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FEDERAL RESERVE BANK OF ST. LOUIS MARCH 1973 The 1973 National Economic Plan: Slowing The Boom by KEITH M. CARLSON T HE ADMINISTRATION recently presented its national economic plan for the eighteen-month period ending June 30, 1974. The Administration’s plan is contained in three documents —the Federal Budget, the Economic Report of the President, and The An nual Report of the Council of Economic Advisers.1 In cluded in the economic plan is (1) a proposed pro gram for the Federal budget, (2) goals for gross na tional product (GNP), output, prices, and employ ment, and (3) general recommendations for monetary actions by the Federal Reserve System. The goals for the U.S. economy in the months ahead are stated most explicitly in the 1973 CEA Report,2 The goals include: a 10 percent advance in GNP from calendar 1972 to 1973 (9 percent from fourth quarter 1972 to fourth quarter 1973); a reduction in the an nual rate of inflation, as measured by the consumer price index, to about 2.5 percent by the end of 1973; and a reduction of unemployment to about 4.5 per cent of the labor force by the end of the year. Proposed as consistent with the achievement of the 10 percent increase in GNP from 1972 to 1973 is a Federal budget program consisting of an expenditure increase (on a national income accounts basis) of 9.3 percent from calendar 1972 to 1973, and an increase in the average tax rate because of previously legis lated social security tax changes. Though the Admin istration is vague in its recommendation for monetary policy, the CEA does indicate that their target for GNP is likely to require a slower increase of the supply of money and credit than was proper when the main objective was to encourage a quickened economic ex pansion in an environment of substantial unused resources.'1 This article summarizes and evaluates the Admin istration’s economic plan. First, as background, last 1The Budget of the United States Government, Fiscal Year Ending June 30, 1974 (Government Printing Office, 1973), and Economic Report of the President, together with The Annual Report of the Council of Economic Advisers (Gov ernment Printing Office, 1973). 21973 CEA Report, chap. 3. m id ., p. 75. Page 2 D e m a n d a n d P ro d uctio n R otio Scale T r i l l i o n of D o llars s 1965 1966 Q uarterly Totals at Annual Rates Se ason ally Adjusted 1967 1968 1969 1970 R a tio Scale T rillio n s of D o lla r s 1971 1972 1973 U_GNP in current dollars. Source: U.S. Department of Commerce [2. G N P in 1958 dollars. Percentages are annual rates ol change between periods indicated. Latest data plotted: 4th quarter 1972; dashed line indicates half-year estimates by this Bank based on the fiscal 1974 Federal Budget and the 1973 Annual Report of the Council of Economic Advisers year’s plan is compared with the record of achieve ment. Second, the proposed Federal budget program is presented in some detail, along with some discus sion of monetary policy recommendations. Third, the economic plan is evaluated in terms of feasibility and internal consistency. To aid in this evaluation, alter native projections with the St. Louis model are pre sented as a basis for comparison. 1972 ECONOMIC PLAN IN RETROSPECT In early 1972 the U.S. economy was still in the process of adjusting to the major policy changes which were implemented on August 15, 1971. At that time, convertibility of the dollar into gold and other reserve assets was suspended, a surcharge was imposed on imports, the Federal excise tax was removed on auto mobiles, and a system of mandatory price-wage con trols was introduced. Then in early 1972, the Admin istration took additional actions which reflected some doubts at that time about the strength of economic expansion. The Administration proposed a stimulative FEDERAL RESERVE BANK OF ST. LOUIS MARCH 1973 fiscal program to be accompanied by an accommoda tive monetary policy. The following section summarizes the economic record for 1972 and compares that record with the Administration’s goals. The record indicates that the Administration’s overall goals came very close to be ing realized. Economic Goals vs. Realizations C E A Projection A c c u ra c y o f G N P CEA 1962 9 .4 % 6 .7 % 1963 4 .4 5 .4 E r r o r '* 2 .7 % -1 .0 1964 6 .5 6 .6 -0 .1 1965 6.1 7 .5 — 1 .4 -1 .7 1966 6 .9 8 .6 1967 6 .4 5 .6 0 .8 1968 7 .8 9 .0 — 1 .2 1969 7 .0 7 .7 -0 .7 1970 5 .7 4 .9 0 .8 1971 9 .0 7 .5 1 .5 1972 9 .4 9 .7 — 0 .3 A v e r a g e a b s o lu t e e rro r a n d C o m p o n e n ts: 1 97 1 to 1 9 7 2 ( B ill io n s o f D o l la r s ) CEA P r o je c t io n * P e r s o n a l C o n s u m p t io n B u s in e s s F ix e d B u s in e s s In v e n t o r ie s 1 .2 % ♦Based on data given in the CEA Report for the year following the forecast year. F e d e ra l P u rc h a se s S tate a n d Local P u rc h a se s Net A c t u a l*' $ E rro r 5 6 .2 $ -3 .2 — 5 .9 8 .7 1 4.6 5 .9 2 .2 3 .7 6.1 1 1 .3 -5 .2 8 .8 8.1 0 .7 1 6.2 1 3.9 2 .3 E xp o rts — 0 .5 -4 .8 GNP $ 9 8 .2 $ 1 0 1 .7 $ 4 .3 $ — 3 .5 ♦Estimated by this Bank and based on 1972 CEA Report. **Based on preliminary data in the 1973 CEA Report. The relatively accurate projection of total GNP car ried through to projections of output, prices and un employment (Table III). The CEA projected an in crease of 5.9 percent in output, which actually grew at a more rapid 6.5 percent rate. Prices were pro jected to increase 3.2 percent; the actual increase was 3 percent. Unemployment was expected to average 5.6 percent in 1972, declining from 6 percent in late 1971 to about 5 percent late in the year. The actual unemployment rate followed this projected pattern almost perfectly, and did in fact average 5.6 percent for the year. T a b le III Projected a n d A c tu a l C h a n g e s in **N o adjustment is made for deviations of policy realizations from plans, or for m ajor strikes. To further assess the accuracy of the Administra tion’s 1972 projection for GNP, an analysis by com ponents is presented in Table II. The CEA displayed uncanny accuracy on the GNP total, but, typically, this accuracy consisted of offsetting errors among the components. Estimates of the increases in personal consumption and Federal purchases were very accur ate, but the increase in fixed investment —that is, busi ness fixed investment plus residential construction — was underestimated by about $11 billion. This under estimate was largely offset by overestimates of inven tory accumulation, state and local government pur chases, and net exports. The error in projecting in ventory accumulation may have been attributable, in part, to the underestimation of fixed investment. The overestimation of state and local purchases related to the timing of the revenue sharing program, but the In v e st m e n t $ 5 3 .0 error in estimating net exports was simply a miscal culation of the impact of changes in international economic arrangements in late 1971. T a b le I A ctual Change* Projected a n d A c tu a l C h a n g e s in G N P R e s id e n t ia l C o n s t r u c t io n The CEA’s Report of a year ago projected an in crease in GNP of 9.4 percent from 1971 to 1972. The realized increase was 9.7 percent. This error of 0.3 percent was the smallest for the CEA since 1964 and well below the average absolute error of 1.2 percent for CEA forecasts over the past eleven years. P ro je c te d Change T a b le II Ec o n o m ic Activity.- 1971 to 1 9 7 2 CEA P ro je c tio n GNP 9 .4 % A ctual E rro r 9 .7 % — 0 .3 % O u tpu t 5 .9 6 .5 -0 .6 Price s 3 .2 3 .0 0 .2 5 .6 5 .6 0 .0 U n e m p lo y m e n t R a te In summary, the CEA was very accurate in its prognosis of the course of the major economic aggre gates for 1972. GNP, output, prices, and unemploy ment generally moved in accordance with the CEA targets. The projected change in total GNP was, for practical purposes, realized, but consisted of offsetting errors in the individual components of GNP. Policy Plans vs. Realizations Assessment of the accuracy of any economic fore cast depends on more than just a comparison of real Page 3 FEDERAL RESERVE BANK OF ST. LOUIS ized and projected values of GNP, output, and prices. A more complete evaluation also takes into account a comparison of policy plans with policy realizations. In other words, was the projection realized because of realized policy plans, or in spite of discrepancies be tween policy plans and realizations? This section compares the record of monetary-fiscal policy actions in 1972 with the original programs and recommendations. 4Charles A. Waite and Joseph C. Wakefield, “Federal Fiscal Programs,” Survey of Current Business (February 1973), p. 20. Page 4 ( B ill io n s o f D o l la r s ) Budget P la n N IA N IA R e ce ip ts S u r p lu s o r D e fic it H ig h - E m p lo y m e n t R e c e ip ts E r ro r 2 9.2 2 6 .0 3 .0 $ -1 2 .8 $ + 3 .2 $ — 1 5.9 $ $ 1 7 .8 E x p e n d it u r e s N IA A ctual $ $ 1 6.3 2 9.0 1 3 .8 $ -1 2 .9 H ig h - E m p lo y m e n t E x p e n d it u r e s 2 9 .5 H ig h - E m p lo y m e n t S u r p l u s or D e ficit $ -1 5 .7 2 6.4 $ — 8 .5 3.1 CN To determine more accurately the extent of fiscal stimulus which occurred, the high-employment bud get serves as a more appropriate, though still approxi mate, measure. By this measure, receipts were under estimated by only $4 billion. This error indicates there 1 97 1 to 1 9 7 2 K 1 When the errors for receipts and expenditures are combined, they show that the NIA deficit was over estimated by almost $16 billion. In general, these errors were of the type that suggest that the fiscal stimulus was not nearly as large as originally planned. However, examination of the NIA budget does not reveal the extent to which the budget was reflecting an underestimate of the strength of economic expansion. P la n n e d a n d A c tu a l C h a n g e s in the F e de ral B u dge t: 1 On the expenditure side, the estimate was quite close, considering the magnitude of the increase which was planned. Furthermore, the error was attrib utable primarily to the delayed enactment of the revenue sharing program. T a b le IV o Federal budget plans are compared with realiza tions in Table IV. Examination of NIA receipts and expenditures indicates that there was a substantial underestimate of receipts and a small overestimate of expenditures. The error in both of these estimates worked in the direction of making the realized deficit smaller than projected. Since receipts projections de pend mainly on the forecast of GNP, it is surprising, given the accuracy of the GNP forecast, that the re ceipts estimate was so far off the mark. The reason, of course, was that the CEA did not forecast the ex tent of overwithholding of personal income taxes. Ad justment for this unexpected high flow of receipts indicates that the basic receipts estimate was much closer to realization, though still underestimated. U.S. Treasury estimates of the amount of overwithholding are in the neighborhood of $9 billion, so the economic expansion and its greater-than-expected effect on re ceipts resulted in an error of about $4 billion in the estimate of receipts.4 MARCH 1973 Note: Estim ates of high-employment receipts do not include the effects of overwithholding personal income taxes. was a miscalculation of the economic stimulus related to the Revenue Act of 1971 and the continuing effects of the Tax Reform Act of 1969. On the other hand, the estimate of high-employment expenditures was in error by about the same amount as for NIA expenditures. As a result, examination of the change in the highemployment deficit indicates that the fiscal stimulus was about $7 billion less than planned. Despite the stimulus being less than planned, GNP grew slightly faster than projected. Consider now monetary actions as a part of the overall economic plan for 1972. The Administration did not indicate a specific growth rate for money; however, they did emphasize that monetary policy should be accommodative. Actual money growth was FEDERAL RESERVE BANK OF ST. LOUIS MARCH 1973 policy actions turned out to be less than if the initial policy recommendations had been realized. Nevertheless, it is clear that the St. Louis model underestimated the momentum of the economy in 1972, which, when viewed within the framework of the St. Louis model, translates into an underestimation of the growth in the income velocity of money. T a b le V Projected C h a n g e s in S p e n d in g , O u tp u t, Prices, a n d U n e m p lo ym e n t: 1971 to 1 9 7 2 Unem p lo y m e n t GNP ( B il l io n s ) O u tpu t P ric e s R a te 9 .4 % 5 .9 % 3 .2 % 5 .6 % 1 0 1 .7 9 .7 6 .5 3 .0 5 .6 C h a n g e s in m o n e y a n d F e d e ra l s p e n d in g a s a c t u a lly o c c u rre d 9 0 .1 8 .6 4 .6 4.1 5 .9 C h a n g e s in m o n e y a n d Fe d e ra l s p e n d in g c o n s is t e n t w it h C E A a ss u m p tio n s o f 1 / 2 4 / 7 2 9 2 .9 CEA P ro je c tio n (1 / 2 4 / 7 2 ) A ctual $ 9 8 .2 St. L o u is M o d e l P ro je c t io n s POLICY PLANS AND RECOMMENDATIONS FOR 1973 The Administration has projected a 10 percent increase in GNP for 1973. This GNP Note: St. Louis model projections are based on latest data with coefficients projection is offered as being consistent with estimated from data through III/1971. Because of tracking: considerations. about a 4.7 percent target for unemploy III/1970 is used as a projection base. Also, these projections make no special allowance for the possible impact of price-wagc* controls. ment for the year (4.5 percent by year end) and a 3 percent rate of inflation for the year (2.5 percent by year end). These projections repre 7.4 percent from fourth quarter 1971 to fourth quarter sent a continuation of the progress made in 1972 in 1972, indicating that, relative to past experience, reducing both unemployment and inflation. monetary actions were very expansive. The 1972 growth of money was faster than 92 percent of all Though the projections of the broad economic ag previous years from 1947 to the present. gregates are very similar to actual experience in 1972, there are some differences in the composition of GNP Analysis Based on St. Louis Model (Table VI). The most notable differences are with reference to business inventories, residential construc In general, the CEA projections proved to be very tion, net exports, and Federal purchases. Business in accurate, though the reasons why they were accurate ventory accumulation is projected to be much stronger are not clear. For purposes of comparison, some alter in 1973 than in 1972, while residential construction is native simulations with the St. Louis model were expected to slow considerably compared to the very conducted. Such simulations shed little direct light rapid 1972 advance. Net exports are projected to show on the CEA projections, yet they provide a systematic a smaller deficit, though it should be noted that the basis for evaluating the 1972 economic experience. CEA projections were released before the U.S. de Two projections of the St. Louis model are shown valued the dollar on February 12. Federal purchases in Table V. The first projection uses money and highare projected to show little change in 1973, in con employment expenditures as they occurred in 1972. trast to the 8 percent increase in 1972. The second projection is the result of using money T a b le V I and high-employment expenditures as recommended Projected C h a n g e s in G N P a n d Com ponents.in the Administration’s economic plan in January 1972 and 1973 1972.5 The first projection using actual movements of 1972 1973* * the two key policy variables indicates that, after the B illio n s B illio ns fact, the St. Louis model estimated the increase in o f D o l la r s P e rc e n t o f D o l la r s P e rc e n t GNP to be $90.1 billion. The second projection indi P e r s o n a l C o n s u m p t io n $ 5 6 .2 8 .6 % $ 6 8 .9 9 .5 % cates that movements of the policy variables in line B u s in e s s F ix e d in v e s t m e n t 1 4.6 1 3.8 with Administrative recommendations would have in 1 6.6 1 3 .8 B u s in e s s In v e n t o r ie s 2 .2 — — 6 .7 creased GNP by $92.9 billion. Comparison of the pro R e s id e n t ia l C o n s t r u c t io n 1 1 .3 2 6 .5 1 .6 3 .0 jections indicates that the total impact of realized 8 .8 4 .6 4.1 5 .8 Fe d e ra l 5After the fact, a growth of money at a 7 percent rate was deemed consistent with the CEA forecast for 1972. This 7 percent rate was the average of two alternatives consid ered in an evaluation of the 1972 economic plan in this Review. See Keith M. Carlson, “The 1972 National Economic Plan: An Experiment in Fiscal Activism,” this Review (March 1972), pp. 3-10. P u rc h a se s State a n d Net Local P u rc h a se s E xp o rts GNP 8.1 8 .3 0 .6 0 .6 1 3 .9 1 0 .3 1 8 .1 1 2 .2 -4 .8 $ 1 0 1 .7 — 9 .7 % 2 .6 $ 1 1 4 .9 — 1 0.0% ♦Based on preliminary data in the 1973 CEA Report. ♦♦Estimated by this Bank and based on 1973 CEA Report. Page 5 FEDERAL RESERVE BANK OF ST. LOUIS MARCH 1973 Federal Budget Program for Calendar 1973 F e d e ra l G o v e rn m e n t E x p e n d itu re s The budget plan for calendar 1973 calls for no further fiscal stimulus from calendar 1972. The highemployment budget, as estimated by this Bank, is projected to be in deficit by about $7 billion in calen dar 1973, which compares with a $6 billion deficit in 1972 and a $3 billion surplus in 1971. The budget plan calls for a reduction in this deficit during the year, with an $11 billion annual rate of deficit in the first half and a $4 billion rate of deficit in the second half. N ational lacom e A c c o u t s Bu d get Expenditures —The budget program indicates a $23 billion increase, or 9.3 percent, in Federal expen ditures on an NIA basis for calendar 1973 (Table V II). This compares with an 11.8 percent advance in 1972 and a 6.8 percent average rate of increase from 1968 to 1971. Defense spending is projected to decline in 1973 by 1.8 percent, compared to a 6.7 percent increase in 1972. However, defense spending is projected to ad vance 1.1 percent from the second half of 1972 to the second half of 1973. The effect of cessation of Vietnam hostilities has already occurred as defense spending declined at a 3 percent average annual rate from 1968 to 1971, after increasing at a 16 percent average rate from 1965 to 1968. Nondefense spending, according to the Adminis tration’s budget, is projected to advance 14.2 percent in 1973, the same rate of increase as in 1972, and in line with the 13 percent average rate of increase from 1965 to 1971. As with defense spending, year-to-year comparisons are misleading, because nondefense spending is projected to increase at a 2 percent an nual rate from the first half 1973 to the second half of 1973. Nondefense spending in the first half of 1973 reflects the temporary effects of retroactive revenue sharing, the continuing effects of a permanent in crease in social security benefits, and a $2.2 billion pay increase for government employees. Receipts —Federal receipts on an NIA basis are projected to rise by $19 billion in 1973, or by 8.4 per cent. By comparison, receipts rose by 15 percent in 1972. These year-to-year comparisons are influenced in considerable measure by the effects of the over withholding of personal income taxes in 1972. To identify more precisely the basic trends for re ceipts, the sources of change are shown in Table VII. The only major tax change is the increase in the social security tax rate from 10.4 to 11.7 percent, effective January 1, 1973, and the expansion of the base for social security taxes from $9,000 to $10,800. The rise Page 6 Latest data plotted: 4th quarter 1972; dashed line indicates half-year estimates by this Bank based on the fiscal 1974 Federal Budget and the 1973 Annual Report of the Council in receipts in 1973 is reduced relative to the increase in 1972 because of settlements attributable to over withholding in 1972. In addition, receipts estimates for 1973 reflect the assumption that taxpayers will ad just downward their rate of withholding in 1973. After consideration of these tax changes, the estimate of the rise in receipts attributable to the advance of eco nomic activity is about $25 billion. T a b le V II P la n n e d C h a n g e s in F e de ral ( N I A ) B u d g e t: 1 9 7 2 to 1 9 7 3 * ( B ill io n s o f D o l la r s ) N IA R e ce ip ts 1 9 .1 $ C h a n g e d o e to g r o w t h C hange due to c y c le C hange due to tax 1 7 .4 8 .2 ra te a d ju s t m e n t s N I A E x p e n d it u r e s C hange N IA in $ d e fe n se 2 3.0 -1 .3 C hange in n o n d e fe n se S u r p lu s or D e ficit H ig h - E m p lo y m e n t — 7 .5 2 4 .3 -4 .0 R e c e ip ts $ 2 3 .6 H ig h - E m p lo y m e n t E x p e n d it u r e s $ 2 4 .7 H ig h - E m p lo y m e n t S u r p lu s $ — 1.1 o r D e fic it ‘ Estimated by this Bank from the Federal Budget for fiscal 1974. Surplus/deficit position —The combined effect of rising expenditures and receipts is a slight increase in the NIA deficit by $4 billion, from $18.5 billion in 1972 to $22.5 billion in 1973. However, since the NIA budget is influenced by the projected pace of eco- FEDERAL RESERVE BANK OF ST. LOUIS nomic activity, a more accurate indication of the eco nomic impact of the budget can be obtained by ex amining the high-employment budget. Even on this basis, the estimate of the economic impact of the budget program is very approximate. MARCH 1973 Fiscal M e a s u r e s H S u p l i l s ; (-)D e fiiit Q uarterly Total* at Annual Rotes Se a son a lly Adjusted B i l l i e s of D o lla rs . „ .. I I I U m i o f D o lla rs On a high-employment basis, the NIA budget is projected to be in deficit by $7 billion in 1973. The plan of the Administration is to have the high-em ployment budget moving toward a surplus position by early 1974. This plan is predicated on the assump tion that inflationary pressures will be developing in 1973 and a movement in the direction of fiscal re straint will be necessary to combat these pressures. This budget strategy stands in marked contrast to 1972 when a large fiscal stimulus was planned to ac celerate economic expansion. Monetary Policy Recommendations The Administration’s overall economic plan is fo cused on the Federal budget, with very little mention of the role for monetary actions. The Economic Re port of the President, for example, makes no men tion of monetary policy. Furthermore, the 1973 CEA Report, in contrast to recent past reports, placed little emphasis on monetary actions, either with reference to their role in the 1972 expansion or in terms of recommendations for 1973. Monetary actions in 1972 were summarized simply as “accommodating” with respect to the financial requirements of last year’s expansion. The role for monetary policy in 1973 is summarized by the CEA as follows: A gradual slowing of the expansion of money GNP to a steady rate consistent with the long-run poten tial growth rate of the economy and reasonable price stability is also an appropriate goal for monetary policy. This is likely to require a slower increase of the supply of money and credit. . . ,6 EVALUATION OF 1973 ECONOMIC PLAN The Administration’s projection for 1973 is very close to the consensus of other forecasts. For purposes of comparison, the CEA projections are evaluated with reference to the St. Louis model. This section focuses on two considerations: (1) Is the projected increase in total spending consistent with the pro posed set of stabilization policies, and (2) are the price and unemployment goals consistent with the projected increase in total spending? *1973 CEA Report, p. 75. •50 1965 1966 1967 1968 1969 1970 1971 1972 1973 Sources: U.S. Department of Commerce, Council of Economic Advisers, and Federal Reserve Bank of St. Louis Latest data plotted: 4th quarter 1972; d ashed line indicates half-year estimates by this Bank based on the fiscal 1974 Federal Budget and the 1973 Annual Report of the Council of Economic Advisers Feasibility of Total Spending Goal To determine the feasibility of the Administration’s projection of a $115 billion, or 10 percent, increase in GNP, two combinations of policies were conducted with the St. Louis model. These combinations of policies are: (1) increases of Federal spending as proposed in the budget and an expansion of money at a steady 6 percent annual rate from fourth quar ter 1972;* (2) increases of Federal spending as proposed in the budget and an expansion of money at a steady 8 percent annual rate from fourth quarter 1972. The two alternatives for money growth represent two illustrative courses of monetary action. It should be emphasized that they are illustrative and in no way directly attributable to the CEA or the Federal Reserve System. The steady 6 percent path of money growth is presented as being consistent with the rec ommendation of the CEA, at least in direction if not 7The assumed path for Federal spending reflects special con siderations which are necessary to assess the economic impact of fiscal actions within the framework of the St. Louis model. The impact of fiscal actions on GNP in the St. Louis model works only through a direct effect on GNP. As a result, large variations in Federal expenditures tend to introduce distor tions in the results because the sample period used for esti mation of the coefficients is relatively free of such variations. And even to the extent such variations are evident in past experience, the process of estimating regression coefficients is itself an averaging process. More specifically, the rise in ex penditures in the fourth quarter of 1972 was attributable in large measure to retroactive revenue sharing. Information re lating to the special nature of this expenditure increase was used to introduce a judgmental element into the model inputs so as to reduce distortions in the