Full text of Review (Federal Reserve Bank of St. Louis) : March 1976

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FEDERAL RESERVE BANK
OF ST. LOUIS
MARCH 1976
If ,f ispii

Vol. 58, No. 3




Recent Changes in Reserve Requirements:
An Example of Contradictory Regulation
R. ALTON GILBERT

O
n e responsibility of the Federal Reserve System
is to promote sound banking practices. In recent
years this Fed eral bank regulator has been concerned
that some banks were tending to leave themselves
vulnerable to liquidity crises by concentrating a large
share of their time deposits in short maturities, par­
ticularly large certificates of deposit1. One tool that
the Board has used to counter this tendency has been
higher reserve requirements on short-term time de­
posits than on longer maturity deposits. The latest
such Board action cam e in O ctober 1975 and January
1976 when reserve requirements were reduced on
member bank time deposits with maturities of 180
days or m ore2.
In the aggregate, banks are likely to respond to
these policy actions by reducing the percentage of
time deposits held in maturities of less than 180 days.
However, since these policy actions are intended pri­
marily to reduce the vulnerability of banks to liquid­
ity crises, their success should be judged not only in
terms of aggregate maturity shifts, but also in terms
of effects on the maturity structure of individual
banks. As indicated in the following analysis, these
reductions in reserve requirements are likely to have
effects on some individual member banks which are
'The assumption that a bank is more vulnerable to liquidity
crises when its time deposits are concentrated in short matur­
ities can be illustrated in the following example. Assume that
a bank experiences a temporarily large declIne in the value of
its assets, for whatever reason. If its time deposits are con­
centrated in short-term maturities, the bank may be forced to
liquidate some of its less liquid assets in order to meet its
current obligations, since it is unlikely that the bank could
attract additional deposits during the adjustment period. The
asset liquidation further reduces the bank’s net worth, which
aggravates its financial position and extends the period of
adjustment, thereby allowing time for more short-term time
deposits to reach maturity — a vicious circle which could re­
sult in a bank failure.
2Federal Reserve Bulletin
(January 1976), p. 66 .
Page 2



(October

1975),

p.

705,

and

opposite to those intended. It appears that only a
small portion of member banks in the Eighth District
are affected by these recent policy actions, and some
of the banks that are affected actually have incen­
tives to shorten the maturity structure of their time
deposits.

RECENT CHANGES IN RESERVE
REQUIREMENTS
Before the fall of 1974 the m aturity structure of
bank time deposits was not influenced by differential
reserve requirements. The maturity structure of time
deposits depended upon the m aturity structure of
bank assets, interest rates on time deposits of vari­
ous maturities, interest rate expectations, and interest
ceilings on deposits.
In September 1974 the Board rem oved marginal
reserve requirements on large certificates of deposit
(C D s) with initial maturities of 4 months or more,
leaving a marginal reserve requirem ent of 3 percent
on large CDs with initial maturities of less than
4 months.3 This action created a differential in re ­
serve requirements which favored longer-term time
deposits. In D ecem ber 1974 all marginal reserve
requirements on large CDs were rem oved and re ­
serve requirements on 30-179 day time deposits over
$5 million were raised to 6 percent, with reserve
3Marginal reserve requirements on CDs of $100,000 and over
were imposed in June 1973. An extra (marginal) reserve
requirement of 3 percent (in addition to the 5 percent re­
serve requirement on time deposits in effect at that time)
applied to the amount of a bank’s large CDs above the
average amount it had outstanding in the week ending May
16, 1973. The marginal reserve requirements in effect until
December 1974 continued to apply to large CDs over the
average amount held in the week ending May 16, 1973, but
did not apply to banks with aggregate obligations less than
$10 million. For more details, see the Federal Reserve
Bulletin (November 1974), p. 800.

MARCH 1976

FEDERAL RESERVE BANK OF ST. LOUIS

Table I

RESERVE REQUIREMENTS O N MEMBER BANK
TIME DEPOSITS
In effect from October 1, 1 9 7 0 through December 11, 197 4
C ategory of Deposits
Savin gs
O ther Time
First $5 million
O ve r $5 million

Category of Deposits

Percent
of Deposits

3%
3
5

In effect
from
1 2 / 1 2 / 7 4 to
10/29

In effect
from
10/30/75
lo 1 / 7 / 7 6 *

In effect
since
January 8,
19761

3%

3%

3%

Savings

175

O ther Time
Initial maturities of
3 0 - 1 7 9 days
First $ 5 million
O ve r $5 million
Initial maturities of 1 80
d a ys to four years

2.5

Initial maturities of four
years or over

1

'Required reserves on tim e and savings deposits at each bank can­
not be less than 3 percent of total tim e and savings deposits.
requirements on all other time deposits set at 3 per­
cent (see Table I ) . The intended effect of this policy
action was to induce banks to shift into obligations
of more than 179 days. This effect was realized as
the percentage of time deposits in maturities of 30-179
days declined steadily from D ecem ber 1974 to Sep­
tem ber 1975.
The reserve requirement changes in October 1975
and January 1976 were designed to give banks even
greater incentives to lengthen the maturity structures
of their time deposits. Reserve requirements on time
deposits with initial maturities of 4 years and over
were reduced from 3 percent to 1 percent in October
1975, and in January 1976 reserve requirements on
time deposits with maturities of 180 days to 4 years
were reduced from 3 percent to 2.5 percent. Federal
Reserve regulations, however, state that a member
bank’s required reserves on total time and savings
deposits can be no less than 3 percent of its total
time and savings deposits. In other words, a member
bank’s required reserves on time deposits must equal
the amount based upon applying the relevant per­
centages to each category of time deposits or 3
percent of total time deposits, whichever is larger.
The 3 percent minimum is crucial for the following
analysis.
The two recent changes in reserve requirements
on tim e deposits (O ctober 1975 and January 1976)



are analyzed in this note as one policy action in order
to consider their combined effects. The response of
an individual bank will depend on the m aturity
structure of its time deposits at the time of the reserve
requirement change. Table II illustrates this situation
by dividing Eighth D istrict banks into three groups
according to their time deposit maturity structure.
M ember banks with less than $5 million in 30-179
day time deposits have no incentive (from a reserve
requirement standpoint) to change their maturity
structure.4 F o r these banks, reserve requirements on
each maturity group of time deposits were set at
3 percent in D ecem ber 1974 and are still effectively
3 percent on each maturity group because of the 3
percent minimum rule.
A second group of m em ber banks has an incentive
to lengthen the maturity structure of time deposits.
Under the new reserve requirements, their required
reserves on total time deposits are greater than 3
percent because they have a relatively large propor­
tion of their time deposits in 30-179 day maturities.
These banks can decrease their total required reserves
by shifting a larger share of their time deposits to
longer maturities. The amount by which a bank in
this group can reduce its required reserves is still
limited by the 3 percent minimum rule.5
A third group of m ember banks, on the other hand,
has an incentive to shift some time deposits to
shorter maturities, the opposite response to that which
was intended. E a ch of these banks had over $5 mil­
lion in 30-179 day time deposits, but their total re­
serve requirements on time deposits was the minimum
3 percent because they had a relatively large amount
of tim e deposits in longer maturities.8
4Except to the extent that they are discouraged from expand­
ing deposits of 30-179 day maturities beyond $5 million.
5The condition required for a member bank’s average reserve
requirement on time deposits to be above 3 percent under the
new reserve requirements is given as follows:
Let S be a bank’s 30-179 day deposits
M be a bank’s 180 day - 4 year deposits
L be a bank’s deposits with maturities of 4 years
and over
(.0 3 ) $5 million + (.0 6 ) ( S — $5 million) +
(.0 2 5 ) M + (.0 1 ) L > (.0 3 ) (S + L + M)
The condition is equivalent to
(.03) (S — $5 million) > (.0 2 ) L + (.005) M
If, by lengthening the maturities of time deposits, these
inequalities become equalities, a bank’s average reserve re­
quirement on its time deposits becomes the minimum 3
percent.
®Using the notation in footnote 5, the
banks to be in this third group are as
S — $5 million > 0
(.02) L + (.0 0 5 ) M > .03 (S

conditions required for
follows:
and
- $5 million)
Page 3

FEDERAL RESERVE BANK OF ST. LOUIS

MARCH 1976

Table II

CHARACTERISTICS OF EIGHTH DISTRICT MEMBER BANKS WITH
DIFFERENT INCENTIVES TO CH A N G E THE MATURITIES
OF THEIR TIME DEPOSITS
Characteristics of Banks
Less than $5 million in
3 0 -1 7 9 d a y time deposits.

Incentives to Change
the Maturity Structure

Num ber of Eighth
District Mem ber B anks1

N o reserve requirement
advantage in changing the
maturity structure of time
deposits.

3 49

M ore than $5 million in
3 0 -1 7 9 d a y time deposits:
(a ) 3 0 - 1 7 9 d a y deposits
in excess of $5 million
greater than % of deposits
of 4 years and over plus
1 6 % percent of 1 80 d a y —
4 year deposits; average
reserve requirement on time
deposits over 3 percent.2

Incentives to shift 3 0 -1 7 9 day
time deposits to maturities of
over 179 days and shift
deposits of 1 80 d a y — 4 year
maturities to maturities of 4
years an d over

53

(b) 3 0 - 1 7 9 d a y deposits
in excess of $5 million less
than or equal to % of
deposits of 4 years and over
plus 1 6 % percent of 180
d a y — 4 year deposits;
average reserve requirement
on time deposits at the 3
percent minimum.2

Incentives to
to maturities
and possibly
maturities of

27

shift time deposits
of 3 0 - 1 7 9 days,
shift deposits to
4 years an d over.

