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, June 19, 1962, at 10:00 a.m.
PRESENT:
Mr. Martin, Chairman
Mr. Hayes, Vice Chairman
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Balderston
Bryan
Deming
Ellis
Fulton
King
Mills
Robertson
Shepardson
Messrs. Bopp,
Scanlon, and Clay, 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
Messrs. Brandt, Brill, Furth, Garry, Hickman,
Holland, Koch, Parsons, 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
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6/19/62
Messrs. Francis and Shuford, First Vice Presidents
of the Federal Reserve Banks of St. Louis and
Dallas, respectively
Mr. Rouse, Vice President and Senior Adviser,
Federal Reserve
Bank of New York
Messrs. Eastburn, Black,
Baughman, Jones, Tow,
Coldwell, and Einzig, Vice Presidents of the
Federal Reserve Banks of Philadelphia,
Richmond, Chicago, St. Louis, Kansas City,
Dallas, and San Francisco, respectively
Mr. Sternlight, Manager, Securities Department,
Federal Reserve Bank of New York
Upon motion duly made and seconded, the
minutes of the meeting of the
Federal Open
Market Committee held on May 8, 1962, were
approved.
In view of the resignation of L. Merle Hostetler from the employ of
the Federal Reserve Bank of Cleveland effective at the end of this month,
Mr. Fulton nominated W. Braddock Hickman to serve as Associate
Economist
of the Federal Open Market Committee in place of Mr. Hostetler.
Upon motion duly made and seconded,
Mr. Hickman was elected Associate Economist,
effective immediately.
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 29 through June 13, 1962,
and
a supplementary report covering the period June 14 through
1962.
Copies of both reports have been placed
June 18,
in the files of the
Committee.
Im supplementation of the written reports, Mr. Stone commented
as follows:
Reserveavailability hasgenerally been
comfortable
through
out the recent perwiod,and the tax date has passed with little
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6/19/62
or no strain in an atmosphere of ample corporate and bank liq
uidity. Federal funds traded for the most part at 2-3/4 per cent,
although the rate dipped below that level for a few days toward
the middle of the period and moved up to 3 per cent yesterday.
The period was generally characterized by a broad and active
demand for short-term securities both from banks and nonbank
sources. The Treasury's additions to the total supply of bills
were readily absorbed and the 91-day rate moved from about 2.70
per cent at the start of the period to around 2.64 per cent
before turning up again to slightly above 2.70 with the approach
of the June 15 tax date.
As several of the Committee members anticipated in their
comments at the last meeting, there was some
room for differences
in emphasis in carrying out a policy of "no change" in the
System's current posture. Thus, in the first part of the
recent period, against the background of the highly charged
atmosphere generated by the sharp break in stock prices, the
emphasis in conducting operations was tilted toward the free
reserve measure and the avoidance of any unsettling swings
in that indicator. As the period moved along, while the stock
market failed to show much bounce, it did at least settle back
to a somewhat calmer tempo.
This made it
possible to shift the
emphasis to the Committe's objectives in terms of preserving
the general market tone that had characterized the several
preceding weeks.
Throughout the period the behavior of the stock market con
tinued to attract a good deal of attention. While a number of
rallies have been attempted, all have proved abortive, and the
declining trend of prices that set in several months ago con
tinues. The pace of trading activity in stocks, which was very
active in the first
few days after the last meeting, tapered off
during much of the period but has picked up again in the past few
days, and the atmosphere continues to be unsettled.
Prices of Treasury notes and bonds showed relatively minor
day-to-day movements and no decisive trend during the period
despite the continued weakness in stock prices and also despite
some questions raised in the market concerning theunderlying
strength of the business expansion.
The failure of Treasry bond
in part reflect a
developments
prices to respond to these may
recent resurgence of concern over the gold situation and the
possibility of increased budgetary deficits ahead.
Turning to Treasury financing, the Treasury has added $800
million to the bill supply in the past five weeks, and its program
for cash financing over the next two months depends in good part
on whether it chooses to fill out the bill cycle at $2 billion
per issue or whether it will stop short of that. If the Treasury
contines to add to the bills until each issue amounts to $2
6/19/62
billion, it will not, according to present estimates, have
to do any additional cash
financing
until late August. If,
on the other hand, the Treasury should terminate now its
program of addition to the weekly bill issue, it would have
to move some of its cash borrowing ahead to July.
This of
course would be in addition to the rollover of the July 15
one-year bills and, in early August, the refunding of the
August 15 maturities.
