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, October 4, 1960, at 10:00 a.m.
PRESENT:
Mr. Martin, Chairman
Mr. Balderston
Mr.
Mr.
Mr.
Mr.
Mr.
Bopp
Fulton
King
Leedy
Mills
Mr. Robertson
Mr. Shepardson
Mr. Szymczak
Mr. Irons, Alternate for Mr. Bryan
Mr. Treiber, Alternate for Mr. Hayes
Messrs. Leach, Allen, and Mangels, Alternate
Members of the Federal Open Market Committee
Messrs. Erickson and Deming, Presidents of the
Federal Reserve Banks of Boston and Minneapolis,
respectively
Mr.
Mr.
Mr.
Mr.
Young, Secretary
Sherman, Assistant Secretary
Kenyon, Assistant Secretary
Hackley, General Counsel
Mr. Thomas, Economist
Messrs. Brandt, Eastburn, 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. Knipe, Consultant to the Chairman, Board of
Governors
Mr.
Keir, Chief, Government Finance Section,
Division of Research and Statistics, Board
of Governors
Mr. Patterson, First Vice President, Federal
Reserve Bank of Atlanta
10/4/60
-2
Messrs. Ellis, Ratchford, and Mitchell, Vice
Presidents of the Federal Reserve Banks of
Boston, Richmond, and Chicago, respectively
Messrs. Parsons and Coldwell, Directors of
Research of the Federal Reserve Banks of
Minneapolis and Dallas, respectively
Messrs. Arlt and Lynn, Assistant Vice Presidents
of the Federal Reserve Banks of St.
Mr.
Louis
and San Francisco, respectively
Stone, Manager, Securities Department,
Federal Reserve Bank of New York
Upon motion duly made and seconded,
and by unanimous vote, the minutes of the
meeting of the Federal Open Market Committee
held on September 13, 1960, were approved.
Before this meeting there had been distributed to the members of
the Committee a report of open market operations covering the period
September 13 through September 28, 1960, and a supplementary report
covering the period September 29 through October 3, 1960.
Copies of
both reports have been placed in the files of the Committee.
In supplementation of the written reports, Mr. Rouse commented as
follows:
As the Committee has instructed, we have been operating
primarily on the feel of the market rather than on the basis of
reserve statistics, and this has involved the insertion of over
$400 million of reserves into the market since the last meeting.
If the statistics have been helpful at all, it has been to point
up the fact that for the time being, at least, higher levels of
reserve availability have been needed to achieve the same degree
of ease in the money market that existed earlier. A primary
reason for this is the continued use of a heavy volume of credit
by Government securities dealers, whose inventories continue at
levels more than twice as large as we have come to regard as
In addition, there are indications that banks are
normal.
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putting the reserves supplied by the System to good use.
Loans have been moving upward, and at the same time banks
have been able to add somewhat to their investments. These
results, which indicate that the money supply is continuing
to grow, have taken place without any further downward
pressure on interest rates.
Between now and the end of the year the Treasury will be
involved in almost continuous financing operations. First,
the schedule tentatively calls for a refunding of the one-year
bills maturing October 17. This would presumably be through an
auction, possibly with a paydown of $500 million, so that the
amount to be bid for would be limited to $1.5 billion. The
second operation would be a borrowing of about $3 to $3.5 billion
of new cash around the third week in October, probably largely
through the auction of a June tax anticipation bill, some of the
proceeds of which could be used to make a paydown on the
October 17 bills. In the first two weeks of November, there
will have to be a refunding of the $10.8 billion maturing bonds
and certificates, of which the System Account owns $5 billion.
Whether this refunding will be done on a cash or exchange basis
will depend on the state of the market at the time of the
refunding. On top of all these activities, the Treasury is
considering whether to have another advance refunding in
the first part of December to extend some of the one-to-five
year debt into the five-to-ten-year area. A final possibility
is that the Treasury may wish to refinance part of the
Series F and G Savings Bonds maturing in early 1961 through an
exchange offering before the year-end. There are about $750
million of these obligations maturing next year.
The prospects for the Treasury's financing operations
do not seem bright at the moment, since the market has not
behaved well despite the underlying bullish influence of the
economic situation. Speculative holders, as well as most
potential buyers, are now following a "wait and see" course
in view of the many current uncertainties. Heavy schedules
of new corporate and municipal financing have also had a dampen
ing influence, along with a sizeable overhang of those issues
and the heavy inventories of Government securities in profes
sional hands. Some announcement of Treasury plans is expected
to be made later this week.
In reply to a question, Mr. Rouse said he would expect that
the Treasury announcement would relate to the refunding of the one-year
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-4
bills maturing October 17 and to the cash financing, with no mention
of the refunding of bonds and certificates maturing in November, an
advance refunding, or a refinancing of Series F and G Savings Bonds.
Thereupon, upon motion duly made and
seconded, the open market transactions during
the period September 13 through October 3, 1960,
were approved, ratified, and confirmed.
A staff memorandum on recent economic and financial developments
in the United States and abroad had been distributed under date of September
30, 1960.
With further reference to economic developments, Mr. Noyes made
the following statement:
At the mid-August meeting of the Committee, I suggested
that one's conclusions from the information then becoming
available depended heavily on the expectations which had gone
before.
This same observation seems to me to apply to most
of the facts that have emerged in the last three weeks. The
absence of a decisive movement in one direction or the other
has left both the optimists and the pessimists without clear
cut confirmation of their expectations.
Perhaps this has been
illustrated best by the rather violent movements in the stock
market in both directions.
On the plus side the increase in new orders for August
attracted particular attention. The rise in orders received
by fabricated metal producers and electrical machinery manu
facturers was especially heartening.
The very rapid increase in loans and investments at weekly
reporting member banks and the strength in the business loan
component were also widely regarded as an encouraging signperhaps more so than all of the underlying facts would justify.
I am sure Mr. Thomas will comment on these developments more
fully, but for the purpose of this analysis of business develop
ments it should be noted that the loan expansion has at least
had some favorable psychological impact and has also demon
strated that the present posture of monetary policy is such as
to permit banks to meet increased loan demands without further
sales from their investment portfolios.
News which was released shortly after the last meeting
that housing starts regained almost all of their July drop in
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August, and more recently that new construction put in place in
September was also up slightly, provides some reassurance.
On the negative side, there is
little
doubt that the in
formation on employment is the most discouraging news of recent
weeks. After seasonal adjustment, both initial and continuing
compensation claims showed a further rise in September to levels
which have heralded or confirmed downturns in economic activity
in the past.
The fact, not yet generally known, that the gross national
product was probably down slightly from the second to the third
quarter will almost certainly have unfavorable repercussions.
Continued operations in the steel industry at only a little more
than half of capacity, even as assemblies of 1961 autos expanded,
and the failure to get even a seasonal rise in ingot output from
August to September have been depressing influences. Both the
number and liabilities of business failures, as reported by Dun
and Bradstreet, have been running at or close to their postwar
highs.
In the face of this mixed--but predominantly discouraginginformation, attention has been focused more closely than ever
on final takings, especially by consumers, for clues to the
future course of business activity. From the weekly data for
department stores and the ten-day reports on sales by automobile
dealers, it appears that seasonally adjusted retail sales may
be off a little from August to September. However, the last
half of September appears to have been somewhat stronger than
the first half.
There are continuing reports of price concessions, espe
cially for durable goods, and some recent evidence that these
may be generating a consumer response. It is noteworthy that
in its August survey the Survey Research Center found a large
number of consumers who stated they felt this was a good time
to buy durable goods because of favorable price conditions.
In summary, there can be no question but that over-all
economic activity has declined and is probably continuing to
decline. It appears likely that the index of industrial pro
duction will drop another point in September, breaking out of
the 109-111 range it has maintained so far this year.
On the other hand, most of the declines so far have been
moderate. While it may be less than an even bet, it seems to
me that there is still a possibility that the current downtrend
may be reversed by the substantial easing of credit that has
already been achieved, a favorable confluence of seasonal factors,
including the seasonal shift in the Government's fiscal operations,
and improved activity in some industries, such as steel, which
have been producing below apparent consumption levels for several
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months. I might add, however, that I think this analysis
suggests that the time within which such a reversal could
occur is running out.
If the downtrend is not arrested in
the next few months--or at most before the first of the
year--there would be much less chance that we shall avoid
a deeper and more prolonged recession.
