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press release

For immediate release

November 16, 1970

The Board of Governors of the Federal Reserve System and
the Federal Open Market Committee today released the attached record
of policy actions taken by the Federal Open Market Committee at its
meeting on August 18, 1970.

Such records are made available approx

imately 90 days after the date of each meeting of the Committee and
will be found in the Federal Reserve Bulletin and the Board's Annual


Meeting held on August 18, 1970

Authority to effect transactions in System Account.
According to revised estimates of the Commerce Department, real
GNP had edged up at an annual rate of 0.6 per cent in the second quarter
of 1970--slightly more than preliminary estimates had indicated--after
having declined appreciably in the first quarter.

Prices and wage rates

generally were continuing to rise at a rapid pace, but there were some
indications that upward pressures on prices were moderating.


projections still suggested that growth in real GNP would pick up some
what in the third and fourth quarters but would remain well below the
economy's potential; also that the rate of price advance would slow as
the year progressed.
In July industrial production increased slightly--about off
setting its decline in June--and was approximately 3 per cent below the
peak that had been reached a year earlier.
according to advance estimates.
continued to ease:

Retail sales also rose,

On the other hand, the labor market

nonfarm payroll employment dropped for the fourth

successive month, and the unemployment rate moved back up to the 5
per cent level of May, after having declined in June to 4.7 per cent.
Average wholesale prices rose sharply from mid-June to mid
July, mainly because of an upsurge in prices of farm products and foods;



the increase for industrial commodities was somewhat below the average
for the first half of the year.

Although the consumer price index

continued to rise at a rapid rate in June, after seasonal adjustment
it advanced less over the second quarter as a whole than it had over
the first.

The increase in unit labor costs in the private nonfarm

sector slowed substantially during the second quarter, largely because
of improvements in productivity.
The staff's GNP projections for the second half assumed that
there would not be an extended strike in the automobile industry when
current wage contracts expired in mid-September.

The expectation

that over-all activity would expand somewhat further depended impor
tantly on a fairly sharp recovery in residential construction activity
and on some acceleration in expenditures of State and local governments.
It was anticipated that consumer spending would continue to rise at
about the average pace of the first half.

On the other hand, business

outlays on fixed investment were expected to turn down and defense
spending to continue declining.
The surplus on U.S. foreign trade increased sharply further in

Preliminary indications were that the over-all balance of pay

ments, which had been in heavy deficit during the second quarter, had
improved somewhat in July on the liquidity basis.

On the other hand,

it appeared that the official settlements deficit had remained heavy,
reflecting substantial reductions in outstanding liabilities of U.S.
banks to their foreign branches following the June 24 suspension of



Regulation Q ceilings on large -denomination CD's with maturities of
less than 90 days.
In foreign exchange markets, demand had been heavy in recent
weeks for the Canadian dollar, the exchange rate for which remained
on a floating basis.

There also were strong demands for the German

mark and some other European currencies, especially the Dutch guilder.
on August 12 the German Federal Bank, acting to offset the effects on
bank liquidity of the large amounts of foreign exchange it had acquired,
imposed high marginal reserve requirements on commercial banks.
In domestic securities markets demands for funds had remained
heavy in recent weeks, and some uncertainties persisted, especially
in the market for commercial paper, which had been most directly
affected by the insolvency of a major railroad in the latter part of

The volume of commercial paper outstanding had contracted

further- -although most recently it appeared to be stabilizing--and
investors remained highly selective and cautious about investing in
less than prime-grade issues in this market or in lower-grade securities
in other markets.

Long-term interest rates--which had declined consid

erably in late June and early July -- subsequently showed mixed changes:
municipal yields continued downward,
corporate bonds edged up.

but yields on Treasury and new

Treasury bill rates also had been under some

upward pressure in recent weeks.

On the day before this meeting the

market rate on 3-month bills, at 6.53 per cent, was about 15 basis
points above its level of 4 weeks earlier.

In July interest rates on new-home mortgages remained close to
the high levels that had prevailed since the beginning of the year.
However, the availability of funds to the mortgage market appeared to
be increasing as a result of continued heavy savings inflows to thrift
In late July the Treasury announced the terms on which it would
refinance securities maturing in mid-August, including about $5.6 billion
held by the public.

