FOMC Minutes

A meeting of the Federal Open Market Committee was held in

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

in Washington on Tuesday, May 8, 1962, at 10:00 a.m.

PRESENT:

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Martin, Chairman

Balderston

Deming

Ellis

Fulton

King

Mills

Mitchell

Robertson

Shepardson

Treiber, Alternate for Mr. Hayes

Messrs. Bopp, Scanlon, Clay, and Irons, Alternate

Members of the Federal Open Market Committee

Messrs. Wayne and Swan, Presidents of the Federal

Reserve Banks of Richmond and San Francisco,

respectively

Mr.

Mr.

Mr.

Mr.

Young, Secretary

Sherman, Assistant Secretary

Kenyon, Assistant Secretary

Hackley, General Counsel

Mr. Noyes, Economist

Messrs. Brandt, Furth, Garvy, Holland, Hostetler,

Koch, and Parsons, Associate Economists

Mr. Molony, Assistant to the Board of Governors

Mr. Williams, Adviser, Division of Research and

Statistics, Board of Governors

Mr. Knipe, Consultant to the Chairman, Board of

Governors

Mr. Yager, Chief, Government Fiance Section,

Division of Research and Statistics, Board

of Governors

5/8/62

Mr. Francis, First Vice President, Federal

Reserve Bank of St. Louis

Messrs. Sanford, Eastburn, Ratchford, Baughman,

Jones, Tow, and Coldwell, Vice Presidents

of the Federal Reserve Banks of New York,

Philadelphia, Richmond, Chicago, St. Louis,

Kansas City, and Dallas, respectively

Mr. Stone, Assistant Vice President, Federal

Reserve Bank of New York

Mr. Eisenmenger, Acting Director of Research,

Mr.

Federal Reserve Bank of Boston

Sternlight, Manager, Securities Department,

Federal Reserve Bank of New York

Mr. Runyon, Economist, Federal Reserve Bank of

San Francisco

Upon motion duly made and seconded,

the

minutes of the meeting of the Federal Open

Market Committee held on March 27, 1962, were

approved.

Before this meeting there had been distributed to the members of

the Committee a report on open market operations in U. S. Government

securities covering the period April 17 through May 2, 1962, and a

supplementary report covering the period May 3 through May 7, 1962.

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

In supplementation of the written reports, Mr. Stone commented

as follows:

The money market remained generally steady during the past

Federal funds traded for the most part between

three weeks.

2-1/2 and 3 per cent, with the bulk of trading on most days at

the 2-3/

per cent level.

The Treasury's refunding operation was a very successful

one, with attrition something less than 9 per cent of public

holdings of the issues eligible for the exchange. With the

completion of the refunding operation, and barring unforeseen

developments, the Treasury should be out of the market at least

until late June and possibly until early July. Moreover, we may,

have come to the end of the

weekly additions of $100 million to the regular bill issue,

since each regular issue is now up to $1.8 billion. When

for the time being, at least,

one considers that last week's refunding operation was the

eighth Treasury financing operation thus far in 1962 apart

from the weekly bill auctions, and that in those auctions an

aggregate of $1.3 billion bills was added to the three-month

issue, the prospective absence of the Treasury from the

market over the weeks ahead should provide a welcome respite.

Whiledealer positions in Government securities have been

reduced in the past few days, they nevertheless continue

relatively heavy, particularly in the case of short-term issues.

Early last week, when dealers were acquiring large amounts of

rights while the subscription books were open, their positions

reached what may well be an all-time high of about $4-1/4

billion. Dealers' use of credit also expanded considerably. The

New York banks, however, were readily able to accomodate this

bulge in credit demands, in part because individual income taxes

flowed into the Treasury's balance at the Reserve Banks at a

rate much faster than anticipated, and in order to prevent that

balance from rising too far a succession of large redeposits,

aggregating more than $1 billion, was made in the "C" depositary

banks at about the same time that dealer credit demands were

rising so sharply. Beginning yesterday, some of these redeposits

were recalled, and more may be recalled over the next few days.

At the same time, as I indicated earlier, dealers' positions,

and their use of credit, have receded from the peak reached

I might mention that despite the sub

during the refunding.

stantial redeposits that were made, the Treasury's balance at

the Reserve Banks ran higher than had been anticipated, and

this higer balance was a major factor in producing the lower

Largely because

than-expected free reserve figure of last week.

of the heavy redeposits into the "C" depositary banks, however,

the money market tended to be somewhat easier, even with the

lower free reserve figure, than it had been during the preceding

two weeks when free reserves were about $100 million higher.

I should call the Committee's attention to the fact that in

yesterday's Treasury bill auction a major New York bank submitted

a tender for $400

million three-month bills at what seemed at

the time to be a relatively high price. The strength of that

and other bidding was such that that price turned out to be the

lowest at which tenders were accepted, and the bank concerned was

allotted $356 million on its tender.

With such a large amount

going to one institution, several other large banks and dealers

received no awards of three-month bills at all, and others won

only small amounts. The efforts of these banks and dealers to

cover their commitments to customers and to establish trading

positions in the new three-month bills is in all likelihood

putting considerable downward pressure on bill rates at this

moment.

Thereupon, upon motion duly made and

seconded, the open market transactions in

Government securities during the period

April 17 through May 7, 1962, were approved,

ratified, and confirmed.

Mr. Noyes presented the following statement with respect to

economic developments:

At the outset it can be said that there has been no marked

change in the over-all economic situation since the last meeting.

On balance, economic conditions may be characterized as having

continued to improve moderately. March housing starts, which I

singled out as an important missing link in the data available

last time, turned out to be high--back up in a single month to

almost the level that prevailed before they turned down last fall.

The McGraw-Hill survey of proposed plant and equipment expendi

tures for the current year has also become available since the

last meeting. The prospective increase over last year of 11 per

cent was up substantially from the 8 per cent reported in the

Commerce-S.E.C. survey earlier in the year.

But there has also been some less favorable news. While

first quarter corporate profits show large gains from the

depressed levels of a year ago, they were probably down from the

fourth quarter, even after allowance for normal seasonal differ

ence.

The stock market has experienced a considerable downward

adjustment, perhaps greater than the profits figures alone would

justify. We have also learned that new orders for durable goods

in March declined further, by 3 per cent.

However, most of the information that has become available

reflects no change or further moderate improvement. Neither the

production index nor total retail sales for April have been

The unemploy

released, but both are likely to be up a little.

ment rate in April was substantially unchanged, the actual

reduction being just about the normal seasonal improvement.

The economy has clearly emerged from the winter lull on the

up side--as almost everyone expected that it would--but it still

has not shown enough strength to suggest a quarter-to-quarter

change in the present quarter equal to that anticipated before

the turn of the year, much less enough to make up the short-fall

in the first quarter. To be more specific, the most optimistic

appraisal of the current quarter would be for an increase in

GNP of about $10 billion, while a rise of $13 billion was

assumed in the $570 billion annual average projected in the

Budget and the Economic Report.

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5/8/62

It

is always a temptation to try to find something new to

say about the economic situation, either in words or in sub

stance; but at this Juncture, the facts seem to demand a

repetition of the colorless phrase--continued moderate improve

ment.

I believe the implications of this situation for monetary

policy are evident and equally colorless.

Credit markets have

eased further in recent weeks, as Mr. Koch will report in more

detail. With Treasury operations confined largely to refunding

and a large flow of savings through financial intermediaries,

this easing has been the result of the normal operation of

market forces, modified by the efforts of the System and the

Treasury to maintain the level of short rates. Whether the

endeavor to avoid downward pressure on short-term rates should

be continued--or perhaps even intensified--is a question that

must be answered on the basis of judgments that extend well

beyond the limits of the domestic economic situation.

On the

other hand, domestic economic conditions certainly suggest, and

might almost be said to dictate, that the easier conditions

which have developed in the intermediate and long-term markets

should not be frustrated by overt action at this time.

Mr. Furth presented the following statement with respect to the

U. S. balance of payments and related matters:

Our international deficit dropped sharply in April, accord

ing to tentative and partial data, perhaps back to the annual

rate of $1-1/2 billion that prevailed in January and February.

Satisfaction with this improvement should be tempered,

however, by the suspicion that some of it may have reflected

movements of capital from Canada. For reasons of economic

analysis or because of some leakage of official secrets, the

market had apparently expected that Canada would establish a

value for its dollar at a rate lower than the current quotation.

