October 19, 1971 FOMC Record of Policy Actions

FOMC minutes

third quarter M1 and M grew at annual rates of about 3 and 4.5 per cent, respectively, compared with rates of 11.5 and 12.5 per cent in 1/ the second quarter. Against the background of strong over-all demands for loans, banks raised offering rates on large-denomination CD's early in September, and the volume of such certificates outstanding rose con siderably during the month. Consequently, expansion in the bank credit proxy--daily-average member bank deposits, adjusted to include nondeposit sources--remained relatively rapid in September. funds from the proxy series rose at a rate of 9 per cent Over the third quarter per cent in the second quarter. Late in September compared with 6.5 some banks reduced offering rates on CD's. in the period since the System open market operations September 21 meeting of the Committee had been directed at encour aging somewhat easier conditions in the money market, in light of the continuing tendency of the monetary aggregates to fall short of the expected paths. The Federal funds rate, which had been fluctu ating around 5-1/2 per cent at the time of the September meeting, 5-1/4 per cent. In the 4 weeks ending October 13 edged down to around borrowings averaged about $380 million, compared with member bank the latter part of September the preceding 4 weeks. In $675 million in level in the last on the basis of the daily-average 1/ Calculated to that in the last month of the preced month of the quarter relative ing quarter.

the System purchased about $96 million of Federal agency securities. These were the first operations conducted pursuant to the Committee's 24, 1971, authorizing outright operations in agency action of August issues. suggested that if prevailing money market condi Staff analysis ions were maintained, growth in both M1 and M2 would remain relatively slow in October and November but would quicken over the course of the following several months. It was noted that the precise timing of the in monetary growth rates was particularly difficult to anticipate step-up because of the many prevailing uncertainties. However, the analysis suggested that over the fourth quarter M and M2 might expand at rates close to those recorded in the third, and that M might increase more the first quarter of 1972. Growth in the bank credit proxy rapidly in was expected to slow in the fourth quarter as a result of a reduction in U.S. Government deposits from their recent unusually high levels. It was noted in the Committee's discussion that the 90-day freeze on prices and wages had been effective thus far and that the announcement concerning the framework of the post-freeze stabilization program seemed to have been generally well received. However, the details of the program remained to be filled in, and there appeared to be wide spread uncertainty about how the program would operate and how effective it might prove to be. As to economic activity, the Committee agreed

that a strengthening was under way but some members voiced doubt that real GNP was rising as much in the current quarter as the staff pro jections suggested. Against this background the Committee decided that open market operations in the period until the next meeting should be directed at achieving moderate growth in monetary and credit aggregates over the months ahead, taking account of the forthcoming Treasury financing. The members agreed that while some easing of money market conditions in the coming period might be indicated by unfolding developments with respect to the aggregates, a marked easing designed to stimulate faster growth in the near term would not be warranted, particularly in light of the very high rates of monetary expansion earlier in the year. The members also agreed that a continued downdrift in market interest rates but that aggressive efforts to stimulate rate would be constructive, declines would risk both a resurgence of inflationary expectations and the development of conditions that could culminate in rising rates. directive was issued to following current economic policy The the Federal Reserve Bank of New York: at this meeting indicates that The information reviewed real output of goods and services expanded modestly in the third quarter and that unemployment remained substantial. However, there are indications of a strengthening in economic activity since the mid-August announcement of the Government's new economic program. The 90-day freeze has thus far effec tively limited increases in prices and wages, and the general framework of the post-freeze stabilization program has been established. The narrowly defined money stock, which had

grown rapidly through July, increased much less in August and declined in September. The broadly defined money stock increased slightly in September as inflows of consumer-type time and savings deposits to banks continued at the moderate August rate. However, the volume of large-denomination CD's outstanding rose sharply, and the rate of expansion in the relatively rapid. Market interest bank credit proxy remained in recent weeks and are appreciably below rates have declined levels. The U.S. foreign trade balance their mid-August in heavy deficit in August. Outflows of short-term remained capital, which had been massive in August, were much smaller market exchange rates for September. In recent weeks the in some foreign currencies against the dollar rose further, reserve holdings increased substan while foreign official In light of the foregoing developments, it is the tially. Committee to foster finan of the Federal Open Market policy cial conditions consistent with the aims of the new govern mental program, including sustainable real economic growth and increased employment, abatement of inflationary pres of reasonable equilibrium in the sure, and attainment country's balance of payments. the Committee seeks to To implement this policy, growth in monetary and credit aggregates achieve moderate ahead. System open market operations until over the months shall be conducted with a the next meeting of the Committee reserve and money market conditions view to achieving bank account of the forth that objective, taking consistent with coming Treasury financing. Votes for this action: Messrs. Burns, Hayes, Brimmer, Clay, Kimbrel, Maisel, Mayo, Mitchell, Morris, Robertson, and Sherrill. Votes against this action: None. and not voting: Mr. Daane. Absent