Holders of the maturing issues were offered the

choice of two new 7-3/4 per cent notes--a 3-1/2-year note priced at par
and a 7-year note priced to yield 7.80 per cent.

In addition, the

Treasury indicated that it would sell for cash about $2.75 billion of
a new 18-month, 7-1/2 per cent note (priced to yield 7.54 per cent).
The volume of subscriptions received in the cash offering was very large,
and the Treasury accepted somewhat more than originally planned.


ing to estimates at the time of this meeting, the financing yielded more
than $2 billion of new cash after allowance had been made for attrition
in the exchange offering.
On the day before this meeting, the Board of Governors had
announced that it was amending Regulation D to apply regular time and
demand deposit reserve requirements to funds obtained by member banks
through the issuance of commercial paper by their affiliates, and at
the same time to reduce from 6 to 5 per cent the reserves that member
banks must hold against time deposits in excess of $5 million.
actions would become effective in the reserve computation period




beginning October 1 and would be applicable to affected deposits and
commercial paper outstanding in the week beginning September 17.


was expected that the net result for all member banks would be a
reduction in required reserves of about $350 million.
Private demand deposits and the money stock expanded moderately
on the average from June to July.

The money stock rose at an annual

rate of 4.1 per cent--considerably less than had been expected at the
time of the preceding meeting of the Committee and almost the same as
the 4.2 per cent rate of growth recorded over the second quarter.
There was an unusually large increase in commercial bank time and
savings deposits in July.

As at nonbank thrift institutions, inflows

of savings funds to banks were heavy, but the bulk of the rise in
total time and savings deposits was attributable to the sharp expan
sion that had occurred in the outstanding volume of large-denomination
CD's after the Board acted in late June to suspend rate ceilings on
such CD's of 30 to 89 days' maturity.

The rise in CD's outstanding

appeared to be slowing somewhat in early August.
Because of the strength in time and savings deposits, the bank
credit proxy--daily-average member bank deposits--increased substan
tially from June to July; growth was at an annual rate of 18 per cent,
after adjustment for some decline in banks' reliance on funds from
nondeposit sources.

Banks added considerably to their holdings of

short-term Government securities, mainly by investment in tax
anticipation bills auctioned by the Treasury on July 2 and 16.


1/ Calculated on the basis of the daily-average level in the last
month of the quarter relative to that in the last month of the preceding



also expanded sharply their loans to finance companies, particularly
in the early weeks of the month when some finance companies were
encountering difficulty in rolling over maturing commercial paper.
System open market operations since the preceding meeting of
the Committee had been directed at fostering money market conditions
that were favorable to stable financial markets and that were con
sistent with a moderate rate of growth in the money stock.


market conditions were permitted to ease somewhat during the period
when it began to appear that the money stock was falling below a
path consistent with growth over the third quarter at the 5 per cent
annual rate favored by the Committee.

Thus, the Federal funds rate

fluctuated mostly in a range of 6-1/2 to 7 per cent, compared with a
7 to 7-5/8 per cent range in the preceding interval between meetings.
Average member bank borrowings in the period remained quite highabout $1.2 billion--chiefly as a result of special accommodation at
the discount window for banks lending to firms that were encountering
difficulties in rolling over maturing commercial paper.


during the period such borrowings declined somewhat as pressures in
the commercial paper market moderated.
Staff analysis suggested that if prevailing money market
conditions were maintained the money stock would grow at an annual
rate of about 4 per cent over the third quarter and into the fourth;
and that some further easing of money market conditions would be
required if money were to grow at a 5 per cent rate.

Within the third

quarter it was expected that the growth rate of money would increase



somewhat from July to August and then slacken moderately in September.
The analysis suggested that a 5 per cent growth rate for the money
stock over the third quarter would be associated with a 16.5 per cent
rate of expansion in the adjusted credit proxy--reflecting a high but
slowing rate of growth in time deposits.
In the Committee's discussion it was noted that expectations
of continuing inflation had abated considerably in recent months, even
though prices were still advancing at an undesirably rapid rate.


was the consensus of the Committee that monetary policy at present
should be sufficiently stimulative to foster moderate growth in real
economic activity, but not so stimulative as to risk a resurgence of
inflationary expectations.

