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RESERVE

FEDERAL
press

release

For immediate release

December 9, 1968

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 September 10, 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.

Attachment

RECORD OF POLICY ACTIONS
OF THE FEDERAL OPEN MARKET COMMITTEE
Meeting held on September 10, 1968

Authority to effect transactions in System Account.
Consumer expenditures had been expanding vigorously this
summer, according to reports at this meeting.

Staff projections

suggested, however, that the rate of business inventory accumulation
was declining markedly in the third quarter--largely because of a
shift from accumulation to liquidation of steel stocks--and that
growth in over-all activity was slowing as a consequence.
Steel production had been cut back sharply following the
wage settlement in the steel industry at the end of July, and as
a result the industrial production index was tentatively estimated
to have declined in August.

Although nonfarm payroll employment

increased fairly sharply in August, manufacturing employment was
unchanged for the second consecutive month.

Total civilian employ

ment declined in August, but the labor force declined somewhat more
and the unemployment rate fell to 3.5 per cent from 3.7 per cent in
July.
Growth in Federal outlays appeared to be slowing in the
third quarter, but total final sales were now estimated to be
rising at a rapid rate.

Retail sales, which had increased sharply

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in July, remained at a high level in August according to available
weekly figures.

The sizable advance in consumer spending apparently

was associated with a decline in the saving rate; the new income tax
surcharge affected paychecks beginning in mid-July, and disposable
income was estimated to be advancing less rapidly in the third
quarter than earlier in the year.

Housing starts also rose consid

erably in July, and it appeared that residential construction
outlays would be somewhat higher in the third quarter than in the
second.

A new Commerce-SEC survey, taken in August, indicated that

business outlays on plant and equipment would be somewhat lower in
1968 as a whole than estimated earlier, but that businesses planned
to increase their outlays moderately from the second quarter to the

third.
Staff projections for the fourth quarter suggested that
the rate of inventory accumulation would be reduced somewhat
further as liquidation of steel stocks continued and that the
expansion in final sales would slow.

It was expected that the

increase in Federal expenditures would be quite small and that
the rise in consumer spending would slacken as a result of contin
uing slow growth of disposable income.

Little change was

anticipated in residential construction expenditures, and the

recent Commerce-SEC survey suggested that business outlays for
plant and equipment would be maintained at about the third-quarter
rate.

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Average prices of industrial commodities, according to

preliminary estimates, were unchanged in August after rising only
slightly in July.

It was expected, however, that the industrial

average for September would be affected by advances already
announced in prices of steel mill products.

Prices of farm

products and foods, which had increased considerably in July,
declined in August, and the over-all wholesale price index moved
down to its June level.

The consumer price index rose substantially

in July for the second month in a row; as in June, a large part of
the advance reflected higher costs of consumer services, including
mortgage interest charges.
In foreign exchange markets, rumors in late August that a
revaluation of the German mark was imminent led to large-scale
inflows of funds into Germany and to sharply increased pressures
on the French franc and sterling.

On September 4 the French

Government unexpectedly removed the foreign exchange controls it
had imposed on May 31.

Following the announcement of this action

and the simultaneous publication of preliminary estimates
of the French budget for 1969, the position of the franc
improved; but pressures subsequently resumed.

The sterling exchange

rate strengthened appreciably after the announcement on September 9
that final agreement had been reached by the Bank of England and
12 other central banks on new arrangements to offset fluctuations

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9/10/68
in overseas sterling balances.

The price of gold in the private

London market had risen by about $1 per ounce since mid-August
and currently was fluctuating narrowly around $40.
U.S. exports increased slightly and imports fell sharply
in July--resulting in a small surplus in the foreign trade balance
after 2 months of deficit.

Despite a foreign trade deficit in the

May-July period as a whole, the payments balance on the liquidity
basis, apart from special official transactions, had improved
considerably.

However, tentative estimates for August suggested

that a large deficit had re-emerged.

The balance on the official

settlements basis apparently was in surplus in August, as liabilities
of U.S. banks to their foreign branches rose to a new high after
declining during the last 3 weeks of July.
In domestic financial markets, prior to the reductions in
Federal Reserve Bank discount rates from 5-1/2 to 5-1/4 per centthe first of which was announced on August 15--interest rates on
various types of market securities had been rising from the lows
they had reached early in the month.
discount rate cuts were varied;

Market reactions to the

some observers interpreted the

action as a confirmation of earlier expectations of some relaxation
in monetary restraint, while others--who had expected more vigorous
action--thought it indicated that a marked easing of policy was not
likely in the near future.

9/10/68
On balance, interest rates on new corporate bonds and on
Treasury securities changed little during the latter half of August.
However, yields on municipal bonds remained under upward pressure in
the face of continuing heavy flotations of new issues by State and
local governments.

In early September yields on new corporate bonds

and on Treasury securities also advanced, as corporate underwriters
released unsold new offerings from syndicate and some Government
securities dealers acted to lighten their heavy inventories.

The

market rate on 3-month Treasury bills was 5.24 per cent on the day
before this meeting, 13 basis points above its level following the
mid-August announcement of discount rate action.