I should mention to the Committee that we have taken a
careful look at the projections of reserve needs over the next
three weeks from the point of view of whether the $1 billion
limitation in the continuing
authority directive would be ade
quate. The Board staff's figures suggest a need for about $750
million, while the New York Bank's projections indicate a need
for perhaps
$600 million.
In the absence of some unforeseen-
and substantial-additional drain on reserves, it seems to us
that the existing limitation will not be constricting.
Thereupon, upon motion duly made and
seconded, the open market transactions in
Government securities during the period
May 29 through June 18, 1962, were
approved, ratified, and confirmed.
The economic review at this meeting was in the form of a visual
auditory presentation for which Messrs. Garfield, Hersey, Altman,
Axilrod, and Trueblood of the Board's staff joined the meeting and
in which they participated along with Mr. Koch.
Copies of the text
of the presentation and the accompanying charts have been placed
in the files of the Open Market Committee.
The text of the introductory portion of the economic review was
as follows:
These are days when economic analysts the world over are
Trading
paying unusual attention to stock market developments.
has been heavy and price declines have been dramatic. Increas
ingly over recent weeks questions have arisen concerning the
effects, as well as the meanings, of these declines. Sometime
in the future data can be assembled to show at least what the
sequels proved to be--although not necessarily to establish
6/19/62
causal connections to everybody's satisfaction. Today we might
consider the purport of nonstatistical reports, and of daily
quotations in various commodity and security markets; scattered
weekly or 10-day reports on activity and sales through early
June; and the latest weekly credit figures for city beaks. In
large part, however, the latest organized information we have
relates to the month of May--and even for May some figures are
still missing.
To make a virtue of a necessity, we might argue that in
times of dramatic events it is well to take a quiet look at the
background
against which these events are occurring. Actually,
the stage of the cycle already reached in May was of considerable
interest in its own right. After 15 months of recovery and ex
pansion the economy had reached a point in time after which, in
the two preceding upswings, further increases in activity had
been small. But conditions this time were different incertainperhaps important--respects. A steel labor contract had already
been negotiated, for example, whereas in midsummer of 1959 a four
month strike was beginning.
This time industrial prices had a
recent history of three years of little change. Even before the
recent decline in stock prices, expectations of a generally
advancing price level had been greatly modified--by the continu
ing availability of unutilized resources as well as by recent
price behavior. By contrast, in mid-1959 prices had been rising
during recovery; and in the previous cyclincal[sic]
upswing--the auto
housing-capital goods boom of 1955-57--there had been a major
advance in prices. The situation this time was different in
other ways, too, and it was evident that analogies drawn from
the past did not provide clear guides to the future.
Domestic deelopments, of course, have continued to depend
in some degree on international developments.
Since the Second
World War and especially since the Korean outbreak in 1950,
defense outlays in this country have been at levels unprecedented
for peace time. In this recovery period they have been expanding.
Since 1958, moreover, balance of payments problems have been
almost continuously in the foreground of economic analysis.
There followed sections dealing with the balance of payments,
the recent performance of the domestic economy, developments in the
major categories of demand, business inventories and consumer spending,
and financial developments.
as follows,
The presentation concluded with comments,
on what the analysis of domestic business and financial
conditions and of the balance of payments position might mean for
monetary policy:
Recent economic and financial developments have been high
lighted by the gradualness of the advance in economic activity,
the availability of resources to permit further advances, and
the sharpest stock price decline of the postwar period. At the
same time, prices in commodity markets have not risen since
early 1961, and there is little
evidence of any incipient infla
tion. While credit supplies are ample, the liquidity of key
spending sectors does not appear excessive.
Internationally, our balance of payments problem remains to
be solved. There have been some recent improvements, but they
may have been due in part to the impact of Canada's financial
troubles on our capital flows. The dollar remains
weak
in
European markets, and private demandfor go1d has reappeared in
London.
To facilitate continued expansion of output domestically,
the economic situation calls for further expansion in bank credit
and the money supply in order to assure a ready availability of
credit and longer-term capital at moderate rates of interest.
The pace of such credit expansion must, of course, take into
account that which has already occurred over the expansion period,
as well as additional liquidity needsof the different sectors of
the private economy as it grows.
On the other hand, our international position calls for the
avoidance of a redundancy of bank reserves, liquidity, andcredit
availability lest the capital
outflow
be stimulated and our pay
ments and gold reserve problem accentuated.
