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F
January 21,
For Use at 4:00 p.m.
1977
The Board of Governors of the Federal Reserve System
and the Federal Open Market Committee today released the
attached record of policy actions taken by the Federal Open
Market Committee at its meeting on December 20-21, 1976.
Such records for each meeting of the Committee are
made available a few days after the next regularly scheduled
meeting and are published in the Federal Reserve Bulletin
The summary descriptions of
and the Board's Annual Report.
economic and financial conditions they contain are based
solely on the information that was available to the Committee
at the time of the meeting.
Attachment
E
D
E
RAL
PRESS
RECORD OF POLICY ACTIONS
OF THE FEDERAL OPEN MARKET COMMITTEE
Meeting held on December 20-21, 1976
1.
Domestic policy directive
The information reviewed at this meeting suggested
that growth in real output of goods and services in the fourth
quarter had remained close to the pace in the third quarter-now indicated by revised estimates of the Commerce Department
to have been at an annual rate of 3.8 per cent, compared with
4. 5 per cent in the second quarter.
The rise in average prices--
as measured by the fixed-weighted index for gross domestic
business product--appeared to have been somewhat faster than
in the third quarter, when it had slowed to an annual rate of
4.3 per cent.
A staff analysis suggested that final purchases of goods
and services in real terms were expanding at a higher rate
in the fourth quarter than in the third--reflecting a substantial
increase in growth of personal consumption expenditures and
an acceleration of the rise in residential construction, offset
only in part by a slowing of the expansion in business fixed
investment.
It also appeared that the strengthening in final
demands was being accompanied by a substantial reduction in
the rate of inventory accumulation.
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The staff projections suggested that the rate of
inventory accumulation would not decline further in the first
quarter of 1977 and that, consequently, growth in real output
of goods and
services would pick up.
Projections of
economic activity for the rest of 1977, it was noted, depended
on the assumptions made with respect to the economic policies
that would be pursued by the new administration taking office
on January 20.
Currently, the question of the need for, and
the character of, new fiscal stimulus was being considered by
the incoming administration.
Retail sales now appeared to be much stronger than
they had seemed to be a month ago.
Sales were estimated to
have risen considerably more in October than had been indicated
earlier, and the advance estimate for November suggested a
large further increase to a level appreciably higher than the
average for the third quarter.
Over the October-November
period gains in sales were particularly strong at general
merchandise stores and at furniture and appliance stores.
In late November sales of new domestic automobiles began
to recover, after having been reduced earlier by the strikeinduced limitation of supplies; for November as a whole, sales
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were at an annual rate of 8.0 million units, compared
with 7. 6 million in October and an average of 8. 7 million
in the first three quarters of 1976.
Sales of imported models
fell in November from an advanced level in the preceding
2 months.
The index of industrial production rose by an
estimated 1. 2 per cent in November, more than recovering
the losses in the preceding 2 months that had been caused in
part by strikes in the automobile and farm machinery industries.
More than half of the November increase resulted from the termination
of the strikes, although moderate gains in output were widespread
among other industries.
At 132 per cent of the 1967 average in
November, the total index had recovered to the pre-recession
high reached in June 1974.
Capacity utilization in the materials-
producing industries was 81 per cent in November, compared
with about 90 per cent in the second quarter of 1974.
In November employment in manufacturing recovered
from the effects of strikes, and employment also expanded in
the service sectors, in construction, and in mining.
Adjusted
for the effects of strikes, however, the increase in over-all
payroll employment in nonfarm establishments was moderate.
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As measured by the household survey, total employment
rose considerably after 2 months of decline; however, the
civilian labor force--which had changed little over the preceding
3 months--rose even more, and the unemployment rate increased
from 7.9 to 8.1 per cent.
The advance in personal income--which had been sizable
in October, in part because of an increase in pay scales in the
Federal Government--was even greater in November.
The gain
in wage and salary disbursements was especially large in manufacturing, reflecting to a considerable extent the return to work
after the major strikes were over, and it continued to be sizable
in other private activities.
Indicators of residential construction activity had
remained strong in recent months.
rose in November.
Residential building permits
Although private housing starts declined
further in November, the figure for October had been revised
to show a somewhat smaller decrease than that indicated a
month earlier; as a result, the October-November level of
starts--at an annual rate of 1. 7 million units--was about
10 per cent above the third-quarter average.
