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FEDERAL
RESERVE
pressrelease
For immediate release
August 25, 1969
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 27, 1969.
Such records are made available
approximately 90 days after the date of each meeting of the
Committee and will be found in the Federal Reserve Bulletin and
the Board's Annual Report.
Attachment
RECORD OF POLICY ACTIONS
OF THE FEDERAL OPEN MARKET COMMITTEE
Meeting Held on May 27, 1969
1.
Authority to effect transactions in System Account.
According to the information reviewed at this meeting, the
pace of expansion in economic activity was moderating slightly
further but substantial upward pressures on prices and costs were
persisting.
New staff projections for the second quarter suggested
that the increase in real GNP would be a little less than the 2.8
per cent annual rate now estimated by the Commerce Department for
the first quarter.
Prices, however, were expected to continue
rising rapidly.
Available data for April showed some signs of a less rapid
pace of economic advance.
Growth in personal income, industrial
production, and nonfarm employment slowed, and the unemployment rate
edged up by 0.1 per cent for the second successive month, to 3.5 per
cent.
Housing starts declined for the third successive month.
Retail
sales increased considerably, but from a March figure that had been
revised downward; in April retail sales were only moderately above
the level of September 1968, even though prices had risen substantially
in that period.
On the other hand, new orders for durable goods
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5/27/69
rebounded in April after declining in March.
Much of the April
surge of orders may have been in anticipation of the administration's
recommendation, made on April 21, for repeal of the 7 per cent
investment tax credit as of that date.
Advances in wholesale prices of industrial commodities
remained widespread in April, but the average of such prices rose
relatively little because of an abrupt reversal of the earlier
rapid run-up for lumber and plywood.
The consumer price index
increased sharply further, with much of the rise accounted for by
higher food prices and homeownership costs. Over the past year
consumer prices had increased by 5.4 per cent.
Unit labor costs in
the private nonfarm sector as a whole were reported to have risen
markedly in the first quarter.
The staff projections for the second quarter suggested that
business inventory accumulation would remain at about the first
quarter rate but that expansion in total final sales would slow.
It was anticipated that consumer spending would rise less than in
the first quarter, that Federal expenditures on goods and services
would increase relatively little, and that residential construction
outlays would decline.
Only a small increase appeared in prospect
for business spending on plant and equipment after the sharp expansion
of the first quarter.
Net exports were still expected to turn up as
a result of the ending of the longshoremen's strike, but by consider
ably less than had been thought likely earlier.
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5/27/69
Projections for the second half of 1969 suggested that
expansion in real GNP would slow further but that upward pressures
on costs and prices would still be strong.
The GNP projections
assumed that Federal expenditures would remain under substantial
restraint and that, as recommended by the administration, the surtax
would be continued at 10 per cent through the end of the year and the
investment tax credit would be repealed.
Although growth in
disposable income was expected to be stimulated temporarily in the
third quarter by the ending of retroactive tax payments and by the
scheduled Federal pay increase, it seemed probable that generally
moderate rates of expansion in employment and income in the second
half of the year would limit increases in consumer spending.
Prospects appeared to be for a continuing downdrift in residential
construction outlays and for only small further increases in business
capital expenditures.
In April both exports and imports of the United States were
above normal as movements of merchandise recovered from the earlier
longshoremen's strike.
With respect to the over-all international
payments of the United States, another large deficit was incurred on
the liquidity basis in April while payments on
the official settlements
basis--which had been in substantial surplus in the first quarter--were
about in balance.
Extremely large deficits were incurred on both bases
in the first half of May, when expectations of a revaluation of the
German mark led to a massive flow of capital into Germany.
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5/27/69
Beginning in late April, funds moved into marks out of
dollars, sterling, French francs, and many other currencies, causing
relatively severe reserve losses for a number of countries.
Movements
out of dollars, from both the United States and the Euro-dollar market,
were exceptionally heavy, and earlier flows of Euro-dollars to the
United States through foreign branches of U.S. banks were temporarily
reversed.
Interest rates in the Euro-dollar market, already high in
April in consequence of U.S. bank demands and of reduced supplies
from banks in some European countries, rose sharply further in the
first half of May.
Subsequently, despite interest costs in the
neighborhood of 9-1/2 per cent, U.S. banks again increased their
liabilities to foreign branches.
In its May refunding the Treasury offered two new notesa 15-month, 6-3/8 per cent note priced to yield 6.42 per cent and
a 7-year, 6-1/2 per cent note priced at par--in exchange for
securities maturing in mid-May and mid-June.
Of the $5.9 billion
of maturing issues held by the public, about $2.1 billion were
exchanged for the shorter-term note, and $2.2 billion--considerably
more than had been anticipated in the market--for the 7-year
note.
The rate of attrition, slightly more than one-fourth of
public holdings, was high by historical standards but lower than
had been generally expected.