Domestic andinternational considerations, then, call for
somewhat different policy emphasis at this juncture andmay con
tinue to do so for some time, To some observers, the existence
of this disparity suggests the need for a differing mix of fiscal
and monetary policies. This issue is receiving increasing dis
near-term
cussion in the press, and will receive more in the
future, now that the possibility of an across-the-board cut in
tax rates has been raise by Administration spokesmen.
of any change is the mix of fiscal and
The consequences
monetary policies, however, cannot be foreseen with assurance and
and fiscal policy, while
risks are involved . Monetary policy
interacting in many aspects, are not simple substitutes one for
the other. Each affects the economythrough different channels
and with different time lags. Whatever change in policy mix may
occur in time, monetary policy has a continuing problemof keeping
in such relation to fiscal policy that the mix fosters a high
utilization of resources at home and a sustainable payments posi
tion with the rest of the world.
The effects of anymix of monetary or fiscal policies depends
in large part on what
the underlying economic situation
really is.
6/19/62
-7
As we have seen this morning, information available on
developments before the recent sharp stock market declines
indicated that economic activity was following an inter
mediate course, not booming, not declining.
In May economic
activity was at a level about as much above pre-recession
highs as at the comparable stage of earlier recoveries. But
resources were being less fully utilized. Incentives to
accumulate inventories were not great and the level of
inventory holdings was not high in relation to sales. With
final demands fairly strong, however, some further gradual
advance in activity was widely anticipated.
What the effects will be of the recent unsettlement in
the stock market and, for that matter, of market developments
ahead remains, of course, to be seen. Few excesses other than
those in the stock market are readily discernible. Yet, in
the present climate, to many market participants uncertainties
as to future trends appear bigger than they normally do, and
some anxieties unquestionably exist because of extended debt
positions. It is too early to conclude either that the
economy will be able to absorb recent market shocks and still
move forward or that expansion will be interrupted.
In discussion following the economic presentation, Mr. Balderston
inquired as to any indications concerning the lending and collection
practices of banks in the recent period of stock market decline.
Speaking for the Board's staff, Mr. Brill commented that
little
information was
available.
Although a survey had been author
ized by the Board some time ago regardig the volume of nonpurpose
lending, it was still in the pilot stage.
The Secrities and
ExchangeCommission was contemplating a study of the actions of
banks at other lenders during the recent severe stock market break,
but this had not gone beyond the planning stage.
Mr. Hayes said reresentatives
ofthe New York Reserve
Bank had come to the general conclusion that the amount of forced
6/19/62
selling
-8
under pressure by lenders was modest.
Perhaps some
non
bank lenders had been lending on narrow margins, but this was a
relatively small-scale business.
One large New York City bank
advised that it had asked for additional collateral on only 600
out of 12,000 loans and that there had been onlysix sell-outs.
Mr. Garvy confirmed the impression that there had been
few calls is relation to the amount of credit outstanding.
Many
of those called for additional collateral had been able to provide
it,
and the number of sell-outs appeared to have been small.
Mr. Bryan said that at the most recent meting of the
Atlanta Reserve Bank's directors, directors from Birmingham and
New Orleans reported surveys indicating that the banks in those
cities had not called any loans or asked for any additional collateral.
This was also said by two Atlanta banks to have been true in their
cases.
Reports by other Reseve Bank Presidents were to the same
effect.
Chairman Martin then called for the usual comments aournd the
table, beginning with Mr.
Hayes, who presented the following state
ment of his views with respect to the economic situation and
monetary policy:
I find it rather harder than usual to symmarize my view
of the domestic economy. The latest statistics, while somewhat
mixed, seem to point to continued gradual business expansion,
but with nothing to suggest probable attainment of the more
-9optimistic goals originally predicted for 1962 by many observers.
The pause in retail sales in May is not in itself
unduly disturbing,
coming on top of the rapid increase of the preceding two months,
but on the other hand we
cannot overlook the recent deterioration
in business sentiment.
Moreover, the purchasing agents' survey
speaks of "signs of
fatigue" in the improvement of business
activity; and business plans for capital investment are clearly
lagging,
even if the steel episode did not have the catastrophic
effect on spending plans that some had predicted. The lagging
tendency
may
well be enhanced by the persistent weakness in the
stock market andby the prevalent atmosphere of business uncer
tainty. So far the stock market decline does not seem to have
had much effect on consumers, but even here there could well be
some delayed adverse influence.