outputs of the model. Page 7 MARCH 1973 FEDERAL RESERVE BANK OF ST. LOUIS T a b le V I I I Projected C h a n g e s in To tal G N P : 1973 and 1974 1974 1973 B illio n s In c r e a s e $ 1 1 4 .9 1 0.0% C E A P ro je c tio n (1 / 3 1 / 7 3 ) B ill io n s $ In c r e a s e — — % St. L o u is M o d e l P ro je c tio n 1 ) W it h 6 p e rc e n t m o n e y gro w th a n d F e d e ra l sp e n d in g b a s e d o n fis c a l 1 9 7 4 budget 2) 1 1 1 .9 9 .7 8 5 .3 6 .8 1 1 9 .2 1 0.3 1 0 8 .8 8 .6 W it h 8 p e rc e n t m o n e y g ro w th a n d Fe d e ra l s p e n d in g b a s e d o n fisc a l 1 9 7 4 budget in precise magnitude. The steady 8 percent money path would represent an approximate continuation of the course of monetary actions in 1972. The results for these combinations of policies are shown in Table VIII. The combination of a steady 6 percent growth of money and government spending based on the fiscal 1974 budget yields results which are roughly consistent with the CEA projections. The conclusion is offered here that the CEA projection is indeed feasible if the impact of retroactive revenue sharing is distributed more evenly over time than the NIA expenditure estimates would indicate. The case with steady 8 percent money growth is shown for illustration. If money should grow at a rapid 8 percent rate, the St. Louis model indicates that GNP would increase by about $5 billion more than the CEA forecasts. Furthermore, it should be remembered that the St. Louis model contains an implicit assumption that velocity will grow at a rela tively slow rate in the range of 2.2 to 2.8 percent from 1972 to 1973. In summary, the CEA projection appears to be feasible and realistic. There is a definite possibility, however, that the expansion of nominal GNP will be stronger than planned if (1) money grows faster than at a 6 percent rate, (2) velocity increases more rap idly, or (3) some combination of the two. longer-run effects of the price-wage control program. Examination of the table indicates the critical im portance of the assumption about the success of Phase III of the price-wage control program, as well as the lasting effects of the earlier phases of the program. The two alternatives reflect assumptions about these lasting effects. The first St. Louis model projection assumes that past controls were effective in permanendy reducing the price level from what it otherwise would have been, and that the 1973 price-unemploy ment mix will be determined within that context. The other alternative assumes that price-wage controls were not effective in permanently reducing the price level, and prices will thus show a catch-up effect toward the basic trend as determined by monetaryfiscal actions during the period of controls. Implications of Total Spending Goal Examination of these alternatives indicates that the Administration’s forecast is roughly consistent with the “effectiveness of controls” version of the St. Louis model. With this version of the model, prices are pro jected to rise 3.3 percent in 1973, only slightly higher than that projected by the CEA. Unemployment is projected to average 4.7 percent, about the same as the Administration’s projection. Aside from the possibility of attaining the GNP goal, attention is now focused on the Administration’s price and unemployment goals. Table IX, on the fol lowing page, shows the implied paths of output, prices and unemployment as given by the St. Louis model using an estimated path for GNP consistent with the CEA forecast. There are two St. Louis model projec- Consider now the “ineffectiveness of controls” ver sion of the St. Louis model. This model shows a rapid run-up in prices in 1973, which illustrates the assump tion that prices will reflect a level consistent with the longer-run path of monetary growth. In other words, the assumption underlying this version of the model is that it is not possible to control prices by fiat over the Page 8 FEDERAL RESERVE BANK OF ST. LOUIS MARCH 1973 T a b le I X Projected C h a n g e s in G N P , O u tp u t , Prices, a n d U n e m p lo ym e n t: 1 9 7 3 a n d 1974 ( P e r c e n t) 1973 i II 1974 III IV Year 1 II III IV Year C E A P r o je c t io n s ( 1 / 3 1 / 7 3 ) ! 1 0 .5 9 .8 8 .5 8 .0 1 0.0 O u tp u t 6 .0 6 .3 5 .4 5 .2 6 .8 — — — — P ric e s 4 .0 3 .5 3 .0 2 .5 3 .0 — — — — — U n e m p lo y m e n t R a te 5 .0 4 .8 4 .6 4 .5 4 .7 — — — — — GNP — St. L o u is M o d e l P ro je c t io n s : (1 ) W it h C E A G N P a n d c o n t r o ls e ffe c tiv e n e ss GNP (2 ) 1 0 .5 9 .8 8 .5 8 .0 1 0.0 8 .0 8 .0 7 .8 7 .8 7 .2 O u tp u t 6 .4 5 .9 4 .8 4 .4 6 .5 4 .4 4 .7 4 .5 4 .5 4 .6 P rices 3 .9 3 .8 3 .6 3 .5 3 .2 3 .4 3 .3 3 .2 3.1 3 .5 U n e m p lo y m e n t R a te 4 .9 4 .7 4 .6 4 .6 4 .7 4 .6 4 .6 4 .5 4 .5 4 .6 8.1 W it h C E A G N P a n d c o n t r o ls in e ffe c t iv e n e s s 1 0 .5 9 .8 8 .5 8 .0 1 0.0 8 .0 8 .0 7 .8 7 .8 O u tp u t 5 .0 4 .5 3 .7 3 .4 5 .7 3 .8 3 .7 4 .0 4 .3 3 .8 P ric e s 5 .3 5 .2 4 .7 4 .5 4.1 4.1 4.1 3 .7 3 .3 4.1 U n e m p lo y m e n t R a te 4 .9 4 .9 4 .9 4 .9 4 .9 5 .0 5 .0 5.1 5 .1 5.1 GNP longer rim. This particular version of the model as sumes that this catch-up process will take two years, though this is an arbitrary assumption. Given this ver sion of the model and its assumptions, the outlook for employment is somewhat less optimistic, showing an average unemployment rate of 4.9 percent for 1973. Any conclusions about the attainability of the Ad ministration’s price-unemployment goals are very ten tative. In particular, it still remains to be determined whether the price-wage control program has had any lasting effects on price trends. Aside from such shortrun considerations, it is perhaps more certain that monetary-fiscal actions over the next two years are crucial in the determination of price trends beyond 1974. An awareness of these longer-run considerations is demonstrated in the CEA Report, however, when they suggest the urgency of getting the economy on a noninflationary growth path. SUMMARY The Administration has projected another year of rapid growth in GNP. Accompanying this rapid growth is a belief that unemployment will be reduced further and inflation will continue to slow. Over the longer run the CEA has made it clear that it seeks the objective of slowing the pace of economic advance so as to be consistent with noninflationary growth. To achieve their objectives, the Administration pro poses a Federal budget program that maintains a stimulative posture in 1973, but with the degree of stimulus moderating during the year. At the same time, the Administration recommends a slowing in monetary growth from the rapid 7.4 percent advance in 1972. Using the St. Louis model as an aid in evaluating the 1973 economic plan, it was found that the total spending goal was feasible. This goal for total spend ing leaves little margin for error, however, for any one or a combination of several eventualities could push GNP above the Administration’s goals. The GNP goal requires that money growth does not exceed 6 percent, that Federal spending rises in line with pro jections, and that the income velocity of money in creases at a rate of about 3 percent. To the extent that the income velocity of money rises at a more rapid rate, the growth of the money stock would have to be correspondingly slower. Assessment of the Administration’s goals for prices and unemployment is much more difficult. Due to the uncertainty that still exists as to the lasting effects of the price-wage control program, as it has been ad ministered up to this time, achievement of these goals is much more tenuous. A version of the St. Louis model, which builds in the assumption of past suc cess of price-wage controls, indicates that the Admin istration’s price-unemployment goals are attainable in 1973, given their assumptions about monetary-fiscal actions. But any tendency towards a catching-up of prices will delay the attainment of either the price or the unemployment goal. Page 9 FOMC Policy Actions in 1972 by JERRY L. JORDAN _L HE PRIMARY policy objective of the Federal Open Market Committee (FOMC) in early 1972 was to provide sufficient monetary growth to facilitate con tinued real economic expansion in an environment in which administrative controls on prices and wages had been imposed. Late in 1972 the directive of the Fed eral Open Market Committee specified slower growth of monetary aggregates as the policy discussions in dicated an increasing concern for the possibilities of re-emergence of inflationary pressures.1 This review of policy actions of the FOMC in 1972 will include little reference to the “New Economic Program.” No one, including members of the FOMC, would be able to say for certain how, or even whether, monetary policy decisions would have been different last year if underlying economic conditions had been the same but there had been no price-wage control program. The primary source of information for this article is the “Record of Policy Actions” of the Federal Open Market Committee.- These “Records” of policy ac tions contain little reference to the Government’s con trol program. Consequently, there is no explicit indi cation of the extent to which the various aspects of the Administration’s program served as either a con straint on, or as an inducement to, FOMC actions. 'The membership, procedures, and terms used in connection with the FOMC are discussed in the screened section en titled “The Federal Open Market Committee in 1972.” 2Unless specifically noted, all quotes in this article come from the “Record of Policy Actions” of the Federal Open Market Committee, released about 90 days after each meeting and later published in the Federal Reserve Bulletin. Supple mentary information regarding monetary and financial de velopments during the year is contained in quarterly reports prepared by the staff of the Board of Governors, and sent to the Joint Economic Committee of Congress. These reports are published in the Federal Reserve Bulletin approximately every three months. They provide the views of the Board’s staff regarding movements in interest rates and monetary and reserve aggregates over the course of the prior quarter. Digitized for Page FRASER 10 PROVIDING SUFFICIENT STIMULUS — EARLY 1972 The “policy consensus” and “operating instructions” at the first meeting of 1972 were unchanged from the December 1971 meeting.3 In fact, the policy consen sus in January 1972 was identical to that of the last five meetings in 1971, all following the August 15 an nouncement of the New Economic Program. Specific ally, the policy of the FOMC was to “foster financial conditions consistent with the aims of the new gov ernmental program. . . .” These aims were said to in clude “sustainable real economic growth and increased employment, abatement of inflationary pressures, and attainment of reasonable equilibrium in the country’s balance of payments.” Although the actions necessary to achieve each of these goals would involve some conflict if pursued simultaneously and equally, the operating instructions provide some indication of the weight given by the Committee to these goals. In November 1971 the Committee’s instructions had indicated a desire to “promote somewhat greater growth in monetary and credit aggregates,” while at the December 1971 meet ing this seems to have become a more definite objec tive as the Committee sought to “promote the degree of ease in bank reserve and money market condi tions essential to greater growth in monetary aggregates. . . .”4 ■^Throughout this article these terms refer, respectively, to the last two sentences in the directive. See Exhibit I for further reference to these terms. 