May 26, 1970 FOMC Record of Policy Actions

FOMC minutes

appeared that the May, when it late April and early In were jeopardizing the conditions in securities markets disturbed System supplied reserves through Treasury's May financing, the it might otherwise have done. operations more readily than open market remained in doubt until the The outcome of the two-part financing out, subscriptions to the completed. As it turned financing had been books were open May 5, the of 18-month notes--for which cash offering the Committee--totaled only slightly day of the preceding meeting of more than the $3.5 billion offered. Consequently, these subscriptions in contrast to the usual partial allotments. were allotted in full, However, in the exchange offering--in which holders of securities in mid-May were offered notes of May 1973 or of February maturing smaller than had been expected. for cash were much 1977--redemptions a whole the Treasury raised about As a result, in the financing as more than it had anticipated. $2 billion of new money, considerably subscription books were open on May 4-6; For the exchange offering, the settlement date was May 15. and for both parts of the financing, since the May 5 meeting had System open market operations keel" considerations during the final stages been conditioned by "even more generally, by the desirability of calming of the financing and, were influenced by the fact that market unsettlement. Operations also bank credit appeared to be running in May both the money stock and with the Committee's target above levels consistent significantly

quarter. However, in view of the very growth rates for the second sensitive state of the securities markets, no effort was made to attain market conditions that might have been the degree of firmness in money to the targeted growth path. to restore the monetary aggregates required rate had fluctuated mostly 5 meeting the Federal funds Since the May in a range of 7-7/8 to 8-1/8 per cent, compared with a range of 8 to 8-1/2 Member bank borrowings averaged in late April and early May. per cent 3 weeks ending May 20, a little below the about $920 million in the $960 million average of the preceding 3 weeks. money stock and the bank credit proxy--daily-average Both the bank deposits--increased substantially from March to April. member at an annual rate now estimated at about The money stock expanded series, after adjustment for some reduction 10.5 per cent; the proxy funds from nondeposit sources, grew at a rate of in banks' use of to tentative estimates for May, the about 13.5 per cent. According on the average than had been stock was rising considerably more money earlier, and the adjusted bank credit proxy was declining expected much less than had been anticipated. that if prevailing money market Staff analysis suggested the money stock would increase slightly conditions were maintained further from May to June and the adjusted bank credit proxy would so fast as in the previous month. The rise more rapidly, although not that, if these expectations were realized and if analysis implied

current estimates for May were correct, both aggregates would increase of about 7 per cent over the second quarter.1/ It at annual rates appeared that somewhat firmer money market conditions than those currently prevailing would be required if the second-quarter growth rates of about 4 per cent--which the Committee earlier had concluded would be appropriate to the underlying economic situation--were to be attained. Looking forward to the third quarter, the analysis suggested that a 4 per cent growth rate in the money stock probably would be associated with more rapid growth in the adjusted proxy seriesperhaps at a 7 per cent rate--partly because the Treasury was expected to raise a large volume of new money in July and August. policy, the Committee considered discussion of open market In its the implications both of the uncertainties and the strains that were unsettling financial markets at present and of the underlying economic situation and outlook. The members agreed that moderate growth in money and bank credit remained the appropriate longer-run objective of policy. They concluded, however, that it was necessary at present to give priority to the objective of moderating pressures on financial markets, recognizing that that might temporarily entail higher growth rates in the monetary aggregates than were considered appropriate for the longer run. 1/ Calculated on the basis of the daily-average level in the last month of the quarter relative to that in the last month of the preceding quarter.

The following current economic policy directive was issued to the Federal Reserve Bank of New York: reviewed at this meeting indicates that The information activity declined more than previously estimated real economic in the first quarter of 1970, but little further change is projected in the second quarter. Prices and costs generally are continuing to rise at a rapid pace, although some compon ents of major price indexes recently have shown moderating tendencies. Since early May most long-term interest rates have remained under upward pressure, partly as a result of continued heavy demands for funds and possible shifts in liquidity preferences, and prices of common stocks have declined further. Attitudes in financial markets generally are being affected by the widespread uncertainties arising from recent international and domestic events, including doubts about the success of the Government's anti-inflationary program. Both bank credit and the money supply rose substan tially from March to April on average; in May bank credit appears to be changing little while the money supply appears to be expanding rapidly. The over-all balance of payments continued in considerable deficit in April and early May. In light of the foregoing developments, 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, in view of current market uncertainties and liquidity strains, open market operations until the next meeting of the Committee shall be conducted with a view to moderating pressures on financial markets, while, to the extent compatible therewith, maintaining bank reserves and money market conditions consistent with the Committee's longer-run objectives of moderate growth in money and bank credit. Votes for this action: Messrs. Burns, Hayes, Brimmer, Daane, Francis, Hickman, Maisel, Mitchell, Robertson, Sherrill, Swan, and Morris. Votes against this action: None. Absent and not voting: Mr. Heflin. (Mr. Morris voted as his alternate.)