FOMC Minutes
A meeting of the Federal Open Market Comittee was held in the
offices
of the Board of Governors of the Federal Reserve System in
Washington on Tuesday, May 29,
PRESENT:
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
1962, at 10:00 a.m.
Martin, Chairman 1/
Hayes,
Vice Chairman
Balderston
Bryan
Deming
Ellis
Fulton
King
Mills
Mitchell
Robertson
Shepardson
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. Sherman, Assistant Secretary
Mr. Kenyon, Assistant Secretary
Mr. Hackley, General Counsel
Mr. Noyes, Economist
Messrs. Brandt, Brill, Furth, Garvy, Holland,
Koch, and Willis, Associate Economists
Mr. Stone, Manager, System Open Market Account
Mr. Coombs, Special Manager, System Open
Market Account
Mr. Molony, Assistant to the Board of Governors
Mr. Cardon, Legislative Counsel, 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 Finance Section,
Division of Research and Statistics,
Board of Governors
1/ Entered meeting at point indicated in minutes.
5/29/62
Mr. Francis, First Vice President, Federal
Reserve Bank of St. Louis
Mr. Hickman, Senior Vice President, Federal
Reserve Bank of Cleveland
Messrs. Eastburn, Ratchford, Baughman, Jones,
Tow, Coldwell, and Einzig, Vice Presidents
of the Federal Reserve Banks of Philadelphia,
Mr.
Richmond, Chicago, St. Louis, Kansas City,
Dallas, and San Francisco, respectively
Sternlight, Manager, Securities Department,
Federal Reserve Bank of New York
Mr. Hellweg, Economist, Federal Reserve Bank
of Minneapolis
Upon motion duly made and seconded,
the minutes of the meeting of the Federal
Open Market Committee held on April 17,
1962, were approved.
Before this meeting there had been distributed to the members
of the Committee a report on open market operations in United States
Government securities covering the period May 8 through May 23,
1962,
and a supplementary report covering the period May 24 through May 28,
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:
Among the more noteworthy developments as viewed from the
Trading Desk since the last meeting of the Committee is the
fact that while the banking system has had continuously
available a volume of free reserves that is within the range
of other recent periods, there has occurred, behind that
volume of free reserves, a considerably more comfortable
money market situation and a perceptible slowing of the
rate of growth of total reserves.
The evident implication
is that the economy has been making less vigorous use of
available free reserves than in April, for example, and, in
the past week or two, less vigorous use than one might expect
on seasonal grounds.
A part of the explanation of this
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situation, as we see it from the vantage point of the Desk,
lies in the sharp reductions in dealer positions and use of
credit since late April and early May, but whether and to
what extent the explanation for the less vigorous use of
available reserves in the recent period goes beyond the
decline in dealer financing requirements is difficult to
determine.
In any event, with Federal funds largely in a
2 - 2-3/4 per cent range, the reserves have clearly been
available in ample volume.
Mr. Holland, in his broader
review of the credit situation, may have somewhat more
perspective on these matters.
Given this new situation, rates on Treasury bills moved
lower during the early part of the period, but turned upward
when the Treasury announced that it would add $100 million
to the bill supply in the auction held last week (and when
it subsequently announced that another $100 million would be
added to the bills sold in yesterday's auction). Demand for
bills has been good throughout the period, and the general
tendency has been toward lower rates.
Yesterday,
partly in
response to the easy money market that developed, the rate
moved lower again. The three-month bills were sold at an
average of 2.66 per cent, while the six-month issue was sold
at an average of 2.74 per cent. These rates are down 4 or
5 basis points from the preceding auction but are close to
the rates set in the auction two weeks ago. If the economy
does not use the reserves available to it any more vigorously
than in the recent period, then assuming free reserves in
about the recent range, bill rates could well drop somewhat
further even if the Treasury continues to add $100 million
to the supply of bills for the next two or three weeks. If,
on the other hand, the economy should use up reserves at the
rate it did in April, short-term rates could well tend to
move upward.
Prices of Treasury bonds in the period since the last
meeting were up, then down during much of the period, and
The rise at the
finally up again in the past several days.
beginning of the period was more or less a continuation of
the upward movement that had started about three months ago,
when the market seemed to decide that neither economic trends
nor developments in credit policy would put upward pressure
on longer-term rates for the time being -- and that the
The rise
balance of forces on rates might even be downward.
in prices gained further impetus from the steady erosion of
stock market prices. Then, from about May 14 through 21,
off and in some cases lost perhaps a third
bond prices fell
of the gains recorded over the previous two and a half months.
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Better news about the economy, the approaching payment date
for the May refunding, and sporadic advances in the stock
market all helped to produce a much more cautious attitude
among dealers -- who still held large amounts of the refunding
issues and sizable inventories of other issues as well. While
there was no heavy selling by investors, the limited offerings
that did appear were not readily absorbed--and in fact dealers
sought instead to lighten their inventories of intermediate
and longer issues at every opportunity.
A second turnabout
in the price trend came around May 21-22 as fresh buying
was stimulated by the more attractice yield levels than
attained, and by the new rush of price declines in the
stock market, while dealers' inventories had by this time
worked down to a considerably lower level. Throughout the
period it was evident that the stock market was a major
factor influencing the prices of Treasury securities--both
as a psychological factor and as a direct influence as some
funds reportedly moved out of equities and into fixed-income
The stock market's influence was particularly
securities.
noteworthy yesterday, when the bond market started out with
small price declines, and then turned around as selling
pressures mounted in the equity market.
Finally, I might comment on the question raised by
meeting of the Committee, with regard
Mr. Swan at the last
We discussed
to the recent use of repurchase agreements.
meeting and it might
this matter informally after the last
be useful to summarize here the substance of that discussion.
You may recall that Mr. Swan asked two questions--first,
whether the recent use of repurchase agreements went somewhat
beyond the rationale originally envisaged when the repurchase
instrument was adopted; and second, whether the recent use of
repurchase agreements had a tendency to cause reserve levels
to turn out somewhat lower than anticipated because of dealers'
action at times in terminating these agreements before maturity.
point I think the answer is "yes"; it seems to us
On the first
that a somewhat more extensive use of repurchase agreements
has been part of the process of adapting System open market
operations so as to be able to inject reserves while minimizing
direct downward pressure on bill rates. As to the second
question, it does not seem to us that the employment of repurchase
agreements has tended to produce significant shortfalls from
anticipated reserve levels.
We know when we arrange these
agreements that they may be withdrawn by dealers prior to
maturity, and some rough allowance can be made for this.
Partly for this reason, shortfalls from anticipated reserve
levels owing to dealer withdrawals of repurchase agreements
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have been very small relative to shortfalls resulting from
the erratic behavior of market factors.
Thereupon, upon motion duly made and
seconded, the open market transactions
in Government securities during the
period May 8 through May 28, 1962, were
approved, ratified, and confirmed.
Mr. Noyes presented the following statement with respect to
economic developments:
At one time or another in recent months almost every
analyst of economic developments has found occasion to express
some doubts as to the sustainability of the level of stock
prices.
In many of the forecasts for 1962 made at the close
of last year, a major break in equity prices was mentioned
as one of the disturbing possibilities. At the first
of the
year, and several times thereafter, it seemed that such a
major adjustment might be under way, but until mid-March
each was reversed after a short drop.
Since March 15, however,
prices have been declining, with only minor interruptions and
growing momentum, until at the close yesterday the Standard
and Poor's average at 55.50 was off 24 per cent from the
December high. The fact that the adjustment was so widely
heralded does not seem to have substantially reduced either
the dismay or the pain of its reality.
doubt that a decline of these
There can be little
proportions must be reckoned as a major factor in any
appraisal of economic developments.
While the effects should
not be exaggerated, they have already spread well beyond the
narrow confines of the market itself. Whether it should be
or not, a drop this large will be interpreted by many as a
harbinger of recession. It will almost certainly result in
some curtailment in investment expenditures and perhaps
dampen consumer spending as well, especially for luxury-type
goods and services.
The stock price decline has proceeded in the face of
quite a bit of relatively favorable news with respect to the
Production in April was up a
performance of the economy.
more, if anything, than we estimated at the time of
little
the last meeting.
Indications are for some slight further
gain in May, despite the curtailed rate of steel production.
Retail sales were up about as anticipated last month,
and both department store and auto sales continued strong
through the first three weeks of May. Neither our own buying
intentions survey taken in mid-April or the current information
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5/29/62
received from other surveys provides evidence of slackened
consumer confidence or a cutback in consumer spending plans.
In fact, the surveys, taken together, would suggest some
pick-up in demand for household durable goods, an area which
has lagged thus far in the recovery and expansion.
Housing starts were up further last month, and house
purchase plans reported in the survey also showed some
improvement. Consumer credit growth in April is now estimated
at almost half a billion dollars--up somewhat more than the
trade would have indicated, and
early figures on retail
considerably above the previous high for this recovery period.
While developments have not taken on any of the character
istics
of a boom, one would have had to have rather high hopes
to find the performances of the economy so far in the current
quarter disappointing with respect to current sales, output,
and employment.
But, apart from the stock market, there has been evidence
of concern and even pessimism regarding the economic outlook.
Information reported by the National Association of Purchasing
Agents with respect to their plans and policies has taken a
very pessimistic turn.
Observers who rely heavily on the
National Bureau of Economic Research leading indicators have
found, especially in certain combinations of these statistics,
configurations which lead them to suspect that a downturn may
not lie too far ahead.
The behavior of manufacturers'
new
orders for durable goods--which declined for two months and
showed no improvement in April--has been disappointing to some.
While they are not as specific and articulate as one might
wish as to their reasons, businessmen in a variety of lines
report dissatisfaction and concern--and this feeling on their
part is an economic fact which must be taken into account, along
with the data.
Even before the dramatic further decline in the market
yesterday, it seemed clear that quite a fundamental reappraisal
of the economy's performance and prospects, especially as to
profits, was under way. It is hard to think of any construc
tive change in policy that the monetary authority might take
while this reappraisal is in process. The continuation of a
policy aimed at the objectives expressed in the current
directive would seem most appropriate.
Mr. Furth presented the following statement on the U.
S.
balance of payments and related matters:
In April and May, balance of payments developments were
midly encouraging.
For the first
quarter, official balance of
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payments data showed a monthly deficit of $150 million. But
the figure based on net transfers to foreigners of gold, con
vertible foreign currencies, and dollars would be around $200
million. The Board's staff believes that the latter figure is
better comparable with current data.
The deficit for April was $200 million, about the same as
the first
quarter average but much less than the figure for
March alone. Tentative and partial data for the first three
weeks of May indicate further improvement this month.
Net gold sales to foreigners amounted to a monthly average
quarter and to $120 million in
of $100 million in the first
Our net sales for this
April, but to only $60 million in May.
month were reduced by some gold purchases, mainly from Canada.
Economic activity abroad remains satisfactory in the
developed countries but mixed in underdeveloped areas.
Output
in the United Kingdom seems to be expanding; the country's
balance of payments appears to be in equilibrium, with a rise
in exports apparently to a large extent offsetting the decline
Concern has been expressed,
in the inflow of capital funds.
however, about pressures for wage increases in excess of
amounts deemed compatible with the maintenance of price
stability.
