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RESERVE
FEDERAL
press
For immediate release
release
February 24, 1969.
The Board of Governors of the Federal Reserve System
and the Federal Open Market Committee today released the attached
records of policy actions taken by the Federal Open Market Committee
at its meetings on November 26 and December 17, 1968.
These records
will be published in the Board's Annual Report for 1968 and in the
Federal Reserve Bulletin.
Attachments
RECORD OF POLICY ACTIONS
OF THE FEDERAL OPEN MARKET COMMITTEE
Meeting held on November 26, 1968
1.
Authority to effect transactions in System Account.
The information reviewed at this meeting suggested that the
expansion in over-all economic activity, while still strong, was
moderating somewhat further in the fourth quarter from its very
rapid pace earlier in the year.
In particular, retail sales in
October were no higher than they had been in August--suggesting that
the surge in consumer spending was subsiding--and the rise in Federal
expenditures was estimated to be slackening further.
Staff projections
implied that the rate of economic expansion would continue to moderate
in the first half of 1969.
Recent data of various kinds indicated that the expansion was
still strong.
Industrial production, which was now reported to have
turned up in September, advanced again in October, and new orders
for durable goods increased sharply.
Nonfarm payroll employment rose
more in October than in other recent months, and the unemployment
rate continued at the September level of 3.6 per cent.
According to
a private survey taken in October, businesses planned to increase
their outlays on new plant and equipment in 1969 by about 8 per cent,
or more than the rise currently estimated for 1968.
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11/26/68
Average prices of industrial commodities increased slightly
in November after advancing at a substantial rate in the two
preceding months,
In contrast, the consumer price index--which had
increased only moderately in September--rose sharply in October.
With labor markets remaining firm, sizable further advances in
average hourly earnings were widespread among industries.
Foreign exchange markets were in turmoil during most of
November.
Speculative buying of German marks revived on a large
scale in early November in response to renewed rumors of an imminent
revaluation.
Selling pressure on the French franc intensified, and
sterling was also subject to pressure, particularly after the
publication of figures indicating that the British foreign trade
deficit had increased somewhat in October.
On November 19 the German Government announced that the
mark would not be revalued, but that in order to reduce the German
trade surplus the value-added tax rebate would be decreased by 4
percentage points for merchandise exports and the border tax would
be reduced by 4 percentage points for most imports.
The finance
ministers and central bank governors of the Group of Ten met at
Bonn November 20 through 22.
New credit facilities totaling $2
billion were made available to France, and the German authorities
increased to 100 per cent the reserve requirements on additions to
German commercial bank liabilities to foreigners.
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11/26/68
On November 23, contrary to the expectations of many observers,
the French Government announced that the franc would not be devalued,
and on the following day President de Gaulle outlined the policy
measures that would be adopted.
In addition to the reimposition of
exchange controls, these measures included a sizable reduction in
French budget expenditures, a more restrictive policy toward wage
and price increases, and changes in the tax system to favor exports
and deter imports.
Earlier, on November 13, the Bank of France had
increased its discount rate from 5 to 6 per cent and had announced
measures to limit the expansion of bank credit.
The British Government on November 22 announced new actions
to restrain domestic demand and to improve the balance of payments.
These included a 10 per cent surcharge on existing purchase and
excise taxes; requirement of 6-month non-interest-bearing deposits
equal to 50 per cent of the value of imports of most manufactured
goods; and tighter ceilings on bank loans to the private sector.
Official estimates of the U.S. balance of payments indicated
that there had been a small surplus in the third quarter on the
liquidity basis of calculation, following a moderate deficit in the
second quarter.
Special official transactions operating to reduce
the deficit remained large, but were not so large as in the second
quarter.
The trade surplus, although still quite small, was larger
than in the first two quarters of the year; this resulted partly
from acceleration of shipments in September in anticipation of a
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11/26/68
possible strike of longshoremen on October 1.
Available data for
October and the first 2 weeks of November suggested that a sizable
deficit on the liquidity basis had again emerged.
Official data confirmed the earlier expectation that a
moderate payments surplus had been recorded in the third quarter
on the official settlements basis, largely because of a further
increase in borrowings of U.S. banks through their branches abroad.
