April 14–15, 1975 FOMC Record of Policy Actions: Full Text
RESERVE FEDERAL press reelease June 2, 1975 For immediate release the Federal Reserve System Board of Governors of The Committee today released the and the Federal Open Market by the Federal Open of policy actions taken attached record meeting on April 14-15, 1975. Market Committee at its approximately 45 days records are made available Such and are published each meeting of the Committee after the date of Board's Annual Report. Bulletin and the in the Federal Reserve and financial conditions descriptions of economic The summary that was available based on the information they contain are rather than on time of the meeting, Committee at the to the revised since then. they may have been data as Attachment
RECORD OF POLICY ACTIONS OF THE FEDERAL OPEN MARKET COMMITTEE Meeting held on April 14-15, 1975 1/ Domestic policy directive The information reviewed at this meeting suggested that real output of goods and services had continued to fall sharply in the first quarter of 1975, that the rise in prices had moder ated, and that nominal GNP had declined. Staff projections sug gested that real economic activity would recede only a little further in the second quarter and would turn up later in the year, and that the rise in prices would continue to moderate. In March economic activity continued to decline but at pace than in the immediately preceding months, a less rapid in both industrial production and nonfarm employment, Decreases substantial, were not so large as in the 4 months although still through February. The rate of unemployment increased from November 8.7 per cent, as the civilian labor force expanded from 8.2 to declined sharply in February. Total retail sales after having in March; although sales of were estimated to have changed little declined following termination of price rebates, the automobiles sales of other consumer further increase in was offset by a reduction on the period, beginning over a 2-day was held 1/ This meeting afternoon of April 14.
4/14-15/75 items. In the first quarter as a whole, total sales were appreciably higher than in the fourth quarter of 1974, and it appeared that inventory liquidation at all levels of business had been substantial. The advance in the index of average hourly earnings for private nonfarm production workers accelerated in March, but over the first quarter it was less rapid than during the spring and summer of 1974. The wholesale price index declined in March for the fourth consecutive month, as prices of farm and food products fell sharply further and prices of industrial commod ities increased only slightly. In February, as in December and January, the rise in the consumer price index had not been so large as in most months in 1974. signed the Tax Reduction Act In late March the President which provided for rebates of 1974 personal income taxes of 1975, and for reductions in both personal and corporate income taxes in New withholding schedules for personal income tax payments effect May 1. The Act also provided for one-time cash would take security benefits and a further payments to recipients of social lengthening of the benefit period for payment of unemployment compensation. that in the second quarter the Staff projections suggested considerably smaller than had been decline in real GNP would be
4/14-15/75 expected 4 weeks earlier and that nominal GNP would turn up. In large part, the improvement in the outlook for the second quarter reflected the expectation that inventory liquidation, while remaining rapid, would moderate from the exceptional pace now estimated for the first quarter. It was anticipated that busi ness fixed investment would decline further, but that personal consumption expenditures would expand slightly in real terms and that residential construction would increase. Exchange rates for the dollar against leading foreign currencies had risen since early March, as short-term interest continued to decline relative to rates in the rates abroad and as market attitudes toward the dollar United States, improved in response to indications of moderation in the rise in U.S. prices and of improvement in the U.S. foreign trade balance. For the first 2 months of the year the balance was in surplus; compared with fourth-quarter rates, exports of commodities were up and imports of commodities agricultural other than fuels were down. Moreover, net outflows of capital by banks--which had continued large in Februaryreported in March. On April 9 the Board of apparently diminished a reduction, from 8 to 4 per cent, in Governors announced on foreign borrowings by member banks. reserve requirements
4/14-15/75 Total loans and investments at U.S. commercial banks expanded relatively little from the end of February to the end of March, and virtually all of the expansion reflected increases in bank holdings of Treasury securities and in loans to securities dealers. Outstanding loans to businesses declined further; business demands for short-term credit remained weak both at banks and in the commercial paper market. narrowly defined money stock (M1)2/ expanded substantially The in part because demand deposits were increased by acceler in March, of Federal tax refunds. Net inflows of consumer ated distribution type time and savings deposits to banks remained strong and those to nonbank thrift institutions were extremely large, in part because but mainly because of relatively attractive inter of the tax refunds available on such deposits. Consequently, growth in broader est rates 3/ 4/ measures of the money stock (M2 3/ and M3/ 4/) was rapid. Over the first , and were estimated to have expanded at annual rates quarter Ml, M respectively. In March, as in February, of 3.9, 8.5, and 10.2 per cent, the outstanding volume of their large-denomination CD's banks reduced deposits and the weakness in loan in response to the growth in other The bank credit proxy over the first quarter grew at an annual demand. 5/ rate of 3.2 per cent.5/ demand deposits plus currency in circulation. 2/ Private other than deposits and savings bank time M1 plus commercial 3/ large-denomination CD's. mutual savings banks and time and savings deposits at 4/ M plus at savings and loan associations. bank deposits, adjusted to include funds 5/ Daily-average member from nondeposit sources.
