FOMC Minutes
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 on Tuesday, May 24, 1960, at 10:00 a.m.
PRESENT:
Mr. Martin, Chairman
Mr.
Mr.
Mr.
Mr.
Mr.
Hayes, Vice Chairman
Balderston
Bopp
Fulton
King
Mr. Leedy
Mr. Mills
Mr. Robertson
Mr. Shepardson
Irons, Alternate for Mr. Bryan
Mr.
Messrs. Leach, Allen, and Mangels, Alternate
Members of the Federal Open Market Committee
Messrs. Erickson, Johns, and Deming, Presidents of
the Federal Reserve Banks of Boston, St. Louis,
and Minneapolis, respectively
Mr. Young, Secretary
Mr. Sherman, Assistant Secretary
Mr. Kenyon, Assistant Secretary
Mr. Hackley, General Counsel
Mr. Thomas, Economist
Messrs. Brandt, Hostetler, Marget, Noyes, Roosa,
and Tow, Associate Economists
Mr. Rouse, Manager, System Open Market Account
Mr. Molony, Assistant to the Board of Governors
Mr. Koch, Adviser, Division of Research and
Statistics, Board of Governors
Mr. Keir, Chief, Government Finance Section,
Division of Research and Statistics, Board
of Governors
Mr. Knipe, Consultant to the Chairman, Board of
Governors
Mr. Patterson, First Vice President, Federal
Reserve Bank of Atlanta
Mr. Daane, Vice President, Federal Reserve Bank
of Minneapolis
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Messrs. Willis and Anderson, Economic Advisers
of the Federal Reserve Banks of Boston and
Philadelphia, respectively
Mr. Coldwell, Director of Research, Federal
Reserve Bank of Dallas
Messrs. Black, Netzer, and Lynn, Assistant Vice
Presidents of the Federal Reserve Banks of
Richmond, Chicago, and San Francisco,
respectively
Mr. Holmes, Manager, Securities Department,
Federal Reserve Bank of New York
Mr. Bowsher, Economist, Federal Reserve Bank of
St. Louis
Upon motion duly made and seconded,
and by unanimous vote, the minutes of the
meeting of the Federal Open Market Committee
held on May 3, 1960, were approved.
At the meeting of the Committee on May 3, 1960, Mr. Young reported
on questions that had been raised by Aubrey G. Lanston and Company, Inc.,
regarding that firm's participation in the Treasury-Federal Reserve program
of Government security market statistics.
Thereafter, with the concurrence
of the available members of the Committee,
as indicated by advices trans
mitted to the Secretary upon distribution of a draft, the following letter
was sent to the President of Lanston and Company on May 17, 1960, over the
signature of President Hayes of the Federal Reserve Bank of New York:
"This is in reply to your letter of May 10 addressed to
Miss Madeline McWhinney and relating to the Treasury-Federal
Reserve program of Government security market statistics.
Your letter raised two points of procedure regarding the
handling of reports of dealers to this Bank.
"Concerning the first
point, the major objective of the
new Treasury-Federal Reserve program has been to develop data
on the Government securities market appropriate for public
information.
We recognize, however, that prior to launching a
5/24/60
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"continuing release of such statistics, some experience in the
processing and interpretation of such data is necessary. There
fore, as explained in earlier meetings between our staff and
members of your firm, we have planned an experimental period
of data collection of several months duration, during which no
statistics would be made public. Following this period of
familiarization, we further plan to contact the dealers again
regarding problems of publication.
At that time we will
solicit suggestions from each dealer on the content and form
of series to be released as well as seek dealer views on the
time lag between collection and release date.
proposed, however,
We have never
to make our publication program in this
area dependent on the individual approval of specific dealers
as to the details of the aggregate data to be released.
"Concerning your second procedural point relating to the
exceptional conditions under which individual firm data will
be available to persons outside the Market Statistics Depart
ment, I understand that Mr. Ralph A. Young of the Board's staff
has already talked to Mr. Youngdahl at some length about the
explicit procedures that the Treasury and Federal Open Market
Committee have adopted in order to limit access to individual
firm data to specially authorized occasions and persons. As
Mr. Young indicated, with the exception of the few summary
figures that may be requested by the Manager of the System
Open Market Account for individual dealers seeking repurchase
accommodations at this Bank, availability of individual firm
data outside the Market Statistics Department under special
conditions is expected to be rare.
"To illustrate specifically the type of conditions under
which such exceptional release of data could occur, I can
perhaps be most helpful by listing the situations presented
for the consideration of the Federal Open Market Committee at
the time it authorized the new market statistics program:
The Manager of the Open Market Account may have full
"1.
access to individual dealer reports in a market situation
determined to be disorderly.
In other circumstances of an exceptional nature, the
"2.
Market Statistics Department might be directed by the President
of the New York Federal Reserve Bank to make selected or full
details of individual dealer reports available to qualified
System officials designated for examination and study.
In connection with any Treasury financing, the Treas
"3.
ury might, on occasion, request the President of the Federal
Reserve Bank of New York to direct that special data be
supplied as to individual dealer holdings of issues specifi
cally involved in, or closely related to, the financing in
question.
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"It is impossible for us to foresee at this time how many
special occasions for access to individual dealer reports might
arise.
If any respondent in the program would wish to raise
the question after several months of experience, we foresee no
reason at this time why an answer might not then be supplied.
All instances of access to individual dealer figures will be
reported to the Federal Open Market Committee and to the
Treasury so that an official record will be maintained.
"I am, naturally, pleased to be informed of your prepara
tions to cooperate in our program. The expectation of the
Treasury and the Federal Open Market Committee is, of course,
that all of the dealers will respond cooperatively to our joint
request for the statistical material needed to fulfill the
program that both agencies are undertaking jointly, through the
Federal Reserve Bank of New York, in the public interest. In
closing, may I assure you that the handling, the processing,
and any exceptional official assess to individual dealer
figures will be protected at all times by the strictest stand
ards of confidentiality.
The program will receive careful
staff review from time to time and substantive or procedural
change, believed to be desirable may be recommended in the
light of such reviews.
"Since these matters are of interest to all reporting
dealers, we are passing the substance of this letter along to
other dealers without mentioning your firm or referring
specifically to the questions which you raised."
The action taken in sending the fore
going letter was ratified by unanimous vote.
In this connection, Mr. Hayes commented that the Lanston firm had
subsequently informed the New York Reserve Bank that it
in the statistical program.
Thus,
would cooperate
all of the Government securities dealers
were participating.
Before this meeting there had been distributed to the members of
the Committee a report of open market operations covering the period May 3
through May 18, 1960, and a supplementary report covering the period May 19
through May 23, 1960.
files of the Committee.
Copies of both reports have been placed in the
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Mr. Rouse made the following comments with respect to developments
since the meeting on May 3, 1960:
As the written report to the Committee points out, the sta
tistical reserve position of member banks, whether measured by
total reserves or by net borrowed reserves, has been on average
somewhat easier than it had been in the preceding interval be
tween Committee meetings. The money market, on the other hand,
did not reflect this statistically easier position, and Federal
funds traded almost consistently at the 4 per cent ceiling. The
reasons for this divergence are not wholly clear, but it appears
that they center on unusually large movements through Treasury
Tax and Loan accounts in both the past and the preceding period,
which affected temporarily the distribution of funds between the
money market banks and the country banks. There were large calls
on all banks and subsequent heavy redeposits in "C" banks which
were in turn recalled.
Treasury bill rates fluctuated widely again over the past
three weeks.
In the auction on May 16 the three- and six-month
Treasury bill rates were established at 3.79 and 4.00 per cent,
1/2 per cent higher than in the previous auction. Bill rates
moved sharply downward last Thursday and Friday to about 3-1/8
per cent and 3-1/2 per cent on the three- and six-month bills,
respectively, but bounced back to 3-1/2 and 3-7/8 per cent in
the auction yesterday. The relative instability of our short
term rate structure has been a source of increasing perplexity,
and concern, to many bankers here and abroad, and it is a
phenomenon to which the Committee may have to pay increasing
attention. Basically it reflects the fact that the market has
become dominated by the nonbanks, and the bill rate has, as a
result, become increasingly divorced from the reserve positions
of the banks. Rate movements in the past period, however, were
in part a reflection of the tense international situation and
of the sour reception by the market of the Treasury's announce
ment that it would add $100 million to the six-month bill issue
While adding to the bill offering has
in the May 16 auction.
always been considered a rather routine way of raising relatively
small amounts of cash, the dealers felt, in this case, that the
Treasury was undermining their positions at a time when they were
in the process of distributing the new certificates and notes
offered in the May refunding operation.
The Treasury has no urgent need for additional cash at the
present time, but would like to build up its cash balance so that
it can enter into the next financing period, early in July, in a
stronger position than it did in April. This would indeed be a
desirable development from the System's point of view,
since it
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would undoubtedly make the task of maintaining an even keel dur
ing Treasury financing operations easier to accomplish.
It now
appears that the Treasury believes it can get by with a $3
billion cash financing in early July and at the same time pay
off $0.5 billion of the special July 15, 1960, bills
on maturity.
This would mean that the Treasury would offer only $1-1/2 billion
one-year bills
in July.
I should also report that with June free
from normal financing operations, the Treasury is giving serious
thought to whether it should attempt a partial advance refunding
of the $11 billion 2-1/2's of 1961.
Developments in the interna
tional situation probably hold the key to the Treasury decision,
although there are a number of technical problems to be resolved.
As you know, the legislative authority for the System to lend
directly to the Treasury up to $5 billion outstanding at any one
time expires next June 30.
Under Secretary Baird advises us that
the Treasury has requested the Congress to renew this authority.
System operations in July 15 Treasury bills
are fully de
tailed in the memorandum prepared by Mr. Larkin, and mailed to
you last
Friday.
So far, $91.5 million July 15 bills
have been
purchased under the authorization made by the Committee on April
12, of which $48 million were on a swap basis.
This brings total
System holdings of July 15 bills
to $104.9 million.
I should also like to call your attention to a slight change
in the regular written reports to the Committee.
In view of the
growing interest within this group in various measurements of
bank reserve positions, we have added data on total reserves,
borrowings, and nonborrowed reserves to the table describing the
factors affecting bank reserve positions, and their
inclusion will
be continued in subsequent reports.
Thereupon, upon motion duly made
and seconded, and by unanimous vote, the
open market transactions during the period
May 3 through May 23, 1960, were approved,
and confirmed.
ratified,
Supplementing the staff
20,
1960, Mr.
memorandum distributed under date of May
Noyes made the following statement with regard to economic
developments:
A large volume and variety of economic information has
At that time the
meeting.
become available since the last
improvement
considerable
impression that April would show
a few weekly
on
based
was
of
March
over the curtailed levels
an obvious
and
businessmen,
by
reports
informal
series, some
change in the weather.
5/2/60
-7
Most of the additional information we have supports the
earlier view. Certainly, retail trade improved substantially
and the improvement was general--extending to both durables
and nondurables. Employment increabed, and unemployment de
clined more than seasonally. With prices of farm and food
products back up to year-ago levels from their low point of
last fall, and crop prospects generally excellent, farm income
should improve as the year progresses.
