FOMC Minutes

Meeting of Federal Open Market Committee

March 9, 1971

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.,

PRESENT:

on Tuesday,

March 9,

1971,

at 9:30 a.m.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Burns, Chairman

Hayes, Vice Chairman

Brimmer

Clay

Daane

Kimbrel

Maisel

Mayo

Mr. Mitchell

Mr.

Morris

Mr. Robertson

Mr. Sherrill

Messrs. Coldwell, Eastburn, and Swan, Alternate

Members of the Federal Open Market Committee

Messrs. Heflin and Francis, Presidents of the

Federal Reserve Banks of Richmond and

St. Louis,

respectively

Mr. Holland, Secretary

Mr. Broida, Deputy Secretary

Messrs. Bernard and Molony, Assistant Secretaries

Mr. Hackley, General Counsel

Mr. Hexter, Assistant General Counsel

Mr. Partee, Economist

Messrs. Axilrod, Eisenmenger, Gramley, Hersey,

Reynolds, Scheld, Solomon, and Taylor,

Associate Economists

Mr. Holmes, Manager, System Open Market Account

Mr. Coombs, Special Manager, System Open Market

Account

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Mr. Kenyon, Deputy Secretary, Board of Governors

Mr. Leonard, Assistant Secretary, Board of

Governors

Mr. Cardon, Assistant to the Board of Governors

Mr. O'Brien, Special Assistant to the Board of

Governors

Mr. Williams, Adviser, Division of Research and

Statistics, Board of Governors

Mr. Keir, Associate Adviser, Division of Research

and Statistics, Board of Governors

Mr. Bryant, Associate Adviser, Division of

International Finance, Board of Governors

Mr. Wendel, Chief, 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

Miss Orr, Secretary, Office of the Secretary,

Board of Governors

Messrs. MacDonald and Strothman, First Vice

Presidents, Federal Reserve Banks of

Cleveland and Minneapolis. respectively

Messrs. Parthemos and Cravan, Senior Vice

Presidents, Federal Reserve Banks of

Richmond and San Francisco, respectively

Messrs. Hocter, Andersen, Billington, and Green,

Vice Presidents, Federal Reserve Banks of

Cleveland, St. Louis, Kansas City, and

Dallas, respectively

Messrs. Gustus and Kareken, Economic Advisers,

Federal Reserve Banks of Philadelphia and

Minneapolis, respectively

Messrs. Meek and Schadrack, Assistant Vice

Presidents, Federal Reserve Bank of New York

The Secretary reported that advices had been received of

the election by the Federal Reserve Banks of members and alternate

members of the Federal Open Market Committee for the term of one

year beginning March 1, 1971, that it appeared that such persons

were legally qualified to serve, and that they had executed their

oaths of office.

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3/9/71

The elected members and alternates were as follows:

Frank E. Morris, President of the Federal Reserve Bark of

Boston, with David P. Eastburn, President of the rederal

Reserve Bank of Philadelphia, as alternate;

Alfred Hayes, President of the Federal Reserve Bank of

New York, with William F. Treiber, First Vice President

of the Federal Reserve Bank of New York, as alternate;

Monroe Kimbrel, President of the Federal Reserve Bank of

Atlanta, with Philip E. Coldwell, President of the

Federal Reserve Bank of Dallas, as alternate;

Robert V. Mayo, President of the Federal Reserve Bank of

Chicago, with the person who shall become President of

the Federal Reserve Bank of Cleveland as alternate;

George H. Clay, President of the Federal Reserve Bank of

Kansas City, with Eliot J. Swan, President of the

Federal Reserve Bank of San Francisco, as alternate.

