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CONDUCT OF MONETARY POLICY

95-1

HEARINGS

BEFORE THE

COMMITTEE ON

BANKING, FINANCE AND URBAN AFFAIRS

HOUSE OF REPRESENTATIVES

NINETY-FIFTH CONGRESS

FIRST SESSION

JULY 28 AND 29, 1977

Printed for the use of the

Committee on Banking, Finance and Urban Affairs

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HOUSE COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS

HENRY S. REUSS, Wisconsin, Chairman

THOMAS L. ASHLEY, Ohio

WILLIAM S. MOORHEAD, Pennsylvania
FERNAND J. ST GERMAIN, Rhode Island
HENRY B. GONZALEZ, Texas
JOSEPH G. MINISH, New Jersey
FRANK ANNUNZIO, Illinois
JAMES M. HANLEY, New York
PARREN J. MITCHELL, Maryland
WALTER E. FAUNTROY,

District of Columbia

STEPHEN L. NEAL, North Carolina
JERRY M. PATTERSON, California
JAMES J. BLANCHARD, Michigan
CARROLL HUBBARD, JR., Kentucky
JOHN J. LAFALCE, New York
GLADYS NOON SPELLMAN, Maryland
LES AUCOIN, Oregon

PAUL E. TSONGAS, Massachusetts
BUTLER DERRICK, South Carolina

MARK W. HANNAFORD, California
DAVID W. EVANS, Indiana
CLIFFORD ALLEN, Tennessee

NORMAN E. D'AMOURS, New Hampshire
STANLEY N. LUNDINE, New York

HERMAN BADILLO, New York

EDWARD W. PATTISON, New York

JOHN J. CAVANAUGH, Nebraska

MARY ROSE OAKAR, Ohio
JIM MATTOX, Texas

BRUCE F. VENTO, Minnesota
DOUG BARNARD, Georgia

WES WATKINS, Oklahoma

J. WILLIAM STANTON, Ohio
GARRY BROWN, Michigan
CHALMERS P. WYLIE, Ohio
JOHN H. ROUSSELOT, California
STEWART B. MCKINNEY, Connecticut
GEORGE HANSEN, Idaho
HENRY J. HYDE, Illinois

RICHARD KELLY, Florida
CHARLES E. GRASSLEY, Iowa
MILLICENT FENWICK, New Jersey
JIM LEACH, Iowa

NEWTON I. STEERS, JR., Maryland
THOMAS B. EVANS, JR., Delaware
BRUCE F. CAPUTO, New York

HAROLD C. HOLLENBECK, New Jersey

PAUL NELSON, Clerk and Staff Director
WILLIAM P. DIXON, General Counsel
MICHAEL P. FLAHERTY, Counsel

GRASTY CREWS II, Counsel

MERCER L. JACKSON, Minority Staff Director
GRAHAM T. NORTHUP, Deputy Minoriyt Staff Director

CONDUCT OF MONETARY POLICY

THURSDAY, JULY 28, 1977'

HOUSE OF REPRESENTATIVES,

COMMITTEE ON BANKING, FINANCE, AND URBAN AFFAIRS,

Washington, D.C. The committee met at 10:25 a.m. in room 2128 of the Rayburn House Office Building; Hon. Henry S. Reuss (chairman of the committee) presiding.

Present: Representatives Reuss, Annunzio, Hanley, Blanchard, LaFalce, Spellman, Lundine, Pattison, Vento, Barnard, Stanton, Brown, Hansen, Kelly, Leach, Caputo, and Hollenbeck.

The CHAIRMAN. Good morning. The House Committee on Banking, Finance and Urban Affairs will be in order for its series of hearings on monetary policy.

Following this committee's last dialog with the Federal Reserve on monetary policy, 31 members of the committee on February 9, 1977, wrote the Federal Reserve Board and the Federal Open Market Committee conveying "our judgment that monetary policy during 1977 should aim at reducing unemployment and fostering recovery, without rekindling demand inflation, consistent with President Carter's proposed stimulus." In our letter, we made three recommendations to the Fed:

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First, money supply: "For M1, in the months ahead, growth should be off the bottom of the range, and at least in the middle of the range." At that time, the Fed's growth rate for M1 had been running at the bottom of the 412-612 percent range. We are pleased that for the year ending July 1, 1977, M, grew at about 6 percent, closely following our February 9 recommendation.

Second, interest rates: "Such monetary policy should give the Nation stable interest rates in the months ahead." In fact, intermediate and long-term rates have been remarkably stable since early February. The yield on 3 to 5 year Treasuries drifted down from 6.8 percent to 6.5 percent between February and June of this year. This represented a decline from 7.4 percent from June 1976. Longer term Treasury rates also were well below year-ago levels.

Third, the Federal Reserve's portfolio: "We commend the Federal Reserve for modest lengthening of the maturity of its security portfolio in 1976, and urge that such lengthening be continued." It is gratifying to see that lengthening of the portfolio has continued. From July 1976, to July 1977, the percentage of U.S. Government and agency securities of less than 1 year in the Fed portfolio has declined from 51.3 percent to 48.8 percent; and the percentage of 1-5 year securities has declined from 32.9 percent to 32 percent. The percentage

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