June 8, 1971 FOMC Record of Policy Actions

FOMC minutes

rapidly as in May; and that it would expand at an annual rate of about 12 per cent over the second quarter as a whole, following the 9 per cent increase of the first quarter.1/ Growth in M2 and the bank credit proxy , which had been at annual rates of 18 and 11 per cent, respectively in the first quarter, was expected to be somewhat more moderate in the second. As to the third quarter, tentative projections suggested that under prevailing money market conditions M1 would continue to grow rapidly over the quarter as a whole--at a rate of perhaps 10 or 11 per cent--but that the pace of the expansion would slow as the quarter progressed. The staff analysis also suggested that, if somewhat firmer money market conditions were attained during coming weeks, the effect on the growth rates of the aggregates in June and over the second quarter as a whole would be slight. It appeared, however, that the rates of increase in the third quarter might be reduced by about 1 percentage point. discussion considerable concern was expressed In the Committee's about the rapid growth of the monetary aggregates, and the members agreed that it would be desirable to seek somewhat slower growth over coming months than appeared likely to eventuate if prevailing money market conditions were maintained. At the same time, a number of daily-average level in the last 1/ Calculated on the basis of the of the quarter relative to that in the last month of the preceding month quarter.

members stressed the importance of moving gradually and cautiously in attaining somewhat firmer money market conditions, in order to minimize any resulting upward pressures on long-term interest rates. The Committee agreed that account should be taken of developments in capital markets in the conduct of open market operations. directive was issued to following current economic policy The the Federal Reserve Bank of New York: at this meeting suggests that The information reviewed real output of goods and services is expanding moderately in the current quarter, following the first-quarter surge that primarily reflected the resumption of higher automobile pro duction. The unemployment rate remained high in May. Wage rates in most sectors are continuing to rise at a rapid pace. In the first four months of 1971 the consumer price index increased at a slower pace than earlier, in considerable part because of a decline in mortgage interest rates; the rate of advance in wholesale prices of industrial commod ities, which had moderated in the first quarter, stepped up again in April and May. The money stock both narrowly and broadly defined expanded even more rapidly in May than in April but growth in the bank credit proxy remained moderate. Interest rates on most types of market securi ties rose sharply further during much of May, reflecting continuing uncertainties about domestic and international financial prospects; more recently rates on long-term have declined on balance, but mortgage rates securities have risen. The U.S. merchandise trade balance, which was in small surplus in the first quarter, worsened in The deficit in the over-all balance of payments April. has diminished since early May, when capital outflows were swollen by expectations of changes in foreign exchange rates, but it remains large. Differentials between short term interest rates in the United States and in major foreign countries narrowed on balance in April and May, but differentials between rates in the United States and in the Euro-dollar market recently have widened as rates in that market moved up sharply in early May, 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 pay ments. To implement this policy, the Committee seeks to moderate growth in monetary aggregates over the months ahead, taking account of developments in capital markets. System open market operations until the next meeting of the Committee shall be conducted with a view to achieving bank reserve and money market conditions consistent with those objectives. Votes for this action: Messrs. Burns, Brimmer, Clay, Daane, Kimbrel, Maisel, Mayo, Mitchell, Morris, Robertson, Sherrill, and Treiber. Votes against this action: None. Absent and not voting: Mr. Hayes. (Mr. Treiber voted as his alternate.) 2. Amendment to continuing authority directive. The Committee amended paragraph 2 of its continuing authority directive to the Federal Reserve Bank of New York with respect to domestic open market operations, to increase the dollar limit on Federal Reserve Bank holdings of short-term certificates of indebted ness purchased directly from the Treasury from $1 billion to $2 billion. With this change, paragraph 2 read as follows: The Federal Open Market Committee authorizes and directs the Federal Reserve Bank of New York, or, if the New York Reserve Bank is closed, any other Federal Reserve Bank, to purchase directly from the Treasury for its own account (with discretion, in cases where it seems desirable, to issue participations to one or more Federal Reserve Banks) such amounts of special short-term certificates of indebtedness as may be necessary from time to time for the temporary accom modation of the Treasury; provided that the rate

charged on such certificates shall be a rate 1/4 of 1 per cent below the discount rate of the Federal Reserve Bank of New York at the time of such pur chases, and provided further that the total amount of such certificates held at any one time by the Federal Reserve Banks shall not exceed $2 billion. Votes for this action: Messrs. Burns, Brimmer, Clay, Daane, Kimbrel, Maisel, Mayo, Mitchell, Morris, Robertson, Sherrill, and Treiber. Votes against this action: None. Absent and not voting: Mr. Hayes. (Mr. Treiber voted as his alternate.) This action was taken on recommendation of the System Account Manager, who advised that an expected sharp decline in the Treasury's cash balances in the period before the mid-June tax-payment date probably would necessitate temporary borrowing from the System, and that the Treasury's needs might well exceed the existing $1 billion limit on such borrowing. It was anticipated that the $1 billion limit would be restored at the next meeting of the Committee.