Market offers of Canadian dollars began greatly to exceed market

demand, and the Bank of Canada lost more than $100 million during

April in its attempts to maintain the quotation at a figure

2-3/4 per cent higher than the par value declared on May 2.

Under these circumstances, the reflux of funds to Canada, which

should promptly occur if the market is satisfied with the

viability of the new par value, might soon increase our deficit.

Further data will be needed, however, before our balance of

payments for April can be firmly analyzed.

The interaational situation still shows continuing or even

change

accelerating expansion in Western Europe and little

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elsewhere.

But four recent financial decisions of foreign

monetary authorities are likely to exert some influence on our

international accounts.

The first and most important of them was the reduction in

British Bank Rate.

Initially, at least, this reduction seems to

have put an end to the accumulation of dollars by the Bank of

England.

This change has lessened the threat of further gold

drains. Since most of the funds that had flown to London came

from Continental Europe, however, the cessation of the flow does

not directly improve the U. S. balance of payments.

Furthermore, the reduction in British interest rates has not

widened the covered interest-rate differential on Treasury bills

in favor of New York, but on the contrary has led to its dis

appearance. Renewed market confidence in the future of sterling,

bolstered by the repeated reductions in Bank Rate, has caused

the forward discount of sterling against the dollar to drop from

more than 1-1/4 per cent. This drop

nearly 2 per cent to little

was greater than the decline in British Treasury bill

rates

following the Bank Rate change.

The second action was the decision of the Netherlands Bank

to increase its discount rate and to permit this year only

nominal foreign bond issues in the Amsterdam market. While these

moves are likely to have only negligible direct effects on the

dollar, they illustrate the tendency of European authorities to

restrict international capital movements without giving much con

sideration to the principles of inter-central-bank cooperation.

Netherlands officials have repeatedly urged the United States to

raise interest rate levels in order to force foreigners to shift

their borrowing to Continental Europe. Interest rates in New

York are higher than in Amsterdam, but the differential cannot

benefit our capital accounts as long as foreign borrowers are

prevented from taking advantage of the lower Netherlands rates.

In a similar vein, the German authorities have followed up

their expressions of concern about inflationary pressures by not

only raising Treasury bill

rates but also permitting German banks

These actions were

again to pay interest to foreign depositors.

taken despite the jump in the German trade surplus in March to

an annual rate of $2 billion, twice the January-February rate.

European surplus countries hardly make it easier for the United

States to eliminate its external deficit when they take

immediate corrective action as soon as their surplus shows the

first signs of declining.

The fourth action was the establishment of the new par

value of the Canadian dollar. The abandoment of the flexible

exchange rate experiment has been acclaimed in Washington, but

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there has been some uneasiness about the magnitude of the

depreciation of the Canadian dollar. The new low rate may well

adversely affect our trade as well as our capital accounts.

The position of the dollar has not changed much in gold and

foreign exchange markets. The gold price in the London market

has remained in the neighborhood of $35.08; at least part of the

time, the Bank of England has probably been able to act as net

purchaser rather than as net seller of gold. The dollar has

slightly improved against sterling and against the German mark.

But it

has declined against the Swiss franc and, probably as a

consequence of the actions of the Netherlands Bank, against the

Netherlands guilder; it is now virtually at the floor in the

Netherlands, as it has been for some time in the two major surplus

countries, France and Italy.

None of these exchange rate movements, however, seems to have

been caused by anything resembling a flight from the dollar. The

market may agree with those economists who believe that the fate

of the dollar will mainly be decided by economic and financial

developments

in the United States, and that these developments

have so far not justified apprehension regarding our ability to

maintain stability in our cost and price system.

Mr. Koch presented the following statement with respect to financial

developments:

In commenting on recent financial happenings this morning,

I should like to focus on those developments that we have on

occasion in the past referred to as the intermediate objectives

of Federal Reserve policy. First, let us look at various concepts

and forms of liquidity.

Money supply, narrowly defined,

has

picked up smartly in recent weeks.

After increasing $300 million

in March, it rose a billion dollars in April. It is now 2-1/2

per cent above the level a year ago.

The sharp growth in time and savings deposits at commercial

banks continued during the first

tapered off somewhat thereafter.

half of April, but apparently

Nevertheless, growth in total

deposits at commercial banks, expressed as a seasonally adjusted

annual rate, has been at about 10 per cent since the first of the

year.

There is also some evidence that the hectic activity in

time accounts is slowing down. The data collected by the Chicago

Federal Reserve Bank on gross new deposits in and withdrawals from

these accounts at banks in the Seventh District show both declin

Forms of liquidity other than

ing quite sharply in recent weeks.

deposits at commercial banks have also apparently increased

significantly further, although no data are available subsequent

to March.

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Such over-all liquidity ratios as that of total liquid assets

to the gross national product and that of corporate liquid assets

to current liabilities, however, are still not high by historical

standards. With reference to the state of the economy's liquidity

and its relevance to activity, a new concept that came to my

attention the other day was that of net private financial assets

to GNP. This concept subtracts private financial liabilities

from liquid assets. When one makes this adjustment, he finds

that liquidity has declined much more sharply relative to the

size of the economy since World War II than is shown by the more

usual liquidity ratios, and also that it is currently at a lower

level.

Turning from liquidity to credit availability as another

indicator of the effects of recent Federal Reserve policies on

economic activity, total bank loans and investments were

up 8 per cent in the first four months of 1962 on a seasonally

adjusted annual rate basis. The sharpest increase has been

in bank holdings of securities other than U. S. Governments,

presumably mainly municipals, which have increased at over a

25 per cent annual rate. The rate of increase in business

lending has slackened somewhat, whereas the rates of increase

in real estate and consumer lending have picked up thus far

this year.

The volume of capital market financing has also accelerated

in recent weeks.

New corporate security issues totaled $1.2

billion in April, up from an $800 million monthly average in

the first quarter and less than the heavy April 1961 calendar

only because of the large AT&T financing a year ago. Municipal

financing totaled about $850 million in April, approximately

equal to the first quarter average, but somewhat above the

year-ago level. The volume of both corporate and municipal

financing, however, is expected to decline this month.

As a final indicator of Federal Reserve effects, working

of course along with all of the various market forces, the

cost of credit has continued to decline, particularly in

the case of long-term financing. The Government bond rate

and that on outstanding Aaa corporate issues, at 3.87 and

4.31 per cent, respectively, are now at around their lowest

levels since last summer. New corporate issues are coming

to market at about their lowest rates since 1958.

The rate on outstanding new Aaa municipal issues, at

2.93 per cent, is also at the lowest level since 1958.

Other

signs of the recent easing tendencies in long-term financing

are the facts (1) that interest rates on new corporate issues

are below those on outstanding issues,

a rare occurrence,

and

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(2) that the rate on lower grade municipal issues has declined

considerably more sharply than that on higher grade issues.

I should like to conclude this morning with a few com

ments on recent projections of economic and financial

developments for the rest of 1962 made by several of my

colleagues here at the Board.

A more detailed presentation

of their findings will be given this afternoon to those of

you who are interested.

The authors conclude that a reasonable case can be made

for either (1)

a continuation of recent experience,

thus

meaning further expansion in GNP at, let us say, a 5 per cent

annual rate, or (2) a pickup of the rate of expansion to the

path projected in the last Budget message, which would imply

GNP increasing at a 7-1/2 per cent rate. The lower model

would likely leave us with unemployment and capacity utiliza

tion rates at about the same levels as at the beginning of the

year. The more optimistic model would mean that some progress

would likely be made in our resource utilization problem, but

at still a surprisingly slow rate.

In neither model does the

rate of resource utilization suggest upward price pressures in

commodity markets this year.

For our more immediate purposes, the main relevance of the

projections is that neither of the models suggests that any

sustained upward pressure on interest rates is likely in the

months ahead. In the case of both projections, credit demands

would be only moderate relative to the size of the economy,

although in dollar amount the total funds raised in credit

and equity markets might approximate the level reached in

1959. The moderate nature of likely prospective credit demands

is also suggested by the recent McGraw-Hill survey of

business plans for capital spending, which found that com

panies expect their demands for external funds for all purposes

to increase only 1 per cent over last year, whereas internal

funds are expected to rise 14 per cent.

