March 10, 1970 FOMC Record of Policy Actions: Full Text
FEDERAL RESERVE press release For immediate release June 8, 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 March 10, 1970. Such records are made available 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 March 10, 1970 1. Authority to effect transactions in System Account. The latest information lent support to the view that over-all economic activity was weakening further in early 1970 after leveling quarter of 1969. As before, staff projections sug off in the fourth gested that real GNP would decline somewhat in the first half of the but would then rise at a moderate rate in the second current year, half. While prices and costs were continuing to increase at a rapid of their advance was still expected over the pace, some slowing course of the year. In February, according to tentative estimates, industrial production fell for the seventh consecutive month. Employment and hours of work in manufacturing declined substantially. Total nonfarm employment was about unchanged, and the over-all rate of unemployment rose further from 3.9 to 4.2 per cent, its highest level since October 1965. Incomplete weekly data suggested that retail sales, which had declined in January, might have fallen further in February. Private housing starts continued downward in January, reaching their lowest level since April 1967, and new orders received by manufacturers of durable goods dropped consider ably after 3 months of moderate reductions.
that wholesale prices of Preliminary calculations indicated and farm products and foods had risen both industrial commodities but that the increases were further from mid-January to mid-February in the previous month. On a seasonally adjusted basis, less than price index continued to rise about as fast in January the consumer as in the two preceding months. Commerce-SEC survey, taken in February, According to the latest businesses planned to increase their spending on new plant and equip ment by about 10.5 per cent in the full year 1970 but at a slower rate in the first half. However, it seemed unlikely that such spending would accelerate in the second half, as implied by the surveyparticularly in view of recent declines in new orders for machinery and equipment and a reported reduction in the fourth quarter of 1969 in manufacturers' appropriations for capital spending. The staff projections still allowed for relatively rapid increases in business fixed investment outlays in the first half and a leveling off in such outlays later in the year. The projections also continued to suggest that the rate of inventory accumulation would decline further in the first half and stabilize in the second; that residential construction outlays would fall sharply further in the first half and then turn up; and that defense spending would decline throughout the year. It was expected that consumer spending would be stimulated somewhat in the second quarter by the increase
and in the third quarter by the in social security benefit payments, per cent income tax surcharge at mid elimination of the remaining 5 however, that growth in consumer spending year. It appeared likely, would remain moderate in the year as a whole as a result of both smaller gains in wage and salary income and an increase in the saving rate. than exports in January, and the U.S. imports rose more trade narrowed. According to tentative surplus in U.S. merchandise estimates, the over-all balance of payments--which had been in sub stantial deficit in January on both the liquidity and official settlements bases--continued in deficit in February. markets, demand for sterling remained In foreign exchange strong during February. Inflows of funds to the United Kingdom became exceptionally large in early March, and on March 5 the Bank its discount rate to 7-1/2 per cent from the 8 of England reduced per cent rate that had been in effect for about a year. On March 6 the German monetary authorities announced that certain credit tightening measures, including an increase in the discount rate of the German Federal Bank from 6 to 7-1/2 per cent, were being taken in light of domestic inflationary pressures and of the continued expansion in bank credit. The Italian lira had remained under heavy selling pressure in recent weeks and--also on March 6--the Bank of Italy announced that it was raising its discount rate from 4 to 5-1/2 per cent.
