The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
MEMORANDUM OF DISCUSSION
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, March 21, 1972, at
9:30 a.m.
PRESENT:
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Burns-, Chairman
Hayes, Vice Chairman
Brimmer
Coldwell
Daane
Eastburn
MacLaury
Maisel
Mitchell
Robertson
Sheehan
Winn
Messrs. Francis, Heflin, Mayo, and Swan, Alternate
Members of the Federal Open Market Committee
Messrs. Morris, Kimbrel, and Clay, Presidents of
the Federal Reserve Banks of Boston, Atlanta,
and Kansas City, respectively
Mr. Holland, Secretary
Mr. Broida, Deputy Secretary
Messrs. Altmann, Bernard, and Molony,
Assistant Secretarieg
Mr. Hackley, General Counsel
Mr. Partee, Senior Economist
Mr. Axilrod, Economist (Domestic Finance)
Mr. Solomon, Economist (International Finance)
Messrs. Boehne, Bryant, Gramley, Green, Hersey,
Hocter, Kareken, and Link, Associate
Economists
Mr. Holmes, Manager, System Open Market Account
Mr. Coombs, Special Manager, System Open
Market Account
3/21/72
Mr. O'Connell, General Counsel, Board of
Governors
Messrs. Keir, Pierce, Wernick, and Williams,
Advisers, Division of Research and
Statistics, Board of Governors
Mr. Wendel, Chief, Government Finance Section,
Division of Research and Statistics,
Board of Governors
Miss Eaton, Open Market Secretariat Assistant,
Office of the Secretary, Board of Governors
Messrs. Eisenmenger, Parthemos, Taylor,
Scheld, Andersen, and Tow, Senior Vice
Presidents, Federal Reserve Banks of
Boston, Richmond, Atlanta, Chicago,
St. Louis, and Kansas City, respectively
Mr. Debs, Vice President, Federal Reserve
Bank of New York
Mr. Lynn, Director of Research, Federal
Reserve Bank of San Francisco
Mr. Cooper, Assistant Vice President,
Federal Reserve Bank of New York
The Secretary reported that advices had been received of
the election by the Federal Reserve Banks of members and alternate
members of the
Federal Open Market Committee for the term of one
year beginning March 1, 1972; that it appeared that such persons
were legally qualified to serve; and that they had executed their
oaths of office.
The elected members and alternates were as follows:
Alfred Hayes, President of the Federal Reserve Bank of
New York, with William F. Treiber, First Vice President
of the Federal Reserve Bank of New York, as alternate;
David P. Eastburn, President of the Federal Reserve Bank of
Philadelphia, with Aubrey N. Heflin, President of the
Federal Reserve Bank of Richmond, as alternate;
Willis J. Winn, President of the Federal Reserve Bank of
Cleveland, with Robert P. Mayo, President of the
Federal Reserve Bank of Chicago, as alternate;
3/21/72
Bruce K. MacLaury, President of the Federal Reserve Bank
of Minneapolis, with Eliot J. Swan, President of the
Federal Reserve Bank of San Francisco, as alternate;
Philip E. Coldwell, President of the Federal Reserve Bank
of Dallas, with Darryl R. Francis, President of the
Federal Reserve Bank of St. Louis, as alternate.
By unanimous vote, the following
officers of the Federal Open Market Com
mittee were elected to serve until the
election of their successors at the first
meeting of the Committee after February 28,
1973, with the understandings (1) that in
the event of the discontinuance of their
official connection with the Board of
Governors or with a Federal Reserve Bank,
as the case might be, they would cease to
have any official connection with the
Federal Open Market Committee; and (2)
that insofar as the titles of the positions
to which they were elected differed from
those heretofore specified in the Committee's
By-Laws and Rules of Organization, conforming
changes were to be made in those documents:
Arthur F. Burns
Alfred Hayes
Robert C. Holland
Arthur L. Broida
Murray Altmann,
Normand R.V. Bernard,
and Charles Molony
Howard H. Hackley
David B. Hexter
J. Charles Partee
Stephen H. Axilrod
Robert Solomon
Edward G. Boehne, Ralph C.
Bryant, Lyle E. Gramley,
Ralph T. Green, A. B. Hersey,
William J. Hocter, John H.
Kareken, and Robert G. Link
Chairman
Vice Chairman
Secretary
Deputy Secretary
Assistant Secretaries
General Counsel
Assistant General Counsel
Senior Economist
Economist (Domestic Finance)
Economist (International
Finance)
Associate Economists
-4
3/21/72
Secretary's Note: In consequence of the
foregoing action, the opening sentences
of Sections 2, 3, and 6 of Article II
of the Committee's By-Laws, and the first
sentence of Section 3 of the Committee's
Rules of Organization, were amended to
read as follows:
By-Laws:
*
*
*
ARTICLE II. OFFICERS
Section 2. Secretary and Deputy and Assistant
Secretaries - At its first meeting on or after March 1
of each year, the Committee shall elect a Secretary
and one or more Deputy and Assistant Secretaries to
serve until the first meeting on or after March 1 of
the next year.. .
Section 3. Economists - At its first meeting on
or after March 1 of each year, the Committee shall
elect one or more Economists to serve until the first
meeting on or after March 1 of the next year. The
Committee shall also from time to time, as it may
decide, designate one or more of its elected Econo
mists as Senior or Associate Economists, or otherwise
qualify their titles. The Economists shall prepare
for the use of the Committee and present to it such
information about business and credit conditions as
will assist the Committee in the determination of
open-market policies, and shall perform such other
duties as the Committee may require.
Section 6. Filling Vacancies - At any meeting
the Committee may fill any vacancy in the offices
described in this Article.
3/21/72
Rules of Organization:
SECTION 3 - PERSONNEL
(a) Official Staff.-The official staff of
the Federal Open Market Committee includes its
Secretary, Deputy Secretary, and Assistant
Secretaries, General Counsel and Assistant
General Counsel, and Senior Economist, Economists,
and Associate Economists, who perform the duties
indicated by their titles. . . .
In connection with the foregoing action, Mr. Holland sug
gested that the Committee might want to authorize the Chairman to
have an ad hoc staff committee review its By-Laws, its Rules
relating to Organization, Procedure, and Availability of Informa
tion, and its general Regulation on open market operations, with
a view to developing recommendations for whatever technical
changes in those documents might be appropriate in light of
developments since they were last revised.
There was general agreement with this suggestion.
Secretary's Note:
Subsequent to the
meeting Chairman Burns designated
the following as members of the ad
hoc staff committee: Mr. Hackley,
chairman; Mr. Broida; and Mr. Debs
of the Federal Reserve Bank of New
York.
Mr. Brimmer noted that in recent years a number of improve
ments had been introduced in the manner in which the Committee
conducted its deliberations on policy.
further improvements might be possible.
He thought, however, that
One recent suggestion worth
-6
3/21/72
considering, for example, was that the Committee plan to devote
several meetings each year to an intensive discussion of the economic
situation and outlook and of monetary policy objectives for the
longer-run; and to confine its policy discussions at intervening
meetings to reviews of the situation in light of developments
in the interim.
In response to Mr. Brimmer's observation, Chairman Burns
suggested that members who would like to propose major or minor modi
fications in the Committee's procedures forward their proposals to
the Secretary.
When such proposals had been received he would review
them with the Secretary and decide how they might be handled.
Some proposed modifications might be so obviously desirable as
to call for their immediate adoption.
Others might require an evalu
ation by the Committee, possibly with a prior staff analysis.
By unanimous vote, the Federal
Reserve Bank of New York was selected
to execute transactions for the System
Open Market Account until the adjourn
ment of the first meeting of the Federal
Open Market Committee after February 28,
1973.
By unanimous vote, Alan R. Holmes
and Charles A. Coombs were selected to
serve at the pleasure of the Federal
Open Market Committee as Manager of the
System Open Market Account and as Special
Manager for foreign currency operations
for such Account, respectively, it being
understood that their selection was subject
to their being satisfactory to the Directors
of the Federal Reserve Bank of New York.
Secretary's Note: Advice subsequently was
received that Messrs. Holmes and Coombs were
satisfactory to the Board of Directors of the
3/21/72
Federal Reserve Bank of New York for ser
vice in the respective capacities indicated.
By unanimous vote, the action of
Committee members on February 29, 1972,
increasing from $2 billion to $3 billion
the limit on changes between Committee
meetings in System Account holdings of U.S.
Government and Federal agency securities
specified in paragraph 1(a) of the contin
uing authority directive, was ratified.
Mr. Holmes noted that the Committee's action of February 29
had been intended as a temporary precautionary measure.
Since the
larger limit no longer appeared likely to be needed, he suggested
that the earlier limit of $2 billion now be restored.
By unanimous vote, the limit on
changes between Committee meetings in
System Account holdings of U.S. Govern
ment and Federal agency securities
specified in paragraph 1(a) of the con
tinuing authority directive was reduced
from $3 billion to $2 billion.
By unanimous vote, the action of
Committee members on March 7, 1972, sus
pending until close of business on March 21,
1972, the lower limit on repurchase agree
ment rates specified in paragraph 1(c) of the
continuing authority directive, was ratified.
Messrs. Brimmer and Robertson noted that they had dissented
from the action of March 7.1
/
Having so recorded their positions,
1/ Mr. Brimmer had dissented from the March 7 action because
he felt that excessive reliance was being placed on RP's in open
market operations. He was also disturbed about the frequency with
which discretionary RP rates had been used recently. He thought
that since discretionary RP rates were typically below yields on
3-month Treasury bills, their continued use might give the market
a misleading impression of the Committee's policy objectives.
Mr. Robertson had dissented from action in question for the same
reasons underlying his dissents from similar (Footnote continued)
-8
3/21/72
they did not consider it necessary to dissent also from the
ratification.
By unanimous vote, the minutes of
actions taken at the meeting of the
Federal Open Market Committee on January
11, 1972, were approved.
The memoranda of discussion for the
meetings of the Federal Open Market Com
mittee on January 11 and February 14,
1972, were accepted.
Chairman Burns observed that Messrs. Daane, Coombs, and
he had attended a recent meeting of central bank governors in
Basle.
The Chairman invited Mr. Daane to report on the meeting.
Mr. Daane said he had found the meeting particularly
useful and constructive, and he believed it had made a significant
contribution to a better international monetary climate.
That
contribution had been underscored by subsequent developments in
the foreign exchange markets and by the related remarks made by
President Pompidou regarding the outlook for the dollar.
The most
important outcome of the meeting was a reaffirmation by the
governors of their determination to support fully the exchange
rates established in the Smithsonian Agreement, even if such
support involved continued additions of dollars to their holdings.
Mr. Daane added that the favorable outcome of the meeting
was due in no small measure to the participation of Chairman Burns.
(Footnote continued)
actions taken in December and January. In his judgment the procedure
was wrong; the Federal Reserve should be buying and selling outright
so that the market could see what the System was doing.
3/21/72
-9
The Chairman had been very effective both in his presentation and
in his responses to the questions and concerns of the other governors.
Those questions and concerns were really threefold.
First, there
was a concern, voiced most specifically by the French governor but
shared by others, with regard to what was viewed as the lack of a
U.S. program to accompany the Smithsonian Agreement.
The French
governor noted that a devaluing country normally devised a program
to make a new parity viable, but it appeared that the U.S. budgetary
deficit was mounting and that U.S. monetary policy had fostered a
sharp decline in interest rates since the Smithsonian meeting.
There
were related questions with regard to the prospects for the U.S.
balance of payments and U.S. controls on capital outflows.
A second
point of concern raised at the meeting related to what the governors
regarded as a negative U.S. attitude with respect to facilitating
repayments to the International Monetary Fund.
A third concern
related to what was viewed as U.S. unwillingness to open up dis
cussions on the issues of international monetary reform.
Mr. Daane noted that in his responses Chairman Burns had
emphasized the difference between a country which devalued its
currency during an economic boom and a country like the United
States which devalued at a time when it continued to face a
stubborn unemployment problem and a relatively sluggish economy.
The Chairman pointed out that the United States had adopted a
very forceful program directed toward wages and prices.
He also
indicated that the Government deficit had been overstated and
3/21/72
-10
stressed that he expected expenditures to flatten out.
In the
latter connection he also drew attention to the President's call
for an expenditure ceiling.
Mr. Daane added that in his comments on interest rate
developments the Chairman noted that recent declines in short-term
rates were not solely the result of monetary policy but had
reflected market forces, including sizable purchases of bills by
foreign monetary authorities.
He indicated that the Federal
Reserve recently had concentrated its purchases in the longer
term area and that the Treasury had reinforced those efforts to
moderate the downward pressures on short-term rates by marketing
a bill strip.
There had resulted a rise of 60 basis points or
more in bill rates during recent weeks.
With regard to the
concerns about the U.S. balance of payments, the Chairman had
underscored the need for patience.
He had also focused attention
on the very small gains that had been realized so far in the
trade negotiations. He also observed that there had been strong
pressures in the United States to remove controls on capital out
flows, but those pressures had been resisted thus far; and the
prospects were that only minor technical changes would be made in
the controls with minimal balance of payments effects.
Mr. Daane said that in response to the concerns about the
future of the IMF, the Chairman had indicated that the United
States was interested in the effective functioning of the IMF,
that its attitude with regard to repurchase transactions was not
-11
3/21/72
intransigent, and that it would play its proper role in support
of the IMF in
the future.
He also indicated that the United States
was willing to participate in an early meeting on the subject of
international monetary reform without prejudging the particular
forum or forums for discussion.
Mr. Daane added that Chairman Burns' quiet and effective
remarks had fostered a spirit of reconciliation and the meeting
had ended with a good atmosphere prevailing.
There was considerable
discussion with regard to the manner in which the press should be
handled and it had been decided not to change past procedures.
That meant there would be no press communique and no press "back
grounder."
Mr. Daane observed that the Sunday afternoon meeting had
been mainly devoted to a discussion of a report by the Standing
Committee on the Euro-Currency Market.
The meeting had resulted
in a directive to the Standing Committee to focus its attention
on a study of two possibilities:
The first
was the manner in
which flows into, the Euro-dollar market might be influenced
by the Bank for International Settlements through transactions
resembling open market operations, and the second involved a
hard look into the ways and means of controlling directly the
activities of Euro-dollar banks and the implications of employ
ing alternative techniques.
-12-
3/21/72
In response to the Chairman's question, Mr. Coombs indicated
that he had nothing to add to Mr. Daane's comprehensive report of
the meeting.
Before this meeting there had been distributed to the
members of the Committee a report from the Special Manager of the
System Open Market Account on foreign exchange market conditions
and on Open Market Account and Treasury operations in foreign cur
rencies for the period February 15 through March 15, 1972, and a
supplemental report covering the period March 16 through 20, 1972.
Copies of these reports have been placed in the files of the Com
mittee.
In comments supplementing the written reports, Mr. Coombs
said that since the last meeting of the Committee there had been
several developments favoring a recovery of the dollar on the
exchange markets.
Continuing slack activity and declining inter
est rates in Europe had been accompanied by economic recovery and
rising short-term rates here, with the result that the interest
rate gap was being squeezed from both sides.
European efforts to
bring inflation under control generally seemed far less successful
than the U.S. programs.
The British trade surplus had already
shifted into sizable deficit, while the latest figures from Germany,
Switzerland, France, and Italy also suggested that a turning point
in their trade balances might have been reached.
It was his
-13-
3/21/72
impression that Japan was benefiting from those developments, but
he also thought the U.S. trade balance would soon begin to reflect
the trends in Europe.
Mr. Coombs added that if, as he was inclined to believe,
the U.S. trade figures for 1971 were grossly distorted by expecta
tions of currency changes, the unwinding of such speculative
factors could swing the U.S. trade figures into surplus far sooner
than estimates of the underlying trends might suggest.
