March 18–19, 1974 FOMC Record of Policy Actions: Full Text
RESERVE FEDERAL release press June 17, 1974 For immediate release of Governors of the Federal Reserve System The Board Market Committee today released the attached and the Federal Open by the Federal Open Market Committee record of policy actions taken at its meeting on March 18-19, 1974. Such records are made available approximately 90 days of the Committee and are published after the date of each meeting in the Federal Reserve Bulletin and the Board's Annual Report. 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 meeting, rather than on data as they may have been revised since then. Attachment
RECORD OF POLICY ACTIONS OF THE FEDERAL OPEN MARKET COMMITTEE Meeting held on March 18-19, 1974 1/ 1. Domestic policy directive reviewed at this meeting continued to The information suggest that real output of goods and services, which had grown at an annual rate of about 1.5 per cent in the fourth quarter of 1973, was declining in the first quarter of this year--in large part because of the oil situation--and that the GNP implicit deflator was still rising at a rapid rate. Staff projections, like those of 4 weeks earlier, suggested that real output would change little in the second quarter and that the rise in prices would remain rapid. In February industrial production receded for the third consecutive month, as output of automobiles and auto parts and of nondurable consumer goods declined while output of business equipment changed little. Employment in durable goods manu facturing also continued to decline, but total nonfarm employment rose appreciably, returning to the peak reached in November 1973. The rate of unemployment--which had risen from a recent low of period, beginning on was held over a 2-day 1/ This meeting the afternoon of March 18, in order to permit the Committee to authorizations and directives without in review its continuing fringing on the time available for its deliberations on current monetary policy.
3/18-19/74 unchanged per cent in January--was October to 5.2 4.6 per cent in in February. Retail sales fell, reflecting decreases in sales at automobile dealerships and gasoline service stations; total retail sales for the month were slightly below the monthly average for the fourth quarter of 1973. Wholesale prices of farm and food products and of industrial commodities rose sharply in February, although at a lesser rate than in the preceding 2 months. Price increases continued to be widespread among industrial commodities and were especially large for fuels, metals, and nonmetallic minerals. In January the consumer price index had risen substantially further, with much of the rise being caused by steep increases in retail prices of foods and fuels. In the first 2 months of the year, advances in the index of average hourly earnings of production workers on nonfarm payrolls moderated from the rapid pace in the second half of 1973. Staff projections suggested that termination of the Arab embargo on oil shipments to the United States--reported on March 18--would have no more than a marginally expansive impact on over-all real output until the summer, although it might strengthen the automobile and housing markets promptly. Expec tations for the second quarter were that expansion in business fixed investment would remain relatively strong; that growth in
3/18-19/74 government purchases of goods and services would continue at a substantial rate; and that the rise in personal consumption expenditures would pick up somewhat as demands for domestic type automobiles--which had fallen sharply in the autumn and winter months--strengthened. It was also anticipated, however, that residential construction outlays--which lag behind starts for new housing units--would decline appreciably further and that invest ment in business inventories would not be so large as in the two preceding quarters. In foreign exchange markets the dollar depreciated against leading foreign currencies during the first 3 weeks of February and then changed little through mid-March, at an average level still well above that of October 1973. Moreover, the U.S. balance of payments on the official settlements basis appeared to have shifted from a substantial surplus in January to a deficit in February. In January the U.S. merchandise trade surplus--although down somewhat from December--remained large, with exports expanding much as imports; a significant part of the rise in the almost as to a sharp increase in the cost value of imports was attributable of imported petroleum products. in total loans and investments at U.S. commercial Growth rapid in February; while expansion in most major banks remained
3/18-19/74 types of loans slowed appreciably, banks' holdings of Treasury and loans to securities dealers rose sharply. Although securities businesses continued to increase their short-term borrowing at a they raised a large share of these funds in the com rapid pace, market where rates were favorable relative to mercial paper rates on bank loans. In late February most banks reduced effective the prime rate applicable to large corporations from 9 to 8-3/4 per cent. The narrowly defined money stock (M1),2/ after having declined in January, expanded substantially in February in associ ation with an unusually large decline in U.S. Government deposits. Rapid expansion in M continued in early March. Net inflows of time and savings deposits other than large-denomination CD's remained relatively strong in February, and growth in the more broadly defined money stock (M2)3/ accelerated to a high rate. However, the bank credit proxy 4/ rose little; the large increases in private demand deposits and in consumer-type time and savings deposits were almost offset by the extraordinary decline in U.S. Government deposits and a slowing down--as compared with Januaryof growth in the outstanding volume of large-denomination CD's. 2/ Private demand deposits plus currency in circulation. 3/ M1 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.