In markets for domestic securities both long- and short-term interest rates had declined considerably on balance since the begin ning of February, despite a very heavy calendar of new corporate bond offerings and a continuing sizable volume of municipal and Federal agency issues. The rate declines reflected the increasing signs that the economy was weakening and the growing belief among investors that monetary restraint would shortly be--or had already been--relaxed. Treasury bill rates fell steadily during much of February, but these rates tended to stabilize later in the month when the Treasury followed its successful refunding operation by a sale of $1.75 billion of additional tax-anticipation bills due in April and by an increase in the size of its regular auctions of 6-month and 1-year bills. On the day before this meeting the market rate on 3-month bills, at about 6.85 per cent, was 45 basis points below its level 4 weeks earlier and about 85 basis points below its early February level. The outflows of time and savings funds at banks and at nonbank thrift institutions, which had been very large in January, apparently came to an end in February--as a consequence of both the declines in yields on competing market instruments and the advances in rates offered by these institutions under the new higher ceilings that became effective in late January. Preliminary figures indicated that small net inflows of funds to savings and loan there were relatively associations and mutual savings banks in early February. In January
of mortgages by savings and loan associations were the net acquisitions for any month in nearly 3 years, and the volume of outstanding smallest commitments was at a 2-year low. banks time and savings deposits expanded almost At commercial as rapidly over the course of February as they had declined in January, and their average level in February was only fractionally below that in the previous month. There were net increases during February in consumer type deposits--particularly at country banks--and in the volume of large denomination CD's outstanding. It appeared that the volume of CD's held by foreign official institutions had increased considerably. the average levels of private demand In contrast to time deposits, deposits and the money stock contracted sharply from January to Februaryat estimated annual rates of about 15 and 10 per cent, respectively. The bank credit proxy--daily-average member bank deposits--was estimated to have declined from January to February at an annual rate of more than 9 per cent, and after adjustment for a net increase in funds raised from nondeposit sources, at a rate of more than 6 per cent. System open market operations since the February 10 meeting of the Committee had been directed at fostering somewhat less firm condi tions in the money market, in accordance with the Committee's decision at that meeting and in light of the unfolding evidence of weakness in both the money stock and the adjusted bank credit proxy. The money market remained firm for a time as the effects of large-scale reserve supplying operations were offset by such factors as unexpectedly sharp declines in float, but market conditions subsequently eased. Thus, in
early March the average Federal funds the latter part of February and levels well above 9 per cent earlier rate fell below 8.50 per cent from and in the week ending March 5 member bank borrowings in February, compared with average weekly levels of more averaged about $835 million, than $1 billion during February. money and bank credit would suggested that Staff projections ahead if the somewhat less firm grow at moderate rates over the months recently achieved in the money market were maintained. conditions that the money stock would rise Specifically, the projections suggested to March at an annual rate of 4 to 7 per on the average from February first quarter as a whole at a rate cent, resulting in growth during the money would continue to expand in the of about 2 per cent; and that of about 3 per cent. The adjusted bank credit second quarter, at a rate February to March at an annual rate was projected to increase from proxy in a first-quarter growth rate of 0.5 per of 8 to 11 per cent--resulting cent--and at a rate of about 5 per cent in the second quarter. The proxy series were influenced to an important projections for the adjusted degree by the expectation that time and savings deposits would continue rapidly, but that this would be partly offset by slower expan to expand sion and then some decline in bank use of nondeposit funds. that growth of money and bank credit The Committee agreed coming months at about the rates projected would be appropriate during Concern was expressed in the dis in the current economic environment. unduly large changes in money market condi cussion about the risks of also was expressed about both the danger of excessive tions. Concern
the risk of shortfalls from desirable growth in the aggregates and some members thought were particularly likely for growth rates, which in a period of economic weakness such as the present. the money stock In view of the importance attached to avoiding such extremes, the Committee decided to convey in its directive the objective of achieving growth in money and bank credit over the months ahead at about the moderate rates indicated, and to call for maintenance of money market conditions consistent with that objective. policy directive was issued to The following current economic 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, is weakening further in early 1970. Prices and costs, are continuing to rise at a rapid pace. Market interest however, rates have declined considerably in recent weeks, partly as a result of changing investor attitudes regarding the outlook for activity and monetary policy. Both bank credit and the economic money supply declined on average in February, but both were tending upward in the latter part of the month. Outflows of time and savings funds at banks and nonbank thrift institutions, which had been sizable in January, apparently ceased in February, reflecting advances in rates offered on such funds following the recent increases in regulatory ceilings, together with declines in short-term market interest rates. The U.S. foreign trade surplus narrowed in January and the over-all balance of payments deficit has remained large 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 in the rate of inflation, while encouraging orderly reduction the resumption of sustainable economic growth and the attainment equilibrium in the country's balance of payments. of reasonable To implement this policy, the Committee desires to see moderate growth in money and bank credit over the months ahead. System open market operations until the next meeting of the shall be conducted with a view to maintaining money Committee market conditions consistent with that objective.
Votes for this action: Messrs. Burns, Hayes, Brimmer, Daane, Heflin, Hickman, Maisel, Mitchell, Robertson, Sherrill, Swan, and Kimbrel. Votes against this action: None. Absent and not voting: Mr. Francis. (Mr. Kimbrel voted as his alternate.) 2. Amendment to continuing authority directive. At its meeting on October 7, 1969, the Committee had modified paragraph 2 of the continuing authority directive regarding domestic open market operations by adding language authorizing Reserve Banks other than the New York Bank to purchase special short-term certificates of indebtedness from the Treasury for their own account at times when the New York Bank was closed. At this meeting the Committee amended the language adopted at that time for purposes of clarification. After this amendment, paragraph 2 read as follows: The Federal Open Market Committee authorizes and directs the Federal Reserve Bank of New York, or, if the New York Reserve Bank is closed, any other Federal Reserve Bank, to purchase directly from the Treasury for its own account (with discretion, in cases where it seems desir able, to issue participations to one or more Federal Reserve Banks) such amounts of special short-term certif icates of indebtedness as may be necessary from time to time for the temporary accommodation of the Treasury; provided that the rate charged on such certificates shall be a rate 1/4 of 1 per cent below the discount rate of the Federal Reserve Bank of New York at the time of such purchases and provided further that the total amount of such certificates held at any one time by the Federal Reserve Banks shall not exceed $1 billion. Votes for this action: Messrs. Burns, Hayes, Brimmer, Daane, Heflin, Hickman, Maisel, Mitchell, Robertson, Sherrill, Swan, and Kimbrel. Votes against this action: None. Absent and not voting: Mr. Francis. (Mr. Kimbrel voted as his alternate.)
