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press release

For immediate release

January 6, 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 Commit
tee at its meeting on October 8, 1968.

Such records are made

available approximately 90 days after the date of each meeting
of the Committee and will be found in the Federal Reserve Bulletin
and the Board's Annual Report.



Meeting held on October 8, 1968


Authority to effect transactions in System Account.
Staff estimates of GNP in the third quarter had been revised

upward since the preceding meeting of the Committee, mainly because
consumer expenditures had proved stronger than expected.

The estimates

still suggested that expansion in real GNP had moderated from its very
rapid pace in the first half of the year, but they indicated that
economic growth had slowed by less than earlier projections had Implied.
Projections for the fourth quarter, which also had been raised,
suggested that expansion would continue at about the rate now estimated
for the third quarter.
According to retail sales figures for August and the first
3 weeks of September, consumer spending on both durable and nondurable
goods was being maintained at the high level to which it had risen in

Since growth of disposable income in the third quarter had been

curtailed by the tax surcharge, it appeared that the rate of personal
saving had declined sharply.
Little further change in the saving rate seemed likely in
the fourth quarter, and with disposable income expected to continue
rising slowly, growth in consumer spending was projected to slacken.



The staff projections also suggested that other categories of final
demand--including Federal outlays, residential construction expen
ditures, and business spending on plant and equipment--would provide
relatively little stimulus to economic expansion in the fourth

On the other hand, the rate of inventory accumulation,

which had declined in the third quarter, was now expected to rise
in the fourth quarter.
In September output of steel was curtailed further as users
of the metal continued to reduce inventories that had been accumulated
prior to the wage settlement in the steel industry.

As a consequence,

the industrial production index was estimated to have declined again.
Employment in manufacturing--even apart from the steel industry--had
not increased since June, but labor markets remained generally firm
and in recent months average hourly earnings had continued to increase
at a rapid pace.
Average prices of industrial commodities rose appreciably in
September after having changed little for several months.

The rise,

which was the largest for any month since late winter, reflected not
only the advance in steel prices following the wage settlement but
also increases for a broad list of other commodities.

With average

prices of farm products and foods turning up, the over-all wholesale
price index rose in September by about as much as it had declined in

The consumer price index increased considerably less in

August than it had in June and July, partly because of a slowing of
the advance in mortgage interest charges.

In foreign exchange markets, pressures on the French franc
abated for a time in late September but then increased again.


speculation on an imminent revaluation of the German mark had subsided
in recent weeks, and market conditions in general had improved consid

The exchange rate for sterling, which had strengthened after

the September 9 announcement that final agreement had been reached on
the new sterling balances arrangement, advanced further following the
publication on September 17 of figures indicating that the British
foreign trade deficit had narrowed sharply in August.

On September 19

the Bank of England reduced its discount rate to 7 per cent from the
7-1/2 per cent rate that had been in effect since March 21.
In August a large rise in U.S. merchandise exports was exceeded
by an even larger rise in imports, and the U.S. trade surplus declined
from the low level of July.

Part of the increase in both exports and

imports was attributable to expectations of a possible strike of
longshoremen on October 1.

With respect to the over-all payments

balance, tentative estimates for the third quarter indicated that the
deficit on the liquidity basis was smaller than in the second quarter.
All of the improvement, however, apparently had occurred in July;
preliminary data suggested that sizable deficits had been incurred in
August and September.

It appeared that there was a moderate surplus

in the third quarter on the official settlements basis, mainly as a
result of a further increase in liabilities of U.S. banks to their
branches abroad.

Such liabilities rose sharply from mid-August to

mid-September, but declined subsequently.

The Treasury was expected shortly to announce a cash offering
of tax-anticipation bills, perhaps in the amount of $3 billion or
$3.5 billion, for which commercial banks would be permitted to make
payment by credits to tax and loan accounts.

Also, an announcement

was expected on October 23 of the terms on which the Treasury would
refund notes and bonds maturing in mid-November, of which about
$4 billion were held by the public.

The possibility was noted that

a pre-refunding of bonds maturing in mid-December, of which $1.6
billion were publicly held, might be undertaken along with the
refunding of November maturities.
System open market operations since the preceding meeting of
the Committee had been directed at maintaining about the prevailing
conditions in the money and short-term credit markets.

Although the

System undertook an unusually large volume of operations for this
purpose--absorbing reserves on a massive scale in the first part of
the period and supplying substantial amounts of reserves latermoney market conditions initially eased somewhat and subsequently
firmed again.

