November 20–21, 1972 FOMC Record of Policy Actions

FOMC minutes

11/20-21/72 -5- moderate rates in the preceding 2 months and remained well below the rates of about 8.5 per cent for M and 9.5 per cent for M recorded over the third quarter as a whole.4/ Expansion in the bank credit proxy 5/ changed little from the rates in the preceding 2 months, although the increase in the outstanding volume of large-denomination CD's was the smallest since March. System open market operations in the recent period had been guided by the Committee's decision at its October meeting to seek bank reserve and money market conditions that would support more moderate rates of monetary growth than those recorded in the third quarter. System operations had been directed toward maintaining growth in reserves available to support private nonbank deposits (RPD's) at an annual rate in a range of 9 to 14 per cent in the October-November period, while continuing to avoid marked changes in money market conditions and taking account of Treasury financing operations and bank regulatory changes.- Through most of the 4/ Growth rates cited are calculated on the basis of the daily-average level in the last month of the quarter relative to that in the last month of the preceding quarter. 5/ Daily-average member bank deposits, adjusted to include funds from nondeposit sources. 6/ It was noted at the October 17 meeting that the amendments to Regulations D and J 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 from the original 6 to 11 per cent to 9 to 14 per cent in a technical adjustment to take account of the expected effects of those regulatory actions on the relationship between reserves and the monetary aggregates.

11/20-21/72 intermeeting period the rate of growth in RPD's had appeared to be within that range, although near the lower limit. Toward the end of the period, available data suggested that growth would fall below the range, and at the time of this meeting it appeared that RPD's would grow over the October-November period at a rate of only about 5.5 per cent. However, the monetary aggregates appeared to be expanding at acceptable rates. To a considerable extent, the shortfall in RPD's occurred because the relationship between reserves and monetary aggregates that evolved after the imple mentation of the amendment to the Board's Regulation D differed from the relationship that had been expected. The changes in Regulations D and J, which became effective on November 9, generated considerable uncertainty about the manage ment of reserves, both for member banks and for the System, and the System made heavy use of repurchase agreements and matched sale purchase transactions for temporary injections and withdrawals of reserves in order to smooth the over-all availability of reserves. Although day-to-day fluctuations in the Federal funds rate were larger than usual, the average rate during the intermeeting periodat a little more than 5 per cent--was about the same as the rate that had prevailed just before the October meeting. In the 5 weeks ending November 15, member bank borrowings averaged about $640 million, compared with about $560 million in the preceding 4 weeks.

11/20-21/72 The Committee agreed that the economic situation continued to call 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 projected relationship between reserves and the monetary aggregates, the Committee decided that its objectives regarding the aggregates would be served by open market operations directed at fostering growth in RPD's during the November-December period at an annual rate within a range of 6 to 10 per cent, while continuing to avoid marked changes in money market conditions. The members also decided that allowance should be made in the conduct of operations if growth in the monetary aggregates appeared to be deviating from an acceptable range and that account should be taken of the continuing effects of the bank regulatory changes implemented in early November. It was under stood 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, including recent data for industrial production, employment and retail sales, suggests that real output of goods and services is growing more rapidly in the current quarter than in the third quarter. However, the unemployment rate has remained substantial. The increase in wages

11/20-21/72 has been larger in recent months than earlier this year. Consumer prices rose considerably in September, but the October rise in wholesale prices was small. In recent weeks, the current account deficit of the U.S. balance of payments has been offset in large part by capital inflows; while the reserves of Japan have increased substantially further, those of other industrial countries have changed little. In September the excess of U.S. merchandise imports over exports remained large. In October rates of growth in the monetary aggre gates changed relatively little from preceding months, with expansion in the narrowly defined money stock again quite moderate. Since mid-October interest rates generally have declined. 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 recent bank regulatory changes, 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, Daane, Eastburn, MacLaury, Mitchell, Robertson, Sheehan, Winn, and Francis. Votes against this action: None. Absent and not voting: Mr. Coldwell. (Mr. Francis voted as Mr. Coldwell's alternate.)