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, June 6, 1961, at 10:00 a.m.
PRESENT:
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Martin, Chairman
Hayes, Vice Chairman
Allen
Balderston
Irons
King
Mills
Robertson
Shepardson
Swan
Wayne
Messrs. Ellis, Fulton, Johns, and Deming, Alternate
Members of the Federal Open Market Committee
Messrs. Bryan l/and Clay, Presidents of the Federal
Reserve Banks of Atlanta and Kansas City,
respectively
Mr. Young, Secretary
Mr. Sherman, Assistant Secretary
Mr. Kenyon, Assistant Secretary
Mr. Hackley, General Counsel
Mr. Thomas, Economist
Messrs. Coldwell, Einzig, Garvy, Noyes, and
Ratchford, Associate Economists
Mr. Rouse, Manager, System Open Market Account
Mr. Molony, Assistant to the Board of Governors
Messrs. Holland and Koch, Advisers, 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
1/
Entered at point indicated in minutes.
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Messrs. Eastburn, Hostetler, Baughman, Jones,
Parsons, and Tow, Vice Presidents of the
Federal Reserve Banks of Philadelphia,
Cleveland, Chicago, St. Louis, Minneapolis,
and Kansas City, respectively
Mr. Anderson, Financial Economist, Federal
Reserve Bank of Boston
Mr. Stone, Manager, Securities Department,
Federal Reserve Bank of New York
Mr. Brandt, Assistant Cashier, Federal Reserve
Bank of Atlanta
Upon motion duly made and seconded, and
by unanimous vote, the minutes of the meeting
of the Federal Open Market Committee held on
April 18, 1961, were approved.
As to the minutes of the meeting of the Committee on May 9, 1961,
Chairman Martin noted that Mr. Wayne had raised certain questions upon
distribution of the preliminary draft, as indicated in an excerpt from a
letter from Mr. Wayne that had been distributed by the Secretary of the
Committee under date of June 5, 1961.
In order that everyone might have
an opportunity to study Mr. Wayne's comments,
the Chairman suggested that
consideration of approval of the May 9 minutes be deferred,
and no
objection to that procedure was indicated.
Before this meeting there had been distributed to the members
of the Committee a report of open market operations covering the period
May 9 through May 31, 1961, and a supplemental report covering the period
June 1 through June 5, 1961.
Copies of both reports have been placed in
the files of the Committee.
In supplementation of the written reports, Mr. Rouse commented as
follows:
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Money market conditions have remained generally easy over
the period since the last meeting of the Committee. There was
some tightening around the middle of May due to the complica
tions arising from the settlement of the Treasury's May refund
ing operation. Over the balance of the period Federal funds have
traded somewhat below the discount rate, with reserves readily
available at these lower rates. On the other hand, the degree
of ease has not been as marked as in the previous period, when
float and the German debt repayment contributed to a very easy
money market reflecting a concentration of reserves in the "C"
banks.
Short-term rates have backed up markedly, with 91-day bills
going over 2-1/2 per cent in yesterday's auction. We have found
it possible to supply reserves readily through open market opera
tions without exerting undue pressure on short rates. In fact,
we recently have bought Treasury bills in the market in addition
to our purchases of longer-term issues and the making of repur
The higher short-term rates have stemmed in
chase agreements.
large measure from the Treasury's prospective financing program,
the first
stage of which was announced on Friday, involving an
offering of a strip of 2 to 6-month bills.
System purchases of longer-term issues were continued on a
moderate scale to meet the need for supplying reserves or, earlier
in the period, to offset sales of short-term issues made to temper
a decline in short rates. Despite these purchases, and continued
purchases for Treasury accounts, market sentiment has shifted even
further toward expectations of higher rates.
There is growing
opinion that the System will not attempt to interfere with the
rate rise which is taking place as a result of the prospects for
better business. The entire long-term market has been going
through an adjustment based on these expectations and upon the
heavy current and prospective private demands for capital as well
as upon the Government's increased financing needs. This adjust
ment has been taking place with generally moderate price declines,
although yesterday prices of some issues fell more than a point.
This mark-down was probably overdone as the volume of selling was
not heavy. There has been no evidence of panic or symptoms of a
disorderly market.
The Treasury will auction a strip of 18 issues of Treasury
bills on Thursday, June 8, for payment Wednesday, June 14. This
new technique was announced on relatively short notice, but the
Treasury's estimate of its cash position was revised sharply down
ward last week, leaving it little alternative but to accelerate its
borrowing plans and to sell 18 issues of bills rather than a strip
of 13 as initially contemplated. There should be no problem in
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the Treasury's obtaining adequate tenders to cover the issue,
but the rate may be somewhat high against the outstanding
market, after allowing for the fact that banks can make payment
by credit to tax and loan accounts. However, this cannot be
considered unreasonable in view of the new technique that is to
be used.
Mr. Robertson said that in his opinion the Account had been managed
during the past four-week period in accordance with the policy decided upon
at the May 9 meeting of the Committee.
However, the effect of those opera
tions had been to accentuate the tightness that had developed in the market.
The results had proved, in his judgment, that the Committee's policy was
wrong.
There had been a restrictive movement in monetary policy, it seemed
to him,
that had shown up all
Mr.
Instead,
across the board.
Rouse stated that he did not think the market had been tight.
he felt
there had been a rather easy situation all along.
Banks
had had adequate reserves to make loans and investments; the fact that
they were not doing more evidently reflected other factors.
As far as
investments were concerned, the banks had confined themselves largely to
short-term Treasury bills.
Mr. Hayes said he did not feel the market had been in a tight
position during the last four weeks.
In fact, statistics on total
reserves, nonborrowed reserves, and required reserves pointed to a
relatively favorable and a relatively easy situation.
Mr. Balderston said he subscribed to the view expressed by Mr.
Robertson.
He thought the Desk had done an admirable job, technically
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speaking, and had lived up to the Committee's instructions.
However,
he regretted that the market was as tight as it appeared to him to
have been during the past four weeks.
Mr. Allen indicated that the position of the Chicago banks
tended to verify what Mr. Hayes and Mr. Rouse had said.
had a basic surplus position and sold Federal funds.
The Chicago banks
Around May 15, with
the Treasury financing, the situation was somewhat tighter, but it was
not tight during the past week.
Mr. Mills commented that there had been an expansion of credit
during the period since the May 9 meeting.
What did occur was a
necessary correction arising out of the excessive reserves that had
appeared earlier in the market.
Those excessive reserves appeared
simultaneously with the subscription date of a Treasury financing, and
that combination produced almost a speculative situation, along with an
active upsurge in bank holdings of Government securities.
Subsequently,
when the excessive reserves had been absorbed, it was necessary for the
banks that had overbought to reduce their holdings somewhat.
The most
recent report of weekly reporting member banks reflected some reduction
in their investment portfolios, which he would interpret as a natural
and proper correction and in no wise an indication of either tightness
in the market or an inadequate base for credit expansion.
Chairman Martin said he interpreted the remarks that had been
made as general comments on money market developments.
He asked if
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there was anyone who would not wish to approve, ratify, and confirm
the open market transactions since the May 9 meeting, and there was no
indication to such effect.
Thereupon, upon motion duly made
and seconded, the open market transac
tions during the period May 9 through
June 5, 1961, were approved, ratified,
and confirmed.
Mr. Noyes made the following statement concerning economic
developments:
Only a few measures of economic activity for May are avail
able this early in June. What we do know suggests that the pace
of recovery was well maintained. In the case of the index of in
dustrial production the increase seems more likely to be two
points rather than either more or less. Weekly data suggest that
department store sales were probably off a little from the strong
showing in April, but automobile sales were up further. Taking
the two together, one might surmise that total retail trade held
even from April to May--well above the first quarter level.
Employment improved about seasonally, leaving unemployment at
6.9 per cent, seasonally adjusted--about the same level that has
prevailed since early winter. The work week lengthened slightly
and there was some further decline in unemployment claims. However,
long-term unemployment continued to rise.
Putting these fragments together with production schedules
that have been announced for the current month, scattered informa
tion on inventories, and the April export-import data, we come up
with a guess that GNP in the second quarter is likely to be up by
$10 billion--somewhat more than the figure I mentioned in response
to Mr. Deming's question at the last meeting.
Broad measures of wholesale prices have shown little change
as scattered reductions have offset the increase in sensitive
materials. The consumer price index was unchanged from March to
April, and the likelihood is that there will be little change, if
any, from April to May. However, there does seem to be some
evidence of a spreading expectation of price increases in the
future,
It is noteworthy that while the improvement estimated for the
second quarter would carry total GNP well above its previous high,
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certain important components remain below earlier levels. For
example, even with some improvement in automobile sales, con
sumer durable goods expenditures in the second quarter will
probably be around $40 billion, or 10 per cent less than a year
ago. Residential construction, at around $20 billion, will be
off 15 per cent or more from the high two years ago. Continuing
weakness in these sectors, which have played such an important
role in other postwar recoveries, is the basis for the misgivings
in some quarters as to whether this recovery will carry forward
after the initial stimulus of the inventory reversal disappears.
This viewpoint certainly deserves careful consideration.
Neither trade reports nor surveys of buying intentions yet
show much evidence of a strong resurgence of consumer demand for
durables and housing. On the contrary, builders, Government hous
ing officials, and demographers all seem to agree that housing
demand--and even housing needs-are lagging behind expected levels.
At the same time, demands for both household durables and automobiles
have responded only very moderately to the "off list" price con
cessions of the past six months. Further evidence of this attitude
is found in the fact that instalment credit outstanding to finance
both automobile and other consumer goods declined again in April.
This reversed the small increase reported in March and brought the
cumulative decline in total instalment credit since the first of
the year to over $400 million, after allowance for seasonal factors.
So far the stimulus to the economy has come almost entirely
from the reversal of inventory liquidation, the rise in Government
expenditures, and the well maintained growth of consumption
expenditures on both nondurable goods and services.
It is still too early to make revised estimates of Government
expenditures to take into account the President's second State of
the Union message. The increases involved may be substantial and
may more than offset any tendency for private demands to develop
less rapidly than in previous recoveries.
Mr. Thomas presented the following statement on the credit
situation:
During the past month, as economic recovery progressed,
interest rates first declined to new lows since 1958 and then
rose close to, and in some cases above, the highs that have been
reached at times during the past ten months. Demands on capital
markets continued fairly large, while business borrowing at banks
declined. Total loans and investments of banks, however, increased
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substantially more than they usually do in May. The increase
reflected largely bank participation in the new Treasury
financing.
Expansion in total bank credit was accompanied by a con
tinued large increase in time deposits at commercial banks, as well as
by an upturn in U. S. Government deposits from the abnormally
low level reached late in April. Private demand deposits,
seasonally adjusted, after increasing in April, declined some
what in May. A moderate increase in required reserves, resulting
from the growth in time and U. S. Government deposits, was met
by a reduction in free reserves of member banks to an average
of $460 million in May--$110 million less than in April. System
operations approximately offset the effect of market factors on
reserves, providing no additional reserves for credit expansion.
