July 27, 1971 FOMC Record of Policy Actions

FOMC minutes

These inflows appeared to be slowing sharply further in July. However, expansion in total time and savings deposits at commercial banks was still relatively large in July, as a result of a substantial further increase in the volume of large-denomination CD's outstanding. Growth in the narrow measure of the money stock (private demand deposits plus currency in circulation, or M1) increased in the second quarter to an annual rate of about 11.5 per cent from 9 per cent in the first quarter.1/ Growth in the broader measure of money (M plus commercial bank time deposits other than large-denomination in the second quarter--at an annual rate CD's, or M ) also was rapid of about 12.5 per cent--but it was appreciably below the 18 per cent rate reached in the first quarter, reflecting the less rapid inflows time and savings deposits. Expansion in the of consumer-type bank credit proxy (daily-average member bank deposits, adjusted nondeposit sources) moderated to a adjusted to include funds from quarter from 11 per cent in cent annual rate in the second 6.5 per the first. data for July, M1 and the adjusted proxy According to partial their rates in the continuing to expand at approximately series were in M2, however, was slowing further. second quarter. Growth level in the last on the basis of the daily-average 1/ Calculated in the last month of the pre of the quarter relative to that month ceding quarter.

Committee, when data 29 meeting of the Following the June June suggested that the rise in the becoming available for late aggregates might be moderating, System open market operations monetary at maintaining money market conditions similar to had been directed shortly before that meeting. Later, however, data those prevailing that the aggregates--particularly M1-- were for early July revealed and somewhat firmer money market conditions again rising strongly, The effective rate on Federal funds, which had fluc were sought. tuated around 5-1/8 per cent in late June and early July, moved up of 5-1/2 per cent after mid-July. With the to the neighborhood funds rate well above the discount rate, member bank borrow Federal ings rose substantially during the period; for the 4 weeks ending borrowings averaged about $885 million compared with about July 21, $455 million in the preceding 4 weeks. Staff analysis suggested that if prevailing money market conditions were maintained, M and M would expand at annual rates of about 9 and 8 per cent, respectively, over the third quarter as a whole, and at substantially lower rates over the final 3 months of the year. On the other hand, expansion in bank credit was expected to step up temporarily in the third quarter, reflecting in part anticipated bank purchases of new securities to be offered by the to the analysis, if somewhat firmer money market Treasury. According attained in coming weeks, the expected rates of growth conditions were

in the monetary and credit aggregates would be reduced slightly in the third quarter and more significantly in the fourth. The Committee decided that the achievement of more moderate growth in the monetary aggregates over the months ahead remained the appropriate objective of System open market operations. At the same time, it was noted that operations during the period until the next meeting would be influenced by even-keel considerations related to the current Treasury financing. Also, as at other recent meetings, the members agreed that account should be taken of developments in capital markets in the conduct of operations. In these circumstances, the Committee decided that the Manager should be given more than the usual amount of discretion to make operating decisions in light of actual market developments during the coming period. The following current economic policy directive was issued to the Federal Reserve Bank of New York: The information reviewed at this meeting suggests that moderate expansion in real output of goods and services is continuing and that unemployment remains substantial. 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 the second quarter inflows of consumer-type time and savings funds at banks and nonbank thrift institutions were large, but below the unusually rapid first-quarter pace. Growth in bank credit and the broadly defined money stock slowed in the second quarter, but the rate of expansion in the narrowly defined money stock increased. In July, according to par tial data, it appears that both bank credit and the narrowly defined money stock are growing at rates close to those of

the second quarter, but that expansion in broadly defined money is slowing. While interest rates on most types of long-term market securities have changed relatively little on balance in recent weeks, short-term interest rates have risen further. In mid-July Federal Reserve discount rates were increased by one-quarter of a percentage point to 5 per cent. The deficit in the U.S. balance of payments remained extraordinarily large in the second quarter, mainly reflect ing capital outflows related to expectations of shifts in foreign exchange rates and the development of a substantial in the merchandise trade balance. In light of the deficit foregoing developments, it is the policy of the Federal Open Market Committee to foster financial conditions con ducive to 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, taking account of the current Treasury financing and of developments in capital markets, the Committee seeks to achieve more moderate growth in monetary aggregates over the months ahead. 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, Hayes, Brimmer, Clay, Daane, Kimbrel, Maisel, Mayo, Mitchell, Morris, Robertson, and Sherrill. Votes against this action: None.