FOMC Minutes
A meeting of the Federal Open Market Committee was held in
the offices of the Board of Governors of the Federal Reserve System
in Washington on Tuesday, May 9, 1961, at 9:00 a.m.
PRESENT:
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Hayes, Vice Chairman, presiding
Allen
Balderston
Irons
King
Mills
Robertson
Shepardson
Swan
Wayne
Messrs. Ellis, Fulton, Johns, and Doming, Alternate
Members of the Federal Open Market Committee
Messrs. Bopp, Bryan, and Clay, Presidents of the
Federal Reserve Banks of Philadelphia, Atlanta,
and Kansas City, respectively
Mr. Sherman, Assistant Secretary
Mr. Kenyon, Assistant Secretary
Mr. Hackley, General Counsel
Mr. Thomas, Economist
Messrs. Coldwell, Einzig, Garvy, Mitchell,
Noyes, Associate Economists
and
Mr. Molony, Assistant to the Board of Governors
Mr. Sammons, Adviser, Division of International
Finance, Board of Governors
Mr. Holland, Adviser, Division of Research and
Statistics, Board of Governors
Mr. Knipe, Consultant to the Chairman, Board of
Governors
Mr. Yager, Economist, Government Finance Section,
Division of Research and Statistics, Board of
Governors
Mr. Petersen, Special Assistant, Office of the
Secretary, Board of Governors
Mr. Hickman, Senior Vice President, Federal Reserve
Bank of Cleveland
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Messrs. Eastburn, Jones, and Tow, Vice Presidents
of the Federal Reserve Banks of Philadelphia,
St. Louis, and Kansas City, respectively
Messrs. Black and Litterer, Assistant Vice
Presidents of the Federal Reserve Banks of
Richmond and Minneapolis, respectively
Mr. Anderson, Financial Economist, Federal Reserve
Bank of Boston
Mr. Holmes, Manager, Securities Department, Federal
Reserve Bank of New York
Mr. Brandt, Assistant Cashier, Federal Reserve
Bank of Atlanta
Upon motion duly made and seconded,
Mr. Coldwell was elected as an Associate
Economist of the Federal Open Market Com
mittee to serve until the election of a
successor at the first meeting of the
Committee after February 28, 1962, with the
understanding that in the event of the
discontinuance of his official connection
with the Federal Reserve Bank of Dallas he
would cease to have any official connection
with the Federal Open Market Committee.
Upon motion duly made and seconded,
the action of the Federal Open Market
Committee on April 28, 1961, in approving
the recommendation of the Manager of the
System Account that the Account subscribe
for $1,700 million of the new Treasury 3
per cent certificates maturing May 15, 1962,
and $700 million of the new Treasury 3-1/4
per cent notes maturing May 15, 1963, and
that the remaining $295 million of the total
Account holdings of $2,695 million Treasury
securities maturing May 15, 1961, be run off
was ratified, approved, and confirmed.
Before this meeting there had been distributed to the members of
the Committee a report of open market operations covering the period
April 18 through May 3, 1961, and a supplemental report covering the
period May 4 through May 8, 1961.
Copies of both reports have been
placed in the files of the Committee.
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In supplementation of the written reports, Mr. Holmes commented
as follows:
Open market operations since the last meeting of the Committee
have been more difficult than in preceding periods, as diverse
influences in bank reserves and interest rates produced a number
of dilemmas for the Management of the System Account, requiring
more than usually complicated efforts to meet System objectives.
In the first part of the period the money market became exces
sively easy as a result of an unexpected bulge in float which
aggravated already strong downward pressures on short-term rates.
Some sales of short-term issues were made on Monday, April 24,
in an effort to mop up the excesses and to temper the drop in
short rates, but very large sales would have been required to
influence the rate strongly and to meet the demand for bills.
This demand was illustrated by the bids for $677 million bills
and $172 million certificates received on a "go-around" con
ducted on that day. Massive sales seemed unwise in the face
of a sharp decline in reserve availability projected for the
next statement week. Despite moderate System sales, the 91-day
bill rate dropped to 2.18 bid in the auction that day, the
lowest level since December 1960. Fortunately, some dealers
showed resistance to this lower level, and market rates sub
sequently rose to around 2.30 per cent.
In the middle of the same week, we learned that the Deutsche
Bundesbank was planning to make a debt repayment of $487 million
to the Treasury in dollars on Friday, April 28, which would
require the sale of about that amount of Treasury bills for
German account. This was a windfall of a sort inasmuch as we
were able to take the bills into the System Account and thereby
avoid the necessity for substantial System purchases of secu
rities in the market. The Treasury was credited with the
proceeds and then redeposited the proceeds in the "C" banks,
thereby increasing the reserve balance. These redeposits had
the effect of concentrating available reserves in the money
centers, and creating excessively easy money conditions
despite a somewhat lower level of free reserves than had
recently prevailed. The easy money conditions added to down
ward pressures on short rate which again reached 2.18 per cent
for 91-day bills on Wednesday, May 3. Once again massive sales
of short issues seemed inadvisable for the same reasons as
before. Yesterday Treasury bill rates backed up a bit, with
average issuing rates of 2.23 and 2.42 per cent established for
3- and 6-month bills in yesterday's auction.
Part of the problem with short rates has arisen from
repeated press comments, from various sources, to the effect
5/9/61
that since the balance of payments has improved, the
System is satisfied to see short rates go lower. We have
tried to deal with these situations by selling short is
sues a bit more aggressively as a signal to the market
that we are still concerned with short rates. But since
these sales have been running contrary to our desire to
supply reserves, we have tried to offset them by purchases
of longer issues which have not always been available in
sufficient size to meet our need. Our purchases over a
period have, of course, absorbed a large portion of what
might be termed the floating supply of longer issues.
Considerable publicity has been given to statements
by Secretary of the Treasury Dillon and the majority of
the Joint Economic Committee with respect to longer-term
rates. Such statements, together with continued System and
Treasury buying, seem to be encouraging a more confident
market attitude toward longer-term securities. There has
been evidence of increasing willingness to commit longer
term funds, especially in corporate and municipal securities.
Retail buying of Governments has been modest, but even this
small demand, given a shrinking supply, has had the effect
of pushing up prices sharply on several occasions. In each
instance new selling has emerged at the higher prices, and
moderate System and Treasury purchases have been sufficient
to hold these levels. It is quite conceivable, however,
that if the incentive for switching out of Governments into
corporates and municipals continues, we may be faced at some
time with considerable selling pressure on longer Govern
ments. Signs of this are lacking so far, and in the mean
time the flow of funds into the corporate and municipal
issues continues at a fair pace.
The successful completion of the Treasury's cash re
funding operation seems to have further encouraged a firm
tone in
the Government securities market.
The terms were
considered very attractive, and despite the fact that the
new issues were only one- and two-year maturities, there
was more than the usual speculation on the part of brokerage
houses which entered very large subscriptions. The over
allotment by the Treasury of $500 million on both issues
combined seems to have been taken in stride by the market
and, of course, the additional cash will reduce the Treas
ury's need for new borrowings in the near future. The
latest projections indicate that they will need to come
to the market about June 22 for roughly $1.5 billion new
money.
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5/9/61
At the last meeting of the Committee, Mr. Rouse
asked whether the provisions contained in the special
authorization to acquire intermediate and longer-term
issues could also be included in the regular directive
given to the Federal Reserve Bank of New York. He has
decided not to recommend this in view of the feeling in
the Committee that the arrangement under which we have
been operating was satisfactory to everyone.
At the request of Mr.
Hayes, Mr. Sherman reviewed the terms
of the special authorization, stating that advice of the authorization,
when first sent to the New York Bank in February, was worded in terms
of the minutes of the meeting of the Committee held on February 7,
1961.
Thus,
the authorization was for the Bank, within the terms
and limitations of the policy directive, to acquire intermediate and/
or longer-term U. S. Government securities having maturities up to
10 years,
or to change the holdings of such securities, by an amount
not to exceed $500 million between that date and the next meeting
of the Committee.1/
Mr. Sherman went on to say that he, Mr. Young,
and Mr. Rouse had discussed the words "acquire" and "change", and
it
was agreed that they meant to purchase,
in addition, to swap.
sell, or exchange and,
The meaning was considered to be as broad
as the opening sentence of the policy directive, which covers pur
chases,
sales, and exchanges.
In addition, the words were considered
to cover swap transactions.
Mr. Hayes asked whether the Committee agreed that it would
be just as well to leave the matter as it
stood, and no different
1/ The maturity limitation was removed by the
Committee at its meeting on March 28, 1961.
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view was expressed.
Accordingly, it was understood that no change in
procedure would be made.
Mr.
Mills referred to the statement by Mr. Holmes and said that
he would like to raise a question to straighten out his own thinking.
In the past three-week period, market conditions had afforded an oppor
tunity to engage in purchases in the longer-term sectors of the market
for the System Account,
and those purchases apparently had focused on
specific securities with the intent of holding the prices of those
securities at some predetermined level set by the judgment of the
Management of the Account.
His question was whether, with the acute
knowledge of market participants as to what was going on in the market,
engagements of that sort might not be regarded as an approach to, if
not an actual, pegging operation,
was the practice to make purchases
Holmes replied that it
Mr.
from dealers approaching the Desk with offers, to which prices were
attached.
The Desk then compared the prices quoted by the dealers
with the composite, or rough average, of market prices.
In other
words, the purchase rates were related to the composite of the market
rather than to any predetermined price.
Mr. Mills tnen inquired whether, if the Desk concentrated its
purchases in
certain securities,
it
was not acting to influence the
price, and hence the interest yield, of those specific securities.
Mr. Holmes said that the selection of securities for purchase
was based on the securities that were offered,
and how the price of those
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securities related to the prices of those securities in the market.
No specific issues were chosen in advance.
Instead,
the Desk took
what was available in the market.
In reply to a question from Mr. Mills concerning whether,
as the market became accustomed to System operations in longer-term
securities, the Desk sensed that offerings would tend to be in
the
maturity ranges regarded by the market as acceptable to the Account,
Mr. Holmes replied that there had been a substantial increase in
offerings of longer-term securities by dealers.
was still
However,
the Desk
getting offerings of shorter-term securities as well.
Mr. Mills then said he had the impression that the Account
was skating on rather thin ice in
Mr. Hayes remarked that it
some of these operations.
was not quite clear to him how
the Desk could operate more effectively.
As Mr.
Holmes had indicated,
the Desk received offerings throughout a wide range of maturities
and prices, and it
in
took those securities that were favorably priced
relation to the composite of market quotations,
maturity.
It
what issues it
Mr.
regardless of
was not the practice of the Desk to decide in advance
would take.
Mills commented that the Committee was experimenting,
now had gotten behind it
some area of experience.
and
In reviewing the
experimentation, he sensed that the Desk was perhaps participating in
the market more aggressively than was called for by the state of the
market or Committee objectives.
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5/9/61
In reply, Mr. Hayes said it
was his observation that in view
of the difficulty of finding a sufficient quantity of longer-term
maturities to have the desired effect on reserves, the Desk sometimes
had had to take a fairly good portion of what was offered to it.
Mr.
Holmes confirmed this observation,
stating that on some
days when the Account Management was particularly anxious to supply
reserves the Desk had to take a substantial proportion of what was
offered.
Mr. Hayes then commented that it was necessary to look at the
matter within the context of the dilemma the Committee had discussed
frequently.
Many times, in order to keep the reserve position consistent
with what the Committee had indicated that it wanted, the Desk had to
find some way to inject reserves.
When short rates were under pressure,
there was a greater inducement to be relatively liberal in making pur
chases in the intermediate and longer ranges.
Mr. Mills said that much would seem to depend on the reasons for
pressure on the short rate.
In the recent period it appeared that the
pressure had been the result of a superfluous supply of reserves not
counteracted by market actions.
This situation apparently had resulted
from unforeseen increases in float.
