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, January 9, 1962, at 10:00 a.m.
PRESENT:
Mr. Martin, Chairman
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Balderston
Irons
King
Mills
Mitchell
Robertson
Shepardson
Swan
Mr. Wayne
Mr. Fulton, Alternate
Mr. Treiber, Alternate for Mr. Hayes
Messrs. Ellis and Deming, Alternate Members of
the Federal Open Market Committee
Messrs. Bopp, Bryan, and Clay, Presidents of
the Federal Reserve Banks of Philadelphia,
Atlanta, and Kansas City, respectively
Mr. Young, Secretary
Mr. Sherman, Assistant Secretary
Mr. Kenyon, Assistant Secretary
Mr. Hackley, General Counsel
Mr. Thomas, Economist
Messrs. Baughman, Coldwell, Einzig, Garvy,
and Noyes, 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. Furth, Adviser, Division of International
Finance, Board of Governors
Mr. Knipe, Consultant to the Chairman, Board of
Governors
Mr. Yager, Chief, Government Finance Section,
Division of Research and Statistics, Board
of Governors
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Mr. Broida, Economist, Government Finance
Section, Division of Research and Statistics,
Board of Governors
Mr. Francis, First Vice President, Federal
Reserve Bank of St. Louis
Mr. Hickman, Senior Vice President, Federal
Reserve Bank of Cleveland
Messrs. Eastburn, Jones, and Tow, Vice Presidents
of the Federal Reserve Banks of Philadelphia,
St. Louis, and Kansas City, respectively
Messrs. Stone, Black,and Brandt, Assistant Vice
Presidents of the Federal Reserve Banks of
New York, Richmond, and Atlanta, respectively
Mr. Willis, Economic Adviser, Federal Reserve
Bank of Boston
Mr. Sternlight, Manager, Securities
Department, Federal Reserve Bank of New York
Mr. Hellweg, Economist, Federal Reserve Bank of
Minneapolis
Before this meeting there had been distributed to the members
of the Committee a report of open market operations covering the period
December 19, 1961, through January 3, 1962, and a supplementary report
covering the period January 4 through January 8, 1962.
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:
In our operations since the last meeting of the Committee, we
have tried to maintain reasonable continuity and stability in the
money market in a period beset by unusual holiday and year-end
gyrations. Under the circumstances, we were necessarily guided
mainly by the feel of the market. The three-month bill rate
worked to the upper part of the 2-1/2 - 2-3/4 per cent range
until yesterday, when it moved up further to 2.82 per cent in
reflection of the Treasury bill auctions yesterday and today.
The Federal funds rate was quite firm through the first half of
the period, holding at the 3 per cent "ceiling" for several
consecutive days between Christmas and New Year, but it has
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since receded to a 2 - 2-3/4 per cent range.
At the same time,
the weekly figures published on free reserves have been such as
to give no overt indication to the public of a significant shift
in policy. Estimated total reserves substantially exceeded
the hypothetical projections that have been developed by the
Board staff, largely because of special--and apparently
In view of the pressures already
temporary--year-end factors.
apparent in the money market, it would have been impracticable
to attempt to hold total reserves down to the hypothetical
projected levels.
The Treasury's announcement on January 3 of its cash
rates,
financing plans also resulted in upward pressure on bill
since the market has been concerned that more bills might be issued
in its second cash offering, expected to be announced next
Thursday. The Treasury has been unwilling to confine its range
of choice by indicating to the market that it would do its
second job outside the bill area.
Another unsettling influence on short rates has been the
situation in negotiable time certificates of deposit. So far
the largest banks, whose certificates trade freely and command
the lowest rates, have not, with one exception that we know of,
gone beyond 3-1/8 per cent for six months and 3-1/4 per cent
for one year.
Very few new certificates have been issued at
these rates in New York. The First National Bank of Chicago
has been aggressive in offering certificates at 3-1/4 per cent
for six months and 3-1/2 per cent for one year, but has not
issued many so far. The only other banks now offering comparable
rates are those whose certificates are not competitive with the
best names. The outcome of the Treasury's auction today, and
of the second cash offering, for which the books will probably
open next Monday, will have a further bearing on the time
certificate situation. Rate competition from Treasury bills
and other instruments, as well as between the large banks, may
eventually result in an upward revision in the rates.
As to the market for longer-term issues, the atmosphere
continues to reflect basic caution despite a somewhat better
feeling which has resulted from an improvement in the corporate
and municipal markets and a related belief that rates will not
necessarily move sharply higher in the near future. The calendar
of forthcoming new corporate issues is moderate until the $300
million A.T. & T. issue in the middle of February; the municipal
calendar is more substantial.
The Treasury seems inclined to offer a coupon issue in its
new cash financing to be announced Thursday, possibly a reopening
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of an outstanding issue of notes or intermediate bonds. Payment
for the issue will be on January 23, after which there will be
a gap of a week before a decision will be made on the $11 billion
February refunding.
Thereupon, upon motion duly made and
seconded, the open market transactions
during the period December 19, 1961,
through January 8, 1962, were approved,
ratified, and confirmed.
Mr. Noyes presented the following statement with respect to
economic developments:
The professional pessimist can still ply his trade by
speculating as to whether the world will end in the bang of
a fireball or the whimper of fallout, but there can be little
question that 1961 ended on a stentorian note. While this was
evident in almost every sector, the most spectacular improve
ments around the year end were in retail trade and unemployment.
Retail sales, which had fluctuated in a narrow range earlier in
the recovery, moved up vigorously in October and November.
Department store sales were at a record 157 per cent of the
1947-49 average, and trade reports suggest further improvement
in the nonautomotive group in December--but perhaps not enough
to carry the total up further in the face of the drop in auto
sales from the advanced 7 million annual rate in November to a
6.1 million rate in December.
Unemployment in December held at the 6.1 per cent level
reported for November--a favorable sign when one considers the
size of the drop from October to November and the persistence
of near 7 per cent rates earlier in the year.
We are still uncertain as to whether industrial production
in December will be up 1 or 2 points, but an increase to 115 or
116 seems assured.
Like auto sales, total construction activity receded from
the advanced November rate, but it was still at a high level
and within the total private residential construction continued
to advance.
We are estimating GNP for the fourth quarter at $542 billiona gain of $16 billion, or 3 per cent, from the third quarter. As
indicated by the rise in retail sales, the striking feature of
the improvement in this quarter was the fact that it involved a
sizeable increase in final takings, as well as a somewhat higher
rate of inventory accumulation.
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Consumer credit extensions picked up sharply in October and
November, primarily as a result of improved auto sales. The net
addition to outstandings in December is not likely to be so
large, but there will probably be some further increase, placing
the fourth quarter in sharp contrast to the first
nine months of
little
change.
Generally, prices have remained stable. The consumer price
index declined by an insignificant amount in November and there
is a possibility that December may show another small decline.
If anything, sensitive commodity prices appear to have edged up
a little since I reported to the Committee three weeks ago, but
they are still
below their level at the end of November.
Common stock prices have declined rather sharply since the
turn of the year, despite the more optimistic appraisal of the
over-all outlook and the prospects for corporate profits. However,
the rally late yesterday afternoon may mark the end of this decline.
The widespread expectation is that the President will
propose a balanced budget in his message to the Congress later
this month--a not inconsiderable increase in expenditures being
offset, along with the deficit in the current fiscal year, by
a sizeable increase in revenues stemming from expanded economic
activity. Meanwhile, improved sales and profits in the fourth
quarter have probably already moved Government expenditures and
receipts on an income and product account basis close to balance.
No commentary on the economic situation at the turn of the
year would be complete without some mention of the record expansion
of bank credit--and especially of bank loans in December. The $775
million increase in business loans at city banks, which substantially
exceeded the gain in any corresponding period, was taken by many
observers as the strongest evidence to date that we have moved out
of the period of recovery into the expansionary phase of the cycle.
Certainly, the increased willingness and capacity of borrowers is
further evidence of the strength of the upward thrust.
There seems to be universal agreement that the most important
single threat to continued orderly economic expansion at the
present time is the situation surrounding the expiration of the
steelworkers' contract at mid-year. Not only the possibility of
a prolonged strike but inventory accumulation in anticipation of
either a strike or a substantial upward price adjustment could
have a damaging effect on the unusually good balance which has
So far, there has been quite a
marked the recovery to date.
bit of talk about inventory build-up, but little
evidence that
physical inventory is actually being taken on in large amounts
relative to current consumption.
Recent reports that steel
orders have leveled out at fairly high rates suggest more of a
"wait and see" attitude for the moment than a scramble to build
up stocks.
1/9/62
In summary, one might say on the one hand that neither market
conditions nor current rates of material and human resource utiliza
tion suggest an imminent inflationary situation. On the other hand,
the rate of expansion in the fourth quarter does not seem to call
for further autonomous stimulation of the economy in the form of
rapid credit expansion.
In these circumstances, it is difficult to say what sort of
a policy with respect to credit and monetary expansion would be
conducive to orderly and sustainable growth. Even if one does not
agree with those who argue that it is always a wise policy to let
market forces reflect themselves against the background of a
steady moderate rate of growth in bank reserves, such a policy
would seem to have much to recommend it in the present situation.
Mr. Mitchell inquired whether the ratio of retail sales, seasonally
adjusted, to disposable personal income was high or low in November and
December relative to previous standards,
in the first
to which Mr. Noyes replied that
nine months of the year retail
sales were low by historical
standards in relation to disposable personal income.
In October and
November the ratio moved up, although not to anything approaching the
levels that prevailed in
the early 1950's.
Mr. Thomas presented the following statement with respect to
credit developments:
In recent weeks credit markets have been dominated by holiday
and year-end credit demands, which were even larger than usual.
Bank credit increased sharply and, although the volume of available
reserves increased substantially as a result of market factors,
the supply was not enough to meet demands. Member banks increased
their borrowings at the Reserve Banks and in the Federal funds
market, and short-term money rates rose somewhat to the highest
levels since mid-1960. Long-term bond yields, after rising in
November or early December, were faily steady during the past
three weeks.
Publicly-offered new capital issues have been in relatively
small volume, but there was a substantial volume of private
placements of corporate securities during December.
Prospects
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are that offerings both of corporate and of State and local
government issues will continue seasonally light in January.
Capital markets have been influenced, however, by the announcement
that the A.T. & T. Corporation will offer $300 million of new
securities for cash in February. Common stock prices, after
reaching new high levels early in December, have declined markedly
during the past two weeks for reasons not yet evident, unless it
is that they had risen too much in terms of prospects for profits.
The most striking recent credit development was the large
increase in bank credit during December.
The expansion in bank
loans was close to or above the record increase in December 1960.
The increase seems to have been concentrated at city banks to an
even larger extent than is usual for December.
Loans to businesses
and to finance companies for tax and other year-end needs increased
somewhat more than usual, and loans on securities showed large
increases, as is customary in December.
There have also been some
fairly large loans by U.S. banks to foreign borrowers.
In addition,
banks added rather large amounts to their holdings of securities,
other than Governments.
Although city bank holdings of Treasury
bills increased substantially, these increases were largely offset
by declines in holdings of other Government securities.
Dealers, after reducing their positions from the high levels
reached in October, showed usual seasonal increases in December.
They increased their borrowings--largely at banks--to finance their
enlarged positions.
Partial figures for the week ending January 3 indicate that
the December expansion in bank loans and investments has been
followed by a rather large decline at city banks, which may have
been concentrated principally in New York and Chicago city banks.
Notwithstanding this decline, the figures for the past five weeks
as a whole generally equal or exceed those for the same period
last year, which was very high. It will be necessary to observe
further developments in January before determining whether the
sharp expansion in December was a transitory development or is
indicative of a trend.
As a consequence of the bank credit expansion, the money
supply increased much more than seasonally in December and ended
the year more than 3 per cent larger than a year ago, with an
annual rate of increase of over 6 per cent since last August.
These figures should be appraised, however, in the light of the
7 per cent or more increase in G.N.P. in the past year and of the
fact that since mid-1959 the money supply has increased by little
over 1 per cent, while G.N.P. grew by more than 10 per cent. At
the same time consideration must be given to increases in the
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public's holdings of other liquid assets, which have been sub
stantially greater than the money supply growth.
U.S. Government deposits at banks also increased in December.
The increase in time deposits at commercial banks, however,
slackened considerably from the rapid pace of the past year.
