June 16–17, 1975 FOMC Record of Policy Actions: Full Text
RESERVE FEDERAL press release For immediate release August 4, 1975 The Board of Governors of the Federal Reserve System and the Federal Open Market Committee today released the attached record of policy actions taken by the Federal Open Market Committee at its meeting on June 16-17, 1975. Such records are made available approximately 45 days after the date of each meeting of the Committee and are published in the Federal Reserve Bulletin and the Board's Annual Report. The summary descriptions of economic and financial conditions they contain are based on the information that was available to the Committee at the time of the meeting, rather than on data as they may have been revised since then. Attachment
RECORD OF POLICY ACTIONS OF THE FEDERAL OPEN MARKET COMMITTEE Meeting held on June 16-17, 1975 1/ 1. Domestic policy directive The information reviewed at this meeting suggested that real output of goods and services--which had fallen sharply during the two preceding quarters--had leveled off in the second quarter of 1975 and that the rise in prices had moderated further. Staff projections continued to suggest that real economic activity would expand in the second half of the year and that the rise in prices would continue to slow somewhat further. In May retail sales increased strongly, most likely in response to the disbursement of a large volume of rebates on Federal income tax liabilities for 1974 and to a reduction in current income tax withholdings, Industrial production declined slightly further, as producers and distributors in many industries continued their efforts to liquidate inventories; total business inventories had declined appreciably in both March and April. Non farm payroll employment increased in May, after having changed and total employment advanced for the second con little in April, secutive month. Nevertheless, the unemployment rate rose further, 9.2 per cent, as the civilian labor force continued to from 8.9 to grow at a rapid pace. over a 2-day period, beginning on the 1/ This meeting was held afternoon of June 16.
6/16-17/75 The index of average hourly earnings for private nonfarm production workers rebounded in May, after having declined slightly in April, but over the first 5 months of the year the rate of advance in the index was considerably less rapid than the rate during the second half of 1974. Average wholesale prices of industrial commodities rose slightly in May--by about as much as over the preceding 2 months--while prices of farm and food products increased moderately further. In April the rise in the consumer price index had picked up, but the average rise over the first 4 months of the year had remained well below the pace during 1974. Staff projections for the second half of 1975 suggested moderate recovery in real output and substantial gains in nominal GNP, It was anticipated that the recovery would be spurred by rapid growth in consumption expenditures in response to the expansive income tax measures; by increases in residential con struction; and by a considerable slowing in the rate of business inventory liquidation. On the other hand, it was anticipated that business fixed investment would decline somewhat further in real terms and that, as a result of the recovery in business this country, imports would rise at a faster pace than activity in exports.
6/16-17/75 -3- average exchange value of the dollar Since mid-May the foreign currencies had changed little in relatively against leading light trading. In April the U.S. foreign trade balance remained in surplus; however, the surplus was well below the first-quarter rate, reflecting a substantially lower rate of exports. Banks' liabilities to foreigners rose more than claims in April, resulting in a small net inflow of funds compared with a large net outflow in the first quarter of the year. Total loans and investments at U.S. commercial banks con tinued to expand at a slow pace during May. Outstanding loans to business declined markedly further--as did the outstanding volume of commercial paper issued by nonfinancial businesses--in association with inventory liquidation and a continued large volume of corporate financing in the capital market. As in the preceding 3 months, banks added substantially to their holdings of U.S. Government securities. Growth in deposits was exceptionally strong at banks and at nonbank thrift institutions in May, reflecting in part the large volume of income tax rebates disbursed during the month, and M , M2, and M3 all increased substantially. Banks continued to reduce the outstanding volume of large-denomination CD's in response to
6/16-17/75 and to the continued weakness in the growth in other deposits bank credit proxy increased by only a small loan demand, and the amount. Interest rates in private short-term markets had changed little over the period since mid-May. Market rates on Treasury little in the latter part of May, but they bills also changed declined in early June, partly in response to the seasonal reduction of bills in prospect for the second half of the month. in the supply the market rate on 3-month Treasury bills At the time of this meeting was 4.88 per cent, compared with 5.11 per cent on the day before the May meeting. Yields on longer-term securities changed little in late May--despite a continued heavy volume of corporate financing--and then declined considerably in early June, in part because the prospective size of Treasury financing through July was not so large as had been expected. Public offerings of corporate bonds expanded to a near-record volume in May, in part because of the marketing of some issues that had been postponed, and a continued large volume was in prospect for June. Offerings of State and local government issues in May and the calendar for June also were heavy. Yields on home mortgages eased in May, after having risen somewhat in April.