Many reasons may be advanced to explain the upturn in in
terest rates--some representing current factors of demand and
It would appear
supply and some expectational or psychological.
that the decline to new low levels early in May was largely
based on expectational factors, particularly intimations that
official policies would be directed toward an endeavor to lower
interest rates. The higher level of free reserves available
during the latter part of April may also have been a factor in
lowering rates at that time.
In May, the tenor of these various forces shifted. Views
as to prospective forces affecting interest rates and as to
official policies were revised, as more information became avail
able as to business recovery--actual and prospective. Enlarged
Government spending plans and a build-up in corporate and
municipal financing calendars also contributed to market pressures
toward higher yields. Reduced System purchases of intermediate
term securities around the middle of May might also have been a
factor, but a subsequent increase in such purchases had only a
temporary effect in stemming the rise in rates.
Short-term
rates in particular, and perhaps also the market in general, have
been influenced by the lower level of free reserves and by prospec
tive Treasury financing in the short-term area, as well as by
the approach of the mid-June tax date, which is generally preceded
by reduced nonbank demand for bills.
Demands on capital markets have been large and seem destined
to continue fairly heavy. New and prospective corporate issues
have been particularly large. Although issues by State and
local governments were moderate in May, following some congestion
in earlier months, they are expected to be substantially greater
in June. Inventories of unsold municipals in dealer hands have
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continued to increase. The stock market, after rising to
new high levels in both prices and trading early in May,
subsequently settled down somewhat, although there was a re
newed upturn yesterday,
Bank credit developments during the recent recession,
though similar in some respects, differed in others from those
in 1954 and 1958 and might be expected to show some differences
in recovery. Bank loans, particularly to business, increased
more in 1960 and early 1961 than they did in previous recessions.
This reflected the continuation of a rather high level of busi
ness inventories and low corporate liquidity.
Yet total credit and the money supply increased less than
in earlier recessions, because of the two related factors of a
gold outflow and a less easy monetary policy. Banks did not
have available as abundant a supply of reserves to induce them
to add as much to their holdings of Government securities as in
earlier periods.
In the early stages of recovery, business loans at banks
customarily decline as inventories are reduced, and businesses
take advantage of low interest rates to borrow in capital mar
kets. Such a decline occurred at city banks in May, but the
total decrease in business loans in the past 5 or 6 months has
been much smaller than in corresponding phases of the 1954 and
1958 recessions. Bank loans to dealers in United States Govern
ment securities, which have been rather large in recent months,
declined somewhat on balance in May, but other security loans in
creased somewhat further, following a marked rise in April. Real
estate loans at banks, which had declined from December 1959 to
March 1961, turned up in April and May.
Banks have continued to increase their holdings of Govern
ment securities, though not as much as in 1958. Holdings of
securities maturing in less than a year have risen substantially,
while longer-term issues have been reduced either through sales
or through approaches to maturity. These shifts have accompanied
increases in longer-term issues held in Federal Reserve and
Treasury accounts.
Bank credit expansion in May, however, did not result in an
increase in the seasonally adjusted private money supply. It
was associated with very large increases in time deposits and
U. S. Treasury deposits. The private money supply, after in
creasing in April, dec ined slightly in early May and appears
to have shown no increase in the latter part of the month.
Thus there has been no net increase since March, and only a
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one per cent growth over the past year. The annual rate of
increase since December has been lowered to 3 per cent,
compared with 4 per cent a month ago.
The significance of the moderate money supply expansion
is difficult to appraise in view of the rapid increase in
time deposits at commercial banks. To the extent that this
growth reflects shifts of funds from other forms of liquid
assets--or a lessened rate of growth in other forms--it does
not represent a net expansion in total liquidity of the
public. There are some indications of a recent slackening
in additions to other liquid assets, but on balance over-all
liquidity has increased substantially since mid-1960, following
a previous slackening in growth,
Even so, an increase in total liquidity might not be fully
adequate as an inducement to recovery, if.it does not include
an appropriate growth in the money supply. It may reflect a
tendency of consumers and businesses to save rather than to
increase spending. To foster recovery, money should be
readily available to encourage spending and investment.
This brings us to the question of an appropriate monetary
policy for the early stages of recovery. In view of the moder
ate monetary expansion that occurred during the recession,
some further growth would seem to be essential. The money
supply outstanding is still less than it was two years ago,
though gross national product is 4 per cent higher and the
potential for further expansion is much greater.
Experience indicates that, in the absence of a vigorous
loan demand, bank credit expansion will not occur unless banks
have adequate reserves both to expand credit and to maintain
excess reserves at around $500 million. Country banks as a
group customarily maintain about this level of excess reserves
and there is no inducement for banks in general to expand credit
unless additional reserves are supplied. This has not been done
in the past month. As a consequence there has been no monetary
expansion and also a tightening in interest rates.
Questions are being raised in public discussions as to
probable rises in interest rates as recovery progresses. At
some stage, as credit demands expand, an increase in rates is
to be expected, but since current rates are much higher than
those prevailing at the beginning of previous recovery periods,
the rapid increases of 1958 should not be expected or needed at
this time. It is doubtful that appropriate monetary policy at
this time should call for any action to bring about a rise in
rates until credit demands exceed amounts appropriate for a
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well-balanced recovery. There is as yet no evidence that this
is now the case or is likely to be the case for some months,
except for Treasury borrowing.
Treasury borrowing needs,
according to current estimates, will be almost but not quite
as large as in 1958. In any event, these demands provide a
medium for an increase in bank credit. Bank credit and
monetary expansion still need to be encouraged, not restricted.
Estimates of reserve needs indicate that, after the heavy
demands for the current statement week have been met, reserve
availability should be fully adequate, or perhaps more than
adequate, to cover the heavy liquidity demands of the mid and
late June periods, even after allowing for the new Treasury
bill offering being taken by banks. In fact, approximately
$340 million have already been supplied through System purchases
this week. Banks miht have S750 million or more free reserves
in the next three weeks. In this period there is a need for
high free reserves because of the tax payments and other mid
year needs. Additional reserves will be needed, however,
early in July and again in August and early September--something
like $1 billion net of additional System purchases (including
System opera
those made this week) may be needed by July 12.
tions can be on the liberal side until there is evidence of
excessive credit expansion or unless an outflow of funds abroad
is resumed. It seems likely that expectations of recovery,
together with repeated Treasury borrowing operations, will
keep interest rates from declining.
Mr. Young made the following statement concerning the international
situation:
A fresh tallying of our international accounts for the
first quarter brings out that a significant shift occurred from
the fourth quarter in the basic balance--that is to say, the
balance on current account, Government aid, and long-term
capital. The basic balance shifted from a deficit of somewhat
under $1 billion annual rate in the fourth quarter (not includ
ing the Ford investment in Britain in December) to a surplus of
about $1/2 billion annual rate in the first quarter.
A moderate improvement was registered in the trade balance,
and there was a resumption of inflow of foreign funds into U. S.
equities. Because of an outflow of short-term funds, foreign
holdings of dollars continued to mount. An over-all deficit of
around $1 billion annual rate resulted, but this was far smaller
than the several-billion rate in the fourth quarter.
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The outlook ahead is for continuing small over-all
deficits. As recovery goes forward, the trade balance may
fall a little. Government aid grants and credits and private
foreign, long-term investment may rise somewhat. For over
all balance, then, much will depend on the short-term capital
outflow, While this appears to have been receding in recent
months, the prevailing forces working to sustain - net out
flow are apparently still fairly strong.
One of these forces is the response of American banks in
meeting foreign demands for trade financing. Japanese credit
demands, for instance, are especially strong. German exporters,
who are obliged to invoice in dollars because importers believe
that there continues to be a DM revaluation risk, are also
active users of dollar credit facilities, though this has not
shown up as a large item in the statistics reported by U. S.
banks.
We may properly infer from this quick review of recent
payments tendencies for this country internationally that the
current close balance in the U. S. accounts is by no means
secure. Accordingly, the Committee will need to continue to
pay especially close attention to developments in inter
national markets.
As yet, there are no clear signs that the German balance
of-payments surplus is yielding to corrective pressures exerted
by the March revaluation and by the efforts of the German
authorities to reduce levels of domestic interest rates.
German money market rates have already reached reasonably low
levels, and long-term rates, while still relatively high, have
been showing slow but persistent decline.
The decline in German long-term rates, very much needed for
the long run, means in the short run that a rise in market values
attracts foreign speculative funds, motivated in part by expec
tations that the mark might be further revalued. Witn sterling
currently weak, and the future value of the DM in question, in
flows into Germany on capital account seem destined to continue.
The German authorities have endeavored to offset the inflow
of funds successively by cooperation with other central banks,
by advance rerayments of Government debts, and by making it
profitable for German banks to increase their foreign exchange
holdings, particularly dollar assets. Whether this succession
of actions will turn the trick remains to be seen.
Sterling is confronted with seasonal and structural in
fluences that are combining to generate very adverse exchange
market pressures. Sterling spot exchange has been falling and
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the close to 2 per cent discount on sterling forward rate
has been indicating widespread market uncertainty as to ster
ling prospects. British interest rates have been firming,
especially on the long-term side, where the gilt-edge yield
has penetrated well above the 6 per cent level and shows a
tendency to settle around 6-1/4 per cent.
Despite these market symptoms of sterling distress, the
British fiscal position has moved onto firmer ground and
restrictive monetary policy is getting reinforcement from
this fact. Also, there is room for discount rate action,
should conditions warrant such a step. A British IMF drawing
may become expedient in the not too distant future.
A special point worth noting is that the sterling-dollar
interest differential with cover has recently been running
under one-half of one percentage point. With the 90-day forward
rate for sterling tending toward a 2 per cent discount, only
rate or a small increase in
a small rise in the Treasury bill
the forward discount on sterling or both could touch off a
flow of short-term funds from London to New York. Such a flow
could be accentuated by an uncovered movement and aggravate
greatly prevailing pressures against the British pound.
Thus, whereas the Committee in its earlier thinking about
the Treasury bill rate had to take into account the need for a
braking effect on an adverse short-term capital outflow, the
Committee now has to give account to the bill rate's possible
incentive role in encouraging an undue inflow of sterling
funds.
Before concluding today's commentary, it is appropriate
to report briefly on the Paris OEEC meetings in which U. S.
delegations participated with some fanfare. The first, the
April meeting to which Chairman Martin was a delegate and
which was a meeting of the OEEC Economic Policy Committee,
had the object of initiating steps that would strengthen the
Economic Policy Committee's program in the successor organiza
tion, the OECD.
Upon the motion of the U. S. Delegation, the Economic
Policy Committee established two working groups--one of open
membership to study the sources and bases of economic growth,
and a second of restricted membership to concern itself with
the fiscal and monetary policies of member countries as they
may bear on balance-of-payments equilibria and disequilibria.
Of these two groups, the latter was deemed to be the more
important and its first meeting late in May was attended by
delegations made up of officials drawn largely from secondary
levels of the governments represented.
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The U. S. delegation to this second group was made up
of Mr. Roosa, as Chairman, Mr. Tobin from the Council of
Economic Advisers, Mr. Goldstein of the State Department,
and myself. For the most part, discussion was carried on
through delegation chairmen, though from time to time other
delegates supplemented observations made by chairmen.
