September 21, 1971 FOMC Record of Policy Actions

FOMC minutes

consumer-type time and savings deposits remained near the reduced rate of that month. were recorded in August for both Relatively low growth rates the narrow and the broader measures of the money stock--M1 (private plus currency in circulation) and M2 (M1 plus commercial demand deposits bank time deposits other than large-denomination CD's). At the time of the previous meeting of the Committee it had been expected that growth in M would slow from the average annual rate of 10 per cent recorded in the first 7 months of the year, in part in a lagged response to earlier increases in short-term interest rates, and that M would at about the moderate rate that had emerged in continue to expand measures, however, actual growth rates in August were July. For both lower than had been anticipated--partly for reasons related to the flows of funds into foreign currencies. Growth in the adjusted bank credit proxy--daily-average member bank deposits, adjusted to include funds from nondeposit sources--was faster than in July mainly because of the sharp increase in Government deposits. System open market operations in the period immediately follow ing the August 24 meeting had been directed at maintaining prevailing money market conditions. Later, when data becoming available indicated that the monetary aggregates were growing more slowly than had been expected, slightly easier money market conditions were sought. Opera tions were complicated in early September by persistent money market

pressures partly related to international flows of funds, and the Federal funds rate--which had been fluctuating between 5-1/2 and 5-5/8 per cent in the period before the preceding meeting--rose to 5-3/4 per cent for a time. Subsequently, however, the funds rate moved down to around 5-1/2 per cent. In the 4 weeks ended September 15, member bank borrowings averaged $675 million, compared with $770 million in the preceding 4 weeks. As at the previous meeting, staff analysis suggested that the effects of the new economic program on demands for money, together with lagged reactions to earlier increases in short-term interest rates, to produce much lower average rates of growth in the should tend monetary aggregates over the rest of 1971 than had been recorded earlier in the year. Including rough estimates for September, it appeared that M1 and M would expand over the third quarter at annual rates substantially below those of 11.5 and 12.5 per cent recorded in the 1/ second quarter. According to the analysis, if prevailing money market conditions were maintained growth in M would slow further in the fourth quarter. It was noted in the Committee's discussion that an appropriate mix of fiscal and monetary policies would be required if the Government's new economic program was to be successful. A number of members stressed on the basis of the daily-average level in the last 1/ Calculated month of the quarter relative to that in the last month of the preced ing quarter.

of determining the proper longer-run stance of monetary the difficulties policy at this juncture in light of the existing uncertainties about the nature of the fiscal measures that would be enacted, the general out lines of the post-freeze stabilization effort, and the manner in which the economy would respond to the new program. The Committee decided that open market operations in the period immediately ahead should be directed at achieving moderate growth in the monetary and credit aggregates, while taking account of develop ments in capital markets. Although it was recognized that the pursuit of these objectives might involve operations designed to attain some what easier money market and reserve conditions, the members agreed that aggressive easing operations should be avoided in order to risk of rekindling inflationary expectations. Also, the minimize the sentiment was widespread among members that, in view of the unusually rapid growth in M through July, relatively low rates of expansion for a few months would not be inconsistent with the Committee's general objectives for the monetary aggregates. The following current economic policy directive was issued to the Federal Reserve Bank of New York: The information reviewed at this meeting suggests that the Government's new economic program has reduced inflation ary expectations and has improved prospects for higher rates of growth in real economic activity and employment. In the current quarter, however, real output of goods and services is expanding modestly and unemployment remains substantial. Prior to the imposition of the 90-day freeze, prices and

wages were rising rapidly on average. In August inflows of consumer-type time and savings funds to nonbank thrift insti tutions moderated and inflows to banks remained at a reduced rate. Growth in the narrowly defined money stock, which had been rapid through July, slowed sharply in August; and growth in broadly defined money continued to slacken. However, the rate of expansion in the bank credit proxy stepped up, mainly reflecting a marked rise in U.S. Government deposits. Market interest rates, which declined sharply following the announce ment of the new program, have since fluctuated irregularly. The U.S. balance of payments continues to be in a position of substantial basic deficit. Speculative capital outflows have diminished recently. Most major foreign currencies are trad ing in the exchange markets at rates against the dollar a few per cent higher than on August 13. Negotiations have begun on additional measures to reduce payments imbalances and on other improvements in the international monetary system. In light of the foregoing developments, it is the policy of the Federal Open Market Committee to foster finan cial conditions consistent with the aims of the new govern mental program, including sustainable real economic growth and increased employment, abatement of inflationary pressures, and attainment of reasonable equilibrium in the country's balance of payments. To implement this policy, the Committee seeks to achieve moderate growth in monetary and credit aggregates, 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 that objective. Votes for this action: Messrs. Burns, Hayes, Brimmer, Clay, Daane, Kimbrel, Maisel, Mayo, Mitchell, Morris, Robertson, and Sherrill. Votes against this action: None.