Mr. Thomas presented the following statement with respect to
financial developments:
Bank credit developments in September were in some respects
spectacular and apparently in contrast to other economic trends.
Total loans and investments--at least of member banks in leading
cities--increased more than in any other September of recent
years. The increase began in the last week of August shortly
following announcement of Federal Reserve action to supply
additional reserves and to lower discount rates. At this stage,
however, one cannot with certainty attribute these developments
to an easier money policy, nor should a hasty conclusion be drawn
that they are indicative of an upturn in economic activity, not
yet shown by the economic indicators leading or coincident.
Special factors can account for much, if not all, of the unusual
increase in bank credit.
It can definitely be said, nevertheless, that System policies
in the period made possible the increase without severe pressures
on money markets and interest rates, even though they did not
Furthermore, the availability of credit under the
spark it.
circumstances avoided unnecessary restraints that might have
retarded economic activity. The longer-run significance from
the standpoint of economic activity and Federal Reserve policy
will depend upon further developments in the weeks ahead.
As to the facts, July and August were a period of moderate
or slack credit expansion. Bank loans to business declined although
some increase is usual for this period. New security issues by
corporations and by State and local governments were larger than
in 1959 but smaller than in many other years. Mortgage loan
expansion was evidently also less than in other recent years.
Growth in consumer credit slackened further and was less than a
year ago. Federal Government borrowing was, of course, much
reduced from last year, but banks increased their holdings of
Government securities in contrast to a decline last year.
During September, in contrast, business loans at city banks
Bank
increased by fully as much as in any previous September.
month
same
the
in
than
more
loans on securities increased much
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of previous years; and bank holdings of securities increased
substantially whereas they usually decline in that month. New
security issues were moderately large, although below previous
high records. Total bank credit expansion, as previously stated,
was larger than in any previous September. The increase was
particularly large in the four weeks ending September 21. A
greater than usual decrease occurred in the last week of Septem
ber, but the record for the month still
stands.
Special factors that may account for the exceptional bank
credit expansion in September were (1) large Federal tax collections,
along with heavy dividend and other payments customary in that month;
(2) the absence of tax antitipation securities maturing in September;
and (3) a shift in the liquidity position of corporations and perhaps
of other businesses that has been developing this year.
Treasury receipts from all taxes were larger than in any pre
vious September, reflecting principally heavy corporate income
taxes payable in that month.
In the previous two years, when
corporations have been expected to pay one-fourth of estimated
tax liabilities in September, not only were the amounts payable
somewhat smaller, but also some of the payment could be made by
turning in maturing securities.
Corporate liquidity, moreover, has been reduced since early
this year. Cash balances have been drawn down some and the large
holdings of Government securities built up in 1959 have been con
siderably reduced since February. Businesses, therefore, to meet
large tax and other payments due in September, had to borrow
from banks and also to reduce further their holdings of Govern
ment securities. The securities sold were purchased either by
banks or by dealers, who in turn borrowed from banks. Expansion
if
in business loans at banks, as already indicated, was little
any greater than the seasonal increase usual for September, and
analysis of the details indicates that the increase was largely
Bank credit to cover tax and
related to seasonal influences.
other payments was provided through the securities channel.
Most of the funds made available by this bank credit expan
instance to swell U. S. Government
sion have gone in the first
deposits, which increased by over $2.4 billion in September to
nearly $7.5 billion at the end of the month. Generally, Treasury
balances decline in September. Private demand deposits at banks
increased sharply in the first half of the month, then declined by
uncertain
almost as much--at least at city banks. It is still
whether they maintained the usual seasonal pattern, but preliminary
estimates on a daily average basis indicate some further increase
in the seasonally adjusted figures. In any event the sharp increase
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in Government deposits did not cause private demand deposits to
decline.
Total money supply, seasonally adjusted, is probably
about 1 per cent above the low level of last June, though still
nearly 2 per cent below the peak reached in the summer of 1959.
The rate of turnover of deposits in August was 7 per cent higher
than a year ago.
In addition to the increase in Treasury deposits in September,
time deposits increased further, continuing the marked upward trend
evident since March.
Such deposits at commercial banks have increased
by over 5 per cent in the past seven months. For the year to date
the accumulation of savings with the principal savings institutions
has been somewhat less than a year ago. The decline, however, has
not been as great as the decrease in direct investment of savings
in credit and equity markets by businesses and individuals from the
exceptionally high levels of last year.
Since bank credit has
expanded more this year than last, most of the decrease in the
total flow of funds in credit and equity markets from the record
$62 billion in 1959 to around $40 billion this year has occurred
principally in direct investment by the nonfinancial sectors-
consumers, businesses, and governments.
These shifts no doubt
reflect to some extent the effect of high rates of interest last
year and lower rates this year.
One aspect of this change in the source of credit flows has been
the weakness in the stock market during recent months. After reach
ing a new high level in July 1959, stock price averages generally
fluctuated within a range of 10 per cent until mid-September of
this year. In the past two weeks they declined sharply to the lowest
average level since 1958, extending the range of fluctuation by about
5 per cent. This decline is related to a growing realization that
corporate profits are not likely to be as large as had been
anticipated.
Heavy demands for liquidity in recent weeks and the resulting
pressures on banks and securities markets resulted in some rise of
interest rates from the low levels reached in August. This rise
has occurred notwithstanding actions by the System to make reserves
readily available. Rates on three-month bills rose in mid-September
Though they
time since June.
to over 2-5/8 per cent for the first
well
have since declined to below 2-1/2 per cent, they are still
Six-month
August.
in
early
reached
low
cent
per
2-1/8
the
above
bills have risen somewhat more in yield to around 2-7/8 per cent,
rates
Treasury bill
compared with a previous low of 2-3/8 per cent.
reflect in part the large positions that dealers built up in August,
which made it difficult for them to absorb the pressure of selling
by other holders to obtain cash that developed later.
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Rises in long-term rates have reflected in part the effect
of the Treasury advance refunding operation and in part the
volume of new offerings in the capital markets and dealers'
enlarged inventories of such issues.
Increases in yields on
outstanding corporate bonds have been quite small, and those
on U. S. Government securities also moderate, while yields on
State and local government issues, where there has been some
what more market congestion, have risen somewhat more.
Additional reserves to enable banks to meet the unexpectedly
large credit and monetary demands in recent weeks have been
liberally supplied by Federal Reserve operations.
Reserves
were made available in late August and early September through
the release of vault cash and the reduction in requirements at
central reserve city banks. These additions were partially
offset by reductions in System holdings of securities, but on
balance the total volume of reserves declined less than the
seasonal decrease in reserve needs; not only did the money
supply increase more than seasonally in August, but net free
reserves also increased.
From the week of September 7 (which covered the reserve
additions and ended just before the previous meeting of this
Committee) to the week ending September 28, total member bank
reserves increased by about $320 million--somewhat more than
had been projected three weeks ago. Required reserves increased
by about $100 million more than had been projected, reflecting
principally a larger than expected increase in Treasury tax
and loan accounts and at least the normal increase in other
deposits. Gold movements and foreign operations absorbed
about $220 million of reserves--somewhat more than had been
allowed for--but the difference was more than counterbalanced
by reserves supplied in excess of anticipations through a
System operations
return flow of currency and other factors.
actually absorbed reserves on balance in the three-week period,
but heavy purchases toward the end of the latest week and in the
course of this week, aggregating over $500 million, will result
in a substantial net addition to System holdings over the past
Free reserves have continued throughout the period
four weeks.
the $400 million level. Estimates for the
above
or
close to
current week ending tomorrow indicate a free reserve average
of $450 million or more.
Continuance of a relatively tight money market in the
face of the increased reserve availability has been attributed
in part to the distribution of reserves, with substantial
excesses in country banks and shortages at city banks. Country
-10bank excess reserves did increase sharply in late August and
the first
half of September, and since mid-September country
banks have reduced their borrowings. Excess reserves have
also declined since mid-September and in the past week free
reserves of country banks have been little
above average
amounts held in July and August.
It appears that the reserves
made available have been largely put to use.
Probably a better explanation of the tightness at city
banks is that the heavy demands for credit were largely con
centrated upon those banks.
They made use of all reserves
available to them and also continued to be heavy purchasers of
Federal funds from other banks.
It is significant that city
banks did not sell Government securities but added to their
holdings, absorbing sales by other holders. Last week, operations
in Federal funds were reduced; this was apparently because funds
were less readily available for sale, as city banks temporarily
increased their borrowings at the Reserve Banks.