One way to summarize the widespread nature of the shifts
from March to April is in terms of diffusion indexes for lead
ing and coincident indicators, virtually all of which increased
in April.
On a month-to-month basis, a diffusion index for five
groups of leading series was above 50 per cent in April, after
hovering in the low 30's in February and March. Similarly, the
index for the three roughly coincident groups was up above 70
per cent, from the 40's in the preceding months.
The question, of course, is whether this rather dramatic
improvement from March to April is significant, or whether it
was due to transitory factors influencing each of these months
in opposite directions.
The scattered information we have so
far for May suggests that the latter may well be the case. De
partment store sales have certainly reacted from the very high
levels of last month.
More important, perhaps, the steel rate
has continued to drop off as new orders for steel are running
considerably below current production.
In fact, new orders in
durable goods manufacturing generally were off somewhat further
in April. With this weakness in the basic industries, there is
little
chance that the index of industrial production will in
crease in May, and it will take unusual strength in the non
durable sector to even hold the March-April level. Thus, the
average physical output at factories and mines in the second
quarter will almost certainly be below the first quarter.
If consumption expenditures are maintained at the rates
indicated for April and May, there is a good chance that the
gross national product in the current quarter will not show a
decline, and perhaps a small increase. However, the advance
from the same quarter of 1959--a growth of only about 4 per cent
or less--will be disappointing for a period in which more vigor
ous expansion was widely anticipated on cyclical grounds.
In what I have said thus far, I have abstracted from the
economic repercussions of the failure of the Summit Conference.
Broadly speaking, these repercussions might be of two types.
First, they might be reflected in a changed attitude on the
part of businessmen and consumers--a renewal of inflationary
expectations, accompanied by an acceleration of durable goods
purchases, a higher rate of inventory accumulation, and all of
the other actions that are provoked by fear of rising prices,
or perhaps even physical shortages. Washington is a singularly
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unsuitable vantage point from which to judge whether such a
psychological reaction has, in fact, occurred; but no evidence
of it is apparent.
The second area in which the repercussions of the Summit
failure might appear is in the expenditures of the Government
itself. It has been suggested by a number of observers that
intensification of the cold war, which now appears almost in
evitable, will lead to an increase in Federal spending and a
less favorable fiscal position than was suggested by the budget
for 1961. At least in the first instance, such increased ex
penditures would be likely to appear in the appropriations for
the defense establishment, for military assistance, or both.
We had undertaken an analysis of recent and prospective
defense expenditures prior to the scheduled Summit Conference,
in the hope that it might shed some light on the erratic be
havior of the economy so far this year, and for that reason we
have assembled somewhat more detailed information on current and
prospective outlays in this area than would normally be the case.
This information would appear to support the official posi
tion taken in recent statements by the Secretary of Defense and
his Deputy that the outcome of the Summit Conference should not
have an appreciable effect on defense spending.
New orders placed by the Defense Department are scheduled
to increase considerably in the second quarter, but this is in
line with a well-established seasonal pattern of defense order
ing and had probably been anticipated by most suppliers.
The defense budget for 1961 already involves a substantial
further shift from manned aircraft to missiles, and provides for
procurement of those missiles which are expected to become opera
tional at rates which constitute the practical capacity for
Hence, there would be little
their production in 1960 and 1961.
immediate advantage to be gained from increased appropriations
In this connection, it should be
for missile procurement.
remembered that while the space program has encountered special
difficulties and disappointments, the military missile program
is proceeding roughly according to schedule, and witnesses for
the defense establishment have all testified that it is not
being substantially retarded by lack of current appropriations.
Defense expenditures for fiscal 1959, fiscal 1960, and the budget
for 1961 are all close to an annual rate of $41 billion. Thus,
in the absence of a general reorientation of the defense program,
it appears that military expenditures in the period ahead are not
likely to be a positive force in general economic developments.
In one sense defense procurement may be a depressing factor as
the further shift toward more missiles and prototype bomber
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development, rather than current procurement, will accentuate a
trend that has been going on since 1957, in which each dollar of
defense procurement has represented a smaller and smaller amount
of man-hour employment and conventional resource utilization.
Unless there is a widespread shift in attitudes and expectations,
or the stimulus of increased military procurement, the prospect
appears to be that we will see operations in many basic indus
tries
for a period at rates well below capacity levels, and more
unemployment than has been associated with high-level activity
in previous postwar periods.
There are always uncertainties as to the future, and these
are most pronounced when the economy is showing no signs of
decisive movement in one direction or the other, but, as I have
tried to bring out in earlier reports, as time passes without
any unequivocal evidence of an upward thrust and accompanying
inflationary pressure, the chances that such a development will
occur are substantially diminished and the need for a restrictive
monetary policy is correspondingly lessened.
Mr. Thomas presented the following statement with respect to finan
cial developments:
Recent credit developments indicate that neither borrowers
nor lenders have responded with any alacrity to the increased
Although interest rates con
availability of bank reserves.
winter, they tend to fluctuate
tinue below the peaks of last
widely in reflection of any actual or anticipated variations in
supply or demand conditions.
The upturn in
total bank credit that occurred in April, as
banks underwrite the Treasury financing, has been followed by a
decline in
total loans and investments at city banks in the first
three weeks of May.
ties
Holdings of Government and of other securi
were reduced and loans on securities also declined, while
loans to businesses, finance companies, and consumers increased
moderately. New capital issues have continued at a moderate
year's peak
level, and mortgage lending is no doubt below last
The increase in the money supply, seasonally adjusted,
volume.
that seemed to be occurring in late March and early April has
U.S. Government deposits at banks, however, have
not continued.
than was expected.
more
risen much
Estimates of flows of funds, that can now be made on a pre
quarter of this year, indicate the
liminary basis for the first
The
year.
changed nature of credit demands compared with last
which
instruments,
market
equity
and
net increase in all credit
attained a record volume in 1959 as a whole, was substantially
smaller in the first quarter of 1960 than in the same period
last year but comparable with the corresponding 1958 quarter.
The most striking change, of course, was the shift of the Federal
Government to a position of debt reduction by an amount that may
be considered as normal for the first
quarter of the year. In
addition, the increase in aggregate private credit was a little
less than a year ago. Businesses borrowed somewhat more,
accounted for by an increase in bank loans. Consumer indebted
ness, however, increased less than in the first quarter of last
year, reflecting principally a lower volume of mortgage loans.
Partial data indicate that similar contrasts with last year
have characterized the second quarter.
With respect to sources of funds, gross saving by consumers
in the first
quarter of 1960 was slightly above last year's high
volume, while saving by nonfinancial business was somewhat
smaller. Consumers invested more of their savings in tangible
capital expenditures, including durable goods, and also borrowed
less than they did last year. Thus the volume of funds available
for acquisition of financial assets was reduced. Most of this
reduction occurred in holdings of deposit-type assets--demand
deposits declined more than last year and savings deposits and
shares increased less. Individuals' purchases of Government
substantialsecurities were smaller than a year ago--though still
while purchases of other securities and mortgages were larger.
Nonbank financial institutions, receiving smaller amounts
from consumers, also advanced less credit than they did last
year. Credit supplied by the commercial banking system showed
quarter of this year than
a much larger decline in the first
usual, corresponding to the greater than seasonal decrease in
In essence, these data point up the market contrast between
deposits.
this year's credit situation and that of a year ago, brought
about principally by the shift in the fiscal position of the
Federal Government. Yet, it also is significant that other
credit demands have not increased so as to offset the decline in
Saving has continued at a high level, but
Government borrowing.
more savings have gone into tangible assets and there has been a
lessened flow of funds into credit and equity markets. As a net
result there has been a lessening of pressures toward rising
interest rates.
Interest rates have declined from the peak levels reached in
the latter part of 1959 and in early January of this year, but
four or five
higher than they were in the first
they are still
credit
aggregate
in
In view of the moderation
months of 1959.
may be
question
year,
this
demands, which persisted since early
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raised as to why interest rates are not lower. What has kept
them from returning to earlier levels? One possible explanation
is that something like the current level of interest rates is
necessary to attract savings into financial assets. Another is
that the shift by the public from bank deposits to other finan
cial assets has resulted in increasing the pressures on markets
for short-term securities to meet current cash needs. These
varying pressures can surely account for some of the wide fluc
tuations that have recently been characteristic of Treasury bill
rates.
A third possible explanation, and one deserving particular
attention by Federal Reserve officials, is the impact of System
policies. To be sure, positive measures have been taken to ease
restraints on the availability of bank reserves. Yet, as
mentioned earlier, the response has not been notable. It may be
that the demand factors are not sufficiently vigorous and could
not be stimulated by more abundant credit availability or lower
interest rates.
In such an event interest rates should decline.
feel restrained and are holding back
It may be that banks still
Possible reasons for
rather than pushing credit extensions.
this attitude deserve scrutiny.
One is that, while bank reserve positions are easier than
they were during the latter half of 1959, they are not any easier
than they were in late 1958 and early 1959 or in early 1955 and
late 195 6 -- all periods of expanding credit demands but of lower
interest rates than at present. Member bank borrowings at the
Reserve Banks of over half a billion dollars tend to be restric
Last year's
tive unless credit demands are very vigorous.
policies of heavy Treasury borrowing, partly underwritten by
banks, followed by bank liquidation of Government securities to
obtain funds for loans was a process that made possible credit
expansion under restraint.
In addition, banks have been borrowing large amounts from
Such borrowings recently have generally exceeded $2
others.
billion. Their possible impact deserves some study. It has
commonly been considered that since the bulk of these borrowings
are within the banking system and consist largely of Federal
funds transactions, the restraint on borrowing banks is
counterbalanced by the effect of liquid funds available to the
lending banks.
Our newly developed figures on Federal funds transactions,
however, indicate that some of the borrowing by banks is not from
The new figures from
other banks and is not all Federal funds.
dealers in Government securities, available for only one or two
days, suggest that these dealers may be important intermediaries
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between banks as borrowers and corporations and others as lenders.
Dealers' "reverse repurchase agreements" with banks exceeded their
borrowings from banks.
The bulk of dealer financing was obtained
from corporations.
These data, of course, need a longer period of
study before definitive conclusions can be drawn as to their
significance.
Another likely factor of restraint on banks at present is the
level of the Reserve Banks' discount rate relative to market rates.
This may be more of a restrictive factor than the volume of borrow
ings and undoubtedly accounts for some of the wide fluctuations in
Treasury bill
rates.
This is the case not only because banks own
ing bills and needing reserves prefer to sell bills at the market
rates prevailing than to borrow at the higher discount rate. It
is also true because banks--and others--possessing available funds
that they want to keep in liquid form can sell Federal funds, i.e.,
lend the funds to other banks or to dealers, at a higher yield than
they can obtain from the purchase of Treasury bills. Banks pur
chasing the funds thus avoid borrowing from the Reserve Banks.
Such borrowing would have had the effect of supplying additional
reserves to the market.
