November 16, 1971 FOMC Record of Policy Actions

FOMC minutes

At commercial banks, business loans outstanding rose relatively little during October. Major banks reduced their prime lending rates from 6 to 5-3/4 per cent late in the month and then to 5-1/2 per cent in early November, and some banks announced that they were adopting a "floating" prime rate. Real estate and consumer loans continued to expand rapidly in October, and banks again reduced their holdings of U.S. Government securities and increased their holdings of other securities. According to preliminary estimates, the narrowly defined money stock (private demand deposits plus currency in circulation, or M ) declined further in October. The broader measure of money (M1 plus commercial bank time deposits other than large-denomination CD's, or M ) increased as a result of a marked expansion of inflows of consumer type time and savings deposits, but the rise in M was somewhat smaller than had been expected. Growth in the bank credit proxy--daily-average member bank deposits, adjusted to include funds from nondeposit sourcesslowed substantially, as U.S. Government deposits declined and the volume of large-denomination CD's outstanding increased less than in September. Offering rates on such CD's had been reduced late in September and they were cut further during October. System open market operations in the period since the October 19 meeting of the Committee had been directed at achieving a gradual easing of money market conditions in light of the con tinuing tendency of the monetary aggregates to fall below expected paths. The Federal funds rate declined from about 5-1/4 per cent

shortly before the preceding meeting to about 4-3/4 per cent. In the 4 weeks ending November 10 member bank borrowings averaged about $270 million, compared with about $380 million in the preceding 4 weeks. Staff analysis suggested that the effects of two factors that had been tending in recent months to hold down demands for moneymoderation of inflationary expectations as a result of the new economic program, and lagged reactions to the high short-term interest rates of late spring and early summer--probably had about run their course. According to the analysis, if money market conditions were similar to those prevailing or slightly easier, M1 would begin to grow again in December and would expand faster over the first quarter--at a pace more nearly in line than recently with growing transactions demands. For M2 , prospects favored a fourth-quarter rate of growth somewhat above the 4.5 per cent annual rate recorded in the third further step-up in growth of M was anticipated quarter. Only a small in early 1972, however, because inflows of consumer-type time and savings deposits were expected to slow as consumer spending expanded. As to the bank credit proxy, it appeared likely that the rise over the fourth quarter would be held to modest proportions by a decline in U.S. Government deposits from their high September level. 1/ Calculated on the basis of the daily-average level in the last month of the quarter relative to that of the preceding quarter.

In the Committee's discussion it was noted that business and consumer confidence was being adversely affected by widespread uncertainties connected with the transition from the 90-day freeze to the post-freeze stabilization program and with the unsettled international monetary situation. The view was expressed that it would be particularly unfortunate in this climate for the recent weak perform ance of the monetary aggregates to persist for long, since the lack of significant growth in the aggregates could become an important independent source of uncertainty. At the same time, some members cautioned against unduly aggressive action to stimulate monetary expansion. The Committee decided that open market operations in the coming period should be directed at promoting somewhat greater growth in monetary and credit aggregates over the months ahead, recognizing that pursuit of that objective might require appreciably easier money market conditions. The following current economic policy directive was issued to the Federal Reserve Bank of New York: The information reviewed at this meeting indicates that real output of goods and services expanded modestly in the third quarter, but greater growth appears in pros pect for the current quarter. Although the unemployment rate has declined recently, it remains high. Available data indicate that the 90-day freeze effectively limited increases in prices and wages, and basic policies for the post-freeze stabilization program have been announced. The narrowly defined money stock declined further in October, but inflows of consumer-type time and savings deposits to banks expanded considerably and the broadly defined money stock increased moderately. Expansion in the bank credit proxy slowed substantially as the volume of large-denomination CD's outstanding rose less than in September and as U.S. Government deposits were reduced.

Interest rates on both short- and long-term market securities have continued to decline in recent weeks and Federal Reserve discount rates were reduced by one-quarter of a percentage point to 4-3/4 per cent. The U.S. foreign trade balance was raised in September by a sharp acceleration of export shipments in advance of an East Coast port strike. In recent weeks net outflows of short-term capital apparently have dimin ished further, market exchange rates for foreign cur rencies against the dollar on average have not changed much, and foreign official reserve holdings have increased less than they did in September. In light of the foregoing developments, it is the policy of the Federal Open Market Committee to foster financial con ditions consistent with the aims of the new governmental program, including sustainable real economic growth and increased employment, abatement of inflationary pres sures, and attainment of reasonable equilibrium in the country's balance of payments. To implement this policy, the Committee seeks to promote somewhat greater growth in monetary and credit 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 that objective. Votes for this action: Messrs. Burns, Hayes, Brimmer, Clay, Daane, Kimbrel, Maisel, Mayo, Mitchell, Morris and Robertson. Votes against this action: None.