September 19, 1972 FOMC Record of Policy Actions

FOMC minutes

5-1/2 per cent. In order to avoid a marked firming in money market conditions and unduly sharp increases in interest rates, for a time the System supplied reserves more generously. At the time of this meeting it appeared that growth in RPD's would be quite rapid in September, and that the average rate of growth in the August-September period would exceed the upper limit of the target range by a significant amount. However, most of the overage evidently would reflect a temporary increase in excess reserves--and member bank borrowings--around the Labor Day weekend. Apart from the rise in excess reserves, growth in RPD's appeared to be at about the upper limit of the target range. The Federal funds rate, which had been around 4-3/4 per cent at the time of the preceding meeting, currently was about 5 per cent. In the 5 weeks ending September 13 member bank borrowings averaged about $440 million, compared with about $250 million in the preceding 4 weeks. The Committee agreed that the economic situation called for growth in the monetary aggregates in coming months at rates less rapid than those that now appeared likely to be recorded for the third quarter. At the same time, the members noted that conditions in financial markets were still highly sensitive. They also noted that the prospective relationships among bank reserves, monetary aggregates, and money market conditions were more than

because of the difficulties of forecasting the usually uncertain of banks during the period of adjustment to the amendments behavior D and J that were scheduled to become effective to Regulations 1972. The situation was further complicated by September 21, uncertainty as to whether implementation of the regulatory actions would be delayed as a consequence of certain court proceedings currently under way. The Committee took note of a staff analysis suggesting that an average rate of expansion in RPD's in September and October in a range equivalent to 9.5 to 13.5 per cent 4/ would be likely to lead to more moderate growth in monetary aggregates over the months ahead. The members decided to seek an RPD growth rate in that range--preferably, in the lower part--unless disturbances arose in financial markets or unless growth rates in the monetary aggre gates appeared to be falling far short of expectations. In view of the sensitive state of financial markets and the uncertainties associated with Regulations D and J, they also decided that the System Account Manager should have more than the usual degree of discretion in making operating decisions and that he should give 4/ The RPD range originally considered by the Committee incorporated adjustments for the estimated effects that the scheduled changes in the Board's Regulations D and J would have on the prospective relationship between growth rates in RPD's and in the monetary aggregates. However, it was agreed that those adjustments would be inappropriate if there were a delay in implementing the changes, and since such a delay in fact occurred, the adjustments are omitted in the figures cited.

to money market conditions, while more than customary attention to avoid marked changes in such conditions. It was continuing be taken of international financial agreed that account also should and it was understood that the Chairman might call developments, Committee to consider the need for supplementary instruc upon the the next scheduled meeting if it appeared that the tions before Committee's objectives and constraints were not being met satis factorily. The following current economic policy directive was issued to the Federal Reserve Bank of New York: The information reviewed at this meeting suggests a substantial increase in real output of goods and services in the current quarter, although well below the unusually large rise recorded in the second quarter. In July and August, wages and prices advanced somewhat more rapidly on balance than in the immediately pre ceding months, while the unemployment rate remained substantial. Foreign exchange market conditions have remained quiet in recent weeks and the central bank reserves of most industrial countries have continued to change little. In July, the large excess of U.S. merchandise imports over exports persisted. In August on average, growth slowed in the narrowly and broadly defined money stock and in the bank credit proxy, but in recent weeks the money stock has been expanding more strongly. Since mid-August, interest rates on Treasury bills have increased sharply, while yields on most other market securities have advanced more moderately. 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, abate ment of inflationay pressures, and attainment of reasonable equilibrium in the country's balance of payments.

this policy, while taking special To implement account of the effects of possible bank regulatory changes, developments in credit markets, and international developments, the Committee seeks to bank reserve and money market conditions achieve that will support more moderate growth in monetary aggregates over the months ahead. Votes for this action: Messrs. Burns, Hayes, Brimmer, Bucher, Coldwell, Daane, Eastburn, Mayo, Mitchell, and Sheehan. Votes against this action: Messrs. MacLaury and Robertson. Absent and not voting: Mr. Winn. (Mr. Mayo voted as Mr. Winn's alternate.) Mr. MacLaury dissented from this action because he had become increasingly disturbed by the rapid rates of growth in the aggregates, given the prospective strength of the economy, and he felt that the Committee's current operating procedures did not assure that money market conditions would be permitted to tighten sufficiently to slow this excessive monetary growth in the near future. Mr. Robertson dissented because of his belief that with the existing potentiality for increased inflationary pressures, the Committee was not doing enough to curb the rate at which reserves were being fed into the banking system by the Federal Reserve and to slow down the rate of growth in the monetary aggregates. In his view, the failure to do so might result in a new groundswell of inflation later on.