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A meeting of the Federal Open Market Committee was held
in the offices of the Board of Governors of the Federal Reserve
System in Washington, D.C., on Tuesday, December 16, 1975, at
9:30 a.m.




Burns, Chairman
Volcker, Vice Chairman

Messrs. Balles, Black, Francis, and Winn,
Alternate Members of the Federal Open
Market Committee
Messrs. Clay, Kimbrel, and Morris,
Presidents of the Federal Reserve
Banks of Kansas City, Atlanta, and
Boston, respectively

Mr. Broida, Secretary
Mr. Altmann, Deputy Secretary
Mr. Bernard, Assistant Secretary
Mr. O'Connell, General Counsel
Mr. Partee, Senior Economist
Mr. Axilrod, Economist (Domestic Finance)
Mr. Gramley, Economist (Domestic Business)
Mr. Solomon, Economist (International Finance)
Messrs. Boehne, Davis, Green, Kareken, Reynolds,
and Scheld, Associate Economists


Mr. Holmes, Manager, System Open Market
Mr. Pardee, Deputy Manager for Foreign
Mr. Sternlight, Deputy Manager for Domestic
Mr. Coyne, Assistant to the Board of Governors
Mr. Keir, Adviser, Division of Research and
Statistics, Board of Governors
Mr. Gemmill, Adviser, Division of International
Finance, Board of Governors
Mrs. Farar, Economist, Open Market Secretariat,
Board of Governors
Mrs. Ferrell, Open Market Secretariat Assistant,
Board of Governors
Messrs. Eisenmenger, Parthemos, Doll, and Sims,
Senior Vice Presidents, Federal Reserve
Banks of Boston, Richmond, Kansas City,
and San Francisco, respectively
Messrs. Hocter, Brandt, and Balbach, Vice
Presidents, Federal Reserve Banks of
Cleveland, Atlanta, and St. Louis,
Mr. Sandberg, Assistant Vice President,
Federal Reserve Bank of New York
By unanimous vote, the
minutes of actions taken at the
meeting of the Federal Open
Market Committee held on
November 18, 1975, were approved.
By unanimous vote, the
memorandum of discussion for the
meeting of the Federal Open Market
Committee held on October 21, 1975,
was accepted.
Before this meeting there had been distributed to the
members of the Committee a report from the Manager of the System
Open Market Account on foreign exchange market conditions and on


Open Market Account and Treasury operations in foreign currencies
for the period November 18 through December 10, 1975, and a sup
plemental report covering the period December 11 through 15, 1975.
Copies of these reports have been placed in the files of the
In supplementation of the written reports, Mr. Holmes
made the following statement:
The dollar has been relatively strong, on
balance, since the last meeting of the Committee.
With the underlying position of the dollar remain
ing buoyant, the "compromise" on New York City
financing and the leveling off of our interest
rates removed many of the market's concerns about
the dollar.
As far as other currencies are concerned, the
German mark continues to be relatively weak within
the snake, as interest rates in Germany remain low
relative to rates elsewhere and as the economic
recovery there, while clearly in progress, is far
from robust.
The Swiss franc, on the other hand, has been
in heavy demand, not only in response to a clear
improvement in the underlying Swiss payments position
this year but also because of the speculative reac
tion to the very sharp rise of the franc rate itself.
Bidding for francs had an unsettling effect on the
market on several days, leading to a broader bidding
up of European currencies against the dollar. The
Swiss National Bank intervened almost daily in Zurich
as well as through us in New York on one occasion.
Mr. Pardee and I have discussed the possibility of
joint intervention with Dr. Leutwiler, President of
the Swiss National Bank, but we have done nothing up
to this moment.
Another situation worth mentioning is that of the
Japanese yen. Earlier, with strikes in Japan weighing
on market psychology, the yen came under heavy selling
pressure in November and early December. The Bank of

Japan, intervening at specific levels for several
days at a time, found itself having to back away
in the face of heavy sales of yen, with the result
that the rate has fallen very close to the Smith
sonian level. The Bank of Japan believes this to
be a temporary weakness, but the situation bears
In general at this point, the markets have
turned fairly quiet, except for the Swiss franc,
as banks and corporations around the world square
their books for the year end. In our own market
operations during the period, we purchased about
$15 million worth of marks to add to our balances
and $4 million worth of Belgian francs. We did
not otherwise intervene.
I am happy to report that at long last we have
reached agreement on procedures for repaying our
Belgian franc swap debt. Late in November the
Belgian Government fulfilled its promise to con
firm the exchange rate adjustment for our long
outstanding swap indebtedness in Belgian francs.
The adjustment of our swap drawing involved a net
loss of $54 million to the System after taking
account of the 1971 and 1973 devaluations of the
dollar and the small revaluation of the Belgian
At Basle we had very constructive conversations
with the Belgians. They have agreed with our sug
gestion that we begin a program of purchasing modest
amounts of Belgian francs in the market each day--a
program we have undertaken--and that they share with
us the proceeds of any significant intervention in
dollars by them in the Belgian market. Moreover, to
the extent that the Belgian franc figures in forth
coming drawings on the IMF oil facility, the Belgians
have agreed that we can acquire part of the francs
involved. All of this has been cleared with the
Treasury. The Belgians suggested that we should
have an objective of repaying some $100 million worth
of franc debt per quarter. With the balances we have
already accumulated, we have repaid a swap drawing of
about $8 million equivalent that otherwise would have
come up for its eighteenth renewal in mid-January.
This has been a fairly arduous negotiation extend
ing over nearly 5 years, and I believe that the


procedures that are now in place are reasonable. You
can be sure that we will press every effort to hasten
the complete repayment of this debt, perhaps over a
shorter period of time than contemplated by the Belgians
if market conditions are favorable.
Our chances of repaying our large Swiss franc
indebtedness are not particularly good at the moment,
given the strength of the Swiss franc. Mr. Pardee and
I discussed this matter also with Dr. Leutwiler in
Basle. We agreed to explore various possible means of
acquiring Swiss francs in addition to market purchases.
One approach suggested by Dr. Leutwiler, which we are
actively discussing with our European colleagues, is
the possibility of using third currencies--which might
be more readily available in the market--to acquire
Swiss francs. The Swiss have a regular need for
Italian lire--for remittances back to Italy from
Italian workers in Switzerland--and at times for
German marks. This may be a fruitful approach, but
any substantial repayment will probably have to await
better market conditions which the Swiss expect to see
develop some time next year.
As a first step to the eventual liquidation of
our Swiss franc indebtedness, however, I recommend
that the System adjust the exchange rate on our Swiss
franc swap debt to 3.3784 Swiss francs per U.S. dollar
to take account of the devaluations of the dollar.
This rate has long been agreed to in principle but
actual implementation will result in a substantial
loss of $195 million--a loss that we have always known
would be incurred. A further substantial loss--over
$300 million--would be involved in the difference
between current market rates and the adjusted swap
rate. The Swiss have agreed in principle to share
in any such loss, and I recommend that the Committee
authorize me to negotiate a specific loss-sharing
arrangement, subject of course to final Committee
approval. We will submit a memorandum on this matter.
Turning to our broader approach to the exchange
market, as you know, the U.S. and French Treasuries
signed an agreement at Rambouillet that carried direct
implications for central bank consultation and inter
vention procedures. As a follow-up to that agreement,
in Basle last week Mr. Pardee and I worked out an
extension of our regular consultation procedures with

the other major central banks. The EC central banks
are linked together in what has been called the daily
"concertation"--three conference calls per day among
the various participants. In these calls there is a
mutual interchange of information on exchange rates,
intervention, and market conditions. Under the new
procedure the leader of the concertation process,
which rotates among the participating central banks
on a daily basis, calls our Desk around 11:00 a.m.
with the full results of those calls. We, in turn,
pass that information on to the Representative Office
of the Bank of Japan in New York and to the Bank of
Canada. At the close of our day, we send out a round
robin cable to all participants, informing them of
the closing rates in New York, our intervention, if
I think this arrange
any, and a brief market comment.
direct bilateral
ment is a very useful addition
The arrange
ment was put into effect last Thursday (December 11)
and we are getting good information on a uniform basis.
Although not specifically mentioned in the
document, one of the features of the Rambouillet
agreement was the presumption that the Federal
Reserve would become somewhat more active in the
exchange markets, especially to counter "erratic
movements" of exchange rates. What this will mean
in practice will probably become clear only as
developments unfold in the market. As a starter,
however, I believe it would be useful to continue
our accumulation of foreign currencies in the market.
We now hold just over $70 million equivalent--mainly
German marks. At the September meeting, I suggested,
and the Committee agreed, that we should accumulate
up to $100 million. I would now suggest that we aim
towards accumulating up to $150 million, as market
conditions permit.
As to future intervention, I would suggest prudent
experimentation, working in close consultation with
our central bank colleagues and the Treasury, which
at some point may decide to acquire some balances of
its own. Should the dollar continue strong or strengthen
further I can visualize a gradual buildup in these
balances. Should the dollar later weaken we would
have some ammunition for intervention without being
forced to borrow under a swap line.


At Basle there was some feeling that the
European central banks carried too large a share
of the burden of intervention. The old concept
that we would intervene to maintain orderly condi
tions in the New York market and the European
central banks in their markets was questioned. As
they pointed out--quite rightly, I think--there is
really only one market. In fact, the thinness of
the New York market has at times led U.S. banks to
accumulate large customer orders and execute them
only after the European markets had opened the
next day. I believe we should try to find ways
of broadening and strengthening the New York market,
although I have nothing specific to suggest at this
Finally, I am happy to report that on Thursday
the Bank of Mexico will repay in full the $360 mil
lion of drawings on the Federal Reserve, taken down
in late September and early October. As you recall,
they had requested the drawing on the expectation
that they would have to ask for a renewal after 3
months. However, the turnaround in their payments
position has been more rapid than expected and they
are repaying prior to the first maturity.
Chairman Burns said he had found Mr. Holmes' report to
be exceptionally interesting and constructive.
Mr. Holland indicated that he was highly gratified not
only by the successful conclusion of the negotiations with the
Belgians but also by the Desk's work in planning for the future.
He looked forward with enthusiasm to approving Mr. Holmes'
Chairman Burns noted that one of Mr. Holmes' recommenda
tions was for the System to acquire up to $150 million in foreign

As Mr. Holmes had indicated, the Committee had


reached an understanding at the September meeting that such
acquisitions should be limited to about $100 million, although
the Manager formally had authority to purchase up to $250 mil
lion equivalent under the Committee's Authorization for Foreign
Currency Operations.
In reply to a question by Mr. MacLaury, Mr. Holmes said
he was not proposing to limit purchases to German marks; when
opportunities arose, he thought it would be desirable cautiously
to accumulate small amounts of certain other currencies.
Mr. MacLaury said he would question any presumption that
it would be useful for the System to acquire a substantial volume
of foreign currencies rather than to rely on the swap lines to
obtain currencies needed for exchange market intervention.


seemed to him that the System could never know in advance what
currencies would prove useful in particular situations, and
accordingly, he viewed use of the swap network as a more flexible

However, he did not consider a stock of $150 million

as substantial, and he would not object to building up the System's
holdings to that amount.
Mr. Pardee commented that the Account

Management had in

mind the possible acquisition, in addition to German marks, of
relatively small amounts of French francs and Dutch guilders for
the sake of increased flexibility in operations.

For example,


there might be a need for such currencies at 3:00 p.m., New York
time, when it was difficult to arrange a System drawing on a
European central bank.
In answer to a question by Mr. Mayo, Mr. Holmes said he
thought the value of holding a modest amount of foreign currencies
had been illustrated in October, when German marks acquired in
September were sold to support the dollar.

At this stage he

would not suggest anything more than a modest buildup of foreign
currency balances.

While it was important to recognize that such

balances involved exchange risks, he thought the Committee should
be prepared to take such risks so long as holdings were not sub

Large holdings would have to be justified on grounds

other than those he had in mind.
Mr. Mayo said he would be inclined to share Mr. MacLaury's
cautionary view, particularly if the dollar was expected to
strengthen so that losses on foreign currency holdings would
be sustained.