4/14-15/75 System open market operations after the March 18 meeting had been guided initially by the Committee's decision to seek bank reserve and money market conditions consistent with more rapid growth in mone tary aggregates over the months ahead than had occurred in recent months, while taking account of developments in domestic and international finan cial markets. In the first statement week after the meeting, the System purchased a substantial volume of Treasury coupon and Federal agency issues in the course of reserve-supplying operations undertaken to offset the effects of a sharp rise in Treasury balances at Reserve Banks. On March 27 available data suggested that in the March-April period the annual rates of growth in both M1 and M2 would be above the upper limits of the ranges of tolerance that had been specified by the Committee. During the previous statement week the Federal funds rate had averaged about 5-1/2 per cent. In light of the behavior of the aggregates, the System Account Manager would, under normal circumstances, have permitted the weekly average Federal funds rate to rise to the upper limit of its range of tolerance--namely, However, a majority of Committee members con to 5-3/4 per cent. curred in the Chairman's recommendation of March 27 that, in view of the weakness in the economy and of the sensitive conditions in financial markets, particularly the bond markets, the Manager be instructed to treat 5-1/2 per cent as the approximate upper limit for the weekly average funds rate for the time being. The funds that level until the statement week ending rate fluctuated around a sharp decline in the Treasury balance supplied a April 9, when
4/14-15/75 large volume of reserves and the funds rate slipped to about 5-1/4 per cent. Short-term market interest rates rose somewhat over the inter-meeting period, apparently because of growing expectations that the decline in interest rates was at or near an end for the time being; accelerated growth in the monetary aggregates and stability in the Federal funds rate strengthened the view that the System would not ease money market conditions further, and enactment of the tax reductions made it clear that near-term Treasury financing needs would be enlarged and also strengthened expectations of economic recovery later in the year. At the time of this meeting the market rate on 3-month Treasury bills was 5.53 per cent, compared with 5.39 per cent on the day before the last meeting. which had turned up before the March meeting, Bond yields, increased further during the inter-meeting period. The bond markets were affected not only by the large volume of current and expected offerings, but also by concern over the financial positions securities entities. Public offerings of of some State and local governmental in March, and a continued large volume corporate bonds were heavy April despite many cancellations and postpone was in prospect for ments of planned issues. Yields on home mortgages declined only primary market and turned up in the secondary slightly further in the market.
4/14-15/75 The Treasury was expected to announce the terms of its mid-May financing on May 1. Of the maturing issues, $3.8 billion were held by the public. At this meeting the Committee reviewed its procedures for specifying desired longer-run growth rates in monetary and credit and concluded that at present it should formulate such aggregates, growth rates for four aggregates--M , M2, M3, and the bank credit proxy--in terms of ranges for annual periods. It was the consensus of the Committee that growth in these aggregates over the period from March 1975 to March 1976 at rates within the following ranges presently appeared to be consistent with its broad economic objec tives: M , 5 to 7-1/2 per cent; M , 8-1/2 to 10-1/2 per cent; M3, cent; and the bank credit proxy, 6-1/2 to 9-1/2 per cent.6/ 10 to 12 per that these ranges, as well as the particular list of It was understood for which such ranges were specified, were subject to aggregates review and modification at subsequent meetings. In considering current policy, the Committee took note of a staff analysis suggesting that the monetary aggregates would grow 6/ Mr. Eastburn preferred to focus on the aggregates that he most closely linked with economic activity--M1, M , and believed were perhaps the bank credit proxy--and he favored employing ranges not more than one percentage point in width. In Mr. MacLaury's view, the outlook for the economy over the coming year--specifically the patterns of performance of employment and prices--called expected of the aggregates over the year, indexed for somewhat faster growth by a 7 per cent growth rate for M1.
