February 20, 1974 FOMC Record of Policy Actions

FOMC minutes

banks were not likely to issue substantial amounts of large CD's, even though business loan expansion might denomination very much from the fast pace of January. not moderate Taking account of the staff analysis, the Committee concluded that progress toward its longer-run objective of moderate monetary growth could be achieved with rates of expan sion in the aggregates over the February-March period that were temporarily above those desired for the longer term. For the February-March period it adopted ranges of tolerance of 6-1/2 to 9-1/2 per cent and 9-1/2 to 12-1/2 per cent for the annual rates of growth in M and M2, respectively. The members agreed that rates of growth within those ranges would be likely to in volve RPD growth during the February-March period at an annual rate within a 3-1/2 to 6-1/2 per cent range of tolerance, and they decided that in the period until the next meeting the weekly average Federal funds rate might be permitted to vary in an orderly as low as 8-1/4 per cent to as high as 9-1/2 per cent, fashion from if necessary, in the course of operations. The members also agreed that, in the conduct of operations, account should be taken of international and domestic financial market developments. 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 real output of goods and services is declining in the current quarter, mainly because of the oil situation, and that prices are continuing to rise rapidly. In January industrial production declined again, nonfarm payroll employment dropped, and the unemployment rate rose above 5 per cent. Prices of both farm products and industrial commodities increased very sharply. Wage rates have continued to rise substantially in recent months, although not so sharply as prices. After having appreciated for several months, the dollar has declined somewhat on the average against foreign currencies in recent weeks. U.S. controls on capital outflows were removed at the end of January, and several foreign countries have relaxed controls on capital inflows. The U.S. trade surplus rose sharply in December and in the fourth quarter as a whole. The narrowly defined money stock, after increasing substantially in the last 2 months of 1973, declined in January; most recently, however, it has appeared to strengthen. Broader measures of the money stock con tinued to rise in January, as net inflows of consumer type time deposits remained relatively strong. Expansion in business loans and in total bank credit accelerated, and banks stepped up issuance of large-denomination CD's. Since mid-January, short-term market interest rates have fallen appreciably, and long-term rates have declined somewhat. 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 declines in production and employ ment that are being induced in large part by the oil situation, and maintaining equilibrium in the country's balance of payments.

taking account of this policy, while To implement international and domestic financial market developments, the Committee seeks to achieve bank reserve and money with moderate growth in market conditions consistent aggregates over the months ahead. monetary Votes for this action: Messrs. Burns, Hayes, Balles, Brimmer, Daane, Holland, Mayo, and Mitchell. Votes against this action: Messrs. Bucher, Francis, Morris, and Sheehan. from this action did so for different The members dissenting Messrs. Bucher, Morris, and Sheehan expressed concern reasons. and prospective weakness in aggregate economic about current order to encourage further declines in short. and demands. In long-term interest rates, including mortgage rates, they favored somewhat higher ranges of tolerance for the monetary aggregates and a lower range for the Federal funds rate than the Committee had agreed would be consistent with the directive. Mr. Francis expressed the view that the over-all economic situation was stronger than suggested by the staff projections and that inflation remained the major long-term economic problem. He dissented because he thought the policy adopted by the Committee would permit the money stock to grow at a faster rate than was consistent with progress in dealing with inflation. Subsequent to the meeting it appeared that in the February-March period growth in the monetary aggregates would equal or exceed the upper limits of the short-run ranges of

by the Committee. In view of that behavior, tolerance specified more restrictive in its ordinarily would have become the System operations, expecting that the weekly-average reserve-supplying funds rate would rise toward the upper limit of its Federal range of tolerance--namely, 9-1/2 per cent. On March 1, however, 5 / members concurred in a recommendation a majority of the available in light of the recent marked rise in market by the Chairman that interest rates and the highly sensitive state of financial markets, the System conduct reserve operations in a manner expected to be consistent with maintenance of the funds rate at the prevailing level of about 9 per cent, for the time being. One week later, it appeared that strong growth in the monetary aggregates was persisting. On March 11, in view of that behavior, the available members--with the exceptions of Messrs. Bucher and Sheehan--concurred in a recommendation by the Chairman that the System return to conducting reserve operations in a manner consistent with the full range of tolerance for the Federal funds rate agreed upon at the However, in light of recent increases in February meeting. market interest rates and the sensitive state of financial markets, the Account Manager would be expected to proceed thought likely to be consistent very cautiously in operations average funds rate above 9 per cent. with a rise in the weekly and alternate members of the Committee newly 5/ The members elected by the Federal Reserve Banks took office on March 1 for the term of one year commencing on that date. Mr. Coldwell, responding as alternate for Mr. Kimbrel, did not concur in the Chairman's recommendation.