However, he could see a justification for acquir

ing a modest amount of currencies as a sort of permanent working
capital for the System.
Mr. Mitchell noted that System officials had chastised
commercial bankers for speculating in the foreign exchange

The Committee certainly would not want the System's

examiners to raise similar questions about the Desk's operations.



However, he did not believe the criteria used in the private
sector could be applied to System operations, in part because
the System had access to better information and System officials
could be expected to operate in a temperate manner.


less, like others around the table, he was not anxious to have
the System build up a big position in foreign currencies, and
he understood that the Manager thought it would be inadvisable
to do so.
Mr. Holmes indicated that Mr. Mitchell's understanding
was correct.
Mr. Coldwell asked how the Desk invested System holdings
of foreign currencies and whether the Manager intended to engage
in any forward operations, including perhaps the matching of
forward positions against spot positions.
In reply to the first question, Mr. Pardee said that
investment procedures varied from currency to currency, and
specific procedures had been worked out with individual central
banks concerned.

In some cases the System's holdings of foreign

currencies were invested in accounts with central banks.


other cases, foreign currency balances were deposited with the
BIS at Euro-currency rates.
Responding to Mr. Coldwell's second question, Mr. Holmes
noted that the Desk's recent purchases of foreign currencies had


all been on a spot basis.

The System had engaged in forward

operations in the past, but he saw no need for such operations
at present.
In reply to a further question by Mr. Coldwell, Mr. Holmes
indicated that the Treasury had acquired foreign currencies in
the past, and indeed the Treasury had participated in tandem
operations with the System on both sides of the market and might

do so again.

However, Treasury officials had not reached

a decision about building up foreign currency balances at this
Mr. Holland commented that the relatively small buildup
of foreign currency balances under consideration seemed desirable
to him, especially if the acquisitions were cyclically oriented
in a world of more flexible exchange rates.

If past cyclical

experience provided any guide to the future, there would be
times when it would make sense for the System to run a bit of
a surplus in its holdings of foreign currencies and times when
it would be advisable to incur a deficit in the sense of making
net drawings on the swap line facilities.

However, he did not

think it would be desirable--and he gathered this was also the
sentiment around the table--to build up surpluses during periods
of cyclical strength for the dollar that were as large as the
deficits that the System might be willing to incur during periods



of cyclical weakness.

Nonetheless, he thought a cyclical

buildup in foreign currency balances to something greater than
zero would represent a better policy than the one followed in
recent years, especially given the difficulties the System had
experienced in repaying swap debts.
Mr. Wallich said he thought the size of the System's
holdings of foreign currencies should be viewed in accordance
with the circumstances under which intervention was considered
appropriate in a regime of floating exchange rates.

If the

System carried net balances over a period of time, one might
argue that it was doing more than maintaining orderly markets.
It was true that one could argue that holding some net
balances was consistent with the minimal objective of main
taining orderly markets because the balances might be needed
for intervention at any given moment.

If, however, the System

were to vary its holdings cyclically, it would be engaging in
a broader form of intervention.
Mr. MacLaury referred

to Mr. Holland's observation

regarding a cyclical buildup of System holdings of foreign
currencies, and commented that the United States was in a
unique position.

Countries on the other side of the Atlantic

could always use holdings of dollars to offset cyclical pres
sures on their currencies.

For the United States, however,

there was no single currency that could serve the same purpose



and there was no way of knowing in advance how useful particular
currencies might be for market intervention during cyclical swings.
Mr. Holland said he thought he was in basic agreement
with Mr. MacLaury.

His remarks were meant to underscore the fact

that, if the System were to follow a somewhat more active policy
of intervention, a tendency for some sort of cyclical pattern in
the System's holdings of foreign currencies was likely to emerge.
Indeed, a general understanding of economic behavior and of the
likely behavior of exchange rates should provide the Committee
with a useful running guideline on when to expect System foreign
currency balances to start increasing or declining.

The recogni

tion of such cyclical patterns should serve as a useful reminder
that balances should not be allowed to move too far in either
Mr. Solomon said he might make two comments that seemed
relevant to the discussion thus far.

One was that the Rambouillet

agreement talked about offsetting erratic movements in exchange

While that concept had not yet been fully spelled out, it

was not at all clear that cyclicalmovements would be defined as

in fact,

it was his guess that cyclical movements

would be viewed for the most part as having a fundamental economic

Accordingly, it was not evident that there would

necessarily be a large amount of intervention to offset such




However, the meaning of the agreement remained to

be seen as it was implemented.
His second comment, Mr. Solomon continued, related to the
issue of risks on System holdings of foreign currencies.


was not urging that the System acquire large balances, but he
thought the risks on System holdings of, say, $150 million in
foreign currencies were minimal in relation to the risks incur
red by foreign central banks that were holding tens of billions
of U.S. dollars.
Chairman Burns observed that there was a difference in
that foreigners were willing holders of large amounts of dollars.
Mr. Volcker said the use of the term "cyclical" created a
bit of a problem for him because he did not think of the System's
intervention policies in terms of business cycles, which involved
rather long periods of time.

There could, of course, be other

sorts of cycles in the foreign exchange market.

In any case, he

thought that foreign currencies should not be acquired just for
the sake of building up balances; if they were acquired, it should
be as a by-product of market intervention that otherwise seemed

For example, if the Committee followed a policy of

moderating movements in dollar exchange rates, it might find that it
was a net purchaser of foreign currencies because of the direction
in which exchange rates were moving.

Such intervention would not be



possible unless the Desk was authorized to hold the resulting

The notion of building up foreign currency holdings

when the dollar was strong was in his view completely symmetrical
with that of drawing on the System's swap lines for intervention
purposes when the dollar was weak and any previously accumulated
holdings had run out.

In his view, therefore, the issue before

the Committee was whether the Manager was to be given authority
to engage in intervention operations when the dollar was tending
to appreciate.

Of course, the System could use acquisitions of

foreign currencies to repay any previous swap drawings, but if it
started from a balanced position it would not be able to intervene
unless the Desk could hold foreign currency balances.
In response to a question by Mr. Coldwell, Mr. Volcker
said he presumed that Desk acquisitions of foreign currencies
would result primarily from market intervention operations.


he could imagine some exceptional circumstances that would justify
other acquisitions, he did not believe that buying foreign cur
rencies solely to build up balances would be desirable as a general
Mr. Holmes said he did not think there was necessarily a
conflict between an expectation of cyclical movements in the
System's foreign exchange position, which Mr. Holland appeared

to have in mind, and the notion of System intervention to prevent



disorderly markets.

It was almost a foregone conclusion, if the

dollar was weakening, that there would be days when the dollar
would be disorderly on the downside and intervention would be
appropriate under almost any intervention rule.

Conversely, if

the dollar was strengthening, there would be days when it tended
to become erratic on the upside and the Desk would want to acquire
foreign currencies.
Mr. MacLaury commented that there still seemed to be a
difference between Mr. Volcker's interpretation of the purposes
for which foreign currency balances might be acquired and what
he understood to be Mr. Holmes' view.

The difference came down

to a question of whether or not one expected the central bank to
operate around a zero balance over time.

The issue was very

subtle--if indeed it wasn't completely arcane--because in the
real world one could never be sure whether $150 million on either
side of zero was not in fact equivalent to zero.

Nonetheless, it

seemed to him that, conceptually at least, one could be talking
either in terms of aiming over time for a zero balance--assuming
the dollar was in equilibrium--or for some positive balance.
Perhaps the issue was more a matter of academic interest than
one of concern to market operators.

The Committee was not talk

ing about building up balances that were so large as to make any
real difference in practice.



Mr. Wallich commented that a test of a neutral interven
tion policy--one that did not counter fundamental trends--was
whether the System accumulated net balances over time.

He was

not referring to holdings of small balances, as recommended by
Mr. Holmes, which could serve a useful purpose late in the day
when it might not be feasible to make arrangements to draw on a
swap line.

Another test of whether intervention was being limited

to the correction of disorderly market conditions in both direc
tions was whether operations yielded net profits.
Mr. Pardee said he thought the latter would be true only
if the exchange rate was stable.

If the rate was moving persis

tently in one direction or the other, the System could lose money
in the process of trying to cushion disorderly market movements.
The System could not be sure about the trend in the exchange rate
and, of course, that was a reason for being cautious in market
Mr. Wallich said that if operations were limited to
leaning against the wind, rate fluctuations in both directions
should enable the System to avoid losses over time even though
there might be a trend in exchange rates.
Mr. Mitchell inquired whether the Treasury, in its
agreement with the French at Rambouillet, had in effect changed
the ground rules for System intervention in the foreign exchange
market without consulting the Committee.



Chairman Burns said he did not think the agreement had
changed any ground rules, although its tone suggested that
intervention might be more active than in the past.


the language of the agreement was so loose that its meaning
could be determined only in the course of experience.
Mr. Wallich observed that the language appeared to have
been broadened by the introduction of a reference to "erratic
markets" in addition to "disorderly markets" in describing the
reasons for intervention.
Chairman Burns added that the term "erratic" was used
as a synonym for "disorderly" in one passage of the agreement.
In another passage, however, a distinction was made between the
two, but it was not defined.

The language was


Mr. Mitchell then asked Mr. Holmes whether, as a result
of the Rambouillet agreement, he intended to recommend any changes
in the Committee's guidelines for market intervention.
Mr. Holmes replied in the negative, noting that the Sub
committee on Foreign Currency Instruments was examining that

In his view, the agreement did not change anything


It might be described as calling for a bit more

of the same kind of intervention.
Chairman Burns said he would answer Mr. Mitchell's ques
tion a little differently.

He thought the American position on



intervention would be unchanged, and he did not anticipate a
need to alter the Committee's guidelines as a result of the

It was an evolving situation, however, and he

would not rule out the possibility that some day the Committee
would be asked to change those guidelines.

In any case, the

Committee's authority over the System's foreign exchange opera
tions was undiminished, and no changes in foreign exchange
operations would be made without authorization by the Committee.
Mr. Mitchell asked whether the System's losses on its
foreign operations were shown separately in the Board's Annual
Report to the Congress and whether the loss on such operations
would be larger in 1976 than in 1975.
Mr. Pardee said profits or losses on foreign exchange
operations were shown in the Annual Report.

In recent years

losses on such transactions had been reported and had been
attributed to the devaluations of the dollar since late 1971.
Whether losses would be greater in 1976 than in 1975 would
depend upon the outcome of negotiations with the Swiss.
Mr. Holmes added that, as Mr. Pardee had indicated,
the System was now taking losses that had been incurred when

dollar was devalued in 1971 and 1973.

He had felt a

little uneasy over the fact that the System swap debts were



carried on the books at rates that did not reflect the changes
in currency values since 1971.

The Treasury had revalued its

foreign currency debts a long time ago.
Mr. Volcker observed that the Treasury had announced
the losses on its foreign currency indebtedness at the time of
both devaluations and he believed that the System had done so
as well.
Chairman Burns said he had called the losses to the
attention of the Congress during the course of testimony.1/
He had also pointed out that the losses were offset by gains
from the increase in the official price of gold.
Mr. Mayo inquired whether an argument could be made
in favor of amortizing the loss on the Swiss franc debt over
a period of years rather than taking it all at one time.
Mr. Holmes said he thought the matter could be argued
either way.

Since the losses arising from the two devalua

tions of the dollar had already been announced, however, it
seemed to him that nothing was to be gained by not taking them
all at once.

1/ Chairman Burns testified on the System's losses from
devaluations on March 2, 1972 before the House Committee on
Banking and Currency; on September 15, 1972 before the Sub
committee on International Exchange and Payments of the Joint
Economic Committee; and on March 7, 1973 before the Subcom
mittee on International Finance of the House Committee on
Banking and Currency.



Mr. Volcker noted that the System's losses on Swiss
francs included not only those resulting from the two devalua
tions of the dollar but also further sizable amounts stemming
from the appreciation of the Swiss franc in the market.
Mr. Holmes said some part of the loss from the appre
ciation of the franc would be taken by the Swiss.


the loss would be reduced if the dollar strengthened against
the franc.

