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FEDERAL RESERVE
press
release
For immediate release
October 6, 1975
The Board of Governors of the Federal Reserve System
and the Federal Open Market Committee today released the
attached record of policy actions taken by the Federal Open
Market Committee at its meeting on August 19, 1975.
Such records are made available approximately 45 days
after the date of each meeting of the Committee and are published
in the Federal Reserve Bulletin and the Board's Annual Report.
The summary descriptions of economic and financial conditions
they contain are based on the information that was available
to the Committee at the time of the meeting, rather than on
data as they may have been revised since then.
Attachment
RECORD OF POLICY ACTIONS
OF THE FEDERAL OPEN MARKET COMMITTEE
Meeting held on August 19, 1975.
1. Domestic policy directive
The information reviewed at this meeting suggested that
output of goods and services--after having fallen sharply for
two quarters--had bottomed out in the second quarter of 1975
and was likely to increase appreciably in the current quarter.
Staff projections suggested that expansion in output would
remain strong in the fourth quarter.
It was expected that the
rate of increase in prices--which had moderated earlier this
year-would be somewhat more rapid in the third and fourth
quarters.
In July retail sales continued to expand at a vigorous
pace, in real as well as in dollar-value terms.
Industrial pro
duction--which had turned up in June after 8 months of declinerose moderately further, reflecting in large part gains in out
put of consumer goods. The average workweek of production
workers in manufacturing industries increased considerably,
and employment in nonfarm establishments also rose. Although
the civilian labor force increased, after having contracted
in June, the unemployment rate declined further, from 8.6 to
8.4 per cent.
8/19/75
The advance in the index of average hourly earnings
for private nonfarm production workers, which had continued
to moderate in the second quarter of the year, was relatively
slow in July.
The wholesale price index rose sharply, in
large part because of substantial increases in prices of
grains, hogs, meats, and some other foods and foodstuffs;
among industrial commodities, prices of fuels and related
products and power rose significantly.
In June the rise in
the consumer price index had accelerated again, reflecting
mainly increases in retail prices of foods and fuels.
Staff projections for the second half of 1975, compared
with those of 5 weeks earlier, suggested a larger rise in prices
and a more vigorous recovery in output.
The faster rate of
expansion in real GNP reflected for the most part a more
marked slowing in business inventory liquidation from the
sharp rate of liquidation in the second quarter.
Business
fixed investment outlays now were projected to strengthen late
in the year. As before, it was anticipated that real consumption
expenditures would increase at a rapid pace and that residential
construction also would expand but that exports would rise less
than imports.
8/19/75
The average exchange value of the dollar against
leading foreign currencies-which had begun to appreciate in
late June--rose considerably further between mid-July and
mid-August, reflecting a continued rise in short-term interest
rates on dollar assets relative to comparable rates on assets
denominated in other currencies.
Moreover, a large increase
in the U.S. foreign trade surplus was reported for June--when
exports increased sharply while imports declined slightly
further--and the surplus for the second quarter as a whole was
substantially greater than for the first quarter.
Total loans and investments at U.S. commercial banks
expanded moderately in July.
On a seasonally adjusted basis,
outstanding loans to businesses changed little, and the out
standing volume of commercial paper issued by nonfinancial
businesses rose somewhat, following several months of decline.
Banks continued to add to their holdings of U.S. Government
securities, but not at so rapid a pace as in earlier months of
this year.
Most major banks raised the prime rate from 7 to
7-3/4 per cent, owing in part to recent increases in short-term
market interest rates.
M1 increased relatively little in July, after having
grown extremely rapidly in May and June in association with
disbursement of Federal income tax rebates and of supplementary
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8/19/75
social security payments.
Inflows of consumer-type time and
savings deposits to banks and to nonbank thrift institutionswhich also had been augmented by the special Treasury paymentsslowed in July, but they were still fairly large; growth in
M2 and M3, although substantially below the pace in the preceding
2 months, was moderate.
System open
market operations since the July 15 meeting
had been guided by the Committee's decision to maintain about
the prevailing bank reserve and money market conditions, pro
vided that growth in monetary aggregates appeared to be slowing
substantially from the bulge during the second quarter.
Data
that had become available immediately after the July meeting
suggested that in the July-August period the aggregates would
grow at rates above the upper limits of the ranges of tolerance
that had been specified by the Committee.
Accordingly, System
operations had been directed toward a slight firming in bank
reserve and money market conditions, and the Federal funds
rate had risen to the vicinity of 6-1/8 to 6-1/4 per cent in
the latter part of July from about 6 per cent at the time of
the July meeting.
Later data suggested that growth in the
aggregates would be within the specified ranges, and System
operations were directed toward maintaining steady conditions.
8/19/75
On July 23 the Treasury announced that it would auction
up to $5.8 billion of notes and bonds, of which $4.8 billion
represented refunding of publicly held notes that were to
mature on August 15.
In auctions on July 29, 30, and 31,
respectively, the Treasury sold $3 billion of 2-3/4-year notes
at an average price to yield 7.94 per cent, $2 billion of 7-year
notes at an average price to yield 8.14 per cent, and $800 million
of 25-year bonds at an average price to yield 8.44 per cent.