By unanimous vote, the following officers of the Federal

Open Market Committee were elected to serve until the election of

their successors at the first meeting of the Committee after

February 29, 1972, with the understanding that in the event of the

discontinuance of their official connection with the Board of

Governors or with a Federal Reserve Bank, as the case might be,

they would cease to have any official connection with the Federal

Open Market Committee:

Arthur F. Burns

Alfred Hayes

Robert C. Holland

Arthur L. Broida

Normand R.V. Bernard and Charles Molony

Howard H. Hackley

David B. Hexter

Chairman

Vice Chairman

Secretary

Deputy Secretary

Assistant Secretaries

General Counsel

Assistant General Counsel

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J. Charles Partee

Economist

Stephen H. Axilrod, Robert M.

Eisenmenger, George Garvy,

Lyle E. Gramley, A.B. Hersey,

John E. Reynolds, Karl A. Scheld,

Robert Solomon, Charles T. Taylor,

and Clarence W. Tow

Associate Economists

By unanimous vote, the Federal Reserve Bank of New York

was selected to execute transactions for the System Open Market

Account until the adjournment of the first meeting of the Federal

Open Market Committee after February 29, 1972.

By unanimous vote, Alan R. Holmes and Charles A. Coombs

were selected to serve at the pleasure of the Federal Open Market

Committee as Manager of the Systen Open Market Account and as

Special Manager for foreign currency operations for such Account,

respectively, it being understood that their selection was subject

to their being satisfactory to the Directors of the Federal

Reserve Bank of New York.

Secretary's Note: Advice subsequently was received

that Messrs. Holmes and Coombs were satisfactory to

the Directors of the Federal Reserve Bank of New

York for service in the respective capacities

indicated.

By unanimous vote, the minutes of actions taken at the

meeting of the Federal Open Market Committee held on February 9, 1971,

were approved.

The memoranda of discussion for the meetings of the Federal

Open Market Committee held on January 12 and February 9,

accepted.

1971, were

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-5

The reports of audit of the System Open Market Account and

of

foreign currency transactions, made by the Board's Division

of Federal Reserve Bank Operations as at the close of business

on September 25, 1970, and submitted by Mr. Schaeffer, Chief

Federal Reserve Examiner, were accepted.

It was agreed to retain the procedure, most recently

reaffirmed on March 10, 1970, whereby, in addition to members and

officers of the Committee and Reserve Bank Presidents not currently

members of the Committee, minutes and other records could be made

available to any other employee of the Board of Governors or of a

Federal Reserve Bank with the approval of a member of the Committee

or another Reserve Bank President, with notice to the Secretary.

It was also agreed to authorize the Secretary to act on the

Chairman's behalf in considering proposals for the addition of

members of the Board's staff to the list of those with access to

Committee minutes and other records.

Consideration was then given to the continuing authorizations

of the Committee, according to the customary practice of reviewing

such matters at the first meeting in March of every year.

Secretary's Note: It had been agreed at the

meeting on March 10, 1970, that certain authori

zations among those that the Committee had

reviewed annually in the past would remain

effective until otherwise directed by the Committee,

and would no longer be submitted routinely for

review each year. Instead,it was understood that

these authorizations would be called to the

Committee's attention before the first meeting in

March of each year and that members would be given

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an opportunity to raise any questions they had

concerning them. Accordingly, copies of the autho

rizations in question (listcd below) had been

distributed to the Committee on January 21, 1971,

with a request that the members advise the

Secretariat if they wished to have any placed on

the agenda for consideration at today's meeting.

No such requests were received.

The authorizations in question were as follows:

1.

2.

3.

4.

5.

Procedure for allocations of securities in the

System Open Market Account.

Distribution list for periodic reports prepared

by the Federal Reserve Bank of New York.

Authority for the Chairman to appoint a Federal

Reserve Bank as agent to operate the System

Account in case the New York Bank was unable

to function.

Resolutions providing for continued operation of

the Committee, and for certain actions by the

Reserve Banks, during an emergency.

Resolution relating to examinations of the

System Open Market Account.

It was agreed that the authorization for the lending of

Government securities from the System Open Market Account, contained

in paragraph 3 of the continuing authority directive with respect to

domestic open market operations, should be retained at this time.