He thought that at this time the System should take

only the losses resulting from the devaluations and that it
should take any further losses resulting from exchange market
developments as the swap drawings were repaid.


might be given to establishing an account to reflect the
potential loss arising from the changes in exchange rates
that had occurred since the formal devaluations and to amor
tizing such loss over time.
Mr. Mayo observed that Mr. Holmes' approach seemed
Chairman Burns asked whether there were any comments
concerning Mr. Holmes' recommendation for rewriting the System's
Swiss franc debt to take account of the dollar devaluations in
1971 and 1973.
Mr. Holland commented that in principle he favored
rewriting the Swiss franc debt and recording the associated



losses, as Mr. Holmes had proposed.

Given the size of those

losses and the further losses stemming from the appreciation
of the Swiss franc in the market, however, he believed it
would be useful for the Committee to endorse some general
principles for taking losses rather than to make decisions
on an ad hoc basis.

He realized that such principles lay

behind Mr. Holmes' recommendations and he thought he agreed
with them.

Nevertheless, he felt that Mr. Holmes should pro

vide the Committee with a memorandum setting forth his philos
ophy of loss-taking, of which Committee action on the debt in
Swiss francs would be one part, even though action on the
Swiss franc debt would have to be put off until the next

In that connection, he believed it made good sense

for the Committee to establish a reserve for losses that
might be incurred in foreign exchange transactions.


advantage of such a reserve would be to give the System more
flexibility in the timing of its losses.
Mr. Holmes remarked that earlier action to adjust
the Belgian franc debt for the two devaluations provided a
precedent for rewriting the Swiss franc debt.

He recommended

action now with respect to that part of the loss, which had
been agreed in principle for years and had already been

The question of further losses stemming from



movements in market rates was somewhat different and was one
He would prepare a

that he would prefer to keep separate.

memorandum that would recommend an approach to such losses.
Mr. Holland said he agreed with Mr. Holmes' recommenda

He hoped the memorandum would include recommendations

concerning losses due to any future devaluations as well as
those due to changes in market rates.

He suggested that a

case could be made for spreading the losses in Swiss francs
over 2 years.

For example, the loss of $195 million result

ing from the two devaluations might be put in 1975, while
some of the losses stemming from the market appreciation
of the Swiss franc might be taken in 1976.
Mr. Mitchell commented that if as much as 5 years
might be required to liquidate the System's drawings that had
been outstanding for so long, he would not take losses above
those caused by the devaluations of the dollar until the debts
were paid off.

To proceed otherwise would be similar to

requiring banks to revalue their security holdings at market
prices, which served no useful purpose.

In developing a

philosophy for System losses on debts in foreign currencies,
one had to keep in mind the possibility that changes in exchange
rates over the last couple of years would be reversed.



Chairman Burns said he would conclude from the Committee's
discussion that the members wanted to proceed very cautiously.
They were not interested in intervening on a large scale, and
if the amount of intervention was to be increased, the Committee
would want to proceed deliberately.

That was the inference he

drew from the comments made by members of the Committee, and in
due course the Committee's thinking would have to be communicated
to the Treasury.
In response to the Chairman's inquiry, the members
indicated their agreement with his summary.
By unanimous vote, an adjust
ment in the exchange rate on the
System's outstanding Swiss franc
swap debt, to reflect the December
1971 Smithsonian realignment of cur
rency values and the February 1973
devaluation of the dollar, was
Chairman Burns then noted that the Committee's foreign
currency authorization set a limit of $250 million on System
holdings of uncovered foreign currencies.

In keeping with

Mr. Holmes' recommendation and the Committee's discussion,
he suggested that the Desk not acquire more than $150 million
equivalent of foreign currencies without consulting further with
the Committee.
There was no objection to that suggestion.



By unanimous vote, the
System open market transactions
in foreign currencies during the
period November 18 through
December 15, 1975, were approved,
ratified, and confirmed.
Secretary's note: Notes by Governor Wallich on the
December BIS meeting, which were distributed at this
meeting, are appended to this memorandum as Attachment A.
Chairman Burns then called for the staff report on the
domestic economic and financial situation, supplementing the
written reports that had been distributed prior to the meeting.
Copies of the written reports have been placed in the files of
the Committee.
Mr. Gramley made the following statement:
Recent incoming statistics indicate a further
slowing in the pace of economic expansion. Last
month, industrial production rose by just 0.2 per
cent, as growth in output of materials was appre
ciably smaller than in earlier months. Production
of business equipment, after declining in October,
rose a little in November, and most other categories
of industrial output also showed small gains.
In the labor market, the slowing pace of
expansion was evidenced in November by a rise of
just 40,000 in nonfarm payroll employment, by a
further reduction in the proportion of nonfarm
industries adding to their work forces, and by a
small decline in the average length of the factory
workweek. The fall in the unemployment rate, to
8.3 per cent, was the result of a sharp reduction
in the civilian labor force.
There have been some concurrent indicators of
economic activity showing a stronger performance
recently. For example, housing starts rose 15 per
cent in October, and the November rate of residential
construction activity increased 5 per cent from the


October pace.


Estimates of retail sales for

September and October were revised upward, and
the advance figure for November indicates a fur
ther gain of 1 per cent. The weight of evidence,
however, points to more slowing in the pace of
expansion during the fourth quarter than the staff
had bargained for a month ago. Our present estimate
is that real GNP will increase at around a 5 per cent
annual rate this quarter--a very sharp reduction from
the double-digit pace of the past summer.
The current lull in the pace of activity has
generated uneasiness in the stock market and else
where that the economic recovery may already be falt
ering. The issue is clearly of substantial importance
for monetary policy, and I would therefore like to
spend the bulk of my time this morning dealing with
this question. I have passed out a few charts that
may be helpful to the discussion.1/
The first point I want to make is that temporary
slowdowns in the course of a cyclical expansion are
not uncommon. The first chart, covering the last
few decades, shows six earlier periods--indicated by
the rectangular boxes--in which the rise of industrial
production faltered--for reasons not readily explain
able by strikes--but then resumed again instead of
culminating in a cyclical downturn. Some of those
pauses lasted just 2 or 3 months; others, as in 1962,
were rather prolonged. And there were about as many
of those temporary periods of very slow growth as
there were cyclical declines, which are indicated by
shading. Thus, a slowdown such as we have experienced
recently may or may not have predictive value; we need
to know why it happened.
One source of the recent slowdown has been the
response of producers to the leveling out of consumer
buying during the late summer and early fall months
shown in the next chart. Total retail sales in con
stant dollars, shown in the upper right-hand panel,
began rising much earlier in the current recession
and recovery than they had in the 1957-58 cycle, but
the extent of recovery to date in total retail sales

1/ Copies of the charts referred to are appended to this
memorandum as Attachment B.



has been about the same as in 1957-58. The recovery
in consumer goods production, however, has been con
siderably less this time than in the 1957-58 cyclefor both durable and nondurable goods--as businesses
have been following very conservative inventory
policies. Since inventory positions of retailers
are in quite good shape now--perhaps even on the
lean side for nondurable goods--any significant
rise in real consumer purchases would likely elicit
a fairly prompt production response. Consumer buy
ing has strengthened since September and appears to
be gathering some momentum. Total retail sales in
the last 2 weeks for which we have data have been
fairly strong, and we hear reports from various
sources, including the red book,1/ of heavy Christmas
buying. Domestic new car sales also rose in the
first 10 days of December to an 8-1/2 million annual
rate. It therefore seems reasonable to expect a
renewed upswing fairly soon in consumer goods produc
tion--especially for nondurables.
A second source of the recent slowdown is found
in developments in the materials-producing industries,
shown in the next chart. Output growth in these
industries has slowed a good deal during recent
months. Production of nondurable materials fell much
more during the recent recession than in the 1957-58
cycle, and it also rebounded more during the first 7
months of recovery. For durable materials, the re
covery of production has been weaker this time than
in 1957-58. In part, this reflects the relatively
moderate improvement thus far in final demands for
durable goods, especially business equipment. But
it also reflects a heavy overhang of inventories of
durable materials at the onset of the recession; these
excess stocks have not yet been worked off.
We have developed from the production index a
measure of the monthly change in physical inventories
of materials, shown in the bottom panel. These inven
tories are still being liquidated, though at a less
rapid rate than a few months ago. While we cannot
break down this inventory measure into its durable
and nondurable components, collateral evidence indi
cates that the liquidation going on now is in the
durables area.
1/ The report, "Current Economic Comment by District,"
prepared for the Committee by the staff.



The fact that inventories of durable materials
are still relatively high is a negative factor in
the business outlook. But the continued liquidation
of materials inventories at this stage of the cycle
is a favorable sign. It means that even if real
final demands do no better than hold to present
levels, production of materials--and especially
durables--will eventually have to rise from current
rates to prevent an undue runoff of stocks. An
increase of real final demands for durables would,
of course, strengthen measurably the outlook for
production of durable materials.
A likely source of expanding final demands for
durables in the months ahead is a rise of business
fixed capital outlays, plotted on the next chart.
Production of business equipment has shown few
signs of recovery thus far, but corporate profits
are rising rapidly, and advance indicators of plant
and equipment spending are beginning to show improve
ment. The recent Commerce survey of anticipations
indicates a probable increase in current dollar
expenditures of around 10-1/2 per cent, at annual
rates, between this quarter and the second quarter
of 1976. In recent years, the November Commerce
survey has been fairly accurate in forecasting
expenditures over the next half year. An upturn
of business fixed capital outlays in the months
ahead thus seems a pretty good bet.
This line of reasoning has led the staff to the
view that the current recovery is not now in serious
danger of aborting, and our real GNP projection for
1976 in this green book 1/ is about the same as it was
a month ago. We are still expecting real GNP growth
over the four quarters of 1976 to average between
4-1/2 and 5 per cent at an annual rate. This is a rela
tively moderate growth rate, but it would be enough to
reduce unemployment by about one-half percentage point
by the fourth quarter of next year.
Our price projections are also about the same as
they were a month ago. We still anticipate a further
moderation in the pace of inflation to around a 5 to
5-1/4 per cent annual rate by late next year, as mea
sured by the fixed-weight price index for private GNP.
1/ The report, "Current Economic and Financial Conditions,"
prepared for the Committee by the Board's staff.



I should alert the Committee, however, to the fact
that we have made no allowance in this projection
for any effects on food prices of a possible resump

tion of sizable grain purchases by the Soviet Union.
Such a development does not seem likely at this time,

but there is some danger of more pressures on farm
and food prices from this source than we have allowed

In reply to a question by Mr. Coldwell, Mr. Gramley
observed that there had been a sharp increase in production of
consumer goods beginning in March of this year and then a definite
tapering off in the last several months.

As he had indicated in

his statement, he expected a renewed upswing fairly soon.
Mr. Kimbrel noted that in conversations with businessmen
in the Atlanta District during recent weeks he had heard a sur
prisingly large number of expressions of concern about the pos
sibility that wage and price controls would be reimposed.
Chairman Burns remarked that the uneasiness to which
Mr. Kimbrel had referred probably could be attributed to a number
of factors.

They included the revival of incomes policies in

Great Britain and the Netherlands, the spread of sentiment for
such policies on the continent, the wage and price freeze in
Canada, the acceleration of the rise in U.S. price indexes since
midyear, and the likelihood of large wage increases in forthcoming
collective bargaining settlements in this country.
Mr. Kimbrel then observed that in his District actual trans
actions prices appeared to be deviating from list prices

for many



He asked whether that phenomenon was occurring

nationally, and if so, whether the staff had taken it into account
in its projections.
Mr. Gramley replied that he had heard reports of the kind
Mr. Kimbrel had mentioned, particularly with respect to the metals
industries, where it was alleged that recent price increases had
Such reports

not held because of the persistence of excess stocks.

had contributed to the staff's judgment that efforts to raise prices
now for the purpose of increasing profit margins were likely to be
more or less self-limiting.

