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 23, 1962, at 10:00 a.m.

PRESENT:

Mr. Martin, Chairman

Mr.

Mr.

Mr.

Mr.

Mr.

Hayes, Vice Chairman

Balderston

Irons

King

Mills

Mr. Mitchell

Mr. Robertson

Mr. Shepardson

Mr. Swan

Mr. Wayne

Mr. Fulton, Alternate

Messrs. Ellis, Johns, and Deming, Alternate

Members of the Federal Open Market Committee

Messrs. Bopp, Bryan, Scanlon, and Clay, Presidents

of the Federal Reserve Banks of Philadelphia,

Atlanta, Chicago, and Kansas City, respectively 1/

Mr. Young, Secretary

Mr. Sherman, Assistant Secretary

Mr. Kenyon, Assistant Secretary

Mr. Hackley, General Counsel

Mr. Thomas, Economist

Messrs. Baughman, Coldwell, Einzig, Garvy, Noyes,

and Ratchford, Associate Economists

Mr. Rouse, Manager, System Open Market Account

Mr. Molony, Assistant to the Board of Governors

Messrs. Holland and Koch, Advisers, Division of

Research and Statistics, Board of Governors

Mr. 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

1/ Mr. Bryan joined the meeting,

in the minutes.

with Mr. Brandt, at the point indicated

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Mr. Broida, Economist, Government Finance Section,

Division of Research and Statistics, Board of

Governors

Messrs. Eastburn, Hostetler, Jones, and Tow, Vice

Presidents of the Federal Reserve Banks of

Philadelphia, Cleveland, St. Louis, and Kansas

City, respectively

Messrs. Stone, Brandt, and Litterer, Assistant Vice

Presidents of the Federal Reserve Banks of New

York, Atlanta, and Minneapolis, respectively

Mr. Cooper, Manager, Securities Department, Federal

Reserve Bank of New York

Mr. Anderson, Financial Economist, Federal Reserve

Bank of Boston

Upon motion duly made and seconded,

and by unanimous vote, the minutes of the

meeting of the Federal Open Market Committee

held on December 19, 1961, were approved.

Under date of January 5, 1962, there had been sent to each member

and alternate member of the Federal Open Market Committee, and to each

President not currently a member of the Committee, a copy of the report

of audit of the System Open Market Account made by the Division of

Examinations of the Board of Governors as at the close of business

August 25, 1961.

The report, which has been placed in the Committee's

files, was submitted to the Secretary of the Committee under date of

October 3, 1961, in accordance with the action of the Federal Open Market

Committee at its meeting on June 21, 1939, as reaffirmed most recently

at the meeting on March 7, 1961.

Chairman Martin inquired whether any of the members of the

Committee wished to comment on the report, and there was no indication

to such effect.

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-3.

Accordidngly, the audit report was

noted and accepted without objection.

Before this meeting there had been distributed to the members

of the Committee a report of open market operations covering the period

January 9 through January 22, 1962.

A copy of this report has been

placed in the files of the Committee.

In supplementation of the written report,

Mr. Rouse made the

following comments:

The results of open market operations since the last

meeting of the Committee have not been entirely satisfactory

because of the persistently greater ease in the money market

than I think the Committee wold have preferred. Free reserves

averaged $548millionfor the week ended January 10 and $464

million for the week ended January 17. Federal funds have

traded below 3 per cent

during

most of the period, especially

in the last two busiess days, when they declined to 1-1/2 per

cent and 1-1/4 per cent, reflecting in part the flow of country

bank excess reserves to the money centers. However, over a

longer period these developments have been largely due to a

unusually high level of float and a substantial

continuing

decline in required reserves, both of which factors have been

hard to anticipate and deal with. Treasury bill rates have

declined from the 2-3/4 per cent level for 91-day bills as a

result of an increasing interest in bills from any sources,

including banks having surplus reserves. The average rate for

91-day bills in yesterday's auction was about 2.68 per cent as

compared with 2.77 per cent in the previous week's auction the

average for the long bills was 2.88 per cent yesterday, compared

with 2.97 per cent a week ago.

We have been reluctant to sell Treasury bills more heavily

in order to deal with the bill rate because of the possibility

that float would decline sharply overnight, in which case we

would most likely have to reverse our operations and supply

reserves in volume. While we cannot say even closely when float

will go down, projections for the next two weeks indicate that

we may have to supply as much as $500 million of reserves to

keep reserve availability about where it has been. Any sizeable

purchases of bills cannot help but push bill rates even lower

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and it seems unlikely that any large amount of securities

other than bills would be available for outright purchase.

In any case, it would probably not be appropriate to buy

much in the intermediate area in the face of the forthcoming

February Treasury refinancing. We may, however, be able to

achieve something through repurchase agreements.

The Treasury's borrowing of new cash through the reopening

of the 4 per cent bonds of 1969 was a moderate success in that

the offering was adequately covered with most of the subscrip

tions being from smaller commercial banks, as the Treasury had

anticipated. Since the bonds were well placed in the subscrip

tion, the floating supply of the issue has been relatively small.

And to the extent that there is a floating supply it is probably

concentrated in the hands of large banks that went in on an

underwriting basis and that are experienced participants in the

market. As a result, the after market has been a good deal

better than many in the market thought it would be when the 60

per cent allotment was announced. That subscriptions were not

greater can be attributed to the fact that the larger commercial

banks were generally not interested in extending maturities as

far as 1969 in the face of a probable offering of a shorter

intermediate issue in the February refunding operation. The

Treasury took a calculated risk in offering the 4s of 1969,

was better to take advantage now of an oppor

believing that it

tunity to extend to 1969 rather than wait until the February

refunding, even though this move might create a problem for the

refunding. The Treasury also took into consideration its

unwieldy debt structure and the opinion of foreigners with

respect to how the debt is managed.

It

appears now that the February refunding might have to

be limited to a short "anchor" issue and something in the 4-5

year area, for which there still seems to be a good appetite.

The market generally is expecting the refunding to be carried

out on an exchange basis and is

currently bidding modest pre

miums on the maturing issues. The maturing issues total about

$11 billion in three issues of notes, of which over $6 billion

are held by the public. An announcement of the terms is to be

made on February 1.

Thereupon, upon motion duly made

and seconded, the open market transactions

during the period January 9 through January

22, 1962, were approved, ratified, and con

firmed.

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The economic review at this meeting was in the form of an auditory

visual presentation, for which Messrs. Cardon, Garfield, Hersey, Axilrod,

and Trueblood of the Board's staff joined the meeting.

The introductory portion of the text of the economic presentation

was as follows:

In February last year the recession ended. The decline

had lasted about as long as earlier postwar declines but had

been much milder, and the turnaround came with production

still considerably above the preceding low point of April 1958.

The initial

rise was sharp, as in 1958, but in contrast

to 1954.

By July, before the defense program was expanded,

industrial output was up 10 per cent, to 112 per cent of the

1957 average.

From then until October there was little

further rise, but later advances brought the index to 115 in

December--nearly 5 per cent above the mid-1960 level.

