August 21, 1973 FOMC Record of Policy Actions

FOMC minutes

weeks. On August 3, a majority of the Committee members had concurred in a recommendation by the Chairman that money market conditions should be permitted to tighten still further if nec essary to limit growth in RPD's and in the monetary aggregates, but in light of subsequent developments, tighter conditions were not sought and the funds rate remained close to 10-1/2 per cent. In the 5 weeks ending August 15, member bank borrowings averaged around $1,965 million, about the same as in the preceding 4 weeks. The additional tightening in money market conditions early in theinter-meeting period along with sustained strength in credit demands led to further sharp increases in short-term market interest rates until mid-August, and then rates turned down. The market rate on 3-month Treasury bills rose from 7.85 per cent on the day before the July meeting to a high of 9.05 per cent on August 14 and then fell back to 8.79 per cent on the this meeting. On August 13 increases in Federal Reserve day before discount rates from 7 to 7-1/2 per cent were announced, effective August 14; shortly thereafter, rates were at 10 Reserve Banks on raised at the two remaining Banks. interest rates also rose sharply In long-term markets, in reaction to mid-July to mid-August, apparently further from rates. Later, however, long-term the advance in short-term over-all volume of new public back appreciably. The rates fell and State and local government bonds offerings of corporate

the volume was change in in July, and little declined moderately in prospect for August. economic situation and pros agreed that the The Committee over the in monetary aggregates for slower growth pects called on average thus far ahead than had occurred months immediately that despite the substantial A staff analysis suggested in 1973. the demand for money in the period growth expected in nominal GNP sharp rise in short-term interest ahead would be limited by the in recent months, In the immediate rates that had occurred moreover, monetary growth was likely to be restricted future, by a downward adjustment in the public's demand for cash balances in response to the increases in rates paid on time and savings deposits. The analysis also suggested, however, that business demands for bank loans would remain strong and that banks would continue to expand the outstanding volume of large-denomination CD's at a relatively fast pace. Reflecting the expansion in such CD's and also the imposition in late June of marginal reserve requirements on them, a relatively rapid rate of growth in RPD's in the August-September period--at an annual rate in a range of 13 to 15 per cent--was thought likely to be consistent with slower growth in monetary aggregates over the months immediately ahead.

pace at which RPD's had grown in In view of the rapid months, the Committee decided that open market operations recent directed at fostering RPD growth during the August should be September period at an annual rate within a range of 11 to 13 cent, while avoiding marked changes in money market conditions. per The members also agreed that, in the conduct of operations, account should be taken of international and domestic financial market developments, of the forthcoming Treasury financing, and of deviations in monetary growth from an acceptable range. It was might call upon the Committee to understood that the Chairman need for supplementary instructions before the next consider the inconsistencies appeared to be scheduled meeting if significant among the Committee's various objectives and constraints. developing domestic policy directive was issued to The following the Federal Reserve Bank of New York: The information reviewed at this meeting suggests that growth in real output of goods and services, which in the second quarter from the exceptionally rapid slowed pace of the two preceding quarters, will be moderate the third quarter. Increases in nonfarm employment in also have slowed in recent months, but the unemployment rate has declined. The rate of rise in wage rates has remained relatively moderate. The exceptionally rapid advance in prices was interrupted in July by the temporary freeze imposed in mid-June. However, farm and food prices adjusted sharply upward after mid-July, when the freeze was lifted on most such products. The U.S. merchandise trade balance improved in June, and the balance on goods and services was in surplus in the second quarter for the first time in nearly two years. Since the end of July the dollar has strengthened markedly in foreign exchange markets, and the price of gold has dropped sharply.

Both the narrowly and more broadly defined money stock, which had increased rapidly in May and June, grew more slowly in July. Inflows of consumer-type time and savings deposits strengthened again at banks in late July and early August, while net outflows were experienced at nonbank thrift institutions. Expansion in bank credit has continued at a substantial pace. Since mid-July short-term market interest rates have advanced considerably further on balance. Long-term rates also rose substantially for much of that period, but most recently they have declined in the course of a sharp market rally. On August 13 increases were announced in Federal Reserve discount rates from 7 to 7-1/2 per cent. 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 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 has occurred on average thus far this 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. Mr. Francis dissented from this action, although he agreed with the objectives of the policy adopted by the Committee, because he could not accept the constraint placed on money market conditions.