December 14, 1971 FOMC Record of Policy Actions

FOMC minutes

the Committee agreed that At the conclusion of the discussion at promoting the degree of operations should be directed open market conditions essential to greater ease in bank reserve and money market over the months ahead. The following growth in monetary aggregates current economic policy directive was issued to the Federal Reserve Bank of New York: The information reviewed at this meeting suggests that real output of goods and services is increasing more rapidly in the current quarter than it had in the third quarter, but the unemployment rate remains high. Increases in prices and wages were effectively limited by the 90-day freeze, which ended in mid-November. Since then some wage and price increases have occurred, but other increases requested have or not approved by the Pay Board and the Price been cut back Commission. The narrowly defined money stock changed little in November and has not grown on balance since August. Inflows of consumer-type time and savings deposits to banks remained rapid in November and the broadly defined money stock continued to increase moderately. Expansion in the bank credit proxy stepped up as U.S. Government deposits and nondeposit liabilities increased on average. After advancing in the latter part of November, most market inter est rates have been declining recently, and discount rates at four Federal Reserve Banks were reduced by an additional one-quarter of a percentage point. The U.S. foreign trade balance was heavily in deficit in October. In recent weeks net outflows of short-term capital apparently have been substantial, market exchange rates for foreign currencies against the dollar on average have risen further, and official reserve holdings of some countries have increased considerably. In light of the foregoing developments, it is the policy of the Federal Open Market Committee to foster financial conditions consistent with the aims of the new governmental 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 promote the degree of ease in bank reserve and money market conditions essential to greater growth in mon etary aggregates over the months ahead.

Votes for this action: Messrs. Burns, Hayes, Brimmer, Clay, Daane, Kimbrel, Maisel, Mayo, Mitchell, Morris, and Robertson. Votes against this action: None. on December 20, 1971, Committee Subsequent to this meeting, economic policy direc to amend this current members voted unanimously "while taking account of international tive by adding the clause sentence. As amended, that at the end of the final developments" sentence read as follows: this policy, the Committee seeks tc pro To implement degree of ease in bank reserve and money market mote the to greater growth in monetary aggre conditions essential the months ahead, while taking account of inter gates over national developments. action was taken following the announcement that agree This ment regarding exchange rates and related matters had been reached on December 18 at the Group of Ten meeting in Washington. The Manager had advised that, if the agreement was followed by substan to the United States, considerable flexibility tial reflows of funds in open market operations might be required to cope with the result ing churning in domestic financial markets. The members decided that the directive should be amended to affirm the Committee's intention to authorize the operations that might be needed. 2. Action with respect to continuing authority directive. On December 23, 1971, a majority of Committee members voted to suspend, until close of business on the day of the next meeting of the

Committee, the lower limit (set forth in paragraph 1(c) of the con tinuing authority directive with respect to domestic open market operations) on interest rates on repurchase agreements arranged by the Federal Reserve Bank of New York with nonbank dealers. The suspended provision specified that such repurchase agreements were to be made "at rates not less than (1) the discount rate of the Federal Reserve Bank of New York at the time such agreement is entered into, or (2) the average issuing rate on the most recent issue of 3-month Treasury bills, whichever is the lower." This action was taken after the Manager had advised that occasions might arise in the next few weeks when it would be desir able to make fairly extensive use of repurchase agreements in order to supply reserves on a flexible temporary basis, in anticipation of possible large-scale sales of U.S. Treasury bills by foreign central banks; and that in light of prevailing costs of funds to dealers it was doubtful that the New York Reserve Bank would be able to arrange repurchase agreements in any significant volume under existing rate limitations. It was understood that the authority to make repurchase agreements at rates lower than those authorized previously would be used sparingly, and only as deemed necessary to accomplish Committee objectives; and that rates below 3-5/8 per cent would not be employed without prior notification to the Committee.

Votes for this action: Messrs. Brimmer, Clay, Daane, Kimbrel, Maisel, Mayo, Mitchell, Morris, and Treiber. Vote against this action: Mr. Robertson. Unavailable and not voting: Messrs. Burns and Hayes. (Mr. Treiber voted as alternate for Mr. Hayes.) Mr. Robertson dissented from this action because he believed that the desired injection of funds into the market by the Federal Reserve should be through the outright purchase of U.S. Government securities rather than through repurchase transactions which, in his judgment, actually constituted low-rate loans to securities dealers. He indicated that he was reluctant to increase the profits of dealers by providing them with low-cost Federal Reserve funds merely to avoid temporarily raising the price (lowering the yield) of Treasury secu rities by purchasing them outright.