The improve
ment in the U.S. stock market and rising business profits should be
arousing the interest of foreign investors.
Finally, all of the
central banks party to the Smithsonian Agreement had shown no
hesitation so far in living up to their commitments to take in
inconvertible dollars when offered them by the market.
Unfortunately, Mr. Coombs continued, those favorable devel
opments had been swamped so far by recurrent speculative attacks
on the dollar.
The latest speculative wave, which crested out on
March 9, was set off by a tough speech by the French Finance
Minister Giscard d'Estaing.
In unusually blunt language, the
French Minister warned that unless the United States took action
to check the outflow of dollars European countries would resort to
exchange controls, since they were no longer prepared to take in
large amounts of inconvertible dollars and would not accept a
further revaluation of their currencies.
The shock effect of that
statement was further intensified a few days later by a formal
-14
3/21/72
agreement reached by the Common Market countries to narrow the
margin of fluctuation between their currencies to 2-1/4 per cent
as a major step towards monetary unification.
In the eyes of the
market, that agreement greatly increased the possibility of a con
certed European effort to liberate itself from the dollar either
through controls, as advocated by the French Finance Minister, or
through a joint float, as had been recommended by German and
Italian officials.
To the exchange market, those two risks sig
naled the same warning: to stockpile now those European currencies
that might become more expensive or even unavailable later on.
The main thrust of that new speculative attack was directed
toward the Dutch guilder and Belgian franc.
The two central banks
had shown no hesitancy in buying up more than $500 million offered
at their ceiling rates but it was significant that both countries
had taken immediate action to reinforce their controls against
further speculative inflows.
Such controls helped to fend off
further capital flows from the United States to Europe but they
simultaneously tended to lock in existing U.S.
in European currencies.
corporate positions
Those corporations hesitated to take pro
fits in a currency which they might not be able to reacquire when
it was needed.
Mr. Coombs noted that the markets recently had calmed
down considerably.
had a useful effect.
The further rise of short-term rates here had
Press commentary on the March BIS meeting
-15
3/21/72
also proved helpful, while recent expressions of support for the
dollar by President Pompidou relieved earlier fears of an imminent
clash with the French.
The dollar had lifted off the floor against
the major European currencies and its technical position was now
even stronger as a result of new short positions built up since
the beginning of the year.
The root of the confidence problem,
however, lay in persuading the market that the Smithsonian Agree
ment on parities could and would be reinforced by inter-govern
On that
mental efforts to rebuild the world financial system.
score, the markets still remained skeptical and, so far, the
major victim of that skepticism had been the dollar.
Mr. Coombs added that he would like to say a few words
about the new Werner Plan to narrow the band among the Common
Market currencies to 2-1/4 per cent.
As he had indicated in a
memorandum 1/ to the Committee, he thought the longer-term impli
cations of a narrower band among the European currencies were
ominous in the sense that it would tend to erode not only the
reserve
but also the transactions
role of the dollar.
The
tendency would be accentuated if, as was now being planned, the
European countries were to conduct the bulk of their intervention
in their own currencies.
Moreover, the new Werner Plan involved
setting up machinery for joint, coordinated market intervention
1/ A copy of this memorandum, dated March 8, 1972, and entitled
"Common Market Exchange Rate Policy" has been placed in the Com
mittee's files.
-16
3/21/72
by the European central banks.
Such intervention could readily
be transformed into a joint float against the dollar, probably
reinforced by tough exchange controls, and it would further
increase the risk in the eyes of the market that Europe might
move towards a defensive monetary bloc.
Mr. Coombs noted that the very negotiation of the new
Werner Plan had reacted against the dollar in the sense of creating
a presumption in the market that the floor on sterling and the
Italian lira, for example, would probably be significantly higher
than the official floor in the Smithsonian Agreement.
The upward
trend of the lira and sterling in January and February clearly had
been strongly influenced by that presumption.
But now that the
Agreement had been signed and all of the European central banks,
including the Bank of England, were committed to maintaining a 2-1/4
per cent spread against each other's currencies, he could see a
real possibility that sterling and the Italian lira, both of which
had been vulnerable to speculative attack, might become even more
vulnerable.
Thus, if either sterling or the lira came under sell
ing pressure, the central banks of both countries would initially
be forced to intervene at rates well above the ultimate floor
levels set by the Smithsonian Agreement.
But, if the market, as
he thought would be its inclination, regarded the Werner Plan floor
rates as no more than temporary defense lines, with the possibility
of falling back to the final defense lines of floor rates set by
-17
3/21/72
the Smithsonian Agreement, the Werner Plan could easily encourage
further speculation against European currencies running into
trouble.
If that prospect materialized, the big question then
would be whether outflows from European currencies becoming sub
ject to such speculation would be directed mainly towards the
dollar area or towards other European markets such as the German
mark or the Dutch guilder.
If the recovery of confidence in the
dollar was strong enough to attract such money flows in the direc
tion of the United States, those flows would help a great deal to
bridge the gap until the fundamentals of the U.S. balance of pay
ments were corrected.
On the other hand, if confidence in the
dollar remained weak, if there continued to be skepticism regarding
the prospects of longer-term negotiations, and if outflows from
London resulted in a further buildup of inconvertible dollars in
the hands of other European central banks, the Smithsonian Agree
ment would be further threatened.
That there might be grounds for
concern about shifts of funds from weaker to stronger European
currencies as well as outflows of dollars from the United States
to Europe served to emphasize the urgency of resolving the under
lying problems.
Mr. MacLaury remarked that since mid-August the swap lines
had not been usable as a cover for dollar accumulations by foreign
central banks.
He wondered, however, whether the United States
would be expected to support the currencies of its swap-line
-18
3/21/72
partners if they should experience speculative outflows of dollars.
Would the British and the Italians, for example, look initially to
the Federal Reserve for funds in that eventuality or would the
other European countries undertake to support those currencies?
Mr. Coombs replied that he thought the United States would
retain full discretion as to whether it would supply the funds.
Under the new Werner Plan, the initial support for a European
currency under pressure would be worked out among the Common
Market countries.
For example, in a situation where the lira was
weak, the mark was strong, and the spread between the lira and the
mark was widening, the Bank of Italy would intervene in the market
with marks borrowed from the German Federal Bank on a one-month
basis.
At the end of the month the Bank of Italy would pay off
the mark debt--if necessary, by drawing down its reserve assets in
proportion to its holdings of such assets.
Beyond that one-month
credit, the Bank of Italy could make use of the system of swap
line credits arranged among Common Market countries.
He did not
know whether the Bank of Italy might eventually turn to its U.S.
swap lines, but he suspected there would be strong pressure to
provide the necessary financing from within the Common Market.
Chairman Burns said he thought there would also be resis
tance in this country to providing financial assistance.
Mr. Coombs suggested that it might well be desirable for
the Europeans to handle such market intervention themselves.
Over
-19
3/21/72
the longer run the nature of the support transactions would depend,
of course, on the structure of the international financial mecha
nism and in particular on whether a truly international or a two
bloc structure materialized.
Mr. Brimmer noted that the System had had drawings
outstanding on the swap line with the National Bank of Belgium
continuously since June 30, 1970, and on other swap lines since the
spring and summer of 1971.
He wondered how much progress was being
made in reducing the System's indebtedness.
Mr. Coombs replied that the System had paid off about $190
million equivalent of its swap drawings since last August.
The
most recent repayment, amounting to $35 million, had been made
just before the year-end.
Mr. Brimmer inquired whether the uncertain prospects with
regard to further System repayments had created a problem in terms
of the Committee's own regulations.
He was raising the question
because the Committee's Authorization for System Foreign Currency
Operations contemplated that the duration of any swap-line use would
be limited to one year.
He wondered whether that regulation had
any real meaning under current circumstances.
Mr. Coombs noted that the Committee had expressly autho
rized all extensions of swap drawings beyond one year, as provided
for under paragraph 1D of the Authorization.
He added that thus
-20
3/21/72
far the European central banks seemed to have a full understanding
of the reasons why repayments were being delayed and were not in
any sense critical of the Federal Reserve.
They understood that
the repayments would become feasible only when a return flow of
dollars to the United States developed and that when it did mate
rialize the repayments would be automatic.
In further comments on this issue some members of the
Committee observed that the Committee did not seem to have much
choice with regard to the extensions, although the U.S. Govern
ment could always undertake to pay off the System's indebtedness
through use of the nation's reserve assets.
Chairman Burns said it was his impression that in the
process of accumulating the swap-line indebtedness a sufficiently
clear picture of the country's reserve-asset position had not been
conveyed to foreign central banks or perceived by U.S. officials.
Those assets appeared to be larger than they in fact were.
In
any event, the issue of the appropriate duration of drawings was
one that the Committee would want to consider in the future.
He
agreed that such drawings could be very helpful, but he thought
they should be strictly limited to short periods.
In his view the
Committee had been wise when it drew up regulations which required
relatively prompt repayments.
-21
3/21/72
In response to questions by Messrs. Brimmer and Mitchell,
Mr. Coombs observed that foreign central banks would be delighted
to be repaid in reserve assets.
While they were prepared for the
present to take in inconvertible dollars from the market, whether
they would do so indefinitely was another question.
The Federal
Reserve had not been asked to acquire foreign currencies in the
market for the purpose of repaying its drawings; indeed, the
British, Belgian, and Swiss authorities had resisted such an
approach on the ground that exchange rates would be driven up and
the risk of a new wave of speculation would be generated.
Responding to a question by Mr. Coldwell, Chairman Burns
indicated that discussions were under way with Treasury officials
regarding the possibility that the System's swap drawings might
eventually be liquidated with reserve assets provided by the
Treasury.
No decisions had been reached thus far by the Treasury;
the problems involved were difficult and it would take time to
resolve them.
The conversations had been given special impetus
by the recent hearings on the gold bill, and by the preceding dis
cussion of his proposed testimony with Treasury officials.
In the
course of his testimony he had commented at some length on prospec
tive Federal Reserve losses stemming from the new foreign exchange
parities.
Mr. Mitchell indicated that he was troubled by the possi
bility that the System's inability to repay its swap drawings
-22
3/21/72
might threaten the longer-run viability of the System's swap
network.
Mr. Coombs said he thought the System's swap network had
been damaged, but whether the damage would be permanent was an
open question.
The present situation was so abnormal that he
hesitated to reach any firm conclusions with regard to the longer
run.
He might note, however, that the British had settled their
indebtedness after a long delay.
It appeared likely that in the
future the European countries would place primary reliance on
their Common Market partners in financing deficits in their bal
ance of payments.
At Mr. Brimmer's suggestion it was agreed to insert in
the memorandum of discussion for today's meeting the portions of
Chairman Burns' testimony on March 2, 1972 before the House
Banking and Currency Committee relating to the System's potential
losses on its swap drawings.
The testimony in question read as
follows:
"The Federal Reserve System will be affected by
the financial and accounting adjustments in two ways.
First, the Treasury will be able to issue new gold
certificates to the Federal Reserve Banks in an amount
equal to the increment in the book value of the Trea
sury gold stock. To the extent that it does so, the
Treasury's cash balance will rise. A subsequent
return of its cash balance to previous levels would of
itself result in an increase of bank reserves, but
this increase could be offset--in whole or in partby Federal Reserve open market operations.
"The other effect on Federal Reserve transactions
and accounts will occur in connection with settlement
3/21/72
-23-
of commitments under the reciprocal currency arrange
ments with foreign central banks. Use of a 'swap'
arrangement by the Federal Reserve entails an obliga
tion to deliver a specified amount of foreign currency
at a future date. Similar commitments have been under
taken by the Treasury on its debt securities denomina
ted in foreign currencies. At the present time, the
Federal Reserve has outstanding foreign commitments of
$2.86 billion. Inasmuch as the dollar prices of the
affected currencies--namely, Swiss francs, Belgian
francs, pounds sterling, and German marks--have risen
since the swap drawings were made, there will be a
cost to the Federal Reserve--presently estimated at
less than $200 million--of liquidating these drawings.
"The purpose of the swap transactions carried
out in 1971, as in earlier years, was to defer or
reduce declines in reserve assets that might other
wise have occurred. The losses to be taken when the
swaps are settled will reduce the earnings of the
Federal Reserve System that are turned over to the
Treasury. But against this loss the Treasury may have
a roughly offsetting profit on the gold and other
reserve assets which it still holds because of the
willingness of foreign central banks to accept Federal
Reserve swap drawings instead of demanding reserve
assets from the Treasury."
By unanimous vote, the System
open market transactions in foreign
currencies during the period February
15 through March 20, 1972, were
approved, ratified, and confirmed.
Mr. Coombs said that he had recommendations on swap
drawing renewals which related to the Committee's discussion
today.
As had been noted earlier, the swap line with the National
Bank of Belgium had been in continuous use since June 30, 1970.
Four drawings on that Bank, totaling $130 million, would mature
in the period from April 4 through April 28.
He did not know
whether it would be possible to work out some arrangement with the
-24
3/21/72
Belgian authorities for paying off the drawings, through the mar
ket or through other means.
Accordingly, he would recommend that
the Committee authorize their renewals for further periods of
three months
should it not prove feasible to liquidate the draw
ings at maturity.
In response to a question by Mr. Coldwell, Mr. Coombs
indicated that the Belgians thus far had not suggested that they
would resist renewal of maturing drawings.
Mr. Mitchell said it was not clear to him how the drawings
might eventually be liquidated and in particular what position the
Treasury would adopt with regard to backstopping the Federal
Reserve.
Mr. Coombs observed that one possible avenue of repayment
would be the provision of reserve assets by the Treasury as con
templated in a letter dated July 23, 1968, from then Secretary of
the Treasury Fowler to Chairman Martin.
A second and preferable
avenue would involve a reversal of speculative flows that would
enable the System to buy the required Belgian francs in the mar
ket.
A third avenue would be to reach an agreement with the
Belgian authorities on an amortization schedule.
That approach
presumably would involve the purchase of Belgian francs at the
ceiling from the National Bank of Belgium.
Such a possibility
had been raised with the Belgian authorities at the Treasury's
suggestion but thus far no response had been received.
3/21/72
-25
Mr. Coombs added that paragraph 4 of the Committee's
foreign currency authorization provided that foreign currency
transactions should be coordinated with foreign central banks.
The Belgians had been opposed to System market purchases of francs
that would drive up the exchange rate and intensify speculative
pressures.
What was at stake, of course, was the viability of the
parities established in the Smithsonian Agreement.
By unanimous vote, renewal for
further periods of three months of
the four System drawings on the
National Bank of Belgium maturing
in the period April 4-28, 1972, was
authorized.
Mr. Coombs then noted that a memorandum from Mr. Bodner,
entitled "Activation of revaluation clause in Belgian swap arrange
ment," had been distributed to the Committee yesterday.
The
memorandum described a Belgian proposal regarding the manner of
effectuating the revaluation clause protection given the System
under the swap arrangement.
The question had been complicated,
however, by the fact that the Treasury had made a counter-proposal
yesterday afternoon.
In view of the complexity of the issue and
the fact that negotiations involving the Treasury and the Belgians
would be required, he would recommend that the Committee delegate
authority to act on its behalf in the matter to the subcommittee
designated in paragraph 6 of the foreign currency authorization-
1/ A copy of this memorandum has been placed in the Committee's
files.
-26-
3/21/72
namely, Chairman Burns, Vice Chairman Hayes, and Mr. Robertson,
or their alternates.
It was agreed that a subcommittee,
consisting of the Chairman and Vice
Chairman of the Committee and the Vice
Chairman of the Board of Governors, or
designated alternates, should be autho
rized to act on behalf of the Committee
with respect to the manner of effectu
ating the revaluation clause in the
System's swap contract with the National
Bank of Belgium.