In October,
moreover, the dollar volume of mortgage commitments
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outstanding at savings and loan associations had continued
to advance, again reaching a record.
On the other hand, the latest data suggested a weakening in the outlook for business plant and equipment
expenditures.
Although the most recent Department of
Commerce survey of business plans, conducted in late
October and November, indicated that a strong gain in
spending was being planned for the current quarter, it
suggested that the increases planned for the first two
quarters of 1977 would be no greater than the rise in
prices.
Other data suggested that in the current quarter
actual spending would fall short of that planned, but that
the shortfall might be made up later on.
New orders for nondefense capital goods rose
further in October.
However, the rate of increase from
June to October was appreciably below that during the first
6 months of the year.
Backlogs of unfilled orders for such
goods continued to change little in October.
Construction
contracts for commercial and industrial buildings--measured
in terms of floor space--rose after having declined in September;
the October level was close to the average for both the second and
the third quarters.
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The index of average hourly earnings for private
nonfarm production workers advanced at an annual rate of about
7 per cent in November, somewhat more than in the preceding
2 months.
However, over the 3-month and 6-month periods
ending in November the index rose at annual rates of about
6 per cent and 6-1/2 per cent, respectively, compared with a
rise of almost 8 per cent over the 12 months ending in December
1975.
The moderation in the rate of increase since 1975 had
occurred in all major industries.
The rise in wholesale prices of industrial commodities,
which had accelerated around midyear, remained rapid in
November; another substantial increase for the fuels and power
group accounted for a large part of the rise although increases
continued to be widespread among other commodity groups.
Since May the index of industrial commodity prices had risen
at an annual rate of nearly 10 per cent, compared with a rate
of about 3 per cent over the first 5 months of the year.
Average
wholesale prices of farm products and foods changed little in
November after having declined on the average over the preceding
4 months.
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The consumer price index rose in both October and
November at an annual rate of about 3-1/2 per cent, and in
November it
In
was 5 per cent higher than a year earlier.
the October-November period average retail prices of foods
changed little while average prices of all other items-including services as well as commodities--increased at an
annual rate of about 6 per cent.
The average value of the dollar against leading foreign
currencies declined slightly over the 5 weeks between the
November and December meetings of the Committee.
The
pound sterling and also the currencies associated in the
European "snake" arrangement strengthened against the
U.S. dollar, while the Canadian dollar depreciated sharply.
The U.S. foreign trade deficit, which had increased
in September, remained substantial in October--with declines
in both exports and imports.
Exports of agricultural commodities
rose sharply, mainly because of a jump in shipments of corn to
areas of Europe that had suffered drought earlier in 1976, but
exports of other commodities fell by a larger amount.
In real
terms, exports of nonagricultural commodities had been
falling since midyear.
Among imports, the reduction in October
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was about equally divided between fuels and other
commodities.
In November expansion in total credit at U.S.
commercial banks was somewhat slower than in October
but was faster than in any other month of 1976.
Banks
added a substantial amount to their holdings of U.S.
Government and other securities, and their outstanding
loans increased for the third consecutive month.
business
While the
expansion in business loans was appreciable, more than half
was accounted for by acquisitions of bankers acceptances by
some commercial banks that were enlarging their loan
portfolios for purposes of their year-end statements.
Outstanding commercial paper issued by nonfinancial
corporations rose slightly in November, after having declined
in the preceding 2 months.
Over the October-November period
the expansion in the total of such commercial paper and of
business loans at banks was larger than in any other 2-month
period in more than 2 years, even after allowance for bank
acquisitions of bankers acceptances.
The narrowly defined money stock (M-1), which had
declined slightly in September and then grown at an annual
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rate of 13-3/4 per cent in October, was unchanged in
November.
The average rate of increase in M-1 was about
4-1/2 per cent over the 3 months, and 4-3/4 per cent over
the 12 months, ending in November.
Growth in M-2 and M-3 moderated in November,
reflecting the behavior of M-1, but was still substantial.
Inflows to commercial banks of the types of time and savings
deposits included in M-2 remained at the advanced rate of
October, and inflows of deposits to thrift institutions--while
down from the pace in October--continued strong.