6/16-17/75 System open market operations since the May 20 meeting had been guided by the Committee's decision to seek to maintain about the prevailing money market conditions over the period immediately ahead, provided that monetary aggregates generally appeared to be growing at rates within acceptable ranges of tolerance. The Federal funds rate, which had been about 5-1/8 per cent in the days before the May meeting, remained within a range of 5 to 5-1/4 per cent. In the second week of June, just a few days before this meeting, available data suggested that over the May-June period both M1 and M would grow at rates well above the specified ranges of tolerance. Consequently, the System sought some tightening of bank reserve and money market conditions, and the Federal funds rate rose into a range of 5-1/4 to 5-1/2 per cent, At this meeting the Committee reviewed the 12-month ranges for rates of growth in the monetary and credit aggregates over the period from March 1975 to March 1976 that on the average it had specified 2 months earlier, at the April meeting. The members agreed that it would be consistent with the Committee's broad economic objectives if growth within the same percentage average over the 12-month period ranges were to be realized on the estimated levels for June 1975.2/ to June 1976 from the currently decided that the per on July 15 the Committee 2/ At its meeting the second quarter of apply to the period from centage ranges should rather than from June to June. to the second quarter of 1976,
6/16-17/75 The ranges were as follows: M , 5 to 7-1/2 per cent; M2, 8-1/2 to 10-1/2 per cent; M3, 10 to 12 per cent; and the bank credit to 9-1/2 per cent. As before, it was understood proxy, 6-1/2 that these ranges, as well as the particular list of aggregates for which such ranges were specified, were subject to review and modification at subsequent meetings. It also was understood that from month to month the rates of growth of the various might well fall outside ranges contemplated for aggregates annual periods as a result of short-run factors. In considering current policy, the Committee took note of a staff analysis suggesting that in the months ahead strong expansion in transactions demands for money was likely if the substantial gains projected in nominal GNP materialized. If monetary growth was to be appropriately constrained, it appeared probable that some tightening of bank reserve and money market conditions would need to develop over the weeks immediately ahead. also suggested that, even with some The staff analysis tightening in bank reserve and money market conditions, the would grow at relatively rapid rates in the monetary aggregates part because of the temporary effects June-July period, in large and, in the second half of June, of one of income tax rebates security recipients. It was anticipated, time payments to social that private short-term credit demands would remain weak, however,
6/16-17/75 as business firms continued to liquidate inventories and to issue longer-term securities in large volume. In the course of the Committee's discussion a number of members expressed uncertainty about the extent to which rapid growth in the monetary aggregates was attributable to transitory rather than to fundamental forces affecting the demand for money. No members advocated aggressive operations at this time to tighten bank reserve and money market conditions, and there was some sentiment for continuing about the prevailing money market conditions in the period until the next meeting on the grounds that additional data might indicate that growth in the monetary aggregates was in the process of subsiding. However, some members favored a modest tightening in the period immediately ahead in order to restrain growth in the monetary aggregates, and others were prepared to accept be necessary for that purpose. if it proved to some tightening At the conclusion of the discussion, the Committee decided that growth in M and M over the June-July period at annual rates within ranges of tolerance of 6-1/2 to 9-1/2 per cent and 9 to 12 per cent, respectively, would be accept able. The members concluded that such growth rates would be likely to involve growth in reserves available to support private nonbank deposits (RPD's) within a range of 5 to 8 per cent. They agreed that in the period until the next meeting
6/16-17/75 rate might be expected to vary the weekly average Federal funds range of 5 to 6 per cent, if nec in an orderly fashion within a growth rates within the in the course of seeking monetary essary members also agreed that, in the conduct ranges specified. The taken of developments in domestic of operations, account should be and international financial markets. directive was issued to the The following domestic policy Federal Reserve Bank of New York: The information reviewed at this meeting suggests that real output of goods and services--after having for two quarters--has leveled off in the fallen sharply current quarter. In May retail sales strengthened con siderably. Industrial production declined slightly further, but total employment advanced for the second month. The unemployment rate increased consecutive 8.9 to 9.2 per cent, as the civilian labor again, from rose substantially further. The rise in average force wholesale prices of industrial commodities continued to be slow; prices of farm and food products increased moderately further. 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 changed little since mid-May. The U.S. foreign trade balance continued in substantial surplus in April, but at a rate much reduced from the first quarter. After large net outflows in the first quarter, there was a small net inflow of funds through banks in April, as liabilities to foreigners rose more than claims. Growth in M1, M , and M was substantial in May, reflecting in part large Federal income tax rebates deposited at both banks and nonbank thrift institutions. Business demands for short-term credit both at banks