Savings flows, on the other hand, are likely to remain

relatively large throughout the rest of 1962 and, assuming

the continuance of monetary ease, the vast bulk of these flows

would likely be channeled through financial intermediaries

Moderate credit

rather than directly into financial markets.

expansion, large savings flows to institutions, and continued

monetary ease are the basis for the projection of relatively

stable interest rates under the optimistic model and possibly

even further declining rates in the lower model.

Neither model suggests the need or desirability of any

near-term lessening of ease in monetary policy--not, at least,

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until or unless the effects of policy become more obviously

adverse, either with respect to capital outflows or with

respect to a marked deterioration in bank lending and invest

ing activities. On the other hand, April developments in

liquidity, credit availability, and interest rates suggest

to me that the degree of ease being achieved by existing

policy is for the present providing an adequate monetary stim

ulant to economic activity.

Mr. Treiber presented the following statement of his views on the

business outlook and monetary policy:

It is now clear that the slowdown in economic expansion

at the beginning of 1962 was only a pause. The expansion has

resumed at a moderate pace.

Consumer spending, especially on automobiles and resi

dential construction, has risen.

The McGraw-Hill spring survey of businessmen's spending

plans for 1962, made before the steel price episode, indicates,

as expected, a somewhat faster growth in expenditures for

plant and equipment for the balance of the year than was

indicated in a survey taken two months earlier. While the

prospect of a cost-price push in the steel industry has been

avoided, a substantial part of the business community disliked

the Administration's role in getting the steel price increase

reversed. With many businessmen questioning the Administra

tion's attitude toward business, will these questions and

doubts have a dampening effect on the spending decisions of

businessmen? Corporate profits have been rising, and greater

profits encourage greater capital expenditures. I would con

clude that, despite the fears and hesitations of some business

mean, we may expect to see increased spending for capital purposes

as indicated in the survey.

The problem of unemployment persists. The rate of

unemployment is still significantly higher than in the comparable

stage of the two previous business expansions.

Despite the drop

in total unemployment, the number of persons out of work more

than half a year (the so-called "hard core" unemployment) is

well above the trough of the recession in early 1961.

The expansion in business activity continues to be accom

panied by price stability,

Bank loans have shown moderate strength in recent weeks.

Consumer loans and loans connected with real estate and con

struction have shown substantial strength. The money supply

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had grown in April by a larger amount than in recent months,

while there are some indications that the growth of time

deposits is slowing down.

The banks still

have adequate liquidity.

This is

also

true of other segments of the economy.

The Treasury will be completing its current refunding

operation on May 15.

Thereafter, there will be a period of

several weeks during which the Treasury will not be coming to

the market except to roll over the weekly Treasury bill issues.

It is not expected to need cash until July, although the

Treasury may meet some of its July needs through an operation

in late June.

The balance-of-payments problem continues with little or

no improvement.

Indeed, the statistics for the first

quarter of

1962 are worse than those for the first quarter of 1961, and even

more so if a technical adjustment in German balances is disre

Assuming a continued expansion of business activity in the

United States, imports are likely to move up further, thereby

worsening our payments position.

We must also be alert to the risk

that at some point continuing deficits and the absence of what

foreigners would regard as a coordinated and determined effort

to cope with the problem may so disturb foreign confidence as

to lead to large-scale shifts from dollars into gold. Our gold

loss this year has exceeded that of the comparable period in

1961: and further losses are to be expected.

In considering relative interest rates in international

markets, we have been accustomed to concentrating on the short

term rates and their influence on short-term capital movements.

Long-term rates, of course, also have an influence. The

relatively low long-term interest rates in the United States

certainly have been an increasing encouragement to long-term

borrowing by foreigners in this market.

In considering monetary policy, it is apparent that the

domestic economic situation is improving while the inter

national financial situation is bad and is likely to continue

Under the circumstances, it seems to me that, with

to be so.

increased economic activity over the coming months, cyclical

forces, as they develop, should be allowed to put some upward

pressure on market rates--both short-term and long-term--and to

reduce free reserve positions. This should help to check undue

acquisition of long-term issues by commercial banks and to

counteract any speculative expectations that might be develop

ing with regard to long-term Government securities; it may also

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speculative real estate developments which are under

taken here and there.

I would not expect that some tightening

would sap the mortgage market and curtail construction activity,

nor would it significantly curtail capital spending.

On the

dampen

other hand, it might dampen to some degree the outflow of

long-term capital.

Settlement for the new issues in connection with the cur

rent Treasury finacing operation will take place next Tuesday,

May15. In the meantime, I think the Desk should resist any

significant downward movement in Treasury bill rates, even if

this should involve some shrinkage in free reserves. After the

refunding is out of the way, I would favor probing toward a

somewhat higher level of short-term rates. I would not stand

in the way of any moderate upward movement in rates that might

come about through the action of market forces.

I think it would be desirable to make some changes in the

current economic policy directive, which for some time has

referred to "the modest nature of recent advances in the pace

of economic activity." It would seem desirable to revise the

first paragraph of the directive so as to reflect the current

economic situation. I think it would also be desirable to

revise the second paragraph so as to indicate that the System

would not resist some moderate upward pressures brought about

by continued business expansion.

I would not favor overt action by raising the discount

rate at this time unless, of course, it were part of a

"package" or a coordinated group of actions to be taken by our

Government on several fronts to focus attention on and to help

solve our balance-of-payments problem.

Mr. Ellis reported that New England had been enjoying good spring

weather.

However, the strength of the economy seemed to have a deeper

base than good weather.

The economy was being assisted by consumer

spending, and the willingness to borrow had improved.

Easter season

retail sales, seasonally adjusted, were some 10 per cent ahead of 1960,

the previous high year.

record year of 1960,

The ski resort business exceeded the previous

and automobile sales continued strong.

Major re

porting banks indicated that purchases of new cars were some 18 per cent

5/8/62

-13

above a year ago, as measured by their extensions of installment credit.

Construction in the greater Boston area was getting a strong boost from

several exceptionally large projects that were all in progress at the

same time.

The New England production index moved up slightly from Febru

ary to March, with the important strength in the durable goods industries.

In summary, economic expansion was proceeding at a modest pace, although

the picture was somewhat mixed.

First District reporting banks continued to experience a business

loan demand that was a little

stronger than seasonal expectations. During

the most recent three-week period, time deposit growth slackened.

Yet

savings banks had a deposit growth running some 8 per cent ahead of a year

ago, while withdrawals were down about 2 per cent.

Turning to policy considerations, Mr. Ellis referred to comments

in Mr. Noyes'

statement to the effect that there had been no material

change in the business picture, which was basically one of continuing

modest improvement.

This improvement was more evident, Mr. Ellis suggested,

in data on final takings at consumer, business, and Government levels than

in production and employment series.

Looking back, he felt that monetary

policy had quite properly been stimulating.

If he understood Mr. Koch's

figures correctly, there had been fairly sharp increases recently in the

measures of money supply and credit availability.

These developments

would appear to reflect the effect of monetary policy, which comes with

some lag in a period when demand is strengthening.

If there continued to

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be a strengthening in demand, he would expect the expansion in the

credit series to be more rapid than one would want to accept on a

continuing basis.

With reference to the two models of economic and

financial developments for the rest of 1962, to which Mr. Koch had

referred, he had some feeling that if the economic advance should gain

momentum a monetary policy designed to preserve free reserves of

around $400 million would support a credit build-up more rapid than

the Committee would like to see continue.

Mr. Ellis expressed the view that no abrupt shift in policy

was warranted at this particular time.

He agreed with Mr. Koch that

the present degree of ease was providing an adequate monetary stimulant

to economic activity.

At the same time, he would be prepared to revert

to the position taken by some in January, before the pause in business

expansion, that the System should think in terms of allowing a strengthen

ing of credit demands, if and when they developed, to create conditions

of less market ease.

The expansion of the domestic economy seemed to

provide greater leeway for monetary policy to make whatever contribution

was possible so far as the international situation was concerned.

This

suggested to him that the projections of required reserves should be

formulated on the basis of an annual growth rate of 3 per cent, or

somewhat less, rather than 4 per cent.

He would be inclined to accept

a target for free reserves in the area of $350-$400 million and to allow

short-term rates to push toward 3 per cent, with the

Federal funds rate

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-15

more frequently at 3 per cent.

