June 8, 1971 FOMC Record of Policy Actions: Full Text
RESERVE FEDERAL release press For immediate release September 7, 1971 The Board of Governors of the Federal Reserve System and the Federal Open Market Committee today released the attached record of policy actions taken by the Federal Open Market Committee at its meeting on June 8, 1971. Such records are made available approximately 90 days after the date of each meeting of the Committee and are published in the Federal Reserve Bulletin and the Board's Annual Report. descriptions of economic and financial conditions they The summary contain are based on the information that was available to the Committee at the time of the meeting, rather than on data as they may have been revised since then. Attachment
RECORD OF POLICY ACTIONS OF THE FEDERAL OPEN MARKET COMMITTEE Meeting held on June 8, 1971 1. Authority to effect transactions in System Account. official estimates, real output of goods According to revised annual rate of 7.1 per cent in the and services had increased at an more than preliminary estimates had indicated. first quarter, somewhat a consequence of the post-strike The size of the advance was primarily recovery of production in the automobile industry, and real GNP appeared to be rising at a slower pace in the second quarter. in the labor force exceeded growth in In May expansion employment, and the unemployment rate edged up further to 6.2 from Industrial production, which had increased only 6.1 per cent in April. tentatively estimated to have advanced a little in March and April, was According to weekly figures retail at a somewhat faster pace in May. In April private housing starts about unchanged in May. sales were remained close to the very high level they had reached in March. of industrial commodities, which had risen Wholesale prices quarter and then advanced sharply in at a moderate pace in the first in May. However, average prices April, increased considerably further and the over-all wholesale and foods declined in May, of farm products price index rose at a slower pace than in the first 4 months of the first quarter, the rate of advance in the year. In April, as in the
than earlier largely because of a decline consumer price index was less recently had continued to mortgage interest costs. Wage rates in increase at a rapid pace. Despite the upward revision in the official estimates of GNP quarter, staff projections continued to suggest that for the first activity would expand at a relatively moderate rate over the rest of further large increases in outlays by 1971. Prospects still favored State and local governments and in expenditures on residential con the advance in housing activity was expected to struction. As before, slow as the year progressed; but the projected rates of growth had been increased significantly in light of the recent strength of housing starts, the Large volume of outstanding mortgage commitments, and the continued heavy flows of savings funds to nonbank thrift institu tions. On the other hand, it now appeared from various kinds of evidence that business fixed investment outlays would expand little over the second half of the year. The latest Commerce-SEC survey, taken in May, revealed that since February businesses had revised downward their planned spending on new plant and equipment in 1971; and a recent survey by the National Industrial Conference Board in the first quarter manufacturers had reduced their indicated that and equipment--the sixth such reduction appropriations for new plant in the last seven quarters.
in consumer spending was still expected to The rate of increase moderate considerably in the second quarter--mainly because outlays on new cars were no longer rising sharply in the aftermath of the auto strike--and then to step up somewhat in the second half of the year. It was anticipated that growth in consumer spending during the second half would be sustained in part by the recently enacted increase in social security benefits, including retroactive payments scheduled for late June; by a possible military pay raise around midyear; and by some decline in the personal saving rate. The possibility of a steel strike at the end of July lent an element of uncertainty to the outlook for the rest of 1971. It appeared, however, that if the duration of any such strike were limited to 2 months or less, the effect on the average rate of growth in real GNP in the third and fourth quarters taken together would not be great. Following the small surplus of the first quarter, U.S. mer chandise trade moved into deficit in April as a result of a large increase in imports and an even larger decline in exports. The deficit in the over-all balance of payments, which had been extremely heavy earlier in the year, reached enormous proportions in late April and early May as a consequence of capital outflows in response to expectations of upward revaluations in the exchange rates of the German mark and some other European currencies. Since May 9--when it was announced that the mark and the Dutch guilder would be allowed
to float for the time being and that the Swiss franc and Austrian schilling were being revalued--therehad been some capital flows into Japanese yen and probably also into Euro-dollars. Although the dif ferentials between short-term interest rates in the United States and in major foreign countries had narrowed on balance in April and May, the spread between rates in the United States and those in the Euro dollar market had been widened by sharp increases in the latter in early May. In recent weeks the mark had fluctuated in a range up to 4.6 per cent above its par value, and the guilder also had traded beyond its normal margin above par. In the week before this meeting the German Federal Bank had reentered the exchange market, buying marks for dollars at rates above the previous ceiling. Interest rates on most types of domestic market securities, which had been under upward pressure since mid-March, rose sharply further during much of May. In the third week of the month--against the background of uncertainties in foreign exchange markets, expecta increased monetary restraint, and continuing heavy demands tions of on capital markets--yields on Treasury and corporate bonds reached new peaks for the year and municipal bond yields held at the highs they had attained in the previous week. Subsequently, however, a developed in bond markets and long-term bond yields declined rally the levels prevailing at the time of the May 11 Committee to or below
meeting. In contrast, short-term interest rates had advanced further recent weeks. For example, the market rate on 3-month on balance in Treasury bills, at about 4.45 per cent on the day before this meeting, was 60 basis points above the level of 4 weeks earlier. rates on conventional new-home mortgages declined Interest in earlier months of the year, and there were much less in April than of advances during May. Secondary-market yields on scattered reports federally insured mortgages turned up in late April and rose to a high in early June. Inflows of savings funds at nonbank thrift for the year slowed in May from the exceptionally high rates that had institutions prevailed earlier in the year, but they still were large. of consumer-type time and savings deposits at commer Inflows in May at about the same rate as in April, which cial banks continued quite high by historical standards but well below the first-quarter was pace. The volume of large-denomination CD's outstanding rose in May by much as it had declined in April, reflecting to a large extent about as in holdings of foreign official institutions. Banks an increase lifted their offering rates on such CD's during the month, and holdings also increased. Business loans outstanding of domestic depositors (including loans that had been sold to affiliates) expanded sharply little in April. While banks continued to add to after having changed their investments in securities other than U.S. Government issues, the rate of growth in such holdings slowed further.
Total bank credit, as measured by the adjusted proxy seriesdaily-average member bank deposits, adjusted to include funds from nondeposit sources--increased moderately from April to May, according to preliminary estimates. However, sharp increases were recorded for both the narrow and broader measures of the money stock--M1 (private demand deposits plus currency in circulation) and M (M1 plus commer cial bank time deposits other than large-denomination CD's). For all three aggregates, the advance in May was substantially greater than had been expected at the time of the previous meeting of the Committee. System open market operations had been directed at maintaining prevailing money market conditions in the period immediately following the May 11 meeting, in light of the Treasury financing then in process and the sensitive state of conditions in capital markets. Subsequently, as the atmosphere in capital markets improved and incoming data indi cated that the monetary aggregates were expanding significantly faster than had been expected, operations were directed at achieving a gradual firming of money market conditions. The Federal funds rate, which had fluctuated around 4-1/2 per cent early in the period, later moved into around 4-3/4 per cent. In the 4 weeks ending June 2 member a range bank borrowings averaged about $330 million, compared with about $150 million in the preceding 4 weeks. Staff analysis suggested that, if prevailing money market condi tions were maintained, M1 would rise rapidly in June although not so
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.