The Chairman 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. Partee made the following statement:
The economic information that has become available
since the last meeting of the Committee shows a notable
strengthening in tone. This improvement is reflected
in the red book,1/ with virtually every District report
ing at least some further increase in business activity
or optimism or both. It is also evident in most of the
incoming national business statistics. Thus, industrial
production is now shown to have risen substantially in
both February and--after upward revision--January; for
the two months combined, the increase was at an 8 per
cent annual rate and appears to have been unusually
broadly based. After surging upward in January, manu
facturers' new orders for durable goods in February fell
back somewhat, mainly in defense. For the two months,
however, total new order volume was 8-1/2 per cent above
the fourth-quarter average. And nonfarm employment was
1/ The report, "Current Economic Comment by District," prepared
for the Committee by the staff.
3/21/72
-27-
revised markedly upward in January; only a moderate
further increase was reported for February, but the
gain over the past six months has been at a very
respectable 2.3 million annual rate.
The one important statistic that has failed thus
far to join in the upward parade is retail sales.
Total trade failed to show any net recovery in January
and February, following the rather disappointing pre
Christmas performance. As a result, sales volume
this year has been slightly below the fourth-quarter
average. In part, the shortfall from normal growth
expectations is accounted for by automobile dealers,
whose dollar volume has remained somewhat below the
exceptional fourth-quarter performance. In addition,
however, sales have shown little or no growth from the
fourth quarter in a variety of categories, including
food stores, apparel stores, drug stores, and gasoline
stations. The major exceptions to this sluggish sales
pattern have been furniture and appliance stores, where
volume is booming, and general merchandise, where mod
erate over-all sales gains may also be reflecting
strength in the home furnishings departments.
There are a number of factors that could account
for the recent lag in consumer spending. First, it
now appears that the new Treasury withholding schedules
resulted in a very substantial boost in tax payments
when they initially took effect in mid-January. Thus,
Board staff estimates are that withheld taxes in the
six weeks after mid-January were at an annual rate about
$14 billion larger than could be accounted for by growth
in incomes and other changes in tax law, although the
excess of withholdings appears to have declined sharply
in March. Second, the unusually warm winter experienced
over most of the country this year may have adversely
affected sales in some lines, such as apparel and drugs.
Finally, it does not seem unreasonable that the surge
in new car sales last fall, financed as it was by exten
sive use of credit, would be followed by a period of
somewhat more conservative spending behavior.
Personal incomes have risen sharply in the first
two months of 1972, and continuing substantial gains
are in prospect as employment recovers and wage rates
advance. Therefore, we still anticipate a good growth
in consumption this year, along with the rise in incomes.
I would not be surprised also to see some decline in the
unusually high personal saving rate, though the staff
projection does not allow for this until late in the
3/21/72
-28-
year. The strength in home furnishing sales, which
should continue, is a good omen in this regard, as is
the fact that total new car sales in terms of units
have held above a 10 million annual rate in the winter
months of the year. A gradual strengthening in the
labor market should also add to consumer confidence,
thus tending to encourage larger outlays in relation
to more certain income flows.
The weakness in retail sales has led us, once
again, to reduce our estimates of consumption for the
first quarter. Also, it appears that the improvement
in net exports will be a good deal less than we had
been projecting. Nevertheless, the increase in nomi
nal GNP may still be in the $30 billion range, because
of offsetting strength in housing and in business
capital expenditures. The initial, and highly confi
dential, Commerce Department estimate for the quarter
indicates a rise of $28-1/2 billion in nominal GNP,
and a gain of 5-1/2 per cent, annual rate, in real
terms. But we think that some upward revision is
fairly likely before the first published estimates are
made available a month from now.
All of the components of investment are showing
considerable present or prospective strength. Housing
starts, as you know, were extraordinarily high in
February. Even if starts now begin to drop off, which
seems likely, residential construction outlays will be
higher than we have projected through at least the first
half of the year. Business capital expenditures, judg
ing both by the successive surveys of anticipations and
new orders for capital equipment, seem clearly to be in
a strengthening trend. Here too, the surveys, if taken
literally, indicate a stronger expansion in the first
half than in the second half of the year. And it seems
increasingly likely that business inventory accumulation
will be a positive force in the economic recovery this
year. The over-all stock/sales ratio has declined fur
ther in recent months, to the lowest point in over five
years, and durable goods manufacturers appear now to be
accumulating inventories for the first time since the
runup in steel stocks prior to the threatened strike
last July.
In short, although our projection of GNP growth
during 1972 has not changed appreciably, I feel consid
erably more confident that the increase projected will
be realized than I did a month or two ago. Qualitatively,
if not quantitatively, the economic situation appears to
3/21/72
-29-
have strengthened appreciably over this period. True,
consumer spending has continued to lag, but I feel
reasonably confident that such spending will pick up
as output, employment and incomes expand. And the
prospects for investment, including housing, seem
materially stronger than was the case even a few months
ago.
If economic recovery is indeed beginning to develop
real strength, then the choices for monetary policy are
likely to grow more difficult in the months ahead. It
is still clearly vitally important that funds remain
readily available during this period to support housing,
investment, and other financing needs that are serving
to bolster the economy. It is also desirable, in my
view, that long-term interest rates remain attractive
enough to induce borrowers to carry through on their
spending and financing plans. But it is also becoming
more important that monetary policy avoid a defense of
any particular structure of interest rates at the
expense of too swift an expansion in the monetary aggre
gates. If the economy should begin to develop a real
head of steam--exceeding our present projectionsrapid monetary expansion now could lead to difficulty
later on in 1972 or early 1973.
To be sure, the growth in nominal GNP that we have
projected will require a substantial monetary expansion
if marked increases in interest rates this year are to
be avoided. We have felt that an expansion rate of
around 7 to 8 per cent in M 1 would be consistent with
these objectives. But I would not be comfortable with
monetary growth substantially higher than that, for
fear of its longer-term implications. Therefore, I
would recommend that the Committee hold to a course
that provides only enough reserves to support such an
expansion in M1, and associated growth rates in M2 and
bank credit, even if this should require that money
market conditions be tightened further in the weeks and
months to come.
Mr. MacLaury asked whether the 7 to 8 per cent rate of
monetary expansion that Mr. Partee had said was consistent with
the staff's projection of nominal GNP was a rate projected for
just the first half of 1972 or throughout the year.
-30
3/21/72
Mr. Partee replied that, as he had reported at the Commit
tee's meeting on February 15, the staff's judgmental model was
based on an assumption that long-term interest rates would not
rise appreciably before mid-year, and that this seemed consistent
with the assumption of expansion in the narrowly defined money
stock at a rate of around 7 per cent throughout the year.
As part
of the staff's rethinking of the judgmental projection for the pre
vious meeting, the quarterly econometric model was rerun using
rates of expansion in M1 of 8 per cent, which was not far from
what had been developing, and 6 per cent.
Monetary expansion at a
rate of 8 rather than 7 per cent produced a little faster rate of
increase in GNP as the year progressed and a smaller increase in
short-term interest rates.
With the 6 per cent rate of expansion
in M1, the rise in interest rates was larger.
Mr. Partee noted
that in his presentation today, he had avoided being very specific
and had cited a rate of expansion of 7 to 8 per cent in M1 , as
consistent with a rate of growth of 10 per cent in nominal GNP.
Mr. Francis remarked that he was in agreement with
Mr. Partee's assessment of the economic situation.
However, he
was concerned about an additional element in the situation--namely,
the rapid rate of increase in the wholesale price index since last
November.
The rate of increase in the industrial price level was
reminiscent of developments in late 1970 and early 1971.
3/21/72
-31
In response to a question from Chairman Burns, Mr. Wernick
reported that wholesale prices of industrial commodities rose at
an annual rate of 4.7 per cent in February, 4.8 per cent in Janu
ary, and 4.2 per cent over the three months from November to
February.
Mr. Partee said that he was somewhat perplexed by recent
price developments.
Such large increases in food prices as occurred
in recent months were associated with supply developments and were
not determined by advances in wage rates.
However, the rate of
increase in industrial commodities was relatively high and con
trasted with the reported rate of advance in wages.
February
In January and
wage rates rose at an annual rate of only 3 per cent,
which was below the trend rate of increase in productivity, and
labor costs per unit of output did not rise.
It was possible that
the Price Commission's program of term-limit pricing
arrangements
for individual large companies, announced in December, caused some
bunching of price increases.
He would expect that if wage rates
continued to behave as they had recently, the rise in prices would
subside.
Chairman Burns commented that profit margins had fallen
to abnormally low levels.
The stepped-up rate of increase in
industrial prices in recent months might reflect an effort on the
part of business to restore profit margins.
-32
3/21/72
Mr. Coldwell said that the latest data seemed to support
two basic conclusions.
First, as Mr. Partee had pointed out, the
economic recovery was proceeding at a more rapid pace and it
seemed to be more broadly based.
Second, the rate of inflation
was accounting for a larger part of the advance in nominal GNP.
There was some evidence that business inventory demands had
picked up.
Consumer spending was not expanding, but he suspected
that it would not remain static.
Housing starts were strong, and
business capital outlays were rising--not so much for new plant
but for pollution control and new machinery.
As yet he saw no
evidence of any major new hiring of workers in industry, but
efforts to hold and to hire workers with special skills suggested
some improvement in the labor market.
Mr. Coldwell observed that there were still elements of
uncertainty that the Committee needed to keep in mind.
Specific
ally, the functioning of the Pay Board and Price Commission still
tended to create some uneasiness.
And the international financial
situation was a continuing source of uncertainty, especially as
daily comments in the press tended to suggest that settlement of
those problems would be long delayed.
There were growing fears of
a further devaluation and of more exchange controls.
Mr. Kimbrel said he had understood Mr. Partee to say that
the staff's judgmental model was based on an assumption that long
term interest rates would not rise before the middle of this year.
-33
3/21/72
He inquired how much more of an increase in short-term interest
rates might be possible without exerting upward pressure on long
term rates.
In reply Mr. Partee observed that the market for long-term
securities behaved very well over the period since the Committee's
last meeting, when short-term rates rose 80 to 90 basis points.
Inflows of funds into savings institutions were very large, and
New corporate issues
mortgage rates were still tending downward.
of bonds had moderated, and the volume of new municipal issues was
not extremely high.
In the long-term market, supply and demand
appeared to be pretty well balanced and there was no reason for a
rise in rates until later in the recovery.
If the rise in short
term rates continued it might well bring some sympathetic increases
in long-term rates, but he would not expect such increases to be
sustained for long.
Mr. Heflin said he agreed with Mr. Partee that the pace
of the recovery appeared to have quickened, and it seemed to him
now that the Committee should be looking ahead for the possible
roadblocks that might stall further progress.
First, he was con
cerned about the possibility of a dock strike, and he wondered
whether the staff had any views regarding the effects such a
strike would have on the course of the economy.
Second, he was
concerned about the recent behavior of consumer spending.
He
noted that in the staff projection of GNP, consumption expenditures
-34
3/21/72
were indicated to rise by only $11 billion in the first quarter
of this year and then to accelerate over the rest of the year.
He did not see the sort of consumer enthusiasm and optimism that
would support that much of a gain, and he wondered what the pro
jection was based on.
Mr. Partee replied that it was very difficult to appraise
the potential effects of a dock strike.
Now that the Pay Board
had determined to cut the increase on straight wages that had been
negotiated for the first year from 16 per cent down to 10 per cent,
excluding fringe benefits, the West Coast longshoremen were con
sidering what course to follow.
A decision to strike would pose
very important issues of Government policy and possibly of law.
With respect to the economic impact, the flow of merchandise could
be pretty well maintained without operation of the West Coast
ports by diversion of goods through Canada, Mexico, and Gulf ports.
Should the situation at East Coast ports also develop into such a
confrontation, the outlook would be much more serious.
Mr. Wernick commented that labor leaders were scheduled
to meet in Washington tomorrow.
Decisions probably would be made
then concerning both continued labor representation on the Pay
Board and a West Coast port strike.
Mr. Sheehan observed that such a strike would be in vio
lation of the Economic Stabilization Act.
-35
3/21/72
Chairman Burns agreed, and commented that it would call
into question the whole mechanism of the Pay Board and Price
Commission.
Concerning Mr. Heflin's second question, Mr. Partee noted
that in his statement he had explained his expectation of a strong
rise in consumer spending after the current quarter largely in
terms of special factors that had been holding down such spending
in the current quarter.
The most important factor was the over
withholding of income taxes resulting from the new withholding
schedules introduced this year, which had had a substantial impact
on middle-income taxpayers.
The adverse effects of overwithholding
would fade as more and more taxpayers filed the necessary W-4 forms
to bring withholdings more in line with their tax liabilities, and
there was evidence that the amount of overwithholding was already
reduced in March.
Chairman Burns observed that the April filing of estimated
tax liabilities for 1972 and simultaneous payment of the first
quarterly instalments of taxes for 1972, which would presumably
be smaller because of overwithholding from current incomes, would
also provide some offset.
A second factor that had been holding down consumer spend
ing, Mr. Partee continued, was the unusually warm weather over
most of the country.
Third, the surge in new car sales last
autumn and the accompanying rise in outstanding instalment credit
obligations might have contributed to a more conservative spending
-36
3/21/72
behavior in the first quarter.
Since all of these effects were
rather temporary in nature, it seemed likely that continued expan
sion in incomes would soon be accompanied by a stronger expansion
in consumer spending.
Chairman Burns observed that rising business investment
and Government expenditures in the period ahead would have a
multiplied effect on personal income.
Mr. Hayes commented that the analysis of the business
situation by the staff at the New York Bank was very close to that
presented by Mr. Partee.
The prospects for continued improvement
in the economy looked stronger now than they had a month or two
ago.
The recent weakness in consumer spending might prove to be
largely temporary.
He had been told by some of the directors at
the New York Bank that they did not yet see a broad improvement
in consumers' attitudes, but there were straws in the wind.
For
example, purchases of the more or less luxury goods sold by a
manufacturer of photographic equipment had been improving.
Mr. Hayes observed that he was cautiously optimistic with
respect to price prospects.
The Pay Board, in his view, had shown
courage in its decision on the West Coast longshoremen's contract
and the Price Commission also had taken some very creditable
actions.
However, he shared Mr. Francis' uneasiness about the
recent behavior of wholesale prices of industrial commodities.
Finally, there had not yet been any fundamental improvement in
-37
3/21/72
the balance of payments, and the Committee had to remain alert with
respect to the international situation.
Mr. Winn said he would like to raise a flag of caution with
respect to the stock market, where there was considerable evidence
of potentially troublesome speculation.
He was not sure what the
effect of that was on confidence, but he did wish to call to the
Board's attention the fact that since margin requirements had been
reduced in early December, there had been one of the sharpest rises
in margin credit ever recorded.
Such credit at brokers and dealers
had now risen almost to the 1968 peak.
Chairman Burns said he was glad that Mr. Winn had called
attention to developments in the stock market.
He was aware of
those developments, and he thought that the Board should pay close
attention to them.
The situation would be put on the agenda for
review at a meeting of the Board.
Mr. Mayo said he also agreed with the general tone of the
staff presentation on economic prospects.
However, he believed the
projection of Federal spending was overstated for the second quarter,
although it might not be for the calendar year as a whole.
With
respect to prices, he was concerned about the behavior of food prices
and their psychological impact.
The rise in food prices could have an
important effect on the housewife's gauge of inflation and could have
harmful consequences for the course of the economy.
-38
3/21/72
Mr.
Swan noted that Mr. Partee had pointed to the over
withholding of income taxes as an important factor in the recent
weakness in consumer spending.
He asked why that factor would
not also have led to a reduction in the rate of personal saving.
According to the green book,1/ the saving rate was rising in
the first quarter.
