June 29, 1971 FOMC Record of Policy Actions

FOMC minutes

per cent. In che 3 weeks ending June 23 member bank borrowings averaged about $390 million, compared with about $330 million in che preceding 4 weeks. Staff analysis suggested that, if conditions in the money market were similar to those that had prevailed on the average during the period since the previous meeting, M1 would grow slightly less in the third quarter than it had in the second, and growth in M also would slow somewhat. In contrast, the adjusted bank credit proxy was expected to expand more rapidly in the third quarter than it had in the second. According to the analysis, if money market conditions were somewhat firmer, it was likely that both M and M would expand at annual rates in the neighborhood of 9 per cent over the third quarter, but that growth in these aggregates would recede to quite modest proportions by the final quarter of the year. In the Committee's discussion considerable concern was expressed about the rapid growth in the monetary aggregates, partic ularly in light of the persistence of inflationary pressures and expectations. At the same time, concern was expressed about the recent upward pressures on interest rates, in view of the dependence of the current economic recovery on continued expansion in such interest-sensitive sectors of the economy as residential construction. While the members agreed that an unduly sharp firming of should be avoided because of the risk of money market conditions undesired repercussions on market interest rates, the Committee

decided that open market operations in the coming period should be directed at achieving more moderate growth in monetary aggregates over the months ahead. As at the preceding meeting, it was agreed that account should be taken of developments in capital markets in the conduct of operations. 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 is expanding moderately in the current quarter and that the unem ployment rate has remained high. Wage rates in most sectors are continuing to rise at a rapid pace. The rate of advance in both consumer prices and wholesale prices of industrial commodities has stepped up again recently after moderating earlier in the year. In June, according to tentative estimates, the money stock both narrowly and broadly defined is still grow ing rapidly on average, although less than in May; growth in the bank credit proxy remains below the first-quarter rate. Interest rates on most types of market securities have increased on balance in recent weeks. The market exchange rate for the German mark has advanced, and a substantial flow of funds from Germany to other markets has occurred in recent weeks. In consequence of a partial reversal of the earlier speculative outflows of short-term capital from the United States and of an increase in Euro-dollar bor rowings of U.S. banks, there has been a surplus in the U.S. payments balance on the official settlements basis in this period. The U.S. merchandise trade balance, which had been in small surplus in the first quarter, was in deficit in April and May. 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 inflation, moderation of short-term capital outflows, and attainment of reasonable equi librium in the country's balance of payments.

To implement this policy, the Committee seeks to achieve more 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 con ducted with a view to achieving bank reserve and money market conditions consistent with those objectives. Votes for this action: Messrs. Burns, Hayes, Brimmer, Clay, Daane, Maisel, Mayo, Mitchell, Morris, Robertson, Sherrill, and Coldwell. Votes against this action; None. Absent and not voting: Mr. Kimbrel. (Mr. Coldwell 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 reduce the dollar limit on Federal Reserve Bank holdings of short-term certificates of indebtedness purchased directly from the Treasury from $2 billion to $1 billion. Votes for this action: Messrs. Burns, Hayes, Brimmer, Clay, Daane, Maisel, Mayo, Mitchell, Morris, Robertson, Sherrill, and Coldwell. Votes against this action: None. Absent and not voting: Mr. Kimbrel. (Mr. Coldwell voted as his alternate.) The dollar limit in question had been increased to $2 billion at the preceding meeting of the Committee, after the System Account Manager advised that an expected sharp decline in the Treasury's cash balance in the period before the mid-June tax payment date might necessitate temporary borrowing by the Treasury from the System in

an amount exceeding the then-existing $1 billion limit. It had been anticipated at the time of that action that the $1 billion limit would be restored at today's meeting.