Offering
rates on such deposits remained attractive in relation to
yields on short-term market instruments, although a
significant number of institutions were reported to have
reduced rates offered on some types of deposits and to have
withdrawn offerings of longer-term deposits.
System open market operations since the November
meeting had been guided by the Committee's decision to
seek bank reserve and money market conditions consistent
with moderate growth in monetary aggregates over the period
ahead.
Soon after that meeting, incoming data suggested that
over the November-December period growth in M-1 would be
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in the lower half of the range that had been specified
by the Committee while growth in M-2 would be near the
midpoint of its specified range.
Accordingly, System
operations were conducted pursuant to the Committee's
decision that the Manager should aim to reduce the Federal
funds rate to about 4-7/8 per cent within the first week after
the meeting and to 4-3/4 per cent within the following week-provided that growth in the monetary aggregates did not appear
to be strong relative to the specified ranges.
By the last week
of November the Federal funds rate had declined to 4-3/4 per
cent.
After the first week of December, incoming data suggested
that in the November-December period growth in M-1 would be
below its specified range while growth in M-2 would be at about
the midpoint of its range.
Therefore, System operations became
somewhat more accommodative in the provision of reserves, and
at the time of this meeting the Federal funds rate was about 4-5/8
per cent--near the lower limit of the specified range of 4-1/2 to
5-1/4 per cent.
On November 19 the Board of Governors of the Federal
Reserve System announced its approval of actions by the directors
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of 11 Federal Reserve Banks reducing the discount rate from
5-1/2 to 5-1/4 per cent, effective November 22; soon afterward the rate was reduced at the remaining Reserve Bank.
On
December 17 the Board announced a structural adjustment in
reserve requirements on demand deposits that would reduce
required reserves by about $550 million.
This action applied
to net demand deposits held by member banks beginning in the
week of December 16-22; under the lagged reserve system,
it would reduce required reserves during the week of December 30January 5.
Over the inter-meeting period, market interest rates declined
substantially to their lowest levels in more than 2 years, under
the influence of the actions to ease monetary conditions and of the
continuing evidence of relatively slow growth in economic activity.
Yields on bonds declined about 30 basis points.
Yields on most
short-term instruments fell 40 to 80 basis points to levels that
suggested that market participants were expecting some further
decline in the Federal funds rate.
Most commercial banks
reduced the prime rate on business loans from 6-1/2 to 6-1/4 per
cent during the period, and two large banks reduced the rate to
6 per cent.
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The volume of new bonds offered to the public by
domestic corporations was unusually light in November as
new issues of high-grade industrial firms and of finance
companies fell substantially.
in the U.S.
However, declines in rates
market attracted a record volume of publicly
offered foreign bonds.
A resurgence of offerings by domestic
corporations appeared to be under way in December.
The supply of new State and local government bonds
remained large in November.
Total offerings of such bonds
during the first 11 months of 1976 amounted to $32 billion,
exceeding the previous record volume of offerings in all of
1975.
The U.S. Treasury raised $6.0 billion of new money
during the inter-meeting period.
In addition, it sold $1 billion
of 2-year notes for payment in late December and announced
an offering of $2-1/2 billion of 5-year notes to be auctioned
before the end of the month.
Activity in the mortgage market apparently remained at a
high level during November.
Mortgage credit expansion continued
to be dominated by loans for new and existing single-family
houses, but the multifamily sector also strengthened somewhat.
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12/20-21/76
With yields on market securities declining, downward
pressures on home mortgage rates intensified.
Although
the latest available national series indicated little change
in rates for primary home mortgages, trade sources
suggested that some cutting of rates on these instruments
was developing.
The recent declines in long-term interest rates were
expected to encourage a heavy volume of capital market
financing both by business corporations and by State and local
governments during the early weeks of 1977.
However, much
of this financing seemed likely to involve either funding of
short-term debt or advance refunding of bonds issued in earlier
years when interest rates were substantially higher.
Growth in mortgage credit seemed likely to remain
strong.
Savings and loan associations, with a record volume
of commitments outstanding, were expected to continue providing
a large volume of mortgage credit.
Also, the sizable premium
prevailing for mortgage rates over bond yields was expected to
encourage acquisitions of mortgages by more diversified types
of lenders.
At the same time, it appeared likely that continuing
strong cash flows to insurance companies would sustain the demands
of these companies for bonds.