The outstanding volume of such borrowings changed little after
mid-September, however, and in October the balance on the official
settlements basis probably was in deficit.
In its November refunding the Treasury offered 2 notes in
exchange for securities maturing in mid-November and mid-December.
Of the $5.6 billion of these issues held by the public, $2.5 billion
were exchanged for a new 18-month, 5-5/8 per cent note (priced to
yield 5.73 per cent), and $1.3 billion were exchanged for a reopened
6-year, 5-3/4 per cent note (priced at par).
On November 19 the
Treasury announced that it would auction $2 billion of tax-anticipation
bills due in June, for payment on December 2, mainly to raise cash to
redeem the $1.8 billion of maturing securities not exchanged in the
November refunding.
This offering was expected to be the Treasury's
last financing in the calendar year, and its size was near the lower
end of the range that had been anticipated by market participants.
With the Treasury refunding under way, recent System open
market operations had been directed at maintaining generally steady
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11/26/68
conditions in money and short-term credit markets.
Operations were
complicated, however, by shifts in the distribution of reservesfirst away from banks in the money centers and then back again--and
by the effects on total reserves of a sharp decline in Treasury
balances at the Federal Reserve Banks and of large-scale international
transactions.
The effective rate on Federal funds was 6 per cent or
higher on most days in the first half of November, but it subsequently
fluctuated around 5-3/4 per cent.
Member bank borrowings averaged
about $520 million in the 4 weeks ending November 20, above the
average of about $450 million in the preceding 4 weeks.
Excess
reserves also increased on the average but less than borrowings, and
net borrowed reserves were slightly larger.
Yields on Treasury, corporate, and State and local government
bonds had risen further in recent weeks, partly because of continuing
heavy demands on the capital markets.
The volume of corporate and
municipal bond offerings in November, while less than in October,
was relatively large.
The upward rate pressures also reflected
cautious attitudes on the part of investors, against the background
of indications of strength in the economy, widespread expectations
of inflation, and growing anticipations of a firmer monetary policy.
On the other hand, there was relatively little reaction in capital
markets to either the late-October announcement of a halt in the
bombing of North Vietnam or the recent turbulence in foreign exchange
markets.
11/26/68
Interest rates on various types of short-term instruments
also had risen recently, in response to some of the same factors
affecting longer-term rates as well as to seasonal pressures.
However, there was little net change in yields on shorter-term
Treasury bills, the market supplies of which had become limited
at a time of strong domestic and foreign demands.
The market rate
on 3-month Treasury bills, at 5.42 per cent on the day before this
meeting, was 4 basis points below its level of 4 weeks earlier.
Net inflows of deposits to nonbank financial intermediaries
again increased only moderately in October.
Yields on home mortgages
in the secondary market, which had been declining for several months,
edged up in Octcber and apparently also in the first half of November.
Rates paid by banks on large-denomination CD's also had
advanced further in recent weeks.
Most banks were now paying the
Regulation Q ceiling rate of 6 per cent on certificates with maturities
of 90 to 179 days, and some reportedly were paying the 6-1/4 per cent
ceiling rate on longer-term certificates.
According to tentative
estimates, growth from October to November in the volume of outstanding
CD's, and of other time and savings deposits as well, was slower than
it had been in other recent months.
On the other hand, the expansion
in private demand deposits and the money supply accelerated--the
latter to an estimated annual rate of more than 10 per cent, the
highest since July.
Bank credit, as measured by the proxy series-
daily-average member bank deposits--was tentatively estimated to have
11/26/68
-7
increased from October to November at an annual rate of 10.5 per
cent, compared with 12.5 per cent from September to October.
In
mid-November prime lending rates were raised to the generally
prevailing level of 6-1/4 per cent by the few large banks that had
reduced such rates from 6-1/2 to 6 per cent in late September.
Staff projections suggested that the bank credit proxy
would increase from November to December at an annual rate of 5 to
8 per cent if prevailing conditions were maintained in money and
short-term credit markets.
The projections assumed that the volume
of large-denomination CD's outstanding would decline seasonally and
that growth in other time and savings deposits would slow somewhat
further.
An anticipated reduction in the average level of U.S.
Government deposits was expected to contribute to expansion in
private demand deposits and the money supply at a rapid rate,
although not so rapid as in November.