The main challenge of discussion for this working group
can be stated in this way: "Now that the long-sought-for
convertibility of the world's principal currencies has been
attained, how do we make convertibility work in a sustainable
way? In short, what are the unavoidable financial disciplines
to which countries with convertible currencies are obliged to
adhere?"
It is not possible to summarize so active a two-day dis
cussion as took place. A few highlights are worth noting:
(1) There was much approving comment about central banking
cooperation, such as occurred following the German and Dutch
revaluations, and a disposition to favor its continuance and
extension.
(2) There was general recognition that speculation as to
exchange rate levels, rather than response to international inter
est rate differentials, was the root cause of the massive short
term capital movements of last fall and early this year. One
consequence of recently occurring political upheavals in develop
ment areas, it was felt, was to swell temporarily the pool of
speculatively motivated funds in international markets.
(3) Interest rate differentials, while not a primary
causative force in the massive flows of short-term funds that
had occurred, did exert a secondary influence, though not so
vital a one as to require that members sacrifice all domestic
monetary objectives to harmonize interest levels and structures
in the interest of convertibility.
(4)Member countries need to recognize a solidarity of
interest in maintaining convertibility, and should be prepared to
take such cooperative steps as may be required to keep the inter
national money market orderly.
(5) In reporting about their own country's balance-of
payments problems, participating experts, naturally enough, were
rather hopeful; on the other hand, they tended to be quite
skeptical that other countries were working out their problems
as well.
(6) There was some clarifying discussion about the need for
strengthening the IMF's resources and about the need for having
Fund drawings available to cope with disturbing capital movements.
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(7) Finally, there was a consensus favorable to the
idea of having a restricted Working Group along the lines
of the present one as a continuing adjunct to the Economic
Policy Committee of the new OECD, and exploratory discussion
took place of the role that such a continuing working group
might perform.
Another meeting of this working group is to be held in
Paris on July 3 and 4 and a further meeting late in July. At
these meetings, the group is expecting to develop a program
of further activities to be submitted later to the Economic
Policy Committee.
Mr. Hayes said he had understood Mr. Young to say that the
sterling-dollar interest differential, with cover, was still somewhat
favorable to the movement of short-term funds from New York to London.
A swing in rates could, of course, cause a reverse movement.
He asked
Mr. Young if the latter would agree, however, that in order to get
much of a movement from London to New York it might be necessary to
develop quite a spread in the other direction.
It was often said, he
noted, that a spread of 1/2 per cent is needed to get much of a flow
of funds.
Mr. Young agreed, but suggested that such a possibility might
not be far out of question at the present time.
Also, if a movement of
that kind commenced, with sterling under pressure and weak, it could
aggravate the speculative movements that are tending to develop against
the pound.
At this point Chairman Martin called the attention of the Com
mittee to a memorandum addressed to Secretary of the Treasury Dillon
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by Under Secretary Roosa under date of June 1, 1961, relating to
the Treasury's prospective financing schedule for the period to the
first of August.
Copies of the memorandum had been distributed prior
to this meeting at the Chairman's request, and with the permission of
the Treasury.
Chairman Martin commented that he felt it important to
bear this schedule in mind in connection with the discussion today.
Mr. Hayes presented the following statement of his views on
the business outlook and credit policy:
There is no longer any reason to doubt that economic
activity reached its low point in February or March this year,
and that the recent recession was the mildest in the postwar
period. However, the pace and duration of the business expan
sion remain a serious question. The largest contribution to
the expansion over the next few months may well be made by a
turnabout from inventory liquidation to accumulation. We have
already seen the first signs of such a change. But this in
fluence could peter out fairly quickly if it is not accompanied
by a vigorous rise in final demand.
In the area of final demand we find a mixed picture.
Although the President's recent message suggests that the upward
push from Government spending will be stronger than was expected
earlier, the outlook for private spending is still uncertain.
Consumers in particular give no indication of being on the verge
of a spending spree. Recent statistics on retail sales and
residential construction have not looked especially buoyant,
nor do consumer credit data for April. Furthermore, the unem
ployment situation has not improved at all and is likely to stay
well above acceptable levels even if rather optimistic projec
tions of GNP expansion over the next year are borne out.
All of this would suggest the likelihood of continuation for
some time ahead of the gratifying stability of consumer and
wholesale prices witnessed in the past year. Nevertheless, we
cannot disregard the possibility, especially during a period of
recovery, of renewed pressure on prices which might originate on
the cost side if industry and labor fail to heed the Administra
tion's repeated pleas for prudence and restraint in this area.
6/6/61
-17
The behavior of stock prices, notwithstanding the moderate
decline of the last week or so, probably reflects, besides
business optimism, considerable public apprehension as to
the longer-run likelihood of renewed inflation; and such
fears with respect to this country are certainly widely held
abroad. Customer credit has risen sharply since January--and
while much of the increase may be attributable to the A.T.&T.
rights offering, these figures will bear close watching over
the next few months.
As for bank credit, business loans and other loan cate
gories responsive to general business conditions have roughly
conformed in recent months with what one might expect for this
phase of the cycle.
On the other hand, acquisitions of
Government securities by the banks have been much smaller so
far this year than in the comparable period of 1958, even
after allowing for a sharp pick-up in May,
As a result, total
bank credit also lagged well behind the 1958 pattern. The
money supply, however, rose at about the same annual rate3 per cent--in the first 5 months of both 1961 and 19 58; but
this year Government deposits were declining whereas in 1958
they were showing an increase. Although bank liquidity im
proved appreciably in April and May, and should benefit further
from Treasury financing operations between now and the end of
the year, the banks have acquired a much less impressive buffer
of liquidity during this period of ease than they did three
years ago.
It seems to me that a continued policy of ease is called
for by business and credit conditions as well as by the need
for maintaining an even keel to facilitate the Treasary's cur
rent financing operation. The business outlook remains too
cloudy, and the road to full recovery too uncertain, to warrant
any change in policy. Both the directive and the discount rate
should remain unchanged. Reserve availability should be kept
relatively abundant to provide the continuing credit growth
required to promote recovery. The recent general level of free
reserves seems quite appropriate for the next two weeks, subject
to the usual provisos as to the feel of the market.
I think we should also continue to pay close attention to
the need for preventing any appreciable decline in short-term
market interest rates. While the balance of payments apparently
improved considerably in May, after an April showing which was
not very gratifying if we disregard the heavy German debt repay
ment, the position of the dollar abroad remains rather touchymore particularly in view of current fears with respect to
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6/6/61
sterling and the consequent ever-present danger of renewed
disturbances in the exchange markets.
Unless we continue to
work to strengthen the dollar vis-a-vis the European Continent,
a sterling crisis might easily lead to heavy pressure on the
dollar in Continental markets--especially if the U. K. were
to make sizable drawings on the Fund, a good share of which
woald doubtless be in dollars. Fortunately market forces in
the past week have been operating in the direction of higher
bill rates, which is all to the good in view of these inter
national aspects of our problem--but we should retain maximum
flexibility as to choice of maturities for our open market
operations in order to continue to deal effectively with the
twin need for monetary ease and firm short-term interest rates.
In connection with this overriding need, there is also
something to be said for our being able to utilize open market
purchases in the intermediate and longer maturities to cushion
whatever rise in longer-term rates may accompany further
business recovery; and such cushioning, properly handled, would
not subject us to any danger of slipping into a pegging opera
tion. There is always a risk that exaggerated expectations as
to the speed of the recovery or the likelihood of a turnabout
in System policy may tend to push up longer-term rates faster
than the realities of the economic situation would justify. I
feel that the special authorization in effect in the last few
serves a very useful role on more than one count
months still
and should clearly be renewed.
Mr.
1960 it
Johns said that upon reviewing the period since November
seemed to him that the Committee's directive, which provided
then, as now, for encouraging expansion of bank credit and the money
supply, had been appropriate and quite satisfactorily realized.
In
that period the money supply, defined as demand deposits plus currency
outside
banks, had increased at a rate of about 3 per cent per annum,
compared with about 5 per cent in the early stages of the two preceding
recoveries.
If time deposits were included, the increase in the same
period had been at an annual rate of about 8 per cent, compared with
6/6/61
-19
5 per cent in the early stages of recovery in 1954 and 8 per cent in
the like stages of the 1958 recovery.
However, in the past month or
month and a half there had been no net increase in demand deposits
plus currency.
While he would not want to overstate the significance
of this short-run development, he did want to express the hope that
this was not a prelude to a continuing decline in the money supply.
As
he had indicated, he believed that the directive was appropriate and
that the actions of the Account should be such as to encourage expansion
of bank credit and the money supply.
As he had pointed out at the May 9 meeting, Mr. Johns said, when
calling for monetary expansion it is necessary to have some idea of an
appropriate rate.
At that time he was inclined to feel that the rate
of expansion since last November was perhaps appropriate.
However,
such expansion of the money supply and total bank credit as had
occurred since late 1960 had been made possible, by and large, not by
an increase in total reserves but by some decline in excess reserves
and a net decline in Treasury deposits.
Therefore, whereas he had sug
gested four weeks ago that a satisfactory rate of growth of money and
credit in the near future might be obtained without further growth in
total reserves, he was now inclined to doubt whether that was so.
This might not be enough.
Accordingly, he was now inclined to feel
that net open market purchases were needed to provide for such an
6/6/61
-20
increase in total reserves as would encourage an appropriate rate of
increase in the money supply.
To accomplish this, he would suggest
that the staff memorandum of June 2, 1961,
bank reserves,
on the outlook for member
including the revised figures distributed at this meet
ing, provided an entirely reasonable and satisfactory set of indicators,
and a procedure which might appropriately be followed.
It followed, Mr. Johns said, that he would not suggest a change
in the directive.
rate.
Neither would he suggest a change in the discount
As to operations in longer-term Government securities, pursuant
to the Committee's special authorization, he wished to renew his expres
sion of doubt four weeks ago about the propriety of continuing such
operations.
Mr. Fulton reported that on the whole expansion of industrial
output in the Fourth District, particularly in the steel industry, con
tinued during May, with favorable effects in terms of reduction of
unemployment.
However, expansion in the heavy industries seemed to have
leveled off to a degree.
Department store sales showed signs of picking
up, but for the year to date were 3 per cent below a year ago, and
automobile sales had been relatively weak recently.
Building activity
had slumped somewhat, due to a considerable extent to a decline in
residential construction.
financial barometers,
There had been little significant change in
although the reserve city banks had moved into a
6/6/61
-21
net borrowed reserve position for a couple of weeks.
Unemployment
had declined to some extent, more so in Ohio than in Pennsylvania, and
one large area had been shifted from the substantial labor surplus
category to an improved classification.
However, claims under the
temporarily extended unemployment compensation benefits increased about
8 per cent from the previous month, indicating the existence of struc
tural unemployment.
Continuing, Mr. Fulton said that in steel and heavy industries a
plateau at a rather low level seemed to have been reached.
Orders had
not increased in volume beyond the level reached about a month ago and
appeared to represent largely replacement of depleted inventories, with
indications lacking of any substantial amount of inventory accumulation.