New York City banks showed a decline in time deposits, other
The effect of higher
than savings accounts, during December.
effective at a
become
just
have
which
deposits,
rates on such
be
seen.
to
remains
of
banks,
number
considerable
It may reasonably be concluded that further expansion in
economic activity toward capacity potentials, which are also
growing, will require some further expansion in the money supply
and in general liquidity.
Growth in deposits has resulted in a greater than seasonal
As shown in the chart in the
expansion in required reserves.
staff memorandum, required reserves against private deposits,
after adjustment for seasonal variations, reached a very high
level in the week ending January 3 and, with excess reserves
averaging nearly $750 million, the level of total available
reserves was even higher. Reserves were supplied principally
by an even greater than seasonal increase in float. The holi
day currency demand--net of changes in vault cash of bankswas largely counterbalanced by a return flow of currency to
the banks in the latest week. There was some drain of reserves
from a gold outflow. Absorption of reserves by System sales
in the open market was largely offset by additional member
bank borrowings at the Reserve Banks.
These credit developments may be appraised in light of the
Committee's current economic policy directive, which in brief
calls for providing reserves for monetary expansion at a some
what slower rate than in the immediate past, while placing
rates at close to the top of
emphasis on continuance of bill
It might be said that credit and monetary
the recent range.
expansion, after adjustment for usual seasonal variations, has
been at a faster pace than that indicated in the directive,
but this expansion has been based on borrowed reserves, not on
Bill rates, as a
reserves supplied by open market operations.
consequence of the pressure of credit demands upon reserve
availability, have remained at close to the level indicated.
No overt action was taken by the Management to reduce the
supply of reserves below the seasonal pattern or to raise in
terest rates. Thus, in the light of circumstances, the Manage
ment may be said to have conformed to the directive.
During the current week, it appears that required reserves
are declining considerably more than seasonally and total re
serves are also being reduced by a combination of market factors,
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System open market operations, and a sharp reduction in member
bank borrowings.
The reductions in required and total reserves this week,
however, will not offset all of the excess expansion in required
reserves in December but may bring total reserves down close to
the projected level based upon a 4 per cent expansion since the
end of November.
Further seasonal declines in required reserves--aggregating
over $500 million--are to be expected during the next five
weeks, as well as a substantial return flow of currency during
January. The effects of these additions to reserve availa
bility are likely to be to a large extent offset by a decrease
in float from the recent abnormally high level. Because of
sales of securities already effected for System Account, free
reserves might amount to around $400 million this week and
next, unless float continues abnormally high.
In the last two weeks of January, in the absence of System
sales or of less than seasonal credit contraction, reserve
availability would increase substantially as a result of market
factors. In February, March, and April, only moderate week-to
week fluctuations in System operations will be necessary in order
to maintain an adequate supply of reserves for further growth in
the economy.
In view of the rapid credit and monetary expansion that
occurred in the past month, the generally more optimistic views as
to economic prospects, and the continued threat of international
drains of dollars, some restraint in supplying additional reserves
seems appropriate at this time, particularly if credit demands
should remain strong. But further credit and monetary expansion
If contraction should
at a moderate pace is certainly desirable.
exceed usual seasonal amounts in the next few weeks, then restraints
would not be proper, unless needed to prevent a decline in interest
rates that would lead to an outflow of funds abroad and a loss of
gold.
It is suggested that, in view of the continued potential
for expansion in the domestic economy and in the absence of
evidence of speculative excesses, a policy of supplying reserves
through open market operations in amounts adequate to support
a 3 per cent per annum rate of expansion in the money supply,
plus a somewhat faster rate of increase in time deposits at
member banks, if that should occur, would probably not be excessive.
In fact, a somewhat more rapid rate of expansion might be desirable,
but if forces in the economy are strong enough to call for such
an increase, the additional reserves needed could be obtained
through member-bank borrowing. If, on the other hand, speculative
or unsustainable credit demands develop, then interest rates can
1/9/62
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be permitted to rise and the discount rate should be increased.
But, as yet, the evidence does not point to the need for any such
overt restrictive action.
Mr. Furth presented the following statement with regard to the
balance of payments:
Once more, there has been no significant change in the
international position of the United States.
Preliminary
and fragmentary figures for December confirm our pessimistic
forecast:
net transfers of gold, foreign convertible cur
rencies, and liquid dollar assets to foreigners have remained
in the neighborhood of $500 million, as in the two preceding
months, although December usually brings a substantial sea
sonal improvement in view of year-end debt payments of foreign
countries to the U. S. Treasury of about $200 million.
As a result, the net transfers for the fourth quarter
probably were around $1.5 billion, as against $0.9 billion in
the third quarter and $1.2 billion in the fourth quarter of
1960. The deterioration remains if we consider only those
payments that are considered part of the so-called basic
balance, i.e., payments on current account and on long-term
capital account, and if we eliminate extraordinary transac
tions, such as U. S. subscriptions to international agencies.
The most disappointing aspect of the picture is the
steadiness of the deterioration since last summer. The
gloom is relieved by only three mildly encouraging features.
First, in sharp contrast to 1960, most if not all
recent net dollar transfers accrued to foreign private
rather than official accounts; the year-end figures are
affected by the usual window-dressing of European commercial
banks and may give a different impression, but the rapid
outflow of foreign funds from the Fed into the market during
the first week of January indicates a continuation of the
trend to private rather than official accrual.
Second, in consequence of that trend most major foreign coun
tries have abstained from converting their dollar gains into gold.
The net decline in our gold stock was kept to $500 million, about
half of the corresponding amount in the fourth quarter of last year,
although more than the total in the first
three quarters of 1961.
Third, it seems that the recent deterioration did not orig
inate on trade account.
Our figures are still
too fragmentary to
permit reliable analysis; but--unless figures for December spring
an unpleasant surprise--the trade surplus was probably higher in
the fourth than in the third quarter.
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While an increase in capital outflow or in Government expen
ditures abroad affects the liquidity position of the United States
as seriously as would a deficit on trade account, the difference
is important for two reasons.
First, insofar as the deficit is
due to a rise in U. S. investment abroad, it does not diminish
the real wealth of the U. S. economy; and second, policy measures
aimed at reducing an excessive outflow of private capital or of
public funds are not as likely to hurt recovery and growth in the
U. S. economy as might the measures designed to reduce, drastically
and immediately, a deficit on trade account.
However, the longer the deficit persists, the harsher will be
the measures needed to correct it.
Chairman Martin commented that he had in mind that the Committee
would meet again in two weeks.
He noted that the Treasury was expected
to announce its second cash offering this Thursday and that the problem
of the Treasury during the period immediately ahead would have to be borne
in mind as comments were made during today's discussion.
Mr. Treiber then presented the following statement of his
views on the business outlook and credit policy:
The contrast between the favorable domestic outlook and the
increasingly serious balance-of-payments position has become even
The December balance-of
more striking since the last meeting.
payments deficit now shows no real improvement over the huge
November figure. For the fourth quarter we are likely to see a
near-record deficit of over $6 billion at a seasonally adjusted
annual rate. This would imply a 1961 balance-of-payments deficit
of over $3 billion (exclusive of special debt repayments), only
a minor improvement over 1960.
The domestic economy continues to be moving ahead at a
Over-all prices continue to be relatively
reasonably good pace.
stable.
Unemployment, despite the recent improvement, continues
to be a serious problem.
The bank credit expansion in December appears to have been
even stronger than in November. Total bank credit rose substantially
in December, as business loans and consumer loans expanded vigor
ously. Bank liquidity remains high.
about 3 per cent in the last year.
The money supply has risen
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During 1961 the Federal Reserve provided the banking
system with ample reserves. With the expansion of the
domestic economy and bank credit, the Federal Reserve should
slow down in the provision of reserves. However, with little
sign of imminent inflationary pressures from the demand side
and with considerable unused resources, there is nothing in
our domestic situation calling for a substantial change in
credit policy at this time.
But what about the international factors? Our adverse
balance of payments is due to a combination of factors includ
ing large payments abroad for military purposes, economic aid
to underdeveloped countries, and movements of capital funds,
especially large amounts of short-term funds.
Our good trade
surplus is not good enough to offset these other large items.
The solution of the problem involves not only monetary and
fiscal policy; it involves the whole gamut of policies, both
Governmental and private, that affect our economic and finan
cial life, Monetary policy can help, but it cannot do the
whole job. Monetary policy should not try to do the whole job,
and we should not get into a position in which the public
thinks it can. Monetary policy has its most discernible short
run influence on the movement of funds.
U. S. policy should, of course, be aimed not merely at
stopping an outflow of short-term funds, but also at bringing
about a return flow. An increase in short-term interest rates
in the United States, even though the increase be modest,
could help to buttress our balance-of-payments position and
protect our gold stock.
The substantial differential between U. S. interest rates
and the higher rates abroad, particularly in Britain, provides
a clear incentive to move or divert funds to Europe or to
Canada on an uncovered basis for those who have no fear that
the foreign currency will soon be devalued.
It is not possible
to tell the extent to which uncovered funds have moved or have
been diverted abroad. Some of the shifts have not necessarily
been just for short-term investment but have involved the so-called
leads and lags, i.e., movements by those needing a foreign cur
rency sometime in the future, either for direct investment or for
the settlement of commercial and other payments.
Another factor contributing to the outward flow has been
the borrowing of funds in the United States at relatively low
interest rates for use abroad.
Every day investors and traders decide whether to hold or
borrow more or less dollars. A modest further increase in
short-term interest rates in the United States would be unlikely
to stop completely the outflow of funds or to stimulate an
inflow. But investment decisions result from a balancing of
1/9/62
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profits and risks; and at the margin a small increase in our
rates might, for some investors, tip the balance of advantages
in favor of the United States. The psychological impact of
even a small increase on the decisions of both private investors
and traders and foreign central banks is even more difficult to
estimate, but it would probably be substantial.
A small addi
rate could help strengthen
tional increase in the Treasury bill
confidence in the dollar.
Our difficult international situation counsels some further
On balance,
increase in short-term interest rates in the U. S.
our international financial problem is so severe and our domestic
economy is so good that some further upward movement in rates is
justified.
At the moment, of course, the Treasury is in the midst of
These operations
both refunding and cash financing operations.
call for an even keel in the money market for the time being.
But what about the period following such operations? Early
in the year it is customary for the banks to gain reserves and
If credit demands
for the Federal Reserve to absorb reserves.
continue to be strong, they should be permitted to have their
As market rates
influence in tightening the money market.
rise, an increase in the discount rate should be considered.
An increase in the discount rate would signal to those
abroad the determination of the U. S. to defend the dollar.
the advantage of the
We would reap a two fold benefit: first,
influence of higher rates here on the international flow of
derived
funds, and, second, an excellent psychological lift
that is well understood by persons abroad. On
from a signal
the other hand, too early an increase in the rate is likely to
be interpreted by many in the United States as evidence of the
desire of the Federal Reserve to apply restraint prematurely.
We do not think that there should be a change in the
discount rate within the next couple of weeks, but we do think
that the System must consider carefully the role that the dis
count rate may play in the coming months in our effort to help
to defend the dollar abroad. For the coming weeks we would
like to see a trending toward a slightly less easy monetary
condition, with the rate on three-month Treasury bills at about
2-3/4 per cent or somewhat higher.
I was glad to hear the Chairman suggest that the next meet
ing of the Committee be held January 23. That will enable the
Committee to view the situation after the conclusion of the
Treasury financing now under way and before the Treasury
establishes the terms of its refunding scheduled for the
middle of February.
-14-
1/9/62
Pursuant to the action of the Committee at its last
meeting there are now two directives to the Federal Reserve
Bank of New York, namely, (1) a continuing authority directive
The continuing
and (2) a current economic policy directive.
authority directive appears appropriate.
I see no reason to
change it.
The current economic policy directive presumably will be
prepared after the Committee has developed a consensus as to
appropriate policy and its implementation.
As I stated earlier,
I think that in view of the improved domestic business situa
tion and the concurrent worsening of our balance of payments,
our policy should be one of trending toward a less easy mone
tary condition, without overt action, with the three-month
rate at or above 2-3/4 per cent.
Treasury bill
Presumably, following the discussion this morning, the
Secretary, the Manager, and the Economist will prepare for the
consideration of the Committee a draft of current economic
policy directive on which the Committee will act after lunch.
I would like to comment on the current economic policy
directive approved by majority vote following the last meeting
of the Committee, with the thought that experience in that con
nection may be helpful in preparing the policy directive today.