Thus, the effective rate in Federal funds transactions,

which had averaged about 5-7/8 per cent in the period before the
previous meeting, fluctuated below that level for a time and then
moved up to the 6 per cent area.

Rates posted by major banks on

loans to Government securities dealers followed a similar pattern.
A number of factors combined to complicate operations and to
require a large volume of transactions by the System in this period.
In addition to normal seasonal fluctuations, these factors included



large international transactions affecting reserves; a sharp, although
temporary, decline in Treasury balances at Reserve Banks before the
September 18 payment date for corporate taxes; and the adoption of new
methods for calculating required reserves of member banks under the
revision of Regulation D that became effective on September 12.1/
With respect to the last of these factors, the introduction
of a 2-week lag in the deposit balances used for calculating required
reserves, at a time when deposits were rising seasonally, had the
effect of temporarily reducing required reserves and increasing excess
reserves considerably relative to the levels that would have obtained
under the prior procedures, thus necessitating offsetting open market

In addition, operations were complicated by uncertainties

as to how member banks would react--particularly during a transition
period--to this and the other changes in procedures, including the
new carry-over provisions for reserve excesses and deficiencies.


effects of the carry-over provisions on reserve-management practices
of banks were expected to have the incidental consequence of weakening

1/ Under Regulation D, as amended effective Sept. 12, 1968, all
member banks are required to meet their daily-average reserve require
ments on a weekly basis; previously, a biweekly settlement period had
been employed for country banks. In addition, required reserves are
calculated on the basis of average deposits 2 weeks earlier rather than
on the basis of average deposits in the current settlement period.
Similarly, the vault cash component of the total reserves maintained by
banks is recorded with a 2-week lag. Also, member banks are permitted
to carry forward into the next reserve week excesses, as well as
deficiencies, in reserve requirements averaging up to 2 per cent of
required reserves, except that any portion of such excesses or
deficiencies not offset in the next week may not be carried forward
into later weeks.



the short-run relationship between marginal reserves--that is, free
or net borrowed reserves--and the other measures used to assess money
market conditions.

As it turned out, net borrowed reserves increased

on the average in the 3 weeks beginning September 12; average borrow
ings by member banks declined to about $475 million from $520 million
in the preceding 4 weeks, but excess reserves declined more.
Yields on both short- and long-term Treasury securities, like
day-to-day money market rates, moved down after mid-September and then
rose again--changing little on balance during the period since the
preceding meeting of the Committee.

The market rate on 3-month

Treasury bills, for example, fell from a high of 5.30 per cent reached
before mid-September to 5.09 per cent late in the month and then
advanced; on the day before this meeting it was 5.26 per cent, 2 basis
points above its level 4 weeks earlier.
The initial downward pressures on Treasury security yields
were reinforced by expectations of a reduction in the 6-1/2 per cent
prime lending rate of banks that had prevailed since mid-April.


prime rate was reduced in late September, to 6-1/4 per cent by most
banks and to 6 per cent by a few.

Among the factors contributing to

the subsequent upward pressures on Treasury security yields were the
failure of the 6 per cent prime rate to become general, indications
that economic conditions were stronger than had been expected, and
increasing attention among market participants to forthcoming Treasury
financing operations.


In private capital markets yields on new corporate bonds had

been relatively stable in recent weeks, but yields on State and local
government issues had declined considerably, mainly because of
continued heavy acquisitions by commercial banks.

At the close of

the period, however, both corporate and municipal yields were rising
Conditions in markets for residential mortgages appeared to
have eased slightly further in September.

Net inflows of deposits

to nonbank financial intermediaries increased only moderately in
August, the latest month for which data were available.


liquidity ratios at Federal savings and loan associations declined
markedly in both July and August after the Federal Home Loan Bank
Board reduced minimum liquidity requirements, and this development
helped to sustain mortgage lending activity by such associations.
Time and savings deposits at commercial banks, which had grown
rapidly in July and August, expanded substantially again in September.
Inf lows of consumer-type deposits increased furtherand the outstanding
volume of large-denomination CD's declined less than seasonally despite
moderate reductions in offering rates on all CD's except those of short

Private demand deposits and the money supply declined; on

balance the money supply had not increased since the first week of
July, after rising substantially in preceding months.
Growth of business loans at banks slowed in September.
Although banks' holdings of municipal securities expanded considerably



further, their holdings of Treasury securities were about unchangedin contrast to the two preceding months when banks had been heavy
buyers of securities offered in Treasury financings.