Similar concern is prevalent in Continental Europe
although the continuing rise in the reserves of the main
European countries makes anxiety about the competitiveness of
European industry appear premature, to say the least. The
Gilpatric agreement with Germany on military expenditures and
agreements with Italy and France on debt prepayments will
temporarily reduce both the European surplus and the U. S.
deficit, but the prepayments will not correct the underlying
situation.
Continuing financial, economic, and political troubles in
many Latin American countries will probably put a double burden
on our balance of payments and on our domestic economy: they
will hamper our exports to those countries, and at the same
time increase pressures for additional government aid.
Gold and foreign exchange markets were quiet until a few
days ago.
Since last week, however, the markets have been
nervous, with unfavorable effects on the dollar.
reasons were technical:
Some of the
the continuing concern about the future
of the Canadian dollar has apparently led to the withdrawal of
European funds from Canada; and since the U. S. dollar is in
variably used as "vehicle currency" in these transactions, the
movement has strengthened the U. S. dollar vis-a-vis the
Canadian dollar but weakened it vis-a-vis the European cur
rencies. Similarly, the apparent cessation of capital flows
5/29/62
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from the Continent to Britain has strengthened the dollar
against sterling but contributed to dollar weakness on the
Continent.
But there have also been rumors about withdrawals of
European funds from the New York stock market.
If such with
drawals became substantial, they would weaken not only the
dollar rate but also our balance of payments.
Whatever the reason, the dollar is again close to the
floor against all major Continental European currencies ex
cept the German mark. It has improved against sterling,
although still
remaining below par.
It has risen substantially
above par against the Canadian dollar, but this
is scant
comfort.
Even the London gold market, which had been a bright spot
in the international financial picture in recent months, has
been disappointing.
The price has again risen above $35.08,
and the Bank of England had to sell some gold to the market.
In absolute terms, all these movements have not been very
impressive. When seen in context with developments on the
stock exchange, however, they may be taken as another symptom
of disturbed investor confidence and the resulting general
market uneasiness.
Mr.
Holland presented the following statement with respect to
credit developments:
Banking and credit changes during the past three weeks have
been pushed into the background by the eye-catching developments
in the central financial markets.
Mr. Noyes has already com
mented on the dramatic decline in the stock market.
The municipal market has also been under some pressure,
with
yields backing up somewhat as dealers worked to move sizable new
offerings in the face of a record total of inventories on the
Blue List.
Meanwhile, the Government securities market has been the
focus of conflicting influences. For a time during May, it
appeared the market yield curve was destined to lose some of the
flatness it had acquired during 1962, as downward market
pressures on the bill rate were followed by upward pressures on
yields extending from the intermediate through the long end of
the Government list. Such pressures were countered in varying
degrees by System and Treasury actions to bolster the bill
rate
and by the strength imparted to the debt markets by sinking stock
prices.
As a consequence, the month of May drew towards its
close with a yield curve in the Government market not far dif
ferent from that at the beginning of the month, despite some
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tendency for other short rates to move lower and long-term
municipal yields to move higher. Now, however, a combination of
resurgent investor demands and the temporary reserve surpluses
of the current week are applying new downward pressures
particularly on the bill market, and it remains to be seen how
much bill yields will be displaced by this convergence of factors.
During this span, the banking system has continued to add to
its loans, although in a somewhat altered pattern. In the first
half of May, loan growth in the smaller urban and rural areas
appeared to slow, while loan increases at city banks were
stronger. In part, the increases in loans at city banks repre
sented temporary or one-time influences, such as the short-run
financing of enlarged dealer positions around the Treasury
financing and the taking into portfolio of almost all the $300
million participation certificates sold by the Export-Import
Bank. Underlying these changes, however, were some further
increases in real estate, consumer, and business loans. Among
the cyclically strategic industries, only construction has
accounted for an important part of the business loan increases
of recent weeks. Loans to construction firms by leading banks
have been moving up briskly since March, paralleling the pickup
in building activity.
Bank holdings of securities appeared little changed on
This resulted in less
balance during the past four weeks.
total bank credit expansion than had been reported for some
previous months or for the comparable period of last year.
for
Bank holdings of municipal securities declined a little
seasonal reasons, due chiefly to the maturity of some New York
City tax notes. Even after allowing for that factor, however,
the more gradually mounting figures reported for recent weeks
suggest some waning in bank appetites for more municipals, at
least at the yield levels prevailing during April and
much of May.
Turning to the deposit side of bank balance sheets, reports
indicate a slower rate of increase in time deposits, a pause in
expansion of demand deposits, and a large shift of demand
balances from private to Government hands. As a result, the
average money supply in the first half of May is estimated to
have slipped about $100 million following its billion dollar
April increase, and a larger reduction is possible in the second
half of this month. At its mid-May mark, the money supply stood
2.8 per cent above its year-ago level. Available data suggest
a continuing increase in the rate of money use. Turnover of
demand accounts in reporting centers outside New York reached an
annual rate of 31.8 in April. Thus far during 1962, deposit
turnover so measured has averaged 8 per cent above a year ago.
5/29/62
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Reflecting these deposit movements, the total of reserves
required against private deposits declined substantially more
than seasonally during the first
three reserve weeks in May.
The
level reached in the week of May 23 was equivalent to a 3 per
cent annual rate of growth in such reserves from last November.
Furthermore, the full amount of that increase in aggregate re
serves over the past six months was more than taken up by the
growth in reserves required against time deposits; reserves
required against private demand deposits were actually below
their November level on a seasonally adjusted basis.
The May contraction in the private reserve base substanti
ally offset the April increase, despite the fact that free
reserves were maintained during the month at an average level
substantially unchanged from April. In fact, free reserves in
this week and last are relatively high compared with typical
1962 levels. Such a pattern calls attention to the fluctuating
nature of private deposit totals, and warns against the imputa
tion of significance to the movements in individual weeks except
as they can be seen as parts of a developing pattern. Dis
tortations or concentrations of deposit movements can be created
by the erratic timing of many bank loan and investment deci
sions, a particular case in point being securities loans.
Another major contributor to private deposit fluctuations--and
a key factor recently--is the change in Federal Government
accounts. Treasury balances dropped to unusually low levels
through April, and then rose probably to a record average level
in May.
They are likely to persist at a relatively high level
during much of June.
Such movements have thus served, first
to
expand, and more recently to contract, private money holdings
for appreciable spans of time. Shifts of deposits into Treasury
accounts during May also led to some concentrations of reserves
in the major money centers. This movement may provide a partial
explanation of the development of easier money markets along with
more or less stable free reserve figures, and perhaps also may
have influenced the appearance of stronger city bank loan ex
pansion along with a slackened pace of expansion in outlying
areas.
The conduct of System operations in the weeks immediately
ahead will continue to be complicated by such Treasury influ
ences, above and beyond the more predictable reserve impacts of
a heavy currency drain over the next statement week and the usual
early-month trough and midmonth bulge in float. An appropriate
policy to guide such operations must take into account many con
siderations, some of which lie outside the scope of this review.
With slackened bank credit expansion, a contracting money supply,
and unsettled conditions in key financial markets, however, any
move toward more restrictive general monetary conditions than
prevailed during the earlier weeks in May would appear out of
step.
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5/29/62
Chairman Martin, who had been attending a meeting at the
White House,
entered the room at this point.
Mr. Hayes presented the following statement of his views with
respect to the business outlook and monetary policy:
I would like to preface my remarks by stating that I wish our
meeting were not occurring only one day after yesterday's momentous
happenings, as the visibility this morning is certainly low. How
ever, I have in mind the fact that we must set policy for three
weeks ahead, and hopefully the atmosphere may be very much less
hazy a week or two weeks hence.
It therefore seems appropriate to
consider what might be done if and when the dust clears.
Most business statistics in April were rather satisfactory
and indicative of a continuing gradual rise in business activity.
Retail sales and housing starts were particularly encouraging.
With personal income continuing upward, the foundation is being
laid for further gains in consumer spending. As for business
spending, the outlook is clouded by the possibility of reper
cussions of the steel price episode on business attitudes. A clear
line on capital spending plans subsequent to the steel episode
must wait on the Commerce-SEC survey, which will become avail
able in June. Inventory accumulation in the current quarter
will be far below that of the first quarter, primarily because
of the situation of the steel industry.
One major uncertainty is the effect on spending of the
sharp drop in stock prices. While experience in the past few
months does not show any clear effect of lower stock prices on
consumer or business spending, there is no doubt that the market
decline reflects an undercurrent of distrust, both here and
abroad, that could act as a check on the current expansion. A
more optimistic interpretation might construe much of the stock
price drop as an adjustment to a noninflationary environment;
but even if the decline stemmed from this worthwhile reason it
could nonetheless generate some highly undesirable effects of
its own. Commodity prices continue to exhibit marked stability,
especially at the wholesale level.
Regardless of the expected improvement in business,
it
seems increasingly doubtful that unemployment can be reduced to
the so-called "tolerable level" of 4 per cent even a year from
now.
Credit demands have been quite moderate, and there has
been a good balance between the supply of, and the demand for,
credit and capital. The loan officers and economists of major
5/29/62
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New York City banks are still concerned over the failure of
loan demand to develop as expected earlier, and they do not
look for much change in the immediate future.
Clearly, most
banks throughout the country are in a comfortable position to
meet all legitimate credit requests. It might even be contended
that they have been enjoying an excessive degree of liquidity
which has tended to put undue downward pressure on short-,
medium-, and long-term yields.
Since the heavy seasonal Treas
ury deficit in prospect for the second half of the calendar year
will necessarily be financed in good measure by the banks, the
latter will experience a significant increase in liquidity as a
consequence of this development. As for nonbank liquidity,
while it is always very difficult to judge its adequacy on the
basis of the various statistical measures available, I have a
general impression that it is relatively comfortable at the
present time.
The balance of payments outlook remains unsatisfactory.
Although the over-all deficit in April improved somewhat over
the high March figure, it remained above the first quarter
average, after adjustment has been made for the French advance
debt repayment last month. Merchandise exports seem to have
been weakening significantly, and there has been an increase in
long-term borrowing in this market by foreigners. While we
should not give too much weight to any single month, the fact
remains that the balance of payments for the year to date shows
a disappointing lack of improvement over a year ago. During the
past week the dollar has been under some pressure in the exchange
markets, partly because of nervousness as to possible protective
measures that might be adopted by the United States. With foreign
dollar holdings continuing to increase, there is reason to look
for declines in the gold stock over the coming weeks.
Some months ago the hope was expressed in our meetings that
a "natural"increase in interest rates accompanying further
cyclical business expansion might help to dampen the outward flow
of capital from this country. However, recent business and credit
developments do not point to the likelihood of such a tendency in
the near future. Monetary policy continues to face a dilemma
with respect to the emphasis that should be placed on domestic and
international considerations, and the dilemma is perhaps becoming
more acute as the balance of payments deficit continues in the
face of a rather slow rate of domestic business expansion.
I am aware that most of the Committee members have been ex
ceedingly reluctant to consider any deliberate tightening of credit
conditions in view of the domestic situation, and the severity of
the stock market break would naturally strengthen this reluctance.
