March 9, 1971 FOMC Record of Policy Actions

FOMC minutes

by widened short-term interest rate differentials. 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 encour aging 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 operations until the next meeting of the Committee shall be conducted with a view to maintaining prevailing money market conditions while accommodating any downward movements in long-term rates; provided that money market conditions shall be modified if it that the monetary and credit aggregates are deviating appears significantly from the growth paths expected. Votes for this action: Messrs. Burns, Hayes, Brimmer, Clay, Daane, Kimbrel, Maisel, Mayo, Mitchell, Morris, Robertson, and Sherrill. Votes against this action: None. Amendment to authorization for System foreign currency operations. On recommendation of the Special Manager of the System Open Market Account the Committee amended paragraph 3 of the authorization currency operations to authorize the purchase of for System foreign to be used for the liquidation of System swap commitments currencies from the foreign central bank drawn on, at the same exchange rate as that employed in the drawing to be liquidated. Prior to this amend ment, the paragraph had specified that unless otherwise expressly authorized by the Committee all transactions in foreign currencies undertaken under paragraph 1(A) of the authorization should be at pre vailing market rates. As a result of this action, paragraph 3 read as follows: 3. Currencies to be used for liquidation of System swap be purchased from the foreign central bank commitments may

drawn on, at the same exchange rate as that employed in the drawing to be liquidated. Apart from any such purchases at the rate of the drawing, all transactions in foreign curren cies undertaken under paragraph 1(A) above shall, unless other wise expressly authorized by the Committee, be at prevailing market rates and no attempt shall be made to establish rates that appear to be out of line with underlying market forces. Votes for this action: Messrs. Burns, Hayes, Brimmer, Clay, Daane, Kimbrel, Maisel, Mayo, Mitchell, Morris, Robertson, and Sherrill. Votes against this action: None. Discussions had been under way recently with certain central banks in the System's swap network regarding the possibility of using new procedures in connection with the liquidation of System swap drawings in cases in which it was necessary to obtain the foreign currency required for liquidation by purchasing it directly from the central bank drawn on. It had been noted that both parties were exposed to a risk of loss if such transactions could be made only at the rate prevailing in the foreign exchange market at the time of repayment, and that such risks could be avoided if it were understood in advance that the currency could be purchased from the foreign central bank at the same exchange rate as that employed in the drawing to be liquidated. The Committee concurred in the judgment of the Special Manager that it would be appropriate to enter into such under standings with foreign central banks at the time a System drawing was made if the foreign bank were agreeable. It was specified that such understandings should not preclude Federal Reserve repayment of swap

drawings on or before maturity through purchase of the foreign currency required at market rates in the foreign exchange market or elsewhere. 3. Review of continuing authorizations. This being the first meeting of the Federal Open Market Committee following the election of new members from the Federal Reserve Banks to serve for the year beginning March 1, 1971, and their assumption of duties, the Committee followed its customary practice of reviewing all of its continuing authorizations and directives. The action taken with respect to the authorization for System foreign currency operations has been described in the preceding portion of the record for this date. Except for the change resulting from that action, the Committee reaf firmed the authorization, and also the foreign currency directive and the continuing authority directive with respect to domestic open market operations, in the form in which they were outstanding at the beginning of the year 1971. Votes for these actions: Messrs. Burns, Hayes, Brimmer, Clay, Daane, Kimbrel, Maisel, Mayo, Mitchell, Morris, Robertson, and Sherrill. Votes against these actions: None. In connection with the review of the continuing authority directive for domestic operations, the Committee took special note of paragraph 3, which authorized the Reserve Banks to engage in lending of U.S. Government securities held in the System Open Market Account under such instructions as the Committee might specify from time to time. That

October 7, 1969, on the to the directive on paragraph had been added in the existing circumstances by the Committee that basis of a judgment was reasonably necessary to the effective such lending of securities operations and to the effectuation of open market conduct of open market on the understanding that the authorization would be policies, and the Committee concurred in the periodically. At this meeting reviewed the System Open Market Account that the judgment of the Manager of lending activity in question remained necessary and, accordingly, that the authorization should remain in effect subject to periodic review.