Mr. Partee replied that the first-quarter
disposable income and saving contained in
were too high.
figures for
the latest green book
They reflected estimated overwithholding at a
$4 billion annual rate, and there was evidence now that the rate
Therefore,
might be as high as $8 billion.
the increase in
saving rate indicated--from 7.8 per cent in the fourth quarter
to 8.4 per cent in the first quarter--was overstated; on the
basis of the higher estimate for overwithholding,
saving rate was about 8 per cent.
of funds into savings institutions,
were an important determinant.
the first-quarter
As to the high rate of inflows
interest rate relationships
He expected that the inflows
would fall off now that market rates of interest had increased.
Mr.
Eastburn asked whether the surveys of consumer inten
tions supported the staff's expectation of stronger consumer
spending over the balance of the year.
1/ The report, "Current Economic and Financial Conditions,"
prepared for the Committee by the Board's staff.
3/21/72
-39
Mr. Partee replied that the Sindlinger survey had shown
considerable improvement since last summer, based mainly on better
employment prospects, but recent surveys by the University of
Michigan Survey Research Center had not indicated much strength.
A new Michigan survey was about due.
In the past, the Michigan
survey had not given much evidence of improvement in consumer
attitudes until the rate of increase in employment and income had
actually picked up.
Mr. Brimmer said he would like to know the staff's latest
assessment of prospects for employment and for the rate of increase
in output per manhour during this year.
Earlier the staff had
expected productivity growth to rise to a rate of 3-3/4 per cent in
1972, compared with 3 per cent over the preceding 18 months.
A
staff assessment of employment prospects by major industries, made
in response to his request, suggested that growth of employment
would be slow outside the service and trade sectors even with out
put growing rapidly.
Mr. Partee had expressed concern about the
possibility of a still stronger expansion, and he (Mr. Brimmer)
wondered what the implications were for the employment situation.
Chairman Burns observed that employment had increased and
unemployment had declined, but he was disturbed to find that the
unemployment rate had risen for teenagers and had not improved
for blacks.
-40
3/21/72
In
reply to Mr.
Brimmer,
Mr. Partee agreed that the rate
of increase in productivity was likely to be appreciable--on the
order of 3.7 per cent from the end of 1971 to the end of 1972.
A
high rate was desirable, of course, in that it would help to limit
upward pressures on prices, but it would also hold down the gains
in employment.
Nevertheless, the staff's projections for real GNP
and output per manhour implied considerable expansion in employ
ment.
A gain of 2.1 million in nonfarm employment was projected
from the fourth quarter of 1971 to the fourth quarter of 1972.
Most of the gain was expected to occur in trade, services, and
State and local government.
The prospective increase in manufac
turing was small--only about 300,000 over the balance of this yearand that would leave sizable pockets of unemployment among workers
ordinarily employed in factories.
The over-all rate of unemploy
ment at the end of the year still was expected to exceed 5 per
cent.
With that prospect for unemployment, Mr. Partee continued,
resources clearly were available to permit a faster rate of expan
sion in output and employment than that projected by the staff.
The concern he had wished to convey in his statement related to
the possibility that cumulative forces of recovery would develop
to the point that economic expansion could substantially exceed
the rate projected by the staff.
He had in mind the possibility
that consumer buying would rise sharply and that desired inventory
-41
3/21/72
investment would increase markedly in response.
Such a develop
ment might well signal the need, over the longer run, for a gradual
movement in the direction of monetary restraint.
therefore, that in the period immediately ahead
He believed,
expansion in the
monetary aggregates at rates in excess of 8 per cent would be too
rapid, even with the relatively high rate of unemployment that was
in prospect for the end of this year.
Mr. MacLaury remarked that even if cumulative forces of
expansion did not develop in the way Mr. Partee described, the
staff projection indicated an acceleration of the rise in real GNP
through the remainder of the year to an annual rate of 6.7 per cent
in the fourth quarter.
If that kind of momentum developed, the
Committee would need to consider a shift in policy even if the
rate of unemployment had not moved down into the desired range.
Mr. Partee responded that the rates of resource utiliza
tion projected for the fourth quarter of the year--5.4 per cent
for unemployment and 77 per cent for manufacturing capacitywere well below optimal rates.
Consequently, real GNP could
expand at a rate of 6 or 6-1/2 per cent well into 1973.
He would
not think in terms of a need to slow down the expansion before the
middle of 1973.
However, he had wished to draw the Committee's
attention to the possibility that economic expansion might proceed
more rapidly than projected by the staff and the associated possi
bility of excessive rates of growth in the monetary aggregates
this spring.
-42-
3/21/72
Mr. Brimmer observed that while the increase in real GNP
was projected to accelerate through the year, so was the rise in
the labor force.
The projected increase in the labor force was
about one-quarter of a million in excess of trend.
Chairman Burns remarked that if the economy developed in
line with staff projections, the decline in the rate of unemploy
ment would be abnormally slow by historical standards.
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 February 15 through March 15, 1972, and a supplemental
report covering the period March 16 through 20, 1972,
Copies of
both reports have been placed in the files of the Committee.
In supplementation of the written reports, Mr. Holmes made
the following statement:
Open market operations over the interval since the
Committee last met were designed to achieve the reserve
targets specified by the Committee for February and
March, combined. Attention was also paid to desired
rates of growth of the monetary and credit aggregates
over the first quarter and to the Federal funds con
straint imposed by the Committee. As the period pro
gressed, the System provided reserves more grudgingly
as reserves available to support private nonbank
deposits appeared to be coming out at or above the
upper end of the 6 to 10 per cent range designated by
the Committee and. as first-quarter growth of the aggre
gates appeared to be exceeding the Committee's desires
somewhat. As a result, the Federal funds rate moved up
by 5/8 to 3/4 of a percentage point over the period,
with the rate touching the upper end of the 2-3/4 to
4 per cent range specified by the Committee in the final
statement week completed in the period.
3/21/72
-43-
Treasury bill rates, already under upward pressure
from substantial sales of bills by the Treasury, came
under further upward pressure as money market conditions
firmed and as the market reacted to reports that Chairman
Burns had indicated in Europe that the System was no
longer fostering aggressive monetary ease. In yesterday's
regular Treasury bill auction, average issuing rates of
3.92 and 4.32 per cent were established for three- and
six-month bills, respectively, up 85 and 78 basis points
from rates established just prior to the last Committee
meeting. Other short-term rates also rose, but not as
much as Treasury bill rates which had earlier been kept
artificially low by a number of factors. Following the
rise in short-term rates, two banks with floating rates
raised the prime rate to 4-3/4 per cent.
In the long-term markets, upward pressure on rates
was less marked, although yields on intermediate-term
Treasury securities showed a substantial increase.
After a noticeably improved atmosphere in the middle of
the period, the corporate and municipal markets became
quite cautious as the period came to a close.
Market expectations about the future of interest
rates are currently being shaped by increased confidence
in business recovery, by speculation over the course of
monetary policy, by the anticipated large volume of
Government financing, and by lingering uncertainties
about the international situation and about prospects
for inflation in the months ahead. Any further rise in
short-term rates would very likely have some influence
on long-term rates. The spread of pressure from short
to long-term securities markets should be moderated,
however, by (1) the still relatively wide spread between
short- and long-term interest rates, (2) by the slackened
corporate demand in the capital market resulting from
the better state of corporate liquidity and improved
cash flows, (3) by the ample state of liquidity of finan
cial institutions, and (4) by the relatively light inven
tory of coupon issues held by Government securities
dealers--a marked contrast from the situation prevailing
a year ago. Recent actions of the Price Commission and
Pay Board have been moderately encouraging to the
markets, although skepticism persists. There is general
agreement that success--or lack of success--on the price
and wage front will be a major determinant of inflation
ary psychology and of long-term interest rates.
As far as open market operations are concerned, the
Desk was able to operate within the framework of the
3/21/72
-44-
Committee's new emphasis on reserves available to
support private nonbank deposits without major operating
or market problems. I suspect that the main reason for
this was the relatively good staff forecasts of the
linkages between reserves and the monetary aggregates on
the one hand and between reserves and money market con
ditions on the other. One can only hope that the good
performance of the past few months can be continued into
the future. But I suspect that we have not yet had to
face the tests that may be posed by a reserve-oriented
approach when the linkages turn out to be different
from those expected.
Throughout much of the period--as far as actual
results were concerned--reserves against private deposits
remained well within the 6 to 10 per cent annual growth
rate specified by the Committee. But as a deposit expan
sion earlier in the period began to make its impact felt
on reserves with the usual two-week lag, reserves moved
up to the upper end of the range. As noted in the writ
ten reports, the latest estimates indicate that total
reserves available to support private deposits are
expected to rise at a rate of about 11 per cent in
February and March combined. Several adjustments
should probably be made to the figures. First of all,
a downward revision of reserves in January means that
the February-March growth is overstated by about 1 per
centage point. On the other hand, excess reserves
absorbed fewer reserves than allowed for in the target
path, and a concentration of deposit growth in country
banks also resulted in a need for fewer reserves than
would have been the case if the ratio of deposits in
country and reserve city banks had been unchanged, as
the path assumed.
On balance, I would conclude that reserves are
turning out in March somewhat above the specified range.
This conclusion is supported by evidence that the mone
tary and credit aggregates rose a bit more rapidly than
the Committee desired. Thus, M1 in the first quarter
appears to be growing about 1 to 1-1/2 percentage points
above the upper end of the desired range, M2 by 1 to 2
points, and the credit proxy by 1-1/2 to 2-1/2 points.
(In each case the larger number refers to the stronger
forecasts made at the Federal Reserve Bank of New York
as compared with Board staff forecasts.) The Committee's
constraint with respect to the aggregates was thus a
factor contributing to the more grudging supply of
reserves as the period progressed.
3/21/72
-45-
Other Committee constraints also played a role in
Desk operations over the period. On March 14, the
Federal funds rate pushed above the 4 per cent upper
limit, and the Desk resisted the firming by supplying
reserves even though the reserve target alone would not
have called for such action. Even the reference to
international conditions came into play in a minor way
when, also on March 14, foreign central bank buying of
Treasury bills was exceptionally large. Rather than
deplete the market of the shorter-dated Treasury bills
desired by foreign accounts, the Desk sold about $150
million Treasury bills from the System Account. This
absorbed a corresponding amount of reserves from the
banking system on a day when the System was supplying
reserves on balance to combat the high Federal funds
rate. In effect, this operation meant that we supplied
more reserves through repurchase agreements than would
otherwise have been necessary.
All of these operations are, of course, covered in
the written reports to the Committee. I have commented
on them here because we are just in the process of
learning how to operate with major focus on reserves
available to support private deposits, but with con
straints involving the Federal funds rate, the growth
rates of the aggregates, and international considerations.
I would appreciate any comments the Committee may want to
make on the Desk's performance under the new content of
the directive.
Looking ahead, staff forecasts indicate that the
movement of factors outside the System's control will
require us to supply a large volume of reserves over
the next few weeks, irrespective of which pattern of
reserve growth--as set forth in the blue book 1/ --the
Committee decides on. In supplying these reserves, I
would expect to include purchases of Treasury coupon and
agencyissues, perhaps in some size, depending on avail
ability and general market conditions. The reserve pic
ture could change substantially, however, should the
Treasury decide to monetize the free gold that will be
made available by passage of the legislation to change
the price of gold.
As far as the aggregates are concerned, the New
York Bank estimates of growth in M 1 and M2 for the
1/ The report, "Monetary Aggregates and Money Market Conditions,"
prepared for the Committee by the Board's staff.
3/21/72
-46-
second quarter as a whole are almost identical to
those set forth in the blue book, but our forecast
of growth in the credit proxy is stronger.
For April, however, there are substantial
divergences in expected rates for M1 and the credit
proxy. Assuming no change in money market condi
tions, the New York Bank staff forecasts an 11 per
cent growth in M1, compared to the Board staff
forecast of 7.5 per cent, and a credit proxy growth
of 18 per cent, compared to 8 per cent. The
deposit growth forecast by the New York Bank would
require substantially greater expansion in reserves
than would the growth forecast by the Board staff.
The blue book analysis indicates that if the
Committee wants to limit reserve supply so as to
provide M1 growth of around 7-1/2 per cent over the
second quarter, the Federal funds rate is likely to
move to the upper end of the 3-1/2 to 4-3/4 per
cent range identified with pattern II. Such a move
ment in the funds rate would involve a further
upward movement in other short rates, and some
impact on longer-term rates, although there are
forces tending to moderate the spread of upward
movements of short rates to long rates, as noted
earlier. Whether or not the staff forecast of the
linkages between reserve supply, the aggregates, and
interest rates will turn out to be right only time
can tell. In deciding on a policy stance today,
the Committee appears to be faced with the possi
bility of difficult trade-offs among the supply of
reserves, growth in monetary and credit aggregates,
and both short- and long-term interest rates. An
indication of the weight to be attached to these
diverse factors would be most helpful to the Desk
in the conduct of operations in the period ahead.
As far as the Treasury is concerned, the cash
outlook has improved considerably of late. An
announcement is expected this afternoon that the
Treasury will discontinue the offering of an addi
tional $300 million of Treasury bills at the regular
weekly auctions. At the same time it is possiblealthough a final decision has not yet been madethat the Treasury will announce the auction of a
short- or intermediate-term note in an amount of
$2 billion or less. This should provide sufficient
cash to last until mid-May. The auction technique
-47
3/21/72
means that even keel considerations should be mini
mal, but it would appear appropriate to make some
reference in the directive to a "possible Treasury
financing."
Chairman Burns said he thought the Desk's performance dur
ing the past two months had been excellent.
Mr. Coldwell asked the Manager for his view of the benefits
that had resulted from operations in coupon issues.
Mr. Holmes responded that at the beginning of the period
since the last meeting of the Committee
the Desk had needed to
supply reserves, and it had done so by buying coupon issues.
He did
not think those purchases significantly affected long-term interest
rates, but they had contributed to a reduction in dealer positions
and thus were marginally helpful.
Shortly thereafter, the Treasury
balance at the Federal Reserve was reduced sharply and the whole
reserve outlook changed considerably.
Mr. Mayo asked what had prompted the Treasury to reduce
its balance so sharply and whether the existing ceiling on Government
debt had been a factor.
Mr. Holmes replied that the balance had been unusually
large and that the Treasury had intended to reduce it sooner or
later.
The debt ceiling was not a consideration.
Mr. Francis said he agreed with the Chairman's judgment
that the performance of the Desk in following a reserve target over
the past two months had been good.
-48-
3/21/72
Mr. Maisel observed that the Manager's recent annual
report, covering open market operations during 1971,1/ contained
one of the best discussions available of the System's operations.
Mr.
Daane said that he too wished to commend the Manager
for the performance of the Desk in the past two months,
but he would
also underscore the Manager's observation that there had not yet
been a test of the reserve-oriented approach.
Chairman Burns observed that there had been a test but
that it had not been a sufficient one.
In any case, the Committee
had not placed its faith in miracles but had established a mechanism
to deal with conflicts in the event that the linkages between
reserves, money market conditions, and the monetary aggregates
differed from those expected.
In that event, the Manager was
promptly to notify the Chairman who promptly would consider whether
the situation called for special Committee action to give supple
mentary instructions.
By unanimous vote, the open
market transactions in Government
securities, agency obligations, and
bankers' acceptances during the
period February 15 through March 20,
1972, were approved, ratified, and
confirmed.
Mr. Axilrod made the following statement on the monetary
relationships discussed in the blue book:
1/ A copy of this report has been placed in the Committee's files.
3/21/72
-49-
The very rapid expansion in M1 and M2 of
February appears to be slowing somewhat in March,
although we have figures only for the first two
weeks of the month. For the first quarter as a
whole, M 1 growth is likely to be in a 9 to 10 per
cent annual rate range, which would bring growth
over the past six months to a 5 to 5-1/2 per cent
rate; for M 2 the growth rate is expected to be
about double that for M1.