6/16-17/75 and in the commercial paper market remained unusually weak, while demands in the long-term market continued very strong. Market interest rates in general changed little during the latter part of May, but since then rates in longer-term markets and on Treasury bills have declined. Mortgage rates have eased over the past month. 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 developments in domestic and international finan cial 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, Baughman, Eastburn, Holland, MacLaury, Mayo, Mitchell, Wallich, Debs. Votes against this action: and Messrs. Bucher and Coldwell. Absent and not voting: Mr. Hayes. as alternate for (Mr. Debs voted Mr. Hayes.) dissented from this action Messrs. Bucher and Coldwell a tightening in money market conditions because they believed that in short-term interest rates would be and the associated increase preferred to specify a lower range premature at this time, and they that adopted by the Committee. Both for the Federal funds rate than rebates and payments to recipients the influence of the tax stressed
6/16-17/75 -10- of social security benefits in bringing about high rates of monetary growth. Mr. Bucher, in addition, thought that primary emphasis should be given to promoting recovery in economic activity, because he believed that as yet there were no clear indications of the forces that would lead the recovery and because he saw no threat of intensified inflationary pressures so long as rates of resource use remained comparatively low, Subsequent to the meeting, on June 26, the available data suggested that the annual rates of growth in M1 and M in June would be much more rapid than had appeared likely at the time of the meeting and that growth in both aggregates over the June-July period, therefore, would be substantially above the upper limits of the ranges of tolerance established by the Committee. In the statement week ending June 25 the Federal funds rate averaged 5.72 per cent; in the latest 3 days it had been close to 6 per cent. The System Account Manager was planning to aim for a rate cent, the upper limit of the specified range of tolerance. of 6 per Against that background and to give the Manager some flexibility, Chairman Burns recommended on June 26 that the upper limit of the funds rate constraint be raised to 6-1/4 per cent, on the understanding that the additional leeway would be used in the event that another week's data confirmed excessive only
6/16-17/75 strength in the monetary aggregates. Members of the Committeewith the exception of Messrs. Bucher, Holland, and Mitchell--con curred in the Chairman's recommendation. Amendment to authorization for domestic open market operations The Committee amended paragraph 1(c) of the authorization for domestic open market operations to authorize the Federal Reserve Bank of New York to arrange repurchase agreements (RP's) directly with Prior to this action, the Bank had been authorized bank dealers. to arrange RP's with nonbank dealers only. With this amendment, paragraph 1(c) read as follows: Government securities, obligations (c) To buy U.S. that are direct obligations of, or fully guaranteed as to principal and interest by, any agency of the United States, and prime bankers' acceptances of the types authorized for purchase under 1(b) above, from dealers for the account of the Federal Reserve Bank of New York under agreements for repurchase of such securi ties, obligations, or acceptances in 15 calendar days or less, at rates that, unless otherwise expressly authorized by the Committee, shall be determined by competitive bidding, after applying reasonable limita tions on the volume of agreements with individual dealers; provided that in the event Government secu rities or agency issues covered by any such agreement are not repurchased by the dealer pursuant to the agreement or a renewal thereof, they shall be sold in the market or transferred to the System Open Market Account; and provided further that in the event bankers' acceptances covered by any such agreement repurchased by the seller, they shall continue are not by the Federal Reserve Bank or shall be to be held sold in the open market.
6/16-17/75 Votes for this action: Messrs. Burns, Baughman, Bucher, Coldwell, Eastburn, Holland, MacLaury, Mayo, Mitchell, Wallich, and Debs. Votes against this action: None. Absent and not voting: Mr. Hayes. (Mr. Debs voted as alternate for Mr. Hayes.) recommendation of a staff committee, This action was taken on it would usefully broaden the scope of partic which advised that System RP's. The staff committee also reported that ipation in experience with determination of interest rates on RP's by competitive bidding--provided for by action of the Committee in April 1972--had been satisfactory. of guidelines for operations in Federal agency issues 3. Revision of the Manager, the Committee amended On recommendation number 5 of the guidelines for the conduct of System operations in Federal agency issues to increase the limit on System holdings of any one issue at any one time from 20 to 30 per cent of the amount of the issue outstanding, and to increase the limit on System holdings of the issues of any one agency from 10 to 15 per cent of the amount of outstanding issues of that agency. The Manager had advised that Desk operations in agency issues might soon be inhibited by the existing limits; that flexibility for operations in agency issues might prove especially useful;
6/16-17/75 -13- and that experience gained over the past 3-1/2 years of operations in agency issues had shown that the market was capable of absorbing a larger volume of System purchases without undue impact on yields or other market relationships. Votes for this action: Messrs. Burns, Baughman, Bucher, Coldwell, Eastburn, MacLaury, Mayo, Mitchell, Wallich, and Debs. Vote against this action: Mr. Holland. Absent and not voting: Mr. Hayes. (Mr. Debs voted as alternate for Mr. Hayes.) dissented from this action because he was con Mr. Holland cerned that to date the System had bought but rarely had sold agency issues and because the limits on System holdings of agency issues might more appropriately be raised at a stage of the busi ness cycle when the volume of new agency issues being marketed was large.