A current economic policy directive is a new venture; we are
feeling our way with respect to its content and use and the
We understood that the directive
method of its preparation.
would in effect state the conclusions embodied in the consensus
of the meeting. The consensus of the last meeting, as stated by
the Chairman, and approved by a majority of the Committee in the
rate in
meeting, "was along the lines of concentrating on a bill
the upper part of the range of 2-1/2 - 2-3/4 per cent and trend
ing toward a slightly less easy monetary condition. without
overt action." No mention was made in the statement of the con
sensus of a goal of providing reserves with a somewhat slower
rate of increase in total reserves than during recent months.
While I have no doubt that the draftsmen were seeking to clarify
the consensus and its implications, it seems to me that the
inclusion of the total reserves concept in the draft of direc
tive sent to Committee members following the meeting could be
construed, in effect, as a statement of a new consensus rather
than merely a clarification of a previously expressed consensus.
It seems to us that the current economic policy directive should
set forth as closely as possible the consensus as stated by the
Chairman and approved by the Committee--perhaps with some re
phrasing to add clarity, but without injecting new tests or new
interpretations.
1/9/62
-15We question the advisability of placing primary emphasis
on total reserves.
We agree that total reserves are an important
consideration, but among other things they do not reflect the
intensity of the use of reserves.
Figures on total reserves are unsuitable as day-to-day
guides.
While member bank balances at the Reserve Banks are
known each day, the amount of vault cash serving as reserves
is known only after some delay. Even if accurate figures on
total reserves were available immediately, the figures would
be helpful over a short period only when adjusted for so-called
seasonal influences. The seasonal adjustments are far from
perfect. The statement week is the basic period for which
member banks calculate their reserves and take steps to comply
with reserve requirements; it is the period used by the Federal
Reserve in its calculations as to whether to supply or absorb
reserves.
The statement week, therefore, must be the period
to which seasonal adjustments are applied to total reserves.
But the composition of each week shifts slightly from year to
year in terms of the days of the month involved, and this can
make an enormous difference in the light of special dates such
as holidays, tax dates, and so forth. Even where the general
outline of a seasonal movement is fairly reliable, just a small
difference in timing can make a large difference in the factor
appropriate for a particular week. And the condition of the
market over a period as short as a week, or even part of a week,
can be quite important to marginal decisions in the capital
markets. In addition to erratic seasonals, the total reserve
measures also suffer from the same short-term volatility that
besets total bank credit and deposits.
The cause might be an
abnormal upsurge in Government securities dealers' borrowings
around a tax date, or a spate of corporate borrowing to make
up for a slowdown in Defense Department progress payments, or
any of numerous other causes that would perhaps be identifiable
much later, if at all.
In the light of all these factors it is impossible to
make adequate seasonal adjustments that will produce, over
a period as short as a statement week, the correct target
level of reserves that the banking system should have. An
effort to offset the various factors that appear to prevent
the attainment of the theoretical figure could produce such
sharp changes in the money market atmosphere as to impede
seriously the smooth flow of credit which is
among the primary
responsibilities of the Federal Reserve System.
We have looked back over our experience during the last
year and have found a number of occasions on which concentra
tion on total reserves would probably have had perverse effects.
1/9/62
-16
At times the close pursuit of a total reserves target could have
led us to withdraw reserves when market conditions were already
quite firm, and to supply reserves when market conditions were
already quite easy.
I mention these occasions not to discredit the use of
total reserves as a factor to be considered but to caution
against giving them too much weight. They are an appropriate
intermediate reference point for the Committee--intermediate
between a measure such as free reserves, with its close tie to
the immediate money market atmosphere, and a broader measure
such as total deposits or total bank credit.
However useful total reserves may be as a benchmark for
the Committee, such a measure, for reasons mentioned earlier,
is not a satisfactory working guide for the Desk in conducting
operations from day to day. I submit that the most satisfactory
and workable guide between meetings is an indication as to
whether it is desirable that money market conditions and short
term interest rates continue about the same, or that they trend
toward an easier or less easy condition. Success in pursuing
such an objective can be tested by the feel of the market as
reflected in such factors as the rate on Federal funds, the
rates on three-month Treasury bills and other securities, the
availability and cost of dealer financing, the amount of
member bank borrowing, and other related factors. The effect
of operations conducted in the light of such guidelines, on
total reserves and other broad measures, can be observed by
the Committee at each meeting, and the Committee' s instructions
can be adjusted accordingly.
Mr. Treiber also said that he was prepared to comment on two
other matters if comments thereon were desired at this point. The
first matter had to do with the continuing operating authorities usually
reaffirmed at the March organization meeting each year, reference to
which had been made at the December 19, 1961, meeting of the Committee.
The second matter had to do with the draft of article prepared for
inclusion in the Federal Reserve Bulletin concerning the Committee's
action at the December 19 meeting in terminating its three continuing
1/9/62
-17
statements of operating policies.
This draft had been distributed to
the Committee with a memorandum from the Secretary dated January 5,
1962.
Chairman Martin indicated that he felt it would be preferable to
defer comments on those matters. For the moment he thought it desirable
to consider, in light of the comments made by Mr. Treiber, the current
economic policy directive that had been issued following the meeting
on December 19. He stated that he would like to have Mr. Young explain
the procedure followed in drafting the directive since, if he understood
correctly, Mr. Treiber did not feel that the second paragraph of the
directive reflected the consensus reached at the meeting.
The Chairman
said he considered it important that the Committee be advised as to
how the difference of opinion arose.
Mr. Young pointed out that the December 19 meeting was the
first occasion for the staff group consisting of Mr. Rouse, Mr. Thomas,
and himself to experiment with the preparation of a current economic
policy directive pursuant to the new procedure that the Committee had
agreed upon at that meeting.
He noted that various phrases had been
used by individuals around the table in describing the kind of operations
that they would like to see conducted during the period that was then
immediately ahead.
Some had used phrases such as "a tendency toward
less ease"; the New York Bank in particular had stressed this.
Other
members of the Committee had talked in terms of a lesser rate of growth in
total reserves.
At the point during the meeting when the consensus was
being formulated the question of total reserves was raised and remarks
1/9/62
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were made by Mr. Thomas, among others.
The consensus was stated generally
in terms of tending toward less ease, and Mr. Shepardson had inquired
whether the consensus included the objective of a slower rate of growth in
total reserves, indicating that he would interpret it as such. In attempt
ing to draft the current policy directive, at which time the minutes
of the meeting were not yet available, there was discussion of the sense
of the meeting on the basis of recollections. There was discussion by
telephone with Mr. Rouse in New York as to the meaning of the words that
had been used--the semantics of the problem--and it was argued by Mr.
Thomas (and Mr. Young stated that he had concurred) that the expression
"less ease" was ambiguous.
The point was made that less ease would be
brought about by tending toward a somewhat slower rate of growth of
bank reserves than the Federal Reserve System had theretofore been
encouraging. In the light of that thought, the question was put to
Mr. Rouse whether it would not be a good idea to include both thoughts
in the draft of directive as alternatives. and Mr. Rouse agreed with
this suggestion. Therefore, this was done in the draft of directive that
was sent to the members of the Committee.
Question then was raised by
Mr. Hayes, who called Mr. Young by telephone and said he thought that
the Secretariat had, so to speak, taken advantage of the situation by
putting in the telegram first the alternative language that referred to
trending toward a somewhat slower rate of increase in total reserves.
The other alternative had been placed second in the wire.
Mr. Hayes
1/9/62
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thought the consensus as expressed at the meeting provided for the
latter alternative only, and Mr. Young had replied that views on the
interpretation of the consensus could differ, but that the Secretariat
could be legitimately criticized for the order of the options in the
outgoing wire.
It was the opinion of Mr. Thomas, and also his opinion
(Mr. Young's), as against that of Mr. Rouse that the real meaning of
the consensus was to work toward a slower rate of growth in total re
serves.
Mr. Young went on to say that when the views of the Committee
members were received concerning the language of the draft directive,
the majority of the eight members who had agreed at the meeting with
the implementation of policy according to the consensus favored the
alternative language providing for a somewhat slower rate of increase
in total reserves than during recent months.
The two who favored the
second alternative choice of language were Mr. Hayes and Mr. Swan.
was reported by Mr. Young to Mr. Hayes,
This
including the fact that most
of the replies had taken explicit note of the two alternatives presented,
and the latter agreed that in the circumstances the Secretary had no
option but to send the directive to the New York Bank in the form in
which it was now recorded in the minutes of the meeting on December 19,
1961.
Mr. Treiber commented that he had not been trying to be critical
of the way in which the situation had developed.
A new procedure was
1/9/62
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involved, and everyone concerned was feeling his way.
Instead, his
statement was intended to bring out the view that for a day-to-day
guide to the Desk it was preferable to say "stay about where we are"
or "less ease" because such expressions were more helpful than to
refer to a factor such as the rate of growth of total reserves.
As
Mr. Thomas had pointed out in his statement today, total reserves had
varied several hundred million dollars from the projections because of
special factors.
Mr. Thomas commented that every objection Mr. Treiber had
raised to total reserves would apply to net free reserves and also to
the feel of the market.
As Mr. Bryan had pointed out at the December
19 meeting, the objectives of the Committee should be stated in terms of
what the System could control, rather than what it
It
could not control.
could not control other factors supplying reserves in the market or
the demand for credit, which would determine whether there was less or
more ease or lower or higher interest rates.
Mr. Mitchell commented that the directive must be expressed in
terms of what the Manager thought he could do.
If
he understood correctly,
Mr. Treiber had said that the Manager could not operate under the formula
contained in the current economic policy directive issued following the
December 19 meeting.
Mr. Rouse commented that the past three weeks had provided a
rather clear-cut example of a situation where total reserves could not be
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used as a guide.
If they had been used as a guide, this would have
resulted in overt action in the market.
There would have been such
a tight situation as to have had an adverse effect on the price of
Government securities, with the public thinking that there had been a
clear-cut shift in System credit policy.
It
would have been necessary
to take $300 or $400 million of reserves out of the market to conform
to the terms of the directive as far as total reserves were concerned.
An extreme situation had developed as the result of special factors.
Had the Desk gone along with the total reserve objective,
the directive, that would have accentuated the situation.
as stated in
If the Desk
had taken out of the market the amouht of reserves that the total
reserve concept suggested, this would have had a drastic effect on market
prices.
Mr. Thomas noted that the Desk did take $300 million of reserves
out of the market by open market operations in the past period, and that
those were replaced by member bank borrowing.
If
the Manager had tried
in this period to maintain free reserves at something like the level
indicated, he would have followed a mistaken policy of feeding the
economy.
Instead, the Manager let free reserves decline and let the
banks obtain any additional reserves they wanted to obtain by borrowing.
The Desk did the job of following the directive, even though this put
free reserves below the level implied by some of the comments at the
December 19 Committee meeting.
1/9/62
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Chairman Martin then commented that it
would be well for every
one to have a chance to study Mr. Treiber's statement.
There were bound
to be difficulties as the Committee got into the new procedure adopted
at the December 19 meeting.
people around the table.
Words had different meanings to different
However, it should be emphasized, in regard
to the new procedure, that the Committee ought to try to do its best
to get a consensus.
The New York Bank had rendered a service by making
available the paper presented by Mr. Treiber.
At the same time, the
Committee should not get too sticky about words unless it
what it was doing.
knew precisely
It would hardly be possible to have anything
written exactly in the way that would suit each individual best.
Mr. King said that the experience cited by Messrs. Treiber
and Young illustrated the advisability of formulating the current
economic policy directive and voting on it before each meeting adjourned.
Chairman Martin replied that the procedure beginning with this
meeting, as agreed to by the Committee at the December 19 meeting,
contemplated voting on the current economic policy directive when the
Committee reconvened following a luncheon recess.
The Chairman then called for a continuation of the usual go
around of views on the economic situation and monetary policy beginning
with Mr. Ellis.
Mr. Ellis said that the terminology used by Mr.
Noyes in
describing the over-all economic situation at the end of 1961 could
well be applied to the situation in New England.
The record of department
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1/9/62
store sales was excellent,
as a whole.
not only for the Boston area but New England
Sales for the year, on a cumulative basis, were about 5
per cent over 1960, one of the best records of any District.
Automobile
sales continued brisk in December, and this briskness carried over into
the manufacturing field.
Manufacturers were experiencing order increases
and were responding by slow expansion in their production,
adjustment.
after seasonal
There was evidence of the increased activity in electric
power consumption and the number of man-hours worked in manufacturing.