Total bank

credit, as measured by the bank credit proxy--daily-average member
bank deposits--rose at an annual rate of about 9 per cent in September,
compared with a rate of more than 21 per cent in August.

Allowance for

changes in the daily average of U.S. bank liabilities to foreign
branches would have served to increase the growth rate by about 1.5
percentage points in September and 0.5 of a percentage point in August.
Bank credit growth was expected to accelerate somewhat in
October as a result of the anticipated cash financing by the Treasury.
The latest staff projections suggested that the bank credit proxy
would expand at an annual rate of 10 to 13 per cent if the conditions
in money and short-term credit markets that had prevailed on the
average since the Committee's preceding meeting were maintained.
This projection assumed that the Treasury would offer $3.5 billion of
tax-anticipation bills for payment in the latter part of the month
and that commercial banks initially would acquire the bulk of the

Slower growth of bank credit was projected for November,

when the Treasury was not expected to raise new cash.

The October

projection allowed for some moderation in the rate of expansion in time
and savings deposits and for

little growth in private demand deposits.

A small increase in the money supply, reflecting mainly an expansion
in currency, was anticipated.

The Committee was divided in its views on the appropriate
course for monetary policy under current circumstances, with a
majority favoring no change and a minority advocating at least a
slight increase in monetary restraint.

The majority was opposed to

greater restraint at present primarily because it continued to
expect the rate of expansion of consumer spending and of economic
activity in general to slow down as the effects of the recent fiscal
restraint measures were increasingly felt.

The fact that the

Treasury would be undertaking a major refunding operation before the
Committee's next meeting also was cited as a consideration militating
against a change in policy at this time.
The Committee concluded that open market operations should be
directed at maintaining the conditions in money and short-term credit
markets that had prevailed on the average in the period since the
preceding meeting, on the understanding that operations would not be
undertaken to offset any moderate upward pressures on Treasury bill
rates that might develop.

The proviso was added that operations

should be modified, insofar as the forthcoming Treasury refunding

permitted, if the rate of bank credit expansion appeared to be
significantly in excess of 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 expansion has moderated, although less than
projected, from its very rapid pace earlier in the year, but
upward pressures on prices and costs are persisting. Most
market interest rates have changed little on balance in recent



Bank credit and time and savings deposits expanded
rapidly this summer, but the money supply has shown no net
growth since July after rising substantially for several
The earlier improvement in the U.S. balance of
payments was not maintained in August and September, accord
ing to preliminary indications, and the foreign trade balance
and underlying payments position continue to be matters of
serious concern. In this situation, it is the policy of the
Federal Open Market Committee to foster financial conditions
conducive to sustainable economic growth, continued resistance
to inflationary pressures, and attainment of reasonable
equilibrium in the country's balance of payments.
To implement this policy, 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, to the extent permitted by the
forthcoming Treasury refunding operation, if bank credit
expansion appears to be significantly exceeding current
Votes for this action:
Martin, Brimmer, Daane, Galusha,
Maisel, Mitchell, Morris, Robertson,
and Sherrill. Votes against this
Messrs. Hayes, Hickman, and
Messrs. Hayes, Hickman, and Kimbrel dissented from this action
because they thought that the rates of bank credit growth recorded in
recent months and the rate projected for October were excessive,
particularly in light of the persisting inflationary pressures and
the unexpected strength in the economy.

Accordingly, they favored

seeking money market conditions somewhat firmer than those advocated
by the majority, to the extent the Treasury refunding operation per-




Amendment to authorization for System foreign currency operations.
At its meeting on March 14, 1968, the Committee had authorized

the Special Manager to undertake negotiations looking toward increases,
up to specified limits, in a number of the System's reciprocal currency
arrangements, on the understanding that any such enlargements--and the
corresponding amendments to paragraph 2 of the authorization for System
foreign currency operations--would become effective upon a determination
by Chairman Martin that they were in the national interest.

As indicated

in the policy record for March 14, the Chairman had made the indicated
determination for certain of these arrangements on March 17.
Among the arrangements covered by the Committee's action of

March 14 was that with the Bank of Italy, for which negotiations
looking toward an increase of up to $250 million equivalent had been

Recently these negotiations had been successfully

completed, and on the day of this meeting Chairman Martin determined
that an increase in the swap arrangement with the Bank of Italy from
$750 million to $1 billion equivalent was in the national interest.
Accordingly, the corresponding amendment to paragraph 2 of the
authorization for System foreign currency operations became effective

on October 8, 1968.