August 20, 1974 FOMC Record of Policy Actions

FOMC minutes

probably lead to only a modest downward adjustment in market interest rates in general, because in the weeks ahead the volume of offerings of both private and Government securities was expected to be substantial. The staff analysis suggested that inflows to banks of time and savings deposits other than money market CD's would slow somewhat further in the months ahead and that the deposit experience of nonbank thrift institutions would remain weak, as many small savers continued to find market instruments more attractive than deposit accounts. It was expected that expansion in business loans--and in total bank credit--would moderate, because of both a decline in the rate of business inventory accumulation and a tightening of bank lending policies, and that, consequently, growth in the outstanding volume of money market CD's would moderate. Taking account of the staff analysis, the Committee concluded that growth in M1 and M over the August-September period at annual rates within ranges of tolerance of 4-3/4 to 6-3/4 per cent and 5-1/2 to 7-1/2 per cent, respectively, would be consistent with its longer-run objectives for the monetary aggregates. The members agreed that such growth rates would be likely to involve growth in reserves available to support private nonbank deposits (RPD's) within a range of

tolerance of 7-3/4 to 9-3/4 per cent, 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 11-1/2 per cent to as high as 12-1/2 per cent, if necessary, in the course of operations. The members also agreed that, in the conduct of operations, account should be taken of developments in domestic and inter national 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 is changing little in the current quarter, following the first half decline, and that price and wage increases are continuing large. In July industrial production was unchanged from the May-June level, and nonfarm pay roll employment declined further. The unemployment rate edged up to 5.3 per cent. Wholesale prices of farm and food products rose sharply, after having declined for 4 months, and increases among industrial commodities continued widespread and extraordinarily large. The new Administration has indicated that it will give high priority to combating inflation and that it will convene a summit meeting of the nation's economic leaders to that end.

In recent weeks the dollar has appreciated some what further against leading foreign currencies. U.S. bank lending to foreign borrowers, especially in Japan, has apparently continued large, but inflows of foreign capital, particularly from oil-exporting countries, have also been large. The foreign trade deficit, al though smaller in June than in May, widened substan the second quarter as the tially from the first to value of petroleum imports increased. The narrowly defined money stock rose only slightly in July, after having grown at an annual rate of 6 per cent over the first half of the year. Net inflows at banks of time deposits other than money market CD's slowed somewhat in July, and deposit experience at nonbank institutions worsened materially in July and early August. Growth in business loans and in total bank credit was substantial in July, although the pace of expansion slackened after the early part of the month. To finance loan growth, banks reduced their holdings of Treasury securities and increased their outstanding volume of large-denomination CD's by substantial amounts. Interest rates on most private market instruments have declined a little in recent weeks, and in association with some easing of tensions in financial markets, yield spreads between prime- and lower-quality issues--which had widened sharply--have narrowed. Yields on Government secu rities, particularly Treasury bills, have increased, in part because new Treasury offerings relieved a market shortage of such securities. 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 financial markets, the Committee seeks to achieve bank reserve and money market conditions consistent with moderate growth in monetary aggregates over the months ahead. Votes for this action: Messrs. Burns, Hayes, Black, Bucher, Clay, Holland, Kimbrel, Mitchell, Sheehan, Wallich, and Winn. Votes against this action: None. Absent and not voting: Mr. Brimmer.