Committee members differed in their views on the appropriate
course for monetary policy under current circumstances, with a
minority favoring operations directed at attaining somewhat firmer
money market conditions.
The majority thought that, although it
would be advisable to resist any easing of money market conditions
that might be produced by market forces, a shift to a firmer policy
stance was not warranted at this time.
Members of the majority shared the concern expressed about
the persistence of inflationary pressures, and some indicated that
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11/26/68
they had found the question of appropriate policy to be close.
On
balance, however, they believed that domestic economic considerations
did not suggest a clear and unequivocal need for a firmer policy at
present.
In their judgment, despite the unexpected strength of the
economy since enactment of fiscal restraint legislation at midyear,
evidences of slowing in the rate of expansion were likely to become
more pronounced in coming months.
Other considerations cited as
militating against a policy change at present were the recent turbulence
and the continuing uncertainties in foreign exchange markets, and the
fact that in financial markets the peak seasonal pressures of the year
were to be expected in the period just ahead.
Several members expressed
the view that a slight firming of policy at this time would not be
effectual in combatting the prevailing inflationary psychology, and
that a more marked firming would be undesirable on the other grounds
cited.
The Committee concluded that open market operations should be
directed at maintaining about the prevailing conditions in money and
short-term credit markets, with the proviso that operations should be
modified if bank credit expansion appeared to be exceeding current
projections.
The following current economic policy directive was
issued to the Federal Reserve Bank of New York:
The information reviewed at this meeting suggests that
the expansion in over-all economic activity, while still
strong, is moderating somewhat further from its very rapid
pace earlier in the year. Upward pressures on prices and
costs are persisting. Most market interest rates have risen
further in recent weeks. Bank credit has continued to
expand rapidly. Growth in the money supply has accelerated
from the low average rate of recent months, while expansion
11/26/68
in commercial bank time and savings deposits has slowed.
Savings inflows to thrift institutions increased somewhat
further in October but remained moderate. Following dis
cussions among leading industrial countries, France, Germany,
and Britain have acted to combat the recent speculation in
their currencies by taking steps designed to reduce imbalances
in their external payments. The U.S. foreign trade balance
and over-all balance of payments improved in the third quarter
but partial data for recent weeks suggest that the improvement
is not being sustained, and the underlying U.S. payments
position remains a serious problem. In this situation, it is
the policy of the Federal Open Market Committee to foster
financial conditions conducive to sustainable economic growth,
continued resistance to inflationary pressures, and attainment
of reasonable equilibrium in the country's balance of payments.
To implement this policy, System open market operations
until the next meeting of the Committee shall be conducted
with a view to maintaining about the prevailing conditions
in money and short-term credit markets; provided, however,
that operations shall be modified if bank credit expansion
appears to be exceeding current projections.
Votes for this action: Messrs.
Martin, Brimmer, Daane, Galusha, Maisel,
Mitchell, Robertson, and Sherrill.
Votes against this action: Messrs.
Hayes, Hickman, Kimbrel, and Morris.
In dissenting from this action, Messrs. Hayes, Hickman, Kimbrel,
and Morris indicated that they favored seeking somewhat firmer money
market conditions in an effort to slow the rate of bank credit growth,
which in their view had been excessive for several months.
They thought
such action was required in light of prevailing inflationary pressures
and expectations.
In their judgment, the latest information on the
domestic economy lent support to the view that the rate of expansion,
while perhaps moderating somewhat in coming months, was likely to remain
excessive under the current stance of fiscal and monetary policies.
The
view also was expressed that a firmer monetary policy was desirable to
help maintain the strength of the dollar in foreign exchange markets.
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11/26/68
2.
Ratification of amendment to authorization for System foreign
currency operations.
The Committee ratified an action taken by members on
November 22, 1968, effective on that date, to increase the System's
swap arrangement with the Bank of France from $700 million to $1
billion, equivalent, and to make the corresponding amendment to
paragraph 2 of the authorization for System foreign currency opera
tions.