Gross national product figures, when adjusted for price

changes, tell about the same story for activity in the whole

GNP in current

economy. Last year, with prices rising little,

dollars rose from an annual rate of $501 billion in the first

quarter to $542 billion in the fourth quarter. This quarter

the rate may well exceed $550 billion.

Meanwhile activity abroad, which rose further early in

1961, leveled off later. In Western Europe, industrial pro

-half

duction has been advancing rapidly for a decade-and-a

with only minor pauses--apparently little influenced by

recurring recession in the United States.

So far, prices of industrial commodities generally have

not shown the advance usually evident by this stage of the

cycle, lending support to the view that this recovery may be

more sustainable than some others. Sensitive prices, which

did rise from January to August, have since fluctuated within

steel scrap prices

Novemberend

a narrow range. Since the of

have risen, accompanying a strong advance in steel output,

which may reflect in part building of inventories in antici

pation of a possible strike this summer.

While the

general shift from inventory liquidation to

inventory replenishment came unusually early this time and

was an important element in the initial recovery in demand

and production, the fourth quarter rise in aggregate demand

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reflected almost entirely a sharp increase in final demands,

especially consumer demands.

The fourth quarter rate of

inventory accumulation was not especially high.

While demand and production have increased considerably

since last winter, there still

appears to be enough unused

capacity to permit some further rise in activity without

creating strong pressures on resources or prices.

How much

is one of the tough uetions.

Important shortages may

develop in particular areas while the economy at large or

even the manufacturing sector is still

operating well below

capacity. The postwar high for manufacturing, reached in

mid-1953, was 94 per cent. Also, changing expectations as

well as changing rates of act ivity may affect demand. This

time, however, with a climate of opinion in which fewer people

regard inflationary developments as inevitable, it may be

possible to achieve higher levels of capacity utilization

than in other recent periods without developing strong infla

tionary pressures. The current situation thus holds out hope

for the future, but it also continues to present problems which

have become all too familiar. While nonagricultural employment

rose by a million after early 1961, the number unemployed in

December represented about 6 per cent of the civilian labor

force.

This was slightly higher than the proportion unemployed

at the corresponding stage of the previous upswing in early

1959, and at no timeduring 1959-60 did unemployment fall

appreciably below 5 per cent.

The

balance of payments also remains a major problem.

The high trade surplus early in 1961 reflected a low level of

imports due to recession in this country. Transfers of gold

and dollars were temporarily in our favor in the second quarter,

partly because foreign governments made special debt repayments

to the United States. At current levels of U. S. demand for

imports, the trade surplus is again too small to cover our

adverse balance in other payments and receipts.

Private capital

outflows, both short-term and long-term, have been an important

element in this adverse balance.

Developments leading to speculative buying and a broad

rise in prices in this country would aggravate the balance of

payments situation and have disturbing repercussions on the

domestic economy

Thus another problem, as the economy

moves

toward higher utilization of available resources, will be to

avoid inflationary developments.

During the past year, an increased supply of bank reserves,

together with an increase flow of saving into financial assets,

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helped borrowers to obtain a growing volume of funds in

credit markets without a sustained or substantial rise in

interest rates.

Demands for credit, mainly Federal and

long-term private credit, expanded after the early months

of last year, and for the year as a whole 25 per cent more

funds were raised in credit and equity markets than in 1960.

Increases in bank loans and investments supplied a

larger portion of credit demands than in most other years.

The public's dollar holdings of liquid assets increased

substantially during the year, but not so rapidly as GNP.

Thus the ratio declined--as it has in other recovery periods.

Partly as a result of monetary and debt management

policies, directed toward fostering economic recovery and at

the same time not encouraging an outflow of funds abroad,

interest rates have moved within a narrow range since mid-1960.

They did not decline as low as in early 1958, nor did they

show the sharp rise that followed later in 1958.

The economic presentation also included sections on the U. S.

balance of payments, recent demand changes in the United States, recent

changes in employment and unemploment, prices, monetary and fiscal

developments, and the Federal budget.

The concluding portion of the

presentation was as follows:

We may well ask what general observations emerge from

our rather detailed analysis. What is there significant

that can be said in a few words about the past developments,

future prospects, and current problems relating to the

balance of international payments, unemployment, and

inflationary potentials?

First of all, in discussing production, employmnt,

demands for capital goods, interest rates, and the like,

repeated reference has been made to the mild nature of the

1960-61 recession. While the U. S. economy did not show

the sort of stability evident in Western Europe, it did

show less decline this time than in any other postwar

recession.

Second, the turnaround in early 1961 started from a

trough much above that in April 1958. The rise in industrial

production from the 1958 low to the 1961 low was more than

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twice as large as the advance from the 1957 high to the 1959-60

high.

Moreover, although unemployment is still disturbingly

high, it did not reach as high a level in the recent trough as

it did in 1958.

A third point emerging is that the current recovery has

its own characteristics. Unlike 1954, when any real advance

was delayed for several months after the decline ended, recovery

this time began immediately after the low was reached. Unlike

1958, the 1961 increase in activity slowed down after only five

months of rapid advance, with industrial production in the

second five months rising only three per cent rather than seven.

Commodity prices meanwhile have been unusually steady in

this recovery.

Consumer prices are still

increasing somewhat,

it is true, but the advance lately has been chiefly in the

service area and there the rate of increase has been less rapid

than earlier. Belief in the inevitability of inflationary

developments appears to be less widespread than it was earlier,

although yields on common stocks are lower relative to those

on bonds than early in 1959.

Interest rates in this upswing have risen relatively little,

following only moderate declines during the recession. Fluctua

tions in business profits have been less sharp than in earlier

cycles, and this has been a principal factor making for less

drastic shifts in Federal revenue and the various net budget

positions.

The rather generally moderate nature of developments in

business and finance, moreover, has permitted continuation of

a policy of making bank reserves readily available longer during

this recovery than in earlier periods, even though operations

have endeavored to discourage the outflow of short-term funds

to markets abroad.

This brings us to the future, and here the observations

mainly take the form of questions.

Will the generally moderate

nature of the recovery and the greater stability of prices so

far tend to make expansion more sustainable this time?

It

should, but immediately questions come to mind about the

possibility of inventory accumulation in anticipation of a

steel strike, as in the first half of 1959. Will the develop

ments then be repeated? It is easier to say that history

seldom repeats itself than it is to see a clear path to an

early settlement of the strike.

A broader question is how much further the use of available

resources can be expanded without creating strong upward price

1/23/62

pressures?

Surely some distance, and perhaps farther than

before, if it is generally felt that inflation is not inevitable.

What are the directions in which progress can be sought in

the balance-of-payments situation? Avoidance of cost and price

rises is one of the most basic essentials of any program in this

area and dampening of incentives to lend and invest abroad is

another.

These are all problems that cannot be solved by monetary

and fiscal policies alone. Efforts must be made by business

and labor to achieve and maintain a cost and price structure

that will stimulate demands from abroad and can sustain demands

at home. Thus, with an approach to a balanced Federal Government

budget in prospect, along with the existence of a substantial but

not excessive degree of financial liquidity in the economy, the

need for fiscal and monetary restraints, or stimulants, will

depend mainly upon demands as they develop in the private economy.