He would anticipate some member bank

borrowing, which should be taken as evidence that the initiative in

credit tightening was coming

demand forces.

from the market place as the result of

While his prescription was presented within the general

framework of no substantial change of policy over the next three weeks,

he would suggest that doubts be resolved on the side of a little

less

ease.

Mr. Ellis expressed the view that it might be appropriate to

change the first paragraph of the current economic policy directive,

but he would be inclined to leave the second paragraph as it

stood.

He

would not recommend changing the discount rate at this time.

Mr. Irons reported that in the Eleventh District the over-all

picture was one of moderate, generally satisfactory improvement.

The

employment situation was strong, department store sales during the

Easter period were up about 8.5 per cent from the previous year, and

construction was running about 35 per cent above a year ago.

Unemploy

ment, on an unadjusted basis, stood at about 4.9 per cent of the labor

force.

There was no appreciable change in the petroleum situation.

The

industrial production index, heavily weighted for petroleum, was down in

March but appeared likely to show some improvement in April.

Agricultural

conditions were generally good, but with some spottiness, as is

the case at this season of the year.

often

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Loans and investments of District banks were up moderately.

The banks had been tending to reduce their holdings of short-term

Governments and to buy longer-term Government and other securities.

Total deposits were up, the rise in time deposits being appreciably

greater than the decline in demand deposits.

During the past three

weeks District banks were net buyers of Federal funds, while borrowing

from the Reserve Bank was nominal.

With respect to monetary policy, Mr. Irons said it seemed to

him, upon evaluating the economic situation, that it would be appropriate

to continue about the same policy that had been followed. during the

past three-week period, in fact the past several periods.

an absence of inflationary pressures.

There was

Also, there appeared to be

considerable uncertainty among businessmen in the Eleventh District

since the steel price episode in terms of the outlook for business.

There was some

concern about the profit-wage-price situation, and how

this would work out.

As to economic activity, there seemed to be

steady improvement, but at only a moderate rate.

Accordingly, as he

had said, he would continue about the same degree of ease that had

prevailed recently.

The System should continue to provide reserves,

but it should not force them on the banking system.

There had been

stability in the Federal funds market during the past three weeks,

also relative stability in the bill market.

and

It appeared that reserves

had been adequately available because bill rates did not move up; it

5/8/62

-17

also appeared that the degree of ease was not particularly excessive

because short rates did not move down appreciably.

He would suggest

continuing to watch the tone and feel of the market closely, with a

view to maintaining a comfortable but not an excessive degree of

ease.

If

the drift

should be toward a little

more firmness as the

result of market forces, he would not be too concerned.

As rough

targets, he would suggest a Federal funds rate from 2-1/2 to 2-3/4

per cent, free reserves in the area of $350-$400 million, and a bill

rate around 2-3/4 per cent or on the up side.

The kind of policy that

he had been suggesting in general terms should come out to about that

sort of picture.

Mr. Irons said he had not thought in terms of changing the

current economic policy directive at this time, partly because he felt

that present policy should be continued and partly because he did not

see enough change in the domestic or international situation to establish

any compelling need for altering the descriptive phrases in the directive.

On the other hand, he would not oppose making some modest changes in

the directive if they were felt desirable by the Committee.

He would

not recommend changing the discount rate at this time.

Mr.

Swan said that very little

in

the way of new Twelfth

District statistics had become available since the April 17 meeting.

As he mentioned at that time, preliminary data had indicated that the

seasonally adjusted unemloyment rate in the Pacific Coast States in

-18

5/8/62

March was not as favorable as the national rate.

confirmed.

In fact, the rate rose a little

That had now been

from February to March.

However, consumer spending continued strong and major construction

contract awards were up sharply in March from the low February level.

For the first

quarter, construction contract awards were up 4 per

cent from the corresponding period of the previous year.

Gains

larger than 4 per cent in residential and private nonresidential

awards more than offset a sharp decline in utilities and public works

contracts.

However,

a rather widespread labor dispute in northern

California tended to cloud the near-term outlook.

For the first three weeks of April, District reporting banks

continued to show a considerable increase in real estate loans, as they

had for several weeks previously, and a smaller increase in commercial

and industrial loans.

Federal funds.

The large banks were still

Savings deposits at weekly reporting banks were down

during the three weeks ended April 25, the first

had occurred this year.

tax payments.

net sellers of

Presumably the decline

time that a decline

was related to income

During that three-week period, incidentally, there was

a small decline in savings deposits at all weekly reporting banks

throughout the country; however, due to the rather substantial decline

in the Twelfth District, there was actually an increase in the remainder

of the country.

Five out of seven major

Los Angeles and San Francisco

banks indicated that they experienced a fairly significant decline in

earnings during the first quarter of this year.

The only two that did

not had already gone on a daily interest basis in the first quarter of

1961.

5/8/62

-19

Turning to the national outlook, Mr. Swan noted that economic

expansion, though continuing, was not vigorous.

The economy still had

a considerable way to go before reaching a satisfactory relationship

to capacity in terms of equipment or manpower, and apparently quite a

way to go before price pressures were created.

There was an excessive

level of unemployment, and this problem might become even more difficult

if there should be a resumption of growth of the labor force.

Thus,

it seemed to him that as of today, there was no basis for even a

slight tightening of policy.

Nor did he believe that the recent de

cline in long-term rates--which reflected market factors rather than

System policy--or the international situation provided sufficient

reason for tightening.

The best inducement for funds to remain in

this country rather than move abroad was a higher level of business

activity in the United States.

Consequently,

Mr. Swan said, he would recommend no particular

change in policy at this time, and if anything a leaning on the side

of slightly more ease rather than less.

This would mean retaining

the 4 per cent growth target in terms of total reserves, or moving

the target a little higher.

As to free reserves, he would move up

a little from the $400 million average of the three weeks ended May 2.

He would not be particularly concerned if the bill rate fell somewhat

below 2-3/4 per cent.

5/8/62

-20

As to the current economic policy directive, Mr.

Swan said

he was rather surprised at the suggestion to change the first

paragraph, because he thought the language of the existing directive

was still an apt description of the current economic situation.

He

would not recommend any change in the discount rate at this time.

In a further comment, Mr. Swan inquired whether there was not

an increasing tendency to use repurchase agreements, in lieu of out

right purchases, when providing additional reserves, presumably to

minimize direct downward pressure on the bill rate.

While he could

appreciate that this might be a useful device, it seemed to him this

was a departure from the original purpose of the use of repurchase

agreements.

Since the option of withdrawal before maturity was with

the borrower, this tended to take the initiative away from the Open

Market Account to some extent.

Of course,

if

repurchase agreements

were withdrawn, presumably they could always be replaced by outright

purchases of securities.

Nevertheless,

he wondered if

the use of

repurchase agreements did not encourage falling short of the estimates

at the end of a week when this happened.

To repeat, he felt that

there had been some shift from the original purpose of repurchase

agreements, which he interpreted as contemplating a device to provide

additional reserves in the event of temporary tightness or knots in

the market, to a more significant and more frequent role in open

market operations.

It

seemed to him that the choice was present, when

5/8/62

-21

there were advance withdrawals, of whether to make a substantial

entry into the market by purchasing a greater amount of securities

than might be desirable, in terms of a given day, or of falling short

of the target for the reserve position of the banking system.

The

foregoing was more in the nature of an inquiry than a critical comment,

but he had wanted to raise the question.

Mr. Deming stated that there was little new to report from the

Ninth District, which appeared to be moving along about the same as

the nation.

The only item that showed any real difference from the

nation was loan demand, which was somewhat stronger in the District.

This had been the case at city banks of the District during most of

the current year.

Bankers were talking about the demand being brisk,

or quite good, and these comments did not seem characteristic of those

being made by bankers throughout the country generally.

As to the national situation, Mr. Deming noted that the rate of

economic gain was characterized as modest.

However,

That was probably correct.

the rate of expansion did not seem to be too bad; current

estimates of gross national product for the second quarter did not

appear to be substantially below the rate that had been projected at

the beginning of the year.

At the same time, from his observations and

contacts, he did not sense any feeling of exuberance.

According to

the projection models to which Mr. Koch had referred, it would seem

doubtful whether natural forces were going to produce any substantial

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5/8/62

market tightening; if he understood correctly, even the more optimistic

model did not contemplate a strength of demand for funds such as to

have such effect on interest rates.