Whether this
reduced supply of Federal funds indicates that other banks have
been putting their excess reserves to use in loans or invest
ments or is due to some other influence will not be clear
until more complete data are available for the current period.
In the period immediately ahead, the most important credit
market factor will probably be the drawing down of the large
In the next three weeks,
Treasury tax and loan accounts.
assuming new Treasury financing payable October 24, the
reduction in Treasury balances will exceed $3 billion. The
question is how these funds will be used as they pass to other
hands.
Will they go to increase private deposits? Will they
be used to pay off bank loans? Or will they be employed for
the purpose of buying Government securities from banks? Their
impact on economic developments will depend upon various uses
that will be made of the funds for spending or investment as
they pass from one holder to another.
The normal seasonal increase in private demand deposits
for the next three or four weeks is around $2 billion and
with a liberal allowance for growth should not be expected
to exceed $2.5 billion. Thus there can be some net contraction
in bank credit and a decrease in total reserve needs during the
three weeks until the next Treasury cash financing operation.
In this period market factors are expected to supply reserves
on balance, with substantial weekly variations and with a
possibility that a larger than assumed gold outflow will
reduce the net amount supplied.
10/4/60
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During the coming week, when currency demands increase
and float declines, the supply of reserves will probably not
be excessive and might even be augmented somewhat.
In the subse
quent two weeks some reserves might be absorbed by reduction in
the System portfolio and still
leave adequate amounts for any
likely credit and monetary expansion.
Retirement of outstand
ing repurchase contracts will absorb only a portion of the
redundant reserves likely to be available at that time. System
operations will need to be regulated according to the state of
the money market.
After the week of October 26, the Treasury cash financing
operation and then other seasonal influences will call for
supplying additional reserves. If normal seasonal needs are
met and free reserves maintained above $300 million, additional
reserves to be supplied by System actions will at times need to
be as much as $900 million, plus any sales made in the interim.
Mr. Marget made the following statement concerning the United States
balance of payments:
When I last reported to this Committee, on September 13,
I pointed out that on the basis of information then available,
even if we were to receive no further orders with respect to
gold purchases during the rest of September, net gold purchases
by foreigners in September would be "about as large as in
August." Actually, we did receive further gold orders, with
the result that the gold figure for September, at $315 million,
was equal to the total purchases for the months of July and
August combined.
We of course do not yet have the September figures for
foreign-owned dollar balances. To the extent that we may take
the figures for foreign dollar holdings at the Federal Reserve
Bank of New York as a guide, the increase in foreign dollar
balances in September may turn out to have been much smaller
But there can be no doubt
than it was in July and August.
that the combined figure for the gold outflow and the increase
in foreign-owned dollar balances during the third quarter of
this year--this combined figure averaged about $500 million a
month in July and August, as compared with a monthly average
of $280 million in May and June--will be such as to invite
widespread comments on what will undoubtedly be generally
characterized as a deterioration in our balance-of-payments
position. One can only hope that the more influential of
these comments will be well informed.
10/4/60
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It would not be well-informed, for example, to fail to
observe that the "deterioration" in question can in no sense
be interpreted as indicating a worsening in the trade account
of the kind that, in 1958 and up to the middle of 1959, was
the source of such widespread concern with respect to our
balance of payments.
In my last report to this Committee,
in commenting on the July trade figures, I pointed out that
our trade surplus had risen from around zero a little
over a
year ago to a figure of around $5 billion. This conclusion
is not significantly changed by the latest figure, which we
now have, giving a preliminary total of exports for August.
This August figure, while it is below the July figure (the
height of which reflected mainly a bunching, in that month,
of jet aircraft shipments and large end-of-season exports of
raw cotton), was still slightly above the relatively high
average May-June rate. With imports remaining relatively
steady, it is therefore quite clear that the cause of the
"deterioration" in our over-all balance of payments that
began in July has not been due to a deterioration of our
trade position.
It is equally clear, on the basis of other information
at our disposal, that a major cause of the "deterioration"
has been an increase in short-term capital outflow, which in
turn has been significantly affected by the differences in the
level of interest rates here and abroad. It is to be hoped
that public comment on the "deterioration" of our balance of
payments in the third quarter of this year will take adequate
account of this fact, and will not misread its implications.
It is a fact, for example, that some countries, in presenting
their balance-of-payments results, would not regard this kind
of capital outflow as affecting the balance of payments at all,
on the ground that the increase in short-term claims on us which
is created by the capital outflow is matched by our equivalent
item of short-term "claims on foreigners." (This was borne in
on me strikingly this last week when the distinguished governor
of one of the European central banks--who happens also to be
an economist--asked me whether we did in fact treat short-term
capital outflow as a factor affecting the over-all deficit in
I should add that he then added
our balance of payments.
immediately that it was probably natural that we should do so,
since, as a country with a "key currency"--that is, a currency
which is very widely used as a reserve currency by other
countries--we did not regard anything but gold as part of our
reserves, even though in practice we might expect that the
10/4/60
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reserves "lost" as a result of an unfavorable international
structure of interest rates could be expected to flow back
when this structure of interest rates changes.)
There is in fact no evidence, as yet, of any action by
foreign monetary authorities with respect to their dollar
balances which would indicate that they do not understand
this fully.
But this is not the same thing as saying that
these authorities are necessarily fully convinced that we
are close to a solution of our balance-of-payments problem
as a whole.
On the contrary, we may expect that renewed
public discussion of the size of our balance-of-payments
deficit, in conjunction with discussion of the continuing
gold outflow, will lead to a renewed posing of this basic
problem, which has far more serious implications than the
particular matter that is now so much in the center of
public discussion; namely, the intensification of gold
outflow in relation to short-term capital movements
induced by interest-rate differentials.
It is possible, indeed, that this renewed public dis
cussion of the basic problem may start with the citation of
a passage, which has already attracted considerable attention,
in a speech made a week ago yesterday by Per Jacobsson, the
Managing Director of the International Monetary Fund, at the
Annual Meeting of that organization here in Washington.
"There is now,"
he said, in speaking of the U. S. balance
of payments, "a substantial trade surplus, which for the
whole of 1960 may exceed $4 billion and which, with net
income from investments and other invisible receipts,
may well amount to $6 billion."
"This," he said, "would
be sufficient to cover fully the present rate of U, S.
Government expenditure abroad, including military expendi
ture and economic grants and loans." This, to be sure,
would leave uncovered not only "the outflow of short-term
funds" but also "the export of long-term capital on private
"Nevertheless," he said, "these movements--and
account."
the same is true of government loans--have as their counter
part the acquisition of foreign assets, and in this way
are somewhat different from an outflow of funds resulting
from a deficit on current account."
of course, true; and it should provide something
This is,
of a corrective for any likening of the balance-of-payments
position of the United States to that of countries which,
unable to balance their current accounts and acquiring no
claims on foreigners as a counterpart for their reserve losses,
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are in effect living on their capital.
But there, one fears,
the crumb of comfort ends. For the United States is in the
position not only of a great trading nation and a great lend
ing nation: it is also in the position of a banker. That is
to say, it has to be concerned also with its liquidity position;
and from this standpoint it is small comfort to be told that
long-term claims are being built up against foreigners if a
considerable part of these long-term claims are being matched,
not by exports which would definitively discharge our obligation
to deliver real resources to those to whom we lend, but by
short-term claims against us held by those countries which did
deliver the real resources.
In contrast to the position created
by the movement of short-term capital in which short-term claims
on us are matched by our short-term claims on foreigners, we
would be in a position of borrowing short and lending long, a
process which, to put it mildly, has been shown to have limits,
in international as well as in domestic finance.
What this amounts to saying is, of course, that as long
as the nontrade international commitments of the United States
remain at their present level (to say nothing of their going
even higher as the result of new commitments for foreign aid),
our export performance, good as it is by comparison with the
grinding decline in exports from 1958 to the middle of 1959,
not good enough; and that it will not be good enough
is still
until our over-all accounts are effectively in balance, so that
it will not be necessary, in order to settle our accounts with
foreign countries, to transfer gold and dollars to them. One
must add to this, and indeed one must underscore heavily, the
"It must be
further caveat which Mr. Jacobsson himself added:
borne in mind that the improvement which has occurred in the
U. S. current account this year, while it is basically an
important development, results from some special factors,
particularly the strong boom in other industrial countries.