5/29/62
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I have considerable sympathy with this view; nevertheless, I be
lieve that if and when the stock market shows signs of bottoming
out and stabilizing we might probe in the direction of somewhat
less ease, with the hope of encouraging the 90-day bill rate to
hold closer to 3 per cent than to 2-3 /4 per cent, a Federal funds
rate consistently close to the discount rate, and some pressure
on the banks' bill portfolios. The liquidity of the economy seems
ample to give some leeway for such probing. Although only
experience can disclose what this might mean in terms of free
reserves, it seems to me likely that these objectives could
probably be achieved with free reserves in the $300 to $400 million
range. I would stress that what I have in mind is cautious ex
perimentation, with close attention being paid to any possible
adverse effects of such probing on the continued expansion of bank
credit and bank deposit.
Incidentally, I have in mind that even
keel considerations may be with us again shortly after the next
meeting. With respect to bill rates, it seems to me that we have
been leaning rather too heavily on the Treasury's debt management
policies ( i.e., adding to the weekly bill issues) to keep these
rates at acceptable levels, especially in view of the fact that the
Treasury must do a great deal of cash financing in the next six
months. I would repeat that any probing towards less ease should
be undertaken only if the stock market regains some measure of
composure.
With respect to the directive, I had thought that one of the
reasons behind our change in procedure a few months ago was to
provide for greater flexibility, i.e., to avoid a tendency to con
tinue in effect for months on end a directive which was very
general in character. The present directive has remained unchanged
since March. I suggest that we amend it today to indicate the
current economic situation (including particularly the stock
market break), the ample liquidity situation, and the need for
some slight shift in emphasis in view of our serious balance
of payments problem.
More broadly, I am wondering more and more whether the
current "mix" of monetary policy and fiscal policy is the
best that could be devised to meet the combination of internal
and external problems which we face.
I am interested to
observe that the possibility of a tax reduction as a means of
stimulating the economy is apparently receiving study. Success
ful action along these lines would of course give monetary
policy greater leeway to exercise a dampening influence on the
outward capital flow.
Mr. Bryan said he had left for this meeting prepared to say that
the business situation seemed to be developing in such manner, both
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5/29/62
nationally and in the Sixth District, as to suggest some lowering of the
Committee' s free reserve target and the establishment of a lower growth
rate than he had heretofore been advocating in regard to total reserves.
However,
after the events of yesterday, he could not advocate any monetary
policy except one of continued ease.
Mr. Noyes had spoken well, he
thought, of the influence of the equity market break on consumption and on
investment.
The stock market developments could affect millions of people
who did not hold a single equity security and simply read about the matter
in the press.
As to investment,
it was the policy of many corporations to
try to maintain a certain proportion between their debt and equity instru
ments.
Where such corporations had been contemplating equity financing,
they would now be reluctant in many cases to go forward.
In addition,
he was afraid that the stock market break was going to have a reaction
that would not be helpful to the banking situation.
He would imagine that
many banks had gotten under way studies of their loans, and that their
standards of lending were going to be raised.
That would be particularly
true, he believed, in the case of banks that had over the past three or
four years piled up a substantial volume of demand loans secured by
high-grade equity and debt instruments.
While such loans might actually
be demand loans in New York, and to a lesser extent in Chicago,
in the
outlying banks of the country they were long-term capital loans on which
neither the borrower nor the lender expected repayment to be made, the
funds being used by the borrower for long-term capital commitments.
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In such circumstances, Mr. Bryan repeated, he was not prepared to
advocate any change in monetary policy.
It seemed to him that the Com
mittee must continue to supply reserves in seasonal amounts, plus some
modest growth factor, say 3 per cent.
Mr. Bopp reported that the Third District was experiencing the
same kind of gradual business upswing as the nation, although as usual
there was a tendency for the District to lag behind the United States.
Such up to the minute data as were available indicated no general accelera
tion in the upswing.
In banking, on the other hand, the picture was quite different.
Business loans in the District, unlike the nation as a whole, had been
experiencing a sharp pick-up.
all industrial categories.
The increase was widely based among almost
Reserve positions were comfortable, borrowing
from the Reserve Bank was negligible,
and reserve city banks were still
net sellers of Federal funds, although in smaller amount.
If it were not for the balance of payments problem, Mr. Bopp said,
he would like to see an easier monetary policy, especially after the
developments in the stock market yesterday.
Although policy to date had
been successful in promoting a high degree of liquidity in the banking
system and the economy and had helped to keep long-term rates from rising,
it was probably true that still greater ease could further stimulate the
rather sluggish demand which, at least in part, was behind the current
relatively moderate rate of economic expansion.
The question had been,
5/29/62
-16
and remained of course, whether further ease could accomplish enough
domestically to warrant possible further aggravation of the balance of
payments situation. He was inclined to doubt it. In view of the possi
bility that the balance of payments might worsen during the course of the
year, substantial further ease could well be too great a risk.
Accordingly, Mr. Bopp said, he would be inclined to continue
monetary policy essentially unchanged, especially in view of the stimulat
ing effect likely to ensue from a rising budget deficit.
At the same
time, he would also like to see the Desk continue to probe in the direction
of lower long-term rates by purchasing intermediate- and long-term issues
when appropriate and selling short terms if necessary to accomplish this.
He would continue about the same degree of ease in reserves, maintain the
present directive, and leave the discount rate unchanged.
Mr. Fulton reported that, except for the retail sales sector,
economic activity in the Fourth District had worsened considerably in
recent weeks, trends in unemployment, electric power output, and steel
production having been unfavorable.
Auto sales had been maintained in the
three major cities of the District at a vigorous rate, and it began to look
like a 7 million car year, including about 350,000 imports.
Reports for
May on department store sales showed them expanding to a new high.
year to date, such sales were up 4 per cent from a year ago.
For the
However, the
unemployment picture had shifted into the unfavorable category in May.
Contraseasonal layoffs had occurred, concentrated largely in the steel
5/29/62
-17
areas.
Unemployment was up three per cent in the District from
late April to mid-May.
As to the steel industry, Mr. Fulton
described the current picture as dismal, with no pick-up in orders
and ingot production continuing to drop.
Steel users, including
the automobile industry, still had substantial inventories.
Construction was in good volume in the major cities of the District,
which provided a bright spot.
Turning to the banking picture, Mr. Fulton said that
commercial and industrial loans had dipped.
In the three weeks
ended May 23, they declined by the largest amount of any week since
January 3 of this year.
Demand deposits adjusted were down sharply,
while savings deposits continued to increase.
As to monetary policy, Mr. Fulton expressed the view that
the System had done about all it could in terms of the domestic
economy.
The System had consistently supplied reserves in quantity;
it had met all of the seasonal factors and had provided an additional
factor for growth.
Credit had been readily available, but was
not used by businesses.
It appeared to him that international
considerations predominated at present and that free reserves might
well be reduced.
Thus, he would go along with a range of $300
$400 million in lieu of figures over $400 million.
Also, while re
cognizing that the margin requirement instrument was not within the
province of the Open Market Committee, he felt that a reduction in
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5/29/62
margin requirements
to put it mildly.
might be considered.
Likewise,
a confidence factor.
Confidence had been shaken,
the international situation involved
Some confidence might be restored, in his
opinion, by a reduction of margin requirements and by a firming
of interest rates through making fewer reserves available.
Mr. Fulton said that he would not recommend changing the
discount rate at this time.
He would have no objection to renewing
the present policy directive, although it might be changed somewhat
to reflect existing economic circumstances more precisely.
Mr. King said he thought it
had been fairly generally agreed
that a stock market correction would necessarily come about at some
point.
The concern he had today was that the ramifications of the
stock market decline not spread further than necessary.
He did not
believe that the System could control or stop the stock market slide,
but it
should do whatever was possible to allow natural forces to
bring about a cessation of the decline.
Mr. King went on to say that he thought the Open Market
Committee had contributed to the defense of the dollar by doing what
it
could to maintain the bill
rate.
The Treasury, of course, had
done a great deal through measures such as adding to the supply of
bills.
Three or four months ago, however, he (Mr. King) had spoken
to this point and said that he thought the Federal Reserve should
cease its efforts to maintain the bill rate within a particular range.
-19
5/29/62
The more the System tried to hold short-term rates in this manner,
the more he felt that the stock market decline was likely to continue.
With that thought in mind, he would suggest that there be deleted
from the policy directive the reference to minimizing sustained
downward pressures on short-term rates.
A time might come when
the bill rate level could no longer be maintained, and in his
opinion it was better to cease the effort before that time came,
although he would not advocate that the System and the Treasury
pursue different objectives.
At one time, he recalled, he had been
a leading proponent of maintaining the bill
this had served a desirable purpose.
been possible to keep the bill
long.
rate, and he thought
He was surprised that it had
rate in
its
present range for so
However, he felt that the time was coming when this would
no longer be possible.
Mr. Mitchell said it was his general feeling that present
System policy was about the best that could be devised at this
particular time.
He did not see that there was any change that would
be particularly helpful.
If there was to be a move in either
direction, he would think that a slight easing would be preferable.
On the other hand, the reverberations of stock market developments
seemed likely to make this country's balance of payments position
somewhat more serious than it had been.
The psychological reverberations
about which the Committee had been worrying might come into play.
On
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5/29/62
the domestic side, there would be, unquestionably, some reaction
on consumer spending, particularly for hard goods, if the stock
market continued weak and prices declined further.
this was a bad day to make policy decisions.
All in all,
Under those
circumstances, it would seem best to wait and make no change
for the moment.
Mr. Shepardson spoke of having attended yesterday a meeting
of representatives of institutional lenders to agriculture, at
which there were reports of a continuing rise in farm land prices.
The drop in land prices in the corn belt area had been completely
recovered, and prices in other areas were continuing to move upward.
Most institutional lenders represented at the meeting reported a
rise in farm mortgage lending.
Several insurance companies, finding
inadequate outlets for their funds elsewhere, were providing their
farm departments with increased allocations of funds.
were being made on rates.
Concessions
Some country bank representatives
mentioned that while their construction loans, particularly
residential, had not shown much increase as yet, they had all made
heavy advance commitments and had been delayed in putting out the
money, only because of weather conditions.
Mr.
Shepardson also reported that at yesterday's meeting there
was discussion of the foreign trade situation and the potential effect
5/29/62
-21
of the European Conon Market agreements on agricultural exports
from the United States.
Question was raised as to whether farm land
prices were not being pushed out of reason, considering the prospects
for crop prices.
All of this, Mr. Shepardson said, strengthened the feeling
he had had for some time that perhaps the System had accomplished
all
it
could do through monetary policy and that it
back a little,
should be drawing
at least on the rate of growth of reserves.
He had
spoken at previous Committee meetings in favor of reducing the annual
rate of growth of total reserves to 3 per cent, or even lower, and
he had felt surer of that position after attending the meeting
yesterday.
However, when he learned of the gyrations in the stock
market, he felt much like Mr. Hayes, that no perceptible change in
policy should be made at this time.