In any event, it seemed to him that
accidentally, rather than by design, the supply of reserves in the mar
ket during two of the statement weeks had been a far cry from what was
envisaged at the April 18 Committee meeting.
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Mr. Hayes remarked that there had been greater ease than intended.
Mr. Holmes added that float was much higher than expected in the
first week of the period.
In the second week the Treasury, by depositing
the German payment in money market banks, had made their positions far
easier than would otherwise have been the case.
Over the last week end
the money market firmed up, and the present reserve position was a more
normal one.
Mr. Robertson noted that by accident the results of the past
three weeks were about in line with the position indicated by the minority
at the April 18 meeting of the Committee.
Mr. Hayes remarked that, as indicated, this was not intentional.
In response to the earlier comment by Mr. Mills, he added that there was
a difficult problem in reconciling the extreme ease in the money centers
with over-all reserve positions.
In the circumstances,
the Account
Manager had some hesitancy about running over-all free reserves down too
low in relation to the levels of previous weeks.
As it was, free reserves
outside the money centers did run substantially lower than they had been.
Such circumstances always require a difficult judgment,
and Mr. Hayes'
feeling was that the judgment made by the Manager was a reasonable one.
Thereupon, upon motion duly made
and seconded, the open market trans
actions during the period April 18
through May 8, 1961, were approved,
ratified, and confirmed.
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Mr. Noyes made the following statement with regard to economic
developments:
This morning I should like to review for you quickly some
of the most significant data that have become available in re
cent weeks, and then take a few moments to relate these recent
developments to a projection prepared by the staff here early
last winter; and also to Professor Samuelson's task force re
port to the President-elect, released January 6.
Perhaps the most striking economic statistic on current
developments is one yet to be announced-our own index of in
do not have all the information,
dustrial production. We still
but it appears that March will be revised up from 102 to 103,
and April will be up two points from that to 105.
But this is not an isolated fact. Not only is the April
index of department store sales now estimated at 150--but March
has been revised upward to 146--more than wiping out the de
cline from February to March suggested by the preliminary data.
Total retail trade was first
reported up 1 per cent from
February to March, and later revised to show a 3 per cent in
crease. Sales of domestically produced autos were at a 5.2
million annual rate in April--about the same as March, which
was up sharply from the depressed mid-winter level. Dealer
stocks are down further--now well below a year ago and close
to the same level that prevailed at this time in 1959. Used
car stocks are also down sharply from a year ago, and even
below the 1959 level.
Among other selected developments, consumer credit moved
New orders re
up again in March, after two months decline.
ceived by durable goods manufacturers picked up in both
February and March, and with sales improved, the backlog of
unfilled orders began to increase again. Business inventories
were liquidated further in March, especially at the retail
level. The latest McGraw-Hill survey of plant and equipment
expenditure plans for 1961 indicated a 1 per cent decline
from 1960, an improvement over botn the Commerce-S.E.C. sur
vey earlier in the year and their own survey last fall.
while consumer and wholesale prices have generally been
stable, sensitive commodities have moved up--regaining 2
percentage points of the 7 per cent decline that occurred
from January 1960 to February 1961.
In addition to these developments, the schedules for steel
and auto production in May virtually assure some further in
crease in the production index this month--perhaps enough to
wipe out half of the decline since last year. For the current
quarter, all the available evidence points to a substantial
rise in GNP.
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It is hard to characterize these developments as
representative of a weak or anemic recovery--yet we ob
serve two facts: first, seasonally adjusted unemployment,
at 6.8 per cent of the labor force in April, remained at
about the mid-winter high; and second, yields on medium
and long-term Government bonds declined further in recent
weeks to the lowest levels since 1958.
The apparent inconsistency between these facts and
the vigorous recovery in the economy generally leads me
back to the projections I mentioned at the outset of my
remarks.
In what he referred to as his "optimistic" model,
Professor Samuelson estimated that unemployment would
"not shrink much or any below present levels in 1961."
The November figure of 6.8 per cent was the latest avail
able at the time the report was written. This estimate
of unemployment was based on the assumption that GNP
would "decline for at most one or two quarters," and
that it would rise to a little less than $520 billion
by the end of the year, yielding an average for the year
as a whole "of from $510 to $515 billion." Our own so
called Model A projection, which we described as one of
moderate recovery, was very similar to Professor Samuelson's.
We had GNP declining to around $500 billion in the first
quarter, rising moderately in the second, and then going
on up to a little
better than $520 billion in the fourth.
On the basis of these assumptions we calculated that un
employment might rise well above 7 per cent in the second
quarter, and that it would remain close to 7 per cent in
the fourth.
I have reviewed this background to make clear that
either in terms of Professor Samuelson's estimates or our
own, a 6.8 per cent unemployment rate in April is com
pletely consistent with a very substantial improvement
in economic activity generally.
Similarly, with regard to recent interest rate devel
opments, the estimates of financial flows we made on the
basis of the aorementioned assumptions as to economic
activity implied declining long-term rates in the first
You will recall that Mr. Thomas discussed
half of 1961.
these projections in his report to the Committee in March.
At that time he observed that "with respect to interest
rates, there is a popular view that any economic recovery
will bring about a rise in both long-term and short-term
rates.
This view is based, in part, on expectations as
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to credit demands and, in part, on beliefs as to shifts
in monetary policies. This may not be a necessary con
clusion. Although pressure for further declines in
short-term rates might come to an end, it is not certain
that a marked rise in interest rates will accompany the
earlier stages of recovery." Later in the same report
he pointed out that even assuming the early recovery
envisaged in our model, private credit demands in 1961
would be the lowest in five years. It must be remembered
that, while a reduced rate of inventory liquidation will
probably contribute to the increase in GNP from the first
quarter to the second, net inventory liquidation will al
most certainly continue in April, with consequent repay
ment of bank borrowing. Furthermore, the substantial
volume of financing in the capital market has been used,
to some extent, to repay bank loans. Thus, it seems
clear that neither the recent course of interest rates
nor the very moderate rate of bank loan expansion in
recent weeks reflects on the strength of the recovery
that is under way.
Both the level of unemployment and interest rate
movements which have accompanied the recovery thus far
are those that we should, and in fact did, anticipate.
The recovery is proceeding more rapidly than was generally
anticipated, and at least as fast as the most optimistic
forecasts.
The problem this poses for monetary policy is al
In the very early stages
most too obvious to mention.
of an upturn, the burden of proof falls on those who
But
would not continue the prevailing degree of ease.
we are now rapidly approaching the point, if we have not
already reached it, at which the generally recognized
principles of countercyclical monetary policy would call
for a lessening of ease--and perhaps even a somewhat
restrictive policy. This is not to say that a policy
of ease should not be continued, or even that special
efforts should not be made to promote further ease in
longer-term credit markets. My point is only that in
the conditions now prevailing, and which seem likely to
continue to prevail, a responsible monetary authority
should have specific and unequivocal reasons for main
Uncertainty as to the
taining a policy of active ease.
economic outlook is no longer a sustainable basis for
such a policy. It is true that uncertainty is still
with us, as it always is, but it is an inconstant ally,
and it has shifted sides.
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5/9/61
In response to a question from Mr. Deming regarding estimated
gross national product in the second quarter, Mr. Noyes indicated
that there were a lot of question marks.
Probably for the quarter
as a whole the best guess was that there would be no net inventory
liquidation or accumulation.
Also, there was the question whether
the United States would lose anything from the first quarter to
the second in terms of net exports.
As a guess, an upward movement
of GNP of from $5 to $7 billion, annual rate, might be possible,
but as he had indicated this was dependent largely on how the in
ventory and net export figures came out.
In reply to a comment by Mr. Deming that he would not
classify such an increase as a strong rise, Mr. Noyes said that it
would require a rather strong movement toward the end of the quarter
to realize the figure he had mentioned.
Inventory liquidation was
still going on fairly substantially in April.
It would be neces
sary to look within the quarter to see the true strength of the
recovery.
Mr. Thomas commented that GNP of $505 billion, annual rate,
was the highest quarterly rate on record, having been attained in
the second quarter of 1960.
Mr. Thomas presented the following statement on the credit
situation:
Information becoming available during the past month
has indicated some progress toward certain of the goals
of credit policy.
Business recovery appears well launched,
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growth in the money supply is continuing, and inter
mediate- and long-term interest rates have shown marked
declines, except in the case of the corporate market,
where there has been an unusually large volume of new
financing.
At the same time, short-term interest rates have
also declined and funds continue to flow abroad, although
at a much reduced rate compared with late 1960. The
private money supply increase has been only moderate,
and seemed to stem from an exceptionally large decrease
in Treasury deposits rather than from any notable ex
pansion of total bank credit.
Business loans, in fact,
showed a considerable decline in April. Reserves were
available to banks in somewhat larger volume during
April than during March, despite a sizable reduction
in the System portfolio.
Reserve availability declined
last week, however, and, perhaps reflecting this change,
yields on Government securities turned up yesterday.
Yields in the Government securities market declined
fairly steadily from April until the end of last week.
They more than retraced the upward adjustments in rates
that occurred during the last half of March and early
part of April and were associated with the heavy con
centration of financings in that period and the spreading
feeling that the recession had touched bottom. Long- and
medium-term yields have declined to the lowest levels
since 1958, and the three-month bill rate has been close
to the low end of the relatively narrow range maintained
since last summer.
Basic supply and demand factors contributing to this
yield decline in the longer-term area of tbe market, and
also in the medium-term area, were the slackened pace of
Treasury and State and local financings, and the success
ful absorption of an unusually large amount of flotations
in the corporate securities market. Recurrent purchases
of securities maturing in over five years for System and
Treasury accounts may also have been a factor in lowering
yields on such issues. Yields on corporate bonds have
risen, however, and the spread between yields on high
grade corporate issues and those on long-term Governments
is close to the widest of recent years.
The bill market drew strength from the investment of
corporate accumulations of tax funds and the proceeds of
securities issues by corporations and various State and
Reductions in Treasury cash balances
local authorities.
may also have supplied some funds to the market. Bank
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reserve positions eased as the month progressed, and,
with the Federal funds rate low,
some flow of bank funds
to the bill market took place. Dealers built up very
large positions in bills in the first half of April,
but though they subsequently reduced them they still
ended the period with a higher level of holdings than
in March. Dealer positions in other short-term issues
increased during April. Psychological or expectational
factors may have had some influence in the trend of bill
rates, including a less exuberant tone in the stock mar
ket and press reports speculating about official moves to
keep down interest rates.
To absorb some of the reserves provided by market
factors and to resist the decline in short-term rates,
the System made gross sales of $1.3 billion of bills
and other short-term securities (due in 1 year or less)
between April 5 and May 5.
Purchases of nearly $500
million of bills from the German authorities partially
offset these operations, but substantial sales of short
term securities were also made on behalf of the Treasury
as part of the maturity lengthening operations being
In the same
undertaken for its investment accounts.
period System Account purchases of longer-term issues
exceeded $300 million and other purchases in that area
were made for the Treasury.
Within the banking system, credit expansion con
tinued during April and early May, though at only a
moderate pace. Total loans and investments of city banks
increased somewhat less in the five weeks ending May 3
than in most other recent years. A similar trend was
shown by other banks in the four weeks ending April 26.
Holdings of Government securities increased by $1 bil
lion at city banks in the 5-week period, reflecting
Treasury financing, in part, which often occurs in April
of each year, with an increase of over $1.5 billion in
issues maturing in less than one year held by city banks.
Commercial banks participated importantly in the advance
refunding in late March, and thereby shifted holdings
from the 1-5 year to the over 5-year category.
Holdings of State, local, and agency securities by
city banks were about unchanged over the period, with
new purchases more or less offset by the usual seasonal
redemptions of municipal tax anticipation notes. Total
loans, meanwhile, rose much less than usual in recent
weeks. The most striking loan developments during April
were a drop in business loans and an increase in loans
on securities.
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Business loans at city banks dipped in April about
as much as in the comparable period in the recession years
of 1954 and 1958.