authority directive that Another amendment to the continuing 1969, involved the addition of a paragraph 3 had been made on October 7, the Reserve Banks to engage in lending of U.S. Government authorizing securities held in the System Open Market Account, under such might specify from time to time. That instructions as the Committee on the basis of a judgment by the Committee that action had been taken circumstances such lending of securities was reason in the existing ably necessary to the effective conduct of open market operations and to the effectuation of open market policies, and on the understanding that the authorization would be reviewed periodically. At this meeting the Committee concurred in the judgment of the Manager of the System Open Market Account that the lending activity in question remained necessary and, accordingly, that the authorization should remain in effect subject to periodic review. certain modifications that had The Committee also approved recommended by the Manager, in light of the operating experience been to date, in the instructions it had issued in conjunction with this authorization. Among the more important of these were an increase from $75 million to $150 million in the dollar limit on the par of securities involved in outstanding loans to any individual value time; a lengthening from three to five business days dealer at any the limit on the duration of loans to dealers, with loans remaining of
subject to renewal; and certain revisions in the rates to be charged on contracts renewed beyond their initial maturity. 3. Amendment to authorization for System foreign currency operations. approved an increase from $1,000 million to The Committee $1,250 million equivalent in the System swap arrangement with the Bank of Italy, and the corresponding amendment to paragraph 2 of the authorization for System foreign currency operations, subject to the understanding that the action would become effective upon a deter mination by Chairman Burns that it was in the national interest. Chairman Burns made the indicated determination later on the day of this meeting. As a result of this action, paragraph 2 read as follows: The Federal Open Market Committee directs the Federal Reserve Bank of New York to maintain reciprocal currency arrangements ("swap" arrangements) for System Open Market Account for periods up to a maximum of 12 months with the following foreign banks, which are among those designated by the Board of Governors of the Federal Reserve System under Section 214.5 of Regulation N, Relations with Foreign Banks and Bankers, and with the approval of the Committee to renew such arrangements on maturity: Amount of arrangement (millions of Foreign bank dollars equivalent) Austrian National Bank 200 National Bank of Belgium 500 Bank of Canada 1,000 National Bank of Denmark 200 Bank of England 2,000 Bank of France 1,000 German Federal Bank 1,000 Bank of Italy 1,250 Bank of Japan 1,000 Bank of Mexico 130 Netherlands Bank
Amount of arrangement (millions of Foreign bank dollars equivalent) Bank of Norway 200 Bank of Sweden 250 Swiss National Bank 600 Bank for International Settlements: Dollars against Swiss francs 600 Dollars against authorized European currencies other than Swiss francs 1,000 Votes for this action: Messrs. Burns, Hayes, Brimmer, Daane, Heflin, Hickman, Maisel, Mitchell, Robertson, Sherrill, Swan, and Kimbrel. Votes against this action: None. Absent and not voting: Mr. Francis. (Mr. Kimbrel voted as his alternate.) This action was taken on recommendation of the Special Manager, who advised that it should prove helpful in providing against destabilizing short-run pressures on the lira. It was understood that the U.S. Treasury would concurrently make available a $250 million swap facility to the Bank of Italy. 4. Review of continuing authorizations. This being the first meeting of the Federal Open Market Committee following the election of new members from the Federal Reserve Banks to serve for the year beginning March 1, 1970, and their assumption of duties, the Committee followed its customary practice of reviewing all of its continuing authorizations and directives. The actions taken with respect to the continuing authority directive for domestic open market operations and the
authorization for System foreign currency operations have been described in the preceding portions of the record for this date. Except for the changes resulting from those actions, the Committee reaffirmed the two instruments, and also the foreign currency directive, in the form in which they were outstanding at the begin ning of the year 1970. Votes for these actions: Messrs. Burns, Hayes, Brimmer, Daane, Heflin, Hickman, Maisel, Mitchell, Robertson, Sherrill, Swan, and Kimbrel. Votes against these actions: None. Absent and not voting: Mr. Francis. (Mr. Kimbrel voted as his alternate.)