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At its telephone meeting on November 8 the
Committee had agreed that from the third quarter of 1976 to
the third quarter of 1977, average rates of growth in the monetary
aggregates within the following ranges appeared to be consistent
with broad economic aims: M-1, 4-1/2 to 6-1/2 per cent; M-2,
7-1/2 to 10 per cent; and M-3, 9 to 11-1/2 per cent.
The
associated range for growth in the bank credit proxy was 5 to
8 per cent.
It was agreed that the longer-term ranges, as well
as the particular aggregates for which such ranges were specified,
would be subject to review and modification at subsequent meetings.
It also was understood that short-run factors might cause growth
rates from month to month to fall outside the ranges contemplated
for annual periods.
In their discussion of economic developments and prospects
at this meeting, Committee members generally agreed that the
latest business statistics indicated a strengthening in the situation
and that the recent sluggishness appeared to have been only a
"pause" in the growth of real output rather than the forerunner
of a new recession.
It was noted that in November the rise in
industrial production had exceeded the amount attributable to
recovery from strikes, that increases in personal income and
12/20-21/76
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retail sales had been sizable, and that progress was
apparently being made in adjusting inventories.
Moreover,
it was suggested that confidence had improved; in particular, it
was thought that the business community had been reassured by
indications that the incoming administration would take a cautious
approach to economic problems and that it would not seek price
and wage controls in any situation short of a national emergency.
Despite the disappointing results of the Commerce Department
survey of business spending plans for the first two quarters of
1977, one member expressed the opinion that the improvement
in business confidence, combined with the recent declines in
longer-term interest rates, would contribute to a significant
expansion in plant and equipment outlays.
Although Committee members in general viewed the
business situation and outlook as having improved, some
noted that the strengthening thus far had not been great and
that it was not certain that the pause had ended.
Also,
attention was called to a number of continuing and potential
problems.
Among these was the outlook for unemployment,
which might remain high for some time to come, especially if
the labor force continued to rise at a rapid pace, in part because
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of increasing participation of women.
In this connection, it
was suggested that specific Government programs to deal with
sectoral problems might be far more effective in reducing
unemployment than general monetary and fiscal policies.
Inflation also continued to be a source of concern; it was
noted that while the rise in the consumer price index had moderated
in recent months, the increase in average wholesale prices of
industrial commodities had accelerated to an annual rate of about
10 per cent.
It was also noted that there was continuing uncertainty
about how much prices of imported oil would be raised at the start
of 1977, and about how the impact of further increases in the price
of oil would affect the performance of the economy.
It was observed during the discussion that the Federal
budget deficit in fiscal 1976 had been substantial--especially
when "off-budget outlays" and deficits of Government-sponsored
agencies were taken into account--and that another deficit of
almost the same size was in prospect for fiscal 1977 even without allowance for new stimulative measures.
Some concern was
expressed that fiscal stimulus might foster new inflationary expectations or that, as at times in the past, its effects might come so
late in the expansion as to cause growth of real output to accelerate
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at a time when it should be moving gradually toward the
longer-term rate of growth in potential output.
The view was
also expressed, however, that a degree of fiscal stimulus was
desirable.
Members of the Committee did not differ greatly in their
views on appropriate monetary policy for the period immediately
ahead.
With respect to the annual rate of growth in M-1 over
the December-January period, most members favored a range of
either 2-1/2 to 6-1/2 per cent or 3 to 7 per cent, although one
suggested a range of 2 to 7 per cent.
For M-2, there was
general support for a range of 9 to 13 per cent.
Most members favored giving greater weight than usual
to money market conditions in conducting open market operations
in the period until the next meeting, in part because projections
of growth in monetary aggregates around the year-end were highly
uncertain.
A majority favored directing operations toward maintaining
the Federal funds rate at about its prevailing level of 4-5/8 per
cent for the time being, unless growth in the monetary aggregates
appeared to be deviating significantly from the rates currently
expected.
Most of these members favored specifying an inter-
meeting range for the Federal funds rate that was symmetrical
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around the prevailing rate--specifically,
4-1/4 to 5 per cent--
but one preferred a range of 4 to 5 per cent.
A number of reasons were advanced for maintaining
prevailing money market conditions at this time.
