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, February 7, 1961, at 10:00 a.m.

PRESENT:

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Martin, Chairman

Hayes, Vice Chairman

Balderston

Bopp

Fulton

King

Leedy

Mills

Robert son

Shepardson

Szymczak

Irons, Alternate to Mr. Bryan

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. Hexter, Assistant General Counsel

Mr. Thomas, Economist

Messrs. Brandt, Eastburn, Hostetler, Marget,

Noyes, 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. Yager, Economist, Division of Research and

Statistics, Board of Governors

Mr. Petersen, Special Assistant, Office of the

Secretary, Board of Governors

Messrs. Wayne, Patterson, and Swan, First Vice

Presidents of the Federal Reserve Banks of

Richmond, Atlanta, and San Francisco,

respectively

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2/7/61

Messrs. Ellis, Baughman, Jones, Parsons, Clay,

and Walker, Vice Presidents of the Federal

Reserve Banks of Boston, Chicago, St. Louis,

Minneapolis, Kansas City, and Dallas,

respectively

Mr. Garvy, Adviser, Federal Reserve Bank of New York

Mr. Rudy, General Counsel, Federal Reserve Bank of

Dallas

Mr. Stone, Manager, Securities Department, Federal

Reserve Bank of New York

Upon motion duly made and seconded, the

minutes of the meeting of the Federal Open

Market Committee held on January 10, 1961,

were approved unanimously.

Before this meeting there had been distributed to the members of

the Committee a report of open market operations covering the period

January 24 through February 6, 1961.

A copy has been placed in the files

of the Committee.

Supplementing the written report, Mr.

Rouse commented as follows:

Experience since the last meeting indicates that the

Committee's dual concern over the level of short-term rates

and the availability of reserves requires an increasingly

Over much of

flexible approach to open market operations.

the period, the money market was easy because of storm

induced float, and although this ease spilled over into the

market at times, short-term rates tended to rise on

bill

Last Wednesday and Thursday, on the other hand,

balance.

there was an evident need to supply reserves at a time when

Treasury bill rates were moving lower. The repurchase agree

ment provided a convenient mechanism for inserting funds.

As to the more general effects of recent System operations,

I think that we can take it as an encouraging sign that

required reserves have been holding up better than could

be expected on seasonal grounds, despite substantial

fluctuations in free reserves.

As might be expected, there was considerable interest,

and some skepticism, in the market over the portions of the

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President's economic message that dealt with the relation

ships between short- and long-term interest rates. The

immediate reaction was that prices of long-term bonds moved

up in moderate trading as much as 1 point (or down about .06

per cent in yield) last Thursday and Friday, mainly on short

covering by dealers and small speculative buying. Yesterday,

however, prices edged down by a few 32nds, principally on

small offers by holders anxious to acquire the new 18-month

Treasury note offered by the Treasury. Although the message

had little

effect on short rates, partly because the market

was already well conditioned to the official attitude toward

that sector, it appears that the long-term rate has already

seen some of the adjustment that the President considers

The President's balance-of-payments message yester

desirable.

day--suggesting that the Treasury might offer foreign official

holders of dollar balances special certificates at attractive

rates--had a more visible impact on short-term rates. Partly

because of this, the average rates in yesterday's auction

were established at 2.37 per cent and 2.57 per cent for three

and six-month bills, respectively, in each case about 7 basis

points above the previous auction. Whether this trend of

long and short rates will follow through remains to be seen.

The Treasury offering was considered very generously

priced by the market, and the main question raised was the

size of allotments to the public. Subscriptions received at

the New York Bank yesterday were unusually heavy, and it

appeared that some dealers were not waiting until the last

minute to enter their subscriptions, as is the usual practice.

There was only a modest reaction in prices of issues of

comparable maturity to the new 3-1/4 per cent notes offered

Market guesses were that the new

by the Treasury at par.

issue would start off in when-issued trading at a substantial

premium; first quotations this morning of par 6 bid and par 8

The Treasury,

offered appear to bear out that expectation.

of course, had hoped that as a result of concentrating the

refinancing in a single short-term issue--properly pricedthere would be a favorable impact on both short- and long

term rates.

The System rolled over its holdings of $3.6 billion of

the maturing 4-7/8 per cent certificates into the new issue.

I might add that the market has apparently not had any great

difficulty in adjusting to the cash refunding method this

time, even though some holders of maturing issues may not

If cash

be able to roll over their maturing holdings.

2/7/61

refunding should become a normal Treasury technique, there

may be possibilities for the System under more normal con

ditions to reduce its large holdings of some individual

issues by permitting some run-off of the maturing issue

in future refinancings and replacement with bills.

Subscriptions already received at the New York Bank

total more than $10 billion, including the $3.6 billion

subscription entered by the System. On the basis of these

subscriptions alone, allotments to the public would be around

50 per cent, and this figure will, of course, be reduced by

subscriptions in other districts and by subscriptions from

others entitled to 100 per cent allotments.

Mr.

Robertson, referring to the change in the free reserve position

that occurred between the first

asked whether it

and second weeks of the preceding period,

was just float that caused this decline.

Mr. Rouse replied that float was responsible for the decline

in the amount of free reserves between the two weeks.

float during the first

were collected.

The bulge in

part of the period was erased when the checks

The Management was faced with the problem during last

week of having to furnish reserves even though Treasury bill

were moving lower.

Large repurchase agreements were used on Wednesday

and Thursday to meet this problem.

up.

rates

This brought the free reserve figure

The market turned easy and on Friday over $150 million of those

repurchase agreements were lost.

Mr. Robertson then asked if one of the reasons for letting

reserves get so low and not trying to put them back was a desire to

bring the bill rate back up.

Mr. Rouse replied that the bill

rate was a factor.

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Thereupon, upon motion duly made and

seconded, the open market transactions

during the period January 24 through

February 6, 1961, were approved, ratified,

and confirmed.

A staff memorandum on recent economic and financial developments

had been distributed under date of February 3, 1961.

With further

reference to economic developments, Mr. Noyes presented the following

statement:

The more optimistic sentiment in business and financial

markets which has continued in recent weeks is well illustrated

by the 6 per cent increase in stock prices that occurred in

the month of January. This has been attributed to both the

conservative and the aggressive nature of the task force

reports to the new President and his own statements. Some

observers seem to be appraising the future more optimistically

because the Administration appears to have rejected radical

proposals which they feared might be adopted, while others

are pleased that prompt action is being taken to employ con

ventional antirecessionary weapons. The result has been a

widespread further shift toward confidence in the economic

outlook, despite the fact that there has been little or no

improvement in the underlying facts with respect to output,

trade and employment.

In January, steel mill operations were up 6 per cent

from the depressed December level, an adjustment that seemed

long overdue to those who have followed the relation between

steel consumption and production since last spring. On the

other hand, auto assemblies were down 20 per cent from the

already curtailed volume. Even the earliest preliminary

figure for total industrial production is still incomplete,

but it now appears most likely that the index will decline

one point. With auto sales down more than seasonally and

department store sales off sharply in the last two weeks,

total retail trade for the month is almost certain to be

down, due in part, of course, to the severe weather con

ditions in many areas.

The 900,000 increase in unemployed resulted in a slight

decline in the seasonally adjusted annual rate of unemployment,

from 6.8 to 6.6 per cent, but this amount of change is not

regarded by technicians familiar with the behavior of the

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series as a significant improvement.

Long-term unemployment

continued to increase.

Thus, it seems clear that the more optimistic appraisals

of the outlook in January were based on expectations of an

early upturn, rather than on any significant improvement in

general business conditions during the month. Of course, it

does not follow from this fact alone that these brighter

expectations will not be realized. Greater optimism itself

provides some stimulus to the economy. There is also evidence

that rates of decline are less severe in the case of many

industries, and some have leveled out. It may be significant,

for example, that on average sensitive commodity prices have

not declined further in recent weeks. Furthermore, there is

no doubt that the recommendations in the President's economic

message a week ago, though moderate, are generally of a

stimulative nature; and some, such as the accelerated G.I.

insurance dividend payment and the extension of unemployment

insurance benefits, will serve to bolster the demand for

goods and services in the near-term future. The length of

time that may be required for other parts of the program

to take effect is more difficult to estimate.

Previous

experience with expediting Government procurement and public

works programs to improve their countercyclical effects has

not been altogether favorable.

One potential danger in the present situation seems to

me to be that overly optimistic expectations for a strong

early reversal of the downward trend will be disappointed.

The easing at the end of last week and yesterday's rather

abrupt decline in stock prices suggests that some reappraisal

of the very bullish attitude of the preceding weeks may

already be under way.

While there may be good reason to suspect that many

measures of economic activity are currently at or near their

cyclical low points, and will not decline much further, there

is, as yet, little

basis for projecting a rapid or vigorous

recovery, either as a result of natural forces or measures

already undertaken by Government.

In this connection, it

is worth remembering that the very rapid turnaround in 1958

was unusual and followed an unusually sharp decline. While

there is no immutable reason that recessions and recoveries

must be symmetrical, there is also no reason to suppose

that one recovery will necessarily follow the pattern of

its immediate predecessor. As one surveys the various

elements of potential strength in the economy, none of them

seems poised for a rapid upward surge. Put another way,

there are very few components of total output that have

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been depressed to such a point that substantial upward

adjustment seems imminent.

Unless the Administration is provoked to much more

drastic and overtly inflationary measures than have been

proposed thus far, some further decline in the current quarter,

followed by a more gradual--and perhaps healthier--upturn than

in 1958 seems the more likely possibility.

Mr. Thomas then presented the following statement on the monetary

situation:

Recent developments in the financial sectors of the

economy may be reviewed in terms of the three prongs of the

objectives--or aspirations--of current System policy.

(1) To foster credit and monetary expansion.Contraction of credit and money has been somewhat smaller

than is customary at this time of the year. In other words,

there has been a seasonally-adjusted expansion.

(2) To avoid lowering short-term interest rates in

order not to add to the outflow of gold.--Short-term interest

rates have not declined in recent weeks, although some decline

generally occurs in January. The gold outflow has perceptibly

slackened in the past two weeks.

(3) To foster, so far as possible, further easing

of long-term credit markets. This is a more indirect result

of Federal Reserve operations. So far long-term rates have

not declined, but their variations have shown a relation

ship to short-term rates that is consistent with the record

of the past.

Taking up these three facets in reverse order, the situ

ation with respect to long-term interest rates is somewhat mixed.

Yields on U. S. Government bonds, which declined in December,

turned up in January, as did also yields on State and local

government bonds. During the last few days, however, since the

President's statement regarding the desirability of lower long

term rates, prices of Treasury bonds have risen somewhat, i.e.,

yields have declined. Yields on both U.S. and State and local

government bonds are above the low levels reached last summer.