If recent money market conditions are main
tained, the staff estimates that growth in M1
over the second quarter would be very little smaller
than in the first quarter, assuming the projected
rapid expansion in nominal GNP for the period is
realized. Expanding transactions needs for cash
together with the lagged effects of earlier low
short-term interest rates are the principal factors
enhancing current money demands.
M2 growth under prevailing money market condi
tions seems likely to be less rapid than the 13 per
cent first-quarter pace, though still remaining
around the high end of experience of the past
several years. In February growth in time deposits
other than large CD's slowed from the exceptionally
high January pace. With short-term market rates
continuing to rise, there appears to have been a
further slowing in early March to a rather more
usual pace, which might be sustained into the
second quarter.
With increased short-term credit demandsparticularly from the Treasury but also in the form
of business loans at banks--short-term interest
rates have risen sharply as the supply of reserves
has been kept to the bounds set by the Committee.
The 3-month Treasury bill rate and the Federal
funds rate have risen about 70 to 80 basis points
from their February lows, and other short rates
have adjusted up in sympathy by varying magnitudes.
Meanwhile, yields on new high-grade corporate bond
offerings have remained about 15 basis points
below their February highs. In the markets for
State and local and Federal Government bonds,
reaction to the recent rise in short-term rates
has been a little more marked, though still very
modest, and rates on these issues are back close
to their February highs.
3/21/72
-50-
While one can thus conclude that the rise in
short-term rates has had little impact on long
term rates, a look over a longer time period makes
it clear that this occurred because the previous
sharp decline in short rates--from the beginning
of the year into February--had also been discounted
by longer-term market participants. That earlier
decline in short rates was thought to be temporary,
and was not accompanied by a decline in long rates.
In fact long rates rose somewhat in that earlier
period, and bond yields are now 20 to 35 basis
points above their early-January lows, apart from
mortgage rates. Bill rates and the Federal funds
rate, by way of comparison, are also above their
early-January levels by that rough order of magni
tude.
With that background, it would seem that the
long-term market may indeed become sensitive to
further significant rises in short-term interest
rates, at least over the weeks immediately ahead.
Higher dealer financing costs, expectations of a
discount rate hike, and a more cautious approach
to bond markets on the part of banks are likely
to lead to an over-all reappraisal of bond yields
by market participants generally. Strong cumula
tive upward pressures on bond rates are not likely
to develop, however. The spread of long- over
short-term rates is very wide, leaving room for
short-term rates to rise. And at the moment the
long-term market is in fairly good technical
condition, with dealer positions much reduced
from February levels. Finally, over the longer
run, we expect some further abatement in corporate
bond offerings to relieve demand pressures on the
market. In the period immediately ahead, if the
Treasury does reduce the amount of expected bill
offerings and auctions a note, as was mentioned
as a possibility by Mr. Holmes, this might dis
tribute interest rate pressures marginally more
away from short- to longer-term markets.
The near-term impact of short rate movements
on the long market is of concern, of course,
because of the likelihood that short rates will
rise as efforts are made to keep expansion in
monetary aggregates on a moderate course by holding
growth in bank reserves to something like, say, the
pattern II path shown in the blue book. This path
indicates noticeable slowing from the first to
3/21/72
-51-
second quarters in the expansion of bank reservesand, in particular, in reserves to support private
deposits. Such a slowing in reserve provision at
a time when demands for money and also for bank
credit are likely to be sustained by considerable
growth in economic activity is expected to lead to
an increase in the Federal funds rate over the
next few weeks to around 4-1/2 per cent and to
upward adjustments in other short-term rates of
1/2 percentage point or more. As short-term market
rates rise relative to the discount rate, we would
expect member bank borrowings to rise to around
$200 million, so that the increase in nonborrowed
reserves would be even slower than the expansion
in total reserves.
If the Committee were to adopt a course that
entailed good odds that short-term rates would rise,
it may wish to continue emphasizing use of coupon
and Federal agency issues in reserve-supplying
operations. This might mitigate short-run feedback
effects on long markets, although I suspect the
more fundamental longer-run effects on long markets
would come from containment of inflationary pressures.
An instruction given to the Desk in terms of
reserve aggregates still, of course, leaves the
Committee with the option of limiting the degree of
tightening that might emerge in the money market
through a proviso clause instruction so long as it
was willing to yield on its aggregate objectives.
But if the Committee sets a reserve course to attain
moderate monetary growth, it might be desirable not
to place too low a ceiling on the extent of tighten
ing in the money market. With an even-keel constraint
in prospect by next meeting in view of the mid-May
refunding, there is some risk that constraints now
on money market conditions would encourage more rapid
monetary aggregate expansion than desired, and would
then perhaps require a sharp upward interest rate
adjustment later in the summer.
Mr. MacLaury inquired how the concurrent constraints of
reserve growth and the funds rate were to be interpreted.
Specifically,
he asked whether the Manager felt that there was no need to influence
the funds rate--apart from moderating day-to-day fluctuations--so long
-52
3/21/72
as reserve growth was within the prescribed range, or whether he
felt that reserve growth in, say, the lower part of its range
called for a lowering of the funds rate within its range.
Mr. Holmes replied that he would endeavor to maintain the
funds rate at about its level at the time of the previous meeting so
long as the rate of growth in reserves was near the mid-point of the
specified range.
However, if the rate of growth in reserves moved
toward the upper end of the specified range, he would allow the
funds rate to move up.
Alternatively, if growth in reserves moved
toward the lower end of the range, he would step up the growth rate
and the funds rate probably would decline as a consequence.
Mr. Mitchell noted that the rate of growth in time deposits
was projected to decline in the period ahead, and he asked about the
implications for growth in required reserves.
He also asked whether
changes in Government and interbank deposits were expected to have
much influence on required reserves.
Mr. Axilrod replied that the slower growth projected in
time deposits accounted for part of the projected reduction in the
rate of growth in reserves.
With respect to Government and interbank
deposits, he expected very little change in April and, therefore,
very little effect on required reserves.
Mr. Mitchell then asked whether Mr. Axilrod thought the
existing spread between short- and long-term interest rates was
great enough to permit the Treasury bill rate to rise as much as,
say, one-half of a percentage point without affecting long-term rates.
-53
3/21/72
Mr. Axilrod replied that the long-term market might well
become sensitive to further significant increases in short-term
rates.
However, any increases that occurred in long-term rates might
not be permanent, owing to the wide spread between short- and long
term rates and to the favorable technical condition of the long-term
market with the volume of new securities coming to market not
expected to build up over the months ahead.
If long-term rates did
rise sympathetically, they could back down again when it became
clear that monetary growth was being kept to moderate proportionsprovided, of course, that the wage and price stabilization effort
did not collapse.
Mr. MacLaury noted that in the blue book discussion of
pattern II it was stated that "the staff would expect the Federal
funds rate to rise to near the upper end of the 3-1/2 to 4-3/4 per
cent range."
He had thought it was the staff's usual practice to
define such ranges so that the expected funds rate was about at the
midpoint.
Mr. Axilrod replied that for both patterns II and III the
lower limit of the range shown for the funds rate had been set low
enough to encompass the prevailing level, on the assumption that if
the Committee adopted either of those patterns it would not want to
have an immediate sharp tightening of the money market.
As indicated
in the blue book, however, the staff believed that the funds rate
would have to rise toward the upper end of the indicated ranges--
-54
3/21/72
and that borrowings would increase gradually--if the associated rates
of growth in reserves and the monetary aggregates were to be achieved.
Mr. Heflin asked what assumptions had been made with respect
to business loans in working out the projections for the second
quarter.
Mr. Axilrod replied that the staff thought business loans
were likely to grow more rapidly through the second quarter than they
had in late 1971.
in two ways.
That expectation had influenced the projections
The stronger expansion in business loans would be a
marginal factor exerting some additional upward pressure on short
term rates, assuming provision of reserves at a moderate pace.
In
addition, it was thought that banks would respond to a slowing in the
inflows of demand deposits and consumer-type time deposits by
increasing issues of large CD's in order to meet loan demand.
Mr. Brimmer remarked that when he had talked with bankers
recently in the Board's offices and on visits to their offices he
had followed the practice of asking about their earlier expectations
for business loan growth in 1972 compared with 1971 and about the
way in which actual developments this year had compared with those
targets.
Although there was considerable variation in the responses,
on the average the bankers in question had expected a year-over-year
increase in business loans of about 15 per cent
but found that
actual loans were falling considerably short of target.
In some
cases, business loans had declined after correction for seasonal
3/21/72
-55
variation.
Bankers were not expecting an upturn in the next three
or four months and therefore were not bidding aggressively for CD
funds.
Mr. Axilrod commented that he had referred to prospective
changes from recent levels.
Business loans had shown little net
change, seasonally adjusted, in the fourth quarter of 1971.
Such
loans had grown at a rate of about 6 per cent through January and
February, and the staff expected that they would continue to grow
at something like that pace.
Over all, that might be construed as
a moderate rate of expansion, but it would be a significant pickup
from earlier experience.
Mr. Hayes commented that while some of the larger banks
in his District had observed a quickening in business loan demand,
on the whole the pattern appeared mixed.
Chairman Burns then remarked that, before calling for the
go-around on monetary policy, he would bring two items of factual
information to the attention of the members, without comment or
evaluation.
First, the Committee had available to it two estimates
of the annual rate of growth of real GNP in the first quarter:
The
Board staff's estimate of 5.9 per cent, and the Commerce Department
estimate of 5.4 per cent.
provisional at this stage.
Both estimates were, of course, highly
Secondly, the stock market had declined
sharply this morning; at 11:30, the Dow Jones industrial average was
down 11 points.
being offered.
As usual, a multiplicity of interpretations were
-56-
3/21/72
With respect to the go-around, the Chairman suggested that
the members indicate the constraints they would favor with regard to
both growth rates of reserves for private nonbank deposits and the
Federal funds rate, and the targets they would prefer for rates of
growth of the monetary aggregates.
It would also be helpful if the
members would express their views on operations in coupon issues and
on the discount rate.
Mr. Hayes began the go-around with the following statement:
The economy looks stronger than it did when
we last met, and projections of further substan
tial recovery this year seem more soundly based
than ever. Also, the sluggish growth of M1 that
concerned us for so many months has given way to
very generous expansion, which may well continue
in the next month or two at least. As we reflect
on the current growth rates of the major aggre
gates taken together, some uneasiness is warranted
over the possibility that we have overdone our
stimulative policy, very much along the lines of
our record a year ago.
Thus, from a purely domestic point of view,
I would favor seeking at this point to moderate
the growth in money and credit aggregates. Inter
national considerations lend support to the same
policy conclusion, given the decided lack of
confidence in the dollar abroad and the ever
present risk of a new international crisis unless
such confidence is restored.
Short-term market rates have, of course,
firmed considerably, but I believe they may have
to move higher rather promptly if we are to suc
ceed in reducing growth of the aggregates to a
satisfactory pace--symbolized, perhaps, by an
M 1 growth rate of 7 per cent in the second
quarter. I would, therefore, advocate a policy
of seeking firmer money market conditions by
supplying reserves reluctantly in order to
achieve more moderate money and credit expansion.
I recognize that there must be a vast element of
3/21/72
-57guesswork in any effort to quantify such a rela
tionship, but I would think a Federal funds range
of about 4 to 5 per cent might be appropriate
for the next four weeks, and I would like to see
the rate move toward the upper end of the range
unless the data on the aggregates look consistently
weaker than expected.
The directive 1 / might well include a refer
ence to international developments, as well as a
clause with respect to Treasury financing. I
would prefer to see a specific instruction to
seek "some firming in money market conditions
with a view to moderating the growth in monetary
But I would
aggregates over the months ahead."
go along with the wording in the draft directive,
using the words "more moderate", which seems con
sistent with the specifications of pattern II.
As for coupon issues, I would favor discreet
use of them by the Manager about the way he has
used them in the last period, when such pur
chases have been marginally helpful.
I think recent developments have fully vin
dicated the System's decision to leave the discount
rate untouched in the last couple of months
despite sizable disparities with market rates.
Much of the gap has now been closed by rising
market rates, and this movement seems likely to
continue. An upward adjustment in the discount
rate may become a real possibility later in the
spring, but at present an unchanged rate seems
appropriate.
Mr. Morris said the specifications shown under pattern II
in the blue book seemed to him to be appropriate at this time.
In
his view, the Committee had to do what it could to maintain the
momentum of the economy and at the same time guard against excessive
rates of growth in the monetary aggregates.
In the period since the
last meeting the Desk had had to move the funds rate up to the upper
limit specified by the Committee and it might find it necessary to do
1/ The alternative draft directives submitted by the staff for
Committee consideration are appended to this memorandum as Attachment A.
3/21/72
-58
so again in the next period.
In that event, member banks might begin
again to borrow from the System.
With respect to the discount rate,
it seemed clear that the time had passed for a reduction designed to
eliminate the gap between that rate and short-term market rates.
Finally, he would favor operations in coupon issues to the extent the
Manager thought they could further the Committee's objectives without
dominating the market.
Mr. Coldwell commented that there were several critical
questions involved in the Committee's policy decision at this meeting.
One issue concerned the pace at which short-term interest rates
should be permitted to rise and what impact that rise would have on
long-term rates.
A second question related to the posture of policy
for the longer run.
What concerned him particularly was the possi
bility that continued efforts to foster growth in the monetary
aggregates at this time might result in the need a few months from
now to make a sharp adjustment in money market conditions.
Another
issue related to the relative emphasis that should be placed on
reserves, monetary aggregates, and money market conditions.
Finally,
there were continuing questions of the effects on expectations of
interest rate and price developments and of unsettlement in the
international area.
With respect to today's decision,,Mr. Coldwell said, he
would like to see the increase in reserves shaded down from the
recent rate.
He would favor specifications in the general area of
-59
3/21/72
those shown under patterns II and III.
While he would not name any
specific target for M 1 , he thought the growth rate could be expected
to slow as money market conditions firmed.
Concerning operations in coupon issues, Mr. Coldwell said
he was perfectly willing to have the Desk supply reserves in that
way but he hoped it would not concentrate its purchases in coupon
He
and agency issues to the extent that it had in the past month.
also thought that the recent use of repurchase agreements had been
excessive, and he hoped the Desk would make less use of them in the
period ahead.
He noted that two or three days after the Desk had
last reduced the RP rate it had found it necessary to raise it again.
That increase had led to market speculation that the Committee's
policy had been changed, which to his mind was an unfortunate
development.
He would not favor a change in the discount rate
now that market rates were coming back into line with the current
discount rate.
Mr. Swan said he favored pattern II, which represented a
continuation of the course for the monetary aggregates that the
Committee had established at the last meeting.
Although it appeared
now that the actual growth rates in the first quarter would be a
little above the desired rates, the pattern II growth rates for the
second quarter seemed to him to be reasonable goals.
He hoped that
the pattern II rates would not be exceeded and, in that connection,
he would be willing to extend the upper limit for the funds rate
-60
3/21/72
from 4-3/4 to 5 per cent.
In the directive he thought it would be
better to describe the desired growth in the aggregates as "moderate"
rather than "more moderate", even though the growth rates sought for
the second quarter were slightly less than those likely to be
recorded for the first quarter.
With respect to coupon issues, Mr. Swan agreed that pur
chases should be made when it appeared that they would be helpful and
not unduly disturbing to the market.
He also agreed that the time
for a reduction in the discount rate had passed, and he saw no
immediate prospect of a need to raise it.
Mr. MacLaury remarked that over the past three months the
Committee had been led to focus on policy for the very short run by
various circumstances--including concern about the slow pace of the
economic recovery, concern
about the lack of adequate growth in the
monetary aggregates, and a seeming loss of confidence in projections
of the relationships between money market conditions and the aggre
gates.