However, automobile manufacturers had been advancing delivery dates for
steel already on order, and their orders for June and July were better
than anticipated.
There was a feeling in the steel industry that the third quarter
of the year would be better than the second, and that the fourth quarter
of 1961 and the first quarter of 1962 should be good. Foreign imports
were still a factor.
American oil companies were buying domestic goods
for use in the United States, but using German and Italian pipe for opera
tions abroad. While there was some exporting of sheet and strip steel
to Europe, this was expected to diminish as European mills with
6/6/61
-22
substantial potential came into production.
As to the price structure,
that question would have to be dealt with in October when wages were
scheduled to advance under the present contract.
The recent reduction
of about 5 per cent in the price of stainless steel was due primarily
to overcapacity and competition from aluminum.
Also, steel distributors
who got a 5 per cent discount from the mills had been splitting the
discount with some customers, thereby underpricing the mills; with the
5 per cent reduction all customers would get about the same price.
The
discount rate allowed distributors has been halved.
Mr. Fulton then discussed factors bearing upon future wage
negotiations in the steel industry, following which he turned to monetary
policy considerations and expressed concern about the growing spread in
longer-term rates between corporate securities, on the one hand, and
U. S. Government and municipal securities on the other.
He also referred
to the decline in the money supply in May, which possibly reflected in
part the increase in time deposits, and noted further that the bill rate
was now about 2-1/2 per cent, with the Federal Funds rate close to the
discount rate.
In his opinion free reserves of around $400 million were
too low to supply the
economy with the reserves necessary to maintain a
position of ease and encouragement, and a level of at least $500 or $550
million would be better, depending of course on the distribution of those
reserves.
The feel of the market should be a controlling factor, and he
6/6/61
-23
would not want to have a sloppy market.
Nevertheless, he did feel that
a posture of more obvious ease would be desirable.
With reference to operations in longer-term Government securi
ties, Mr. Fulton suggested that there could be an unfortunate effect on
the Treasury, and also the Federal Reserve, if the System were to pull
away from the longer-term market at some time in the future when the
rate spread between corporate and Government securities was substantial.
In his opinion the System would be criticized severely if a substantial
drop in the price of longer-term Governments then occurred.
As he saw
it, the banks were taking advantage of the Federal Reserve by shortening
their positions now that the price of Government bonds had increased.
Thus,
he would like to see the Desk more active in the bill
well as the long end, not to drive the bill
area as
rate down precipitantly but
to take advantage of existing rate levels and nudge the short-term rate
down rather than concentrating in the longer end of the market.
Mr. Fulton said he would not change the discount rate at this
time.
However, he would suggest, in view of the rapid rise in the indus.
trial production index in the past two months, that clause (b) of the
policy directive be changed to provide for operations with a view to en
couraging expansion of bank credit and the money supply so as to contrib
ute to sustaining the forces of recovery that were developing in the
economy, while giving consideration to international factors.
Since it
now rather obvious that the forces of recovery were developing, it
6/6/61
-24
seemed to him desirable to reflect that fact by an appropriate change
in the directive.
Mr.
King said that if
he interpreted correctly the views ex
pressed thus far, they boiled down to the thought that it
desirable to be too quick on the trigger.
would not be
This was in line with his own
thinking, since he did not believe the extent and scope of the recovery
was so strong, at least as yet, as to produce serious inflationary pres
sures.
Such pressures could come.
At present, however, he thought the
System would be well advised not to move too ouickly to a posture of
restraint.
Turning to System operations in longer-term Government securities,
Mr. King expressed the view that a good job had been done.
However, the
time had come when he felt that a way must be found of pulling away from
those operations.
It did not seem advisable to him to suspend the opera
tions suddenly, and therefore he would suggest asking the Account Management
to proceed slowly in the direction of withdrawing from the longer-term
market.
In this connection, he felt that the bill rate might constitute
a relief valve, for in his opinion it could decline somewhat from the
present level of around 2-1/2 per cent without injurious effect.
On the
contrary, he felt that some decline would be desirable.
It was his view, Mr. King said, that attention should be focused
at this time largely on an effort to keep the interest rate structure
6/6/61
-25
somewhere around the present level and to avoid extreme movements in
any direction.
To judge from the expressions made thus far today, in
cluding those by the staff, there seemed to be a rather general sentiment
that it would not be desirable for longer-term securities to fall too
much in price, certainly not to such an extent that a disorderly market
might result.
A concentration of Account operations in bills at this
time might, he thought, have a steadying influence on the whole structure
of rates.
The course that he had suggested might not be easy of accom
plishment, but in the present situation he considered it desirable to
attempt to proceed in that direction.
Mr. King noted that at the preceding two meetings he had suggested
a free reserve target of about $575 million, somewhat in excess of the
average over the past several weeks.
The comments today indicated some
dissatisfaction with the performance of the money supply, and he felt
that a target of $575 million might again be appropriate for the forth
coming two-week period.
In conclusion, he would not favor a change in
the discount rate and he would not be inclined to change the directive.
Mr. Shepardson said that as far as the economy was concerned, the
situation did not seem to have changed materially in the past four-week
period.
The economy was still making some progress, but the prospect of
a vigorous upturn in the immediate future was still uncertain.
This, he
thought, was a wholesome development, for he would prefer gradual growth
6/6/61
-26
to a sudden upturn.
It would be easier to manage, and it would reduce
the prospect of a reverse movement.
Mr. Shepardson expressed the view the recent trend of the bill
rate afforded an opportunity to begin a disengagement from operations
in the longer end of the market.
done.
He would hope that this could be
As far as reserves were concerned, he felt that they should
continue to be supplied freely as needed.
It seemed to him that open
market operations had continued to provide reasonable ease.
Therefore,
he would attempt to maintain approximately the same degree of reserve
availability as in recent weeks.
To restate his position, although he
realized that such things could not be pinpointed, he felt that the
degree of ease maintained had been appropriate and he would favor its
continuance.
Mr. Robertson indicated that he would support a change in the
directive along the lines suggested by Mr. Fulton.
In general, he con
sidered it desirable to change the directive frequently in line with
changes in the economy.
Therefore, although he had no strong feeling
on the matter, the suggested change would be in keeping with the
economic developments and seemed to him appropriate.
Mr. Robertson expressed the view that the System had not suc
ceeded in providing enough reserves to stimulate the economy and
encourage expansion of credit and the money supply, at least to the
extent he thought desirable.
He noted that reductions in interest rates
6/6/61
-27
on business loans, consumer credit,
and even real estate loans had
been rather insignificant, and he saw no indication of idle money
looking for investment.
In the stage of the cycle through which the
economy had been passing for the past three months,
banks normally
should have had sufficient reserves to be in a position of seeking
business, which would reflect itself in lower rates.
On the other
hand, the Federal funds rate had increased and rates on Government
securities had moved up, which was to him an indication of too restric
tive a monetary policy or, to put it another way, that policy had not
been sufficiently easy.
Further, he saw no indication of an inflation
ary movement which would necessitate the tightening that appeared to
have occurred during the past four weeks.
Accordingly, he would
recommend moving toward an easier position, and he felt that Mr.
King's suggestion for a free reserve target of around $575 million was
reasonable.
In other words, he felt that free reserves should be in
the neighborhood of $100 million higher than they had been in the past
four weeks.
As to the suggestion that had been made that the System
begin to withdraw from operations in
it
longer-term Government securities,
was his opinion that those operations should be halted and he would
want to speak further on the subject if it should become an issue at
this meeting.
Mr. Mills commented that technical rather than economic consid
erations seemed to be dominating the trend of the discussion today, and
6/6/61
-28
that they focused once again on the adequacy or inadequacy of the
money supply.
In that regard, he suggested that there was a true
distinction between a forcing of the money supply and a need for its
expansion because of a rising credit demand that would absorb reserves
available to the commercial banking system.
an orderly and a desirable medium.
In view of the Treasury's approach
ing financing, and subsequent financings,
provided for permitting an
The second would represent
increase in
hand-made vehicles had been
the money supply through the tax
and loan account procedures, for assisting the Treasury financing,
for providing reserves in the appropriate periods.
However,
in
and
a
period when the Treasury was acknowledgedly going to operate with a
rising deficit and in a period when, at least hopefully, reviving
business activity also would be stimulating an expansion of credit, the
System should be wary about taking overt actions other than in the field
of utilizing the Treasury's operations to its
own advantage.
It
should
be wary about taking actions that would have as their sole objective an
explosive expansion of the money supply.
He wished to point out the
Achilles heel of injecting reserves into the banking system blindly to
permit an increase in the money supply irrespective of the market in
which those reserves would settle.
A policy of that sort would only
reproduce situations in the past in which a sloppy money market and an
unrealistically low interest rate structure developed.
Such a policy
6/6/61
-29
would lay a basis for speculation in Government securities of the
1958 variety.
Of overriding importance and danger, however, in making
the money supply the sole objective and in aggressively attacking that
situation was the resulting effect of destroying confidence in financial
circles at home and abroad in the wisdom of the System monetary and
credit policy by creating the impression that the System was avowedly
and frankly adopting a policy having an inflationary objective.
Mr. Wayne reported that business activity in the Fifth District
was tracing a well-defined pattern of recovery.
The improvement had
widened in scope and now covered almost every phase of the economy.
Manufacturing man-hours, new orders, and shipments had shown significant
gains, and employment and hours worked per week had been stable or
slightly higher.
The largest steel plant in the District recently re
called some 3,000 workers.
The continuing increase in steel production
had boosted the demand for coal, leading to increased production and the
reopening of several mines in this long-depressed industry.
Construction
remained a source of strength in the economy, with contract awards main
taining a high level and employment rising toward the record high levels
of the past two years.
The trends in personal income and retail sales
had apparently been about the same in the Fifth District as in the
country as a whole.
Continuing rains and the coolest weather in many
years had delayed farm work in many parts of the District but apparently
6/6/61
-30
had not caused any substantial damage thus far.
Prospects remained
favorable for a good crop year, although prices received by livestock
and poultry producers had been dropping, with little
hope for near-term
improvement.
The position of District banks continued basically easy, al
though some signs of pressure, probably seasonal, had developed in the
most recent four weeks.
For most of the period District banks were
large net buyers of Federal funds,
window rose sharply after mid-May.
and borrowings at the discount
Deposits of weekly reporting banks
showed a sizable reduction and Government securities were liquidated in
moderate amounts.
Other securities and gross loans rose slightly,
With respect to policy, Mr. Wayne commented that over the past
four weeks the Desk had come quite close to the level of free reserves
that a majority of the Committee at the May 9 meeting thought would be
desirable--a level between $450 million and $500 million.
that policy, it
seemed to him, had been quite satisfactory.
Results of
The recent
behavior of bank loans indicated that commercial and industrial interests
were amply provided with credit; further ease would probably exercise its
influence chiefly in stock and other securities markets with effects
which, for a number of reasons, might not prove desirable.
Moreover,
while the money supply had not grown as rapidly as might be desired,
liquid assets in general and time deposits in
particular had expanded
6/6/61
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at near-record rates.
