May 21, 1974 FOMC Record of Policy Actions

FOMC minutes

was in prospect for May. increase in the volume A substantial expanded in government issues of State and local Offerings was in prospect for May. April, and a moderate decline analysis suggested that maintenance of pre A staff this time would be associated market conditions at vailing money the rate of growth of the narrowly defined with a dampening in money stock over the months ahead, because the demand for money to be restrained by the lagged effects of the sharp was likely rise in short-term market rates of interest that had occurred over the past few months. According to the analysis, growth in consumer-type time and savings deposits at both banks and nonbank thrift institutions would continue to be curtailedbecause of high market interest rates relative to rates available on time deposits--and growth in broader measures of the money stock would slow further. Banks would continue to rely heavily on issuance of large-denomination CD's and borrowings in the Euro-dollar market to finance loan expansion, appeared likely that a tightening in banks' lending although it terms would moderate loan growth. The Committee concluded that the economic situation to call for moderate growth in monetary aggregates continued ahead. At the same time, the members decided over the months

that--in view of the sensitive state of financial markets and the considerable tightening in money market conditions that over recent months--greater emphasis than usual had occurred should be placed on money market conditions during the period until the next meeting, and accordingly, that the range spec ified for the Federal funds rate should be narrower than usual. In particular, they agreed that operations in the coming period should be directed toward maintaining about the prevailing restrictive money market conditions, provided that the monetary aggregates appeared to be growing over the May-June period at rates within specified ranges of tolerance. The members also agreed that the lower limits of the tolerance ranges specified for the monetary aggregates should be set at levels that would accommodate slower growth rates than expected at present in the event that such rates developed, given about the prevailing money market conditions. Taking account of the staff analysis, the Committee 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 11 per cent to as high as 11-1/2 per cent, if necessary, in the course of operations. For the May-June period the Committee adopted ranges of tolerance of

3 to 7 per cent and 4-1/2 to 7-1/2 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 involve RPD growth during the same period at an annual rate within a 13 to 20 per cent range. The members also agreed that, in the conduct of operations, account should be taken of developments in domestic and interna tional financial markets. It was understood that the Chairman might call upon the Committee to consider the need for supple mentary 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--which had declined appreciably in the first quarter--is likely to change little in the current quarter and that price increases are continuing exceptionally large. In April industrial production and manufacturing employment expanded somewhat, after having declined for 4 months. The unemployment rate edged down to 5 per cent, as the civilian labor force declined. Wholesale prices of farm and food pro ducts declined substantially further, but increases among industrial commodities again were widespread and extraordinarily large. The advance in wage rates has accelerated somewhat in recent months, and unit labor costs have been rising at a fast pace.

In the first 3 days of the statement week beginning June 6 the Federal funds rate averaged about 11.40 per cent, close to the 11-1/2 per cent upper limit established by the The System Account Manager advised that market Committee. psychology was delicately poised; expectations of declining interest rates had strengthened during the past week, partly in conjunction with publicity attendant on reductions in the prime rate by a number of banks. Although those expectations had been dampened by System operations, the Manager reported that it would be useful to have some additional leeway with respect to the funds rate if necessary to counteract a resur gence of such expectations. Against that background, Chairman Burns recommended on June 10 that the upper limit of the funds rate constraint be raised to 11-3/4 per cent, on the under standing that the Manager would use the additional leeway if market interest rates came under downward pressure or if the monetary aggregates for the May-June period appeared to be testing the upper limits of their tolerance ranges. The members concurred in the Chairman's recommendation.