A moderate recovery is indicated by
preliminary data in the week of May 3, but not sufficient
to offset the previous decline. Net repayments were re
corded during April from industries with seasonal inflows
of funds in this period, from those continuing to reduce
inventories, and from firms which may be drawing funds
for bank debt retirement from refinancings in other mar
kets, particularly utilities and related lines. One ex
ception was the petroleum and chemical sector, which
borrowed more during April than in most other recent
years, including a substantial volume of term credit.
Loans for purchasing and carrying securities have
risen more substantially than any other form of private
credit at leading banks in recent weeks. Most of this
advance has been in credit to brokers and dealers.
Loans to Government securities dealers mounted in step
with the build-up of dealer positions in short-term
securities from the reduced March level.
Loans to other
brokers and dealers have also increased, as did other
loans on securities-this increase was most marked in
the week in which the A.T.&T. rights expired, but with
further increases continuing to be reported in succeeding
weeks.
Deposit expansion proceeded in substantial volume
The bulk of the in
at commercial banks during April.
crease centered in time accounts, which moved up a billion
and a quarter dollars in April, a much larger rise than
in most other recent periods. The increase continued at
city banks in the week of May 3 (nearly $200 million).
A substantial proportion of this net increase was accounted
for by the rise in negotiable time certificates of deposit,
as interest rates on such instruments appeared increasingly
attractive with the decline in bill rates. This increase
included the deposit of some of the proceeds of recent
corporate security issues.
The money supply, seasonally adjusted, is estimated
to have risen moderately in the second half of April to
$142.3 billion, or $300 million above the second half of
March.
For April as a whole the private money supply
averaged $800 million larger than in February, an annual
rate of increase of 3-1/2 per cent. The April average is
about $2 billion, or 1-1/2 per cent, larger than a year
ago, when economic activity was somewhat higher than this
year.
A decline in the Treasury cash balance to unusually
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low levels during April undoubtedly helped to sustain
the expansion of privately-owned demand deposits.
Recent deposit expansion has carried required re
serves substantially above earlier projections.
By the
beginning of May required reserves averaged $300 million
higher than the estimated needs which had been projected
from February, after allowing for the lower level of U. S.
Government deposits.
A substantial portion of this ex
pansion occurred in the second half of April, when market
factors in excess of offsetting System operations gave
rise to free reserves averaging around $650 million.
Reserve absorption by market factors since that time
lowered free reserves to about $450 million last week
and probably to around $350 million for the current
statement week, after allowing for System purchases of
nearly $100 million yesterday. Reserves supplied by
market factors late next week and during the following
week will be largely offset by the scheduled net re
demption of $295 million of System holdings of May 15
maturities.
Further purchases for System Account will be needed
this week and substantial purchases will be necessary in
the last week of May and the first week in June to bring
total reserves to the projected level of needs. Inter
vening sales of securities in the middle of each of these
months may be required in order to offset temporary re
serve inflows from other sources. On the average, over
$500 million of additions to System holdings from the
present levels will be required to provide the reserves
called for by projections through July and August.
Any less than the supply of reserves indicated
would surely be inadequate to foster economic recovery.
Yet, if recovery is going ahead, it is highly unlikely
that supplying the amount indicated or perhaps somewhat
more would have the effect of reducing interest rates to
any appreciable extent from present levels. At the same
time, unless economic expansion proceeds very rapidly, it
is possible that no substantial rise in interest rates
would need to occur for some time.
Mr. Sammons presented the following statement on the inter
national situation:
What might be termed the "basic" elements in the
balance of payments--that is, those elements other than
the higher-than-normal outflows of short-term capital,
5/9/61
-18
both recorded and unrecorded--have continued to show
in the first
quarter of this year a partly cyclical
movement toward an increasing positive balance for the
United States. The balance on current transactions,
Government aid, and private long-term capital apparently
exceeded an annual rate of $1-1/2 billion, seasonally
adjusted.
The gold outflow has virtually ceased during
But private short-term capital
the past 2-1/2 months.
outflows, although somewhat reduced, continued high in
the first
quarter, so that there was still
an over-all
deficit (as conventionally measured) at an annual rate
of about $1 billion. The greater part of the $3 billion
reduction in this deficit between the fourth quarter of
quarter of 1961 was due to changes
1960 and the first
in the basic items--including some changes that may be
temporary in the outflow of-funds for Government aid
and private long-term capital.
The continued outflow of short-term capital oc
curred despite a reduction in the difference between
short-term rates in the United States and in most other
important money markets-or in those cases where foreign
interest rates are lower than in the United States, a
In March and April,
widening of the negative difference.
there was also a large outflow of funds to Continental
centers from London--where interest rates across the
board have remained relatively high. Evidently, specula
tive factors, including the opportunity for capital gains
accompanying reductions in German long-term interest
rates and the belief that additional exchange rate ad
justments might yet occur--were playing a larger role
than pure short-term interest rate differentials in
stimulating shifts of short-term funds.
The short-term rates that now seem to be having
the most substantial influence on capital movements are
The relatively low level of these
bank lending rates.
rates in the United States has induced borrowers in
Continental Europe as well as in other areas to seek
accommodation in New York rather than in other centers,
and thus has contributed to outflows of short-term
capital from this country in the form of bank credit.
The recent further reduction in the German discount
rates is important, according to this
and Treasury bill
analysis, not so much because of its immediate probable
effects on the inflow of short-term capital into Germany,
but because of its possible impact on the basic German
balance of payments through an expansion of German de
mand for consumption and investment.
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5/9/61
There remains the question of exchange rate expectations.
The United States authorities can directly influence the
decisions of foreign monetary authorities regarding the form
in which they hold reserves mainly through the recently much
Apart
discussed international cooperation of central banks.
from that, United States monetary policy can affect international
flows of volatile capital in one obvious but vital way; it must
continue to eliminate any suspicion that a change--planned or
unplanned--in the international value of the dollar might even
remotely be thought possible. This objective--which of course
coincides with the basic objective of the Federal Reserve to
avoid inflation--is, in my opinion, and at least for the present,
the most significant restraint which international pressures
impose on the freedom of action of the United States monetary
authorities.
In summary, recent movements of volatile capital have been
influenced mainly by (a) exchange rate speculation; (b) differences
in bank lending rates; and (c) opportunities for capital gain,
especially in German fixed interest securities--and have not been
much influenced by traditional interest-rate arbitrage operations
in money market instruments.
If this analysis is correct, its implications for monetary
The problem of the rate on short-term
policy are fairly evident.
A
money market paper, while not negligible, is not crucial.
further decline in United States long-term rates would seem to
be unlikely as business activity rises here, but in any event
would not be a favorable factor for the balance of payments if
it did occur.
Also, a decline in bank lending rates here would
probably tend to stimulate further capital outflow in the form
of bank credit to foreigners.
One other international fact is relevant now.
This is the
widespread resumption of growth in demand in Europe, following a
lull last year. Though output growth will be limited by capacity
problems arising out of labor-market tightness, sizable advances
are possible this year through rising productivity and through
utilization of slack that existed in some countries at the end of
last year--especially in Britain.
The United States will continue
to get benefits from this renewed growth of demand abroad, but to
maximize those benefits and to make them lasting calls for holding
price advances in this country to a minimum.
In response to a question from Mr.
Ellis, Mr.
Sammons said that
he did not feel that the short-term open market rates had been as critical
a factor in
recent weeks as earlier.
Instead,
the outflow of short-term
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5/9/61
funds from the United States might be attributable more to the relatively
low level of bank lending rates in
the United States.
Mr. Allen said he gathered from Mr.
Sammons'
statement that
foreign concerns were finding bank lending rates in the United States
attractive, and Mr. Sammons replied that German concerns, particularly,
were said to be borrowing in New York.
The rates were lower than in
Germany, and the procedure provided a hedge against a further revaluation
of the mark.
Mr.
Hayes expressed the opinion that the exchange protection
feature was a more important factor than the interest rate.
Many loans
were being made to German exporters who bill in dollars and expect to
receive dollars.
Mr. Hayes then asked whether, even though the actual flow of
funds due to interest rate differentials might not have bulked large
recently, it
was not felt that the 90-day bill rate might have a
psychological influence abroad.
Mr.
Sammons replied that he thought this was quite possible.
The impression foreigners got of United States monetary policy based on
short-term rates might be rather important.
Mr. Hayes presented the following statement of his views on the
business outlook and credit policy:
While it now seems clear that business is on the upgrade
again, there remain a number of major uncertainties as to the
business outlook. One is, of course, the question whether the
expansion will be slow or rapid. There is no real basis for a
solid judgment on this, although considerable initial thrust
5/9/61
-21
could result from a changeover from inventory liquidation to
accumulation.
Another major uncertainty concerns the probable
course of prices and whether inflation will again become an
important threat within the coming year or so. An important
factor will be the extent to which businessmen try to restore
weakened profit margins by raising prices, as against a policy
of seeking to solve the same problem by maximizing volume at
currently prevailing, or in some cases perhaps even lower price
levels. It seems to me probable that the strength of consumer
demand may be affected importantly by price developments, as
the Chairman suggested in his Boca Raton speech.
And of course
decisions in this area will be affected by the intensity of
further cost pressures, reflecting in part the type of wage
settlements to be made this year in major industries, especially
the automobile industry.
As already suggested, the changing inventory situation may
well be a major factor in business expansion in the coming months.
We can also find encouragement in recent data on business spending
on plant and equipment; manufacturers' orders; housing starts; and
personal income and retail sales, among other items.
Whether the
recovery is slow or rapid, the problem of getting back to a
reasonably full level of employment seems very difficult. We have
made some very rough calculations indicating that 3.3 million jobs
might have to be found over the coming year to reduce unemployment
to, say, 4 per cent of the labor force.
The dollar increase in
GNP needed to reach this goal would appear to be very substantially
greater than the GNP gain actually achieved during the first year
after the trough of any of the previous postwa recessions.
As for bank credit, the statistics for all commercial banks
in March and for the weekly reporting banks in the first
four weeks
of April generally point to a weaker performance, in relation to
comparable periods of recent years, than had been observed in
February; and this is particularly true of loans.
However, there
are a number of special factors in partial explanation of this,
so that the bank credit showing does not necessarily cast doubt
on the probable strength of the recovery. It is heartening to
note some improvement in bank liquidity ratios in April, both in
and outside of New York--as well as good gains in total nonbank
liquidity in March, the latest month for which data are available.
In view of widely expressed fears that larger Federal spending
programs might, after some interval, lead to deficits approaching
the $13 billion recorded in 1958-59, it may be well to point out
that that unusually high-total reflected several major special
factors which are unlikely to recur soon.
It is hard at present
to find any spending areas likely to lead to a runaway deficit;
and on the other hand, a business expansion faster than is now
5/9/61
-22-
anticipated could cut quite sharply the deficits of uncertain
but rather moderate size now in prospect for the next year or
two.
With respect to policy, the basic considerations dictating
a policy of monetary ease remain unchanged.
In view of the
fact that banks are still
much less liquid than at the outset
of earlier post-war recoveries, and with an abundance of unused
resources in the economy (both labor and plant capacity), we
can well afford to maintain the existing policy for some time
to come, deferring our traditional posture of "leaning against
the wind" at least until later in the expansion phase of the
cycle.
Although we are hearing a good many comments on the
"excessively timid" approach of the Federal Reserve System to
the task of encouraging lower long-term interest rates, it is
quite evident that there have been strong market factors at
work in the direction of higher rates--including growing and
widespread business optimism, an increasing volume of new
corporate bonds and mortgage financing, and the Treasury's
advance refunding of last month. Under these conditions we
have probably done well merely to counter these tendencies and
contribute to an atmosphere of reasonable stability or even
mild buoyancy in bond prices, and it would be worth while to
see what we can continue to accomplish along these lines.
In the short-term rate area our policy has been criticized
too for not permitting an adequate rate decline. As a matter
of fact I think it would be a grave mistake to permit short
term rates to decline materially from present levels.
