December 17–18, 1973 FOMC Record of Policy Actions: Full Text
RESERVE FEDERAL release press For immediate release February 19, 1974 The Board of Governors of the Federal Reserve System and the Federal Open Market Committee today released the attached records of policy actions taken by the Federal Open Market Committee at its meetings on November 19-20 and December 17-18, 1973. As in the past, the record for the December meeting of the Committee has been released along with the record for the November meeting rather than in accordance with the usual schedule of approximately 90 days after the meeting in order to complete the published record for the year in advance of the Chairman's testimony at the Congressional hearings on the Economic Report of the President and the Annual Report of the Council of Economic Advisers. These records will be published in the Board's Annual Report for 1973 and in the Federal Reserve Bulletin. The summary descriptions of economic and financial conditions they contain are based on the information that was available to the Committee at the time of the meetings, rather than on data as they may have been revised since then. Attachments
RECORD OF POLICY ACTIONS OF THE FEDERAL OPEN MARKET COMMITTEE Meeting held on December 17-18, 1973 1/ 1. Domestic policy directive The information reviewed at this meeting suggested that growth in real output of goods and services, which had been at an annual rate of about 3.5 per cent in the third quarter, was slowing appreciably in the current quarter. Staff projections suggested that economic activity would weaken further in the first half of 1974 and that prices would rise appreciably, in part because of curtailment in oil supplies. In November industrial production expanded slightly. Increases in output in September and October were considerably less than had been reported previously, however, and growth over the 3-month period was well below the pace of advance earlier in the year. The value of new residential construc further in November. Total nonfarm tion activity declined payroll employment continued to rise, reflecting gains in manu facturing as well as in trade, services, and State and local government. However, the unemployment rate--which had declined to 4.5 per cent in October--moved back up to 4.7 per cent, about a 2-day period beginning on the 1/ This meeting was held over afternoon of December 17, 1973, in order to enable the Committee to consider certain procedural matters without infringing on the time available for its deliberations on current monetary policy.
12/17-18/73 since June. Retail sales were the rate that had prevailed in November, according to the advance report; unchanged remained at the reduced level of sales of new automobiles October. prices of industrial commodities continued to Wholesale rise sharply in November, reflecting extraordinarily large increases in prices of gasoline and other petroleum products and also sizable advances among metals, machinery, textiles, chemicals, and paper products. Wholesale prices of farm and food products declined for the third consecutive month, largely as a result of decreases in prices of cattle, poultry, grains, fats and oils, and cotton. In October the rate of increase in the consumer price index accelerated, after having slowed in September, as costs of fuels, health services, and homeownership rose appreciably. Staff projections of growth in real GNP in the first half of 1974 suggested that the shortfall in supplies of petro leum products then envisioned would have its greatest impact on expenditures for automobiles and various other travel-related goods and services; as a result, the slower rate of growth in consumption expenditures that had been developing in the current quarter was likely to persist in the first half of 1974. It was also anticipated that the decline in residential construction
12/17-18/73 would be larger than had appeared likely 4 weeks earlierbecause of the adverse effects of the oil shortage on building in the more remote suburban areas and on construction of vacation homes--and that the expansion in business fixed invest ment would be somewhat less vigorous. State and local govern ment purchases of goods and services were still expected to grow at a substantial rate. the prospect of a In most other industrial countries, even greater economic cut in oil supplies threatened sustained United States. From mid-November to disruptions than in the currencies depreciated significantly mid-December, major foreign and a number of foreign monetary further against the dollar, intervene in the exchange markets, authorities continued to their currencies from depreciating selling dollars to prevent balance, which had been The U.S. merchandise trade even more. surplus in both September early 1973, was in large improving since and October. Outstanding business loans at U.S. commercial banks increased in November--following 2 months of little or no changein association with a rise in interest rates in the commercial paper market relative to effective rates on bank loans. However, total bank credit expansion remained moderate, as growth in most other types of loans slowed further and banks liquidated signif icant amounts of their holdings of Government and other securities.
12/17-18/73 The narrowly defined money stock (M1),2/ after changing little over the third quarter, grew moderately in October and rapidly in November. It appeared that the November rate of growth had been affected by such temporary influences as expansion in precautionary balances held by the public in response to the new economic uncertainties and increases in deposits of foreign commercial and central banks. Inflows of time and savings deposits other than large-denomination CD'swhile down from the October level--were still large, and growth in the more broadly defined money stock (M2)3/ remained sub stantial. The outstanding volume of large-denomination CD's declined further in November, on the average, although the volume turned up around the middle of the month as banks raised the rates paid on such CD's in response to the expansion in business loan demand at banks. Treasury deposits also declined, and the bank credit proxy 4/ changed little for the second con secutive month. On December 7 the Federal Reserve announced a reduction from 11 to 8 per cent in marginal reserve require ments on large-denomination CD's, effective in the statement week beginning on December 27 against deposits held 2 weeks earlier. 2/ Private demand deposits plus currency in circulation. 3/ M plus commercial bank time and savings deposits other than large-denomination CD's. 4/ Daily-average member bank deposits, adjusted to include funds from nondeposit sources.