Considerable stress was placed on the need

to encourage an adequate flow of credit to the housing industry and to
State and local governments if a satisfactory rate of growth in over
all activity were to be achieved.
Against this background, the Committee decided that open market
operations should be directed at promoting some easing of conditions in
credit markets and growth in the money stock at a rate somewhat greater
than that of the second quarter.

In the latter connection most members

continued to believe, as they had at the preceding meeting, that an
appropriate target rate of growth for the money stock over the period
ahead would be an annual rate of about 5 per cent; and should moderate
deviations from that growth rate develop, they preferably should be in
an upward rather than a downward direction.
As to bank credit, the Committee took note of the reintermedia
tion process now under way and decided that the growth rate should be

allowed to reflect any continued shift of credit flows from market to
banking channels.

It also directed that account be taken of possible

liquidity problems, if they should emerge in the coming period, and
of the effect of the Board's actions with respect to Regulation D.
The following current economic policy directive was issued to
the Federal Reserve Bank of New York:
The information reviewed at this meeting suggests that
real economic activity, which edged up slightly in the second
quarter after declining appreciably earlier in the year, may
be expanding somewhat further. Prices and wage rates generally
are continuing to rise at a rapid pace. However, improvements
in productivity appear to be slowing the rise in costs, and
some major price measures are showing moderating tendencies.
Credit demands in securities markets have continued heavy, and
interest rates have shown mixed changes since mid-July after
Some uncertainties
declining considerably in preceding weeks.
persist in financial markets, particularly in connection with
market instruments of less than prime grade. In July the
money supply rose moderately on average and bank credit expanded
substantially. Banks increased holdings of securities and loans
to finance companies, some of which were experiencing difficulty
in refinancing maturing commercial paper.
Banks sharply expanded
their outstanding large-denomination CD's of short maturity, for
which rate ceilings had been suspended in late June, and both
banks and nonbank thrift institutions experienced large net
inflows of consumer-type time and savings funds. The over-all
balance of payments remained in heavy deficit inthe second
quarter, despite a sizable increase in the export surplus.
July the official settlements deficit continued large, but
there apparently was a marked shrinkage in the liquidity deficit.
In light of the foregoing developments, it is the policy of the
Federal Open Market Committee to foster financial conditions
conducive to orderly reduction in the rate of inflation, while
encouraging the resumption of sustainable economic growth and
the attainment of reasonable equilibrium in the country's
balance of payments.
To implement this policy, the Committee seeks to promote
some easing of conditions in credit markets and somewhat
greater growth in money over the months ahead than occurred
in the second quarter, while taking account of possible liquid
ity problems and allowing bank credit growth to reflect any
continued shift of credit flows from market to banking channels.
System open market operations until the next meeting of the



Committee shall be conducted with a view to maintaining bank
reserves and money market conditions consistent with that
objective, taking account of the effects of other monetary
policy actions.
Votes for this action: Messrs.
Burns, Daane, Heflin, Hickman, Maisel,
Mitchell, Robertson, Sherrill, and
Swan. Votes against this action:
Messrs. Hayes, Brimmer, and Francis.
Messrs. Hayes, Brimmer, and Francis believed that it was
appropriate for money to grow at a moderate rate at present.


dissented from this directive primarily because they were opposed
to the promotion of "some easing of conditions in credit markets"
as a specific objective of Committee policy at this time.


their judgment such easing was not presently required for the pur
pose of encouraging a satisfactory rate of expansion in economic
activity, and it would involve an unduly large risk of rekindling
inflationary expectations.
The views of the dissenting members regarding bank credit

Mr. Brimmer indicated that he was deeply troubled by the

rapid recent and projected growth rates in bank credit, and that he
favored fostering growth at only a modest rate.

Mr. Hayes thought

that a sizable increase in bank credit in the last month or two had
been appropriate, in view of the shrinkage in commercial paper fol
lowing the insolvency of a major railroad corporation.

However, he

observed that he would be troubled by continued rapid growth in bank
credit now that the commercial paper market seemed to be stabilizing.



Mr. Francis expressed the view that bank credit was likely to be
misleading as a proximate guide to policy because of the reinter
mediation in process, and that the Committee accordingly should focus
on the growth rate in money.