October 16, 1973 FOMC Record of Policy Actions

FOMC minutes

Following the telephone meeting, at which the majority market conditions should be of the members concluded that money easing did not threaten to allowed to ease somewhat if such reinvigorate the sharp rally in markets for short-term securities, the System became somewhat more aggressive in supplying reserves. Short-term interest rates in general declined further, but the Federal funds rate on most days through October 8 remained close to 10-3/4 per cent. Moreover, incoming data indicated that growth in RPD's and the monetary aggregates would be even weaker in the September-October period than had been expected a week earlier. On October 10 the Committee held another telephone meeting, at which the members agreed that in the few days remaining until this meeting, reserves should be supplied at a rate consistent with some easing in money market conditions beyond that decided upon on October 2. In the days just before this meeting, the Federal funds rate was around 10 per cent. In the 4 weeks ending October 10, member bank borrowings averaged about $1,690 million, down from an average of $2,135 million in the preceding 4 weeks. At this meeting the Committee agreed that the economic situation and prospects continued to call for moderate growth in monetary aggregates over the months ahead. A staff analysis indicated that, although the transactions demand for money would

probably expand, the sharp rise in short-term interest rates that had occurred through early September would tend to dampen the demand for money in the months ahead. Consequently, achieve ment of moderate growth in monetary aggregates was likely to require some easing in money market conditions. The staff analysis also indicated that growth of consumer and savings deposits probably would strengthen and that type time expansion in the outstanding volume of large-denomination CD's would be resumed in response to moderate growth in business loan demand. However, because of the recent weakness in the aggre gates in combination with lagged reserve accounting, relatively slow growth in RPD's in the October-November period--at an annual rate in a range of 2 to 4 per cent--was thought likely to be con sistent with moderate growth in both the narrowly defined and the more broadly defined money stock over the months ahead. In view of the weak behavior of the monetary aggregates in August and September, the Committee concluded that reserve supplying operations should not become restrictive unless RPD's in the October-November period appeared to be growing at an annual rate of more than 5 per cent. Specifically, the members decided that operations should be directed at fostering RPD growth during that period within a range of 2 to 5 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 developments, 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 suggests that growth in real output of goods and services in the fourth quarter is likely to remain at about the moderate rate indicated for the third quarter. In recent months manufacturing employment has leveled off and total non farm employment has expanded less rapidly than earlier; the unemployment rate has remained at 4.8 per cent. The advance in wage rates has been somewhat faster than earlier. wholesale prices of industrial commodities In September rose appreciably; farm and food prices declined, but by less than they had risen in August. The U.S. merchan far dise trade balance weakened slightly in August. Net foreign of U.S. stocks continued large, however, and the purchases balance of payments on an official settlements basis was in surplus in both August and September. Exchange rates for the dollar against most foreign currencies have changed little since mid-August. The narrowly defined money stock, which had risen sharply during the second quarter, declined in September for the second successive month. The more broadly defined money stock expanded slightly in September as a result of net inflows at banks of consumer-type time deposits. The

deposit experience at nonbank thrift institutions improved somewhat in September following a period of sizable out flows. Bank credit--which had been expanding rapidlyincreased little as business loan growth slowed markedly, and after mid-September the outstanding volume of large denomination CD's declined substantially. Short-term market interest rates fell sharply from mid-September to early October, partly as a result of a shift in market expectations regarding monetary policy, and rates on long-term market securities declined moderately further. In light of the foregoing developments, it is the policy of the Federal Open Market Committee to foster financial conditions conducive to abatement of infla tionary pressures, a sustainable rate of advance in economic activity, and continued progress toward equilibrium in the country's balance of payments. To implement this policy, while taking account of the forthcoming Treasury financing and 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, Hayes, Balles, Brimmer, Bucher, Daane, Francis, Holland, Mayo, Mitchell, Morris, and Sheehan. Votes against this action: None.