3/18-19/74 Net deposit inflows at nonbank thrift institutions in February, as in January, remained near the improved rate of the final months of 1973. Growth in the measure of the money stock that includes such deposits (M3)5/ --like growth in M2--accelerated to a high rate. Contract interest rates on conventional mortgages declined further between early February and early March. System open market operations since the February 20 meeting had been guided by the Committee's decision to seek bank reserve and money market conditions consistent with moderate growth in the monetary aggregates over the months ahead, while taking account of international and domestic financial market develop ments. Toward the end of February, incoming data suggested that in the February-March period growth in M would exceed the range of tolerance specified by the Committee and that growth in M and in reserves available to support private demand deposits (RPD's) would about equal the upper limits of their specified ranges. Such behavior ordinarily would have led to more restrictive reserve-supplying operations and a rise in the Federal funds rate toward the upper limit of its range of tolerance--namely, 9-1/2 per cent. On March 1, however, a majority of the available Committee members concurred in the Chairman's recommendation that, in light of the marked rise in short-term interest rates 5/ M2 plus time and savings deposits at mutual savings banks and at savings and loan associations.
3/18-19/74 that had occurred since the February meeting and of the highly sensitive state of the financial markets, reserve-supplying operations for the time being should be conducted in a manner expected to be consistent with maintenance of the Federal funds rate at about the 9 per cent level that had prevailed over the preceding 3 weeks. Ten days later, in response to evidence that strong growth in the monetary aggregates was persisting, a majority of the available members concurred in the Chairman's recommendation that reserve-supplying operations should be conducted in a manner consistent with the range of tolerance for the Federal funds rate that had been agreed upon at the February meeting--although, in light of recent increases in market interest rates and the sensitive state of financial markets, the Account Manager was instructed to proceed very cautiously in operations thought likely to be con rise in the weekly average Federal funds rate above sistent with a 9 per cent. In mid-March, just before this meeting, the Federal funds rate was in a range of 9-1/4 to 9-1/2 per cent; member bank borrowings averaged around $1,130 million in the 4 weeks ending March 13, almost the same as in the preceding 4 weeks. Short-term market interest rates, which had fallen irregularly for more than 2 months, rose appreciably in the period between the
3/18-19/74 meeting on February 20 and this meeting--in large Committee's rate did not decline further as part because the Federal funds had expected and because short-term credit market participants Rates advanced more for Treasury bills demands remained strong. than for other short-term instruments, under the influence of in dealers' costs of financing the following: an increase sales of bills to offset the reserve-supplying inventories, System deposits at reduction in U.S. Government effects of the large of a tax-anticipation and Treasury issuance Reserve Banks, Federal the market rate the time of this meeting for new cash. At bill was 7.95 per cent, up from 7.03 per on 3-month Treasury bills day before the February meeting. cent on the Yields on long-term securities, like those on short-term appreciably in the inter-meeting period, as capital issues, rose market financing remained heavy and as dealers--who had been holding substantial inventories in anticipation of continuing declines in yields--reduced their inventories when yields turned up. The over-all volume of new public offerings of corporate and State and local government bonds--although down moderatelywas still relatively large in February, and a substantial increase in the volume was in prospect for March. The Treasury planned to announce shortly a cash offering of securities amounting to $4 billion. The offering was expected to include short-term notes as well as tax-anticipation bills.