Total: 42 9

1Based upon member bank tim e deposits in the reserve settlem ent week ending October
22. 1975.
2These relations between the m aturity distribution of tim e deposits and the average
reserve requirem ent of tim e deposits is dem onstrated for the case of an average reserve
requirem ent above 3 percent. Let
S be a bank’s 30-179 day deposits
M be a bank’s 180 day — 4 year deposits
L be a bank’s deposits w ith m aturities of 4 years and over
In this case:
(.03) $5 million + (.06) (S — $5 million) -f (.025) M + (.01) L > .03 (S + L + M)
This condition yields:
S — $5 million > (.6667)L + (.1667)M
W hen the recent changes in reserve requirements
went into effect, the proportions of time deposits
these banks had in short maturities are assumed to
b e smaller than if reserve requirements had been
uniform on all maturities of time deposits. Under the
new reserve requirements, banks in the third group
can shift some deposits with maturities of over 179
days to maturities of 30-179 days without increasing
their total required reserves because of the 3 percent
minimum rule. Therefore, for these banks the penalty
on short-term time deposits imposed in D ecem ber
1974 is effectively removed.7 However, all of these
statements about tendencies for banks to alter the
m aturity structure of their time deposits must be
qualified to the extent that interest ceilings on time
deposits prevent banks from inducing their customers
to change maturities of deposits.
7Some banks in this third group may also increase the propor­
tion of their time deposits with maturities of 4 years and
over in response to the recent changes in reserve require­
ments. Suppose banks in this third group increase their time
deposits in short maturities to the levels they would desire
in the absence of differential reserve requirements by shifting
Page 4



INCENTIVES FOR ALTERING
MATURITY STRUCTURE:
EIGHTH DISTRICT
MEMRER RANKS
Time deposits at m em ber banks in the
Eighth D istrict are examined to deter­
mine their incentives for changing the
m aturity structure of their time de­
posits under the new reserve require­
ments. The deposits are for the week
ending O ctober 22, 1975 — the first
week for which the reserve require­
ment change of O ctober 1975 applies.8
C urrent reserve requirements are ap ­
plied to those deposits to determine
w hether reserve requirements on time
deposits would have been above or
equal to 3 percent of total time deposits.9
Of the 429 m em ber banks in the
Eighth District, only 80 are affected by
the recent reserve requirement changes
(those with m ore than $5 million in 30179 day time deposits). The relevant
total reserve requirem ent on time d e­
posits was the minimum 3 percent for 27
of those 80 banks and above 3 percent
deposits out of 180 day - 4 year maturity de­
posits. The average reserve requirements on
time deposits would be above 3 percent for
some of these banks; they could keep their

average reserve requirem ents on tim e deposits at th e m inim um

3 percent by also shifting deposits out of 180 day - 4 year de­
posits to maturities of 4 years and over.
8Under lagged reserve requirements in effect since September
1968, required reserves of a member bank for each settlement
week (ending each Wednesday) are based upon its deposit
liabilities two weeks earlier. The deposit liabilities of a mem­
ber bank in the week ending October 22, 1975 determined its
required reserves for the settlement week of October 30
through November 5, 1975.
9An alternative approach would involve analyzing the implica­
tions of each change in reserve requirements using deposit
data for the first weeks to which each change in reserve
requirements apply. This approach would create problems
for determining the effects of the combined changes in re­
serve requirements on the incentives for banks to change
the maturity structure of their time deposits. Suppose, for
example, that by January 1976 banks had made partial ad­
justments in the maturity structures of their time deposits
in response to the reserve requirement change in October
1975. In this situation there would be ambiguity as to the
number of banks that would have incentives to shift de­
posits to short maturities under the combined changes in
reserve requirements and the amount by which they could
shift deposits to short maturities without increasing their
required reserves. Some banks would have incentives to
lengthen the maturity structure of their time deposits under
the October 1975 change and shorten maturities under the
change in January 1976. These offsetting influences can be
netted out by applying the two changes to time deposit bal­
ances in the week ending October 22, 1975.

FEDERAL RESERVE BANK OF ST

LOUIS

MARCH 1976

lengthened the m aturity of their
time deposits by shifting 30-179
PERCENTAGES BY W HICH EIGHTH DISTRICT MEMBER BANKS
day deposits to maturities of 4
C A N SHIFT TIME DEPOSITS TO SHORT MATURITIES WITHOUT
years and over. Total required
INCREASIN G REQUIRED RESERVES
reserves on time deposits would
M axim um Percentage Increases in 3 0 - 1 7 9 D a y Time Deposits
be reduced to the minimum 3
That W ill Not Increase Required Reserves1_________ _______
percent for 13 of these 53 banks
0-1 0 %
1 0 % -2 0 %
2 0 % -3 0 %
3 0 % -5 0 %
5 0 % -1 0 0 % O ve r 1 0 0 %
with less than 10 percent reduc­
Num ber of Banks 5
5
4
3
7
3
tions in their 30-179 day deposits.
1In these calculations, 30-179 day deposits are increased by reducing 180 day — 4 year deposits by Required reserves for 8 of these
equal amounts.
13 banks would hit the 3 percent
minimum with less than 5 percent reductions in the
for the other 53 banks. Therefore, only 53 member
30-179 day deposits.
banks in the Eighth D istrict have incentives to
lengthen the maturity structure of their time de­
In the aggregate, however, the percentage of time
posits, while 27 actually have incentives to shift de­
deposits in 30-179 day maturities at Eighth District
posits to maturities of 30-179 days.10
member banks is likely to decline. Banks with in­
centives to red u ce their short-term deposits are gen­
Total deposits of banks that have incentives to
erally larger than the banks with incentives to in­
shift time deposits to short maturities range from
crease. As one possible response, suppose that the 53
about $18 million to $130 million. Table III gives
banks in the District with average reserve require­
information on the extent to which these banks can
ments on time deposits over 3 percent reduce their
shift deposits to short maturities without increasing
30-179 day deposits by 10 percent or until the 3 p er­
their required reserves. Note that 10 banks can in­
cent minimum rule is reached, whichever comes first.
crease their short-term deposits by more than 50
In addition, the 27 banks with incentives to shift
percent, and of these 10, 3 can more than double
deposits to short maturities do so by the maximum
their short-term deposits without increasing their total
amount without increasing their required reserves.
required reserves. These 27 banks can increase their
These reactions would generate a net decrease of
30-179 day time deposits by a total of $76.7 million
$117.9 million in 30-179 day deposits. Also note that
without increasing their required reserves.11
banks with incentives to lengthen the m aturity of
Several of the 53 banks in the Eighth D istrict with
their time deposits will tend to com plete their adjust­
average reserve requirements on their time deposits
m ent to the recent changes in reserve requirements
above 3 percent have limited incentives to lengthen
faster than banks with incentives to shorten, since
the maturity structure of their time deposits because
short-term deposits can be converted to long-term
of the 3 percent minimum rule. Suppose these banks
deposits faster than long-term deposits can be con­
verted to short-term.
Table III

10Limiting the analysis to only those banks with over $5
million in 30-179 day deposits may understate the number
of banks with incentives to increase their short-term de­
posits under the new reserve requirements. Suppose that in
October 1975 some banks would have preferred to have
more than $5 million in 30-179 day deposits if there had
been no penalty on those deposits, but they reduced their
30-179 day deposits to below $5 million in response to the
penalty. Those banks could shift some of their longer-term
deposits to short maturities, bringing their 30-179 day de­
posits to over $5 million, without increasing their required
reserves. If there were such banks, they would have tended
to keep their 30-179 day deposits just below $5 million
before the recent changes in reserve requirements. In the
week ending October 22, 1975, 6 member banks in the
Eighth District had between $4.75 and $5 million in 30-179
day deposits, and 3 of those banks had between $4.9 and
$5 million. Some of these banks may have incentives to
increase their short-term deposits under the new reserve
requirements.
11 The reserve requirement reduction in January 1976 increased

the number of banks with incentives to shift deposits to short
maturities above the number given such incentives by the
olicy action in October 1975 alone. With only the first reuction in reserve requirements (reserve requirements on
deposits with maturities of 4 years or more reduced from



SUMMARY
In October 1975 and January 1976 the Federal
Reserve Board lowered reserve requirements on time
deposits with maturities of over 179 days to induce
member banks to lengthen the m aturity structure of
their time deposits. The effectiveness of these policy
actions is limited by a constraint on the reduction
in reserve requirements: a m em ber bank’s required
3 percent to 1 percent), 16 banks in the Eighth District
had incentives to shift deposits to short maturities. With
the second change (reserve requirements on 180 d ay4 year deposits lowered from 3 percent to 2.5 percent),
11 more banks were given such incentives. Those first 16
banks could shift a total of $46 million in 180 day - 4 year
deposits to maturities of 30-179 days without increasing
their required reserves under the first change, and could
shift $62.8 million to 30-179 day maturities witnout increas­
ing their required reserves when the second change is added.
Page 5

MARCH 1976

FEDERAL RESERVE BANK OF ST. LOUIS

reserves on time deposits can be no less than 3 per­
cent of its total time deposits. Banks with less than
$5 million in 30-179 day time deposits are not af­
fected by these changes in reserve requirements;
most member banks are in this category. Among the
larger member banks, some have incentives to
lengthen the maturity structure of their time deposits

under the new reserve requirements, and others are
given incentives to shorten. In the Eighth Federal
Reserve District, only about one-fifth of the member
banks are affected by these recent policy actions,
and about one-third of the larger banks which are
affected have incentives to shorten the maturity struc­
ture of their time deposits.

