June 18, 1974 FOMC Record of Policy Actions

FOMC minutes

in the narrowly defined money stock moder Growth ated in May, but apparently it accelerated in early June. Net inflows of consumer-type time deposits at banks slowed in May, and deposit experience at nonbank thrift institutions continued poor. Business credit demands remained large, although the expansion in short-term credit was below the extraordinary pace of was less concentrated at banks. In May banks April and increased their outstanding large-denomination CD's substantially further and continued to borrow in the Euro-dollar market; most recently, however, they have their reliance on these sources of funds. reduced Market interest rates have fluctuated in a narrow range 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 inflationary pressures, supporting a resumption of real economic growth, and achieving equilibrium in the country's balance of payments. To implement this policy, while taking account of developments in domestic and international finan cial markets, the Committee seeks to maintain about the prevailing restrictive money market conditions, provided that the monetary aggregates appear to be growing at rates within the specified ranges of tolerance. Votes for this action: Messrs. Burns, Black, Brimmer, Bucher, Holland, Kimbrel, Mitchell, Sheehan, Wallich, Winn, and Debs. Vote against this action: Mr. Clay. Absent and not voting: Mr. Hayes. (Mr. Debs voted as alternate for Mr. Hayes.) Mr. Clay dissented from this action because he thought that for too long the Committee had accepted rates of growth in the monetary aggregates that would result in a continuing and

inflation. He believed that the aggregates had not yet growing control and that the longer that situation been brought under the more difficult it would be to achieve control and persisted the greater would be the damage done to the economy by inflation. Subsequent to this meeting, in the statement week ending July 3, the Federal funds rate was consistently above 13 per cent about 13-1/2 per cent, despite System efforts to bring and averaged the rate down into the 11-1/4 to 12-1/4 per cent range of tolerance that had been specified by the Committee. On July 5 the Committee held a telephone meeting to discuss the situation and to consider whether any Committee actions would be appropriate. Mr. Coldwell and Mr. Debs participated as alternates for Mr. Kimbrel and Mr. Hayes, respectively. On the day of the telephone meeting, it appeared that in the June-July period growth in M1 would be within its range of tolerance and that growth in M2 would be at about the upper limit of its range. The Manager reported that in order to bring the funds rate back within its range of tolerance he would have had to expand reserve-supplying operations substantially. In his view, the high funds rate was a reflection of the great uncertainty pre vailing in both domestic and foreign financial markets, compounded by the effects of market transactions related to the midyear statement

date for banks and by the July 4 holiday. The Committee concluded that there was no immediate need to press hard to bring the funds rate down within the specified range of tolerance, in view of the likelihood that the high level of the rate was primarily a conse quence of technical factors that might well prove temporary. Subsequent to the telephone meeting the volume of reserves provided was deemed sufficient to have reduced the Federal funds rate to about 12 per cent under normal circumstances. Member bank borrowing at the Reserve Banks was unexpectedly low, however, and the funds rate remained at an extremely high level; its average for the statement week ending July 10 was estimated at about 13-1/2 per cent. The Manager reported that it probably would be difficult to bring the weekly average rate down to the 12-1/4 per cent upper limit of the Committee's range of tolerance without providing nonborrowed reserves on a very large scale. It appeared that in the June-July period the growth rates of both M and M would be somewhat below the upper limits of their ranges of tolerance. On July 10 Chairman Burns recommended that the Manager be instructed to act to reduce the funds rate, but not so aggressively as to risk unduly rapid growth in reserves and monetary aggregates. The Chairman recommended specifically that the Manager be instructed to undertake operations promptly with a view to reducing the average

funds rate to 13 per cent, on the understanding that the funds rate would be permitted to decline to the neighborhood of 12 per cent should money market factors work in that direction. All of the members concurred in this recommendation except Messrs. Bucher and Sheehan, who favored decisive action to reduce the Federal funds rate to the neighborhood of 12-1/4 per cent, and Mr. Winn, who opposed overt action to lower the funds rate, although he would not resist a decline produced by market forces.