3/18-19/74 The Committee concluded that the economic situation and to call for moderate growth in monetary aggre outlook continued run; therefore, in view of the rapid monetary gates over the longer expansion recently, it would seek to moderate growth in monetary ahead. According to a staff analysis, aggregates over the months pursuit of that objective would be likely to entail a further tightening of bank reserve and money market conditions in the near term and some further increases in interest rates in general. Upward pressures on interest rates might well be intensified in the weeks ahead as the market absorbed the large Treasury financing in prospect. The analysis also noted, however, that estimates of the likely strength of money demands over the spring and summer and of the relationships between monetary growth rates and market interest rates were subject to larger margins of error than usual because of the greater uncertainty attached to projections of nominal GNP and because of the difficulties of assessing how and savers would react to the recent and borrowers, lenders, prospective rates of inflation. The staff analysis suggested that, even with the contem plated firming of bank reserve and money market conditions, expansion in M would be relatively large over the March-April period, partly as a consequence of the sizable increase that had taken place in early March. Although net inflows of con time and savings deposits to banks and nonbank thrift sumer-type
3/18-19/74 institutions were expected to recede in response to the increases in market rates of interest, growth in M also was expected to be relatively high. Thus, ranges of tolerance for the March April period of 6-1/2 to 8-1/2 per cent and 7-3/4 to 9-3/4 per cent for M and M2, respectively, might be consistent with achieve ment of the Committee's longer-run objectives for the monetary aggregates. Taking account of the staff analysis, the Committee con cluded that progress toward its objective of moderating monetary growth could be achieved even with rates of expansion in the aggre the March-April period that were temporarily above gates over Accordingly, the members desired for the longer term. those found the upper limits of the 2-month ranges of tolerance noted above to be acceptable. In view of the recent high rate of monetary growth, however, they agreed that the lower limits of those ranges should be reduced somewhat, so as to permit more rapid progress toward moderate monetary growth, should the growth rates in the aggregates in the period immediately ahead appear to be falling short of present expectations. Specifically, for the March-April period the Committee adopted ranges of tol erance of 5-1/2 to 8-1/2 per cent and of 6-3/4 to 9-3/4 per cent for the annual rates of growth in M and M , respectively. The
3/18-19/74 members agreed that rates of growth within those ranges would be likely to involve RPD growth during the same period at an annual rate within a 4 to 7 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 fashion from as low as 9 per cent to as high as 10-1/2 per cent, if nec essary, 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, including the prospective Treasury financing. It was understood that the Chairman might call upon the Committee to consider the need for supplementary instructions before the meeting if significant inconsistencies appeared next scheduled among the Committee's various objectives and to be developing constraints. policy directive was issued to The following domestic 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, in large part because of the oil situation, and that prices are continuing to rise rapidly. In February industrial production and manu facturing employment declined again, while total nonfarm payroll employment recovered, and the unemployment rate was unchanged at 5.2 per cent. Prices of farm and food products and industrial commodities increased sharply, although less so than in the preceding 2 months. In creases in wage rates appear to have moderated in recent months.
