January 12, 1971 FOMC Record of Policy Actions

FOMC minutes

Various measures of the money stock also expanded considerably on the average in December--including "M1" defined as private demand deposits plus currency in circulation; and "M2" defined as M plus commercial bank time deposits other than large-denomination CD's. However, growth in M1 was smaller both in December and over the fourth quarter as a whole than had been expected at the time of the previous meeting of the Committee. After having expanded at an annual rate of approximately 6 per cent during the first three quarters of 1970, M1 increased over 3 / the fourth quarter at a rate of about 3.5 per cent. Fourth-quarter growth rates for M and the adjusted bank credit proxy were about 9 and 8 per cent, respectively. System open market operations following the mid-December meeting of the Committee had been directed initially at maintaining the money market conditions that had recently been attained. Subsequently, however, when it became clear that M1 was expanding at rates below earlier expectations, easier money market conditions were sought. Opera tions were complicated by the market churning that is typical of the period around a year-end, and conditions fluctuated relatively widely from day to day. Most recently, however, Federal funds had traded at an effective rate of about 4-1/2 per cent, compared with the rates around 5 per cent that had prevailed shortly before the preceding meeting. During the interval the System supplied a substantial volume of reserves, partly through purchases of longer-term Treasury securities, 3/ 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.

Staff analysis suggested that the bulge in economic activity anticipated for the first quarter would tend to produce more rapid and bank credit than had been recorded in the fourth growth in money quarter. According to the analysis, however, some further easing of money market conditions probably would be required if M1 were to expand sufficiently over the first quarter--at an annual rate of about 7.5 per cent--to compensate for the shortfall in the fourth quarter from the expected growth rate. The Committee agreed that it would be desirable at this time to promote accommodative conditions in credit markets and moderate expansion in monetary and credit aggregates. In the discussion divergent views were expressed about the degree to which open market operations during the period immediately ahead should be directed toward attaining specific objectives for various monetary and credit aggregates. A number of members favored seeking growth rates in the first quarter high enough to make up for the fourth-quarter shortfall in M1. Others, while not necessarily opposed to such growth rates, noted that their concern about the shortfall was mitigated by the recent relatively high rates of expansion in M and the bank credit proxy, or by the fact that they did not attach great importance in any event to short-run fluctuations in the growth rate of a single monetary aggregate. At the conclusion of the discussion the Committee agreed that the attainment of its objectives for both credit conditions and the monetary and credit aggregates would be facilitated by some moderate easing of

money market conditions; and that such easing should be accomplished soon, partly because it would become necessary to take account of the forthcoming Treasury financing later in the month. The members also agreed that money market conditions should be eased somewhat further if it appeared that the aggregates were expanding at rates below those consistent with making up the fourth-quarter shortfall in M1 policy directive was issued to The following current economic the Federal Reserve Bank of New York: at this meeting suggests that The information reviewed real output of goods and services declined in the fourth quarter of 1970, largely as a consequence of the recent strike in the automobile industry. Unemployment increased further in December. The resumption of higher automobile is expected to result in a bulge in activity in production Wage rates generally are continuing to rise early 1971. at a rapid pace, but gains in productivity appear to be slowing the increase in unit labor costs. The rise in wholesale and consumer prices appears to have moder both ated recently, following substantial increases earlier in the fall. Most market interest rates turned down again in recent days, and Federal Reserve discount rates were reduced by an additional one-quarter of a percentage point. funds in capital markets have continued heavy, Demands for loan demands at banks remain weak. Although but business growth in the money supply accelerated in December, over the fourth quarter as a whole it was at a rate below that prevailing in the preceding three quarters. Banks made further additions to their holdings of securi substantial and bank credit increased sharply. The ties in December, foreign trade surplus has declined markedly in recent The over-all balance of payments deficit on the months. liquidity basis in the fourth quarter was apparently about as large as in the third quarter. The deficit on the official settlements basis was very large as banks continued to repay Euro-dollar liabilities. In light of it is the policy of the Federal the foregoing developments,

Open Market Committee to foster financial conditions conducive of sustainable economic growth, while to the resumption encouraging an orderly reduction in the rate of inflation and the attainment of reasonable equilibrium in the country's balance of payments. the Committee seeks to To implement this policy, promote accommodative conditions in credit markets and moderate expansion in monetary and credit aggregates. System open market operations until the next meeting of the Committee shallbe conducted with a view to main taining bank reserves and money market conditions consistent with those objectives, taking account of the forthcoming Treasury financing. Votes for this action: Messrs. Burns, Brimmer, Daane, Heflin, Maisel, Mitchell, Robertson, Swan, Mayo, and Treiber. Vote against this action: Mr. Francis. Absent and not voting: Messrs. Hayes and Sherrill. (Mr. Treiber voted as alternate for Mr. Hayes, and Mr. Mayo voted as alternate for the late Mr. Hickman.) Mr. Francis dissented from this action for reasons similar to those underlying his dissent from the directive adopted at the December meeting. In his judgment, if growth in M were maintained over annual rate of approximately 5 per centcoming months at an average about the average prevailing over the second half of 1970--the longer run performance of production and prices would be better than if money were to expand at some faster rate. In addition, he favored reducing the emphasis given to money market conditions in implementing open market policy.