The rapid growth of time deposits indicated
that depositors preferred time rather than demand deposits, and that
preference was being stimulated by various bank schemes to attract
time deposits.
Some months ago certificates of deposit were initiated
on a large scale, and in recent weeks there had been a rapid spread of
the practice of computing interest on a daily basis.
Initially, at
least, this latter practice was causing some spectacular increases in
time deposits.
Most of the funds being thus moved were business funds
that could be converted back into demand deposits on short notice if
needed by expanded business or if
tion.
businessmen feared a growth of infla
For these reasons, further ease would, in his opinion, cause a
dangerous accumulation of inflationary potential for the near future.
On the other hand, Mr. Wayne continued, he could see no reason
yet to move in the direction of less ease.
in its
Business recovery was still
infancy, and the important question at the moment was how much
of the existing ease could be absorbed in this recovery without upward
pressure on prices.
While there was no way of knowing the answer to
this question at present, the large unused capacity in the economy and
the remarkable stability of prices over the past year suggested that
the present level of free reserves posed no immediate inflationary
threat.
In view of the experience in
the early stages of recovery in
1958, he thought it was important this time not to reverse policy
prematurely.
6/6/61
-32
The one element in the present situation that gave him some
concern was the large increase in stock market credit and other evi
dences of a strong speculative movement.
However, if this was a
problem, the appropriate remedy was action by the Board to change
margin requirements,
and not open market or discount rate measures,
It might be that a change in margin requirements was in order--that
was a matter for the Board to decide.
that if
He felt rather strongly, however,
action was taken to this end,
it
should be made clear that the
action was aimed at speculation and should not be interpreted as a first
step toward tighter money.
In conclusion, Mr. Wayne said that he did not see any need to
change either the directive or the discount rate, and that he would
renew the special authorization,
in
effect since February, covering
operations in longer-term Government securities.
Mr. Clay reported that economic activity in the Tenth District
had shown some further expansion in recent weeks.
Recovery in industrial
activity had characterized recent nonfarm developments, with the turn
about in
durable goods industries much in
metropolitan areas.
evidence among District
Total nonfarm employment in the District was
approximately at the level of a year ago.
This contrast with the
national situation was a reflection of the lesser sensitivity of economic
activity in the region to cyclical fluctuations, with nonmanufacturing
employment increasing over the past year and manufacturing employment
6/6/61
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declining less than nationally.
More recently, manufacturing employ
ment had increased moderately.
Another expansive factor in the general level of activity in
the Tenth District was the agricultural situation.
Cash receipts from
farm marketings thus far this year had run well above last year's record
level, and at present another record this year appeared probable.
Weather conditions generally had been favorable for small grain crops
and for pasture.
The wheat harvest was under way in
of the District, and currently it
the southern part
appeared likely that the crop would
equal last year's excellent harvest.
The payments to farmers under
the new Federal Feed Grain Program constituted another source of ex
pansion in farm cash income.
Examination of the liquidity position of District member banks
showed some improvement over the past year, Mr. Clay said, resulting
from the combination of a relatively strong deposit expansion and a
relatively moderate loan expansion.
Despite some recent easing of
liquidity positions, however, District banks had made only moderate
headway in reversing the decline that took place during the last
business upswing.
Both country banks and reserve city banks showed an
appreciable net decline in their liquidity positions since the comparable
juncture of the previous business cycle.
Turning to the national scene, Mr. Clay commented that the devel
opments of recent weeks showed evidence of further economic recovery,
Al
6/6/61
-34
this early stage of the recovery, however,
the economy was only begin
ning the utilization of the resources that were available for employment.
While monetary policy could not do the job by itself, it should contrib
ute its part to facilitating the appropriate pace, level, and duration
of the economic upswing.
With unused resources large and bank liquidity
low, this would be an inappropriate time for monetary policy to become
restrictive.
It would be necessary in the months ahead to provide not
only the funds required for seasonal needs but also the additional
funds for facilitating the requisite economic growth.
At the present
time, the policy of monetary ease should be continued and on a some
what more generous scale than it had been since the May 9 meeting of
the Committee.
In conclusion, Mr. Clay said that he would recommend no change
in either the directive or the discount rate.
Mr.
Allen said two meetings of Chicago area economists in May
revealed unanimous agreement that the rise in economic activity was
proceeding more rapidly than anticipated, and a majority opinion that
the increase would become even more vigorous in the months ahead.
Some of those who expected a strong upward movement felt that it
would
be accompanied, inevitably, by inflationary pressures.
It
appeared to him, Mr.
Allen continued, that substantially in
creased consumer spending would necessarily occur if there was to be a
rise in activity sufficiently vigorous to result in inflationary
6/6/61
-35
pressures.
During May, consumer spending apparently remained near
the April level, and there was evidence of substantial savings,
notably the continued rise in time deposits at commercial banks.
him, this was no particular cause for alarm, unless and until it
sulted from a fear psychology.
To
re
The international situation and the
increase in governmental expenditures might produce, or might have
produced, an attitude of caution, but if
that meant a steady rate of
improvement in economic activity rather than a boom condition, so much
the better.
Despite the McGraw-Hill and Fortune surveys, which predicted
that capital equipment purchases would rise appreciably in the months
ahead, new orders for total industrial machinery declined sharply in
April, and in the case of machine tools there was a substantial drop.
Producers of capital goods in
had been little
rise in
the Seventh District advised that there
orders recently.
And although the improvement
in the steel industry had been substantial and heartening, there was
no evidence of a sufficiently strong demand to support higher prices
for steel; in
fact, prices of some types of steel had been reduced quite
recently.
In the automotive area, Mr.
Allen said, he could add nothing to
the staff review except to say that Detroit sources did not expect a
strike.
If a strike should materialize, they felt it would be brief.
6/6/61
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Liquidation of business loans had continued at District report
ing banks, and in the four weeks ended May 24 more than offset rather
sharp increases in real estate and "other" loans.
This was a normal
lag following a business upturn, and might continue for some time
unless market rates moved up rapidly.
The large Chicago banks were
under some reserve pressure in mid-May as they acquired Treasury
securities, but that had since eased off and in the past week they had
a basic surplus position and were net sellers of Federal funds.
With reference to the optimistic views of the Chicago area
economists, Mr. Allen commented that he should add that some experienced
businessmen, who played pretty much by ear and were less exposed to
statistics, but whose playing had been markedly successful in the past,
were less optimistic.
They felt that the recovery would proceed with
the saucer or perhaps a cereal bowl curve, but not in the V shape.
In any case, Mr. Allen concluded, it seemed to him that for
the next two weeks the Committee should try to retain approximately
the degree of ease that had existed for the past month.
He would not
change the directive or the discount rate at this time.
Mr. Deming said there was little evidence at hand currently to
indicate a rapid economic recovery in the Ninth District, a picture
which apparently contrasted rather sharply with that of the nation.
On a seasonally adjusted basis, District personal income in April fell
6/6/61
-37
about 1-1/2 per cent from March.
Most of the decline was in the
wage and salary component and might reflect in large part unfavorable
weather for construction work, although there were declines in many
other sectors also.
Employment gains had been small thus far, retail
sales had been relatively slow, and home building showed no signs of
strong upsurge.
a bad year.
As he had reported previously, iron mining was in for
The agricultural outlook had improved with beneficial
rains and a good crop was in prospect, but not as good as last year's
bumper output.
All in all, the current evidence indicated slower
growth prospects for the District than for the nation.
How much the
evidence had been influenced by weather conditions remained to be seen.
In District banking the record of the first five months had
been mixed.
At city banks, loan growth had been significantly below
normal and very much smaller than in the like period of either 1959
or 1960.
Country bank loan growth, while smaller than in the past
two years, had been about double the normal growth.
Seasonal deposit
losses at both classes of banks had been well below normal and much
smaller than in like periods of the past two years.
As a result, city
bank loan-deposit ratios, while still high by postwar standards, were
down from their postwar peaks, while country bank loan-deposit ratios
were at 30-year highs.
Mr. Deming said he saw the national economic picture as one
characterized by an economic upturn of gathering strength.
At the same
6/6/61
-38
time he continued to see enough unused resources--men, materials, and
machinery--to absorb a strong upturn without undue strain.
This was
not to say that there could be no build-up of inflationary forces dur
ing the next six to nine months; strikes,
ments,
speculative buying,
build-up.
It
overoptimistic wage settle
and other factors could produce such a
seemed unlikely,
however,
that physical resources would
be strained or real bottlenecks would develop during that period.
Mr.
Deming also saw the national economy and the financial
system as being not overly liquid at present.
He had already referred
to District loan-deposit ratios, and broader measures also suggested no
overliquidity.
The ratio of the money supply, conventionally defined,
to gross national product was about 28 per cent at present.
It
was
over 30 per cent in the second quarter of 1957 and 33 per cent in 1955.
Aside from 1960,
when the ratio was slightly lower than today,
to go back to the 1920's to find smaller figures.
one had
Even if time de
posits were included in the money supply numerator, ratios to gross
product today would be low by historical standards until one got back
to the early 1920's.
Recently, Mr. Deming said, the Minneapolis Bank had done some
crude figuring to produce some other ratios that might be of interest.
If
one took the growth in
gross national product during the first
year
of upswing from the troughs of 1954 and 1958 and associated with those
6/6/61
-39
gains increases in the money supply and bank credit in the same time
periods, he would get the following results.
For
every dollar in
crease in money supply, there was associated an increase of between
6 and 7 dollars in GNP.
For every dollar growth in bank credit,
there was associated an increase of about 3 dollars in GNP.
If, as
seemed possible, GNP were to increase $40 billion over the first year
of the current upswing, these ratios would suggest associated growth
of $6 billion in the money supply and $13 billion in bank credit in the
same period, or rates of growth significantly larger than presently
evident.
Mr. Deming noted that he was anything but a devotee of a
mechanistic approach to policy making.
figures as targets or goals.
He had not cited the foregoing
He cited them merely to emphasize the
simple point he wished to make about near-term monetary policy.
Until
it could be demonstrated reasonably well that rates of growth in money
supply and bank credit were running significantly higher than at
present relative to GNP gains, or that new credit was financing specula
tive activity or underwriting price increases, monetary policy should
continue in
an easy posture.
Such a policy seemed to offer little
danger of losing control over liquidity.
To implement such a policy, Mr. Deming suggested a free reserve
target of about $500 plus million, a little higher than had prevailed,
6/6/61
-40
with excess reserves in the neighborhood of $650 million and borrow
ings of about $100 million.
In common with many others, he had said
harsh things from time to time about the free reserve guide.
For the
present, however, it might be the best guide available, if an easy
posture was to be maintained.
As he said at the May 9 meeting, this
policy would keep a loose rein on the credit horse, but would not let
him run free and would permit gradual tightening should that seem
indicated.
With regard to rates, Mr. Deming expressed the view that there
was no longer a need to be much concerned about propping up the short
rate; other forces seemed to be taking care of that.
In fact, it
might be found desirable to keep the short rate from rising in light
of the British situation.
He did not think the Committee could dis
engage itself from operating in the longer-term market at this time.