APPENDIX

Table A-I illustrates conditions under which a bank
would shorten the maturity structure of its time de­
posits in response to the recent change in reserve
requirements. A hypothetical member bank has $100
million in time and savings deposits throughout the
discussion.1 The behavior of the bank is analyzed as
though both of the recent changes in reserve require­
ments went into effect at the same time. This ap­
proach avoids analyzing effects of the reserve require­
ment changes separately. In December 1974 the bank
had $25 million in 30-179 day time deposits, but by
the time the recent changes in reserve requirements
were imposed, it had reduced its 30-179 day time
deposits to $15 million because of the 6 percent re­
serve requirement, while increasing time deposits with
maturities between 180 days and 4 years by $10 mil­
lion. Applying the new reserve requirements to each
category of time and savings deposits would indi­
cate required reserves of only $2,775 million, which
!This discussion abstracts from the effects that changes
in reserve requirements have on total deposits. To illus­
trate such an effect, with the time and savings deposits
held by the hypothetical bank in Table A-I as of October
1975, the bank’s required reserves on time and savings
deposits declined from $3.3 million to $3 million when
reserve requirements were changed. The bank could have
expanded its deposits with the reserves that were freed
by the reduction in reserve requirements. In the illustra­
tion in Table A-I total time and savings deposits are held
constant and reserves changed because the issue investi­
gated in this note is the effect of changes in reserve
requirements on the maturity distribution or time deposits
and not effects on excess reserves and deposit expansion.
Effects on the maturity distribution of time deposits ave
probably easier to understand if total deposits are held
constant and their maturity distribution changed than if
reserves were held constant, and total deposits and their
maturity distribution changed.
Page 6



would be only 2.775 percent of total time and savings
deposits [see column ( 3 ) ] . However, because of the
3 percent minimum rule, the bank’s actual required
reserves on time and savings deposits would be $3
million.
The responses of banks to the recent reserve re­
quirement changes depend upon such influences as
the maturity preferences of banks for deposits and the
changing pattern of interest rates on time deposits
of various maturities. Therefore, the actual response
of a bank with a maturity distribution of deposits like
that of the hypothetical bank in Table A-I is uncertain.
Nevertheless, such banks have incentives to shift some
of their deposits to short maturities, and the two pos­
sible responses illustrated in columns (4 ) and (6 ) of
Table A-I indicate the types of adjustments such banks
are likely to make in the maturity distribution of their
time deposits.
In the first possible adjustment, the bank shifts
$6.45 million of its 180 day - 4 year deposits to maturi­
ties of 30-179 days. This is the maximum such change
in maturities the bank can make without increasing
its required reserves [see column (5 ) of Table A-I].
Note that in this first adjustment the hypothetical
bank has still not restored its short-term time deposits
to the level desired before the penalty was imposed
on those deposits ($25 million in 30-179 day deposits).
As illustrated in columns (6 ) and (7 ) of Table A-I, the
bank can restore its short-term deposits to that de­
sired level without increasing its required reserves if
it also shifts $8.33 million from 180 day - 4 year de­
posits to deposits with maturities of 4 years and over.
With short-term deposits of $25 million and long-term
deposits of $18.33 million, required reserves would

FEDERAL RESERVE BANK OF ST. LOUIS

MARCH 1976

Table A -l

CHANGES IN THE CO M PO SITIO N OF TIME A N D SA V IN G S DEPOSITS
AT A HYPOTHETICAL BANK
(Dollar Amounts in Millions)

1

( )

2

( )

W hen New
Reserve
RequireDecember
ments
1974*
Im posed2

Types of
Deposits

(3)
Calculated
Required
Reserves,
Based O n
Column ( 2 ) 3

(4)

First
Adjust­
ment4

(5 )
Calculated
Required
Reserves,
Based O n
Column ( 4 ) 3

Savings

$

10

$ 10

(.0 3) X $ 1 0 = $ 0 .3 0 0

$ 10.00

(.0 3 ) X
$ 1 0 = $ 0 .3 0 0

O ther Time
Maturity—
3 0 -1 7 9 days

$ 25

$ 15

(.0 3 ) X $ 5 + (.0 6)
X $ 1 0 = $ 0 .7 5 0

$ 21.45

180 days —
four years

$ 55

$ 65

(.0 2 5 ) X $ 6 5 = $ 1 .6 2 5

$ 5 8 .5 5

Four years and over

$ 10

$ 10

(.0 1) X $ 1 0 = $ 0 .1 0 0

$ 10.00

6

( )

Second
Adjust­
ment5

$

10.00

(.0 3) X
$ 1 0 = $ 0 .3 0 0

(.0 3 ) X $5
+ (•06) X
$ 1 6.45 = $ 1 .137

$ 25.00

(.0 3) X $5
+ (•06) X
$ 2 0 = $ 1 .350

(.0 2 5 ) X
$5 8 .5 5 = $ 1.463

$ 46.6 7

(.0 2 5 ) X
$ 4 6 . 6 7 = $ 1.167

$ 18.33

(.0 1) X
$1 8.33 = $0.1 83

$ 1 0 0 .0 0

$3,0 0 0

(.0 1) X

$ 10 = $ 0.100
$100
M IN I M U M

REQ UIRED RESERVES

$100

$ 2 ,7 7 5
$3

$ 1 0 0 .0 0

(7 )
Calculated
Required
Reserves,
Based O n
Column ( 6 ) 3

$ 3 ,0 0 0
$3

$3

1This is the m aturity distribution of the hypothetical bank’s deposits as of December 1974 before the bank had time to adjust the m aturity
of its deposits to the change in reserve requirements that went into effect during that month.
2This m aturity distribution of deposits reflects adjustm ent of the bank to the reserve requirem ent changes in December 1974 but before ad­
justm ents are made in response to the reserve requirem ent changes in October 1975 and January 1976.
3Calculated required reserves based upon reserve requirem ents in effect since January 8, 1976.
4Shifting 180 day — 4 year deposits to m aturities of 30-179 days until calculated required reserves equal 3 percent of total tim e and savings
deposits. This is the maximum shift of 180 day — 4 year deposits to m aturities of 30-179 days th at does not increase required reserves.
5Shifting 180 day — 4 year deposits to m aturities of 30-179 days and 4 years or over such th at the 30-179 day deposits are at the level before
the penalty was imposed on 30-179 day deposits while keeping required reserves on tim e and savings deposits a t the minimum 3 percent.
still be $3 million. In this second possible adjustment
the bank would increase its 30-179 day deposits by
$10 million. This is more than the $8.33 million increase
in its deposits with maturities of 4 years and over. How­
ever, other cases can be constructed in which the
combination of shifts in deposits to short and long




maturities that keep required reserves unchanged in­
volve greater shifts to long maturities than to short
maturities. Therefore, the effect of the recent reserve
requirement change on the average maturity of time
deposits for the type of banks represented in Table
A-I is uncertain.

Page 7

The FOMC in 1975: Announcing Monetary Targets
NANCY JIANAKOPLOS

I V X o N E T A R Y policy in 1975 was directed at aiding
econom ic recovery from the most severe recession in
the post-W orld W ar II years without rekindling the
fires of inflation. As in recent years, the Federal Open
Market Com m ittee pursued short-run objectives of
monetary policy formulated in terms of both an in­
terest rate and money growth rate targets.1 These
dual objectives w ere pursued through open market
operations — that is, the buying and selling of U. S.
Government and Federal agency securities and
bankers’ acceptances.2
As 1975 began, the prospects for a renewal in eco­
nomic growth w ere dim. The year 1974 had closed
with econom ic activity plummeting, unemployment
high, and prices increasing at a double-digit rate.
F a ced with this situation Congress gave particular
attention to the formulation of monetary policy as a
tool of econom ic recovery. Congressional interest re ­
sulted in passage of a Concurrent Resolution, which
called for the adoption and public disclosure of longrun target growth ranges for monetary aggregates by
the FO M C . In addition, Congress called for the initia­
tion of quarterly consultations on m onetary policy be­
tween Congressional Committees and the Board of
Governors of the Federal Reserve System.
Monetary developments during 1975 occurred amid
other significant econom ic developments. The econ­
omy continued to adjust to shocks experienced in
1973 and 1974. These shocks included the sharp rise
in the cost of energy, crop failures, price controls, and
throughout this article the Federal Open Market Committee
will be referred to as either the “Committee” or the “FOMC”.
2The other tools of monetary policy are not controlled by the
FOMC. Reserve requirements are set by the Board of Gov­
ernors of the Federal Reserve System. Discount rates are
established by the Boards of Directors of the twelve regional
Federal Reserve Banks.

Page 8


the implementation of environmental, safety, and con­
sumer protection program s.3 Congress approved tax
cuts and rebates along with special Social Security
payments designed to revive the lagging economy. In
addition, Treasury operations to finance the resultant
$80 billion deficit were expected to have a stimulative
impact on the economy.
This review of monetary policy in 1975 begins with
a consideration of various approaches to m onetary
policy that w ere put forward as appropriate for deal­
ing with econom ic conditions in early 1975. T h e shortrun implementation of m onetary policy by the FO M C
with respect to both its stated policy goals and its
operating targets will be reviewed next. Finally, a
major constraint on monetary policy actions will be
discussed.

MONETARY POLICY PRESCRIPTIONS
The appropriate course for monetary policy in 1975
was widely discussed. Most economists seemed to
concur that m onetaiy restraint in late 1974 had been
excessive and, in part, responsible for the deepening
of the recession. F o r example, Paul Samuelson
charged that “if w e do go into a depression, the F ed
will justly bear m uch of the blame.”4 Milton F ried ­
man declared that “From June 1974 to January 1975,
M x has grown at the average rate of 1.1% per year.
This has surely contributed to the recent deepening
of recession.”5
3See Norman N. Bowsher, “1975 —- Year of Economic Turn­
around,” this Review (January 1976), pp. 2-8.
4Paul A. Samuelson, “A Bums Depression?” Newsweek,
March 3, 1975, p. 63.
5 U. S. Congress, Senate, Committee on Banking, Housing and

Urban Affairs, Monetary Policy Oversight, 94th Cong., 1st
sess., February 25 and 26, 1975, p. 59.

