November 19, 1974 FOMC Record of Policy Actions

FOMC minutes

Markets for long-term securities also improved, as many investors concluded that long-term rates had passed their peaks. Yields on Treasury and corporate bonds declined, although the volume of public offerings of corporate bonds in October and in prospect for November was unusually large. Contract interest rates on new commitments for conventional home mortgages in the primary market turned down in October, while yields on commitments in the secondary market for Federally underwritten home mortgages continued to decline. The Committee concluded that the economic situation and outlook called for moderate growth in the monetary aggregates over the longer run. A staff analysis suggested that growth in M1--although still relatively sluggish in October--would be fairly rapid in the November-December period, reflecting the cumulative impact of the decline in interest rates that had occurred in recent months and the temporary effects of a substantial decline in U.S. Government deposits. Nevertheless, it appeared likely that if M1 were to grow at a rate consistent with the Committee's longer-run objectives for the monetary aggregates, money market conditions would have to ease slightly further in the period immediately ahead. Such easing probably would be accompanied by little, if any, further decline in other market interest rates.

The staff analysis suggested that net inflows to banks of time and savings deposits other than large-denomination CD's, which had picked up sharply in October, would remain substantial in the period immediately ahead and that net inflows to nonbank thrift institutions would imporve further. Expansion in bank credit was likely to be moderate, in part because banks had adopted more cautious loan and investment policies. Taking account of the staff analysis and in light of the recent relatively slow growth of the monetary aggregates, the Committee concluded that its objective of moderate monetary growth could be [strikeout:achieved] FURTHERED with RELATIVELY RAPID rates of expansion in the NOVEMBER-DECEMBER PERIOD [strikeout: near term that were temporarily above those desired for the longer term]. Specifically, the Committee adopted ranges of tolerance for the November-December period of 6-1/2 to 9-1/2 per cent and 8 to 10-1/2 per cent for the annual rates of growth in M and M2, The members agreed that such growth rates would respectively. be likely to involve growth in reserves available to support private nonbank deposits (RPD's) within a range of tolerance of 2-1/2 to 5-1/2 per cent. They decided that in the period until the next meeting the weekly average Federal funds rate be per mitted to vary in an orderly fashion from as low as 8-1/2 per cent to as high as 10 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 international financial markets. It was understood that the Chairman might call upon the Committee to consider the need for supplementary instruc tions 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 falling significantly further in the current quarter while price and wage increases are continuing large. In October industrial production declined--after having changed little since May--and the unemployment rate increased further, from 5.8 to 6.0 per cent. In recent weeks sizable cutbacks in automobile production have been announced, and claims for unemployment insurance have continued to increase. There are major uncertainties concerning the duration of the coal strike; a lengthy shutdown would have substantial effects on other industries. The October rise in wholesale prices of industrial commodities, although substantial, remained well below the extraordinarily rapid rate in the first 8 months of the year; prices of farm products and foods increased sharply. In recent weeks the dollar has declined further against leading foreign currencies. In the third the U.S. foreign trade deficit was substan quarter tially larger than in the second quarter, but U.S. banks sharply reduced their foreign lending.

Growth of the narrowly defined money stock picked up from the slow pace of the third quarter to an annual rate of about 5 per cent in October. Net inflows of consumer-type time and savings deposits at banks and at nonbank thrift institutions also improved in October, and the money supply measures more broadly defined expanded appreciably. Bank credit outstanding changed little, and banks reduced their borrowing through Euro dollars and large-denomination CD's. Since mid-October markets for short- and long-term securities have improved, despite heavy Treasury financing and a large volume of corporate security issues. Interest rates on market securities in general have declined further, and mortgage yields also have fallen somewhat. On November 13 the Board of Governors announced a restructuring of member bank reserve requirements, which will have the effect of releasing reserves to the banking system in the week beginning December 12. 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, Coldwell, Holland, Kimbrel, Mitchell, Sheehan, Wallich, and Winn. Votes against this action: None.