Rates on longer

term Treasury bills had risen only slightly during the interval
and currently were close to or below the rate on 3-month bills.
Growth in commercial bank time and savings deposits, which
had stepped up sharply in July, accelerated further in August.
Expansion in large-denomination CD's outstanding was substantial
but less than the very large rise of July, when interest rates on
competing market instruments had been declining.

The average level

of U.S. Government deposits increased considerably in August as a
result of Treasury cash financings, and expansion in private demand
deposits and the money supply slowed appreciably--the money supply
to an annual rate of about 5 per cent from nearly 15 per cent in
July.

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9/10/68

In August, as in July, banks were heavy buyers in the large
offerings of securities undertaken by Federal, State, and local
governments.

Growth in bank loans to businesses was maintained at

about the recent average pace, and loans to brokers and dealers to
finance holdings of securities increased moderately further.

Total

bank credit, as measured by the bank credit proxy--daily-average
member bank deposits--expanded at the unusually high annual rate of
21 per cent, after rising at a 9 per cent rate in July.

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 1/2
of a percentage point in August and 1-1/2 percentage points in July.
System open market operations in the period since the
Committee's August 19 meeting had been directed mainly at facilitating
orderly adjustments in money market conditions to the reduction in
Federal Reserve Bank discount rates.

As the period progressed less

emphasis was placed on the supplementary objective of moderating
upward pressures on Treasury bill rates, in light of accumulating
evidence that bank credit was growing at a higher rate than that
projected at the time of the Committee's previous meeting.

The

effective rate on Federal funds, which had been mostly in a 6 to
6-1/4 per cent range prior to the discount rate cuts, subsequently
fluctuated in a 5-3/4 to 6 per cent range and was at the upper end
of that range at the close of the period.

Net borrowed reserves

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and member bank borrowings averaged about $185 million and $480
million, respectively, in the 3 weeks ending September 4, down from
averages of about $290 million and $640 million in the previous
3 weeks.
Growth in bank credit was expected to moderate from the
high August rate in September and October.

The Treasury was not

expected to engage in another major cash financing until the latter
part of October; and prospects favored some reduction from the
current high level of outstanding loans to finance holdings of
securities and also a slower growth in business loans, particularly
after the mid-September tax date.

New staff projections suggested

that the bank credit proxy would expand at an annual rate of 7 to
10 per cent in September if prevailing conditions in money and
short-term credit markets were maintained.

Growth in about the

same range was foreseen for October, on the assumption that the
Treasury would raise about $3 billion of new cash in the latter
part of the month.

The projections suggested that expansion in

time and savings deposits would moderate in September, and that on
the average Government deposits would change little over September
and October and the money supply would rise only slightly.
The Committee decided that no change in monetary policy
was warranted at this time.

On the one hand, a relaxation of

monetary restraint was not deemed appropriate in light of the
current strength of final demands and the persistence of

9/10/68

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inflationary pressures; on the other hand, greater restraint was not
considered desirable in view of the outlook for slowing in over-all
economic activity, although it was noted that firm evidence was
lacking thus far on the amount of slowing in prospect.

However, a

number of members--while not advocating a firming of policyexpressed concern about the rapid rates of bank credit expansion in
recent months, and some thought that expansion in September and
October at a rate near the upper end of the projected range would
be higher than desirable in the current economic environment.
At the same time, it was noted that Treasury bill rates
might well come under temporary upward pressure as a result of
credit demands associated with the September tax date and the large
scale sales of bills by the System that were expected to be required
in the next week or so to absorb reserves supplied by market factors.
A number of members expressed the view that such pressures should be
moderated if they proved to be unduly marked or prolonged, in light
of the risk that persistent large increases in bill rates might
precipitate a change in market expectations that would result in a
new general uptrend in market interest rates.
The Committee concluded that it would be desirable at present
for open market operations to be directed at maintaining about the
prevailing conditions in the money and short-term credit markets, on
the understanding that increases in Treasury bill rates in the near
term, if moderate, would not be considered inconsistent with this

9/10/68
objective.

The proviso was added that operations should be modified

if bank credit 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, although consumer demands have been strong this
summer, reduced rates of inventory accumulation and
tapering growth of Government expenditures are being
reflected in a slowing of expansion in over-all
activity. Industrial prices have been increasing less
rapidly in recent months, but consumer prices have
continued to rise substantially and wage pressures
remain strong. Most market interest rates have changed
little on balance following reductions in Federal Reserve
Bank discount rates. Growth in bank credit and time and
savings deposits has been rapid this summer; growth in
the money supply slowed in August as U.S. Government
deposits were built up following an extended decline.
The earlier improvement in the U.S. balance of payments
was not maintained in August, according 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 resis
tance to inflationary pressures, and attainment of reasonable
equilibrium in the country's balance of payments.
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 appears to be deviating significantly
from current projections.
Votes for this action:
Messrs.
Martin, Hayes, Brimmer, Daane, Galusha,
Hickman, Kimbrel, Maisel, Mitchell,
Morris, Robertson, and Sherrill. Votes
against this action:
None.