In his view the Committee had been concentrating too closely
on the objective of influencing the behavior of the aggregates on a
current basis--an objective which he, at least, thought was unattain
able in the present state of the art.
He hoped the Committee would
now begin again to formulate policy with a longer horizon.
Given the
uncertainties in the projected relationships between money market
conditions and the aggregates, he thought the Committee should pro
ceed more gradually than it had recently, whether it was moving
-61
3/21/72
in the direction of easing or firming.
Now that his own recent
concern about the lack of growth in M1 had been mitigated, he would
favor aiming for the conditions specified under pattern II.
Mr. MacLaury said he did not have any strong views
regarding operations in coupon issues.
The policy response to any
tendency for longer-term rates to move upward would have to be based
on a judgment as to whether such a tendency might best be moderated
by providing additional reserves, or by permitting short-term rates
to rise somewhat as an indication to the market that the Committee
was not going to allow a repetition of the rapid rates of growth in
the aggregates that occurred in 1971.
In his judgment, within the
relevant time period the latter course was the more likely to be
successful in keeping long-term rates from rising.
As to the dis
count rate, he would be content to keep it unchanged at present.
In concluding, Mr. MacLaury observed that in earlier
Committee discussions several members had commented on the need to
educate the market about the increased emphasis on reserve targets.
However, he was not aware of any public comment on that subject, and
he wondered whether information about the shift had been conveyed to
the market.
Chairman Burns remarked that in testifying before the
Joint Economic Committee last month he had made a rather general
reference to the shift.
-62
3/21/72
Mr. Brimmer observed that in the normal course of events
an explicit statement about such a policy action would not be made
before publication of the policy record 90 days after the meeting.
Mr. Morris commented that the Committee might have to con
sider the need to inform the market earlier if it appeared likely
that the Manager's efforts to achieve the Committee's reserve
objectives would produce unusual movements in money market conditions.
Such circumstances had not developed thus far under the new approach.
Chairman Burns said it would be important not to exaggerate
the significance of the shift, which in fact had been a modest one.
The Committee had decided to place greater emphasis on reserves as
an operating target, but it was not abandoning constraints on changes
in money market conditions and it was continuing to specify targets
for the various monetary aggregates.
In the future it might decide
to move further along the road on which it had started, but it
might also decide to move back.
Mr. Mayo said he considered pattern II to be a reasonable
course.
He would not want to push interest rates up unduly in the
effort to follow the narrow line between avoiding inflation and
stimulating economic activity.
Like Mr. Swan, he would extend the
upper limit of the range for the funds rate to 5 per cent, in the
belief that the wider range of 3-1/2 to 5 per cent was consistent
with the greater emphasis the Committee was placing on reserves as
an operating target.
An upper limit of 4-3/4 per cent, as specified
-63
3/21/72
under pattern II in the blue book, was likely to provide an undue
constraint.
He would regard a second-quarter rate of expansion in
M1 within a range of 6-1/2 to 8 per cent as reasonable, although
he believed that in that case also the range could be widened a
In his view, the pattern II growth rates for the aggregates
little.
were "moderate," and he favored using that word in the directive.
Concerning operations in coupon issues, Mr. Mayo said he
would like to see the Desk continue its purchases but he believed
that they could have no more than a marginal influence on long-term
rates over a period of time.
With respect to the discount rate, he
thought there was no immediate need for a change in either direction
at present, although he suspected that the next change would be
upward.
He would urge that, if there were no adverse reactions to
the announcement of the proposed changes in Regulations D and J, the
Board give serious consideration to putting the redesigned discount
window into operation in the near future.
He thought that prevailing
interest rate relationships and the general economic environment
were suitable for that step.
Mr. Clay said he would summarize the statement he had pre
pared and submit the full text for inclusion in the record.
summarized the following statement:
Recent growth rates in the monetary aggre
gates are larger than it would be appropriate to
continue in the interest of balanced economic
growth. While there is considerable slack in the
economy and substantial improvement is desired,
He then
-64-
3/21/72
the Federal Reserve System has already supplied
a high degree of liquidity to the financial sys
tem. In weighing the proper growth rates in the
aggregates, account needs to be taken not only of
the immediate desire to stimulate economic growth
and employment but also of the risk of excess
liquidity becoming an inflationary force as the
upswing advances.
Reducing the rates of expansion in the mone
tary aggregates will tend to push money market
rates higher. This development already has begun
within the range of targets given the Manager at
the last Committee meeting. This is a necessary
accompaniment of the shift in policy. Within
limits it should not interfere with domestic
economic improvement, and it may prove helpful
on the international side.
It is hoped that these money market develop
ments will not have a pronounced upward impact
on long-term interest rates. At the same time it
must be recognized that the problem of long-term
interest rates would be intensified by evidence
of an overly expansive monetary policy, arousing
inflationary expectations, particularly in view
of the current and prospective Government budget
position.
Pattern II seems to provide the proper tar
get package, calling for a moderate growth in the
monetary aggregates.
Mr. Clay added that he would favor operations in coupon
issues of a probing nature.
He agreed that the time for a reduction
in the discount rate had passed, but he disagreed with the view
expressed by Mr. Hayes that the decision not to lower the rate earlier
had been vindicated by the recent rise in market interest rates.
In
his opinion it would have been better if the discount rate had been
lowered earlier and then raised again now, thus keeping it reasonably
in line with market rates.
If the discount rate was held unchanged
for a long enough period, the market would always eventually confirm
its
level.
3/21/72
Mr. Heflin said he was somewhat more concerned than others
appeared to be today about the prospect for upward pressures on short
term interest rates.
The pace of expansion in economic activity
seemed to have picked up and business demands for short-term credit
would be strong.
If at the same time renewed confidence in the
dollar should stimulate the return flow of funds from abroad and
precipitate sizable sales of Treasury bills by foreign central banks,
interest rates generally could rise.
However, he believed that the
Committee's emphasis at this point should be on controlling the rates
of growth in the aggregates and not on trying to hold interest rates
down.
Specifically, Mr. Heflin continued, he would aim for growth
in reserves against private nonbank deposits in a range of 9 to 12 per
cent for the March-April period.
He would set the range for the funds
rate at 3 to 4-1/2 per cent, preferring that the funds rate not rise
above the discount rate in the period until the next meeting if it
could be prevented from doing so.
He would favor growth rates in the
aggregates in the neighborhood of those shown under pattern II, per
haps shaded in the direction of pattern I; and he would use the word
"moderate" in the directive to describe the desired growth rates.
Mr. Mitchell said he was agreeable to the pattern II speci
fications as recommended by the staff.
Also, he would encourage the
Manager to purchase coupon issues whenever such operations appeared
to be consistent with the Committee's objectives.
-66-
3/21/72
Mr. Mitchell then said he thought there was merit in
Mr. MacLaury's observations about the conflicting factors influencing
the course of long-term interest rates.
But he (Mr. Mitchell) would
note that portfolio managers were likely to increase their takings of
long-term securities if short-term rates remained low much longer.
If short-term rates rose, however, they would be given additional
incentives not to invest at long term.
Mr. Daane commented that he, like others, found pattern II to
provide a reasonable framework for operations.
He thought Mr. MacLaury
had posed the issue concerning long-term interest rates very well.
He
was inclined to agree with Mr. MacLaury that the chances of limiting
increases in long-term rates would be better if the Committee con
trolled the rate of expansion in the aggregates and allowed some
increase in short-term rates.
such judgments.
However, one could not be sure about
As to the directive, he would be agreeable to de
scribing the desired growth in the aggregates either as "moderate"
or as "more moderate".
With regard to coupon issues, while he con
curred in Mr. Mayo's observation that purchases of such issues would
have only marginal effects, he thought they were useful nevertheless.
In that connection, he would not want the Committee to appear to be
guilty of "benign neglect" in the international financial area and
would support both coupon purchases and the suggestion for including
a reference to international developments in the directive.
Mr. Maisel noted that at recent meetings and again in his
annual report the Manager had urged the Committee to indicate the
relative amount of weight it wanted him to place on the various
3/21/72
-67
monetary aggregates.
He (Mr. Maisel) hoped the Committee would
specify its objectives simply in terms of a growth rate of reserves.
At present he would favor aiming at a rate of growth of 8 to 9 per
cent in reserves against private nonbank deposits over the first half
of 1972.
That would be consistent with pattern II for the near term.
As to operations in coupon issues, he thought decisions should be
made by the Manager on the basis of his judgment as to their likely
effects on market expectations and long-term interest rates.
Mr. Maisel then referred to Mr. MacLaury's comment on the
subject of a possible public statement regarding the recent shift in
the Committee's operating targets.
He thought such a statement might
be needed to avoid market misinterpretations of policy if the pursuit
of pattern II specifications led to a substantial rise in the funds
rate.
The System should stand ready to issue such a statement on
very short notice if necessary.
Mr. Brimmer said he also favored the specifications of
pattern II.
He considered the choice between the terms "moderate"
and "more moderate" for describing the desired growth rates in the
monetary aggregates to be substantive rather than semantic.
Use of
the latter term would imply a slight shading toward a less expansive
policy--a step which in his judgment would be premature by at least
a month.
He thought the directive should include an instruction to
take account of international developments and a possible Treasury
financing.
-68
3/21/72
Mr. Brimmer remarked that, like Mr. Mitchell, he would
encourage the Manager to operate in coupon issues when feasible.
Such operations could be particularly useful if upward pressures
on long-term interest rates emerged under the pattern II policy
course.
In his view, Mr. Brimmer continued, information on the
Committee's shift toward greater emphasis on reserves should be made
public in the usual manner, when the policy record was released
90 days after the meeting.
He did not consider the change to be of
such major character as to warrant a special public statement before
that date.
Mr. Brimmer then observed that before this meeting the
staff had distributed a sheet listing the five points for guidance
to the Manager agreed upon at the February meeting and indicating the
specifications under each point the Committee had approved then.
He
had been pleased to have that information provided in convenient
form.
However, the sheet would have been even more useful if it
had been distributed shortly after the February meeting, since
it would then have been of value in reviewing the course of opera
tions during the ensuing period.
Mr. Sheehan noted that no one had commented on Mr. Coombs'
observation about the possibility of a faster than expected improve
ment in the balance of payments, and he wondered what implications
such a development might have for monetary policy.
With respect to
the immediate policy decision, he felt that business confidence
-69
3/21/72
had improved in the period since he had joined the System and he was
less concerned about the state of the economy than he had been two
months ago.
He was prepared to go along with the pattern II speci
fications,
except that like Mr. Heflin he would prefer a 4-1/2 per
cent upper limit for the Federal funds rate.
He would favor opera
tions in coupon issues insofar as they were likely to reduce upward
pressures on long-term interest rates.
Mr. Winn said he questioned whether the Committee had quite
as much flexibility with respect to policy as might appear at first
He suspected that the rise in food prices was likely to
glance.
lead to a widespread public feeling that inflation was getting out
of hand.
Under such circumstances there probably would be a strong
reaction to a rise in long-term market interest rates or an increase
in the discount rate.
However, he would not expect a similar reac
tion to advances in short-term rates.
He favored giving the Mana
ger more flexibility with respect to the funds rate than was
called for under pattern II; specifically, he would set the upper
limit for that rate at 5 rather than 4-3/4 per cent.
Mr.. Eastburn remarked that the Committee had to decide how
quickly it should try to slow the growth in the monetary aggregates
and how much of an increase in long-term interest rates it was
willing to countenance.
Given the outlook for the economy, he
thought that continued growth in M1 at the 9-1/2 per cent rate now
estimated for the first quarter would be clearly undesirable.
He
would favor aiming for a second-quarter growth rate of 6 to 8 per
cent--preferably near the lower end of that range--while looking
-70
3/21/72
forward to a further slowing, perhaps to 5 per cent, in the third
For the coming period he would specify a 4 to
and fourth quarters.
5 per cent range for the Federal funds rate.
Thus, the specifications
he preferred were between those of patterns II and III.
Although short-term interest rates probably would rise
under such a policy course, Mr. Eastburn continued, he did not think
an increase in the discount rate would be required in the near term.
There was also a good chance that long-term rates would come under
upward pressure.
While he would hope that pressures on long-term
rates could be moderated by System operations in coupon issues, he
would be willing to accept increases in such rates as the necessary
price of avoiding excessive growth in the monetary aggregates.
Developments last year had demonstrated that the longer the Committee
delayed in moving to limit growth in the aggregates the more diffi
cult that task became, and he thought it would be desirable to face
up to the problem now.
Mr. Kimbrel said he found himself close to Mr. Eastburn's
position.
It seemed inevitable that there would have to be some
continued slight firming of short-term interest rates if excessive
rates of expansion in the monetary aggregates were to be avoided.
The current policy decision, as he saw it, required an answer to
two questions:
Should the rate of growth in the aggregates be
moderated from that of the first quarter, especially that of March?
If so, by how much and how soon?
first question was
"yes."
To his mind, the answer to the
A less exuberant rate of growth in the
-71
3/21/72
aggregates seemed adequate for an orderly expansion in the economy;
continuing growth in M1 at or above the first-quarter rate would
carry inflationary potentials which would ultimately require adoption
of a restrictive policy that could seriously upset a pattern of
sustained economic expansion.
Mr. Kimbrel commented that he would be a lot happier if
during the latest three quarters the Committee had achieved a
consistent growth rate in M1 of 5 to 6 per cent.
However, to
attempt now to suddenly reduce growth to such a rate seemed clearly
undesirable; it would constitute the kind of "off and on" policy
the Committee was trying to avoid.
He would prefer to move consis
tently but less aggressively toward moderation.
Under present
circumstances specifications somewhere between those of patterns II
and III would best fit his views.
Concerning operations in coupon issues, Mr. Kimbrel
thought the Committee would be well advised to continue granting a
good deal of discretion to the Manager with the idea that purchases
could be made when they might have a favorable influence on the
market for long-term securities.
He would not move now on the
discount rate, but he thought the time was near at which the System
would want to consider some adjustment.
Mr. Francis observed that since January monetary actions
had produced average rates of growth in the aggregates generally
within limits established by the Committee and without deviation
from the ranges specified for the Federal funds rate.
He thought
-72
3/21/72
recent pressures against the upper limit for the Federal funds rate
did necessitate a decision on whether those limits should be raised
and widened or whether there should be an increase in the present
path of monetary aggregates.
In view of the performance of wholesale
prices, he hoped the Committee would choose to widen and to shift
upward the limits around the funds rate.
For the forthcoming period, Mr. Francis preferred
alternative III which provided for continuation through the second
quarter of the aggregate growth paths adopted at the last meeting.
Alternatives I and II would represent a shift toward a more expan
sive policy.
In view of the economic analysis presented in the
green book, which indicated more total spending and more inflation
than previously, he did not believe that additional stimulus was
needed.
Mr. Francis noted that alternative III provided for an
8 per cent rate of growth in money for the first half of the year.
He believed that before long the Committee would be considering a
reduction in the long-run expansion paths of the aggregates in spite
of the possible upward pressures on interest rates.
In his judgment
the recovery was no longer fragile and a slight increase in interest
rates would have minimal detrimental effects domestically while it
would contribute significantly to the solution of international
problems.
3/21/72
-73Mr. Francis said he would leave decisions with respect to
operations in coupon issues to the Manager's discretion.
He saw no
need for action on the discount rate at this time.
Mr. Robertson made the following statement:
It seems to me there are more and more signs of
strengthening in the business picture. That is all to
the good, so long as the process is an orderly one.
In this kind of situation, the Federal Reserve
ought to be feeding enough monetary expansion into the
system so as not to thwart the business recovery, but
not so much as to rekindle inflationary expectations.