3/18-19/74 -11- After depreciating during the first 3 weeks of February, the dollar has since shown little net change against leading foreign currencies. The U.S. trade surplus remained large in January, despite a further sharp rise in the cost of petroleum imports. The narrowly defined money stock, after having declined in January, increased sharply in February and early March. Broader measures of the money stock rose substantially in February, as net inflows of consumer-type time deposits remained relatively strong. Business short-term borrowing at banks and in the open market has continued at a rapid pace. Following earlier declines, both short- and long-term market interest rates have risen appreciably 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 resisting inflation ary pressures, supporting a resumption of real economic growth, 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, including the prospective Treasury financing, the Committee seeks to achieve bank reserve and money conditions that would moderate growth in mone market tary aggregates over the months ahead. Votes for this action: Messrs. Hayes, Black, Brimmer, Bucher, Burns, Clay, Holland, Kimbrel, Mitchell, Sheehan, Wallich, and Winn. Votes against this action: None. 2. Review of continuing authorizations of the Federal Open Market being the first meeting This of new members from the Federal Committee following the election beginning March 1, 1974, and Banks to serve for the year Reserve followed its customary of duties, the Committee their assumption authorizations and all of its continuing practice of reviewing
3/18-19/74 the authorization for amendments made to directives. Certain and the authorization for foreign domestic open market operations sections of this are reported in succeeding currency operations from those amendments, for the changes resulting record. Except and also the the two authorizations, the Committee reaffirmed their existing form. directive, in foreign currency actions: Messrs. Votes for these Burns, Hayes, Black, Brimmer, Bucher, Holland, Kimbrel, Mitchell, Clay, Sheehan, Wallich, and Winn. Votes against these actions: None. Paragraph 2 of the authorization for domestic open market operations authorizes the Federal Reserve Bank of New York (and, under certain circumstances, other Reserve Banks) to purchase short-term certificates of indebtedness directly from the Treasury, subject to certain conditions. This authorization is, in turn, based on a provision of Section 14(b) of the Federal Reserve Act authorizing the Federal Reserve Banks to buy and sell obligations "directly from or to the United States," sub of specified types ject to certain conditions. It was noted at this meeting that, because the statutory authority in question had expired on November 1, 1973, paragraph 2 of the authorization had been in a state of de facto suspension since then, and that the paragraph would remain in suspension until pending legislation to extend the authority was enacted.
3/18-19/74 of paragraph 3 of also took special note The Committee the Reserve Banks authorization, which authorizes the domestic securities held in the in lending of U.S. Government to engage instructions as the Com Market Account under such System Open That paragraph had been specify from time to time. mittee might 1969, on the basis of authorization on October 7, added to the that in the existing circumstances a judgment by the Committee was reasonably necessary to the such lending of securities market operations and to the effectu effective conduct of open and on the understanding that the ation of open market policies, be reviewed periodically. At this meeting authorization would the judgment of the Manager that the the Committee concurred in lending activity in question remained reasonably necessary and should remain in effect sub that, accordingly, the authorization ject to periodic review. 3. Amendments to authorization for domestic open market operations On the recommendation of the System Account Manager, the Committee amended paragraph 1(a) of the authorization for domestic open market operations to raise 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, effective March 18, 1974. The Manager noted that there had been a marked increase in recent years in the maximum net variation
3/18-19/74 -14- between meeting dates as a result in System Account holdings of increased variation in market factors affecting mainly and that in 3 of the past 12 inter-meeting periods reserves, the Committee had found it necessary to authorize temporary increases in the limit to $3 billion. The Committee concurred in the Manager's view that a permanent increase would be appro priate at this time. The Committee also approved two clarifying changes in the language of paragraph 1(a) recommended by the Manager, effective March 18, 1974. One of these, which involved the insertion of a parenthetical phrase reading "including forward in the statement regarding changes in System Account commitments" holdings between meeting dates, was intended to make it clear for purpose of the limit, holdings were to be calculated that, on a "commitment" basis. A similar phrase had been included statement prior to March 1964. At that in the corresponding time the Committee had approved an amendment to the clause for of clarifying the language in certain other respects, the purpose the new language the reference to forward and in transcribing commitments was inadvertently omitted. The second clarifying change, which involved the addition of the phrase "including securities of the Federal Financing Bank"