FEDERAL RESERVE BANK OF ST. LOUIS

Prescriptions for monetary policy in 1975 w ere far
ranging, but can be broadly divided into three ap­
proaches. One school of thought holds that steady,
moderate, monetary growth was the appropriate pol­
icy. Milton Friedm an expressed this long-held view
before the Senate Banking Com m ittee: “I believe that
we need stability in m onetary growth, not wide fluc­
tuations from one side to the other. . . . F o r Mi, 3% to
5%, or even the broader 2% to 6% earlier specified
by the Joint Econom ic Com m ittee is about right.”8 H e
further stated that the Federal Reserve could not
achieve steady growth of the money stock “if it insists
on operating as it now does by controlling an interest
rate such as the F ed era l F u n d s rate.”7 Arthur Burns,
chairman of the FO M C , explicitly rejected this
approach:
There is a school of thought that holds that the
Federal Reserve need pay no attention to interest
rates, that the only thing that matters is how this or
that monetary aggregate is behaving. W e at the Fed­
eral Reserve cannot afford the luxury of any such
mechanical rule. As the Nation’s central bank, we
have a vital role to play as the lender of last resort.
It is our duty to avert liquidity or banking crises. It
is our duty to protect the integrity of both the do­
mestic value of the dollar and its foreign-exchange
value. In discharging these functions, we at times
need to set aside temporarily our objectives with
regard to the monetary aggregates.
In particular, we pay close attention to interest
rates because of their profound effects on the work­
ings of the economy.8
Other analysts of monetary policy focused attention
exclusively on interest rates. F ran co Modigliani, pro­
fessor of economics at the Massachusetts Institute of
Technology, recom m ended this course before the
Joint Econom ic Comm ittee in February:
I think the mistakes of last year came from the fact
that the Fed was looking at the money supply in­
stead of looking at what really bites the economy.
No one, no one except a few fools perhaps on Wall
Street are directly affected by the money supply,
but people do pay higher interest rates, people do
have to pay higher mortgage rates, and that is where
monetary policy bites, not through the change of the
money supply.9
A third policy approach supported a rapid expan­
sion of the money stock to stimulate econom ic recov­
«Ibid„ pp. 59-60.

MARCH 1976

ery — a discretionary policy focused on the monetary
aggregates. First National City Bank of N ew York
expressed this view:
This year is going to be bad enough as it is without
a perverse monetary policy. And in the current en­
vironment, anything less than 8% growth is likely to
be perverse. An 8% floor sounds rather expansive,
but given the slack in the economy, it is unlikely to
rekindle inflationary fires within the next two years.
An easing back in monetary expansion below 8%
would be appropriate in 1976 and further in 1977 to
damp down inflation over the longer run.10
Joining the widespread public attention being given
to the appropriate course of monetary policy in 1975
were several committees of Congress. Both the Senate
and House Banking Committees held hearings on the
conduct of monetary policy. In light of the concern
over the state of the economy in general, and mone­
tary policy in particular, House Concurrent Resolu­
tion 133 was passed on M arch 24, 1975 expressing the
view of Congress as to the appropriate course of
monetary policy during 1975. The resolution did not
impose binding prescriptions, but expressed the Con­
gress’s desire for the Board of Governors and the
FO M C to:
(1 ) encourage lower long term interest rates and ex­
pansion in the monetary and credit aggregates ap­
propriate to facilitating prompt economic recovery,
and
(2 ) maintain long run growth of the monetary and
credit aggregates commensurate with the economy’s
long run potential to increase production, so as to
promote effectively the goals of maximum employ­
ment, stable prices, and moderate long term interest
rates.11
The resolution called for the Board of Governors to
consult with Congressional Committees quarterly as
to its “objectives and plans with respect to the ranges
of growth or diminution of monetary and credit aggre­
gates in the upcoming twelve months.”12
Pursuant to this resolution Chairm an Burns met
with Committees of Congress on M ay 1, July 24, and
November 4 to discuss the condition of the national
10“Scotching the recession — the missing monetary factors,”
First National City Bank Economic W eek, January 20,
1975, p. 2.

8“Statements to Congress,” Federal Reserve Bulletin (Feb­
ruary 1975), p. 64.

n U. S. Congress, Senate, Committee on Banking, Housing
and Urban Affairs, First Meeting on the Conduct of Mone­
tary Policy, 94th Cong., 1st sess., April 29 and 30; and May
1, 1975, p. 3.

9U. S. Congress, Joint Economic Committee, The 1975 Eco­

12Ibid. Chairman Bums testified before the Senate and House

7 Ibid., p. 60.

nomic Report of the President, 94th Cong., 1st sess., February

5, 6 , 7, and 14, 1975, p. 542.



Banking Committees in alternate quarters during the re­
mainder of 1975.
Page 9

FEDERAL RESERVE BANK OF ST. LOUIS

economy and the course of monetary policy.13 D e­
parting from tradition, Chairman Bum s announced
long-term target ranges for the growth of monetary
and credit aggregates at the May hearings (see
C hart I ) :
The Federal Reserve System is presently seeking a
moderate rate of expansion in the monetary and
credit aggregates. We believe that the course we are
pursuing will promote an increase in Mj of between
5 and 7% per cent over the 12 months from March
1975 to March 1976. . . .
A growth rate of Mj in the range of 5 to 7% per
cent would, we believe, be accompanied by higher
rates of increase in the other major monetary and
credit aggregates — ranging from 8% to 10% per cent
for M2, 10 to 12 per cent for M3, and 6% to 9% per
cent for the credit proxy.14
In announcing the long-run target growth, Chairman
Burns cautioned that the appropriate growth ranges
depended upon the underlying econom ic conditions.
And, as the econom ic conditions changed, the ta r­
geted growth ranges might have to be modified in a
month or two.
At the July hearings Chairman Burns announced
that the target ranges had been modified slighdy to
apply from second quarter 1975 to second quarter
1976, rather than from M arch to March. The change
from a monthly to a quarterly base was m ade “be­
cause a 3-month average is less subject to erratic
movements than is a single-month base.”16 The effect
of moving the base period forward, while retaining
the original growth range, was to accept, rather than
to attem pt to offset, a faster rate of monetary growth
during the second quarter than had been implicit in
the original 12-month target. Testifying before the
Senate Budget Com m ittee in September, Chairman
Bum s discussed the appropriateness of the target
ranges:
These growth ranges are appropriate under current
conditions, when the economy is struggling with
widespread unemployment of labor and industrial
capital. However, these growth ranges are on the
generous side by historical standards, and our eco­
nomy would have litde or no chance of regaining
general price stability if they were maintained inde­
finitely. Even so, the Federal Reserve System has
frequendy been urged to raise its present target
13“Statements to Congress,” Federal Reserve Bulletin (May
1975), p. 282; (August 1975), p. 491; (November 1975),
p. 744.

MARCH 1976

rates for the money supply. We have resisted these
suggestions because, in our judgment, such a policy
would soon lead to accelerated inflation and thereby
frustrate the process of economic recovery.16
At the November hearings Chairman Bum s again
announced changes in the long-run money growth
targets. The applicable time span had been set by the
FO M C at third quarter 1975 to third quarter 1976.
The growth ranges for M 2 and M 3 w ere widened to
7% to 10% percent and 9 to 12 percent, respectively.
Chairman Bum s commented on the consequences of
these changes in his statement to the Congressional
Comm ittee as follows: “This updating of the base, I
should note, implies a slightly higher level of money
balances a year from now than would be the case if
the second-quarter base w ere retained.”17
In considering the implementation of these longrun targets since their announcement in May, Chair­
man Burns stated in November that
. . growth of
the monetary aggregates has been broadly in line with
the ranges we adopted earlier. However, month-tomonth and quarter-to-quarter changes in the aggre­
gates have been very large, reflecting unusual factors
influencing the public’s demand for money.”18 Addi­
tional explanation of the short-run swings in the
growth of the aggregates outside the long-run target
ranges had been offered by Chairm an Bum s in
O ctober as well:
Month-to-month changes in the monetary aggregates
have deviated this year from the longer-run target
ranges, and they can be expected to do so in the
future. Since the demands of the public for money
are subject to rather wide short-term variations,
efforts by the Federal Reserve to maintain a con­
stant growth rate of the money supply could lead to
sharp swings in interest rates and risk damage to
financial markets and the economy.19

IMPLEMENTATION OF
MONETARY POLICY
The FO M C , whose organization and operating pro­
cedures are outlined on p. 12, m et each m onth in
1975 to review the results of their previous decisions
and decide on the future course of monetary policy.
Summaries of the goals and operating objectives
adopted at each meeting, as well as a record of dis­
senting votes, are presented in Exhibit I on pp. 16-17.
Jaibid. (October 1975), p. 627.
17Ibid. (November 1975), p. 747,

14“Statements to Congress,” Federal Reserve Bulletin (May
1975), p. 286.

tsibid.

1BIbid. (August 1975), p. 495.

19Ibid. (October 1975), p. 627.


Page 10


FEDERAL RESERVE BANK OF ST




LOUIS

MARCH 1976

Page 11

MARCH 1976

FEDERAL RESERVE BANK OF ST. LOUIS

Organization of the Committee in 1975
The Federal Open Market Committee (FOM C)
consists of the seven members of the Federal Reserve
Board of Governors and five of the twelve Federal
Reserve Bank Presidents. The Chairman of the Board
of Governors is also, by tradition, Chairman of the
Committee. The President of the New York Federal
Reserve Bank is a permanent member of the Com­
mittee and also, by tradition, its Vice Chairman. All
other Federal Reserve Bank Presidents attend the
meetings and present their views, but votes may be
cast by only the four Presidents who are members of
the Committee. These four memberships rotate among
Bank Presidents and are held for one-year terms be­
ginning March 1.
Members of the Board of Governors in 1975 in­
cluded Chairman Arthur F. Burns, Vice Chairman
George W. Mitchell, Jeffrey M. Bucher, Philip E.
Coldwell, Robert C. Holland, John E. Sheehan and
Henry C. Wallich. On July 14, Philip C. Jackson, Jr.,
succeeded John E. Sheehan, who resigned effective
June 1. In addition to Alfred Hayes, President of the
Federal Reserve Bank of New York, the following
Presidents served on the Committee during January
and February 1975: Robert P. Black (Richmond),
George H. Clay (Kansas City), Monroe Kimbrel
(Atlanta) and Willis J. Winn (Cleveland). Beginning
in March the four rotating positions were filled by:
Ernest T. Baughman (Dallas), David P. Eastbum
(Philadelphia), Bruce K. MacLaury (Minneapolis),
and Robert P. Mayo (Chicago). Effective August 1
Paul A. Volcker succeeded Alfred Hayes as President
of the Federal Reserve Bank of New York.
The Committee met regularly once each month dur­
ing 1975 to discuss economic trends and to decide
upon the future course of open market operations.
During each meeting, a directive was issued to the
Federal Reserve Bank of New York stating the gen­
eral economic goals of the Committee and providing
general guidelines as to how the Manager of the
System Open Market Account1 at the New York Fed>The Manager of the System Open Market Account may
be referred to as the “Account Manager”, and the Trading
Desk of the New York Federal Reserve Bank as the
“Desk.”

