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For immediate release

August 13, 1973

The Board of Governors of the Federal Reserve System
and the Federal Open Market Committee today released the attached
record of policy actions taken by the Federal Open Market Committee
at its meeting on May 15, 1973.
Such records are made available approximately 90 days
after the date of each meeting of the Committee and are published
in the Federal Reserve Bulletin and the Board's Annual Report.
The summary descriptions of economic and financial conditions they
contain are based on the information that was available to the
Committee at the time of the meeting, rather than on data as they
may have been revised since then.



Meeting held on May 15, 1973
Domestic policy directive
Estimates of the Commerce Department indicated that real

output of goods and services had grown at an annual rate of 8 per
cent in the first quarter, the same rate as in the fourth quarter
of 1972.

Growth appeared to be moderating somewhat in the current

quarter, and staff projections continued to suggest that it would
moderate further in the second half of 1973.
In April industrial production continued to expand at a
high rate, reflecting further substantial gains in output of
consumer goods, business equipment, and materials.


in manufacturing establishments also rose appreciably, and the
average factory workweek advanced to the highest level since late

However, total nonfarm payroll employment rose less rapidly

than in the first 3 months of the year, and the unemployment rate
remained at 5 per cent.

Retail sales declined in April, according

to the advance report, after having increased sharply in the first

The advance in average hourly earnings of production
workers on nonfarm payrolls stepped up in March and April,


following only modest increases in the first 2 months of the year.

The consumer price index continued to rise rapidly in March, as
retail prices of foods soared for the third successive month and
prices of other consumer goods and services continued to move up
at substantial rates.

In April wholesale prices of consumer foods

rose considerably further. As in February and March, moreover,
increases among wholesale prices of industrial commodities were
large and widespread.
The latest staff projection of growth in real output in
the second quarter of 1973 was essentially unchanged from that of
4 weeks earlier, although the projected increase in inventory invest
ment was somewhat larger.

It was still expected that the rise in

consumption expenditures would be substantial, but not so large as
the extraordinary increase in the first quarter; that expansion in
business fixed investment and in State and local government purchases
of goods and services would remain strong; and that outlays for
residential construction would turn down.
For the final two quarters of the year, expectations were
that residential construction outlays would decline further; that
fixed investment and inventory investment of businesses would expand
less rapidly; and that the rise in disposable income and consumption
expenditures would slow considerably.
U.S. merchandise exports rose substantially in March, led
by a large further increase in agricultural commodities.




remained at the January-February level, and the trade deficit
dropped sharply.

For the first quarter as a whole, the trade

deficit was well below that in the fourth quarter of 1972.
Exchange markets had been quiet in late April and early
May, and the dollar had firmed against most other major currenciesespecially just after the announcement, on April 26, of the U.S.
foreign trade statistics for March.

On the day before this meeting,

however, new speculative pressures developed and the dollar declined
markedly against major European currencies.
At U.S. commercial banks, expansion in business loans, although
still substantial, moderated further in April in association with a
reduction in business substitution of bank credit for commercial paper

Growth in real estate and consumer loans remained rapid,

while bank holdings of securities declined somewhat.
Growth in the narrowly defined money stock (M1),1/which had
been at an annual rate of less than 2 per cent in the first quarter,2/
picked up in April.

Reflecting the faster rate of expansion in

M1, growth in the more broadly defined money stock (M2)3/also
increased; inflows of time and savings deposits other than

large-denomination CD's were about the same as in March. The
1/ Private demand deposits plus currency in circulation.
2/ Growth rates cited are calculated on the basis of the
daily-average level in the last month of the quarter relative
to that in the last month of the preceding quarter.
3/ M 1 plus commercial bank time and savings deposits other
than large-denomination CD's.



increase in the outstanding volume of large-denomination CD's,
although still large, was below the record March expansion, and

Government deposits declined.


the bank credit

proxy 4/ grew much less rapidly than in March.
Inflows of savings to nonbank thrift institutions slowed
considerably in April, in part because of earlier increases in
market interest rates.

Mortgage interest rates continued to

edge up.
The Treasury announced on April 25 that in its mid-May
financing it would auction a 7-year, 6-7/8 per cent note and a
25-year, 7 per cent bond to refund up to $2.65 billion of the
$4.30 billion of publicly held notes maturing on May 15; the
balance of the maturing notes held by the public would be redeemed
for cash.

In the auctions, held on May 1 and 2, $2 billion of the

note was sold at an average price to yield 7.01 per cent, and
$650 million of the bond was sold at the lowest bid price (paid
by all successful bidders) to yield about 7.11 per cent.


addition to the cash redemption of part of the notes maturing in
mid-May, the Treasury announced that, in view of its strong cash
position, it would reduce the size of the weekly auction of 6
month bills by $100 million and that it foresaw no need to borrow
new money until August.
4/ Daily-average member bank deposits, adjusted to include
funds from nondeposit sources.

System open market operations since the meeting on April 17
had been guided by the Committee's decision to seek bank reserve
and money market conditions consistent with moderate growth in
monetary aggregates over the months ahead.

Soon after the April

meeting, it appeared that the monetary aggregates would grow in
the April-May period at rates in excess of an acceptable range
even though estimates suggested that reserves available to support
private nonbank deposits (RPD's) would grow in that period at an
annual rate below the range of 10 to 12 per cent specified by the

The divergent tendencies were attributed to two main
Banks' excess reserves were lower than anticipated and

currency in circulation was growing more rapidly than expected.
In view of the strength in the monetary aggregates, System
operations had been directed toward limiting growth in reserves,
while continuing to avoid marked changes in money market conditions
and while taking account of the Treasury financing.

