July 21, 1970 FOMC Record of Policy Actions

FOMC minutes

since the beginning of the year. Net inflows of savings funds to nonbank thrift institutions were relatively strong during the month, and outflows immediately after midyear interest and dividend credit ing were quite small. In view of such experience, it appeared likely that these institutions would step up the rate at which they were making new mortgage commitments. Following the Board's action on Regulation Q in late June, major commercial banks acted quickly to raise their offering rates on large-denomination CD's of less than 90 days' maturity--generally into a range of 7-1/2 to 8 per cent, in contrast to the previous ceiling rates of 6-1/4 and 6-1/2 per cent for maturities of 30 to 59 and 60 to 89 days, respectively. The subsequent influx of funds was very large; in the 3 weeks ending July 15, large-denomination CD's outstanding at weekly reporting banks increased by about $3 billion, the most rapid advance on record. Private demand deposits also expanded sharply in early July. The latest staff analysis suggested that both the money stock and the bank credit proxy--daily-average member bank deposits--would rise considerably on the average from June to July. However, assuming that prevailing money market conditions were maintained, growth in the money stock was expected to slow sharply in the two succeeding months 1/ and to be at an annual rate of about 5 per cent over the third quarter. 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.

It appeared likely that the rate of expansion in large-denomination CD's would moderate after banks completed their initial adjustments to the Regulation Q action and were no longer faced with large loan demands from firms experiencing run-offs of outstanding commercial paper. However, the annual rate of growth in the proxy series over the third quarter was still expected to be high--about 14 per cent, after adjustment for an anticipated reduction in banks' use of funds from nondeposit sources. The Committee decided that pressures in financial markets had abated sufficiently to warrant reducing the special emphasis recently given in open market operations to moderating such pressures, and increasing the emphasis placed on achieving the longer-run growth rates in the monetary aggregates that were considered appropriate to the underlying economic situation. At the same time, the Committee decided that account should be taken of the uncertainties and strains that did persist in financial markets, as well as of the "even keel" considerations associated with the forthcoming Treasury financing. While there were some differences in the members' assessment of the economic outlook, they agreed that moderate growth in the monetary aggregates--including growth in the money stock at about a 5 per cent annual rate in the third quarter--would be desirable. A majority also concurred in the view that, if moderate deviations from that growth rate should develop, it would be preferable if they were in an upward direction.

it was noted that a relatively rapid rate With respect to bank credit, the third quarter need not be disturbing in light of of expansion in the shift of credit flows from market to banking channels that was under way. current economic policy directive was issued to The following the Federal Reserve Bank of New York: The information reviewed at this meeting indicates that real economic activity changed little in the second quarter after declining appreciably earlier in the year. Prices and wage rates generally are continuing to rise at a rapid pace. However, improvements in productivity appear to be slowing the rise in costs, and some major price measures are showing moderating tendencies. Since mid-June long-term interest rates have declined considerably, and prices of common stocks have fluctuated above their recent lows. Although conditions in financial markets have improved in recent weeks uncertain ties persist, particularly in the commercial paper market where the volume of outstanding paper has contracted sharply. A large proportion of the funds so freed apparently was rechanneled through the banking system, as suggested by sharp increases in bank loans and in large-denomination CD's of short maturity--for which rate ceilings were suspended in late June. Consequently, in early July bank credit grew rapidly; there was also a sharp increase in the money supply. Over the second quarter as a whole both bank credit and money supply rose moderately. The over-all balance of payments remained in heavy deficit in the second quarter. 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 encour aging the resumption of sustainable economic growth and the attainment of reasonable equilibrium in the country's balance of payments. To implement this policy, while taking account of persisting market uncertainties, liquidity strains, and the forthcoming Treasury financing, the Committee seeks to pro mote moderate growth in money and bank credit over the months ahead, allowing for a possible continued shift of credit flows from market to banking channels. System open

the Committee of next meeting the until operations market reserves bank to maintaining a view with be conducted shall that objective; with consistent conditions market and money as be modified shall that operations however, provided, markets in financial pressures excessive to counter needed they develop. should Messrs. this action: Votes for Heflin, Francis, Daane, Brimmer, Burns, Sherrill, Maisel, Robertson, Hickman, this Votes against and Treiber. Swan, action: None. Messrs. and not voting: Absent (Mr. Treiber Hayes and Mitchell. as Mr. Hayes' alternate.) voted securities directly from the Treasury. 2. Authority to purchase Paragraph 2 of the Committee's continuing authority directive, as most recently amended on March 10, 1970, authorizes the Federal New York (and, under certain circumstances, other Reserve Bank of special short-term certificates of Reserve Banks) to purchase directly from the Treasury, subject to certain conditions. indebtedness is, in turn, based on a provision of Section 14(b) This authorization of the Federal Reserve Act authorizing the Federal Reserve Banks to of specified types "directly from or to the buy and sell obligations United States," subject to certain conditions. It was noted at this meeting that the statutory authority in question had expired on June 30, 1970, and that paragraph 2 of the continuing authority directive had accordingly been in a state of de facto suspension since that date; and that the paragraph would remain in suspension until pending legislation, which would extend the authority until July 1, 1971, was enacted. (Such legislation was enacted on July 31, 1970.)