There
is a very dangerous tendency to look upon our balance-of-payments
difficulties as a thing of the past, whereas I am convinced that
we have only begun to cope with our hard-core balance-of-payments
problem, faced as we are with the possibility of less favorable
circumstances in the future for our trade balance, and with the
virtual certainty of a heavier, rather than a lighter, foreign
aid burden.
Our basic competitive position in the world is still
strong but could easily be jeopardized by unsound wage and price
policies.
The automobile wage settlement, for example, will be
watched keenly abroad as well as here. Also, dollar holdings
of some major central banks are currently at a level which could
prove embarrassingly high if we fail to do all we can to preserve
confidence in the dollar. Our balance of payments did not show
quarter, despite the large
any improving trend during the first
improvement in that quarter as a whole over the showing of last
fall; and the prospective favorable balance for April will
probably be due entirely to the nonrecurring German debt repayment.
Last week the Bundesbank, in cutting its discount rate to 3 per
cent, demonstrated again its willingness to make a deliberate
contribution to help restore international equilibrium, even though
-23such an endeavor might be hard to reconcile with purely
It seems to me the very least we
domestic considerations.
can do is to meet our foreign friends halfway by doing what
we can to avoid a further decline in our own short-term rates.
This means, among other things, maintaining firmly our 3 per
cent discount rate, as an anchor for our short-rate structure.
As for open market operations, I believe that any purchases
called for over the weeks to come should be concentrated in the
intermediate and long sectors, while heavy sales in the short
end may be necessary to prevent a further decline in short-term
rates. Much of the recent downward pressure on these rates is
due to reinvestment purchases by issuers of long-term securities
At
who are apparently trying to beat an upturn in long rates.
some point the pressure will be relieved as these funds gradually
move out of the short-term market into the spending stream, but
meanwhile the downward pressure on short-term rates constitutes
a serious problem which may make it necessary to let free reserves
Such a decline would not
decline somewhat from recent levels.
compromise domestic policy objectives. The money market has been
exceptionally easy recently, and there has been a gratifying
loosening in the flow of longer-term capital funds at somewhat
lower rates.
Under these conditions a rigid free reserve target
is probably even less warranted than usual, and I can see no
objection to free reserves in the $200-$00 million range provided
other signs point to a continuing atmosphere of ease.
The directive, having just been amended, should, I think,
be reaffirmed in its present form.
Mr.
Hayes added the comment that his view on short-term rates was
based to a large extent on conversations
bankers and other foreign parties.
and contacts with foreign central
In talking with Chairman Martin on the
telephone recently, he was interested to learn that the Chairman also had
received the same general impression.
opinion that it
The Chairman had volunteered the
was quite important that the System not let
rate weaken appreciably,
even if
that meant,
perhaps,
the short-term
a lower level of
free reserves.
Mr.
Ellis reported that New England business conditions,
showed signs of gradual recovery from an unsatisfactory level.
in
general,
Unemployment
5/9/61
was,
-24
of course, always pointed out as an unfavorable factor, but there
were other elements of an unsatisfactory nature.
As an illustration,
Mr. Ellis described the situation in respect to the marketing of Maine
potatoes.
As to unemployment,
the March level of 7.9 per cent compared
with slightly lower figures for the United States, and there appeared
to be less than seasonal strength in
activity strengthened in March.
residential component,
However,
the factory segment.
Construction
The strength was largely in
the
and multi-unit awards were up substantially.
the total was still
down 4 per cent compared with a 6 per cent
gain for the country as a whole.
Figures on new orders showed some
strengthening in April, consumer spending was holding up well, and bank
debits were strong in
22 cities.
Deposits of District banks had risen during the past eight weeks,
Mr. Ellis said, while business loans declined a little
more than seasonally.
About 10 per cent of the savings banks reduced their mortgage rates 1/4
of a percentage point or more from February to March.
Banks had been
increasing their holdings of bills and increasingly were net sellers of
Federal funds.
Borrowing from the Reserve Bank was at a five-year low.
Turning to the credit conditions generally, Mr. Ellis referred
first
to the high level of corporate issues, which obviously had accounted
for some of the decline in business loans.
He also noted that banks had
had their liquidity restored somewhat; the average loan-deposit ratio was
down about two percentage points from a year ago although still
relatively high level.
at a
The money markets appeared to be flush with reserves,
5/9/61
-25
as indicated by the low Federal funds rate.
he had expressed at the April 18 meeting,
As suggested by the views
money market conditions in
the past few weeks had been just about as he would like at this stage
of the business cycle.
It would be necessary to supply some reserves
intermittently during the next four weeks,
and he would judge that the
proper way was to continue in about the same manner as during the past
several weeks.
To supply needed reserves,
maturities of over one year.
he would suggest purchasing
At this stage he would not seek to expand
purchases of longer maturities for the purpose of affecting long-term
interest rates.
Bill rates below 2-1/4 per cent had been experienced recently,
Mr.
Ellis pointed out, without visible impact on the outward movement
of short-term capital.
The small differential on covered movements of
short-term capital suggested that, although the threat of an accelerated
outflow of funds was still
On the other hand,
present, this was not an overriding factor.
he would not like to have the System press its
luck
too far; probably the System should not accept a penetration of the
short-term rate below 2 per cent.
An adequate stimulation of investment
flows apparently was being obtained at present rates, which led him to
accept the present pattern as a general goal for the next four weeks.
From that point of view,
Mr. Noyes,
and in recognition of the points raised by
he would be willing to retreat from the position expressed
by the minority on April 18 to the position expressed by the majority
of the Committee.
He would not recommend a change in
the discount rate
-26
5/9/61
at this time, and he would not favor a change in the directive until
economic recovery had been more firmly established.
To summarize,
he would supply needed reserves by purchasing maturities over one year,
and if
necessary he would sell bills and buy longer-term securities.
Also, he would favor renewing the special authorization covering opera
tions for the Account in longer-term securities.
Mr.
Irons said that Eleventh District conditions were similar,
generally speaking,
to those reported nationally.
There were an in
creasing number of signs of strength; while many of them were not
very substantial in amount, the number had grown.
The situation with
respect to both employment and unemployment had improved moderately.
Improvement also was noted in construction, with further increases in
dicated in
that area of activity.
Although department store sales had
not been rising sharply, they were quite strong, and the agricultural
situation seemed generally favorable.
The prevailing attitude of
businessmen and bankers appeared to be one of confidence.
however,
He sensed,
that there might be a trace of awareness of the Government
deficit; people were beginning to think a little
more about that, and
possibly the anticipated rise in Government spending,
and were begin
ning to wonder whether this would mean sooner or later a resumption
of inflation.
it
While this was not in
the forefront of their thinking,
was tucked away in the back of their minds.
Mr.
Irons said that the District banking situation was easy.
Deposits were up substantially from year-ago levels, with just over
5/9/61
-27
half of the increase represented by time deposits.
three weeks loans, investments,
During the past
and deposits were down slightly, and
borrowing from the Reserve Bank was minimal.
Federal funds transac
tions were at a lower level on both the buying and selling sides.
Mr. Irons commented that, although the reasons may have been
plausible, during the past period ease became a little
than he would have liked.
that had prevailed.
more active
He appreciated the various market factors
However,
judging from the level of rates and
other developments that took place, reserves were very readily avail
able, and Federal funds were trading at low rates.
In his opinion
there should certainly be no further easing; possibly there should
even be some lessening of ease, although not necessarily any deliberate
move in
that direction.
He would be influenced by the level of rates
as reflecting the state of the market more than by any free reserve
figure, but he was inclined to believe that the System might be getting
to the point where maintenance of some given amount of free reserves
would be itself expansive and contributory to a more active ease than
the statistic alone would indicate.
Essentially, however, he would
not be too much concerned about where the level of free reserves was
set as long as excessive ease was avoided.
In his view the bill rate
should be in the area of 2-3/8 to 2-1/2 per cent, at least not lower
than at present, the rate on Federal funds should move to at least the
range of 2-1/4 to 2-1/2 per cent, and other short-term rates should be
at relative levels.
Such a situation would still signify a policy of
-28
5/9/61
He would not advocate a tightening policy at this stage in
ease.
view of the extent of unutilized facilities and manpower.
The economy
was not producing, in general, at anything near capacity, and the
System therefore could afford to be a little
tive, than it
easier, or less restric
otherwise would be until these unused resources were
brought into play.
At the same time, however,
he questioned the degree
of ease that had existed in the past period.
Mr. Irons said that he would not change the directive at this
time, and he felt strongly that there should be no change in the dis
count rate.
For a free reserve figure he would say somewhere around
$400 million, but he would discount the value of any such figure.
Rather,
he would urge that the Desk give consideration to the feel
of the market and to the rate structure,
and not inject funds in an
effort to bring about a statistical figure that would not mean much
if
attained.
Mr. Swan commented that on the basis of the more complete March
data now available,
still
evidences of recovery in the Twelfth District were
quite moderate.
A slight seasonally adjusted increase in employ
ment was more than offset by a gain in the labor force, with the result
that unemployment rose a little
from February.
However,
if,
as appeared
to be the case, recovery in the District had not yet been as vigorous as
in other parts of the nation, he would not be too surprised because
heavy industries,
important in
including steel and autos, are not relatively as
the District.
To illustrate, steel production in April
rose more rapidly than in the nation, but that rise did not have as
-29
5/9/61
much impact on the District picture, in which aircraft and lumber are
considerably more important.
As to lumber, including Douglas fir,
after the upturn in new orders in late February and early March,
in the first
three weeks of April dropped below the March level.
orders
A
more substantial pickup in housing was needed to sustain any appreciable
increase in demand for lumber.
As to aircraft, it
appeared that the
abatement of layoffs that occurred in March might prove to be somewhat
temporary.
Southern California firms were now predicting further
layoffs in the next three months.
Mr. Swan noted that a small gain occurred in commercial and
industrial loans at District weekly reporting banks in the three weeks
ended April 26, in contrast to the national decline in that category.
By and large, however, additional funds that had become available to
the larger banks in that period were invested in bills.
State and
local governments had also been heavy buyers of bills, using the pro
ceeds of the April property tax payments.
Savingsand other time
deposits continued to rise quite substantially at weekly reporting banks.
Mr. Swan said that the policy of the past three weeks seemed to
him quite appropriate.
Apparently the fluctuation in the bill rate from
2.30 to as low as 2.18, along with free reserves of well over $600 mil
lion in two of the three weeks,
the international standpoint.
to the bill
had not exerted adverse effects from
If
it
so developed, he would not object
rate declining to somewhat below the present levels.
In
the prevailing circumstances, he saw no particular basis at the moment
for a change in policy, as reflected by the results of the past three
-30-
5/9/61
weeks.
Apparently,
there was increasing evidence of recovery
nationally, yet the oversupply of manpower and plant capacity was
still
quite impressive,
and he saw no indication as yet of the bottle
necks that tend to give rise to inflationary pressures.
Therefore,
he would continue a program of supplying reserves moderately in ex
cess of seasonal needs to contribute to the expansion of bank credit
and the money supply referred to in the policy directive, even though
the bill rate remained at present levels or on occasion dropped below
those levels toward 2 per cent.
He agreed with the view that the
free reserve figure had become less and less useful, and he would not
care to specify any particular level as a target.
that it
However,
he hoped
would not be necessary to have any very abrupt or substantial
change from recent levels.
He would not favor changing the discount
rate or the directive at this time.
Mr. Deming said that there had been no particularly significant
developments in the Ninth District.
Manufacturing employment had been
gaining and retail sales looked quite good.
Total personal income in
March was 6.8 per cent above March 1960, while cash farm income for
the first
quarter was about 12 per cent above 1960.
Thus, the District
appeared to be moving along in just about the same manner as the country.
Mr. Deming agreed with the view that there was no longer any
uncertainty about the fact of an upturn, at least as to direction.
did not see the upturn as strong, however.