However,
even though 1960 was a year of relatively low manufacturing
employment, there was still only a gain of 0.3 per cent in 1961.
Statis
tics on other employment were stronger, but on a year-to-year basis the
increase in total employment was only about 1 per cent.
On the other
hand, insured unemployment was some 25 per cent below year-ago levels.
Continuing, Mr. Ellis said that during the past few months
construction activity in New England had been rising more rapidly than
in the nation as a whole.
On a cumulative basis, it had recovered to
such an extent as to match the national pattern.
Banking statistics
reflected the steady expansion in economic activity.
Debits and demand
deposits were up materially, and in December check volume at the Federal
Reserve Bank was 12 per cent ahead of 1960 on a year-to-year basis.
few banks had as yet announced increases in
savings deposits.
interest rates on time and
Business loans rose further in December,
ratios matched year-ago levels.
Very
and loan-deposit
The banks continued to shorten their
1/9/62
-24
portfolios of Government securities.
Except for one two-week interval,
District banks had been heavy sellers of Federal funds since late
September.
Turning to the national economy and monetary policy, Mr. Ellis
said he was attracted to an analysis that started with recognition that
throughout 1961 the Federal Reserve System had supplied about as many
reserves as the banking system could absorb without pushing short-term
rates down to such a degree as to stimulate short-term capital movements.
He agreed that there should be some further bank credit and monetary
expansion.
However, if the System continued to supply reserves to the
same extent as in the past, speculative tendencies and credit excesses
could be expected to develop.
Therefore,
only for some steady reserve growth.
the System should provide
Then, if market demands should
become more intense, the banks would borrow and the market would tighten
itself.
Only after such tightening should there be a confirming discount
rate action on the part of the Federal Reserve System.
At the December
19 meeting the Committee had adopted a policy of providing additional
reserves at a somewhat slower rate, with a shading of policy toward some
what less ease.
Since the Treasury would be conducting financing operations
in the next few weeks, it would seem appropriate to make no change at
this time in the basic policy adopted at the December 19 meeting.
Mr. Ellis also said that in view of the traditional year-end
difficulties, he had been quite satisfied with conditions in the money
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1/9/62
market and with the actions of the Account Management during recent
weeks.
He would expect the Desk to vary from strict adherence to the
language of any directive if
market conditions developed that were
at variance with expectations at the time the directive was issued.
For the period ahead,
he would favor a current economic policy directive
much along the lines of the existing directive.
Mr. Ellis said he had viewed the new format of the directive
as an opportunity to experiment with the use of factors that the
Committee might consider most important at any particular time.
On
occasion he believed the directive should refer to total reserves,
on occasion to other factors.
and
Given the present situation, he would
expect that the policy would be to refer to some expansion of the volume
of reserves.
He would anticipate net free reserves in the $400 million
area and expect a rate on short-term bills
of around 2-3/4 per cent,
with Federal funds occasionally at 3 per cent but mostly just below.
As to the continuing directive, Mr. Ellis said he would like
to see the Committee arrive at an understanding whereby that directive
would be renewed each time without having an official motion made and
acted upon at each meeting.
out the sentence:
As to the current directive, he would drop
"No overt action shall be taken to reduce unduly the
supply of reserves or to bring about a rise in interest rates."
In saying
this, he did not mean to suggest that the Desk should proceed to take
overt action.
However, while this sentence may have seemed appropriate
-26
1/9/62
the first time the Committee adopted its current procedure, he questioned
whether it was wise for the Committee constantly to refer to what it
proposed not to do.
As to operations in the longer-term area of the
market, he hoped that implementation of the current directive would not
lead to the purchasing of longer-term securities in
such degree as to
suggest that the Federal Reserve was dominating the market.
On the other
hand, he would favor maintaining contact with the market over the entire
range of maturities.
Mr. Irons said that during the closing weeks of 1961,
moved ahead rather substantially in the Eleventh District.
ended on a strong note.
expansion
The year had
Department store sales in December were up
substantially from the preceding month.
The industrial production index
rose to a new record high, with advances spread rather widely throughout
the manufacturing and mining areas.
in
crude oil production,
There had been a seasonal advance
and refinery activity also improved.
activity moved ahead sharply; it
Construction
looked as though 1961 would be up about
7 per cent from the preceding year.
There had been little
change in
employment figures, except for the seasonal movement, while unemployment
in the area was about 4.9 per cent of the labor force.
Agricultural
activity was very good, with about a 7 per cent improvement in cash farm
income indicated for the year 1961 as a whole.
Turning to banking, Mr. Irons said there was strength at year-end,
with loans up sharply.
For the year, loans and investments each were up
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1/9/62
about 10 per cent.
strong advance,
corporations.
At the end of the year, demand deposits also showed a
especially deposits of individuals, partnerships,
and
The banks appeared to be in a reasonably liquid position.
Except for sometemporary borrowing incident to year-end adjustments,
borrowing from the Federal Reserve Bank had been quite nominal.
There
had been a spreading tendency throughout the District to raise interest
rates on time and savings deposits, with considerable advertising, but
personal comments by bankers indicated that the increases were made with
reluctance.
Turning to policy, Mr. Irons commented that the dominant factor
in the period ahead would be the Treasury's intervention in the market,
which suggested maintaining the status quo as nearly as possible during
the next two-week period.
By this he meant that policy should continue
to be implemented in about the same manner as during the past three
weeks.
Considering all of the year-end disturbances, he felt
that
the New York Bank had done a good job in operating in a way that carried
out the consensus.
directive,
Further, it
had seemed to him that the draft of
as distributed, was a good statement of the consensus.
The
directive could have been written in various ways, but he was agreeable
to it
as written.
For the next two weeks,
he would envisage a bill
around 2-3/4 per cent and a Federal funds rate between
cent, with reasonable fluctuations.
if
rate
2-3/4 and 3 per
While he would provide some reserves
such were needed, he would not object if the market firmed against
1/9/62
itself
-28
somewhat; however, there should be no direct action on the
part of the Desk to bring about such a firming development.
The domination of the Treasury in the picture may have caused
some disturbance in the market, Mr. Irons noted.
In his view the Desk
should work largely according to the feel of the market, at the same
time watching interest rate movements and reserve availability.
Two
weeks from now the Committee would have an opportunity to look at what
had happened and see what action it might want to take.
Perhaps that
action would be a little more affirmative than seemed warranted today.
Developments were moving in the direction where, from the standpoint of
both domestic and international factors, monetary policy action might
be more clearly indicated.
The strengthening of the economy might cause
domestic considerations to fit into the same kind of policy that the
Committee would want to follow from the point of view of international
considerations.
Mr. Swan reported that the business situation in the Twelfth
District continued to improve.
While employment data for December
were not yet available, construction and manufacturing led a general
advance in November and reports of employer hiring intentions for the
next few months suggested a further improvement in most of the major
labor markets in the District.
Steel production rose in December, and
demand strengthened for copper and zinc.
As elsewhere, department store
sales were strong in December and new car sales, on the basis of early
1/9/62
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registrations in California, were quite good.
In the three weeks ended
December 27, weekly reporting banks showed substantial increases in
business,
real estate, and consumer loans.
holdings of Government and other securities.
They also increased their
Virtually every major bank
in the District had gone to a 3-1/2 per cent interest rate on savings
accounts and many of them had also announced a 4 per cent rate on one-year
certificates or some kind of special savings accounts.
The 4 per cent
rate loomed very large in the advertisements and the 3-1/2 per cent rate
very small, but this did not reflect exactly the situation that the banks
would like to see develop.
One bank had made an estimate that the 4 per
cent money represented by special certificates was coming from the bank's
own savings depositors, as against funds from other sources, in a ratio
of about 3 to 1.
In view of the substantial volume of savings deposits
held by District banks, many banks were concerned at the moment about
earnings and were looking around for higher yields, including the possi
bility of shifting into municipals from U. S. Government securities.
In terms of policy, Mr. Swan pointed out that it had already
been noted several times at this meeting that Treasury financing
operations rather obviously dictated an even keel, that is, no change
in policy for the immediate future.
no change in the discount rate.
He would include in that picture
As also had been mentioned, the past
three weeks provided an illustration of market forces tightening the
situation.
It did not seem to him that in the weeks immediately ahead
1/9/62
-30
the Committee would want to do anything to promote this tightening.
However,
it probably would continue to some extent due to market forces,
which posed some problem relative to maintaining an even keel.
The behavior of the bill rate in the past three weeks had been
in line with what the Committee had indicated in its directive, Mr. Swan
pointed out.
While he was not sure that this result could be achieved,
he would hope that some margin could be maintained between the bill
rate and 3 per cent.
He would favor a bill rate around 2.75 or 2.8 per
cent, yet it seemed to him that if the rise should continue and the rate
should approach 3 per cent, that would tend to add, in a self-reinforcing
sense, to the upward pressure on rates.
If it should begin to create
expectations that a discount rate increase might be imminent, that would
tend to reinforce upward pressures in the market, and there were enough
such pressures from other market expectations at the moment.
Since it
did seem that some selling might be ahead in terms of seasonal factors,
this might imply a possibility of absorbing reserves by selling some
securities other than bills, unless that would in turn conflict with
Treasury financing plans, depending on the securities offered by the
Treasury in its cash financing.
Some problem might develop in that
area, but of course this could not be known at the moment.
Regarding the inclusion of the total reserve concept in the
directive, Mr. Swan said that although he was one of those who had
preferred the other phrasing of the draft directive, he thought the
1/9/62
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directive did reflect the attitude at the December 19 meeting.
On the
broader question of the general use of a reference to total reserves
in the directive, he had some sympathy with Mr. Treiber's remarks.
It
seemed to him that total reserves were valuable as a general indicator
of where the Committee had been and where in the longer run it might
want to go.
On the other hand, he had some question about the use of
total reserves as a short-run guide.
He appreciated the fact that the
question of the availability of reserves was important, that a reduction
in net free reserves because required reserves had increased was different
from a reduction because total reserves went down.
However, he still
had a question about the source of the additional available reserves.
This might be a problem, partly, of what was meant by providing reserves.
In the week ended January 3, there was an average daily excess of $481
million of reserves over the total reserve target.
He would agree that
the Desk could not appropriately have offset this, yet as Mr. Thomas
indicated, this excess had resulted from member bank borrowing rather
than positive action on the part of the Desk.
Nevertheless, this
illustrated the fact that the increase of over $300 million in total
reserves,
as supplied by borrowing, was quite different from an increase
as supplied by Federal Reserve initiative through open market operations.
At the December 19 meeting, Mr. Thomas had suggested in his statement
that the specific guide to operations should be total reserves--or non
borrowed reserves--rather than free reserves or interest rates.
But the
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1/9/62
phrase inside the dashes did not receive any further attention.
There
fore, he wondered whether, for shorter or longer-run reserve guidance,
the Committee should not look more specifically at nonborrowed reserves.
By subtraction, one could get that out of the staff memorandum, but he
would like to have the figure actually shown.
difference when there was little
This had not made much
or no borrowing, but when borrowing rose
substantially the Committee might want to consider nonborrowed reserves
as well as total or free reserves.
Mr. Swan also said that he was not sure that the Committee should
discard free reserves as a guide even if it wanted to deemphasize that
statistic.
Whether rightly or not, the market attached considerable
weight to free reserves.
From that standpoint, it seemed quite fortunate
that the average of free reserves ($341 million) for the week ended
December 27 was the revised figure, issued a week later, rather than the
estimate.
keel,
For the next two weeks, and thinking in terms of an even
he felt that the Committee might have in mind free reserves of
$400-$450 million rather than $400 million and below.
As to the directive, Mr.
Swan said he would agree with Mr. Ellis
that the last sentence in the directive issued after the December 19
meeting was not only unnecessary but could be harmful.
It
stated what
should not be done rather than what should be done.
In a final comment, Mr. Swan referred to the provision in the
procedure for reallocation of securities in the System Open Market Account
1/9/62
-33
whereby when a Reserve Bank's reserve ratio falls below 30 per cent on
the next to the last business day of a statement week or month, an adjust
ment is made in Account participations to bring that Bank' s ratio back to
35 per cent.
However, the result of the procedure was to bring the Bank' s
ratio to above the System reserve ratio at the present time.
If the Com
mittee so desired, the procedure could, of course, be changed at the
March organization meeting.
He simply mentioned the matter for what it
was worth.