As a result, the rate of price advance

projected for 1976 was roughly in line with the expected increase
in unit labor costs.
Mr. Partee added that the specific price measure used in the
staff's projections--the gross private product fixed-weight deflatorwas composed mainly of elements of the consumer price index, which
in turn was based on prices actually prevailing in the market.
Accordingly, fictitious increases in list prices were not likely
to pose a serious problem for the staff's projections.
Mr. Eastburn observed that he had talked with a number of
corporate executives during the past week or two in an effort to
determine the extent to which changes in list prices were illusory.
The impression he had received was that list prices were holding
rather firmly for metals.

There was some discounting for chemicals,

but even in that area, list prices were fairly firm.




further increases in list prices were anticipated, and they were
expected to hold fairly well.
The Chairman observed that the problem of possible dif
ferences between list and transactions prices applied mainly to
the industrial component of the wholesale price index.


Mr. Partee had noted, it applied not at all to the consumer
price index and only in small degree to the fixed-weight
private GNP deflator, on which the staff relied so heavily.
In response to a question by Mr. Francis, Mr. Gramley
said that manufacturers' rebates were reflected in the price
figures for automobiles used in the consumer price index.
Mr. Winn remarked that there were some questions in his
mind about the projected upturn in business fixed capital out

First, it was his impression that a change had occurred

in business thinking:

businessmen had become more concerned

about current profits and less about market shares.


part of the anticipated capital expenditures would represent man
dated outlays for pollution control, and thus would not contribute
to production capacity.

Finally, he could detect no evidence that

businessmen were expecting increases in interest rates next year
of the magnitude projected by the staff; in particular, they did
not seem to be scrambling now to arrange financing for their
planned capital outlays.

That, of course, might be explained by

the highly liquid condition of many industrial firms.

But such



firms presumably would have to resort to external financing at some
point, and if they encountered higher interest rates than they now
expected, many of them might well cut back on their expenditure plans.
Mr. Morris observed that Mr. Gramley's final chart
reflected figures on anticipated capital outlays in dollar

If the figures charted had been expressed in real terms

the outlook would, of course, have appeared much weaker.
Mr. Morris added that Mr. Gramley had made a valid point
when he noted that slowdowns like the present one had often
occurred during past recoveries without leading to cyclical

It should also be noted, however, that the financial

constraints now affecting the economy were greater than had
existed at so early a stage in any prior business expansion
within his memory.

Accordingly, he found the charts distributed

today less reassuring than Mr. Gramley evidently did, and he
thought the Committee had to be alert to the fact that the risk
of aborting the present recovery was rather high.
Chairman Burns remarked that if by "financial constraints"
Mr. Morris meant the level of interest rates and the mood of
caution that had spread through the business and banking community,
he was undoubtedly correct in observing that the constraints were
now greater than in past recoveries.

However, corporate profits

had risensharply thus far in the current expansion.
course, was a source of financial strength.

That, of



Mr. Volcker observed that, even after the recent sharp
rise, the level of corporate profits relative to GNP remained
low by historical standards.
Mr. Gramley said he might make one point in response to
Mr. Morris' comments.

He hoped that the Committee had not inter

preted his remarks today to indicate that the staff had changed
its basic view of the outlook to one of great optimism.


some time the staff had been forecasting a relatively weak over
all recovery because of basic problems in a number of industries,
including problems resulting from the existing financial con

The staff still held to that view; under its latest

projections, the rate of growth in real GNP would slow in 1976
to the 4-1/2 to 5 per cent area and unemployment at year-end
would still be quite high.

The point he had intended to make

this morning was that recent developments had not caused the
staff to modify its general view of the outlook.
Mr. Wallich observed that the recent rise in corporate
profits was due in good part to large increases in productivity,
and that a slowing of the rate of growth in real GNP ordinarily
would be associated with an increase in unit costs.

He asked

whether the staff expected the rise in productivity to remain
substantially above normal even if the rate of growth in real
GNP fell to 4-1/2 or 5 per cent.



Mr. Gramley replied that the staff expected the rise in
productivity to fall back to the neighborhood of the long-term
trend rate, which was about 2-3/4 per cent.
Mr. Wallich then asked whether the staff thought a down
trend in the rate of inflation was likely, given the apparent
rise in corporate profit margins and possible difficulties in
upcoming wage negotiations.
Mr. Gramley replied that the staff was projecting a
relatively moderate reduction in the rate of inflation--to a
rate of about 5 per cent by late 1976.

Even if profit margins

did not rise further, aggregate profits were expected to con
tinue to increase as economic activity expanded.
In response to a question by Mr. Black, Mr. Gramley said
the Bureau of Labor Statistics for some time had been working on
a revision of the wholesale price index.

It was his understand

ing that the revision would apply to future measurements and
would not be carried back to historical periods.
Mr. Francis said he rather liked the outlook for real

portrayed in the staff's projections because its contour

was somewhat less cyclical than in many past recoveries.


had been no real hope that the rapid rate of growth of the third
quarter could be maintained.

While continuing growth at a rate

in the range of 4-1/2 to 6 per cent might represent a somewhat



slower recovery than many observers would like to see, such
growth might make it possible to avoid a later need to adopt
restrictive economic policies.
Mr. Baughman remarked that in recent conversations with
businessmen in his District he had found an erosion of confidence
with respect to the continuing strength of the economy.


reason for that erosion was a lessening in the flow of new orders
and a decline in the backlog of outstanding orders.

He wondered

whether similar developments were apparent on a national scale.
Mr. Gramley replied that the circumstances underlying
such attitudes no doubt were the same as those leading to the
decline in the rate of increase of industrial production in
October and November.

In his judgment that slowdown, which

affected orders as well as other economic magnitudes, would not
persist; a resumption of orders was likely, particularly for
nondurable goods--and also, after some time, for durable goods.
Chairman Burns observed that he had asked the staff to
prepare a list of the economic statistics that had become avail
able since the November meeting of the Committee.

Because they

were of general interest, he would cite some of the figures in
the list, starting with the monthly figures showing increases,
whether large or small.



In October, the Chairman noted, private housing startsa physical volume series--rose 15 per cent.

Personal income

increased at an annual rate of 12 per cent.

Machine tool orders

rose 4.9 per cent.

New orders for manufacturers' durable goods-

a series bearing on Mr. Baughman's point--rose 0.3 per cent.
Orders for nondefense capital goods--which, looking to the
future, might be a more significant series--rose 4.2 per cent.
Value of construction contracts awarded went up 6 per cent.


struction contracts for commercial and industrial floor space, a
physical unit measure, rose 8 per cent.
In November, the Chairman continued, construction expen
ditures rose 2 per cent in both current and constant dollars.
In October the dollar value of shipments of manufactured goods
rose 1.5 per cent.

In November the unemployment rate fell to

8.3 per cent and nonfarm payroll employment rose 41,000.


sales--a dollar value series--had been revised up for September
and October and rose 1 per cent in November.

In October sales

of existing homes were up 2.5 per cent, and in November industrial
production rose 0.2 per cent.
Next, Chairman Burns said, he would list the monthly
series that were unchanged or declined.

Unchanged in October

were residential building permits, new home sales, and real
earnings--that is, average hourly earnings deflated by the



consumer price index.

In November hours of employment in

manufacturing fell 0.25 per cent, the household survey figures
on total employment declined 163,000, and the average manufactur
ing workweek fell 0.1 of an hour.

In October new home sales

were unchanged.
Turning to the weekly and other series, the Chairman
noted that in recent weeks retail sales had strengthened
and unemployment insurance claims had shown no change.
Domestic auto sales rose in the first 10 days of December.
Chairman Burns said he might mention a few other recent

The New York crisis had abated; the City's situa

tion looked better now, and municipal bond yields had declined.
Finally, he had heard reports that the figures for housing starts
in November would show a decline, and that the Commerce Depart
ment's current estimates of real GNP suggested a larger rise in
the fourth quarter than the Committee's staff was currently
Mr. Morris remarked that tensions in the market for
municipal bonds were now related more to the financial problems

New York State than to those of the City.

In view of the

potential impact of New York's problems on New England States
and on State and local spending in general, he asked whether
Mr. Volcker had

an appraisal of the prospects for resolving



In response, Mr. Volcker observed that a coherent assess
ment of the situation probably could not be made at this time.
An intense political debate was in progress over the means of
balancing the State's budget.

All sides agreed in principle

that the budget should be balanced, but estimates of the size
of the prospective deficit varied greatly and ranged up to $700

Governor Carey held that the State government ought

to act now--and immediate action made economic sense in that it
would have a calming effect on financial markets--but for various
reasons his political opposition preferred to delay action until
after the beginning of the new year.
Continuing, Mr. Volcker said New York State agencies
were limping along from month to month in meeting their obliga

At 11:30 last night a law finally had been enacted,

which--as he understood it--committed a State insurance fund
to sell holdings of Federal agency and Treasury securities to
a syndicate of banks and other financial institutions in order
to acquire funds to lend to the State Housing Finance Agency,
enabling the latter to redeem securities that matured yesterday.
The redemption was accomplished by 11:55 p.m.

Repetition of

that kind of process would undermine confidence in the market.
Mr. Volcker observed that several of the smaller school
districts in the State were unable to raise funds in the market in



the normal way.

None had yet gone into default, but defaults had

been avoided by last minute rescues, typically achieved through a
combination ofa small amount of funds from the State and of
the proceeds of a private placement with one or more local banks.
It was uncertain whether that process could be relied upon for
very long.

In summary, confidence had eroded further, and it

was not likely to be restored until the State took decisive

The credit of the State agencies was dependent on the

credit of the State.
Mr. Morris noted that 2 months ago the Massachusetts
legislature had approved a balanced budget, but the market for
the State's obligations had not returned to normal.

He asked

Mr. Volcker whether he had reason to think that New York's
experience would be different.
Mr. Volcker replied that he did not.

However, the State

was in a more or less fortunate position in that essentially it
would have sufficient funds to redeem all of its securities
maturing until late March, and it had no additional short-term
obligations beyond March.

However, from the last day of March

through the second quarter it would have to finance a deficit
of $3-1/2 billion to $4 billion.

If the State acted promptly

to balance its budget, it would have a few months in which a
climate of market receptivity might be restored.

The idea was



to balance the budget--not in this fiscal year, which was not
possible, but over this and the next fiscal year combined--in
order to demonstrate that the borrowing required next spring
would be repaid from revenues in the following winter.


then, it was doubtful that the deficit in the spring could be
financed through normal market operations.

A substantial volume

of funds probably would be available from the State pension funds,
but a sizable amount would remain to be financed.

The question

was whether the State would take the fiscal actions necessary to
lay a foundation for an abnormal kind of financing operation
through some sort of a nation-wide syndicate of banks or in some
other manner.
Mr. Mayo remarked that he would add price indexes for
common stocks to the Chairman's list of statistics becoming
available since the November meeting.

The failure of stock

prices to respond significantly to the improvement in the
New York City financial situation was one of a succession of
disappointments in the market.

That was a source of concern,

even if the relationship between the behavior of the market and
subsequent economic developments was rather loose.
Before this meeting there had been distributed to the
members of the Committee a report from the Manager of the System
Open Market Account covering domestic open market operations for



the period November 18 through December 10, 1975, and a supple
mental report covering the period December 11 through 15, 1975.
Copies of both reports have been placed in the files of the
In supplementation of the written reports, Mr. Sternlight
made the following statement:
In aiming for moderate growth of the monetary
aggregates since the last meeting of the Committee,
Desk operations were directed steadily at maintain

ing a climate of reserve availability consistent with
Federal funds remaining around 5-1/4 per cent. It
was contemplated at the time of the last meeting
that the Account Management would, after about a
week, encourage a move from the then-prevailing

5-1/4 per cent funds rate to a point midway in the
agreed 4-1/2 to 5-1/2 per cent Federal funds range.
However, evidence on the aggregates received early
in the period suggested greater-than-expected
strength, and thus a more accommodative stance
did not appear appropriate. Toward the close of
the interval, data on the aggregates provided a
more mixed picture--with M1 expected to be in the
lower part of its preferred range for November
December and M 2 in the upper part of its range,
though with both aggregates relatively strong in
the November portion of the period for which
actual data were available. In these circumstances,
given also that today's meeting was then but a few
days off, the Account Management continued a steady
policy of reserve availability.
Close attention was paid throughout the period
to financial market developments, giving particular
care to the New York situation. While a number of
uncertainties remained in regard to New York City,
State, and State agency finances, the over-all situa
tion appeared much less bleak after the President's
Thanksgiving eve endorsement of limited seasonal
financial assistance for the City.



