FOMC Minutes

A meeting of the Federal Open Market Committee was held in

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

Washington on Tuesday, October 3, 1961, at 10:00 a.m.

PRESENT:

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Balderston, Presiding

Allen

Irons

King

Mills

Mitchell

Robertson

Shepardson

Swan

Wayne

Treiber, Alternate for Mr.

Hayes

Messrs. Ellis, Fulon, and Deming, Alternate Members

of the Federal Open Market Committee

Messrs. Bopp and Clay, Presidents of the Federal

Reserve Banks of Philadelphia and Kansas City,

respectively

Mr. Young, Secretary

Mr. Sherman, Assistant Secretary

Mr. Thomas, Economist

Messrs. Baughman, Coldwell, Einzig, 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

Mr. Knipe, Consultant to the Chairman, Board of

Governors

Mr. Yager, Economist, Government Finance Section,

Division of Research and Statistics, Board

of Governors

Mr. Francis, First Vice President,

serve Bank of St. Louis

Federal Re

Messrs. Eastburn, Hostetler, Jones, and Tow,

Vice Presidents of the Federal Reserve Banks

of Philadelphia, Cleveland, St. Louis, and

Kansas City, respectively

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10/3/61

Mr. Litterer, Assistant Vice President, Federal

Reserve Bank of Minneapolis

Mr. Schiff, Manager, Research Department,

Federal Reserve Bank of New York

Mr. Stone, Manager, Securities Department,

Federal Reserve Bank of New York

Mr. Anderson, Financial Economist, Federal

Reserve Bank of Boston

Upon motion duly made and seconded,

and by unanimous vote, the minutes of the

meeting of the Federal Open Market Com

mittee held on September 12, 1961, were

approved.

Before this meeting there had been distributed to the members of

the Committee a report of open market operations covering the period

September 12 through September 27, 1961, and a supplemental report

covering the period September 28 through October 2, 1961.

Copies of

both reports have been placed in the files of the Committee.

In

supplementation of the written reports,

Mr.

Rouse made the

following comments:

Open market operations during the past three weeks were

complicated by wide swings in market factors, which required

sizable operations on both sides of the market.

Outright

sales of securities--most of which were made early in the

period to offset a part of the mid-month bulge in floatamounted to nearly $740 million, while outright purchases,

made largely last Wednesday and Thursday, amounted to nearly

$950 million. Since most of the purchases were Treasury

bills, and since a part of the sales was in securities other

than bills, our holdings of bills rose by about $385 million

net over the period.

The money market was generally steady during the past

three weeks despite the wide swings in reserves, and Federal

funds traded for the most part between 1-1/2 and 2-1/2 per

cent. Rates on three-month bills edged gradually lower

10/3/61

through yesterday, with the three-month issue closing last

night at 2.24 per cent bid, 9 basis points below the rate at

the time of the last meeting. Over the same period, British

three-month bill rates have remained at around 6.44 per cent,

while the discount on forward sterling has declined somewhat.

As a result there was a spread of 34 basis points in favor

of British bills on a covered basis yesterday, compared with

a spread of only 2 basis points at the time of the last meeting.

I should point out that too much emphasis may be placed on the

British bill rate in this connection, and that the Euro-dollar

rate is perhaps more important than the British bill rate. In

yesterday's auction, the average rate on our three-month bill

was 2.30 per cent, while the average on the six-month bill was

2.68 per cent. This is the fifth successive week in which the

average rate on the six-month bill has been in the 2.68 - 2.70

per cent range.

The major part of the Treasury's financing program that

we discussed at the time of the last meeting has now been

completed. The results of the advance refunding were especially

gratifying, and the auction of June tax bills went about as

expected. The market's initial reaction to the $2 billion of

additional 3-1/4 per cent notes of May 1963 was rather lukewarm,

since the Treasury priced the issue right on the market, with

the tax on loan account deposit, which is worth 4 or 5/32,

providing the incentive margin against the current market.

Nevertheless, it appears from early reports received from New

York this morning that subscriptions may only be fair and that

the guessing in the market last night that allotments may be in

the neighborhood of 35 per cent may be low. The Treasury will

complete the current phase of its financing program with the

auction next week of $2 billion one-year bills to replace $1.5

Looking further ahead, the

billion bills maturing October 16.

Treasury will have to raise some additional cash during this

calendar year, with the amount depending very largely upon

whether it handles the $7 billion November 15 maturity through

a cash or an exchange offering. That refinancing will be a

sizable operation, particularly since almost the entire issue

is publicly held. I should add that with the success the

Treasury has had in its financing program thus far, and the

good performance of the market in recent weeks, the market

thinks that the climate may be right for a junior advance re

funding at an early date, and the Treasury is giving some

consideration to this possibility.

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Thereupon, upon motion duly made and

seconded, the open market transactions

during the neriod September 12 through

October 2, 1961, were approved, ratified,

and confirmed.

There followed an economic presentation in the form of a chart

show.

In concluding the presentation Mr.