12/17-18/73 Net deposit inflows at nonbank thrift institutions improved somewhat further in November, and expansion in the measure of the money stock that includes such deposits (M3),5/ like growth in M2, remained substantial. Contract interest rates on conventional mortgages and yields in the secondary market for Federally insured mortgages declined for the second consecutive month. Since the Committee's meeting on November 19-20 most short- and long-term market interest rates had fluctuated in response to changing expectations with regard to monetary policy and to the impact of the fuel shortage on economic activity. Short-term rates in general had fallen following the December 7 announcement of the reduction in marginal reserve requirements against large-denomination CD's, and on balance, most had declined somewhat over the inter-meeting period. Just before this meeting, the market rate on 3-month Treasury bills was 7.47 per cent, compared with an interim high of 7.82 per cent on November 23 and with 7.50 per cent just before the November meeting. long-term markets, some rates had increased slightly In November meeting while others had declined, and on since the balance, rates had changed little. The volume of new public 5/ M plus time and savings deposits at mutual savings banks and at savings and loan associations.
12/17-18/73 had risen sharply in Octoberofferings of corporate bonds--which somewhat further in November, and a less-than-seasonal increased December. The volume of new State decline was in prospect for remained high in November, and a and local government bonds seasonal decline appeared likely in the current month. open market operations since the meeting in mid System November had been guided by the Committee's decision to seek bank reserve and money market conditions consistent with moderate growth in monetary aggregates over the months ahead, while taking account of international and domestic financial market developments. Soon after the November meeting, available data suggested that growth in M1 and M in the November-December period might exceed acceptable ranges. Although it appeared that growth in reserves available to support private nonbank deposits (RPD's) would fall below the range of -1 to -3 per cent that the Committee had specified, for the most part the shortfall was attributable to a larger-than-expected drop in required reserves against large denomination CD's. In view of the behavior of the monetary aggregates, the System, under ordinary circumstances, would have become more restrictive in its reserve-supplying operations, expecting as a result that money market conditions would tighten somewhat.
12/17-18/73 On November 30, however, the available members of the Committee concurred in a recommendation by the Chairman that, in light of current uncertainties regarding the economic outlook and the sensitive state of financial market psychology, current money market conditions be maintained for the time being. In the two statement weeks preceding this meeting, the Federal funds rate averaged about 10-1/8 per cent, little changed from the rate prevailing in the days preceding the November meeting. In the 4 weeks ending December 12, member bank borrowings averaged about $1,410 million, close to the average of about $1,446 million in the preceding 5 weeks. A staff analysis suggested that, if prevailing money market conditions were maintained, the rate of growth of the narrowly defined money stock would be dampened over the months ahead because of the effects on transactions demands for money of the anticipated weakening in economic activity. Some easing of money market and reserve conditions, and the further declines in short-term market rates of interest likely to accompany such easing, would help to sustain moderate growth in M and alsoby encouraging expansion in consumer-type time and savings deposits at banks and nonbank thrift institutions--in M and M . suggested that the outstanding volume of large The analysis also grow moderately, reflecting continuation denomination CD's would
12/17-18/73 of fairly strong business demands for short-term credit and also the lower net cost of such deposits to banks resulting from the recent reduction in marginal reserve requirements against large-denomination CD's. The Committee concluded that the economic situation and outlook called for a modest easing of monetary policy. The members decided that for the period until the next meeting somewhat more emphasis should be placed on money market conditions than had been the case in recent months; specifically, they decided that toward achieving some easing in bank operations should be directed reserve and money market conditions, provided that the monetary excessively. Taking into did not appear to be growing aggregates the staff analysis, the members expected that pursuit account with growth in RPD's in that objective would be consistent of an annual rate within a range the December-January period at that, in the conduct of to 11 per cent. They agreed of 8-1/4 international and domestic should be taken of operations, account and as at other recent meetings, financial market developments, call upon the Committee the Chairman might was understood that it before the for supplementary instructions to consider the need appeared significant inconsistencies meeting if next scheduled objectives and Committee's various among the to be developing constraints.
