FOMC Minutes

Meeting of Federal Open Market Committee

July 21, 1970

MINUTES OF ACTIONS

A meeting of the Federal Open Market Committee was held in

the offices of the Board of Governors of the Federal Reserve System

in Washington, D.C., on Tuesday, July 21, 1970, at 9:30 a.m.

PRESENT:

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Burns, Chairman

Brimmer

Daane

Francis

Heflin

Hickman

Maisel

Robertson

Sherrill

Swan

Treiber, Alternate for Mr. Hayes

Messrs. Galusha, Kimbrel, and Morris, Alternate

Members of the Federal Open Market Committee

Messrs. Eastburn, Clay, and Coldwell, Presidents

of the Federal Reserve Banks of Philadelphia,

Kansas City, and Dallas, respectively

Mr. Holland, Secretary

Mr. Broida, Deputy Secretary

Messrs. Kenyon and Molony, Assistant Secretaries

Mr. Hackley, General Counsel

Mr. Partee, Economist

Messrs. Axilrod, Garvy, Gramley, Hersey, Hocter,

Jones, and Reynolds, Associate Economists

Mr. Holmes, Manager, System Open Market Account

Mr. Bernard, Assistant Secretary, Office of the

Secretary, Board of Governors

Mr. Coyne, Special Assistant to the Board of

Governors

Messrs. Wernick and Williams, Advisers,

Division of Research and Statistics,

Board of Governors

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Mr. Keir, Associate Adviser, Division of

Research and Statistics, Board of

Governors

Mr. Baker, Economist, Government Finance

Section, Division of Research and

Statistics, Board of Governors

Miss Ormsby, Special Assistant, Office of

the Secretary, Board of Governors

Miss Eaton, Open Market Secretariat Assistant,

Office of the Secretary, Board of Governors

Mr. Baughman, First Vice President, Federal

Reserve Bank of Chicago

Messrs. Eisenmenger and Taylor, Senior Vice

Presidents, Federal Reserve Banks of

Boston and Atlanta, respectively

Messrs. Bodner, Snellings, Scheld, Billington,

and Green, Vice Presidents, Federal Reserve

Banks of New York, Richmond, Chicago,

Kansas City, and Dallas, respectively

Messrs. Gustus and Kareken, Economic Advisers,

Federal Reserve Banks of Philadelphia and

Minneapolis, respectively

Mr. Lynn, Director of Research, Federal

Reserve Bank of San Francisco

Mr. Cooper, Manager, Securities and Acceptance

Departments, Federal Reserve Bank of

New York

By unanimous vote, the minutes of actions taken at the meeting

of the Federal Open Market Committee held on June 23, 1970, were

approved.

The memorandum of discussion for the meeting of the Federal

Open Market Committee held on June 23, 1970, was accepted.

By unanimous vote, the System open market transactions in

foreign currencies during the period June 23 through July 20, 1970,

were approved, ratified, and confirmed.

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By unanimous vote, the open market transactions in Govern

ment securities, agency obligations, and bankers' acceptances

during the period June 23 through July 20, 1970, were approved,

ratified, and confirmed.

By unanimous vote, the Federal Reserve Bank of New York was

authorized and directed, until otherwise directed by the Committee,

to execute transactions in the System Account in accordance with the

following current economic policy directive:

The information reviewed at this meeting indicates

that real economic activity changed little in the second

quarter after declining appreciably earlier in the year.

Prices and wage rates generally are continuing to rise

at a rapid pace. However, improvements in productivity

appear to be slowing the rise in costs, and some major

Since

price measures are showing moderating tendencies.

mid-June long-term interest rates have declined consider

ably, and prices of common stocks have fluctuated above

their recent lows. Although conditions in financial mar

kets have improved in recent weeks uncertainties persist,

particularly in the commercial paper market where the

volume of outstanding paper has contracted sharply. A

large proportion of the funds so freed apparently was

rechanneled through the banking system, as suggested by

sharp increases in bank loans and in large-denomination

CD's of short maturity--for which rate ceilings were

suspended in late June. Consequently, in early July bank

credit grew rapidly; there was also a sharp increase in

the money supply. Over the second quarter as a whole

both bank credit and money supply rose moderately. The

over-all balance of payments remained in heavy deficit

in the second quarter. In light of the foregoing devel

opments, it is the policy of the Federal Open Market

Committee to foster financial conditions conducive to

orderly reduction in the rate of inflation, while

encouraging the resumption of sustainable economic growth

and the attainment of reasonable equilibrium in the

country's balance of payments.

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To implement this policy, while taking account of

persisting market uncertainties, liquidity strains, and

the forthcoming Treasury financing, the Committee seeks

to promote moderate growth in money and bank credit over

the months ahead, allowing for a possible continued shift

of credit flows from market to banking channels. System

open market operations until the next meeting of the

Committee shall be conducted with a view to maintaining

bank reserves and money market conditions consistent with

that objective; provided, however, that operations shall

be modified as needed to counter excessive pressures in

financial markets should they develop.