By unanimous vote, the continuing authority directive to

the Federal Reserve Bank of New York with respect to domestic

open market operations,

1.

as shown below, was reaffirmed:

The Federal Open Market Committee authorizes

and directs the Federal Reserve Bank of New York, to

the extent necessary to carry out the most recent

current economic policy directive adopted at a meeting

of the Committee:

(a)

To buy or sell U. S. Government

securities in the open market, from or to

Government securities dealers and foreign

and international accounts maintained at

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the Federal Reserve Bank of New York, on

a cash, regular, or deferred delivery basis,

for the System Open Market Account at market

prices and, for such Account, to exchange

maturing U.S. Government securities with the

Treasury or allow them to mature without

replacement; provided that the aggregate

amount of such securities held in such Account

at the close of business on the day of a

meeting of the Committee at which action is

taken with respect to a current economic policy

directive shall not be increased or decreased

by more than $2.0 billion during the period

commencing with the opening of business on the

day following such meeting and ending with the

close of business on the day of the next such

meeting;

(b) To buy or sell prime bankers'

acceptances of the kinds designated in the

Regulation of the Federal Open Market Committee

in the open market, from or to acceptance

dealers and foreign accounts maintained at the

Federal Reserve Bank of New York, on a cash,

regular, or deferred delivery basis, for the

account of the Federal Reserve Bank of

New York at narket discount rates; provided

that the aggregate amount of bankers' accep

tances held at any one time shall not exceed

(1) $125 million or (2) 10 per cent of the

total of bankers' acceptances outstanding as

shown in the most recent acceptance survey

conducted by the Federal Reserve Bank of

New York, whichever is the lower;

(c) To buy U.S. Government securities,

obligations that are direct obligations of, or

fully guaranteed as to principal and interest

by, any agency of the United States, and prime

bankers' acceptances with maturities of

6 months or less at the time of purchase, from

nonbank dealers for the account of the Federal

Reserve Bank of New York under agreements for

repurchase of such securities, obligations, or

acceptances in 15 calendar days or less, at rates

not less than (1) the discount rate of the

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Federal Reserve Bank of New York at the

time such agreement is entered into, or (2)

the average issuing rate on the most recent

issue of 3-month Treasury bills, whichever

is the lower; provided that in the event

Government securities or agency issues covered

by any such agreement are not repurchased by the

dealer pursuant to the agreement or a renewal

thereof, they shall be sold in the market or

transferred to the System Open Market Account;

and provided further that in the event bankers'

acceptances covered by any such agreement are

not repurchased by the seller, they shall

continue to be held by the Federal Reserve Bank

or shall be sold in the open market.

The Federal Open Market Committee authorizes and

2.

directs the Federal Reserve Bank of New York, or, if the

New York Reserve Bank is closed, any other Federal Reserve

Bank, to purchase directly from the Treasury for its own

account (with discretion, in cases where it seems desir

able, to issue participations to one or more Federal

Reserve Banks) such amounts of special short-term certifi

cates of indebtedness as may be necessary from

time to

time for the temporary accommodation of the Treasury;

provided that the rate charged on such certificates shall

be a rate 1/4 of 1 per cent below the discount rate of the

Federal Reserve Bank of New York at the time of such

purchases, and provided further that the total amount of

such certificates held at any one time by the Federal

Reserve Banks shall not exceed $1 billion.

3. In order to insure the effective conduct of open

market operations, the Federal Open Market Committee

authorizes and directs the Federal Reserve Banks to lend

U.S. Government securities held in the System Open

Market Account to Government securities dealers and to

banks participating in Government securities clearing

arrangements conducted through a Federal Reserve Bank,

under such instructions as the Committee may specify

from time to time.