These
included the evidence of improvement in the economic outlook,
the substantial declines in interest rates over the past few weeks,
the recent reductions in Federal Reserve discount rates and in
member bank reserve requirements, and the recent weakening in
the value of the dollar in foreign exchange markets.
Also noted
were the uncertainties regarding the amount of fiscal stimulus
that might be forthcoming, the large Federal deficit in prospect
even without new fiscal measures, and the continuing inflation.
A minority of Committee members favored aiming at the
outset of the coming period for a slight further reduction in the
Federal funds rate--to about 4-1/2 per cent, the midpoint of
the 4 to 5 per cent range that they preferred.
A principal
argument offered for this course was that it would tend to avoid
the increases in other short-term interest rates that--in the light
of current market expectations--might result if the prevailing
Federal funds rate were maintained.
Other arguments
advanced were that a slightly lower Federal funds rate might
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encourage further declines in long-term rates, that it
would tend to validate the reduction in reserve requirements,
and that the evidence of an end to the period of slow growth in
real output was not yet conclusive.
At the conclusion of the discussion the Committee decided
that operations in the period immediately ahead should be directed
toward maintaining the money market conditions now prevailing,
including a weekly-average Federal funds rate of about 4-5/8 per
cent.
With respect to the annual rates of growth in M-1 and M-2
over the December-January period, the Committee specified ranges
of 2-1/2 to 6-1/2 per cent and 9 to 13 per cent, respectively.
The
members agreed that, if growth in the aggregates should appear to
be strong or weak relative to the specified ranges, the weeklyaverage Federal funds rate might be expected to vary in an orderly
fashion within a range of 4-1/4 to 5 per cent.
As at other recent
meetings, the Committee decided that approximately equal weight
should be given to M-1 and M-2 in assessing the behavior of the
aggregates.
As customary, it was understood that the Chairman might
call upon the Committee to consider the need for supplementary
instructions before the next scheduled meeting if significant
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inconsistencies appeared to be developing among the Committee's
various objectives.
The following domestic policy directive was issued to the
Federal Reserve Bank of New York:
The information reviewed at this meeting suggests
that growth in real output of goods and services in the
fourth quarter has remained at about the reduced pace
of the third quarter. In both October and November
retail sales increased substantially. Industrial
production rose appreciably in November--following
2 months of decline--in large part as a result of
termination of strikes in two major industries,
although advances in output were widespread among
other industries. Employment in manufacturing
also recovered from the effects of strikes. According
to household survey data, the gain in total employment
was large, but the unemployment rate increased from
7.9 to 8.1 per cent as the civilian labor force--which
had changed little over the preceding 3 months-increased considerably. The wholesale price index
for all commodities rose as much in November as in
October, reflecting another substantial increase in
average prices of industrial commodities; average
prices of farm products and foods changed little.
The advance in the index of average wage rates
over recent months has remained below the rapid
rate of increase during 1975.
The average value of the dollar against
leading foreign currencies has declined slightly
in recent weeks. The pound sterling and also the
currencies associated in the European "snake"
arrangement strengthened against the U.S. dollar,
while the Canadian dollar depreciated sharply.
In October the U.S. foreign trade deficit remained
substantial.
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M-1, which had expanded sharply in October,
was unchanged in November. Although growth in
M-2 and M-3 moderated, it remained substantial
as inflows of the time and savings deposits included
in these broader aggregates continued strong. Interest
rates have declined appreciably in recent weeks. In
late November Federal Reserve discount rates were
reduced from 5-1/2 to 5-1/4 per cent, and in midDecember member bank reserve requirements were
lowered som ewhat.
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 expansion, while resisting
inflationary pressures and contributing to a
sustainable pattern of international transactions.
To implement this policy, while taking account
of developments in domestic and international
financial markets, the Committee seeks to 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.
Votes for this action: Messrs.
Burns, Volcker, Balles, Black, Coldwell,
Gardner, Jackson, Kimbrel, Lilly, Partee,
Wallich, and Winn. Votes against this
action: None.
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2.
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Foreign currency instruments
At this meeting the Committee agreed upon broad
revisions in the Authorization for Foreign Currency Operations
and the Foreign Currency Directive.
The most recent basic
revision in these documents had been made in June 1966, and
several amendments to specific provisions had been adopted
over the ensuing period.