He
Grossnational product of
$507 billion in the second quarter might be a new peak, but it would
-31
5/9/61
not be a very impressive peak, being only about one-half a percentage
point above the previous one.
Continuation of the second quarter rate
of gain throughout the rest of this year would produce a gross national
product of about $520 billion in the fourth quarter,
a figure that also
was not very impressive, representing a gain from the previous peak and
from the fourth quarter of 1960 of only about 3-1/2 per cent.
This
development certainly would not push very hard against the nation's
capacity or against the high level of unemployment.
It
had been suggested, Mr. Deming brought out, that classical
monetary policy might call for some movement toward restraint, or at
least abandonment of ease, at this stage of the cycle.
He was not at
all sure that this was correct, however, given the excess capacity pre
vailing in the economy, the relatively high loan-deposit ratios still
evident (despite some recent improvement in them,
and the relatively
low money supply--GNP ratios, which were about where they were in the
1920's.
It
seemed to him that these factors argued for continuation of
present policy, which he would call "adequate" rather than "active" ease.
On the one hand, the excess capacity factor would argue for continued
"adequate" ease; on the other hand, the relatively low liquidity factor
would argue that there was little
danger in continuing such a policy,
for control could be exercised fairly quickly if
a shift to more restraint
seemed indicated in the future.
Thus, Mr. Deming continued, without attempting to press funds on
the banking system, he would advocate keeping the reserve supply ample
5/9/61
-32
so as to permit credit expansion without any build-up of pressure, at
least until a significant cutback of excess capacity of plant, materials,
and manpower could be foreseen fairly clearly.
In essence, this policy
called for keeping a loose rein on reserves--not letting the horse run
completely free but not snubbing him either.
What this meant in terms
of free reserves, particularly when the Committee was still
about short-term rates, Mr.
Deming could not say.
concerned
He would hope that
free reserves could be kept in the neighborhood of $500 million, but
he would temper this goal as necessary to keep short rates from falling.
He would continue the discount rate at 3 per cent, both as an anchor
to short rates and as a symbol that the System was not easing further.
He saw no reason to change the directive.
Mr. Allen reported that business appeared to be moving slowly
upward in most metal-using lines, with some indication that the uptrend
might accelerate.
An important factor was the completion of voluntary
inventory reduction in the durable goods manufacturing industries.
Al
though these inventories declined by $400 million in March, much more
than in earlier months,
there was evidence that some of the reduction
was not planned but resulted from larger shipments than expected.
Unemployment compensation claims and data on new hires indicated a
modest improvement in the job market in most areas of the Seventh Dis
trict, and reports from State employment offices suggested that this
trend would continue in the next several weeks.
The steel industry was increasing production as orders began to
"snowball," to quote Iron Age.
At the end of April the steel production
5/9/61
-33
index was 100 for the country, 102 for Chicago,
and 113 for Detroit.
Auto industry orders were beginning to put some strain on cold rolled
sheets.
Automobile sales in April were 466,300,
but 17 per cent below April of last year.
or 3 per cent above March,
May sales, aided by sales
contests, were forecasted at 520,000, and June sales at 535,000.
If
those forecasts were realized, total second quarter sales will be
1,515,000, or 13 per cent below a year ago.
Indications were that new
model change-overs would begin on July 15 and that the last shutdowns
would be in the third week of August.
That,
along with the expectation
that styling and engineering changes would be minor,
tilt
production by mid-September.
April 30,
should mean full
Inventories of new cars, 913,000 on
or 100,000 units below last year, were expected to remain
around 900,000 until July when they would begin to drop seasonally.
About 475,000 current models were expected to be left in
stock on
September 1, whereas last year there were 798,000.
A field survey of lenders, builders,
and real estate brokers in
the Chicago and Milwaukee areas provided confirmation of reports that
the housing market remained weak at the beginning of the 1961 season,
although builders were somewhat more optimistic over prospects for the
season than they were a few weeks ago.
The supply of mortgage funds
was comparatively easy. with FHA 5-1/2's available at par and 20 to 25
year 80 per cent conventionals at 5-3/4 to 6 per cent.
no enthusiasm for the 40-year, no downpayment FHA's.
Lenders showed
-34
5/9/61
In the agricultural areas of the District, interest in
grain program was unexpectedly high, Mr. Allen said.
the feed
Reports from the
Corn Belt indicated that the total sign-up might well run over 50 per
cent, with much higner proportions in
the cash grain areas.
This
degree of participation should mean rising corn prices next spring
and summer, in the absence of substantial CCC sales.
Despite increasing evidence that the economy was now moving
upward, bank credit had been slow to expand.
For the months of March
and April, reporting banks in the Seventh District showed a decline of
$307 million in loans and investments, of which $143 million was a de
cline in loans.
The continued inventory reduction, some of it
planned, was undoubtedly a factor.
not
The Chicago money market banks had
shown a basic surplus position for the past several weeks, with both
deposit gains and loan declines contributing.
Under the circumstances, Mr. Allen said, the banks seemed to
be sufficiently well supplied with reserves to support a substantial
increase in loans as and when the demand showed up,
and he favored
carrying on the current degree of ease until the next meeting.
light of current quotations on Treasury bills and Federal funds,
would not like to see the degree of ease augmented,
In the
he
and he did not feel
that the recovery had proceeded to the point where the Committee could
He would not suggest changing
seriously consider a tightening move.
the directive or the discount rate.
If
there was a time in the current
cycle to lower the discount rate further, he felt that it
had passed.
5/9/61
-35
Mr.
Clay commented that the latest information on developments
in the national economy was encouraging in giving evidence that the
recovery phase of the business cycle was under way.
nized, however,
It
must be recog
that these developments constituted only the beginning
of the substantial economic expansion that would be required in
to obtain a satisfactory level of resource utilization.
order
For its part,
monetary policy would need to be conducted with a view to facilitating
economic recovery and expansion by making the requisite funds available
to the banking system and by encouraging favorable conditions in the
credit and security markets.
At the present time,
this called for a
continuation of the policy of monetary ease.
In carrying out open market operations,
Mr.
Clay said, appro
priate recognition would have to be given to the international flow-of
funds problem so far as the impact on the Treasury bill
cerned.
On the other hand, it
rate was con
also was important for domestic monetary
policy that the bill rate not be maintained any higher than necessary.
Just what that international level might be was difficult to assess
accurately, but the range of the past two or three weeks did not appear
unduly low.
Continuing, Mr. Clay remarked that developments in intermediate
and longer Treasury yields since the last meeting of the Federal Open
Market Committee had been particularly noteworthy.
While it
frequently
was not easy to explain just what factor brought about a particular
-36
5/9/61
market development.
and in this instance there probably were several
factors, the downward adjustment did occur in the context of Federal
Reserve operations in these maturity sectors that were modest in size.
It
appeared that market expectations with respect to Treasury and
Federal Reserve intentions played a key role in the downward adjustment
in these longer-term yields.
It was to be hoped that those expectations
would not be destroyed by either open market operations or open mouth
operations on the part of the Federal Reserve,
in
for a further reduction
long-term rates would be desirable as a means of stimulating recovery
and expansion.
Mr.
Clay suggested, rather, that further operations be carried
out in those sectors as a part of the program of making the necessary
additions to reserves of the banking system and in connection with off
setting operations that might be required for maintaining the Treasury
bill rate within an appropriate range.
Moreover, he suggested that
these probing operations be concentrated more heavily in longer maturi
ties than heretofore to obtain more effect on longer-term yields.
In conclusion, Mr. Clay indicated that he would not recommend a
change in the directive or in the discount rate at this time.
Mr. Wayne reported indications that recovery in
trict
had continued into its
third month.
Virtually all
the Fifth Dis
principal
manufacturing industries were holding their own or advancing,
and there
were widespread reports of rising orders in the past three weeks,
gesting that further expansion was likely.
sug
Textile industry spokesmen
had been somewhat heartened by announcement of the Administration's
5/9/61
-37
seven-point plan for assisting the industry, which suggested that the
industry's plight was at least understood in some quarters.
Stocks of
raw cotton were being built up with borrowed funds in anticipation of
increased support prices this fall.
Continuing, Mr. Wayne said a check indicated that leading banks
that had been active in Federal funds in recent weeks had, with the
greater ease that developed, switched from net sellers to net buyers
in order to profit from the differential between rates on very short
term investments and rates on Federal funds.
It was also reported that
a main reason for the marked shortening of portfolios was the expecta
tion that interest rates would increase later this year.
It was ex
pected that loan demand would be fairly strong in the third and fourth
quarters, and in several areas there appeared to be some expectation
that increasing Government spending would lead to a renewal of infla
tionary pressures, probably by early next year.
Turning to the national picture, Mr. Wayne commented that re
covery seemed to be proceeding with encouraging vigor.
He saw nothing
to be gained from any additional ease, but he also believed that it
would be premature to begin tightening in view of existing overcapacity
and unemployment.
Like Mr. Doming, he would favor adequate ease as
contrasted with active ease.
In view of the strengthening recovery,
he felt that the Committee must begin to think in terms of moving
cautiously and gradually toward a neutral reserve position, but not
at this early date.
In his opinion it would not be advisable to lower
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5/9/61
the range of free reserves that had prevailed prior to the past few
weeks.
Recently the situation had unfortunately been too easy, and
he would suggest a range somewhere around $400-$500 million, with any
doubts resolved on the side of the lower level.
In any event, main
taining a fixed free reserve figure may result in constantly increasing
the volume of reserves, which could go beyond the Committee's intent
and lead to a too rapid contraction of reserves at some later date.
He would not favor a change in the directive or in the discount rate
at this time.
Mr. Mills commented that the record of movements in the supply
of reserves during the past three weeks showed up the kind of pitfalls
that can upset the conduct of monetary policy in the present sort of
economic climate.
Against a background of a superfluity of reserves
a wide gap had opened up between interest yields on Treasury bills and
open market paper and the discount rate of the Federal Reserve Banks.
This condition had again raised the potential problem that the attrac
tiveness of higher interest rates abroad would promote a new outflow
of funds.
Of most seriousness, however, was the fact that excessive
market ease had seemingly created expectations of rising prices for
U. S. Government securities that had come within an ace of fomenting a
speculative movement that would have been akin to the 1958 experience
if it had taken hold on the market.
In the light of these circum
stances it was his opinion that for the next several weeks technical,
rather than economic considerations, must have first call on the conduct
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5/9/61
of System credit policy until more appropriate reserve conditions
have been restored.
Mr. Mills said he must confess that he did not,
yet, have the degree of confidence in
the vigor and lasting quality
of the recovery that others appeared to have.
ceding comments,
at least as
In line with his pre
he therefore had different reasons for believing
that a lower level in the supply of reserves than had been the case
recently would be helpful.
However,
he felt that it
would be dan
gerous to draw back too fast and thereby allow the market to be
whipsawed by bewildering fluctuations in
It
the supply of reserves.
was his impression that free reserves at around $350 million in
the present statement week could be harmful and that it
would be
preferable to draw back cautiously and gradually from a $500 million
to a $400 million level.
He saw no reason to change the discount
rate or to consider a revision of the directive at this time.
Mr. Robertson in
views expressed by Mr.
cated that he agreed substantially with the
Swan.
He would only add that in his opinion
the degree of ease achieved inadvertently during the past three weeks,
with perhaps a slight bit of backsliding during the most recent week,
was very salutary.
Such a degree of ease did bring about an increase
in the money supply and in bank liquidity, of which more was needed.
The downward pressure on rates was, he felt, attributable more to an
open-mouth policy on the part of some outside the System than to ac
tions of the Committee or the degree of ease in
the market.
He was a
5/9/61
-40
bit concerned, however, about the indications that some of this ease
was resulting in an increase in loans on securities, which led him to
the thought that consideration should be given to the question of mar
gin requirements.
This did not mean that he thought an increase neces
sarily was needed, but consideration should be given to the problem in
the near future.
