January 11, 1972 FOMC Record of Policy Actions: Full Text
RESERVE FEDERAL release press For immediate release April 10, 1972 The Board of Governors of the Federal Reserve System and the Federal Open Market Committee today released the attached record of policy actions taken by the Federal Open Market Committee at its meeting on January 11, 1972. Such records are made available approximately 90 days after the date of each meeting of the Committee and are published in the Federal Reserve Bulletin and the Board's Annual Report. The summary descriptions of economic and financial conditions they contain are based on the information that was available to the Committee at the time of the meeting, rather than on data as they may have been revised since then. Attachment
RECORD OF POLICY ACTIONS OF THE FEDERAL OPEN MARKET COMMITTEE Meeting held on January 11, 1972 1. Current Economic Policy Directive. reviewed at this meeting suggested that The information the rate of growth in real output of goods and services (real the fourth quarter of had stepped up in gross national product) prices, which had been subject to Government con 1971 and that risen relatively little from the trols since mid-August, had Staff projections suggested that third to the fourth quarter. pace of growth in real GNP would continue in the the faster first half of 1972. payroll employment and industrial In December nonfarm production rose further, although to a large extent the gains were attributable to post-strike recovery in coal mining. The rate edged up to 6.1 from 6.0 per cent in November. unemployment Retail sales fell in December, according to the advance report, because sales of new cars dropped from the high rates in part prevailing during the first phase of the new economic program. The rates of increase in prices and wages, which had slowed sharply during the freeze in effect from mid-August to picked up afterward. Under the post-freeze program, mid-November, in wages--both previously scheduled and newly some increases
allowed to go into effect, some of the many negotiated--were for price increases were approved, and a pending applications general increase in residential rents was authorized. The latest staff projections for the first half of to those of 4 weeks earlier, although the 1972 were similar now expected in consumer spending was not so rapid. expansion in Federal outlays in the first quarter Also, the projected rise as a consequence of a recently enacted Govern had been increased in early January. It was still antic ment pay raise effective ipated that business capital outlays, residential construction, local government expenditures would grow at sub and State and and that business inventory investment would stantial rates increase further. and central bank Governors of the The Finance Ministers at the Smithsonian Institution in Washington, Group of Ten, meeting December 18 regarding revaluations of foreign reached agreement on dollar and a widening of permissible margins currencies against the for exchange rate fluctuations. Following announcement of the market exchange rates for major foreign currencies agreement, dollar generally moved up to levels a little above against the limits. Outflows of short-term capital from their new lower the United States--which had been very large during much of 1971- to a halt, and some funds flowed back before the year-end. came However, the U.S. basic balance of payments remained in deficit and foreign official reserves declined only a little.
for business loans at commercial banks remained Demands banks reduced their prime rates weak in December, and most large end of that month. Real estate and consumer loans around the pace in December and banks sharply continued to expand at a rapid increased their holdings of securities. narrowly defined money stock (private demand deposits The or M), which had not grown on bal plus currency in circulation, rose somewhat from November to ance from August to November, December. Over the fourth quarter M1 increased at an annual rate of about 1 per cent, after rising at rates of about 3.5 per cent over the third quarter and 10 per cent over the first half of 1/ 1971. Inflows of savings to commercial banks increased in December and the money stock more broadly defined (M1 plus com mercial bank time deposits other than large-denomination CD's, or M2) rose at a substantial rate. Growth in the bank credit proxy--daily-average member bank deposits, adjusted to include funds from nondeposit sources--also was substantial as the average CD's outstanding and U.S. Govern volume of both large-denomination At the same time, banks reduced their out ment deposits expanded. borrowings of Euro-dollars by large amounts. Over the standing the proxy series increased at annual rates fourth quarter M and of about 8 and 9.5 per cent, respectively. calculated on the basis of the daily 1/ Growth rates cited are of the period relative to that of average level in the last month the preceding period.
System open market operations in the period since the last of the Committee had been complicated by year-end churning meeting by uncertainties regarding the likely in the money market and reflows of short-term capital following the Smithsonian volume of agreement. It was expected that if the reflows were large they would be accompanied by heavy foreign central bank sales of Treasury securities. In order to leave scope for future outright to moderate the market impact of such purchases of securities sales, the System made extensive use of repurchase agreements in the latter part of December to supply reserves on a temporary basis. In fact, however, reflows during the period were of quite modest dimensions. Over the period as a whole System operations had been directed at fostering a substantial easing in money market con ditions, against the background of the behavior of the monetary aggregates--particularly the continuing sluggishness of M . The rate was about 3-5/8 per cent at the time of this Federal funds down from the level of about 4-3/8 per cent prevailing meeting, at the time of the preceding meeting. In the 4 weeks ending January 5, member bank borrowings averaged $110 million compared with $395 million in the preceding 4 weeks. time of this meeting interest rates on most At the securities were lower than they had been in types of market Short-term rates had fallen, in part because of the mid-December.
associated with the System's easing of money market conditions because of anticipations on the reserve-supplying operations and ease. Even with the of still greater part of market participants of $2.5 billion of tax-anticipation bills, auction on December 22 Treasury bill rates had come under strong downward pressure as the of short-term capital from abroad--and the consequent reflow bills by foreign central banks--proved to be far less sales of had expected. On the day before this meeting of than the market on 3-month bills was about 3.00 per the Committee, the market rate cent compared with 3.95 per cent 4 weeks earlier. Declines in rates for long-term securities were much more moderate. Early in the period capital markets were still under the influence of the Treasury's November financing, and were affected by discussion of the possibility that later they the February financing--the terms of which were expected to be announced near the end of January--would include an advance refunding. Public offerings of new corporate bonds were light, as is usual in December, but offerings of new State and local bonds were contraseasonally large. It was expected government that the volume of corporate issues would rebound in January but that issues of State and local governments would taper off. Yields in the secondary market for federally insured mortgages declined slightly further in December. Inflows of savings to nonbank thrift institutions, which had slowed in
in December as the relative attractiveness of November, increased by the further declines in savings shares and deposits was enhanced market interest rates. In the Committee's discussion considerable concern was expressed of key monetary aggregates, and a about the persistent sluggishness number of members advocated action to provide sufficient reserves to support the faster monetary growth that they believed was required by the economic situation and outlook. It was noted in this connection that the level of member bank reserves, as well as that of M1 had changed little during the fourth quarter despite a progressive easing of money market conditions. In the interest of assuring the provision of reserves needed for adequate growth in monetary aggregates, the Com its next meeting open market that in the period until mittee decided appropriate account of conditions while continuing to take operations, by the course of total should be guided more in the money market, than had been customary in the past. reserves The members also agreed that in the course of operations account should be taken of international developments and, begin ning late in the month, of the forthcoming Treasury financing. In placing greater emphasis on total reserves, the Com mittee took note of a staff analysis suggesting that moderate rates of growth in M1 and M in January and February were likely to be associated with a large increase in total reserves from December to January and then a decline in February--mainly as
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.