of a recovery in residential construction outlays, some step-up in spending by State governments, an end to the reduction in business inventory and local accumulation, and the elimination of the income tax surcharge at midyear. However, the rate of increase in real GNP was expected to be held to moderate proporcions by continuing declines in defense spending and by a leveling off in business capital outlays. The surplus in U.S. merchandise trace rose in December, as imports declined more than exports. For the fourth quarter as a wnole the trade surplus was somehat larger than in the preceding quarter. The over-all payments balance reverted to deficit in January on both the liquidity and official settlements bases, as a result of cessation (and partial reversal) of the exceptionally large year-end inflow of funds that had produced large surpluses in December and in the fourth quarter as a whole. In foreign exchange markets sterling strengthened signif icantly after mid-January. The Italian lira was under considerable selling pressure throughout the month. Euro-dollar rates declined more than seasonally in January, in part because of reduced demands for Euro-dollars by U.S. banks.
On January 28 the Treasury announced that, in exchange for bonds maturing on February 15 and March 15, it would offer three new notes having, respectively, maturities of 18 months, 3-1/2 years, and and yields of 8-1/4, 8-1/8, and 8 per cent. The refunding 7 years, favorably received by the market, and according to preliminary was estimates, only about 15 per cent of the $5.6 billion of maturing securities held by the public were turned in for cash. on new corporate and municipal bonds and on Interest rates securities of all maturities had fluctuated over outstanding Treasury wide range since the January 15 meeting of the Committee. a relatively The rate declines that had been under way earlier in the month con after mid-January, against the background of tinued for a time additional reports indicating weakness in the economy. Subsequently, however, yields turned up under the pressure of a mounting volume of new corporate and municipal issues and continued large-scale borrow ing by Federal agencies. Then, around the month-end, yields moved sharply downward as market participants interpreted statements by various officials as suggesting that monetary restraint would be eased soon. On the day before this meeting the market rate on 3 month Treasury bills was 7.30 per cent, about 55 basis points below its mid-January level. At both commercial banks and nonbank thrift institutions, outflows of savings funds--which had been unusually heavy following
and dividend crediting--continued at a significant year-end interest On January 20 the Board of Governors of rate throughout January. Reserve System announced moderate increases in maximum the Federal 1/ banks on time and savings deposits. interest rates payable by member Federal Deposit Insurance Corporation and At about the same time the Board announced increases in maximum rates the Federal Home Loan Bank savings and loan associations over which they payable by the banks and authority. Thus far these actions had had little have regulatory observable effect on flows of time and savings funds. stock declined over the demand deposits and the money Private course of January, following a sharp and sudden rise at the year-end, and Jan. 11, 1970, the Board By amendment to Regulation Q effective 1/ of Governors increased from 4 to 4-1/2 per cent the maximum rate pay able on passbook savings and on 30- to 89-day "consumer-type" time deposits--those of less than $100,000--of multiple maturity. Maximum rates were increased from 5 per cent to 5-1/2 and 5-3/4 per cent, respectively, for 1-year and 2-year single-maturity consumer-type deposits; for other consumer-type deposits (that is, multiple matur and over and single maturities of less than 1 year) ities of 90 days the previous maximum of 5 per cent was retained. In addition, the following changes were made in maximum rates payable on time deposits of $100,000 or more: New Previous Maturity maximum maximum (per cent) 30-59 days 6-1/4 5-1/2 60-89 days 6-1/2 5-3/4 90-179 days 6-3/4 6 180 days to 1 year 7 6-1/4 1 year or more 7-1/2 6-1/4
by early February they were below their average December levels. However, the erosion of the year-end bulge in these series was slower than expected, and from December to January on the average the money stock increased at an annual rate of 9 per cent. Meanwhile, and savings deposits contracted sharply--at an estimated total time annual rate of 12.5 per cent--because of the large outflow of consumer-type deposits. diverse movements among deposit categories, the Reflecting bank deposits--declined from credit proxy--daily-average member bank at an annual rate estimated at about 3.5 per cent. December to January in funds obtained through sales of commercial paper A sharp increase was nearly offset by a decline in the average by bank affiliates borroings through foreign branches. After level of Euro-dollar taking into account the net change in funds from these "nondeposit" sources, the adjusted bank credit proxy was estimated to have declined at an annual rate of about 3 per cent from December to January. In the fourth quarter of 1969 the money stock and the adjusted proxy series had increased at annual rates of about 1.5 and 2 per cent, respectively. Along with the amendment to Regulation Q, on January 20 the Board of Governors published for comment a proposed rule applying reserve requirements to certain types of bank-related commercial paper. It was noted that the proposed action was of a type explicitly
authorized by legislation enacted December 23, 1969. Earlier--on 29, 1969--the Board had announced that it was considering October interest rate ceilings to certain bank-related commercial applying paper, but action on that proposal subsequently was withheld while was being given to the application of reserve require consideration ments to the same type of paper. since the preceding meeting of System open market operations had been directed at maintaining firm conditions in the the Committee money market, with operations subject to modification if it appeared that the Committee's objective of modest growth in the money stock and bank credit over the first quarter was not being achieved. In fact, not only had the average levels of two aggregates moved in opposite directions from December to January--the money stock rising and the bank credit proxy declining--but also, during the period since the previous meeting, the projections for the first quarter had been revised upward for the money stock and downward for the proxy series. In the 4 weeks ending February 4, the Federal funds rate averaged slightly more than 9 per cent and member bank borrowings about $1 billion, both relatively close to their averages in the preceding 4 weeks. Average net borrowed reserves increased somewhat as excess reserves declined from the seasonal high they had reached at the year-end.
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.