4In February 1973 the Federal Reserve Board released revised data for monetary aggregates for the previous fourteen years. However, unless specifically noted otherwise, throughout this article references to monetary and reserve aggregates are based on the former series — the data available to the Com mittee at the time of their deliberations. Page 12 contains rates-of-change triangles for the money stock series on both the old and the revised basis. Also, all rates-of-change com putations are on a compound annual basis unless contained within quoted material or specifically noted otherwise. MARCH 1973 FEDERAL RESERVE BANK OF ST. LOUIS The Federal Open Market Committee in 1972 The Federal Open Market Committee (F O M C ) consists of the seven members of the Federal Reserve Board of Governors and five of the twelve Federal Reserve Bank Presidents. The Chairman of the Board of Governors is also, by tradition, Chairman of the Committee. The President of the New York Federal Reserve Bank is a permanent voting member of the Committee and, also by tradition, is its Vice-Chairman. All other Federal Reserve Bank Presidents attend the meetings and present their views, but votes may be cast by only four of these Presidents, who serve as vot ing members for one-year terms on a rotation basis. Members of the Board of Governors for most of 1972 included Arthur F . Burns, J. L. Robertson, An drew F . Brimmer, Jeffrey M. Bucher, J. Dewey Daane, George W . Mitchell, and John E . Sheehan. The term of Governor Sherman Maisel expired on January 31, 1972; however, Mr. Maisel continued to serve as a Governor and to participate in Federal Open Market Committee meetings through April last year. Jeffrey M. Bucher joined the Board on June 5 iast year to fill the position vacated by Mr. Maisel. Mr. Bucher has participated in the FO M C meetings since last June. In addition to Alfred Hayes, President of the Federal Reserve Bank of New York, the follow ing Presidents served on the Committee during Jan uary and February 1972: George H. Clay (Kansas C ity ), Monroe Kimbrel (A d an ta), Robert P. Mayo (C hicago) and Frank E . Morris (B oston ). In March the Committee was reorganized and the four rotating positions were filled by the following new members: Philip E . Coldwell (D allas), David P. Eastbum (Philadelphia), Bruce K. M acLaury (Minneapolis) and Willis J. Winn (C leveland). The Committee regularly met once each month dur ing 1972 to discuss economic trends and to decide upon the future course of open market operations. At these meetings they may discuss other possible policy actions for subsequent weeks and months. At each meeting, a directive was issued to the Federal Re serve Bank of New York stating the ultimate goals of the Committee and providing general guidelines as to how the Manager of the System Open Market Account1 at the New York Federal Reserve Bank should conduct open market operations to achieve these goals. Each directive contained a short review of economic data considered and the general economic goals sought by the Committee. The second paragraph gave operating instructions to the Account Manager. These instructions were stated in terms of bank re serve and money market conditions to achieve desired growth rates of monetary aggregates, and any special factors to be taken into account, such as Treasury financing operations. ■The Manager of the System Open Market Account may be referred to as the “Account Manager” and the Trading Desk of the New York Federal Reserve Bank as the “Desk”. The decisions on the exact timing and amount of daily buying and selling operations of securities in fulfilling the Committee’s directive are the respon sibility of the Account Manager at the Trading Desk of the New York Bank. E ach morning, he and his staff decide on a program for open market operations to be undertaken that day. In developing this program, money and credit market conditions and aggregate targets desired by the Committee are considered as well as other factors which may be of concern at that time. Each morning, the Account Manager places a conference call to staff members of the Board of Governors and one voting President to give informa tion about present market conditions and open market operations which he proposes to execute that day. Other members of the Committee are informed of the daily program by wire summary. A summary of the Committee’s actions is pre sented to the public in the “Record of Policy Actions” of the Federal Open Market Committee. This “Record” is released about 9 0 days after each meeting and is published in both the Annual Report of the Board of Governors of the F ederal Reserve System each spring and in the Federal Reserve Bulletin each month. The “Record” for each meeting generally includes: 1) a summary of recent economic developments, such as prices, employment, industrial produc tion, and components of the national income accounts; also, staff projections concerning real output growth for the current and following quarters are usually discussed; 2 ) a discussion of the U.S. balance of payments, including international financial developments; 3 ) a discussion of interest rate movements; 4 ) a discussion of open market operations and growth of reserve aggregates since the last meeting; 5 ) a discussion of the movements of monetary ag gregates such as Mi and M2, and the adjusted credit proxy2; 6 ) a general statement of the views of the members of the FOM C; 7 ) conclusions of the FO M C ; 8 ) a policy directive issued by the FO M C ; 9 ) a list of the voting position of members and any dissenting comments. 2Mi refers to the money stock, defined as private demand deposits plus currency in the hands of the nonbank public. Mj refers to money stock plus net time deposits; net time deposits are defined as total time deposits at all commercial banks minus large time certificates of deposit at large weekly reporting commercial banks. Adjusted credit proxy is defined as member bank deposits subject to reserve re quirements plus bank-related commercial paper, Eurodollar borrowings of U. S. banks, and certain other nondeposit items. Page 11 FEDERAL RESERVE BANK OF ST. LOUIS MARCH 1973 MONEY ST O C K * COMPOUNOEO ANNUAL R A T E S OF CHANGE IN IT IA L T E R M IN A L MONTH 7 -7 1 8-7 1 9-7 1 1 0 -7 1 1 1 -7 1 12 -71 8-7 1 3 .2 9 -7 1 0 .5 -2 . 1 10 -71 0 .5 -0 .8 0 .5 1 1 -7 1 0 .4 -0 .5 0 .3 0.0 1 2 -71 0 .8 0 .3 l.l 1 .3 2 .7 1 -7 2 1 .2 0 .8 1 .6 1 .9 2.9 3 .2 2 -7 2 2 .9 2 .8 3 .8 4.7 6.3 8 .2 1 -7 2 2 -7 2 3-7 2 MONTH 4 -7 2 5-7 2 B I L L I O N S OF DO LLARS 4 -7 2 7 -7 2 8 -7 2 9 -7 2 1 0 -7 2 1 1 -7 2 1 2 -7 2 i-7 3 2 2 8 .0 2 2 7 .6 2 2 7 .7 2 2 7 .7 2 2 8 .2 2 2 8 .8 13. 3 2 3 1 .2 3 -7 2 4.1 4 .2 5.3 6 .2 7 .8 9 .6 13 .0 1 2 .6 4 -7 2 4 .5 4.6 5.6 6 .5 7.9 9 .2 11 .3 1 0 .3 8 .0 2 3 3 .5 2 3 5 .0 5 -7 2 4.3 4 .4 5.3 5.9 7 .0 7.9 9.0 7.6 5 .3 2 .6 6 -7 2 4.4 4 .5 5 .3 5.9 6 .8 7.5 8 .4 7 .2 5 .4 4 .2 5 .8 7 -7 2 5.3 5.5 6 .3 6.9 7 .8 8 .6 9. 5 8 .7 7 .8 7 .7 1 0 .4 15 .2 2 3 5 .5 23 6 .6 2 3 9 .4 8 -7 2 5 .3 5.5 6 .2 6.8 7 .6 8 .2 8 .9 8 .2 7 .3 7 .2 8 .8 10 .3 5.7 9 -7 2 5 .3 5.5 6 .2 6.7 7 .4 7 .9 8 .5 7.8 7 .1 6 .9 8.0 8.7 5 .6 5 .6 10 -7 2 5 .2 5 .4 5.9 6 .4 7 .0 7 .5 7 .9 7.3 6 .5 6 .3 7 .1 7.4 4.9 4 .6 3 .5 1 1 -7 2 5.3 5 .4 6.0 6 .4 7 .0 7.4 7 .8 7.2 6 .6 6.4 7 .0 7 .2 5.4 5 .3 5 .1 6 .6 12 -7 2 5.9 6.1 6.7 7. 1 7.7 8 .2 8 .6 8 .2 7 .7 7 .6 8 .4 8 .8 7 .6 8. 1 8 .9 1 1 .7 1 7 .0 7 -7 2 8 -7 2 9 -7 2 1 0 -7 2 11 -7 2 1 -7 3 2 4 0 .5 24 1 .6 2 4 2 .3 2 4 3 .6 2 4 6 .8 SERIES D IS C O N T IN U E D AFTER R E V ISIO N 2 -7 3 * T - 71 8 -7 1 9-7 1 1 0 -7 1 11 -71 1 2-7 1 1-7 2 2 -7 2 3 -7 2 4 -7 2 IN IT IA L * P R IO R TO FE B R U A R Y 5 -7 2 T E R M IN A L MONTH MONEY STOCK ANNUAL RA T E S OF CHANGE IN IT IA L 8 -7 1 1 2 -7 2 1 -7 3 1 9 7 3 R E V IS I O N COMPOUNDED 7-7 1 6 -7 2 MONTH 9-7 1 1 0 -7 1 8-7 i 2 .6 9 -7 1 2.1 1.5 1 0 -7 1 2 .8 2 .8 4 .2 11 -71 1.9 1.7 1 .8 -0 .5 1 2 -7 1 2 .0 1.8 1 .9 0.8 11 -71 12 -7 1 1 -7 2 2 -7 2 3 -7 2 4 -7 2 RE V ISE D SE R IES EFFECTIVE FEBRU ARY 1973 MONTH 5 -7 2 B IL L IO N S OF D O LL A R S 6 -7 2 7 -7 2 8 -7 2 9 -7 2 1 0 -7 2 1 1 -7 2 1 2 -7 2 1 -7 3 2 3 4 .6 2 3 4 .9 2 3 5 .7 2 3 5 .6 2.1 2 3 6 .0 1 -7 2 1.8 1.6 1.7 0 .9 1.5 1 .0 2 -7 2 3 .7 3.9 4. 3 4 .4 6. 1 8 .1 3 -7 2 4.7 5.0 5 .6 5.9 7.6 9 .5 14 .0 1 2 .2 4 -7 2 5 .1 5.4 6.0 6. 3 7 .7 9 .2 12 .0 1 0 .2 5 -7 2 5 .0 5 .3 5.7 6.0 7.1 8 .1 10 .0 8. 1 6 .1 4. 0 6 -7 2 5 .1 5 .4 5.8 6 .0 7.0 7 .9 9 .3 7. 7 6 .3 5. 3 6 .6 7 -7 2 5 .8 6 .1 6.6 6.8 7 .8 8 .6 10 .0 8.9 8 .0 8. 0 1 0 .0 13 .5 8 -7 2 5 .7 6.0 6 .4 6.6 7 .4 8. 1 9.2 8.1 7 .3 7. 1 8.1 8 .9 4 .4 2 3 6 .2 15 .8 23 9 .1 2 4 1 .4 8 .3 24 3 .0 24 3 .8 24 5 .1 24 7 .7 24 8 .6 9 -7 2 5.8 6. 1 6 .5 6 .7 7.4 8 .0 9 .0 8 .0 7 .3 7. 2 8 .0 8.4 6 .0 7 .5 1 0 -7 2 5 .9 6 .2 6.5 6.7 7 .4 8.0 8 .8 7.9 7 .4 7. 2 7 .9 8 .2 6 .4 7 .5 7 .4 1 1 -7 2 5 .9 6 .1 6 .5 6 .6 7.3 7 .7 8 .4 7 .7 7.1 6. 9 7 .4 7 .6 6.2 6 .8 6.4 5.4 12 -72 6 .4 6 .6 7 .0 7 .2 7.8 8 .3 8 .9 8.3 7 .9 7. 9 8.4 8 .7 7 .7 8 .6 8 .9 9.7 1 4 .1 1 -7 3 6 .0 6.2 6 .5 6.6 7 .2 7 .6 8 .1 7 .5 7.0 6. 9 7.2 7 .3 6.3 6 .7 6 .5 6.2 6.6 -0 .5 2 -7 3 6.0 6 .2 6 .5 6 .6 7 .1 7 .5 8 .0 7 .4 6 .9 6. 8 7.1 7 .2 6.3 6 .6 6.5 6 .2 6 .5 2.9 6. 3 7 -7 1 8-7 1 9 -7 1 1 0 -7 1 1 1 -7 1 1 2 -7 1 1-7 2 2 -7 2 3 -7 2 4 -7 2 5 -7 2 6 -7 2 7 -7 2 8 -7 2 9 -7 2 1 0 -7 2 1 1 -7 2 1 2 -7 2 1 -7 3 Page 12 IN IT IA L MONTH 2 5 0 .1 2 5 1 .6 25 2 .7 2 5 5 .5 2 5 5 .4 2 5 6 .7 FEDERAL RESERVE BANK OF ST. LOUIS This wording, which was repeated at the January 1972 meeting, indicates that at that time, with the existence of a price-wage control program, the Com mittee gave greater weight to providing the growth of money and credit which they viewed as essential to real economic recovery. A review of operating instruc tions issued in 1971 shows that for several months prior to the imposition of the price-wage freeze, the FOMC desired to slow the growth in monetary aggregates from the very high rates of the first half of the year. At the September and October 1971 meetings the Committee had agreed to seek “to achieve moderate growth in monetary and credit aggregates. . . How ever, by November, after a few months of slower growth, the consensus had moved to one of desiring more rapid growth. This qualitative phrasing of the growth rates of monetary aggregates sought by the policymakers is characteristic of the “Record of Policy Actions” of each meeting in 1972. Thus, the reader has only a general impression of the rates of growth that would be satisfactory to the Committee. At previous meet ings, mostly from February 1970 to May 1971, the directive indicated specific growth rates of the money supply or other monetary aggregates that were being sought. This practice was not followed in the secondhalf of 1971. Then, at the January 1972 meeting, the “Record” began to report an objective of the Com mittee in terms of a specific range for the rate of growth of a measure of bank reserves. Specified at each subsequent meeting was a “target” growth rate of reserves which was deemed consistent with the Committee’s desired growth rates for monetary ag gregates. However, the rates of monetary aggregates were not specified, and because of the possibility of anticipated changes in the reserve-money multiplier, one cannot assume that a change in the target growth rate of the reserve aggregate would be accompanied by a similar change in the desired growth of the money supply and other monetary aggregates.5 The policy consensus and the operating instructions included in the economic policy directive issued at the January 1972 meeting contained essentially the same wording as a month earlier. However, by this time there were apparently significant differences in the views of some members of the Committee. The policy directive had been adopted unanimously at the De cember 1971 meeting, but in January three votes were cast against the directive. BFor a more detailed discussion of reserve operating targets, see Charlotte E. Ruebling, “RPDs and Other Reserve Op erating Targets,” this Review (August 1972), pp. 2-7. MARCH 1973 The reasons given for the dissents reveal some of the differences concerning the implementation of pol icy. The text of the “Record of Policy Actions” for the January meeting summarizes the majority view: In the Committee’s discussion considerable con cern was expressed about the persistent sluggishness of key monetary aggregates, and a number of mem bers advocated action to provide sufficient reserves to support the faster monetary growth that they believed was required by the economic situation and outlook. It was noted in this connection that the level of member bank reserves, as well as that of M i, had changed little during the fourth quarter de spite a progressive easing of money market condi tions. In the interest of assuring the provision of reserves needed for adequate growth in monetary aggregates, the Committee decided that in the pe riod until its next meeting open market operations, while continuing to take appropriate account of conditions in the money market, should be guided more by the course of total reserves than had been customary in the past . . . . In placing greater emphasis on total reserves, the Committee took note of a staff analysis suggesting that moderate rates of growth in Mi and M2 in January and February were likely to be associated with a large increase in total reserves from December to January and then a decline in February — mainly as a consequence of recent and anticipated changes in U.S. Government deposits, and allowing for the 2-week lag between member bank deposits and re quired reserves. Against the background of this analysis, a majority agreed that an annual rate of growth in total reserves of roughly 20 to 2 5 per cent from December to January would be satisfactory, provided that it could be attained without undue easing of money market conditions. Following the directive, the “Record” notes: Messrs. Hayes, Brimmer, and Kimbrel differed somewhat in their reasons for dissenting from this action. Mr. Hayes considered the emphasis placed on total reserves as an operating target to be an undesirable step; in his judgment, reserves were much less meaningful than other measures, such as the monetary and credit aggregates and interest rates, as an instrument for working toward the Commit tee’s basic economic objectives. Also, he was reluc tant to issue a directive that might involve a sub stantial further easing of money market conditions, since the Committee had already moved rapidly in that direction and since it appeared to him that the economic outlook had improved somewhat in recent months. H e was concerned about the risk that a further sharp decline in short-term interest rates might subject financial markets to unnecessary whipsawing and might tend to rekindle inflationary expectations. Mr. Brimmer shared the majority’s views concern ing broad objectives of policy a t this time, and he Page 13 EXHIBIT I Page FOMC ECONOMIC POLICY DIRECTIVES D a te of FOM C M e e t in g 14 D ecem b er 14, 1971 Ja n u a ry 1 1, Policy Consensus In lig h t of th e f o r e g o in g d e v e lo p m e n t s , it is th e p o l ic y o f t h e F e d e r a l O p e n M a r k e t C o m m ittee to f o s t e r f in a n c i a l c o n d it io n s c o n sis t e n t w it h t h e a im s o f t h e n e w g o v e r n m e n t a l p r o gra m , in c lu d in g s u s t a in a b l e re a l e c o n o m ic g r o w t h a n d in c r e a s e d e m p lo y m e n t , a b a t e m e n t of in f l a t io n a r y p r e s s u r e s , a n d a t t a in m e n t o f r e a s o n a b l e e q u ilib r iu m in th e c o u n t r y 's b a la n c e o f p a y m e n ts. No Change D is s e n t s : None D is s e n t s : M r . 