If that was true, the only way

that a tightening could be achieved would be through overt action,

and he would not be prepared to suggest such action at this time.

Summarizing, Mr. Deming said he did not believe that any

particular change in the course of policy was called for in the next

three weeks.

levels.

He would try to keep free reserves around their recent

While he did not like to see the bill rate fall unduly,

neither would he be particularly concerned if it fell to a somewhat

lower level for a day or two, or even for a week.

He saw no particular

reason to change the policy directive at this time, and he would not

change the discount rate.

Mr. Scanlon reported that business continued to improve slowly

in the Seventh District.

Department store sales and sales of new

automobiles indicated that the rather strong consumer demand in March

had continued in April.

Production was rising gradually, but remained

below prerecession levels.

The decline in steel production following

the wage settlement had been somewhat less in the Chicago area than in

the nation.

Nevertheless, although order cancellations had ended,

production was expected to decline further.

A recent survey indicated

that farm real estate prices had risen from year-ago levels.

5/8/62

-23Mr. Scanlon commented that interest in foreign trade continued

to grow in the Midwest.

The relatively slow economic growth in important

areas in the District seemed to have stimulated interest in the possibility

of increasing exports.

In view of comments heard frequently with regard

to wage rates and commodity prices,

it

was interesting to note that

there were some situations where United States manufacturers were

competing on favorable terms with foreign plants.

After citing certain

cases in point, Mr. Scanlon commented that according to one manufacturer

with plants here and abroad, the advantages of domestic production

included the economies of large volume, the availability and quality of

suppliers, and the availability of skilled labor.

Also, Government

sponsored insurance programs appeared to be playing a larger role in

private plans to finance exports.

Seventh District banks, in order to offset the increased cost

of interest payments on savings deposits, were lengthening the average

maturities of their portfolios by purchasing longer-term Government

bonds and other securities and by acquiring mortgages from the Federal

National Mortgage Association.

In summary, Mr. Scanlon said, the rise in business activity at

a pace below general expectations, together with the uncertainties

created by the recent steel price episode and the possible effects of

the Administration's proposed new international trade program, had caused

some business executives to adopt a cautious attitude.

With considerable

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5/8/62

margins of unused labor and unused plant capacity, he felt that no

signal should be given to the market at present that would suggest a

shift of Federal Reserve policy toward less ease.

In his opinion there

was no need for any material change in the policy directive, and he

would not make any change in the discount rate at this time.

Mr. Clay expressed the opinion that the Committee should

continue essentially the same policy of monetary ease that it had been

pursuing in recent weeks.

While there had been further expansion in

economic activity, notably in the automobile industry, a satisfactory

performance of the national economy in terms of employment and output

would require substantial and widespread improvement in various sectors

of the economy.

Expansion in bank credit on a seasonally adjusted

basis and the accompanying developments that had been taking place in

the money and capital markets had been appropriate to these circumstances.

A combination of various factors, including the growth of bank

credit, expectations as to both demand and supply of credit, and the

interest of banks in

acquiring assets with higher yields to cover costs

on time deposits, had produced more attractive interest rates for

prospective borrowers in the important areas of business capital

outlays, residential building, and State and local construction.

State

ments by bankers in the Kansas City District suggested that the expansion

of the credit base also may have had some impact on effective consumer

credit rates.

These easier credit conditions should help to encourage

further expansion in demand for goods and services, and monetary

policy should foster their continuation.

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5/8/62

The international balance-of-payments problem appeared to

Mr.

Clay to call for an extension of recent policy with respect to

the Treasury bill rate--within the same general range previously

determined.

In line with the monetary policy he suggested, no

change was recommended in the Reserve Bank discount rate.

Mr. Wayne said he saw nothing in recent Fifth District

developments that differed significantly from the situation reported

three weeks ago.

The economy continued to plod slightly upward

without unusual strength in any area.

Manufacturing employment

increased slightly in March, and nonmanufacturing fell a little.

Furniture was still

smaller each month.

the brightest spot, but the gains were growing

Textiles showed little change, and bituminous

coal production--while improving somewhat--was still

satisfactory.

far from

In short, the District situation closely resembled

that of the nation.

Turning to policy considerations, Mr. Wayne said that as

this second year of the current upswing advanced, it seemed to him

there were two trends or tendencies in the economy that had real

significance for monetary policy.

The first was an increasing

possibility that business activity would flatten out and later turn

down without ever having attained a

momentum which would justify or

permit any significant degree of credit restraint.

The second was a

tendency for long-term capital outflows to continue and perhaps increase

as a result of the decline in long-term interest rates.

This decline

had been caused to a considerable extent by the higher interest rates

-26

5/8/62

on time deposits permitted by the change in Regulation Q as banks

reached for investments with longer maturities.

The outflow of long

term funds might be more troublesome than the movement of short-term

funds since it

was more permanent and not so likely to be reversed

by changes in the relative levels of interest rates here and abroad.

Even so, it would certainly be unwise,

in view of the faltering

upswing, to attempt to raise long-term rates to prevent such flows.

The dilemma was a most complex one, Mr. Wayne continued, and

monetary policy could make no more than a limited contribution toward

its

solution.

Nothing in the domestic situation indicated any need

for tightening credit,

and he believed that the System was doing all

that was feasible on the international front.

Therefore, he would

suggest a continuation of present policy, by which he meant a policy

of "maintaining a supply of reserves adequate for further credit and

monetary expansion," and avoiding any general pressure on banks'

reserve positions.

This would probably require a level of free

reserves substantially higher than the level inadvertently reached

last week, and perhaps in the range mentioned in the discussion three

weeks ago.

Mr. Wayne believed it would be appropriate to renew the present

current economic policy directive, and he saw no reason to change the

discount rate.

Mr. Mills said his reasoning paralleled that expressed by Mr.

Treiber.

It argued for coming to grips with what he believed to be an

5/8/62

-27-

unsatisfactory financial situation, and a shift in the course of

Federal Reserve policy toward reducing the supply of reserves.

Adoption of that kind of recommendation would require a modification

of the current economic policy directive to reflect the shift of

policy.

In further explanation of his position, Mr. Mills presented

the following statement:

Monetary and fiscal policy actions going back over more

than one year are responsible for critical problems that are

daily coming into clearer perspective. A start toward their

solution has become urgent and further delay will only

complicate an already difficult situation.

Massive deficit financing for the Federal Government is

the crux of the problem. Official encouragement from both

monetary and fiscal authorities has sponsored the commercial

banking system's absorption of the past year's increase in the

Federal debt. This encouragement has taken the tangible form

in the area of debt management of tailoring new issues of

U. S. Treasury securities so as to attract commercial bank

investment as against investment by the private sector of the

financial market, and in the area of monetary policy by con

tinuously supplying reserves to the commercial banks in

quantities that, in the absence of a strong loan demand, have

fostered their massive acquisition of U. S. Government securi

ties. It is significant that in dollar amount a substantial

proportion of the increase in the Federal debt is now held in

the swollen positions of the U. S. Government securities

dealers, and has been financed on commercial bank advances. In

terms of "classical" theory, the present fiscal and monetary

background is suspect and its implications have been rendered

more dangerous because of official support, which has instilled

confidence into the minds of investors that the present financial

market climate can be maintained indefinitely even though it is

the artificial product of a needlessly easy credit policy that

has been abetted by officially pegging an interest yield floor

for U. S. Treasury bills.

Foreknowledge that the U. S. Treasury will have to borrow

heavily in the second half of calendar year 1962 emphasizes the

urgent need for a change in the tone of Federal Reserve System

monetary and credit policy that will shift its influence to the

side of free market principles and thereby encourage private,

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5/8/62

rather than commercial bank,

obligations.

investment in U.

S. Treasury

Unless such action is taken, the risk will

be

run that the U. S. Government securities market will break down

under its own weight, particularly because of the unwieldy

positions of the U. S. Government securities dealers.

Consider

ing the degree of liquidity already injected into the economy

by virtue of monetary policy actions, a moderate move toward

lessening the supply of reserves at the commercial banking

system's disposal would in no wise reduce general credit avail

ability in the economy to a point that could stifle the

constructive use of credit in fostering a high level of economic

activity.

The kind of policy shift contemplated could be expected

to influence some strengthening of interest rates, which would of

itself be beneficial in compelling same reduction in the posi

tions of U. S. Government securities dealers, thereby improving

their capacity to participate more broadly in financing the U. S.

