December 15, 1970 FOMC Record of Policy Actions

FOMC minutes

It was noted that the outlook for the monetary aggregates was particularly uncertain at this time, both because of the difficulties of assessing the precise impact on financial markets of the surge in expected in the aftermath of the automobile strike and because activity of the churning in those markets that is typical of the period around the year-end. Staff analysis suggested that the money stock would tend rapidly in December and January, in part as a to increase relatively result of the expected bulge in economic activity. According to the market conditions were about the same as those most analysis, if money recently attained, over the fourth quarter the money stock and the adjusted bank credit proxy would expand at annual rates of about 5 and 9 per cent, respectively. For both aggregates somewhat faster growth was anticipated over the first quarter of 1971. of the uncertainties affecting the weeks immediately In light ahead, a number of Committee members suggested that it would be appro priate, in making decisions on open market operations in this period, to give somewhat greater weight than previously to money market condi tions relative to the weight given to reported statistics on the monetary aggregates. A few members expressed the view that such a shift in emphasis was desirable on more general grounds, apart from present uncertainties. With respect to the monetary aggregates, some members drew attention to the significance of the behavior of aggregates other than

money stock--private demand deposits plus currency the narrowly defined "M ." Reference was made in this connec in circulation, the so-called bank credit and to money on various definitions that are tion both to broader than M1. There were some differences in the views expressed regarding the rates of expansion in money and bank credit that might be consid ered desirable or acceptable in the coming period. In the course of the discussion, and against the background of present expectations rates in the fourth quarter, it was suggested that the regarding growth should expand in the weeks immediately ahead by at monetary aggregates least the amounts that appeared to be consistent with the somewhat faster growth rates anticipated for the first quarter. The Committee agreed that money market conditions should be eased if it appeared that shortfalls from those growth paths were developing, but that otherwise operations should be directed at maintaining the conditions most recently attained. 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 has declined since the third quarter, largely as a consequence of the recent strike in the automobile industry, and that unemployment has increased. Resumption of higher automobile production is expected to result in a bulge in activity in early 1971. Wage rates generally are continuing to rise at a rapid pace, but gains in productivity appear to be slowing the increase in unit labor costs. Movements in major price measures have been diverse; most recently, wholesale prices have shown little change while consumer prices have advanced substan tially. Market interest rates declined considerably further in the past few weeks, and Federal Reserve discount rates

were reduced by an additional one-quarter of a percentage point. Demands for funds in capital markets have contin ued heavy, but business loan demands at banks have been weak. Growth in the money supply was somewhat more rapid on average in November than in October, although it remained below the rate prevailing in the first three quarters of the year. Banks acquired a substantial volume of securities in November, and bank credit increased mod erately after changing little in October. The foreign trade balance in September and October was smaller than in any other 2-month period this year. The over-all balance of payments deficit on the liquidity basis remained in October and November at about its third-quarter rate. The deficit on the official settlements basis was very large as banks continued to repay 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, System open market operations shall be conducted with a view to maintaining the recently attained money market conditions until the next meeting of the Committee, provided that the expected rates of growth in money and bank credit will at least be achieved. Votes for this action: Messrs. Burns, Hayes, Brimmer, Daane, Heflin, Maisel, Mitchell, Robertson, Sherrill, Swan, and Mayo. Vote against this Mr. Francis. (Mr. Mayo voted action: as alternate for the late Mr. Hickman.) dissented from this action both because he favored Mr. Francis increasing, rather than reducing, the emphasis on M relative to that System operating decisions, and on money market conditions in making because he favored maintaining growth in the money stock at the recently prevailing annual rate of 5 per cent. In the latter connection, he believed that continued growth in money at a 5 per cent rate was likely

to assure steady progress toward moderating price increases, along with a gradually increasing pace of expansion in real output. In his judg ment a faster growth rate for money would result in higher real output in 1971, but at a disproportionate cost in terms of prolonging infla tion and perhaps intensifying it after 1971.