It is, therefore, too early to conclude that the United States'
payments difficulties have been fully overcome, and continued
vigilance is required."
This is a reasonable, balanced statement to which one
It does not say, and does not imply, that our
can subscribe.
balance-of-payments problem is so serious, as of this moment,
as to deprive us of all flexibility in our efforts to cope
with the requiremnts of the domestic situation. It simply
states a proposition which ought to be regarded as virtually
self-evident; namely, that the requirement of flexibility
cannot, in the current situation, be interpreted as permitting
10/4/60
-15-
a range of action as unlimited as it might have been if our
basic balance-of-payments position were different from what
it is in fact.
Mr. Treiber presented the following statement of his views on the
business outlook and credit policy:
Recent economic activity has been disappointing. The
seasonal upswing customary at this time of the year lacks its
usual vigor. On the other hand, there is no evidence of
serious deterioration.
With retail sales showing no increase and manufacturers'
sales declining, business concerns are very cautious on their
inventories.
Surveys of business plant and equipment expendi
tures point to a leveling off or decline in capital spending.
On the other hand, some August developments hint at the
possibility of an upswing in the home building sector. In
addition, Federal Government defense spending is being stepped
up slowly, and State and local governments are expanding their
construction outlays. The hesitancy in consumer demand, the
leveling tendencies in business demand, and increased domestic
and foreign competition have been reflected in an unannounced
easing of prices of many types of manufactures.
There is
little
evidence as yet, however, of aggressive price reductions
aimed at increasing volume.
Economic activity in Europe is strong, although there
are some signs that the expansion is moderating. Because of
our balance-of-payments deficit, foreign official holdings of
dollar assets continue to rise. And there has been a further
outflow of gold reflecting the practices of foreign central
banks with respect to the portion of their reserves to be held
in gold. The recent stream of foreign visitors has emphasized
the concern abroad lest the United States fail to take adequate
measures to correct its balance-of-payments deficit, and lest
it succumb to excessive monetary ease and fiscal laxity.
Our most recent studies of the Treasury's prospective
income and expenditures indicate some reduction in the estimated
cash surplus for the current fiscal year. Such a change would,
of course, reduce the contractive effects of a budgetary surplus.
There continues to be a good demand for bank credit.
Although the demand for business loans since mid-year has been
less vigorous than it was last year, the demand was strong in
10/4/60
September.
The poorer record in August reflected in part a
shift from bank borrowing to financing through commercial
paper to take advantage of a rate differential. The volume of
commercial paper, finance paper, and bankers acceptances has
increased substantially. The rise in member bank reserves in
September suggests that a base has been provided for a further
increase in the money supply.
Short-term interest rates, as measured by the three-month
United States Treasury bill, are nearly half of what they were
at the beginning of the year. Other short-term rates have
declined substantially, but not as greatly as the bill rate.
Mortgage money is more readily available, but rates are sticky.
I wonder to what extent a further decline in mortgage rates
might stimulate construction, for I think we would not want
to see additional construction held back because of inadequate
credit.
Although the Federal Reserve has contributed greatly to
credit availability, the decline in long-term interest rates has
This may be one of those times, arising once
been quite modest.
in a while, when it may be well for the Committee to consider
the extent to which a further reduction in long-term rates
might contribute to economic activity.
Interest rates abroad, particularly for money market
assets, are much higher than interest rates in the United
States. Therefore, there is some attraction to investors,
both foreign and American, to move funds abroad. We must
bear this in mind in considering the level of interest rates
in the United States, particularly the level of short-term
rates.
It is important that the United States act promptly
and wisely to rectify its balance-of-payments deficit.
Failure to do so will more and more circumscribe the ability
of the Federal Reserve to pursue a flexible monetary policy.
Indeed, it may no longer be practicable for the Federal Reserve
to seek to bring about a substantial reduction in long-term
rate and
rates by helping to produce a very low Treasury bill
other short-term rates.
In our opinion, business and credit developments counsel
a continuation of the policy of credit ease. We should avoid,
however, driving short-term rates much lower; to do so would
intensify our balance-of-payments problems without promoting
any real advantage domestically. We see no reason for a change
in the directive or a change in the discount rate. Later this
10/4/60
-17
week the Treasury will announce its plans for refunding the
one year Treasury bills maturing October 17, 1960, and for
raising additional cash. This prospective Treasury financing
counsels the maintenance of an even keel in the money market.
While reserve requirements and margin requirements are
not within the jurisdiction of the Committee, it seems to us
that some time this fall it may be opportune to reduce further
the reserve requirements applicable to central reserve city
banks, bringing closer to fulfillment the Congressional mandate
to abolish the differential between central reserve cities and
reserve cities. As for margin requirements, we tend to think
of a margin requirement of 50 per cent as a normal requirement.
Recent events in the stock market would seem to indicate little
need for continuing the present degree of restraint on the
availability of credit for the purpose of purchasing and carry
ing securities.
As for open market operations, we believe that the Committee
should seek to maintain a comfortable money market atmosphere.
This would mean, for example, that the Federal funds rate should
frequently be below the discount rate.
On the other hand, it
would seem important to avoid any substantial decline in the
rate on three-month Treasury bills. We think that the Manager
should be given wide latitude to supply reserves according to
the tone of the market.
Mr. Erickson reported that the sideways movement in the First
District had continued, with no apparent strong tendencies either upward
or downward.
As he had reported earlier, the New England production
index went up from 118 in May to 124 in June; in July it
the same as in July 1959.
dropped to 122,
What the index would do in the future remained
to be seen, particularly with 30 to 40 thousand people out of work in the
area because of a continuing strike.
The Dodge figures on construction
contracts in August showed a gain of 19 per cent, the best since April
1959.
The increase was 64 per cent in nonresidential contracts and 5 per
cent in residential, with increases in all categories except utility
10/4/60
-18
companies.
The cumulative figure for the first eight months of the current
year lagged 9 per cent behind the previous year, however, primarily due
to a 40 per cent drop in public works and utilities.
The gain in non
agricultural employment from July to August was the same as last year,
but the unemployment situation had worsened, as it
had nationally; the
volume of new and continued unemployment compensation claims was sub
stantially higher than last year.
For the first
eight months of the year,
the cumulative figure on department store sales was 3 per cent above the
previous year.
In July, new car registrations were up, whereas they
were down nationally; for the first seven months of this year, regis
trations were 18 per cent above 1959, this increase also being greater
than the national figure.
The survey of mutual savings banks for September
had not yet been completed, but in August sales of Series F and G Savings
Bonds increased over July and redemptions decreased.
The rate of redemptions
over sales was the lowest since February.
Business failures in the District were less than in the previous
year, though in August they were greater than in the same month of 1959.
New incorporations had been more favorable in New England than nationally
in each month since March.
In the past three weeks District banks were substantial buyers of
Federal funds, Mr.
Erickson said.
Borrowings at the discount window
amounted to $10 million or more on only four days, and averaged around
10/4/60
-19.
$6 million.
The heavy borrowings were on days when the larger banks
could not buy Federal funds.
Mr. Erickson stated that he would favor no change in the policy
directive or the discount rate.
admirable job in
In his opinion the Desk had done an
supplying reserves aggressively, and he would favor
issuing the same instructions as before.
He would supply reserves as
needed, and if the Desk should anticipate the need for reserves somewhat
he would not object.
He had been pleased to see the Federal funds rate
below 3 per cent on a number of days, and he hoped that this would
continue to be the case in the next three weeks.
Mr. Irons reported that, broadly speaking, conditions in the
Eleventh District were similar to those prevailing nationally.
Activity
was moving along in sideways fashion on a high plateau, with mixed forces
underlying the total.
On balance, however, there may have been some
slight weakening during the past three weeks, and some indicators were a
little less favorable.
The index of production was down, and until recently
department store sales were off somewhat.
On the other hand, construction
had improved substantially, as reflected by contract awards, and the agri
cultural situation, although marked by some spottiness, was good in total.
In Texas, unemployment had declined a bit.
Mr. Irons said that demand and time deposits of District banks
were up during the past three weeks, as were loans, and that reserve
10/4/60
-20
positions were somewhat easier than several weeks ago.
On balance,
District banks had been sellers of Federal funds; only one large bank
had been a persistent and substantial buyer of Federal funds.