As a result of this action, paragraph 2 read as follows:
The Federal Open Market Committee directs the Federal
Reserve Bank of New York to maintain reciprocal currency
arrangements ("swap" arrangements) for System Open Market
Account for periods up to a maximum of 12 months with the
following foreign banks, which are among those designated
by the Board of Governors of the Federal Reserve System
under Section 214.5 of Regulation N, relations with foreign
banks and bankers, and with the approval of the Committee
to renew such arrangements on maturity:
Amount of
Foreign bank
arrangement
(millions of
dollars equivalent)
Austrian National Bank
National Bank of Belgium
Bank of Canada
National Bank of Denmark
Bank of England
Bank of France
German Federal Bank
Bank of Italy
Bank of Japan
Bank of Mexico
Netherlands Bank
Bank of Norway
Bank of Sweden
Swiss National Bank
Bank for International Settlements:
System drawings in Swiss francs
System drawings in authorized European
currencies other than Swiss francs
100
225
1,000
100
2,000
1,000
1,000
1,000
1,000
130
400
100
250
600
600
1,000
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11/26/68
Votes for ratification of this
action:
Messrs. Martin, Hayes,
Brimmer, Daane, Galusha, Hickman,
Kimbrel, Maisel, Mitchell, Morris,
Robertson, and Sherrill. Votes
against ratification of this action:
None.
This increase in the Federal Reserve swap line with the Bank
of France represented part of the U.S. share of the $2 billion in new
credit facilities to France that had been announced in Bonn on
November 22, following the meeting of the finance ministers and
central bank governors.
In addition, the U.S. Treasury made a $200
million credit facility available to France, so total U.S. partic
ipation in the new facilities was $500 million.
RECORD OF POLICY ACTIONS
OF THE FEDERAL OPEN MARKET COMMITTEE
Meeting held on December 17, 1968
Authority to effect transactions in System Account.
The current rate of expansion in over-all economic activity
was significantly higher than has been projected earlier, according
to a broad variety of economic information that had become available
since the preceding meeting of the Committee.
New staff projections
suggested that GNP in current-dollar terms would increase about as
rapidly in the fourth quarter as it had in the third.
Average prices,
as measured by the "GNP deflator," were estimated to be rising at a
faster pace again in the fourth quarter, and growth in real GNP was
expected to moderate somewhat further from the very high rates recorded
in the first two quarters of the year.
Expectations of continued
inflationary pressures appeared to be widespread.
The staff projections of GNP in both the fourth and first
quarters had been revised upward from those of 3 weeks earlier
largely because of the indication, from the Commerce-SEC survey of
business plans taken in November, that outlays on new plant and
equipment were rising sharply.
Other evidences of strength in the
current business situation were reflected in November data on
production, employment, and retail sales.
A sizable further
advance in industrial production in November brought the index
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12/17/68
above the previous high recorded in July, when output of steel had
been substantially larger.
Nonfarm payroll employment again rose
sharply, and the unemployment rate declined to 3.3 per cent--its
lowest level in 15 years--from 3.6 per cent in October.
Average
hourly earnings continued to advance at the rapid pace of recent
months.
Retail sales, according to the advance estimate, rose in
November after edging down in September and October.
It appeared,
however, that consumer expenditures would expand considerably less
in the fourth quarter as a whole than they had in the third quarter.
The staff projections still implied that the rate of increase
in real GNP would moderate considerably in the first half of 1969,
partly because of a marked swing from deficit to surplus that was
already under way in the Federal fiscal position.
In addition, it
was expected that expansion in consumer expenditures would slow
further as a result of slackened growth in disposable income and
that the increase in residential construction outlays would be
limited by tight conditions in mortgage markets.
Against the back
ground of prospects in these sectors, the resurgence of business
capital outlays and the report that inventories had risen markedly
in October suggested that imbalances could be developing in the
economy as a result of inflationary expectations.
In foreign exchange markets, earlier speculative movements
of funds were partly reversed following the actions taken in late
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12/17/68
November by Germany, France, and Britain to reduce imbalances in
their external payments.
The pound was again subject to selling
pressure in early December, however, and the market for sterling
remained uneasy even after publication of figures indicating that
Britain's foreign trade balance had improved sharply in November.
Available information on the U.S. balance of payments in
October and November suggested that sizable deficits had again
emerged on both the liquidity and official settlements bases of
calculation, following the surpluses--small in the case of the
liquidity balance--that had been recorded in the third quarter.