On
August 6 the Treasury announced that over the following 2 weeks
it would sell 2-year and 4-year notes and additional amounts of
bills to raise $6 billion in new cash.
Market interest rates in general had risen appreciably
further since the July meeting of the Committee, in response
to indications of the strengthening in economic activity, to
the pick-up in the rate of increase in prices, to the large
current and prospective financing requirements of the Treasury,
and to the firming in money market conditions.
In the short
term market, rates on Treasury securities had risen somewhat more
than those on private instruments.
On the day before this meet
ing, the rate on 3-month Treasury bills was 6.42 per cent, up
about 40 basis points from the rate at the time of the July
meeting.
8/19/75
In markets for longer-term securities, upward pressures
were also greater for Government than for private securities,
reflecting the heavy offerings of Treasury coupon issues.
Con
ditions in the market for State and local government securities
were adversely affected by the uncertainties stemming from the
financing problems of New York City.
Offerings of such securities
were large in July, but a decline was in prospect for August.
On
the other hand, upward pressures on corporate bond yields were
dampened by cancellation or postponement of some new issues that
had been scheduled for marketing in August.
The volume of public
offerings of corporate bonds fell in July from the record high
of June, and a further decline was in prospect for August.
A staff analysis suggested that growth in monetary aggre
gates would pick up moderately in the August-September period
from the reduced rate in July, in part because of the gathering
strength in economic activity.
It was further suggested that if
nominal GNP were to expand over the second half of the year at
about the rates now projected,
the demand for money would
strengthen considerably.
At its
previous meeting, the Committee had agreed that
growth in the monetary and credit aggregates on the average
over the period from the second quarter of 1975 to the second
quarter of 1976 at rates within the following ranges appeared
8/19/75
to be consistent with its broad economic aims:
M , 5 to 7-1/2
per cent; M2, 8-1/2 to 10-1/2 per cent; M3, 10 to 12 per cent;
and the bank credit proxy, 6-1/2 to 9-1/2 per cent.
It was
understood that the ranges, as well as the particular list of
aggregates for which such ranges were specified, would be
subject to review and modification at subsequent meetings.
It
also was understood that from month to month short-run factors
might cause the rates of growth of the various aggregates to
fall outside the ranges contemplated for annual periods.
In the course of the Committee's discussion of current
policy at this meeting, it was noted that the economic recovery
appeared to have gained strength over the past month--suggesting
that expansion in activity would be relatively vigorous over the
second half of the year--and that inflationary expectations had
increased.
It was also suggested, however, that financial markets
had over-reacted to the minor tightening in bank reserve and
money market conditions that had occurred over the past 2 months;
that financial markets in general were unsettled, in part because
of the financial problems of New York City and the possible
repercussions of those problems; and that interest rates were
high for this stage of the business cycle.
In the circumstances,
most members advocated maintenance of about the prevailing bank
8/19/75
reserve and money market conditions in the period immediately
ahead, provided that the monetary aggregates appeared to be
growing in the August-September period at about the moderate
rates expected.
However, some members advocated a slight
further firming in bank reserve and money market conditions
in order to restrain monetary expansion later on.
The Committee decided to seek bank reserve and money
market conditions consistent with moderate growth in monetary
aggregates over the months ahead, while taking account of
developments in domestic and international financial markets.
Specifically, the members agreed that growth in M1 and M2 over
the August-September period at annual rates within ranges of
tolerance of 4-1/2 to 7 per cent and 8-1/4 to 10-3/4 per cent,
respectively, would be acceptable.
Such growth rates were
thought likely to involve an annual rate of change in reserves
available to support private nonbank deposits (RPD's) within a
range of -1-1/2 to -4 per cent.
The members agreed that in the period until the next
meeting the weekly average for the Federal funds rate might be
expected to vary in an orderly fashion within a range of 5-3/4
to 7 per cent, although it was understood that operations would
not be directed toward establishing reserve conditions consistent
8/19/75
-9-
with a movement in the rate above or below the current 6-1/8 to
6-1/4 per cent area unless it appeared that in the August-September
period growth in the monetary aggregates would be substantially
stronger or weaker than now expected.
It was also understood
that the Chairman might call upon the Committee to consider the
need for supplementary instructions before the next scheduled
meeting if significant inconsistencies appeared to be developing
among the Committee's various objectives and constraints.
The following domestic policy directive was issued to
the Federal Reserve Bank of New York:
The information reviewed at this meeting sug
gests that output of goods and services bottomed
out in the second quarter and is likely to increase
appreciably in the current quarter. In July retail
sales expanded further and industrial production
rose moderately for the second consecutive month,
following 8 months of decline. Conditions in
labor markets improved further: employment in
creased, the unemployment rate declined from 8.6
to 8.4 per cent, and the average workweek in
manufacturing lengthened considerably. Average
wholesale prices rose sharply in July, chiefly be
cause of increases in prices of agricultural and
energy products. The advance in average wage
rates has continued to moderate over recent months.