By unanimous vote, the authorization for System foreign

currency operations was amended to read as follows:

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AUTHORIZATION FOR SYSTEM FOREIGN CURRENCY OPERATIONS

1. The Federal Open Market Committee authorizes and

directs the Federal Reserve Bank of New York, for System

Open Market Account, to the extent necessary to carry out

the Committee's foreign currency directive and express

authorizations by the Committee pursuant thereto:

A. To purchase and sell the following foreign

currencies in the form of cable transfers through spot or

forward transactions on the open market at home and abroad,

including transactions with the U.S. Stabilization Fund

established by Section 10 of the Gold Reserve Act of 1934,

with foreign monetary authorities, and with the Bank for

International Settlements:

Austrian schillings

Belgian francs

Canadian dollars

Danish kroner

Pounds sterling

French francs

German marks

Italian lire

Japanese yen

Mexican pesos

Netherlands guilders

Norwegian kroner

Swedish kronor

Swiss francs

B. To hold foreign currencies listed in para

graph A above, up to the following limits:

(1) Currencies purchased spot,

including currencies purchased from the

Stabilization Fund, and sold forward to the

Stabilization Fund, up to $1 billion equiva

lent;

(2) Currencies purchased spot or

forward, up to the amounts necessary to ful

other forward commitments;

fill

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-10(3) Additional currencies purchased

spot or forward, up to the amount necessary for

System operations to exert a market influence

but not exceeding $250 million equivalent; and

(4) Sterling purchased on a covered

or guaranteed basis in terms of the dollar,

under agreement with the Bank of England, up

to $200 million equivalent.

C. To have outstanding forward commitments

undertaken under paragraph A above to deliver foreign

currencies, up to the following limits:

(1)

Commitments to deliver foreign

currencies to the Stabilization Fund, up to

the limit specified in paragraph 1B(1)

above; and

(2)

Other forward commitments to

deliver foreign currencies, up to $550

million equivalent.

D.

To draw foreign currencies and to permit

foreign banks to draw dollars under the reciprocal

currency arrangements listed in paragraph 2 below,

provided that drawings by either party to any such

arrangement shall be fully liquidated within 12 months

after any amount outstanding at that time was first

drawn, unless the Committee, because of exceptional

circumstances, specifically authorizes a delay.

2.

The Federal Open Market Committee directs the

Federal Reserve Bank of New York to maintain reciprocal

currency arrangements ("swap" arrangements) for System

Open Market Account for periods up to a maximum of

12 months with the following foreign banks, which are

among those designated by the Board of Governors of the

Federal Reserve System under Section 214.5 of

Regulation N, Relations with Foreign Banks and Bankers,

and with the approval of the Committee to renew such

arrangements on maturity:

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Foreign bank

Amount of

arrangement

(millions of

dollars equivalent)

Austrian National Bank

200

National Bank of Belgium

500

Bank of Canada

National Bank of Denmark

Bank of England

Bank of France

German Federal Bank

Bank of Italy

Bank of Japan

Bank of Mexico

1,000

200

2,000

1,000

1,000

1,250

1,000

130

Netherlands Bank

Bank of Norway

300

200

Bank of Sweden

Swiss National Bank

Bank for International Settlements:

Dollars against Swiss francs

250

600

600

Dollars against authorized European

currencies other than Swiss francs

1,000

3.

Currencies to be used for liquidation of System,

swap commitments may be purchased from the foreign central

bank drawn on, at the same exchange rate as that employed

in the drawing to be liquidated. Apart from any such

purchases at the rate of the drawing, all transactions

in foreign currencies undertaken under paragraph 1(A)

above shall, unless otherwise expressly authorized by

the Committee, be at prevailing Market rates and no

attempt shall be made to establish rates that appear to be

out of line with underlying market forces.

4. It shall be the practice to arrange with foreign

central banks for the coordination of foreign currency

transactions. In making operating arrangements with

foreign central banks on System holdings of foreign cur

rencies, the Federal Reserve Bank of New York shall not

commit itself to maintain any specific balance, unless

authorized by the Federal Open Market Committee. Any

agreements or understandings concerning the adminis

tration of the accounts maintained by the Federal

3/9/71

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Reserve Bank of New York with the foreign banks

designated by the Board of Governors under

Section 214.5 of Regulation N shall be referred

for review and approval to the Committee.

