January 17, 1978 FOMC Record of Policy Actions

FOMC minutes

and foreign and international accounts maintained at the Bank. Transactions undertaken with such accounts under the provisions of this paragraph may provide for a service fee when appropriate. Votes for this action: Messrs. Burns, Volcker, Coldwell, Gardner, Guffey, Lilly, Mayo, Morris, Partee, Roos, and Wallich. Votes against this action: None. Absent and not voting: Mr. Jackson. Since mid-1974 the Federal Reserve Bank of New York had made available to its foreign official accounts a facility for making repurchase agreements (Rp's) involving U.S. Government and Federal agency securities. The facility not only provided a service for foreign central banks but also added a useful dimension of flexibility to System open market operations. In arranging Rp's for foreign official accounts the New York Bank had--depending on the System's operating objectives at the moment--either served as an agent in arranging the transactions with the market or made the with the System Open Market Account (SOMA). Arrangements transactions type were not under the jurisdiction of the Federal of the former Open Market Committee; those of the latter type were authorized by the Committee under the general authority to buy or sell U.S. Government or agency securities for SOMA contained in paragraph 1(a) of the authorization for domestic open market operations.

In May 1977 the New York Bank had learned of an Internal Revenue Service (IRS) ruling on the treatment of Rp's by a tax payer that suggested that a tax liability might be incurred in connection with income earned by some foreign official accounts on Rp's with the market. At the same time it did not appear probable that a tax liability would be incurred in the case where Rp's were arranged between foreign official accounts and some entity of the Federal Reserve System. Accordingly, after Committee discussion, the New York Bank ceased acting as agent for foreign official accounts in making Rp's with the market, and it requested an IRS determination of the tax consequences of Rp's made for foreign official accounts with various entities. The IRS subsequently ruled that income received by foreign central banks on Rp's made with SOMA, or with the Federal Reserve Bank of New York acting as a principal, was exempt from Federal income tax. In light of that ruling, the Committee amended its authorization for domestic open market operations to authorize the New York Bank to arrange foreign official account Rp's with the Bank as a principal, and to make corresponding Rp's with the market, again with the Bank acting as principal. It was understood

that such "back-to-back" arrangements would be undertaken under circumstances similar to those in which, before May 1977, the Bank had served as agent in arranging foreign official account Rp's with the market. While the authority for the New York Bank to make foreign official account Rp's with SOMA had been viewed as contained in paragraph 1(a) of the authorization, for the sake of clarity and completeness the Committee decided to include language explicitly authorizing such transactions in the new paragraph 4, along with the authority for the New York Bank to act as a principal in "back-to-back" Rp transactions. Subsequent to this meeting, on February 15, 1978, Committee members voted to increase from $3 billion to $4 billion the limit on changes between Committee meetings in System Account holdings of U.S. Government and Federal agency securities specified in paragraph 1(a) of the authorization for domestic open market operations, effective immediately, for the period ending with the close of business on February 28, 1978. Votes for this action: Messrs. Burns, Volcker, Coldwell, Gardner, Guffey, Jackson, Mayo, Morris, Partee, and Roos. Votes against this action: None. Absent and not voting: Messrs. Lilly and Wallich.

This action was taken on recommendation of the System Account Manager. The Manager had advised that large-scale sales securities since the January meeting--required mainly of Treasury to counter the effect of seasonal declines in required reserves and currency in circulation--had reduced the leeway for further $780 million, and that it appeared likely that the leeway sales to would shortly be reduced further, to $300 million or less, as a result of the completion of an anticipated transaction with a foreign account. The Manager also noted that the current inter meeting period had been lengthened by a change in the date of from February 22 to February 28, and that the next meeting projections suggested the need for further reserve-absorbing operations during the interval ending with the latter date.