Following the typical pattern of recent months,
the Desk provided reserves in large size in the early
part of the inter-meeting period to offset the need
from such factors as the rising Treasury balance.
Outright purchases in the opening days of the period
included $354 million of Treasury coupon issues and
$921 million of bills. Reserves were also supplied
through repurchase agreements. Later, as market
factors supplied reserves, including the usual early
in-the-month run-down in Treasury balances, reserves
were withdrawn through the redemption of $400 million
of Treasury bills and extensive use of day-to-day
matched sale-purchase transactions. Projections indi
cate a very large reserve need for the week beginning
December 18, and it will most likely be appropriate
to meet an appreciable part of it through outright
purchases of Treasury and agency securities. Indeed,
we got a small start on that job yesterday by purchas
ing $204 million of bills from foreign accounts, and
we may buy agency issues today.
Interest rate changes were relatively moderate
during the past inter-meeting period. Bill rates
have risen by some 4 to 20 basis points as the market
continued to absorb fresh supplies from the Treasury
against the background of steady day-to-day conditions
of reserve availability. In yesterday's auction of 3
and 6-month bills, average issuing rates were 5.49 and
5.91 per cent, respectively, compared with 5.47 and 5.80
per cent just before the last Committee meeting. With
day-to-day fi ancing costs holding below these levels,
dealers have been willing to hold large inventories of
Yields on Treasury coupon issues also rose modestly
over the period--most issues were up in the range of
about 5 to 20 basis points. Much of the rise came in
reaction to reports of large money supply increases
and attendant concern that the System might move to
a firmer stance. Anticipation of new Treasury sales
of coupon issues also placed some upward pressure on
yields, but with actual new sales temporarily at low
ebb, dealers managed to work down their inventories of
issues having maturities in excess of 1 year by nearly
$1.5 billion during the period. That respite in new

issuance is now at an end, and today the market is
bidding on $2.5 billion of 2-year notes to refund a



maturing issue and raise $1 billion of new cash. Next
Monday, the Treasury will auction $2 billion of 4-year
notes for payment in early January, thus getting a start
on the very heavy cash needs of the next quarter.
The corporate and municipal markets registered
little net change for the full period. Corporate
issues were under pressure at times, as the market
worked through a fairly heavy calendar in early
December, but a better tone had emerged by the close
of the period, possibly reflecting views that the pace
of business recovery, and credit demands, would be
moderate for some months to come.
Developments in the tax exempt market remained
mixed and still burdened with questions about the
New York City and State situations. The passage of
legislation to provide temporary Federal aid for
New York City was helpful to the markets, although
considerable uncertainties remain about the legality
of the State-imposed moratorium on repayment of
maturing City notes. Questions remain, too, about
the finances of New York State and its agencies,
although there has been progress in recent days in
recognizing the underlying budget realities facing
these borrowers.
By unanimous vote, the open
market transactions in Government
securities, agency obligations,
and bankers' acceptances during
the period November 18 through
December 15, 1975, were approved,
ratified, and confirmed.
Mr. Axilrod made the following statement on prospective
financial relationships:
I can be very brief this morning, since our
basic financial outlook is little changed from what
it was at the previous meeting. We still expect
interest rates to rise gradually during the first
half of next year in order to keep the monetary aggre
gates on target. But the timing of the projected
rise is once again a little further in the future
than it was, and the degree of rise is a shade less
than indicated at the last meeting and considerably
more moderate than expected last summer.



A new development affecting interpretation of
the monetary aggregates in the period immediately
ahead is the sizable increase that has been occurring
in corporate savings deposits at banks. Such deposits
were permitted by regulation beginning November 10.
The staff believed that these accounts would begin
growing quite slowly. That turned out to be an
erroneous assumption.
Through December 3, these accounts at weekly
reporting banks expanded by $530 million. The
increase was concentrated outside the major money
center banks. Thus, the accounts would appear to be
attracting mainly medium- and smaller-size businesses,
and it is therefore reasonable to believe that at
least a similar rise occurred at other, non-weekly
reporting banks. It would also be reasonable to
believe that at least half, and probably more, of
the funds represented shifts from demand deposits.
We believe that recent M1 growth has been reduced
by 1 to 1-1/2 percentage points because of shifts out
of demand into savings accounts in response to the
new regulation. Our expectations for M1 growth in
the December-January period have also been reduced by
about that amount because of continuation of such
These shifts in funds out of demand into savings
accounts rather clearly entail a reduction in the
demand for M1 for any given GNP and level of interest
rates. Thus, the Committee would probably wish to
make explicit allowance for them by permitting some
what lower M1 growth than otherwise during the transi
tion period. M 2 would, of course, not be affected by
shifts out of demand deposits. However, to the extent
that some of the funds going into saving accounts come
out of market instruments, there would be a slight
upward influence on M 2 .
We have assumed that the transition period over
which corporations readjust deposit holdings to the
new regulation will be relatively short. Specifically,
we expect one-time stock adjustments to be virtually
completed by late winter. As a result, we anticipate
that M1 targets would be affected for only a few
months or so. Nevertheless, we cannot be certain of
the length of the transition period nor of the size
of the adjustment. Thus, the recent behavior of

corporations, and attendant uncertainties, once again



illustrate the essential instability of M1 in the
short run and the need to take account of broader
measures of money, as well as M1, in setting guide
lines for open market operations.
Mr. Balles asked for the staff's latest projections of
growth in M

and M2 in December.

Mr. Axilrod stated that on the basis of the old seasonals
December growth was projected at annual rates of 2.0 per cent
and 6.5 per cent for M1 and M2, respectively.

Based on the new

seasonals, growth in M1 and M2 was projected at rates of 0.8
per cent and 5.9 per cent, respectively.
Mr. Holland asked whether any adjustments to the December
January ranges of tolerance for growth in M1 and M2 had been made
to take account of the shift in business deposits from demand to
savings accounts.
Mr. Axilrod replied that the assumption of continuation of
the shift had caused the range for M1 over the 2-month period to be
about 1-1/2 percentage points lower than it would have been and the
range for M 2 to be about 1/2 percentage point higher than otherwise.
In response to questions by Mr. Mitchell, Mr. Axilrod said
the staff was planning to make a special survey soon after the end
of the year in order to obtain a benchmark total of business sav
ings accounts at commercial banks.

He had assumed that the total

was twice the amount indicated by weekly reporting member banks,
but that estimate could be off by a considerable amount.



Mr. Wallich observed that staff projections of growth in
the money supply had been significantly in error and that the cur
rent level of interest rates was associated withamuch lower volume
of money than had been anticipated.

In other words, the income

velocity of money had increased without a rise in interest rates.
As Chairman Burns had indicated on past occasions, monetary velocity
had been extraordinarily flexible.

He wondered what the equations

now were suggesting about the behavior of the money supply and
whether, as he had heard, the New York Bank staff's equations
over-predicted growth in the money supply to an even greater
extent than did the Board staff's equations.
In response, Mr. Axilrod said he was not familiar with
New York Bank projections of monetary growth over the longer run.
For the short run--the December-January period--the New York Bank
had projected a somewhat lower rate of monetary growth, at given
interest rates, than had the Board staff.

The staff's projection,

in turn, was somewhat lower than that suggested by its model.
In view of the recent projection errors of the model, the staff
had tended to lower the level of interest rates it associated
with any assumed rate of monetary growth.

In other words, the

staff now was assuming less demand for money, given nominal GNP,
than it had earlier.



Mr. Volcker commented that after watching the performance
of the money market equations for some time, he had concluded that
none was any good.
Mr. Wallich remarked that the equations seemed to have
performed reasonably well for a long time.

However, something

peculiar had happened over the past six quarters.
Mr. Jackson asked why it was that the projected rates of
monetary growth for the third quarter of 1976 shown in the blue

were higher under the most restrictive alternative--C-

than under the least restrictive alternative--A.2/
In response, Mr. Axilrod said the explanation was to be
found in the different behavior of interest rates under the two

Under alternative C, the Federal funds rate was

assumed to begin to move up promptly in the next inter-meeting
period but then to level off at around 6-1/2 per cent in the
second and third quarters of 1976.

Under alternative A, the

Federal funds rate was assumed to decline in the short run and
then to rise sharply in the second and third quarters of next
year to levels higher than under alternative C.


monetary growth under alternative C was slower than under

1/ The report, "Monetary Aggregates and Money Market Conditions,"
prepared for the Committee by the Board's staff.
2/ The alternative draft directives submitted by the staff for
Committee consideration are appended to this memorandum as Attachment C.



alternative A in the first and second quarters of next year and
faster than under alternative A in the third quarter.
Chairman Burns commented that over the period from the
third quarter of 1975 to the third quarter of 1976 growth in M1
under all three alternatives was projected to be 6-1/4 per centthe midpoint of the longer-run range adopted by the Committee.
Therefore, if growth under alternative C was less rapid than
under alternative A in the early part of the period, it had to
be more rapid later in the period.
Chairman Burns then called for a discussion of monetary
policy and the policy directive.

He suggested that in their

prescriptions for policy, members of the Committee not attach
too much weight to minor arithmetical differences.

On some

past occasions when such differences had been debated with con
siderable feeling, the specifics of those debates had been dif
ficult to recall just a month or two later.

He invited the

Committee's Chief Economist, Mr. Partee, to open the discussion
by offering his advice to the Committee.
Mr. Partee remarked that the main point he would like
to emphasize to the Committee today was that the task of
projecting rates of growth in the various monetary aggregates
was particularly difficult for the month of December.

In the

decade or so that he had been involved in making such projections,



he had found December rates of growth in the aggregates the
hardest of all to predict with any confidence, probably because
many business and financial institutions customarily made adjust
ments to cash and debt positions for purposes of year-end finan
cial statements.

He had the impression that in the past the

staff's projections for December had been off the mark by as
much as 10 percentage points; moreover, the projections had not
been consistently above or below the realized rates of growth.
If a probability index relating the staff's monthly projections
to actual monetary growth were constructed, its low point would
most likely be for December.
In addition, Mr. Partee observed, projecting the aggre
gates had been further complicated recently by the difficulty of
analyzing the effects of the November 10th amendment to regula
tions that permitted corporations, partnerships and other profit
making organizations to maintain savings accounts in amounts of
up to $150,000 at member banks.

Not only was the initial stock

adjustment now taking place difficult to assess, but there was
no basis whatever for projecting the extent to which flows into
such accounts might be maintained over coming months.
He had emphasized the difficulty surrounding the projec
tions, Mr. Partee said, because at the moment he could see no
clear reason for the Committee to change the current posture of

The sharp rise in the money supply in November had



brought the level close to the path in line with the Committee's
minimum longer-run rates for growth in the aggregates, and in
interpreting this path some allowance should now be made for the
growth in business savings accounts.

Moreover, he had been per

suaded by Mr. Gramley's remarks that the prospect of a near-term
resumption of the recovery in business activity was good.


ing by historical relationships between indicators of demands
for goods and the index of industrial production, recent develop
ments suggested that output and employment would rise over the
next few months.

Accordingly, he did not see the advent of a

period of economic stagnation ahead; in fact, he thought the
evidence would support the opposite conclusion.
In sum, Mr. Partee remarked, if the Committee ever was
inclined to specify operations in terms of money market conditions,
there appeared to be seasonal grounds in support of doing so in
December and early January.

He saw nothing that would preclude

him from recommending that course to the Committee today.


fically, he would recommend maintaining current money market con
ditions until there were clear indications concerning the course
of the aggregates or of the economy.