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5/27/69
System open market operations since the previous meeting of
the Committee had been directed at maintaining firm conditions in
the money and short-term credit markets.
were quite taut during the interval.
Money market conditions
The effective rate on Federal
funds fluctuated mostly in a range of 8 to 9 per cent, compared
with rates in the 7-3/4 to 7-7/8 per cent area in the latter part
of April.
Member bank borrowings rose to an average of about $1.3
billion in the 4 weeks ending May 21 from about $1.0 billion in
the previous 4 weeks, and net borrowed reserves increased by a
corresponding amount.
The tautness in the money market in part reflected aggressive
bidding for funds by large banks as they adjusted to the cumulative
effects of monetary restraint, the reduced availability of funds
from the Euro-dollar market, and a shift of reserves away from the
money centers over the course of the period.
Although the System
supplied a substantial volume of reserves on balance, it did not
fully offset reserve drains stemming from market factors in light
of the tendency during much of the interval for short-term Treasury
bill rates to move to or below the lower end of recent ranges.
For
example, the market rate on 3-month Treasury bills, which had been
in a range of 6.00 to 6.20 per cent during most of April, declined
to a low for the year--5.87 per cent--at the end of that month and
subsequently fluctuated mostly in a range below 6.10 per cent.
Relatively strong investor demands for bills in the period were
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5/27/69
augmented by heavy foreign official purchases resulting from the
speculative flows into the German mark.
Interest rates on other short-term debt instruments and on
long-term securities had risen in recent weeks under the influence
of taut money market conditions, expectations of a possible increase
in the prime lending rate of banks, and dampened hopes for a settle
ment of the Vietnamese war in the near future.
Also contributing to
upward pressures was the sizable calendar of corporate bond offerings
in May and June.
The advance in municipal yields was particularly
sharp, reflecting limited bank interest in new issues and efforts by
dealers to dispose of bonds for which they had made commitments in
April in the expectation of declining yields.
Postponements of
municipal offerings increased in May, and the calendar for that monthas well as for June--was considerably smaller than the unusually
large volume marketed in April.
Business loan demands at banks, which were augmented in
April by needs to finance tax payments, apparently continued strong
in early May.
Bank holdings of municipal securities declined
slightly in April but holdings of U.S. Government securities
increased a little, in part because of bank participation in the
Treasury's late-March bill financing.
Bank credit and the money stock had risen sharply in the
first week of April, and although both had declined later in the
month, their average levels for April as a whole were considerably above
5/27/69
-7
those for March.
According to revised estimates, the adjusted bank
credit proxy--daily-average member bank deposits, adjusted to include
changes in the daily average of U.S. bank liabilities to foreign
branches--expanded at an annual rate of 6 per cent from March to
April, and the money stock grew at a rate of more than 10 per cent.
However, total time and savings deposits of banks declined slightly.
Tentative estimates for May indicated that the average level of
both the adjusted proxy series and the money stock would be about
the same as in April, and that time and savings deposits would
again decline slightly.
The volume of large-denomination CD's out
standing was being reduced further in May, and other time and
savings deposits apparently were recovering sluggishly from the
sizable net outflows that marked much of April.
The data available
for savings flows at nonbank thrift institutions in early May also
suggested only modest improvement over the weak April performance.
It appeared likely that the banking system--and financial
markets generally--would be under heavy pressure in June.
A near
record volume of corporate income tax payments due at midmonth
was expected to contribute both to substantial demands for business
loans and to continuing run-off s of outstanding large-denomination
CD's.
Staff projections suggested that bank credit would grow
relatively little from May to June if prevailing conditions were
maintained in money and short-term credit markets.
Specifically, the
proxy series adjusted for changes in Euro-dollar liabilities was
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5/27/69
projected to increase at an annual rate in a range from zero to 5
per cent.
Some further recovery was anticipated in consumer-type
time and savings deposits, at least until the midyear
crediting period.
interest
U.S. Government deposits were projected to decline
on the average in June as a result of net debt repayments by the
Treasury in the latter half of the month.
Partly for this reason,
and partly in consequence of the expected heavy demands for business
loans, sharp increases appeared in prospect for private demand deposits
and the money stock; the latter was projected to rise at an annual
rate of 7 to 10 per cent.
It was noted at the meeting that in recent months banks
had begun to draw increasingly on nondeposit sources of funds other
than Euro-dollars--such as funds obtained through sales of commercial
paper by bank holding companies and sales of loan participations to
nonbank customers under agreements to repurchase--and that credit
based on funds from these sources was not reflected in the proxy
series as currently calculated.
While data for firm estimates of
the amounts involved were lacking, it was suggested that funds
raised from such nondeposit
sources might have grown at a rate
equivalent to 1 or 2 percentage points in the adjusted proxy series
in May and might possibly grow more in June.