It was understood that copies of the text of the economic presenta

tion and the accompanying charts would be sent to the Committee and would

be placed in the files of the Committee.

Mr. Hayes then presented the following statement of his views with

respect to the business outlook and credit policy:

It seems to me that the over-all domestic business situation

has changed very little over the last two weeks. Although the

signs of a possible acceleration that were apparent two weeks

ago have faded, nevertheless the prospect is favorable for

continued healthy expansion. It was encouraging that the strong

advance in GNP in the fourth quarter was achieved without help

from inventory accumulation. Inflationary overtones are still

conspicuous by their absence, and there are no definite signs

yet of any unsound steel inventory buildup in anticipation of

a steel strike. In contrast with some softening in automobile

demand in December, consumption of other durables and of non

durables improved.

While the expansion in total bank loans in December was less

than might have been expected from the earlier data on weekly

reporting member banks alone, it would still appear that there

has been some modest improvement in bank loan demand, after making

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allowances for special factors, including tax borrowing and

year-end window-dressing transactions. Business loans have

now risen just as much above the recession trough as they

did in the corresponding period following the 1958 cyclical

trough. Comments of New York City bank loan officers tend

better

to confirm the view that loan demand is rising a little

than seasonally. The latest statistics on the money supply

and related data suggest that the economy's degree of liquidity

is generally appropriate.

In contrast with the domestic scene, the balance-of

payments position remains decidedly disturbing. It is true

that the preliminary estimate of the December deficit is a

trifle better than the estimate available at the last meeting.

points to a deficit in the fourth quarter of $5

But it still

to $5-1/2 billion, seasonally adjusted annual rate, and a

deficit of $3 billion for 1961 (excluding special debt repay

ments).

The merchandise trade surplus has behaved surprisingly

well, with some apparent increase from the third to the fourth

quarter--but some drop in the months to come might reasonably

be exected on the basis of cyclical phasing here and abroad.

Meanwhile the recent over-all deficit figures suggest that

short-term capital movements, including "unrecorded transactions,"

have been moving heavily against this country.

While it

is

doubtless better to have the deficit attributable mainly to these

short-term flows than to more basic long-term deficiencies, it

is the size of the over-all deficit that determines how many

additional dollars are being placed in the hands of foreigners

and therefore how large an additional drain on our gold stock is

being potentially created. Moreover, the trend of the over-all

deficit is undoubtedly causing a good deal of concern abroad.

We cannot afford a complacent attitude toward such developments.

Monetary policy cannot do the whole job of remedying the balance

of payments, nor should we give the public the impression that

we think it can do the job; but the Federal Reserve is as much

concerned with protecting the international standing of the

dollar as any other arm of the Government, and in some respects

more directly so.

I shall not try to go into detail on the relationship

between the heavily adverse short-term capital movement and

the relative position of interest rates and credit availability

The relationship has been well spelled out in

here and abroad.

previous discussions at Committee meetings and in various memo

randato which the Committee members have had access. In general,

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however, it is hard to deny the importance of the fact that

this country is just too easy a place in which to borrow and

not a sufficiently attractive place in which to invest. As

the domstic economy continues to improve, we can well afford

to take steps to modify this set of conditions and try to

induce some return flow of capital, without incurring undue

risks domestically.

In terms of open market policy this means that we should

edge towards less ease, with close attention to short-term

market rates. I can see no reason whatever for maintaining

free reserves at approximately the same level as late last

summer, in view of all the economic changes that have occurred

since. I

would think we should try to keep the ninty-day

bill rate above 2-3/4 per cent, and that we would prefer to

see it move towards the 3 per cent level, even though it be

at the expense of lower reserves, however measured. The

current economic policy directive could be couched in such

terms.

It would be well if a good start along these lines could

be made between now and the time of announcement of the

Treasury's February financing. Most signs now point to the

likelihood of our having to proceed further in this tightening

process after the refunding is completed. It would be fairer

to the market to make some start, at least, before the terms

of the offering are settled, to minimize later accusations that

we have "pulled the rug out" from under the subscribers to the

new issues. By the same token, this would suggest that we urge

the Treasury to use shorter-term issues, which are less vulner

able pricewise, and to price the generously.

In our Bank my fellow officers and I, as well as our

directors, have done a good deal of soul-searching lately on

the subject of a possible discount rate increase. The balance

of-payments problem is serious enough to raise the question

whether we should not act on the rate in advance of a market

rate rise, in order to emphasize the increase as a signal of

our determination to do our part in meeting the critical inter

national problem. On the other hand, I recognize that we have

very little time before an "even keel" policy is once more

required. I also recognize that discount rate action for which

the way has not been paved through market rate developments could

subject the System to accusations of premature tightening that

especially if it gave rise

might endanager the domestic expansion,

to exaggerated expectations as to future monetary restraints.

1/23/62

12

At the same time, we cannot escape the fact that we shall be

subject to severe criticism if inaction on our part should

contribute to a new dollar crisis.

On balance, I would be inclined to pass up the idea of

a discount rate move in the immediate future, with the thought

that a move may very well be seriously considered following

the next meeting. In the meantime I would hope that spokesmen

for the System would stress to the Administration the serious

ness with which we regard the international outlook and would

urge a more prompt and vigorous concerted Government program

to meet the balance-of-payments outlook as we appraise it--in

which program a contribution in the field of monetary policy,

as set forth above, would play a part

Mr. Johns said he found himself in agreement with the view expressed

by Mr. Hayes that the System should be moving toward less ease.

Although

he recognized the differences between this period of recovery and expansion

and similar periods since the Treasury-Federal Reserve Accord in 1951, it

seemed to him, nevertheless, that the time was either here or rapidly

approaching when the monetary policy that the System had been following

must be reconsidered.

It appeared to him that in no similar period of

the business cycle since the Accord had monetary policy been so easy, even

taking into consideration the fact that velocity had not been increasing

as rapidly as in earlier periods.

Whether monetary actions were measured

by the rate of change in bank reserves, the rate of change in the money

supply, the change in interest rates, or free reserves, the fact remained

that the System had been and was following an expaansionary policy.

Further, the degree of ease now being pursued was comparable to that of

a year ago, when the country was in recession, which raised the question

whether the same monetary policy was appropriate at such dissimilar points

in the business cycle.

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Mr. Johns

said he was inclined to believe that the rate of

increase of reserves and money ought to be permitted to decline, or

caused to decline; he would suggest a decline to about half the rate

of increase that had occurred during the past few months.

He would

expect such a decline to be followed by increases in interest rates,

and the Treasury bill rate would probably rise to or above the present

discount rate.

At that time, it not before, he would think that the

discount rate should be adjusted upward.

Higher interest rates would

be beneficial from the standpoint of the balance of payments, both in

the shorter and the longer run.

Further, he found it difficult to have

any great confidence in the view that the danger of inflationary price

rises was less now than it had been in previous periods of expansion

in the past decade.

of the business

As he recalled, it was not until after this stage

cycle that marked price rises occurred in previous

periods of expansion, and that might also be the case this time.

Mr. Bopp commented that the generally optimistic sentiments of

two weeks ago did not seem quite as strong today.

apparent

The spurt that seemed

two weeks ago had suggested that the pace of expansion might

have been quickening more than most people were anticipating, and that

it might not be long until evidence was seen of stresses and strains in

the economy.