Thomas presented summary

comments as follows:

First, the recovery in activity so far has been as fast

as in the first half of the 1958 upswing. This was unexpected.

Not only that, the rise started from a level substantially

above the low of early 1958 and the present level is substan

tially

higher, both in absolute terms and in relation to the

previous peak, than the level at this stage of the 1958

upswing.

If further advance lies ahead, on a scale comparable

to that after the autumn of 1958, the level reached by mid

1962 will be much higher than that in 1959-60 and the growth

rate for recent years will appear to have been considerably

higher than had been thought.

It is possible too that activity will rise substantially

further and without much price advance. So far there has been

little

evidence of upward price pressures, less than at the

comparable stage in 1958.

Price advances then, moreover, were

limited despite speculative buying of steel in the spring of

1959 and a wave of optimism at the end of the steel strike.

Some of the same forces that limited price advances then--such

as international competition--are still present.

The credit situation does not show evidence of continuing

speculative activities and there has been no such dramatic

advance in interest rates as occurred in the summer of 1958.

above those of late

Yields on long-term securities are still

1958 but not by much.

Looked at in other ways, the facts are subject to other

One alternative view is that, strong as the

interpretations.

advance over all has been so far, it has depended too much on

an inventory turn-around and increased defense outlays. Housing

There is little

evidence yet

starts have risen only moderately.

of real strength in consumer buying and that is basic to any

important sustained advance in business spending for inventories

and capital goods and to any further substantial rise in general

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economic activity. In this broad view the recovery may prove

abortive, stopping at levels only moderately above 1959-60.

A third view is that recovery forces will prove cumulative

in their impact, with higher incomes leading soon to increasing

consumption, and thence, along with other influences, to higher

utilization of capacity, and upward pressures on prices. Under

such circumstances, inventory buying would be presumed to

increase considerably further and there would be heavy capital

outlays for capacity expansion as well as modernization. The

continuation of the Federal budget deficit through the second

half of 1962 tends t- support the view that total demands will

rise sharply. Current lags in unemployment, consumption,

business loans, and the money supply would disappear. With such

developments, restraints on credit expansion would be needed at

some stages.

These are all possibilities that need to be weighed in

thinking about fiscal and monetary policy. If this Committee

could act only at intervals of several months, a decision

among the alternative prospects would be pressing. With action

being taken continuously, however, policy can be made more on

the basis of established facts and less on the basis of

speculation about the future, taking into account, of course,

lags between policy action and economic responses. Retail sales

performance in the current month, for example, should be

esoecially helpful in evaluating the underlying strength of

consumer demand, one of the major uncertainties in the present

situation.

At this point the need for some additional credit and

monetary expansion seems evident if we are to achieve higher

levels of resource utilization. Apparently, restraint is not

yet needed. In the record of commodity prices there is as yet

little evidence of strong upward pressures. Yet, it is

important in supplying the basis for desirable monetary

expansion to avoid laying the seeds for unsound debt expansion

and inflationary developments.

Before this meeting, Mr. Balderston had distributed a memorandum

dated September 28, 1961, with respect to the derivation of "Adjusted

Available Reserves."

At this point, he called upon Mr. Thomas, who

commented on staff projections of reserves as prepared at the Board and

10/3/61

at the Federal Reserve Bank of New York, as well as on the chart that

had been distributed with Mr, Balderston's memorandum showing total

reserves available to support private deposit expansion.

Mr.

Treiber then made the following statement regarding the

business outlook and credit policy:

The domestic business and credit situation continues to

develop satisfactorily, without any obvious signs of strain.

There has been little

basic change in the economic and

financial picture since the last meeting of the Committee.

There has been no rush on the part of consumers to buy, nor on

the part of businessmen to build up inventories or to expand

plant and equipment. The increase in corporate profits in the

second quarter of 1961 may, however, provide both the means

and the incentive for further investment outlays. In view of

the increase in corporate profits and in corporate income

taxes resulting therefrom, the Treasury deficit now appears

more manageable than might have been feared earlier. The

unemployment problem remains serious.

The demand for bank loans has been roughly in line with

business developments.

There is no indication of exceptional

borrowing in expectation of higher interest rates or inventory

needs.

While price stability does not appear threatened from the

demand side, there is some concern about the effect of a

possible wage push.

The automobile settlement seems to provide

for larger wage increases (tentatively estimated at a bit higher

than 4 per cent a year) than the probable gains in average

productivity in the nation as a whole. So far there appears to

be little

or no change in the basic pattern of demands for

higher wages; nor is there sufficient recognition that the

vulnerability of American industry to foreign competition has

introduced a new element into the wage picture.

On the international side, preliminary estimates for

August show a marked improvement in our balance of payments

The dollar has been somewhat

over the poor July figures.

stronger in the exchange markets. These favorable developments,

however, do not justify any relaxation in our effort to solve

the balance-of-payments problem. Over the last three months

10/3/61

there was a balance-of-payments deficit at an annual seasonally

adjusted rate of close to $2-1/2 billion; a continued expansion

in business can be expected to increase imports further and to

make more difficult the correction of the deficit.