Mr. Deming commented that the procedure of reporting at Committee
meetings every two or three weeks perhaps tended to cause some loss of
perspective.
Looking at personal income, the Ninth District did not
gain as rapidly as the nation in the last half of 1961.
been gaining more rapidly through the middle of 1961.
However, it had
When one looked
at the last half of the year relative to the beginning of 1960, the Dis
trict had shown a better gain than the nation.
Perhaps, therefore, the
situation in the District was not as bad, in a relative sense, as he
might have seemed to imply from time to time.
Department store sales in November and December set a new record
for the Ninth District, Mr. Deming said, and last year the District did
somewhat better than the country as a whole in comparison with 1959.
It
was probably fair to say that the District was still suffering somewhat,
relatively speaking, from the effects of the drought last summer, but it
was moving back in line with the rest of the country.
Even in the banking
1/9/62
-34
area, where loan demand in the District had lagged the nation, the
demand in November was up.
This trend seemed to have continued in
December, with the demand again focusing on the city rather than the
country banks.
With reference to the results of the recent "Minnesota Poll" on
personal finances and general business conditions in 1962, which were
published in the Minneapolis Tribune last Sunday, Mr. Deming noted that
more than 4 out of every 10 State residents (42 per cent) expected busi
ness conditions in the United States to be better in 1962.
This compared
with 29 per cent in December 1960 and 36 per cent in December 1959.
One
out of three respondents thought he was going to be better off financially
a year from now, as compared with one out of five in December 1960 and
one out of four in December 1959.
Turning to the national economy and monetary policy, Mr. Deming
said he was one of those who had believed that total reserves would be a
good guide for the Desk.
He had so stated at the December 19 meeting,
at which time he also stated that he thought the movement should be to
ward less ease.
He had some sympathy with what Messrs. Treiber and Rouse
had said about total reserves as a guide to the Desk, but he also had
some sympathy with what Mr. Thomas had said, namely, that the same crit
icism would apply to free reserves.
Probably, it would likewise apply
to nonborrowed reserves, although he had not looked closely.
Reviewing
the past three weeks, there was no question but that there had been less
1/9/62
-35
ease in the market, which was what the Committee said should happen.
The bill rate was in the upper part of the 2-1/2 - 2-3/4 per cent range,
as also specifically mentioned by the Committee.
With all the year-end
churning and other developments, he felt that the Desk had done a good
job.
It did not hew to the 4 per cent total reserve growth rate target,
and would have fared badly had it done so.
However, this did not mean
necessarily that total reserves would not be a reasonably good guide in
the future.
The past period was probably as bad from that standpoint as
could have been encountered, ad total reserves could be a better opera
tional guide at some time in the future.
With regard to the forthcoming two weeks, and probably the period
beyond that, Mr. Deming felt that the directive ought to be written in
terms of maintaining an even keel.
If there was less ease at the moment,
that condition probably should be maintained for the next five weeks.
In other words, the present policy should be continued.
He would think
that the Committee would not want to recover the reserve surplus--if
that was what one wanted to call it--that had accumulated in the past
three weeks, at least not to such an extent as to change the feeling in
the market.
He would emphasize maintaining the bill rate at around 2-3/4
per cent during the next two weeks.
There seemed to be no reason for,
and positive reasons against, changing the discount rate at this time.
He would renew the continuing directive.
Mr. Baughman said it appeared that business conditions in the
Seventh District had continued to improve somewhat, with the steel and
1/9/62
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automobile industries continuing to be the outstanding factors in the
picture.
The steel industry saw nothing immediately ahead except a con
tinued rise in activity, due in part to the uncertainty regarding
continuation of production but also due in part to a rebuilding of in
ventories from what the industry believed was a very low level,
as most users were concerned, at the end of 1961.
so far
Contacts in the auto
bile industry continued to hold a very optimistic view, notwithstanding
the decline in the daily average sales rate in December and notwithstand
ing a gradual cutback by one producer and a continued strike at another
producer.
There was evidence of some further pickup in employment,
mostly in areas primarily concerned with motor vehicles and electrical
goods, which were benefiting from an increased flow of defense orders.
Recently there had been same recruitment of skilled machine-shop workers
in the District by West Coast aircraft firms.
Retail sales of general
merchandise in December appeared to have moved somewhat closer to the
national pattern after a considerable period during which they lagged.
The loan picture at District weekly reporting banks had been
following about the same trend as in the nation recently, Mr. Baughman
said, although there was a little
less pickup in
for weekly reporting banks generally.
security holdings than
Even aside from the fact that
there was no tax bill maturing in December, and some similar factors,
evidence was seen of a pickup in basic loan demand at District banks
currently.
However,
no pickup had been seen in consumer loans, and real
1/9/62
-37
estate lending remained slow.
portfolios of bills.
Chicago banks were holding rather large
Unless there was some change between now and the
April 1 personal property tax assessment date, they would seem to be in
a better position than usual to meet the demands with which they are
always confronted at that time.
Early reports from the Reserve Bank's monthly survey of rates
paid on time deposits indicated that about 12 per cent of the District
banks in metropolitan areas had announced rates of 3-1/2 per cent or
more.
Most of them had announced a rate of 4 per cent on time certifi
cates of one-year maturity, but there was some variation in respect to
paying 4 per cent on savings deposits over one year.
A small number of
reports available from banks in rural areas gave some evidence of a
tendency to stick to 3 per cent on savings accounts while offering 4 per
cent on 12-month certificates of deposit.
As compared with the experience
when the maximum permissible rates were last raised, effective January 1,
1957, banks were moving much more rapidly to the new maximum rates.
In
January 1957, only about 5 per cent of the banks in metropolitan areas
had moved to the 3 per cent ceiling.
However,
a much larger proportion
were at the ceiling rate this time before the ceiling was raised.
The
large Chicago banks had announced their changes in rates only last week
end, so they had had little experience with the new rates as of yesterday
afternoon.
However, they indicated that they were getting a large re
sponse, with some evidence that the money was coming in part from the
transfer of funds from other kinds of financial institutions.
1/9/62
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Mr. Baughman said, in summary, that evidence was seen of increased
activity in the Seventh District.
However,
there was still
a very sub
stantial amount of unused capacity in most industries.
Mr. Clay said that for the period immediately ahead it
appeared
that Treasury financing was the dominant consideration in the formulation
of monetary policy--calling for the maintenance of the so-called "even keel."
Continuation of essentially the current posture without further tightening
would be appropriate for other considerations as well.
The Treasury bill
rate had reached the level of approximately 2-3/4 per cent that the Com
mittee set as its
goal at the last meeting in view of the international
balance-of-payments problem,
and the maintenance of approximately that
rate level would seem to be in order.
In terms of the domestic economy,
the objective of monetary policy should continue to be that of encour
aging economic expansion and the fuller utilization of manpower and other
resources.
Recent economic developments had been distinctly favorable,
but there was still a long distance to go in order to attain the satis
factory level of activity that was essential in the interest of both our
domestic and our international problems.
Mr. Clay observed that the nature of open market operations would
be strongly conditioned by seasonal factors in the weeks imediately ahead.
It might not be necessary to operate in longer-term maturities, but the
Manager should have the authority to do so if it became necessary to off
set some of the sales of Treasury bills.
rate should not be changed.
The Reserve Banks' discount
1/9/62
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Mr. Wayne reported that Fifth District business continued to move
ahead at a good rate toward the end of 1961.
Strength was evident par
ticularly in sustained record levels of employment and increased consumer
buying.
Christmas business apparently rose to record volume and was ex
pected to provide additional impetus in some industrial lines.
Textile
and apparel manufacturers, for instance, viewed the resulting reduction
of soft goods inventories as a prelude to a good volume of orders for
spring and summer.
The construction industry, one of 1961's most consistent
sources of strength, gained new support from a strong November increase in
contract awards.
Furthermore,
the November rise
included the second
largest seasonally adjusted volume of residential awards in the past five
years, an encouraging sign for the lumber business, which had thus far
failed to respond to the business upswing.
Fourth quarter coal production
was up considerably from the previous year's level, and producers continued
to take a bright view of the future.
The tobacco business had a record
year all along the line, and the experts foresaw further gains in
consump
tion in 1962.
Mr. Wayne said that after nearly a year of experimentation it had
become the regular practice of the Richmond Bank to contact a representa
tive group of 65 businessmen every three weeks.
Forty-five manufacturers
were among those responding to the most recent request.
On balance,they
reported a rising trend in new orders, shipments, and employment, but the
proportion of favorable reports was somewhat smaller than previously.
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1/9/62
Hours of work, formerly rising, were reportedly fairly stable.
Respond
ents' views of the outlook for profits were somewhat less salutary than
they were a few weeks earlier.
The recent strength in bank loan demand across the nation was
even more pronounced in the Fifth District, Mr. Wayne said.
Business
and all other loans had been particularly strong.
Mr. Wayne expressed the view that the results of policy since
the December 19 meeting had been desirable.
He would like to see bill
rates edge somewhat further upward, but he would not favor any overt
actions to nudge the market--particularly in view of the forthcoming
Treasury financing.
He believed that every encouragement should be given
to any natural tightening forces.
Over the past five weeks there had
been a definite and fairly strong upward movement in primary spot market
prices.
It
was too early to know whether this would be reflected in the
broader price indexes, but in any event it
should be remembered that
price increases by this phase of earlier recoveries were quite small in
comparison to those that occurred later in the upswing.
In short, the
recent stability of prices might present a somewhat misleading picture
of the pressures that would be felt
as business activity expanded.
Moreover, as Mr. Noyes had pointed out, the strength of the expansion
movement was such that it
no longer seemed to need further stimulus.
Mr. Wayne said he wished to emphasize again that he did not have
in mind sufficient tightening to interfere with the Treasury financing.
1/9/62
However,
he would encourage any factors moving the System on the way it
might have to travel in the months ahead.
rate at 3 per cent at this time.
He would leave the discount
The policy direction or trend contem
plated in the current directive should be continued (though he agreed
with Messrs. Ellis and Swan that the admonition against overt action
should not be allowed to remain in the directive indefinitely).
The
continuing directive should be renewed.
Mr. Mills said he shared completely Mr. Treiber's reservations
about attempting to use total reserves as an infallible guide to the formu
lation of monetary and credit policy.
His own belief was that there were
other satisfactory guides that could be used in combination and had dollar
values,
including particularly net free reserves.
He did not believe
that the Committee could legally, or should, abdicate its
responsibility
by leaving the Desk to be guided completely by its feel and judgment of
the market.
As to current and prospective developments having a bearing on
policy, Mr. Mills presented the following statement:
Since the December 19th meeting of the Open Market Committee,
natural factors working through market processes have produced
the kind of monetary and credit policy climate that preferably
should have been developed over many weeks past by conscious
Federal Reserve System actions. An abrupt rise in required re
serves, actuated by higher demands for bank loans, has been
reflected in a tighter money market and a firmer interest rate
structure, but has in no wise constricted the basic availability
of bank credit.
The present situation should now be capitalized upon policy.
wise and not thwarted or negated by an impulsive effort to loosen
1/9/62
the money market and bring down interest rates; in fact, to at
tempt to do so would only confuse market operators, who long ago
justified in their own reasoning the kind of money market con
ditions that have eventuated.
(To interpolate, there is now a
projected level of free reserves in the area of $550 million
for the current statement week, and as of yesterday the rate for
Federal funds dropped below 2 per cent.
I would feel that this
is a negation of the policy that should appropriately be carried
out.) As far as the Treasury's prospective financing program is
concerned, the adequate credit base presently serving the private
borrowing needs of the economy is also broad enough to support
the Treasury's approaching cash financing, given a temporary re
serve assist if a tax and loan account financing procedure is
followed at that time.
A monetary and credit policy appropriate to existing finan
cial and economic circumstances would (in the family sense of the
word) "adopt" the kind of policy that has recently developed out
of the interplay of natural market factors. The results of such
a policy would be to tacitly recognize the appearance of firmer
interest rates and their restraining influence both on an over
growth of credit and on the outflow of gold and dollars from the
United States.
A wholesome public reaction could be expected to
this Federal Reserve System policy stance which would at long last
face up to the national and international financial exigencies that
dominate the attitudes of many economic observers.
Inasmuch as any early demand for commercial bank loans can
be satisfied readily through a rearrangement of bank assets
(replacing securities with loans), excessive upward pressure on
interest rates arising from this source, and money market dis
turbances,
are unlikely.
The economic policy directive issued
at the last meeting of the Committee conceives a more liberal
monetary and credit policy than is
called for.