Treasury's prospective offerings of new securities. By the same

token, commercial bank portfolios of U. S. Government securities

would be jogged loose, leaving the banks in better positions to

flexibly underwrite and participate in the U. S. Treasury's new

securities offerings while, at the same time, the long neglected

free market for U. S. Government securities would have been

cultivated by the attraction of a modest increase in investment

returns. The policy proposed, of course, contemplates terminat

ing the present pegging operation with respect to U. S. Treasury

bills and, needless to say, foreign observers would welcome the

Federal Reserve System's action as being in accordance with

accepted central banking theory and as token recognition of its

part in countering the nation's balance-of-payments problem.

Mr. Robertson said he agreed completely with the views expressed

by Mr. Swan.

Recently, he had reviewed the policy followed by the Open

Market Comittee during the past five three-week periods, and he felt that

this policy provided a good record.

It

had been successful in stimulating

moderate economic growth, but there were still

excessive unemployment.

unutilized resources and

He could see no evidence of sloppiness in the

credit markets or of speculative trends.

Consequently, he would have no

brief for any tightening of credit at this time.

Instead, he felt that

5/8/62

-29

the Committee should hold close to present policy and, if

anything, move

slightly on the side of additional ease.

Turning to the current economic policy directive, Mr. Robertson

suggested certain changes.

He would make no change of substance in the

first paragraph, because in his opinion the language of that paragraph

described the current situation well.

His only recommmendation would be

to eliminate the clause that called for recognizing the need to main

tain a viable international payments system.

not understand its meaning.

That was because he did

As to the second paragraph, he would re

vise it as follows:

To implement the policy of the Committee, operations of

the System Open Market Account shall be conducted with a

view to maintaining an average level of free reserves in the

neighborhood of $400-$450

million, with allowance for any

uncertainties or distortions that may develop regarding

current or projected reserve figures. Deviations from this

specified free reserve range shall be permitted as appropri

ate in order to moderate abrupt or sustained changes in

short-term rates or other untoward market pressures or

persistent departure of adjusted required reserves against

private demand deposits from the average upward trend of the

past five months.

Such a directive, Mr. Robertson noted, would call for a growth of

required reserves against private demand deposits at a little

an annual rate of 5 per cent.

below

It would allow for temporary deviations

that might occur accidentally while continuing to aim generally toward the

prescribed target.

In his opinion, such language would be more under

5/8/62

-30

standable and provide a better basis for the operation of the Open

Market Account.

Mr. Shepardson noted that there seemed to be rather general

agreement that a modest continuing growth of the economy was taking

place,

In his opinion, the rate of growth was affected more by

other factors than by monetary policy. There was, for example, the

uncertainty of the business community resulting from the steel price

situation, along with the uncertainty about wage pressures.

Government spending program also was a factor.

The

Certainly, there was

needed a fuller utilization of resources, both human and physical, but

he did not feel that monetary policy could exert a significant effect.

Reports on the availability of credit, the money supply, and liquidity

seemed to indicate that monetary policy had done its job adequately,

if not more than adequately.

Mr. Shepardson expressed concern about a continued growth of

total reserves at. the rate of 5 per cent.

It would be preferable, he

thought, if the rate of growth was more like 3 per cent,

less than that.

or possibly

He would not interpret that as a tightening of credit,

but rather as a slowing down of the rate of credit expansion.

As to the current policy directive, Mr. Shepardson suggested

the possibility of a change in the first paragraph to call for

"permitting" rather than "promoting" further expansion of bank credit

and the money supply.

As he saw it, the present wording indicated that

-31

5/8/62

the Committee was trying to do too much .

Its function should be to

permit such expasion as might be brought about by other forces.

This could come only through a revival of business confidence, which could

be aided by removal of the uncertainty growing out of the steel price

situatopm and by some different approach to Government expenditures.

Mr. King commented, with respect to the recent rise in bond

prices

and the weakness in the stock market, that such movements

usually were associated with conditions that would suggest a shift of

policy in the direction of ease instead of tightening.

He did not

fell that the System should provide more ease than it had provided.

Onthe other hand, he did not think that economic conditions at the

present time required any tightening.

The fact that the Treasury,

after another week, reportedly intended to refrain from adding an

addtional $100 million to the weekly

bill offering wasa

with which the Account Management would have to contend.

a factor

He would

not want the bill rate to decline unduly, and developments would

have to be watched closely.

In any event, however, he doubted

whether the bill rate was likely to move higher; efforts probably

would have to be focused on the other side.

In fact, he did not

believe it would be appropriate to ask the Manager to assume

responsibility for holding the bill rate at the present level.

the bill rate should fall somewhat,

If

that might reflect forces that

5/8/62

-32

were beyond the reasonable control of monetary policy.

In conclusion,

Mr. King said that his general views on policy were similar to those

expressed by Messrs. Wayne and Deming.

Mr. Mitchell expressed agreement with the position of Mr.

Swan, both in reasoning and recommendations.

He would add only the

comment that in his opinion the debate on policy that had been going

on within the Committee for several meetings was an important one,

although at first it

might appear to involve degrees of difference

that were very small.

The question centered in the view presented

repeatedly by the representatives of the New York Bank in favor of

a change of policy, a change which it was indicated would be slight.

In Mr. Mitchell' s opinion, that point of view should be resisted

vigorously until the country had approached closer to full utilization

of plant capacity and labor force, and until it could be shown that the

stability of the price level was threatened in some way.

juncture, he saw no

At this

justification for a change in monetary policy.

Mr. Fulton said that the Fourth District was feeling the

backlash of the steel inventory build-up.

might be prolonged for a while,

Furthermore, this situation

as steel ingot production had not

as yet adjusted to slower deliveries as customers sought to reduce

inventories.

As a matter of fact, the Fourth District had been

lagging somewhat before the current downslide began.

As to steel

production, the first quarter of 1962 was quite high and satisfactory,

5/8/62

-33

the second quarter would be lower than the first,

and the third

probably would be lower than the second by about 10 per cent.

It

was hoped that production would start back up in the fourth quarter.

The cancellation of orders and deferment of deliveries had been

general throughout most of the steel product lines, although pipe

was showing a somewhat better performance than other lines.

The

steel companies felt, however, that the atmosphere in which their

customers were working was rather good.

The customers seemed to

feel that business had reached a plateau from which an expansion

could occur at a reasonably satisfactory pace.

Automobile sales in the major centers of the District continued

to show considerable strength, although they did not measure up to the

outstanding performance nationally.

Including imports, sales in the

nation were at an annual rate of about 7.5

million in April, causing

some sources in the auto industry to raise their estimates for the

year to about 6.75 million, or possibly 7 million.

Inventories had

been substantially reduced, and at the end of April totaled about

953,000--a 38-day supply--which was quite low for this time of year.

If sales continued high, this would of course have a beneficial effect

on the steel industry.

Construction activity in the District during March, as during

the entire first quarter of the year, was mediocre, only 3 per cent

above the year-ago level compared with an increase of 19 per cent

nationally.

Insured unemployment had declined considerably more than

-34

5/8/62

seasonally,

but the improvement seemed to have tapered off, especially

in the steel centers.

levels.

Nonfarm employment was still below pre-recession

Department store sales were estimated to have declined

slightly in April after seasonal adjustment.

Bank credit had expanded somewhat,

with the increase divided

about equally between loans and investments.

Investments reflected

a lengthening of maturities, and business loans had declined.

All in all, Mr. Fulton said, no ebullience was seen.

He

believed that the degree of ease provided by the Committee had been

appropriate, and he would continue it.

He would not change the

current policy directive, feeling that any revisions would necessarily

be minor and would amount only to changing words.

He would not favor

a change in the discount rate.

Mr. Bopp reported that business indicators in the Third

District showed mixed trends.

Unemployment claims continued to

decline gradually, and both new and continued claims were at the

lowest levels in several years.

However, seven of the 13 major

labor market areas were still classified as having a substantial

labor surplus.

The classification of Atlantic City had been changed

from "F" to "E", clearly reflecting seasonal factors; usually the

change was from "E" to "D".

In view of the considerable amount of unused plant capacity

and of unemployment, Mr. Bopp felt that the Committee should continue

5/8/62

-35

the degree of ease that had existed thus far, with no change in the

current policy directive or the discount rate.

