September 15, 1970 FOMC Record of Policy Actions

FOMC minutes

early September. On the average in August, the published measure showed an increase at an annual rate of about 11 per cent--compared of about 4 per cent in July and close to 4 per cent with annual rates 2/ over each of the first two quarters of the year. Including a pro rest of September, growth over the third quarter was jection for the estimated at about a 4.5 per cent annual rate. however, that the rates of growth It was noted at the meeting, money would be somewhat different if adjustments were calculated for that had developed in the data because of the account made for biases in connection with certain types of inter ing procedures employed national transactions. It was reported that work was now in process revisions, including not only adjustments for these on statistical also benchmark corrections and revisions of seasonal biases but final revisions were not expected to be avail factors. Although the tentative calculations based on the preliminary able until late autumn, now available suggested that the adjustments for biases information these types of international transactions might in themselves due to raise the growth rates for the first two quarters by about 1 or 2 percentage points and might lower the rate for the third quarter by about 1 percentage point. 2/ 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.

suggested that some easing of currently prevail Staff analysis ing money market conditions probably would be required if the money stock series, adjusted for bias, were to grow at an annual rate of about the fourth quarter. The analysis also suggested that 5 per cent over such a growth rate for money would be associated with a 10 per cent rate of expansion in the adjusted bank credit proxy. The anticipation of marked slowing in bank credit growth--from a third-quarter rate tenta tively estimated at 17.5 per cent--reflected in part expectations that the rate of increase of time deposits would slacken as banks completed their adjustments to the suspension of rate ceilings on large-denomina tion CD's of shorter term. Also, it appeared likely that there would be a considerable abatement in the shift of credit flows from market to banking channels that had followed earlier pressures in the commercial paper market and that had contributed importantly to the rapid growth of the bank credit proxy in the third quarter. The Committee agreed that some easing of conditions in credit markets and moderate growth in the money stock--at an annual rate of about 5 per cent in the fourth quarter--remained appropriate as the objectives of monetary policy at this time, although a few members felt that somewhat faster expansion of money would be preferable. A few members also expressed the view that it would be desirable to place less emphasis on a specific growth rate for the money stock, particularly in light of present data uncertainties. It was noted in the discussion that prospects for a satisfactory rate of economic growth depended importantly on continued recovery in residential construction outlays and State and local government expen ditures. In view of the sensitivity of these types of spending to

interest rates, some members stressed the desirability of fostering somewhat lower levels of interest rates over the months ahead. There was some sentiment in the Committee for increasing the weight given to developments in bank credit in day-to-day decisions regarding open market operations, now that the period of rapid reinter mediation appeared to be drawing to a close. The Committee concluded, however, that for the time being the practice should be continued of giving preponderant weight to the money stock in assaying the impli cations of the behavior of financial aggregates for System operating decisions. 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, is expanding somewhat further in the third quarter, led by an upturn in residential construction. Wage rates generally are continuing to rise at a rapid pace, but improve ments in productivity appear to be slowing the rise in costs, and some major price measures are rising less rapidly than before. Interest rates declined in the last half of August, but most yields turned up in early September, as credit demands in securities markets have continued heavy; existing yield spreads continue to suggest concern with credit quality. The money supply rose rapidly in the first half of August but moved back down through early September. Bank credit expanded sharply further in August as banks continued to issue large-denomination at a relatively rapid rate, while reducing their reliance CD's on the commercial paper market after the Board of Governors acted to impose reserve requirements on bank funds obtained from that source. The balance of payments deficit on the liquidity basis diminished somewhat in July and August from the very large second-quarter rate, but the deficit on the official settlements basis remained high as banks repaid Euro-dollar liabilities. 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 moderate growth in money and attendant bank credit expansion over the months ahead. System open market operations until the next meeting of the Committee shall be conducted with a view to maintaining bank reserves and money market conditions consistent with that objective. Votes for this action: Messrs. Burns, Brimmer, Daane, Francis, Heflin, Hickman, Maisel, Robertson, Sherrill, and Swan. Vote against this action: Mr. Hayes. Absent and not voting: Mr. Mitchell. In dissenting from this action, Mr. Hayes indicated that he was concerned about again calling in the directive for an easing of condi tions in credit markets. Short-term interest rates had declined since the last Committee meeting and he was not convinced that further easing would be required to achieve the objective, which he favored, of moderate growth in money and bank credit. He feared the possible inflationary effects of a policy calling for progressive easing of credit conditions.