At each of the monthly meetings of the FO M C in
1975, the Comm ittee reviewed the long-run target
ranges for the monetary aggregates, which w ere men­
tioned earlier in this article. In addition, two-month
tolerance ranges considered consistent with the longerrun objectives of the Com m ittee were specified for the
growth of Mi, M 2, and reserves available to support
private nonbank deposits (R P D s). These short-run
tolerance ranges for Mi and M 2, and their actual
growth rates over each period, are shown in Chart

Page 12


eral Reserve Bank should conduct open market opera­
tions to achieve these goals. Each directive contained
a short review of economic data considered and the
general economic goals sought by the Committee. The
last paragraph gave operating instructions to the Ac­
count Manager. These instructions were stated in
terms of bank reserve and money market conditions
which were considered consistent with the achieve­
ment of desired growth rates of monetary aggregates.
Special factors, such as Treasury financing operations,
were also taken into account. As in previous years,
occasional telephone or telegram consultations were
held between regular meetings.
The decisions on the exact timing and amount of
daily buying and selling of securities in fulfilling the
Committee’s directive are the responsibility of the
System Open Market Account Manager at the Trad­
ing Desk of the New York Bank. Each morning, the
Account Manager and his staff decide on a plan for
open market operations to be undertaken that day. In
developing this plan, money and credit market condi­
tions and aggregate targets desired by the Committee
are considered, as well as other factors which may be
of concern at that time.2 Each morning, in a conference
call, the Account Manager informs one voting Presi­
dent and staff members of the Board of Governors
about present market conditions and open market
operations which he proposes to execute that day.
Other members of the Committee are informed of the
daily program by wire summary.
A summary of the Committee’s actions is presented
to the public in the “Record of Policy Actions” of the
Federal Open Market Committee. Effective March 24,
1975, the “Record” was released about 45 days after
each meeting. Soon after it is released, the “Record”
appears in the Federal Reserve Bulletin and, in addi­
tion, the entire year of “Records” are published in the
Annual Report of the Board of Governors.
^Aggregate targets were generally specified in tenns of the
growth rates of Mi (currency and demand deposits),
Ma (M i plus time deposits other than large certificates of
deposit), and M3 (M 2 plus deposits at nonbank thrift
institutions).

II.20 Interm eeting tolerance ranges for the weekly
average Federal funds rate w ere also established.
These ranges and actual weekly average rates are
shown in Chart III.
As Charts II and III indicate, the M anager of the
System Open Market Account was m uch more suc20Throughout this article, unless otherwise stated, Mi and M2
data are the most recent series available after the January
1976 revisions. Because of discontinuities of the series, RPDs
are omitted from the discussion presented here.

FEDERAL RESERVE BANK OF ST. LOUIS

MARCH 1976

Chart II

F O M C R a n g e s of Tolerance for M o n e t a r y A g g r e g a t e s
1975

JAN .
FEB.
MAR.
APR.
MAY
JUNE
JULY
AUG.
SEPT.
OCT.
NOV.
DEC.
U_The rates are two-month sim ple annual rates of change from the month prior to the meeting to the month follow ing the
meeting. Rates are b a se d on the most current se a so n a lly adjusted m onthly data.
[2 The sh a d e d a re a s are two-m onth tolerance ran ge s show n in the month that the ra n g e s were adopted by the Federal O pen
M arke t Comittee. R anges represent two-month sim ple a n nua l rates of change from the month prio r to the meeting to the
month follow ing the meeting.

cessful in achieving the interest rate targets than the
monetary growth targets. The System attained the
two-month money growth targets specified in the first
half of 1975 more frequently than those specified
during meetings held in the second half.

stance. This is indicated by the operating instructions
listed in Exhibit I. The following sections provide a

The aim of short-run monetary action appeared to
be strongly expansionary in the first four months of

FO M C used in formulating short-run monetary policy




1975, when econom ic activity was contracting sharply,
while during the recovery in the remainder of the
year actions appeared to take on a m ore m oderate

detailed review of the data and analyses which the

Page 13

FEDERAL. RESERVE BANK OF ST. LOUIS

MARCH 1976

Short-run target ranges w ere established at the
January m eeting in view of
a staff analysis [which] suggested that — although
Mj was not expanding in January — the demand for
money would pick up in February, in part as a result
of the lagged effects of earlier declines in interest
rates.
The Com m ittee agreed that money market conditions
would have to ease in the short run. The tolerance
ranges for Mi and M 2 for the January-February
period were set at 3% to 6% percent and 7 to 10 per­
cent, respectively. The Federal funds rate would be
allowed to vary within a range of 6% to 7V* percent.
each month in 1975. The FO M C ’s short-run targets
are examined in relation to the changes in the Federal
funds rate and money growth rates which actually
occurred.

January

—

April: Monetary Expansion

Staff projections for each of the FO M C meetings in
January through April suggested declines in real eco­
nomic activity through the first half of 1975 and
moderation of price increases. By the M arch meeting,
an upturn in econom ic activity later in the year was
being predicted. D uring these four meetings the Com ­
mittee’s short-run policy was to cushion the recession
and stimulate recovery, although by the M arch m eet­
ing the domestic policy directive no longer contained
the clause directing action to cushion the recession.
The Com m ittee issued operating directives at the
January through M arch meetings which w ere aimed
at achieving interest rate and money growth rate
targets. The directives specifically said that “the Com ­
mittee seeks to achieve bank reserve and money m ar­
ket conditions consistent with more rapid growth in
monetary aggregates over the months ahead than has
occurred in recent months.”21 (emphasis added)
Expansion of monetary aggregates was substantial in
M arch and by April the target for the aggregates was
qualified as “somewhat more rapid growth.”
Over this four-month period the short-term target
ranges for the Federal funds rate were never wider
than one percentage point. The target growth ranges
for the aggregates, on the other hand, w ere specified
to be as wide as 3 percentage points, but never nar­
rower than 2 percentage points.
21 Unless stated otherwise all citations in the following section
are taken from the Record of Policy Actions of the Federal
Open Market Committee, Federal Reserve Bulletin (April
1975 - February 1976).



By February 5 it was evident that the growth of the
monetary aggregates would be well below the lower
limits of the tolerance ranges, suggesting that the
adopted Federal funds target was too high relative to
the desired growth rate of the m onetary aggregates.
On the Chairman’s recommendation the lower limit of
Federal funds rate range was reduced to 6 V4 percent.
Both Mi and M2 actually fell well below their Janu­
ary - February tolerance ranges.
At the February 19 meeting the FO M C agreed that
further easing in money market conditions in the
short run probably would be appropriate if Mi w ere
to grow at a rate consistent with the Com m ittee’s
longer-run objectives for monetary growth. The toler­
ance range for Mi was raised for the February-M arch
period; however, the actual growth of Mi fell below
this range. The tolerance range for M 2 was lowered,
although the Com m ittee had called for further easing
conditions in the February-M arch period. Given this
lower range, M2 grew at a rate near its upper limit.
The Federal funds rate range, whose limits w ere set
between 5% and 6 V4 percent at the February m eet­
ing, was lower than that previously specified, and the
average weekly rate remained within these limits dur­
ing the intermeeting period.
Again at the M arch FO M C meeting, the Commit­
tee agreed that further easing of money m arket con­
ditions would be necessary in view of analysis avail­
able to them which suggested that “the demand for
money would be weak in the near term in association
with the expected weakness in econom ic activity. . . .”
The lower limit of the Mi range was changed for the
M arch-April period (decreased from 5% to 5 p e rce n t),
while the upper limit remained at 7 percent. The
tolerance range for M2 was raised and the Federal
funds rate range was lowered for the intermeeting
period. Three members of the FO M C dissented from
this action believing that m ore aggressive easing a c­

FEDERAL RESERVE BANK OF ST. LOUIS

tions were called for — a higher upper limit for the
aggregates and a lower limit for the Federal funds
rate.
On M arch 27, in contrast with earlier analysis, data
suggested that the growth rates of the aggregates
were not as low as expected and would exceed the
upper limits of the tolerance ranges, implying that the
upper limit of the Federal funds rate range was now
too low for achievement of the desired growth rate of
the aggregates. In these circumstances the Federal
funds rate would normally be allowed to rise to the
upper limits of its range of tolerance — 5% percent.
However, the Chairman recommended, and the m em ­
bers of the Committee — with one exception —
concurred, that “in view of the weakness in the econ­
omy and of the sensitive conditions in financial m ar­
kets, particularly the bond markets, the M anager be
instructed to treat 5% per cent as the approximate
upper limit for the weekly average funds rate for the
time being.” Both M, and M2 stayed within their
M arch - April tolerance ranges.
At the April meeting the staff analysis suggested
that the aggregates would temporarily grow at rela­
tively rapid rates in the April - May period because of
the tax rebates scheduled to begin in May. The ranges
of tolerance for both M , and M2 were raised and the
range for the Federal funds rate was widened by
raising the upper limit to 5% percent. The growth of
the aggregates and the weekly average Federal funds
rate stayed within the tolerance ranges established at
the April meeting.
Viewing the January through April period in retro­
spect, it is apparent that in only one out of four cases
did the growth of both Mi and M2 fall outside the
two-month tolerance ranges specified at the FO M C
meetings. In the case of the deviation, action was
taken subsequent to the regular January meeting to
attem pt to correct the expected short-fall in both
aggregates, but the action proved to be insufficient.
FO M C operating instructions in this period called
for more rapid growth of the aggregates. Evidence
indicates that the growth rates of the aggregates
did increase, on balance.
Accompanying the F O M C ’s policy of monetary
expansion during this period was the use of other tools
of monetary policy. The discount rate charged by each
of the Federal Reserve Banks, which was 7% percent
at the beginning of the year, was lowered in January,
February, and again in M arch when it was set at 6 Vt
percent at all twelve Federal Reserve Banks. The
Board of Governors announced a reduction in reserve