The main purposes of the current revisions were to
simplify and clarify the Committee's instructions to the
Federal Reserve Bank of New York in this area and to bring
the documents up to date in light of changes under way in the
international monetary system and its functioning.
These
revisions were not intended to signify a change in policy
orientation; they simply codified current practice under the
evolving regime of floating exchange rates.
The main change in the Authorization was to replace the
several separate limits on various types of spot and forward
transactions with a single limit on the System's "over-all open
position, " as defined in paragraph 1(D).
The previous separate
limits, which had been developed in particular historical
circumstances under the Bretton Woods system, had lost
relevance under current circumstances or under the evolving
exchange rate regime.
The main change in the Directive was
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to omit the detailed listing of basic purposes and specific
objectives of System foreign currency operations--many of
which were anachronistic in current circumstances--and to
indicate instead that System operations were generally to be
directed at countering disorderly conditions in the exchange markets.
As revised, the two documents read as follows:
AUTHORIZATION FOR FOREIGN CURRENCY OPERATIONS
1. The Federal Open Market Committee authorizes
and directs the Federal Reserve Bank of New York, for
System Open Market Account, to the extent necessary
to carry out the Committee's foreign currency directive
and express authorizations by the Committee pursuant
thereto, and in conformity with such procedural instructions
as the Committee may issue from time to time:
A. To purchase and sell the following foreign
currencies in the form of cable transfers through
spot or forward transactions on the open market at
home and abroad, including transactions with the
U.S. Exchange Stabilization Fund established by
Section 10 of the Gold Reserve Act of 1934, with
foreign monetary authorities, with the Bank
for International Settlements, and with other
international financial institutions:
Austrian schillings
Belgian francs
Canadian dollars
Danish kroner
Pounds sterling
French francs
German marks
Italian lire
Japanese yen
Mexican pesos
Netherlands guilders
Norwegian kroner
Swedish kronor
Swiss francs
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B. To hold balances of, and to have
outstanding forward contracts to receive
or to deliver, the foreign currencies listed
in paragraph A above.
C. To draw foreign currencies and to permit
foreign banks to draw dollars under the
reciprocal currency arrangements listed
in paragraph 2 below, provided that drawings
by either party to any such arrangement
shall be fully liquidated within 12 months
after any amount outstanding at that time was
first drawn, unless the Committee, because
of exceptional circumstances, specifically
authorizes a delay.
D. To maintain an over-all open position
in all foreign currencies not exceeding
$1.0 billion, unless a larger position is
expressly authorized by the Committee.
For this purpose, the over-all open position
in all foreign currencies is defined as the
sum (disregarding signs) of open positions
in each currency. The open position in a
single foreign currency is defined as holdings
of balances in that currency, plus outstanding
contracts for future receipt, minus outstanding contracts for future delivery of that
currency, i. e., as the sum of these elements
with due regard to sign.
2. The Federal Open Market Committee directs the Federal
Reserve Bank of New York to maintain reciprocal currency
arrangements ("swap" arrangements) for the System Open
Market Account for periods up to a maximum of 12 months
with the following foreign banks, which are among those
designated by the Board of Governors of the Federal
Reserve System under Section 214.5 of Regulation N,
Relations with Foreign Banks and Bankers, and with the
approval of the Committee to renew such arrangements
on maturity:
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Foreign bank
Austrian National Bank
National Bank of Belgium
Bank of Canada
National Bank of Denmark
Bank of England
Bank of France
German Federal Bank
Bank of Italy
Bank of Japan
Bank of Mexico
Netherlands Bank
Bank of Norway
Bank of Sweden
Swiss National Bank
Bank for International
Settlements:
Dollars against Swiss francs
Dollars against authorized
European currencies other
than Swiss francs
Amount of
arrangement
(Millions of
dollars equivalent)
250
1, 000
2, 000
250
3, 000
2, 000
2, 000
3, 000
2, 0OO
360
500
250
300
1, 400
600
1, 250
Any changes in the terms of existing swap arrangements, and
the proposed terms of any new arrangements that may be
authorized, shall be referred for review and approval to the
Committee.
3. Currencies to be used for liquidation of System swap
commitments may be purchased from the foreign central
bank drawn on, at the same exchange rate as that employed
in the drawing to be liquidated. Apart from any such
purchases at the rate of the drawing, all transactions in foreign
currencies undertaken under paragraph 1(A) above shall,
unless otherwise expressly authorized by the Committee, be
at prevailing market rates.