However, the pace of activity now seemed to have settled

down somewhat, and one could feel more secure in advocating a continuation

of the monetary conditions that had prevailed, abstracting the past two

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weeks.

There was no evidence of significant price changes, and until

such evidence did appear a presumption would exist on the side of

continuing the degree of monetary ease that had existed prior to the

past week or so.

He would

recommend such a policy.

Mr. Fulton reported that industrial production continued

generally strong in the Fourth District in the early part of the current

year.

Nevertheless, there had been a fairly acute reduction in new car

sales, unemployment had risen a bit more than seasonally, and department

store sales had slipped.

Turning to the steel industry, Mr. Fulton said that orders were

still coming in and that the order books were full for the first quarter

for certain kinds of steel.

hands of user

It was estimated that inventories in the

were about 11 million tons,

the present use of steel.

which was low in relation to

However, inventories were expected to build

up to 21 million tons by midyear in anticipation of a strike,

whereas a

normal level of inventories at the current rate of consumption would be

about 15 million tons.

Therefore, it appeared that the latter part of

this year would be marked by a considerably lower output of steel.

Regardlss of how much talk there might be about not accumulating large

inventories, there were pressures for such accumulation.

However,

borrowing to finance the building of inventories had not yet shown

up

because the orders for steel were booked for delivery after the first

of the year, even though the steel mills began to accumlate some

inventories prior to that time for future shipment.

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In view of the present and prospective borrowing of activity

in the first

part of this year from activity in the latter part of the

year, Mr. Fulton said that he would not like to see any drastic revision

of the availability of credit.

Free reserves had been more than adequate

in the recent past, however, due to float and other unforeseen conditions.

He would like to see the bill rate maintained at around 2-3/4 per cent,

which probably meant that free reserves would have to be lower than at

present, perhaps between

$400 and $450million.

He would not favor

changing the discount rate at this time.

Mr. Mitchell said he would agree precisely with Mr. Bopp and

roughly with Mr. Fulton.

He had only two other comments.

First, he

thought there was an increasing tendency to employ what might be called

a count-down technique in monetary management.

This involved beginning

with a certain month of trough or peak, counting months from that point,

and concluding that the time had come to make one move or another.

However, the peculiar value of monetary management was in not counting

out actions in advance.

Instead, monetary policy should be formulated

according to the events of the moment.

When people said that this was

the time to act because a certain number of months had elapsed since a

given point, he would be cautious about accepting that kind of advice.

The second point that he wished to make related to the comments of

Mr. Hayes about the international situation.

It might be true that this

country was a good place to borrow for people in countries with higher

1/23/62

interest rates.

Nevertheless,

one must be cautious about adopting a

particular policy that was at odds with what the domestic economy

required.

A move in the direction of higher interest rates would not,

in his opinion, renew the confidence of foreigners in this country.

Such a move would perhaps make it a little harder for American banks

to lend abroad, but this was about as much as the technique could hope

to accomplish. Therefore, while the Open Market Committee should give

thought to what Mr. Hayes was saying, he (Mr. Mitchell) would be

reluctant to move too far in the direction of encouraging higher interest

rates.

At this point Mr. Bryan joined the meeting, along with Mr. Brandt.

Mr. King indicated that he agreed with the point of view expressed

by Mr. Bopp.

Developments in the market, as referred to earlier by

Mr. Rouse, should be kept in mind.

The seasonal pressure had appeared

that one would normally expect to appear,

and in his opinion it

been a mistake to try to counteract that pressure fully.

circumstances,

he felt

the past two weeks.

would have

In the prevailing

the System Account had been handled well during

There should be no discount rate increase at the

present time.

Mr. Shepardson said that he was inclined to agree with the views

expressed by Messrs. Hayes and Johns.

The supply of reserves and money

had been building up at a faster rate than was anticipated.

At its two

preceding meetings, the Comittee had talked in terms of leveling off

the rate of growth somewhat, and it seemed to him that the growth rate

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should be leveled off.

The System should be cognizant of the inter

national situation and make such contribution as it could in light of

that situation.

This would call for a trend toward less ease, and he

would concur completely with the appraisal of Mr. Hayes.

Mr. Robertson recalled that at the meeting five weeks ago he

had expressed the view that there should be a gradual edging toward less

ease.

Two weeks ago he expressed the same feeling,

although his view

was moderated at that time by the advisability of maintaining an even

keel in the light of Treasury financing.

have the same view.

Today, however, he did not

There appeared to have been a moderating of the

pace of expansion and of credit demands such as to make it appropriate

to continue the degree of ease that the System had been seeking, with

a view to stimulating the domestic economy and thus enabling the

unemployment situation to be dealt with better.

For the time being,

therefore, he would continue the same degree of ease that had prevailed,

abstracting the past two weeks, until after the next Treasury financing.

In any event, there was only a week remaining in which the Committee could

do anything.

Thereafter,

it would want to maintain an even keel, and

in his view the situation was not so clear as to warrant any firming

operation at this particular point.

As to the discount rate, this would

be an inappropriate time for a change.

However, the time might not be

too far off when a shift to appreciably less ease would be appropriate.

At such time the discount rate perhaps should be raised, but not now.

-18

1/23/62

Mr.

Mills said he shared entirely the views stated by Messrs.

Hayes and Johns.

He had been of that opinion for many weeks.

However,

because of earlier monetary and credit policy decisions and the imminence

of the Treasury's refunding operation, policy formulation was now caught

in midstream.

There was no opportunity at present to breast the current

and develop the firmer interest rate structure that in his opinion was

called for by balance-of-payments considerations and the general posture

of the economy.

Accordingly, a policy that would produce the modest kind

of restrictiveness that was conceived of at the January 9 meeting of the

Comittee, but which was not achieved, should be the objective until the

next Committee meeting.

If events should work in favor of an even more

restrictive policy, however, he would consider it desirable to capitalize

on them.

Looking toward the development of a consensus and the issuance of

instructions to the Account Management, Mr. Mills said he was concerned

about the framework in which the Committee's recent directives were

couched.

In that connection he presented the following

statement:

Experience with the current economic policy directives

issued at the Committee meetings held on December 19, 1961,

and January 9, 1962, cannot be considered satisfactory.

Essentially the instructions contained in the two paragraphs

of the directives are contradictory because of the practical

difficulty of attempting to develop a firmer interest rate

structure simultaneously with liberally supplying reserves.

As has been demonstrated by actual test, on the occasions

where positive reserve actions have been taken to shore up

Treasury bill rates, the supply of reserves has been reduced

-19

1/23/62

below levels deemed to be consistent with an adequate credit

base, while vice versa on the occasions where reserves have

been supplied to raise their level to a hypothetically

established point, it has tended to bring Treasury bill rates

down unduly. The general result of these diverse actions has

been a tinkering with the short-term interest rate structure

that in effect is a disguised attempt to peg the Treasury bill

As a policy of this sort becomes more widely recognized

rate.

in investment circles, opportunities for playing the market

against the Federal Reserve System will be seized upon. (In

that connection, I call the Comittee's attention to an article

in the current issue of Business Week, which refers to the

views of certain former members of the Federal Reserve staff.)