MARCH 1976

requirements on net demand deposits in January
which was estimated to release $1.1 billion of re­
serves. This reduction was designed “to permit fur­
ther gradual improvement in bank liquidity and
to facilitate m oderate growth in the monetary
aggregates.”22

May through July: Fiscal Considerations
At meetings from May through July the FO M C
gave special attention to the expected effects of fiscal
operations in the formulation of monetary policy. The
tax rebates and social security payments were ex­
pected to increase temporarily the growth rates of the
aggregates during the period.
In May the Comm ittee decided that in order “to
allow for the expected tem porary bulge in money
holdings . . . relatively rapid growth in M, and M*
over the May - June period — at annual rates within
ranges of tolerance of 7 to 9 Vz per cent and 9 to 11%
per cent, respectively — would be acceptable.” The
Federal funds rate range was lowered to 4% to 5%
percent. Members of the Com m ittee w ere concerned
that “upward pressures on interest rates would be
particularly undesirable at present, in light of the
sensitive state of financial markets and of uncertainties
with respect to the timing and strength of the eco­
nomic recovery that now appeared to be in process of
developing.” Taking this into consideration, the direc­
tive issued by the Com m ittee in May relegated the
growth ranges of the aggregates to a proviso clause,
putting more emphasis on money market conditions
(short-term m arket interest rates or, specifically, the
Federal funds r a te ):
the Committee seeks to maintain about the prevail­
ing money market conditions over the period imme­
diately ahead, p rov id ed that monetary aggregates
generally appear to be growing within currently
acceptable short-run ranges of tolerance, (emphasis
added)

The aggregates M, and M 2 both exceeded the
upper limits of their May - June tolerance range —
M, increasing at a 12.8 percent annual rate and M 2 at
a 15 percent annual rate. The Federal funds rate
stayed within its tolerance range during the inter­
meeting period.
At the June meeting the Com m ittee decided some
short-run firming action might be appropriate in view
of the rapid growth of the monetary aggregates in the
previous period, and the continuing effects of tax re22“Announcements”, Federal Reserve Bulletin (January 1975),
p. 51.
Page 15

Page

EXHIBIT 1

16

Date of
FO M C
M eeting

Dissents

O perating Instructions

Policy Consensus

N one

. . . while resisting inflationary pressures and
w orking tow ard equilibrium in the country’s bal­
ance of payments, to foster financial conditions
conducive to cushioning recessionary tendencies
an d stimulating economic recovery.

. . . while taking account of the forthcoming Treasury
financing, developments in domestic and international
financial markets, and the B oa rd 's action on reserve re­
quirements, the Committee seeks to achieve bank reserve
and m oney market conditions consistent with more rapid
growth in monetary aggregates over the months ahead
than has occurred in recent months.

. . . to foster financial conditions conductive to
cushioning recessionary tendencies and stimu­
lating economic recovery, w hile resisting infla­
tionary pressures and w orking toward equilib­
rium in the country's balance of payments.

. . . while taking account of developments in domestic
and international financial markets, the Committee seeks
to achieve bank reserve and money market conditions
consistent with more rapid growth in monetary aggregates
over the months ahead than has occurred in recent months.

None

March 1 8

. . . to foster financial conditions conducive to
stim ulating economic recovery, while resisting
inflationary pressures an d w orking toward equi­
librium in the country’s balance of payments.

N o Change

Messrs. Bucher, Eastburn, and Sheehan dissented from
this action because they believed that the economic
situation and outlook together with recent slow growth
in the monetary aggregates called for more aggressive
efforts in the near term to achieve the Committee’s
longer-run objectives for the aggregates.

A pril 1 4 -1 5

N o C hange

. . . while taking account of the forthcoming Treasury
financing and of developments in domestic and interna­
tional financial markets, the Committee seeks to achieve
bank reserve and money market conditions consistent with
somewhat more rapid growth in monetary aggregates over
the months ahead than has occurred on average in
recent months.

Mr. Eastburn: W hile he believed that firmer money
market conditions might prove to be necessary later
on in the year, he thought a n y such firming would be
inappropriate at this time, given the sensitive state
of financial markets, the continued weakness in the
economy, and his preference for seeking more rapid
growth in the monetary aggregates in the near term
than would be desirable over the longer run.

January 20-21

February 19

Absent and not voting: Mr. Hayes.
as alternate for Mr. Hayes.)

(M r. Debs voted

Absent and not voting: Mr. Sheehan.

Absent and not voting: Messrs. Bucher and Sheehan.

M a y 20

June 1 6 -1 7

N o C hange

N o C hange




. . . while taking account of developments in domestic
and international financial markets, the Committee seeks
to maintain about the prevailing money market conditions
over the period immediately ahead, provided that mone­
tary aggregates generally appear to be gro w in g within
currently acceptable short-run ranges of tolerance.

None

. . . while taking account of developments in domestic
and international financial markets, the Committee seeks
to achieve bank reserve and money market conditions
consistent with moderate growth in m onetary aggregates
over the months ahead.

Messrs. Bucher and Coldwell dissented from this action
because they believed that a tightening in money
market conditions an d the associated increase in
short-term interest rates would be premature at this
time. . . .

Absent and not voting: Mr. Sheehan.

Absent and not voting: Mr. Hayes.
as alternate for Mr. Hayes.)

(M r. Debs voted

July 15

N o C h an ge

. . . while taking account of the forthcoming Treasury
financing and of developments in domestic and inter­
national financial markets, the Committee seeks to maintain
about the prevailing bank reserve and money market
conditions over the period immediately ahead, provided
that growth in monetary aggregates appears to be
slow ing substantially from the bulge during the second
quarter.

Mr. Holland . . . preferred to maintain bank reserve
and money market conditions in the inter-meeting
period closer to those now prevailing, in the ex­
pectation that b y the next meeting the unw inding of
the recent bulge in monetary aggregates caused by
unusual Treasury paym ents would have proceeded
far enough to permit monetary policy decisions to be
related more closely to underlying trends in the
aggregates.
Absent and not voting: Messrs. Hayes and Mitchell.
(M r. Debs voted as alternate for Mr. Hayes.)

A ugust 19

. . . to foster financial conditions conducive to
stim ulating economic recovery, while resisting
inflationary pressures and contributing to a sus­
tainable pattern of international transactions.

. . . while taking account of developments in domestic
and international financial markets, the Committee seeks
to achieve bank reserve and money market conditions
consistent with moderate growth in monetary aggregates
over the months ahead.

None

Septem ber 16

N o C h an ge

N o Change

None

October 21

. . . to foster financial conditions that will en­
courage continued economic recovery, while
resisting inflationary pressures and contributing
to a sustainable pattern of international trans­
actions.

N o Change

None

N o C h an ge

. . . while taking more than usual account of develop­
ments in domestic and international financial markets,
the Committee seeks to achieve bank reserve and money
market conditions consistent with moderate growth in
monetary aggregates over the months ahead.

Novem ber 1 8

Absent and not voting: Mr. Bucher.

Messrs. Volcker and Jackson dissented from this action
because they thought prevailing money market condi­
tions should be maintained for the time being, in part
because of the current uncertainties about the short-run
relationship between monetary growth and interest
rates.
Mr. Eastburn dissented because he believed that the
System should be more aggressive in supplying reserves
in order to compensate for recent short-falls in the rate
of m onetary expansion from the Committee's longerrun growth ranges.

December 16

N o C h an ge

Page 17



. . . while taking account of developments in domestic
and international financial markets, the Committee seeks
to maintain prevailing bank reserve and m oney market
conditions over the period immediately ahead, provided
that monetary aggregates appear to be grow ing at about
the rates currently expected.

None
Absent and not voting: Mr. Bucher.

FEDERAL RESERVE BANK OF ST. LOUIS

bates and one-time payments to social security recipi­
ents in the second half of June. A higher Federal
funds range was specified. The June-July tolerance
ranges for
and M2 w ere not very different from
the ranges specified at the May meeting. The lower
limit of the M, tolerance range was lowered by %
percentage point while the upper limit of the M 2
tolerance range was raised by % percentage point.
Two members of the Com m ittee dissented from these
actions because they believed the tightening of money
m arket conditions would be premature.
On June 26, as it appeared that the aggregates
would exceed the upper limits of their tolerance
ranges and the Federal funds rate would approach its
upper limit, Chairman Burns recommended, “that the
upper limit of the funds rate constraint be raised to
6V4 per cent, on the understanding that the additional
leeway would be used only in the event that another
week’s data confirmed excessive strength in the mone­
tary aggregates.” Three members of the Committee
did not concur with the Chairman’s recommendation.
The aggregate M x remained within its June-July
range, but M 2 exceeded the upper limits of its toler­
ance range. The Federal funds rate deviated slightly
from its range following the June 26 modification.
At the July meeting staff analysis stated that
“growth in m onetary aggregates would slow consid­
erably in July from the extremely rapid pace in May
and June associated with the Federal income tax re ­
bates and social security payments.” The FO M C de­
cided again to put the growth of the aggregates in a
proviso clause in the July directive, specifying that,
the Committee seeks to maintain about the prevail­
ing bank reserve and money market conditions over
the period immediately ahead, provided that growth
in monetary aggregates appears to be slowing sub­
stantially from the bulge during the second quarter,
(emphasis added)
The tolerance ranges for Mx and M2 were lowered
for the July - August period and the Federal funds
rate range was raised, with limits set at 5% and 6%
percent. The aggregate M2 fell below the lower limit
of its tolerance range while M, grew near the mid­
point of its range and the Federal funds rate remained
within its tolerance range during the intermeeting
period.
Growth of both Ma and M 2 only once exceeded the
limits of the two-month tolerance ranges specified at
the three FO M C meetings in the period from May
through July.

