October 17, 1972 FOMC Record of Policy Actions

FOMC minutes

of corporate borrowing to meet September tax payments. amount Banks increased their holdings of U.S. Government securitiesafter having reduced them in July and August--and continued to add to their holdings of other securities. In early October, primarily in response to increases in short-term market rates of interest, most banks raised their prime rates from 5-1/2 to 5-3/4 per cent. Both the narrowly defined money stock (M1)1/ and the more broadly defined money stock (M2)2/ grew in September at about the moderate rates recorded in August. Over the third quarter, however, M1 and M grew at rates of about 8.5 and 9.5 respectively, compared with rates of about 5.5 and 8.5 per cent, / per cent over the second quarter.3 Growth in the bank credit proxy 4/ was somewhat more rapid in September than in August, mainly because of an increase in U.S. Government deposits. System open market operations in the period since the September 19 meeting had been guided by the Committee's decision to seek growth in reserves available to support private nonbank 1/ Private demand deposits plus currency in circulation. 2/ M1 plus commercial bank time and savings deposits other than large-denomination CD's. are calculated on the basis of the 3/ Growth rates cited daily-average level in the last month of the quarter relative to that in the last month of the preceding quarter. 4/ Daily-average member bank deposits, adjusted to include funds from nondeposit sources.

deposits (RPD's) at an annual rate in a range of 9.5 to 13.5 per cent in the September-October period--in order to support more moderate growth in the monetary aggregates in the months aheadunless disturbances arose in financial markets or unless growth in the monetary aggregates appeared to be falling far short of expectations. In fact, financial markets were calm and both M1 and M2 seemed to be growing moderately. At the time of this meeting it appeared that growth in RPD's over the September October period would be close to the lower limit of the target range. The Federal funds rate was about 5 per cent in the days before this meeting, unchanged from the level prevailing just before the preceding meeting. In the 4 weeks ending October 11 member bank borrowings averaged about $560 million, compared with about $440 million in the preceding 5 weeks. The Committee agreed that the economic situation called for growth in the monetary aggregates over the months ahead at rates less rapid than those recorded over the third quarter as a whole. Taking account of a staff analysis of the relationship between reserves and the monetary aggregates, the Committee decided that its objectives for the aggregates would be fostered by growth in RPD's during the October-November period at an annual rate within a range of 6 to 11 per cent. Accordingly, the members agreed that open market operations should be directed at con straining RPD growth within that range, while continuing to

avoid marked changes in money market conditions. The members also decided that account should be taken of the effects of bank regulatory changes, should they be implemented; of Treasury financing operations; and of developments in credit markets.5/ Moreover, they agreed that some allowance should be made in the conduct of operations if growth in the monetary aggregates appeared to be deviating from an acceptable range. 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 significant inconsistencies appeared to be developing among the Committee's various objectives and constraints. 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 third quarter, although well below the unusually large rise recorded in the second quarter. In September wages and prices advanced moderately, while the unemployment rate remained substantial. In 5/ It was noted at the meeting that the amendments to Regulations D and J, initially scheduled to become effective on September 21, 1972, but postponed as a result of court proceedings, might be implemented during the October-November period. Following the Board's decision on October 24 to implement the amendments as of November 9, 1972, the range of tolerance for the RPD growth rate was modified to 9 to 14 per cent in a technical adjustment to take account of the effects of those regulatory actions on the relationship between reserves and the monetary aggregates.

the U.S. balance of payments, the current account been largely offset by capital inflows in deficit has and the central bank reserves of most recent weeks, countries have continued to change little. industrial of U.S. merchandise imports over In August, the excess exports declined somewhat. The narrowly and broadly defined money stock at moderate rates in August and September, expanded following large increases in .uly, but the bank credit proxy continued to grow rapidly. Since mid-September, short-term interest rates have increased somewhat, while yields on most long-term securities have changed little. 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 effects of possible bank regulatory changes, Treasury financing operations, and developments in credit markets, the Committee seeks to achieve bank reserve and money market conditions that will support more moderate growth in monetary aggregates over the months ahead than recorded in the third quarter. Votes for this action: Messrs. Burns, Hayes, Brimmer, Bucher, Coldwell, Daane, Eastburn, MacLaury, Mitchell, Robertson, Sheehan, and Winn. Votes against this action: None.