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press release

For immediate release


February 5,

The Board of Governors of the Federal Reserve System
and the Federal Open Market Committee today released the
attached records of policy actions taken by the Federal Open
Market Committee at its meetings on November 19 and December 16-17,

As in the past, the record for the December meeting of the

Committee has been released along with the record for the November
meeting rather than in accordance with the usual schedule of
approximately 90 days after the meeting in

order to complete the

published record for the year in advance of the Chairman's testimony
at the Congressional hearings on the Economic Report of the President
and the Annual Report of the Council of Economic Advisers.
These records will be published in

the Board's Annual

Report for 1974 and in the Federal Reserve Bulletin.

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 meetings, rather than on data as they may have
been revised since then.



Meeting held on December 16-17, 1974 1 /

Domestic policy directive
The information reviewed at this meeting suggested that
real output of goods and services--after declining at an annual
rate of 2 per cent in the third quarter of the year and about 4.5
per cent in the first half--was falling substantially further in
the current quarter, only in small part because of the 4-week
coal strike.

Price and wage increases were continuing large,

although not so large as in the first three quarters of the year.
Staff projections suggested that real economic activity would
recede significantly further in the first half of 1975 and that
the rate of increase in prices, while still rapid, would mod
In November retail sales declined for the third consecu
tive month.

The index of industrial production fell sharply

further, reflecting curtailments in output of some types of
business equipment as well as of consumer goods and industrial

Reductions in employment were widespread, especially

in manufacturing, and the unemployment rate rose further, from
6.0 to 6.5 per cent.

In recent weeks additional production

cutbacks and layoffs had been announced.
1/ This meeting began on the afternoon of December 16 and con
tinued on the following day.


Wholesale prices of industrial commodities rose sub
stantially further in November--reflecting for the most part
increases in machinery and chemicals--but as in September and
October, the rise was below the extraordinarily rapid pace
earlier in the year.
continued to increase.

Wholesale prices of farm and food products
As in October, the advance in the index

of average hourly earnings for private nonfarm production workers
was less rapid than in the second and third quarters of the year.
The consumer price index had increased substantially further in
October, although the rise in prices of nonfood commodities had
The latest staff projections for the first half of 1975
suggested that economic activity would contract significantly
more than anticipated at the time of the last meeting, and
consequently that nominal GNP would rise appreciably less.
For the most part, the greater weakness now expected reflected
a substantial reduction in the rate of business inventory invest
ment in the first quarter--from an unusually high rate estimated
for the current quarter, in association with a sharp weakening
in final purchases of goods--and then a shift to inventory
liquidation in the second quarter.

In addition, the expansion

in business fixed investment now was expected to fall short of



the rise-in prices.

It was still anticipated that the rise

both in disposable personal income and in personal consumption
expenditures would be little, if any, greater than the increase
in consumer prices and that residential construction activity
would decline somewhat further in the first quarter and then
turn up in the second.
The exchange rate for the dollar against leading foreign
currencies--which had been declining since early Septemberdeclined somewhat further between mid-November and mid-December,
reflecting in part upward pressure on the German mark and the
Swiss franc.

In October the U.S. merchandise trade deficit had

narrowed, for the second consecutive month, as exports of nonagri
cultural commodities expanded sharply while total imports in
creased little.

Inflows of bank-reported private capital had

continued, although at a pace somewhat below that during the
third quarter, and on balance, oil-exporting countries had added
to their investments in the United States.

At U.S. commercial banks, total loans expanded at a moderate
pace in November and holdings of securities increased slightly.
The growth in outstanding business loans slowed, as many prime
business borrowers continued to be attracted to the commercial paper
market by the relatively lower cost of funds.

Although most banks

reduced the prime rate applicable to large corporations from



10-3/4 per cent to 10-1/2 per cent in late November, reductions
in the prime rate continued to lag behind declines in commercial
paper rates.
The narrowly defined money stock (M1)2/ grew at an
annual rate of about 7 per cent in November, compared with
rates of about 4 per cent in October and of 1.5 per cent in the
third quarter..

In November net inflows of consumer-type time

and savings deposits remained strong at banks and continued to
improve at nonbank thrift institutions, and the more broadly
defined measures of the money stock (M2 4/ and M3 5/) again ex
panded appreciably.

System open market operations since the November 19 meet
ing had been guided by the Committee's decision 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

Data that had become available a few days after the

November meeting suggested that in the November-December period
the aggregates would grow at rates near the lower limits of the
2/ Private demand deposits plus currency in circulation.
3/ The growth rate cited for the quarter is 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
4/ M1 plus commercial bank time and savings deposits other
than money market CD's.
5/ M2 plus time and savings deposits at mutual savings banks
and at savings and loan associations.

ranges of tolerance that had been specified by the Committee.

Consequently, System operations were directed toward some further
easing in bank reserve and money market conditions.

Through the

first week after the meeting, however, the Federal funds rate
remained near its

pre-meeting level of 9-1/2 per cent,

as banks

elected to hold large excess reserves over the Thanksgiving holiday.

the funds rate declined to about 8-3/4 per cent.

Short-term market interest rates turned up in late November,
apparently because market participants were disappointed in their
expectations that the Federal funds rate would continue to decline.

rates turned down again around the end of the month,

following resumption of the decline in the funds rate.

At the

time of this meeting the market rate on 3-month Treasury bills
was 7.14 per cent, compared with 7.52 per cent on the day before
the November meeting and with 7.17 per cent on November 14,
before the Treasury announced that it would raise a considerable
amount of new money in the short-term market.

