March 9, 1971 FOMC Record of Policy Actions: Full Text
RESERVE FEDERAL release press June 7, 1971 For immediate release Reserve System of the Federal Board of Governors The released the attached Market Committee today and the Federal Open Open Market Committee by the Federal of policy actions/taken record at its meeting on March 9, 90 days approximately made available records are Such and are published meeting of the Committee the date of each after Annual Report. and the Board's Reserve Bulletin in the Federal conditions they and financial of economic summary descriptions The to the that was available on the information are based contain data as they rather than on time of the meeting, at the Committee may have been revised since then. Attachment
RECORD OF POLICY ACTIONS OF THE FEDERAL OPEN MARKET COMMITTEE Meeting held on March 9, 1971 1. Authority to effect transactions in System Account. that real output of goods official estimates indicated Revised annual rate of 3.9 per cent in the and services had declined at an that real GNP would rise substan quarter of 1970. It appeared fourth as a result of the recovery of in the current quarter, largely tially following settlement in late in the automobile industry production November of the strike at a major producer. preliminary indications industrial production According to 2 months of advance, as further declined slightly in February, following and steel were more than offset increases in output of motor vehicles in output of business and defense equipment. by continued reductions also declined in February, but because there was an even Employment the unemployment rate edged down to larger decline in the labor force Weekly data suggested that retail 5.8 from 6.0 per cent in January. in February at both automobile dealers and other types sales had risen autos, however, it appeared that average retail of stores. Apart from were little changed from the fourth quarter. sales in January and February starts fell sharply--reversing the unusually In January private housing of the previous month--but they remained at a high level. large increase Recent movements in major price indexes had been diverse, Average wholesale prices rose substantially from mid-January to
mid-February, as a result of a marked increase in prices of farm products and foods; prices of industrial commodities rose less than in most other recent months. In January the advance in the consumer price index moderated from the sharp December increase. Meanwhile, wage rates con tinued to rise rapidly in most sectors of the economy. suggested that growth in real GNP would slow Staff projections in the second quarter from its current high rate, mainly because the post-strike recovery in the automobile industry would no longer be stimulus to consumer and business spending on autos providing unusual and trucks. In addition, defense outlays were expected to decline. On the other hand, it seemed likely that residential construction expendi local government outlays would continue to rise at tures and State and and that the stockpiling of steel in anticipation of substantial rates, a possible strike in that industry in August--which already was making an appreciable contribution to over-all business investment in inven tories--would increase in importance. Also, it was expected that some strength would be imparted to consumer spending by payments late in the quarter of an anticipated increase in social security benefits retro active to the beginning of the year. The U.S. foreign trade surplus narrowed further in January, extending the trend begun in mid-1970. The chief factor in the dete rioration was a sharp rise in the total value of imports. The over-all balance of payments in the January-February period continued very heavily in deficit on the official settlements basis. On the liquidity
basis the deficit was at a rate much larger than in the second half of 1970, reflecting for the most part adverse capital flows stemming from the wide differentials between short-term interest rates in the United States and abroad. Short-term interest rates in Britain had risen since the begin year, and rates in Germany had fallen less than U.S. rates ning of the and Euro-dollar rates. Largely in consequence of interest rate dif ferences, the dollar was at the floor against nearly all major currencies in the exchange markets in February. The Bank of Canada reduced its discount rate by 1/4 percentage point in mid-February and by a further 1/2 point, to 5-1/4 per cent, effective February 24. On February 26, the Export-Import Bank offered an additional $1/2 billion of special securities to overseas branches of U.S. banks, for payment March 3. In domestic financial markets short-term interest rates had continued to decline in recent weeks. For example, the market rate on 3-month Treasury bills, at 3.32 per cent on the day before this meeting, was 50 basis points below its level 4 weeks earlier. Discount rates at Federal Reserve Banks were reduced by another quarter of a percentage point, to 4-3/4 per cent, effective February 13 (February 19 for the New York Reserve Bank) and commercial banks lowered their prime lending rate again, from 6 to 5-3/4 per cent, effective February 16. Further declines also had been recorded recently in bank offering rates on large-denomination CD's and in rates on commercial and finance company paper.