5. Foreign currency holdings shall be

invested insofar as practicable, considering

needs for minimum working balances. Such invest

ments shall be in accordance with Section 14(e)

of the Federal Reserve Act.

6. A Subcommittee consisting of the Chairman

and the Vice Chairman of the Committee and the

Vice Chairman of the Board of Governors (or in the

absence of the Chairman or of the Vice Chairman of

the Board of Governors the members of the Board

designated by the Chairman as alternates, and in

the absence of the Vice Chairman of the Committee

his alternate) is authorized to act on behalf of

the Committee when it is necessary to enable the

Federal Reserve Bank of New York to engage in

foreign currency operations before the Committee

can be consulted. All actions taken by the

Subcommittee under this paragraph shall be reported

promptly to the Committee.

7. The Chairman (and in his absence the

Vice Chairman of the Committee, and in the absence

of both, the Vice Chairman of the Board of

Governors) is authorized:

A. With the approval of the Committee,

to enter into any needed agreement or understanding

with the Secretary of the Treasury about the

division of responsibility for foreign currency

operations between the System and the Secretary;

B. To keep the Secretary of the

Treasury fully advised concerning System foreign

currency operations, and to consult with the

Secretary on such policy matters as may relate to

the Secretary's responsibilities; and

C. From time to time, to transmit

appropriate reports and information to the National

Advisory Council on International Monetary and

Financial Policies.

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3/9/71

8. Staff officers of the Committee are

authorized to transmit pertinent information on

System foreign currency operations to appropriate

officials of the Treasury Department.

9. All Federal Reserve Banks shall participate

in the foreign currency operations for System

Account in accordance with paragraph 3 G(1) of the

Board of Governors' Statement of Procedure with

Respect to Foreign Relationships of Federal Reserve

Banks dated January 1, 1944.

10. The Special Manager of the System Open

Market Account for foreign currency operations shall

keep the Committee informed on conditions in foreign

exchange markets and on transactions he has made and

shall render such reports as the Committee may

specify.

By unanimous vote, the foreign currency directive shown

below was reaffirmed:

FOREIGN CURRENCY DIRECTIVE

1. The basic purposes of System operations in

foreign currencies are:

A. To help safeguard the value of the

dollar in international exchange markets;

B. To aid in making the system of

international payments more efficient;

C. To further monetary cooperation with

central banks of other countries having convertible

currencies, with the International Monetary Fund,

and with other international payments institutions;

D. To help insure that market movements

in exchange rates, within the limits stated in the

International Monetary Fund Agreement or established

by central bank practices. reflect the interaction

of underlying economic forces and thus serve as

efficient guides to current financial decisions,

private and public; and

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-14E. To facilitate growth in international

liquidity in accordance with the needs of an

expanding world economy.

2. Unless otherwise expressly authorized by the

Federal Open Market Committee, System operations in

foreign currencies shall be undertaken only when

necessary:

A. To cushion or moderate fluctuations in

the flows of international payments if such fluc

tuations (1) are deemed to reflect transitional

market unsettlement or other temporary forces and

therefore are expected to be reversed in the fore

seeable future; and (2) are deemed to be disequil

ibrating or otherwise to have potentially destab

ilizing effects on U.S. or foreign official reserves

or on exchange markets, for example, by occasioning

market anxieties, undesirable speculative activity,

or excessive leads and lags in international payments;

B. To temper and smooth out abrupt changes

in spot exchange rates, and to moderate forward

premiums and discounts judged to be disequilibrating.