Europeans are still

watching closely developments in the

United States. At the annual meeting of the International

Monetary Fund in Vienna there was considerable emphasis by some

Europeans--with an obvious eve on the United States--on the

relation between sound and vigorous domestic policies and the

need for additional international credits such as were discussed

at the meeting.

The United States gold stock will probably

decline substantially this week, and short-term rates here are

low compared with rates available abroad,

The dollar is still

vulnerable.

The Treasury is moving forward with its crowded calendar

of financing in which it has been engaged more or less con

tinuously for several weeks.

Payment must be made on October

11 for the additional $2 billion of 3-1/4 per cent Treasury

notes of May 15, 1963, offered for subscription yesterday.

The

Treasury has just announced the terms of a $2 billion issue

of one-year Treasury bills to provide $1/2 billion of cash

and to refund the $1-1/2 billion of one-year Treasury bills

maturing October 16, and there is talk about a possible junior

advance refunding.

calls for

The domestic and business credit situation still

a policy of monetary ease. Treasury operations counsel the

continuation of an "even keel" in the money market.

We must

continue to be alert to the possibility that not only a wage

cost push but also stepped-up defense spending and related

expansion in private spending may place excessive pressures on

the price structure and endanger economic stability; this is

still

a matter of being alert rather than a matter calling for

immediate action,

We think it desirable that there be some increase in the

rate on three-month Treasury bills which has been about 2-1/4

per cent for the last several weeks. We would prefer to see the

rate nearer the middle or in the upper part of the 2-1/8 - 2-5/8

per cent range that has existed over the last year--if necessary,

at the expense of a somewhat lower level of free reserves.

Thus, while we favor continuation of the same degree of ease as

has prevailed since the last meeting, we would resolve doubts

on the side of less ease.

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10/3/61

We see no reason for a change in the directive. We

believe that the authority to engage in transactions in

longer-term securities should be continued and that the

discount rate should not be changed.

Mr. Francis said that in the Eighth District business conditions

had continued to improvspectacular.

,ut the rate of improvement had not been

Agricultural prospects were better than a year ago.

However, the stubbornly high level of unemployment,

the pattern of

production activity among manufacturing industries, and the lack of

expansive loan demand at District banks suggested that some of the

earlier vigor of the recovery was lagging.

He noted that the lateness

of the cotton crop had been a factor in the weakness of demand for

credit, particularly in the Memphis area.

it

As to the national situation,

appeared to be quite comparable to that observed for the Eighth

District.

Disposable personal income continued to rise but consumer

purchases were showing a surprising lack of exuberance, and plant

capacity was not being fully utilized.

Unemployment rates continued

high and price levels were not under pressure.

Coupling these indica

tions with an international balance-of-payments situation that harbors

problem potentials, but offers no observable reason for a change in

attitude toward domestic affairs during the next few weeks, he could

find little reason to urge a more restrictive monetary policy than that

followed recently.

He was pleased with the recent substantial increase

in total bank reserves.

In sum, he saw no reason at this time for change

10/3/61

-9

in the Committee's directive, the discount rate, or the special

authorization for purchases of longer-term securities.

Mr. Bopp said that in the Third District production and employ

ment were rising and unemployment was declining.

An exception to the

general evidence of continuing business expansion was to be found in

department store sales, which fell in September on every basis of

comparison and now for the year to date failed to exceed 1960.

Bank

credit was expanding, deposits were rising, and banks (both reserve city

and country) were in

was not in

an easy reserve position.

Even though the Treasury

the market, Mr. Bopp said that he felt on balance the

condition of the economy favored maintenance of the status quo.

He was

conscious that he had been recommending the same policy for some time

and he was alert to the fact that a change might become necessary.

While he would be looking for any need for a change in policy, he still

could see no need for that change at the present time and would recommend

continuation of the same degree of ease that had existed in

recent weeks

with no change in the Committee's directive or other policy measures.

Mr.

Fulton said that new orders for steel were not increasing to

the extent that had been expected and that a considerable portion of the

steel being produced was going into inventories at the mills rather than

for immediate shipment.

The situation in the automobile industry had

caused some stockpiling and orders for steel from that industry were not

10/3/61

-10

now being placed in quantity.

to sales of new model cars.

New orders were expected only in

Steel producers looked

relation

longingly to

increasing prices on the basis of the wage increase that became

effective October 1, Mr.

Fulton said, but ther

was little

hope that

they could actually make an increase effective at the present time

because of the amount of capacity not being used, the slowness of new

orders, and the recent reduction in the price of aluminum which is

competitive with steel in many ways.

There was no change in tne

unemployment situation, with 11 of the 14 major ar as in

District still

the Fourth

classed as substantial areas of unemployment.

Department

store sales declined in September and for the year to date were 1 per

cent below a year ago.

Building permits had slowed down in Cleveland

although some public works had helped maintain building in

of the District.

other parts

Bank credit was not increasing and there was no pressure

for loan expansion.

All in all, Mr.