In contrast, yields on outstanding high-grade corporate bonds,

which tended to rise in December, have declined in January

and are at approximately the low of last August. This decline

in corporate bond yields is apparently related to the reduced

volume of new issues offered and in prospect since the turn

of the year. New issues of State and local government securi

ties, on the other hand, have been in somewhat larger volume

than in the last quarter of 1960.

Stock prices have risen fairly steadily since October and

the more comprehensive averages are higher than at any previous

time. Trading activity has been at an exceptionally high level.

Yields on stocks at recent prices and dividend returns have

fallen to an average of about 3-1/8 per cent--close to the low

est levels of recent years.

The margin between yields on

stocks and those on highgrade corporate bonds has widened

appreciably.

Some easing of the mortgage market is indicated by FNMA

operations in December.

Offerings and purchases continued to

decline and were less than two-fifths the high volume of early

1960.

Sales by FNMA, which have been negligible, increased in

December to half the volume of purchases. With reduction in

the maximum permissible rate on FHA mortgages from 5-3/4 per

cent to 5-1/2 per cent, FNMA has set its purchase prices for

the 5-1/2 per cent mortgages at a slightly smaller differential

from prices for 5-3/4 per cent paper than would be indicated

This may provide a slight nudge toward

by the rate difference.

a broader reduction in mortgage rates.

With respect to shorter-term rates, yields on 3-5 year

Treasury issues rose somewhat in January, after declining in

December, contrary to the usual seasonal pattern. Treasury

bill rates, after declining in December, have fluctuated in

January at or above the low levels previously reached. These

fluctuations have shown some correspondence with variations

in the reserve positions of banks. Rates on finance company

paper were further reduced in January to the lowest level since

1958. The maintenance of Treasury bill rates has no doubt

been aided by increases, aggregating $500 million, in weekly

bill offerings, as well as by reductions in the Federal Reserve

portfolio, which has tended to reduce somewhat the availability

of reserves relative to demands.

Bank credit, after allowance for seasonal variations,

Total loans and investments of

has expanded in recent months.

banks, after increasing more than usual in December, seem to

have declined less than usual in January. Loans declined sub

stantially, after only a moderate increase in December, but

banks continued to add to their holdings of Government securi

ties, which usually are reduced in January. The reduction

in business loans corresponded roughly to the usual seasonal

pattern, and decreases in loans to finance companies and to

brokers and dealers in securities followed rather large increases

in December. Bank loans to dealers in Government securities,

however, have remained rather large, while loans to other dealers

in securities are relatively small.

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The bulk of the January increase in holdings of U.S. Govern

ment securities at city banks was in Treasury bills. There were

also increases in other short-term issues and in notes and bonds

maturing within one to five years, with a further decline in

holdings of longer-term issues.

In maturity distribution of

securities held, banks have substantially improved their liquidity

positions during the past year. The increase in bank holdings

of Treasury bills and other short-term securities may have tended

to keep bill rates down, but at the same time sales of bills by

the Federal Reserve and the less than seasonal decline in the

money supply and in required reserves have operated in the

opposite direction.

Demand deposits at banks decreased much less than usual in

January, and time deposits continued to show a sizable increase.

It is evident that the seasonally adjusted money supply increased

by a substantial amount in January. Preliminary figures show it

may have increased by $1 billion. By the beginning of February,

the money supply was probably larger than a year ago. Time

deposits at commercial banks increased by about $900 million in

In the same month of previous years, changes have

January.

varied between increases of $400 million and decreases of a

similar amount. In the week ending February 1 there was a

further sharp increase of over $500 million in time deposits at

city banks, reflecting principally a special large-scale trans

action by Sears Roebuck with a number of banks whereby the banks

took over customer paper, thereby increasing their consumer

loans and their time deposits.

United States Government deposits, which were larger than

usual at the end of December, declined substantially in January

but turned up last week. Interbank balances did not decline as

much as usual in January of this year. At the same time banks

These are other

reduced their borrowings from other banks.

indications of relative improvement in bank liquidity.

Bank reserve positions continued relatively easy on the

average during the past month, but showed rather wide week-to

week fluctuations and are now somewhat tighter than they have

been for some time. Free reserves varied from close to $1

billion in the weeks ending January 4 and January 25 down to

around $400 million last week. They may average even less

this week; we would say about $300 million. Required reserves,

which increased by more than estimated seasonal needs in December,

are now over $200 million larger than the figure projected from

the December average on the basis of the usual seasonal pattern.

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Reserves were made available during the past 5 weeks by

the seasonal return flow of currency and decline in required

reserves and were absorbed by a less than seasonal decrease in

float, by the gold drain of around $400 million, and by a

reduction in the System portfolio, which aggregated about $800

million in the four weeks ending February 1. As a net result,

while required reserves are now more than $200 million above

the projected level, excess reserves are below the assumed

$700 million figure by a somewhat larger amount, giving total

reserves of close to the projected figure.

In projecting reserve needs for the period ahead, it

seems appropriate to make some allowance for the higher level

that required reserves have reached, since an aim of policy is

to achieve credit expansion. The level of January 25 has been

used as a base; this is more than $100 million above the December

base, but is below the level actually reached in the week of

February 1 by about $100 million. Excess reserves of $700

million have been added to the January 25 figure for required

If the gain in required

reserves to give a total reserve base.

reserves attained last week is maintained, the projected figure

of total reserves needed will leave excess reserves of less than

$600 million and free reserves of less than $550 million.

In the current week, some $400 million of Federal Reserve

credit would be needed to offset normal market factors draining

reserves and bring total reserves to the projected figure, but

System

$100 million of this could be taken out next week.

operations to date, which have included substantial repurchase

contracts and moderate outright purchases, will supply over

$200 million (on a daily average basis) this week and nearly

$60 million more next week, if the repurchase contracts remain

On this basis, free reserves

until maturity, mostly February 16.

might average close to $300 million this week and nearly $500

In the week ending February 22, the run-off

million next week.

of repurchase contracts would absorb reserves supplied by market

factors, and free reserves would remain close to $500 million.

In the subsequent two weeks (ending March 1 and March 8), System

purchases of nearly $500 million would be needed to maintain

reserves at the levels indicated.

Most of the reserve variations during the next three

months are temporary. Except for perhaps about $100 million

of additional purchases during the next few weeks, there would

need to be no sustained increase in the System portfolio until

early May in order to cover seasonal reserve needs and allow

for an estimated gold drain of about $40 million a week.

The Committee may wish to consider whether it wishes to

provide more or less inducement to credit expansion in supplying

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reserves. The amount of reserves supplied in recent weeks has

permitted or perhaps encouraged monetary expansion, relative to

the usual seasonal pattern, without actually depressing bill

rates. The $700 million of excess reserves assumed have not

been available in the past two weeks largely because they have

been absorbed by the higher than projected level of required

reserves. Unless required reserves decline in the period ahead,

the total reserve needs projected will make possible little

more

than $500 million of free reserves.

If credit demands should be

greater than seasonal, somewhat more reserves might be needed

during the next month. Decision as to when and how to supply

those needs can be made by the Account Management on the basis

of developments in the market.

Mr. Marget presented the following statement concerning the balance

of payments and related international developments:

In January, the U. S. Treasury sold $320 million of gold to

foreign countries. This compares with a December level of $440

million (if we leave out the special sale of $300 million in gold

to the United States by the International Monetary Fund), and a

November level--the worst we have seen thus far--of over $490

million. It is true that there has been a slackening of gold

sales since January 24, but it is not possible to conclude from

that fact alone, or from the mere fact that there has been some

improvement as compared with the appalling figures for November

and December, that the worst is now over. January 24 is still

too recent a date to permit any such conclusion, and, while $320

million is less than $440 million and $490 million, respectively,

it is still

much too high for comfort.

If any comfort is to be

found, it is with respect to the nature of the forces that may

be working toward a reduction in the rate of gold outflow in

the immediate future.

There is some comfort, to begin with, in the fact that

December did not witness a repetition of the disturbing develop

ment that I reported to this Committee a month ago: namely, that

time since our balance of

November saw, for virtually the first

payments situation became a matter of serious concern, an actual

diminution in the level of foreign dollar balances, by as much as

$470 million--clear evidence, obviously, that existing foreign

owned dollar balances were being converted on a large scale into

In December, on the other hand, while the sum of the gold

gold.

outflow and the increase in foreign dollar balances reached a

record high, the level of existing dollar balances, instead of

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showing a sharp decrease comparable to that shown in November,

actually showed a significant increase.

(While privately

owned foreign dollar balances declined by $82 million,

official dollar balances rose by $290 million.) We do not

yet have the complete January figures on foreign-owned dollar

balances, but the fact that foreign dollar holdings with the

Federal Reserve Bank of New York remained virtually unchanged

in January gives at least reason to hope that the mass con

version of dollar balances into gold that we feared might

have started in November is, for the moment at least, in

abeyance.

There is some comfort, also, in the action of a country

such as Japan, which, with holdings of almost $1.9 billion, is

second only to Germany (with around $3.5 billion) in the size of

its dollar holdings convertible into gold. As I reported last

time, the Japanese Finance Minister had announced on December 20

last, in reply to an interpellation in Parliament, that the

Government of Japan wished to increase the ratio of gold in

Japan's reserves from the present 14 per cent to 30 per cent,

"following the example of other countries." On the other hand,

as I also reported last time, the Minister had added that he was

"in no hurry to purchase gold right now."

In fact, a struggle

was then going on within the Japanese Government as to whether

the Japanese should or should not convert dollar balances into

gold at this time. It is comforting to learn that, at least for

the moment, the opponents of conversion into gold have won out.

We are informed that, while Japan intends to bring its gold ratio

up to 30 per cent "eventually," it does not propose to make any

gold purchases for the time being.

Finally, for what it is worth, there is the evidence pro

vided by the London gold market concerning what is described in

the financial press as a "dampening of speculative enthusiasm"

with respect to the price of gold. Since last Friday, the price

in London has been such, after payment of brokerage and handling

charges, as to yield a net price of about the United States par.

What these developments add up to, clearly, is the suggestion

that we may possibly--I stress the word "possibly"--be moving into

a period of a slackened rate of gold outflow, while the inter

national financial community holds its breath to see which way

"Things," in this context, must mean,

things are going to move.

for our purpose, the course of the United States balance of

payments.

For in the case of a country like the United States,

possesses, and with the

with the immense reserves that it still

determination to use these reserves in the defense of the dollar

at its present parity as freely as the President has declared it

to be our determination to use them, what should matter is not such

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expectations of speculators as rest on nothing more substantial

than guesses as to how other speculators may act, but the answer

to the basic question which has been facing us ever since the

developments of 1958 awakened us to a realization that we, too,

can have a balance of payments problem: namely, are we, or are

we not, moving toward a position of reasonable equilibrium in

our international accounts?

