October 20, 1970 FOMC Record of Policy Actions: Full Text
RESERVE FEDERAL release press For immediate release January 18, 1971 The Board of Governors of the Federal Reserve System and the Federal Open Market Committee today released the attached record of policy actions taken by the Federal Open Market Committee at its meeting on October 20, 1970. Such records are made available approx imately 90 days after the date of each meeting of the Committee and will be found in the Federal Reserve Bulletin and the Board's Annual Report. Attachment
RECORD OF POLICY ACTIONS OF THE FEDERAL OPEN MARKET COMMITTEE Meeting held on October 20, 1970 Authority to effect transactions in System Account. Preliminary estimates of the Commerce Department indicated that real output of goods and services had risen at an annual rate of 1.4 per cent in the third quarter, compared with a 0.6 per cent rate of growth in the second. Nonfarm payroll employment declined on the average in the third quarter and the unemployment rate rose further. Wage rates generally were continuing to increase at a rapid pace, but it appeared that gains in productivity were slowing the advance in costs and some major price measures were rising less rapidly than earlier. A strike at a major automobile manufacturer that had begun in mid-September was retarding current economic activity and clouding the near-term out look. Industrial production, which had been declining irregularly since July 1969, fell considerably in September; much of the reduction in that month was directly attributable to the strike in the automobile industry. Retail sales were about unchanged from August, and in the third quarter as a whole sales rose less than in any of the three preceding quarters. Nonfarm payroll employment leveled off in September, following earlier declines, but the unemployment rate advanced sharply from 5.1 to 5.5
hand, increased sub starts, on the other per cent. Private housing stantially in the third quarter. rose considerably from mid-August to The wholesale price index after having declined in the previous month; to a large mid-September the volatile behavior of prices of extent these fluctuations reflected farm products and foods. Average prices of industrial commodities the third quarter as a whole the upward in September, but in continued somewhat slower than in the second quarter. In rate of advance was price index was smaller than in any August the increase in the consumer other month since December 1968. It appeared that output per manhour in the private nonfarm sector of the economy had increased appreciably second and third quarters, contributing to a significant in both the slowing of the rise in unit labor costs. that real GNP might edge up in the Staff projections suggested fourth quarter at about the same pace as in the third if the strike in the automobile industry were settled by the end of October. On this appeared likely that the main effects of the strike on assumption it would be to hold down inventory accumulation and to business activity from accelerating very much from the low rate of keep consumer spending expansion recorded in the third quarter. With respect to other sectors, the projections for the fourth quarter contemplated an acceleration of the advance in residential construction outlays that had begun in the third quarter, continued
growth in State and local government expenditures at a rather rapid rate, and declines in business capital investment and defense outlays. Some rebound in over-all economic activity was expected in the first quarter of 1971, but it was anticipated that the rate of expansion would moderate in the second quarter when it was assumed that pro duction and sales lost by the strike would have been largely made up. The surplus on U.S. foreign trade fell substantially in August from the unusually high level of the previous 2 months. Preliminary estimates indicated that the over-all balance of payments deficit had declined markedly on the liquidity basis from the second to the third quarters--reflecting mainly improvements in private capital flows. On the official settlements basis, however, the deficit remained close to its high second-quarter level as U.S. banks made sizable repayments of their Euro-dollar liabilities to foreign branches. By mid-October several large banks had reduced, or had announced intentions to reduce, such Euro-dollar liabilities by amounts large enough to lower their bases. 1/ "reserve-free" the Board to its Regulations D and M. effective .1/ Amendments by September 4, 1969, had (among other things) placed a 10 per cent reserve requirement on borrowings by member banks from their foreign branches, to the extent that these borrowings exceeded the daily average amounts outstanding in the 4 weeks ending May 28, 1969. At the same time the Board had provided that the reserve-free base so established would be reduced when and to the extent that the liabil ities of any bank to its foreign branches dropped below the original base in any subsequent period used to compute the reserve requirement.
In foreign exchange markets, sterling had strengthened recently, in early September. The rate after having been under selling pressure had declined sharply from its mid-September for the Canadian dollar day of this meeting the Bank of France reduced its discount peak. On the rate from 7-1/2 to 7 per cent. auctioned a $2.5 billion issue of On October 15 the Treasury bills due to mature in June 1971. The Treasury was tax-anticipation on October 22 the terms on which it would refund expected to announce 16. It was anticipated that billion of notes maturing November $7.7 the Treasury would offer intermediate-term notes in exchange for the and that it would engage in a subsequent cash maturing securities cover attrition and perhaps to raise additional new cash. financing to System open market operations since the September 15 meeting of the Committee had been directed at promoting some easing of condi credit markets and moderate growth in the money stock. Money tions in varied considerably--tending toward ease in the market conditions September and toward firmness in early October--as a latter part of of unexpectedly wide swings in market factors affecting reserves; result such conditions eased somewhat. Thus, the average rate but on balance on Federal funds since the preceding meeting was about 6-1/8 per cent, per cent in the previous intermeeting period; and compared with 6-1/2 borrowings in the 5 weeks ending October 14 averaged about member bank below the average of the previous 4 weeks. $490 million, $200 million
Interest rates on short-term securities and on Treasury notes and bonds also had declined on balance since mid-September, in reflec the easing of money market conditions, indications of sluggish tion of ness in the economy, and the reduction in the prime lending rate of banks--from 8 to 7-1/2 per cent--in the latter part of September. On the day before this meeting the market rate on 3-month Treasury bills was 5.94 per cent, about 40 basis points below its level 5 weeks earlier, and municipal bonds had changed little over the Yields on corporate period, however, in the face of a continuing very heavy flow of new issues. In September secondary market yields on federally insured residential mortgages again edged down, and the average contract interest rate on new-home mortgages declined for the first time in 2 years. The availability of mortgage funds had continued to improve recently as savings inflows to nonbank thrift institutions remained substantial. At commercial banks also, inflows of consumer-type time and savings deposits remained substantial in September. Outstanding large denomination CD's continued to expand at a relatively rapid pace despite reductions in the interest rates offered by banks for such deposits. Private demand deposits and the money stock had increased slightly from August to September, according to the latest published statistics. Growth in the money stock over the third quarter was now estimated to
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.