It might have induced additional Federal
Reserve purchases of securities to relieve the strain. The addi
tional reserves would have been conducive to further bank credit
expansion.
Recent behavior of the money market supports the view that
the maintenance of the discount rate above market rates is an
effective penalty on borrowing and credit expansion. The question
to be considered at present is whether it is exerting more re
The review of
straint than is desirable under the circumstances.
credit developments to date indicates that this may be the case.
There are few, if any, indications of excessive uses of credit
that need to be restrained--unless it be in the area of consumer
instalment credit. Whether the dramatic events in the inter
national political area will change this picture raises serious
questions that at this stage are matters of conjecture and judg
ment. They need to be considered, nevertheless, before taking
any overt action that would be interpreted as a shift of policy.
As for the period immediately ahead, seasonal demands will
exert a substantial drain on reserves during the next two or
This drain will equal $400 million or more, and at
three weeks.
least half of that amount will continue to be needed through the
last half of June, when markets will be under the pressure of
Substantial additional amounts will
seasonal liquidity needs.
be needed early in July to meet holiday currency demands. After
mid-July, seasonal reserve needs will not increase further until
the Labor Day week end.
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If
it
seems
appropriate to encourage a resumption of bank
credit growth, $400 million or more of additional reserves might
be supplied in the course of the next three to six weeks.
A re
duction in the discount rate might accomplish the same purpose
with a somewhat smaller volume of open market purchases.
Mr. Marget commented as follows
regarding the United States balance
of payments:
No new data have become available since the last
meeting of
this
Committee which would change significantly the picture,
justifying an attitude of relative optimism with respect to re
cent developments in our balance of payments, that I have been
presenting at recent meetings of the Committee.
I would like,
of course, to stress very strongly that the optimism that would
seem to be justified is in fact only a very relative optimism:
relative, that is to say, to some of the extremely pessimistic
views as to our balance-of-payments prospects that one still
hears expressed.
Certainly it
would not do, for example, to put
any particular stress upon the fact that gold purchases by for
eigners (which, in the first
quarter of this year, as I reported
a couple of meetings back, were, at $42 million, less than half
the already relatively low figure for the first
quarter of last
year) were almost negligible in the first
three weeks of May.
(Actually, including a transaction announced but not yet executed,
the total of gold sales to foreigners in those three weeks was
One should not overstress such figures, in
below $5 million.)
place, because gold movements are very erratic in the
the first
In the second place, even over a longer periodshort period.
a hard thing for many people to understand
although this is still
-- gold movements are not necessarily a good indicator of what is
happening to the balance of payments; and it is the balance of
payments which must remain our primary source of concern.
From this standpoint, there is one matter which does seem
In my reports to this Commit
to me to deserve further comment.
tee, in undertaking to account for the international movements
of gold and dollars, which we do take as a measure of what has
been happening to our over-all balance of payments, I have con
centrated on what the trade figures--the figures for exports and
This has been quite deliberate: for
imports--have been showing.
the simple reason that, in the long view, it is our performance
in the field of commodity trade that will decide whether our in
ternational accounts are or are not going to be balanced at a
5/24/60
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high level without the imposition of arbitrary restrictions.
But
this is not to say that we can leave the so-called "invisible"
items in our balance of payments altogether out of account; and
this is especially true with respect to the particular "invisible"
item which is represented by the movements of capital.
More
specifically, one should ask: are the capital items in our bal
ance of payments currently moving in our favor or are they cur
rently moving against us?
The answer, so far as the figures for the first
quarter of
this year are concerned (and these are the latest
figures avail
able to us) is,
quite clearly, that the capital items on balance
moved against us during that quarter of this year, to an extent
of the general order of magnitude of $200 million, as compared
with the first
quarter of 1959.
If the noncapital items in our
balance of payments had remained the same, this would have meant,
of course, that gold and dollar transfers to foreigners would
have been higher by that amount than they were a year ago.
Actually, however, gold and dollar transfers to foreigners in
the first
quarter of 1960 were about one-fourth less than they
were a year ago.
From this set of facts, some obvious conclu
sions can be drawn:
First,
it is clearly wrong to suppose, as so much of recent
discussion seems to have been supposing, that we can come to a
conclusion as to what is going to happen to the size of our bal
ance-of-payments deficit solely on the basis of what may be hap
pening to the capital movements component in the balance of pay
a very considerable part of the discussion
Specifically:
ments.
to which I have referred has rested on the assumption that if,
as
the result of a differential interest-rate structure here and
abroad, capital--particularly short-term capital--moves out, we
shall find ourselves losing "gold," and therefore are likely to
find ourselves effectively barred from any efforts that we might
otherwise have wished to make in the direction of a counter
cyclical monetary policy.
I do not enter here into all the weaknesses of this argu
great exaggeration, by implication, of
ment: for example, its
the proportion of foreign balances held in the United States
which can be said to be "interest-sensitive" in the degree which
ignoring of the difference between
the argument suggests; or its
hold relatively
a country such as the United States, which still
and a
obligations,
foreign
its
to
relation
in
reserves
massive
country such as the United Kingdom, whose reserve position is
My point is simply that it is wrong to talk
much more tenuous.
about the future of our balance of payments as if it depended
solely, or even primarily, on capital movements (and short-term
5/24/60
-15-
capital movements, at that) without regard to what is happening
to the central matter of trade--the basic relation between our
exports and imports of commodities.
I have tried to illustrate
the point particularly by the experience of our balance of pay
ments thus far this year as compared with the experience last
year.
This year, I have pointed out, despite a shift against
us in capital movements, our balance of payments deficit this
year is significantly less than it was at this time last year
because the improvement in our trade position has been much
more than enough to offset the adverse capital movements.
This in itself is, I think, an encouraging finding, pre
cisely because it is in the field of trade, and all that "trade"
implies in the way of technical efficiency in production and com
petitiveness in the broadest sense of the term, that the adjust
ments required in order to bring our international accounts into
close balance are the most difficult to make: much more diffi
cult, for example, than is implied by the suggestion that the
balance can be brought about simply by keeping our interest rate
structure higher than that of our trading partners at all times.
Monetary policy certainly has a critical
role to play in the
process of adjustment of our international accounts; in my own
view it has already played a role in that process which is cer
What is to be rejected is not the
tainly not to its
discredit.
conception of a role for monetary policy in the process of
in rela
balance-of-payments adjustment, but a conception of it,
tion to differential interest-rate structures and short-term
capital flows, which rests on so narrow a technical base that
it misses the really essential point even vithin the field of
capital movements: namely, that capital moves internationally
not only in response to interest-rate differentials, but also
on the basis of a judgment by the well-informed as to whether
the monetary authorities of the countries in question have an
adequate understanding of their responsibilities, in relation
to the twin goals of containing inflation and fostering sus
tainable growth, and adequate courage and determination to
carry the fruits of that understanding into accomplishment.
Mr.
Hayes presented the following statement of his views with re
spect to the business outlook and credit policy:
three weeks
data of the last
On the whole, statistical
lend considerable support to the views already held by a good
many in the System, including my associates in New York, to the
effect that further moderate expansion in business activity
5/24/60
-16-
this year is a reasonable expectation--but with no likelihood
of a real surge involving inflationary pressures.
The basic
outlook has remained about the same through a disappointing
March and an encouraging April.
Natu: lly the sudden worsen
ing of the international situation could have major effects on
the domestic economy, but neither the extent nor even the direc
tion of such effects is yet visible.
Of course we must expect
a sharp decline in the rate of total inventory accumulation in
the second quarter.
However, this may be offset by gains in
final consumption.
Favorable factors include continuing
optimism on the part of consumers and businessmen, although
this is tempered, in the case of businessmen, by rather sober
profit expectations for the remainder of the year, attributable
in large part to increasing price competition.
Housing starts
reported for April, and for March on a revised basis, suggest
that residential construction may have bottomed out. While
steel output has continued to drop, there seems to be sub
stantial evidence that inventories are being drawn down, which
should limit further declines, especially with plant and
equipment spending on the rise.
Although unemployment is clearly higher than it should be,
the problem seems to be due in large part to inadequate train
ing and inadequate mobility of labor--causes which are not
easily influenced by credit availability.
Demand for credit is generally strong but not excessive.
Total loans and investments of all commercial banks rose sharply
in April, reflecting a roughly seasonal expansion of business
loans, unusual strength in other loan categories combined, and
a large increase in holdings of Government securities incident
Loan demand has been less in
to the April Treasury financing.
sistent in New York than elsewhere, but this seems in line with
shows a
The money supply still
the usual seasonal pattern.
On the other
drop of about one-half per cent in the past year.
new statistics on total liquid assets
hand, the Board staff's
emphasize the sharp contrast be
public
nonbank
the
by
held
tween liquidity as measured by this total and liquidity as
quarter,
In the first
indicated by the money supply alone.
for example, liquid assets rose at an annual rate of 3-1/2 per
at an annual rate of 2 per
cent, while the money supply fell
It is interesting to note that in the past nine years
cent.
the year-to-year increases in liquid asset holdings have been
both much steadier and considerably larger, on the average,
than the increases in the money supply.
The corporate bond market has been quite steady, although
the calendar of new issues scheduled for the next thirty days
is higher than at any time in 1959 and 1960.
5/24/60
-17-
It seems to me that the satisfactory business outlook
warrants maintenance of our recent policy which might be
characterized as one of substantially lessened restraint as
compared with a few months ago.
It does not, in my judgment,
call for any further easing action at this time.
Another con
sideration suggesting a steady policy is the uncertain economic
and political impact of recent international developments.
Moreover, an even keel policy will be appropriate if the
Treasury undertakes an advance refunding program in the next
few weeks.
I should think that the Manager might be instructed to
pursue the same open market policy as in the past three weeks,
with emphasis on the feel of the market rather than any specific
target.
The projections clearly indicate that substantial out
right purchases and/or repurchase agreements will be required
in the next three weeks.
Liquidation of bills
by corporations
and others prior to the June 15 tax date, and perhaps some pre
liminary window dressing, should supply bills
to the market, and
this may minimize the impact of System purchases on market rates
of interest.
As for the discount rate, I recognize that a case might be
made for a reduction at this time on the grounds that the 4 per
cent rate was adopted last
September at a time when inflationary
expectations were far stronger than now; that there is some
question whether current business conditions justify the highest
30 years; that with business still
discount rate of the last
rather strong we could reduce the rate without the danger of
signalling fear of recession on the part of the Federal
Reserve; and that a lower rate would put us in a better position
to increase it at some later date when firmer restraint might be
needed.
However, in my judgment there are even stronger reasons
for taking no action on the discount rate. As we look back a
few months, I think we can conclude that the existence of the
4 per cent rate since last September has had a good stabilizing
influence; and we can certainly be glad that we resisted the
temptation to increase it in January when temporary market
pressures pointed strongly in that direction. Later the 4 per
cent rate probably helped deter market rates from dropping even
lower than they did. At present neither business nor credit
conditions call for any overt signal--and the gap between the
discount rate and market rates, which is not excessive in any
case and is not creating any problems of discount administra
tion, may tend to narrow as seasonal pressures on market rates
increase in the next couple of months--including the influence
5/24/60
-18
of the Treasury's prospective shift from surplus to seasonal
deficit. Moreover, the credit markets appear to be pretty well
stabilized, suggesting that it might be best not to "rock the
boat."