Page 18


MARCH 1976

August

—

December: Moderation

Staff projections of output and prices were modified
somewhat as time progressed from the August to the
D ecem ber FO M C meeting. In August and Septem­
ber, projections suggested strong expansion of output
in the fourth quarter and a somewhat m ore rapid rate
of price increase in the third and fourth quarters. By
O ctober, however, the projections suggested less rapid
expansion in output during the fourth than in the
third quarter, and further m oderate growth in the
first half of 1976. Additionally, the projections avail­
able at the O ctober m eeting suggested that price in­
creases through mid-1976, although still rapid, would
be below the rate in third quarter 1975. At the No­
vember and D ecem ber meetings staff projections in­
dicated a slowing in the rate of price increase through
the first half of 1976. The desire for short-run rapid
growth in the aggregates evidenced in Comm ittee
directives earlier in the year gave way to directives
calling for “. . . bank reserve and money market con­
ditions consistent with m oderate growth in m onetary
aggregates over the months ahead.” ( emphasis
added)
Short-run tolerance ranges established by the
FO M C took on new characteristics in the August
through D ecem ber period. At several meetings the
FO M C specified both inner and outer ranges of toler­
ance for the Federal funds rate. The outer ranges
w ere as wide as IV* percentage points or as narrow as
one percentage point. The new development, how­
ever, was the specification of inner ranges, areas
within the outer ranges where the Com m ittee desired
to keep the Federal funds rate. F o r example, at the
August m eeting the outer range was established b e­
tween 5% and 7 percent. The inner range was set
between 6 Y8 and 6 V4 percent — a very narrow target.
In fact, at the D ecem ber meeting the inner range was
not even a range, but a specific level at which the
Com m ittee wished to stabilize the Federal funds rate
“unless rates of growth in the monetary aggregates
appeared to be deviating significandy from the mid­
points of their specified ranges.” D uring this period
the width of the two-month tolerance ranges for
growth of the aggregates w ere rather broad, varying
from 2% to 4 percentage points.
At the August meeting the Com m ittee decided that
m oderate growth of the aggregates would be appro­
priate short-run policy. In the course of the Com ­
m ittee’s discussion, it was suggested that
financial markets had overreacted to the minor tight­
ening in bank reserve and money market conditions

FEDERAL RESERVE BANK OF ST. LOUIS

that had occurred over the past 2 months; that finan­
cial markets in general were unsettled, in part be­
cause of the financial problems of New York City
and the possible repercussions of those problems;
and that interest rates were high for this stage of the
business cycle.

The tolerance range for Mi was raised to 4% to 7
percent for th e August-September period, an upward
movement from the 3 to 5% percent range established
at the previous meeting. The upper and lower limits
of the tolerance range for M 2 w ere also raised, but
only by Vi percentage point at each end. The new
range was set between 8^4 and 10% percent. The
Federal funds rate range was raised and m ade sub­
ject to the provision “that operations would not be
directed tow ard establishing reserve conditions con­
sistent with a movement in the rate above or below
the current 6 Vs to 6 'A per cent area unless it appeared
that in the August - September period growth in the
monetary aggregates would be substantially stronger
or w eaker than now expected.”
On September 5, “the available data suggested that
in the August-September period Mi would grow at a
rate in the lower part of the range of tolerance that
had been specified by the Comm ittee and that M2
would grow at a rate just below the lower limits of its
range.” To lower the Federal funds range outside the
narrow range established, however, was viewed as
inappropriate: “In view of the likelihood of substan­
tial strengthening in demands for money and credit
over coming months, it appeared that a decline in the
Federal funds rate at this time might have to be re­
versed shortly — a sequence that could seriously
compound uncertainties in financial markets.” The
Chairm an recommended and members concurred that
“the M anager be instructed to continue to maintain
reserve conditions consistent with a Federal funds
rate in the 6 Vs to 6V4 per cent area, while leaning
toward the lower figure.” The growth of both M a and
M2 fell below the lower limits of the tolerance ranges
in the August - September period as the preliminary
data had suggested, while the Federal funds rate re­
mained within its outer range during the entire inter­
meeting period and within the inner range in two of
the four weeks.
A m oderate growth in the aggregates was again
specified as the appropriate two-month policy at the
September meeting in view of “. . . indications that
econom ic activity was now on the increase and of the
likelihood that expansion in nominal GNP over com ­
ing quarters would be associated with considerable
strengthening in the demand for money and credit.’’



MARCH 1976

The tolerance range for M x was raised, but that for
M 2 was lowered. The lower limit of the Federal funds
rate range was raised slightly. The upper limit re­
mained at 7 percent on the condition “that if develop­
ments with respect to the aggregates suggested the
need to move the Federal funds rate above 6% per
cent, open market operations tow ard that end would
not be undertaken until after the Chairman had con­
sulted with the Com m ittee.”
W hile concern at the September FO M C meeting
had been centered on the upper limit of the Federal
funds range, on O ctober 2 the Chairman recom ­
mended reduction of the lower limit of the Federal
funds rate range to 5% percent in view of the slow
growth of the aggregates, a course of action he had
recommended against in the previous month because
the circumstances were believed to be only tempo­
rary. Over the September-October period Mi and
M 2 again fell well below the lower limits of the toler­
ance range, suggesting that the Federal funds range
had not been lowered far enough. The Federal funds
rate deviated slightly from its range near the end of
the intermeeting period.
At the O ctober meeting some members
expressed doubt concerning the strength of recovery
in economic activity over the quarters immediately
ahead, in part because of the possible repercussions
of New York’s financial problems and because of the
relatively high levels of market interest rates prevail­
ing at this early stage of the recovery. It was noted,
moreover, that inflation remained a serious problem.

The Comm ittee again decided that m oderate growth
of the aggregates was the appropriate policy for the
next two-month period. Tolerance ranges for Mi and
M2 were lowered for the O ctober - N ovember period
and the Federal funds rate range was lowered also.
The Federal funds rate range was specified with the
condition that “unless new data suggested that growth
in the monetary aggregates in the O ctober - Novem­
ber period would exceed the rates now expected, op­
erations would be directed toward moving the F e d ­
eral funds rate down to 5% per cent by the end of the
statement week following this meeting.” Both M t and
M2 stayed within their tolerance ranges in the
October - N ovember period. The Federal funds rate
remained near the lower limits of its range in the
intermeeting period.
During O ctober the Board of Governors announced
a reserve requirement change which would “help to
m eet the seasonal need for bank reserves over the
coming weeks and to facilitate m oderate growth in
the monetary aggregates.”
Page 19

FEDERAL RESERVE BANK OF ST. LOUIS

Staff analysis at the November FO M C meeting
suggested that
. . in view of the projected expan­
sion in GNP, Mj was likely to grow substanially
faster over the months ahead than it had over the
immediately preceding months.” Com m ittee members
expressed differing views over which of the dual
operating targets, interest rates or money growth,
should be the primary focus of attention. Some con­
tended that
. . changing relationships tended to
make monetary growth rates unreliable guides to
monetary policy at present.” Others, “who preferred
to continue to base operating decisions in the period
immediately ahead primarily on the behavior of the
monetary aggregates, expressed concern about their
sluggish growth over recent months.”
The November directive issued by the FO M C
called for m oderate growth of the aggregates
“. . . while taking more than usual account of develop­
ments in domestic and international financial
markets. . . .” The tolerance ranges for Mi and M 2
were raised substantially. The limits of the range for
Mj were set at 6 and 10 percent, com pared to the
3 to 7 percent range established at the previous m eet­
ing. Likewise, the M2 range was set at 7% tol0%
percent, m uch higher than the 5% to 8 V2 percent
range set for the previous two-month period. The
Federal funds rate target was specified as a range
somewhat lower than during the previous period;
however, System operations were to be directed at
hitting the midpoint of that range (5 p ercen t). D ur­
ing the N ovember - D ecem ber period the growth of
both M, and M L fell below the lower limit of their
tolerance ranges. In contrast, the Federal funds rate
remained within its 4% to 5% percent range.
The Board of Governors announced a change in
Regulations D and Q effective on November 10. This
change perm itted corporations, partnerships, and
other profit-making organizations to maintain savings
accounts at member banks subject to a $150,000 ceil­
ing on the size of the accounts. In light of this and
other developments, staff analysis at the D ecem ber
FO M C meeting provided technical advice about the
use of monetary measures:
. . . in the period immediately ahead growth in the
demand for money would be constrained by con­
tinuation of the shift in business deposits from de­
mand accounts to savings accounts in response to the
recent changes in regulations. Because the magni­
tude and duration of the shift were highly uncertain,
however, estimates of the effects on M, were subject
to a large margin of error. It was also noted that
projections of monetary growth for the month of
December were more uncertain than those for other

Page 20


MARCH 1976

months because many business and financial institu­
tions customarily made adjustments to cash and debt
positions for purposes of vear-end statements.

Members of the Com m ittee again w ere somewhat
divided over which of the operating targets should
receive m ore emphasis — money market conditions
or monetary aggregates. The target ranges for Mi and
M 2 were lowered for the D ecem ber - January
period.23 Operations w ere to be directed at m aintain­
ing the Federal funds rate at 5% percent, its current
level, unless the aggregates deviated significantly from
the midpoints of their ranges. If necessary the Federal
funds rate would be allowed to vary between 4 Vi. and
5% percent.
By January 12, 1976, “the available data suggested
that in the D ecem ber-January period both M x and
M , would grow at rates below the lower limits of the
ranges of tolerance that had been specified by the
Comm ittee.”
The significance of the apparent weakness in the
aggregates was highly uncertain, because of the ef­
fects of the recent introduction of business savings
accounts at commercial banks and because the re­
vised seasonal adjustment factors employed were
still under review. The problems of seasonal adjust­
ment were particularly acute for the months of D e­
cember and January. F o r these technical reasons,
and in view of more favorable recent economic sta­
tistics — including the latest data on employment
and retail sales — Chairman Bums recommended
that the Manager be instructed to hold the weekly
average Federal funds rate at the approximate level
of 4% per cent until the Committee’s next meeting.
All members of the Committee, with the exceptions
of Messrs. Eastbum and M acLaury, concurred in the
Chairman’s recommendation.