In recent weeks the average exchange value of
the dollar against leading foreign currencies has
risen considerably further, reflecting additional
increases in interest rates on U.S. dollar assets
relative to rates on foreign currency assets. In
June the U.S. foreign trade surplus rose substan
tially, as exports increased sharply while imports
declined slightly further.
8/19/75
-10-
In July M1 increased relatively little and growth
in M2 and M3 slowed substantially, following a sharp
increase in depositors' balances in May and June in
connection with Federal income tax rebates and supple
mentary social security payments. Market interest
rates in general have risen appreciably further in
recent weeks, in association with indications of
strengthening economic activity, more rapid infla
tion, and larger current and prospective Treasury
financing requirements. Corporate bond offerings
moderated somewhat in July but State and local govern
ment offerings continued large. Financial markets
reflected considerable uncertainty stemming from
New York City's financing problems. Business demands
for short-term credit remained weak, although less so
than in earlier months.
In light of the foregoing developments, it is the
policy of the Federal Open Market Committee to foster
financial conditions conducive to stimulating economic
recovery, while resisting inflationary pressures and
contributing to a sustainable pattern of international
transactions.
To implement this policy, while taking account
of developments in domestic and international financial
markets, the Committee seeks to achieve bank reserve
and money market conditions consistent with moderate
growth in monetary aggregates over the months ahead.
Votes for this action: Messrs.
Burns, Volcker, Baughman, Bucher,
Coldwell, Eastburn, Holland, Jackson,
MacLaury, Mayo, Mitchell, and Wallich.
Votes against this action: None.
Subsequent to the meeting, on September 5, the available
data suggested that in the August-September period M1 would grow
at a rate in the lower part of the range of tolerance that had
been specified by the Committee and that M2 would grow at a rate
just below the lower limit of its range.
In view of the likeli
hood of substantial strengthening in demands for money and credit
8/19/75
-11-
over coming months, it appeared that a decline in the Federal
funds rate at this time might have to be reversed shortly--a
sequence that could seriously compound uncertainties in
financial markets.
Therefore, Chairman Burns recommended
that until the next meeting of the Committee the Manager be
instructed to continue to maintain reserve conditions con
sistent with a Federal funds rate in the 6-1/8 to 6-1/4 per
cent area, while leaning toward the lower figure.
Available
members of the Committee concurred in the Chairman's recom
mendation.
2. Authorization for domestic open market operations
On August 6, 1975, Committee members had voted to increase
from $2 billion to $3 billion the limit on System holdings of
special short-term certificates of indebtedness purchased directly
from the Treasury, specified in paragraph 2 of the authorization
for domestic open market operations, effective immediately, for
the period until the close of business on August 19, 1975.
Votes for this action: Messrs.
Burns, Bucher, Coldwell, Eastburn,
Mitchell, Volcker, Wallich, Balles,
and Francis. Votes against this
action: None.
Absent and not voting: Messrs.
Baughman, Holland, Jackson, MacLaury,
and Mayo. (Messrs. Balles and Francis
voted as alternates for Messrs. MacLaury
and Baughman, respectively.)
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8/19/75
This action, which was ratified at today's meeting,
was taken on the recommendation of the System Account Manager.
At the time of the recommendation, Treasury balances at
Federal Reserve Banks were in overdraft in the amount of
$651 million.
Overdrafts were expected to continue until
August 18 or 19, and it appeared possible that Treasury cash
borrowing from the System substantially in excess of the $2
billion limit would be required.
3.
Authorization for foreign currency operations
The Committee approved an increase from $180 million to
$360 million in the System's swap arrangement with the Bank of
Mexico and the corresponding amendment to paragraph 2 of the
authorization for foreign currency operations, effective after
review and approval by Chairman Burns following resolution of
certain technical matters.
on August 29, 1975.
The Chairman approved the increase
With this change, paragraph 2 of the
authorization read as follows:
The Federal Open Market Committee directs the
Federal Reserve Bank of New York to maintain recip
rocal currency arrangements ("swap" arrangements)
for the System Open Market Account for periods up to
a maximum of 12 months with the following foreign
banks, which are among those designated by the Board
of Governors of the Federal Reserve System under
Section 214.5 of Regulation N, Relations with Foreign
Banks and Bankers, and with the approval of the Com
mittee to renew such arrangements on maturity:
8/19/75
-13-
Amount of
arrangement
(millions of
Foreign bank
dollars equivalent)
Austrian National Bank
National Bank of Belgium
Bank of Canada
250
1,000
2,000
National Bank of Denmark
250
Bank of England
Bank of France
German Federal Bank
Bank of Italy
Bank of Japan
Bank of Mexico
3,000
2,000
2,000
3,000
2,000
360
Netherlands Bank
Bank of Norway
Bank of Sweden
500
250
300
1,400
Swiss National Bank
Bank for International Settlements:
Dollars against Swiss francs
Dollars against authorized European
currencies other than Swiss francs
600
1,250
Votes for this action: Messrs.
Burns, Volcker, Baughman, Bucher,
Coldwell, Eastburn, Holland, Jackson,
MacLaury, Mayo, Mitchell, and Wallich.
Votes against this action:
None.
This action was taken in order to expand the facilities
available for coping with the possible temporary pressures on the
peso.
@FedFRASER