July 18, 1972 FOMC Record of Policy Actions

FOMC minutes

Growth in the narrowly defined money stock (private demand deposits plus currency in circulation, or M1) in June remained close to the relatively slow rate recorded in May. Sluggishness in June, however, may have reflected temporary effects of the speculation in foreign exchange markets and outflows of funds from the United States after midmonth, and weekly data suggested a sharp increase in the rate of expansion in early July. Growth in the more broadly defined money stock (M1 plus commercial bank time and savings deposits other than large-denomination CD's, or M2) remained substantial in June, as inflows of consumer-type time and savings deposits to banks con tinued at a relatively high rate. Expansion in the bank credit proxy--daily-average member bank deposits, adjusted to include funds from nondeposit sources--slowed sharply, reflecting a marked reduc tion in U.S. Government deposits. System open market operations in the period since the June 19-20 meeting of the Committee had been directed at fostering growth in reserves available to support private nonbank deposits (RPD's) at an annual rate in the June-July period of between 4.5 and 8.5 per cent, while avoiding sharp day-to-day fluctuations and large cumulative changes in money market conditions. Since July 6, when Committee members voted to amend the current economic policy directive to take international developments into account, operations also had been conducted with a view to providing and

absorbing reserves in ways that avoided significant declines in Treasury bill rates that might otherwise have resulted from heavy foreign official demands for bills. It appeared at present that RPD's would grow over the June-July period at a rate of about 8.5 per cent. The Federal funds rate rose to about 4-5/8 per cent from just under 4-1/2 per cent shortly before the preceding meeting. In the 4 weeks ending July 12 member bank borrowings averaged about $180 million, compared with about $115 million in the preceding 4 weeks. The Committee agreed that the economic situation continued to call for moderate growth in the monetary aggregates over the months ahead, and it decided to seek growth in RPD's at an annual rate in a range of 3 to 7 per cent during the July-August period while continuing to avoid sharp fluctuations and large cumulative changes in money market conditions. The members also decided that account should be taken of the forthcoming Treasury financing, of developments in capital markets, and of international developments, 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 rates expected. As at other recent meetings, 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 increased at a faster rate in the second quarter than in the two preceding quarters. In June the unemployment rate declined, but it was still substantial. Wholesale prices of farm and food products advanced appreciably further in June and the rise in prices of industrial commodities remained substantial. Recent data suggest moderation in the pace of advance in wage rates. In foreign exchange markets, following disturbances leading to a floating of the pound sterling, the dollar has come under pressure and the reserves of European central banks have increased sharply. In May, the excess of merchandise imports over exports remained large, though a little less than in April. Growth in the narrowly defined money stock was relatively slow in May and June, but preliminary weekly data suggest a pickup in early July. Growth in the broadly defined money stock was more substantial as inflows of consumer-type time and savings deposits to banks remained strong. Expansion in the bank credit proxy slowed sharply in June as U.S. Government deposits declined markedly. In recent weeks, long-term interest rates have changed little; rates in short-term markets have advanced, except for those on shorter-maturity Treasury bills. 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 the forthcoming Treasury financing, developments in capital markets, and international developments, the Committee seeks to achieve bank reserve and money market conditions that will support moderate growth in monetary aggregates over the months ahead.

Votes for this action: Messrs. Burns, Hayes, Brimmer, Bucher, Daane, Eastburn, MacLaury, Robertson, Sheehan, and Winn. Votes against this action: Mr. Coldwell. Absent and not voting: Mr. Mitchell. Mr. Coldwell dissented from this action because in his growth in bank reserves within the specified range judgment average August and the associated expansion in the money supply for July and for excessive economic stimulation. He was con might build a base the effects both on the domestic economic situation, cerned about in the context of heavy stimulation from fiscal policy, and on international financial problems.