February 9, 1971 FOMC Record of Policy Actions

FOMC minutes

for the first three quarters of 1970 and higher than the as the average recorded in the fourth quarter. For M and the 3.4 per cent rate adjusted credit proxy, the analysis suggested growth over the first quarter at rates of about 15 to 16 per cent and 10 to 11 per cent, respectively. that in light of the economic situation The Committee agreed be desirable to accommodate further declines in and outlook it would rates at this time. Views differed, however, with long-term interest respect to the appropriate objectives for conditions in the money and short-term credit markets and for growth rates in the monetary and credit A number of members advocated some further easing of money aggregates. market conditions in an effort to achieve growth rates in M1 over coming months that would tend to compensate for the recent shortfalls. Other members indicated that they would prefer to maintain prevailing money market conditions during coming weeks, at least in the absence of developments militating strongly in favor of further easing. Among the considerations stressed by these members were the rapid recent and prospective growth rates in monetary and credit aggregates other than M1 and the undesirable consequences for international capital flows of further sizable declines in short-term interest rates in the United States. There also was some sentiment for placing less emphasis on short-run fluctuations in M1 in the period ahead, of the discussion the Committee decided that At the conclusion open market operations in the coming period should be directed at main taining the prevailing conditions in the money market unless there were

indications of shortfalls in M1 and M from the growth paths expected on that basis--in which case, money market conditions were promptly to be eased somewhat further. The Committee also agreed that its objec tives for interest rates would be facilitated if, to the extent feasible, needs to supply reserves were met by purchases of longer-term Treasury securities. 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, which declined in the fourth quarter of 1970, is rising in the current quarter primarily because of the resumption of higher automobile production. The unemployment rate remained high in January. Wage rates in most sectors are continuing to rise at a rapid pace, and recent increases in some major price measures have been relatively large. Interest rates have fallen consider ably further in recent weeks despite continued heavy demands for funds in capital markets, and differentials between interest rates in the United States and those in major for eign countries have widened further. Federal Reserve dis count rates were reduced by an additional one-quarter of a percentage point to 5 per cent. Bank credit increased considerably further in January, as business loan demands strengthened somewhat and banks made substantial further additions to their holdings of securities. The money stock narrowly defined grew modestly in January following a stronger December rise, but money more broadly defined expanded sharply further as a result of continued rapid growth in consumer-type time and savings deposits. The over-all balance of payments deficit in the fourth quarter was about as large as in the third quarter on the liquidity basis; on the official settlements basis the deficit increased further from the very high third-quarter level as banks continued to repay Euro-dollar liabilities. More recently, the issuance of a special Export-Import Bank security to foreign branches of U.S. banks helped to moderate the flow of dollars to foreign central banks. In light of the foregoing developments, it is the policy of the Federal Open Market Committee to foster financial

conditions conducive to the resumption of sustainable economic growth, while encouraging an orderly reduction in the rate of inflation and the attainment of reasonable equilibrium in the country's balance of payments. To implement this policy, System open market opera tions until the next meeting of the Committee shall be conducted with a view to maintaining prevailing money market conditions while accommodating additional downward in long-term rates; provided that money market movements conditions shall promptly be eased somewhat further if it appears that the monetary aggregates are falling short of the growth path desired. Votes for this action: Messrs. Burns, Hayes, Brimmer, Daane, Heflin, Mitchell, Sherrill, Swan, and Maisel, Vote against this action: Mayo. Mr. Francis. Absent and not voting: (Mr. Mayo voted as Mr. Robertson. alternative for the late Mr. Hickman.) dissented from this action for reasons similar to Mr. Francis his dissents from the directives adopted at the two those underlying preceding meetings. Briefly, he favored placing less emphasis on money market conditions in implementing policy, and he thought that expansion in M1 at an annual rate of about 5 per cent would be best suited to the needs of the economy. 2. Ratification of an action with respect to continuing authority directive. The Committee ratified an action taken by members on January 22, 1971, suspending a provision of paragraph 1(A) of the continuing authority directive (the provision limiting exchanges with the Treasury of securities held in the System Open Market Account to maturing issues) to the extent of enabling the Account Manager to

billion of System Account holdings of the 7-3/4 per cent prerefund $4 note of November 1971 in the current Treasury financing. This action had been taken on recommendation of the Manager, for the purpose of reducing the System's concentrated holdings of this issue. As the Manager had indicated, more than $7.2 billion of this issue was held in the System Account, out of a total outstanding volume of about $10.7 billion. Votes for ratification of this action: Messrs. Burns, Hayes, Brimmer, Daane, Francis, Heflin, Maisel, Mitchell, Robertson, Sherrill, Swan, and Mayo. Votes against ratification of this action: None. (Mr. Mayo voted as alternate for the late Mr. Hickman.)