Having just returned from Europe, I can't help giving some
weight to the consideration that any reduction in our discount
rate could tend to accentuate the flow of short-term capital to
Europe--a flow which is already raising difficult problems for
some of the European central banks. Also, as I havealready
mentioned, the post-Summit uncertainty of international affairs
in general would point to the wisdom of deferring any change in
credit policy, even if a change were indicated by domestic con
siderations--and in my judgment it is not indicated on that
score.
So I come out with a clear conviction that we should
leave the rate unchanged between now and our next meeting.
With respect to the directive, I would still
like to see a
procedural change in the way of separating long-range goals
from immediate objectives--but there is no urgent need for such
a move immediately.
Mr. Erickson said that business performance and sentiment in the
First District had improved somewhat,
generally good.
and that business reports were
The New England production index was up in February and
remained at the same level in March.
construction or employment.
There was nothing new to report on
In recent weeks, total claims for unemploy
ment compensation and additional claims had been running higher than a
year ago, but the rates were not as high as nationally.
Retail sales
were ahead of last year, and new automobile registrations were ahead by
30 per cent, a rate of gain higher than the national average.
The April
survey of mutual savings banks showed an increase in deposits of 4.6 per
cent, slightly less than in other recent months.
During the past three
weeks purchases and sales of Federal funds by reporting banks were about in
balance, but there was slightly greater use of the discount window, with
more banks coming to the window then in
the preceding three-eek period.
5/24/60
-19
Mr.
Erickson said that he would not recommend a change in the
discount rate or the directive at this time, although he did not feel too
strongly about the directive.
With the System having been supplying
reserves, he was rather surprised that the Federal funds rate did not go
below 4 per cent, except for a day or two,
during the past three weeks.
As to open market operations in the forthcoming period, he would favor
giving the Desk the same instruction as at the meeting of the Committee
three weeks ago.
He would supply needed reserves freely, and he hoped
there might be a number of days when the Federal funds rate would not be
at the discount rate.
Mr. Erickson commented that he would like to see a paper pre
pared on interest rates that would review the past two or three years,
particularly in light of factors such as the increased use of Federal
funds, the greater use of short-term securities,
including Treasury bills,
by nonbank interests, and the fact that the Treasury was unable to under
take long-term financing at rates in excess of 4-1/4 per cent.
Mr.
Irons reported mixed movements in the Eleventh District, with
economic activity at a generally satisfactory over-all level.
Department
store sales thus far in May were off somewhat from a year ago, while the
oil situation was unchanged and apparently would be substantially
unchanged for some time.
There had been a slight decline in construction,
but employment was satisfactory and the agricultural outlook was quite
good.
5/2/60
-20
With regard to the banking situation, Mr. Irons said that in the
past three weeks District banks lost deposits and loans and investments
declined somewhat.
Bankers in
the larger cities with whom he had talked
recently reported a strong demand for credit and stated that they were
being selective in
if
granting applications for loans.
more funds were available,
They indicated that
they would be making more loans.
at the Reserve Bank had increased in
Borrowing
terms of the number of banks borrow
ing, with more of the larger country banks coming to the window.
city banks continued to operate substantially in
The large
the Federal funds market;
during the past three weeks purchases of Federal funds had been running
around $450-$475 million, with sales around $150 million.
Had it
not been
for the use of Federal funds, more banks would have been coming to the
discount window.
With respect to Federal Reserve policy,
Mr.
Irons said that
although he had not been dissatisfied with open market operations during
the past three weeks, he was concerned and confused by the fact that the
lessening of restraint over a period of some six weeks appeared only to
have reflected itself
to any degree in New York City.
Upon reviewing
statistics on reserves and borrowing since the first of April, it appeared
to him that on average reserve city banks showed substantial net borrowed
reserves of around $200-$250 million.
On the other hand, New York City
banks had not been borrowing from the Federal Reserve and free reserves
5/24/60
-21
had appeared quite frequently.
The Chicago picture seemed to be more like
that of the reserve city banks.
Thus,
it
appeared that the results of the
lessening of restraint were not extending to a substantial part of the
banking system, that is,
the reserve city banks.
If
the System really
wanted to lessen restraint and encourage an increase in the money supply,
it
occurred to him that this might be a situation in which it
would be
desirable to make a further change in the amount of vault cash permitted
to be included in
required reserves,
with the adjustment of such a nature
as to allow the reserve city banks to reap some benefit.
this, he was not arguing for a lot
In
of ease, but the statistics
suggesting
appeared to
bear out his feeling that what the System had been trying to achieve was
not flowing through to a substantial part of the banking system.
A further
release of vault cash might be a way to supply a reasonable amount of addi
tional reserves and distribute them widely.
The action could be defended
on the basis of seasonal demands as well as a desire to encourage an in.
crease in
the money supply.
favor this procedure,
Mr.
Thus,
while he was not sure whether he would
there seemed to be some basis for it.
Irons went on to say that he would prefer to leave the dis
count rate unchanged at this time, his position being in
that of Mr. Hayes.
accord with
In considering any reduction of the discount rate,
the Federal Reserve would have to decide whether it
wanted a general
lessening of restraint over the entire banking system or whether it
wanted
5/24/60
-22
to aid special cases.
He would prefer to keep the present discount rate
until there was evidence of some adjustment of market rates.
One reason
why the Federal funds rate had not drifted away from the discount rate
appeared to be that, on the one hand, the Reserve Banks were trying to
administer the window in accordance with the principles of Regulation A
pertaining to continuous borrowing while, on the other, member banks were
in need of funds.
In conclusion, Mr.
Irons said he was not particularly
concerned about the policy directive.
Mr. Mangels summarized the results of a poll among members of the
California Bankers Association which showed that 58 per cent of the respond
ents expected business to continue at present levels during the second half
of this year, while 26 per cent expected an upturn and 16 per cent a decline.
Some 78 per cent felt that inflation had not been checked,
while 82 per cent
thought that interest rates would remain fairly steady for the remainder of
the year and only 2 per cent foresaw an increase.
Turning to the Twelfth District economy, Mr. Mangels said there
had been no outstanding changes recently,
were slightly better than a month ago.
In April, unemployment was at 4.2
per cent, against 4.5 per cent in March.
in
although conditions probably
About half of a gain of .3 per cent
employment in April was accounted for by the employment of persons in
connection with the taking of the census.
Steel production in May was
holding at about the April level of 71 per cent of capacity, but it
was
5/24/60
-23
felt that production probably would drop further in the next month or two.
Lumber production again declined, and in late April and early May some mills
in the Pacific Northwest had closed temporarily because of the weakness of
demand.
Department store sales during the four weeks ended May 14 showed
no change from a year ago.
In the first
quarter of this year, farm cash
receipts were 5 per cent higher than in the corresponding period of 1959.
With respect to the banking situation, Mr. Mangels reported that
during the three weeks ended May 11 loans were down $50 million, holdings
of Government securities were down $188 million, and demand deposits were
down $579 million.
Time deposits were up $87 million and savings deposits
were up $32 million, most of the increase occurring outside of the State
of California.
Borrowings from the Reserve Bank were quite nominal.
Trad
ing in Federal funds was quite active, with purchases and sales about in
balance.
Mr. Mangels noted that while there had been some slight improvement
in business conditions,
over all, no upward push was evident and there seemed
to be rather general concern about the future.
Under these conditions, he
felt that the Committee would be justified in continuing its
policy of easing.
He would look forward to a zero balance in net borrowed reserves,
with perhaps
even a period of a week or so when there would be free reserves.
As to the discount rate, Mr. Mangels suggested that a reduction
might have a less adverse psychological effect than a month ago in view
of the fact that there had been some change in conditions.
A number of
5/2/60
24
financial writers, he noted, were analyzing the easing that had taken
place through open market operations and were commenting on the possibility
of a discount rate reduction.
the discount rate at this time,
Government spending,
find itself
Nevertheless, he would not favor changing
There was likely to be some increase in
along with seasonal pressures,
again having to hold the line.
and the System might
For the same reason, the
directive seemed to him to be satisfactory as it stood.
Mr.
in
Deming said there had been no new developments of significance
the Ninth District during the past three weeks.
evident for several months continued:
The trend that had been
modest gains in many measures of
activity, appreciably smaller than national gains, and substantial liquidity
pressure on the banks.
In April, only one major economic indicator--depart
In
ment store sales--shoved up better for the District than the nation.
contrast, bank debits were off fractionally from year-ago levels, unemployment
was slightly higher than a year earlier, and personal income in Minnesota rose
much less than was the case nationally.
but prospects seemed reasonably good.
favorable.
The forecast for winter wheat was quite
Since, in many respects, the lag in the Ninth District reflected
the effects of the drought last
coming,
In agriculture, the season was late
summer,
a good agricultural season,
if
forth
should change the picture somewhat.
With reference to the discussion of the international and national
situation, Mr.
Deming said he had no additional comments.
As he looked at
recent developments, they seemed to support the view that the trend toward
5/24/60
-25
easier money market conditions could be continued without appreciable
danger.
However, the current uncertainties,
in the international picture
particularly, argued against any sharp change in policy.
Mr. Deming expressed agreement with the views of Mr. Hayes regarding
the discount rate and the directive.
He would continue, as Mr. Mangels had
suggested, to probe toward easier conditions in the total reserve picture.
Like Mr. Irons, he was somewhat confused regarding the development of easier
conditions in New York City than elsewhere.
were appreciably easier in
He did not see that conditions
the Ninth District, where the pressure on banks
seemed about the same as a month or two months ago.
The suggestion that a
release of additional vault cash be used as a means of alleviating the
situation had some appeal,
although he had not thought particularly about
this possibility before today's meeting.
To summarize his views on the
general policy program, he saw no particular danger in probing toward a
mildly easier position.
Mr. Allen reported that in recent weeks activity in certain hard
goodslines of importance in the Seventh District, including steel, farm
machinery, and construction machinery, had been reduced further.
The
District had been affected more than the nation as a whole by cutbacks in
output, as indicated by the fact that in the four weeks ended May 7 new
claims for unemployment compensation in the five-State area were 50 per
cent above last year, compared with a 25 per cent increase nationally.
For the four post-Easter weeks ended May 14, department store sales were
5/24/60
-26
only slightly above last year, both in the country and in the District.
For the final two weeks of this period, the District showed declines from
last year, possibly accounted for by cold and rainy weather this year and
excellent sales last year.
The analyst for the nation's largest retailer of general merchandise
found recent trends "confusing," Mr. Allen said.
However,
this analyst
continued to look for a good year-to-year rise and believed that the use of
credit by consumers was still
relative to cash sales.
moderate in the aggregate and could expand
Business and financial circles continued to view
the future with confidence but without enthusiasm.
With few exceptions,
capital spending plans were being carried through.