In its discussion of policy the Committee took note of the
signs of some slowing in the economic expansion and of the indications
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5/27/69
of stringency in financial markets.
In view of the persistence of
strong inflationary pressures and expectations, however, the members
agreed that a relaxation of the existing degree of monetary restraint
would not be appropriate at this time.
There was some comment about
the possible need for a slight further firming of policy, but it was
noted that the strains anticipated in financial markets in connection
with corporate tax payments in June militated against such a course.
A number of members expressed the view that--while disorderly market
conditions should be avoided--concern among market participants over
the possibility of a "credit crunch" would not in itself warrant an
easing of monetary policy.
The Committee decided that open market operations should be
directed at maintaining the prevailing pressure on money and short
term credit markets, with the proviso that operations should be
modified if bank credit appeared to be deviating significantly from
current projections.
Although not all members were of the same view
on the matter, a number suggested that it would be desirable for the
change in the adjusted bank credit proxy in June to be kept to the
lower end of the projected range, particularly since the measure
currently understated the resources actually available to the banking
system.
And a number of members expressed the hope that growth in
the money stock in June could be held below the rate projected.
5/27/69
-10The following current economic policy directive was issued
to the Federal Reserve Bank of New York:
The information reviewed at this meeting suggests
that expansion in real economic activity is continuing
to moderate slightly, but that substantial upward
pressures on prices and costs are persisting. Interest
rates have risen in recent weeks. Bank credit and the
money supply appear to be changing little on average in
May after bulging in April. The outstanding volume of
large-denomination CD's has continued to decline, and
the available evidence suggests only modest recovery in
other time and savings deposits at banks and in savings
balances at nonbank thrift institutions following the
outflows of the first half of April. The U.S. balance
of payments on the liquidity basis was in sizable
deficit in the first 4 months of 1969 but the balance
on the official settlements basis remained in surplus
as a result of large inflows of Euro-dollars. However,
there were substantial outflows of funds from the United
States in the first half of May, during the period of
intense speculation on a revaluation of the German mark,
and the payments balance was in very large deficit on
both bases. In light of the foregoing developments, it
is the policy of the Federal Open Market Committee to
foster financial conditions conducive to the reduction
of inflationary pressures, with a view to encouraging
a more sustainable rate of economic growth and attaining
reasonable equilibrium in the country's balance of
payments.
To implement this policy, System open market
operations until the next meeting of the Committee shall
be conducted with a view to maintaining the prevailing
pressure on money and short-term credit markets; provided,
however, that operations shall be modified if bank credit
appears to be deviating significantly from current pro
jections.
Votes for this action; Messrs.
Martin, Hayes, Bopp, Brimmer, Clay,
Coldwell, Daane, Maisel, Mitchell,
Robertson, Scanlon, and Sherrill.
Votes against this action: None.
5/27/69
2.
-11
Amendment to authorization for System foreign currency operations.
The Committee ratified an action taken by members on May 14,
1969, effective on that date, equalizing the System's swap arrange
ments with the National Bank of Belgium and the Netherlands Bank at
$300 million, and making the corresponding amendment to paragraph 2
of the authorization for System foreign currency operations.
Pre
viously, the arrangement with the National Bank of Belgium had been
in the amount of $225 million and that with the Netherlands Bank in
the amount of $400 million.
As a result of this action, paragraph 2
of the authorization read as follows,
The Federal Open Market Committee directs the Federal
Reserve Bank of New York to maintain reciprocal currency
arrangements ("swap" arrangements) for System Open Market
Account for periods up to a maximum of 12 months with the
following foreign banks, which are among those designated
by the Board of Governors of the Federal Reserve System
under Section 214.5 of Regulation N, Relations with Foreign
Banks and Bankers, and with the approval of the Committee
to renew such arrangements on maturity,
Foreign bank
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
Amount of
arrangement
(millions of
dollars equivalent)
100
300
1,000
100
2,000
1,000
1,000
1,000
1,000
5/27/69
-12-
Amount of
arrangement
(millions of
dollars equivalent)
Foreign bank
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
130
300
100
250
600
600
1,000
Votes for ratification of
Messrs. Martin,
this action.
Hayes, Bopp, Brimmer, Clay,
Coldwell, Daane, Maisel, Mitchell,
Robertson, Scanlon, and Sherrill.
Votes against ratification of
this action: None.
The System's swap arrangements with the two central banks in
question had been of equal size for several years before the gold
crisis of March 1968,
when the arrangement with the Netherlands Bank
had been increased by $175 million.
Members of the Committee had
voted in mid-May to approve the restoration of equality in the size
of the two swap arrangements at $300 million upon recommendation
of the Special Manager, who advised that the action was agreeable
to the central banks of Belgium and the Netherlands.
@FedFRASER