Fulton said that the District was

having a sidewise movement

which led him to the conclusion that no change

should be made in monetary

rolicy, that the same degree of ease that had

existed recently should be maintained,

the Committee's directive or its

purchases of longer-term

special authorization permitting

securities,

remain unchanged for the present.

that there should be no change in

and that the discount rate should

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10/3/61

Mr. Mitchell said that if

whereby it

it

could tell

could act in

the Committee had some arrangement

what was going on currently and last week, perhaps

some way today.

It

did not have that information, and

the Committee was faced with a basic uncertainty as to what the final

takings of consumers would be.

There did not seem to be much to do

at this time but to continue as during the past few weeks.

felt it

would be unfortunate if

Mr.

Mitchell

anything done by the Committee could be

interpreted by the business or financial community as indicating that

the Committee had taken a step of some sort because of a belief that a

change had taken place in the situation.

Therefore,

Committee policy

and operations should continue just as in the recent past.

Mr.

made.

It

King said that he would second the comments Mr.

Mitchell had

looked extremely doubtful to him that the boom that had been

forecast by the rise in the stock market earlier this year was going to

be pronounced.

Producers today obviously were under twin restraints of

foreign competition and excess capacity.

Although not every producer

was directly subject to foreign competition,

he was indirectly affected.

A producer could not raise prices without peril of losing part of his

market or going out of business.

data,

Mr. King felt it

On the basis of August and September

difficult to conclude that the country was in

great period of advance.

a

He did not want to sound overly pessimistic

although he had been somewhat that way since the beginning of this year.

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10/3/61

He would not resolve doubts in

of less ease, as Mr.

such instruction.

the Committee's operations on the side

Treiber had suggested,

but would vote against any

With the recent strength apparent

in the longer

term Government securities market,

he saw no reason for the Committee's

taking action that would result in

an increase in the bill rate.

He

hoped that rate could stay about where it is and would not object if a

slight decline occurred.

in his judgment,

the country was simply not

experiencing a dynamic recovery at this point,

recognized the more likely it

in

good for the economy.

and the sooner this was

was that Committee

actions would result

He would make no change

3 1 the discount rate

or in the directive and would continue the special authorization with

respect to longer-term Government

securities.

He wouuld make no change

whatsoever in the degree of ease in the market.

Mr.

Shepardson said that the presentation of the economic

situation given this morning showed clearly a tweedle-dee tweedle-dum

situation.

On balance, a continuation of the policy that the Committee

had been following recently was indicated.

He differed a little

from

Mr.

King in that he was inclined to agree with the suggestion that

Mr.

Treiber had made that if

any doubts had to be resolved, he would

resolve them on the side of less ease.

fortunate if

In fact,

there were some rise in the bill

international situation.

Other than that, Mr.

he felt it

would be

rate in the light of the

Shepardson said that he

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10/3/61

believed the Committee should continue its policy and operations on the

same basis as during the past several weeks, bearing in mind that the

time was getting closer when the Committee might have to be prepared to

move promptly to modify policy.

Mr. Robertson said he did not think there was much basis in the

economic information available for a great difference of view among the

members of the Committee, and that this was borne out from the comments

made thus far,

The outlook seemed clear:

there was very little

justification for any deviation from present policy in the light of the

underutilization of resources in productive capacity or manpower.

Certainly, ease should be maintained.

However, he was one who could

understand the third alternative that Mr. Thomas had presented in his

summary of possible courses, namely, that recovery forces would prove

cumulative and that restraint on credit expansion would be needed at

some stage.

His feeling was that there would be continuing expansion

and the time would come when there was a possibility of recurrence of

inflationary conditions with pressures increasing all along the line.

The Committee should be prepared to act at that time.

Although he

would make no change in the direction of policy at this time, he

would be happy if during the next three weeks operations would strive

for net free reserves in the $500-$550 million range--no great vari

ation from the degree of ease recently.

He would suggest that the

10/3/61

-14-

Committee should not continue to guide its

bill

policy by the level of the

rate--too much emphasis had been put on the bi]l rate.

he would make no change in

the directive,

no change in

In

sum,

discount rate,

and proceed as indicated.

Mr.

Mills said that the economic experience since 1958 had been

arbitrarily posed as a basis for comparison with the 1961 experience

and also as a basis for policy considerations by the Committee.

not at all

sure that 1958 as a benchmark in

out to be a delusion and a myth.

retrospect would not turn

There were other benchmarks that might

have been chosen, possibly with equal comparability.

background,

Mr.

He was

With that as a

Mills said that his approach to policy formulation was

a classic one and a much more spartan approach than had been expressed

thus far in

the discussion.

He then presented a

statement as follows:

Students of public finance are the mo;t frequent and vocal

critics of financing a deficit in the national accounts through

the commercial banking system as being danrerously inflationary,

but in the case of the United States no real clamor has been

raised against that practice as it now exists.

Over the past

year our commercial banks have increased their :oldings of

United States Government securities by substantially more than

the increase in the Federal deficit and debt and, on prospect,

can be expected to add still

more to their portfolios.