The prospect of shrinking
profit margins, naturally enough, was cited by some firms as the reason for a
high level of capital outlays.
railroads,
and food processing.
Examples were found in petroleum, chemicals,
The Purchasing Agents of Chicago continued
to report that deliveries of goods were speeding up, and more and more of
them found that inventory reduction programs had been completed.
to be the case in steel, as an example.
That seemed
The steel industry nationally was
operating at 72 per cent of capacity in mid-May.
In Chicago the rate had
been a point or two higher than the national rate, and in Detroit operations
had been maintained near capacity.
Contacts in the industry now estimated
that the second quarter rate would average 72 per cent, the third quarter 69
per cent, and the fourth quarter in the 80's.
Auto production continued to increase, Mr. Allen noted, with last
week's output estimated at 156,000 as against 146,000 in the prior week.
5/24/60
It
-27.
appeared that May production might exceed 623,000,
called for 628,000 assemblies.
and June schedules
That meant that despite good sales-- April
sales and early May sales were the best since 1955--inventories would
continue at a high figure at least through June.
On May 10 they were
1,042,000 units,
Production in
a record high for the industry.
quarter was scheduled to drop to 1,000,000 cars--450,000 in
in August, and 300,000 in September.
the third
July, 250,000
The assembly lines would start to go
down in July, with most of the down time coming in August.
Compact car
changes reportedly would be negligible, so on those lines the changeover
time would be the shortest on record.
to get out the new models,
And manufacturers would work hard
so September production could run well over the
300,000 projection.
Mr. Allen pointed out that in
passenger cars delivered in
third of the total
the first
for the year.
been exactly one-third.
If
the past several years the number of
four months had been just about one
In four of the past seven years it
that relationship should prevail in 1960,
number of new car deliveries would be just under 6,300,000.
had
the
With five or
six hundred thousand imports, total deliveries would be at about the 6-3/4
million level that conservative forecasts suggested at the beginning of
the year.
With regard to the financial picture in the District, Mr. Allen
said that many of the larger banks were in
relatively,
a tight position, at least
the reason being disparity of loan trends.
So far this year
5/24/60
-28
the business loans of weekly reporting member banks in Chicago had in
creased by 7 per cent,
in Detroit by 10 per cent,
in Indianapolis by 13
per cent, in Des Moines by 15 per cent, and in Milwaukee by 20 per cent.
In New York there was a decline of 2.3 per cent.
Excluding New York and
the five major Seventh District cities he had mentioned, business loans
in
the rest of the country increased by 3 per cent.
detailed analysis,
categories,
the disparity seemed to lie
chiefly public utilities,
in
Without going into a
loans in nonmanufacturing
which declined in New York and increased
rather generally elsewhere throughout the country.
Mr. Allen said that in view of the conditions in the Seventh District
that he had mentioned,
this time.
he would not favor a change in the discount rate at
Mr. Thomas had suggested that the discount rate,
at its
present
level, might be a deterrent to credit extension, but this did not appear to
be the case in the Seventh District.
For the next three weeks, Mr. Allen
suggested continuing to aim at a zero level of net borrowed reserves,
Again having in
though he would not object to $100 million either way.
mind conditions in
present form.
its
al
the Seventh District, he would leave the directive in
In his opinion,
the reference in the directive to guard
ing against excessive credit expansion was appropriate.
Mr. Leedy said that financial and economic indicators in the Tenth
District corresponded generally to those elsewhere in
in
the nation, although
some areas the indicators were not quite as favorable as for the country
as a
hole.
This was true, for example,
with respect to retail sales, where
5/24/60
-29
the Tenth District was one of those on the minus side this year.
had been a pronounced decline in demand deposits.
There
While unemployment
compensation claims were lower than earlier this year, they were still
at a higher level than last year.
Mr. Leedy indicated that he continued to be concerned about the
money supply and the fact that, notwithstanding the program followed in
recent weeks to provide some ease in the reserve position of the banks
and in the credit picture, the System was not getting the results that
might have been anticipated.
The fact that the effects of the breakdown
of the Summit Conference could not yet be fully measured must be taken
into account.
From the analysis presented by Mr. Noyes, there apparently
was not much to be feared as far as Governmental expenditures were con
cerned, but the effects of recent developments on the private sector of
the economy were yet to be determined.
The performance of the market
seemed to him to have been quite reassuring, but whether developments yet
to come and further appraisal of what had happened might set off another
movement in the direction of inflation remained to be seen.
Mr. Leedy said he would be hesitant to suggest that the System
should be moving very much further in the direction of ease or that any
immediate step should be taken on the discount rate.
Nevertheless,
was concerned about the matters to which Mr. Thomas had referred.
he
The
penalty feature of the discount rate and the gyrations in the bill rate
indicated to him that the present discount rate level might be operating
5/24/60
-30
to defeat, or at least retard, obtaining the results that had been sought
in the program of providing additional reserves.
He would favor continu
ing to make some moderate additions to reserves and, recognizing the diffi
culties involved in attempting to fix a target in terms of net borrowed
reserves, he would leave to the Management of the Account considerable
latitude in continuing to conduct operations in accordance with that
objective,
even if
this meant creating some amount of net free reserves.
At the same time, he would feel that if,
by the time of the June meetings
of the directors of the respective Reserve Banks, there had not been any
developments, or more evidence than now existed, to indicate that the events
of the past week portended something substantial in the way of inflationary
bias, consideration might be given to a change in the discount rate.
Mr. Leach reported that Fifth District business activity had expanded
moderately in recent weeks, reflecting a pattern of seasonal changes and
normal growth.
There was virtually no evidence of either speculative expansion
or cyclical contraction.
District growth was reflected in the good volume
and diversity of industrial and commercial building projects planned and in
process.
Seasonal strength was evident in the District's declining rate of
insured unemployment,
in the appearance of new activity in textile markets
while backlogs were still
substantial,
and in lumber market improvements.
Existing backlogs of furniture manufacturers were estimated to be equal to
3-1/2 weeks'
production, which was considered fairly strong.
Cigarette manu
facturing companies were experiencing good sales and earnings, while bituminous
5/24/60
-31
coal production improved in April and was one per cent above a year ago.
On balance,
the District farm situation continued to improve, although
unseasonably cool weather had made necessary the replanting of considerable
cotton acreage.
At Fifth District banks, Mr. Leach said, loans continued to rise
more than seasonally.
During the past three weeks,
they had increased by
a larger percentage than during any corresponding period since 1955.
The
discount window continued active and banks had been net purchasers of
Federal funds.
With respect to open market operations,
Mr. Leach said he would
continue to maintain the present posture and not lean in either direction.
Any further easing might invite trouble, and maintenance of the status quo
should provide such reserves as were needed to support economic growth.
He
Developments in the
would expect net borrowed reserves to be around zero.
past three weeks had not caused him to change his opinion as to the discount
rate; he would prefer to stand pat for the time being.
As he had said before,
he felt that the expression "while guarding against excessive credit expansion"
had been inappropriate for several weeks and that it
the directive.
should be omitted from
Nothing in today's economic report made him fearful of in
flation in the immediate future.
Mr. Mills said the facts that the level of outstanding Federal
Reserve credit was no higher than a year ago, the level of required reserves
was lower, and the velocity of the turnover of money was maintained at a
5/24/60
-32
high rate convinced him that the money supply continued to be under heavy
pressure and accounted for the fact that the money supply remained at a
figure below a year ago.
In the light of those facts, it
seemed to him
that the Federal Reserve System was called upon to provide additional
reserves through some vehicle that would help to sustain the increase in
gross national product and the higher level of personal income, to the
end that, it
would be hoped,
the expansion in economic activity being
looked for in some areas would be achieved.
Listening to the discussion
around the table, he was impressed that there were so many who seemed to
feel that the System was groping in the dark for an understanding of the
financial situation, and particularly the factors that affect the commercial
banking system in the utilization of the reserves supplied to it.
his speculation as to the reasons for the perplexity, he thought it
To add
not
improbable that in hindsight attention would be focused on the attitude of
the commercial banks,
positions.
as a reflection of their investment and lending
Mr. Thomas had developed the imponderables relative to the
Federal funds situation and, more importantly, an area that deserved much
greater investigation and analysis,
namely, the volume of bank borrowing
that originates outside of the Federal Reserve Banks and the Federal funds
market.
It
was his impression that the volume of such borrowing was tend
ing to increase, that it
had moved fast into the reserve city banking
picture, and that it was now moving rather rapidly into the country bank
sector, particularly in
the case of country banks that found themselves
5/24/60
-33
handicapped in meeting the loan demands of their communities in
the face
of a leveling-off or loss of deposits and were turning as a consequence
to borrowing from their correspondent banks,
since Regulation A properly
does not encourage more than temporary borrowing from the Federal Reserve
Banks.
It
was his impression that there was a backing up of general borrow
ing demands from the country banks to the reserve city banks,
a depressive influence on their credit activities.
fit--and he believed it
If
the System should see
would be advisable--to supply additional reserves
and bring negative free reserves down to the zero level,
about some free reserves,
reserves,
thus exerting
he considered it
or perhaps to bring
doubtful that the effect of those
as they reached the commercial banking system, would be other than
beneficial,
leeway in
for he felt
that the commercial banking system required some
order to meet a reasonable loan demand that was reaching the banks.
As that loan demand was pressing against their loan-to-deposit ratios,
banks were not encouraged to expand credit aggressively.
reserves were more freely available,
in
loans,
In
the
consequence,
if
one might reasonably expect some increase
and beyond that an expansion of holdings by banks of short-term
Government securities.
logical easiness in
This in
turn would afford the banks a certain psycho
their attitudes and give them less discomfort about their
high loan-to-deposit ratios.
Parallel to a development of that sort--and the
symptoms might already be appearing at the New York City banks--he thought it
likely that the commercial banks would act to put their houses in
reduce their
outstanding credit commitments,
order and
while at the same time meeting
5/24/60
-34
the necessitous demands for credit that were properly brought before them.
In other words, such a dovetailing of influences--a reduction of commitments
and a reduction of loans in some areas while, on the other hand, the banks
justifiably and properly serviced credit demands that commercial banks have
an obligation to meet--might bring about a proper increase in the level of
commercial bank loans while at the same time the banks were curtailing their
credits in other areas.
Thus, there was not likely to be the kind of credit
expansion that would arouse concern from the standpoint of inflationary in
fluences.
In short, he saw little need to be concerned that an increased
supply of reserves would spark any expansion of bank credit that would be
other than helpful to the economy at the present time.
Mr. Mills noted that in countries abroad, particularly the United
Kingdom and to a somewhat lesser extent, perhaps, Germany, the Low Countries,
and Japan, the forces of business expansion appeared to be approaching a point
that was requiring more aggressive attention from the monetary authorities.
It seemed to him that at some point not too far in the future the effects
of those restrictive policies would be reflected in United States exports
and that the volume of exports might fall to a degree.