15 O perating Target T o im p le m e n t t h is p o lic y , th e C o m m itt e e s e e k s to p r o m o t e th e d e g r e e o f e a s e in b a n k r e s e r v e a n d m o n e y m a rk e t c o n d it io n s e s s e n t ia l to g r e a t e r g r o w t h in m o n e t a r y a g g r e g a t e s o v e r th e m o n t h s a h e a d . 1 . . . w h ile t a k in g a c c o u n t o f in t e r n a t io n a l d e v e lo p m e n t s a n d th e f o r t h c o m in g T r e a s u r y f in a n c in g , th e C o m m itt e e s e e k s to p r o m o t e th e d e g r e e o f e a s e in b a n k r e s e r v e a n d m o n e y m a r k e t c o n d it io n s e s s e n t ia l to g r e a t e r g r o w t h in m o n e t a r y a g g r e g a t e s o v e r th e m o n t h s a h e a d . 1972 F e b ru a ry 1972 Operating Instructions . . . to f o s t e r f in a n c ia l c o n d it io n s c o n d u c iv e to s u s t a in a b l e r e a l e c o n o m ic g r o w t h a n d in c r e a s e d e m p lo y m e n t , a b a t e m e n t o f in f l a t io n a r y p r e s s u r e s , a n d a t t a in m e n t o f r e a s o n a b l e e q u ilib r iu m in the c o u n t r y 's b a l a n c e o f p a y m e n t s . H a y e s, M r. B rim m e r, M r . K im b r e l . . . w h ile t a k in g a c c o u n t o f in t e r n a t io n a l d e v e lo p m e n t s , th e C o m m itt e e s e e k s to a c h ie v e b a n k r e se r v e a n d m o n e y m a rk e t c o n d it io n s t h a t w ill s u p p o r t m o d e r a t e g r o w t h in m o n e t a r y a g g r e g a t e s o v e r th e m o n t h s a h e a d . D is s e n t s : M r . H a y e s FO M C M a rch 21 No Change No Change R E O R G A N IZ E D W IT H NEW . . . a m a jo r it y a g r e e d t h a t a n a n n u a l ra te o f g r o w t h in to ta l r e s e r v e s o f r o u g h l y 2 0 to 2 5 p e r cent fro m D e c e m b e r to J a n u a r y w o u ld b e s a t is f a c t o r y , p r o v id e d t h a t it c o u ld b e a t t a in e d w it h o u t u n d u e e a s i n g o f m o n e y m a r k e t c o n d it io n s . V O T IN G T h e m e m b e rs d e c id e d t h a t it w o u ld b e d e s ir a b le to s e e k g r o w t h in th e r e se r v e m e a s u r e in th e F e b r u a r y M a r c h p e r io d a t a n a n n u a l ra te in a r a n g e o f 6 to 1 0 p e r cen t, w h ile a v o i d i n g b o t h s h a r p s h o r t -r u n flu c tu a t io n s a n d u n d e s ir a b l y l a r g e c u m u la t iv e c h a n g e s in m o n e y m a r k e t c o n d it io n s in e it h e r d ire c tio n in the p e r io d b e t w e e n m e e t in g s . 2 M EMBERS . . . w h ile t a k in g a c c o u n t o f in t e r n a t io n a l d e v e lo p m e n t s a n d p o s s ib le T r e a s u r y f in a n c in g , th e C o m m itt e e s e e k s to a c h ie v e b a n k r e se r v e a n d m o n e y m a r k e t c o n d it io n s t h a t w ill s u p p o r t m o d e r a t e g r o w t h in m o n e ta ry a g g re g a t e s o v e r th e m o n t h s a h e a d . T h e C o m m itt e e d e c id e d to s e e k g r o w t h in th e r e se rv e m e a s u r e e m p lo y e d a t a n a n n u a l ra te in a r a n g e o f 9 to 1 3 p e r ce n t d u r i n g th e M a r c h - A p r i l p e r io d w h ile a v o i d i n g b o t h s h a r p d a y - t o - d a y f lu c tu a t io n s a n d la r g e c u m u la t iv e c h a n g e s in m o n e y m a r k e t c o n d it io n s . D is s e n t s : N o n e A p r il 1 8 . . . w h ile t a k in g a c c o u n t o f c a p it a l m a r k e t d e v e lo p m e n t s a n d th e f o r t h c o m in g T r e a s u r y f in a n c in g , th e C o m m itt e e s e e k s to a c h ie v e b a n k r e se r v e a n d m o n e y m a r k e t c o n d i tio n s t h a t w ill s u p p o r t s o m e w h a t m o r e m o d e ra t e g r o w t h in m o n e t a r y a g g r e g a t e s o v e r th e m o n t h s a h e a d . D is s e n t s : N o n e M a y 23 No C hange . . . w h ile t a k in g a c c o u n t o f c a p it a l m a r k e t d e v e lo p m e n t s a n d p o s s ib le T r e a s u r y r e f u n d in g , th e C o m m itt e e s e e k s to a c h ie v e b a n k r e se r v e a n d m o n e y m a r k e t c o n d it io n s t h a t w ill s u p p o r t s o m e w h a t s lo w e r g r o w t h in m o n e t a r y a g g r e g a t e s o v e r th e m o n t h s a h e a d . T h e C o m m itt e e d e c id e d to s e e k g r o w t h in th e r e se rv e m e a s u r e e m p lo y e d a t a n a n n u a l r a t e in a r a n g e o f 7 to 11 p e r ce n t d u r i n g th e A p r i l - M a y p e r io d a n d to a c c e p t, if n e c e s s a r y , s o m e w h a t firm e r m o n e y m a rk e t c o n d it io n s in o r d e r to a c h ie v e g r o w t h in t h a t r a n g e in e x is t in g c ir c u m s t a n c e s, w h ile c o n t in u in g to a v o id s h a r p f lu c tu a t io n s a n d la r g e c u m u la t iv e c h a n g e s in m o n e y m a r k e t c o n d it io n s . . . . th e C o m m itt e e d e c id e d to s e e k g r o w t h in R P D ’s a t a n a n n u a l ra te in a r a n g e o f 7 . 5 to 1 1 . 5 p e r cent d u r i n g th e M a y - J u n e p e r io d w h ile c o n t in u in g to a v o id s h a r p f lu c tu a t io n s a n d la r g e c u m u la t iv e c h a n g e s in m o n e y m a r k e t c o n d it io n s . D is s e n t s : N o n e A b s e n t a n d n o t v o t in g : M r . R o b e r t s o n June 1 9-20 No Change . . . w h ile t a k in g a c c o u n t o f p o s s i b le T r e a s u r y f in a n c in g a n d d e v e lo p m e n t s in c a p it a l m a r k e t s, th e C o m m itt e e s e e k s to a c h ie v e b a n k r e s e r v e a n d m o n e y m a r k e t c o n d it io n s th a t w ill s u p p o r t m o d e r a t e g r o w t h in m o n e t a r y a g g r e g a t e s o v e r th e m o n t h s a h e a d .$ D is s e n t s : N o n e A b s e n t a n d n o t v o t in g : M r . H a y e s ( M r . T r e ib e r v o t e d a s h is a lt e r n a t e ) . . . th e C o m m itt e e d e c id e d to s e e k g r o w t h in R P D 's at a n a n n u a l ra te in a r a n g e o f 4 . 5 to 8 . 5 p e r cent d u r in g th e J u n e - J u ly p e r io d w h ile c o n t i n u in g to a v o id s h a r p f lu c tu a t io n s a n d la r g e c u m u la t iv e c h a n g e s in m o n e y m a r k e t c o n d it io n s . J u ,y No Change . . . w h ile t a k in g account of th e f o r t h c o m in g T re asu ry f in a n c in g , d e v e lo p m e n t s in c a p it a l m a r k e t s, a n d in t e r n a t io n a l d e v e lo p m e n t s , th e C o m m itt e e s e e k s to a c h ie v e b a n k r e se r v e a n d m o n e y m a r k e t c o n d it io n s t h a t w ill s u p p o r t m o d e r a t e g r o w t h in m o n e t a r y a g g r e g a t e s o v e r th e m o n t h s ahead. . . . it [t h e C o m m itt e e ] d e c id e d to seek g r o w th in R P D 's a t a n a n n u a l ra te in a r a n g e o f 3 to 7 p e r cent d u r i n g th e J u l y - A u g u s t p e r io d w h ile c o n t in u in g to a v o id s h a r p f lu c tu a t io n s a n d l a r g e c u m u la tiv e c h a n g e s in m o n e y m a r k e t c o n d it io n s , D is s e n t s : M r . C o ld w e ll A b s e n t a n d n o t v o t in g : M r . M it c h e ll A u g u st 15 No Change . . . w h ile t a k in g a c c o u n t o f d e v e lo p m e n t s in c a p it a l m a r k e ts a n d in t e r n a t io n a l d e v e lo p m e n t s , th e C o m m itt e e s e e k s to a c h ie v e b a n k r e s e r v e a n d m o n e y m a r k e t c o n d it io n s th a t w ill s u p p o r t m o d e ra t e g r o w t h in m o n e t a r y a g g r e g a t e s o v e r th e m o n t h s a h e a d . It [ t h e C o m m itt e e ] d e c id e d to se e k g r o w t h in R P D ’s d u r i n g th e A u g u s t - S e p t e m b e r p e r io d at a n a n n u a l rate in a r a n g e o f 5 to 9 p e r cent. . . . D is s e n t s : N o n e Se p te m be r 1 9 No C hange . . . w h ile t a k in g s p e c ia l a c c o u n t o f th e e ffects o f p o s s ib le b a n k r e g u l a t o r y c h a n g e s , d e v e lo p m e n t s in c re d it m a rk e ts, a n d in t e r n a t io n a l d e v e lo p m e n t s , th e C o m m itt e e s e e k s to a c h ie v e b a n k r e se r v e a n d m o n e y m a r k e t c o n d it io n s t h a t w ill s u p p o r t m o re m o d e ra t e g r o w t h in m o n e t a r y a g g r e g a t e s o v e r th e m o n t h s a h e a d . T h e C o m m itt e e t o o k n o te o f a staff a n a ly s is s u g g e s t in g t h a t a n a v e r a g e ra te o f e x p a n s io n in R P D 's in S e p te m b e r a n d O c t o b e r in a r a n g e e q u iv a le n t to 9 . 5 to 1 3 . 5 p e r ce n t w o u ld b e lik e ly to le a d to m o re m o d e r a t e g r o w t h in m o n e t a r y a g g r e g a t e s o v e r the m o n th s a h e a d .4 D is s e n t s : M r . M a c L a u r y , M r . R o b e r t s o n A b s e n t a n d n o t v o t in g : M r . W i n n ( M r . M a y o v o t e d a s h is a lt e r n a t e .) O c to b e r 17 No Change . . . w h ile t a k in g a c c o u n t o f the e ffects o f p o s s i b le bank r e g u l a t o r y c h a n g e s , T r e a s u r y f in a n c in g o p e r a t io n s , a n d d e v e lo p m e n t s in c re d it m a r k e t s, th e C o m m itt e e s e e k s to a c h ie v e b a n k r e se r v e a n d m o n e y m a r k e t c o n d it io n s t h a t w ill s u p p o r t m o re m o d e r a t e g r o w t h in m o n e t a r y a g g r e g a t e s o v e r th e m o n t h s a h e a d t h a n r e c o r d e d in th e th ir d q u a r t e r. . . . th e C o m m itt e e d e c id e d t h a t its o b je c tiv e s f o r the a g g r e g a t e s w o u ld b e f o s t e r e d b y g r o w t h in R P D ’s d u r in g th e O c t o b e r - N o v e m b e r p e r io d a t a n a n n u a l rate w it h in a r a n g e o f 6 to 11 p e r cen t.5 D is s e n t s : N o n e Novem ber 20-21 No C hange . . . w h ile t a k in g a c c o u n t o f th e effects o f re ce n t b a n k r e g u l a t o r y c h a n g e s , th e C o m m itt e e s e e k s to a c h ie v e b a n k r e s e r v e a n d m o n e y m a r k e t c o n d it io n s t h a t w ill s u p p o r t m o re m o d e ra t e g r o w t h in m o n e t a r y a g g r e g a t e s o v e r th e m o n t h s a h e a d t h a n r e c o r d e d in th e t h ir d q u a rte r. . . . th e C o m m itt e e d e c id e d t h a t its o b je c tiv e s r e g a r d in g th e a g g r e g a t e s w o u ld b e s e rv e d b y o p e n m a rk e t o p e r a t i o n s d ire c te d a t f o s t e r in g g r o w t h in R P D ’s d u r in g th e N o v e m b e r - D e c e m b e r p e r io d a t a n a n n u a l ra te w it h in a r a n g e o f 6 to 1 0 p e r cent, w h ile c o n t in u in g to a v o id m a r k e d c h a n g e s in m o n e y m a rk e t c o n d it io n s . D is s e n t s : N o n e A b s e n t a n d n o t v o t in g : M r . C o ld w e ll ( M r . F ra n c is v o t e d a s h is a lt e r n a t e .) Decem ber 19 No C hange . . . w h ile t a k in g a c c o u n t o f T r e a s u r y f in a n c in g o p e r a t i o n s a n d p o s s i b le c re d it m a r k e t d e v e lo p m e n t s , th e C o m m itt e e s e e k s to a c h ie v e b a n k r e se rv e a n d m o n e y m a r k e t c o n d i t io n s t h a t w ill s u p p o r t s lo w e r g r o w t h in m o n e t a r y a g g r e g a t e s o v e r th e m o n t h s a h e a d t h a n a p p e a r s in d ic a t e d f o r th e s e c o n d h a lf o f t h is y e a r . . . . t h e y d e c id e d t h a t o p e n m a r k e t o p e r a t io n s s h o u ld b e d ire c te d a t f o s t e r in g R P D g r o w t h d u r in g th e 2 -m o n th p e r io d w it h in a r a n g e o f 4 to 11 p e r cen t, w h ile c o n t in u i n g to a v o id m a r k e d c h a n g e s in m o n e y m a rk e t c o n d it io n s . D is s e n t s : N o n e *On December 20, 1971, the phrase “while taking account of international developments” was added. 