April 6, 1971 FOMC Record of Policy Actions

FOMC minutes

as a whole than it had in the first quarter. The analysis also suggested that expansion in time and savings deposits other than large-denomination CD's would slow substantially in coming months, in part because of the spreading practice among banks of reducing rates offered on such deposits. As a result, it was expected that growth in M would moderate in the second quarter from its excep tionally rapid first-quarter pace. In addition, it appeared likely that the volume of CD's outstanding would increase relatively little further over the quarter and that this development, along with slower expansion of other time deposits, would contribute to an expected moderation in the growth of the adjusted bank credit proxy. The Committee decided that open market operations at present should be directed at attaining temporarily some minor firming of money market conditions. Some members favored this course primarily for the purpose of achieving less rapid growth in the monetary aggre gates than the staff analysis indicated might eventuate in the second quarter under unchanged money market conditions. Others placed main emphasis on the objective of contributing, at least marginally, to a narrowing of the differentials between short-term interest rates in this country and abroad, in the interest of moderating capital out the Committee indicated that it flows. In the former connection, expansion in the monetary aggregates would like to see more moderate in the second quarter than had occurred in the first. As a step in

that direction it was felt that growth in M1 in April at a slower rate than in March and more in line with the first-quarter rate would be desirable, and various members expressed a desire for further slowing in M as the quarter progressed. It was recognized that the aggregates were likely to increase at faster rates in April than over the second quarter as a whole. The Committee agreed that money market conditions should be modified somewhat if the monetary and credit aggregates appeared to be deviating substantially from the growth paths desired. The Committee also decided that needs for reserves should continue to be met to the extent feasible by purchases of long-term Treasury securities, in the interest of promoting accommodative condi tions in long-term credit markets. It was noted that later in April even-keel considerations related to the forthcoming Treasury refunding would begin to place constraints on operations in coupon issues, as well as on operations directed at modifying money market conditions. 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 rose substantially in the first quarter primarily because of the resumption of higher automobile production, but that the unemployment rate remained high. More moderate growth in real GNP appears to be in prospect for the current quarter. Wage rates in most sectors are continuing to rise at a rapid pace. The rate of advance in consumer prices and in wholesale prices of industrial commodities appears to have moderated recently.

In March bank credit and the money stock both narrowly and broadly defined again expanded substantially, although the increases were less sharp than in February. Inflows of consumer-type time and savings funds to banks and nonbank thrift institutions reached unusually high levels in the first quarter as interest rates on competitive short-term market instruments declined considerably further. In recent weeks, however, key short-term interest rates have moved up somewhat on balance. Yields on new issues of corporate and municipal bonds declined during much of March despite a continuing heavy calendar of offerings, but most recently long-term market yields have also risen somewhat. The over-all balance of payments deficit in the first quarter was exceptionally large. The trade surplus for the first two months was very small, and capital outflows have been stimulated by wide short-term interest rate differentials. Despite recent reductions in the discount rates of several European central banks, these differentials remain wide. In light of the fore going 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, moderation of short-term capital outflows, and attainment of reasonable equilibrium in the country's balance of payments. To implement this policy, while taking account of the Treasury financing the terms of which are to be announced late in the month, System open market operations until the next meeting of the Committee shall be conducted with a view to attaining temporarily some minor firming in money market conditions, while continuing to meet some part of reserve needs through purchases of coupon issues in the interest of promoting accommodative conditions in long term credit markets; provided that money market conditions shall be modified if it appears that the monetary and credit aggregates are deviating significantly from the growth paths desired. Votes for this action: Messrs. Burns, Brimmer, Clay, Daane, Maisel, Mayo, Morris, Robertson, and Sherrill. Votes against this action: Messrs. Hayes and Kimbrel. Absent and not voting: Mr. Mitchell.

In dissenting, Messrs. Hayes and Kimbrel noted that they favored more firming of money market conditions than contemplated under this directive, although not so much firming as to cause serious repercus sions in bond markets. Mr. Hayes thought the directive gave inadequate recognition to the need for moving toward somewhat higher short-term interest rates in light of the international financial situation, and he also expressed concern about the risk of excessive growth in the money stock. Mr. Kimbrel believed that higher short-term interest rates would be desirable mainly to hold growth in the monetary and credit aggregates to a moderate pace in order to avoid a rekindling of inflationary expectations.