on new issues of corporate and municipal In contrast, yields bonds--which also had been declining earlier--turned up in early and rose considerably over the course of the following weeks. February These yield increases reflected the continuing very heavy calendar of new offerings--particularly of corporate bonds--and apparently also a that long-term interest rates were at growing belief among investors or near their cyclical lows. Yields rose only slightly on long-term Treasury bonds and they moved down on intermediate-term Treasury of such securities by part because of sizable purchases issues, in the Federal Reserve. Interest rates on residential mortgages declined further in February in secondary markets for federally insured loans, and on 18 the ceiling rate on such loans was reduced by administra February tive action from 7-1/2 to 7 per cent--the third half-point cut in which had at nonbank thrift institutions, months. Deposit inflows continued large in the high rates in January, reached extraordinarily first half of February. banks the rate of growth in consumer-type time At commercial rapid in February, but the and savings deposits was exceptionally expansion in large-denomination CD's slowed somewhat further. The (including loans that had been volume of business loans outstanding increased substantially, following a moderate sold to affiliates) and declines in the four preceding months. Banks rise in January sizable additions to their holdings of securities. again made
Total bank credit, as measured by the adjusted proxy seriesdaily-average member bank deposits, adjusted to include funds from nondeposit sources--increased considerably further on the average in February. Sharp increases also were recorded for two key measures of the money stock--M , defined as private demand deposits plus currency in circulation, and M2, defined as M1 plus commercial bank time deposits other than large-denomination CD's. For all of these aggre gates the growth rates in February exceeded those expected at the time of the preceding meeting of the Committee. For both of the money stock series, however, earlier estimates of the increase in January had been revised downward somewhat, and for M1 the February expansion followed a number of months in which growth had fallen well short of Committee expectations. The strength of the aggregates in February appeared to be related to the step-up in the growth of business loans at banks and, more generally, to the first-quarter bulge in economic activity in the aftermath of the auto strike. market operations had been directed at achieving System open somewhat easier conditions in the money market shortly after the February 9 Committee meeting, when revised data for late January and tentative estimates for early February suggested that both M and M were growing less rapidly than desired. Subsequently, however, new data becoming available indicated that these aggregates were currently expand ing at rates at or above those desired, and operations were directed at
The Federal funds rate fluctuated maintaining prevailing conditions. the period,but most recently it had averaged rather widely during about 3-1/2 per cent, compared with the average of about 3-3/4 per shortly before the February 9 meeting. In cent that had prevailed had been met to an important extent recent weeks needs for reserves long-term Treasury securities. of intermediate- and by System purchases money market condi suggested that, if prevailing Staff analysis M1 and M would expand considerably less in tions were maintained,both the first quarter as a had in February, and that over March than they grow at annual rates of about 7 and 16 per cent, whole they would respectively. The adjusted bank credit proxy was projected to continue to that of February, and to increase at upward in March at a pace close rate over the first quarter. It was noted about a 12 per cent annual that, while the outlook for the monetary aggregates in the second quarter was highly uncertain at this juncture, present indications suggested that M would grow more rapidly than in the first quarter if money market conditions remained unchanged, and that M and the proxy series would grow a little less rapidly. In the Committee's discussion considerable concern was expressed about the recent sharp increases in corporate and municipal bond yields, and the members agreed that it would be desirable to accommodate renewed declines in long-term interest rates generally. At the same time, there was widespread sentiment to the effect that further sizable declines in short-term interest rates would not serve a useful purpose. Indeed,
in the monetary and credit aggregates in light of the expected growth rates and the recent large capital outflows, a number of members thought that some modest increase in short-term rates would be desirable if--as they con sidered likely--such a development would not be inconsistent with a down drift in long-term rates. However, other members believed that any significant rise in short-term rates at this time would risk putting upward pressure on long-term rates. diverse views about the emphasis that The members also expressed be placed on the behavior of the monetary and credit aggregates should decisions during coming weeks, and about in making open market operating rates of growth in the aggregates over the months ahead. the appropriate some members expressed concern about the In the latter connection, relatively high growth rates projected by the staff for the period the assumption of unchanged money market through the second quarter on especially about the acceleration anticipated in M1. conditions, and however, stressed the uncertainties attached to the projections Others, months of the period covered and indicated that they for the later were not disturbed by the near-term outlook for the aggregates--partic in M experienced in other recent months. ularly in light of the shortfalls the Committee decided that At the conclusion of the discussion at present should be directed at maintaining open market operations money market conditions while accommodating any downward prevailing long-term interest rates. A proviso was added calling for movements in
modification of money market conditions if during coming weeks the monetary and credit aggregates appeared to be deviating widely from the growth paths consistent with the first-quarter rates of expansion cited above. Specifically, money market rates were to be increased somewhat if the aggregates were rising considerably faster than expected, but in light of recent declines in such rates they were to be shaded down only slightly if growth were markedly below expectations. The Committee also agreed that its objectives for interest rates would be served if, to the extent feasible, needs to supply reserves continued to be met by purchases of longer-term Treasury securities. economic policy directive was issued to The following current 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 pri marily because of the resumption of higher automobile produc tion. Although the unemployment rate has edged down recently, it remains high. Wage rates in most sectors are continuing to rise at a rapid pace. Movements in major price measures have been diverse; most recently, the rate of advance moderated for consumer prices and wholesale prices of industrial commodities, but wholesale prices of farm products and foods rose sharply. Bank credit increased considerably further in February, as business loans strengthened substantially and banks again made sizable additions to their holdings of securities. The money stock both narrowly and broadly defined expanded sharply in February. Short-term interest rates and mortgage rates have fallen further in recent weeks but yields on new issues of corporate and municipal bonds have risen considerably, in part as a result of the very heavy calendar of offerings. The over all balance of payments deficit in January and February was exceptionally large. Imports increased more rapidly than exports in January, and capital outflows have been stimulated
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.