If and when that
came about, it would be a matter of serious concern in the United States,
because along with that development there were reasonable possibilities that
the lack of aggressive expansion of domestic economic activity would be
followed by a substantial contraction of imports.
that it
might be advisable if
Accordingly, he suggested
the economic staff would develop some projections
5/24/60
-35
that might reveal the extent to which a contraction of imports could proceed
without producing a reversal in the dollar and gold positions of friendly
neighbors and compelling a flow of gold to this country that might be em
barrassing to them.
In view of the substantial time lag from the date of
origination of export and import transactions to their reflection in balance
of-payment statistics, he also suggested that it
would be desirable to obtain
some sense of what was going on in both domestic and foreign business
communities as to forward commitments that in due course would affect the
international balance of payments.
Mr.
Mills said he would not be inclined to favor a reduction of the
discount rate until about the time of the next Committee meeting,
If,
at least.
by that time, additional reserves were supplied in reasonable quantity,
the System might be in a better position to assess the impact of those
reserves on the financial markets.
He would not change the directive at this
time.
Mr. Robertson said that in view of the international situation and
in the absence of any strong trends domestically,
either up or down, he
would agree with those who had spoken in favor of maintaining present policy
for the time being, neither easing nor tightening.
he would consider quite neutral.
It was a position that
He was grateful to Messrs. Thomas and Irons
for the suggestions they had made with regard to the discount rate and vault
cash.
He had the feeling that by the time of the next Committee meeting
consideration perhaps should be given to a change in the discount rate,
5/24/60
-36
depending entirely an what happened in the interim.
He also felt that
there should be exploration of the proposal of Mr. Irons with respect to
supplying reserves through instruments of policy other than open market
operations in a way that would scatter them throughout the country.
Mr. Shepardson expressed the view that the economy, in general,
seemed to be moving along in satisfactory fashion.
Thus far, there had
been no evidence of undue disturbance because of recent international
developments,
although some uncertainty was bound to exist.
of the May 3 meeting,
At the time
Mr. Shepardson recalled, he had the feeling that by
this time serious consideration should be given to a change in the discount
rate,
still
Because of the current uncertainty, however, he was not sure.
He
thought there would be some advantage in a change in the rate, but
in view of the present situation it might be appropriate to defer consideration
of a change for some little
period.
He felt that the discount rate, at its
present level, was having an effect on the distribution of funds, as Mr.
Thomas had pointed out, and the lack of growth in
to give him some concern.
he believed that it
the money supply continued
If no change was to be made in the discount rate,
would be desirable to continue to supply reserves through
open market operations, looking toward a zero level of net borrowed reserves,
plus or minus.
This would mean reaching somewhat further in the direction of
supplying reserves than contemplated by the consensus, as he recalled it,
the May 3 meeting.
at
5/24/60
-37
Mr. Shepardson commented that, like Mr. Leach, he had felt at
the past two meetings that it
might be well to change the directive to
eliminate the portion of clause (b) having to do with guarding against
excessive credit expansion.
He still
thought such a change would be
appropriate, with perhaps a substitution of language along the lines
suggested by Mr. Johns at the May 3 meeting.
Mr.
King noted that those who had spoken today apparently were in
general accord.
His own thoughts, he said, were in line with those ex
pressed by the group as a whole.
In terms of net borrowed reserves, he
felt that the Committee should aim at zero and try to work in that general
area.
Three weeks ago, Mr. King recalled, he had said that he would be
inclined to approve a change in the discount rate if a majority of the
Reserve Banks wanted to move on the rate.
to feel that it
At present, he was inclined
would be better to defer such action for some time, at
least, and reconsider the matter in the light of circumstances as they
might develop a few days in the future.
Like Mr. Irons, he believed that
the effects of open market operations had not reached out very far from
the New York City banks.
Mr.
Irons in
In his opinion, therefore, the suggestion of
regard to a further release of vault cash was worth exploring.
In further comments, Mr. King repeated that as of today he would
leave the discount rate alone.
He felt that the System would have been in
5/24/60
-38
a better position to have moved on the rate three weeks ago.
he thought the System would be well advised to sit
At present,
tight on the rate and
to continue easing the reserve position of the banking system through open
market operations.
As he had indicated, he would try to reach a zero level
of net borrowed reserves.
He would favor deleting from clause (b) of the
directive the phrase having to do with guarding against excessive credit
expansion.
Mr. Fulton said that in the Fourth District there were a few
favorable developments,
in the output of coal,
including a high level of new auto sales, an increase
and a higher volume of construction than last year,
with the increase largely in the industrial field.
Unemployment had declined,
but not as much as seasonally, and some pockets of substantial unemployment
remained.
The situation with respect to heavy industries might be character
ized as one of "deteriorating stagnation."
Nationally, the rate of steel
production for this week was projected at about 67 per cent of capacity; in
the District the projections ranged from 41 per cent in Youngstown to 76 per
cent in Cleveland, where the rate was admittedly high and was expected to go
lower.
At present, expectations were that during the holiday week of July 4
the rate of steel production might go as low as 50 per cent nationally.
New
orders were deteriorating rapidly and were coming in at a rate of only about
50 per cent of capacity.
Steel men claimed that the inventory liquidation
among their customers was the most rapid in their experience.
know
when the situation would level off, although it
They did not
was felt that the
5/24/60
-39
automobile industry might begin to order in the latter
the case of some steel customers,
it
part of July.
In
was indicated that the use of computers
was enabling them to control inventories more precisely than in the past.
Thus, they would tend to keep inventories at a minimum, expecting that the
mills would be able to deliver promptly whatever was required.
In the
next ten days, several thousand workers at one mill were scheduled to be
laid off because of a declining order book.
Mr. Fulton commented that an unfavorable inventory situation prevailed
among the auto parts manufacturers, who had scheduled their operations in line
with the substantially higher rate of output anticipated by the auto companies
earlier in the year.
Now that the auto companies were dealing on a 20-day
inventory basis instead of a
4
5-day basis, these parts were being carried by
the manufacturers and their operations were quite low.
Appliances were over
stocked, and machine tools and heavy machines were not moving well.
The orders
that had been anticipated incident to plant and equipment expenditures had not
appeared; there were, reportedly, lots of plans, but there were few firm orders.
All in all, Mr. Fulton said, the picture in the Fourth District was
not bright for the next couple of months, at least.
Mr. Fulton expressed the view that more reserves were needed, that
the supply had been starved to a considerable degree, and that the aim should
be a situation from zero up to $100 million of free reserves.
that net borrowed reserves were appropriate at this time.
cultural) banks particularly were in
He did not feel
The country (agri
a tight situation, and there was a good
5/24/60
-40
demand for loans.
If
the loan demand was not satisfied to a degree,
a
psychology might develop that could be cumulative in its effect; and if
such a psychology developed, it might be difficult to reestablish loan
demand once it had stopped.
Mr. Fulton agreed with Mr. Irons that the distribution of reserves
was not good and that an adjustment of reserve requirements by way of per
mitting additional vault cash to be counted as required reserves might be
a highly appropriate means of achieving a better distribution.
It
appeared
to him from the projections that substantial quantities of reserves would
be needed in
the near future,
and it
might be appropriate to provide them
in this way.
Mr.
Fulton pointed out that borrowings of member banks from the
Reserve Banks had been at a rate around $500 million for some time,
and
he noted that the banks probably would want to get out of debt to the
Federal Reserve rather than employ their funds for lending purposes when
additional reserves became available.
The present degree of restraint
seemed to him a little too strong in the light of what he viewed as a
deterioration in the psychology of business.
For reasons already stated
by others, he would not change the discount rate at this time.
he felt
that it
However,
would be appropriate to change the directive by deleting
the portion of clause (b)
credit expansion.
that referred to guarding against excessive
5/24/60
41
Mr. Bopp said that conditions in the Third District were not as
good as nationally, and the national movement had been described as side
ways.
Turning to the discount rate, he reported that the directors of
the Philadelphia Bank, at their meeting on May 5,
the discount rate should be reduced.
felt unanimously that
They went along unanimously with
continuing the present rate only as an expression of confidence in manage
ment, perhaps,
time.
and because the Treasury was in the market at about that
At the meeting last Thursday the directors again voted unanimously
to continue the existing discount rate, but only because of the inter
national situation, which still
required interpretation and might have
led to a revival of inflationary pressures.
The directors felt unani
mously that in the economy as a whole there were very few bottlenecks.
Looking at plant capacity, employment levels, industrial production,
and prospects for the immediate future, they concluded that there was
adequate capacity to permit a significant increase in output without the
danger of strong inflationary pressures developing.
appraisal of the domestic economy,
On the basis of this
they felt that a discount rate reduction
would be appropriate.
Mr.
Bopp said that he agreed with the directors.
Although he
appreciated the possible results of recent international developments,
it
appeared as though the country had taken those developments pretty
much in
stride.
If
a reduction were made now in the discount rate and
inflationary pressures should revive,
the System could always move in the
5/24/60
42
other direction.
A reduction would indicate that the System was flexible
and did not always tend to lean in the direction of tightness.
After indicating that he had been impressed by the analysis presented
by Mr. Thomas concerning the sources of funds,
picture that he would like to see develop.
reserves,
rate,
Mr. Bopp outlined the general
This embraced a position of free
the Federal funds rate periodically, at least, below the discount
and member bank borrowings less than $500 million.
He
would recommend
reducing the discount rate one-half point, and he would delete the portion
of clause (b)
of the directive which referred to guarding against excessive
credit expansion.
Mr. Patterson reported that Sixth District indicators showed signs
of some improvement in business activity although there were many mixed
movements.
Nonfarm employment was up in April and department store sales
doubled the rate of increase for the nation as a whole.
While construction
employment was down in March, the fact that awards increased in January and
February pointed to possible improvement in construction employment.
late cold spell resulted in
estimated damage to the cotton crop of $4 to $6
million, but the farm production outlook vas still
wages were higher than last
The
spring,
relatively good.
although rates were still
below farm wages elsewhere in the nation.
Farm
9 per cent
Farm marketings were being main
tained at a higher level in the District than nationally.
Turning to District banking developments,
Mr. Patterson said that
lending rose in April and then declined slightly early in May.
5/24/60
-43
Deposits rose modestly in April.
Borrowings of member banks in relation
ship to the System total were still
high.
Mr. Patterson said that few complaints had been heard from
commercial bankers with regard to monetary policy.
However, many bankers
had expressed the view that the legislation passed by Congress last year
to permit the carrying of vault cash as part of required reserves was
intended to produce some benefit to the banks and that they had gotten
little
from the present allowances.
Mr.
Johns said he continued to hold the views that he had expressed
at the May 3 meeting.
He thought it
highly desirable for such additions to
be made to the supply of reserves as would in time, it
reflected in
an increase in the money supply.
might be hoped, be
In this connection, he wished
to make the point, as he had done repeatedly on previous occasions, that in
his view the use of net borrowed reserves as a proximate objective of monetary
policy might lead to results that were not wanted and not intended.
felt
it
had done in recent months,
This he
for the reason, primarily, that a net
borrowed reserve target leaves out of account the question of what the banks
do with the reserves that are available.