12/17-18/73 issued to directive was domestic policy The following Reserve Bank of New York: the Federal information reviewed at this meeting--including The production, residential developments in industrial recent that growth in and retail sales--suggests construction, the fourth quarter. A activity is slowing in economic an appreciable rise in in activity and further weakening of the curtailment in oil are in prospect because prices payroll employment expanded supplies. In November nonfarm the unemployment rate, which had dropped in further, but rose again to about the level that had prevailed October, midyear. Wholesale prices of industrial commodities since rise sharply in November, reflecting large continued to increases for petroleum products and widespread additional advances among other commodities; farm and food prices declined further. In nearly all industrial countries abroad, concern has grown that a sustained cut in oil supplies will dis rupt economic activity. Major foreign currencies have depreciated further against the dollar, and intervention sales of dollars by foreign monetary authorities have continued. The U.S. merchandise trade balance registered a strong surplus in the September-October period. The narrowly defined money stock, following little net change over the third quarter, has grown at a rela tively rapid pace over the past 2 months. Growth in the more broadly defined money stock has also been substantial, as net inflows at banks of consumer-type time deposits have been large. Net deposit inflows at nonbank thrift institutions improved somewhat further. Bank credit expansion remained moderate in November, although business loans increased after 2 months of little or no growth. 7 the Federal Reserve announced a reduction On December from 11 to 8 per cent in marginal reserve requirements on large-denomination CD's. Most short-term market interest rates have declined somewhat on balance in recent weeks, while movements in long-term market rates have been mixed.
12/17-18/73 In light of the foregoing developments, it is the policy of the Federal Open Market Committee to foster financial conditions conducive to resisting inflationary pressures, cushioning the effects on production and employment growing out of the oil shortage, and maintaining equilibrium in the country's balance of payments. To implement this policy, while taking account of international and domestic financial market develop ments, the Committee seeks to achieve some easing in bank reserve and money market conditions, provided that the monetary aggregates do not appear to be growing excessively. Votes for this action: Messrs. Burns, Balles, Brimmer, Bucher, Daane, Holland, Mayo, Mitchell, Morris, Sheehan, and Kimbrel. Vote against this action: Mr. Hayes. Absent and not voting: Mr. Francis. (Mr. Kimbrel voted as alternate for Mr. Francis.) Mr. Hayes dissented from this action because, with the problems of inflation increasing rather than abating and with the monetary aggregates apparently growing more rapidly in 1973 than the Committee had considered desirable, he favored a con tinuation of the current degree of monetary restraint without noticeable relaxation unless signs of weakening in the economy became more apparent. He believed that, while there was not much that monetary policy could do to relieve the economic problems arising from the oil shortage, a premature easing of policy could exacerbate the problems of inflation.
12/17-18/73 Subsequent to the meeting it appeared that in the December-January period the annual rate of growth in RPD's might be close to the upper limit of the range that had been specified by the Committee and that rates of growth in M and M might exceed acceptable ranges, although a significant part of the growth in the monetary aggregates could be attributed to an unanticipated increase in deposits of foreign commercial banks at U.S. banks. On January 11 the available memberswith the exception of Mr. Francis--concurred in a recommendation by the Chairman that, in view of the sensitive state of financial markets and the general economic situation, the System aim to maintain prevailing money market conditions for the time being. 2. Authorization for domestic open market operations On January 4, 1974, a majority of Committee members voted to increase from $2 billion to $3 billion the limit on changes between Committee meetings in System Account holdings of U.S. Government and Federal agency securities specified in paragraph the authorization for domestic open market operations, 1(a) of effective immediately, for the period ending with the close of business on January 22, 1974.
12/17-18/73 Votes for this action: Messrs. Burns, Hayes, Brimmer, Holland, Mayo, Mitchell, Morris, Sheehan, and Clay. Vote against this action: Mr. Francis. Absent and not voting: Messrs. Balles, Bucher, and Daane. (Mr. Clay voted as alternate for Mr. Balles.) This action was taken on recommendation of the System Account Manager. The Manager had advised that a substantial volume of open market purchases of securities had been required in the period since the Committee's meeting on December 18, 1973, in order to offset reserve absorption resulting from market factors and that a near-term need to supply reserves was in prospect; he had further advised that strength of the dollar in foreign exchange markets suggested that foreign official sales of U.S. Treasury bills might be heavy and that the System should be in a position to acquire some of those bills while offsetting any undesired effects on bank reserves by other means. Mr. Francis dissented from this action because, in view of his concern over the continuing rapid rate of growth in the monetary aggregates, he preferred that additional reserves necessary to meet requirements over the next few weeks be obtained through member bank borrowings rather than provided through additions to System holdings of securities. Moreover, he believed that foreign official sales of Treasury bills should be absorbed in the market.