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4. It shall be the normal practice to arrange with foreign
central banks for the coordination of foreign currency transactions. In making operating arrangements with foreign
central banks on System holdings of foreign currencies, the
Federal Reserve Bank of New York shall not commit itself
to maintain any specific balance, unless authorized by the
Federal Open Market Committee. Any agreements or
understandings concerning the administration of the accounts
maintained by the Federal Reserve Bank of New York with
the foreign banks designated by the Board of Governors
under Section 214. 5 of Regulation N shall be referred for
review and approval to the Committee.
5. Foreign currency holdings shall be invested insofar as
practicable, considering needs for minimum working balances.
Such investments shall be in accordance with Section 14(e) of
the Federal Reserve Act.
6. All operations undertaken pursuant to the preceding
paragraphs shall be reported daily to the Foreign Currency
Subcommittee. The Foreign Currency Subcommittee consists
of the Chairman and Vice Chairman of the Committee, the Vice
Chairman of the Board of Governors, and such other member
of the Board as the Chairman may designate (or in the absence
of members of the Board serving on the Subcommittee, other
Board Members designated by the Chairman as alternates, and
in the absence of the Vice Chairman of the Committee, his
alternate). Meetings of the Subcommittee shall be called
at the request of any member, or at the request of the Manager,
for the purposes of reviewing recent or contemplated operations
and of consulting with the Manager on other matters relating
to his responsibilities. At the request of any member of the
Subcommittee, questions arising from such reviews and
consultations shall be referred for determination to the
Federal Open Market Committee.
7.
The Chairman is authorized:
A. With the approval of the Committee, to
enter into any needed agreement or understanding with the Secretary of the Treasury
about the division of responsibility for foreign
currency operations between the System and
the Treasury;
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B. To keep the Secretary of the Treasury fully
advised concerning System foreign currency
operations, and to consult with the Secretary on
policy matters relating to foreign currency
operations;
C.
From time to time, to transmit appropriate
reports and information to the National
Advisory Council on International Monetary
and Financial Policies.
8. Staff officers of the Committee are authorized to
transmit pertinent information on System foreign currency
operations to appropriate officials of the Treasury
Department.
9. All Federal Reserve Banks shall participate in the
foreign currency operations for System Account in
accoruance with paragraph 3 G(1) of the Board of
Governors' Statement of Procedure with Respect to
Foreign Relationships of Federal Reserve Banks dated
January 1, 1944.
FOREIGN CURRENCY DIRECTIVE
1. System operations in foreign currencies shall generally
be directed at countering disorderly market conditions,
provided that market exchange rates for the U.S. dollar
reflect actions and behavior consistent with the proposed
IMF Article IV, Section 1.
2.
To achieve this end the System shall:
A. Undertake spot and forward purchases and
sales of foreign exchange.
B. Maintain reciprocal currency ("swap")
arrangements with selected foreign central
banks and with the Bank for International
Settlements.
C. Cooperate in other respects with central
banks of other countries and with international
monetary institutions.
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3.
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Transactions may also be undertaken:
A. To adjust System balances in light of
probable future needs for currencies.
B. To provide means for meeting System
and Treasury commitments in particular
currencies, and to facilitate operations
of the Exchange Stabilization Fund.
C. For such other purposes as may be expressly
authorized by the Commttee.
4.
System foreign currency operations shall be conducted:
A. In close and continuous consultation and
cooperation with the United States Treasury;
B. In cooperation, as appropriate, with
foreign monetary authorities; and
C. In a manner consistent with the obligations of
the United States in the International Monetary
Fund regarding exchange arrangements under the
proposed IMF Article IV.
Paragraph 1(D) of the new Authorization specified a limit
of $1.0 billion on the System's over-all open position in all
foreign currencies "unless a larger position is expressly
authorized by the Committee. " The $1.0 billion limit was
intended to apply to the open position exclusive of the System's
obligations in Swiss francs remaining under drawings made in
1971, which currently were in process of repayment under a
schedule agreed upon with the Swiss National Bank.