As we all know, it is the movements on capital account which

have had the effect of obscuring the very real progress toward

such equilibrium that we have been having in the sector which

would ordinarily have been characterized as the most difficult

and intractable part of our problem: namely, the trade sector.

But while this may be irritating, it can hardly be ignored.

Capital movements do affect the balance of payments, and there

fore the international movement of dollars and gold. We do have

to begin, therefore, by asking what we are likely to see, in the

period immediately ahead, in the way of capital movements.

This, in turn, requires some judgment as to the nature of

the forces which have been behind the very large outflow of

capital that we have been witnessing. Specifically, if those

commentators were right who have discussed the capital outflow

of recent months as if it were solely a result of interest-rate

differentials as between this country and abroad, we should not

expect any relief in this quarter until there is a marked shift

in the international structure of interest rates in our favor.

But the evidence is quite clear that the recent capital outflow

has not been solely the result of interest-rate differentials;

that, on the contrary, the element of confidence in our basic

domestic policies, as well as in our policy with respect to the

dollar price of gold, has played a very considerable role. It

is, therefore, not beyond the realm of possibility that the

evidence I cited at the outset for believing that the "flight

from the dollar" that had begun, particularly last November, to

loom up as a most unpleasant reality, may for the moment be in

abeyance, could mean that the confidence factor, which has been

working against us in balance-of-payments terms, may now begin

to work in our favor. But this is something that we shall be

able to cheer about only when it happens. Thus far, to be sure,

the statements by the President, particularly with respect to

the official dollar price of gold, seem to have had a calming

effect. But on occasions of this kind, one is always reminded

of a remark of Voltaire's that Alfred Marshall, the great economist

of the last generation, was fond of quoting. "An incantation,"

said Voltaire, "will kill a flock of sheep, provided that it is

accompanied by a dose of arsenic." Thus far, it is principally

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the incantation that has been so favorably received. What will

be watched from now on will be the application of the arsenic,

and the effects thereof.

Within the field of Federal Reserve responsibility, the

arsenic involved--namely, monetary policy--is bound to have its

effect on interest rates, which in turn have certainly had their

effects upon capital movements, although not nearly to the extent

implied by so many commentators.

Here I would note only that in

January there were reductions in the discount rate by both

Germany and Japan.

In both cases, the action was taken, not

because of a significant slackening in the strength of the

domestic economic situation in those two countries, but--in

the words of the announcement by the German Bundesbank-- in

order "to reduce the continuing inflow of foreign exchange and

the export of funds."

In this respect too, then,

to facilitate

with proper policies on our side, there is no reason to expect

a further deterioration in the capital account of our balance

of payments, and, over a period, we may even expect an improve

ment.

is said, it is our position on current

But, when all

account, and particularly on trade account, that is going to

be really decisive. And here I recommend a perusal of the

figures given on page 28 of the current Staff Report on Recent

Economic and Financial Developments, with respect to what happened

during the last quarter of 1960 to what is called there the "basic

deficit" in our balance of payments--that is, the deficit after

exclusion of recorded U. S. private short-term capital outflow

two

The latter

and estimated unrecorded capital outflows.

items amounted to a full billion in the quarter; without them,

the "basic deficit" would have been $0.4 billion, or around

(It should be noted that this

$1-1/2 billion annual rate.

figure of $0.4 billion for the fourth quarter includes the

Ford transaction; without that, the "basic deficit" for the

quarter would have been virtually zero.) It has been recently

estimated, moreover, that, taking as a basis the projection for

U. S. foreign trade for the year 1961 that was made recently

by the Balance of Payments Group of the National Foreign Trade

that if the

Council, one arrives at the following result:

capital movements in response to doubts about the dollar and

those in response to interest-rate differentials were to dry

to a

year, the over-all deficit for the year can fall

up this

not

level in the neighborhood of $1 billion. This is still

the zero deficit that we must have in order to be able to say

that we have reached that position of reasonable equilibrium

in our international accounts which we have set as our goal;

2/7/61

-15

and it is still

further removed from the actual surplus in

our international accounts that we must obtain in "good"

years in order to balance the moderate deficits that we may

expect when the cyclical constellation with respect to trade

prospects may be less favorable than it is now. But it is

also a picture vastly different from that of the low point

in our balance-of-payments experience since 1958 (as in the

second quarter of 1959) when, instead of running an export

surplus at a seasonally adjusted annual rate of nearly $6

billion, as we did in the fourth quarter of 1960, we had

virtually no surplus on trade account at all. There has

certainly been adjustment since that low point; and the

direction and degree of adjustment have not been unrelated

to the policies that were being followed during the period

in question. Given time, and unremitting adherence to those

policies, in all fields, which alone can assure that our

products will maintain, and indeed improve, their competitive

position vis-a-vis those of our principal trading partners, we

can solve our balance-of-payments problem, and with it the

vexing problem of apparent conflict between internal and

external policy goals which is now so much with us. But

those two conditions--the right policies, and enough time to

let them work out to the desired result--are of the essence.

Mr. Hackley then entered the room and Mr. Hexter withdrew.

Chairman Martin said that the ad hoc Subcommittee appointed at

the meeting on January 10, 1961, had had two meetings and wanted to dis

cuss Committee operating procedures at the end of this session.

Therefore,

he would suggest that there be an executive session at the end of this

meeting with attendance limited to the members of the Committee, the

other Reserve Bank Presidents, the four incoming Presidents, and Messrs.

Young, Thomas, and Rouse.

No objection to this procedure was indicated.

Mr.

Hayes then presented the following statement of his views on

the economic situation and credit policy:

2/7/61

-16

It

seems to me that the basic conditions which should

determine our policies have not changed materially in the

brief interval since our last

meeting, although there has

certainly been an important gain, for the time being at

least, in foreign confidence in the dollar following the

President's strong statements on this subject.

The domestic business picture does not seem to have

brightened and may, in fact, have turned a little

darker.

For example, retail

sales have been relatively weak, and the

retail inventory-sales ratio has reached the highest level

since the summer of 1958. The general inventory situation

suggests that the inventory adjustment process has not yet

reached completion, even though this point may not be very

far in the future.

Meanwhile there is always the risk that

the high level of unemployment may add a further secondary

push to what has been up to now an inventory recession, or at

least that it makes a business turnaround more remote in the

absence of special stimulating forces--this despite the high

rate of personal savings over the past year, which could of

course finance a revival of large-scale consumer spending.

Oddly enough, the stock market has continued to ignore these

more gloomy possibilities, but it is not clear to what extent

the buoyant market in equities reflects business optimism as

distinguished from fears of inflationary developments.

Despite the gratifying recovery in foreign confidence in

the dollar, this remains a matter of great delicacy. We have

made only a start toward correcting the heavy balance-of-payments

deficit; and moreover, if the recession at home should deepen,

and particularly if it should bring on a sizable Treasury

deficit, this

would put the strength of the dollar to a further

test.

Some deficit in the Federal Budget is to be expected, but

if it should begin to approach the magnitude reached in 1958 we

might face increasing skepticism abroad on the strength of our

And of course the same risk would arise if we were

currency.

a

decline in short-term interest rates with a conse

permit

to

Thus the

quent stimulus to a renewed outflow of capital.

balance of payments must remain a major consideration in our

policy decisions.

It seems to me that the policies pursued by the System

over the last

month or two have been appropriate for the twin

objectives posed by the domestic recession and the international

status of the dollar. Banks have been supplied with a rising

fund of reserves, their liquidity positions have improved, and

The behavior of total

the money supply has been increasing.

bank credit at weekly reporting banks in January was considerably

stronger than the seasonal pattern, primarily because of continued

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acquisitions of Government securities by the banks--and

this followed a record breaking expansion of bank credit in

December. Time deposits moved up again strongly in early

January, and I understand that the money supply will show a

substantial rise in the second half of the month in contrast

with the slight dip in the first half. We have also witnessed

a decline in the velocity of money, a development associated

with the diminished pressure on the cash balances of the public

at large. Moreover, it has proved possible to hold the bill

rate at around the 2-1/4 per cent level without interfering

with the liquidity needs of the domestic economy.

In the light of the Treasury's recent financing announce

ment and our long-standing "even keel" policy, it is clear that

in the next week or so we should try to maintain about the same

atmosphere in the market that has prevailed during the recent

past. The projections suggest that this may not be too diffi

cult, although there is always a danger that the bill rate may

slip lower while at the same time the position of bank reserves

may not leave much scope for net selling of bills designed to

counteract such a tendency. I would continue to place the main

emphasis on the bill rate. Looking beyond this immediate situ

ation, I think it is incumbent upon us to grapple now with the

difficult implications of a continuing delicate international

situation and a possibly deepening recession. At the risk of

repetition, I would like again to stress the need for flexi

bility in our policies. We are confronted with an increased

emphasis on experimentation in public policy, particularly in

fiscal policy and debt management. While we should welcome

these innovations to the extent that they may relieve monetary

policy from carrying the whole load of countercyclical action,

we should not let an inactive or an inflexible posture on our

part encourage unwise actions in these other areas of public

policy.

At this point I had intended to comment on the desirability

of experimentation in open market operations along the lines of

suggestions which have been made at the last few meetings, but

I shall defer these remarks until the executive session scheduled

immediately following this meeting.

I see no reason now to consider a change in the discount

rate or in the directive--apart from the longer-range question

as to the proper form which the directive should take. We

should, I believe, have in mind the possibility that, in the

event of a renewed large-scale flight of short-term capital,

the System might wish to consider an increase in the discount

rate in order to put upward pressure on short-term market

rates--but hopefully this can be avoided, if present favorable

trends continue.

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Mr. Erickson commented to the effect that it

was necessary to give

consideration to the extremely severe weather conditions that had prevailed

recently in the First District when making any evaluation of business

conditions.

still

Continuing, he said that employment and production figures

showed an unfavorable trend.

On the other hand,

in the weeks ended

January 21 and 28 there were rather substantial increases in electric power

output over year-ago levels, and the January poll of New England purchasing

agents was more optimistic than the December poll.

Construction was down

in December; for the year, residential was off 4.6 per cent,

was up 17 per cent, and public utility

cent.

nonresidential

and heavy engineering were down 33 per

The over-all decline for the year was 3.4 per cent.

Department store

sales had been erratic due to weather conditions.

Mr.

Erickson said the December survey of mutual savings banks showed

a deposit gain of 5.9 per cent compared with December 1959.

The comparative

percentage gains had gone up gradually from the low of 4.4 per cent in May.

At the end of the year,

mutuals showed an increase of better than 11 per

cent in mortgage loans from the previous year.

The average rate on con

ventional mortgages was between 5-1/2 and 6 per cent, but four small banks

had cut their prime mortgage rate to 5-1/4 per cent.

Commercial and

industrial loans of reporting member banks showed a rise in January,

contrast to a decline last year,

of a year ago.

in

and on January 25 were 7 per cent ahead

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2/7/61

After expressing the opinion that the Desk had done a good job in

the past two weeks, Mr. Erickson said that he would not favor a change in

the discount rate or the directive at this time.