4/14-15/75 at relatively rapid rates in the April-May period if prevailing conditions persisted. Relatively rapid growth was money market part because of the temporary effects of large expected in large tax rebates scheduled to begin in May, at a time when the demand for money was also being influenced by the continuing impact of in short-term interest rates and by the rise in earlier declines nominal GNP anticipated for the second quarter. Any further upward interest rates most likely would be confined to pressures on market for Treasury securities. It was expected that business, the market and consumer demands for bank credit would remain rela mortgage, tively weak. background of this analysis and of its longer Against the run objectives for monetary and credit aggregates, the Committee decided to seek growth in M1 and M over the April-May period at annual rates with ranges of tolerance of 6-1/2 to 9 per cent and to 11-3/4 per cent, respectively. The members concluded 9-1/2 that such growth rates would be likely to involve growth in reserves available to support private nonbank deposits (RPD's) within a range of 1-1/2 to 4-1/4 per cent. They agreed that in the period until the next meeting the weekly average Federal funds rate might be expected to vary in an orderly fashion in a range of 4-3/4 to 5-3/4 per cent, if necessary in the course of seeking monetary the ranges specified. The members also agreed growth rates within
4/14-15/75 that in the conduct of operations, account should be taken of the forthcoming Treasury financing and of developments in domestic and international financial markets. 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 fell sharply in the first quarter. However, retail sales strengthened during the quarter, and the rate of decline in over-all activity has slowed in recent weeks. In March industrial production and employment declined less than they had on average in the preceding 4 months, but the unemployment rate increased from 8.2 to 8.7 per cent, as the civilian labor force grew. Average wholesale prices of industrial commodities rose little in March and prices of farm and food products declined sharply. The advance in average wage rates during the first quarter was large, but it was still below the increases of last spring and summer. The prospect of an upturn in economic activity has been strengthened by enactment of the Tax Reduction Act of 1975, which will be adding soon to growth in dispos able personal income. The foreign exchange value of the dollar has risen since early March, as short-term interest rates abroad have declined further and market attitudes toward the dollar have continued to improve. In January-February the U.S. foreign trade balance was in surplus, as agri cultural exports reached a new high and the volume of imports other than fuels declined. Net outflows of funds through banks continued large in February but appear to have diminished in March. In early April reserve requirements on foreign borrowings by member banks were reduced from 8 to 4 per cent. The narrowly defined money stock rose moderately on balance over the first quarter, while broader mea of the money stock expanded more rapidly. Growth sures was substantial in March, apparently in part because of
4/14-15/75 -10- the effects of accelerated tax refunds on deposits at banks and nonbank thrift institutions. Business demands for short-term credit remained weak, both at banks and in the commercial paper market, while demands in the long-term market continued exceptionally strong. Since mid-March short-term market interest rates have increased somewhat and longer-term yields have risen considerably further. In light of the foregoing developments, it is the policy of the Federal Open Market Committee to foster financial conditions conducive to stimulating economic recovery, while resisting inflationary pressures and working toward 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 somewhat more rapid growth in monetary aggregates over the months ahead than has occurred on average in recent months. Votes for this action: Messrs. Burns, Hayes, Baughman, Coldwell, Holland, MacLaury, Mayo, Mitchell, and Wallich. Vote against this action: Mr. Eastburn. Absent and not voting: Messrs. Bucher and Sheehan. Mr. Eastburn dissented from this action because he preferred to retain the previous 5-1/2 per cent upper limit on the inter meeting range for the Federal funds rate. While he believed that firmer money market conditions might prove to be necessary later on in the year, he thought any such firming would be inappropriate at the sensitive state of financial markets, the con this time, given tinued weakness in the economy, and his preference for seeking more rapid growth in the monetary aggregates in the near term than would be desirable over the longer run.