In fact, he would hope that any open market buying could be concentrated
in the longer maturities to moderate tendencies for longer rates to
rise, although he was not sanguine about prospects in that area.
In any
event, the Desk was hardly likely to be buying much, if anything, in
the next two or three weeks if the projections of the Board's staff were
reasonably accurate.
In summary, Mr. Deming said, he would like to see a policy of
ease continued for the time being and would like to see any errors made
6/6/61
-41
on the side of ease.
avoided.
He hoped that knots in the market could be
He saw no need to change the discount rate and no strong
reason to change the directive.
However, Mr. Fulton's point about
recognizing that economic conditions had changed since the current
directive was first
issued made him somewhat sympathetic to amending
the language of the directive.
Mr.
Deming suggested that the change
in economic conditions could be reflected in the directive merely by
substituting the word "are" for the phrase "appear to be" in clause
(b).
Mr.
Bryan joined the meeting during the course of Mr.
Deming's
comments,
Mr. Swan reported that recovery was proceeding in the Twelfth
District, but still
somewhat less vigorously, to judge from April and
May indicators, than in
the nation as a whole.
Employment had been
rising very slowly and, although over-all unemployment figures for the
District were not yet available,
the decline in
insured unemployment
claims from April to May were considerably less than seasonal.
agriculture,
receipts of farmers from marketings and Government payments
were expected to be higher in 1961 than
less than for the country as a whole.
last year relative to allotments,
12 per cent,
In
in 1960, but the gain might be
In cotton, because of overplanting
District acreage this year was down
compared to an increase nationally of 5 per cent.
Banks
-42
6/6/61
were still
expecting increases in commercial and industrial loans to
develop, but such loans declined in the four weeks ended May 2.4
Demand deposits dropped sharply during that period, while time deposits
continued to rise.
On the whole, banks were in a somewhat tighter
position in May than earlier, as reflected by the fact that they became
net purchasers of Federal funds.
As to policy, Mr.
Swan said it
seemed to him that adequate ease,
to use the phrase mentioned by Mr. Deming at the May 9 meeting, was
still
essential.
In the words of the directive,
the Committee needed
to encourage expansion in bank credit and the money supply in
stimulate the forces of recovery.
ahead,
order to
At least in the period immediately
and possibly for some further period of time, it
appeared to
him that the additional credit demands that should be generating as
recovery proceeded could be met without undue pressure on output and
employment.
Mr. Swan went on to say that, as this meeting approached, he
had thought his position would be about in line with the consensus ex
pressed at the May 9 meeting.
However, he would like to see a little
more ease than had existed in the past few weeks.
More specifically,
he would not object to a 2-1/2 per cent bill rate provided that was not
considered simply a point in a continuing upward trend.
His preference
though, would be for a bill rate fluctuating in the area from 2-1/4 to
-43
6/6/61
2-1/2 per cent.
Similarly, he would accept a net free reserve posi
tion of around $500 million, rather than $600 million, but he would
be much less concerned about going above $500 million than about drop
ping significantly below $500 million.
Mr. Swan said he would not favor changing the discount rate,
He would, however, support a change in the directive along the lines
that had been mentioned.
One possibility would be simply to drop the
words "that appear to be developing" from the phrase "strengthening
of the forces of recovery that appear to be developing in the economy."
Mr. Irons said that, generally speaking, activity in the
Eleventh District was fairly stable at fairly high levels.
He could
not put his finger on any element of great strength that might force
the recovery ahead at an inordinately rapid rate.
Department store
sales probably did not quite match seasonal levels during the past
month, but they were fairly stable at a fairly high level.
Incidentally,
their reliability as an indicator was open to some question because of
the development of discount houses, particularly in Dallas and Houston,
and it was not known just how much diversion of business to those houses
was taking place.
Employment and unemployment each improved during
the past four-week period, and the petroleum situation continued about
as it had been, with some threat of an overstocked situation developing.
The agricultural situation was generally good; available figures
6/6/61
-44
indicated that for the year to date farm cash receipts were up 10
per cent from last year, with receipts from both crops and livestock
showing increases.
Available figures indicated that although construc
tion was down a little the past month, for the year to date there was a
gain, the increase in nonresidential more than offsetting the decline
in residential.
The District banking situation seemed to reflect adequate re
serve positions, Mr. Irons said.
During the past period, in contrast
to the preceding period, District banks were net sellers of Federal
funds on balance by a small amount.
Borrowing from the Reserve Bank
was almost negligible, consisting solely of borrowing by a few country
banks for seasonal purposes.
Loans, investments, and deposits all de
clined in the latest period, with the loan decline largely in the
commercial and industrial category.
After summarizing the District picture in terms that conditions
were generally satisfactory and improving at a moderate rate, Mr. Irons
turned to the national picture and said it appeared to him that during
the past four weeks reserves had been available without restraint.
Rates and other factors had been in line with his recommendations at
the May 9
meeting.
reserve availability.
He continued to feel that there should be adequate
To a considerable extent this would have to be
determined by the feel of the market, as experienced by the Manager of
6/6/61
-45
the Account,
tant factor.
and the distribution of reserves would also be an impor
The bill rate, having moved up to 2-1/2 per cent, was at
a level where purchases of bills could be made as needed to put funds
into the market.
He would consider it desirable if the bill rate was
in the range of 2-3/8 per cent, with Federal funds from 2-1/. to 2-1/2
per cent, and he would think there should be a minimum of borrowing
through the discount window, with such borrowing as took place accounted
for by banks that happened to be temporarily in
a tight position.
As
to free reserves, he would suggest $00-$00 million; he would not be
too disturbed if the figure went somewhat higher as long as market
rates did not begin to reflect signs of excessive ease.
This might be a situation, Mr. Irons felt, where the Committee
could begin to lessen its activity in the intermediate and longer-term
areas of the market.
However,
he would leave that decision largely to
the on-the-spot judgment of the Account Manager as the latter saw the
situation unfold, and he would continue the special authorization for
the next two-week period.
Perhaps the rate situation, as it had
developed, was such that it would be possible to operate as needed in
the short-term area.
Also to be kept in mind was that, according to the
staff statistics, there probably would not be too much opportunity for
substantial intervention in the market between now and August.
Mr. Ellis reported that business recovery in New England appeared
to be proceeding quite satisfactorily, with production moving along about
-46
6/6/61
on pattern.
The April manufacturing index was up three points from
March and was running about 3 per cent below the year-ago level.
In
April there was a sharp pickup in residential construction contract
awards.
Total contract awards for the year were up about 3 per cent,
which was just about in line with the nation,
Employment continued to
rise slowly, being up 1 per cent in April to a level about 1 per cent
below a year ago, and unemployment continued to decline slowly.
The
pattern of spending continued strong at department stores, but lagged
for automobile dealers.
Business loans were not as strong as in 1959
or 1960, and deposits were about on the seasonal pattern so far this
year.
The average loan-deposit ratio of 66.2 per cent was almost the
same as a year ago, while the national ratio of 61.1 was 2-1/2 points
below last year.
After having been net sellers of Federal funds for
three months, District banks were buyers on balance during the past
two weeks.
Mutual savings banks in Boston reported some growth in the
availability of funds in relation to mortgages; four of the 11 banks re
ported a decline of 1/4 per cent in average mortgage rates between
March and April.
The going rate was now about 5-1/4 per cent.
Turning to policy, Mr. Ellis expressed general satisfaction.
If policy were to be changed now, he felt that the change should be in
the direction of somewhat greater ease, although without making any
significant shift.
He would continue the current pattern of providing
reserves, as called for by the directive, to support a strengthening
6/6/61
-47
of the forces of recovery in the economy.
The possibility of a
tightening in the money market through some inadvertence should be
avoided, particularly in view of the pending Treasury financing.
How
ever, this did not lead him in his thinking to the view that it would
be desirable to convert System operations in longer-term securities
from the present objectives into an effort to cushion changes in
longer-term rates.
Careful consideration would be warranted before any
switch was made in the rationale with respect to operations in the
longer-term area.
As mentioned by the Account Manager,
the market might
go through swings in rates due to expectations that were not justified,
but he would feel poorly equipped to put his judgment ahead of that of
the market.
If
market conditions should permit,
of the Account Manager it
and if
in the judgment
was appropriate, he would favor gradually
reducing System participation in the longer-term market but, as this
approach suggested, he would continue the special authorization.
Mr. Ellis said that he would not favor a discount rate change.
With respect to the directive, he felt that the Committee could perhaps
wait another two weeks before making a change.
However, either today
or two weeks hence it would seem advisable to recognize that the
present wording was no longer appropriate, because the forces of
recovery that earlier had appeared to be developing in the economy were
now
actually in evidence.
6/6/61
Mr. Balderston indicated that he would favor a change in the
directive along the lines suggested.
Proceeding, he said that he
would like to turn for a moment to what appeared to him to be the
salient factors in the current situation, although in mentioning them
he was not implying forgetfulness of longer-run objectives.
the Treasury would be in the market the first
July.
Consequently, it
First,
half of June and all of
was important that the market not be too
unhealthy in that period.
Second, the market for long-term Government
securities, and intermediates, was showing weakness and lack of buying
interest, which indicated to him that potential buyers were relying
more and more on the behavior of the Federal Reserve and the Treasury.
This situation should be corrected as rapidly as possible, and to that
end he would favor a gradual disengagement from System operations in
the longer-term area.
Third, the bill rate was weaker and seemed likely
to trend higher as the Treasury increased the supply of bills.
Fourth,
as mentioned by Mr. Young, the pound sterling was under pressure.
When either of the world's two reserve currencies--the pound or the
dollar--was under pressure, all must be concerned.
While he did not
know how soon interest rate differentials might induce a return flow
of short-term capital to this country, the situation should be watched
closely.
Fifth, the money supply, adjusted, had fallen between the
last half of April and the last half of May by about $400 million,
Mr. Balderston went on to say that he was not certain what
policy conclusion should follow from the set of circumstances that he
6/6/61
-49
had recited.
However, he would again urge the Open Market Committee
to use a higher free reserve target, and he would be willing to accept
the $575 million target suggested by Mr. King.
It had been his feeling
for many weeks that the Committee ought to discover, if possible, from
inductive data what level of free reserves was required to keep the
money supply moving upward.
For six months, starting with November,
there had been a gradual increase in the adjusted money supply figures,
and at the end of April the money supply stood at $142.3 billion.
How
ever, between the end of April and the present time, there had not
only been no progress but actually a decline.
The Committee should
take into account, he felt, that this was a period when business expan
sion needed to be fed and one when the demand for bank credit was not
strong.
In the absence of such demand, banks would be less inclined to
borrow from the Federal Reserve; they would not take the initiative to
expand reserves.
Furthermore, as had been noted, country banks commonly
carry excess reserves of about $500 million.
Thus, if total excess
reserves were at that level there would appear to be no stimulus to
expansion.
Accordingly, he would again suggest probing upward toward
$600 million of free reserves in order to see what the effect might be.
