April 18, 1972 FOMC Record of Policy Actions

FOMC minutes

loans continued to expand rapidly. Banks increased sharply consumer of both U.S. Government and other securities. further their holdings loan demand and advances in money In reaction to strengthening most major banks raised their prime rates from market rates, 5 per cent in late March and early April. 4-3/4 to in the narrowly defined money stock (private demand Growth in circulation, or M1 ) remained rapid in deposits plus currency growth in the more broadly defined money stock March. However, (M1 plus commercial bank time and savings deposits other than large-denomination CD's, or M2) slowed somewhat. Inflows of savings funds to commercial banks, while still strong, continued to moderate--reflecting in part the increases in yields available on short-term market securities and earlier reductions in rates on time and savings deposits. Over the first quarter, paid by banks at annual rates of about 9.5 and 13.5 per cent, M1 and M2 grew respectively, compared with rates of about 1 and 8 per cent over 1/ the fourth quarter of 1971. Chiefly because of large swings in deposits, the rate of growth in the bank credit U.S. Government proxy--daily-average member bank deposits, adjusted to include funds from nondeposit sources--increased sharply in March after having slowed in February. are calculated on the basis of the daily 1/ Growth rates cited in the last month of the quarter relative to that in average level the last month of the preceding quarter.

System open market operations since the March 21 meeting of the Committee had been directed at fostering growth in reserves available to support private nonbank deposits at an annual rate in the March-April period of 9 to 13 per cent while at the same time avoiding sharp day-to-day fluctuations and large cumulative changes in money market conditions. It appeared at present that the reserve measure employed would actually grow over the March April period at an annual rate of about 13.5 per cent, but a technical adjustment to the underlying data--which did not affect the deposit measure--accounted for about 1 percentage point of the rate of growth in the measure of reserves. The Federal funds rate had risen from about 4 per cent at the time of the March 21 meeting to around 4-1/4 per cent in recent weeks. Member bank borrowings averaged about $105 million in the 4 weeks ending April 12 compared with about $45 million in the preceding 5 weeks. The Committee agreed that the economic situation called for growth in the monetary aggregates at rates somewhat more moderate than those recorded for the first quarter of the year. The members took account of a staff analysis which suggested that somewhat more moderate rates of growth over April and May com bined were likely to be associated with expansion in the volume of reserves available to support private nonbank deposits at an annual rate of about 9 per cent in those months and probably with some further tightening of money market conditions.

The Committee decided to seek growth in the reserve measure employed at an annual rate in a range of 7 to 11 per cent during the April-May period and to accept, if necessary, somewhat firmer money market conditions in order to achieve growth in that range in existing while continuing to avoid sharp fluctuations and large circumstances, cumulative changes in money market conditions. The members also decided that account should be taken of the forthcoming Treasury financing and of developments in capital markets, and that some allowance should be made in the conduct of operations if growth in the monetary aggregates appeared to be deviating significantly from the somewhat more moderate rates expected. It was understood that the Chairman might call upon the Committee to consider the need for supplementary instructions before the next scheduled meeting if it appeared that the Committee's objectives and constraints were not being met satisfactorily. 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 grew in the first quarter at about the stepped-up rate attained in the fourth quarter of 1971. Most measures of business activ ity have shown strength recently and demands for labor have improved further, but the unemployment rate remains high. The rise in wholesale prices slowed in March as some farm and food products declined sharply, but the rise in prices of industrial commodities remained sub stantial. Wage rates also rose substantially in March and over the first quarter as a whole. The dollar has strengthened somewhat in exchange markets in recent weeks, and the over-all U.S. balance of payments deficit on the official settlements basis has been small. In January and February merchandise imports continued to be considerably in excess of exports. The narrowly defined money stock expanded rapidly in February and March, bringing the annual rate of growth

over the past 6 months to about 5-1/4 per cent. Inflows of consumer-type time and savings deposits to banks have thus far this year, although they moderated been strong as the first quarter progressed; inflows to nonbank thrift institutions remained very large. Mainly reflect ing swings in U.S. Government deposits, a modest increase in the bank credit proxy in February was followed by a large increase in March. Market interest rates generally have continued to rise in recent weeks. In light of the foregoing developments, it is the policy of the Federal Open Market Committee to foster financial conditions conducive to 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, while taking account of capital market developments and the forthcoming Treasury financing, the Committee seeks to achieve bank reserve and money market conditions that will support somewhat more moderate growth in monetary aggregates over the months ahead. Votes for this action: Messrs. Burns, Hayes, Brimmer, Coldwell, Daane, Eastburn, MacLaury, Maisel, Mitchell, Robertson, Sheehan, and Winn. Votes against this action: None.