For the next four weeks, Mr. Robertson said, he thought it de
sirable to avoid backsliding, and to maintain approximately the same
degree of ease that had been achieved during the past three-week period.
He would suggest a target for free reserves in the neighborhood of
$600 million, siply because he had the feeling that there would be a
tendency to backslide into the $200-$300-$400 million range, and he
would be happier if the level of free reserves was held higher.
He
agreed with all of those who had spoken against a change in the dis
count rate, for the time had long passed by when the System could move.
He felt that the directive should not be changed.
Mr. Robertson then stated that he would like to add a footnote
to the presentation by Mr. Bryan at the April 18 meeting with regard to
the use of total reserves as a guide to open market operations.
Ac
cordingly, he read the following memorandum:
During the past year and a half, there has been a good
bit of exposition at our meetings concerning the trend of
total reserves as a guide to the operation of the System
Open Market Account. We are indebted to Mr. Bryan, and also
to Mr. Johns, for their formally calling to our attention
this added perspective concerning our operations. At the
same time, it seems to me we must be careful not to go too
5/9/61
-41
far in using this type of guide as a substitute for the
other strategic and tactical considerations to which
this Committee is also called upon to give attention.
As I cast my mind back over our operations of recent
years, I find numerous occasions which illustrate this
point. The first half of last year, when business was
cresting, provides one such example. During that span,
total reserves if one attempts to allow for seasonal
movements, evidenced a downward trend. This implied a
shrinking base for commercial bank demand deposits which
we could all agree in retrospect merited consideration in
determining the appropriate course for monetary policy.
This total reserve trend, however, was not in itself a
sufficient measure of what our policy was or should have
been. In fact, our operations were importantly improving
bank liquidity during that period by providing sufficient
reserves to enable banks to retire their net indebtedness
to the Federal Reserve. Reserve injections used for debt
retirement produced no net growth in the aggregate reserve
base, but did serve to ease restraints upon bank manage
ments and thus to enhance bank credit availability.
Moreover, substantial bank deposit creation was in
fact taking place during the first half of 1960, but the
net deposit increase was being transferred by deposit owners
into time accounts. With the smaller reserve requirement
on time accounts, tbis pattern of deposit expansion could
be accomplished with a smaller reserve base. In effect, this
decrease in public preference for money relative to near money
enabled banks to economize on their reserve balances. Finally,
the lessened public demand for money was also evidenced by
declining market interest rates, reflecting substantial de
mands for Governments and other interest-bearing instruments
in the financial markets. Taken together, the above develop
ments could be construed as indications of some shift of
public preference between money and other liquid assets; in
brief, the demand for money was flagging.
Our responsibilities in such circumstances are not to
keep the supply of money up to the level that would have been
needed if no demand decrease had occurred, but to keep reserves
sufficiently abundant as money demand decreases to produce a
spreading availability of money and credit at declining in
terest rates, in the interest of stimulating recovery. The
extent and duration of such easing must depend upon the dimen
sions of the recession and the amount of recovery necessary
to return to as full use of resources as can be sustained
without generating inflationary price pressures.
Policy determinations as to the degree of monetary ease
or tightness must also be conditioned by the relative contri
bution of other elements of Federal economic policy toward the
5/9/61
-42-
objective of stable economic growth. For example, from
mid-1958 to early 1959 the Treasury was running a very
large deficit, aggravating rather than dampening the
ebullient atmosphere which characterized much of the period.
In this circumstance, monetary policy was compelled to as
sume a larger share of the burden of restraining excessive
demands than most of us would regard as desirable ordinarily.
In the light of its responsibilities, the System had no
other choice at that time.
In the process, however, this
kind of policy on our part held the total of member bank
reserves below its postwar trend line, and led to virtually
no growth in the reserve base for one and one-half years.
Some of the consequences of that period of overreliance
upon monetary policy may still be with us, requiring some
further adjustments in order to bring the total liquidity
available to the economy back more in line with public
desires.
The comments I have made up to this point are quali
fications of the type which I believe we must keep in mind
in including total reserve measures among the various tacti
cal
ides for our open market opeations.
Such reservations
would apply a fortiori, however, to any tendency to use an
historical trend line of total reserves as a strategic objec
tive of policy. I am wary of speaking of anything as fixed
as a 3 per cent--or 2 per cent, or 4 per cent--annual growth
trend in the economy's need for money. The popular appetite
for monetary assets changes over time. During World War II
with few spending alternatives available, additions to de
posit holdings were very large. Much of the postwar period
has been colored by a gradual reduction from wartime peaks
in the proportion of income held in monetary form, often
I do not like
with unfortunate inflationary consequences.
to project this kind of monetary readjustment indefinitely,
yet aiming our operations at the postwar trend line of total
reserve growth seems to me to do so. I think we must be alert
to shifting public demands for demand and time deposits, as
well as for nonbank near monies, and we must be prepared to
moderate our policies accordingly.
More broadly, let me point out that the long-run trend
line of reserve growth does not allow for the wide variations
which have occurred in the performance of the economy itself.
The postwar era has been characterized by recurrent price in
flations. Thus, from the point of view of preserving the
value of the dollar, the 3 per cent postwar annual growth
trend in the reserve base was too much. Now, in contrast,
with nearly 7 per cent of our labor force unemployed and with
prices slack, I believe that a good deal more than a 3 per
cent annual growth trend in our reserve base would be salutary
-43
5/9/61
for a time in order to stimulate, in so far as monetary
policy can, an early and orderly advance in levels of
economic activity.
I think the import of what I am saying is that our
job cannot be made easy. A steady growth trend in the
reserve base is not a new target toward which we can aim
as a substitute for other measures. The trend of total
and nonborrowed reserves is rather an additional perspec
tive-and an important one--to be examined in combination
with other longer-run and shorter-run factors.
If we
find the current total of reserves departing far from its
recent trend, we must take pains to assure ourselves that
there are either (a) changes in the public's appetite for
money relative to other assets, or (b) inflationary or
deflationary factors outside the money supply, which jus
tify some adjustment in, or departure from, the previous
path of monetary growth.
This, I am sure, can prove a
helpful discipline, as it already has given indication of
doing in the recent past. But, when such justifications
appear, as I believe they do in our present state of
underutilization of resources, we should not hesitate to
employ monetary policy in flexible and compensatory fash
ion, in order to promote our long-run objective of stable
economic growth.
Mr.
Shepardson said it
seemed to him the situation at the
present time was one that obviously would give concern to some people.
Yet it
was one that he considered wholesome.
mentioned in
his statement the recurring inflationary pressures of the
postwar period.
It
is
or line of reasoning,
change.
Mr. Robertson had just
However,
easy, Mr.
in
Shepardson noted, to develop a habit,
that connection,
and it
takes a long time to
the System's concern must be with the promotion of
sustainable growth.
In horticulture, sustainable growth is
on the root system, which is
much as the foliage.
dependent
not visible, except by deep probing, as
One can get quick growth and show a lot of
leaves, but in the face of adversity that kind of growth withers fast.
-44
5/9/61
At the present time the possibly slow, but nevertheless persistent,
economic readjustment seemed comparable to the development of the root
system.
For example, available reports on plans for investment in
plant and equipment indicated that a larger proportion was to be spent
on modernizing present facilities than on construction of new facilities,
and in his opinion this was all to the good.
The modernization would
tend to improve the country's competitive position, which was one of
the underlying needs, both for domestic growth and in
balance-of-payments problem.
relation to the
Also, there were now some indications of
a little more concern on the part of labor about its role in relation
to the growth problem; those reports likewise were encouraging, even
though not too much had been accomplished as yet.
Further, it was
encouraging to note that more thought and attention was being given
to increasing the mobility of labor through retraining, and to broader
training for the growing labor force that was due to appear.
These
developments were noteworthy because growth inevitably involves change.
It would involve change in the requirements for labor and an increasing
flexibility and mobility of labor.
Such things move slowly, but they
are as essential to sustainable economic growth as the root system
development is to a thriving plant.
For this reason, he was not in
terested in a mushroom growth that might wither in the heat of the
July sun.
Instead, he would prefer to give the root system time to
develop before getting too much of the plant above ground, for that
5/9/61
-45
was the way to bring the crop through the harvest.
True, it was dis
turbing to look at some of the existing unemployment, but it must be
recognized that some diseases cannot be cured overnight, particularly
when they are deep-seated.
Mr. Shepardson expressed the view that the System should not
be in a position at this time of imposing restraint, and that it should
be prepared to provide reserves as the need might develop.
At the same
time, he continued to feel that it would be inadvisable to try to flood
the garden too fast.
Therefore, he would not care to see a continua
tion of the degree of ease that had developed inadvertently in the
weeks just past.
In his opinion Mr. Mills had made a good point about
trying to avoid wide swings; to drop down too fast from the level of
free reserves that had occurred through inadvertence might be discon
certing to the economy.
He did think, however, that it would be de
sirable to trend back to a free reserve level below $500 million, for
he would not want to see monetary ease become a drug on the market.
In summary, he would provide needed reserves freely but try to avoid
the excessive ease that had occurred recently.
The Committee must
continue to be concerned about the short-term rate situation, and he
would subscribe to goals such as Mr. Irons had outlined with regard to
the bill rate and the Federal funds rate.
He saw no reason to change
either the directive or the discount rate at this point.
Mr. King recalled that at the April 18 meeting he had suggested
an exact free reserve target figure of $575 million.
At present, he
said, he would again suggest the area of $550-$575 million.
The
5/9/61
-46
relatively small decline in
the bill
rate apparently had not alarmed
anyone unduly, and he would not object if the bill rate receded to
around the 2.05 level.
This did not mean that he would propose any
overt action to try to push the rate to that point.
However, if
pressures should develop that would tend to move the bill rate in that
direction, he would not object.
the bill
Also, he felt that a further drop in
rate might afford an opportunity to begin withdrawing from
operations in the longer end of the market, at least to the extent
that such operations were being engaged in
he would not object if
summarize,
the bill
range or declined a few more points.
at the present time.
rate stayed in its
To
present
His suggested target for free
reserves would be around $575 million, and he would hope that the Desk
could hit that figure fairly closely,
problems inherent in
a change in
even though he appreciated the
the operation of the Account.
He would not favor
the discount rate at this time.
Mr. Fulton reported that despite same further gains in
steel
output and construction the program of recovery in the Fourth District
was running into a few snags, particularly in the area of retail sales.
This was evidenced by persistent unemployment,
increasing softness in
department store sales, and lack of sustained demand for bank credit.
However,
the views of District industrial economists seemed to have
changed somewhat.
Earlier, they had expected a continuing slow economic
improvement, but now there was at least a minority feeling that the
recovery would not be as gradual as formerly was contemplated.
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5/9/61
The unemployment situation was not good,
Mr. Fulton said.
figures had shown a slightly less than seasonal improvement.
The
With re
gard to the retraining of labor, Mr. Fulton commented on a situation
in the Cleveland area where the response to an offer of that kind had
been disappointing.
In the steel industry there had been a marked pickup, percentage
wise, and orders in April were the best since a year ago.
While ship
ments were still prompt, they were probably not going to stay that way;
some backlog seemed likely to begin to build up, particularly in sheets.
It was felt that customers'
inventories had been liquidated below
reasonable operating levels and that the orders being received might
include some provision for inventory accumulation as well as for cur
rent use.
The industry was looking for improvement in the third quarter
and for a good fourth quarter.
However, the picture was not bright for
the companies because of increased costs.
Labor rates were due to go
up this fall under the terms of the existing labor agreement, and the
present contract would expire in July 1962.
Everything that the com
panies had to buy had gone up in cost, whereas the price of steel had
not increased.
Turning to a bright spot in the District picture, Mr. Fulton
said one good-sized foundry that in the past had been quite a bell
wether reported that about a month ago orders began to come in strongly
for immediate delivery.
It was felt that the companies with which that
foundry dealt, and they represented a wide segment of manufacturing
industries, had run out of inventory, that their orders also may have
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5/9/61
picked up somewhat,
and they were ordering both for current production
and for inventory.