2At the February 1972 m eeting the Committee decided to express its reserve objectives in terms o f reserves available to support private nonbank deposits ( R P D s ) , defined specifically a s total member bank reserves less those required to support Government and interbank deposits. Page 30 n Ju ly 6, 1972, the phrase “and international developments,” was added. 4The figures cited were based on the assumption th at Regulations D and J would not become effective during this period. 15 ®The range of tolerance fo r the R PD growth rate was modified to 9 to 14 percent due to the amendments to Regulations D and J . N O TE: Em phasis added by this Bank. MARCH 1973 FEDERAL RESERVE BANK OF ST. LOUIS indicated that he would have voted favorably on the directive were it not for the decision to give special emphasis to total reserves as an operating target dur ing coming weeks. In his judgment the Committee should have had more discussion of the implications of that decision, and in any case it should have postponed the decision until after it had held a con templated meeting to be devoted primarily to dis cussion of its general procedures with respect to operating targets. Reserves A v a ila b le to Support Private N onbank Deposits 11 All M e n b t r B a a ks Mr. Kimbrel favored supplying reserves at a rate that would accommodate orderly economic expan sion. H e voted against the directive because he thought it involved risks of depressing short-term in terest rates to unsustainably low levels and of pro ducing excessive rates of growth in the monetary aggregates in the future. MODERATE GROWTH OF AGGREGATES — FERRUARY AND MARCH When the Committee met again in February it established a policy consensus which was similar to those adopted during the previous six months. The essential difference was deletion of reference to “the aims of the new governmental program. . . .” Through out the remainder of the year there was no change in the policy consensus. The operating instruction included in the directive issued at the February meeting was less expansive in tone than the previous two. As intended, a large growth in bank reserves had occurred between the January and February meetings, and the desired ac celeration in the growth of monetary aggregates had begun. Consequently, the Committee decided to seek conditions that would “support moderate growth in monetary aggregates. . . .” To achieve its near-term objectives, the Commit tee modified further the operating target. The use of total bank reserves had been adopted only a month earlier, but at the February meeting . . . the Committee decided to express its reserve objectives in terms of reserves available to support private nonbank deposits [RPDs] — defined specifi cally as total member bank reserves less those re quired to support Government and interbank depos its. This measure was considered preferable to total reserves because short-run fluctuations in Govern ment and interbank deposits are sometimes large and difficult to predict and usually are not of major significance for policy. It was deemed appropriate for System open market operations normally to ac commodate such changes in Government and inter bank deposits. The Committee agreed that the economic situation and outlook at this time called for growth in the Page 16 'C h a n g e in re se rve req u irem en ts. • • T h e b r e a k in the se r ie s w a s a re su lt o f the c h a n g e s in R e g u la t io n s D a n d J. P e r c e n t a g e s a re a n n u a l ra te s o f c h a n g e fo r p e r io d s in d ic a te d . Latest d a t a p lotted: F e b ru a ry monetary aggregates at moderate rates. It took note of a staff analysis suggesting that, over the months of February and M arch combined, such growth was likely to be associated with expansion in the reserve measure employed at about an 8 per cent annual rate, and possibly with some firming of money mar ket conditions. The members decided that it would be desirable to seek growth in the reserve measure in the February-M arch period at an annual rate in a range of 6 to 10 per cent, while avoiding both sharp short-run fluctuations and undesirably large cumula tive changes in money market conditions in either direction in the period between meetings. They also decided that some allowance should be made in the conduct of operations for any significant deviations that might develop between the actual rates of growth in the monetary aggregates and the moderate growth rates expected. Mr. Hayes dissented from this action . . . for essentially the same reasons he had dis sented from the directive adopted at the previous meeting. First, he did not favor placing as much emphasis as contemplated on reserves as an operat ing target; he preferred to place main emphasis on money market conditions for that purpose. Second, he thought the policy agreed upon could result in an easing of money market conditions to a degree that in his judgment would entail substantial risks both domestically and internationally. Another new element at the February meeting was introduced: FEDERAL RESERVE BANK OF ST. LOUIS MARCH 1973 M oney Stock Plij s Time Deposits S"!V B lj h o is Of ^ *l* M o n t h ly A v e r a g e o f D a i ly F ig u re s S e a s o n a l!) A d ju ste d II Dollars lilllO iS of D o lla rs 620 620 60 0 60 0 580 580 560 560 M oney Stock Plus Time Deposits 540 * 520 / / // 4 O 500 540 5 3 0 .5 520 ' 500 / * 9 4% * O' C 440 O » » 460 O +U 8 7 y * M 420 O ---------- U O* O * O y.A " ' / / +i .87. 400 M oney Stoc k Plus Net ime Deposit *23% (M2)11 360 I> k > W O' O O y +9 9 % Z ^ + 9 7 7 . 1/ OQ Jar 68 <5 & 41 1968 k: t ♦ 1969 340 -a • -O • 1970 1971 1972 320 1973 LLCurrency, d e m a n d d e p osits, sa v in g s deposits, time d e p o s its op en account p lus time certificates of d e p osit other than n e go tia b le time certificates of deposit issued in . . . it was understood that the Chairman might call upon the Committee to consider the need for sup plementary instructions if it appeared during the period before the next scheduled meeting that the Committee’s several objectives and constraints were not being m et satisfactorily. The understanding was repeated in the “Record of Policy Actions” for each of the subsequent meetings through the remainder of 1972. Some perspective on a prominent view of the role of monetary policy early last year might be gained from reference to Chairman Bums’ testimony on Feb ruary 9, 1972 before the Joint Economic Committee. Regarding monetary developments, the Chairman noted . . . the role that monetary policy needs to play in furthering national objectives this year. Clearly, our monetary affairs — no less than our fiscal affairs — must be kept in order, so that public confidence in our monetary management is maintained. An unduly expansive monetary policy would be most unfortun ate, particularly in view of the large Federal budg etary deficits now projected. W e need always to be mindful of the fact that increases in money and credit achieved today will still be with us tomorrow, when economic conditions may no longer be the same as they are today. At this stage of the business cycle it is essential to pursue a monetary policy that will facilitate good economic recovery. Supplies of money and credit must be sufficient to finance the growth in consumer spending and in investment plans that now appears in process. L et me assure this committee that the Federal Beserve does not intend to let the present de n om inations of $100,000 or m ore b y la rg e w eekly reporting com m ercial banks. Percentages a re a n n u a l ra tes o f c h a n g e for p e rio d s indicated. Latest d a ta plotted: F e b ru a ry recovery falter for want of money or credit. And let me add, just as firmly, that the Federal Reserve will not release the forces of a renewed inflationary spiral. W e are now in a favorable position to provide the monetary support needed for a quickening pace of production and employment. While expansion in the supply of money and credit was relatively brisk dur ing 1971, w e successfully avoided an unduly rapid growth of liquidity. No single measure of money or credit represents adequately the im pact of monetary policy on the economy. L et me nevertheless cite a few salient facts. Growth of the narrowly defined money sup ply — that is, currency and private demand deposits — amounted to 6 .2 per cent during 1971, compared with 5.4 per cent in 1970. If the money supply is defined more broadly, so as to include also consumertype time and savings deposits at commercial banks, the rate of growth was 11.1 per cent during 1971, compared with 8.1 per cent in the previous year. These 1971 growth rates of money balances are at the upper end of the range witnessed over the postwar period. That is what should happen at a time of sluggish economic growth, as this committee has pointed out. [Federal Reserve Bulletin (F eb ru ary 1 9 7 2 ), pp. 125-126.] After reviewing the monetary policy actions of the previous year, Mr. Bums also remarked: In recent months, the Federal Reserve has sought to encourage a faster rate of monetary expansion than occurred in the late summer and fall of last year. Open market operations have been conducted Page 17 FEDERAL RESERVE BANK OF ST. LOUIS MARCH 1973 with more emphasis on increasing the reserve base of the banking system. In the 5 months from Septem ber through January, total bank reserves rose at an annual rate of over 8 per cent. Thus far, much of this increase has supported an accelerated growth in time deposits. But, in due course, the narrowly de fined money stock, on which so much emphasis is nowadays placed by some single-minded observers, will also respond; preliminary calculations indicate that this aggregate rose more rapidly in January than in the immediately preceding months. [Ibid, p. 127.] For the meeting on March 21 the “Record” notes the fact that yields on short-term market securities had risen considerably in recent weeks. This was a largely expected development following the very sharp declines in short-term rates that had occurred in late 1971 and the first few weeks of 1972. It was pointed out in the “Record” that the spread between rates on short- and long-term securities had been ex tremely wide by historical standards, and it remained wide even after the recent rise in short-term rates. The staff analysis indicated that a moderate growth in monetary aggregates during March and April com bined would likely be associated with an 11 percent rate of growth in RPDs and some further tightening in money market conditions. As cited above, the Committee directives for De cember 1971 and January 1972 had called for greater growth in the monetary aggregates over the months ahead. In order to achieve this greater growth, a ma jority of the Committee at the January meeting had voted to increase total bank reserves at a 20-25 per cent annual rate from December to January. This effort was clearly successful by the March meeting where . . . it appeared that over the first quarter Mi and M2 would expand at annual rates of about 9 .5 and 13.0 per cent, respectively, and that the bank credit proxy would rise at a rate of about 10.5 per cent.6 However, regarding this increase, it was noted that M1 “increased sharply in February —in part because of a substantial reduction in U. S. Government de posits at commercial banks.” The growth of the narrowly defined money stock accelerated to a 9.6 percent annual rate in the period from December 1971 to March 1972, compared with a 1.1 percent rate of increase in the previous three months. Staff projections at the March meeting sug6Quarterly growth rates cited are calculated on the basis of the daily-average level in the last month of the quarter relative to the last month of the preceding quarter. Page 18 gested a somewhat faster growth in real GNP in the second quarter than in the first, and the Committee agreed that the . . . economic situation continued to call for moderate growth in the monetary aggregates, although at rates less rapid than those likely to be recorded for the first quarter. SEEKING SLOWER MONEY GROWTH — APRIL AND MAY According to the “Record” for the Committee meet ing in mid-April, the economic oudook at that time appeared almost the same as a month earlier. In view of the projections of a continually strengthening eco nomy in 1972, the monetary authorities indicated a desire to avoid providing excessive stimulus. At the April meeting The Committee agreed that the economic situa tion called for growth in the monetary