May 23, 1972 FOMC Record of Policy Actions

FOMC minutes

issued had declined somewhat in April and appeared likely to decline further in May. Toward the end of the period, however, interest rates--especially short-term rates--had tended upward again partly in response to some firming in money market conditions and to three Treasury auctions of bills in a short period of time. The market rate on 3-month bills was 3.79 per cent on the day before this meet ing, compared with a low of 3.42 per cent in early May and 3.85 per cent on the day before the April meeting. Contract interest rates on conventional new-home mortgages and yields in the secondary market for Federally insured mortgages rose somewhat in April; in both cases the increases were the first in many months. Inflows of savings funds to nonbank thrift institu tions slowed, but they remained at a relatively advanced pace. At commercial banks, business loans outstanding expanded in April at a faster pace than in the first quarter, and real estate and consumer loans continued to grow rapidly. Banks added only a small amount to their holdings of Government securities and reduced slightly their holdings of other securities; in the first quarter, they had added substantial amounts of both. Growth in the narrowly defined money stock (private demand deposits plus currency in circulation, or M1) slowed to an annual rate of about 8 per cent in April from an average rate of about 12 per cent in February and March. Inflows of savings funds to commercial banks continued to slacken, and growth in the more broadly defined money stock (M1, plus commercial bank time and savings deposits

other than large-denomination CD's, or M ) also moderated to a rate of about 8 per cent, from an average rate of 13 per cent in February and March. However, expansion in the bank credit proxy--daily-average member bank deposits, adjusted to include funds from nondeposit sources--remained rapid, reflecting increases in both U.S. Govern ment deposits and the volume of large-denomination CD's outstanding. System open market operations since the April 18 meeting of the Committee had been directed at fostering growth in reserves available to support private nonbank deposits (RPD) at an annual rate in the April-May period of 7 to 11 per cent and growth in the monetary aggregates at somewhat more moderate rates than earlier, while at the same time avoiding sharp day-to-day fluctuations and large cumulative changes in money market conditions. It appeared at present that RPD would actually grow over the April-May period at an annual rate of 7.5 per cent. Since the April meeting the Federal funds rate had continued to fluctuate around the 4-1/4 per cent level reached in early April. Member bank borrowings averaged about $115 million in the 5 weeks ending May 17 compared with about $105 million the preceding 4 weeks. In pursuit of its open market objectives, the System needed to provide fewer reserves than it would otherwise have provided because a large amount of reserves was supplied by a reduction in the Treasury's balance at the Federal Reserve Banks and by the monetization of the gain in the dollar value of the gold stock that resulted from the recent increase in the U.S. official price of gold.

In late April the System met temporary needs for reserves by making repurchase agreements with nonbank dealers; interest rates on those agreements were established by competitive bidding, in accordance with a Committee decision on April 17, 1972. In this initial use of the experimental auction procedure, no major difficulties were encountered. agreed that the economic situation called for The Committee growth in the monetary aggregates over the months ahead at rates somewhat slower than those recorded in recent months. After taking account of recent changes in deposits and lagged reserve requirements, growth in RPD at an annual rate in a the Committee decided to seek 7.5 to 11.5 per cent during the Lay-June period while con range of tinuing to avoid sharp fluctuations and large cumulative changes in conditions. It was recognized that growth in RPD within money market with some firming of money market con that range might be associated that some allowance should be made ditions. The members also decided in the conduct of operations if growth in the monetary aggregates from the rates expected and appeared to be deviating significantly of capital market developments and pos that account should be taken As at other recent meetings, it was under sible Treasury refunding. the Committee to consider the that the Chairman might call upon stood before the next scheduled meeting need for supplementary instructions objectives and constraints were if it appeared that the Committee's 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, including recent data for such measures of business activity as industrial production and employment, suggests that real output of goods and services may be growing at a faster rate in the current quarter than in the two preceding quarters, but the unemployment rate remains high. In April wholesale prices of farm and food products changed littleafter having declined in March--but the rise in prices of industrial commodities remained substantial. The consumer price index, which had been stable in March, increased somewhat. Wage rates continued to rise at a substantial U.S. balance of payments on the official settle pace. The ments basis has been in small surplus since mid-March, but the payments balance on the net liquidity basis has appar ently remained in deficit. In March merchandise imports continued to be considerably in excess of exports. Growth in both the narrowly and broadly defined money stock slowed in April from the rapid rates in February and March. Inflows of savings funds to nonbank thrift institu tions also slowed, but they remained at a relatively advanced pace. Reflecting a further increase in U.S. Government deposits and a rise in the outstanding volume of large CD's, the bank credit proxy continued to expand denomination at a rapid rate. In recent weeks, market interest rates have fluctuated in a narrow range. In light of the foregoing developments, it is the policy of the Federal Open liarket Committee to foster financial con ditions 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. this policy, while taking account of To implement capital market developments and possible Treasury refund ing, the Committee seeks to achieve bank reserve and money market conditions that will support somewhat slower growth in monetary aggregates over the months ahead. Votes for this action: Messrs. Burns, Hayes, Brimmer, Coldwell, Daane, Eastburn, MacLaury, Mitchell, Sheehan, and Winn. Votes against this action: None.