He would instruct the Desk

to supply reserves as needed, bearing in mind the short-term rate more than

any free reserve figure.

Mr. Irons reported that on balance there had been no particularly

significant changes in the Eleventh District.

Construction in the past

month was good; awards were very high in January.

to petroleum stocks showed some improvement,

severe weather in other parts of the country.

The situation in regard

with demand reflecting the

Employment had increased, but

there was also a slight increase in unemployment;

in Texas, unemployment

was averaging about 5.3 per cent of the labor force.

It

seemed doubtful

that there would be any great improvement over the next few months, but

neither was any particularly unfavorable trend foreseen.

The industrial

production index for the District was up for the most recent month.

Depart

ment store sales, however, were down, with unfavorable weather a factor.

Agriculture had been affected by unusually heavy rains.

Mr.

Irons stated that the banking situation remained easy.

Borrow

ings at the Reserve Bank were low and District banks were net sellers of

Federal funds.

However,

their net sales aggregated about $150 million less

than in the preceding two-week period.

Demand deposits had shown some down

ward movement, with most of the decline accounted for by interbank deposits.

Time deposits,

on the other hand, continued to rise substantially, building

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2/7/61

up liquidity to a higher level than the money supply alone would indicate.

While there had been some decline in loans, it was no wore than seasonal,

and investments were up.

Turning to policy for the next period, Mr. Irons commented that the

Treasury financing suggested maintenance of the status quo.

He felt the

Account had done a creditable job in the past two weeks; after getting over

the float problem during the earlier week, conditions were about as they

should be.

He would like to see about the same degree of reserve availa

bility maintained as in the past week or so, with any deviations on the

side of less aggressive ease but no overt action in that direction.

As far

as guides were concerned, he would favor using the short-term rate, as

reflected by the bill rate, and he would like to see the bill rate around

2-1/2 per cent.

Also, he would like to see the Federal funds rate in the

area of 2-1/2 to 3 per cent.

As far as free reserves were concerned, he

would prefer the $450-$500 million range to the $600-$700 million range.

He felt this would indicate a better relationship and that it would provide

adequate reserve availability to the banking system.

The Account should

have considerable leeway in the forthcoming period, but he would urge

avoiding anything that would put pressure on the Treasury bill rate.

He

would recommend no change in the directive or in the discount rate.

Mr. Mangels reported that developments in the Twelfth District

were not significantly different from the rest of the country.

The

Pacific Coast had shown a slight improvement in employment and a slight

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2/7/61

drop in unemployment.

However, this was no cause for optimism as it

reflected increased payrolls in the food processing industries due to

seasonal factors.

hand, was down.

Aircraft and manufacturing employment,

on the other

The net effect of these movements kept unemployment in

relation to the total labor force at a 6 per cent figure.

District steel

mills in the week ended January 28 were operating at 84 per cent of the

1957-59 average, which marked a leveling off after the rise during the

first two weeks of January.

The lumber industry remained in the doldrums,

with production down and the volume of unfilled and new orders not offering

any encouragement.

present time.

As to agriculture,

farmers were not suffering at the

Pacific Northwest wheat farmers in particular were doing

well, since wheat prices were 17-22 cents above support prices, largely

as a result of export demand.

per cent from 1959.

Total construction in December was up 1

Although residential construction was down 13 per

cent and nonresidential was down 3 per cent,

works and utilities offset those declines.

construction of public

In the area of retail sales,

latest figures indicated that both department stores and automotive sales

were down somewhat in January.

Mr. Mangels indicated that there had been a sharp decrease ($180

million) in bank loans during the last two weeks of January, this being

twice the decline during the comparable 1960 period.

Demand for commercial

loans was slack, and the demand for consumer and real estate loans was not

encouraging.

However, banks added about $100 million to their holdings of

bills and certificates.

Demand deposits held about even during this period,

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2/7/61

although expectations were for a more rapid decline in bank deposits in

the next month or six weeks than in the past.

Time deposits, on the other

hand, were up somewhat despite a continuing decline in savings deposits.

Only two banks, both country banks, resorted to borrowing from the Reserve

Bank in January.

It was reported that there had been some talk among the

banking fraternity of a cut in the prime rate during the next 30 or 60

days.

However, it

seemed to be felt generally that if the Administration's

programs were implemented and the Government needed new money for them,

interest rates would be higher at the end of the year than at present.

Turning to policy, Mr.

Mangels said that in view of the Treasury

financing situation, he would maintain an even keel for the next week or

so.

He would define this as meaning free reserves somewhere around

$600-800 million, with the bill rate around 2-1/4 per cent.

no change in the discount rate or the directive at this time.

He would make

However, by

the time of the next meeting he felt that in the absence of unforeseen

developments he would be inclined to move to a somewhat easier position

in order to encourage recovery of the domestic situation.

Mr. Deming reported that in the Ninth District there were some

optimistic appraisals of the outlook, coming mostly from the business

community.

However, he did not believe that this was a general feeling

on the part of the public; in fact, he could paint a fairly black picture

of the outlook for the District on the basis of available information.

A recent newspaper poll indicated that a substantial percentage of the

2/7/61

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respondents thought the outlook for the current year was not too good.

Of those interviewed in January 1961, 57 per cent indicated that they

thought the outlook was good compared with 79 per cent during the same

month in 1960 and 71 per cent in 1959.

In evaluating conditions at the

present time (good, bad, or indifferent), 64 per cent thought that times

were good in 1960 compared with 39 per cent in 1961.

Only 15 per cent

thought that times were bad in 1960, while 31 per cent felt that way in

1961.

Also, the District's natural resource industries were not experiencing

a great amount of activity, showing declines from preceding periods, so the

outlook there was not too optimistic.

The agricultural picture could be

quite good, although there might be a moisture problem in the spring.

In discussing the banking situation, Mr. Deming remarked that the

bank loan picture indicated a softerning of activity.

While loans at city

banks usually fall during January, they fell faster this year, the dollar

amount of decline being almost 6 times as large as the average decline

over the past thirteen years.

It was thought that this might reflect a

shift by borrowers to other markets for funds.

The banks were happy about

the improvement in liquidity, but not particularly happy about the decline

in loan demand.

On balance, Mr.

Deming said, it

appeared that the District situation

was about the same as the situation in other areas.

He doubted that there

was a firm basis for optimism at this time on the part of business and the

2/7/61

-24

stock market, and he could not see what underlying factors were used in

arriving at this optimism.

Mr. Deming indicated that he had no disagreement with the views

of Messrs. Hayes, Erickson, or Irons.

In his opinion, the prescription

that the Committee was following was the right one.

He would not change

the directive or the discount rate at this time, and he would favor using

the bill rate, rather than the level of free reserves, as a guide for

open market operations.

He added that he felt the Desk had done a good

job in the past two weeks under conditions that were somewhat less than

favorable.

Mr. Allen indicated that in the short interval since the last

meeting there was little

new in the Seventh District.

Total economic

activity continued to decline in January, with the automobile industry

contributing the most important depressing development.

Automobile sales

in January were 369,000 units, 19 per cent below last year.

Some improve

ment was expected in February and March., with guesses that 1,250,000 cars

will be sold in the first

the first

quarter, but that would be 16 per cent below

quarter of 1960.

Inventories continued relatively static, at

a little over 1,000,000 units.

sales, and on that basis first

The industry was gearing production to

quarter production would not exceed

1,300,000 units--35 per cent below last year.

Automobile analysts in

Detroit felt that the bottom was being scraped in terms of production and

sales and that conditions would not get worse.

There was much the same

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2/7/61

attitude throughout the District generally, with no evidence that business

men or consumers believed that a major slump was in the making.

January

saw some improvement in farm machinery and household appliances and a

number of industries increased orders for steel, but the over-all

production rate was held down by reductions in orders from auto producers.

Mr. Allen mentioned that there were diverse views among mortgage

lenders in the Chicago market as to the probable effect of the recent

reduction of the ceiling rate on FHA mortgages.

The most general view

was that it would merely increase the prevailing discount for such

mortgages by about 2 points.

However, the president of a large mortgage

company believed that the reduction might be just what was needed to set

in motion a downward adjustment in home mortgage rates, and an important

builder considered the move beneficial as part of a package of official

measures designed to bolster consumer expectations.

Reports at a meeting

of the nation's major lenders to agriculture, held at the Chicago Bank

last week, indicated that delinquencies and foreclosures of farm real

estate mortgages were at low levels, that interest rates had declined

recently and were expected to decline somewhat further, that activity in

farm real estate was slow, and that the supply of agricultural credit,

both long-term and short-term, was adequate for 1961 and was somewhat

larger relative to prospective demand than in 1960.

Mr. Allen remarked that these factors, together with movements in

the long-term securities markets,

seemed to indicate response, slow

2/7/61

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though it might be, to monetary ease.

However, the demand for bank credit

continued weaker than normal for this time of year.

Business loans at

District reporting banks dropped $132 million in the four weeks ended

January 25, compared with $22 million last year, but the basic deficit

of Chicago central reserve city banks rose to an average of $82 million

for the period ended February 1.

These banks had begun to buy bills in

anticipation of the April 1 tax date and the Sears financing on January

31 generated pressure.

Eight Seventh District banks purchased $316

million of the $1.1 billion total of Sears' customer contracts sold.

Turning to policy, Mr. Allen stated that in his opinion the

reasons so generally expressed two weeks ago for continuing the status

quo continued to be valid and controlling.

He would not favor a change

in the discount rate, the directive, or the degree of ease.

Mr. Allen then referred to the many expressions heard to the

effect that longer-term rates were too high and must be reduced.

was not at all sure that they were too high if

He

the savings-investment

process so important in our way of life was to be nourished.

In any case,

the word "confidence" was all-important, and by this he meant real confidence,

not psychological hoop-la or "incantations," to use the word Mr. Marget had

quoted from Voltaire.

Bank reserves were plentiful, savings had increased

substantially in the past year, and it

seemed that the requisites for

investment in the long-term area were present except for the one that was

most necessary--confidence.

It was, of course, important that the System,

2/7/61

in

-27

its limited sphere,

do whatever it

could to increase confidence on the

part of the saver and investor, and refrain from doing anything that would

impair confidence.

Mr. Allen added that under present conditions, difficult

as they were, he felt that the Committee could make its maximum contribution

by continuing to operate until its

next meeting, at least, as it

had been

operating for the past several weeks.

Mr. Leedy commented that it

had been recommended at the end of

January that the Kansas City metropolitan area be classified as a sub

stantial labor surplus area.

It was estimated that about 8 per cent of

the labor force was unemployed on January 15.

If the city was so

classified, it would be the first metropolitan area in the District

to be classified as an area of substantial labor surplus since 1959.

