July 17, 1973 FOMC Record of Policy Actions

FOMC minutes

interest rates that had occurred in recent months. in short-term Because of the rise in short-term market rates, moreover, net and savings deposits at commercial expansion in consumer-type time despite the increase in rate banks was expected to slow appreciably July. As a consequence, it was antic ceilings announced in early would attempt to expand the outstanding volume of ipated that banks CD's; the increase in these issues in the July large-denomination period was expected to remain relatively large. August The staff analysis suggested that a relatively rapid rate of growth in RPD's in the July-August period--at an annual rate in a range of 11-1/2 to 13-1/2 per cent--would be consistent with slower growth in the monetary aggregates over the months immediately ahead than had occurred in the first half of the year. The analysis also suggested that such a rate of growth in RPD's might be associated with little change in money market conditions but that short- and long-term market interest rates in general might be subject to additional upward pressures in further adjust ment to the firming in money market conditions that had occurred in recent weeks. The Committee decided that operations should be directed at fostering RPD growth during the July-August period at an annual rate within a range of 11-1/2 to 13-1/2 per cent, while avoiding unduly sharp changes in money market conditions. The members also

agreed that, in the conduct of operations, account should be taken of international and domestic financial market develop ments, of the forthcoming Treasury financing, and of deviations in monetary growth from an acceptable range. 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 domestic policy directive was issued to the Federal Reserve Bank of New York: The information reviewed at this meeting, including recent developments in industrial production, employ ment, and retail sales, suggests that growth in economic activity moderated in the second quarter from the excep tionally rapid pace of the two preceding quarters. Increases in employment were relatively substantial, however, and in June the unemployment rate dropped below 5 per cent. Wage rates advanced at a faster pace during the second quarter than earlier in the year. In the months immediately preceding the price freeze imposed in mid-June, the rise in prices of both industrial commodities and farm and food products remained extraordinarily rapid. The U.S. merchandise trade balance worsened in May as import prices rose sharply further, but the trade deficit remained well below the first-quarter average. In foreign exchange markets, the jointly floating continental European currencies rose sharply further against the dollar in early July. After the first week in July, the dollar recovered somewhat on the basis of market expectations of official inter vention. On July 10 the Federal Reserve announced substantial increases in its swap arrangements with other central banks.

Both the narrowly and more broadly defined money sharply in May and June, although inflows stock rose and savings deposits slackened of consumer-type time month. Expansion in bank credit somewhat in the latter pace. Since mid-June both continued at a substantial market interest rates have advanced short- and long-term considerably further, with the sharpest increases in the short-term sector. On June 29 increases were announced in Federal Reserve discount rates, from 6-1/2 to 7 per cent, and in member bank reserve requirements; on July 5 ceiling interest rates were increased on time and savings deposits at commercial banks and other thrift institutions. In light of the foregoing developments, it is the policy of the Federal Open Market Committee to foster financial conditions conducive to abatement of inflationary pressures, a more sustainable rate of advance in economic activity, and progress toward equilibrium in the country's balance of payments. To implement this policy, while taking account of international and domestic financial market developments and the forthcoming Treasury financing, the Committee seeks to achieve bank reserve and money market conditions consistent with slower growth in monetary aggregates over the months immediately ahead than occurred on average in the first half of the year. Votes for this action: Messrs. Burns, Hayes, Balles, Brimmer, Bucher, Daane, Holland, Mayo, Morris, and Sheehan. Vote against this action: Mr. Francis, Absent and not voting: Mr. Mitchell. dissented from this action not because he Mr. Francis disagreed with the objectives of the policy adopted by the Committee but because he believed that--as had proved to be recent meetings--the objectives would the case following other not be achieved because of the constraint on money market conditions.

Subsequent to the meeting it appeared that in the July August period the annual rate of growth in RPD's and in the monetary aggregates might exceed acceptable ranges, even though money market conditions had continued to tighten. On August 3, 1973, the available members--with the exception of Messrs. Bucher and Sheehan--concurred in a recommendation by the Chairman that money market conditions should be permitted to tighten still further if necessary to limit growth in RPD's.