Accordingly, he would sug

gest that the Committee narrow the range for the Federal funds
rate and specify, say, 5 to 5-1/2 per cent--a range centered on the
5-1/4 per cent rate prevailing during the period since the previous




He would change the range only in response to some

significant financial or economic development.
Mr. Morris observed that in large part he agreed with
Mr. Partee.

The performance of the aggregates over the past

5 weeks suggested that a 5-1/4 per cent funds rate was compatible
with a healthy rate of monetary growth.

Accordingly, he would

maintain current money market conditions unless evidence to the
contrary emerged.

However, he would not narrow the funds rate

To his mind, the 4-3/4

to 5-3/4 per cent range of alterna

tive B was narrow enough; he preferred to allow the Manager some
leeway should growth in the aggregates prove inconsistent with

While he could accept the funds rate range of

alternative B, he could not accept the specifications for the
aggregates under that alternative.

Those specifications would

call for an increase in the funds rate if growth in M1

over the

December-January period appeared to be exceeding a 6 per cent
annual rate.

In light of the sluggishness of the economy and

the current shortfall in the aggregates from the Committee's
longer-run objectives, he doubted that many members of the Com
mittee would favor an increase in the funds rate if the 2-month
rate of growth in M1 appeared to be greater than 6 per cent.


thought the Committee had been wise last month to widen the ranges
for the aggregates and he would suggest that it do so again today.



Specifically, he favored ranges of 4 to 9 per cent for M1 and
7 to 12 per cent for M 2 .
Mr. Kimbrel remarked that he drew confidence from recent
conversations with business leaders and the directors of his
Bank and also from incoming economic data, and he continued to
feel reasonably optimistic about the economic outlook.


seemed to expect good Christmas sales, and auto manufacturers
appeared to be somewhat more optimistic.

Prospects for a pick

up in business capital spending and in housing appeared to
have improved.

While the behavior of wages and industrial prices

called for close monitoring over the near term, recent develop
ments did not suggest any intensification of inflationary pres

On the other hand, commercial banks and thrift institu

tions appeared to have adequate funds to accommodate demands so
that a step-up in the rate at which the System provided funds
would not seem to serve any worthy purpose at this juncture.
Mr. Kimbrel observed that those considerations led him
to favor the specifications of alternative B, although with the
range for the Federal funds rate narrowed to 5 to 5-1/2 per cent
as suggested by Mr. Partee.

He thought that upward pressures on

interest rates still were in prospect for the near term, and he
would not want to see policy directed toward reducing interest
rates because of the likelihood that any declines would have to


be reversed shortly.

Neither would he want to see rates move

This was a time for stability.
Mr. Coldwell remarked that he was not at all satisfied

with the progress of the recovery recently or with the prospects
suggested by the staff projection--particularly the outlook for
an unemployment rate still

close to 8 per cent at the end of 1976.

In his judgment, it was time for the Committee to take a measure
of stimulative action with a view to achieving a faster rate of
growth in economic activity promptly.

The expansion in consumer

spending that many were counting on to bolster the recovery was,
in his opinion, quite uncertain.

Interest rates were too high,

and bank lending policies were too tight for a period of recovery.
To his mind, the Committee's emphasis on M1 had caused policy to
be erratic and perhaps had contributed to public misunderstanding.

about possible bank failures and about New York's

financial problems had created uncertainties that called for some
counter-balancing action.

In the absence of more monetary stimulus

over the next few months, Congressional uneasiness about the
recovery might generate sizable fiscal actions, which he would
regard as extremely undesirable.
Mr. Coldwell said he agreed with Mr. Partee's observation
concerning the great uncertainty surrounding projections of the
aggregates in this period.

However, he would not narrow the range



for the Federal funds rate; rather, he would widen the ranges for
the aggregates.

Specifically, he would suggest ranges of 4 to 7

per cent for M1 and 7 to 10 per cent for M 2 .

For the Federal

funds rate, he favored continuing the 4-1/2 to 5-1/2 per cent
range specified at the last meeting.
Mr. MacLaury said he agreed with the thrust of Mr. Gramley's
remarks that the economy was currently in a period of pause and not
a period of stagnation.

The extremely rapid and clearly unsustain

able pace of expansion in the third quarter tended to magnify the
recent slowdown.

As he had indicated at the previous two Committee

meetings, he believed that the economy would be stronger in 1976
than projected by the staff, although his confidence in that pre
diction was not very robust.
With regard to the specifications, Mr. MacLaury observed
that his prescription for policy was similar to Mr. Coldwell's,
but for different reasons.

He would set a range of 4 to 7 per

cent for M1--with whatever range for M 2 was consistent with thatand a range of 4-1/2 to 5-1/2 per cent for the Federal funds rate.
He regarded those specifications as representing a policy of no
change, and that was what he favored at this time.
Mr. Jackson remarked that he was in general agreement
with the specifications suggested by Messrs. Coldwell and MacLaury.

he was concerned that the substantial financing demands



anticipated over the next few weeks might exert some upward
pressure on market rates of interest.

Accordingly, he thought

it might be necessary to nudge the Federal funds rate down a
bit in order to maintain the broader spectrum of interest rates
at about prevailing levels.

To achieve the broad concept of

interest rate stability he had in mind, he would advocate a
4-1/2 to 5-1/2 per cent funds rate range--perhaps with an instruc
tion to the Manager to exert slight downward pressure on the rate.
For M1, he favored the widened range of 4 to 7 per cent.
Mr. Francis said he believed that the recovery was
making reasonably good progress.

The extremely rapid rate of

expansion in the third quarter of this year obviously could not
be maintained into the fourth quarter and the quarters that follow.
Consequently, he was not concerned about the leveling off of
economic activity in the current quarter.

For the coming period

he tended to favor the specifications of alternative B in the
blue book--although he saw little difference between those of
alternatives B and C.

He would not narrow the funds rate range;

to his mind, the width of the ranges shown in the blue book would
provide the appropriate degree of flexibility for Desk operations
over the coming inter-meeting interval.
Mr. Mayo remarked that operations during the period
since the last meeting had proceeded quite satisfactorily within



the 4-1/2 to 5-1/2 per cent Federal funds rate range that had
been specified, and he favored continuing that range for the
coming period.

In his judgment, an added degree of flexibility

was called for at this juncture, and he thought it desirable to
depart from the general practice of setting out to move the
funds rate toward the midpoint of its specified range.


ahead 45 days to the publication date of the policy record for
this meeting, a change in the funds rate range--say, to one of

to 5-3/4 per cent or 5 to 5-1/2 per cent--to encompass

a midpoint of 5-1/4 per cent would require more of an explana
tion than he would care to attempt to provide.
With respect to the monetary aggregates, Mr. Mayo said
the current situation presented an excellent opportunity for the
Committee to emphasize to the public that the behavior of both
M and M 2 were taken into account in its decision-making process.
Presently, the projections for M 2 were subject to less uncertainty
than those for M1 .

Like others who had spoken earlier, he favored

widening the 2-month ranges of tolerance for M 1 and M 2 to 4 to 7
per cent and 7 to 10 per cent, respectively.

Those specifications

were consistent with growth in the aggregates at rates within the
Committee's longer-term target ranges.

He interpreted the Com

mittee's longer-term objectives as growth rates within the ranges
specified, rather than at the midpoints of the ranges.

It would



be a mistake to focus on the midpoints.

Accordingly, he pre

ferred to err a little on the side of ease now, even if that
necessitated action to slow the rate of monetary growth later on.
He might note in passing, Mr. Mayo continued, that RPD's
had become obsolete as a short-run policy variable.

On strictly

economic grounds, he would recommend dropping RPD's from the
list of variables for which the Committee set specifications.
However, since the absence of that variable from the list would
be noticed and its presence did no harm, he would retain it among
the specifications until the Subcommittee on the Directive made
its recommendations.
Chairman Burns remarked that he agreed completely with
the specifications Mr. Mayo had suggested.

He favored widening

the 2-month range of tolerance for M1 to about 4 to 7 per cent.
He would continue the 4-1/2 to 5-1/2 per cent range for the Federal
funds rate, but he would view the range asymmetrically.

Thus, he

would seek to maintain the funds rate at about the currently pre
vailing 5-1/4 per cent level unless incoming data suggested that
the rates of growth in the monetary aggregates were deviating
significantly from the midpoints of their specified ranges.
Mr. Wallich said he agreed with the view that the economic
expansion was not proceeding satisfactorily.

Like Mr. Coldwell,

he was concerned about the fiscal actions that might be taken



next year if the Federal Reserve did not give some indication
of a more stimulative policy.

In light of the current projec

tions for economic activity, however, he would hesitate to
push strongly in that direction.

In any event, the effect of

any action taken now would not be seen immediately but would
be delayed, perhaps until next summer.

Moreover, given the

longer-term target of 5 to 7-1/2 per cent M, growth, the result
of a significantly more stimulative policy now would be greater
upward pressures on interest rates next summer, and sharp
increases in rates then would be detrimental.

He would argue,

therefore, that specifications along the lines of those shown
under alternative B were directed more to achieving continued
economic expansion during 1976 than those under alternative A,
which would lead to intensification of upward pressures on
interest rates around midyear.
He was troubled, Mr. Wallich said, by the recent erratic
behavior of M 1 .

Because he was uncertain whether that sort of

behavior would continue, he would place less emphasis on M
more emphasis on interest rates in this period.


He thought the

avoidance of a rise in interest rates was particularly important
at this juncture; accordingly, he would not want to specify an
upper limit for the funds rate range above 5-1/2 per cent.
Although he usually favored a wide range for the funds rate, he



tended to agree that a narrowing of the range made sense at this

If the funds rate were pushed down too far in the period

immediately ahead, policy would become more stimulative in the
short run and might have to be reversed later on.


a 5 to 5-1/2 per cent funds rate range appeared reasonable to

For the aggregates, he found the specifications of alterna

tive B broadly acceptable, but at this time he would pay consider
ably less attention to M.
Mr. Balles remarked that he, like Mr. Coldwell, was con
cerned about the economic outlook and the level of interest rates.
Moreover, he had the impression that business confidence was not
as favorable as business statistics might suggest.

For example,

business executives viewed the substantial rise in corporate
profits that had been noted earlier in the light of proposals
for "price level accounting" and of the adjustments not only for
inventory valuation but also for inadequate depreciation allow

After such adjustments, corporate profits were below the

levels reached 3 or 4 years ago.
Chairman Burns noted that the staff had made a special
report on corporate profits to the Board recently, and he asked
Mr. Gramley to comment.
Mr. Gramley remarked that corporate profits, adjusted for
inventory profits, as a proportion of corporate gross product had
returned to about the levels reached in 1969 but remained below



earlier peak levels.

However, the recovery in corporate profits

had been stronger during the current upswing than in any previous
business cycle.
Mr. Volcker observed that, as he had noted earlier, corporate
profits relative to GNP were low by historical standards.
Chairman Burns commented that the data for corporate profits
after inventory valuation adjustment suggested remarkable improve
ment relative not only to the recession low but to levels in other
recent years.

He suggested that a copy of the recent staff report

be sent to the Reserve Bank Presidents.1/
Mr. Coldwell remarked that a great deal of the recent
improvement had occurred in the third quarter of this year.
Mr. Balles said the point he had wanted to emphasize was
that corporate profits as viewed both by corporate executives and
by financial analysts were not as favorable in terms of levels or
rates of growth as the nominal figures might suggest.

The behavior

of business investment outlays in the months ahead was the great
uncertainty in the outlook, and he was concerned about prospects
in that area not only because of the profits situation, but also
because of the levels of long-term interest rates, which adversely

1/ The staff report, dated December 8, 1975, and entitled
"Corporate Profits," was distributed to the Reserve Bank Presidents
on December 18, and a copy has been placed in the Committee's files.



affected businesses' willingness to undertake external financing
for expansion of plant and equipment.