Regarding the banking picture in his District, Mr. Leedy said it

followed much the same pattern as the neighboring Districts.

There had

been a substantial reduction in loans since the first of the year, demand

deposits were under the year-ago levels, largely as the result of a

substantial drop in interbank deposits, and there was an unusually large

increase in time deposits.

Mr. Leedy recommended that the Committee continue to do what it

had been attempting to do since the January 24 meeting.

As he saw it,

recent developments, including the attitude indicated by the President in

his statements regarding the need to protect the dollar, were working in

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2/7/61

the System's favor and were tending to minimize its problem.

Nevertheless,

the System still had a responsibility in this area that it must continue to

fulfill.

In his opinion, the Committee should pursue about the same policy

that it had been following, being sensitive to any downward movement in the

bill rate of a material nature and also keeping watch on the Federal funds

rate, which he felt need be only slightly lower than the discount rate.

The level of net free reserves that might eventuate from pursuing such a

policy would not concern him too much.

Mr. Leach reported that business activity in the Fifth District

continued to decline slowly, although a few indicators showed some slight

improvement.

Man-hours, seasonally adjusted, had declined in the durable

goods industries, but furniture factories collectively had improved a

little.

In the nondurables field, activity had held up well in food and

tobacco manufacturing but had declined in other groups.

The small volume

of forward buying continued to restrain activity in the textile industry

generally, although yarn mills recently had a sizable increase in their

backlog of orders.

While total employment had declined, employment in the

fields of trade, finance, and services remained stable or increased

slightly. January department store sales slowed sharply under adverse

weather conditions after a favorable early start.

The position of

District banks continued to ease.

Mr. Leach expressed the view that monetary policy had done its

job, and a good job at that.

In his opinion, any further easing at this

2/7/61

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point would be a grave mistake.

It was unlikely that it would stimulate

employment, and on the basis of recent experience it

expand time deposits rather than the money supply.

probably would

With loan demand

relatively weak, banks presumably would channel most new funds into short

term investments,

thus aggravating the balance-of-payments problem by

further depressing short-term rates.

further ease, he did not think it

However, while he was opposed to

would be advisable at the present time

to adopt a positive program to mop up reserves solely to push rates higher

than they now were.

Although he hesitated to say anything about reserves,

he believed $700 million of excess reserves was a little high; it seemed

to him that a range of $500-600 million would be an appropriate benchmark.

However, he would play down the present importance of the free reserve

figure as an indicator compared with short-term interest rates, particularly

the 90-day bill rate.

Although the 90-day rate was recently as low as 2.13

per cent, he was pleased that it had risen to a substantially higher level.

Considering existing levels of interest rates abroad, he believed the

System should seriously consider offsetting action if the bill rate

approached 2 per cent.

This did not mean that he favored a 2 per cent

peg, or any other peg, but the 2 per cent figure had acquired inter

national psychological importance.

In view of the balance-of-payments

problem and the current Treasury financing, a reduction in the discount

rate was entirely out of the question, and he saw no immediate need to

change the directive.

2/7/61

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Mr. Leach added that, inasmuch as this was probably the last

Committee meeting he would attend, he would like to say that while he

thought the System's policy actions since last spring had been as

appropriate as any one could reasonably expect, he believed that there

was much room for improvement in the manner of handling the directive to

the New York Bank.

Mr. Mills said he was heartened by what he sensed to be a spread

ing awareness of the necessity that the Open Market Committee focus its

attention on the international financial situation.

To that end,

it

was

his belief that the objective should be to develop a level of positive

free reserves in the range of $400 to $500 million, which conceivably

would be reflected in a Federal funds rate approaching 3 per cent and, he

would hope, a 90-day bill rate in the range of 2-1/2 per cent.

In his

belief, the pursuit of that objective would not do violence to those who

espoused the view that reserves should be supplied in greater abundance

and who endorsed a level of positive free reserves of $700 or $800 million

or even more.

His reasoning was that in reverting back to past experience

it was clear that where a level of positive free reserves in the range of

$400 to $500 million had been maintained constantly over any considerable

period, a more than ample stimulus had been given to the expansion of

bank loans and investments.

Again, as at the January 24 meeting, he

wished to call attention to the chart of positive free reserves and

negative free reserves over a period of several years.

This chart

2/7/61

-31

indicated that on the occasions when the System had permitted positive free

reserves to remain for a long period at a high level it had produced con

ditions that were followed by a vigorous counter policy and by attendant

difficulties and problems.

With regard to the international situation, Mr. Mills said it

seemed to him that the Committee was fortunate in the erudite presentations

that it received concerning the statistical movements of domestic and

international financial affairs.

However, it might also be well to turn

back to the perceptiveness that comes from reading economic history.

If

it is true that history repeats itself, it seemed not at all improbable

that the country was moving into a situation that would find its friends

abroad again saying that "when America sneezes, Europe and other parts of

the world have pneumonia."

There were definite signs of deterioration in

economic activity abroad, both in England and Western Europe, and in his

opinion the economy of Japan was poised at a very narrow balance.

If the

movement of recessionary influences continued its downward path in the

United States, history would suggest that at some point the market for

foreign goods would be so impaired that the balance of trade would turn

in favor of this country, possibly more violently than one would choose

of his own accord.

Accordingly, Mr. Mills said, his concern was more with

the possibility that in the future this country would experience an inflow

of gold than that it would experience a continued outflow.

In the mean

time, however, he thought it was of critical importance that the System

2/7/61

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bring the short-term interest rate structure of the United States, to the

extent of its

powers, to a level that was competitive with the rate

structures in Great Britain and on the Continent.

Mr. Robertson said that he would not comment on economic conditions,

or debate them, except to say that there was still

indication of an upturn.

no upturn or any immediate

The turnaround had not yet been made.

to him, as he had pointed out before, that it

It

seemed

was a grave mistake on the

part of the Committee to attempt to use the bill rate as the controlling

guide for monetary policy.

In his opinion, this had prevented monetary

policy from making the kind of contribution it was capable of making

toward a reversal of the economic downturn by increasing the availability

and lowering the cost of money.

This failure would serve to prolong the

recession.

For several months he had been urging that the Committee provide

the banking system with a more ample supply of reserves in order to

enable monetary policy to make whatever contribution it could toward

reversing the economic trend.

He still believed in the validity of that

course of action, and if it resulted in driving the bill rate to 2 per

cent or below, he would not be concerned.

He felt that the Committee, in

pressing to hold up the bill rate, had set up a "bogey," based on no good

reasons that he had heard in the discussions around the table.

He was not

impressed with the argument that a lower bill rate would stimulate a

further outflow of capital or even accentuate the outflow of gold.

2/7/61

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Furthermore, he believed that any outflow of capital based on interest

rates would flow back when rates here rose--as they would when the

economy began to move upward.

if

The outflow of gold would reverse itself

and when the world learned that this country meant to manage its

internal affairs in a way that would revitalize the economy and at the

same time maintain the stability of the dollar.

Also, he did not believe that long-term rates could be lowered

significantly and effectively while the System was pegging short-term

rates.

Therefore,

the System should have the courage to permit short

term rates to go lower.

In his view, it

would not require much lower

short-term rates to achieve the desired effect on longer-term rates.

In

fact, even the policy that the System had been following was apparently

beginning, belatedly, to exert some slight impact.

Mr.

Robertson commented that during the past several months he

had joined in voting for renewal of the policy directive.

He had done

so because the language of the directive was sufficiently broad to

encompass his position.

The statute, he noted, requires a statement of

the reasons for the policy actions taken by the Committee.

Although his

reasons would not be in the policy record submitted to the Congress, he

had voted for renewal of the directive on the basis that he had just

explained, as clearly shown by the minutes of those meetings.

the minute record of this meeting to make it

He wanted

doubly clear that, although

he did agree with the economic policy specified in the language of the

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2/7/61

policy directive, which called for encouraging monetary expansion, the

direction of open market policy had not been fully in accord with his

views.

Mr. Shepardson expressed the view that a policy of additional

ease might only stimulate a sudden burst of growth that would be

incompatible with the longer-run objective of sustainable economic

growth.

Continuing, he said that his concern about the course of mone

tary policy went not only to the international problem arising out of the

balance of payments but also to the problem of fostering the sound growth

of the domestic economy.

It seemed to him there were certain fundamental

adjustments that must take place, and that those adjustments were in

process.

After the 1957-58 recession a quick turnaround occurred, but

the country shortly found itself

faced with another problem, and he was

not convinced that on this occasion a sudden turnaround would be desirable.

Mr. Shepardson stated that he felt the policy the Federal Reserve

had been following was sound and that he would strongly urge its

continuation.

In his opinion attention should be given to the short-term rate not only

because of its

international implications but because it

was important in

the evolution of the domestic economy not to strive toward too sudden a

change.

Mr.

Shepardson then commented on his favorable reaction to the

statements of the President that looked toward placing American industry

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2/7/61

on a competitive basis in world markets.

This, of course, was a longer

range objective that could not be accomplished immediately.

Conversely,

he was concerned about some of the palliatives that had been suggested

which would have the effect of removing forces that hopefully would bring

about basic adjustments.

As he had said, those adjustments were important

from the standpoint of international relations.

In addition, however,

they were essential to the kind of growth that was wanted in this country,

based on increased productivity and increased efficiency.

After indicating that he would not favor a change in the directive

or in the discount rate at this time, Mr. Shepardson said it

him that the degree of ease had been fully adequate.

himself with the view that it

would be preferable if

seemed to

He wished to associate

the level of free

reserves were on the low side of $500 million rather than on the high

side.

The Federal funds rate should be somewhat below the discount rate,

but it

should not be in the low range that had prevailed at some times in

the recent past.

Mr.

King said that although there were many important problems

with which the Open Market Committee could concern itself, he felt that

the principal problems at present were the general state of the domestic

economy and the position of the United States in international finance.

Given these problems, he had been wondering how the Committee would meet

its responsibility.

Now, as demonstrated by the instructions to the

Desk, particularly in regard to the short-term rate, the Committee had

2/7/61

-36

indicated that it

was stopping at approximately this point in the pursuit

of further ease, or that it

stopped at a good point.

had already stopped.

In his view, it

had

Although, as he had stated previously, he felt

that the recessionary influences in this country might well continue

through this year, when the upturn occurred he believed it would be more

soundly based and of longer duration than the upturn that followed the

recession of 1957-58, when Federal Reserve policy appeared to have

involved a greater degree of ease than had prevailed during the past

several months.

Mr.

financing,

King went on to say that, in view of the imminent Treasury

it

was clear to him that this was not a time for overt actions.

This point of view, he noted, had already been expressed by others around

the table.

He would hope that the level of free reserves might be in the

range of $400-500 million rather than $600-700 million.

After indicating

that he would not favor a change in the discount rate or the directive at

this time, Mr.