It
should,
therefore, be modified.
Mr. Robertson said he saw nothing in the economic picture today
that would justify any deviation from the long-continued policy of even
keel during periods of Treasury financing,
He would hope, however, that
the even keel would be related to the past five-week period rather than
the most recent week.
1/9/62
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Mr. Shepardson
said it seemed to him that the situation portrayed
in the current reports, namely, rising activity in the domestic economy
and an adverse international payments position, justified a lessened rate
of monetary expansion.
He was not disposed to argue how this should be
measured, but in his opinion the situation had reached the point where the
rate of monetary expansion that had prevailed for some time past could
be lessened,
recognizing of course the necessity of taking into account
the Treasury operations over the next few weeks.
While these operations
should not be upset, he continued to hope that by whatever guideline was
appropriate, whether it
be free reserves or total reserves or some other
guide, the System could slow down a little
serves and the money supply.
A Treasury bill rate of 2-3/4 per cent or
upward seemed to him appropriate.
propriate if
the rate of expansion of re
Likewise,
he thought it would be ap
free reserves were in the area of $400-$450 million rather
than $500-$550 million.
It would not seem appropriate to consider a dis
count rate change at the moment, although that might be in the offing.
Mr. King said that although business activity clearly was improving
throughout the country, he thought it was improving rather slowly.
The
Committee should be careful not to think that Christmas was necessarily
going to last all year.
The holiday season buying
had, of course, removed
stock from some shelves and the replacement of that stock would carry
into the new year.
Treasury operations were now imminent, and it
ficult to oppose an even keel policy.
However,
was dif
as a reference point for
1/9/62
maintaining an even keel, he would take the period beginning January 4,
as reviewed in the supplemental memorandum on open market operations re
ceived from the Federal Reserve Bank of New York.
An extension of those
conditions would, he thought, be appropriate for this particular month
and for this particular type of business cycle,
the characteristics of
which seemed to differ somewhat from other recent cycles.
He would not
care to see open market operations conducted in such manner that the
current level of free reserves would be reduced too much; the desirability
of free reserves as low as $400 million seemed to him doubtful.
Mr. Mitchell commented that one could be thankful that economic
activity was continuing to expand at a rather steady pace.
He did not
think there was anyone present who doubted that there was still
room for a good deal of additional noninflationary growth.
considerable
It should be
a major objective of Government economic policy, he suggested, to see that
this condition continued as long as possible.
However, the problem of
monetary policy was one of dealing with expectations in the financial
area.
Anticipations, and speculation based thereon, were the things about
which it was necessary to be apprehensive.
There was currently a great
deal of speculation about a change in Federal Reserve policy, and this had
given rise to a considerable amount of uncertainty in financial markets.
In his opinion, therefore, this was no time to drop from the current
economic policy directive the statement that no overt action signalling
a shift in policy was to be taken.
An even keel should be maintained
during the next two weeks, first, on account of the Treasury situation,
1/9/62
and second, because even apart from that circumstance this would be, at
least in his opinion, the right policy.
Mr. Mitchell went on to say that there were same things that ap
peared likely to cause trouble in the future, and the Committee should
start thinking about them.
For a long time there had been a highly arti
ficial level of short-term rates, which served as a deterrent to the
stretching out of investment portfolios of many institutions, including
banks.
If they should decide to stretch out their portfolios, that would
have an influence on longer-term rates, which had been quite tranquil,
even declining a little.
One might look forward to a situation where
there would be this kind of action, which would be desirable as far as
the economy was concerned, and he hoped that the System would not con
tribute to another abortion of economic activity such as occurred in 1959
by tightening too soon.
The current volume of steel orders seemed to
reflect largely the objective of temporary inventory accumlation; there
fore, the situation was more analogous to a seasonal development than a
cyclical swing.
For this reason, be would try to evaluate the quantity
of credit necessary to finance those orders and accommodate it like a
seasonal development instead of attempting to use this temporary phenomenon
as a reason for a more restrictive monetary policy.
steel users' inventory accumulation was concerned,
So far as financing
it should not be a signal
to set off a sequence of monetary restraint as in 1959.
Further, year-end credit statistics should be appraised with
caution.
It would seem advisable to wait and see the figures for the next
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1/9/62
couple of weeks, for they might be toned down quite a bit after a short
flare-up around the end of the year.
With regard to instructions to the Desk, Mr. Mitchell commented that
they should be consistent and capable of being executed.
should become inconsistent, as he understood it
If
the directive
was in the past period,
the Committee should be gotten together by telephone and asked what it
wanted the Account Management to do.
The Committee should be able to com
municate to the Manager in terms that the latter could understand and that
he considered consistent.
If
the Manager failed to understand or felt
that the instructions were not consistent, it
was up to the Comittee to
make the instructions consistent and understandable.
The fact that a dif
ficult problem was involved should not prevent the Committee from attempt
ing to communicate understandably with the Manager, and the Manager should
come back to the Committee when he did not get meaningful instructions.
Mr. Fulton reported that a year end economic activity in the
Fourth District was moving up briskly.
For the year as a whole, depart
ment store sales were up 3 per cent from 1960, reflecting strength in
Automobile sales receded slightly in December, as they did
December.
nationally.
The seasonal rise in unemployment was partly offset by im
proved job opportunities.
However,
in the recession the District dropped
further in manufacturing employment than the country as a whole, and it
had not yet recovered to the same extent as the nation.
Turning to the steel industry, Mr. Fulton said that a flood of
orders had been coming in
for certain types of steel.
Order books were
1/9/62
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full for the first
quarter, with some items being placed on allocation.
Shipments were picking up and were due to increase until mid-year.
The
automotive and appliance industries were taking large tonnage for current
production and for stockpiling, with the auto companies insisting that
their suppliers accumulate a 90-day inventory in addition to regular pro
duction needs.
In summary, the outlook was for a booming first
half in
the steel industry but for a poor third quarter, with no hope seen of
avoiding a let-down after mid-year.
Operations were now at between 80
and 90 per cent of capacity, but profits were down from prior years, on
the basis of comparable tonnage, despite the fact that the steel companies
had spent, and were spending, large sums for modernization of equipment
and to increase capacity.
The labor situation in the steel industry, with its
pervasive ef
fects on other industries, was a matter of concern, Mr. Fulton said.
The
kind of package settlement that was worked out in the automobile industry
would be substantially more expensive for the steel companies than for the
auto companies,
and evidently would necessitate a price increase.
In fact,
although there was concern about a price increase in light of foreign com
petition, it seemed almost inevitable that any substantial labor settle
ment would result in a price adjustment.
At present, there was every ap
pearance that a strike would occur; its likely duration was more uncertain.
Turning to other industries, Mr. Fulton said he understood that
businessmen were appraising the current improvement in activity with
caution. They were trying to put their houses in order and to build up
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1/9/62
adequate but not excessive inventories.
While there had been an abrupt
increase in bank loans in the District over the year end, some bankers
felt that the increase was temporary, that most of it was in loans on
securities and loans to finance companies, and it did not reflect in
ventory borrowing.
Their projection was for a rather steady volume of
commercial loans, with no real increase for at least the next 90 days.
Turning to policy, Mr. Fulton said he would hope that the bill
rate could be maintained at about the 2-3/4 per cent level, with free
reserves in the $400-$500 million area if that would contribute to a bill
rate around the level mentioned.
For the period ahead he would maintain
an even keel, with no overt action.
He would not change the discount
rate at this time.
Mr. Bopp commented substantially as follows:
There is nothing especially noteworthy to report about the
Third District. We, too, have had very brisk department store
sales. Except for a recent more-than-seasonal rise in claims
in December, the unemployment picture is looking better. In
banking, although reserve positions still are essentially easy,
there has been a perceptible trend toward less ease. Reserve
city banks have been borrowing more frequently, although only
small amounts, at the discount window, and they have been more
frequent borrowers of Federal funds. We feel that the recent
somewhat firmer "tone " of the money market is appropriate and
with Treasury operations pending should be continued.
I am concerned with the public relations aspect of our
current economic policy directive. An important reason for
changing our method was to promote public understanding and
to facilitate analysis by professional observers. The direc
tive of December 19, 1961 instructed the Manager of the Account
to conduct operations so as to produce "a somewhat slower
rate of increase in total reserves than during recent months."
Actually, as has been pointed out, total reserves have in
creased much more rapidly. An historian, looking back on this
1/9/62
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period, might be tempted to conclude that the Manager had not
followed his instructions. This is the kind of evidence in
which some historians and analysts delight.
In striking contrast to such an interpretation is the
fact that everyone who has commented on operations since our
last meeting has agreed that the Manager did an excellent job.
He was guided by the last two sentences of the directive:
"Operations shall place emphasis on continuance of
the three-month Treasury bill rate at close to the
top of the range recently prevailing. No overt
action shall be taken to reduce unduly the supply
of reserves or to bring about a rise in interest
rates."
This experience casts additional light on the nature of
our problem.
I have been impressed with the view developed
over a long period by Mr. Bryan and Mr. Johns that the direc
tive to the Manager should be as precise as possible and should
be related to the means at his disposal.
Experience in the last three weeks demonstrates that the
Manager cannot control the volume of reserves--total, nonborrowed
or free; and that they are inadequate guides to policy even if
they were subject to precise control by the Manager.
The Manager operates from moment to moment.
His only
control in the short run is over the size and composition of
the portfolio of securities. The portfolio, of course, is related
to reserves but not in any invariable or even predictable way.
It is beyond the capacity of the Manager to achieve a precise
objective couched in terms of reserves.
A directive in terms of yields on Government securities
could, of course, be achieved so long as the portfolio of Govern
ment securities was appropriate on the one hand and there were
excess gold reserves on the other. The Radcliffe Commission,
if I understand its report, would favor a directive couched in
terms of interest rates. My own view is that this is inadequate.
Neither of the two precise criteria that the Manager can in fact
achieve--size and ccmposition of the portfolio and yields on
Government securities--is adequate for our purpose in our present
state of knowledge and foresight.
This leaves us with the alternatives of expressing the
directive in some general term such as "tone" or "feel" of the
market or in terms of several criteria which would define these
rates, volume of
words--such as the Federal funds rate, bill
various reserve magnitudes, and so on. The discussion would
indicate to the Manager the relative importance that he should
attach to the several items.
1/9/62
-50
I wish we could be more precise; but I would not purchase
precision at the cost of occasionally forcing the Manager to do
what is clearly not intended.
Mr. Bryan said there were no important developments in the Sixth
District that differed significantly from national trends.
had ended the year briskly.
The District
However, he was concerned about some longer
run factors in the District.
With a heavy percentage of completely unskilled
and semi-skilled labor, he was apprehensive that in an age of automation
the Sixth District was not prepared to expand as it
had in the past decade,
and at a rate that was needed.
Mr. Bryan commented that there had been a number of statements
made during this meeting with which he would take issue, but that he would
not go into them at this particular time.
As he saw it,
every signal was
flying to indicate that the Committee should move gradually toward a more
restrictive policy.
therefore,
Abstracting the next two weeks,
that the Desk proceed according to its
he would suggest,
feel of the market and,
based on that feel, trend toward a situation of less ease.
In view of
the impending Treasury operations, he would suggest that for the next two
weeks the Desk strive to maintain an even keel.
Mr. Francis said that in the Eighth District production quickened
and unemployment declined somewhat in November.
loans and investments, expanded in December.
Also, bank credit, both
But, relying on the evidence
of bank debits, over-all activity improved only moderately during November
and, in fact, was still
slightly below the May to July average.
The
1/9/62
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District had not moved up appreciably from the plateau of activity that
appeared about mid-year in both the District and the nation.
Longer-term
measures suggested that the District was not growing in pace with the
nation in several significant economic activities.
To a large extent
this failure to keep in step with the nation reflected developments in
the St. Louis metropolitan area.
Employment in St. Louis had lagged
national growth, even though the unemployment ratio had been cut to about
half what it
was earlier in 1961.
Bank deposit growth at District member
banks in the year to November 1961 did not match the percentage increase
for all
member banks because time deposit growth was relatively less in
the District.
Construction contract awards for the first
of 1961 were about 6 per cent below year-earlier levels,
plus 2 per cent nationally.
eleven months
in contrast to a
Retail sales in the District, according to
Census data on Group I stores, were below year-ago volumes in October,
whereas nationally the totals were slightly above the previous year.
