August 18, 1970 FOMC Record of Policy Actions

FOMC minutes

somewhat from July to August and then slacken moderately in September. The analysis suggested that a 5 per cent growth rate for the money stock over the third quarter would be associated with a 16.5 per cent rate of expansion in the adjusted credit proxy--reflecting a high but slowing rate of growth in time deposits. In the Committee's discussion it was noted that expectations of continuing inflation had abated considerably in recent months, even though prices were still advancing at an undesirably rapid rate. It was the consensus of the Committee that monetary policy at present should be sufficiently stimulative to foster moderate growth in real economic activity, but not so stimulative as to risk a resurgence of expectations. Considerable stress was placed on the need inflationary to encourage an adequate flow of credit to the housing industry and to State and local governments if a satisfactory rate of growth in over all activity were to be achieved. the Committee decided that open market Against this background, operations should be directed at promoting some easing of conditions in and growth in the money stock at a rate somewhat greater credit markets than that of the second quarter. In the latter connection most members continued to believe, as they had at the preceding meeting, that an appropriate target rate of growth for the money stock over the period ahead would be an annual rate of about 5 per cent; and should moderate deviations from that growth rate develop, they preferably should be in an upward rather than a downward direction. As to bank credit, the Committee took note of the reintermedia tion process now under way and decided that the growth rate should be

allowed to reflect any continued shift of credit flows from market to banking channels. It also directed that account be taken of possible liquidity problems, if they should emerge in the coming period, and of the effect of the Board's actions with respect to Regulation D. 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 edged up slightly in the second quarter after declining appreciably earlier in the year, may be expanding somewhat further. 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. Credit demands in securities markets have continued heavy, and interest rates have shown mixed changes since mid-July after declining considerably in preceding weeks. Some uncertainties persist in financial markets, particularly in connection with market instruments of less than prime grade. In July the money supply rose moderately on average and bank credit expanded substantially. Banks increased holdings of securities and loans to finance companies, some of which were experiencing difficulty in refinancing maturing commercial paper. Banks sharply expanded their outstanding large-denomination CD's of short maturity, for which rate ceilings had been suspended in late June, and both banks and nonbank thrift institutions experienced large net inflows of consumer-type time and savings funds. The over-all balance of payments remained in heavy deficit inthe second quarter, despite a sizable increase in the export surplus. In July the official settlements deficit continued large, but there apparently was a marked shrinkage in the liquidity deficit. 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, the Committee seeks to promote some easing of conditions in credit markets and somewhat greater growth in money over the months ahead than occurred in the second quarter, while taking account of possible liquid ity problems and allowing bank credit growth to reflect any continued shift of credit flows from market to banking channels. System open market operations until the next meeting of the

with a view to maintaining bank Committee shall be conducted conditions consistent with that reserves and money market account of the effects of other monetary objective, taking policy actions. Votes for this action: Messrs. Daane, Heflin, Hickman, Maisel, Burns, Mitchell, Robertson, Sherrill, and Votes against this action: Swan. Hayes, Brimmer, and Francis. Messrs. Hayes, Brimmer, and Francis believed that it was Messrs. for money to grow at a moderate rate at present. They appropriate dissented from this directive primarily because they were opposed of conditions in credit markets" to the promotion of "some easing objective of Committee policy at this time. In as a specific not presently required for the pur their judgment such easing was pose of encouraging a satisfactory rate of expansion in economic activity, and it would involve an unduly large risk of rekindling inflationary expectations. The views of the dissenting members regarding bank credit differed. Mr. Brimmer indicated that he was deeply troubled by the rapid recent and projected growth rates in bank credit, and that he favored fostering growth at only a modest rate. Mr. Hayes thought that a sizable increase in bank credit in the last month or two had been appropriate, in view of the shrinkage in commercial paper fol lowing the insolvency of a major railroad corporation. However, he observed that he would be troubled by continued rapid growth in bank credit now that the commercial paper market seemed to be stabilizing.

Mr. Francis expressed the view that bank credit was likely to be misleading as a proximate guide to policy because of the reinter mediation in process, and that the Committee accordingly should focus on the growth rate in money.