As to the problem of disengagement from System operations in
longer-term securities, Mr. Balderston said that he would be averse to
a published announcement that the System was getting out of the market
6/6/61
-50
at the long end.
at this time,
He would also be averse to complete withdrawal
because that would be tantamount to a public announce
ment as soon as observers realized what had happened.
Therefore,
he
would support a procedure of gradual disengagement along the lines
suggested by others at this meeting.
Mr.
Bryan said the Atlanta Reserve Bank had made a considerable
study to try to find out what had happened in the Sixth District during
the recent downturn and at the beginning of the present upturn.
In
the other postwar recoveries, the District did not go down as far as
the country as a whole, based on statistical measures, and it came up
more rapidly.
This time the situation was different,
in that the
District's behavior had been almost exactly like that of the national
economy.
As to the national economy, the Reserve Bank had tried to
see whether or not, by comparisons with other recoveries, any real
basis could be found for predicting the duration and movement of the
current recovery.
After study, however, it was concluded that the
trough of the recession had been passed too recently to make any
reliable judgment.
As to policy, Mr.
been monetary ease.
Bryan said it
seemed to him that there had
He did not believe that the recent rate movements
were caused essentially by any lack thereof.
Instead, he thought they
had been caused by other factors, to which reference probably had been
6/6/61
-51
made prior to the time he joined this meeting.
Accordingly, believ
ing that there had been monetary ease and looking at the picture of
required reserves, total reserves, and free reserves, he would come
out for a continuation of approximately the present policy.
However,
inasmuch as required reserves, the money supply, and total reserves
had not as yet behaved quite as he would have supposed them to behave,
he would be willing to agree to a modest increase of free reserves.
An increase such as he had in mind would mean a free reserve target of
$500 million, perhaps somewhat higher.
With regard to System operations in longer-term securities,
Mr. Bryan said he would like to associate himself with the view that
the current authorization should not be changed officially, either by
means of a public announcement or a de facto revelation.
However, he
believed that the Account probably ought to put more emphasis on bill
purchases than it
had been recently, and by the same token reduce
proportionately its purchases in the long- and intermediate-term
market.
He would hope that at some appropriate time the System might
disengage from the whole operation.
However, he did not see any chance
of that until the System had allowed the operation to run the whole
course of a business cycle and more experience had been accumulated
than at present.
Chairman Martin said that the phrase "errors on the side of
ease," as used by Mr.
Deming, reflected his own position as far as
6/6/61
-52
policy was concerned.
This was not intended to mean that he would
favor any specific change in policy.
A thing that interested him,
the Chairman said, was that within a free reserve range of $100 million
or so, it was not possible to make too much of a judgment.
Looking
back at past periods, he noted, for example, that in the early part of
1960 the System was not trying to ease credit.
it was trying to tighten gradually.
System a clear signal.
As a matter of fact,
Nevertheless, rates gave the
At the present time, the System was not trying
to tighten credit, and yet rates were showing some indication of moving
upward.
This was in accord with business conditions and business
trends.
The point he was making was that the Committee ought to
utilize little
signs of that kind, although without overemphasizing
them.
The thing that concerned him most, Chairman Martin said, was
the Treasury's prospective financing schedule.
That was the reason he
had asked the Treasury to permit use of the memorandum distributed
prior to this meeting.
The Treasury's problem, he pointed out, is
always complicated by Federal Reserve policy immediately preceding
and during a period of Treasury financing.
to maintain exactly an even keel.
He would not suggest trying
However, if the Committee tried to
help the Treasury by going to a $600 million level of free reserves,
that might produce so sloppy a market as to make the Treasury's problem
more difficult.
6/6/61
-53
Errors on the side of ease,
although definitely without show
ing any clear change of policy in terms of reserves,
seemed to Chairman
Martin a consistent policy that would be in accord with the thinking of
the majority at this meeting.
degree had been expressed.
He realized that differences in terms of
Before dealing with them, however, he sug
gested that consideration be given to the directive.
While he had no
strong feeling, he thought a case had been made for a change, and he saw
no reason why the Committee should not make a change along the lines
suggested if it so desired.
The choice of phraseology from among the
several suggestions that had been advanced did not seem to present any
severe problem,
Mr. Hayes said that, like the Chairman,
strong feeling.
However,
he did not have any
he recalled that on occasions in
the past
participants in Committee meetings had expressed the view that it
might
be better not to change the directive unless the Committee was making
some significant change in policy.
Certainly, no such change was
indicated by the discussion today.
If anything, the discussion sug
gested a slight move in the direction of further ease, while the tone
of the proposed revision of the directive might suggest a change in
the opposite direction.
Chairman Martin replied that he thought the point Mr. Hayes had
mentioned was a valid one.
It had been raised on previous occasions.
6/6/61
-54
According to one line of reasoning, if the Committee was not making
any substantial change in policy, there was some advantage in not
changing the directive.
Consequently, the directive ordinarily would
be changed only when the Committee actually was changing policy.
Mr. Swan recalled that when the Committee changed the directive
at the April 18 meeting, it was clear that no significant change in
policy was intended.
The Committee simply had been trying to bring the
directive up to date in the light of then current circumstances.
He
would suggest that any change in the directive today be of a minimum
nature.
However, it did seem to him that in relation to realities the
Committee should not be in the position of issuing a directive which
referred to forces of recovery that appeared to be developing in the
economy.
In his opinion, a minimum change to recognize the appearance
of the forces of recovery that had been anticipated earlier would not
necessarily imply any change in policy.
Rather, it would simply make
the directive more consistent with current economic events.
Mr. Hayes said he would be inclined to agree.
matter of tidying up the language of the directive.
It was simply a
However, having in
mind the discussions in the past to which he had referred, he hoped
there would not be an interpretation that a change in the directive of
the kind that had been suggested at this meeting implied any significant
change of policy.
6/6/61
-55
Mr. Irons recalled that sometimes in the past he had been
one of those who expressed the view that changes in the directive
should coincide with changes in policy.
However, an amendment of
the directive along the lines suggested today would not change the
directive in any significant way in terms of policy.
It would still
be stated that operations were to be conducted with a view to encourag
ing expansion of bank credit and the money supply so as to strengthen
the forces of recovery in the economy.
The only effect would be to
eliminate one qualifying phrase relating to economic conditions.
Therefore, he would favor such an adjustment of the directive at this
time.
After further discussion of the various suggestions that had
been made for changing clause (b) of the directive, the Chairman said
that he would put the matter to the Committee in terms of changing
clause (b) to provide for open market operations with a view to
encouraging expansion of bank credit and the money supply so as to con
tribute to strengthening of the forces of recovery, while giving
consideration to international factors.
No indication of dissent from such wording was heard.
Accordingly, 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 (includ
ing replacement of maturing securities, and allowing maturities
6/6/61
-56
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 strengthening of the forces of
recovery, while giving consideration to international
factors, and (c) to the practical administration of the
Account; provided that the aggregate amount of securities
held in the System Account (including commitments for the
purchase or sale of securities for the Account) at the
close of this date, other than special short-term certificates
of indebtedness purchased from time to time for the temporary
accommodation of the Treasury, shall not be increased or de
creased 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.
Chairman Martin then reverted to the question of the free re
serve target for the next two weeks and noted that a range of opinions
had been expressed, varying from around $575 million to continuation at
approximately the current level.
In this connection he turned to Mr. Rouse, who said that during
the current statement week free reserves should average about $492
million.
For the period May 9 to May 31 they averaged $488 million.
Over the next two-week period, he would guess that if the Account did
6/6/61
-57
nothing free reserves would average around $600 million.
period, he noted, there would be some unusual situations.
Treasury would be taking bids on its
Over that
The
financing offer on June 8,
with
payment due June 14, and there would also be the corporate income tax
payment period,
so a good deal of churning in
the market was indicated.
Looking at the major factors that were developing,
if anything needed
to be done, the Account might run off bills on June 15.
Otherwise,
there might be no occasion for the Account to be in the market,
recognizing that the Desk would have to be governed more or less by
what eventuated between now and the next meeting.
Or balance, he
thought free reserves would tend to run closer to t600 million thar
$500 million.
Mr. Thomas pointed out that from the standpoint of the amount
of System operations needed to cover the volume of required reserves
projected there was little difference between projections of the New
York Bank and the Board's staff.
If New York's projections were
realized, free reserves would be less, with a given volume of operations,
than in the case of the Board's staff estimates of required reserves
needed; total reserves might be about the same.
Mr. Fulton commented on problems occasioned by the distribution
of reserves at any particular time.
These problems, he suggested,
seemed to call for directing remarks more to the feel of the market
6/6/61
-58
than to over-all figures.
Chairman Martin noted that this was what
the Committee was concerned with in using terms such as the feel,
color,
and tone of the market.
The Chairman then said that he understood the consensus to
favor resolving doubts on the side of ease.
consensus was,
he thought,
To put a target on that
almost a futile endeavor.
However,
he would
say around $500 million of free reserves or something in that area.
Certainly, the Committee would not want a tiqhtening in the market to
develop during the period of Treasury financing,
nor would it
want the
market to become sloppy.
There was no indication of dissent from the accuracy of this
interpretation of the consensus by the Chairman.
Chairman Martin referred next to the special authorization for
operations in
intermediate- and long-term Government securities.
the light of today's discussion, it
In
appeared to him that the Committee
would favor renewing the special authorization until the next meeting.
However, there were a growing number who would like to see a gradual
disengagement from operations in the longer-term area.
appeared that a bill
It
also
rate of 2-1/4 to 2-3/8 per cent was nothing that
the Committee would be alarmed about at the present time.
The Committee
would not want to move from a nudging to a price-fixing operation, al
though it was recognized that the System had some responsibility for
6/6/61
-59
the market as a whole.
That,
he thought,
was really what the Committee
was dealing with today in renewing the special authorization.
It was
placing a large degree of responsibility on the Account Manager,
but
with the understanding that the Committee did not consider it as
necessary to take account of the bill
rate now, with that rate at 2-1/2
per cent.
Mr. Mills said he agreed with the consensus, but for the record
would like to be identified with those who would disengage from opera
tions in the longer-term area rather than withdraw gradually.
gradual withdrawal, he felt,
could only confuse the market.
A
He then
referred to an article in the financial columns of today's New York
Times which, he suggested, offered the most acceptable position that
the System could take in the eyes of the public.
As he recalled the
article, the writer indicated that the operations in longer-term
securities in which the System had been engaging had not been effective.
The writer surmised that there would be withdrawal from engagements in
the longer-term area and that the visible evidence of that sort of
withdrawal would confirm the market estimate.
Chairman Martin commented,
in response,
that in his opinion it
was important to view what the Committee had been doing in proper per
spective.
There would be differing judgments as to how effective or
ineffective the operations in the longer-term area had been.
However,
6/6/61
it
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should not be said simply that the operations were a complete
failure, because there had been a complete shift in the business
picture in the midst of those operations.
In terms of the flows of
money, the rapidity of the movement of funds abroad had been halted,
and the flow offunds into domestic business had been somewhat accelerated.
The question of how one related those developments to the System's
operations was a matter of semantics in part, but those in the
System should not go around saying the experiment had been a complete
failure and that this was evidenced by the change in the rate structure
of the market.