3/18-19/74 was intended to make it sentence of paragraph 1(a), in the first when issued, would be treated clear that securities of that Bank, operations in the same manner as Treasury in System open market Bank, which had been established The Federal Financing securities. late in 1973 for the purpose of consolidating by legislation enacted agencies and of other bor financing of a variety of Federal the whose obligations are guaranteed by the Federal Government, rowers to commence operations soon. Under the terms of the was expected legislation, the obligations of the Bank would be obligations of the United States. Votes for these actions: Messrs. Burns, Hayes, Black, Brimmer, Bucher, Clay, Holland, Kimbrel, Mitchell, Sheehan, Wallich, and Winn. Votes against these actions: None. On the basis of recommendations by a staff committee appointed to study System operations in bankers' acceptances, the Committee amended paragraph 1(b) of the domestic autho rization, which relates to open market purchases and sales of acceptances, and the part of paragraph 1(c), governing repurchase agreements, which relates to repurchase agreements in acceptances, effective April 1, 1974. Prior to this action the domestic autho rization had authorized System operations in prime bankers' accep tances "of the kinds designated in the Regulation of the Federal
3/18-19/74 / amendments was to purpose of the Committee."6 One Open Market incorporate the rules governing System operations in bankers' acceptances directly in the Committee's domestic authorization. A second purpose was to modernize those rules by removing outdated provisions and broadening somewhat the scope of bankers' accep tances eligible for purchase by the System. The new rules broadened the types of acceptances eligible for purchase by eliminating the requirement that banks have in their possession shipping documents conveying or securing title at the time they accept drafts covering the shipment of goods in the United States; by increasing from 6 to 9 months the maximum maturity of acceptances eligible for pur chase; and by authorizing the purchase of acceptances that finance the storage in the United States of any goods, rather than "readily marketable staples." Dollar exchange bills, a type of instrument that is seldom used, were eliminated from the list of acceptances authorized for purchase. No major change in System operations in bankers' acceptances was expected to result from these amendments. One further amendment to paragraph 1(b) was made simply to remove unnecessary wording. Previous language specifying had authorized operations Regulation, in turn, 6/ The Committee's for purchase by the Reserve of the kinds made eligible in acceptances Regulation B. In companion actions, Banks under the Board of Governors' Governors rescinded its 1, 1974, the Board of also effective April to delete the Committee amended its Regulation Regulation B and the regulatory actions was B. Notice of these reference to Regulation Register for April 1, 1974. published in the Federal
3/18-19/74 should not exceed of bankers' acceptances aggregate holdings that of the total or 10 per cent million, of two figures--$125 the lower by language spec outstanding--was replaced volume of acceptances 10 per cent limitation million. The limit of $125 ifying a single the volume of outstanding useful purpose since no longer served a in excess of $8 billion. had grown to a level acceptances actions: Messrs. Votes for these Brimmer, Bucher, Burns, Hayes, Black, Kimbrel, Mitchell, Clay, Holland, and Winn. Votes Sheehan, Wallich, actions: None. against these In connection with the foregoing actions, the Committee instructed the staff committee to conduct further studies of the desirability of expanding System open market operations in bankers' acceptances to encompass all types of prime acceptances, including finance bills. Reflecting the amendments to paragraphs 1(a), 1(b), and open market operations read 1(c), the authorization for domestic as follows: 1. The Federal Open Market Committee authorizes and directs the Bank of New York, to the extent necessary to Federal Reserve carry out the most recent domestic policy directive adopted at a meeting of the Committee: To buy or sell U.S. Government securities, (a) including securities of the Federal Financing Bank, that are direct obligations of, or fully and securities as to principal and interest by, any agency guaranteed of the United States in the open market, from or to and foreign and international accounts securities dealers
