September 10, 1974 FOMC Record of Policy Actions

FOMC minutes

remained relatively strong in August, growth in total bank credit was moderate, and banks reduced their reliance on large-denomination CD's and nondeposit funds. Interest rates on most short-term market instruments have changed little on balance since mid-August, while rates on most types of longer-term securities have risen further. On September 4 the Federal Reserve announced the removal of the 3 per cent marginal reserve requirement on longer term large-denomination CD's. 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, Black, Bucher, Clay, Holland, Kimbrel, Mitchell, Sheehan, Wallich, and Winn. Vote against this action: Mr. Hayes. Mr. Hayes, who dissented from this action, observed that inflation and inflationary expectations continued unabated whereas the probabilities, in his view, were against the develop ment of a severe recession. He believed that the pursuit of somewhat higher rates of monetary growth than contemplated earlierin accordance with the Committee's decision--would signify an

inappropriate easing of policy in terms of an immediate decline in the Federal funds rate and in other market interest rates. He favored maintenance of about the current policy of firm monetary restraint, particularly since fiscal restraint was by no means assured at present. Subsequent to the meeting it appeared that in the September-October period the annual rates of growth in the monetary aggregates would be below the lower limits of the ranges of tolerance that had been specified by the Committee. The Federal funds rate recently had been fluctuating around 11 per cent, 1/2 of a percentage point above the lower limit of its specified range, and the System Account Manager was endeavoring to supply reserves at a rate consistent with some further easing in money market conditions. The members--with the exception of Messrs. Hayes and Winn--concurred in the Chairman's recommendation of October 3 that, in order to pro vide operating flexibility in the event of evidence of further weakening in the behavior of the aggregates, the lower limit of the funds rate constraint be reduced by 1/4 of a percentage point, to 10-1/4 per cent, for the period remaining until the next Committee meeting.

2. Special authorization relating to foreign currency operations On September 25, 1974, Committee members were advised that the Federal Reserve Bank of New York, after discussions with Franklin National Bank, had developed a plan to purchase the foreign exchange position of Franklin, amounting to approximately $800 million equi valent; that the Board of Governors of the Federal Reserve System had concurred in the proposed arrangement; and that the New York Bank was requesting the Committee's specific approval of such open market transactions in foreign currencies as might be necessary to carry out the arrangement. The members of the Committee voted to approve the following special authorization: The Federal Reserve Bank of New York is authorized and directed, under the provisions of 270.4(e) of the Regulation relating to Open Market Operations of Federal Reserve Banks, to engage in such open market transactions in foreign currencies, including transactions for the System Open Market Account, as may be necessary to carry out the arrangements that have been made by the Federal Reserve Bank of New York, with the concurrence of the Board of Governors of the Federal Reserve System, for the disposition of assets and liabilities of the Franklin National Bank. Votes for this action: Messrs. Burns, Hayes, Black, Bucher, Clay, Holland, Kimbrel, Mitchell, Sheehan, Wallich, and Winn. Votes against this action: None. This action was taken against the background of the problems that Franklin had been experiencing in covering its foreign exchange

commitments, and for the purpose of assisting the foreign exchange markets by avoiding the weakening of confidence that appeared likely to ensue if contracts in the volume Franklin had outstanding were not honored. Under the agreement proposed (and subsequently implemented), Franklin would indemnify the New York Bank against any losses it might incur in fulfilling Franklin's foreign exchange position.