The

absence of criticism for this development has been buried in

the concern over what has been a lethargic increase in the

money supply and a continuing evidence of slack in the economy,

which have overridden doubts about the inflationary implications

of present financial trends.

the fact that prices have been

generally stable has been taken as a favorable financial omen

when, in fact, their stability revives the possibility, in my

mind, that the economy has not as yet completed downward passage

through a major business cycle and that full recovery from its

10/3/61

-15-

stagnating effects still lies ahead. If this should prove to

be the case, the constant piling up of reserves in the

commercial banking system is storing up trouble for the

future at the time then the holders of time and savings

deposits will begin to convert them to more dynamic economic

uses. A strong demand for bank credit will then appear which

can be readily satisfied by bank substitution of loans for

investments in United States Government securities subject to

the restraining influence of higher reserve requirements on

the newly created demand deposits that will develop in

replacement of a reduction in time deposits. Upward price

pressures would certainly occur under these conditions and the

ingenuity of Federal Reserve System officials would be taxed

to devise ways to prevent the eruption of dangerous inflation

ary financial conditions.

In my opinion, the Federal Reserve System should not be

quiescent about permitting this possible kind of situation to

develop and should act now to limit, and maybe to absorb, the

excessive liquidity in the commercial banking system, which

liquidity is now giving evidence of spreading to other sectors

of the economy.

A start should be made in bringing down the

level of positive free reserves to around $400 million, and if

in that process interest rates move up, an increase in the

discount rate to 3-1/2 per cent will be in order.

For that

matter, the disparity between short-term interest rates in the

United States and Great Britain argues for higher rates in

this country as a hindrance against renewed gold losses and as

a token of our determination to counter inflationary influences.

Frequent allusions in the financial press to a seeming lack of

Federal Reserve System recognition of the need for moving toward

a restraining monetary policy indicates that in the public's

mind such action is past due.

In any event, it would be folly

to look to Great Britain to lower its interest rate structure

in order to accommodate a level of interest rates in the United

States that is becoming unrealistic.

No change in the directive is suggested and a renewal of

the special authority is in order. In the latter respect, I

wish to record a modification of my earlier position in favor of

disengagement from oven market actions outside of the Treasury

Although opposing purchases of longer-term United

bill sector.

States Government securities for the System Open Market Account

and recommending divestment of those now held, further

experience has justified operations in short-term United States

10/3/61

-16

Government securities other than Treasury bills as being in

the interest of a flexible conduct of monetary policy.

However, the advantages of the policy flexibility that has

been gained through these dealings would be enhanced if more

emphasis were placed on sales of such securities when

withdrawing reserves as compared to the weight that has been

given to purchases made to supply reserves.

Mr.

Wayne said that, despite some hesitations,

business remains basically strong.

Fifth District

In August nonmanufacturing employment

was at a record level due to widespread gains, the largest of which were

in government,

construction,

services, and trade.

In manufacturing,

however, both employment and man-hours showed less than normal seasonal

increases, largely because of conditions in nondurable goods industries.

Opinions received in a recent survey of manufacturers around the District

were less optimistic than they were three weeks ago but still

indicated

that in September factory production was moving up slightly.

On balance,

these reports showed gains in factory employment and weekly hours backed

by generally good levels of new orders.

been rising since the first

moderately; yet in

uncertain demand,

troublesome.

Textile order backlogs have

of the year and inventories are down

some sectors of the industry problems relating to

rising costs, and foreign competition are still

Retail sales are reportedly about the same as they have

been all year--good but not good enough.

Contract construction workers

numbered more than 300,000 in August, a new record for the District; and

the value of building permits in principal cities exceeded the previous

high by a substantial margin.

Responding to stronger demand again last

10/3/61

month,

-17

coal mines hired more labor thus maintaining this year's pattern

of fairly stable employment in

sharp contrast to annual declines

averaging 10 per cent over the last three years.

Business and all other (primarily consumer) loans at District

banks have shown notable strength in recent weeks, moving up at a

better-than-seasonal pace.

off somewhat in September,

The rate of increase in time deposits tapered

and in the final week for which data are

available these deposits declined for the first time since April.

District money market banks made large net sales of Federal funds in

the last two weeks, after moderate net purchases in early September.

In the area of policy, Mr.

Wayne said that developments since

the preceding meeting provided no basis for any significant change in

posture.

The current recovery now seemed to be a bit more moderate than

it, appeared three weeks ago, and there was still

no evidence of the

beginning of any general upward movement of prices.

As often noted, the

Treasury's schedule of financing left few times in which it

would be

feasible to make any substantial changes of policy and none of the

openings appeared in the weeks just ahead.

In the international field,

London bills have had a relatively small and varying advantage over

New York bills on a covered basis for several weeks.

fall in the domestic bill rate, if

other factors remain unchanged, might

start an outflow of short-term funds.

no more restraint,

Any substantial

The domestic situation called for

the international position called for no more ease,

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10/3/61

and the Treasury schedule called for stability.

obvious--the Committee should maintain its

The answer seemed

present posture, which

meant no change in the discount rate or in the substance of the

directive.