To me, that means we ought to be moving toward rates
of expansion somewhat less than those indicated for
February and March.
I regard the aggregate specifications associated
with pattern II in the blue book as in accord with this
objective, and I would support those, with appropriate
ranges, as targets for the Manager to shoot for.
I like the new structure of directions to the
Manager which we have evolved, placing primary emphasis
on supplying reserves to support private demand deposits,
with secondary attention to money market constraints,
and tertiary consideration given to deviations in the
deposit aggregates. I would certainly continue that
form of guidance to the Manager.
Insofar as specific ranges and constraints are
concerned, I will confine myself to saying that the
Manager should not conduct his reserve operations so as
to allow the funds rate to rise enough to call the cur
rent discount rate into question, except after prior
consultation with the Committee. My own impression is
that such a funds rate threshold is around 4-1/2 or
4-3/8 per cent.
Mr. Robertson added that his concern about the funds rate
reflected his belief that a level above the discount rate would
encourage market expectations of continued increases in interest
rates--long- as well as short-term.
He thought decisions regarding
purchases of coupon issues should depend on judgments with respect
-74
3/21/72
to their effect on expectations.
He had no objections to such
operations but he would not want them to be overdone;
if
carried out on too large a scale they could have undesirable
effects.
Chairman Burns said it was clear that a preponderant
majority of the members favored the targets and constraints set
forth in connection with pattern II.
Also, it appeared that the
language of the draft directive for pattern II would be acceptable
with the addition of a reference to Treasury financing.
With
that addition the second paragraph would read as follows:
"To implement this policy, while taking account of international
developments and possible Treasury financing, the Committee seeks
to achieve bank reserve and money market conditions that will
support moderate growth in monetary aggregates over the months
ahead."
Mr. Robertson remarked that he was sympathetic with
Mr. Hayes' suggestion to use the term "more moderate" to describe
the desired growth in the monetary aggregates.
While he did not
consider the matter to be of major importance, he thought that
term would help make clear to readers of the record that the
Committee was aiming for growth rates in the aggregates somewhat
slower than those of the first quarter.
Chairman Burns observed that he would prefer to retain
the term "moderate" since the Committee had not changed its
-75
3/21/72
targets for the aggregates.
In his judgment it would be a
mistake to suggest that the Committee had modified its policy at
this point, when the economy was first beginning to show signs of
vigorous recovery.
Mr. Hayes said he thought there was merit to the Chairman's
observation.
However, he still considered the term "more moderate"
to be preferable because the second-quarter rates of growth for
the monetary aggregates specified under pattern II were below the
recent rates.
He agreed with Mr. Robertson, however, that the
matter was not of great importance.
After further discussion the Committee decided to retain
the term "moderate."
The Chairman then observed that many members of the Committee
had expressed concern about the behavior of long-term interest
rates, and in varying degrees they favored continued operations in
Treasury coupon and agency issues.
As for the discount rate, there
was no sentiment for a change at this time.
At this point, Chairman Burns continued, he wished to
comment on an issue of particular concern to him.
He thought the
country was heading into a season in which there would be an
increasing outcry not only about rising prices of foods but also
about the sharp increases in rates for utilities and other services.
It seemed inevitable that the prices of services--to which the
public paid a great deal of attention--would be rising sharply.
3/21/72
-76
Administration policies with respect to the Pay Board and the
Price Commission were going to be tested.
If there was an outcry
about inflation, and if at the same time interest rates were
rising sharply, many people would link the difficulties facing the
country with the interest rate policies of the Federal Reserve as
those policies would be described and interpreted in the press.
The Chairman noted that the three-month Treasury bill rate
had increased from about 3.00 per cent a month ago to about 3.90
per cent now. According to the blue book specifications for
pattern II, the bill rate could go as high as 5 per cent in the
coming period and the Federal funds rate might reach 4-3/4 per
cent.
If the bill rate rose to the upper limit specified it would
have increased by 2 percentage points in two months or less.
No
matter what happened to long-term rates, such a rise in bill
rates was likely to be interpreted as reflecting a move by
the Federal Reserve to raise interest rates.
Moreover, the
discount rate would be called into question.
He had been
surprised at the limited amount of attention paid in the go-around
to the linkage between levels of money market rates and market
speculation about possible Federal Reserve action on the discount
rate.
If such speculation was to develop it would in turn have
implications for the behavior of short-term interest rates.
He
would be greatly disturbed by a possibility that the Federal Reserve
might have to raise the discount rate at so early a stage of the
-77
3/21/72
recovery.
That subject required more attention than had so far
been given to it.
With those thoughts in mind, Chairman Burns continued, he
would suggest that the Committee adopt the specifications of
pattern II, but that it also agree on what might be called a
"resting point" for the Federal funds rate.
Under the fifth
point of the five-point procedure the Committee was now employing
for guiding the Manager, the latter was instructed to notify the
Chairman promptly if it appeared that the Committee's various
objectives and constraints were not going to be met satisfactorily
in the period between meetings.
Within that framework, the
Committee might instruct the Manager not to allow the Federal funds
rate to go above 4-1/4 per cent without informing the Chairman
that the Committee's objectives could not be attained in the absence
of a higher funds rate.
with the Committee.
In that event, the Chairman would consult
The implication was not that the funds rate
would be prevented from going above 4-1/4 per cent, but that the
Committee would have an opportunity to review all of the circum
stances prevailing at the time before instructing the Manager to
aim at a higher funds rate.
In response to a question by Mr. Brimmer, Mr. Holmes said
the effective Federal funds rate had averaged 3-7/8 per cent last
week and was 4 per cent this morning.
Mr. Brimmer then remarked that the proposed resting point of
4-1/4 per cent would permit very little upward movement in the
-78-
3/21/72
funds rate before Committee consultation was called for.
He asked
whether 4-1/2 per cent might not be a better choice.
Mr. Daane expressed a similar view.
Chairman Burns said he had suggested 4-1/4 per cent because
any further increase would bring the funds rate into the neighbor
hood of the 4-1/2 per cent discount rate and was likely to generate
speculation about a possible increase in the latter.
Mr. Mitchell remarked that while he was inclined to agree
with Messrs. Brimmer and Daane he would like to hear the Manager's
views.
Mr. Holmes observed that it was very hard to predict the
effects on expectations of rate changes.
While the funds rate had
moved up substantially, a 4 per cent level had not yet been fully
established.
He suspected that a further step-up to a 4-1/4 per
cent level would have some impact on expectations.
Mr. Daane remarked that maintenance of the 4-1/2 per cent
discount rate as the funds rate rose to, say, 4-1/4 per cent might
in itself dampen expectations, with constructive effects on inter
mediate- and long-term interest rates.
In reply to a question by Mr. Eastburn, Mr. Holmes noted
that the Board staff's estimates indicated that the pattern II
growth rates for M1 --6-1/2 per cent in April and 7-1/2 per cent in
the second quarter--would be associated with a rise in the funds
3/21/72
-79
rate to near the upper end of the 3-1/2 to 4-3/4 per cent range
specified under that pattern.
According to the New York Bank's
estimates attainment of the pattern II growth rate for April
would involve even more upward pressure on the funds rate.
Chairman Burns noted that the Desk would not be taking
steps to raise the funds rate unless the need for such action was
indicated by new information on the aggregates.
In response to a question by Mr. Coldwell, the Chairman
observed that the 4-1/4 per cent resting point he had suggested
might be interpreted in terms of a weekly average.
Mr. Mitchell remarked that on that basis he would have no
objection to 4-1/4 per cent as a resting point.
Mr. Daane said he would prefer to leave the question to
the judgment of the Manager and the Chairman.
If it appeared that
the Committee's objectives were not going to be met, the Chairman
had the right and the obligation to consult with the Committee under
point five of the procedure being employed.
He would not want the
decision to be tied closely to some specific figure for the funds
rate.
Mr. MacLaury said he was in full agreement with the
Chairman's concern about the discount rate.
Under present circum
stances, with price and wage controls in effect, he would be
prepared to let short-term interest rates rise more with no change
in the discount rate than he would ordinarily consider desirable.
-80-
3/21/72
What concerned him was the apparent reluctance to let market
interest rates rise.
In his view, the Committee was in danger
of once more permitting short-run considerations to take precedence
over its longer-term objectives, thereby storing up problems for
the future.
The fact that the Committee would be faced with even
keel considerations at the time of its next meeting sharpened the
question of how far it was prepared to let short-term interest
rates rise in the interim.
In his view, Mr. MacLaury continued, the Committee probably
would have to face the prospect of permitting short-term interest
rates to rise some time this year.
He agreed with the Chairman
that the Federal Reserve would be subject to criticism from many
quarters when the rate advances occurred, but he thought it would
be easier to cope with that criticism if it came in the near term
rather than later.
As to the recent advance in the Treasury bill
rate, the rise was as large as it was because the rate had been
driven so low earlier, partly by events outside the Committee's
control.
On the whole, he would prefer to set the resting point
for the funds rate at 4-1/2 rather than 4-1/4 per cent.
Mr. Hayes said it was his impression from the go-around that
almost all of the members were willing to see the funds rate rise
to 4-1/2 per cent if necessary to achieve the Committee's objec
tives for the aggregates.
A majority considered acceptable the
4-3/4 per cent upper limit shown in the blue book under pattern II,
3/21/72
-81
and some had expressed a preference for a 5 per cent upper limit.
Against that background, he would consider 4-1/2 per cent conser
vative as a stopping point for the funds rate and 4-1/4 per cent
extremely conservative.
In his judgment the Committee could not
afford to let the aggregates get out of hand for the sake of
keeping the funds rate from exceeding 4-1/4 per cent.
Chairman Burns observed that he had proposed a 4-1/4 per cent
funds rate not as a "stopping point" but as a "resting point."
In
effect, he was advising the members that he would be following
interest rate developments closely during the coming period and
would plan on consulting with the Committee about the possible
need for further instructions if at any point he thought that rates
were rising faster than was consistent with the Committee's basic
objectives.
It was his present thinking that consultation was
likely to be desirable before the weekly average funds rate was
permitted to exceed 4-1/4 per cent.
The Chairman then proposed that the Committee vote on a
directive consisting of the staff's draft for the first paragraph
and the modified version of the second paragraph as he had read it
earlier.
It would be understood that in implementing that directive
the Manager would be guided by the specifications of pattern II in
the blue book, within the framework of the five-point procedure
agreed upon at the meeting of February 15, 1972.
3/21/72
-82By unanimous vote, the
Federal Reserve Bank of New York
was authorized and directed,
until otherwise directed by the
Committee, to execute transactions
in the System Account in accordance
with the following current economic
policy directive:
The information reviewed at this meeting suggests
that real output of goods and services is increasing
in the current quarter at about the stepped-up rate
attained in the fourth quarter of 1971. Several
measures of business activity have strengthened
recently and demands for labor have improved somewhat,
but the unemployment rate remains high. Wholesale
prices continued to rise rapidly in January and
February, in part because of large increases in prices
of foods. However, the advance in wage rates slowed
markedly after the post-freeze surge in December.
Following a period of sluggish growth, the narrowly
defined money stock increased sharply in February,
partly reflecting a substantial reduction in U.S.
Government deposits. Inflows of time and savings
funds at bank and nonbank thrift institutions continued
rapid in February, although below January's extraor
dinary pace. Short-term interest rates have risen
considerably in recent weeks while yields on long-term
securities have changed little on balance. Exchange
rates for most major foreign currencies against the
dollar appreciated further in February and early
March, as recurrent speculative outflows of capital
added to the U.S. balance of payments deficit. In
light of the foregoing developments, it is the
policy of the Federal Open Market Committee to foster
financial conditions conducive to sustainable real
economic growth and increased employment, abatement
of inflationary pressures, and attainment of reasonable
equilibrium in the country's balance of payments.
To implement this policy, while taking account of
international developments and possible Treasury
financing, the Committee seeks to achieve bank reserve
and money market conditions that will support moderate
growth in monetary aggregates over the months ahead.
3/21/72
-83
Secretary's Note: The specifications agreed
upon by the Committee, in the form distributed
following this meeting, are appended to this
memorandum as Attachment B.
Chairman Burns noted that a memorandum from the System
Account Manager, entitled "Six-month Review of System Lending of
Securities," had been distributed on March 8, 1972, along with a
related memorandum from the Committee's General Counsel.1/ He
asked Mr. Holmes to comment.
Mr. Holmes observed that in his memorandum he had
summarized System lending operations since the last semi-annual
review and had expressed the judgment that such operations continued
to be necessary for the effective functioning of the Government
securities market in light of the continuing problem of securities
delivery failures.
Accordingly, he recommended that the underlying
authority, contained in paragraph 3 of the continuing authority
directive, be continued at this time.
Also, Mr. Holmes continued, he suggested that the
Committee's
periodic review of lending operations be shifted from
a semi-annual to an annual basis in view of the long-term nature
of the underlying problem and the consequent likelihood that lending
operations would remain necessary for the most effective functioning
of the market.
If the situation should change significantly
1/ Copies of these memoranda have been placed in the Committee's
files.
-84-
3/21/72
between annual reviews he would, of course, report the facts
promptly to the Committee.
Mr. Daane said he concurred in the Manager's recommendations.
Mr. Robertson commented that continuing reliance by the
market on System lending operations might in itself make such
operations necessary for an indefinite period.
He thought the
authority to lend securities should be used cautiously.
He noted
that according to the Manager's memorandum some $2.4 billion of
securities had been lent during the past six months.
That was a
considerably larger volume than he had expected.
In response to questions, Mr. Holmes reported that the
average amount of security loans outstanding at any one time was in
the neighborhood of $40 or $50 million.
The loans tended to be
repaid quickly, and since they were covered by good collateral they
involved no risks to the System.
Chairman Burns asked when the question of the need for the
lending authority had last been studied by the staff.
Mr. Holland replied that the matter had been considered
closely before the original authorization was agreed upon in
October 1969.
Since then it had been reviewed semi-annually by the
Committee on the basis of memoranda from the Manager.
The Chairman then remarked that the Manager's advice
regarding the need for the authority was, of course, fundamental to
the Committee's judgment.
However, he thought a useful purpose
-85
3/21/72
would be served by having the question examined from another
point of view also.
He suggested that the Committee agree to retain
the authority to lend securities at this time, on the understanding
that the staff would make an independent study and submit recommen
dations when the question was next considered.
Mr. Brimmer remarked that whatever the findings of the staff
he would favor continuing the present practice of making semi-annual
reviews rather than shifting to an annual basis.
Mr. Heflin noted that in the opinion of the Committee's
Counsel lending operations were legally authorized only if the
Committee determined that they were reasonably necessary to the
effective conduct of open market operations.
In his (Mr. Heflin's)
judgment it would be desirable to have something more than an
expression of the Manager's view on that question; such views should
be documented.
Mr. Holmes remarked that there had been very little change
in the factual situation since the Committee had first authorized
lending operations.
After further discussion, Chairman Burns suggested that the
Committee plan on next reviewing the need for lending operations in
six months.
Both the Manager and a senior member of the Board's
staff might be asked to present carefully considered oral statements
to the Committee at that time, to provide the basis for the review.
-86-
3/21/72
There was general agreement with the Chairman's suggestion.
It was agreed that the authori
zation for the lending of Government
securities from the System Open Market
Account should be retained at this time.
Consideration was then given to the continuing authoriza
tions of the Committee, according to the customary practice of
reviewing such matters at the first meeting in March of every year.
Secretary's Note: It had been agreed at
the meeting on March 10, 1970, that certain
authorizations among those that the Committee
had reviewed annually in the past would
remain effective until otherwise directed by
the Committee, and would no longer be sub
mitted routinely for review each year.