Moreover, the efforts of

many large banks to absorb loan losses stemming from the excesses
of the past several years had made banks fairly selective in lend
ing to businesses, and conservative

loan policies were not help

ing to promote a vigorous recovery.
Turning to his prescription for policy, Mr. Balles observed
that he favored the specifications recommended by Mr. Mayo and
endorsed by the Chairman:


to 7 per cent for M1, 7 to 10 per

cent for M2, and 4-1/2 to 5-1/2 per cent for the Federal funds

Because of his concern that the apparent pause in the

economic expansion might turn out to be of longer duration than
currently anticipated by the staff, he would resolve any doubts
by moving slightly in the direction of ease.
Mr. Volcker remarked that he was in general agreement
with the views expressed by Mr. Wallich and thought that the
emphasis in Mr. Partee's prescription for policy was about right.
He was uncertain about the business outlook, but he had no dis
agreement with the staff's analysis of prospective developments.
While he believed that some risk of aborting the recovery still
existed, he thought that if economic activity deviated from the
staff's projections, it was more likely to be on the side of
greater than less strength.



Against that background, Mr. Volcker said, he agreed
with the general sentiment expressed so far today that no tight
ening should be undertaken; he could, perhaps, be convinced that
some easing might be appropriate.

But he could not agree with a

policy prescription that gave much weight to the behavior of M
in this period--particularly in light of Mr. Partee's remarks
about the uncertainty surrounding projections for the month of

The chances were unusually great that growth in the

aggregates in the December-January period would fall outside any
ranges that the Committee was likely to specify.

The potential

for erratic movements in the aggregates was too great to justify
a range only 2 or 3 percentage points in width.


he would be disturbed if operations were to be directed toward
changing the funds rate significantly on the basis of incoming
data for the aggregates.
Chairman Burns remarked that there was a degree of pro
tection in that the Committee set ranges of tolerance for rates

of growth in the aggregates over 2-month rather than 1-month periods.
Mr. Volcker said much would depend on interpretation of
the weekly data becoming available and on the projections for the
remainder of the period.

Personally, he would not be greatly

concerned if monetary growth appeared to be relatively rapid in
this period, and he would not be quick to react if it appeared


to be slow.

In sum, whatever the precise specifications adopted,

he would favor a money market directive so that the major emphasis
of policy would be on maintaining stable--or if the Committee
desired, somewhat easier--money market conditions.

In any case,

he would not want to see movements in the funds rate triggered
by short-term fluctuations in money supply growth.


he would specify a range for M 1 of 2 to 8 per cent and a range
for the Federal funds rate either of 5 to 5-1/2 per cent, as
recommended by Mr. Partee, or a range of 4-1/2 to 5-1/2 per cent,
to be interpreted asymmetrically, as suggested by the Chairman.
Mr. Mayo remarked that he had the impression that most
members were willing to place more than usual emphasis on M2 dur
ing the coming period.
Mr. Volcker indicated that such a course would alleviate
his problem somewhat, but he was not at all certain that the
behavior of M2 would be free from short-term aberrations.
Chairman Burns said he thought that most Committee members
typically regarded M1 as an index of the bundle of monetary aggre
gates, but that a majority attached more importance to M1 than to
the other monetary aggregates.

In view of the increasing evidence

of the changing character of the nation's payments system, he
believed that Committee members should increase the weight they
placed on M

relative to M 1 .



Mr. Volcker remarked that the behavior of business
savings accounts since the recent regulatory changes permitting
such accounts was an argument in support of the Chairman's
Mr. Baughman said he was in sympathy with those who
favored a mild easing, which might take the form of an inclina
tion toward a slightly lower Federal funds rate and a greater
tolerance toward increases in the rates of growth in the mone
tary aggregates.

Among the major reasons for that view was the

evidence available on business attitudes and expectations.


retailers with whom he had been in touch recently had indicated
that credit sales currently were smaller relative to cash sales
than a year ago, which might suggest that consumer expenditureswhich were a key element in the business outlook--would be less
vigorous than had been expected.

A third consideration was his

belief that bank leading rates were a bit high relative to
general credit market conditions.

A slightly easier monetary

policy posture would help avoid a premature rise in those rates
and might even nudge them down.
Mr. Baughman observed that he was concerned about the
continuing indications that wages and prices were able to move
independently of the utilization rates of industrial and labor

In addition to doing what appeared appropriate with



respect to monetary policy, System officials should continue to
call attention to that development--as the Chairman had been
doing--in the hope of at least taking the edge off the
aggressiveness with which wages and prices were pressing

He had noted with interest that West Coast

retailers apparently anticipated some weakening in upward
price pressures over the months immediately ahead.


in the Eleventh District had a contrary view; they were encounter
ing higher wholesale prices as they endeavored to replace goods
sold from inventories, and they warned that there might be fairly
large price advances in the first 3 months of next year.


theless, he thought the general economic environment was one in
which it would be appropriate for the Federal Reserve to resist
any tendency for credit markets to tighten or for interest rates
to rise.
Mr. Eastburn remarked that his concerns about the economy
had been effectively expressed by Mr. Coldwell.

He was also con

cerned about the fact that the rates of growth in both M1

and M2

were still low relative to the Committee's longer-run targets.
Faster growth in those aggregates was needed, and he would pre
fer to see it occur early rather than late in the target period.
The alternative A specifications would best serve that end.


ever, in view of the various uncertainties, noted by Mr. Partee,



that were particularly prevalent at this time of year, he was
prepared to accept a policy prescription like that the Chairman
and others had suggested, calling for widening the 2-month ranges
for the monetary aggregates and retaining the present 4-1/2 to
5-1/2 per cent range for the Federal funds rate.
Mr. Winn said he wondered whether the Committee was not
suffering from myopia in focusing on specifications for a 2-month

He was particularly sobered by the table in the blue

book showing four-quarter projections of the Federal funds rates
that would be needed to achieve the Committee's longer-run aggre
gate targets for each of the three sets of short-run specifica

If the pattern reflected in those projections was about

right, the figures would almost argue for raising the funds rate
now in order to permit a reduction later when credit demands

would be greater.

However, he would not find such a course

Mr. Winn observed that myopic thinking might also be
involved in the concentration on interest rates and monetary

Raising the investment tax credit was one obvious

means of stimulating investment.

Because an increase in the tax

credit would add to the Federal deficit, he would not advocate
such action in isolation.

He wondered, however, whether it

would not be feasible to adjust the general level of tax rates



in order to offset the revenue loss that would be incurred.


any case, policy-makers operated under a handicap when they con
sidered only a narrow range of instruments.
With respect to specifications for monetary policy,
Mr. Winn remarked, he agreed with those who favored retaining
a 4-1/2 to 5-1/2 per cent range for the Federal funds rate and
widening somewhat the 2-month ranges for the monetary aggregates.
Mr. Holland observed that, despite some discouraging
aspects of the current economic situation and of the staff's
projections, the economy appeared to be passing through a period
of adjustment.

A whole complex of economic and financial adjust

ments were under way; for the most part, they seemed to be con
structively resolving existing problems and positioning the
economy for better performance in the future.
Personally, Mr. Holland continued, he anticipated a some
what better economic performance than suggested by the staff's
projections, given the amount of monetary and fiscal stimulus
assumed in those projections.

That was a subjective judgment,

not one based on some elaborate econometric model.

He believed,

however, that the present situation offered the System some
reasons for proceeding with caution--perhaps resolving doubts
on the side of a slight easing, in contrast to the approach
last summer when doubts were resolved by leaning toward



more firmness.

He certainly was not ready for any major policy

While he would not mind shading policy a bit toward ease,
Mr. Holland remarked, he would much prefer to have any action of
that kind take the form of another small cut in reserve require
ments rather than increased provision of reserves through open
market operations.

Accordingly, he favored the specifications

of alternative B, with modifications like those suggested by
Chairman Burns and Mr. Coldwell.

For the operational paragraph

of the directive he favored the "monetary aggregates" proposal,
calling for moderate growth in the aggregates, rather than any
of the "money market" alternatives.
Mr. Clay said he was rather pleased with the over-all
economic situation.
like it

The economy was not as vigorous as he would

to be or as he hoped it would be later.

However, it

was about as vigorous as it could be if the long-range problem-

that of inflation--was to be overcome.

He was also pleased with

the nation's attitude, as he sensed it, that it was necessary to
accept a somewhat slower recovery in order to overcome inflation.
With respect to policy, Mr. Clay continued, he certainly
would favor maintaining money market conditions near their cur
rent levels.

That course would be consistent with the specifica

tions shown under alternative B in the blue book.

He would not



be unhappy with a widening in the 2-month range for M1 from 4 to
6 per cent to 4 to 6-1/2 or 4 to 7 per cent.

He also would be

willing to widen the range for the Federal funds rate, perhaps
to 4-1/2 to 6 per cent.

He would prefer a directive formulated

in terms of the monetary aggregates.
Mr. Black observed that almost all of the points he had
intended to make had already been made by others.

He would

stress Mr. Clay's observation that inflation remained the primary
longer-run problem; while some progress had been made in that
connection, it was certainly important that the Committee main
tain adequate control over the longer-run growth rates in the
monetary aggregates.

He was inclined to agree with Messrs. MacLaury

and Holland that the economy would prove somewhat stronger than the
staff's projections suggested, although he recognized that there
were legitimate grounds for reaching the opposite conclusion.
In any event, Mr. Black remarked, in light of the prevail
ing uncertainties this was not a time to rock the boat.

The Chair

man's proposal that the present range be retained for the Federal
funds rate struck him as wise, and he concurred in Mr. Partee's
suggestion that recently prevailing money market conditions be
maintained, unless it became pretty clear that the aggregates
were departing significantly from the prescribed limits.


he favored the 2-month ranges for the aggregates that Mr. Coldwell
had suggested.



Chairman Burns observed that the speaking order in the
policy discussion today was not entirely accidental.

Mr. Partee

had spoken first and Mr. Mitchell, whose term of office would
soon reach its end, would have the last word.
Mr. Mitchell remarked that he could not help but recall
today the statement made by Abbott Mills, a former member of the
Board and the Committee, at the last FOMC meeting he had attended.
On that occasion Mr. Mills had had the audacity and the courage
to say he had been wrong in his policy views ever since he had
become associated with the Federal Reserve.

He (Mr. Mitchell)

was on the verge of making the same statement about himself.
As the members knew, Mr. Mitchell continued, he had long
been an advocate of the monetary aggregates as guides to policy;
over the years, he had encouraged staff work on the aggregates
and had urged their use on the Committee.
been produced!

What a monster had

He felt most unhappy about the product, and did

not know what exactly to recommend.

He thought, however, that

when the Committee wrestled with the problem--as it would have
to do--it would be well advised to give attention to the variables
over which it could exert close control.

Open market operations,

through their effect on bank reserves, could directly influence
the behavior of the banking system; indirectly, they could influence
the liquidity of the whole economy.

For the narrower purpose of



assessing the direct effects of open market operations, he
thought the bank credit proxy was much superior to M1 because
it was subject to closer control.

Accordingly, he would sug

gest that the Committee consider discarding M 1 entirely and
resurrecting the proxy in its place.

For measuring the broader

effects of policy, some measure of over-all liquidity would be
desirable. He suspected that the Committee would eventually
find itself using some such approach. While he could not say
when that would be, he was quite sure that M 1 was not a useful
guide to policy and that at some point the Committee would
recognize that fact.
Chairman Burns observed that the Committee appeared to
be close to agreement on specifications.

However, the question

of the operational paragraph of the directive remained to be

He asked the members to indicate informally whether

they preferred the "monetary aggregates" proposal or one of the
"money market" proposals--presumably alternative B, which called
for maintaining prevailing conditions.
not express his

For the moment, he would

own preference.

The poll indicated that the preferences of the remaining
10 members present were evenly divided between the two directives.
Mr. Mayo expressed the view that some oversimplification
was involved in the short-hand descriptions of the two types of



directives, since both money market conditions and monetary
aggregates were taken into account in each.

Thus, the so

called "monetary aggregates" language called for "bank reserve
and money market conditions consistent with moderate growth in
monetary aggregates," and the so-called "money market" language
called for maintaining "prevailing bank reserve and money market
conditions...provided that the monetary aggregates appear to be
growing at about the rates currently expected."

