October 14–15, 1974 FOMC Record of Policy Actions

FOMC minutes

10/14-15/74 President recommended a pro On October 8 the gram to combat inflation and to mitigate the impact fiscal restraint on certain sectors of monetary and The tax and expenditure proposals of the economy. in the program would, on balance, have included approximately a neutral effect on the size of the Federal deficit. In recent weeks the dollar has declined against leading foreign currencies. The U.S. foreign trade deficit increased substantially in August, as imports of petroleum and industrial materials rose while exports held steady. The narrowly defined money stock rose slightly in September and grew at an annual rate of about 2 per cent over the third quarter, compared with a rate of 6 per cent in the first half of the year. The money supply measure more broadly defined to include bank time and savings deposits other than money market CD's--as well as the measure that includes deposits at other thrift institutions--also rose only slightly in September. Over-all business credit demands slack ened last month, and outstanding business loans at banks leveled off. Since early September interest rates on short-term market instruments have fallen considerably, while yields on Treasury and State and local government bonds have declined modestly. Yields on corporate bonds have risen somewhat further, on balance, reflecting the large volume of offerings in prospect. 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 the forthcoming Treasury financing and of developments in domestic and international financial markets, the Committee seeks to achieve bank reserve and money market conditions consistent with resumption of moderate growth in monetary aggregates over the months ahead.

10/14-15/74 -11- Votes for this action: Messrs. Burns, Hayes, Black, Bucher, Holland, Kimbrel, Mitchell, Sheehan, Wallich, and Winn. Vote against this action: Mr. Clay. Mr. Clay, who dissented from this action, expressed the opinion that the recent shortfalls in growth of M1 were not due entirely to the weakness in economic activity but were, at least in part, a lagged response to the high levels of short term interest rates prevailing in the spring. He believed that monetary growth was likely to pick up, and he was concerned about the possibility of provoking a growth rate that was too rapid. Subsequent to this meeting, on October 31, the available data suggested that in the October-November period the annual rate of growth in M1 would be at the midpoint of the 4-3/4 to 7-1/4 per cent range of tolerance that had been specified by the Committee, reflecting an expectation that M1 growth would accelerate in November from an estimated October rate that was near the lower limit of the range. The rate of growth in M2 in the 2-month period appeared to be at the upper limit of its range. Federal funds most recently had been trading around 9-3/4 per cent, the midpoint of the 9 to 10-1/2 per cent range of tolerance that had been adopted by the Committee.

10/14-15/74 -12- In view of the behavior of the aggregates, the System ordinarily would have become more restrictive in its reserve supplying operations, to the extent consistent with even-keel considerations, expecting that the weekly average Federal funds rate would rise slightly above 9-3/4 per cent. However, members of the Committee, with the exception of Messrs. Clay and Coldwell, concurred in the Chairman's recommendation of October 31 that the funds rate target be reduced to 9-1/2 per cent for the time being, in view of the evidence of additional weakness in economic activity, restraint in the lending policies of banks and other institutions, and the severe financial problems of the construction industry. It was understood that the Manager's operations would need to reflect further changes in the behavior of monetary also have to take account of the current aggregates and would Treasury financing. 2. Amendment to authorization for domestic open market operations On November 11 Committee members voted to amend paragraph 1(b) for domestic open market operations to increase of the authorization the limit on outright holdings of bankers' acceptances from $500 this amendment, paragraph 1(b) read million to $1 billion. With as follows:

10/14-15/74 To buy or sell in the open market, from or to acceptance dealers and foreign accounts maintained at the Federal Reserve Bank of New York, on a cash, regu lar, or deferred delivery basis, for the account of the Federal Reserve Bank of New York at market dis count rates, prime bankers' acceptances with maturities of up to nine months at the time of acceptance that (1) arise out of the current 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 conveying title to the underlying goods; provided that the aggregate amount of bankers' acceptances held at any one time shall not exceed $1 billion. Votes for this action: Messrs. Burns, Hayes, Black, Bucher, Clay, Coldwell, Holland, Kimbrel, Mitchell, Sheehan, and Winn. Votes against this action: None. and not voting: Mr. Wallich. Absent This action was taken on recommendation of the Account Manager who noted that, pending further review, Federal Reserve Banks, effective November 12, 1974, would no longer guarantee payment of bankers' acceptances purchased by the Federal Reserve Bank of New York for official foreign accounts. The Manager advised that the effects of this change on the acceptance market and on accepting banks could not be foreseen and that an increase in the limit in question could prove helpful in case of need for System action designed to insure a smooth market adjust ment. (At its meeting on November 19 the Committee decided to retain the $1 billion limit, which was deemed consistent with longer-term needs to supply reserves.)