3/18-19/74 the Federal Reserve Bank of New York, on maintained at a cash, regular, or deferred delivery basis, for the System prices, and, for such Account, Open Market Account at market U.S. Government and Federal agency to exchange maturing or the individual agencies with the Treasury securities without replacement; provided or to allow them to mature U.S. Government and Federal aggregate amount of that the in such Account (including forward agency securities held of business on the day of a commitments) at the close at which action is taken with meeting of the Committee directive shall not be increased respect to a domestic policy by more than $3.0 billion during the period or decreased of business on the day follow commencing with the opening ending with the close of business on ing such meeting and the day of the next such meeting; buy or sell in the open market, from or to (b) To acceptance dealers and foreign accounts maintained at the Federal Reserve Bank of New York, on a cash, regular, or deferred delivery basis, for the account of the Federal Reserve Bank of New York at market discount rates, prime bankers' acceptances with maturities of up to nine months at the time of acceptance that (1) arise out of the cur rent shipment of goods between countries or within the United States, or (2) arise out of the storage within the United States of goods under contract of sale or expected to move into the channels of trade within a reasonable time and that are secured throughout their life by a warehouse receipt or similar document con veying title to the underlying goods; provided that the acceptances held at any one aggregate amount of bankers' time shall not exceed $125 million; (c) To buy U.S. Government securities, obligations that are direct obligations of, or fully guaranteed as to principal and interest by, any agency of the United States, and prime bankers' acceptances of the types authorized for purchase under 1(b) above, from nonbank dealers for the account of the Federal Reserve Bank of New York under agreements for repurchase of such sec urities, obligations, or acceptances in 15 calendar days or less, at rates that, unless otherwise expressly authorized by the Committee, shall be determined by com bidding, after applying reasonable limitations petitive
3/18-19/74 volume of agreements with individual dealers; on the that in the event Government securities or agency provided by any such agreement are not repurchased issues covered by the dealer pursuant to the agreement or a renewal they shall be sold in the market or transferred thereof, System Open Market Account; and provided further to the that in the event bankers' acceptances covered by any such agreement are not repurchased by the seller, they to be held by the Federal Reserve Bank or shall continue shall be sold in the open market. 2. The Federal Open Market Committee authorizes and directs Reserve Bank of New York, or, if the New York the Federal Reserve Bank is closed, any other Federal Reserve Bank, to purchase directly from the Treasury for its own account (with discretion, in cases where it seems desirable, to issue participations to one or more Federal Reserve Banks) such amounts of special short-term certificates of indebted ness as may be necessary from time to time for the temporary accommodation of the Treasury; provided that the rate charged on such certificates shall be a rate 1/4 of 1 per cent below the discount rate of the Federal Reserve Bank of New York at the time of such purchases, and provided further that the total amount of such certificates held at any one time by the Federal Reserve Banks shall not exceed $1 billion. 3. In order to insure the effective conduct of open market operations, the Federal Open Market Committee authorizes and directs the Federal Reserve Banks to lend U.S. Govern ment securities held in the System Open Market Account to Government securities dealers and to banks participating in Government securities clearing arrangements conducted through a Federal Reserve Bank, under such instructions as the Committee may specify from time to time. 4. Authorization for foreign currency operations The Committee approved an increase from $2 billion to $3 billion in the System's swap arrangement with the Bank of England and the corresponding amendment to paragraph 2 of the authorization
3/18-19/74 for foreign currency operations, effective March 26, 1974. With this change, paragraph 2 of the authorization read as follows: The Federal Open Market Committee directs the Bank of New York to maintain reciprocal Federal Reserve ("swap" arrangements) for the currency arrangements Market Account for periods up to a maximum System Open of 12 months with the following foreign banks, which are among those designated by the Board of Governors of the Federal Reserve System under Section 214.5 of Regulation N, Relations with Foreign Banks and Bankers, and with the approval of the Committee to renew such arrangements on maturity: Amount of arrangement (millions of Foreign bank dollars equivalent) Austrian National Bank 250 National Bank of Belgium 1,000 Bank of Canada 2,000 National Bank of Denmark 250 Bank of England 3,000 Bank of France 2,000 German Federal Bank 2,000 Bank of Italy 3,000 Bank of Japan 2,000 Bank of Mexico 180 Netherlands Bank 500 Bank of Norway 250 Bank of Sweden 300 Swiss National Bank 1,400 Bank for International Settlements: Dollars against Swiss francs 600 Dollars against other European currencies 1,250 Votes for this action: Messrs. Burns, Hayes, Black, Brimmer, Bucher, Clay, Holland, Kimbrel, Mitchell, Sheehan, Wallich, and Winn. Votes against this action: None.
3/18-19/74 -21 This action was taken after consultation with the U.S. Treasury. It was expected to contribute to international monetary stability by expanding the facilities available for coping with temporary pressures on sterling arising from short-run possible fluctuations in international payments flows.