May 5, 1970 FOMC Record of Policy Actions

FOMC minutes

these operations served to offset reserve drains resulting from other factors. The effective rate on Federal funds, which had fluctuated mostly in a range of 7-1/2 to 8 per cent in late March April, subsequently moved into an 8 to 8-1/2 per cent and early range. In the 3 weeks ending April 29, member bank borrowings averaged about $960 million, compared with an average in March of slightly under $900 million. analysis suggested that annual rates of growth of about Staff 4 per cent for both the money stock and the adjusted bank credit proxy over the second quarter 1/ might be attained with money market conditions similar to or slightly firmer than those currently pre vailing. The indicated growth rates--somewhat higher for the money somewhat lower for the proxy series than those contemplated stock and at its previous meeting--took account of the likeli by the Committee public's demand for money now was greater than had hood that the been thought earlier and that, as a consequence of recent increases interest rates, the pace of expansion in time in short-term market be considerably slower in May and June and savings deposits would For May alone it was expected that the than previously anticipated. average, although much less than it money stock would rise on the had in April, and that the proxy series would decline. The Committee agreed that growth in money and bank credit during the second quarter at about the 4 per cent annual rates indicated above would be appropriate to the underlying economic 1/ Calculated on the basis of the daily-average levels in March and June.

At the same time, however, the members situation and outlook. of the current Treasury financ that account should be taken agreed the targets for the directed at attaining ing, and that operations in light of "even keel" should be modified if necessary aggregates that operations should be modified It was also agreed considerations. financial markets, should they to moderate unusual pressures in develop. second paragraph of the the language of the In considering the Committee decided that ref current economic policy directive, should be made to "bank reserves" as well as to "money market erence concerning open market operations. The conditions" in the statement the Committee's intention that information purpose was to clarify from the expected paths of various aggregative regarding deviations reserve measures was to be used as a supplement to--but not as a substitute for--data reflecting money market conditions in making decisions regarding possible System operations. 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 weakened further in the first quarter of 1970. Growth in personal income, however, is being stimulated in the second quarter by the enlargement of social security benefit payments and the Federal pay raise. Prices and costs generally are continuing to rise at a rapid pace, although some components of major price indexes recently have shown moderating tendencies. Most market interest rates have risen sharply in recent weeks as a result of heavy demands for funds, possible shifts in liquidity preferences, and the disappointment of earlier expectations regarding easing of credit market

conditions. Prices of common stocks have declined markedly since early April. Attitudes in financial markets generally are being affected by the expansion of military operations in Southeast Asia and by concern about the success of the Government's anti-inflationary program. Both bank credit and the money supply rose substantially from March to April on average, although during the course of April bank credit leveled off and the money supply receded sharply from the end-of-March bulge. The over-all balance of payments was in considerable deficit during the first quarter. In light of the foregoing develop ments, it is the policy of the Federal Open Market Committee to foster financial conditions conducive to orderly reduction in the rate of inflation, while encouraging the resumption of sustainable economic growth and the attainment of reasonable equilibrium in the country's balance of payments. 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 Committee shall be conducted with a view to maintain ing bank reserves and money market conditions consistent with that objective, taking account of the current Treasury financing; provided, however, that operations shall be mod ified as needed to moderate excessive pressures in financial markets, should they develop. Votes for this action: Messrs. Burns, Hayes, Brimmer, Daane, Heflin, Hickman, Maisel, Mitchell, Robertson, and Swan. Vote against this Sherrill, action: Mr. Francis. In dissenting from this action Mr. Francis expressed the view that under present economic circumstances the target for growth in the money stock during the second quarter should remain at the 3 per cent annual rate favored by the Committee as a whole at recent meet ings. He noted that second-quarter growth at a 4 per cent annual rate would imply a rise from February--the recent monthly low for the money stock--to June at about a 6 per cent annual rate, which in his judgment would be excessive for the period in question.

2. Action with respect to continuing authority directive. At this meeting the Committee suspended, for the period from the opening of business May 5, 1970, until the close of business May 26, 1970, the provision of paragraph 1(a) of the continuing authority directive limiting changes in System Account holdings of U.S. Government securities between meetings of the Committee to $2 billion. Votes for this action: Messrs. Burns, Hayes, Brimmer, Daane, Francis, Heflin, Hickman, Maisel, Mitchell, Robertson, Sherrill, and Swan. Votes against this action: None. This action was taken on the recommendation of the System Account Manager, who advised that increased leeway for System purchases of Government securities might well be required during the period in question, in view of the unsettled conditions in markets for Government securities and of the uncertain prospects for the Treasury financing now in process.