A change in the character of the current economic policy

directives that are presently being issued is imperative because,

even now, the early publication in the Federal Reserve Board's

Annual Report of the record of the year-end meeting of the

Committee may prove to have been harmful. In my opinion, the

content of the current economic policy directive should be

confined to the kind of over-all guidance set out in the first

paragraph of the last two directives, and a second paragraph

such as has followed should be omitted. This refinement in

drafting the directive would serve the purpose of placing the

objectives of Federal Reserve System monetary and credit policy

within the framework of a historic relationship to a calculated

basis of credit availability on which interest rates are deter

mined largely by the interplay of market factors with a minimum

of artificial

interference.

Mr. Wayne said that such additional statistical information as

had become available in the Fifth District since the previous Committee

meeting provided a rather substantial echo of the stentorian note sounded

at that meeting by Mr. Noyes.

The District economy was showing continued

strength.

Mr. Wayne went on to say that during the past two weeks the Desk

had faced unusual difficulties in attempting to carry out the current

policy directive.

Seasonal factors affecting reserves had behaved somewhat

-20

1/23/62

erratically, causing large errors of estimating, and there had been a

slow downward drift in short-term rates.

lesser downward drift, or none at all,

circumstances involved.

He would have preferred a

although he recognized the

At present he would favor no substantial change

in policy, in view of the desirability

of maintaining an even keel during

the period of Treasury financing that was just ahead.

However,

the

directive issued two weeks ago contemplated a three-month bill rate in

the area of 2.8 per cent, and he would try to get back to that level

before the Treasury announcement.

For the period

therefore, he would like to see the bill

reserves somewhat below $500

rate.

immediately ahead,

rate in that area and free

million, with priority given to the bill

He would hope that such conditions could be achieved in the next

statement week,

after which he would hold as steady as possible during

the Treasury financing.

In other words, the period of even keel should

start from a point of less ease than during the past two weeks:

about

the same degree of ease that prevailed at the time of the January 9

Committee meeting. He did not feel that a discount rate change would

be advisable at this time. As to the current policy directive, he

would favor renewing the existing directive subject to the interpretation

he had just stated.

Mr. Clay commented that except for the first

week, the period

immediately ahead again was one in which Treasury financing was the

1/23/62

-21

dominant consideration in the formulation of monetary policy--calling

for the maintenance of the so-called "even keel."

For that first week,

as well as for the period of Treasury financing, monetary policy should

remain essentially unchanged, with approximately the same degree of

ease that had been maintained in recent weeks.

So far as the international

balance-of-payments problem was concerned, it would appear in order to

continue the recent goal of about 2-3/4 per cent in the Treasury bill

rate.

At the same time, domestic economic developments called for the

continuation of a monetary policy that would encourage expansion in

economic activity. Obviously, this view also would incorporate within

it no change in the Reserve Banks' discount rate.

Considerable encouragement, Mr. Clay noted, had been derived

from the improved consumer performance of the past three months or so,

but it was not a performance of such exuberance that it needed any

dampening down.

A strong pick-up in business capital outlays would

appear to be essential to a satisfactory level of total activity.

While

enlarged outlays for business equipment began early in this upswing,

available information did not yet give evidence of any pronounced upturn

in total business capital outlays.

Residential construction last year

had been encouraging in that the record was better than anticipated, but

present evidence did not indicate any strong expansion in that sector.

Moreover, the pace of economic activity presently was being affected by

1/23/62

-22

stockpiling efforts in anticipation of a possible steel strike.

As

mentioned by one Committee member at the January 9 meeting, this impact

needed to be discounted in determining basic monetary policy.

When

these things were taken into account, along with the ample supply of

manpower and other resources, and the favorable performance of commodity

prices, the resulting case was one that argued against tightening of

monetary policy quite apart from Treasury financing requirements.

Mr. Scanlon said that in general economic activity in the

Seventh District was showing a favorable trend.

still

However,

considerable elbow room for further increases.

there was

As to policy, the

view expressed by Mr. Wayne tended to have appeal to him.

Mr. Deming reported that in December nonagricultural employment

in Minnesota was ahead of the year-ago level by one per cent.

Also,

it was estimated by State officials, off the record, that employment

would be about 3 per cent higher this year than in 1961, with unemploy

ment about 1/2 of one percentage point below the 1961 average.

While

these figures did not indicate a low level of unemployment, they did

indicate some improvement.

Mr. Deming also reported a rise in time deposits and business

loans in the Ninth District.

As to time deposits, most banks were taking

advantage of the higher ceiling and were raising their rates.

In the

three weeks ended January 10, total time deposits at city banks, including

savings deposits, moved up almost 3 per cent, a substantially greater

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1/23/62

upward movement than at any comparable time in the past and 4 to 6

times as high as the average.

The next highest rise on record was

in January 1957, after the rate ceiling had been moved from 2-1/2 to

3 per cent.

The one mutual savings bank in Minneapolis reported people

standing in the lobby to deposit money.

In sumary, the results of

the rate increases seemed to provide a reasonably clear indication that

the rate of interest paid does make same difference.

In large measure,

the gain in total time deposits apparently was coming in the form of

new money, though with some shifting from demand to time deposits.

Within the total of time deposits a significant shift from savings to

time certificates was indicated.

As to business loans, during the past

three weeks there had been a contraseasonal increase at city banks.

While this was not a significant movement,

it represented a change from

the pattern that had occurred previously.

Loan demand, as judged by

bankers, was not expected to be unusually strong, but stronger than in

1961.

For the first

half of this year, it

was anticipated that loans

would average 5 per cent above a year ago.

As to policy, Mr. Deming said he found himself pretty much in

agreement with Mr. Wayne.

Although he subscribed to the analysis made

by Mr. Hayes, he did not agree with Mr. Hayes on the matter of timing.

For the next three weeks, he believed that an even keel should be

maintained.

He was not quite sure how this thought should be translated

in the directive since, through inadvertence, an even keel was not

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1/23/62

maintained during the past two weeks.

Essentially, however, he would

favor the degree of ease that the Committee had contemplated achieving

during the past two weeks.

Looking at the calendar, Mr. Deming noted that the statement

week figures for the next week would be released on February 1, the

same day that the Treasury refunding announcement was due to be issued,

and part of an even-keel policy would be to avoid shocking the market

on that date.

higher bill

Consequently, he would temper the goal of a somewhat

rate by keeping an eye on free reserves in view of the

imminence of the Treasury financing.

Mr. Rouse commented at this point that any lower free reserve

figure for the statement week ending January 31 would be preceded by

a firmer feel in the money market for several days during the statement

week.

It

might turn out that the Federal funds rate would be more or

less at 3 per cent throughout this period.

Therefore, a somewhat lower

free reserve figure would not come as a shock to the market.

Mr. Rouse added that the maintenance of the bill

rate at around

2-3/4 per cent had been due in part to special factors, including the

change in maximum permissible interest rates on time and savings deposits,

Treasury financing in the bill

area, and year-end credit demands.