The evidence seemed quite clear,
as Mr. Thomas had pointed out, that when the reserves are used to reduce in
debtedness to the Federal Reserve Banks,
result in
the System does not obtain the
total reserves or the money supply for which it
is
aiming.
Mr. Johns said that in recent days banks in the Eighth District
had decreased somewhat their
use of the discount facility,
measured both
5/24/60
-44
in terms of number of banks borrowing and in dollar amount.
felt
it
However, he
would be quite erroneous to construe this as evidence that the
banks felt
easier or were in fact in an easier position.
The disposition
of Government securities continued, but there was also another factor
involved.
Some of these banks had been rather steady customers at the
discount windows of the Reserve Bank.
In some cases,
there had been
tactful discussion with those banks of their situation and plans for the
future; in
other cases,
the banks well knew the time was approaching when
they might expect similar approaches from officers of the Reserve Bank.
This was particularly true in Memphis,
where the cotton financing banks
continued to be under pressure but had gotten out of debt to the Reserve
Bank.
Mr. Johns added that he wished to underline what Mr. Thomas had
said about the indebtedness of banks to other banks and to nonbank lenders.
This had been observed for quite a time.
Mr.
In the circumstances,
Johns said, he would like to see in
structions issued to the Desk that would bring about an increase in
supply of reserves,
increases in
the total
in the hope that sooner or later this would result in
the money supply.
He again wished to caution that if
the
Committee adhered too closely to a net borrowed reserve target this objective
might be defeated.
Three weeks ago,
Mr.
Johns recalled, he had expressed the view, for
reasons to which Mr. Thomas referred today, that the discount rate ought to
be reduced, and he had suggested a reduction of one-half point as soon as
5/24/60
-45
possible.
This was not intended,
however, to be taken as meaning that a
reduction should necessarily be made right at that time.
At the meeting
of the directors of the St. Louis Bank a few days later, he did not recom
mend a reduction,
for he had in mind the traditional policy of even keel
during a period of Treasury financing.
Similarly, when he said today that
the discount rate was in need of downward adjustment, he was quite aware of
the fact that there had been a radical change in
Therefore,
the international situation.
although with some regret, he would be quite prepared to accept a
further deferment of action on the discount rate rather than to take such
action too hastily without full
situation.
realization of the impact of the international
For his own part, he was inclined to think that the impact on the
economy would not be too great and that before long the System might see its
way clear to make the downward adjustment of the discount rate that he thought
was needed.
Mr. Johns said that he would still
in
like to see the directive changed
the manner he had suggested three weeks ago,
so as to remove what he
considered undue and inappropriate emphasis at this time on guarding against
excessive expansion of credit.
Mr.
Balderston said the rolling prosperity that he thought descriptive
of the economy three weeks ago seemed to be continuing to roll, and on a high
plateau.
However, he did not see ground ahead that was higher than the
plateau on which the economy had been travelling.
rental vacancies were up,
Steel production was down,
and unemployment rates were unsatisfactorily high
5/24/60
-46
in relation to the current phase of the business cycle.
Consequently,
believing as he did that the System should take action earlier rather
than later, even though it might not want to make overt moves, he would
favor a change in the directive.
It
seemed to him three weeks ago that
monetary policy had changed, and that it
was being changed even more at
that time.
would be appropriate to make one
Accordingly,
of two changes:
he felt that it
either to eliminate from clause (b) of the directive the
phrase "while guarding against excessive credit expansion" or to substitute
some modification of clause (b) along the lines suggested by Mr. Johns at
the May 3 meeting.
He was inclined to favor the latter alternative and
therefore would like to suggest an amendment of clause (b)
so as to provide
for operations with a view "to fostering sustainable growth in economic
activity and employment while increasing moderately the total reserves of
member banks."
With regard to the target for open market operations, Mr. Balderston
said he would consider a target of free reserves of at least $100 million
appropriate.
He was deeply concerned that the efforts the Committee had
been making to increase the money supply had thus far proved ineffective.
His conclusion was that the loaned-up condition of the banks and the
expectation of heavy loan demands upon them during the fall had created a
psychology among bankers that tended to make the current level of reserves
operate in a different fashion than had been the case some years ago when
the ratio of loans to deposits was lower.
In short, he was not sure that
5/24/60
-47
a zero level of net borrowed reserves would increase the money supply
promptly, and he felt that the System must seek some results promptly.
He would, therefore, like to see free reserves at once, and in the amount
of at least $100 million.
He was rather impressed with the suggestion of
Mr. Irons that another move might be made to increase the portion of vault
cash countable as required reserves.
He was not certain whether that should
be done during the next month or until the System found it
change the discount rate.
Nevertheless,
appropriate to
he thought the idea was well worth
studying.
Chairman Martin said it
seemed to him that the only added starter
at this time, as compared with the May 3 meeting, was the international
situation.
It
was too early to attempt to evaluate with any degree of
certainty the effects of the breakdown of the Summit Conference.
However,
it was his feeling that the evolution of Federal Reserve policy was quite
clear; it had been moving in a clear direction.
If he understood correctly,
nobody today had indicated a desire to tighten, and the question, therefore,
was how to increase the money supply, and when, under present conditions.
The Chairman said he did not think there was evidence of any strong
upward pressure on prices at the moment.
He thought the Committee could
find some satisfaction in the way it had been increasing reserves in the
market, but there was reason for concern about the lack of response of the
money supply.
it
In his opinion,
this could not be corrected overnight, but
was necessary to face up to some fundamentals.
The most significant
48-
5/24/60
unexplained item in the first
decline in
half of the year, to date, had been the
interest rates, that is,
the way it
came about.
There had
as yet been no satisfactory explanation of that development, but it
convinced him that something had been going on in the economy.
While
he did not want to sound too bearish, his choice of one word to describe
the present situation would be "saturation."
As he saw it,
the economy
was in a period of temporary saturation, of which the automobile market
was an indication.
Despite good sales of cars, some unemployment might
be seen in that and other areas before long, because for the time being
the market was saturated.
A new demand must be developed for some products.
In certain respects, Chairman Martin said, he thought the System
must reorient its thinking.
payments disturbed him.
The situation with respect to the balance of
He was not optimistic about the longer-run aspects
of the balance of payments,
and he was not completely convinced that one
could totally ignore world money markets.
in 1957 and 1958 would be disastrous.
To pursue any policy such as
There could not be moves of that
sort, where the only significant development in the economy was a decline
in interest rates.
Looking back at the recession of 1957 and 1958, that
was about all that occurred.
in some areas,
Instead, there must be adjustments in prices
although admittedly this would be painful.
mentioned before,
As he had
the profit margin was becoming more of a problem.
Chairman Martin recalled that he had been firm at the May 3 meeting
in saying that he thought it
would be a mistake to adjust the discount rate.
5/24/60
49
Basically, he believed that the international situation was a disturbing
element to business planning,
and not the reverse.
sidering plant and equipment expenditures,
If
a firm were con
and the development of markets,
the management would not be thinking primarily of inflationary consequences
at this particular juncture.
Instead, the thinking would be likely to
center on the prospect of an extension and intensification of the cold war,
with no prospect of a break in the situation for some time.
In these circum
stances, such a firm might well be inclined to be more cautious and less
likely to spend.
This, Chairman Martin added, was a tentative judgment, and
the matter could be argued on both sides of the fence.
He was merely throwing
this out as his own tentative thinking.
After referring to the gyrations of the bill rate, the Chairman said
that the situation seemed to call for some adjustment of the discount rate.
It
would be preferable to have another ten days, or possibly two weeks, to
digest the international news before taking overt action.
However, net
borrowed reserves were already down to around the zero level.
reserves were indicated, on average,
In fact, free
for the current statement week.
If
it
was the intention of the Committee to supply additional reserves--and the
sentiment around the table today so indicated--this would put more pressure
on the discount rate as time passed.
While he did not know at what point
the supplying of additional reserves would take hold, the market process was
perfectly clear.
It
to face up to that.
was only a matter of time before it
would become necessary
5/24/60
-50
In his opinion, Chairman Martin said, the System should continue
to feel its way; the odds were all with the System.
He found himself in
fluenced by the sentiment around the table in favor of moving,
cautiously,
in the direction of supplying additional reserves.
slowly and
At some
point the money supply would begin to take hold, and then the System could
consider what ought to be done.
In further comments,
the Chairman alluded to the difficult problems
confronting the System in the psychological area.
There had recently been
speculation, he noted, regarding a reduction of margin requirements.
He
did not know what the manifestations of that would be, but there would be
a difficult problem of explanation.
In either a further release of vault
cash, a possibility to which he had been attracted for some time, or a
direct cut in reserve requirements,
there would be a difficult problem of
explanation because the broad problem was not generally understood.
A lot
of people who favored an easy money policy some time ago were now for a
tight money policy because of the problem of the balance of payments.
In
his opinion, they were grossly exaggerating the impact, but without doubt
there were cross currents and swings.
Chairman Martin repeated that he felt the System had been moving
in the right direction.
It
would be helpful to have a better chance to
digest what was coming out of the breakdown of the Summit Conference and
the effects on the domestic economy.
were now rather close at hand.
At the same time, the summer doldrums
In his view, the Committee would be justified
5/2/60
-51
on that basis alone in moving in
the direction of supplying additional
reserves.
Chairman Martin then said that if
open market operations were going
to move into the direction indicated by the consensus it
to make good sense to change the policy directive.
a suggestion,
as had several others.
would seem to him
Mr. Balderston had made
He (Chairman Martin) had before him
a suggestion of Mr. Thomas, which was that clause (b) be amended to provide
for operations with a view "to fostering sustainable growth in economic
activity and employment by providing reserves needed for moderate credit
expansion."
it
This, he noted,
would be a simple, straightforward statement;
would not state how much would be done or in any way say that the
Committee would necessarily do anything or change anything.
The Chairman then called for discussion and, in the light of a
comment by Mr. Shepardson, the suggestion was made that the word "bank"
be inserted just prior to the words "credit expansion,"
Mr. Robertson noted that an alternative would be to strike the
language of the existing clause (b)
after the word "employment"
so that
the clause would read "to fostering sustainable growth in economic activity
and employment."
Mr. Shepardson then moved that clause (b) be amended to read "to
fostering sustainable growth in economic activity and employment by providing
reserves needed for moderate bank credit expansion",
seconded.
and this motion was
5/24/60
-52
Mr. Hayes noted that Committee policy had been changing only
gradually and said it
change gradually.
would be his preference that the directive also
The thing that some members of the Committee had been
wanting to get rid of was the portion of clause (b) relating to guarding
against excessive credit expansion.
He wondered whether the proposed
change might not represent too much of a jump at one meeting, and whether
the Committee should not remain on more neutral ground for a while.
Mr. Johns asked what a more liberal supplying of reserves was in
tended for, if not to provide reserves needed for moderate bank credit
expansion,
and Mr.
Irons stated that his objection to the shorter form
of clause (b) mentioned by Mr. Robertson would be on the ground that the
language was so broad it
could almost never be changed.