He also favored renewing the special authorization for

purchases of longer-term securities.

Mr.

Clay said that present circumstances appeared to call for

a continuance of essentially the same monetary policy that the Federal

Reserve System had been pursuing.

Economic activitv was continuing to

expand but there was no evidence of overexuberance on the part of

either business or consumers.

In fact, the pace of expansion had

moderated somwhat from the pronounced forward thrust of the initial

months of the upswing.

Moreover,

the private demand for credit in both

the commercial banks and the capital markets did not give evidence of

strong cyclical expansion.

Altogether, these factors indicated that

monetary policy should continue its

role of encouraging the expansion

of economic activity and the fuller utilization o' manpower and other

resources.

During part of the period until the next meeing of the Committee,

Mr.

Clay noted that the Treasury's financing activities would need to be

taken into account in conducting the System's open market operations.

Avoidance of any change in

the System's monetary policy would be

consistent with both the needs of the Treasury and the continued pursuit

of the appropriate policv of monetary ease.

He also suggested that, in

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10/3/61

conducting open market operations, the level of the Treasury bill rate

would need to be watched with reference to the flow-of-funds problem.

Recently, the bill rate had been at about the lower limit that would

appear to be in order so far as this aspect was concerned.

No change

was called for in either the discount rate or the directive, Mr. Clay

said, and the special authorization with respect to operations in

longer-term Government securities should be renewed.

Mr. Allen said that the situation was about the same as at the

last meeting in

that business activity continued to increase,

less rapid rate than in the spring and early summer.

but at a

In the three weeks

ended September 16 new claims for unemployment

compensation in

Seventh District were 20 per cent less than in

the same period last year,

compared with a drop of 11 per cent for the nation.

the

In August, Milwaukee

was reclassified from "substantial labor surplus" to "moderate unemploy

ment" and was the only large city in the nation reclassified in August.

He believed that before the end of the year a number of other seventh

District

Flint,

cities would be reclassified upward, suchas Rockford, Detroit,

and the Gary-Hammond steel area.

In the area of prices, Mr.

Allen said that there was a good deal

of talk about tough price competition in such lines as industrial

equipment, plumbing and heating equipment, farm machinery, radio

television,

and petroleum products.

A representative of the steel

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10/3/61

industry had reported that while officials resent the President's

public request that the industry refrain from raising prices, there

arpeared to be little chance of an "across the board" increase in any

case.

The closing of General Motors plants incident to labor contract

negotiations affected both production and sales of automobiles for

September,

Mr.

Allen stated,

but if

Ford and Chrysler escaped without

shutdowns,

Detroit analysts expected the best fourth quarter since

1955, with sales of 1,600,000 units and production of 1,800,000 units.

He noted that the industry was in disagreement as to which of the 1962

models should be labeled compact, and until a standard was devised and

agreed upon,

percentage figures of compact production and sales would be

meaningless.

Borrowing at the discount window of the Chicago Reserve Bank

continued negligible and member banks which operates inthe Federal funds

market had been net sellers, with one or two exceptions.

Weekly

reporting banks in Chicago now hold $2.5 billion of Government securities,

of which about half mature within one year.

This was twice as much as a

year ago and supported the statements that the banks were able as well

as willing to handle considerable additional loan demand.

Mr.

Allen repeated that he felt we were

the time of the last meeting.

.bout where we were at

The rate of rise in business activity had

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10/3/61

slowed,

but the rise was going on and there was widespread confidence

that conditions would continue to improve.

was still high.

The number of unemployed

The international problems were no less serious.

And

treasury financing continued to be a matter which must be taken into

consideration.

His conclusion was that the Committee should carry on

until the next meeting its

effort to maintain that degree of ease in

the money and credit markets that had existed for some time.

not change the discount rate or the directive,

the so-called special authorization

He

would

but he would discontinue

permitting purchases of longer-term

Government securities.

Mr. Deming said that the Ninth District economy continued to

move more slowly than that of the nation.

quarter showed a marked slowdown in

A look at the whole third

over-all activity in

July and

September.

District banking

continued to experience relatively weak loan demand.

July-August data

August,

for all

followed by some strengthening in

member banks showed loan declines larger than in

comparable month in

in

most years.

this trend.

the postwar years,

and these contrasted with gains

City bank data for September showed a continuation of

Deposits rose,

than the decline in loans.

significantly.

almost any

but investments increased substantially less

Bank liquidity consequently had improved

There had been no borrowin- at the Reserve Bank during

the last week, and city banks had not borrowed at the Reserve Bank for

many months.

LO/3/61

-22

Mr. Deming went on to say that the information given in the

chart show this morning confirmed his feeling of uncertainty about the

national picture.

This uncertainty had to do more

with

implications for financial

markets and for credit policy of further

economic expansion than with the probabilities of

itself.

the

such expansion

The Treasury financing situation made the policy prescription

for the next three weeks relatively easy for the Committee, is,

that

no

change in policy, in the degree of ease, in the Committee's directive,

,r in the discount rate.