The reported data later indicated that both Mi
M2 grew at rates below the lower limits of the target
range, while the Federal funds rate remained within
its range during the intermeeting period.
The aims of short-run monetary actions in the Au­
gust to D ecem ber period w ere stated in terms of a
moderate position (see Exhibit I ) . However, tolerance
ranges for the monetary aggregates established to
achieve these aims w ere not successfully attained dur­
ing m uch of this period. Both Mj and M 2 grew at
rates below the limits of their two-month tolerance
ranges in four out of five cases in the August to
D ecem ber period. Failure of the m onetary aggregates
to grow within the desired ranges in the NovemberD ecem ber and D ecem ber-January periods correspond­
^These targets were formulated taking into account the new
seasonal factors which were to be published in January.

FEDERAL RESERVE BANK OF ST. LOUIS

ed with the special attention given to money market
conditions in the N ovember directive. In addition,
data which becam e available after the August and D e­
cem ber meetings, as cited above from the “Record of
Policy Actions,” gave advance indications that the ag­
gregates w ere growing below or at the low end of
their tolerance ranges. On these tw o occasions Chair­
man Bum s recom m ended against lowering the F e d ­
eral funds rate range for reasons that have previously
been mentioned. Following the September FO M C
meeting, steps w ere taken to reduce the lower limit
of the Federal funds rate range by V* percent, when
data available subsequent to the meeting indicated
that the aggregates would grow below the lower limits
of their tolerance ranges. However, these steps w ere
not enough, since later data indicated that both Mi
and M 2 fell below the September-October tolerance
ranges specified by the Committee.

A CONSTRAINT ON MONETARY
POLICY ACTIONS
The year began with concerns about the implica­
tion for money growth of a projected Federal deficit
of over $80 billion. If the Federal Reserve w ere to
monetize even 15 percent of the deficit — m uch less
than they had on average since 1965 — a 15 percent
rate of growth for Mi was implied.24 As the year
progressed, however, it becam e evident that private
credit demands w ere extremely weak, allowing a
greater portion of the Government’s debt to be pur­
chased by the private sector without raising interest
rates. The portion of the debt monetized was consid­
erably less than at first was expected.
Thus the financing of the deficit did not confront
the Federal Reserve with the choice between exces­
sive expansion in the money supply or substantial
increases in interest rates. However, the sheer volume
of Treasury operations did result in a number of
complications for Federal Reserve policy. Respond­
ing to pressure from Congress, the Treasury sought to
minimize its noninterest earning deposits at com m er­
cial banks, and sought, instead, to keep a larger p er­
centage of its deposits at Federal Reserve Banks. The
consequences of this action w ere pointed out by Under
Secretary of the Treasury Edw in H . Yeo:
While this action of reducing balances [at commer­
cial banks] has resulted in a reasonable equilibrium
between the value of balances and the value of serv­
ices, it has been accomplished at the expense of
seriously complicating the Federal Reserve System’s
24Susan R. Roesch, “The Monetary — Fiscal Mix Through
Mid-1976,” this Review (August 1975), pp. 2-7.



MARCH 1976

management of bank reserves and other monetary
aggregates. . . What has happened is that the swings
in the Treasury’s cash balance at the Federal Re­
serve Banks have forced the Federal Reserve Sys­
tem to drastically increase its open market opera­
tions in order to nullify the impact of the swings on
bank reserves. This has created confusion in the
market as to which Federal Reserve actions are to
offset swings in Treasury cash and which are to
carry out monetary policy.25
As Chart IV indicates the changes in Federal R e­
serve holdings of Government securities closely par­
allel the changes in Treasury balances at Federal R e­
serve Banks. These tw o items have offsetting effects
on bank reserves. Increases in Federal Reserve hold­
ings of Government securities increase bank reserves,
while increases in Treasury deposits at Federal Re­
serve Banks decrease bank reserves.
N ot only did the necessity of offsetting Treasury
actions com plicate the implementation of monetary
policy, but the size of Treasury operations resulting
from the tremendous deficit added further to the
problems. On two occasions the size of open market
operations required to offset Treasury operations made
it necessary for the M anager to request increases in
the limits on changes in holdings of U. S. Government
and Federal agency securities (April 30 and October
3 ) . On two other occasions the M anager requested
increases in the ceiling on Federal Reserve holdings
of short-term certificates of indebtedness purchased
from the Treasury ( M arch 10 and August 6 ) . This was
necessary to allow the Treasury to borrow from the
Federal Reserve when its cash balances ran low.
25“Statement of the Honorable Edwin H. Yeo, III, Under
Secretary of the Treasury for Monetary Affairs, before the
Subcommittee on Domestic Monetary Policy of the House
Committee on Ranking, Currency and Housing,” The De­
partment of the Treasury News, September 25, 1975.
Page 21

FEDERAL RESERVE BANK OF ST. LOUIS

SUMMARY AND CONCLUSION
M onetary policy in 1975 did achieve the longer-run
policy goals set forth by the FO M C in its January
directive: “. . . to foster financial conditions conducive
to cushioning recessionary tendencies and stimulating
econom ic recovery.” The recession “bottomed-out” and
econom ic activity rebounded during 1975. In addition,
the renewal of econom ic activity has been achieved,
so far, without an acceleration in the rate of inflation.
Directives issued by the FO M C indicated that the
short-run aims of monetary actions w ere expansionary
in the first four months of 1975 and m ore m oderate
during the remainder of the year. These short-run
aims w ere formulated in terms of tolerance ranges
for the Federal funds rate and growth rates for mone­
tary aggregates. If these aims are evaluated w ith re ­
spect to the attainment of Federal funds rate levels
within specified ranges, the FO M C was extremely
successful in achieving its short-run aims. On the
other hand, the FO M C was less successful in attain­
ing the growth of the monetary aggregates within
their desired ranges. In six of the twelve cases, the
growth rates of both Mi and M2 were outside their
tolerance ranges — above the ranges in one instance
and below the ranges on five occasions.
Among the most significant developments regarding
the implementation of monetary policy during 1975
were those which centered around the relative impor­
tance of the interest rate and money growth rate ta r­
gets. W hile the money growth ranges w ere generally

Page 22



MARCH 1976

two or three percentage points in w idth at the be­
ginning of the year, by the end of the year they
tended to be three or four percentage points in width.
In contrast, the Federal funds rate ranges at the end
of the year actually consisted of two ranges — an
outer range ( generally one percentage point in w id th )
and a narrower inner range ( V* percentage point or
n arrow er). Institutional changes, which allowed busi­
nesses to establish savings accounts at com m ercial
banks, and problems relating to seasonal fluctuations
caused some members of the FO M C at the end of
1975 to question the relevance of Mj data and to pay
more attention to money market conditions in the
implementation of monetary policy.
The formulation and implementation of m onetary
policy received wider attention in 1975 than in p re­
vious years. Congressional concern over m onetary pol­
icy was expressed in House Concurrent Resolution
133 and in subsequent quarterly consultations be­
tween Chairman Burns and the Congressional Com ­
mittees. In response to Congressional interest, the
FO M C began to formulate long-term targets for the
monetary aggregates and shortened the disclosure
period of the FO M C “Record of Policy Actions” from
90 to 45 days. W hile the new long-term targets, and
much of the public discussion of m onetary policy in
1975, centered on the growth of the m onetary aggre­
gates, the FO M C pursued operating procedures spe­
cified in terms of both aggregates and money market
conditions. Although attention was given to the aggre­
gates, the record shows th at the concern of the FO M C
was directed primarily at money m arket conditions.

FEDERAL RESERVE BANK OF ST, LOUIS

MARCH 1976

WORKING PAPERS
W orking Papers 2-18 are available at a cost of $1.00 p er copy.* To order,
please send check or money order, m ade payable to the Federal Reserve Bank
of St. Louis, to the following address:
Research D epartm ent
Fed eral Reserve Bank of St. Louis
P. O. Box 442
St. Louis, Mo. 63166
Title of Working Paper

Release Date

C hapter on Agribusiness Prepared for American
Institute of Banking Textbook A gricultural C redit

Aug. 1967

3

Monetary Policy and the Business Cycle in Post­
w ar Japan ( Revised)

April 1968

4

The Influence of Fiscal and M onetary Actions on
A ggregate D em and: A Quantitative Appraisal
(R evised)

M arch 1969

5

T he D evelopment of Explanatory Econom ic Hyphotheses for M onetary M anagem ent

Nov. 1968

6

A Model of the Markets for Consumer Instalment
C redit and New Automobiles

Jan. 1969

Number
2

7

A Summary of the Brunner-M eltzer Non-Linear
Money Supply Hypothesis (R evised)

M ay 1969

8

The Market F o r D eposit-Type Financial Assets

M arch 1969

9

Im pact of Changing Conditions on Life Insurance
Companies

M arch 1969

10

Adjustments of Selected Markets in Tight Money
Periods

June 1969

11

A Study of Money Stock Control

July 1969

12

Em pirical Test on the Effect of Changes in Money
Supply in Developing Economies

M ay 1970

13

H istorical Analysis of the “Crowding Out” of Pri­
vate Expenditures by Fiscal Policy Actions

January 1971

14

Money Stock Control and Its Implications for
M onetary Policy: Technical Appendices

O ctober 1971

15

The Influence of Current and Potential Competition
on a Comm ercial Bank’s Operating Efficiency

January 1972

16

Comm ercial Banking in M etropolitan Areas:
Study of the Chicago SMSA

August 1972

17
18

A

The Effect of M arket Expectations on Employment,
W ages, and Prices

August 1973

Deposit Relationships and Bank Portfolio Selection

Sept. 1974

^Working Paper No. 1 is available in our Reprint Series as Reprint No. 24,
“The Three Approaches to Money Stock Analysis.”




Page 23