King concluded by saying that in his opinion the Committee's

position with respect to maintenance of the bill

rate represented one of

the greatest contributions that the Committee could make in the present

period.

Mr. Fulton, in reviewing developments in the Fourth District,

indicated there was nothing to cause much joy.

rise in the production of steel.

There had been a faltering

Department store sales, on the other

hand, had been adversely affected by the weather and for the year to date

2/7/61

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were 5 per cent below a year ago.

Unemployment was still

high, although

on a seasonally adjusted basis there had been a slight improvement.

In

Youngstown, for example, the steel mills were now making inventories for

themselves in anticipation of having to shut down completely at a later

date for the installation of a new rolling mill, so the temporary decline

in unemployment could not be classed as solid improvement.

The machine

tool industry was going along fairly well, receiving stimulus from foreign

orders for tools.

Domestic orders, however, were not coming in.

New

orders in the steel industry in January were about 2 per cent above

but shipments so far in Feburary had been the lowest for many

December,

months.

A number of orders had been deferred from February to March

delivery.

In one of the large mills about 25 per cent of the employees

had been laid off, and in other mills about 40 per cent, and the super

visors, office help, and officials had received wage reductions.

Due to

the falling off of automobile production and sales, that industry had been

deferring and cutting back orders from steel mills and foundries.

There

was one gleam of hope in the fact that a number of other users of steel

were coming in with rush orders, indicating a shortage in their inventory

positions.

If this condition was widespread, there could be some sub

stantial buying of basic metals.

However, it was understood that those

who were ordering did not have more orders themselves.

Their production

was being maintained at low levels, but their inventories were so low they

had to get more materials with which to work.

Many complaints were heard

2/7/61

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about the profit squeeze resulting from high operating costs and price

concessions.

Turning to policy, Mr. Fulton indicated that he did not believe

that the discount rate should be changed at this time.

He would like to

see free reserves in the neighborhood of $500-600 million, a level that

he felt would give the banking system adequate liquidity.

gested,

He again sug

as he had done at the January 24 meeting, that the language of

clause (b) of the directive be changed to substitute the word "recovery"

for "sustainable growth."

Mr.

Bopp commented briefly on weather conditions in the Third

District, noting that for 16 days the temperature had nor risen above

freezing.

Department store sales during the week ended January 21 were

27 per cent below the previous year, and in the following week they were

16 per cent below the year-ago level.

per cent below 1960 figures.

Mr.

For the year to date, they were 11

Unemployment was high and rising.

Bopp said, the domestic situation was not one of great hope.

there was the problem of the balance of payments.

Certainly,

Unfortunately,

In terms of policy, he

would not favor a change in the directive or the discount rate at this time.

He felt

that the present degree of ease should be maintained, and that the

primary measure of that ease should be the level of short-term rates.

Mr.

Patterson said that the recession in

economic activity in the

Sixth District appeared to have continued in January.

report on some of the District figures.

However,

He had prepared a

after hearing the other

2/7/61

-39

reports, there appeared to be no differences of sufficient importance to

warrant going into detail concerning Sixth District developments.

Mr. Johns said that although there were some in the Eighth District

who claimed to discern some improvement in the business outlook, it

difficult to find facts to support such contentions.

was

Recently, he said,

the newspapers had focused attention on a report that 8.4 per cent of the

labor force in the St. Louis area was now unemployed.

After summarizing

comments in this regard that had been made by a local employment official,

Mr. Johns expressed the view that the attention directed to this matter

was almost certain to affect the general feeling about the economic

situation, particularly if the matter continued to receive as much

attention as it

had.

Mr. Johns then commented on the unemployment problem

that had existed for some time in Evansville,

Indiana, following which

he noted that although total credit at Eighth District member banks

increased slightly more than $80 million in

November and December, most

of the increase was in bank investment portfolios as loans rose less

than seasonally.

During January, total credit at weekly reporting banks

declined more than seasonally, with the banks selling securities on

balance.

Mr. Johns said that as he reviewed developments in the Eighth

District and in the nation, he did not see much hope for an early upturn.

Therefore,

he continued to believe that the policy directive, which

called for encouraging bank credit expansion, was appropriate.

After

referring to the reserve porjections that had been distributed before this

meeting, he said it

continued to be his view that "total reserves needed"

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-40

should be increased modestly.

to make it

In expressing this view, however, he wished

clear that he was not advocating more than a moderate expansion.

He did not care to suggest any specific target, and instead would say

merely that he would like to see "total reserves needed" increased

modestly and continuously until further order.

Mr.

Szymczak expressed the view that System policy had been going

along in the right way.

He believed it

was becoming more and more clear

that the thinking of the Committee was in terms of supplying enough reserves

to the banking system, but, in view of the balance-of-payments problem, not

going so far as to contribute to a downward movement of the short-term rate.

He would subscribe to a continuation of present policy for this reason and

also because the Treasury financing called for maintenance of an even keel.

Mr. Balderston commented that he assumed an even keel should be

maintained during the first part of the forthcoming period because of

the Treasury financing, even though the pricing of the issue offered by

the Treasury might make the maintenance of an even keel less necessary

than usual.

Once the Treasury financing was past, however, he hoped

that the views of Messrs. Hayes and Irons and others who had spoken in

the same vein would be followed by the Committee.

While it was not

possible to tell at this juncture whether the turnaround in domestic

economic conditions, when it occurred, would involve a quick recovery

or a slow one, it was his view that the liquidity that bad been supplied

to the banking system was sufficient for the present and that the element

of aggressiveness should be removed from the System's policy of ease

until such time as the economy seemed to be putting the added reserves

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to good use.

As to tests, he suggested first the bill rate because of

its international significance.

He would also suggest the Federal funds

rate, which he would like to see closer to the discount rate than it

been at some times during recent weeks.

had

Further, he would suggest that

the Committee watch the extent to which banks were buying bills.

During

the month of January, he noted, the banks had bought about $500 million

of Government securities, principally bills.

His own concept for the

period ahead was that System policy should be one of neutrality, and such

a policy might mean only small additions to bank holdings of Government

securities.

In terms of free reserves, the effect of such a policy might

be to reduce the level below $500 million, perhaps to the $300-400 million

range.

However, this was difficult to determine because of the fundamental

change that had occurred in allowing member banks to count their vault

cash as part of required reserves.

Accordingly, he agreed with those

who had suggested that for the time being it would be better to watch

the bill rate than the level of free reserves.

Mr. King withdrew from the meeting at this point.

Chairman Martin indicated that he had little to add to the dis

cussion.

In his opinion the bill rate was the crucial point.

A difficult

problem was involved in the use of words such as "pegging" or "influencing,"

but under present circumstances he felt that the System should influence

the short-term rate.

He also felt that at this time the short-term rate

provided a better benchmark of System policy than the free reserve

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figure, which he suggested might have about outrun its usefulness as an

effective measurement.

Chairman Martin said it

appeared that the consensus favored no

change in the discount rate and no change in the directive.

It

also

appeared to be the consensus that the measuring benchmark of open market

policy should be primarily the bill

rate.

The Chairman then inquired whether anyone wished to be recorded

as dissenting from the consensus, and Mr. Robertson said he agreed that

the statement by the Chairman represented the consensus.

He did not

agree, however, with the direction of System policy.

Chairman Martin asked whether there were others who wished to

comment on the consensus, and no comments were heard.

The Chairman next referred to the policy directive,

and Mr.

Robertson said that he agreed with the policy directive because he felt

that its language encompassed his own position.

The Chairman said it was

his understanding that it was on the general implementation of the

directive that Mr. Robertson wanted to record his dissent, and Mr.

Robertson indicated that this was correct.

The Chairman then inquired whether there were others who wished to

record themselves similarly, and Mr. Johns remarked that he was not at this

time a member of the Committee.

Chairman Martin indicated that Mr. Johns'

views on open market policy, as expressed earlier during the meeting, would

of course be reflected in the minutes.

2/7/61

-3

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 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

general 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 encouraging monetary expansion

for the purpose of fostering sustainable growth in economic

activity and employment, while taking into consideration

current international developments, 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 amounts of special short-term certifi

cates of indebtedness as may be necessary from time to time for

the temporary accommodation of the Treasury; provided that the

total amount of such certificates held at any one time by the

Federal Reserve Banks shall not exceed in the aggregate $500

million.

Secretary's Note:

The Chairman then

called for a session at which attendance

would be limited. The minutes of that

session begin on the following page.

2/7/61

-44

The meeting of the Federal Open Market Committee reconvened in

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

Washington at 12:20 p.m. on February 7,

1961,

with the following in

attendance:

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Martin, Chairman

Hayes, Vice Chairman

Balderston

Bopp

Fulton

Leedy

Mills

Robertson

Shepardson

Szymczak

Irons, alternate for Mr.

Bryan

Messrs. Leach, Allen, and Mangels,

Federal Open Market Committee

Alternate Members of the

Messrs. Deming, Erickson, and Johns, Presidents of the Federal

Reserve Banks of Minneapolis, Boston, and St. Louis,

respectively, and Messrs. Ellis, Wayne, Clay, and Swan

Presidents-elect of the Federal Reserve Banks of Boston,

Richmond, Kansas City, and San Francisco, respectively

Mr. Young, Secretary

Mr. Thomas, Economist

Mr. Rouse, Manager, System Open Market Account

In

opening this session, Chairman Martin noted that Mr.

Bryan

was absent on account of illness and that, in view of the meeting of the

Ad Hoc Subcommittee called for yesterday,

he had requested Mr. Irons,

who is the alternate for Mr. Bryan at the regular meetings, to serve for

him at the Subcommittee's meeting.

Chairman Martin then stated that he had called this Committee

meeting to receive an interim report from its

Ad Hoc Subcommittee.

The

2/7/61

-45

Subcommittee, he said, had held two meetings, had had the help of

documents submitted by Mr. Young and Mr. Rouse for its consideration,

and had taken into account the very heavy barrage both from within

and outside Government, against the System for the uncompromising

position it

allegedly took towards its own operating procedures and

policies.

In the light of its discussions and evaluations,

the several

members of the Subcommittee were unanimous in the view that the System

had to give some further tangible indication of open-mindedness and

willingness to experiment.

The whole issue of operations, they agreed,

had become one of conceptual contention and, therefore, no progress

could be made in resolving it by the device of papers, studies, or

committee reports.

There had to be evidence accumulated from actual

experiment or testing to enable the System to escape from the charge of

doctrinaire commitment to a laissez faire, free private market position

in confining operations to short-term securities.

Therefore, the

sooner the System got busy at the task of obtaining empirical data

the better it

would be.

Since that was the Subcommittee's undivided

view, Mr. Rouse had been requested to propose an appropriate program

of action and to set forth the requisite implemental procedures for

carrying it

out.

Accordingly, he would ask Mr. Rouse to report on his

recommendations shortly.