The difference

was one of emphasis.
The Chairman observed that Mr. Mayo's interpretation
seemed to be a fair one.
Mr. Volcker said it could be argued that the "monetary
aggregates" language should always be acceptable since it was
hard to conceive of circumstances under which the Committee
would not want moderate growth in the aggregates.

By the same

token, however, that language did not convey much meaning.


the Committee intended at this time to seek stability in the
money market--or perhaps a slight easing--he thought it should
use directive language that said so.
Chairman Burns remarked that he also preferred the money
market formulation, for the reason Mr. Volcker had cited.


suggested that the Committee vote on a directive consisting of
the staff's draft of the general paragraphs and alternative B of



the money market proposals for the operational paragraph.


would be understood that the directive would be interpreted in
accordance with the following short-run specifications.


ranges of tolerance for growth rates in the December-January
period would be 4 to 7 per cent for M1, 7

to 10 per cent for M2,

and the range for RPD's determined by the staff to be consistent

with those for M1 and M2.1/

The range of tolerance for the weekly

average Federal funds rate in the inter-meeting period would be
4-1/2 to 5-1/2 per cent, with the understanding that the range

would be viewed asymmetrically, in the manner he had suggested
In response to a question, the Chairman observed that
under the Committee's customary procedures the full range
specified for the Federal funds rate would be available for use.
Mr. Baughman observed that, while he would have preferred
somewhat higher ranges for the monetary aggregates, he was pre
pared to cast an affirmative vote.
Mr. Holland remarked that he also planned to vote affirma
tively on the proposal.

He would do so on the assumption that, in

the event some other System policy action was taken during the
interval before the next meeting, the Manager would not interpret

1/ The staff subsequently determined that an RPD range of 4 to
7 per cent would be consistent with the ranges specified for M1
and M 2 .



the instruction to "maintain prevailing...conditions" to require
him to offset completely any effects the other action might have.
By unanimous vote, the
Federal Reserve Bank of New York
was authorized and directed, until
otherwise directed by the Com
mittee, to execute transactions
for the System Account in accor
dance with the following domestic
policy directive:
The information reviewed at this meeting suggests
that output of goods and services--which had increased
very sharply in the third quarter--is expanding more
moderately in the current quarter. In November the
rise in industrial production and in nonfarm payroll
employment slowed further. The dollar volume of
retail sales rose again, however, and residential
construction activity expanded, reflecting recent
substantial increases in private housing starts.
The unemployment rate--which had risen 0.3 percent
age points to 8.6 per cent in October--fell back to
8.3 per cent in November, reflecting a sizable decline
in the civilian labor force. The increase in average
wholesale prices of industrial commodities, although
below that in October, was still relatively large;
prices of farm products declined appreciably, follow
ing 2 months of large increases. The advance in
average wage rates in November was again substantial.
The exchange value of the dollar against leading
foreign currencies has risen somewhat since mid-November.
The net outflow of bank-reported private capital appears
to have declined from the high rate reported for October.
In October the U.S. foreign trade surplus remained
M 1 --which had declined in October--rose sharply
in November. Growth in M 2 and M3 was substantial, as
inflows of consumer-type time and savings deposits to
banks strengthened while inflows to nonbank thrift
institutions remained relatively favorable. Long-term
interest rates have fluctuated in a narrow range in
recent weeks, while short-term market rates have risen



In light of the foregoing developments it is the
policy of the Federal Open Market Committee to foster
financial conditions that will encourage continued
economic recovery, while resisting inflationary pres
sures 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 maintain prevailing
bank reserve and money market conditions over the
period immediately ahead, provided that monetary
aggregates appear to be growing at about the rates
currently expected.
Secretary's note: The specifications agreed upon
by the Committee, in the form distributed after the
meeting, are appended to this memorandum as Attach
ment D.
Chairman Burns noted that the Secretariat had distributed
two memoranda, dated December 4, 1975, regarding the release of
the Committee's memoranda of discussion for the year 1970.1/
He asked Mr. Broida to comment.
Mr. Broida said the Secretariat recommended that the
Committee's 1970 memoranda of discussion be released in January
1976, under the customary schedule of making public the memoranda
for a calendar year shortly after the close of the fifth succeed
ing year.

As usual, staff at the Board and the New York Bank

1/ Copies of these memoranda, have been placed in the Com
mittee's files. The first, from Mr. Broida, was entitled
"Release of FOMC memoranda of discussion for 1970." The
second, from the Secretariat, was entitled "Passages recom
mended for deletion when FOMC memoranda of discussion for 1970
are released."



had reviewed the memoranda for the purpose of identifying
potentially sensitive passages that the Committee might wish
to have withheld when the memoranda were initially released.
Two such passages, both of which occurred on one page of the
memorandum of discussion for January 15, 1970, had been
identified, as indicated in the second of the two memoranda
from the Secretariat.
After discussion, the Committee concurred in the
Secretariat's recommendations.
By unanimous vote, transfer to
the National Archives of the FOMC
memoranda of discussion for 1970,
on the basis described in the
memoranda from the Secretariat
dated December 4, 1975, was authorized.
It was agreed that the next meeting of the Committee would
be held on January 20, 1976.
Thereupon the meeting adjourned.



Henry C. Wallich
December 16, 1975

Monthly Meeting of Bank for International Settlements
December 7-8, 1975

The BIS meeting of December 7-8 focused on three principal
Eurocurrency statistics, the control of central bank opera
tions in gold, and the French-American agreement on exchange arrange
(1) Concerning Eurocurrency reporting, it was agreed to
approach the major offshore Eurocurrency centers in order to broaden
the present coverage of the statistics assembled by the BIS.


acceleration of on-going data collection also was envisaged.
(2) In the discussion of central bank gold trading, both
in the technicians' and the governors' meeting, much the same differences
surfaced as in the November meetings.

There are firm and less firm

attitudes on three of the four major issues -- the prohibition against
pegging, the determination and safeguarding of the ceiling for the
official gold stock, and reporting requirements.

On the issue of

admission of countries outside the G-10, it was agreed that the system
should be an open one, but that there was no need for meetings in Basle
of all adherents.

On pegging,

a compromise was reached to the effect that

any evidence pointing to such a practice should be discussed at
monthly meetings of the BIS.
Concerning the ceiling, no agreement was reached between
those who argued for a firm ceiling, monitored by continuous reporting
and vigorous action to remedy any breach, and the proponents of the
opposite view, who have a slight majority.

This disagreement will

have to be presented to the ministers at the G-10 meeting.
On the reporting issue, no precise agreement between those
who want immediate reporting of each transaction with respect to volume
and price,

and the other side who prefer monthly reporting, perhaps

without price details, was reached.

As a pragmatic solution, it was

suggested that central banks planning to purchase gold should check
with the agent (BIS) whether there was leeway under the ceiling, on
which occasion the agent could update the latest information if necessary.
In view of the uncertainty as to the frequency of central bank gold
transactions, there appeared to be no need to resolve the reporting
issue immediately.
On the French-American exchange agreement, the French
representative made no comment.

The U.S. representatives stressed

that the most important aspect was a removal of previous differences
between the U.S. and France, and a better understanding of the
condition in which exchange rate stability should be pursued.


condition in which central bank intervention was appropriate had been

broadened slightly by the agreement through emphasis on "erratic"

Slightly greater intervention activity might be

expected as a result, but with no fundamental changes.

No fixed

rates or bands were contemplated as far as the dollar was concerned.
More intensive consultation and better information were to
be regarded as important gains from the agreement.

A procedure under

which the Federal Reserve Bank of New York would receive daily details
on European exchange markets and intervention was discussed and has
already been put in place.
As regards the weekly or monthly reviews among finance
ministry deputies, the Board representative pointed out that the
Federal Reserve would be a full and equal partner therein.


tives of some other central banks expressed concern, partly at the
meeting and more often in private, as to the position in which the
French-American agreement would place their institutions.

~ ~ ~





- 140

- :. "

.i '

• ,:....

..:: .


.. :V..






i i ..















Q3 '57

& '74


INDEX, 03 '57 & '74 = 100


1 110



1967 $







3 Trough 3




Months after

Months before







3 Trough


Months before





Months after







Months before

3 Trough 3



Months after





Months before

[ LI

3 Trough


L1 1





Months after



'57 &'74 = 100










Q3 '57









Months after

Months before






Quarters before




Quarters after

& '74 = 100


December 15, 1975

Drafts of Domestic Policy Directive for Consideration by the
Federal Open Market Committee at its Meeting on December 16, 1975

The information reviewed at this meeting suggests that
output of goods and services--which had increased very sharply
in the third quarter--is expanding more moderately in the current
quarter. In November the rise in industrial production and in
nonfarm payroll employment slowed further. The dollar volume of
retail sales rose again, however, and residential construction
activity expanded, reflecting recent substantial increases in
private housing starts. The unemployment rate--which had risen
0.3 percentage points to 8.6 per cent in October--fell back to
8.3 per cent in November, reflecting a sizable decline in the
civilian labor force. The increase in average wholesale prices
of industrial commodities, although below that in October, was
still relatively large; prices of farm products declined appre
ciably, following 2 months of large increases. The advance in
average wage rates in November was again substantial.
The exchange value of the dollar against leading foreign
currencies has risen somewhat since mid-November. The net outflow
of bank-reported private capital appears to have declined from
the high rate reported for October. In October the U.S. foreign
trade surplus remained substantial.
M 1 --which had declined in October--rose
Growth in M 2 and M3 was substantial, as inflows
time and savings deposits to banks strengthened
nonbank thrift institutions remained relatively
term interest rates have fluctuated in a narrow
weeks, while short-term market rates have risen

sharply in November.
of consumer-type
while inflows to
favorable. Long
range in recent

In light of the foregoing developments, it is the policy
of the Federal Open Market Committee to foster financial conditions
that will encourage continued economic recovery, while resisting
inflationary pressures and contributing to a sustainable pattern
of international transactions.

"Monetary Aggregate" Proposal
To implement this policy, while taking account of develop
ments in domestic and international financial markets, the Com
mittee seeks to achieve bank reserve and money market conditions
consistent with moderate growth in monetary aggregates over the
months ahead.
Alternative "Money Market" Proposals
Alternative A
To implement this policy, while taking account of develop
ments in domestic and international financial markets, the Com
mittee seeks to achieve somewhat easier bank reserve and money
market conditions over the period immediately ahead, provided
that monetary aggregates do not appear to be growing at rates
above those currently expected.
Alternative B
To implement this policy, while taking account of develop

ments in domestic and international financial markets, the Com
mittee seeks to maintain prevailing bank reserve and money market

conditions over the period immediately ahead, provided that mone
tary aggregates appear to be growing at about the rates currently
Alternative C
To implement this policy, while taking account of develop
ments in domestic and international financial markets, the Com
mittee seeks to achieve somewhat firmer bank reserve and money
market conditions over the period immediately ahead, provided
that monetary aggregates do not appear to be growing at rates
below those currently expected.


December 16,
Points for FOMC guidance to Manager
in implementation of directive


Desired longer-run growth rate ranges
(QIII '75 to QIII '76)


(as agreed, 10/21/75):

5 to 7-1/2%


7-1/2 to 10-1/2%


9 to 12%



6 to 9%

Short-run operating constraints (as agreed, 12/16/75):


Range of tolerance for RPD growth
rate (December-January average):

4 to 7%

Ranges of tolerance for monetary
aggregates (December-January average):

4 to 7%
7 to 10%


Range of tolerance for Federal funds
rate (daily average in statement weeks
between meetings):

4-1/2 to 5-1/2%

4. Federal funds rate to be moved in an
orderly way within range of toleration.
5. Other considerations: Account to be taken of developments in domestic
and international financial markets.
C. If it appears that the Committee's various operating constraints are proving to
be significantly inconsistent in the period between meetings, the Manager is
promptly to notify the Chairman, who will then promptly decide whether the
situation calls for special Committee action to give supplementary instructions.