Mr. Balderston commented that although the money supply proper
increased only about 3 per cent during the past calendar year, the money
supply plus time deposits increased about 6 per cent as did the reserves
supporting private deposit expansion.
for what he was going to say next.
He mentioned that as background
This was that since the September
October period the reserves supporting private deposit expansion had
increased at an annual rate about double the 6 per cent rate of reserve
expansion since March 1, 1961.
Therefore, he would favor, as a longer
run policy, the continuation of some additions to bank reserves, but at
1/9/62
-52
a rate less than the rate that had prevailed recently.
To repeat a phrase
that he had used at the December 19 meeting, he would favor a deceleration
of the rate of acceleration.
However, even though in his opinion that
should be the longer-run goal, he would favor approaching that goal
gradually.
It
seemed to him the financial community understood the
System's actions best when the System moved from one position to another,
or changed from one direction to another, with smoothness and gradualness
rather than in a jerky fashion.
For the period immediately ahead, of
course, precedence must be given to the needs of the Treasury, which
would be in the market between now and the middle of February.
It was
especially important that the large refunding that would take place around
the first
of February should be a success because $6.2 billion of the
maturing securities were held by the public.
Consequently, during the
period between now and the middle of February he would favor the maintenance
of an even keel.
After the middle of February, there would be an opportunity
for a change of System policy if conditions at that time made such a change
seem necessary.
Chairman Martin commented that the only thing with which the
Committee was immediately concerned today was the forthcoming two-week
period.
Like Mr. Robertson, he did not see anything in the present picture
that would cause the Committee to deviate from the long-held policy of even
keel in a period of Treasury financing, and such a period was immediately
ahead.
Nevertheless, the Account Manager might have a difficult time in
trying to maintain an even keel.
He (Chairman Martin) had come to have more
1/9/62
-53
and more sympathy for the position of the Account Manager the longer he
worked in this field.
After commenting that he thought Mr. Bopp had made some good points
with regard to the formulation of the current policy directive, the Chairman
went on to say that he thought it
Treasury financing, if
would be unfortunate,
on the eve of
the language of the present directive with regard
to avoiding overt action were to be changed.
This illustrated the kind
of problem with which the Committee was confronted all the time.
There
was a major public relations problem involved in explaining System actions
to the public.
The Chairman then noted that there had been dissents at the
December 19 meeting from the implementation of policy according to the
consensus, as then stated.
Those who had dissented might still
the policy expressed in the consensus was not correct.
However,
feel that
they
probably would not want to dissent from the maintenance of an even keel
during the period of Treasury financing.
Mr. Mills said he understood that the even keel policy would be
keyed into the sort of reserve and interest rate climate that had pre
vailed in the period since the meeting of the Committee on December 19,
following which Chairman Martin noted that on December 19 there had been
a split decision, by vote of eight to four, on the implementation of policy
according to the consensus.
It would be his understanding that the even
keel now being talked about would be an extension of the policy reflected
in the majority position then expressed.
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1/9/62
Mr. Mills then said that he would have interpreted the weight of
opinion today as accepting the sort of climate that had prevailed in the
past three weeks, with an interest rate structure that was relatively in
line with the averages of that period.
Chairman Martin commented that the lesser degree of ease indicated
by the directive had been achieved by the Desk,
although by a somewhat
different route than the directive suggested.
Mr. King inquired whether it
was fair to say that, if
the Desk
had followed literally the Committee's directive of December 19, 1961,
regarding a slower rate of increase in total reserves that would have
resulted in more tightness than actually existed, and Mr. Rouse responded
in the affirmative.
As the Chairman had stated, the objectives of the
Committee had been achieved, but by a different route than indicated by
the reference to total reserves in the directive.
The Committee's
objectives were achieved by following the last part of the directive when
it
became clear that following the total reserves part would have pro
duced results contrary to those objectives.
Mr. Rouse then said he had regarded the consensus at the December 19
meeting as being in the terms used when the Chairman restated his concept
of the consensus.
sensus,
The Chairman had said at that point that the con
as he saw it,
was along the lines of concentrating on a bill
rate
in the upper part of the range of 2-1/2 - 2-3/4 per cent and trending
toward a slightly less easy monetary condition, without overt action.
Mr. Rouse added that his interpretation of what had been said today,
bearing in mind the Treasury's position, was that the consensus would be
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along the lines of concentrating on a bill rate of around 2-3/4 per cent
and maintaining the slightly less easy monetary condition that had
developed without overt action.
Chairman Martin said that he thought this was about the only way
the matter could be put.
However, Mr. Mitchell commented that he thought
the maintenance of an even keel should mean not moving in any direction
during a period of Treasury financing. That was not quite the same as
saying "a little less ease all the time."
Mr. Wayne said he would interpret
the even keel concept as meaning that the Desk would strive to maintain
the position of slightly less ease that had developed, and with this
Mr. Mitchell agreed.
Mr. Rouse indicated that this was in conformity with
the thought he had expressed previously.
Chairman Martin commented that if such a course of action for the
next two weeks was agreed upon, it would appear relatively easy for the
group consisting of the Secretary, the Account Manager, and the Economist
to draft a policy directive that the Committee could consider after the
luncheon recess.
There was no indication of a view that the drafting should not be
along such lines.
At this point Mr. Mills referred to the distribution by the
Secretary under date of January 5, 1962, of a draft of statement proposed
for inclusion in the Federal Reserve Bulletin explaining the termination
by the Open Market Committee, at its meeting on December 19, 1961, of the
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three statements of operating policies that had been in effect since 1953.
This draft had been prepared pursuant to the understanding at the
December 19 meeting.
Mr. Mills said that he would like to direct the Committee's atten
tion to what he considered an erroneous tone of the draft, a tone which
suggested to him that the termination of the operating policy statements
reflected a conclusion that the original reasons for operating in Treasury
bills exclusively had disappeared.
there were good grounds for it,
His own conception, and he thought
was that the operating policy statements
were adopted following a complete review of System open market operations
that gave primary importance to the thought that monetary policy could best
be conducted within the framework of a free market.
It was felt that the
free market should determine, with as few impediments as possible, the trend
of interest rates.
Therefore, the policy would be to operate in bills,
except as determined by proper decisions of the Committee.
He did not feel
that the proposed Bulletin article, in the manner in which it was drafted,
brought out that philosophy, as it existed and as it was accepted.
If an
article of this sort should appear in the Bulletin, he believed it would
do an injustice to Mr. Riefler, the former Secretary of the Committee, and
his dedicated study of this problem, including the papers Mr. Riefler wrote
explaining the operating policies and the reasons for their adoption.
same thing might be said with regard to the comments in the paper that
Messrs. Young and Yager wrote more recently and presented at a Harvard
The
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seminar.
-57
In his opinion it would be a disservice to permit an article to
be published without taking fully into account the different facets of the
System' s operating principles.
Chairman Martin suggested that the Committee should put down for
discussion the question whether or not it wanted to have an article pub
lished in the Bulletin.
It was not entirely clear, he thought, from the
December 19 minutes whether the Committee did or did not.
The subject
should be taken up at the next meeting of the Committee for discussion in
its
entirety.
Mr. Treiber noted that the Secretary' s memorandum transmitting the
draft article had suggested the possibility of publication of such an
article in the January or February issues of the Bulletin.
It
seemed to
him that it would be advisable to wait at least until the February issue.
This was an important subject and should be studied carefully.
He inquired
whether another draft would be envisaged in the light of comments received.
Mr. Young replied that the Secretariat was expecting comments and
had in mind preparing a redraft in the light of those comments.
In further discussion there was general agreement that publication
of an article in the January issue should not be considered, and the Chairman
commented that the Committee did not need to decide at this time whether
to publish an article in the February issue.
In reply to a question, he
stated that any comments on the draft should be submitted as promptly as
feasible.
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The Chairman then referred to the continuing authority directive
to the Federal Reserve Bank of New York that had been adopted by the Commit
tee at the meeting on December 19, 1961, and inquired of Mr. Rouse whether
the latter saw need for any change at this time, to which Mr. Rouse replied
in the negative.
Mr. Treiber said it was his understanding that the directive would
continue in effect unless the Committee took action to change it in some
respect.
If the Committee decided not to make any change, the directive
would remain in effect.
Mr. Robertson and Chairman Martin expressed agreement, and there
were no comments to the contrary.
Accordingly, it was understood, without
objection, that the continuing authority
directive, as adopted at the December 19
meeting of the Committee, would remain in
effect.
Mr. Hexter, Assistant General Counsel, entered the room at this
point.
Chairman Martin turned next to the subject of Federal Reserve opera
tions in foreign currencies, stating that in accordance with the understand
ing at the meeting on December 19, 1961, further discussions had now been
held with the Treasury.
From the minutes of the December 19 meeting, he
did not think that the scope of the authorization for further discussion
was entirely clear, except for agreement that the matter should be explored
with Counsel for the Treasury.
He noted that there had now been received
and distributed to the Committee a letter from Robert
H. Knight, General
1/9/62
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Counsel of the Treasury, dated January 8, 1962, transmitting a copy of his
opinion to the Secretary of the Treasury with regard to the power under
existing legislation of the Federal Reserve System to conduct operations
in foreign currencies under the proposed plan being considered by the Open
Market Committee.
The Chairman then turned to Mr. Hackley and asked that
he report to the Committee on his discussions with Mr. Knight.
Mr. Hackley stated that yesterday afternoon, after some previous
discussion of the matter, Mr. Knight brought to him a two-page memorandum
addressed to the Secretary of the Treasury in which he expressed general
concurrence with the legal conclusions set forth in Mr. Hackley' s memorandum
to the Open Market Committee of November 22, 1961.
Further, as indicated
in his memorandum, Mr. Knight had asked the Department of Justice whether
the Attorney General concurred in his (Mr. Knight's) opinion, and he had
been authorized by that Department to state that the Attorney General did
concur.
Mr. Hackley commented that it was gratifying to know that the
Attorney General concurred.
He added that he would like to make it plain
that he (Mr. Hackley) was satisfied with the legal conclusions reached in
his November 22 memorandum.
consider it
However, as he had indicated before, he would
preferable to have legislation enacted specifically authorizing
the proposed operations in foreign currencies.
The Attorney General's
opinion perhaps supported the legal position of the Federal Reserve System;
that opinion might make it less necessary to seek legislation.
Furthermore,
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legislation was sought but was not enacted,
that might politically, if
not legally, weaken the System's position under present law.
Mr. Hackley said, he would still
Nevertheless,
prefer to have legislation if
there could
be some definite assurance that such legislation would be promptly enacted.
Chairman Martin commented at this point that the obtaining of the
Attorney General's comments was an outgrowth of a Federal Reserve suggestion,
made in the light of points raised by several members during previous discus
sion of the subject by the Open Market Committee.
The Chairman then called upon Mr. Young, who said that last week
Mr. Knight came to his office,
if
at his (Mr.
Knight's) initiative, and asked
he could discuss this whole matter informally.
Mr. Knight stated that
he had arrived at a legal opinion that would concur with Mr.
Hackley' s
He further indicated, rather vaguely, that he might get the con
opinion.
curring opinion of the Attorney General.
He seemed to have had some con
versations with the Attorney General's Office about the subject.
indicated to Mr. Knight that if
his own opinion was now firm, it
It was
would be
helpful to have that opinion available for this meeting of the Open Market
Committee.
Also, if
the Attorney General was disposed to concur, it
seem helpful to have his concurrence reported at the same time,
would
since there
had been some indication on the part of Committee members that they would be
interested in knowing just what the Attorney General thought about this
problem.
Mr. Young went on to say that Mr. Knight then went into the matter
of legislation, which he stated he had been discussing with Mr. Hackley.
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Mr.
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Knight indicated that there were some rather strong reservations at
the Treasury about seeking legislation at this time and gave three grounds
for those reservations.
First, the international situation was very tender,
particularly with respect to volatile flows of funds.
what was happening in
It
was not clear just
international markets, but indications from figures
that had been reported to him at the Treasury were not too favorable.
such circumstances,
if
In
there were discussions on the Hill, they might be
agitating to the markets.
Second, to the extent that the problem was one
of obtaining clarifying legislation, it
was felt that it
might be better
to seek such legislation after the Open Market Committee had had some
experience in order to determine what its
problems and limitations were.
Presumably and hopefully, its operations in the initial stages would be
on a relatively small scale.