Nevertheless,
as soon as the
situation cleared somewhat, he believed that a careful look should
be taken at the amount of funds available in the market to appraise
whether the System was going to aid the domestic situation by continuing
to supply reserves so liberally since corrections in the domestic situa
tion might well have to come from other factors.
The System should
study whether the uncertainties generated by the stock market situation
and their impact on the balance of payments situation did not call
more than ever for a position of less ease as soon as the visibility
improved.
Mr. Hayes.
In summary, his position was similar to that expressed by
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5/29/62
Mr. Robertson expressed the view that the Committee should
refrain at this time from being panicked into any action that might
develop to be unfortunate.
This was the time when an organization
like the Federal Reserve System ought to stand out as an example
for the nation.
It should hold as steady as possible.
Mr. Mills commented that if
a loss of public faith in the
stability of financial conditions was being experienced, the thing
needed to restore confidence was the injection of some degree of
discipline into the financial markets under the leadership of the
Federal Reserve System.
Unhappily, in the light of the circumstances
in the stock market, he believed, like others who had spoken, that
any overt change in policy at the present time would be misunder
stood and would be more disturbing than tranquilizing.
However,
every opportunity should be taken by the System to inject some
discipline into what he considered a very soft and weak monetary
and credit policy situation.
To elaborate on his thinking, Mr.
Mills presented the following statement:
Over many months past, repeated opportunities have
opened up for changing the direction of Federal Reserve
System monetary and credit policy toward moderately less
ease, but have been rejected by the Federal Open Market
The last three meetings of the Committee
Committee.
offered two practical openings for a policy change, while
the intervening third meeting prevented the possibility of
any overt move because of impending U. S. Treasury financing
and the consequent need of maintaining a relatively unchanged
policy position.
5/29/62
-23-
The spreading weakness in the stock market that culminated
in panic conditions and a collapse of prices on May 28 has
thrown up a new obstacle against a change in monetary and
credit policy, in that Federal Reserve System policies are
a vital part and influence in the entire complex of the factors
that comprise the entire financial market, and it would be
unwise at this juncture to make any immediate policy change,
for to do so could further unsettle financial market conditions.
A calm and undisturbed Federal Reserve System policy posture is
called for at the present time.
However, the need for a revised
policy that will produce a firmer interest rate structure is as
pressing as ever, and the first
opportunity for its achievement
should be seized upon.
The ambivalent efforts that have been made to hold up the
yields on U. S. Treasury bills
as a deterrent to the movement of
gold and U. S. dollars abroad at the same time that the main
burden of Federal Reserve System policy actions has been on the
side of credit ease have resulted in pegging U. S. Treasury bill
yields.
In the eyes of operators in the U. S. Government securities
market, the Federal Reserve System's monetary and credit policy
objectives have come increasingly into a kind of disrepute, which
has had by-product effects on the markets for municipal and cor
poration fixed interest obligations, which are becoming progressively
unsettled. In formulating Federal Reserve System monetary and
credit policy, a paramount need exists for returning as quickly
as possible to a free market concept, by virtue of which the
interest rate structure will be freed from artificial manipulations
and will develop naturally out of the uninhibited influence of
the supply and demand for the use of funds available to the
market.
In the interval before the next meeting of the Federal Open
Market Committee any opportunity for a revision in monetary and
credit policy should be exploited, even to the extent of calling
a special meeting of the Committee for that purpose. By the
same token, a special meeting of the Committee should be called
to deal with any kind of emergency in the U. S. Government
securities market that might develop in the event that the serious
conditions in the stock market should be commnicated to other
investment areas and react in unusually heavy drains on our
gold reserves.
Mr. Wayne reported that business activity in the Fifth District
had continued to improve in recent weeks, probably at a somewhat faster
-24
5/29/62
pace than in the country as a whole.
April gains in nonfarm employ
ment and factory man-hours were quite general, and unemployment had
steadily declined.
The Reserve Bank's latest canvass of District
business leaders suggested that most of the April increases con
tinued into May.
Durable goods manufacturing had probably not
advanced beyond the good levels reached in April except in the
furniture industry, which continued to show significant improvement.
Reports from the textile industry presented a rather neutral picture,
but respondents covering the nondrable goods group as a whole
indicated that new orders, shipments, and employment had recently
achieved further gains.
On the other hand, coal orders and ship
ments had declined in recent weeks, causing some layoffs, reduced
workweeks, and small price cuts.
Regarding general business
prospects, about three-fourths of the respondents to the Bank's
periodic surveys had regularly expected either no change or only
slight improvement since the first of the year.
Turning to the policy field, Mr. Wayne noted that for many
months the Committee had been faced by a conflict between the require
ments of the domestic and the international sectors of the economy.
In recent weeks both sectors had been marked by increased uncertainty
about the near future.
Falling stock prices had been both a reflection
and a cause of this uneasiness.
The sharp decline in the trade balance
-25
5/29/62
for March was a contributing factor in the international sector,
while an the domestic side a cautious attitude was reflected by
declining forward purchase commitments by business firms, a slow
drop in orders for machinery and equipment, a sluggish rise in
capital outlays, and wholesale prices that were slightly on the
weak side.
The international situation was clearly delicate and
potentially dangerous. Beyond what was already being done, however,
he did not believe that monetary policy could make any significant
contribution toward its improvement short of some comprehensive and
drastic move which would have to be aimed at raising long-term as
well as short-term interest rates.
Such a move was not warranted
by the domestic situation and, he believed, would be highly
undesirable.
Further, he did not believe that any small increase in short-term
rates would have any significant effect on the balance of payments.
On the domestic side, perhaps the greatest contribution the Committee
could make would be to insure that no fear of any credit squeeze
was added to the other uncertainties which were developing.
For
that reason, he believed that the Committee should continue to make
available a supply of reserves sufficient to maintain a condition of
moderate ease, as it had been doing for a number of weeks.
He would
favor renewing the current directive and leaving the discount rate
-26
5/29/62
Mr. Clay commented that although domestic economic develop
ments had continued to show improvement in recent weeks, the pattern
had been by no means uniform.
It
still
was correct to characterize
aggregate economic activity as less than vigorous.
Moreover, the
basic fact remained that the economy had a long distance to go in
order to attain a satisfactory rate of utilization of manpower and
other resources.
Under the circumstances, he felt that the domestic
economy continued to call for monetary policy to be expansionary
with a view to fostering a higher level of economic activity.
This
would be reflected in a further growth of bank credit on a seasonally
adjusted basis and further downward movement in interest rates.
For some time, Mr. Clay noted, the Committee had endeavored
to affect favorably the international flow of funds by the general
level at which it had maintained the Treasury bill rate.
This
action had pointed up the conflict between the Committee's current
domestic and international objectives.
The open market operations
required to maintain the Treasury bill rate at a higher level than
it
otherwise would have been had tended to be restrictive in nature.
The Committee had sought to avoid or reduce this effect by making
purchases in other sectors of the Government securities market.
At the last meeting of the Committee, Mr. Clay recalled,
it had been suggested that the relative level of interest rates in
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5/29/62
international markets throughout the maturity structure should be
considered henceforth in formulating monetary policy.
specifically,
More
the view advanced looked with favor upon a higher
level of interest rates in the United States throughout the
maturity range,
so that these rates would be higher relative to
rates in foreign markets.
Clearly, this approach to the problem
would involve a more restrictive monetary policy, which in his
opinion would jeopardize the improvements in the domestic economy
resulting from the expansionary policy that had been pursued.
Moreover, there was a real question whether the increase in interest
rates necessary to affect materially the international flow of
funds would not be of such magnitude as to be severely restrictive
in terms of monetary policy and its impact on the domestic economy.
At a time when the performance of the domestic economy was
far from satisfactory, Mr. Clay thought that the question was whether
monetary policy should not be directed toward providing more instead
of less stimulus to the pace of activity.
Certainly, as he saw it,
no action should be taken to foster higher intermediate- and long
term interest rates; the downward trend of recent months had been
salutary and should be encouraged to continue.
The Treasury bill
rate might be maintained within the same range as it
had been for
some months, with offsetting open market operations as necessary in
5/29/62
-28
order to maintain reserve availability.
No change was recoended
in the Federal Reserve Bank discount rate, and he felt
directive could well be renewed in its
that the
present form.
Mr. Scanlon reported that in general business activity in
the Seventh District appeared to be following the national pattern.
However, home building in most District centers was below a year ago,
in contrast to the strong national picture.
It
appeared to him, Mr.
Scanlon continued, that during the
past several weeks there had been a marked difference in the attitude
of consumers and the attitude of businessmen.
indications of recent surveys,
According to the
the consumer's confidence in his
financial well-being had improved, and he was no more interested
in buying automobiles and other durable goods.
(Of course, the
behavior of the stock market in the past few days might have
changed the survey indications somewhat.)
As to businessmen, many
of them had expressed disappointment despite the facts reported
on items such as employment, the work-week, construction, and
housing starts, all
of which were highly encouraging.
The consumer
appeared to be acting on a more favorable evaluation of the economic
situation.
In the Seventh District, department store sales during the
four weeks after Easter were 12 per cent above a year ago, compared
to a rise of 10 per cent nationally.
Auto sales during the first
20
-29
5/29/62
days of May maintained the advanced April level.
Reflecting the
trend of sales, auto assemblies during the past three weeks were
at an annual rate of 8 million, the highest since December.
estimates of Detroit sources were still
However,
based on sales of 6.8 to 7
million cars this year, including imports.
Mr. Scanlon also reported that local manufacturing output in
major centers, based purely on use of electric power,
showed gains
in the most recent month reported, the increases from a year ago
ranging from 16 to 18 per cent.
Steel output had declined about 30
per cent from the March level in the District as well as nationally,
and some further decline was still in prospect.
Order trends were
being evaluated somewhat less favorably than three weeks ago.
Employment reports were moderately encouraging; unemployment
compensation claims were below the levels of the past two years.
Housing contracts were down 9 per cent from a year ago, compared
with a rise of 18 per cent nationally.
an increase reported.
Only in Indianapolis was
Mortgage terms in Chicago had eased only
slightly since the first of the year.
As to banking developments, Mr.
Scanlon reported that
business loan demand was relatively strong, although not as strong
as the bankers would desire.
From the end of January until the middle
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5/29/62
of May, business loans had risen at a rate twice as fast as nationally.
Chicago banks had regained a modest surplus reserve position since
the middle of April, and the larger banks had been sellers of
Federal funds.
Between the middle of April and the middle of May,
the banks reduced their bill
holdings and purchased other securities.
Turning to policy, Mr. Scanlon commented that although most
business news had been favorable during the past several weeks,
on resources continued to be moderate.
demands
Wholesale price increases
were at least balanced by price declines.
One must necessarily take
into account the possibility of the further development of adverse
business sentiment due to the stock market, along with some dis
satisfaction regarding order and profit trends.
In his view, current
monetary policy should be continued until the next meeting of the
Committee,
and he would not recommend a change in the discount rate
at this time.
The current policy directive might be continued unless
the Committee wanted to give some recognition to the current stock
market situation.
If changes were made, he would like to see the
phrase "short-term" eliminated from the final clause of the directive,
which called for taking account of the desirability of avoiding
downward pressures on short-term interest rates.
