November 17, 1970 FOMC Record of Policy Actions

FOMC minutes

would step up in the first quarter of 1971, when demands for money and credit were expected to strengthen temporarily in connection with the bulge in GNP anticipated in the aftermath of the auto that growth in the money stock at an annual strike. It appeared rate of 4 per cent in the fourth quarter might be associated with expansion in the adjusted bank credit proxy at a rate of about 4.5 per cent. The Committee agreed that, in light of the current and economic situation, some easing of conditions in credit prospective moderate growth in money remained appropriate as objec markets and monetary policy. Concern was expressed about the shortfalls tives of growth rates for the monetary aggregates that had been from expected experienced in October, and the members decided that an easing of conditions would be desirable at present for the pur money market of stimulating more substantial growth in the aggregates. pose As at other recent meetings, there were some differences of view with respect to the emphasis that should be placed on the growth rate of money relative to other indicators of policy, and with respect to the specific growth rate for money that should be sought. The Committee decided that it would be undesirable to "whipsaw" money and credit market conditions to the extent that might be required to a 5 per cent money growth rate in the fourth and first quarters attain individually. In particular, the Committee agreed that a 4 per cent

growth rate in the fourth quarter would be acceptable if the results of operating experience over coming weeks bore out the indication of the staff analysis that attainment of a 5 per cent rate would require of money market conditions. This judgment was reached a sharp easing in light of the expectation that money growth would pick up in the first quarter if there were no further substantial change in money market conditions. At the same time, it was noted that the policy objectives for the first quarter and subsequent periods would, of course, be considered by the Committee at future meetings. discussion the Committee considered the degree to During the which money market conditions should be eased in coming weeks in pur suing the longer-run objectives for the monetary aggregates, in light of the possibility that a marked easing might substantially accelerate the currently large outflows of short-term capital from the United States. The Committee decided that, if it was found in the course of opera tions that easing sufficient to reduce the Federal funds rate to around 5 per cent was still not producing an adequate response in terms of growth rates in the aggregates, members' views regarding further operations should be ascertained. It was noted appropriate in this connection that the Board of Governors was prepared to consider measures to moderate the pace of repayments of Euro-dollar borrowings by U.S. banks if those repayments threatened to exceed tolerable limits.

The Committee also considered a proposal for making somewhat more use than was customary at this time of the year of open market purchases of longer-term Treasury securities in meeting reserve needs. Most members thought that a moderate volume of such purchases, if practicable, could serve a constructive purpose. 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 is changing little in the current quarter and that unemployment has increased. Part but not all of the weakness in over-all activity is attrib utable to the strike in the automobile industry which apparently is now coming to an end. Wage rates generally are continuing to rise at a rapid pace, but gains in pro ductivity appear to be slowing the increase in unit labor costs. Recent movements in major price measures have been erratic but the general pace of advance in these measures has tended to slow. Most interest rates declined consid erably in the past few weeks, and Federal Reserve discount rates were reduced by one-quarter of a percentage point in the week of November 9. Demands for funds in capital markets have continued heavy, but business loan demands at banks have weakened. The money supply changed little on average in October for the second consecutive month; bank credit also was about unchanged, following a slowing of growth in September. The balance of payments deficit on the liquidity basis was at a lower rate in the third quarter and in October than the very high 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 sustain able 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 expan sion over the months ahead, with allowance for temporary shifts in money and credit demands related to the auto strike. 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. Votes for this action: Messrs. Burns, Hayes, Brimmer, Daane, Francis, Heflin, Hickman, Mitchell, Robertson, Sherrill, and Swan. Vote against this action: Mr. Maisel. Mr. Maisel dissented from this action because he believed that the objectives for growth in money and credit favored by the majority were unsatisfactory. He favored seeking a growth rate for money in the fourth quarter at least as high as the rate that had prevailed on the average in the first three quarters of the year. Indeed, he thought the information developed at this and prior meet ings on the state of the economy and its prospects should have led the Committee to reconsider and change the policies it had previously pursued. The monetary conditions sought under this directive would, he believed, increase the probabilities that output and employment would continue on a path that was too far below the economy's potential. In his judgment the gap between actual and potential output and the consequent lost production, income, and jobs would be greater than could be justified on the basis of the needs of the economy, demand pressures on prices, or the balance of payments.