aggregates at rates somewhat more moderate than those recorded for the first quarter of the year. When the Committee met again five weeks later they “agreed that the economic situation called for growth in the monetary aggregates over the months ahead at rates somewhat slower than those recorded in recent months.” However, to achieve this objective, after taking account of lagged reserve requirements and recent changes in deposits, the Committee speci fied a range of growth in RPDs that was slightly higher than the range indicated at the previous meeting, and FEDERAL RESERVE BANK OF ST. LOUIS MARCH 1973 R e se rv e s A v a i l a b l e to S u p p o rt P riva te N o n b a n k D e p o s its Percent Operating Target and Actual Growth Li Percent 0 -------- 1__________ l___________i_____________ i__________ 1_____________ l_____________ I_____________ I______________ I___________ FEB.M ARCHAPRILMAYJUNEJULYA U G .SEPT.O C T .N O V .. M ARCH AP RIL MAY JU N E JULY AUG. SEPT OCT. NOV. DEC. L i The sh a d e d a r e a s indicate F O M C targe t gro w th ra n g e fo r RPDs, the b a rs in dicate a c tu a l g ro w th ac h ie ve d . The actu al RPD gro w th rates w ere c o m p u te d u sin g the RPD se rie s p rio r to the F e b ru a ry 1 9 7 3 revision. The fig u re s re present sim ple a n n u a l what more moderate growth” and “somewhat slower growth” in mone tary aggregates over the months ahead, respectively. At the June meet ing the desired range of RPD growth had been significantly reduced. Appar ently, though, the results were differ ent than expected. The “Record” for the July meeting, after noting that the growth of Mj in June was at the same relatively slow rate of May, stated: Sluggishness in June, however, may have reflected temporary effects of the speculation in foreign exchange markets and outflows of funds from the United States after mid-month, and weekly data suggested a sharp increase in the rate of expansion in early July. The idea underlying the reference to “outflows of funds from the United States” is complex. During such an “outflow” there is a change in ownership of demand deposit accounts at U. S. commercial banks, wherein deposits of domestic holders are reduced (initially and temporarily) and holdings of foreigners (in dividuals, governments, banks, or other firms) are increased. Since the U. S. money stock is defined to include deposits of foreigners, a change of ownership of demand deposits from U. S. residents to foreigners does not influence the quantity of money outstanding unless government deposits are also changed. rates o v e r the two-m onth p e rio d s indicated. [2 The o rigin a l R PD gro w th ra n g e o f 6 - 11 percent w a s modified to 9 - 14 percent a s a result of c h a n g e s in R egu lation s D a n d J. Note: The a c tu a l fig u re s for N o v e m b e r a n d D e ce m b e r w ere a d ju ste d in o rd er to co m p e n sa te for c h a n g e s in R e g u la tio n s D a n d J. the lower end of which was the same as recent experi ence. Thus, at the April meeting they had specified a range of RPD growth of 7 to 11 percent, and at the time of the May meeting it appeared their actions had resulted in growth of these reserves at a 7.5 percent rate. The consensus was to seek a somewhat slower rate of growth in monetary aggregates; the range of RPD growth for the May-June period was specified to be 7.5 to 11.5 percent. ACHIEVING MODERATE GROWTHJUNE TO AUGUST A month later it appeared that growth of RPDs in the May-June period would be at the lower end of the specified range, and growth of the narrowly de fined money stock had slowed further. The Commit tee lowered its desired target range of RPD growth to 4.5 to 8.5 percent during the June-July period. As usual, “the members also decided that some allowance should be made in the conduct of operations if growth in the monetary aggregates appeared to be deviating significantly from the rates expected. . . .” The provision for a change in the conduct of op erations under certain conditions would appear to have become of some importance in view of the events around mid-year. The decisions and actions of the preceding few months had been in the direction of less rapid growth of monetary aggregates than had occurred early in the year. The operating instructions of the April and May meetings had called for “some The reference to “a sharp increase in the rate of expansion in early July” is another matter. Mid-year “window-dressing” by commercial banks, and the oc currence of the July 4 holiday on Tuesday of the same settlement week, may have contributed to an unusually large increase in net demand deposits at member banks in the first week of July.7 Similar tem porary fluctuations have occurred on other occasions, and over the subsequent few weeks the growth of the money supply returned to its previous trend. How ever, instead of an offsetting drop in demand deposits following the mid-year bulge, the level of deposits plateaued at the high level. The growth rate of money for the month of July was at a 15 percent annual rate, and in August the growth rate of money was reduced to only a 5.7 percent rate.8 7For nonbusiness days, banks use the balance of the preceding business day. During the week ending July 5, banks carried the large June 30 balances for three days, resulting in a large increase in the weekly average net demand deposits. sThe “revised” money stock series shows an increase in money from June to July at a 13.5 percent rate, and an increase at a 4.4 percent rate from July to August. Page 19 MARCH 1973 FEDERAL RESERVE BANK OF ST. LOUIS The operating instructions issued at the July 18 meeting were the same as had been issued at the June meeting, namely “the Committee seeks to achieve bank reserve and money market conditions that will support moderate growth in monetary aggregates over the months ahead.” Mr. Coldwell dissented from this action Monetary Base and Federal Reserve Credit Ratio Scale B illioas of Dollars 120 r R atio Scale B illioa s of D o lla rs M o n t h ly A v e r a g e s of D a ily F igu re s 120 110 110 100 + 8 .8 % ^ ] 90 M onetary 1 ase 90 n * f The “Record” for the August 15 meeting noted the very rapid growth of the money stock in July, but no reason for the sharp rise was reported. The report to the Joint Economic Committee of Congress regarding the “Financial Developments in the Third Quarter of 1972” states, “Over the third quarter, M, grew at an 8.5 percent annual rate, but this mainly reflected in creased public demand for cash balances early in JuZt/.”9 [emphasis added] 85.3 80 80 +5 70 70 Fed eral Reserve Credit £ 60 60 g -o R Q . . . because in his judgment average growth in bank reserves within the specified range for July and August and the associated expansion in the money supply might build a base for excessive economic stimulation. He was concerned about the effects both on the domestic economic situation, in the context of heavy stimulation from fiscal policy, and on in ternational financial problems. 100 » 9 7 .9 ♦ Dec 7 2 This episode may illustrate some of the problems associated with short-run monetary management, espe cially under a system of lagged reserve requirements. The deposits of banks in any given week are relatively independent of the amount of reserves in the banking system that week, but the Federal Reserve is obliged to provide reserves —either through open market op erations or through the discount window —to meet the requirements based on the deposits of two weeks earlier. * 50 1968 1969 . 1970 1971 t 1972 1973 L^ U ses of the m oneta ry b a s e a re m em ber b ank reserves a n d currency h eld b y the p ublic a n d nonmem ber banks. A dju stm ents a re m a d e for reserve requirement cha nges a n d shifts in d e p o sits a m o n g classes of banks. D a ta a re com p uted b y this bank. l2.Total F e d e ra l Reserve credit outstanding includes h o ld in g s of securities, lo an s, float, a n d "other" assets. A dju stm ents are m ad e for reserve requirement ch a n ge s a n d shifts in d e p o sits a m o n g classes of banks. D a ta are com p uted b y this bank. P e rc e n ta g e s a re a n n u a l ra tes o f c h a n g e fo r p e r io d s in d ica te d . Latest d a ta plotted: F e b ru a ry might be associated with some finning of market conditions, the Committee agreed m arked firming, which might precipitate sharp increases in interest rates in a sensitive atmosphere, should be avoided, [emphasis money that a unduly market added] The Committee agreed that the economic situation continued to call for moderate growth in the mone tary aggregates over the months ahead. It decided to seek growth in RPD’s during the August-September period at an annual rate in a range of 5 to 9 per cent — a rate which was expected to be associated with some moderation in monetary growth. While recognizing that pursuit of the objective for RPD ’s In commenting on the rapid growth of RPDs in the third quarter, the report to the Joint Economic Com mittee emphasizes the different avenues through which the Federal Reserve provides reserves to the banking system. The report notes that “reserves pro vided through open market operations were held back and more than half of the increased demand for re serves was obtained by banks through enlarged bor rowing from Reserve Bank discount windows.”10 Dur ing that period short-term market interest rates tended to rise, with relatively sharp increases occurring in the second half of the quarter. Prior to August the Federal funds rate (the rate at which banks borrow reserves from each other) had been mostly below the Federal Reserve Banks’ discount rate. Since that time the funds rate has generally been rising relative to the discount rate, making borrowing from Federal Reserve banks a relatively cheaper source of short term funds to banks. The accompanying chart shows the movement of short-term interest rates in this period. 9Federal Reserve Bulletin (November 1972), p. 947. 10Ibid. In view of the then current rapid growth of aggre gates, the “Record” reports that following the July meeting “the System undertook to slow the increase in reserves to the extent feasible in light of the largescale Treasury refunding then in process.” While con tinuing to desire to hold down monetary growth in the coming period, an increased concern about inter est rate movements was expressed: Page 20 MARCH 1973 FEDERAL RESERVE BANK OF ST. LOUIS M e m b e r B a n k B o rro w in g s a n d Short-Term Interest Rate Differential Percent Selected Sh o rt-T erm Interest R a tes Percent - 1.6 JA N . FEB. M A R . APR. M A Y JU N E JULY A U G . SEPT. OCT. N O V . DEC. J A N . FEB. M AR . 1972 1973 Latest d a ta plotted: w eek ending M arc h 14, 1973 SLOWING THE GROWTH OF MONEY — SEPTEMBER TO DECEMBER At the final meeting of the quarter, the economic outlook was for an even stronger growth of GNP in the fourth quarter than in the third. GNP growth was seen to remain at a fast pace in the first half of 1973. Analysis prepared for the September meeting included discussion of the factors contributing to sharp increases in short-term market interest rates in the pe riod between meetings. The Committee’s target from the previous meeting was for growth of RPDs be tween 5 and 9 percent “subject to the proviso that money market conditions should not be permitted to firm markedly.” Pursuit of the RPD target was complicated by the need to absorb reserves at a time when the market supply of Treasury bills was increasing. Early in the period, R PD ’s — and the monetary aggregates — ap peared to be expanding rapidly. As the System acted to restrain growth in reserves, short-term interest rates began to rise sharply and financial markets became increasingly sensitive; this was especially evident just before the Labor Day weekend when a number of banks misjudged their reserve needs and bid the Federal funds rate up as high as 5V2 per cent. In order to avoid a marked firming in money market conditions and unduly sharp increases in interest rates, for a time the System supplied reserves more generously. For the coming months the Committee desired to slow the growth in monetary aggregates from the rates of the third quarter; however, “the members noted that conditions in financial markets were still highly sensitive.” Because of this condition and the possibility of regulatory changes, the members de cided that in seeking an annual rate of RPD growth in a 9.5 to 13.5 percent range 1972 1973 ‘ W e e k ly a v e r a g e s of d a ily ra t e s e n d e d F rid a y. L a te st d a t a p lotted: w e e k e n d in g M a r c h 9, 1973 . . . the System Account Manager should have more than the usual degree of discretion in making operat ing decisions and that he should give more than customary attention to money market conditions, while continuing to avoid marked changes in such conditions. There were two dissents from this