Mr. Bryan said that the latest Sixth District figures were

mostly for March, with little

preliminary data for April available.

These figures seemed to indicate that economic activity had edged

up, although with no boom-like surge occurring.

The most notable

increases involved a sharp expansion of construction contract awards

and a sharp rise in member bank loans.

A survey of a few member

banks showed that the demand for loans was increasing, with the

quality of applications good.

As to the national picture, Mr. Bryan commented that the

pace of expansion still appeared modest.

Inflationary forces were

restrained by ample plant capacity and unemployment,

as well as by a

mixed earnings picture and favorable investment opportunities abroad.

The moderate pace of the upturn and other factors argued against a

policy that would lessen the supply of bank reserves.

Accordingly,

there seemed no reason for an overt change in policy such as a change

in the discount rate, and he would continue to supply reserves in

approximately seasonal proportions, plus a modest growth factor.

In April the daily average of total reserves was about $19,700 million.

On the basis of a three per cent annual growth rate the daily average

for May would be around $19,750 million, which would be satisfactory

to him as a rough target.

If

this were converted to free reserves,

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5/8/62

the target would appear to be about $5

million.

In his view

a 3 per cent growth rate was ample at the present time.

If banks

needed reserves in greater volume, those reserves could be sought

through the discount window.

Mr. Francis noted that most of this year Eighth District

activity seemed to have lagged behind the nation.

However,

recent

data indicated that District figures more nearly approximated

national trends.

Recent conversations with a number of businessmen

and others in the District seemed to support that conclusion.

Almost

without exception, business was said to be better than last year,

and that the outlook for the immediate future was regarded as good.

No concern was expressed about the possibility of a runaway type of

expansion.

Mr. Balderston commented that a couple of weeks ago, on the

basis of figures then available, he thought perhaps the time had come

to press on the brakes.

Liquid assets for March were up to an extent

that produced an annual rate of increase for the first quarter of about

10 per cent.

Also, the money supply, if time deposits were included,

rose during the first

However,

four months of the year by about 10 per cent.

in studying what had happened it

seemed to him that funds

had moved from the hands of the Treasury into private deposits in

the latter part of March, and that the picture shown on the chart

that the Committee had been using was in large part explained by that

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5/8/62

movement.

For the past four or five weeks required reserves against

private deposits had been growing not at a 6 per cent annual rate but

at only about a 4 per cent rate.

The principal question in his mind in recent weeks, Mr. Balderston

said, had been whether the economy was at last moving in such fashion as

to require some curbing of the rate of credit expansion.

at the moment, however,

was that this was not the case.

His conclusion

In terms of the

projections referred to by Mr. Koch, it appeared that the economy

be following the low road rather than the high road.

might

Despite such

factors as near-record sales of automobiles and a sharp increase in

housing starts, the economy did not yet show the same

of ebullience as in 1958-59 and 1955-56.

characteristics

The rate of inventory accumu

lation was moderate, along with the rate of fixed investment.

Moreover,

it appeared that the stock and bond markets might be reflecting some

change in inflationary expectations; something was happening in the

minds of investors that made the stock market look less attractive at

the moment,

and foreign pastures seemed to look greener from the

standpoint of investment opportunities.

On the other hand, the

balance-of-payments situation seemed not to have worsened in the

past month, although the progress toward a basic balance might not

be too encouraging.

The best answer to the question of how much

bank credit fed in by the Federal Reserve was seeping out to other

countries might be that last year about $2 billion of bank funds were

loaned to Japan and other countries, or one out of every seven dollars

of bank credit provided.

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5/8/62

Mr. Balderston said that, in coming to the conclusion that

the Committee should continue its current policy without change for

a while longer, he was influenced by these considerations:

(1) the

steel price episode had unsettled the minds of businessmen as to fixed

investments,

and businessmen would be watching for any action by the

Federal Reserve System that would confirm their suspicions that the

Government was trying to restrain profit making; (2) he was not sure

that an increase in interest rates would restrain the kind of borrowing

that the Japanese seemed to be doing in this country.

With interest

rates as high as they were in Japan, those firms would not be inhibited

from borrowing in this country even if

the moment.

rates were much higher than at

In suggesting a continuation of present monetary policy,

he realized there was the risk of some day running into a real crisis

due to the outflow of gold.

At present, however, he saw a continued

need to foster domestic expansion.

On balance, therefore, he would

continue present policy, with no change in the existing policy directive.

Chairman Martin expressed the view that this was a period when

monetary policy could do very little

more than was now being done.

He agreed with Mr. Wayne's comments about the limitations of monetary

policy under current circumstances.

If that was correct, it

seemed

to him that maintenance of the status quo was about the best contri

bution that could be made.

In his opinion, "no change, more ease" and

"no change, less ease" defied definition from the standpoint of the

5/8/62

-39

conduct of open market operations.

While he might question some

words in the current policy directive and while, if the directive

were being written afresh, Mr. Shepardson's suggestion for "permitting"

rather than "promoting" further credit and monetary expansion might be

good phrasing, it was his feeling on the basis of the discussion at this

meeting that the best course would be to retain the existing directive,

thus reasserting for the next three weeks the policy that the Committee

had been following.

There would be another meeting of the Committee in

three weeks, and the Treasury would be out of market for a while.

The Committee might have at that time a better perspective of what

the economy was doing.

At the moment, any improvement in the economy

was offset--perhaps more than offset--by uncertainties affecting business

confidence.

One could hardly say that there was a definite improvement

in the business picture until the confidence factor had been resolved

more effectively.

It might be that the picture would be clearer by the

time of the next meeting than it was today.

Chairman Martin then proposed that the current economic policy

directive be retained and that the Committee continue its

present policy

for the next three weeks.

Mr. Mills stated that he would like to be recorded as voting

against renewal of the existing directive for reasons that he had pre

viously expressed.

Mr. Treiber indicated that the differences between his position

5/8/62

-40

and a continuation of the policy embodied in the existing directive

were not sufficient to cause him to record a dissenting vote.

There were no other comments by members of the Committee and,

in response to a question, Mr.

Stone indicated that he had no comment.

Thereupon, upon motion duly made and

seconded, the Federal Reserve Bank of New

York was authorized and directed until other

wise directed by the Committee to effect

transactions for the System Open Market

Account in accordance with the following

current economic policy directive:

In view of the modest nature of recent advances in the pace

of economic activity and the continued underutilization of

resources, it remains the current policy of the Federal Open

Market Committee to promote further expansion of bank credit and

the money supply, while giving recognition to the country's

adverse balance of payments and the need to maintain a viable

international payments system.

To implement this policy, operations for the System Open

Market Account during the next three weeks shall be conducted

with a view to maintaining a supply of reserves adequate for

further credit and monetary expansion, taking account of the

desirability of avoiding sustained downward pressures on short

term interest rates.

Votes for this action: Messrs. Martin,

Balderston, Bryan, Deming, Ellis, Fulton,

King, Mitchell, Robertson, Shepardson, and

Treiber. Vote against this action: Mr. Mills.

Mr. Williams then withdrew from the meeting.

There had been distributed to the Committee a report from the

Special Manager of the System Open Market Account on System and Treasury

operations in foreign currencies and on foreign exchange market conditions

for the period April 17 through May 2, 1962, along with a supplementary

report for the period May 3 through May 7, 1962.

Copies of these reports

have been placed in the files of the Federal Open Market Committee.

5/8/62

-41

In supplementation of the written reports, Mr.

Sanford commented

substantially as follows:

Since the last meeting of the Committee, on April 17, the

most important development in the foreign exchange market has

been the re-establishment by Canada of a par value.

The new

par declared to the International Monetary Fund of U. S.

$0.92-1/2 = $1.00 Canadian was established well after the close

of business May 2. So far as

concerned, the devaluation of

level passed off quite easily

in the Swiss franc market and

the Canadian exchange rate is

about 3 per cent from the previous

but it did have some repercussion

in the London gold market.

In Switzerland an atmosphere of uneasiness developed.

People pointed to the devaluation of the Canadian dollar and

linked that with the possibility of changes occurring in one or

more other currencies.