By unanimous vote, the resolution authorizing certain actions

by the Federal Reserve Banks that had last been reaffirmed on March 10,

1970, was amended to read as follows:

RESOLUTION OF FEDERAL OPEN MARKET COMMITTEE AUTHORIZING

CERTAIN ACTIONS BY FEDERAL RESERVE BANKS DURING AN EMERGENCY

The Federal Open Market Committee hereby authorizes

each Federal Reserve Bank to take any or all of the actions

set forth below during war or defense emergency when such

Federal Reserve Bank finds itself unable after reasonable

efforts to be in communication with the Federal Open Market

Committee (or with the Interim Committee acting in lieu of

the Federal Open Market Committee) or when the Federal Open

Market Committee (or such Interim Committee) is unable to

function.

(1) Whenever it deems it necessary in the light of

economic conditions and the general credit situation then

prevailing (after taking into account the possibility of

providing necessary credit through advances secured by

direct obligations of the United States under the last

paragraph of section 13 of the Federal Reserve Act), such

Federal Reserve Bank may purchase and sell obligations of

the United States for its own account, either outright or

under repurchase agreement, from and to banks, dealers, or

other holders of such obligations.

(2) In case any prospective seller of obligations of

the United States to a Federal Reserve Bank is unable to

tender the actual securities representing such obligations

because of conditions resulting from the emergency, such

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Federal Reserve Bank may, in its discretion and subject

to such safeguards as it deems necessary, accept from

such seller, in lieu of the actual securities, a "due

bill" executed by the seller in form acceptable to such

Federal Reserve Bank stating in substantial effect that

the seller is the owner of the obligations which are

the subject of the purchase, that ownership of such

obligations is thereby transferred to the Federal Reserve

Bank, and that the obligations themselves will be delivered

to the Federal Reserve Bank as soon as possible.

(3) Such Federal Reserve Bank may in its discretion

purchase special certificates of indebtedness directly

from the United States in such amounts as may be needed

to cover overdrafts in the general account of the Treasurer

of the United States on the books of such Bank or for the

temporary accommodation of the Treasury, but such Bank

shall take all steps practicable at the time to insure as

far as possible that the amount of obligations acquired

directly from the United States and held by it, together

with the amount of such obligations so acquired and held

by all other Federal Reserve Banks, does not exceed $5

billion at any one time.

(4) Such Federal Reserve Bank may engage in operations

of the types specified in the Committee's authorization for

System foreign currency operations when requested to do so

by an authorized official of the U.S. Treasury Department;

provided, however, that such Bank shall take all steps

practicable at the time to insure as far as possible that,

in light of the information available on other System

foreign currency operations, its own operations do not

result in the aggregate in breaching any of the several

dollar limits specified in the authorization.

Authority to take the actions set forth shall be

effective only until such time as the Federal Reserve Bank

is able again to establish communications with the Federal

Open Market Committee (or the Interim Committee), and such

Committee is then functioning.

It was agreed that the next meeting of the Federal Open

Market Committee would be held on Tuesday, August 18, 1970, at

9:30 a.m.

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The meeting adjourned.

Secretary's note:

On July 15, 1970,

the second of the two letters quoted

below was sent to Mr. Elmer B. Staats,

Comptroller General of the United

States, over the signature of

Mr. Holland. This letter was in

response to Mr. Staats' letter of

June 30, 1970, quoted immediately

below, to Chairman Burns.

Dear Mr. Burns:

The Chairman of the Joint Economic Committee of the

Congress has asked the General Accounting Office to review

the accounting standards and practices of dealers in

Federal Government securities in relation to their report

ing to the Federal Reserve System. A copy of the Chairman's

request has been furnished to Mr. Peter Keir of your staff.

The Committee is concerned with the soundness of the

dealers' accounting in support of the data they report to

the Federal Reserve System, in the reliability and adequacy

of these data, and in the accuracy of the reported profits

taking into account the methods of allocating expenses.

Our review is to be directed entirely to these matters

through interview, interrogation and observation of dealers'

activities. The knowledge and experience of officials of

the Federal Reserve Bank of New York who are involved with

the dealers' operations and reporting could provide valuable

insight as a basis for our review approach and possibly for

an entree to the dealers selected.

We plan to secure our basic data directly from the

dealers and to rely on the Federal Reserve Bank of New York

to validate such data from the Bank's reports and records

if needed. This should avoid any question of compromising

confidential data reported to the Bank by the dealers.

In view of the Committee's interest in speedy comple

tion of our review, we would very much appreciate your

cooperation in arranging with the Federal Reserve Bank of

New York to assist our representatives and give them the

benefit of their expertise.

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Dear Mr.

Staats:

I am replying to your letter of June 30, 1970, in

which you asked for assistance in responding to a request

from Chairman Patman of the Joint Economic Committee who

asked for a review of the accounting standards and prac

tices used by U.S. Government securities dealers in their

reports to the Federal Reserve System. It is our under

standing that the General Accounting Office would secure

the necessary information for complying with Chairman

Patman's request by direct interviews and observation

of the dealers' activities and that the necessary basic

data would be obtained directly from the dealers.

The

Federal Reserve, notably officials at the Federal Reserve

Bank of New York, would undertake to provide the GAO staff

with technical advice and might in addition be asked to

validate from the records of the Federal Reserve Bank of

New York data which the dealers will provide.

Members of the Federal Open Market Committee, which

has jurisdiction in this area, have indicated their

willingness to have the Federal Reserve cooperate in this

study in the manner you have outlined. It is their under

standing that the confidential nature of the dealers'

reports to the System would be protected and on this basis

they interpose no objection to proceeding promptly with

the study.

Secretary