At

present, reserve positions were about as easy as last fall when the bill

rate was around 2-1/4 - 2-1/2 per cent, and it might be difficult to

maintain the bill rate in the 2-3/4 per cent range.

1/23/62

-25

Mr. Deming said that he would not be concerned if

ran somewhere between $400

if

free reserves

and $450 million, but he would be concerned

they came out at $250 million right at the time of the Treasury

announcement.

Mr.

Rouse commented that the reserve projections for the week

of January 31 assumed a rapid decline in float, which might not occur

due to continued adverse weather conditions.

Therefore, the free reserve

figures might work out reasonably well.

Mr. Swan reported that there had been no significant change in

the economic picture in the Twelfth District during the past two weeks.

The expansion was continuing with considerable strength.

Preliminary

figures on unemployment in the Pacific Coast States in December indicated

that there had been a slight further drop to the national rate of 6.1

per cent following a rather substantial drop to 6.2 per cent in November.

Department store sales were continuing strong in January, and steel

output rose sharply in the first two weeks of that month.

As to time deposits, Mr. Swan said there had been increases in

rates pretty much across the board as far as banks were concerned, and

time deposits including savings deposits, had risen substantially in

contrast with the usual decline for this period.

There seemed to be a

considerable response to the higher rates, although to some extent there

may have been a shifting around of deposits to take advantage of the

rate changes.

The large District banks had recently been net buyers of

Federal funds, and they expected to be net buyers in the current week also.

1/23/62

-26

As to policy, Mr. Swan said it

seemed to him that thus far the

expansion had been fairly well balanced and noninflationary.

There was

only a short time remaining before the Treasury refunding announcement,

and he saw nothing sufficiently compelling in the picture to require

attempting to move in the direction of a tighter situation during that

short period of time.

Consequently, he would agree,

generally speaking,

with the view that the Committee ought to continue pretty much along

the lines that it had contemplated two weeks ago.

He would have in mind

a bill rate in the area of 2-3/4 per cent, which might be associated

with a level of free reserves somewhere around $450 million.

As had

been mentioned previously, the higher free reserve level at the present

time reflected unforeseen developments in terms of float, and the level

was not as significant when float was in the picture as under other

circumstances.

Mr.

Irons stated that Eleventh District conditions were funda

mentally sound, with evidences of strength and further advance.

Certain

unfavorable developments during the past three weeks were attributable

to adverse weather conditions.

There had been damage to agriculture in

the lower valley, and retail trade, including department store sales,

reflected the poor weather.

However, the industrial production index

was up and employment had risen to a record level.

running about 4.9 per cent.

Unemployment was

Heavy construction projects were extensive

in Dallas, Houston, and other large cities.

1/23/62

-27

The financial situation, Mr. Irons said, was highlighted by

adjustments incident to the new higher permissible rates of interest

on time and savings deposits.

Many of the larger banks had increased

their rates to the maximum, along with some of the smaller banks.

Talk was heard about a shifting of portfolios so as to include more

tax-exempt securities and real estate loans, but he did not think that

much had been done as yet.

Reporting banks showed a decline in demand

deposits and loans, with an increase in time deposits and investments.

Some of the increase in time deposits might represent new money, but

there was apparently a considerable amount of shifting out of demand

deposits, savings bonds, and equities.

Bank was at a low level.

shifted, on average,

net sellers.

Borrowing from the Reserve

In the past three weeks,

District banks had

from net purchasers of Federal funds to slight

Bankers and other informed persons seemed to anticipate

somewhat higher interest rates and to regard the recent change in

maximum interest rates on time and savings deposits as a step in that

direction.

Turning to policy, Mr. Irons said that the Committee continued

to face the problem of trying to strike a balance between the domestic

situation and the international situation.

At present there was also

the fact that a Treasury refunding was in the offing.

In the absence

of strong and clear evidence of need at this time for an appreciably

firmer policy, he would come to the same conclusion as at the past two

1/23/62

-28

or three Committee meetings, namely, no change in policy but a shifting

toward slightly less ease.

and set

He would disregard the past week or 10 days

upas an objective conditions such as the Committee had been

If

hoping to achieve at the time of the January 9 meeting.

conditions were achieved, he would be quite satisfied.

such

In short, he

would favor maintaining largely an even keel, with no change in policy

but with perhaps some slight shift or trend toward a little

less ease.

Mr. Irons also said that he had felt for some time that short

term rates, including the bill

rate and Federal Funds rate, should be

among the key indicators of what the Committee was doing.

would not be inclined to set targets that were too precise.

However,

he

A Federal

funds rate averaging between 2-1/2 and 3 per cent was about as close

a target as it

seemed reasonable to suggest.

As to the bill rate, he

would suggest that it run around a level that would not aggravate the

international problem.

The objective should be to maintain an availability

of reserves consistent with short-term rates that would not create trouble

in the international field.

As to free reserves, he would suggest a

level around $400-$450 million rather than $550-$600 million, because he

did not see how short-term rates could be maintained with free reserves

as high as during the past 10 days.

discount rate at this time.

He would not favor a change in the

The domestic situation did not call for it,

and he was not sure that the international situation was as yet of such

a nature as to demand it.

-29

1/23/62

Mr. Ellis reported that in

New

England consumer buying had

remained strong since the Christmas season.

On the basis of preliminary

information, manufacturing output in December seemed to have risen

further.

Unemployment continued to fall

and employment to rise.

In

satisfactory pace

short, business expansion was continuing a moderate,

without evidence of excesses.

Mr. Ellis said a recent survey showed that none of the large

banks in Boston or Providence had raised their rate on savings deposits

beyond

3 per cent, although they had increased the rate on time deposits.

Smaller banks with a high percentage of savings deposits, and under

pressure to hold those deposits, had been under more pressure to raise

the interest rate beyond 3 per cent.

The local

competitive situation

seemed to control the decisions at those banks.

Turning to policy, Mr. Ellis commented that the economic presenta

tion today seemed to indicate that the rate of expansion was quite satis

factory.

It did not appear that the expansion was any longer dependent

upon a continued stimulation of credit expansion.

however,

It appeared to him,

that monetary policy was continuing a high degree of stimulation

of credit expansion.

He agreed with Mr. Johns' analysis.

It was of

critical importance, of course, not to take action ahead of or during the

Treasury refunding that would be seriously disturbing to the market, yet

he was concerned about the trend of monetary policy.

paragraph of the current policy directive,

He liked the first

which suggested an intent to

1/23/62

-30

permit further bank credit and monetary expansion.

However,

That was appropriate.

he also liked the phraseology of trending toward slightly less

easy monetary conditions.

That also was appropriate.

The major thrust

of policy could be a trend toward slightly less easy monetary conditions

with a view to maintaining stable money market conditions.

looking at the even keel was to give it

One way of

the meaning of holding steady,

with a stable money market, on a course trending toward less ease.

This

would rule out a discount rate change in the immediate future.

Mr.

Bryan said that he had no strong views on policy.

any preference,

of policy.

it

If he had

would be to continue with no dramatic or overt change

Looking ahead somewhat further than the next few weeks,

his

inclination was to say that the System ought to take care of seasonal

needs, with a small growth factor in reserves added.