It was also felt, however,
that inventory levels
were likely to be considerably smaller than heretofore, which meant
that loans by banks to carry inventories would be less than they had
been in the past.
Of course, if boom conditions should develop and
delivery times lengthened, there might be a reversion to the previous
inventory practices.
In this industry, also, it was indicated that
prices were too low, that the cost of everything, including labor,
was increasing,
and that price rises seemed inevitable.
Turning to policy, Mr. Fulton said that he would not favor
He would suggest free
changing the discount rate or the directive.
reserves in the area of $500 million and hoped that the level would
not remain as high as it had been recently.
A disturbing factor was
the appearance of some evidence of speculation in Government securities,
particularly longer maturities, possibly reflecting to some extent the
recommendation of the Joint Economic Committee that the Federal Reserve
put more money into the financial system in order to reduce the long
term interest rate.
He felt it
would be desirable if
the Federal Re
serve could in some way assure the investing public that its actions
were always taken within the context of monetary policy,
and were not
dictated by views expressed outside the System.
Mr. Bopp reported that business in
was improving.
the Third District clearly
Though total unemployment still
claims were dropping.
was high, unemployment
Department store sales were rising, although
sales to date in 1961 had not yet reached the levels of 1960, and
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5/9/61
production was increasing, with recent increases concentrated in
durable goods industries.
Construction contract awards in the Dis
trict dropped in the first quarter of 1961, but compared more favorably
with national construction awards than they had for over a year.
There
was still no evidence, however,
of any vigorous upturn in demands being
made on banks in the District.
Stability in bank credit and a slowly
increasing deposit level had been in evidence since February.
Reserve
positions were still easy.
Mr. Bopp commented that policy considerations were somewhat
unusual at this time.
Usually the decision rested between (a) no change
and (b) movement in one direction.
Today, however, consideration was
being given in various quarters to (a) no change, (b) less ease, or
(c) more ease.
Any case for less ease would have to rest largely on
the strength of the business recovery.
Although the recovery so far
looked good and even suggested that the business revival could turn
out to be more vigorous than many thought it would be, it was neverthe
less still
only beginning.
And while it was probably true that there
was a natural tendency for the System to overstay both booms and reces
sions, action toward less ease right now would seem premature.
This
was quite apart from the question as to whether there was a "different"
economy now from the one that prevailed in the 1954 and 1958 recoveries.
The case for more ease would seem to rest largely on the argu
ment that the System would like to have had more ease earlier, but only
now that the gold flow had ceased was this possible; true, it was rather
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5/9/61
late in the cycle, but better late than never.
This course assumed
the calculated risk that lower short-term rates would not trigger a
resumption of the capital outflows which were so troublesome earlier.
It was still far from clear that the balance of payments was strong
enough to stand this test.
If the gains to be achieved domestically
were very great, this risk might be worth taking anyway, but there
was evidence that the present degree of ease was accomplishing its
purpose of restoring bank liquidity and stimulating a demand for
capital in corporate and municipal markets.
A substantial move to
ward more ease would inevitably call for a reduction in the discount
rate, and this could have the adverse psychological reactions (a)
that the monetary authorities lacked confidence in the strength of
the business recovery and (b) that it represented a yielding to pres
sures from outside the System,
On balance, Mr. Bopp said, the wisest course seemed to be no
change.
Therefore, he recommended continuation of the present direc
tive, the present degree of ease, and the existing discount rate.
Mr. Bryan noted that during the discussion today several per
sons had referred to the liquidity of the banking system as being less
than at the beginning of previous recoveries.
to be that this was an unfavorable factor.
The assumption seemed
In this connection, however,
he brought out that the inflation associated with previous recoveries
may have arisen out of excessive liquidity in the banking system.
Thus, the System might be in a more fortunate position now by virtue
of the fact that the banking system was somewhat less liquid.
-51
5/9/61
Mr. Bryan also commented that a number of persons seemed to
think that, although the country was experiencing a good recovery,
there was a terrific problem due to the underutilization of resources.
While he shared with everyone a desire to see resources fully utilized,
a considerable part of the undertilization could not be remedied by
monetary policy.
Some part of it reflected the misapplication of
capital induced by inflation.
Further, some part of the unemployment
problem was attributable to deliberate Governmental policy outside
the field of fiscal and monetary affairs.
ment had become a profession.
To many people, unemploy
Monetary policy alone could not bring
about a full utilization of resources, particularly in the face of
other policies and in the face of a preceding inflation of many years
that had robbed the American people and had contributed to the mis
allocation of a lot of capital.
The most dramatic development in the Sixth District, Mr. Bryan
said, had been the increase in the workweek and in manufacturing pay
rolls.
things had been going along about
For the most part, however,
the same as in the nation generally.
With regard to policy, Mr. Bryan said he could not quarrel too
much with the reserve situation in
felt
the past three weeks.
the Committee would make a grave mistake if
it
However, he
did not watch
reserve developments closely because an inflationary course could re
sult.
Required reserves had gone up somewhat more than seasonally, as
had total reserves, and the money supply appeared to be behaving about
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5/9/61
as it
should.
In substance,
he thought that reserves were ample at
present and that the Committee should begin to think ahead to the time
when it
might want to let free reserves trend downward.
Mr. Johns said that if he had been present at the April 18 meeting
he might well have joined in the minority position.
Like Mr. Ellis,
however, he was disposed to retreat from that position.
The policy directive, Mr. Johns observed, continued to call for
encouraging expansion of bank credit and the money supply.
this appropriate.
He considered
However, he thought it was impossible for one who
must make recommendations about policy to avoid making some judgment as
to the appropriate rate of expansion of bank credit and the money sup
ply.
From the latter half of November 1960 to the latter half of April
appeared that the money supply, as defined for the purposes of
1961, it
the Board's semi-monthly series, had grown at an annual rate of 4.1 per
cent.
If
the definition were expanded to include time deposits, the
rate of growth over the same period was at an annual rate of 9 per cent.
Further, the only comparable rate of growth in total deposits plus cur
rency during the past ten-year period was from February to June 1958.
The question he raised was whether the Committee would want the present
rate to continue or whether some other rate would be more appropriate.
Considering pertinent factors such as (1) the upturn of the economy,
which probably would result in
for liquidity,
(2)
some modification of the public desire
fiscal policy, including the change from a cash
5/9/61
-53
surplus of substantial amount in the second and third quarters last
year, and (3)
current debt management policy, which was increasing
the supply of short-term securities in the hands of the public as con
trasted with a decline in the latter half of 1960, it occurred to him
that it
would be inappropriate to bring about or encourage an increase
in the money supply at a greater rate than in the past five months.
It might even be possible that the rate of the past five months was
too great and something less should be the objective.
Having said
that, he recognized quite well the difficulty which confronts the
System in trying to control the rate of growth with any degree of
precision.
Inasmuch as, along with others, he had been talking consider
ably in recent months about total reserves, Mr. Johns said he would
like to observe that whereas the staff calculations assumed excess
reserves of $700 million in the banking system, actually there had
been in the most recent past excess reserves of about $500 million.
He suggested that it might be possible to obtain an appropriate rate
of growth of the money supply and bank credit without a further in
crease in total reserves, seasonally adjusted, if close attention was
paid to the use that the banking system was making of excess reserves.
There was,
of course, the possibility of falling into the error to
which Mr. Thomas called attention several months ago when he pointed
out that the maintenance of a free reserve target, with continual re
plenishment as banks used reserves, could result in what the Committee
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5/9/61
might not think was an appropriate rate of growth of bank credit and
the money supply.
Therefore, he would be disposed for the short run,
that is, until the next meeting and perhaps until the succeeding meet
ing, to observe the use that the banks were making of excess reserves.
A rate of growth of the money supply might result that seemed appro
priate.
sired, it
On the other hand, if
the rate of growth was less than de
would be necessary to supply some further reserves.
Mr. Johns said he assumed that if the recovery continued the
tendency would be for interest rates to move upward.
In his opinion,
a policy designed to prevent that from occurring would be more expan
sionary than justified.
He would think that if
and as the recovery
proceeded to the System's satisfaction, some upward tendency in rates
should not be resisted.
If
the time was not actually here, it
might
not be too far off when the System ought to consider whether it should
any longer be concerned with the pattern of interest rates.
As he had
said, if the recovery progressed rates would probably move up.
Even
without a special operation, it seemed likely that short-term rates
might be high enough relative to longer-term rates to discourage a
flow of short-term funds from the country.
were concentrated in longer maturities in
down,
If
purchases for the Account
an attempt to hold long rates
short-term rates might tend to go up all the faster, perhaps
faster than would be liked.
The time might be near in
this cycle,
it
seemed to him, when the System should no longer attempt to keep the
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5/9/61
short-term rate up relative to longer-term rates, or vice versa.
There
might be considerations outside the field of monetary and credit policy
that would make it
inadvisable to abandon operations in the longer-term
area precipitantly, and he would not advise that.
tions, however, it
Despite such opera
seemed likely that if business expanded the creation
of an appropriate amount of bank credit and money was not likely to be
accompanied by a downward adjustment in long-term rates.
In conclusion, Mr.
Johns said that he would not change the di
rective or the discount rate at this time.
He shared the view that it
was not too early to begin to think about margin requirements.
Mr. Johns then withdrew from the meeting.
Mr. Balderston expressed the view that the fundamental domestic
problem for the longer run remained that of providing sufficient job
opportunities to take care of the rising need for them.
This, he sup
posed, called for a greater flow of capital funds into investment.
Therefore, the signs, even if temporary, of some renewed activity in
the capital markets gave him encouragement.
In this connection, he
observed that those who criticized the Federal Reserve for its so
called experimentation in the longer-term sector of the market seemed
to confuse interest rates with the results that were sought.
If funds
flowed increasingly into investment, that was the desired result.
Looking at the longer run, Mr. Balderston said, he was concerned
that the ratio of the money supply to gross national product had fallen
to a low level.
Strong sustainable growth of the economy required
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5/9/61
continued attention to the money supply, narrowly defined, and also to
near-money substitutes.
Continuing, Mr. Balderston noted that in the first
quarter of
this year profits of industrial firms seemed to have dropped about 20
per cent.
About 69 per cent of those firms reported profits lower
than in the corresponding quarter of a year ago; in the case of durable
goods firms the figure was 78 per cent.
However,
he was convinced
that a turnaround of the economy had occurred, and it
might be assumed
that the larger volume and better production usually accompanying the
early months of recovery would improve corporate profits.
That in
turn would add to Treasury receipts at a future time.
In view of the concern he had expressed at the past two or
three meetings,
responded.
he was gratified that the money supply at last had
As inventories were rebuilt, the impact on bank lending
would doubtlessly enhance the money supply further.
Now that the money
supply had responded, he would not press reserves on the banking system
quite as strongly as during the past three weeks, particularly if
the
result was to press short-term rates any lower than in recent days.
Earlier, as long as the money supply was not responsive,
he had been
willing to risk showing to the world a somewhat different posture as
to the bill
rate.
However, now that the money supply had responded,
at least for the time being, he would not like to see the bill rate
go any lower than it
was at the moment.
5/9/61
-57
Mr. Balderston said he thought it
doubtlessly was true that
The
interest rate differentials were no longer pulling funds abroad.
forces active at the moment appeared to be those outlined by Mr.
Sammons.
Nevertheless, the bill rate is a signal watched closely by persons
abroad and in
this country.
It
presents to the world a posture re
flecting the views of the central banking system.
should be kept in
Consequently,
it
mind, especially during a period when international
negotiations were under way looking toward minimizing the flow of funds
from country to country.
Balderston said that for the reasons to
In conclusion, Mr.
which he had referred he would favor a free reserve target of about
$500 million.
He would not change the discount rate.
In sum,
his
present position represented a retreat from the position he had ad
vocated at recent Committee meetings.