Mr, Deming reported that the most notable Ninth District
economic development in the past three weeks had been a dramatic
turnaround in crop prospects for 1962.
From the first
of April through
5/19/62
-31
the middle of May there had been little rain, but since then there
had been a great deal of rain, and everyone was now optimistic.
Otherwise, the District was continuing pretty much along the lines
indicated at previous Committee meetings.
As to the coming three weeks, Mr. Deming expressed agreement
with those who believed that monetary policy should not be changed.
By that, he meant that there should be no change quite explicitly
in terms of most of the significant guides.
For example, he would
not like to see the free reserve level change significantly even
though the maintenance of that level might result in lower bill
rates and a somewhat easier money market than had been sought in
the past three weeks.
In other words, he would like ot see the
indicators that were watched by the public maintained without change,
and he had same feeling that the Committee ought to say this in the
current policy directive. For example, the first paragraph of the
directive might be changed to read somewhat as follows:
"In view
of the continuing modest advance of economic activity and the continued
underutilization of resources, and in light of recent stock market
developments, but with continued recognition of the adverse balance
of payments situation, it is the policy of the Federal Open Market
Committee to continue in a posture essentially unchanged from that
of recent weeks."
Such changes in the first paragraph would reflect
the Committee's awareness of stock market developments in the past
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5/29/62
three weeks,
and he thought this would be desirable from the stand
point of the record.
He would recommend no change in the discount
rate at this time.
Mr. Swan reported that the Twelfth District, like the nation,
showed some further, but very moderate improvement in the business
situation in April.
According to scattered indicators, the same
trend continued into early May. There had been a slight reduction
in the rate of unemployment, the seasonally adjusted rate having
fallen from 5.8 per cent in March to 5.7 per cent in April.
Lumber
markets in the District had firmed somewhat as new orders exceeded
production, and western steel production had declined much less
than the decline for the country as a whole.
In the three weeks
ended May 16, District weekly reporting banks reflected gains in
loans, including a marked increase in real estate loans.
As a general
statement, there did not appear to be any very significant differences
between the District situation and the over-all picture for the country.
In terms of policy, Mr. Swan said it seemed to him that the
Committee should maintain much the same position that it had maintained
quite recently.
Since the economic upswing certainly was not vigorous
and further uncertainties had been introduced by stock market develop
ments, he did not think that any significant change in policy would
be desirable.
Like Mr. Deming, he felt that a continuation of policy
without change should be related to the free reserve level, which for
5/29/62
the
-33
immediate future should be held about where it had been, that is,
$450 million or thereabouts.
If
this meant some decline in the bill
rate below 2-3/4 per cent, no attempt should be made to offset that
decline by a significant reduction in free reserves.
As to the current policy directive, Mr. Swan concurred with
the view of Mr.
Hayes that it
was not desirable to have the directive
remain unchanged for a lengthy period, particularly in light of current
developments.
Therefore, he would like to see those developments
recognized in the first
paragraph.
In the second paragraph, he was
bothered by the phrase that called for avoiding sustained downward
pressures on short-term rates.
While there could be different inter
pretations of the word "sustained," it might be argued that any
reduction below 2-3/4 per cent in the bill
as reflecting sustained pressure.
eliminating that particular phrase.
rate would be regarded
Accordingly, he would favor
He would not recommend changing
the discount rate at this time.
Mr.
Irons reported that economic activity in the Eleventh
District was proceeding favorably.
There was strength in the
employment picture, with total nonagricultural employment moving to
a near record and unemployment,
on an unadjusted basis, falling to
about 4.3 per cent of the labor force.
was favorable.
sharply.
The trend of consumer demand
Industrial output was up, and construction was up
Except for some developing dryness, which was not a great
problem, the agricultural situation was quite good.
In summary,
5/29/62
-34
economic activity was proceeding at a moderate upward pace.
Mr. Irons also said that Eleventh District banks seemed to
be adequately liquid.
past three weeks,
There had been increased loan demand in the
especially for business and construction loans,
with a reduction in investments.
Demand deposits were off a bit,
and savings deposits were up a little.
was slowing down.
The growth of savings deposits
There seemed to be little
change in the demand for
Federal funds, with purchases running at an average of about $500
million and sales about $450 million.
of seasonal borrowing, there was little
Except for some small amount
activity at the discount
window.
Turning to policy, Mr. Irons commented that when he left
Dallas for this meeting he had in mind some tentative conclusions.
It
seemed to him that the System had done about as much in the way
of supplying reserves as would be appropriate under the circumstances,
and he leaned toward a somewhat less generous approach to the providing
of reserves, even though that might result in some firming of interest
rates.
However, the events of the past few days had changed his line
of reasoning.
The economic statistics looked quite good, but attitudes,
the confidence factor, and related matters were less favorable and
the developments in the stock market could not be ignored.
Accord
ingly, he concluded that this was a good time to maintain the status
quo, while reexamining the System's position, evaluating the consequences
5/29/62
-35
of what was going on in the stock market, and appraising thematter
of business confidence.
Perhaps another look should be taken at
economic trends to see whether any factors were developing of which
the Comittee had not been aware.
In particular, he would want to
watch consumer reaction--and also the international reaction--to
the recent stock market developments.
There were a lot of unanswered
questions that were being brought to the fore by the finacial
Thus, the situation seemed
market changes.
to call for study of
possible consequences rather than for action at this moment.
In
summary, Mr. Irons said, his views were much the same
those expressed by Mr. Robertson.
He would
maintain the status quo
at
kind
as nearly as possible and avoid overt action of any
time.
as
this
He would not change the discount rate or the current policy
directive.
Mr. Ellis reported that New
England
business conditions had
shown continued modest improvement since the previous meeting of the
Committee. No
sector of the economy showed signs of disturbing weak
ness, and no sector
manufacturing
showedsigns of unsustainable
strengthened in April,
industries
suggested a rise in the index of production.
expansion.
Most
andman-hour data
Nonmanufacturing
been a little weaker in April than seasonal
employment seemed to have
expectations.
Mr. Ellis also reported that First District reporting banks
found
business
just
demand
loan
aboutmeeting seasonal expectations.
5/29/62
-36
Total loans and investments continued to grow at a good pace.
The
growth of deposits was holding loan-deposit ratios fairly stable.
District banks had been fairly heavy net sellers of Federal funds
in the past five weeks.
Turning to policy, Mr. Ellis commented that he, like so
others, had left for this meeting prepared to urge a change in the
policy guidelines.
After the stock market events of yesterday,
however, he had shifted to a position of no change in policy at
this time.
As to what no change in policy might mean, he noted
that there are several anchors of policy, among them free reserves,
avoidance of sustained downward pressures on short-term rates, and
concern with finacial markets in general.
The question was to
which anchors of policy the Committee desired to cling most
strongly in the next few weeks.
According to the projections, the
System was going to have to inject several hundred million dollars of
reserves in the next two weeks.
injected in a way that would
Hewould urge that they not be
promote further pressure on short-term
rates, for he would not want to give up the objective of avoiding
that kind of pressure.
be no chage
His definition
of nochange in policy would
from the weeks in April rather than the most recent
three-week period, which was characterized by greater ease in the
money
market centers, traceable perhaps in some degree to Treasury
operations.
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5/29/62
Mr. Ellis said that he
would like to see the Committee
recognize changes in the economic situation in the first paragraph
of the current policy directive.
One of the purposes of instituting
the present procedure was to be able to recognize such changes,
and he felt that the Committee's record of understanding and
evaluating the situation it was attempting to meet would read better
if there was some recogntion of the changes that had occurred
since March.
The language suggested by Mr. Deming would go some
way in that direction.
Mr. Deming, however, had omitted the phrase
that called for promoting further expansion
money supply.
He (Mr.
of bank credit and the
Ellis) would like to see that phrase retained,
but to have the word "promote" changed to "permit," as suggested by
Mr.
Shepardson at the May 8 meeting.
Mr. Balderston said that he would advocate holding just as
steady as possible.
However, he was impressed by the reasons for
changing the wording of the current policy directive.
His suggestion
would be to eliminate the second paragraph and change the first
paragraph somewhat as follows:
In view of the continued under
utilization of resources, the modest rate of domestic expansion,
and the recent sharp decline in stock market prices, the Federal
Open Market Committee is continuing its policy of promoting the ex
pansion of bank credit and the money supply.
-38
5/29/62
In discussion of his proposal,
sharp decline in stock market prices,
Mr. Balderston said the
alongwith the results that
might flow therefrom, constituted the principal reason why he
would continue
present policy.
veer toward less ease.
Otherwise, he
His proposed directive
might
be inclined to
wouldmake no reference
to the international situation because he had a feeling that the
Committee had been "driving on both sides of the road long enough"
and as a result its directives were not clear.
He would drop the
second paragraph of the present directive because it
seemd to him
that it was redundant,
Mr. Francis commented that
Eighth District business conditions
continued to improve to about the same extent as indicated by
many
of the other District reports that had been given.
Chairman Martin noted from a news ticker report that had
been brought to him that stock market prices had experienced another
substantial decline this morning.
He went on to say that before this
meeting he had attended a meeting at the White House with the
President and other officials of the Administration.
He felt
constrained to say to the Committee that the President throught[sic]
the Federal Reserve System, like the rest of the Government, had
an obligation in this matter.
Against this background, he told
the President that the Board of Governors had discussed yesterday
the question of margin requirements, at which time the Board members
5/29/62
-39
were of the view that "steady in the boat" was the proper course.
The President's position was that the Federal Reserve should
follow whatever course it
thought would be most helpful; he raised
the question whether, if the Board was not going to change the
margin requirements, it would be desirable for the Board to say that
it was not going to change them.
He (Chairman Martin) left with
the President, as a matter of general information, a paper on the
pros and cons of a margin requirement change that had been prepared
by the Board's staff.
Chairman Martin said he had made no commitment other than
to bring to this meeting of the Committee the President's view
that this was a serious situation.
The President had left to
the discretion of the Federal Reserve the question whether any
action should be taken by the System, indicating that the System
ought to do whatever it
If
it
considered wisest in the present circumstances.
was the view of the Federal Reserve that it
would be better
not to issue any statement, that was for the System to decide.
If,
on the other hand, there was a feeling that the System should make
a statement, the President would be glad to have such a statement
made.
The Chairman then read from a news ticker report the answers
that had been given this morning by Secretary of the Treasury Dillon
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5/29/62
to questions raised by reporters.
Mr. Dillon reportedly attributed
to the White House conferees a feeling that stock prices had been
on the high side and had now dropped to a level more in keeping
with price-earnings ratios.
Mr. Dillon stressed that the Govern
ment had no controls directly affecting stock market prices.
He
also pointed out that margin requirements were a matter within the
sole discretion of the Board of Governors.
Mr. Dillon urged speedy
Congressional action on the proposal to allow tax credit to businesses
on purchases of equipment.
He did not feel that the stock market
developments reflected any decline in confidence outside the stock
market.
He noted that stock prices had already started on a down
ward trend before the steel price episode.
Chairman Martin then said that he would like to indicate to
the Committee his own thinking on monetary policy, which was much
along the lines that some members of the Committee had expressed
prior to the recent stock market decline.
