October 20, 1970 FOMC Record of Policy Actions

FOMC minutes

have been at an annual rate of about 5 per cent, after a tentative allowance for the biases resulting from the accounting procedures employed in connection with certain types of international transactions. There was a sharp decline during September in business loans at banks, adjusted to include loans that had been sold to affiliates. Growth in bank holdings of U.S. Government securities moderated sub stantially, but holdings of municipal and Federal agency securities increased markedly further. Banks continued to reduce their reliance on funds obtained from nondeposit sources--both Euro-dollar borrowings and funds obtained through the sale of commercial paper by bank affil iates. The bank credit proxy--daily-average member bank depositsincreased at an annual rate of about 10 per cent in September, after adjustment for changes in nondeposit funds. Over the third quarter the adjusted proxy series expanded at an annual rate of about 17 per cent. Staff analysis suggested that if money market conditions similar to those recently prevailing were maintained the money stock series, roughly adjusted for the biases related to international transactions, would grow at annual rates of about 4.5 per cent in October and about 5 per cent over the fourth quarter. It appeared that such growth rates for money would be associated with expansion in the adjusted bank credit proxy at an annual rate of about 9 per cent in the quarter. 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.

In the Committee's discussion considerable concern was expressed about the indications of actual and prospective weakness in economic activity, apart from the effects of the auto strike, and about the level to which the unemployment rate had risen. Concern also was voiced about the continuing advances in prices and costs, although some members expressed the view that progress was being made toward controlling inflation. 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 policy. As at the previous meeting, some members advo cated a somewhat faster growth rate for the money stock, and a few observed that data uncertainties argued for reducing the emphasis placed on a specific growth rate for money. Several members again stressed the desirability of fostering declines in interest rates over coming months in order to encourage needed recovery in residential construction outlays and State and local government spending. It was noted that in the weeks immediately ahead account would have to be taken of "even keel" considerations arising from the forthcoming Treasury financings. 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 output of goods and services increased slightly further

in the third quarter but that employment declined and unemployment continued to rise; activity in the current quarter is being adversely affected by a major strike in the automobile industry. Wage rates generally are con tinuing to rise at a rapid pace, but improvements in productivity appear to be slowing the increase in costs, and some major price measures are rising less rapidly than before. Most interest rates have declined since mid September, although yields on corporate and municipal bonds have been sustained by the continuing heavy demands for funds in capital markets. The money supply rose slightly on average in September and increased moderately over the third quarter as a whole. Bank credit expanded further in September but at a rate considerably less than the fast pace of the two preceding months. Banks continued to issue large-denomination CD's at a relatively rapid rate and experienced heavy inflows of consumer-type time and savings funds, while making substantial further reductions in their use of nondeposit sources of funds. The balance of payments deficit on the liquidity basis diminished in the third quarter 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 con ducive 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 those objectives, taking account of the forthcoming Treasury financ ings. Votes for this action: Messrs. Burns, Brimmer, Francis, Hickman, Maisel, Mitchell, Robertson, Sherrill, Swan, and Morris. Vote against this action: Mr. Hayes. Absent and not voting: Messrs. Daane and Heflin. (Mr. Morris voted as Mr. Heflin's alternate.)

In dissenting from this action, Mr. Hayes said that he favored moderate growth in the monetary aggregates--including expansion in money and bank credit at annual rates of about 5 and 9 per cent, respectively, in the fourth quarter--and that he would have no objection to some easing of credit market conditions if that was the natural result of demand factors under such a policy course. As at the two preceding meetings, however, he was concerned about the directive language reading "the Committee seeks to promote some easing of conditions in credit markets," because it implied to him that a persistent push toward lower interest rates was intended, irrespective of market forces. Such a course, in his view, would involve undue risks of rekindling inflationary expec tations and of weakening the international position of the dollar.