Borrowings
at the Reserve Bank were comparatively light, averaging around $12 to
$14 million, with practically all
of the activity accounted for by
smaller banks borrowing for seasonal reasons.
The one large bank
mentioned previously had come to the discount window on a few days
when Federal funds were not available.
Mr.
Irons noted that there were some factors that might be
considered neutral.
Employment was just about the same as a year ago,
and there had been no change recently in the petroleum situation.
Psychologically,
there did not appear to be an attitude of pessimism,
but more an attitude of reconciliation to the point of view that there
was not likely to be too much change one way or the other.
Mr. Irons expressed the view that during the past three weeks
the operations of the Desk in
most satisfactory.
standpoint.
carrying out Comittee policy had been
Developments had been favorable from the System's
There had been a substantial expansion in bank credit
and the increase in the money supply so much desired was being achieved,
while at the same time it
had been possible to avoid pressing down short
term rates substantially.
He would like to see approximately the same
policy continued, without any attempt to force further ease aggressively.
10/4/6
-21
He would meet seasonal requirements and, as best as could be determined
by the feel of the market and other factors, the requirements for essential
and reasonable loan expansion.
However, he would avoid a degree of ease
that would tend to push short-term rates substantially lower.
In his
opinion a market position reflected by a bill rate fluctuating from
2-1/4 to 2-1/2 per cent, a Federal funds rate from 2-1/2 to 3 per cent,
and member bank borrowings in the area of $250 to $400 million would be
appropriate in the present situation.
He would not recommend any change
in the directive or the discount rate at this time.
Mr. Mangels said that the Twelfth District picture was somewhat
mixed.
In the West Coast States there had been a further decline in
employment,
and unemployment was at a rate close to 6.5 per cent.
On the other hand, there was an increase in both residential and non
residential building awards in August, which was somewhat unusual
because that month normally shows a decline.
While both categories
were up 19 per cent from July and nonresidential contract awards were
about 18 per cent higher than a year ago, the residential figures were
still
somewhat below 1959.
Steel production had improved somewhat in
the past few weeks, with operations increasing from 52 per cent to
55 per cent of capacity, this having been due in part to a rather large
order for pipe for a natural gas transmission line to Canada.
There
had also been some improvement in the demand for reinforcing bars and
tin plate, and people in the industry seemed to feel that the steel
10/4/60
-22
problem might be bottoming out.
There appeared to be somewhat the same
feeling in the lumber industry, although output was still
tories were remaining constant,
down, inven
and orders had not increased.
Fir
prices had softened, but plywood prices had increased because of the
rather substantial curtailment of production.
Department store sales were about 3 per cent below a year ago
in the four-week period ended September 21, and it
appeared that sales
for the month of September might show a 3 to 4 per cent decline from
August.
New car registrations in California were lower in August than
in any other month this year, but information for September indicated
a substantial pickup in sales as compared to 1959.
The farm situation
apparently was not as good as had appeared at mid-year, with some
reductions in market prices and in estimates of crop output.
farmers in California were still
it
Some
having difficulties with the unions;
was reported that in some cases crops were being plowed under.
The cattle situation seemed to be a little
better; there were 24 per
cent more cattle on feed lots in California than a year ago.
Mr. Mangels reported that loans of District banks increased
slightly in the four-week period ended September 21, mostly in the
week ended September 14 due to borrowings for tax purposes.
Real estate
loans declined and although consumer loans increased, outstandings were
somewhat below mid-year.
deposits also were up.
Demand deposits increased slightly and time
It was rather encouraging to find savings deposits
10/4/60
-23
increasing, even though at a somewhat lower rate than at savings and loan
associations.
District banks increased their holdings of Government
securities about $140 million in the past three weeks; they were net
purchasers of Federal funds to the extent of about half a billion
dollars in the past week and estimates for the current week were about
the same.
Borrowing from the Reserve Bank had been nominal; one sub
stantial borrowing last week was reportedly due to inability to obtain
Federal funds.
In some areas, banks reported that they were in a rather
tight position.
Mr. Mangels said it
continue.
was his feeling that a policy of ease should
The projection for free reserves of $480 million for the week
ending tomorrow was about what he had in mind; that is,
around the $500 million level.
free reserves
The prospect of a further decline in
general business activity seemed to him to be greater than any possibility
of an increase.
If action were taken in the early stages, it would do
more good than if the System waited until later, and if the situation
should improve it would be quite easy to reverse quickly.
The period was
approaching when the usual seasonal demand for loans could be expected,
and reserves should be supplied freely.
Also, the time was approaching
when the Treasury would be in the market frequently and an even keel
policy would be required. As quickly as possible, therefore, he would
supply additional reserves on a rather liberal basis.
As he had indicated,
10/4/60
-24
he would try to maintain free reserves of around $500 million or a little
higher.
The discount rate and the directive seemed to him to be quite
proper.
Mr.
Deming reported that Ninth District economic developments were
mixed, and that opinions also were mixed regarding the outlook.
the picture broadly,
agricultural conditions showed considerable improvement
over a year earlier, trade and industry revealed some tendency to
although this
Viewing
slacken,
was not consistent from area to area, and bank liquidity
positions had been eased.
The District farm outlook seemed excellent, Mr.
Cash receipts in
the 1960 crop year (from mid-1960 to mid-1961)
about 5 per cent greater than in
improved crop output,
as
and it
much as 20 per cent.
2 per cent in
alone.
total
Deming said.
If
should be
the preceding crop year, due largely to
appeared that net farm income might increase
so, this
would mean an increase of perhaps
personal income in the District from this factor
The four weeks ended September 21 showed the largest gain in
bank deposits for any comparable period since 1950 while loans and
investments increased at a lesser rate, resulting in
improvement in member bank liquidity positions.
a reasonably good
Purchases of Federal
funds and borrowings at the Reserve Bank both had declined quite sub
stantially.
While industrial activity in
slackened in
recent months,
both in
the District appeared to have
at least on a seasonally adjusted basis,
durable and nondurable manufacturing, mining activity compared
10/4/60
-25
favorably with a year ago, reflecting primarily the effects of strikes
last year in both copper and iron ore.
Construction activity seemed to
be moving upward, but retail sales during September were disappointing.
Mr. Deming said he saw no reason to change either the directive
or the discount rate.
As to open market operations, he wished to
associate himself closely with the position of Mr. Irons.
The Desk had
done a good job in the past three weeks, and he would like to see the
Desk allowed to continue to operate with wide latitude.
He would
meet seasonal requirements as they built up, but not press too
aggressively for additional ease in the market.
His summarizing
comment was that "we are about where I would like to see us stay for
at least the next three-week period."
Mr. Allen noted that the Federal Reserve staff summary referred
to diverse views on the business situation and said that such views
were expressed at the meeting of the Chicago Board of Directors last week.
Some saw signs of improvement while others, incidentally a majority,
could find no basis for optimism.
However, it
might be representative
of an unrecognized confidence that not one of the directors wanted to
reduce the discount rate, whereas two weeks earlier a few of them had
felt that another reduction might be in order.
Mr. Allen said that department store sales in the Seventh District,
while making a poor showing during the first part of September, were
three per cent above last year in the week ended September 24.
Steel
-26
10/4/60
operating rates continued higher in the District than in the country
as a
whole.
The mills in Chicago were doing better than 60 per cent of
capacity and the rate in Detroit was about 70 per cent.
Some of the
machine tool industry's executives reported that the improvement in
orders in August continued in September.
Another promising note was
that new business generated at the Machine Tool Exposition was not
expected to show up until October and November.
On the other hand, unemployment claims continued heavy.
the first
In
three weeks of September such claims were 60 per cent over
last year in the Seventh District, compared with 37 per cent for the
country.
Unemployment appeared to be heavily concentrated in the
industrial areas; the Reserve Bank's Personnel Department and those of
the commercial banks in Chicago had found no appreciable easing in the
job market.
Farm and construction machinery firms had been reducing pro
duction.
Recently, International Harvester announced a temporary
lay-off of 17,000 workers in a number of plants throughout the country,
the purpose being to reduce inventories.
However, Harvester reported
that sales to farmers had improved recently, and the same report came
from Allis-Chalmers.
Automobile production was being increased gradually, but not
so rapidly as originally scheduled, Mr. Allen said.
Although sales
for September continued to be estimated at about 400,000 cars, which
10/4/60
-27
would be an improvement of 14 per cent over September 1959, the
aor
source of concern continued to be the load of 1960 model cars still
in dealers' hands, with the concentration in medium-priced lines.