Its
view was,
in essence,
that the System had gone as far as it should with a policy of easy
money and that such a policy had outlived its usefulness.
This
did not mean, however, that the System should take any overt
action at this particular time.
On the basis of his recent visit
abroad and the views expressed by people with whom he had been talking
recently, he felt there was something more fundamental in the stock
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5/29/62
market situation than easy money.
Unquestionably, however,
the
developments in the market reflected the backwash of speculation
in a wholesale manner that had been going on all around the
country.
The margin requirements, he thought, had been reasonably
effective in controlling the amount of credit going into speculation
in stocks, but they had not affected real estate and other speculative
activities.
Therefore,
he was inclined to feel that easy money was
part of the total picture; he doubted very much whether it
could be
said that easy money had nothing to do with the situation.
While
he felt that the Federal Reserve had been thoroughly justified in
the course it
had been pursuing, the System could not just go along
thinking that easy money was going to produce an exuberant economy.
Continuing, Chairman Martin said that he would like to
reiterate a view he had expressed a number of times before, namely,
that the balance of payments problem overshadowed everything else.
He would not want to say that this was the crisis he had referred
to several times as a possibility, but the situation conceivably
could develop such proportions.
As to policy for the immediate future, the Chairman said it
was his feeling, on the basis of the discussion at this meeting, that
the wisest course would be to stay steady in the boat and make no
change in policy of any sort at this moment, but rather to continue
5/29/62
-42
to evaluate the
problem
Whetherthere should be a change in the
current policy directive along the lines that had been suggested
or whether it would be wiser to renew the directive in its present
form was open to debate .
clearly
was
sentiment
However, it
seemed that the
majority
no policy at this particular
forchange
in
time.
Chairman
Martin inquired whether there were any questions
about the accuracy of his statement of the consensus as to policy
for the immediate future, and no such question was indicated.
There
followed,
however, consideration of the wording of
the current economic policy directive in light of the several
suggestions that had been made,
and it was the prevailing view that
some reference to recent developments in the stock market should
appropriately be incorporated in order to place on record that
this was a factor
recognized by the Committee in shaping its
policy for the forthcoming period.
Certain other possible changes
in the directive, such as to provide for "permitting" rather than
"promoting"
further expansion of bank credit and the money supply,
were decided against in view of the basic decision of the Committee
to continue monetary policy unchanged at this time.
At the conclusion of this discussion, there was read to the
Committee
language for the first paragraph of the directive reflecting
5/29/62
a formulation with which there appeared to be general agreement,
and the expressions of the Committee members were favorable.
Accordingly, upon motion duly made and
seconded, the Federal Reserve Bank of New
York was authorized and directed, until
otherwise directed by the Committee, to ex
ecute transactions in 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, the continued underutilization of resources,
and the uncertainties created by the disturbed conditions in
some financial markets, 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.
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, Hayes, Balderston, Bryan,
Deming, Ellis, Fulton, King, Mills,
Mitchell, Robertson, and Shepardson.
Votes against this action: None.
Chairman Martin said he wished to place on record at this
point that he had told the President of the United States this
morning that the Presidents of the Federal Reserve Banks and the
members of the Board of Governors might be counted upon to do what
ever they could, regardless of whether any statement was issued by
the Federal Reserve System, to maintain a sense of order in the present
5/29/62
44
situation.
He did not say to the President that any particular
course of action would be taken by the Federal Reserve System,
but he did say, as he had indicated, that the President could
all of the Reserve Bank Presidents and members of the
count on
Board of Governors to do whatever was possible to maintain balance.
The President, in turn, expressed his desire that those in the
Federal Reserve bend their best efforts in that direction.
General agreement was expressed as to the appropriateness
of the comment that the Chairman had made to the President.
Question
was raised, however, as to what kind of statement the President
might have in mind that the Federal Reserve could issue.
Chairman Martin responded to the effect that there had
been no
effort by the President to press the Federal Reserve
System to do anything that it
did not want to do.
The President
was approaching the current problem entirely from the standpoint
of his responsibility as Chief Executive.
The President did say
that if he were doing it himself, he would be inclined to reduce
margin requirements, in which connection he noted that this was the
only selective credit control available.
said, he
In turn, Chairman Martin
indicated to the President that there was a question
whether the Board would feel that a reduction in margin requirements
at this time was advisable.
However, he had told the President that
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5/29/62
he would relay the latter's comments to the Board.
The President
then suggested that if the Board was not going to change margin
requirements, it might be helpful for the Board to issue a statement
to such effect and give the reasons.
Chairman Martin emphasized that he regarded his conference
at the White House as entirely satisfactory.
More specifically
in response to the question that had been raised, Chairman Martin
said he did not think that any of those who had conferred at the
White House had in mind exactly what kind of a statement by the
Federal Reserve might be helpful.
Personally, he was less inclined
toward the issuance of statements than some others might be; he
felt there could be too many statements.
There followed discussion with respect to the possible
public reaction to any statement that might be issued by the Federal
Reserve,
including a statement that the Board did not intend to reduce
margin requirements.
The Chairman then repeated that in his view there was some
thing more fundamental in the stock market decline than the level
of margin requirements.
He had been concerned for some time about
the fact that a number of foreigners with whom he had talked seemed
to feel that the post-war cyclical peak of the Western economies
was being reached.
Therefore, they were inclined to be rather bearish
-46
5/29/62
about their own countries as well as the United States.
connection,
In this
Chairman Martin noted that substantial price declines
were occurring on the European stock exchanges; the downward move
ment in stock prices was fairly general and was not limited to
this country.
Chairman Martin commented further that he did not know what
type of statement might be issued by the Federal Reserve that would
be helpful.
In any event, however,
this was clearly not a situation
where a statement could be drafted by a number of people sitting around
the table, as at this meeting.
He thought the comments that had
been made to the press yesterday and today by the Chairman of the
Council of Economic Advisers and by the Secretary of the Treasury
were essentially correct.
On the basis of the reports made during
the go-around at this meeting, there was nothing that would lead
him to think that there should logically be general dumping of
stocks at current prices.
In further discussion, Mr. Mills suggested that in view of
the uncertain nature of future developments the Open Market Committee
might want to consider authorizing Chairman Martin to issue a state
ment if,
in his judgment, such a statement should seem desirable,
with the understanding that the choice of words therein would be
left to Chairman Martin and any person or persons with whom he might
want to consult.
5/29/62
The comments that ensued indicated that the members of the
Committee found it difficult to envisage any type of Federal Reserve
statement that might be helpful in the present situation.
At the
same time, it was recognized that some turn of events might produce
a situation wherein the issuance of a statement would seem desirable.
Against this possibility, members of the Committee indicated that
they would be agreeable to giving an authorization to Chairman
Martin along the lines that had been suggested by Mr. Mills.
Chairman Martin commented that this was not a responsibility
he was particularly seeking.
Yet it was hard to envisage what might
develop within the next week or ten days.
It was then moved by Mr. Shepardson and seconded by Mr.
Hayes that Chairman Martin be authorized, during the period until
the next meeting of the Open Market Committee, to issue a statement
on behalf of the Committee with regard to stock market developments
and related economic or financial developments if events should occur
that in his judgment made it desirable to issue such a statement.
This motion was carried by unanimous
vote, subject to the understanding that in
certain circumstances Chairman Martin might
deem it advisable to call a special meeting
of the Open Market Committee before the next
regular meeting of the Committee, scheduled
for Tuesday, June 19, 1962.
Under date of December 11, 1961, there had been transmitted
to the Committee members and other Reserve Bank Presidents a draft
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5/29/62
revision of the 1957 Federal Open Market Committee Guides for
Emergency Operations with a request for comments.
The Open
Market Committee Guides had been reviewed pursuant to a suggestion
made when the Board of Governors approved revised Guidelines for
Emergency Monetary Policy as of May 15, 1961.
In light of comments
received following distribution of the preliminary draft revision
of the Open Market Committee Guides,
a revised draft was distributed
by the Secretary of the Committee under date of May 17, 1962.
Upon motion duly made and seconded,
and by unanimous vote, the revised Federal
Open Market Committee Guides for Emergency
Operations, in the form distributed with
the Secretary's memorandum of May 17, 1962,
were approved.
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 May 8 through May 23, 1962, along
with a supplementary report for the period May 24 through May 28, 1962.
Copies of these reports have been placed in the files of the Federal
Open Market Committee.
As indicated in those reports, there had been no System foreign
currency transactions during the period since the Open Market Committee
meeting on May 8, 1962.
Accordingly, no action to approve, ratify, and
confirm any such transactions was necessary.
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5/29/62
At the request of the Chairman, Mr.
in
Coombs presented comments
supplementation of the aforementioned written reports,
in the
course of which he referred to certain documents that had been distributed
to the Committee with respect to a possible dollar-sterling swap
arrangement.
The first
memorandum, dated May 16, 1962,
described
a meeting in London on Monday, May 7, in which Mr. Coombs,
Mr. Roosa,
Under Secretary of the Treasury for Monetary Affairs, and representatives
of the British Treasury and the Bank of England participated.
As
the result of this meeting a telephone call had been received by
Mr. Coombs on Tuesday, May 15, from an official of the Bank of
England who informed him that the British financial authorities
were agreeable to a $50 million swap at flat rates and an identical
interest rate, which might be set at 2 per cent.
In connection with
this swap possibility, there had also been distributed a memorandum
from the Secretary of the Committee dated May 25, 1962, with respect
to recent economic developments in the United Kingdom.
In this
memorandum the view was expressed that the economic outlook in the
United Kingdom would justify the holding by the System of pounds
sterling under a swap agreement with the Bank of England.
Further, with a transmittal memorandum dated May 28, 1962,
there had been distributed to the Committee a copy of a cable from
Mr. Coombs to the Bank of England dated May 18, 1962, suggesting the
5/29/62
-50
text of a press release that might be used in event of the completion
of a dollar-sterling swap arrangement, along with a copy of a cable
sent to the Bank of England by Mr. Coombs on May 21, 1962, outlining
the proposed terms of such an arrangement.
The draft proposal was
for a sterling-dollar swap in the amount of $50 million, the swap
to have a maturity of three months and to be liquidated on date of
maturity at the original rate of exchange.
The Bank of England would
place the resultant dollar balance in a nontransferable U. S. Treasury
certificate of indebtedness which would be issued by the U. S.
Treasury at par to mature three months after date of issue, but
redeemable upon two days' notice, and which would bear interest at
the rate of 2 per cent per annum.
The sterling balance accruing
to the Federal Reserve System would bear the same rate of interest.
The swap arrangement, including the U. S. certificate of indebtedness,
would be renewable upon agreement of both parties.
To protect both
parties against the remote risk of a revaluation of either currency,
the Federal Reserve would place with the Bank of England a standing
order, to be executed when necessary for that purpose, to purchase
for Federal Reserve account sterling in any amount sufficient to
replenish any earlier drafts upon Federal Reserve sterling balances
created by the swap.
The Federal Reserve would accept from the Bank
of England a similar standing order.