Instead, it was understood that these au
thorizations would be called to the Com
mittee's attention before the first meeting
in March of each year and that members would
be given an opportunity to raise any questions
they had concerning them. Accordingly, copies
of the authorizations in question (listed
below) had been distributed to the Committee
on February 28, 1972, with a request that
members advise the Secretariat if they wished
to have any placed on the agenda for consider
ation at today's meeting. No such requests
were received.
The authorizations in question were as follows:
1.
2.
3.
4.
5.
Procedure for allocations of securities in the
System Open Market Account.
Distribution list for periodic reports prepared
by the Federal Reserve Bank of New York.
Authority for the Chairman to appoint a Federal
Reserve Bank as agent to operate the System
Account in case the New York Bank was unable
to function.
Resolutions providing for continued operation of
the Committee, and for certain actions by the
Reserve Banks, during an emergency.
Resolution relating to examinations of the System
Open Market Account.
3/21/72
-87
Reference was made to the procedure authorized at the
meeting of the Committee on March 4, 1955 (and most recently
amended on March 9, 1971, to authorize the Secretary to act on the
Chairman's behalf in considering proposals for the addition of
members of the Board's staff) whereby, in addition to members and
officers of the Committee and Reserve Bank Presidents not currently
members of the Committee, minutes and other records could be made
available to any other employee of the Board of Governors or of a
Federal Reserve Bank with the approval of a member of the Committee
or another Reserve Bank President, with notice to the Secretary.
It was stated that lists of currently authorized persons
at the Board and at each Federal Reserve Bank (excluding secretaries
and records and duplicating personnel) had recently been confirmed
by the Secretary of the Committee.
The current lists were reported
to be in the custody of the Secretary, and it was noted that
revisions could be sent to the Secretary at any time.
It was agreed to retain the existing
procedure for making minutes and other
records of the Committee available to
employees of the Board of Governors and
the Federal Reserve Banks, including
authorization to the Secretary to act on
the Chairman's behalf in considering
proposals for the addition of members of
the Board's staff to the list of those
having access to Committee minutes and
other records.
3/21/72
-88By unanimous vote, the continuing
authority directive to the Federal Reserve
Bank of New York with respect to domestic
open market operations, as shown below,
was reaffirmed:
CONTINUING AUTHORITY DIRECTIVE WITH RESPECT TO
DOMESTIC OPEN MARKET OPERATIONS
1. The Federal Open Market Committee authorizes
and directs the Federal Reserve Bank of New York, to
the extent necessary to carry out the most recent
current economic policy directive adopted at a meeting
of the Committee:
(a) To buy or sell U.S. Government securities
and securities that are direct obligations of, or
fully guaranteed as to principal and interest by,
any agency of the United States in the open market,
from or to securities dealers and foreign and
international accounts maintained at the Federal
Reserve Bank of New York, on a cash, regular, or
deferred delivery basis, for the System Open Market
Account at market prices and, for such Account, to
exchange maturing U.S. Government and Federal agency
securities with the Treasury or the individual
agencies or to allow them to mature without replace
ment; provided that the aggregate amount of U.S.
Government and Federal agency securities held in
such Account at the close of business on the day of
a meeting of the Committee at which action is taken
with respect to a current economic policy directive
shall not be increased or decreased by more than
$2.0 billion during the period commencing with the
opening of business on the day following such
meeting and ending with the close of business on the
day of the next such meeting;
(b) To buy or sell prime bankers' acceptances of
the kinds designated in the Regulation of the Federal
Open Market Committee in the open market, from or to
acceptance dealers and foreign accounts maintained
at the Federal Reserve Bank of New York, on a cash,
regular, or deferred delivery basis, for the account
of the Federal Reserve Bank of New York at market
discount rates; provided that the aggregate amount
of bankers' acceptances held at any one time shall
3/21/72
-89not exceed (1) $125 million or (2) 10 per cent of
the total of bankers' acceptances outstanding as
shown in the most recent acceptance survey conducted
by the Federal Reserve Bank of New York, whichever
is the lower;
(c) To buy U.S. Government securities, obliga
tions that are direct obligations of, or fully
guaranteed as to principal and interest by, any
agency of the United States, and prime bankers'
acceptances with maturities of 6 months or less at
the time of purchase, from nonbank dealers for the
account of the Federal Reserve Bank of New York
under agreements for repurchase of such securities,
obligations, or acceptances in 15 calendar days or
less, at rates not less than (1) the discount rate
of the Federal Reserve Bank of New York at the time
such agreement is entered into, or (2) the average
issuing rate on the most recent issue of 3-month
Treasury bills, whichever is the lower; provided
that in the event Government securities or agency
issues covered by any such agreement are not
repurchased by the dealer pursuant to the agreement
or a renewal thereof, they shall be sold in the
market or transferred to the System Open Market
Account; and provided further that in the event
bankers' acceptances covered by any such agreement
are not repurchased by the seller, they shall
continue to be held by the Federal Reserve Bank or
shall be sold in the open market.
2. The Federal Open Market Committee authorizes and
directs the Federal Reserve Bank of New York, or, if the New
York Reserve Bank is closed, any other Federal Reserve Bank,
to purchase directly from the Treasury for its own account
(with discretion, in cases where it seems desirable, to
issue participations to one or more Federal Reserve Banks)
such amounts of special short-term certificates of indebted
ness as may be necessary from time to time for the temporary
accommodation of the Treasury; provided that the rate
charged on such certificates shall be a rate 1/4 of 1 per
cent below the discount rate of the Federal Reserve Bank of
New York at the time of such purchases, and provided
further that the total amount of such certificates held at
any one time by the Federal Reserve Banks shall not exceed
$1 billion.
3/21/72
-90-
3. In order to insure the effective conduct of
open market operations, the Federal Open Market Committee
authorizes and directs the Federal Reserve Banks to lend
U.S. Government securities held in the System Open
Market Account to Government securities dealers and to
banks participating in Government securities clearing
arrangements conducted through a Federal Reserve Bank,
under such instructions as the Committee may specify
from time to time.
By unanimous vote, the
authorization for System foreign
currency operations, as shown
below, was reaffirmed:
AUTHORIZATION FOR SYSTEM 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:
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. Stabili
zation Fund established by Section 10 of the Gold
Reserve Act of 1934, with foreign monetary authorities,
and with the Bank for International Settlements:
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
3/21/72
-91-
B. To hold foreign currencies listed in
paragraph A above, up to the following limits:
(1) Currencies purchased spot,
including currencies purchased from the
Stabilization Fund, and sold forward to
the Stabilization Fund, up to $1 billion
equivalent;
(2) Currencies purchased spot
or forward, up to the amounts necessary
to fulfill other forward commitments;
(3) Additional currencies purchased
spot or forward, up to the amount necessary
for System operations to exert a market
influence but not exceeding $250 million
equivalent; and
(4) Sterling purchased on a
covered or guaranteed basis in terms of the
dollar, under agreement with the Bank of
England, up to $200 million equivalent.
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
the limit specified in paragraph 1B(1) above;
and
(2) Other forward commitments to
deliver foreign currencies, up to $550 million
equivalent.
D. 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.
-92-
3/21/72
2. 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
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)
200
600
1,000
200
2,000
1,000
1,000
1,250
1,000
130
300
200
250
1,000
600
1,000
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 and no attempt shall be
made to establish rates that appear to be out of
line with underlying market forces.
3/21/72
-93-
4. It shall be the practice to arrange with
foreign central banks for the coordination of foreign
currency transactions. In making operating arrange
ments 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. A Subcommittee consisting of the Chairman and
the Vice Chairman of the Committee and the Vice Chairman
of the Board of Governors (or in the absence of the
Chairman or of the Vice Chairman of the Board of
Governors the members of the Board designated by the
Chairman as alternates, and in the absence of the Vice
Chairman of the Committee his alternate) is authorized
to act on behalf of the Committee when it is necessary
to enable the Federal Reserve Bank of New York to
engage in foreign currency operations before the
Committee can be consulted. All actions taken by the
Subcommittee under this paragraph shall be reported
promptly to the Committee.
7. The Chairman (and in his absence the Vice
Chairman of the Committee, and in the absence of both,
the Vice Chairman of the Board of Governors) 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 Secretary;
B. To keep the Secretary of the Treasury fully
advised concerning System foreign currency operations,
and to consult with the Secretary on such policy matters
as may relate to the Secretary's responsibilities; and
3/21/72
-94-
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 accordance 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.
10. The Special Manager of the System
Open Market Account for foreign currency
operations shall keep the Committee informed
on conditions in foreign exchange markets and
on transactions he has made and shall render
such reports as the Committee may specify.
By unanimous vote, the
foreign currency directive,
as shown below, was reaffirmed:
FOREIGN CURRENCY DIRECTIVE
1. The basic purposes of System operations
in foreign currencies are:
A. To help safeguard the value of the
dollar in international exchange markets;
B. To aid in making the system of
international payments more efficient;
C. To further monetary cooperation
with central banks of other countries having
convertible currencies, with the International
Monetary Fund, and with other international
payments institutions;
3/21/72
-95-
D. To help insure that market movements
in exchange rates, within the limits stated in the
International Monetary Fund Agreement or established
by central bank practices, reflect the interaction
of underlying economic forces and thus serve as
efficient guides to current financial decisions,
private and public; and
E. To facilitate growth in international
liquidity in accordance with the needs of an
expanding world economy.
2. Unless otherwise expressly authorized by
the Federal Open Market Committee, System operations
in foreign currencies shall be undertaken only when
necessary:
A. To cushion or moderate fluctuations in
the flows of international payments, if such
fluctuations (1) are deemed to reflect transitional
market unsettlement or other temporary forces and
therefore are expected to be reversed in the
foreseeable future; and (2) are deemed to be
disequilibrating or otherwise to have potentially
destabilizing effects on U.S. or foreign official
reserves or on exchange markets, for example, by
occasioning market anxieties, undesirable specula
tive activity, or excessive leads and lags in
international payments;
B. To temper and smooth out abrupt
in
spot exchange rates, and to moderate
changes
forward premiums and discounts judged to be
disequilibrating. Whenever supply or demand
persists in influencing exchange rates in one
direction, System transactions should be modified
or curtailed unless upon review and reassessment
of the situation the Committee directs otherwise;
C. To aid in avoiding disorderly condi
tions in exchange markets. Special factors that
might make for exchange market instabilities
include (1) responses to short-run increases in
international political tension, (2) differences
in phasing of international economic activity
that give rise to unusually large interest rate
-96-
3/21/72
differentials between major markets, and (3) market
rumors of a character likely to stimulate speculative
transactions.
Whenever exchange market instability
threatens to produce disorderly conditions, System
transactions may be undertaken if the Special Manager
reaches a judgment that they may help to reestablish
supply and demand balance at a level more consistent
with the prevailing flow of underlying payments.
In
such cases, the Special Manager shall consult as soon
as practicable with the Committee or, in an emergency,
with the members of the Subcommittee designated for
that purpose in paragraph 6 of the Authorization for
System foreign currency operations; and
D. To adjust System balances within the
limits established in the Authorization for System
foreign currency operations in light of probable
future needs for currencies.
3. System drawings under the swap arrangements
are appropriate when necessary to obtain foreign cur
rencies for the purposes stated in paragraph 2 above.
4. Unless otherwise expressly authorized by the
Committee, transactions in forward exchange, either
outright or in conjunction with spot transactions, may
be undertaken only (i) to prevent forward premiums or
discounts from giving rise to disequilibrating move
ments of short-term funds; (ii) to minimize speculative
disturbances; (iii) to supplement existing market sup
plies of forward cover, directly or indirectly, as a
means of encouraging the retention or accumulation of
dollar holdings by private foreign holders; (iv) to
allow greater flexibility in covering System or Trea
sury commitments, including commitments under swap
arrangements, and to facilitate operations of the
Stabilization Fund; (v) to facilitate the use of one
currency for the settlement of System or Treasury com
mitments denominated in other currencies; and (vi) to
provide cover for System holdings of foreign currencies.
Chairman Burns then noted that the Committee had planned
to discuss certain other matters today--namely, a proposed pro
cedure for making historical Committee records available to the
3/21/72
-97
public, the report of the staff committee on repurchase agreements,
and a proposed revision of the guidelines for operations in agency
issues.
In view of the lateness of the hour, however, it might
be desirable to defer consideration of those matters.
He asked
whether there would be any objections to such a course, and no
objections were raised.
It was agreed that the next meeting of the Federal Open
Market Committee would be held on Tuesday, April 18, 1972, at
9:30 a.m.
The Chairman remarked that he might decide later to call
an additional meeting of the Committee for Monday, April 17, for
the purpose of discussing the three matters being deferred today.
Thereupon the meeting adjourned.
Secretary
ATTACHMENT A
CONFIDENTIAL (FR)
March 20, 1972
Draft of Current Economic Policy Directive for Consideration by the
Federal Open Market Committee at its Meeting on March 21, 1972
The information reviewed at this meeting suggests that real
output of goods and services is increasing in the current quarter,
at about the stepped-up rate attained in the fourth quarter of 1971.
Several measures of business activity have strengthened recently and
demands for labor have improved somewhat, but the unemployment rate
remains high. Wholesale prices continued to rise rapidly in January
and February, in part because of large increases in prices of foods.
However, the advance in wage rates slowed markedly after the post
freeze surge in December. Following a period of sluggish growth, the
narrowly defined money stock increased sharply in February, partly
reflecting a substantial reduction in U.S. Government deposits.
Inflows of time and savings funds at bank and nonbank thrift institu
tions continued rapid in February, although below January's extraor
dinary pace. Short-term interest rates have risen considerably in
recent weeks while yields on long-term securities have changed little
on balance. Exchange rates for most major foreign currencies against
the dollar have appreciated further in February and early March, as
recurrent speculative outflows of capital added to the U.S. balance
of payments deficit. In light of the foregoing developments, it is
the policy of the Federal Open Market Committee to foster financial
conditions conducive to sustainable real economic growth and increased
employment, abatement of inflationary pressures, and attainment of
reasonable equilibrium in the country's balance of payments.
To implement this policy, while taking account of international
developments, the Committee seeks to achieve bank reserve and money
market conditions that will support (I - ample, II - moderate, III
more moderate) growth in monetary aggregates over the months ahead.
ATTACHMENT B
STRICTLY CONFIDENTIAL (FR)
Points for FOMC Guidance to Manager
In Implementation of Directive
(as agreed upon 2/15/72)
March 24, 1972
SPECIFICATIONS
As agreed,
3/21/72
(Pattern II)
1.
Desired rate of growth in aggregate
reserves expressed as a range rather
than a point target.
9-13% seas. adj.
annual rate in R.
for pvt. nonbank
deposits in Mar.
April.
2.
Range of toleration for fluctuations
in Federal funds rate--enough to
allow significant changes in reserve
supply, but not so much as to disturb
markets.
3-1/2 to 4-3/4%
3.
Federal funds rate to be moved in an
orderly way within the range of
tolerance (rather than to be allowed
to bounce around unchecked between
the upper and lower limit of the
range).
4.
Significant deviations from expecta
tions for monetary aggregates (M1,
M2, and bank credit) are to be given
some allowance by the Manager as he
supplies reserves between meetings.
(SAAR)
Mar. Apr. 2nd Q
11
6.5
7.5
10.5 8
Proxy: 15
5.
If it appears the Committee's various
objectives and constraints are not
going to be met satisfactorily in any
period between meetings, the Manager
is promptly to notify the Chairman,
who will then promptly decide whether
the situation calls for special Com
mittee action to give supplementary
instructions.
7
(As indicated at the March 21
meeting, Chairman Burns may call
for a Committee review of the
need for supplementary instruc
tions in the period before the
next scheduled meeting under
other circumstances also, depend
ing on the course of interest
rates and other relevant develop
ments.)
@FedFRASER