January 11, 1972 FOMC Record of Policy Actions

FOMC minutes

changes in U.S. Govern of recent and anticipated a consequence 2-week lag between member and allowing for the ment deposits, the background of required reserves. Against bank deposits and that an annual rate of growth analysis, a majority agreed this of roughly 20 to 25 per cent from December in total reserves be satisfactory, provided that it could be to January would without undue easing of money market conditions. attained The following 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 increased more rapidly in the fourth quarter than it had in the third quarter, but the unemployment rate remained high. In recent weeks wage and price developments have reflected some increases that had been deferred under the 90-day freeze. The narrowly defined money stock, which had not grown on balance from August to November, rose somewhat in December, while both the broadly defined money stock and the bank credit proxy increased sub stantially. Market interest rates, particularly short term rates, have declined in recent weeks. After inter national agreement was reached in December on new central exchange rates and on wider margins of permissible variation, market exchange rates for major foreign currencies against the dollar initially moved to levels a little above their new lower limits. The volume of capital reflows to the United States has been modest, however, and the underlying U.S. balance of payments remains in deficit. In light of the foregoing develop ments, 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 employ ment, abatement of inflationary pressures, and attain ment of reasonable equilibrium in the country's balance of payments.

To implement this policy, while taking account of international developments and the forthcoming Treasury financing, the Committee seeks to promote the degree of ease in bank reserve and money market conditions essential to greater growth in monetary aggregates over the months ahead. Votes for this action: Messrs. Burns, Clay, Daane, Maisel, Mayo, Mitchell, Morris, Robertson, and Sheehan. Votes against this action: Messrs. Hayes, Brimmer, and Kimbrel. Messrs. Hayes, Brimmer, and Kimbrel differed somewhat in their reasons for dissenting from this action. Mr. Hayes emphasis placed on total reserves as an oper considered the target to be an undesirable step; in his judgment, ating meaningful than other measures, such reserves were much less as the monetary and credit aggregates and interest rates, as an instrument for working toward the Committee's basic economic objectives. Also, he was reluctant to issue a directive that might involve a substantial further easing of money market con ditions, since the Committee had already moved rapidly in that direction and since it appeared to him that the economic outlook had improved somewhat in recent months. He was concerned about the risk that a further sharp decline in short-term interest rates might subject financial markets to unnecessary whipsawing and might tend to rekindle inflationary expectations. shared the majority's views concerning broad Mr. Brimmer of policy at this time, and he indicated that he would objectives

have voted favorably on the directive were it not for the decision to give special emphasis to total reserves as an operating target during coming weeks. In his judgment the Committee should have had more discussion of the implications of that decision, and in any case it should have postponed the decision until after it had held a contemplated meeting to be devoted primarily to discussion of its general procedures with respect to operating targets. Mr. Kimbrel favored supplying reserves at a rate that would accommodate orderly economic expansion. He voted against the directive because he thought it involved risks of depressing short-term interest rates to unsustainably low levels and of producing excessive rates of growth in the monetary aggregates in the future. 2. Ratification of earlier actions. Earlier in the course of this meeting the Committee, by unanimous vote, ratified the action taken by the members on December 20, 1971, adding the clause "while taking account of international developments" at the end of the final sentence of the current economic policy directive then in effect. Also, with Mr. Robertson dissenting, the Committee ratified the action taken by vote of a majority on December 23, 1971, to suspend, until close of business on the day of the next meeting, the lower limit (specified in paragraph 1(c) of the continuing

directive with respect to domestic open market operations) authority on interest rates on repurchase agreements arranged by the Federal nonbank dealers. The suspended pro Reserve Bank of New York with vision 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." The two actions in question had been taken for reasons set forth in the policy record for the meeting held on December 14, 1971. Mr. Robertson dissented from ratification of the second action for the same reasons that had led him to dissent from the action itself, as described in that policy record.