Whenever supply or demand persists in influencing

exchange rates in one direction. System transactions

should be modified or curtailed unless upon review

and reassessment of the situation the Committee

directs otherwise;

C. To aid in avoiding disorderly conditions

in exchange markets. Special factors that might make

for exchange market instabilities include (1) responses

to short-run increases in international political

tension, (2) differences in phasing of international

economic activity that give rise to unusually large

interest rate differentials between major markets, and

(3) market rumors of a character likely to stimulate

speculative transactions. Whenever exchange market

instability threatens to produce disorderly conditions,

System transactions may be undertaken if the Special

Manager reaches a judgment that they may help to

reestablish supply and demand balance at a level more

consistent with the prevailing flow of underlying

payments. In such cases, the Special Manager shall

consult as soon as practicable with the Committee or,

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-15in an emergency, with the members of the

Subcommittee designated for that purpose in

paragraph 6 of the Authorization for System

foreign currency operations; and

D.

To adjust System balances within the

limits established in the Authorization for System

foreign currency operations in light of probable

future needs for currencies.

3. System drawings under the swap arrangements

are appropriate when necessary to obtain foreign

currencies for the purposes stated in paragraph 2

above.

4.

Unless otherwise expressly authorized by

the Committee, transactions in forward exchange,

either outright or in conjunction with spot trans

actions, may be undertaken only (i) to prevent

forward premiums or discounts from giving rise to

disequilibrating movements of short-term funds;

(ii) to minimize speculative disturbances; (iii) to

supplement existing market supplies of forward cover,

directly or indirectly, as a means of encouraging

the retention or accumulation of dollar holdings by

private foreign holders; (iv) to allow greater

flexibility in covering System or Treasury commitments,

including commitments under swap arrangements, and to

facilitate operations of the Stabilization Fund; (v)

to facilitate the use of one currency for the settle

ment of System or Treasury commitments denoninated in

other currencies; and (vi) to provide cover for

System holdings of foreign currencies.

By unanimous vote, the System open market transactions in

foreign currencies during the period February 9 through March 8, 1971,

were approved, ratified, and confirmed.

By unanimous vote, the open market transactions in Government

securities, agency obligations, and bankers' acceptances during the

period February 9 through March 8, 1971, were approved, ratified,

and confirmed.

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-16By 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 accor

dance with the following current economic policy directive:

The information reviewed at this meeting suggests

that real output of goods and services, which declined

in the fourth quarter of 1970, is rising in the current

quarter primarily because of the resumption of higher

automobile production. Although the unemployment rate

has edged down recently, it remains high. Wage rates in

most sectors are continuing to rise at a rapid pace.

Movements in major price measures have been diverse;

most recently, the rate of advance moderated for con

sumer prices and wholesale prices of industrial

commodities, but wholesale prices of farm products and

foods rose sharply. Bank credit increased considerably

further in February, as business loans strengthened

substantially and banks again made sizeable additions to

their holdings of securities. The money stock both

narrowly and broadly defined expanded sharply in February.

Short-term interest rates and mortgage rates have

fallen further in recent weeks but yields on new issues

of corporate and municipal bonds have risen considerably,

in part as a result of the very heavy calendar of

offerings.

The over-all balance of payments deficit in

January and February was exceptionally large. Imports

increased more rapidly than exports in January, and

capital outflows have been stimulated by widened short

term interest rate differentials. In light of the

foregoing developments, it is the policy of the Federal

Open Market Committee to foster financial conditions

conducive to the resumption of sustainable economic

growth, while encouraging an orderly reduction in the

rate of inflation and the attainment of reasonable

equilibrium in the country's balance of payments.

To implement this policy, System open market

operations until the next meeting of the Committee

shall be conducted with a view to maintaining

prevailing money market conditions while accommodating

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any downward movements in long-term rates; provided

that money market conditions shall be modified if

it appears that the monetary and credit aggregates

are deviating significantly from the growth paths

expected.

It was agreed that the next meeting of the Federal Open

Market Committee would be held on Tuesday, April 6, 1971, at

9:30 a.m.

The meeting adjourned.

Secretary