2/7/61

-46

Chairman Martin next observed that, while the Subcommittee was

unanimous in feeling that inauguration of a period of experiment was

the only feasible course, feelings were mixed as to what the experiment

would demonstrate.

He himself had doubts about the outcome; at the

same time, he could not prove at this time that these doubts were

justified.

From his discussions with dealers, he would gather that

they were divided in their judgments as to whether the area of operations

should remain limited as in the past eight years or should be broadened.

The Subcommittee members, the Chairman further stated, were

particularly concerned about what experimental transactions outside the

bill

area involved with regard to System relations with the market.

After all of these years of operating primarily in bills, how could

the System, in experimenting with transactions outside the bill

be fair to the market?

area,

Even if the Federal Open Market Committee had

stated that its procedures could be changed or superseded at any time,

was there in fact a commitment not to change without publicly-issued

notice?

Chairman Martin then asked the several members of the Ad Hoc

Subcommittee to offer any comment they cared to about their own views.

Mr. Mills commented to the effect that any market experiment

undertaken now would have the objective of seeing whether the long rate

could be moved down relative to the short rate in the present market

context.

While he had consistently supported the limitation of Federal

2/7/61

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Open Market Committee operations to short securities, he now felt that

experiment to move long relative to short rates had to be made.

Subcommittee was only divided as to its

The

views about how the experiment

should get under way--whether cautiously or boldly.

Personally, he

favored a bold approach.

Mr. Irons commented that Subcommittee member differences related

mainly to degree of experiment.

While he believed strongly in present

Federal Open Market Committee procedures, he still felt that we must

explore pragmatically possibilities of operations in longer sectors.

Such probing should be accomplished without publicity or at least with

as little publicity as possible.

His counsel in undertaking experiment

would be to begin in the 3-to-5 year area, then try the 5-to-8 year sector,

and finally move to the 8-to-10 year maturity.

Further stretching out

could be pursued if desirable, but it was quite possible objectives

could be reached within the intermediate range.

Mr. Balderston remarked that, as he saw it, the problem had two

sides:

first, experimentation with market procedure; second, public

understanding of the Open Market Committee's procedures. The Ad Hoc

Subcommittee has recommended experimentation with the Committee's

procedures and is,

therefore, reporting only with respect to the first

half of the problem,

and not the second.

The latter

should be given

attention at the Committee's organization meeting in March.

In con

ducting the experiment, he favored operations in Governments of

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intermediate term.

in

Avoidance of public announcement would be desirable

his opinion, and he would strongly favor leaning over backward to

be fair

to dealers and using the go-around for any transactions engaged

in outside the short area.

Mr.

Hayes reaffirmed the position he had earlier expressed to

the Committee favoring flexibility

operations,

in Federal Open Market Committee

and he stated that any experiment and demonstration under

taken in present circumstances would be altogether consistent with his

views.

Experiment now, he felt, was both urgent and timely.

Experiment

was urgent because of the System's public relations problem and timely

because it might serve to lift some of the down-pressure on the short

rate and put some down-pressure on the long rate, and so stimulate some

long-term borrowing.

He stressed that any experimental operations should

be limited, be of nudging character,

rates,

as regards both short and long

and should give no hint of pegging; pegging or establishing a pre

determined level of rates was the last

thing that the Federal Open Market

Committee wanted.

The problem of public announcement troubled him greatly, Mr.

Hayes said, because experiment constituted important, even if temporary,

departure from what was now long-established Committee operating policy.

As to maturity area that might serve as a limit to experiment,

he thought

maybe 10 years was long enough because market impact here should certainly

communicate through the rest

of the maturity range.

If

results of

2/7/61

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initial experiment should suggest a need for transactions in still longer

maturities, experiment could be extended then to that area.

At this point, Chairman Martin asked Mr. Rouse to present his

plan for experiment, and Mr. Rouse reported as follows:

In line with the discussion yesterday afternoon at the

meeting of the Ad Hoc Subcommittee, the following program is

submitted. In this outline I have endeavored to follow what

seemed to me to be the trend of thinking in the Subcommittee.

The program is based on the conviction that at this time the

interest rate structure in relation to the balance of payments

is paramount and that current short-term interest rates must

be maintained and, preferably, allowed to rise somewhat. While

it is conceivable that this might be accomplished by reducing

somewhat the availability of reserves to the banking system,

the needs of the domestic business situation may render this

impracticable, thus pointing to the necessity of making

purchases in areas outside of the shortest maturities. The

advantage of such procedure is further pointed out by the

Subcommittee's wish to make a cautious test of the feasibility

of influencing longer-term rates in a downward direction in

recognition of the widespread comment on the Committee's

current procedures and alleged doctrinaire inflexibility.

The suggested program, which obviously must be experimental,

follows:

FIRST--The Desk would be authorized to extend its oper

ations to securities having maturities up to perhaps ten years,

but initially it would be made known to the market in terms of

only up to five and one-half years by means of a "go-around"

in which all dealers would be asked for offerings in the range

of one to five and one-half years. The amounts purchased would

not need to be large. It is anticipated that the dealers there

after will tend to keep the Desk informed of current bids and

offers in that range and beyond. They will not be surprised as

they are expecting something of this sort in view of the press

comment of recent days.

It is not contemplated that probing operations in the five

and one-half to ten year range be begun until after the market

has become somewhat used to the changed frame of operations.

Nevertheless it might develop that such experiments could be

started prior to the next meeting of the Committee. The Desk

is to keep clearly in mind that all such operations are to be

modest in amount and only for the purpose and in the manner

indicated,

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SECOND--The prospective amount of additions to the System

Open Market Account in the next few months is small, and most

of the gross purchases or sales will need to be offset fairly

promptly. Therefore if this program is to be carried out, the

logic of removing temporarily at least, the prohibition against

"offsetting purchases and sales of securities for the purpose

of altering the maturity pattern of the System portfolio"

becomes apparent, i.e., if longer securities are to be purchased,

shorter securities will have to be sold or run off in order to

make room. Futhermore, it may be noted that such purchases

are designed primarily to affect the rate structure rather

than to provide reserves.

THIRD--As an illustration--the general idea of the proposed

operation is to encourage the development of a slightly higher

under

rate and Federal funds rate (but still

91-day Treasury bill

the discount rate) and at the same time to direct purchase

operations of the System Open Market Account toward somewhat

longer-term securities. This does not mean that we would ever

try to, or ever could, peg rates or determinedly hold them within

Any result will be the combined product of

particular ranges.

our influence and the market's reactions.

FOURTH--As I have stated, this approach is experimental and

is to be carried out in relatively modest amounts. I figure that

the new authorization should include the power to purchase up to

$400 million securities maturing beyond fifteen months and up to

five and one-half years, and an additional $100 million securities

maturing beyond five and one-half years and up to ten years.

In suggesting these figures I assume that our next meeting will

take place on March 7th. These operations are to be handled

with the utmost care so as to avoid charges of unfairness to any

one dealer or group of dealers and so as to avoid any charges or

implication of favoritism. Detailed records are to be kept of

all transactions.

I recommend that the Secretary of the Treasury and the

Chairman and Vice Chairman of the Joint Economic Committee

be advised promptly if this or a similar program is adopted.

Incidentally, in light of the "open mouth operation" in

the press the past few days and the expectations which it has

engendered in the market--that is--of System operations through

out the maturity range--I suggest that the Committee consider

the issuance of a statement--for the news ticker in the first

instance--such as the following:

"In the light of changes in the international and

domestic situations the F.O.M.C. in recent months has

been examining the implications of its operating

objectives and procedures. It is suspending its

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existing operating policies in this respect pending the

conclusion of its review. In the meantime operations

may be carried out in an extended range of maturities."

FIFTH--Referring again to the intermediate range of maturities

(five and one-half to ten years), it is in this area that the System

could be most helpful to the Treasury, having in mind the Treasury's

urgent need to do successfully a sizable junior advance refunding at

the earliest feasible date.

SIXTH--Finally, the execution of the proposed program will be

difficult and must be delicately handled. The Desk will need all

the help it can get and all the tools at the disposal of the System.

Following Mr. Rouse's report, Chairman Martin suggested a round

table discussion, with Mr. Allen volunteering to comment first.

Mr. Allen

stated that he was not at present a member of the Committee, and so was

not entitled to vote, but he gathered that it would be in order for him

to express his opinion.

He assumed that, since the Chairman had stated

that the Subcommittee was making only an interim report, a final report

would be forthcoming at a later date and he welcomed the prospect of

having time to study the recommendations which he had just heard on such

an important subject.

Chairman Martin then said that no such time would be available

and that a decision would have to be made at the present meeting.

Mr. Allen resumed his statement by saying that since the reacti

vation of the Subcommittee on January 10 he had studied the subject under

discussion to the extent that time and his eyes permitted, and that he

had read again the original report of the Subcommittee, a great deal of

the Chairman's testimony on the subject before various Congressional

committees, Mr. Riefler's paper delivered in Minneapolis on May 3, 1958,

and other memoranda including that of Mr. Thomas dated November 23, 1960.

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Mr. Allen said that in the light of what he had been able to find on the

subject, as well as his own experience, he did not favor the proposed

operations.

He mentioned that the word "nudge" did not appeal to him,

for he thought it could result either in simply annoyance or in an

avalanche, neither of which would be desirable.

Mr. Allen referred to the

assertion that empirical evidence was lacking, and stated that Mr. Riefler

had mentioned empirical evidence in supporting his argument that the

Committee should not operate in long-term securities.

Mr. Allen

concluded by saying that if the Committee decided to follow the recom

mendation of the Subcommittee he shared what he understood to be the

feeling of Messrs. Hayes and Rouse that a public statement regarding the

change in area of Committee operations should be made.

Mr. Erickson stated that he would favor the experiment but

thought that a public announcement was quite unnecessary for a temporary

deviation from established practice.

Chairman Martin observed that he really leaned against a public

announcement himself, but thought that everyone should express his view

before any voting was done on it.

Mr. Szymczak stated that he thought market experiment in the

present environment was wise but that any public statement about it would

be injudicious because the Federal Open Market Committee wanted the

market to be affected by operations and not by any statement.

2/7/61

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Mr. Johns expressed himself as being sympathetic to experiment

though doubtful as to its

efficacy.

If

the Committee did engage in

experiment, he definitely thought that it

had a responsibility for

making some statement to inform the market and the public.

Chairman Martin noted that there was really not much that a

Federal Open Market Committee statement could add to the publicity that

had already been given to the possibility of System experiment to

influence interest rate paterns through recent Administration statements

and press commentary.

But Mr. Hayes doubted whether this disposed of the question of

System statement or announcement because once the press knew that trans

actions in the intermediate or longer area had actually transpired,

there would be questions put to the Board and Reserve Banks that would

have to be answered.

To this, Chairman Martin replied that the risk in a statement

was that it

might be interpreted as making a commitment to continue

indefinitely the operations in the long terms and as a commitment to

support the whole market.