If
production and sales estimates for September were realized, stocks on
September 30 should have been about 900,000 units, including 440,000
1960 models and 460,000 1961 models.
That number of unsold old models
would be 100,000 higher than on the same date last year and would, it
was generally believed, restrict 1961 model sales for several weeks.
Mr. Allen went on to say that for what it might be worth as
an indicator, the amount of space in Chicago newspapers utilized to
advertise for help in September was 17 per cent below September of
last year, and had shown a steady decline since March.
The amount of
advertising lineage was one-third below the relatively high level in
the first quarter of 1960, but it was 50 per cent above the level
reached during the first half of 1958.
Information received from large Seventh District banks in
the quarterly interest rate survey indicated that the prime rate
cut was followed by a significant decline in the rates actually
charged on business loans during the first half of September.
The
average rate for all loans made during this period dropped to 4.93
per cent, from 5.33 per cent last June.
As would be expected, the
cut showed most for the largest loans, but was reflected to some
degree in all size categories.
Moreover, a larger proportion of
10/4/60
-28
the total number of loans reported in
September was made at the
prime rate than in the previous survey.
For the most part, Seventh District banks continued to enjoy
lessened reserve pressures.
The basic position of the Chicago central
reserve city banks had fluctuated between small surpluses and small
deficits.
In dollar amount, the bulk of borrowing at the discount
window during the last month had been concentrated at a few large banks
in Detroit and, to a lesser extent, Milwaukee.
Borrowing by country
banks had continued to decline in amount, frequency, and number of
borrowers.
Mr. Allen said it was his feeling that in the area of monetary
policy the Committee should carry along as in the past three weeks.
He would not change the discount rate or the directive, and he would
seek to maintain the current degree of ease in the money and credit
picture.
He supposed that the pending Treasury financing argued
for a policy such as he had suggested for the next three weeks, but he
would favor it
even if
a new Treasury issue were not on the table.
Mr. Leedy said there had been no new developments in the
Tenth District of enough significance to warrant summarization.
As had
been mentioned several times, policy for the forthcoming period would
seem to be dictated largely by the Treasury financing program, which
would call for maintaining an even keel.
it
Aside from that, however,
seemed to him that economic considerations, both nationally and
10/4/60
-29
as far as the situation in
the Tenth District was concerned, would
indicate a continuation of the policy that had been followed during
the past three weeks.
He wished to associate himself with those who
felt that the Desk had done a good job during this period.
Some of
the objectives of the Committee had been achieved,
including increases
in the money supply and in
For the period
loans and investments.
immediately ahead, he saw no necessity for changing what had been done
during the past period.
Mr.
Leach reported that business activity in the Fifth District
continued to show only small changes, with perhaps a majority of them
pointing downward.
in manufacturing,
A gradual but steady decline in District man-hours
seasonally adjusted, had been in progress since May.
Employment in trade remained steady, while in financial institutions,
service industries,
the textile
and government it
had increased.
Production in
industry, which was curtailed three or four weeks ago, had
apparently stabilized at the reduced level.
Textile prices remained
soft but had not declined significantly, and leaders of the industry
continued to regard prospects as mildly favorable.
Furniture makers in
the District reported normal seasonal strength, both in new and unfilled
orders, and expected to complete the year without much change.
employment in the District remained at or near its
May of this year.
Construction
highest level,
set in
Construction awards already made and the volume of
10/4/60
-30
construction currently in process were significantly higher than a year
ago and probably assured the industry of a high level of activity for the
remainder of the year.
Farm income prospects remained good in spite of
crop damage by hurricane Donna, which was severe in certain localities.
Retail trade was fairly steady at a level slightly below that of a
year ago.
Mr. Leach commented that Fifth District banks were definitely
in an easier position than at the time of the previous Committee meeting.
Total loans of weekly reporting member banks rose more than during
comparable weeks of any recent year, but the percentage increase in
investments was twice as large.
Deposits increased sharply and loan
to-deposit ratios dropped from 54 per cent to 52 per cent.
Average
daily borrowings at the discount window had been quite low, and money
market banks had been heavy net sellers of Federal funds.
With respect to policy, Mr. Leach said he thought the Committee
had eased enough for the time being and should stand pat for the next
three weeks.
The reserve position of member banks was now quite a bit
easier than it had been earlier, and he saw nothing to be gained by
driving short-term interest rates down from existing levels.
More
ease, in his opinion, would not be of material assistance to the
economy, but would affect the balance of payments adversely and could
make the task of monetary policy more difficult in the future.
In
determining the prevailing degree of ease, he thought the Account
10/4/60
-31
Manager might give somewhat more than the usual attention to short-term
rates.
It
seemed to him that the System was in
a very good position to
follow the even-keel policy that was called for by the Treasury financing.
He saw no reason to change the directive or the discount rate.
Mr. Mills commented that in the normal course of policy making
the actions of the Open Market Committee had been governed by a cautious
interpretation of, and alignment of policy actions with, statistical
evidence of movements in the economy.
statistics
However,
since the best of
relate to past events and since the economy was unquestionably
experiencing a rapid period of change,
in his opinion there was a good
case for taking a much more imaginative approach to policy actions that
would speculate further into the future and move out of the realm of
dead statistics.
To implement a policy of that kind which would require
a resourceful adaptation to evidence that might be foreseeable but was
not yet clearly visible on the horizon, he wished to offer a statement
which in effect did not contemplate any major change in the supply of
reserves that was put at the disposal of the commercial banking system
but involved the choice of a different vehicle for supplying those reserves.
Mr. Mills then presented the following statement:
In the light of past experience, a minimum volume of mem
ber bank borrowing at the Federal Reserve Banks and a low
level of positive free reserves would have supported a marked
expansion of commercial bank credit and brought about a sharp
reduction in interest rates. That not having been the case
leads to the conclusion that the drag of recessionary financial
forces has tended to overcome the intended effects of an expansionary
Federal Reserve System credit policy.
The most striking indications that this kind of situation
exists are a tight money market in the midst of easy commercial
10/4/60
-32-
bank reserve positions, sluggish and falling markets for
U. S. Government securities and other types of fixed interest
obligations, and an abrupt increase in commercial bank time
deposits.
As regards the tight money market, the evidence suggests
that slackening business activity has set up contractive fi
nancial forces that are drawing funds into the major financial
centers which are then employed by important borrowers to apply
on their bank indebtedness, with the consequence that demand
deposits, both from the outlying banks from which they have
been withdrawn and from the main depository banks of such
borrowers, are subjected to downward pressure. These financial
movements may account for the tight condition of the money market.
As regards the ragged market performance for U. S. Government
securities, the evidence suggests that slackening business activity
has reduced the turnover of inventory and accounts receivable
investments of commercial and industrial concerns to the point of
compelling a divestment of some proportion of their holdings of
short-term U. S. Government securities in order to avoid having
to compress their sales and inventory activities. The divestment
of U. S. Government securities that has reflected these pressues
on corporate liquidity positions has resulted in an outflow of
such securities from corporate hands that, as it has been absorbed
only partially into the commercial banking system, has lodged in
the unusually heavy positions of the U. S. Government securities
dealers.
It would, therefore, appear that a direct relationship
exists between the contractive financial forces that seem to
account for tight money market conditions and the poor per
formance of the U. S. Government securities market in the face
of a nonrestrictive Federal Reserve System credit policy.
As regards the increase in commercial bank commercial and
individual time deposits, the available evidence suggests that
this phenomenon is also attributable to slackening business
activity, with a consequent unwillingness of the holders of
such deposits to employ them more venturesomely.
The determination of a Federal Reserve System monetary and
credit policy that will constructively counteract the financially
depressing economic factors that have been discussed is difficult.
The fact that U. S. Government securities are coming onto the
market in greater volume than the market's absorptive capacity,
and that time deposits have been the chief vehicle used by the
commercial banks to acquire U. S. Government securities, gives
reassuring evidence that what might otherwise have been a
superfluity of reserves placed at the disposal of the commercial
banking system will not erupt at any foreseeable date into a
10/4/60
-33
major expansion of bank credit that would force interest
rates down to undesirably low levels.
As a matter of fact,
the real problem seems to be how to develop a Federal Reserve
System monetary and credit policy that will counteract the
contractive influences that are bearing down on commercial
bank deposits. Inasmuch as these contractive forces will
increasingly have their initial
effects on the deposits of
the country banks and the smaller reserve city banks, it
would be logical to adopt policies that will sustain the
deposit positions of these banks and prevent a spiraling
contraction of deposits at all classes of banks.