Chairman Martin suggested that each of these statements should
be looked at in the context of what the Committee had been doing in the
past several weeks,
following which Mr. Hayes said he had been concerned
for a long time about the fact that clause (b) typically contained long
run goals as well as more immediate objectives.
He suggested that appropriate
members of the Committee's staff might be asked to work on a method of
separating the two parts of clause (b); that is,
the more permanent part
and the temporary objective.
Chairman Martin replied that this would represent a somewhat
range project.
longer
He felt that the Secretary of the Committee could well be
asked to work on improving the form of the directive; that is,
the way in
5/24/60
-53
which the directive is
cast.
However,
for the immediate purpose of the
meeting today, the question was one of deciding whether clause (b) of
the existing directive should be changed in the manner that had been
suggested.
The Chairman then read again the proposed change in clause
(b) that had been moved and seconded.
Turning to the level of reserves, Chairman Martin said it
seemed
clearly to be the consensus that the Committee should not tighten and that
it
should continue in the direction of a modest increase in the supply of
reserves.
In
this connection,
Mr.
been to provide an increase in
Shepardson clarified that his thought had
the supply of reserves.
earlier statement, he had had in
was in
In making his
mind that the target at the May 3 meeting
terms of a range from $100 million of net borrowed reserves down
to zero.
If
it
would make his position clearer, he definitely contemplated
some further increase in the supply of reserves.
Mr. Allen said that, as he understood it,
the consensus at the
May 3 meeting was in terms of trending toward zero, and Chairman Martin
said the suggestion today would be to carry that a little
further.
Chairman Martin then referred back to the change in the directive
that had been moved and seconded, and inquired whether anyone wished to
record a negative vote.
There being no such indication, he stated that
the directive would be approved in
such form.
He also stated that the
consensus would be to trend slightly further in the direction of providing
reserves.
5/24/60
-54
Mr. Balderston inquired whether the consensus would be interpreted
by the Desk as meaning net free reserves rather than net borrowed reserves,
and Mr. Rouse said he thought this was understood.
Accordingly, the Committee voted unanimously
to direct the Federal Reserve Bank of New York
until otherwise directed by the Committee:
(1) To make such purchases, sales, or exchanges (including
replacement of maturing securities, and allowing maturities to
run off without replacement) for the System Open Market Account
in the open market or, in the case of maturing securities, by
direct exchange with the Treasury, as may be necessary in the
light of current and prospective economic conditions and the gen
eral credit situation of the country, with a view (a) to relating
the supply of funds in the market to the needs of commerce and
business, (b) to fostering sustainable growth in economic activity
and employment by providing reserves needed for moderate bank
credit expansion, and (c) to the practical administration of the
Account; provided that the aggregate amount of securities held
in the System Account (including commitments for the purchase or
sale of securities for the Account) at the close of this date,
other than special short-term certificates of indebtedness pur
chased from time to time for the temporary accommodation of the
Treasury, shall not be increased or decreased by more than $1
billion;
To purchase direct from the Treasury for the account
(2)
of the Federal Reserve Bank of New York (with discretion, in
cases where it seems desirable, to issue participations to one or
more Federal Reserve Banks) such amounts of special short-term
certificates of indebtedness as may be necessary from time to
time for the temporary accommodation of the Treasury; provided
that the total amount of such certificates held at any one time
by the Federal Reserve Banks shall not exceed in the aggregate
$500 million.
With further reference to the discount rate, Mr. Shepardson said
he hoped that as the situation clarified, particularly the international
situation,
and unless there was an unfavorable turn of events, consideration
might be given to a change in the rate before the next Committee meeting.
5/24/60
-55
Mr. Hayes noted that the discount rate was not within the scope
of the consensus reached at Open Market Committee meetings, and Chairman
Martin agreed that the role of the Committee was purely advisory, with
neither the Board nor the Presidents being committed.
Mr. Hayes then said he thought it
proper to emphasize that a
large majority of those who commented today had indicated that they
would not favor moving on the discount rate now.
Also, he wished to
point out that advance refunding by the Treasury of the 2-1/2 per cent
bonds of 1961 might be in the wind.
As of now, there was a question
whether this might be done before the next Committee meeting.
mentioned again,
He also
as a factor to be considered, that the System should
have in mind the position of friendly foreign countries; he felt that
this factor deserved some weight.
Chairman Martin said that without question this factor was involved.
He added, however, that the System could not let the problems of foreign
and Mr. Hayes said that he granted the
countries compound its own problems,
point.
Chairman Martin repeated that he thought the role of the Federal
Open Market Committee in
stood.
relation to the discount rate was clearly under
Discussion within the Committee does not bind any President or
any member of the Board of Governors.
The Chairman went on to say that this was an evolving situation,
and that the System must tackle it
as it
moved along.
That was the framework
5/24/60
-56
in which it
was necessary to work at the present time.
It might be that
a week from today nobody would want to do anything on the discount rate
but that in two weeks, for example, the situation might be different.
He went on to say that the more time the System could have to digest
developments the better it
to jump prematurely.
manner in which it
would be, and that the System would not want
The more time it
could get and the more orderly a
could take things, the better off it
would be.
On the
other hand, things cannot always be ordered in a way that one would like
to see them.
The System cannot set dates and be bound by them.
Mr. Bopp commented that at a number of Reserve Banks it is the
practice of the Board of Directors to meet only once a month.
This
presented a technical problem of a complicating nature.
Mr. Hayes said he had always considered it
desirable that timing
of discount rate actions be coordinated, and that it
had been his feeling
that a consensus on the rate at the Federal Open Market Committee meetings
had been helpful in achieving this coordination.
The general feeling to
day appeared to be that a change in the rate would not be a good idea.
Chairman Martin said that the view of Mr. Hayes was well expressed.
As he had indicated previously, however, discussion of the discount rate
at Open Market Committee meetings could not be binding upon anyone.
Mr. Balderston expressed agreement with Mr. Hayes that time might
help to clarify the situation internationally in this particular field.
However, as far as Treasury operations were concerned, he noted that a
8/24/60
.57
reduction of the discount rate was a different thing from an increase.
In
the fall of 1957 the Treasury postponed a financing operation temporarily,
if he remembered correctly, because the Federal Reserve System was prepared
to decrease the discount rate, but there was only a short interval between
the two actions.
Had the System been moving in the opposite direction, it
would have been an entirely different matter.
Mr.
Bopp pointed out there are relatively short, and few, intervals
when the System is free to move on the discount rate.
If
the Treasury should
take up these intervals by advance refunding or similar operations, the
opportunities for discount rate action would become very limited.
Mr. Robertson commented that if there was to be a move on the
discount rate, that move should be made not after advance refunding took
place but before such time, and Messrs.
Balderston and Bopp expressed
agreement.
Chairman Martin suggested that the attitude of the System be one
of flexible, watchful waiting.
In a further comment, he issued a word of
caution that all those present be most careful in their conversations after
they left the room today.
Chairman Martin then referred to a memorandum from Mr. Rouse dated
May 20, 1960, which transmitted a memorandum of the same date from Mr.
Larkin, Assistant Vice President of the Federal Reserve Bank of New York,
summarizing operations under the authorization given by the Open Market
Committee at its meeting on April 12, 1960, and renewed at the meeting
5/24/60
-58
on May 3, 1960, to acquire up to $150 million of one-year Treasury bills
maturing July 15, 1960, either by outright purchase or by swapping other
Treasury bills.
Mr. Larkin's memorandum indicated that a total of $91.5
million of the bills maturing July 15, 1960, had been acquired under this
authorization,
so that total holdings of such bills, including holdings
of $13.4 million acquired by outright purchase prior to April 12, 1960,
amounted to $104.9 million.
Mr. Rouse commented that if
the Treasury was successful in
developing a better cash position so that it
when it
15,
could cut down by $500 million
came to the rollover, the present holdings of the bills due July
On the other hand the situation
1960, would probably be sufficient.
was not clear.
Therefore, he would suggest that the outstanding authorization
for acquisition of the July 15 bills be renewed.
still
Under it,
he noted, there was
leeway to acquire up to $58.5 million of such bills.
Chairman Martin inquired whether anyone had heard of repercussions
in
the market because of the transactions in the one-year bills, and no
comments were heard.
Mr. Rouse said it
was in a way rather strange that
there seemed to have been no market comment, because the swap transactions
that had been undertaken could clearly be identified in some cases as swaps.
Mr. Thomas noted that the outstanding Committee authorization was
limited to acquisition of July bills, to which Chairman Martin added that
the Desk was limited to the July bills as far as the acquisition of one-year
bills by swap transactions was concerned.
Mr. Rouse agreed, stating that,
5/2/60
-59
as far as outright purchases were concerned, it
was his understanding that
the Account had authority to acquire other issues of the one-year bills, and
no disagreement with this comment was heard.
Mr. Hayes said he supposed that at some time the Committee would
wish to consider authorizing acquisition of the one-year bills of October
17, 1960, on a basis similar to the authorization relating to the July 15
bills.
However, he thought there was no hurry to consider that matter.
Mr. Rouse expressed the view that the operation in the July 15
bills should first be completed so that the Open Market Committee might
make an appraisal as to whether it
wanted to authorize further operations
in one-year bills along the lines of the current authorization.
Thereupon, it was agreed to renew until
the next meeting of the Open Market Committee
the authorization given on April 12, 1960, and
renewed on May 3, 1960, to acquire for the System
Open Market Account either by outright purchases or
by swaps of other bills, up to $150 million of one
year Treasury bills maturing July 15, 1960. Mr.
Robertson dissented from this action to the extent
that it involved acquisition of the one-year bills
by swap transactions, as opposed to outright purchases.
It was agreed that the next meeting of the Federal Open Market
Committee would be held on Tuesday, June 14, 1960,
meeting would be held on Tuesday,
and that the succeeding
July 5, 1960.
Chairman Martin noted receipt of a letter from Mr. Hayes which
suggested that he might want to call to the attention of the members of
the Committee and the Presidents not currently serving thereon that the
-60-
5/24/60
New York Bank would welcome visits to the Desk.
The Chairman said he
would like to support this invitation to learn firsthand what was going
on at the Desk whenever visits could be worked out.
Mr. Hayes said his thinking was in
terms of rather extensive
visits, perhaps in the order of a week, during
hich members of the Committee
could sink their teeth into the operations of the Desk and see what was
actually going on there.
Chairman Martin noted that three Reserve Bank Presidents (Messrs.
Hayes,
Allen, and Mangels) had been called to testify before the Subcommittee
of the House Banking and Currency Committee that was to hold hearings in
connection with H.R. 8516, which would provide for the retirement of Federal
Reserve Bank stock.
The meeting then adjourned.
Secretary
Cite this document
Federal Reserve (1960, May 23). FOMC Minutes. Fomc Minutes, Federal Reserve. https://whenthefedspeaks.com/doc/fomc_minutes_19600524
@misc{wtfs_fomc_minutes_19600524,
author = {Federal Reserve},
title = {FOMC Minutes},
year = {1960},
month = {May},
howpublished = {Fomc Minutes, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/fomc_minutes_19600524},
note = {Retrieved via When the Fed Speaks corpus}
}