Although this policy decision was relatively easy, Mr.

felt that it

miht be inadequate.

for policy change

The "oopen

season'

came on to the Committee quickly and would be short.

He was disturbed

ly what seemed to be increasing talk about price advances.

be no discernible price

pressures, he said, and

Deming

There might

analysis might indicate

little in the short-run future, but there was more talk about increasing

prices than he wished to hear.

He also was disturbed by some implications

of outside commentators that economic expansion could be accompanied by

financial pressures, and by the further implicati on that Federal

Reserve policy might continue to be easy for an indefinite period.

was impressed by the words used in the summary concluding the chart show

presentation this morning,

"Restraint is

not yet needed . . . .

Yet, it

is important to avoid laying the seeds for unsound debt expansion and

inflationary developments."

Thus, it seemed to him that the chances were

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10/3/61

better than even that monetary policy would move toward some restriction

in the future and that for the immediate period doubts should be

resolved on the side of less ease.

Mr. Swan said that business activity in the Twelfth District

continued to reflect only moderate or quite gradual improvement.

However,

nonfarm employment on a seasonally adjusted basis rose significantly

faster in the District than in the nation during August.

District had been lagging considerably in

employment.

Previously, the

The rise during

August was largely offset by an increase in labor force, however,

there was little

change in the unemployment situation.

continued at a quite satisfactory level during August.

and

Construction

Department store

sales, after a disappointing August,

showed year-to-year gains during

the first three weeks of September.

Bank loans had increased in almost

all categories during the three weeks ended September 20 but the rise

was less than seasonal except for real estate loans.

Banks had been

heavy sellers of Federal funds during the three weeks ended September 20

but more recently they had been about in balance.

Mr. Swan commented that, in view of the rather wide fluctuations

in other factors affecting reserves during the past three weeks,

he

thought the Desk had done a very good job in coming out about where it

had in its

operations.

As to policy, he agreed with those who felt that

operations should continue to produce about the same degree of ease in

the next three weeks, partly because an even keel was called for by the

10/3/61

-24

Treasury financing but

also because he could see no indication of

developments that called for any lessening in the degree of ease in the

period immediately ahead.

Consequently, his view would be that no

change in the Committee's directive or policy should be made and that

there should be no change in discount rate at this t:me.

Also, he

would continue the authorization for surchases of longer-term securities.

Mr.

Irons said that estimates of damage cau3ed in the Eleventh

District by the recent hurricane ranged rather widely but that it appeared

the dollar losses would be much less than some

ofthe figures earlier

mentioned.

His own judgment was that the totak dollar loss might be

around $300

million which insured coverage of about $100 million.

Repair

of damage would give some stimulus to construction and plant expenditures,

but the return of most plants to productive act

rapid.

With respect to

which had

been surprisingly

current conditions in the District generally,

employment had shown little change while unemployment had decreased

slightly in recent weeks.

July and August,

Construction contracts, which had declined in

were expected to be higher during the next few months,

partly as a result of repair of damage caused by the hurricane.

Agricultural conditions were very good except in the hurricane area.

loans had shown a fairly sizeable increase in the past three weeks,

a moderate decline in investments.

deposits had declined.

Bank

with

Demand deposits had risen while time

Banks were reasonably liquid and borrowings from

10/3/61

-25

the Reserve Bank were small with no city banks borrowing recently.

In

sum, District conditions could be described as reasonably satisfactory

and showing a broad upward movement.

Mr. Irons felt that this condition

would continue and possibly be stimulated by reconstruction from the

hurricane.

As to the national picture, Mr.

Irons felt that with economic

conditions as described earlier in this meeting and with the Treasury

financing situation and international conditions being what they were,

the Committee could strike a balance between the domestic and

international situation by continuing a policy of ease that would be

reflected in free reserves of around $450 to $500 million, a bill rate

in the 2-1/4 to 2-1/2 per cent range,

per cent area, and little

Mr.

Federal funds in the 2 to 2-1/2

borrowing at the Federal Reserve Banks.

Irons said he liked the comment that Mr. Treiber had made that

doubts should be resolved on the side of less ease, although he felt

the System certainly should supply seasonal requirements and perhaps a

little

more.

Beyond that he would be inclined to the view Mr. Mills

had expressed as to what might be ahead in the more distant future.

He would make no change now in discount rate or in the Committee's

directive and would renew the authorization permitting purchases of

longer-term Government securities.

Mr. Ellis summed up the New England situation by stating that

it was caught up in a vigorous lull.

The lull in production continued

-26

10/3/61

during August,

and the rise in employment also was stalled in August.

Insured unemployment seemed to be declining more recently and in the

first week of September was below the rate of a year ago for the first

time since March 1960.

Business loans had shown more than the seasonal

growth as had deposits.

Banks continued to expect a substantial loan

demand this fall and felt well equipped to meet it.

They did not

visualize any boom conditions.