In the
light of recent experience, open market policy actions
supplying reserves have not induced a credit expansion at
the outlying banks sufficient to offset the down pull on their
deposits. More positive action seems necessary, and conceivably
should take the form of a reduction in the reserve requirements
for the country banks.
Coming directly into the possession of
additional reserves through this policy action the country
banks might be expected to employ them in the acquisition of
short-term U. S. Government securities, thus creating new
deposits as a buffer against potential deposit losses
arising from previously described circumstances at the same
time that a modest strengthening of influence would have
been thrown behind the U. S. Government securities market.
Mr.
Robertson said it
seemed to him that the policy of providing
additional reserves that the Committee was following had been working
well.
The reserves had been put to use,
not only in the expansion of
bank loans but also to improve the liquidity positions of the banks of
the country, which augured well for the further loan expansion that would
be needed.
Consequently, there was good reason to believe that the
should stay on that track.
Committee had been on the right track, and it
Mr.
Robertson said he was impressed by a comment Mr.
Noyes had
made to the effect that a great deal was going to depend on what happened
in the next two or three months.
Therefore,
if
the policy that had been
10/4/60
-34
followed was good up to this time,
Treasury problems,
it
would appear,
in the absence of
that the Committee ought to enhance the degree to which
reserves were made available.
However,
it
seemed to him the Treasury
position was one that bound the Committee and that it
maintain an even keel.
Nevertheless,
was necessary to
he would do everything possible to
provide additional reserves within the concept of even keel.
He would
not permit tightness to develop in the market any more than it
had been
permitted to develop during the past three weeks.
Mr.
directive,
Robertson said that he would not recommend changing the policy
and that the discount rate could hardly be changed at this
stage of the Treasury's financing plans.
In
the present circumstances, he
would adhere as closely as possible to the policy that had been followed
while doing as much in the way of further ease as could be done in the
circumstances.
Mr. Shepardson made several comments on the agricultural situation
in
the light of his attendance at the recent fall
Agricultural Credit Committee.
He noted, first,
meeting of the National
that the level of land
prices appeared definitely to be trending downward.
there had been no appreciable
change as yet, but in
prices had fallen as much as 2 or 3 per cent,
a whole they were down almost 2 per cent.
In
In some districts
other districts
and for the country as
a few areas, particularly
in the corn belt, there had been a very perceptible drop.
Second,
all
areas reported almost a complete lack of city buyers for farm property.
10/4/60
-35
A constantly increasing percentage of farm purchases was for enlargement
of existing units, and there was little
owners.
in the way of entry of new farm
Third, the rate of expansion of farm mortgage debt was down
significantly and the rate of expansion of other debt had slowed
considerably, with a particular reaction in the amount of feeder loans.
There had been some increase in delinquencies and in foreclosures, the
latter representing mostly a closing out of inefficient operators.
previously indicated at the spring meeting of the same group, it
As
appeared
that more attention was being given to the earning capacity of the borrower
and that less reliance was being placed on the security for the loan.
Reports from the Department of Agriculture on farm income indicated that
while there was some slackening in farm prices there had also been a
slackening in farm costs,
so the net return to farmers was anticipated
to be fully as good or possibly a little
better than last year.
Turning to the general economic situation, Mr.
Shepardson
He was not sure that the
noted the diversity of indicators and trends.
balance-of-payments picture could be changed fast, one reason being that
price adjustments do not come about quickly.
situation was encouraging to him for it
The report on the price
appeared that more and more
sharp-pencil adjustments were taking place; although list
not changed
much, deals were being made.
He felt
were wholesome and that they had to occur if
prices had
that those adjustments
there was going to be an
improvement in the balance of current accounts.
He did not feel that
10/4/60
-36
the situation with respect to the movement of capital or the expenditures
of Government would change fast, but he hoped that there might be some
what greater scrutiny of expenditures and appropriate restrictions
placed upon the use of funds.
Mr.
Shepardson said he thought the unemployment situation was
going to be relieved only as demand, not the credit situation, improved.
He did not feel that the slack at the moment was due to a lack of credit
but rather to a lack of demand at existing prices.
Mr.
Shepardson expressed the view that the System had followed
a good program recently and that the results had been satisfactory.
He
thought the Committee should continue to maintain about the degree of
ease that had prevailed and that reserves needed for seasonal purposes
should be supplied willingly.
However, he questioned whether reserves
should be pressed on the market at this time.
ing, if
it
The time might be approach
was not already here, when in order to try to maintain a given
level of free reserves the Committee would have to keep pressing to the
point where there might be a recurrence of the situation that prevailed
a couple of years ago.
For that reason he would align himself with the
views of Messrs. Leach, Irons, and Deming.
He would supply needed
reserves and maintain an even keel, but he would not press reserves on
the market.
If
free reserves,
on average, fell from the $480 million
figure indicated by the projections to $400 million or even $350 million,
he did not think that that would be serious.
10/4/60
-37
Mr. King said that he would recommend no change in the discount
rate or in the directive, which left for consideration the matter of
instructions to the Desk.
Before coming to that, however, he wished
to make a comment on the price adjustments that were being mentioned.
In his opinion they did not offer real hope for long-range adjustment
because they were based on a desperate need to move goods rather than
a reduction in manufacturing costs.
Therefore, he got little
comfort
from the fact that some such price adjustments apparently were taking
place.
While they might afford a little
relief to the general economy,
he doubted whether they would provide any long-range correction of the
basic problem.
As he understood the discussion, Mr. King said, the Committee
was in practically unanimous agreement that the atmosphere that had
prevailed in the market should continue to prevail.
be fairly well agreed that it
go lower.
also seemed to
would not be desirable for bill
rates to
Accordingly, the Account Manager might find himself in a
difficult position, and it
if
It
seemed appropriate to provide some guidance
the Manager should find that the conflicting objectives produced an
impossible situation.
to let
Personally, he considered it
more important not
short-term rates go substantially lower than to maintain the
prevailing atmosphere of ease in the market.
He was doubtful as to
whether that ease was really accomplishing very much, while he was fairly
10/4/60
-38
well convinced that it
lower.
in
Therefore,
would be undesirable for short-term rates to go
if
it
became necessary to supply additional reserves
large quantity, he would consider the possibility of using other
maturities,
term rates.
although he realized that this might ultimately affect short
If
the present policy could not be pursued without affecting
short-term rates unduly, he felt
that the Board perhaps should consider
taking action through some means other than open market operations.
Mr.
Fulton reported that the trend in
slightly downward.
Department store sales had not come up to expectations
and insured unemployment was up in
producing centers.
the Fourth District was
some areas, particularly the steel
other places, however,
In
there had been some
improvement in the unemployment situation due to the new model automobiles
The steel industry seemed to be living on hopes,
going into production.
and the operating rate this week would be below last week.
had been some pickup in
orders,
Although there
the pickup was slight, and nobody in the
steel industry to whom he had spoken looked for any marked rise.
Mr.
Fulton said that the auto companies were doing about as well
as had been expected,
except that Chrysler had cut back production because
of the large number of cars produced in the past few weeks.
being placed quite cautiously, with full
hang of unsold 1960 models.
Were it
Orders were
knowledge of the large over
not for the auto companies, however,
the steel mills would be in bad shape because orders from other users
had been declining.
There were practically no orders for transmission
10/4/60
-39
pipe and bars.
Tin plate was also moving slowly; the can manufacturers
had experienced a cutback in orders because the cool summer had delayed
some crops.
For this reason also, beer and soft drink cans had not been
so much in demand.
There was no forward buying of steel and orders were
for immediate delivery, so the mills were forced to inventory for immediate
delivery.
It appeared that about 5 million tons of foreign steel would
come in this year, and while exports of steel had increased, they were
not going to reach 5 million tons.
Projections for production in the
fourth quarter were slightly above present levels and there did not
seem to be too much joy in the outlook for next year, the forecast being
that production would be about the same as this year, at least until
about the fourth quarter.
If current projections for this year were
realized, production would probably amount to somewhat less than 105
million tons.
Profits were being hurt, with some companies in the red
and likely to wind up in the red for this year.
Contractual wage increases
in December would tighten the profit squeeze further unless prices could
be raised, which seemed highly unlikely.