Since mid-September there had been relatively little net change in
borrowings by U.S. banks through their foreign branches; in the
spring and summer, increases in such borrowings had resulted in the
payments surpluses recorded then on the official settlements basis.
U.S. merchandise exports declined sharply in October after rising
considerably in September in anticipation of a longshoremen's
strike on October 1.
Imports also declined in October, but more
moderately than exports; for September and October together there
was a small surplus in U.S. foreign trade.
With the current Taft
Hartley Act injunction against the strike scheduled to expire on
December 20, continued marked fluctuations in monthly foreign trade
figures appeared likely.
In late November the Treasury auctioned $2 billion of tax-anticipa
tion bills due in June 1969, for payment on December 2.
Banks, which were
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12/17/68
allowed to pay for the bills through credits to Treasury tax and
loan accounts, successfully bid for the bulk of the issue.
Despite
this cash financing, however, Treasury cash balances at banks were
drawn down to very low levels prior to the quarterly corporate tax
date in mid-December, and the Treasury temporarily replenished its
balances in the period December 10-17 by selling special certificates
of indebtedness to the Federal Reserve.
The volume of such
certificates outstanding was $92 million on December 10, none on
December 11, $45 million on December 12, $430 million from December 13
through 15, $447 million on December 16, and $596 million on December 17.
(Certificates outstanding on December 17 were redeemed the following
day.)
Interest rates on market securities of all maturities had
risen sharply further in recent weeks as the steady stream of
statistics reflecting strength in the economy heightened concern
about inflationary pressures and enhanced expectations of a firmer
monetary policy.
Increases in yields were particularly rapid in
early December after commercial banks increased their prime lending
rates from 6-1/4 per cent to the 6-1/2 per cent level that had pre
vailed before the reductions of late September.
Yields on most
long-term securities rose to levels above the peaks that had been
reached in the spring, and unsettled conditions in the capital
markets led to the postponement or cancellation of a number of
scheduled corporate and municipal bond offerings.
Conditions in the
secondary market for home mortgages continued to tighten in early
December.
12/17/68
In markets for short-term securities, yield advances were
particularly pronounced for Treasury bills; on the day before this
meeting the market rate on 3-month bills was 5.94 per cent, 52 basis
points above its level of 3 weeks earlier.
Upward pressures on bill
yields were augmented by seasonal forces, sales of bills by foreign
monetary authorities, and sales by domestic commercial banks of
tax-anticipation bills they had acquired in the Treasury's recent
auction.
Rates paid by commercial banks on large-denomination CD's
of longer maturity had increased further in recent weeks, and most
large banks were now paying the Regulation Q ceiling rates for all
maturities.
The volume of CD's outstanding rose substantially in
November, particularly after midmonth.
Largely as a consequence,
the expansion in total time and savings deposits from October to
November was more rapid than earlier tentative estimates had
indicated, although somewhat less rapid than in other recent months.
Estimates of November growth rates also had been revised
upward somewhat for bank credit, as measured by the proxy seriesdaily-average member bank deposits--and for the money supply; both
were now estimated to have increased from October to November at an
11.5 per cent annual rate.
Since midyear, bank credit and the money
supply had expanded at annual rates of about 13 and 6 per cent,
respectively, compared with rates of about 4 and 6.5 per cent in
the first half of the year.
In November banks increased the volume
12/17/68
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of business loans outstanding considerably further and continued to
acquire municipal securities at a rapid pace, while reducing their
holdings of U.S. Government securities.
To a large extent, the
accelerated growth in the money supply in November reflected a rise
in private demand deposits in the last half of the month, when U.S.
Government deposits declined markedly.
System open market operations in the first part of the period
since the Committee's preceding meeting were directed at maintaining
about the prevailing conditions in money and short-term credit markets,
and reserves were supplied partly in an effort to cushion the sharp
reaction of short-term market interest rates to the rise in the prime
rate.
Operations subsequently were shifted in the direction of
reserve absorption when market factors began to supply a large volume
of reserves and when estimates indicated that bank credit was
expanding at a rate in excess of the range projected at the time of
the previous meeting.
These operations were tempered, however, in
view of the continuing increases in short-term rates.