Summarizing the meeting, Mr.
broad range of opinions,
Hayes said that although a fairly
or shades of opinion, had been expressed,
he
did not feel that it would be too difficult to come to a reasonable
consensus.
There had been general recognition of the appropriateness
of a policy of ease,
although there were some interesting characteriza
tions of the kind of ease that had prevailed recently.
general recognition that in
There was also
the past few weeks unforeseen circumstances
had resulted in somewhat greater ease than anticipated.
A minority
of the Committee was glad that that had occurred, but the majority
felt the degree of ease had gone further than would have been desired.
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5/9/61
There had been some interesting comments on the possibility that
excessive reserves might at some juncture combine with fears of a
revival of inflation, or expectations thereof, and lead to specula
tion in the Government securities market.
Also, there had been
references to the effects in the area of System operations, and
especially on rates, of pronouncements made outside the System.
Mr. Hayes went on to say that the opinions of those who had
commented on long-term rate objectives and operations in longer
maturities were divided.
Some would press this program forward as a
useful device, while others already were beginning to have qualms
about the usefulness of continued operations in the longer-term area
of the market.
of opinions.
As to short rates, there was again quite a variety
A few of those who had spoken would not be reluctant to
see the short-term rate go a bit lower, but a clear majority would
prefer to see the short-term rate remain within the present range and
one or two would like to see it move a little higher.
A clear majority
felt that continued attention should be given to the short-term rate
because of international considerations.
It appeared to be the gen
eral view, Mr. Hayes said, that the atmosphere of the market must play
a role and, although it may not have been stated in so many words, this
would require continuing to give reasonable leeway to the Manager of
the Account.
5/9/61
-59With regard to the directive, Mr. Hayes said it was clearly
the consensus that there should be no change at this time.
He then
inquired whether anyone wished to dissent from continuing the directive
in its present form, and no comments were heard.
Thereupon, upon motion duly made
and seconded, it was voted unanimously
to direct the Federal Reserve Bank of
New York until otherwise directed by
the Committee:
(1) To make such purchases, sales, or exchanges (including
replacement of maturing securities, and 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 expansion of bank
credit and the money supply so as to contribute to strength
ening of the forces of recovery that appear to be developing
in the economy, while giving consideration to international
factors, and (c) to the practical administration of the Ac
count; 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 indebted
ness purchased from time to time for the temporary accommoda
tion 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 certificates of indebtedness as may be necessary
from time to time for the temporary accommodation of the
Treasury; provided that the total amount of such certificates
held at any one time by the Federal Reserve Banks shall not
exceed in the aggregate $500 million.
Turning to free reserves, Mr.
Hayes said that he always hesitated
to center views around any particular target because some preferred to
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5/9/61
de-emphasize this and some did not comment.
However,
although a few
would prefer a range around $600 million, a good many more had spoken
in terms of $500 million, or possibly a shade lower.
Mr. Hayes said it
appeared that the consensus was essentially
to maintain the same degree of ease as had prevailed, apart from the
unusual ease that developed inadvertently during the past few weeks.
The Desk should continue to pay attention to the short-term interest
rate structure,
and the atmosphere of the market would have a great
deal to do with day-to-day operations.
He then inquired whether this
was a reasonable statement of the consensus.
Mr. Robertson asked whether this was equivalent to saying that
the consensus was for a degree of ease indicated by a free reserve
figure somewhere between $400 and $500 million.
Mr.
Hayes replied that he would think so.
He wished to point
out that a number of factors might call for deviation from any fixed
free reserve target.
Other things being equal, however, the range men
tioned by Mr. Robertson would appear to reflect the tenor of the com
ments around the table.
Mr. Hayes then inquired again if there was agreement that he
had stated the consensus accurately,
and there were no comments to
the contrary.
Accordingly, Mr. Hayes inquired whether anyone wished to record
a dissent from the implementation of the directive in the manner indicated
by the consensus,
and Mr. Robertson stated that he would dissent.
-61.
5/9/61
Secretary's note: Mr. Robertson subsequently
submitted the following statement for inclu
sion in the record of the meeting in explana
tion of his dissent:
Mr. Robertson dissented from the decision to request the
Manager of the Account to so conduct open market operations as
to achieve a degree of ease comparable to that which prevailed
prior to the last meeting of the Committee rather than the
higher degree of ease which has prevailed from that time to
this.
It was his belief that the recent level of around $600
million has promoted a turn-around in the money supply and
brought about an increase in bank credit without unduly de
pressing yields on Government securities.
It was his view
that the downswing in yields which did occur was attributable
more to the West German discount rate reduction and comments
by persons outside the Federal Reserve System than to System
open market operations.
All members of the Committee agree that this is a time
when the American economy ought to move upward toward a more
satisfactory rate of employment and toward a fuller use of
its resources. While current information suggests that this
may be happening, it would be dangerous to take it for granted
that recovery is going to proceed vigorously upward without
significant interruption, which has never been the case after
a downturn except in the spring of 1958.
With the gold outflow apparently halted for the time
being, and with inflationary pressures seemingly less danger
ous just now than at any time in recent years, he believed
that in order for the Open Market Committee to make certain
that the System does its full part in stimulating recovery
to more nearly satisfactory levels of production and employ
ment, the degree of ease achieved during the past three weeks
should not be diminished (and if anything, increased slightly)
during the next four weeks until the next meeting of the Com
mittee.
In view of the likely monetary and credit needs which
will accompany business recovery, he felt that a volume of
free reserves in the neighborhood of $600 million during this
period would not result in any sloppiness in the money markets
or an unduly low bill
rate.
Mr. Swan said that he also wished to dissent, although with much
more reluctance than at the previous two meetings.
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5/9/61
Mr. Deming referred to the range of free reserves mentioned
by Mr. Robertson (between
$400 and $500 million) and inquired whether
the consensus was not toward the high side of that range.
Mr. Shepardson stated that he would favor the low side of
that range.
Mr. Hayes indicated that he would rather not try to be too
specific.
If
a general range could be agreed upon even for purposes
of this conversation, he thought that was doing quite well.
Mr. Hayes then referred to the special authorization covering
operations in other than short-term securities and said he assumed it
was the intention of the Committee to continue the authorization in
effect until the next meeting.
Messrs. Allen and Robertson stated that, for reasons given at
previous meetings, they would want to be recorded as dissenting.
Thereupon, the Committee authorized
the Federal Reserve Bank of New York,
between May 9, 1961, and the next meeting
of the Committee, within the terms and
limitations of the directive issued at
this meeting, to acquire intermediate and/
or longer-term U. S. Government securities
of any maturity, or to change the holdings
of such securities, in an amount not to ex
ceed $500 million.
Votes for this action: Messrs. Hayes,
Balderston, Irons, King, Mills, Shepardson,
Votes against this action:
Swan, and Wayne.
Messrs. Allen and Robertson.
Mr. Hayes inquired of Mr.
questions in
Holmes whether he had any comments or
the light of today's discussion, and Mr.
in the negative.
Holmes replied
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5/9/61
Mr. Hayes then referred to the inclusion on the agenda for
this meeting of a preliminary discussion of the publication of the
record of policy actions of the Federal Open Market Committee more
frequently than on an annual basis; for example, on a quarterly basis
after a lag of one full quarter.
Mr.
Hayes said it
had seemed appropriate to Mr. Balderston,
to him, and to Mr. Sherman to consider this question, which he knew
had been thought about from time to time by most of those around the
table.
He noted that under the present procedure of publishing the
record of policy actions for each calendar year in
the Board's Annual
Report, the time lag before publication of the respective actions
ranged from roughly three months to 15 months.
This time lag had led
to quite a bit of criticism from outside the System, and some comment
within the System.
Therefore,
the question arose whether, without
taking undue risk in the execution of policy, it
would be possible to
release the policy record on a regular quarterly basis with approxi
mately a three-month time lag.
This might be accomplished, perhaps,
through publication in the Federal Reserve Bulletin or by means of a
special release.
Mr. Hayes then turned to Mr. Balderston, who commented that
it
seemed rather difficult to answer criticisms of a 15-month time lag,
when in some cases there was only about a three-month lag before pub
lication of actions in the Annual Report.
He was not too much in
terested at this point in the question of procedure for publication,
5/9/61
-64
but he had in mind that perhaps the record for each of the first
three quarters of the year might be the subject of a press release.
As he saw it,
a time lag of at least three months would be desirable,
which would mean that in July the record of policy actions taken
during the first
quarter of the year would be released.
Presumably,
the policy record would continue to be presented in the usual manner
in the Annual Report, with the record of actions taken during the
fourth quarter of the year being released initially in
the Annual
Report.
In further discussion, Mr. Deming suggested that some of the
criticisms directed toward the System on this general subject would
not stand up under examination.
It was not a fact that the public
was unaware of what the System was doing for a period of as long as
15 months.
Rather, it
was simply that the public did not have access
to the official record of policy actions and the specific wording of
the directives that had been given by the Committee to the Federal
Reserve Bank of New York.
requirements,
immediately,
actions,
On changes in the discount rate, reserve
and margin requirements, notices were given to the press
and within limitations there were explanations of System
often in the form of comments by System spokesmen.
There
fore, the public was kept reasonably up to date on System policy.
Accordingly, although he would have no particular objection to pub
lishing the record of Committee policy actions at three-month inter
vals, with a three-month lag,
he doubted that some of the criticisms
5/9/61
-65
that had been heard would be satisfied thereby to a much greater
extent than under present procedures.
Mr. Hayes suggested that in addition to specifying the di
rective,
the policy record entries served to explain the rationale
of Committee actions.
While certain interpretations of System actions
were made during the course of any given year, an explanation released
by the System through publication of the policy record would have the
advantage of being fully authentic.
Mr. Deming noted that Chairman Martin testified regularly
before Congressional committees and that other official statements
were made from time to time with regard to System policy.
Given this
situation, he doubted that quarterly release of policy record would
add much to the knowledge of the Congress or others.
As he had said,
he did not wish to quarrel particularly with the idea of quarterly
publication, but he doubted whether it
would fully satisfy some of
the criticisms that had been made.
Mr. Robertson inquired whether the reason for placing the
matter on the agenda had not been to call attention to the fact that
this possibility was under consideration rather than for the purpose
of debating the matter today.
Mr. Hayes replied that no action had been contemplated at to
day's meeting.
He added that he had mentioned the matter in telephone
conversation with Chairman Martin, who seemed generally sympathetic
in principle but felt that timing was important and that any decision
on implementing the suggestion should be considered carefully.
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5/9/61
In further discussion Mr. Wayne suggested that the possibility
of more frequent publication of the policy record be studied primarily
from the point of view of a move on the part of the System to develop
better public understanding of its policies.
From this standpoint an
argument could be made in favor of such an approach apart from endeavor
ing to meet any criticisms that had been directed at the System.
Mr. Hayes stated that he thought this was an important point
and that he was glad Mr. Wayne had brought it up, following which Mr.
Bryan expressed the view that a decision to release the record of pol
icy actions at frequent intervals would have dangerous implications.
Therefore,
he said, he would want to debate the matter vigorously at
the proper time.
Messrs. Mills and Irons indicated that they con
curred in the view expressed by Mr. Bryan.
Mr. Hayes then stated that the matter could be included on the
agenda for the next meeting of the Committee with a view to further
discussion.
Meanwhile,
if anyone cared to do so, he could let the
Secretary of the Committee have his comments.
It was agreed that the next meeting of the Committee would be
held on Tuesday, June 6, 1961.
The meeting then adjourned.
Assistant Secretary
Cite this document
Federal Reserve (1961, May 8). FOMC Minutes. Fomc Minutes, Federal Reserve. https://whenthefedspeaks.com/doc/fomc_minutes_19610509
@misc{wtfs_fomc_minutes_19610509,
author = {Federal Reserve},
title = {FOMC Minutes},
year = {1961},
month = {May},
howpublished = {Fomc Minutes, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/fomc_minutes_19610509},
note = {Retrieved via When the Fed Speaks corpus}
}