Federal Reserve

discount rates were reduced at two Reserve Banks from 8 to 7-3/4
per cent, effective on December 9; shortly thereafter, rates were
reduced at the remaining 10 Banks.
Yields on long-term corporate and Treasury issues rose
in late November and subsequently declined, along with short-term


market rates, but yields on State and local government bonds
were subjected to upward pressures throughout the period.


volume of public offerings of corporate and State and local
government securities remained exceptionally large in November,
and a substantial volume was in prospect for December.


mortgage markets, contract interest rates on new commitments
for conventional home mortgages in the primary market and yields
on commitments in the secondary market for Federally underwritten
home mortgages continued to decline during the period from early
November to early December.
The Committee concluded that the economic situation and
outlook called for somewhat more rapid growth in monetary aggre
gates over the months ahead than had occurred in recent months.
The longer-run growth rates for the aggregates adopted by the
Committee were raised slightly from those contemplated at other
recent meetings.
A staff analysis suggested that, in view of the weaker
expansion in nominal GNP now projected, some further easing in
money market conditions probably would be required in the period
immediately ahead if M1 were to grow at a rate consistent with
the Committee's longer-run objectives for the monetary aggregates.
Such easing was likely to be accompanied by only modest declines


in other market interest rates because credit demands--although
tending to moderate--would still be strong.

It was expected that

net inflows to banks of time and savings deposits other than large
denomination CD's would remain substantial and that net inflows
to nonbank thrift institutions would continue

to improve,

The Committee concluded that growth in M1 and M 2 over
the December-January period at annual rates within ranges of
tolerance of 5 to 7 per cent and 7-1/2 to 10 per cent, respectively,
would be consistent with its longer-run objectives for the mone
tary aggregates.

The members agreed that such growth rates would

be likely to involve growth in reserves available to support
private nonbank deposits (PD's) within a range of tolerance of
9 to 11 per cent.

They decided that in the period until the

next meeting the weekly average Federal funds rate be permitted

to vary in an orderly fashion from as low as 7-1/2 per cent to
as high as 9 per cent, if necessary, in the course of operations.
The members also agreed that, in the conduct of operations,

account should be taken of developments in domestic and inter
national financial markets.

It was understood that the Chairman

might call upon the Committee to consider the need for supple
mentary 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 suggests
that real output of goods and services is falling sub
stantially further in the current quarter. Price and
wage increases are continuing large, although not so
large as earlier this year. In November declines in
industrial production and employment were sharp and
widespread, and the unemployment rate increased further,
from 6.0 to 6.5 per cent. In recent weeks additional
production cutbacks and layoffs have been announced.
The November rise in wholesale prices of industrial
commodities, although substantial, remained well below
the extraordinarily rapid rate in the first 8 months
of the year.

Since mid-November the dollar has declined some
what further against leading foreign currencies. In
October the U.S. foreign trade deficit was reduced
sharply for the second consecutive month, while there
were continued net inflows of bank-reported private
capital and of investments by oil-exporting countries.

Growth of the narrowly defined money stock in
creased in November to an annual rate of about 7 per

Net inflows of consumer-type time and savings

deposits remained strong at banks and continued to im
prove at nonbank thrift institutions, and the more

broadly defined money supply measures again expanded
appreciably. Bank loans increased only moderately.
Most market interest rates, after rising in the second

half of November, subsequently turned down again. Yields
on State and local government securities, however, con
tinued under upward pressure. Effective December 9,
Federal Reserve discount rates were reduced from 8 to
7-3/4 per cent.


In light of the foregoing developments, it is the
policy of the Federal Open Market Committee to foster
financial conditions conducive to resisting inflationary
pressures, cushioning recessionary tendencies and encour
aging resumption of real economic growth, and achieving
equilibrium in the country's balance of payments.
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 somewhat
more rapid growth in monetary aggregates over the
months ahead than has occurred in recent months.
Votes for this action: Messrs.
Burns, Hayes, Black, Bucher, Clay,
Coldwell, Holland, Kimbrel, Sheehan,
and Winn. Votes against this action:
Messrs. Mitchell and Wallich.

Mitchell and Wallich, who dissented from this

action, both believed that the economic situation and outlook
called for a more stimulative monetary policy.

In Mr. Mitchell's

opinion, the primary objective should be to achieve a level of
interest rates that would encourage the increased volume of
borrowing in mortgage and capital markets essential to the kind
of revival in economic activity needed in 1975.

Mr. Wallich

believed that for a limited period it would be desirable to seek
a higher rate of monetary growth than favored by the majority.



Subsequent to the meeting, on January 9, the available
data suggested that in December M1 and M2 had grown at rates of
about 2 and 2.5 per cent, respectively, and that growth rates for
the December-January period would be well below the lower limits
of the ranges of tolerance that had been specified by the Committee.
In the statement week ending January 8, the Federal funds rate had
averaged slightly below 7-3/4 per cent, and the System currently
was conducting reserve-supplying operations thought to be consistent
with a weekly average rate of about 7-1/2 per cent, the lower limit
of its range of tolerance. Against that background, and to give
the Manager greater flexibility, Chairman Burns recommended on
January 9 that the lower limit of the funds rate constraint be
reduced to 7-1/8 per cent for the period remaining until the next
Committee meeting.

The members concurred in the Chairman's recom