At the time

of this meeting, it still appeared that growth in RPD's would
fall somewhat short of the specified range.

The Federal funds

rate was about 7-3/4 per cent in the days before the meeting,
compared with about 7 per cent shortly before the preceding meeting.
In the 4 weeks ending May 9, member bank borrowings averaged about
$1,715 million, compared with an average of about $1,850 million
in the preceding 4 weeks.

Short-term market interest rates, which had risen sharply
earlier in the year, advanced little further on balance in the
inter-meeting period, despite the substantial increase in the
Federal funds rate,

Markets, especially for Treasury bills,

were strengthened by a shortage in the market supply of bills
and by current and prospective Treasury financing operations.


the day before this meeting, the market rate on 3-month Treasury
bills was 6.17 per cent, compared with 6.19 per cent on the day
before the April meeting.

Federal Reserve discount rates were

raised 1/4 percentage point, to 5-3/4 per cent, at all Reserve
Banks on April 23 and 1/4 point further, to 6 per cent, at 11 of
the Reserve Banks on May 11.
Interest rates on long-term securities had changed little

since the April meeting of the Committee, as demands for funds in
the capital markets had remained moderate.

The over-all volume

of new public offerings of corporate and State and local government
bonds had declined substantially in April, and although a partial
recovery was in prospect, it appeared likely that the volume in
May would be close to the reduced monthly rate in the first quarter.
The Committee agreed that the economic situation and
prospects called for somewhat slower growth in the monetary
aggregates over the months immediately ahead than had
occurred on average in the past 6 months.

A staff analysis


that the unusually large refunds of Federal personal

income taxes had added temporarily to both demand deposits and
consumer-type time and savings deposits and that as such refunds
diminished growth in the demand for money would tend to moderate
in the period immediately ahead.

The analysis also suggested that

the lagged effects of recent increases in interest rates would work
in the direction of moderating the demand for money.

Faced with

sustained strong demands for credit, banks were likely to continue
to increase substantially the outstanding volume of large-denomination

Therefore, according to the analysis, relatively rapid growth

in RPD's in the May-June period was likely to be consistent with
somewhat slower growth in the monetary aggregates than had occurred
on average over the past 6 months.

The staff analysis also indicated

that such a slowing in monetary growth would probably be associated
with further increases in short-term interest rates and also with
some rise in longer-term rates.
The Committee decided that operations should be directed
at fostering RPD growth during the May-June period at an annual
rate within a range of 9 to 11 per cent, while continuing to avoid
marked changes in money market conditions.

The members also agreed

that allowance should be made in operations if growth in the monetary
aggregates appeared to be deviating from an acceptable range and
that in the conduct of operations account should be taken of inter
national and domestic financial market developments.

It was

understood that the Chairman might call upon the Committee to
consider the need for supplementary instructions before the next
scheduled meeting if significant inconsistencies appeared to be
developing among the Committee's various objectives and constraints;
the chances seemed greater than usual that such consultation would
be needed.
The following domestic policy directive was issued to the
Federal Reserve Bank of New York:
The information reviewed at this meeting suggests
that growth in real output of goods and services is
likely to moderate somewhat in the current quarter from
an exceptionally rapid pace in the two preceding quarters.
Over the first 4 months of this year, employment rose
considerably but the unemployment rate remained about
5 per cent. Retail prices of foods continued upward
at an extraordinary pace in March, and in April average
wholesale prices of consumer foods rose further.
Increases in wholesale prices of industrial commodities
were large and widespread in April, as in the two pre
ceding months. In foreign exchange markets, which had
been relatively quiet since mid-March, speculative
pressures have developed in recent days and exchange
rates for major European currencies have appreciated
against the dollar. The U.S. merchandise trade balance
improved considerably in the first quarter, reflecting
in part an especially large increase in agricultural
In April growth in the narrowly defined money stock
picked up from its low first-quarter rate, and growth
in the broadly defined money stock also increased.
Growth in business loans at banks slowed, and banks
reduced the pace at which they issued large-denomination
CD's; consequently, the bank credit proxy expanded
somewhat less than in other recent months. In recent
weeks Federal Reserve Bank discount rates have been
increased in two steps of one-quarter point to 6 per
cent by May 11. Most short-term market interest rates,

which had risen sharply earlier, have advanced slightly
further. Interest rates on long-term market securities
have been relatively stable.

In light of the foregoing developments, it is the
policy of the Federal Open Market Committee to foster
financial conditions conducive to abatement of infla
tionary pressures, a more sustainable rate of advance
in economic activity, and progress toward equilibrium
in the country's balance of payments.
To implement this policy, while taking account of
international and domestic financial market developments,
the Committee seeks to achieve bank reserve and money
market conditions consistent with somewhat slower growth
in monetary aggregates over the months immediately ahead
than occurred on average in the past 6 months.
Votes for this action: Messrs.
Burns, Hayes, Balles, Brimmer, Bucher,
Daane, Francis, Mayo, Morris, and
Sheehan. Votes against this action:

Absent and not voting:

Mr. Mitchell.

Subsequent to the meeting it appeared that in the
May-June period the annual rate of growth in RPD's would be above

11 per cent and

that growth in the monetary aggregates would exceed

an acceptable range, even though money market conditions continued
to tighten.

On May 24, 1973, and again on June 8, a majority of

the members concurred in a recommendation by the Chairman that

money market conditions should be permitted to tighten still
further if necessary to limit growth in RPD's.