That growth factor

certainly should not be over 3 per cent, and for some time he would

prefer a lower rate, because reserves had gone a little beyond the target.

As to the Sixth District, Mr. Bryan said that it

going along about the same as the nation.

seemed to be

Heavy freezes had done some

damage to crops, particularly in Florida, but apparently there would be

a larger cash flow from the marketing of the smaller citrus crop due to

price adjustments.

Mr. Balderston commented that the imminence of the Treasury

refunding was basic to the Committee's instructions to the Desk for the

next three weeks.

This impelled an even-keel policy regardless of views

1/23/62

-31

as to current domestic and international situations.

it

Consequently,

appeared that any detailed examination of the fundamentals of the

situation might well be deferred until another meeting of the Committee.

However, he would make this observation:

with excess capacity here and

abroad, there seemed to be no imminent risk of price advances.

more, he sensed some diminution in business optimism.

was no speculative ebullience.

noted in

Further

Certainly, there

This was something that had also been

the early months of other years.

It

might be associated with

the process of budget-making or with post-mortems after financial reports

of the previous year were available.

What he was suggesting was that

the System's longer-ran goals might become more apparent after float

had become stabilized and business psychology had emerged from its

early-year doubts.

Chairman Martin stated that in his judgment the only development

of any significance since the January 9 Committee meeting was the slight

diminution of pressure for loans.

Generally speaking, the month of

January was not a good period in which to make evaluations.

However,

he was inclined to feel that at this point there was less urgency for

tightening, apart from the international situation.

That situation was

very difficult to evaluate; it was easy to see ghosts that might or might

not be there.

In any event, the immediate fact of overriding importance

was the Treasury refunding.

With the first of February as close as it

was, it would not be appropriate for the System to upset the money market

1/23/62

-32

by any minor adjustment of policy.

it

If

the Committee was convinced that

was necessary to take some major action, that would be one thing.

In the circumstances, however,

it

would be a serious mistake to decide,

for example, to diminish the supply of reserves slightly.

Chairman Martin said he thought the consensus today was essentially

to maintain an even keel.

There might be some question as to what the

even keel actually meant; that is,

whether it

should be related to how

things had worked out in the past two weeks or how the Comittee had

wanted them to work out.

The Chairman noted that the Secretary of the Committee,

in con

sultation with the Economist and the Manager of the System Account, had

prepared, for consideration a draft of possible current economic policy

directive, the first

paragraph of which would be the same as in the

directive issued at the meeting on January 9, 1962.

The second paragraph

would state that operations for the System Open Market Account during

the next three weeks should be with a view to maintaining a supply of

reserves adequate for credit expansion, while avoiding downward pressure

on short-term rates.

It would also state that during the period of

Treasury financing, emphasis should be placed on maintaining a steady

money market.

After copies of the draft had been distributed, Mr.

he thought there was one fault in

it.

Hayes said

The language did not give any

flavor of eliminating the excessive ease that had occurred inadvertently

1/23/62

-33

during the past two weeks.

From a count that he had made, those who

spoke today in terms of getting back to the kind of situation that the

Committee had hoped to achieve two weeks ago were in the majority.

Therefore, he felt that the directive should contain some reflection

of that modification.

Mr. Thomas commented, with respect to developments during the

past two weeks,

that bill rates had declined only quite moderately and

were still higher than at the beginning of this year.

Some decline in

bill rates usually occurs in January following a rise in December.

Actually, the Account Manager had done a good job of observing the

Committee's directive and in keeping the bill rate up in the face of

seasonal factors, a greater than seasonal contraction in the volume of

bank credit and required reserves, and a large increase in available

reserves due to the maintenance of float at an unusually high level.

Chairman Martin then commented that to him it

seemed difficult

to write a current policy directive that would take into account accidental

occurrences.

Further, although there might be some merit in using figures

in the directive, he did not think that the Committee could stick to any

particular figures.

The directive must recognize factors such as the

color, tone, and feel of the market.

The phraseology Mr. Young had

suggested was "a steady money market."

With reference to the comments of Mr. Thomas, Mr. Hayes said

that a drift in the three-month bill rate from 2.83 to 2.67 per cent,

1/23/62

-34

while not dramatic, was enough to cause him concern in light of the

critical international problem.

in the form in which it

Further, the proposed current directive,

had been drafted, was too general a directive.

Except for the last sentence which dealt with maintaining an even keel,

it

was almost the kind of directive that could have been subscribed to

at any time during the past year.

In further discussion, Mr. Balderston said that he thought the

Committee,

in its

experimentation with instructions to the Desk, had

moved forward an appreciable distance.

He had in mind particularly the

difficulty encountered in the past, when preparing the policy record,

in recapturing the flavor and tone of Committee meetings.

While it was

difficult, he recognized, to do a drafting job around the table, he had

a feeling that the time spent on the directive at the January 9 meeting

would not have to be repeated meeting after meeting, that perhaps the

Committee would be able to settle on some reasonable combination of words,

and that such wording would then constitute a policy record comprising

a satisfactory exposition of the Committee's objectives.

He would be

content, in this instance, with the wording suggested by Mr. Young.

He

did not think that the Committee ought to spend long hours at each

meeting doing a drafting job, provided the effort placed before it for

consideration seemed to represent a reasonably accurate reflection of

what the Committee desired.

1/23/62

-35

Mr. Mitchell inquired about the intent of the proposed directive

in relation to the seasonal pressure on interest rates, and Mr. Robertson

suggested that the intent might be clarified by changing the second

paragraph to provide for operations with a view to maintaining a supply

of reserves adequate for further expansion of credit and a steady money

market during the period of Treasury financing, which would be announced

February 1.

Mr. Mitchell commented that he was still

not clear as to

the intent of the directive in relation to interest rates, and Mr. Young

replied that it

would be the intent to permit usual seasonal variations

in credit and in interest rates.

Mr. Mitchell said he thought that point

should be made clear.

Mr. Swan said it

had been his reaction from Mr. Rouse's earlier

comments that the Desk was not going to have to worry too much longer

about downward seasonal pressure on short-term rates.

Mr. Rouse stated

that this was correct, that the end of the period of seasonal pressure

was now approaching.

Chairman Martin then suggested that the emphasis of the directive

be placed on maintaining a steady money market,

and Mr. Hayes said he

continued to feel strongly that the wording of the proposed directive

did not give the flavor of an edging toward a slightly less easy situation,

which sentiment was voiced by the Comittee at the January 9 meeting.

Chairman Martin noted that the degree of ease since that meeting had

developed inadvertently, to which he added that he thought the problem

1/23/62

-36

of the directive was principally one of semantics.

It was difficult

to forecast what was going to happen against a background of what had

happened inadvertently in a previous period.

This was all part of the

problem of maintaining a steady money market.

Mr. King suggested changing the word "avoiding" to "minimizing"

in the second paragraph of the proposed directive, his thought being

that this might capture some of the flavor that Mr. Hayes was seeking.

Mr. Hayes said he would like to mention, as a further comment,

that the proposed last sentence of the directive clearly implied the

maintenance of a steady money market during the period of Treasury

financing.

However,

such language would provide no guidance for the

period before the period of Treasury financing began.