In the field of monetary policy, Mr.

Ellis said that he had

been impressed by the chart show this morning,

summary presented by Mr. Thomas.

had outlined, that is,

particularly by the

The third alternative that Mr. Thomas

that recovery forces would prove cumulative and

that restraints on credit expansion would be needed at some stages,

seemed a likely development in Mr. Ellis'

opinion,

There was no

evidence that credit was unduly stimulative, but the most likely

projection was that it

would become so if

present position for too long.

in

credit could be quite sharp.

policy were continued in its

As Mr. Mills had indicated, the run-up

Mr. Ellis said he was glad that the

Committee did not have to consider a change in policy at this time in

terms of the Treasury financing schedule.

The only concession he would

make toward the longer run view he had expressed was that he would agree

with Mr.

Treiber's suggestion that doubts be resolved on the side of

less ease and that the short bill rate be permitted to range somewhat

-27

10/3/61

higher.

He was not prepared to seek a lower free reserve level or to

accept aterially

higher bill rates.

indicating a change in

There should be no overt action

Committee policy, no change in discount rate,

and he would continue the special authorization with respect to

Government securities' purchases.

Mr. Balderston stated that the consensus appeared to call for

no change in the Committee's directive and for continuation of the

degree of ease that had prevailed during recent weeks.

Most Committee

memberswould make no change in the disount rate, and the special

authorization for transactions in securities outside the short-term

maturity range would be renewed with Messrs. Allen and Robertson

dissenting.

He inquired whether there were dissents from the policy

indicated by the consensus other than those of Messrs. Allen and

Robertson on the special authortzation.

Mr

Mills said that he wished

to have recorded his dissent from the policy indicated by the consensus.

For reasons that he had indicated earlier, he believed that policy should

move more positively to a degree of less ease.

He still would contemplate

a reserve base ample or more than ample to support the credit needs of

the economy, but in his judgment there were more than enough reserves

now to provide a base for satisfying such credit requirements and in

fact he was fearful that the amount of shrinkage he had indicated would

still

leave reserves at too high a level.

He recognized, however, that

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10/3/61

in moving back from the present degree of ease the Committee must move

cautiously and experimentally.

Mr. Mills also said that, while he

dissented from the consensus as to policy, he would approve the wording

of the existing directive to the Federal Reserve Bank of New York.

Mr.

Balderston asked whether there were other dissents, and

Mr. King raised the question whether the consensus included any

statement as to resolving doubts on the side of restraint.

After Mr.

Balderston stated that no such provision was in the consensus that he

had presented, there was a general discussion of its

wording.

During

this discussion, Mr. Shepardson and several others indicated that they

would prefer that doubts be resolved on the side of less ease, but the

Chairman pointed out that less than a majority of the members of the

Committee had so expressed themselves.

Therefore, the consensus that

he had presented included nothing on resolving doubts either way.

then inquired of Mr.

He

Rouse whether he had any questions as to the

interpretation of the consensus as stated, and the latter responded in

the negative.

Mr. Balderston indicated that the consensus as he had stated it

would be approved,

Mr. Mills dissenting, and the directive to the Federal

Reserve Bank of New York would be renewed without change.

Thereupon, upon motion duly made and

seconded, it was voted unanimously to

direct the Federal Reserve Bank of New York

until otherwise directed by the Committee:

10/3/61

-29

(1) To make such purchases, sales, or exchanges (includ

ing replacement of maturing securities, and allowing maturities

to run off without replacement) for the System Open Market

Account in the open market or, in the case of maturing

securities, by direct exchange with the Treasury, as may be

necessary in the light of current and prospective economic

conditions and the general credit situation of the country,

with a view (a) to relating the supply of funds in the market

to the needs of commerce and business, (b) to encouraging

credit expansion so as to promote fuller utilization of

resources, while giving consideration to international factors,

and (c) to the practical administration of the Account; pro

vided that the aggregate amount of securities held in the System

Account (including commitments for the purchase or sale of

securities for the Account) at the close of this date, other

than special short-term certificates of indebtedness purchased

from time to time for the temporary accommodation of the

Treasury, shall not be increased or decreased by more than 41

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.

Mr. Balderston noted that Messrs. Allen and Robertson had indicated

that they would dissent from action to renew the special authorization

regarding purchases of longer-term Government securities for the System

Open Market Account and this was confirmed.

The Committee then authorized the Federal

Reserve Bank of New York, between October 3,

1961, and the next meeting of the Committee,

within the terms and limitations of the

directive issued at this meeting to acquire

10/3/61

-30intermediate- and/or longer-term Government

securities of any maturity, or to change the

holdings of such securities, in an amount

not to exceed $500 million.

Votes for this action; Messrs. Balderston,

Irons, King, Mills, Mitchell, Shepardson, Swan,

Wayne, and Treiber. Votes against this action:

Messrs. Allen and Robertson.

It

was agreed that the next meeting of the Federal Open Market

Committee would be held on Tuesday,

October 24, 1961.

The meeting then adjourned.

Secretary