The closing spot rate for the Swiss franc

rose somewhat (from $.2302-1/4 on May 2 to $.2305-3/8 on May 3

and $.2307 on May 4), and in order to avoid the uneasiness from

feeding on itself and perhaps spreading to other currencies, i.e.,

the United States dollar, the U. S. Stabilization Fund sold a

total of 6-1/2 million Swiss francs on those two days. As time

progressed, it became more evident that a fairly strong flow of

funds to Switzerland (sources unknown) had developed and the

Stabilization Fund ceased, at least temporarily, operating in

the market.

The market uncertainties resulting from the Canadian rate

change were reflected in an increased demand for gold in London.

The dollar equivalent of the fixing price rose one cent from

Wednesday's level to $35.0808 by Monday, with half this increase

coming on Monday when demand was reported to be quite heavy, and

today the price is up further to $35.0824.

Since the last meeting of the Committee there have been no

On the other

operations in foreign exchange for System Account.

hand, the Stabilization Fund has had transactions in several

currencies--Deutschemarks, Netherlands guilders, and Swiss francs.

The range of fluctuation of the Deutschemark has been only

On May 1 the Bundesbank,

between $0.2499-5/8 and $0.2501.

believing that the danger of hot money flows to Germany has now

lessened and that the German balance of payments is closer to

equilibrium, authorized German banks to resume interest payments

In the circumstances the Deutschemark

on nonresident time deposits.

may in the near future be more often below par than above and in

Thus, an opportunity

fact today declined to slightly below par.

may be afforded to build up System holdings of Deutschemarks for

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5/8/62

possible use in the future. If we should arrive at a judgment

that System acquisition of Deutschemarks is desirable at the

time,

in consultation with Bundesbank,

it

would be discussed

with the Committee's staff and reported to the Committee as a

matter of course,

as acquisitions contemplated at this

time would

only be made within the guidelines, which state that acquisitions

should be made at or below par, in so far as practicable.

On April 24 the Nederlandsche Bank announced an increase in

its

discount rate to 4 per cent from 3-1/2 per cent,

a step which

was taken to restrain domestic inflationary pressures. This

increase was not generally anticipated by the exchange market

because Dutch international reserves had been rising.

As

traders attempted to cover commitments entered into prior to

the announcement of the increase, some upward pressure was

exerted on the guilder rate, and to restrain any sharp rise

in the exchange rate which might have had an adverse effect on

the international position of the dollar, we, acting for the

Stabilization Fund, and in consultation with the Nederlandsche

Bank, sold a total of 7 million guilders on April 2 4 , 27, and

30. Our action in countering the fairly sharp slump of the

dollar against the guilder exercised a braking action on the

movement.

It also resulted in a clearer understanding between

the Nederlandsche Bank and ourselves as to cooperation, i.e.,

it established a clearer understanding that we can sell in the

New York market. We are, of course, still appraising the effect

of too rapid changes in exchange rates on public attitudes and

psychology. Meanwhile, the three-month forward guilder rate

has declined from a premium of 0.10 per cent per annum to a

discount of 0.65 per cent.

Mr.

Coombs is

presently in Europe.

In

Basle he has,

at

the request of the Treasury Department, been meeting with the

central bank foreign department experts on the completion of

arrangements relating to the London gold market.

In London he

has been discussing with the British the question of a proposed

dollar-pound swap between the Federal Reserve and the Bank of

England. Any such swap would, of course, be submitted to the

Committee for approval. There are also discussions scheduled

with the Swiss concerning a reciprocal standby credit as a

supplement to the arrangements entered into by other countries

with the International Monetary Fund for standby credits.

I

understand that good progress has been made with the Dutch on

the establishment of a line of credit for the U. S. Treasury to

backstop forward guilder operations.

(This would be carried out

through the Bank for International Settlements.)

Finally, I

understand conversations are also scheduled with the Belgians,

who may be interested in a swap arrangement.

5/8/62

-43

As you know, there has been a spate of new issues of foreign

securities in the United States either already consummated or in

near contemplation. The New York market for foreign security

issues is both broad and completely open to borrowers, unlike

the situation in the European markets, which have very limited

capacity and considerable official control. In the case of the

Danish Government $20 million issue, we had discussed with

Mr. Hartogsohn, Deputy Governor of the Danmarks Nationalbank,

during his visit with us, the disposition of the proceeds of

this issue and had been informed that he believed they would

be transferred into sterling, which he likened to a borrowing

from the Chase Bank, which is immediately checked out and

deposited in the National City Bank.

He, therefore, contacted

his Governor and we have now been informed that the funds will

remain in the United States until such time as the Danes need to

disburse the funds here and in other countries. Similar discus

sions have occurred in the case of the New Zealand $25 million

issue, which, if the past pattern is followed, would result in

transfer of the proceeds to the United Kingdom dollar pool; at

this moment there has been no definitive reply from the New

Zealand authorities as to their decision in the case of the

present issue. The significance of such borrowing and immediate

conversion into sterling is that the gain of dollars to the

United Kingdom results in an immediate equivalent conversion

Hence, the Treasury

into gold obtained from the U. S. Treasury.

and we consider it desirable to arrange, if possible, for con

version into other currencies only as and when the need for such

currencies may arise.

Following a brief discussion based on Mr. Sanford's comments, it

was noted that inasmuch as there had been no System foreign currency

transactions during the period since the Open Market Committee meeting on

April 17,

1962, no action to approve, ratify, and confirm any such trans

actions was necessary.

All of those present except the members and alternate members of

the Committee, the other Reserve Bank Presidents, Messrs. Francis, Young,

Sherman, and Kenyon then withdrew from the meeting.

5/8/62

Pursuant to an understanding during an executive session

of the meeting of the Open Market Committee on January 23, 1962,

Messrs. Martin, Hayes, and Balderston had been holding informal

exploratory discussions looking toward the selection of a successor

to Mr. Rouse as Manager of the System Open Market Account.

At the

meeting on April 17, 1962, it was agreed that this group would submit

a report to the Committee for consideration at a later meeting.

Such a report, dated May 1, 1962, was distributed to the Committee

under date of May 3, 1962.

In this report the group recommended

that Robert W. Stone, Assistant Vice President of the Federal Reserve

Bank of New York, be selected to succeed Mr. Rouse as Manager of the

Open Market Account and suggested that the appointment be made effective

on

a date to be agreed upon by the Committee and the New York Bank,

perhaps May 15, 1962.

In a letter dated May 1, 1962, to Chairman

Martin, Mr. Rouse submitted his resignation as Manager of the Open Market

Account.

In discussion, Chairman Martin commented that the recommendation

with respect to Mr. Stone reflected both the views expressed by a

number of persons outside the Federal Reserve System regarding Mr.

Stone's qualifications and observation by members of the three-man

group concerning Mr. Stone's work on the Desk.

Thereupon, upon motion duly made and

seconded, and by unanimous vote, Mr. Rouse's

resignation as Manager of the System Open

Market Account was accepted as of the close

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5/8/62

of business May 14, 1962, and Mr. Stone was

selected as Manager of the System Open Market

Account to succeed Mr. Rouse, effective at the

beginning of business May 15, 1962, it being

understood that Mr. Stone's selection was sub

ject to his being satisfactory to the Board of

Directors of the New York Reserve Bank.

Upon motion duly made and seconded, the

Secretary of the Committee was requested to

prepare appropriate expressions of apprecia

tion for presentation to Mr. Rouse and to

Mr. Woodlief Thomas on suitable occasions in

recognition of their signal services to the

Committee over many years as Manager of the

System Open Market Account and as Economist

of the Federal Open Market Comittee, respec

tively.

In further discussion, Mr. Treiber said he anticipated that the

directors of the New York Reserve Bank at their meeting on Thursday,

May 10,

would appoint Mr. Rouse as Vice President and Senior Adviser

of the Bank, appoint Mr.

Stone as Vice President of the Bank, and

approve Mr. Stone's selection as Manager of the System Open Market

Account.

As to the manner of public announcement with respect to Mr.

Stone's selection as Account Manager, it

was understood that this

announcement would be released by the Open Market Committee along

with advice of the resignation of Mr. Rouse as Account Manager.

It

was agreed that the timing of the announcement, and of the announcement

by the New York Reserve Bank of the new officer posts at the Bank for

Messrs. Rouse and Stone, would be worked out between the Bank and Mr.

Molony, Assistant to the Board of Governors.

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5/8/62

It

was agreed that the next meeting of the Federal Open

Market Committee would be held on Tuesday, May 29, 1962.

The meeting then adjourned.

Secretary