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FEDERAL
For immediate release
RESERVE
press
release
October 14, 1968
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 July 16, 1968.
Such records are made available
approximately 90 days after the date of each meeting of the
Committee and will be found in the Federal Reserve Bulletin and
the Board's Annual Report.
Attachment
RECORD OF POLICY ACTIONS
OF THE FEDERAL OPEN MARKET COMMITTEE
Meeting held on July 16, 1968
1. Authority to effect transactions in System Account.
Staff estimates for the second quarter continued to indicate
sharp further advances in real GNP and in average prices as measured
by the "GNP deflator."
It now appeared, however, that growth in
consumer expenditures had been smaller than expected earlier and
that business fixed investment had declined somewhat.
Much of the
increase in real GNP was a consequence of a marked rise in the rate
of inventory accumulation, reflecting in part a build-up of
stocks of steel as a precaution against a possible strike when
current wage contracts expired on July 31.
Industrial production was estimated to have increased
somewhat further in June and retail sales, according to the advance
estimate, were unchanged.
Although the labor market remained
generally firm, growth of nonfarm employment had slowed in recent
months.
The unemployment rate rose from 3.5 per cent in May to
3.8 per cent in June, when young workers entered the labor force
in larger numbers than usual.
The consumer price index advanced again in May and was
about 4 per cent above a year earlier.
Average hourly earnings
had continued to rise at a substantial rate in recent months, but
increases in consumer prices had held down gains in real earnings
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7/16/68
and had contributed to demands for higher wages.
At the wholesale
level, average prices of industrial goods rose again in June after
declining in May.
Although increases had become less widespread
recently, it appeared likely that industrial prices would remain
under upward pressure in coming months.
In late June legislation was enacted that provided for a
10 per cent surcharge on income taxes, retroactive to April 1, 1968,
for individuals and to January 1, 1968, for corporations.
The
legislation also provided for a $6 billion reduction from the
January Budget estimate for Federal expenditures in the fiscal
year 1969.
However, the exemption from cuts of certain categories
of expenditures together with upward revisions in estimates of
defense spending suggested that the net reduction was likely to
be less than $6 billion.
Staff projections suggested that the pace of advance in
aggregate demands would moderate considerably in the third
quarter, partly as a result of this legislation.
It was expected
that consumer expenditures would advance at only about the moderate
pace of the second quarter--with a decline in the rate of personal
saving roughly offsetting the combined effects on disposable income
of the income tax surcharge and smaller employment gains; that the
rise in Federal spending would slow; and that residential
construction outlays would turn down.
On the other hand, some
increase in business fixed investment outlays appeared likely.
A
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significant reduction was now anticipated in the rate of inventory
accumulation; businesses were expected to shift from accumulation
to decumulation of steel stocks after the strike deadline and to
adjust stocks of consumer goods in line with the recently smaller
gains in sales.
In foreign exchange markets, the French franc continued
under heavy pressure in late June and early July.
The Bank of
France increased its discount rate from 3-1/2 to 5 per cent
effective July 3, and on July 10 announced that it had arranged
for $1.3 billion in new international credit facilities.
The
exchange rate for sterling reached a new low in late June,
but subsequently strengthened markedly as a result of two
developments:
(1) an announcement on July 8 that 12 central
banks and the Bank for International Settlements had given firm
assurances of their willingness to participate in new arrangements
to offset fluctuations in the sterling balances of countries in
the sterling area; and (2) the publication on July 11 of figures
indicating that British imports had declined significantly in
June for the first time since devaluation of the pound.
The
price of gold in the private London market recently had fallen
from around $41 to around $39 per ounce on rumors of an arrange
ment designed to encourage sales of gold in the market by
South Africa.
7/16/68
Tentative estimates suggested that the deficit in the
U.S. balance of payments on the liquidity basis had declined
markedly in the second quarter.
All of the improvement, however,
appeared to reflect special official transactions; except for
these transactions, the deficit would have been large.
The
merchandise trade account was in deficit in May for the second
time in 3 months.
On the official settlements basis the payments
balance was estimated to have been in substantial surplus in the
second quarter, as a result of a record increase in liabilities
of U.S. banks to foreign branches.
On July 2 the Treasury auctioned $4 billion of
tax-anticipation bills maturing in March and April 1969, for
which commercial banks were permitted to make payment in full
by credits to tax and loan accounts.
The Treasury was expected
to announce at the end of July the terms on which it would
refund the $8.6 billion of securities maturing in mid-August,
of which $3.6 billion were held by the public.
Current
estimates suggested that the Treasury also would have to
raise a substantial amount of new cash in August.