Third, there was a range of ideas on the
Hill with regard to the Federal Reserve System,
including varying views
with respect to the operations and the organization of the System.
lation, if
Legis
sought, might become a vehicle for adding various amendments
the nature of which could not be foretold.
Mr. Young said that the balance of his discussion with Mr. Knight
related to problems of organization and relations with the Treasury.
On
the matter of organization, Mr. Knight indicated a Treasury preference for
an operation that would be started under the immediate direction of a
special subcommittee of the full Open Market Committee.
In that respect,
Mr. Young explained to him the reasons why the original design of the staff
proposal had been changed so that the responsibility from the outset would
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be in the hands of the full
Committee.
Mr. Young related to Mr. Knight
the feeling that since this was not an undertaking which,
it
would be easy to withdraw from, it
if
entered into,
would probably be best from the
outset to go forward with the full Committee having the responsibility.
After this explanation Mr. Knight seemed to concur, or at least to be
satisfied.
Mr. Knight then went into the matter of how responsibility
might be divided between the Federal Reserve and the Treasury.
He advanced
very tentatively an idea of his for discussion and asked whether or not the
Federal Reserve staff proposal with regard to the division of responsibility
was intended as more than a starting point for negotiations.
Mr. Young
explained to him that the proposal, before being presented to the Open
Market Committee, had been seen by Under Secretary of the Treasury Roosa,
not with the idea, however,
of getting any commitment.
In fact, Mr. Roosa
would have been unable to make any commitment because he was not in a posi
tion to consult with his colleagues and with the Secretary of the Treasury.
Therefore,
the proposal could only be regarded as a beginning point for
negotiations and discussions between the Federal Reserve and the Treasury
if the Open Market Committee decided to go ahead with the program.
Mr.
Young said he told Mr. Knight that at the moment the Federal Reserve staff
was without any instruction from the Committee to discuss the division of
responsibilities in any detail.
The staff would have to await an instruction
from the Committee.
Chairman Martin said he spent about an hour yesterday with the
Secretary of the Treasury and that he thought there had been a fairly good
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meeting of the minds.
The Secretary went over with him the points Mr. Young
had just presented regarding the question of seeking legislation.
be seen, there were real problems involved.
As could
Where he and the Secretary
came out was that on the basis of the concurring legal opinions, and with
out crossing the bridge as to what specific legislation, if any, should be
sought, the Open Market Committee might want to authorize him (Chairman
Martin) to take the matter up with the Chairman of the House and Senate
Banking and Currency Committees in order to get their advice.
If the Open
Market Committee wished to give such authorization, he would then report
back to the Committee on January 23.
In this manner, the Open Market Com
mittee would be in a position to have the benefit of some further guidance.
If the Committee Chairmen, after hearing Chairman Martin's explanation,
should feel strongly that the introduction of legislation would cause a
great deal of stir, it might be better not to embark on that course.
In
this, he thought the Secretary of the Treasury concurred. Whatever
advantages there might be in System operations in foreign currencies could
be completely destroyed by a long Congressional debate on the subject.
The Chairman then commented that apparently there would be some
publicity even if the System should decide to move forward without
Congressional sanction in the form of specific legislation.
If he under
stood correctly, the Board would have to make an amendment to one of its
regulations.
Mr. Hackley responded that the Board would have to make an amend
ment to Regulation N, Relationships with Foreign Banks and Bankers, and
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certain instructions would have to be issued by the Federal Open Market
Committee.
It
would seem to be a matter of judgment whether those instruc
tions should be made public.
Chairman Martin noted that a delicate problem was involved, partic
ularly in view of the balance-of-payments information that would be coming
out at the middle of the month.
He suggested that the opinion of the
Treasury's General Counsel be studied in conjunction with the opinion of
Mr. Hackley.
Also, he would propose, if the Committee was willing, to explore
this matter with the Chairman of the Banking and Currency Committees and to
report back to the Open Market Committee.
Then there could be a full discus
sion at the next Committee meeting against the background of whatever he
(Chairman Martin) could develop from the discussions with the Committee
Chairmen.
Mr. Treiber said he considered this a very important matter, on
which it was important to move forward.
He thought it would be highly
desirable for Chairman Martin to talk with the Chairmen of the Banking
and Currency Committees.
Mr. Mitchell observed that none of the people being consulted,
including the Chairmen of the Banking and Currency Committees, would
appear to have anywhere near the same stake in the matter, in terms of
prestige and public relations, as the Federal Reserve.
If the Federal
Reserve got into the proposed operations via the back door and made a
mistake, particularly with no precedent for such operations over a period
of 30 or 40 years, he felt that the reverberations would be serious.
No
1/9/62
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one else had reason to be nearly as concerned as the System itself.
If
a mistake should be made,
Reserve that did it.
everyone would say that it
was the Federal
Therefore, before making a move of this sort, he
felt that the possible public relations reaction should be considered
fully.
Chairman Martin responded that the point was well taken.
He
simply would like to inject the thought that if a crisis should develop in
this field and the Federal Reserve was not alert to it,
the repercussions
could be equally severe.
Mr. Mitchell then inquired about the progress being made in
developing draft legislation, to which Mr. Hackley replied that the draft
prepared prior to the December 19 meeting had since been re-worked to
some extent.
It had been discussed with the legal staff of the New York
Bank, and the Bank was satisfied.
He felt
that the Federal Reserve would
be prepared to go forward with a request for legislation fairly promptly
if
such a course should be decided upon.
Chairman Martin agreed, adding that the question came down to
whether legislation should or should not be sought.
Mr. King commented that the reservations expressed by the Treasury
appeared to be based on apprehension as to what might happen if
were requested.
legislation
He went on to say that he would want to be cooperative with
any Treasury or any Administration.
However, it appeared to him that
because of apprehension as to what might happen if legislation were sought,
the Federal Reserve might be asked to take all of the responsibility, and
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1/9/62
he would have a question about cooperating to that extent.
It
should
be recognized, he thought, that all of the opinions that had been
expressed came from more or less a common base and might not necessarily
be thoroughly objective.
He agreed that the thing to do next was to
talk with the Chairmen of the Banking and Currency Committees.
However,
he was inclined to think that the Federal Reserve was being asked to go
a little too far in the name of cooperation.
As he understood it, the
Treasury was suggesting that it might not favor seeking legislation
because of apprehension as to the outcome.
Chairman Martin responded that he wished to make it
one had asked the Federal Reserve for its cooperation.
the impetus had come from the Federal Reserve.
clear that no
To date, all of
It had approached the
Treasury; the Treasury had not approached the System.
When the Treasury
was approached, however, it was entitled to raise a question.
tion was whether it might not be inadvisable to do anything.
This ques
In that case,
the Treasury might want to use the Stabilization Fund entirely.
It
should be kept clear, the Chairman continued, that the proposal
now before the Committee had been developed within the Board and the New
York Bank.
It had been discussed over a period of several months.
Every
effort had been made to give each member of the Open Market Committee an
opportunity to express his opinion on the matter, and no final decision of
any sort had yet been made.
proposal.
There were certainly questions involved in the
However, he (Chairman Martin) happened to believe that the world
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1/9/62
had changed, in fact much more than he understood, and he was convinced
that this job was going to have to be done by somebody, whether it be the
Stabilization Fund or the Federal Reserve.
Mr. Thomas, he noted, had
submitted a good memorandum on the rationale for such a program being
undertaken by the Federal Reserve, but the point had not been resolved as
yet.
In any event, however, nobody had asked the Federal Reserve for its
cooperation or made any request.
In reply to a question by Mr. Mitchell regarding how Under Secretary
Roosa had entered into the picture, Mr. Young recalled that last summer he
and Mr. Furth prepared a memorandum in which operations in foreign currencies
were proposed.
It was then suggested that an operational framework for such
operations be designed, and additional memoranda, as distributed to the
Committee, were prepared for that purpose.
It was in connection with that
work that at one point he told Mr. Roosa in confidence of the assignment
on which he (Mr. Young) was then engaged.
After further discussion, Mr. Mills said that he would like to
second the proposal that Chairman Martin be authorized to contact the
Chairmen of the House and Senate Banking and Currency Committees to acquaint
them with the problem and with the approach that the System might be making
to operations in foreign currencies, and to obtain their reaction.
Chairman Martin added that, if so authorized, he would like to
report back to the Open Market Committee at its next meeting and to have
a full discussion by the Committee of the whole problem.
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1/9/62
The Chairman then inquired whether there were any objections to
proceeding in this manner.
No objection being indicated,
it was under
stood that he would contact the Chairmen of the Banking and Currency
Committees for the purpose indicated and that he would then report back
to the Open Market Committee at its
next meeting.
In this connection, Chairman Martin said it
should be made clear
that at this point no commitment was being made to anyone.
It was agreed that the next meeting of the Open Market Committee
would be held on Tuesday, January 23, 1962, and that succeeding meetings
6, the
would be scheduled for Tuesday, February 13, and Tuesday, March
latter to be the annual organization meeting of the Committee.
Mr. Treiber noted that at the December 19 meeting Mr.
Thomas had
referred to the effect of adoption of the continuing authority directive
on certain operating authorities that are customarily reaffirmed each year
at the Committee's organization meeting.
He said that, if
desired, he
would be prepared to comment on that subject at this meeting.
Chairman Martin suggested, however, that the subject be deferred
until another meeting of the Committee,
and there was agreement with this
suggestion.
The meeting then recessed and reconvened at 2:15 p.m., with the
same attendance as at the beginning of the morning session.
There were distributed copies of a draft of proposed current
economic policy directive to the Federal Reserve Bank of New York that
1/9/62
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had been prepared by the Secretary, Account Manager,
and Economist.
The
draft read as follows:
It is the current policy of the Committee to permit further
bank credit and monetary expansion so as to promote fuller uti
lization of the economy's resources, together with money market
conditions consistent with the needs of an expanding domestic
economy, taking into account this country's adverse balance of
payments as well as the Treasury financing calendar.
To implement this policy, operations for the System Open
Market Account during the next two weeks shall be conducted
with a view to maintaining the generally less easy monetary
conditions that have prevailed in recent weeks, and to continu
ing the rate on three-month Treasury bills within the recent
range, without overt action to change unduly the supply of
reserves or the level of interest rates.
In reply to a question whether the Account Manager felt that he
could operate satisfactorily under a directive along the lines drafted,
Mr. Rouse stated that he could.
In a discussion that ensued concerning the language of the proposed
directive, certain changes were suggested.
It developed that a majority
favored eliminating the final clause, beginning with the words "without
overt action,"
Those supporting the elimination of this language sug
gested, in essence,
that it was unnecessary or redundant in view of the
preceding phraseology, that it might convey unintended implications, and
that it might inhibit the Manager if certain actions were deemed necessary
to carry out other portions of the directive.
A minority view, favoring
retention of the language, was based on the thought that the language had
been included in the directive issued following the December 19 meeting,
that its elimination of this particular time might be misunderstood, and
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that it pointed up the desire of the Committee that an even keel be main
tained during the forthcoming two weeks.
There was general agreement with a suggestion that the words
"generally less easy" be stricken from the portion of the directive
referring to conditions that had prevailed in recent weeks,
and that the
Desk should seek to maintain during the ensuing two weeks, inasmuch as
those words would seem to convey the impression of a more pronounced shift
in money market conditions than the Committee had had in mind at the
December 19 meeting, and possibly also the impression that same further
shift was contemplated during the next two weeks.
There was likewise general agreement with a suggestion that the
term "money market conditions," as used in the first paragraph of the draft,
be changed to "monetary conditions," and that, conversely, the term
"monetary conditions," as used in the second paragraph, be changed to
"money market conditions."
In the course of the comments on the directive, Mr. Mills
recalled that at the December 19 meeting he had dissented from the adoption
of a procedure whereby the policy directive, in its then-existing form,
would be separated into a continuing authority directive and a current
policy directive, with the latter to be drafted and acted upon before the
adjournment of each meeting.
He felt that his grounds for dissent were
validated by the difficulty being experienced in issuing a current policy
directive, as exemplified by the discussion that had occurred today regarding
Cite this document
Federal Reserve (1962, January 8). FOMC Minutes. Fomc Minutes, Federal Reserve. https://whenthefedspeaks.com/doc/fomc_minutes_19620109
@misc{wtfs_fomc_minutes_19620109,
author = {Federal Reserve},
title = {FOMC Minutes},
year = {1962},
month = {Jan},
howpublished = {Fomc Minutes, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/fomc_minutes_19620109},
note = {Retrieved via When the Fed Speaks corpus}
}