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5/29/62
Mr. Coombs recommended that the Federal Open Market Committee
approve a dollar-sterling swap arrangement on the terms outlined in
the cable of May 21, 1962, effective May 31, 1962, in which connection
he stated reasons for believing that such an arrangement would be
advantageous.
Mr. Robertson stated that he continued to be skeptical
about the whole program of System foreign currency operations.
However,
inasmuch as the program had been initiated, he would be
willing to vote to approve the proposed dollar-sterling swap
arrangement.
Inquiry was made about the desirability of issuing a press
release, and Mr. Coombs commented that it
was his impression that
the announcement of arrangements of this kind had a stabilizing
influence on the exchange markets.
The reaction conceivably might
be different in present circumstances,
but the record had been
favorable thus far.
Chairman Martin indicated that he would be apprehensive about
the result if
such an arrangement were entered into without a press
release being issued and knowledge of the arrangement nevertheless
became known.
Other members of the Committee expressed agreement with
the views stated by Chairman Martin and Mr. Coombs.
Thereupon, the proposed dollar
sterling swap arrangement was unanimously
approved effective May 31, 1962, with the
understanding that a press release would
be issued along the lines set forth in
Mr. Coombs' cable of May 18, 1962.
5/29/62
-52
Mr. Coombs next referred to his memorandum, distributed to
the Committee under date of May 21, 1962, regarding the possibility
of a dollar-guilder swap arrangement with the Netherlands Bank, which
might involve a pilot swap of $10 million plus a standby swap of $40
million.
The memorandum pointed out, among other things, that the
Netherlands Bank would be unable to place any Federal Reserve holdings
of guilders in either commercial paper or a time deposit.
it
However,
was thought probable that the Federal Reserve could obtain a
guilder time deposit facility at the Bank for International Settle
ments.
With this exception, the suggested swap arrangement would
be along the lines of the arrangement with the Bank of France.
One
immediate objective would be to mop up as much as possible of the
prospective flow of dollars into the Netherlands when, on June 27,
1962, the Dutch Philips Corporation was to receive payment on
subscriptions for a new stock issue that might yield roughly $200
million equivalent.
An estimated $80 million might be raised from
United States subscribers, with a $50 million inflow in prospect
from subscriptions in other European countries.
Since it
was the
traditional policy of the Netherlands Bank to convert into gold all
dollar and other foreign exchange acquisitions in excess of $200
million, and since present dollar holdings of the Bank amounted to
around $183 million, the dollar receipts generated by the Philips
issue would mean that the Netherlands Bank would shortly be compelled
to make heavy purchases of gold from the United States.
5/29/62
-53
In connection with the possible reciprocal transaction between
the Federal Reserve and the Netherlands Bank, there had also been dis
tributed a memorandum from the Secretary of the Committee dated May 25,
1962, which discussed recent economic developments in the Netherlands and
expressed the view that the immediate economic outlook would justify the
System's holding of guilders under such an agreement with the Netherlands
Bank.
In a memorandum from the Committee's General Counsel dated May 28,
1962, concerning the legal aspects of several proposed swap arrangements
with foreign banks,
the view was expressed that there would be no legal
objection to placing Federal Reserve guilder holdings in a time deposit
with the Bank for International Settlements.
In comments supplementing his memorandum, Mr.
Coombs noted that
the possible swap arrangement would extend the dollar defense line to
another important European currency and provide the possibility of mop
ping up the flow of dollars into the Netherlands Bank as payment was made
for the Philips issue.
in principle.
The Netherlands Bank was agreeable to the swap
The main technical problem was the inability of the
Netherlands Bank to place Federal Reserve holdings of guilders in either
commercial paper or a time deposit.
Therefore, Mr. Coombs had been talk
ing not only with the Netherlands Bank but also with the Bank for Inter
national Settlements about the possibility of a time deposit facility.
Yesterday, word was received of agreement in principle on the part of
both the Netherlands Bank and the Bank for International Settlements
that such a time deposit facility would be feasible.
The Federal Reserve
would be able to obtain a rate of interest thereon equivalent to the rate
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5/29/62
made available to the Netherlands Bank on its holdings of dollars.
In
this case, Mr. Coombs felt, it might be useful to follow the pattern of
the French swap and to base the interest rate upon the last Treasury
bill issue immediately preceding the swap.
He would regard the 2 per cent
rate of interest in the proposed dollar-sterling swap as a deviation from
the general pattern.
The deposit with the Bank for International Settle
ments would be a three-month time deposit subject to withdrawal on two
days' notice.
In response to a request from Mr. Mitchell for further elaboration
of the reasons for the swap arrangement, Mr. Coombs said the Netherlands
had been running more or less in even balance in international payments
for the past year.
However, the payment for the Philips issue would
involve a substantial influx of funds.
The question was whether it would
not be useful to try to deter the prospective drain on U. S. gold reserves.
Before the expiration of three or six months, the guilder might come under
some selling pressure; the Netherlands was not in a strong surplus posi
tion.
The worst that could happen was that the United States would
eventually lose as much gold as if there were no swap arrangement in
effect.
With regard to the traditional policy of the Netherlands Bank
to convert into gold dollar and other foreign exchange acquisitions in
excess of $200 million, Mr. Swan inquired whether,
if
the swap arrange
ment were entered into, there was reason to believe that the Bank might
be induced to alter its
policy.
5/29/62
-55
Mr. Coombs replied that he thought the consummation of a swap
arrangement might have such an effect.
The Swiss, as a quid pro quo
for Stabilization Fund forward operations, had let
their dollar balances
run up, and the same sort of development could occur here.
He did not
think that a swap arrangement would lessen the possibility of the
Netherlands Bank considering some adjustment of its
traditional policy.
After further discussion had indicated that the Open Market
Committee was inclined to look with favor on a proposed dollar-guilder
swap arrangement such as described, Mr. Coombs asked whether he under
stood that the Committee would prefer to authorize the negotiation of
such a swap or to approve in principle.
He would hope the latter, with
the possibility of obtaining final approval of the arrangement by poll
of the Committee.
If possible, he would like to move forward on this
matter before the next Committee meeting.
Thereupon, unanimous approval was
given in principle to a dollar-guilder
swap arrangement with the Netherlands
Bank along the lines described in Mr.
Coombs' memorandum of May 21, 1962, it
being understood that the arrangement
was subject to final approval by the
Federal Open Market Committee.
Mr.
Coombs then referred to his memorandum, distributed to the
Committee under date of May 23, 1962, with regard to possible Belgian
franc operations.
Attached to the memorandum was a letter from the
National Bank of Belgium suggesting a swap arrangement in the amount of
$50 million for six months, renewable, with an identical interest rate
on both sides.
The dollars accruing to the National Bank of Belgium
5/29/62
-56
would be invested in special U. S. Treasury certificates of indebtedness,
while the Belgian francs accruing to the Federal Reserve would be invested
in bills (promissory notes) issued by the National Society of Credit and
Industry.
The U. S. certificates and the Belgian bills would be issued
for six months, but would be redeemable or discountable at any time, on
demand, at par value and without modification of interest.
The interest
rate would be 2.75 per cent on both sides.
In a memorandum from the Committee's General Counsel dated May 28,
1962, question was raised whether investment of Belgian francs in notes
of a Belgian company engaged in providing credit for commerce and industry
would be clearly authorized. However, the question was understood to have
become academic.
As stated in Mr. Coombs' memorandum of May 23, he had
inquired of the National Bank of Belgium whether it would be possible to
place Federal Reserve holdings of Belgian francs on time deposit with the
Bank for International Settlements.
The offhand reaction was that this
might prove feasible, and a definite answer was promised as soon as
possible.
In connection with the swap possibility, there had also been
distributed a memorandum from the Secretary of the Committee dated May 25,
1962, regarding recent economic developments in Belgium in which the view
was expressed that the immediate economic outlook seemed more favorable
than for some time and that it would justify the holding of Belgian francs
under a swap agreement with the National Bank of Belgium.
In supplementary comments on this swap possibility, Mr. Coombs
noted that it would provide still another link in the line of bilateral
5/29/62
-57
exchange arrangements.
He thought it would be possible to work out the
procedure whereby Belgian franc holdings of the Federal Reserve System would
be placed on time deposit with the Bank for International Settlements.
He
would recommend approval of a dollar-Belgian franc swap in principle, in the
amount of $50 million.
In response to a question as to why this swap arrangement was
proposed on a six-month basis, Mr. Coombs said he thought this was intended
to be something of a generous gesture on the part of the National Bank of
Belgium.
The letter from the National Bank might be regarded as an
indication of what that Bank would be willing to consider.
However, he
would prefer a three-month swap on a renewable basis to keep the arrange
ment more in line with the other swap arrangements negotiated or pending,
and that was what he would suggest.
Question was raised as to whether a swap in the amount of $50
million with the Belgians would not be out of line in terms of the arrange
ments with other countries, whether $50 million was looked upon as a
minimum for swap arrangements,
or whether there were particular reasons
for that figure in the case of the proposed transaction with the National
Bank of Belgium.
Mr.
Coombs replied that the Belgians had suggested $50 million.
Perhaps they had taken into account their policy of converting into gold
practically all of their dollar inflow and thought of the $50 million
figure as a gesture of cooperation from that standpoint.
Mr. Coombs
said he would agree that swap arrangements of $50 million all around,
5/29/62
-58
regardless of the size of the country concerned and the balance of trade,
might seem somewhat illogical.
In
time,
he thought, there might be
higher figures with the Uhited Kingdom and France than with other countries.
Thereupon, unanimous approval was
given in principle to a dollar-Belgian
franc swap arrangement with the National
Bank of Belgium along the lines described
in the letter from the National Bank of
Belgium dated May 16, 1962, and Mr.
Coombs' memorandum of May 23, 1962, it
being understood that the arrangement
was subject to final approval by the
Federal Open Market Committee.
Mr. Coombs next referred to his memorandum,
distributed to the
Committee under date of May 22, 1962, with respect to a possible swap
arrangement with the National Bank of Switzerland.
possibility of a medium-term credit arrangement.
Mr.
Coombs in Europe,
This involved the
In conversations with
officials of the National Bank of Switzerland had
indicated that the Bank would expect to provide credit under a swap
arrangement on a 90-day basis, but with a tacit understanding that the
credit would be renewed for as long as might prove necessary.
The Bank
needed protection only against some emergency situation in which the credit
facility might advisedly be shifted to a medium-term basis, and it
antici
pated working out some arrangement with the Swiss Treasury whereby the
latter
would take over the credit in
such circumstances.
Mr.
Coombs had
suggested, in the alternative, consideration of a relatively short-term
swap, say for three months, with the possibility of two renewals.
The question whether a medium-term credit arrangment with the
National Bank of Switzerland would be legally warranted was discussed
briefly in the memorandum from Mr. Hackley dated May 28, 1962, referred
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5/29/62
to previously in these minutes.
That memorandum pointed out that there
was no statutory restriction upon the length or maturity of accounts
that might be maintained by a Reserve Bank with a foreign bank.
