December 16–17, 1974 FOMC Record of Policy Actions

FOMC minutes

12/16-17/74 in other market interest rates because credit demands--although tending to moderate--would still be strong. It was expected that net inflows to banks of time and savings deposits other than large denomination CD's would remain substantial and that net inflows to nonbank thrift institutions would continue to improve, The Committee concluded that growth in M1 and M over the December-January period at annual rates within ranges of tolerance of 5 to 7 per cent and 7-1/2 to 10 per cent, respectively, would be consistent with its longer-run objectives for the mone tary aggregates. The members agreed that such growth rates would be likely to involve growth in reserves available to support private nonbank deposits (PD's) within a range of tolerance of 9 to 11 per cent. They decided that in the period until the next meeting the weekly average Federal funds rate be permitted to vary in an orderly fashion from as low as 7-1/2 per cent to as high as 9 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

12/16-17/74 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 sub stantially further in the current quarter. Price and wage increases are continuing large, although not so large as earlier this year. In November declines in industrial production and employment were sharp and widespread, and the unemployment rate increased further, from 6.0 to 6.5 per cent. In recent weeks additional production cutbacks and layoffs have been announced. The November rise in wholesale prices of industrial commodities, although substantial, remained well below the extraordinarily rapid rate in the first 8 months of the year. Since mid-November the dollar has declined some what further against leading foreign currencies. In October the U.S. foreign trade deficit was reduced sharply for the second consecutive month, while there were continued net inflows of bank-reported private capital and of investments by oil-exporting countries. Growth of the narrowly defined money stock in creased in November to an annual rate of about 7 per cent. Net inflows of consumer-type time and savings deposits remained strong at banks and continued to im prove at nonbank thrift institutions, and the more broadly defined money supply measures again expanded appreciably. Bank loans increased only moderately. Most market interest rates, after rising in the second half of November, subsequently turned down again. Yields on State and local government securities, however, con tinued under upward pressure. Effective December 9, Federal Reserve discount rates were reduced from 8 to 7-3/4 per cent.

12/16-17/74 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, cushioning recessionary tendencies and encour aging 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 somewhat more rapid growth in monetary aggregates over the months ahead than has occurred in recent months. Votes for this action: Messrs. Burns, Hayes, Black, Bucher, Clay, Coldwell, Holland, Kimbrel, Sheehan, and Winn. Votes against this action: Messrs. Mitchell and Wallich. Messrs. Mitchell and Wallich, who dissented from this action, both believed that the economic situation and outlook called for a more stimulative monetary policy. In Mr. Mitchell's opinion, the primary objective should be to achieve a level of interest rates that would encourage the increased volume of borrowing in mortgage and capital markets essential to the kind of revival in economic activity needed in 1975. Mr. Wallich believed that for a limited period it would be desirable to seek a higher rate of monetary growth than favored by the majority.

12/16-17/74 -10- meeting, on January 9, the available Subsequent to the data suggested that in December M and M2 had grown at rates of about 2 and 2.5 per cent, respectively, and that growth rates for the December-January period would be well below the lower limits of the ranges of tolerance that had been specified by the Committee. In the statement week ending January 8, the Federal funds rate had averaged slightly below 7-3/4 per cent, and the System currently was conducting reserve-supplying operations thought to be consistent with a weekly average rate of about 7-1/2 per cent, the lower limit of its range of tolerance. Against that background, and to give the Manager greater flexibility, Chairman Burns recommended on January 9 that the lower limit of the funds rate constraint be reduced to 7-1/8 per cent for the period remaining until the next Committee meeting. The members concurred in the Chairman's recom mendation.