Chairman Martin

responded that he thought the consensus was that there should be no

change in policy preceding the Treasury announcement.

In his opinion,

this was all part of the same picture.

Mr. Hayes commented that he thought the consensus was not to

depart during the next week from the policy that was intended two weeks

ago.

In his opinion, the Comittee should not instruct the Desk to

continue a condition that had occurred inadvertently.

Free reserves

had been higher than expected; they had averaged over $500 million.

Mr. Mitchell commented that he thought it was the posture of

the System, as outsiders saw it,

concerned.

with which the Committee should be

From that standpoint, there might be a tendency to exaggerate

1/23/62

-37

things that were not too important.

The Chairman had stated a consensus

with which he (Mr. Mitchell) would agree.

In fact, he felt that within

narrow limits all of the Committee members were of one mind.

The

Committee did not want anyone to think that the System was making a

change of policy between now and the Treasury financing.

There followed a suggestion by Mr. Thomas for a change in the

last sentence of the directive that might help to avoid the question

raised by Mr. Hayes regarding the appearance of a gap in the instructions

to the Desk for the period prior to the announcement of the forthcoming

Treasury financing.

Mr. Wayne expressed the view that the suggestions that had been

made would meet substantially the points that seemed to be of some con

cern regarding the draft directive.

He went on to say that he would like

to reiterate a view he had expressed previously; that is, that the

Committee,

in preparing a directive, was not engaged so much in writing

a precise instruction for the Desk as in writing a statement for the

record.

The Account Manager understood clearly from the discussion

today that the past week was recognized to have been an aberration and that

use of the term "even keel" did not carry with it

the intent that the

Desk should strive to perpetuate the aberration.

It was clearly the

intent to maintain a steady money market, whereas the past week was

unsteady.

As he saw it,

the important thing was to be sure that the

1/23/62

-38

Committee was writing a directive that would constitute an understandable

public record.

Use of the word

"minimizing" would reflect an opinion

that lower short-term rates would be contrary to the public interest

and a realization that the past week was an aberration.

Chairman Martin then asked the Secretary to read the proposed

directive,

in form that would reflect suggestions made thus far.

After the Secretary had done so, Chairman Martin turned to Messrs.

Hayes and Rouse and inquired whether such a directive would be

reasonably clear.

it

would be all

Mr. Hayes and Mr. Rouse indicated that they thought

right.

The Chairman next inquired whether there were those who

wished to record a dissent from the adoption of such a directive.

Mr. Hayes said that his reservations were so much a matter of degree

that he would not want to record a formal dissent.

No other member

of the Committee indicated that he wished to record a dissent.

Accordingly, the Federal Reserve Bank

of New York was authorized and directed, until

otherwise directed by the Committee, to

execute transactions for the System Open Market

Account in accordance with the following cur

rent economic policy directive:

It continues to be the current policy of the Committee to

permit further bank credit and monetary expansion so as to

promote fuller utilization of the economy's resources, together

with monetary conditions consistent with the needs of an expand

ing 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 three weeks shall be conducted

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with a view to maintaining a

supply of reserves adequate for

further credit expansion, while minimizing downward pressures on

short-term interest rates. In view of the imminence of Treasury

financing, emphasis shall be placed on maintaining a steady money

market.

Votes for this action:

Messrs. Martin,

Hayes, Balderston, Irons, King, Mills,

Mitchell, Robertson, Shepardson, Swan, Wayne,

and Fulton. Votes against this action: None.

No changes were suggested in the continuing authority directive

to the Federal Reserve Bank of New York that had been adopted on

December 19, 1961.

It

was understood that the next meeting of the Federal Open

Market Committee would be held on Tuesday,

February 13,

1962.

All of those present except the members and alternate members

of the Committee,

the other Reserve Bank Presidents,

and Mr. Young

then withdrew from the meeting.

At this session, discussion was concerned with the next steps

for consideration of the proposal before the Committee for the System

Open Market Account to engage in foreign exchange operations and to

hold at different times varying amounts of convertible foreign

currencies.

Chairman Martin reported on his consultations about the

subject with the Chairmen of Senate and House Banking and Currency

Committees and commented briefly on the general problem of obtaining

legislation that would clarify the Committee's authority to conduct

foreign currency operations.

In the discussion that followed, differing viewpoints were

expressed as to the potential contribution that System foreign

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-40

currency operations might make in fulfilling its responsibilities

for a sound dollar domestically and internationally, especially in

view of persisting deficits in the U. S. balance of international

payments.

There was also reference in the discussion to the legal

opinions rendered by the Committee's General Counsel and the General

Counsel of Treasury (the latter having the concurrence of the Attorney

General) to the effect that the System's existing statutory authority,

although in some respects limiting, did provide a general sanction

for Committee operations of the kind in question.

In the light of the Chairman's report and the roundtable

comment, a majority of the Committee were favorably disposed

towards operations on an experimental basis.

Several members

mentioned that the Committee would presumably review critically

any operations undertaken, and that the Committee might later decide

to discontinue them if constructive benefits appeared not to have

been achieved.

In bringing the discussion to a head, it was moved by

Mr.

Balderston and seconded by Mr. Hayes that the Committee go on

record at this session as favoring in principle the Committee's

initiation on an experimental basis of a program of foreign currency

operations; that Mr. Young, the Committee's Secretary, and Mr. Coombs,

Vice President in charge of foreign operations of the New York

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1/23/62

Federal Reserve Bank, be authorized to explore for the Committee

with the Treasury needed guidelines for actual operations, drawing

on experience that the Stabilization Fund had had in recent months,

and to develop plans for effective working relationships in the

foreign exchange field with the Stabilization Fund; and further that

Chairman Martin be authorized to refer to this development in his

statement and testimony before the Joint Economic Committee scheduled

for January 30, 1962.

Discussion having reached the point of question,

Chairman Martin called for a vote and the motion was carried.

Votes for the motion: Messrs. Martin,

Hayes, Balderston, Irons, King, Mills,

Shepardson, Swan, Wayne, and Fulton. Votes

against the motion: Messrs. Robertson and

Mitchell.

Messrs. Bopp, Clay, Deming, Ellis, Johns,

and Scanlon indicated that if they were presently

members of the Committee, they would have voted

for the motion. Mr. Bryan, also not a present

member, said that he would have voted aye on the

motion because he believed that operations in

foreign currencies were in principle a proper

function of a central bank; but he added that he

was opposed to the Committee's initiating such

operations until statistics for the latest

available twelve-month period showed the United

States to be operating with a balance-of-payments

surplus, not a balance-of-payments deficit.

In opposing the motion, Mr. Mitchell felt he was not prepared,

on the basis of the information at his disposal, to see the Committee

take this step at this time.

He believed that an undertaking of this

importance to the System needed analysis by outside experts as well

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as public discussion before any Committee action and that the

Committee would be better equipped to proceed with a program of

foreign currency operations if its consideration of the matter had

been preceded by legislative clarification of its

statutory authority

to acquire and hold foreign currency assets.

Mr. Robertson voted against the motion for reasons set forth

in more detail in the memorandum he presented to the Committee at its

meeting on December 5 and included in the minutes of that meeting.

The meeting then adjourned.

Secretary