May 11, 1971 FOMC Record of Policy Actions

FOMC minutes

in the first quarter. The analysis suggested that, if money market conditions were somewhat firmer, expansion in M1 would slow gradually during coming months; but that--in part because of the sharp increase that had already occurred in April and in part because of lags in responses to changed money market conditions--M would still grow at a rate of about 8.5 per cent over the second quarter as a whole. It appeared that a sharp firming of money market conditions would be required to slow expansion in M1, sufficiently during the rest of the moderation of growth over the second quarter to achieve a substantial quarter as a whole. members expressed concern both In the discussion Committee high rates of growth in the monetary aggregates and about the recent increases that had occurred in long-term interest about the marked was widely held among members that expansion in M1 rates. The view pace for an extended period would be inconsistent at the first-quarter in the rate of inflation. Also widely held, with an orderly reduction in long-term rates at this was the view that sharp increases however, for spending, particularly might have adverse consequences juncture and State and local government sectors, in the residential construction the economic recovery under way. and might thus pose a threat to were some rather marked differences in the Although there on these two types of con individual members placed stress that that it would not be desirable the Committee agreed siderations, market conditions that either to revert to the money at present

had prevailed until the end of April or to seek the amount of firming that evidently would be required to achieve a substantial slowing of growth in the aggregates over the second quarter. Instead, the Committee decided that in the early part of the coming period, when open market operations in any case would be condi tioned by even-keel considerations related to the current Treasury refunding, the objective should be to maintain the money market conditions currently prevailing. Similar conditions were to be sought later if the monetary aggregates appeared to be on paths con sistent with gradual moderation of growth during the second quarter. If the aggregates appeared to be deviating significantly from such paths, the objective was to be modified accordinglyexcept that any firming of money market conditions directed at slowing excessive growth was to be carried out cautiously, with a view to avoiding undue reactions in capital markets. The Committee agreed that, in light of the uncertain ties prevailing in domestic financial markets and in foreign exchange markets, the Account Manager should have more than the usual degree of discretion in making day-to-day operating decisions. However, the Committee also agreed that it would be advisable at present for the System to engage in purchases of longer-term Government securities on a smaller scale than the process of meeting needs for reserves. in recent months in

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, and more moderate growth appears to be in prospect for the current quarter. The unemployment rate remained high in April. 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 moderated in the first quarter, but the rise in industrial prices stepped up again in April. The money stock both narrowly and broadly defined expanded substan tially further in April but growth in bank credit slowed. Inflows of consumer-type time and savings funds to banks moderated, partly as a result of reductions in the interest rates offered by banks, but flows to nonbank thrift institutions continued heavy. Interest rates on most types of short- and long-term market securities rose sharply in April and early May, reflecting uncertainties about domestic, and more recently international, financial prospects. The over-all balance of payments deficit in the first four months of 1971 was exceptionally large, in great part reflecting short-term capital outflows. Recently, after further large international flows of funds, several European central banks suspended sales of their currencies for dollars; subsequently, announcements were made that the German mark and Dutch guilder would be permitted to float for the time being, and that the Swiss franc and Austrian schilling were being revalued. 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 infla tion, moderation of short-term capital outflows, and attain ment of reasonable equilibrium in the country's balance of payments. policy, the Committee seeks to moderate To implement this growth in monetary and credit aggregates over the months ahead, taking account of the current Treasury financing, developments in capital markets, and uncertainties in foreign exchange markets. System open market operations until the next meeting of the Committee shall be aimed initially at maintaining

currently prevailing money market conditions, and thereafter conducted with a view to maintaining bank reserves and money market conditions consistent with the above-cited objectives. Votes for this action: Messrs. Burns, Hayes, Brimmer, Clay, Daane, Kimbrel, Maisel, Mayo, Mitchell, Morris, Robertson, and Sherrill. Votes against this action: None.