As to the machine tool industry, Mr. Fulton said that after the
recent exposition in Chicago some good orders, both domestic and foreign,
had been received.
One machine toolmaker had expressed the view that
the industry was becoming quite competitive and therefore was getting
orders for some of the smaller machines not previously sold abroad to
any extent.
10/4/60
-10
Mr. Fulton said that he would not favor reducing the discount
rate or changing the policy directive, and that he thought the Desk had
done a good job in the past three weeks.
He would like to see the same
degree of ease maintained, with emphasis not on free reserves but on
the feel of the market, the level of short-term rates, and the Federal
funds rate,
since in his opinion these were the things that were most
indicative of the condition of the market.
He concurred in the view
of Mr. Treiber that a reduction in margin requirements would do no
violence at the present time and might be of help to the stock market
from a psychological standpoint.
Mr.
Bopp stated that conditions in the Third District were
approximately the same as in the country as a whole.
ments had been disappointing.
In brief, develop
A recent survey of housing and the real
estate market reflected considerable pessimism, and at a recent meeting
of the Philadelphia Economists' Discussion Group the views were almost
unanimously gloomy regarding the remainder of 1960 and most of 1961.
gloom was not deep but it
The
was widespread, and there were few exceptions.
Mr. Bopp went on to say that there had been a significant increase
in bank loans and investments, and also in deposits, which was encouraging
in terms of what the Committee had been trying to do recently.
One bright
spot was that the operating rate in steel had improved, although the
improvement was only to 62 per cent of capacity.
10/4/60
-41
As to policy, Mr. Bopp said he was concerned about the sluggish
ness in the capital markets, where developments seemed somewhat similar
to 1958.
Although, for a variety of reasons, he felt
that nothing should
be done at this point, the movement of ease from short-term to long-term
markets is not always as automatic as one might hope.
He would keep
reserve positions in continued ease and would hope that the Federal funds
rate might be fairly frequently below the discount rate.
However, this
was qualified by realization that the Account Manager would have to walk
a tight rope so that short-term rates would not be pushed lower.
He
would recommend no change in the discount rate or in the directive at
this time.
Mr.
Patterson said that in August additional signs of weakness
in economic activity and available comparisons indicated that Sixth
District activity was no better and might be somewhat weaker.
month nonfarm employment declined in
all
Tennessee, where a slight rise occurred.
In that
States of the District except
Manufacturing employment,
however, had not declined quite as much as in the nation as a whole.
Cotton textile activity had weakened considerably in recent months, with
seasonally adjusted cotton consumption in August about 6 per cent below
January.
This had affected Georgia particularly because of the relative
importance of textile manufacturing there, and to a lesser extent Alabama
and Tennessee.
10/4/60
Sixth District retail spending had been sluggish, Mr. Patterson
said, just as in the nation.
Department store sales, which had been
showing greater strength than nationally, dropped 8 per cent in August
compared with a national decline of 3 per cent.
department store sales were unchanged.
In September, District
Bank debits, although up in August,
had been trending downward somewhat more in the District since February
than in the nation.
The sales picture within the District had been
spotty, with none of the States as a whole showing either general weak
ness or strength.
Automobile sales were apparently doing better than
in the nation, judging from registration figures through July.
first
For the
seven months, registrations in District States were nearly 10 per
cent above the comparable period of last year compared with a national
gain of just over 8 per cent.
Continuing, Mr. Patterson said that residential building had
been somewhat stronger in the District than in the nation, although
activity in Alabama, Louisiana, and Florida was off sharply from a
year ago.
Mortgage funds were becoming more plentiful, but easier money
had not yet resulted in the hoped-for upturn in residential construction.
The District's farm economy, although showing mixed trends, had not
weakened materially in recent weeks except in Florida, where citrus and
vegetable crops were damaged by hurricane Donna.
Loans and investments
at banks in leading District cities increased substantially during the
first three weeks in September, showing response to System actions.
10/4/60
-43
Mr.
Szymczak said that in light of the uncertainties that existed
and would continue to exist, he thought that monetary policy had done a
good job and that the present policy should be continued.
He felt that
the Manager of the System Open Market Account had done an excellent job
in the market and that the Committee should continue to pursue the policy
it
had been following.
He would favor deferment of any change in margin
requirements or in reserve requirements at either central reserve city or
country banks.
Mr. Balderston said he was comforted by the fact that at long
last the money supply seemed to have responded to monetary policy and
by the fact that the seasonally adjusted money supply has risen about
one billion dollars between June and the middle of September.
A related
fact was that turnover outside the financial centers was as high as in
June and some 7.5 per cent higher than a year ago.
Mr. Balderston said he shared the view expressed by many today
that the economy had turned downward and that it
traditional course that was to be expected.
If
was following the
one looked at Shiskin's
business cycle series, which is more broadly based than the series con
tained in publications of the National Bureau of Economic Research, he
would find now that even some of the laggards were beginning to turn
down.
This was to be expected at this stage of the business cycle; it
would be unusual if any upsurge were to grow out of the present situation.
10/4/60
-44Therefore, Mr. Balderston said, he concluded that the System
had been correct in taking action early.
However, he felt that the
System should not press its luck until the effects of what had already
been done could be observed.
The money supply appeared to be responding,
and it would seem advisable to wait and see how great the response might be.
Mr. Balderston said he would suggest a target of free reserves
of about $400 million, realizing that the Committee had been on this
target since about the first of September and that experience had
demonstrated that there is a cumulative effect in keeping the same
target week after week and month after month.
Chairman Martin said he thought System policy had been effective
and that it
was a good policy.
He wished only to emphasize the point
that had been made that the Account Manager should operate on the feel
and tone of the market and not the statistics.
The dead hand of statistics
had been responsible for many of the System's difficulties.
After commenting that monetary policy could not seek to correct
all of the problems of the world, Chairman Martin said he continued to
feel more hopeful about the economy, from a long-range standpoint, than
a year ago.
A year ago he saw no answers to some of these problems, but
today he thought the answers were coming in the rolling adjustments
that were being made.
Whether we as a people had the courage,
gence, and capacity to accept them was another matter.
intelli
However, he
continued to have a feeling that the nation did have that capacity.
10/4/60
Chairman Martin said that the consensus today seemed clear.
There should be no change in policy, in the directive, or in the discount
rate.
Also, it had been suggested that the Board consider certain questions
that were within its jurisdiction.
In reply to a question by the Chairman, Mr. Rouse said that he had
no comments.
The Chairman then inquired whether others had anything further that
they would like to say, and no comments were heard.
Thereupon, upon motion duly made and
seconded,
it
was 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 allow
ing 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 general credit
situation of the country, vith a view (a) to relating the
supply of funds in the market to the needs of commerce and
business, (b) to encouraging monetary expansion for the
purpose of fostering sustainable growth in economic
activity and employment, 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 purchased from
time to time for the temporary accommodation of the
Treasury, shall not be increased or decreased by more than
$1 billion.
(2) To purchase direct from the Treasury for the
account 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
10/4/60
-46
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.
Chairman Martin noted that pursuant to the understanding at the
meeting on September 13, 1960, there appeared on the agenda for this
meeting further discussion of the memorandum from the Federal Reserve
Bank of New York dated September 8, 1960, recommending that the Bank's
Market Statistics Department be authorized to furnish to the Securities
Department quarterly statistics on the trading volume of individual
Government securities dealers.
If there was no objection, however, he
would like to hold this topic over until another meeting.
Two Comittee
members and one other President were absent today, and he was quite sure
that one of them, at least, would like to comment on the matter.
No objection to Chairman Martin's suggestion was indicated.
It was agreed that the next meeting of the Federal Open Market
Committee would be held in Washington on Tuesday, October 25, 1960,
at 10:00 a.m.,
and that succeeding meetings of the Committee would be
scheduled tentatively for November 22, 1960, and December 13, 1960.
The meeting then adjourned.
Secretary
Cite this document
Federal Reserve (1960, October 3). FOMC Minutes. Fomc Minutes, Federal Reserve. https://whenthefedspeaks.com/doc/fomc_minutes_19601004
@misc{wtfs_fomc_minutes_19601004,
author = {Federal Reserve},
title = {FOMC Minutes},
year = {1960},
month = {Oct},
howpublished = {Fomc Minutes, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/fomc_minutes_19601004},
note = {Retrieved via When the Fed Speaks corpus}
}