Mr. Deming commented that, while favorable to experiment, he

did hope that our instruction to the Manager of the Account would be in

terms of amount of operations and not in terms of effect on market

interest rates.

From the discussion that he had heard and despite

protestations to the contrary, he thought the Federal Open Market Com

mittee was treading awfully close to a peg of market interest rates.

In

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view of all the risks of mininterpretation and misunderstanding, it

would be most unwise in his view to issue any statement.

Who does the

Committee want to inform? he asked. Foreign financial observers?

System condition statement would do this.

go-arounds would do this.

The public?

Market dealers?

The

The Desk's

In his opinion, the System had

better have "no comment" for the public.

Mr. Leach observed briefly that, in his judgment, the time was

ripe for experiment, but that no statement should be issued since, as

Mr. Szymczak had noted, we didn't know what to say.

Mr. Bopp, while favoring experiment, was of the opinion that a

public statement would be essential.

Questions will be numerous, he

said, and we can't afford not to respond to them.

Furthermore, he

stressed that the initial reaction to a given operation that reflected

a change of procedure might differ significantly from the reaction to

the same operation that was part of a standard procedure.

Consequently,

he did not feel that significant conclusions could be drawn in a matter

of weeks.

He felt also that no relevant conclusions could be drawn

from a program that was launched with an announcement that it was

experimental.

The announcement that he had in mind would state that

the new procedure was undertaken to stimulate the domestic economy

without aggravating problems concerning our balance of payments.

Chairman Martin again expressed reservations against a statement,

saying that the Committee was on record in its continuing operating

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procedures and policies, reaffirmed each year, as being prepared to

change policies at any time.

He also noted that the language of the

Committee's directive adopted at each meeting was flexible enough to

embrace transactions outside the short area.

But Mr. Hayes interposed that it was not a question of a very

elaborate statement; in fact, the less formal and elaborate it was the

more satisfied he would be with it.

At this juncture, Mr. Robertson stated that he would like to

present his views.

In his opinion, he said, there would be justification

for experiment (a) if the Committee in its own view had doubts about the

substance and reason of its existing position, or (b) if the Committee

was threatened with dire political consequences if

it

were unable to

bring forward empirical evidence favorable to its view.

these bases of experiment is present, he contended.

the Committee, he felt, was retrogression.

Neither of

The real danger to

There is no reason why the

Committee should feel that the burden of proof was on it

rather than

on its critics.

As regards the matter of public announcement, Mr. Robertson

expressed himself as strongly favoring some statement to press, saying

that an experiment was under way to deal in all areas of market.

What

really disturbed him, he said, was that no one at the table thought

that much could be accomplished by the experiment, but they were still

willing to engage in it.

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Mr. Leedy observed that the System confronts an unprecedented

operating problem stemming out of balance-of-payments developments.

Since the System has done all that it

can to provide adequate reserves

to the banking system to foster economic recovery, the fact that it

has to make some adjustments now to deal with the balance-of-payments

problem should meet with sympathetic reception.

The System would be in

a defensible position, as he saw it, and the System should not hesitate

to defend itself.

Mr. Shepardson stated that he felt the present policy had been

a correct one.

He recognized, however, the difficulty of proving its

validity and that some experimentation might be necessary to demonstrate

the effect, if any, of a different approach.

Mention had been made of

a cautious as compared with a bold approach.

It seemed doubtful to him

that a cautious approach would produce any measurable results and that

if we were to experiment it should be done on the more extensive basis.

Furthermore, it seemed to him that some statement was necessary if we

were to avoid serious misunderstanding.

At this point, Mr. Mills emphasized the great difficulties in

compromising in a public statement the different points of view and

shadings of opinion that had been expressed.

Chairman Martin next asked Mr.

Rouse how he thought sophisticated

investors would respond to knowledge that the System was operating out

side the short area, whether they would respond by testing System

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position, and whether there was any hazard of such tests reaching

avalanche volume.

Mr. Rouse responded by saying that, in his opinion, there would

be testing but that it would be cautious and not avalanche in character.

Mr. Allen stated that he continued to have a worry about the

press relations angle of the matter.

Either the Presidents should have

a common line in writing from which to answer press queries or there

should be a spokesman for the Federal Open Market Committee to whom

the queries should be referred.

From his standpoint, the only answer

he could now give to any queries would be:

"I am not the spokesman

for the Federal Open Market Committee."

Mr. Szymczak observed that it was only necessary to admit that

transactions in intermediate- or longer-term securities were a departure

from established practice and to point to the country's balance of

payments as justifying it.

At this stage, Chairman Martin stated that he thought the

discussion had proceeded far enough and if there was no further comment

that members considered to be important, he would like to put the issue

to a vote.

There followed some roundtable discussion about the scope of the

directive that might be given to the Federal Reserve Bank of New York for

operations in the Account. The discussion consensus was that the

directive should provide adequate latitude for an effective testing.

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This was resolved to be an authority for change,

between this

date and

the next meeting of the Committee to be held on March 7, 1961,

Account's holdings of intermediate-

in

the

and longer-term securities not to

exceed $500 million and an authority to acquire securities of this

category up to a maturity of 10 years.

Question was raised of Mr. Rouse whether his plan would be first

to probe in the shorter intermediate range and then later

to probe

longer, to which his answer was in the affirmative.

Both Chairman Martin and Mr. Hayes individually emphasized that

the authority was not intended to change monetary policy and that any

transactions carried out need to be consistent with the general monetary

policy expressed in the Committee's directive approved at the regular

meeting just held.

System portfolio,

In the absence of the need for net additions to the

the operations would involve, it was explained, either

concurrent sales at the short end to offset purchases in the longer

area or offsetting operations after an interval probably not longer

than a few days.

Thereupon, Chairman Martin polled the members of the Committee,

the alternate members present, and the other Presidents present

concerning their views of the Ad Hoc Subcommittee's recommendation and

the program of action proposed by Mr. Rouse.

Votes favoring the recommendation:

Members Martin, Hayes,

Balderston, Bopp, Fulton, Leedy, Mills, Shepardson, and Szymczak;

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Alternate Members Irons, Leach, and Mangels; and nonmember Presidents

Deming, Erickson,

and Johns.

Votes against the recommendation:

Member

Robertson and Alternate Member Allen.

In voting against the recommendation, Mr. Robertson argued along

the following lines, which he later submitted in written form:

It was his opinion (1) that the established operating procedures

and policies of the Committee were,

in fact, the product of careful

empirical and analytical study, (2) that they had proved in practice to

be sound both in terms of monetary policy and in terms of fair dealing

with the market,

(3)

that in deviating from its established policies

the Federal Open Market Committee was asserting, without reason or

conviction, that it

made a critically incorrect judgment eight years

ago and had pursued incorrect operating practices since, and (4) that

critics of present methods of operating in the market were relying on

the simplest theories of determination of market interest rates and

making allegations on postulates having little if any basis in empirical

fact.

Mr. Robertson further stated that he, for one, believed that

this departure from established operating techniques would not con

structively influence market rates, and he gathered from the discussion

that not many (if

any) at the table were confident of such a result.

What he was confident of, however, was that the Committee was running

serious risk (a) of undermining domestic and foreign confidence in the

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System's integrity and judgment, and the reliability of the new

Administration's assertions of an intent to maintain the stability of

the dollar, (b) of impairing the market for Government securities by

placing dealers and investors in the position of having to guess which

area of the market the Federal Reserve was going to enter and hence

affect prices, and (c)

of impeding Government financing by making it

extremely difficult for the Treasury to determine objectively appropriate

market rates for future intermediate- and long-term financing.

It was

his view that these risks were too large to run.

He also felt that the reversal of such a fundamental position

as this should not be taken without a public announcement of the nature

of the Open Market Committee's future operating procedures and the

reasons therefor, for otherwise there would be grave doubt concerning

the purpose and extent of the System's operations in other than the

short-term area of the Government securities market with a consequent

adverse effect on general public confidence, the diminution of which

can be ill afforded at this time.

In addition, he believed it to be inadvisable for the Committee

virtually to abdicate its

authority and responsibility by giving

practically unlimited authority to the Manager of the Open Market

Account (1) to buy and sell securities in any area of the market up

to 10 years, as he saw fit, for the stated purpose of affecting rates

as distinguished from providing or withdrawing reserves from the banking

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2/7/61

system, and (2) to engage in "swap" transactions--i.e., buying securities

in one maturity area and selling in another--to effectuate changes in

rates and hence marshal the System's portfolio of Government securities

against market forces.

Chairman Martin then put the question as to whether a statement

should be issued explaining the departure from established operating

procedures of the Federal Open Market Committee.

From the roundtable

discussion that had preceded and which then further took place, the

majority sentiment, the Chairman thought, was clearly against such a

statement and, without objection, he so ruled.

In this concluding

discussion, it was brought out and strongly emphasized that there was

a real risk that this test might be frustrated if word got around the

market that System purchases of longer terms were just an experiment.

For the test to provide useful empirical evidence, the market needed to

look upon the transactions as a change in Federal Open Market Committee

practice.

In concluding the discussion, Chairman Martin stated that the

documentation that the Subcommittee had had before it

would be distributed

to all of the members and nonmember Presidents for their information.

The meeting then adjourned.

Secretary's Note: The Manager of the Open Market

Account commenced open market operations in

longer-term Government securities on the after

noon of February 20, 1961.

At that time he

issued the following statement:

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At the direction of the Chairman of the Open Market Committee

of the Federal Reserve System, the following announcement was

made today by the Manager of the System Open Market Account

for the information of the public and all participants in

the market for Government securities:

"The System Open Market Account is purchasing in

the open market U. S. Government notes and bonds of

varying maturities, some of which will exceed 5

years.

"Price quotations and offerings are being

requested of all primary dealers in U. S. Government

securities. Determination as to which offerings

to purchase is being governed by the prices that

appear most advantageous, i.e., the lowest prices.

Net amounts of all transactions for System account

will be shown as usual in the condition statements

issued every Thursday.

"During recent years transactions for the System

Account, except in correction of disorderly markets,

have been made in short-term U. S. Government securities.

Authority for transactions in securities of longer

maturity has been granted by the Open Market Committee

of the Federal Reserve System in the light of conditions

that have developed in the domestic economy and in the

U. S. balance of payments with other countries."

The decision to issue a statement, which

reversed the understanding reached at the

February 7 meeting, was made in the light of

subsequent discussions between Chairman Martin,

Vice Chairman Hayes, Mr. Rouse, Manager of the

System Open Market Account, and Mr. Roosa,

Under Secretary of the Treasury. The consider

ation weighing most heavily in the decision was

the desirability that all market participants

be informed at the same time that the Trading

Desk was engaging in transactions outside the

usual short-term sector and that no market group

gain any trading advantage in the operations by

virtue of information not known by the whole

market.

Secretary