Conditions in securities markets had eased somewhat in
reaction to the enactment of fiscal-restraint legislation, and
yields on Government securities of all maturities had declined
moderately on balance in the period since the preceding meeting
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of the Committee.
The market rate on 3-month Treasury bills
initially fell sharply--from 5.60 per cent on June 18 to 5.20
per cent on June 21.
The abruptness of this decline was related
to heavy reinvestment demands by holders of maturing tax
anticipation bills and to substantial purchases of bills by the
System on June 19 to offset the effects on bank reserves of
large-scale international transactions.
Subsequently the 3-month
bill rate came under upward pressure partly as a result of the
Treasury's offering of tax bills in early July, and on the day
before this meeting it was 5.42 per cent, 18 basis points
below its level 4 weeks earlier.
Rates on other short-term
instruments showed smaller net declines over the interval, and
some--such as those on commercial paper--remained at their
mid-June levels.
Yields on long-term corporate and municipal bonds, for
which the volume of new issues continued sizable in June and July,
were little changed over most of the period since the preceding
meeting of the Committee.
Conditions in private bond markets
had become more buoyant in recent days, however, following the
good reception accorded a large corporate issue.
Expectations
of a near-term relaxation in monetary conditions contributed
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to the improvement in bond markets, as did the announcements of
new international support for sterling and the French franc.
System open market operations since the preceding
meeting of the Committee had been directed at maintaining firm
conditions in the money market, while accommodating tendencies
for short-term interest rates to decline following congressional
action on fiscal legislation.
The interest rate on System repur
chase agreements with nonbank dealers was reduced to 5-5/8 per
cent on July 5 from the level of 5-3/4 per cent that had been
employed since late April.
The effective rate on Federal funds,
which was mainly in a 6-1/4 to 6-1/2 per cent range early in the
interval, subsequently fluctuated primarily in a 6 to 6-1/8 per
cent range.
Member bank borrowings averaged $595 million and net
borrowed reserves $260 million in the 4 weeks ending July 10,
compared with averages of $720 million and $410 million,
respectively, in the preceding 4 weeks.
Conditions in markets for residential mortgages
continued to tighten through mid-June but appeared to have
stabilized thereafter.
Preliminary indications suggested that
the savings flow experience of nonbank depositary institutions
during the interest-and-dividend-crediting period around the
end of June was better than many industry observers had
expected.
7/16/68
Growth in time and saving deposits at commercial banks
in June remained at the low annual rate of about 3 per cent that
had prevailed in the two preceding months.
However, the net
reduction during the course of the month in the volume of large
denomination CD's outstanding was considerably less than normal
for the season, and in late June and early July the outstanding
volume was increasing.
By the time of this meeting most banks
issuing such CD's had reduced their offering rates for certificates
of longer maturity to levels below the Regulation Q ceilings.
Private demand deposits and the money supply continued to expand
rapidly in June, although not so rapidly as in May, and U.S.
Government deposits increased slightly after declining steadily
since February.
In the second quarter as a whole, during which
Government deposits fell substantially on balance, the money
supply grew at an annual rate of about 8.5 per cent, compared
with about 4.5 per cent in the first quarter.
Commercial bank credit, as measured by the bank credit
proxy--daily-average member bank deposits--increased at an annual
rate of 6 per cent in June after rising relatively little in May
and declining in April.
For the 3 months together, the proxy
series increased at an annual rate of 1 per cent, compared with
a rate of about 7 per cent in the first quarter.
Allowance for
changes in the daily average of U.S. bank liabilities to foreign
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branches, which are among the nondeposit liabilities omitted in
calculating the credit proxy, would have served to increase the
growth rates by about 2.5 percentage points in the second quarter
and 0.5 of a percentage point in the first.
It was expected that the pattern of bank credit growth
in July and August would be strongly influenced by Treasury
financing operations and by business borrowing to finance
additional tax payments required under the terms of the new
legislation.
Staff projections suggested that if prevailing
money market conditions were maintained the bank credit proxy
would grow at annual rates in the ranges of 1 to 4 per cent in
July, 10 to 12 per cent in August, and 6 to 8 per cent in the
2 months taken together.
In an alternative projection, in which
somewhat easier money market conditions were assumed, the annual
rate of increase in the bank credit proxy in July and August
together was estimated in a range of 7 to 9 per cent.
These
projections assumed that the Treasury would raise a total of
about $7.5 billion of new cash in the 2 months, including the
$4 billion already raised in July through the sale of tax
anticipation bills.
Allowance for a further increase in average
liabilities to foreign branches, expected to occur in July,
would have added about 1 percentage point to the limits of the
ranges of growth projected for July and August together.