Accordingly,
the Committee adopted the following special authorization:
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The Federal Open Market Committee authorizes the
Federal Reserve Bank of New York to maintain an over-all
open position in foreign currencies exceeding the figure of
$1.0 billion specified in paragraph 1(D) of the Authorization for
Foreign Currency Operations by an amount equal to the
remaining forward commitments associated with the System's
outstanding 1971 swap drawings in Swiss francs.
Votes for these actions:
Messrs. Burns, Volcker, Balles,
Black, Coldwell, Gardner, Jackson,
Kimbrel, Lilly, Partee, Wallich, and
Winn. Votes against these actions:
None.
The Committee also agreed upon certain procedural
instructions.
These were intended to clarify the respective roles
of the Committee, the Foreign Currency Subcommittee designated
in paragraph 6 of the Authorization, and the Chairman in providing
guidance to the Manager of the System Open Market Account with
respect to proposed or ongoing foreign currency operations under
the Authorization and Directive.
These instructions read as
follows:
PROCEDURAL INSTRUCTIONS
In conducting operations pursuant to the authorization
and direction of the Federal Open Market Committee as set
forth in the Authorization for Foreign Currency Operations
and the Foreign Currency Directive, the Federal Reserve
Bank of New York, through the Manager of the System Open
Market Account, shall be guided by the following procedural
understandings with respect to consultations and clearance
with the Committee, the Foreign Currency Subcommittee,
and the Chairman of the Committee. All operations
undertaken pursuant to such clearances shall be reported
promptly to the Committee.
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1. The Manager shall clear with the Subcommittee (or with
the Chairman, if the Chairman believes that consultation
with the Subcommittee is not feasible in the time available):
A. Any transaction which would result in a change
in the System's over-all open position in foreign
currencies exceeding $100 million on any day or
$300 million since the most recent regular meeting
of the Committee.
B. Any transaction which would result in gross
transactions (excluding swap drawings and repayments)
in a single foreign currency exceeding $100 million on
any day or $300 million since the most recent regular
meeting of the Committee.
C. Any swap drawing proposed by a foreign bank
not exceeding the larger of (i) $200 million or (ii)
15 per cent of the size of the swap arrangement.
2. The Manager shall clear with the Committee (or with
the Subcommittee, if the Subcommittee believes that
consultation with the full Committee is not feasible in the
time available, or with the Chairman, if the Chairman
believes that consultation with the Subcommittee is not
feasible in the time available):
A. Any transaction which would result in a
change in the System's over-all open position in
foreign currencies exceeding $500 million since
the most recent regular meeting of the Committee.
B. Any swap drawing proposed by a foreign
bank exceeding the larger of (i) $200 million or
(ii) 15 per cent of the size of the swap arrangement.
3. The Manager shall also consult with the Subcommittee
or the Chairman about proposed swap drawings by the System,
and about any transactions that are not of a routine character.
Votes for this action: Messrs.
Burns, Volcker, Balles, Black, Gardner,
Jackson, Kimbrel, Lilly, Partee, Wallich,
and Winn. Vote against this action:
Mr. Coldwell.
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In dissenting from this action, Mr. Coldwell noted that
paragraph 2 reserved to the full Committee the power to approve
market transactions by the System and swap drawings by foreign
central banks exceeding specified figures.
However, that language
was qualified by a parenthetical statement (similar to a statement
in paragraph 1) indicating that such transactions could be approved
by the Subcommittee or the Chairman under particular circumstances,
relating to the availability of time. Mr. Coldwell would have preferred
language indicating that such power--which extended to operations
up to the limits permitted by the Authorization--was reserved to
the full Committee except under circumstances of extreme emergency.
The foregoing actions were effective December 26,
3.
1976.
Authorization for domestic open market operations
Paragraph 2 of the authorization for domestic open
market operations authorizes the Federal Reserve Bank of
New York (and, under certain circumstances, other Reserve
Banks) to purchase short-term certificates of indebtedness
directly from the Treasury, subject to certain conditions.
authorization is,
This
in turn, based on a provision of Section 14 (b)
of the Federal Reserve Act authorizing the Federal Reserve Banks
to buy and sell obligations of specified types "directly from or to
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the United States, " subject to certain conditions.
It was
noted at this meeting that, because the statutory authority in
question had expired on November 1,
1976, paragraph 2 of the
authorization had been in a state of de facto suspension since
then, and that the paragraph would remain in suspension until
the enactment of expected legislation extending the authority.
@FedFRASER