October 19, 1971 FOMC Record of Policy Actions: Full Text
FEDERAL RESERVE press release release January 17, 1972 For immediate Governors of the Federal Reserve System and The Board of the Federal Open Market Committee today released the attached of policy actions taken by the Federal Open Market Committee record at its meeting on October 19, 1971. Such records are made available approximately 90 days the date of each meeting of the Committee and are published after in the Federal Reserve Bulletin and the Board's Annual Report. The summary descriptions of economic and financial conditions based on the information that was available to they contain are the time of the meeting, rather than on data as the Committee at may have been revised since then. they Attachment
RECORD OF POLICY ACTIONS FEDERAL OPEN MARKET COMMITTEE OF THE Meeting held on October 19, 1971 Authority to effect transactions in System Account. that the increase at this meeting indicated Information reviewed in the third quarter was of only in real output of goods and services in part because of reductions in steel inventories modest proportions, of a steel strike was eliminated by the August 1 after the threat However, there were indications of agreement on a new labor contract. activity following the mid-August announce a strengthening in economic ment of the Government's new economic program. Staff projections considerably faster in the current suggested that real GNP would grow half of 1972 than it had in the third quarter, quarter and in the first and that the rise in prices would be appreciably slower. further, mainly because of In September retail sales expanded the sharp rise in purchases of new domestic automobiles that had begun in mid-August. Retail sales were considerably higher in the third quarter as a whole than in the second quarter. Industrial production, after having declined in July and August, increased somewhat in Septem ber, chiefly as a result of partial recovery in output of steel. Total nonfarm payroll employment rose appreciably, in part because of wide spread gains among manufacturing industries, and the unemployment rate
despite a sizable increase from 6.1 per cent in August edged down to 6.0 of private housing Although the number civilian labor force. in the third quarter was a record the total for the starts fell in September, high. industrial commodities declined slightly Wholesale prices of monthly decrease in several to mid-September--the first from mid-August among classes of industrial commodities years. The number of increases sharply, reflecting the 90-day freeze, and prices of motor dropped were reduced as the 1971 model-year came to an end. The rise vehicles apparently also slowed significantly following imposition in wage rates general framework of the post-freeze stabilization of the freeze. The program, including provision for a Price Commission and a Pay Board, was described in an address by the President on October 7 and in sub sequent statements by administration officials. The latest staff projections for the fourth quarter contem plated a larger increase in Federal expenditures than those prepared 4 weeks earlier, mainly because it was now assumed that the military pay raise associated with the development of a volunteer armed force would be effective in mid-November rather than on January 1. Expansion in residential construction outlays was expected to be substantial, although well below the unexpectedly large gain in the third quarter. For other sectors, projections were about the same as 4 weeks earlier. Thus, it was anticipated that the real volume of consumer spending would increase appreciably; that State and local government expenditures
at a substantial rate; that business capital would continue to expand and that inventory investment would rise. outlays would change little; real GNP would continue to grow in the The expectation that the rapid rate anticipated for the fourth first half of 1972 at about part on the assumption that tax measures along the quarter was based in recently approved by the House of Representatives would lines of those law. It was expected that consumer expenditures would be enacted into as a result of advances in disposable income rise substantially further that reflected cuts in personal income taxes as well as increases in employment; and it appeared likely that a renewed expansion in business outlays for plant and equipment would be stimulated by the upswing in production, along with the investment tax credit. Also, business inventory investment was projected to increase considerably in response to the rise in final sales and the need for the auto industry to replenish depleted stocks. exports by a substantial margin U.S. imports again exceeded in August, and in July and August together the trade deficit remained at about the second-quarter rate. Contributing to the July-August deficit was an acceleration in imports in anticipation of the East Coast port strike, which began on October 1. Outflows of short-term smaller than the massive outflows in capital in September were much August. In foreign exchange markets, rates for most major currencies had risen further against the dollar in recent weeks. Some foreign
central banks acquired substantial amounts of dollars in September and early October in the process of limiting appreciation of their currencies. Interest rates on market securities had declined in recent weeks to levels somewhat below those to which they had dropped imme diately after announcement of the new economic program in mid-August. Among the factors contributing to the declines were the developments with respect to the post-freeze stabilization program and growing expecta tions of a more stimulative monetary policy in the light of recent slackening in the expansion of the monetary aggregates and moderate easing of money market conditions. Although the volume of new issues of corporate bonds rose substantially from August to September and of State and local government issues also increased, it appeared that that total offerings in those sectors would decline somewhat in October and November. was influenced not only by the The market for Treasury bills market conditions but also by the continuing demands easing of money the part of foreign central banks. On the day before for bills on on 3-month bills was 4.45 per cent, about this meeting the market rate points lower than 4 weeks earlier and 70 basis points lower 25 basis than on August 13. to announce on October 27 the terms The Treasury was expected on which it would refund securities maturing on November 15, including
Market participants expected billion held by the public. about $3.8 some issues and to offer some longer-term the Treasury to pre-refund authority to sell bonds with making further use of the limited issues, a yield above 4-1/4 per cent. Contract interest rates on conventional new-home mortgages, over the preceding 4 months, were unchanged in which had risen sensitive secondary market for feder September. Yields in the more edged down for the second consecutive month. ally insured mortgages savings to nonbank thrift institutions increased in Inflows of but for the third quarter as a whole they were well below September, the extraordinary rates in the first two quarters of the year. banks, business loans rose moderately in At commercial September following the very large increase that had occurred in with developments in foreign exchange markets. August in connection Other categories of loans--especially real estate, consumer, and appreciably. Banks acquired sizable amounts security loans--expanded of short-term municipal securities but reduced their holdings of U.S. Government obligations for the third consecutive month. The narrowly defined money stock (private demand deposits plus currency in circulation, or M1) declined in September, after having increased at a sharply reduced rate in August. Inflows of consumer-type time and savings deposits remained relatively small, and the broadly stock (M1 plus commercial bank time deposits other than defined money CD's, or M2) increased only slightly. Over the large-denomination
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