September 18, 1973 FOMC Record of Policy Actions

FOMC minutes

issued to the directive was domestic policy The following Bank of New York: Federal Reserve suggests that at this meeting reviewed The information which slowed goods and services, output of growth in real rapid pace from the exceptionally in the second quarter in the will be moderate preceding quarters, of the two rose sharply nonfarm employment quarter. Although third months has been gain in recent the average in August, rate has changed earlier and the unemployment smaller than 5 per cent. The excep a level somewhat below little at interrupted in July advance in prices was tionally rapid imposed in mid-June. However, by the temporary freeze mid-July--when the prices surged after farm and food despite later lifted on most such products--and freeze was appreciable declines, they remained far above pre-freeze levels. The U.S. merchandise trade balance improved fur ther in July, and net foreign purchases of U.S. stocks increased. In recent weeks exchange rates for the dollar against most foreign currencies have changed little on balance after strengthening in the first half of August, and the balance of payments has been in surplus on an official settlements basis. The narrowly defined money stock, which had increased moderately in July, declined somewhat in August. The more broadly defined money stock continued to expand as a result of net inflows at banks of consumer-type time de posits. Nonbank thrift institutions experienced net de posit outflows in the July-August period. Expansion in bank credit has continued at a substantial pace. On September 7 the Federal Reserve announced an increase from 8 to 11 per cent in marginal reserve requirements on large-denomination CD's. Interest rates on long-term market securities declined from early August to early September, partly because of growing expectations that the maximum degree of monetary restraint had been reached. Later, however, such expectations weakened and some long term rates turned up. Short-term rates generally remained under upward pressure in recent weeks. 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 activ ity, and continued progress toward equilibrium in the country's balance of payments.

To implement this policy, while taking account of international and domestic financial market developments, the Committee seeks to achieve bank reserve and money market conditions consistent with moderate growth in monetary aggregates over the months ahead. Votes for this action: Messrs. Burns, Balles, Bucher, Daane, Francis, Holland, Mayo, Mitchell, Morris, Sheehan, and Debs. Votes against this action: None. Absent and not voting; Messrs. Brimmer and Hayes. (Mr. Debs voted as alternate for Mr. Hayes.) On October 1 the System Account Manager reported that significant inconsistencies had developed among the Committee's various objectives and constraints. Incoming data had suggested that in the September-October period the annual rate of growth in RPD's would fall well below the range specified by the Com mittee at the September 18 meeting and that growth in both M and M would fall short of acceptable ranges. In domestic finan cial markets, however, short-term interest rates had dropped very sharply--although the Federal funds rate had remained close to 10-3/4 per cent--and long-term rates had continued to decline as many market participants had become convinced that the System had relaxed its policy of restraint and that in general interest rate peaks had been passed.

The Committee held a telephone meeting on October 2, in which all members other than Chairman Burns participated. A Balles, Bucher, Francis, Morris, minority of the members--Messrs. proceeding to provide reserves at a rate and Sheehan--favored with an easing in money market conditions to the degree consistent considered acceptable at the meeting on September 18, provided that market conditions did not become disorderly and that growth in the aggregates appeared to remain below acceptable ranges. The majority of the members, however, concluded that at least over the next few days money market conditions should be allowed to ease less than originally considered acceptable and then only if that did not threaten to reinvigorate the sharp rally in markets for short-term securities. It was understood that further consultation was likely to be desirable before the meeting scheduled for October 16. The Committee held another telephone meeting on October 10, in which all members participated. The additional week's data available by then suggested that in the September-October period growth in RPD's and the monetary aggregates would be still weaker than had been expected earlier. Although System operations had supplied large amounts of reserves and short-term market interest rates had declined further on balance, the Federal funds rate on most days through October 8 had remained near 10-3/4 per cent. Committee members agreed unanimously that reserves should be

supplied at a rate consistent with some easing in money market conditions beyond that decided upon on October 2 and that conditions should be eased somewhat further if the recent weakness in RPD's and in the monetary aggregates should be confirmed by data that would become available after the meeting.