During the
period as a whole, the effective rate on Federal funds fluctuated
mostly in a range of 5-3/4 to 6 per cent.
Member bank borrowings
averaged $515 million in the 3 weeks ending December 11, little
changed from the previous 4 weeks.
With excess reserves lower on
the average, net borrowed reserves rose in the period.
New staff projections suggested that if prevailing conditions
in money and short-term credit markets were maintained, on balance,
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12/17/68
the bank credit proxy would expand at an annual rate of 8 to 11 per
cent from November to December and at a rate of 4 to 7 per cent from
December to January.
Given the current relationships between short
term interest rates and Regulation Q ceiling rates, it was expected
that banks would experience a larger-than-seasonal run-off of CD's
in December and a contraseasonal run-off in January, and that inflows
of consumer-type time and savings deposits would begin to moderate.
Growth in the money supply was expected to slow considerably in
December--and perhaps to taper off further in January, particularly
if demands for business loans were reduced.
An alternative projection suggested that a firming of money
market conditions would have relatively little effect on bank credit
growth in December but would result in a slower rate of growth in
January--an annual rate of perhaps 2 to 5 per cent--mainly as a
result of a larger run-off of CD's.
For purposes of the projections
it was assumed that the Treasury would not engage in any new cash
borrowing through the end of January.
Prior to this meeting the boards of directors of nine Federal
Reserve Banks had acted, subject to the approval of the Board of
Governors, to increase discount rates from the present level of 5-1/4
per cent.
It was reported to the Committee that the Board of Governors
planned shortly after this meeting to take action with respect to
discount rates and also to consider the desirability of a moderate
increase in member bank reserve requirements.
The Committee was unanimously of the view that greater monetary
restraint was required at this time in light of the unexpected strength
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12/17/68
of current economic activity, the persistence of inflationary pressures
and expectations, and the recent rapid rate of growth in bank credit.
The members agreed that one element of the shift to greater monetary
restraint should be a firmer open market policy.
There also was general
sentiment at the meeting that discount rates should be increased,
although there were some differences of view with respect to the amount;
and divergent opinions were expressed about the desirability of action
now to raise reserve requirements.
A number of members expressed the view that the combination of
a firmer open market policy and an increase of one-quarter of a percentage
point in discount rates would be appropriate to the current economic
situation.
Some of these members added that, while additional measures
could be taken later if deemed necessary, various considerations--including
the continuing uncertainties with respect to foreign exchange markets, as
well as the sensitive state of conditions in domestic financial markets
with the attendant risks of unduly large market reactions--militated
against also increasing reserve requirements at this time or raising
discount rates by as much as one-half point.
The basic argument advanced
by those who favored a broader combination of policy actions now was that
more limited actions were likely to be inadequate to dampen the prevailing
inflationary psychology, particularly since it appeared that an increase
of at least one-quarter point in the discount rate was already widely
anticipated in financial markets.
At the conclusion of the discussion the Committee agreed that
open market operations should be directed at attaining firmer conditions
in money and short-term credit markets, while taking account of the
12/17/68
effects of any other monetary policy actions that might be taken.
The proviso was added that operations should be modified if bank
credit expansion appeared to be deviating significantly from current
projections.
The following current economic policy directive was
issued to the Federal Reserve Bank of New York:
The information reviewed at this meeting suggests
that over-all economic activity is expanding rapidly
and that upward pressures on prices and costs are
persisting. Market interest rates have risen consid
erably further in recent weeks. Bank credit growth
has been sustained by continuing strong expansion of
time and savings deposits, while growth in the money
supply has accelerated and U.S. Government deposits
have declined. The U.S. foreign trade surplus remains
very small and the over-all balance of payments
apparently worsened in October and November. In this
situation, 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 attaining firmer
conditions in money and short-term credit markets,
taking account of the effects of other possible
monetary policy action; provided, however, that
operations shall be modified if bank credit expan
sion appears to be deviating significantly from
current projections.
Votes for this action:
Messrs.
Hayes, Brimmer, Daane, Galusha,
Hickman, Kimbrel, Maisel, Mitchell,
Morris, Robertson, and Sherrill.
Votes against this action: None.
Absent and not voting:
Mr. Martin.
@FedFRASER