7/16/68
It appeared likely that private demand deposits and the
money supply would continue to expand at a substantial rate on
average in July, but to slow sharply in the latter part of the
month and to change little on average in August, a period in which
Government deposits were expected to rise substantially on balance.
The outlook also favored further rapid growth in large-denomination
CD's outstanding, at least in July.
In the course of the Committee's discussion a number of
members indicated that they were inclined to maintain prevailing
money market conditions for the time being, while awaiting evidence
of the probable effectiveness of the recently enacted fiscal
restraint measures in containing inflationary pressures and
improving the underlying position of the balance of payments.
Other members, while not advocating a substantially easier monetary
policy at present, thought that the prospective effects of the new
fiscal legislation warranted seeking somewhat less firm money market
conditions to the extent such a course was consistent with the
forthcoming Treasury financing.
After considering these alternatives, the Committee agreed
upon an intermediate course.
Specifically, it was decided that
open market operations should be directed at accommodating
easing tendencies in money market conditions in the period ahead if
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such tendencies arose from market forces; and at cushioning upward
pressures on interest rates if they should develop.
It also was
agreed that operations should be modified, to the extent permitted
by the Treasury financing, if bank credit appeared to be deviating
significantly from current projections.
The Committee also discussed the appropriate interest rate
for System repurchase agreements (RP's) with nonbank dealers.
The
members noted that market participants had attached some degree of
policy significance to recent changes in the RP rate and to the fact
that the rate employed most lately was still 1/8 of a percentage
point above the discount rate.
While the views of members differed
regarding the desirability of regular use of a flexible RP rate as
an instrument for influencing money market conditions, the Committee
thought that under existing circumstances it would be appropriate to
employ a 5-1/2 per cent rate beginning with the next occasion on
which the Account Management made repurchase agreements.
The following current economic policy directive was issued
to the Federal Reserve Bank of New York:
The information reviewed at this meeting indicates
that over-all economic activity continued to expand
rapidly in the second quarter, with inventory accumula
tion accelerating while the rise in capital outlays and
in consumer spending slowed. The new fiscal restraint
measures are expected to contribute to a considerable
moderation of the rate of advance in aggregate demands.
Industrial prices have been increasing less rapidly than
earlier but consumer prices have continued to rise
substantially and wage pressures remain strong. Growth
in bank credit and time and savings deposits has been
7/16/68
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moderate on average in recent months; growth in the
money supply has been larger as U.S. Government
deposits have been reduced. Conditions in money and
capital markets have eased somewhat, mainly in
response to the increase in fiscal restraint. Although
there recently have been large inflows of foreign
capital, the U.S. foreign trade balance and underlying
payments position continue to be matters of serious
concern. In this situation, it is the policy of the
Federal Open Market Committee to foster financial
conditions conducive to sustainable economic growth,
continued resistance to inflationary pressures, and
attainment of reasonable equilibrium in the country's
balance of payments.
To implement this policy, while taking account
of forthcoming Treasury financing activity, System
open market operations until the next meeting of the
Committee shall be conducted with a view to accommodat
ing the tendency toward somewhat less firm conditions
in the money market that has developed since the
preceding meeting of the Committee; provided, however,
that operations shall be modified, to the extent
permitted by Treasury financing, if bank credit appears
to be deviating significantly from current projections.
Messrs.
Votes for this action:
Martin, Hayes, Brimmer, Daane, Galusha,
Hickman, Kimbrel, Maisel, Mitchell,
Robertson, Sherrill, and Bopp. Votes
against this action:
None.
(Mr. Bopp voted as an alternate
member in place of Mr. Ellis, whose
membership on the Committee had
terminated on June 30, 1968, the
effective date of his resignation as
President of the Federal Reserve Bank
of Boston.)
2.
Amendments to authorization for System foreign currency operations.
The Committee ratified an action taken by members on July 2,
1968, effective on that date, to increase the System's swap arrangement
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7/16/68
with the Bank of France from $100 million to $700 million equivalent,
and to make the corresponding amendment to paragraph 2 of the
authorization for System. foreign currency operations.
As a result
of this action, paragraph 2 read as follows:
The Federal Open Market Committee directs the Federal
Reserve Bank of New York to maintain reciprocal currency
arrangements ("swap" arrangements) for 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:
Foreign bank
Amount of
arrangement
(millions of
dollars equivalent)
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:
System drawings in Swiss francs
System drawings in authorized European
currencies other than Swiss francs
100
225
1,000
100
2,000
700
1,000
750
1,000
130
400
100
250
600
600
1,000
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Votes for ratification of this
action: Messrs. Martin, Hayes,
Brimmer, Daane, Galusha, Hickman,
Kimbrel, Maisel, Mitchell, Robertson,
Sherrill, and Bopp. Votes against
ratification of this action: None.