directive, both based on concern about the rapid monetary growth. Mr. M acLaury dissented from this action because he had become increasingly disturbed by the rapid rates of growth in the aggregates, given the prospec tive strength of the economy, and he felt that the Committee’s current operating procedures did not assure that money market conditions would be per mitted to tighten sufficiently to slow this excessive monetary growth in the near future. Mr. Robertson dissented because of his belief that with the existing potentiality for increased inflation ary pressures, the Committee was not doing enough to curb the rate at which reserves were being fed into the banking system by the Federal Reserve and to slow down the rate of growth in the mone tary aggregates. In his view, the failure to do so might result in a new ground swell of inflation later on. At the final three meetings of 1972, the Committee made explicit in its operating instructions that lower growth rates of monetary aggregates were being sought. The operating target adopted at the meeting of September 19 was for growth of RPDs in the range of 9.5 to 13.5 percent for the September-October pe riod, “unless disturbances arose in financial markets or unless growth rates in the monetary aggregates appeared to be falling far short of expectations.” At the October meeting RPD growth appeared to be at the lower end of the range, and it was noted: The Federal funds rate was about 5 per cent in the days before this meeting, unchanged from the level prevailing just before the preceding meeting. Page 21 FEDERAL RESERVE BANK OF ST. LOUIS MARCH 1973 In accordance with their desire for less rapid growth in monetary aggregates than in the third quarter, the Committee specified an RPD range of 6 to 11 percent for the October-November period “while continuing to avoid marked changes in money market conditions.”11 port more moderate monetary growth than the annual rates of about 8.5 per cent for M, and 9.5 per cent for M2 recorded over the third quarter.” The directive issued at the November meeting was essentially the same as a month earlier, with the ma jor difference being that the changes in Regulations D and J that had been pending for several months had been implemented on November 9. The RPD range specified for the following two-month period was 6 to 10 percent, and the proviso “to avoid marked changes in money market conditions” was repeated. . . . the rate of growth in R PD ’s had appeared to be substantially above the specified range, and the System had acted to restrain expansion in non borrowed reserves. At the time of this meeting it appeared that RPD growth would be at only a 5.5 percent rate in the October-November period, compared with the revised target range of 9 to 14 percent specified at the October meeting. Regarding this slower growth, the “Record” states: To a considerable extent, the short-fall in R PD ’s occurred because the relationship between reserves and monetary aggregates that evolved after the im plementation of the amendment to the Board’s Reg ulation D differed from the relationship that had been expected. At the final meeting of the year the outlook was for a continued strong economic expansion through the first half of 1973. The members of the Committee in dicated a continued desire to curb further monetary growth as they issued a directive to achieve “slower rates than those that appeared likely to be recorded for the second half of 1972.” [emphasis added] The “Record” for this meeting stated that since the prior meeting, operations had been conducted so as to “sup11It was noted at this meeting that the amendments to Regu lations D and J, initially scheduled to become effective on September 21, 1972 but postponed as a result of court proceedings, might be implemented during the October-No vember period. Following the Board’s decision on October 24 to implement the amendments as of November 9, 1972, the range of tolerance for the RPD growth rate was modified to 9 to 14 percent in a technical adjustment to take account of the effects of those regulatory actions on the relationship between reserves and the monetary aggregates. The target range for RPDs had been 6 to 10 per cent, but during much of the intermeeting period The directive for the December-January period specified a wider range for RPD growth than had been indicated previously. The Committee sought RPD growth in the range of 4 to 11 percent, and the reason given for this wider band was to allow the Committee to take account of . . . a staff analysis of prospective reserve-deposit relationships which suggested that the Committee’s objectives for the aggregates might be served by fostering growth in R PD ’s during the DecemberJanuary period at an annual rate within a range of 7 to 11 per cent. However, in view of the rapid expansion in monetary aggregates since the preced ing meeting, the members concluded that reservesupplying operations that would result in an easing of money market conditions should be avoided un less the annual rate of RPD growth appeared to be dropping below 4 per cent. And it was decided that in so doing they would con tinue “to avoid marked changes in money market conditions.” SUMMARY At year’s end the policy consensus was essentially the same as a year earlier, but the direction of empha sis in monetary actions was reversed. The desire to achieve greater growth in monetary aggregates at the December 1971 and January 1972 meetings of the Com mittee would indicate that relatively greater weight was being given to promoting real economic growth. In contrast, late in 1972 the Committee instructed the Desk to achieve slower growth in the monetary ag gregates in view of the economic situation and the rapid rates of growth in money that had occurred. Other FOMC Actions in 1972 During 1972 the Federal Open Market Committee revised its rules with regard to the pricing of “repur chase agreements” (R P s) arranged by the Federal Page 22 Reserve Bank of New York with nonbank dealers, and the limits on Federal Reserve holdings of the security issues of various Federal agencies. FEDERAL RESERVE BANK OF ST. LOUIS Pricing of Repurchase Agreements At a meeting on April 17, 1972 the FOM C amended its “continuing authority directive” with respect to open market operations. The change involved the method of determining the interest rates that would apply in arrangements between the Federal Reserve Bank of New York (the Desk) and nonbank security dealers, in which the Desk acquires short-term securi ties from the dealers under an advance agreement that the dealers would repurchase the securities in a fixed number of days. The use of these repurchase agreements has increased considerably in recent years. Such an arrangement is a method available to the Desk for supplying reserves to the banking system; it is used as an alternative to outright purchases on the open market. A repurchase agreement is, in effect, a loan by the Federal Reserve Bank to private security dealers. Until December 1971, the interest rate charged by the Desk on funds loaned to the dealers under such agreements was “not less than ( 1 ) the discount rate of the Federal Reserve Bank of New York at the time such agreement is entered into, or (2 ) the average issuing rate on the most recent issue of 3-month Treasury bills, whichever is the lower.”1 The dealers would not be willing to enter into such arrangements if the costs of funds in the market were lower than the cost of additional funds available from the New York Reserve Bank. On December 23, 1971, a m a jority of the Committee voted to suspend this lower limit through January 11, 1972, the date of the subse quent FO M C meeting. Mr. Treiber voted on this action as alternate for Mr. Hayes; Chairman Burns was absent and not voting. Mr. Robertson dissented from this action be cause he believed that the desired injection of funds into the market by the Federal Reserve should be through the outright purchase of U. S. Government securities rather than through repur chase transactions which, in his judgment, actually constituted low-rate loans to securities dealers. He indicated that he was reluctant to increase the profits of dealers by providing them with low-cost Federal Reserve funds merely to avoid temporarily raising the price (lowering the yield) of Treasury securities by purchasing them outright. At the meeting on January 11, 1972 the Committee ratified the earlier action to suspend the minimum interest charge on RPs. Mr. Robertson dissented from ratification for the same reason he dissented from the action itself. On two subsequent occasions the Com mittee suspended the lower limits on interest rates charged on repurchase agreements. The dates were January 26 through February 15, 1972, and March 7 through March 21, 1972. Mr. Robertson dissented on both occasions, emphasizing that “in his judgment, such agreements actually constituted subsidized loans ■Federal Reserve Bulletin (February 1972), p. 148. MARCH 1973 to dealers, and he saw no justification for increasing the subsidy by making them at lower and lower rates of interest.”-’ On the latter occasion Chairman Burns and Mr. Maisel were absent and not voting, and Mr. Brimmer joined Mr. Robertson in dissenting from the action . . . because he felt that excessive reliance was be ing placed on RP’s in open market operations. He was also disturbed about the frequency with which R P’s had been made recently at rates below the lower limit that would obtain in the absence of Committee action to suspend the relevant pro vision of the continuing authority directive. He thought that since such RP rates were typically below yields on 3-month Treasury bills, their con tinued use might give the market a misleading impression of the Committee’s policy objectives. On the recommendation of a staff committee ap pointed to study repurchase agreements, the FOM C amended its continuing authority directive to provide that in the future the interest rate charged on RPs should be determined by competitive bidding unless otherwise expressly authorized by the Committee. Previously there had been a lower limit on the interest rate on RPs, and, although no upper limit had been specified, in practice the rate charged had not been greater than the Federal Reserve discount rate. The staff committee felt a competitive bidding procedure would minimize any unintended announcement ef fects sometimes associated with changes in the RP rate, and it would insure that the costs to dealers of funds obtained through System repurchase agreements were closely related to the costs of funds from alterna tive sources. Lending of Government Securities At the March 21 meeting the FO M C reviewed all of its continuing authorizations and directives. This is the customary practice following election of new mem bers from the Federal Reserve Banks to serve on the Committee. In connection with the review, special note was made of the authorization of Reserve Banks to lend U.S. Government Securities held in the System Open Market Account. This authorization had been added on October 7, 1969, with the understanding it would be reviewed periodically. At that time, . . . the Manager had advised that the problem of delivery failures in the Government securities market had worsened significantly over the past year, partly because private facilities for lending such securities had become inadequate; that de livery failures were markedly impairing the per formance of the market; and that the functioning of the market would be improved if securities held in the System Open Market Account could be lent, for the express purpose of avoiding de livery failures, to Government securities dealers 2Federal Reserve Bulletin (May 1972), p. 462. Page 23 FEDERAL RESERVE BANK OF ST. LOUIS doing business with the Federal Reserve Bank of New York and to banks participating in securi ties clearing arrangements conducted through a Reserve Bank. Operations in Federal Agency Issues On two occasions last year the FO M C revised its guidelines for the conduct of operations in securities issued by Federal agencies. The Committee had first authorized outright purchases and sales in agency issues on August 24, 1971. At its meeting on February 15, 1972, the FO M C revised the guideline regarding Page 24 MARCH 1973 maturities of eligible issues so that the maturity of an obligation should be taken as of the time of issuance rather than as of the time of purchase. The second revision of guidelines on operations in agency issues consisted of an increase in the limit of the holdings of any one issue from 10 percent to 20 percent of the amount outstanding, with the addi tional provision that System holdings of the issues of any one agency could not exceed 10 percent of the total outstanding issues of that agency. This action was taken at the Committee meeting on April 17, 1972.
@FedFRASER