If
it
could be established that a medium-term swap arrangement was necessary
or desirable in order to effectuate open market transactions in foreign
currencies, Mr. Hackley felt it
would be subject to no greater legal
objection than a short-term, 90-day swap.
commitment might make it
However, the length of the
more difficult, as a matter of degree,
to
establish that the arrangement was related to the effective conduct of open
market operations.
Also, an arrangement of this kind might be subject
to question on policy grounds.
In comments supplementing his memorandum, Mr. Coombs noted that
the U. S. Treasury was not in a position to provide a medium-term credit
facility to the Swiss.
Further, as Mr. Hackley's memorandum suggested,
it might be difficult to establish that a medium-term credit facility
provided by the Federal Reserve could be related effectively to the conduct
of open market transactions in foreign exchange.
His own view was that it
would be preferable to keep such an arrangement on a short-term basis
if
possible.
Therefore, he had suggested to the Swiss that they consider
a swap arrangement on a 90-day basis, with the explicit understanding
that the arrangement could be renewed for another three or six months.
A short-term arrangement would not fully satisfy the apparent desire
on the part of the Swiss more or less to match the standby credit
facilities being provided by certain member countries of the International
Monetary Fund.
In terms of realities, however, an arrangement running
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for nine months might give the United States time to counter any heavy
flow of speculative funds to Zurich, and possibly to bring about a
reversal.
Mr. Coombs then suggested that the Committee might want to
authorize further negotiations with the National Bank of Switzerland
for a short-term swap facility of $150 million, with $50 million as
a pilot swap and the remaining $100 million put on a standby basis.
If
current disturbances in the stock exchanges continued, there could be a
rather heavy flow of funds to Switzerland and there might well be a
need for the full $150 million.
In response to a request for further explanation of the basis
for the Swiss suggestion for a medium-term credit arrangement, Mr. Coombs
brought out that an important second line of defense was being established
by the enlargement of the standby resources of the International Monetary
Fund.
If the dollar should get into serious difficulty, the United
States could go to the Fund and pick up a sizable supply of European
currencies.
However, since Switzerland was not a member, the Fund
arrangement did not cover the Swiss franc, and the Swiss felt a certain
moral obligation to do as much as they could to close the gap. They
would like to work out a facility as similar as possible to those being
extended by a number of the major countries in connection with the
enlargement of the standby resources of the Fund, and those facilities
were on a medium-term basis.
The Swiss appeared to feel that a short
term arrangement might be criticized on the ground that Switzerland was
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failing to do its part.
officials
that it
Mr. Coombs said he had suggested to the Swiss
should be possible to provide a satisfactory explana
tion by tying in a short-term dollar-Swiss franc swap arrangement with
the swap arrangements being negotiated with other central banks.
If the
swap was in terms of a figure such as $150 million, the Swiss would
certainly get credit on that score.
Question was raised whether a $150 million swap would appear
adequate, and also as to the relationship between that figure and the
part that the Swiss might have been expected to play in enlarging the
standby resources of the Monetary Fund had Switzerland been a member
of the Fund.
Mr. Coombs replied that such questions were difficult to answer.
He thought that the Swiss might be ready to put up as much as $250
million on a medium-term basis.
Further, unless there were basic changes
in underlying conditions, he foresaw the possibility of a sizable
net flow of capital to Switzerland. Conceivably, of course, the situation
would turn in the other direction.
Thereupon, the Open Market Committee
authorized further negotiations with the
National Bank of Switzerland looking
toward the possibility of a dollar-Swiss
franc short-term swap arrangement along
the lines described by Mr. Coombs.
Mr. Coombs then pointed out that the swap arrangement with the
Bank of France in the amount of $50 million, which became effective
March 1, 1962, would mature June 1, 1962.
arrangement for another three months;
it
He recommended renewal of the
was his understanding that the
Bank of France was agreeable to such an extension.
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In this connection, Mr. Coombs commented that the French had
been taking in so many dollars during the past three months that no
useful opportunity had presented itself for employment of the French
francs obtained by the Federal Reserve under the swap arrangement.
entire $50 million could have been exhausted quickly.
Therefore,
The
it
had seemed better to wait for a time when use of French francs might
bring the market into better balance.
If the heavy flow of dollars
into France should continue during the summer months, it might prove
desirable to liquidate the swap arrangement in advance of the next
say on August 1,
maturity,
and then to renegotiate an arrangement
in the
fall months when the French payments position might be less strong.
In discussion, question was raised whether, in the circumstances
described by Mr. Coombs, the amount of the swap with the Bank of France
should not be raised or the arrangement dropped.
Comments made in
response by Messrs.
Hayes and Coombs were to
the effect that in conditions such as had existed recently the use of the
French francs to the extent of $50 million would have had little or no
effect.
On the other hand, the existence of the arrangement and lack of
use of the French francs did not appear to have created any adverse
reaction.
In the fall months an opportunity might come.
As to
increasing the amount of the swap arrangement, other negotiations were
now in process between the United States and France, having to do with
a possible advance debt repayment and adjustments with respect to military
procurement.
In the circumstances, it seemed doubtful whether this was
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an appropriate time to suggest an increase in the terms of the swap
arrangement, although that might become appropriate in the fall.
Thereupon, the Open Market Committee
approved unanimously a three-month renewal,
effective June 1, 1962, of the existing
dollar-French franc swap arrangement with
the Bank of France.
Mr. Coombs next commented upon discussions that had been held
with the Bank of Canada regarding the possibility
involving that Bank and the U. S. Treasury.
of a
However,
swap facility
it
had developed
that the Treasury could not commit more than $25 or $30 million out of
the Stabilization Fund at the present time.
The reaction of the Bank
of Canada was one of appreciation that this had been suggested as a token
of cooperation,
but the Canadians were doubtful that an arrangement of
such magnitude would have much impact.
interested in
a
swap arrangement in
It
appeared that
they might be
a much larger figure,
or $250 million, as a backstop to the recent action in
such as $200
establishing
a par value for the Canadian dollar.
Mr.
Coombs raised the question whether the Open Market
Committee would be interested in
exploration
of
the possibility
of
a
swap arrangement between the Federal Reserve and the Bank of Canada,
having in
mind that
the Canadians might be interested only in
arrangement of substantial size.
an
He noted that the establishment of a
par value for the Canadian dollar had been a long-sought objective
American policy.
of
That having been done, it appeared appropriate to give
some support to the Canadians.
He was not sure, however, whether this
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5/29/62
might best be done through a Federal Reserve-Bank
of Canada swap
arrangement or through a Canadian drawing on the Monetary Fund.
In discussion, it was noted that a Canadian drawing on the
Monetary Fund would subject the Canadians to the discipline of the
Fund.
It was also noted, however, that the Canadians might hesitate
to go to the Monetary Fund until after the forthcoming elections and
that they had been subjected to a speculative outflow of funds of rather
substantial proportions during the past two or three months.
Mr.
of U.
S.
Mitchell raised the question whether,
foreign exchange
if
the endeavor
transactions was to help build a strong
international payments system,
it
would not seem almost unavoidable,
in the interest of consistency, to consider a swap arrangement with
the Bank of Canada.
Mr. Coombs said he had such a feeling.
That was why he had
favored the Stabilization Fund arrangement on a $25 or $30 million
basis, but that figure apparently was not high enough in the eyes of
the Canadians to have any real impact.
After Mr. Mitchell had suggested the possibility of negotiating
with the Bank of Canada in terms of a swap of $50 or $100 million,
Mr.
Hayes said he shared the view that, with the Canadian economy so
close to that of the United States and the Canadian currency so important
to the United States, it would seem somewhat illogical not to include
the Canadians in the network of swap arrangements at such time as a
favorable basis for such an arrangement could be found.
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5/29/62
Mr. Balderston said he also shared that view.
He saw virtue
in taking the initiative in discussions with the Bank of Canada,
so as
to be able to suggest limits compatible with the Federal Reserve swap
arrangements negotiated or pending with other central banks.
Thereupon, the Open Market Committee
authorized negotiations with the Bank of
Canada looking toward the possibility of
a swap arrangement between the Federal Re
serve and that Bank.
Mr. Coombs pointed out that on the exchange markets the United
States dollar had been under considerable pressure in the past few days.
It had been driven to the floor against the Swiss franc, and it was
weakening against the German mark.
Assuming that the German Federal
Bank was prepared to intervene and buy dollars to check a further decline
of the dollar rate against the German mark, he hoped that the Open Market
Committee would concur in the appropriateness of using some of the Federal
Reserve holdings of German marks to reinforce that operation.
It seemed
quite clear that a speculative movement of a reversible type was occurring,
and use of the System holdings of German marks would appear to meet the
criteria for intervention as stated in the Guidelines for System Foreign
Currency Operations.
The proposed use of Federal Reserve
System holdings of German marks in the
manner described by Mr. Coombs, if that
should seem desirable to him in the light
of developments, was noted without objec
tion.
With reference to the earlier discussion concerning a possible
swap arrangement with the National Bank of Belgium, it was brought out
that the continuing authority directive to the Federal Reserve Bank of
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New York with respect to System foreign currency operations, originally
adopted by the Committee on February 13, 1962, and reaffirmed on March 6,
1962, did not authorize the purchase and sale of Belgian francs.
Accordingly, upon motion duly made
and seconded, and by unanimous vote, the
continuing authority directive to the
Federal Reserve Bank of New York with
respect to System foreign currency opera
tions was approved in the following
amended form, effective immediately:
The Federal Reserve Bank of New York is authorized and
directed to purchase and sell through spot transactions any
or all of the following currencies in accordance with the
Guidelines on System Foreign Currency Operations issued by
the Federal Open Market Committee on February 13, 1962:
Pounds sterling
French francs
German marks
Italian lire
Netherlands guilders
Swiss francs
Belgian francs
Total foreign currencies held at any one time shall not
exceed $500 million.
Mr. Mitchell commented that the recent developments in the
stock market had led him to wonder whether something might not happen
to bring about a substantial drain on the gold supply and cause the
reserve requirements specified under existing law to have to be suspended.
In his opinion the existing law was clearly obsolete, having been
adopted under a different set of circumstances than now prevailed.
His
question, therefore, was whether there should not be a re-examination
of the existing law, with a view to the possibility of some change that
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would make it possible for the Federal Reserve System to meet any
crisis without having to take emergency action.
Chairman Martin noted that this problem had been given consid
eration on previous occasions.
The Committee might ask its staff to
review the procedures involved so that everyone would be familiar with
them.
Some caution was indicated, because a planning exercise, if under
stood to be in process, could lead to comment and speculation.
However,
he would see no objection to putting down in a paper the facts relating
to the procedures provided under the present law.
It was agreed that the next meeting of the Federal Open Market
Committee would be held on Tuesday, June 19, 1962.
The meeting then adjourned.
Assistant Secretary
Cite this document
Federal Reserve (1962, May 28). FOMC Minutes. Fomc Minutes, Federal Reserve. https://whenthefedspeaks.com/doc/fomc_minutes_19620529
@misc{wtfs_fomc_minutes_19620529,
author = {Federal Reserve},
title = {FOMC Minutes},
year = {1962},
month = {May},
howpublished = {Fomc Minutes, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/fomc_minutes_19620529},
note = {Retrieved via When the Fed Speaks corpus}
}