(Mr. Bopp voted as an alternate
member in place of Mr. Ellis, whose
membership on the Committee had
terminated on June 30, 1968.)
Although the arrangement between the Bank of France and the
Federal Reserve had been the first negotiated when the System's swap
network was established in 1962, it had remained at $100 million
since early 1963 while various other lines in the network had been
enlarged from time to time.
The increase in this arrangement served
to bring the relative sizes of the arrangements in the System's swap
network into better balance.
It formed part of a package of credit
facilities provided to the Bank of France at this time by a number
of central banks to help deal with destabilizing exchange market
pressures.
The Committee also amended the foreign currency authorization
in another respect at this meeting.
Under paragraph 1C(1) of the
authorization, as it had been amended on November 14, 1967, the
Federal Reserve Bank of New York was authorized to have outstanding
forward commitments to deliver foreign currencies to the Stabilization
Fund of up to $350 million equivalent.
The limit had been increased
to that level (from a previous figure of $200 million) in November
to facilitate the "warehousing" by the System Account of Stabilization
Fund holdings of sterling if the resources of the Stabilization Fund
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proved inadequate to meet all the demands upon them from time to
time in the future.
At this meeting the Committee approved an increase in the
limit in question up to an amount not exceeding $1,050 million
equivalent, on the understandings that (1) the specific amount
would be determined by Chairman Martin (or in his absence,
Mr. Robertson, Vice Chairman of the Board of Governors) and
(2) that the action would become effective upon a determination
by Chairman Martin (or in his absence, Mr. Robertson) that it was
in the national interest.
Votes for this action: Messrs.
Martin, Hayes, Brimmer, Daane, Galusha,
Hickman, Kimbrel, Maisel, Mitchell,
Robertson, Sherrill, and Bopp. Votes
against this action: None.
(Mr. Bopp voted as an alternate
member in place of Mr. Ellis, whose
membership on the Committee had
terminated on June 30, 1968.)
This action was taken against the background of discussions
at meetings in Basle, Switzerland, on July 6-8, 1968, and prior
discussions between representatives of the U.S. Treasury and the
Federal Reserve.
At the Basle meetings agreement in principle
had been reached among representatives of the Bank for
International Settlements, the Bank of England, and 12 other
central banks including the Federal Reserve regarding new arrange
ments for offsetting fluctuations in sterling balances held by
countries in the overseas sterling area (OSA).
In general, the
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agreement provided for the extension of a medium-term facility of
$2 billion equivalent to the Bank of England by the BIS, with
backing provided by the participating central banks, acting where
appropriate on behalf of their Governments.
It was understood
that the agreement was contingent on the satisfactory completion
of negotiations by the British authorities with the OSA countries
concerning the management by the latter of their sterling reserves.
In the System's preliminary discussions with the U.S.
Treasury it had been agreed that the Treasury should participate
as principal in the arrangement, with the dollars to be made
available on a swap basis against sterling by the Stabilization
Fund.
It was also agreed that if the resources of the Stabilization
Fund should prove insufficient from time to time to meet these and
other commitments, the Federal Reserve would undertake to warehouse
temporarily for the Stabilization Fund necessary portions of the
sterling acquired by the latter.
It was reported at this meeting of the Committee that the
U.S. share in the arrangement would be in the neighborhood of
$600 million to $700 million.
After approving System participation
in the arrangement in the manner described, the Committee noted
that the agreement was contingent on certain negotiations by the
British authorities and that the specific size of the U.S. share
had not yet been determined.
Accordingly, it was decided that
both the effective date of the amendment to paragraph 1C(1) of
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the authorization and the new figure for maximum forward commitments
to the Stabilization Fund to be established by that amendment (within
the limit set by today's action) should be subject to determination
by Chairman Martin, or in his absence, Mr. Robertson.
Subsequently, agreement was reached on the new arrangement
at a meeting in Basle on September 9, 1968, with the U.S. share
established at $650 million, and the arrangement went into force
on September 23, 1968.
On September 24, Chairman Martin determined
that an increase in the limit on forward commitments to deliver
foreign currencies to the Stabilization Fund of $650 million
equivalent, to $1 billion, was in the national interest.
Accord
ingly, effective September 24, 1968, paragraph 1C(1) of the
authorization for System foreign currency operations was amended
to read as follows:
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:
C. To have outstanding forward commitments undertaken
under paragraph A above to deliver foreign currencies, up
to the following limits:
(1) Commitments to deliver foreign currencies
to the Stabilization Fund, up to $1 billion equivalent;
*
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@FedFRASER