May 20, 1975 FOMC Record of Policy Actions

FOMC minutes

out in those months. It seemed likely that a sizable portion of the rebates would be held for a time in demand balances before being used to acquire assets, repay debt, or increase spending, and that some part would be placed directly in savings accounts. To allow for the expected temporary bulge in money holdings, the Committtee agreed that relatively rapid growth in M and M2 over the May-June period-at annual rates within ranges of tolerance of 7 to 9-1/2 per cent and 9 to 11-1/2 per cent, respectively-would be acceptable. Such growth rates were thought likely to involve growth in reserves available to support private nonbank deposits (RPD's) at a rate within a range of 1-1/2 to 4 per cent, and they were expected to be consistent with a weekly average Federal funds rate in a range of 4-1/2 to 5-1/2 per cent. In the course of the Committee's discussion a number of members expressed the view that upward pressures on interest rates would be particularly undesirable at present, in light of the sensitive state of financial markets and of uncertainties with respect to the timing and strength of the economic recovery that now appeared to be in process of developing. There was no sentiment for aggressive easing operations for the purpose of reducing market interest rates further. Some members urged, however, that the

System should be prepared to respond promptly should the monetary aggregates be unexpectedly weak. The Committee decided that open market operating decisions in the period until the next meeting should be based to a greater extent than usual on the state of financial markets, with the objective of maintaining money market conditions about like those now prevailing so long as the monetary aggregates appeared to be growing at rates within acceptable ranges of tolerance. 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--after having fallen sharply for two quarters--is declining much less rapidly in the current quarter. In April the pace of the decline in industrial production moderated considerably further, and total employment rose. However, the un employment rate increased again, from 8.7 to 8.9 per cent, as the civilian labor force increased considerably. Average wholesale prices of industrial commodities changed little in April, as in March; prices of farm and food products rose sharply, following several months of large decreases. The advance in average wage rates so far this year has been considerably less rapid than the increase during the second half of 1974. The foreign exchange value of the dollar has declined somewhat since mid-April, but it is still above the low of early March. U.S. imports fell sharply in the first quarter, and the foreign trade balance was in substantial surplus, in contrast to the deficits of preceding quarters. Net outflows of funds through banks were large in the first quarter, as loans to foreigners continued to increase while liabilities to foreigners declined.

Both M1 and M2 grew moderately in April, but M3 grew more rapidly as inflows of deposits to nonbank thrift institutions remained substantial. 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 strong. Since mid April short-term market interest rates have declined somewhat. Most longer-term yields have changed little on balance, and mortgage rates have risen. Federal Reserve discount rates were reduced from 6-1/4 to 6 per cent in mid-May. In light of the foregoing developments, it is the policy of the Federal Open Market Committee to financial conditions conducive to stimulating foster economic recovery, while resisting inflationary pres sures and working toward 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 maintain about the pre vailing money market conditions over the period immedi ately ahead, provided that monetary aggregates generally appear to be growing within currently acceptable short run ranges of tolerance. Votes for this action: Messrs. Burns, Hayes, Baughman, Bucher, Coldwell, Eastburn, Holland, MacLaury, Mayo, Mitchell, and Wallich. Votes against this action: None. Absent and not voting: Mr. Sheehan. to authorization for domestic open market operations 2. Amendment On April 30, 1975, Committee members voted to increase from $3 billion to $4 billion the limit on changes between Committee in System Account holdings of U.S. Government and Federal meetings securities specified in paragraph 1(a) of the authorization agency

for domestic open market operations, effective immediately, for ending with the close of business on May 20, 1975. the period Votes for this action: Messrs. Burns, Hayes, Coldwell, Eastburn, Holland, MacLaury, Mayo, Mitchell, Wallich, and Francis. Votes against this action: None. Abstention: Mr. Sheehan. Absent and not voting: Messrs. Bucher and Baughman. (Mr. Francis voted as alternate for Mr. Baughman.) This action was taken on recommendation of the System Account Manager. The Manager advised that large-scale securities purchases had been necessary to carry out the Committee's objectives in the period since the previous meeting because an extremely large of reserves had been absorbed by a rise in the Treasury's volume balances at Reserve Banks to record levels, and that a temporary increase in the leeway for System purchases appeared desirable in light of the prospective near-term needs to supply reserves. At this meeting, the Committee decided to maintain the $4 billion limit for the period through the close of business on June 17, 1975. This action was taken on the recommendation of the Deputy Manager for Domestic Operations, who advised that an expected sharp decrease in Treasury balances at the Reserve Banks in the period ahead might necessitate an unusually large volume of secu rities sales by the System to absorb reserves. this action: Messrs. Votes for Burns, Hayes, Baughman, Bucher, Coldwell, Eastburn, Holland, MacLaury, Mayo, Mitchell, and Wallich. Votes against this action: None. Absent and not voting: Mr. Sheehan.