He made these comments,
the Chairman said, because it
was important that everyone keep in perspective what was involved.
That under present circumstances the so-called nudging effort
was getting to be a matter of flying into the wind was becoming quite
apparent to him, the Chairman continued.
be borne in mind.
That was something that should
Mr. Mills had raised a good point with regard to the
method of disengagement from operations in the longer-term area,
general,
In
he (Chairman Martin) did not favor cushioning as such, and
one could make a case that under current conditions the System should
step out entirely.
However,
he questioned whether that was the right
approach at the present time, particularly in light of all of the
misunderstandings and public discussion. In his view, the Committee
should leave to the discretion of the Account Manager the question
6/6/61
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whether in terms of the objectives of monetary policy, further
operations should be conducted in the longer-tern area.
In effect,
that was the context in which the Committee had been operating all the
way through.
The Chairman added that he did not think it was possible to
cling successfully to the view that System operations have no influence
on interest rates.
This was a view that the System had gradually gotten
itself into, and he thought it was absurd.
The academic profession and
the public generally had gotten the System over a barrel on that point.
The question of controlling rates was, of course, a different story.
Chairman Martin went on to say that he felt some success had
been achieved in promoting an understanding in various places outside
the System as to what was involved in the operations in
area.
the longer-term
He also thought that the Committee must do the best it
could to
resolve the box it was in; the fact that it was in that box was due
largely to the change in business conditions, and the Committee should
endeavor to resolve the matter in as orderly a way as possible.
The
Account Manager should have discretion, within the framework of gradual
withdrawal, to withdraw from operations in longer-term securities as
rapidly as possible without unduly impairing the structure of the market
This was a problem with which the Committee would have to wrestle from
now on, but it seemed to him the only consistent approach to take.
6/6/61
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Mr.
Hayes said he would like to associate himself generally
with what the Chairman had said, although with perhaps a little
differ
ence in the degree to which he thought the System might legitimately
exert some cushioning influence.
He was not sure whether he had inter
preted Mr. Mills' comments correctly, but he would say the financial
writer in question had from the start been a poor interpreter of what
the System had been attempting to do.
Mr. Mills commented that the writer had expressed a sophisticated
view:
it was the market that made these decisions rather than some out
side estimate of what the System's purposes and intentions were.
Mr. King said that to him the primary consideration had been
that the special operations were a necessary part of the effort to
maintain the bill
rate.
In
tions had been successful.
might be debatable,
that light, he felt that the special opera
Whether the objective was a desirable one
but he thought the System would be well advised to
discuss the matter in that context more than as an experiment to
determine its ability to nudge or push longer-term rates.
Chairman Martin then inquired whether it
would be agreeable to
the Committee to leave the special authorization in effect until the
next meeting of the Committee, with those who wished to record a
dissent at liberty to do so.
He added that in looking at the record
he was not sure whether Messrs. Allen and Robertson would want to be
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recorded as dissenting each time from a continuation of the special
authorization in the same manner that they did when the authorization
was first granted.
another meeting.
That was something that could be decided at
His only point was that he did not know whether they
would wish to have themselves recorded at every meeting as being out
of sympathy with what the Committee was doing.
In reply, Mr.
Allen noted that Mr. Robertson, at a recent meet
ing, had expressed the wish that the Committee could decide on a
procedure that would make it unnecessary to record a dissent at each
meeting.
The Chairman then commented that the Committee had granted the
special authorization on February 7 and an announcement of the initia
tion of transactions under that authorization had been made on
February 20,
However, the Committee had in effect certain operating
policy statements that never had been changed except to the extent that
the techniques were modified by the terms of the special authorization.
The Committee could either abandon the operating policy statements,
which he would not be willing to do right now, or it could hold them
in abeyance, so to speak, until such time as it wanted to make a policy
decision on them as such.
His question was whether in the interim
Messrs. Allen and Robertson would want to be recorded at each meeting
against action to continue the special authorization in effect until
the next meeting.
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6/6/61
Mr. Allen responded that he wished to be recorded against the
continuation of the special authorization for the two weeks until the
next meeting, with the statement for the record that at its inception
he felt the operation was ill-advised and misguided and that the opera
tion had, as he saw it, confirmed that judgment.
Mr. Robertson said that in his view this was a good time to
terminate the operation.
Therefore, he would not want to renew the
special authorization.
Thereupon, the Committee authorized the
Federal Reserve Bank of New York, between this
date and the next meeting of the Committee,
within the terms and limitations of the direc
tive issued at this meeting, to acquire
intermediate and/or longer-term U. S. Govern
ment securities of any maturity, or to change
the holdings of such securities, in an amount
not to exceed $500million.
Votes for this action: Messrs. Martin,
Hayes, Balderston, Irons, King, Mills,
Shepardson, Swan, and Wayne. Votes against
this action: Messrs. Allen and Robertson.
Chairman Martin then referred to the distribution before this
meeting of excerpts from his testimony before the Joint Economic Committee
on June 2, 1961, in connection with hearings on the Board's Annual Report
for 1960.
One of the excerpts included references by Senator Bush and
by Committee Chairman Patman to the following statement in the text of
the recent message from the President of the United States to a joint
session of the Congress on the subject of urgent national needs:
6/6/61
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"The full financial influence of Government must continue
to be exerted in the direction of general credit ease and fur
ther monetary growth while the economy is recovering. Some
further downward adjustments in interest rates, particularly
those which have been slow to adjust in the recent recession,
are clearly desirable, and certainly to increase them would
choke off recovery."
Congressman Patman had inquired whether Chairman Martin would ask the
Open Market Committee to take into consideration this statement of the
President, and the Chairman had replied that he would be glad to see
that every member of the Open Market Committee had a copy of the
statement.
Chairman Martin said the record should show that the statement
of the President had been brought to the attention of the Open Market
Committee,
as requested by Congressman Patman.
The suggestion then was
made that the portion of the transcript of the hearings relating to the
questioning,
and Chairman Martin's responses,
concerning the President's
statement be appended to the minutes of this meeting, with an indication
in the minutes that the statement was given consideration by the members
of the Committee, and it was agreed that this procedure would be followed.
Accordingly, a copy of the pertinent portion of the transcript is
appended to the minutes as Attachment A.
The Chairman referred next to the portion of the transcript in
which Congressman Patman had asked him (Chairman Martin) whether he
would furnish to the Committee the minutes of the Open Market Committee
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6/6/62
for the calendar year 1960.
Mr.
Chairman Martin had suggested to
Patman that, in the interest of orderly procedure, the latter
write a letter requesting those minutes for the use of the Joint
Economic Committee, indicating that he (Chairman Martin) would place
such a letter, if received, before the Open Market Committee for consid
When Mr. Patman stated that he was not going to write such a
eration.
letter and renewed his request, Chairman Martin had indicated that he
would bring the oral request to the attention of the Open Market Committee
at its meeting today.
Chairman Martin commented, after reading a part of the transcript,
that he would propose, if
advise Mr.
the Open Market Committee was agreeable,
to
Patman that the oral request had been discussed by the Open
Market Committee and that it would be willing to consider furnishing
the minutes for 1960 if Mr. Patman transmitted a formal request in
writing.
Mr.
In reply to a question,
the Chairman pointed out that since
Patman was Chairman of the Joint Economic Committee, it seemed
questionable whether any letter to him should specify that any formal
request should be made on behalf of the Committee.
Question was raised whether a letter from the Chairman to
Mr.
the
Patman should be in terms that if
minutes,
the latter wrote a letter requesting
they would be furnished, as opposed to saying that the
Committee would be willing to consider a formal request.
However, in
6/6/61
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further discussion certain reservations were expressed about possible
consequences,
from the standpoint of the effective functioning of
the Open Market Committee,
date in their full form.
of releasing minutes of relatively recent
Some of these considerations, it was suggested,
were of such a nature that, if explained, they might cause members of
the Congress to be reluctant about pressing a request that the minutes
be furnished.
As a possible alternative to furnishing the 1960 minutes,
the thought was expressed that the Committee might want to consider
making public the minutes for some prior period.
The comments made during this discussion indicated that at
least some of the Committee members and other Presidents would like to
give further consideration to the matter in the light of any formal
request for the 1960 minutes that might be received.
Accordingly,
Chairman Martin renewed his earlier suggestion as to the type of letter
that might be addressed by him to Congressman Patman.
The suggestion was made,
to Mr.
and received favorably, that a letter
Patman might include the statement that if
a formal request was
received, the Open Market Committee might want to consult the Chairmen
of the Banking and Currency Committees before taking action on the
request in view of the relationships existing between those Committees
and the Federal Reserve System.
At the conclusion of the discussion, it
was agreed that any
letter sent by Chairman Martin to Chairman Patman would be phrased
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6/6/61
along the lines proposed by Chairman Martin, taking into account the
additional suggestions made at this meeting,
Chairman Martin then noted that there had been included on the
agenda for today's meeting, pursuant to the understanding at the meet
ing on May 9, consideration of the publication of the record of policy
actions of the Open Market Committee more frequently than on an annual
basis.
He suggested that this item be held over, with the understanding
that the Committee would continue to consider the matter, and no
objection was indicated.
In this regard, Mr. Hayes commented that there had been dis
tributed to the members of the Committee prior to this meeting excerpts
from his testimony before the Joint Economic Committee on June 1, 1961.
These excerpts consisted of exchanges between Mr. Hayes and Congressman
Reuss in which the latter requested that Mr. Hayes pass along to the
Federal Open Market Committee for consideration the suggestion that
the Committee publish its record of policy actions quarterly after a
suitable time lag.
Congressman Reuss also requested that Mr. Hayes
pass on to the Open Market Committee the view that that Committee should
adopt the suggestion of the majority of the Joint Economic Committee,
as stated in
the Joint Commitbee's report of January 1960, that "the
Federal Reserve System . . . abandon its inflexible portfolio policy
and, at least, weigh the desirability of changing its portfolio align
ment."
Mr. Reuss made the further statement that if
the Open Market
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6/6/61
Committee did not adopt the suggestion of the majority of the Joint
Committee, it
should tell
the Joint Committee why it
had not done so.
Mr. Hayes said he was calling these portions of his testimony
to the attention of the Open Market Committee in fulfillment of the
replies he had made to Congressman Reuss.
After discussion, it
was understood, pursuant to a suggestion
by Chairman Martin, that the portions of the transcript of the testi
mony on June 1, 1961, to which Mr. Hayes had referred would be appended
to the minutes of this meeting.
Accordingly, the excerpts from the
testimony are appended as attachment B.
It was agreed that the next meeting of the Federal Open Market
Committee would be held on Tuesday,
June 20, 1961.
Secretary
Cite this document
Federal Reserve (1961, June 5). FOMC Minutes. Fomc Minutes, Federal Reserve. https://whenthefedspeaks.com/doc/fomc_minutes_19610606
@misc{wtfs_fomc_minutes_19610606,
author = {Federal Reserve},
title = {FOMC Minutes},
year = {1961},
month = {Jun},
howpublished = {Fomc Minutes, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/fomc_minutes_19610606},
note = {Retrieved via When the Fed Speaks corpus}
}