With respect to the causes of the stock market weakness, I
find it hard to reach anyfirm conclusions.
While it is easy
to point to some correction, in a noninflationary environment, of
the high price-earnings ratios
and speculative fever of the last
year or two, this does not wholly explain the timing and intensity
of the drop. Our fragmentary findings do not confirm the wide
spread press suggestions that forced selling through pressure by
lenders, and selling from foreign sources, were important causes
of the decline, although they doubtless had some contributing
influence. Pessimism over the longer-range outlook for profit
margins and widespread questioning of certain aspects of Admin
istration leadership undoubtedly played a significant part; and
a slower rate of stock accumulation by large institutional buyers
since the latter part of 1961, coupled with an increased volume
of new stock offerings, doubtless tended to weaken the market ' s
underpinnings some months ago.
As for the latest balance of payments indications, the
picture is mixed but on balance still
very vulnerable. While
the May over-all deficit was sharply lower than in the two
preceding months-and while this occurred despite a probable
substantial rise in long-term capital outflows-I suspect that
the improvement was due in large measure to Canada's diffi
culties. The dollar has been persistently weak in European
markets. Although the gold stock has remained steady now for
five weeks, this has not prevented a growing state of nervous
ness on currencies in general and on the dollar in particular.
This is evidenced, for example, by the heavy buying pressure in
the London gold market in recent weeks, as well as by the rising
interest in gold shares. Despite the somewhat better outlook
for the balance of payments figures themselves in the second and
6/19/62
-_10-
third quarters, the position of the dollar, in the light of cur
rent heavy dollar holdings abroad and growing nervousness in the
gold and exchange markets, cannot be looked upon with complacency.
Total credit at commercial banks rose again in May, resum
ing the rise that had been interrupted in April, The demand for
business loans continues relatively weak, in keeping with the
absence of buoyancy in the business picture. The decline in the
money supply should be viewed in the light of an unusually large
build-up in Government deposits and a rise in time deposits.
Liquidity of the banks remains at a high level; and the banks are
both able and willing to reach out for new outlets for their
funds, including foreign term loans in the case of some of the
large New York banks.
Under these complex circumstances, it is not easy to form
a clear-cut judgment as to appropriate monetary policy. Neverthe
less, I believe that the balance of considerations is strongly
on the side of a firmer policy. For one thing, it seems to me
that the liquidity of the country is high enough so that the
domestic economy can, in all probability, take in stride somewhat
firmer rates and a lesser degree of ease. In a sense our policy
of ease has probably contributed about all that it can to the
current expansion. If additional Government measures are needed
to stimulate the economy, they are more likely to be found in the
fiscal area than
monetary policy. Of course, the weakness in
in
the stock market and the nervous business atmosphere argue against
any sharp or drastic change of policy.
The gravity of the dollar'sinternational position is such
that we should re-examine the question whether we have been doing
all that we could in the monetary field to improve our balance of
payments and foreign confidence in our currency. It is not easy
to demonstrate to what extent a firmer monetary policy would
dampen outward capital flows, both short term and long term, but
I believe there is a growing body of expert opinion--with which
I would concur--that the effect might well be considerable. More
over, the increasing likelihood of a tax cut in the coming year
and a resulting substatial deficit in the Federal budget points
to a need for progress towards a higher rate structure to permit
orderly financing of that deficit. To put it another way, foreign
confidence in the dollar could be seriously hurt if the impression
were to gain ground abroad that a more expansionary fiscal policy
was likely to be accompanied by an unchanging policy of monetary
ease. Conversely, I do not believe that foreign confidence would
be shaken if a tax cut carefully designedto help restore busi
ness confidence and stimulate expansion, especially in business
investment, were backed up by a firmer monetary policy.
6/19/62
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I would repeat, then, that in my judgment the time has come
for some modification in our monetary policy. The weakness of
the stock market and the nervous business atmosphere suggest
that, in the first
instance at least, this policy change should
be gradual and cautious.
I think the Manager should be given a
high degree of flexibility to probe toward lesser ease, with the
hope of getting bill rates somewhat higher and avoiding downward
rate pressure in the Federal funds market. The feel of the market
should, I think, be a major guide, with the level of free reserves
a secondary consideration, and with the proviso of course that a
close watch would have to be kept on possible reperecssions of
such probing toward lesser ease on the domestic situation, and
especially on the stock market.
A decision as to whether to make a more overt policy move
might well wait for further clarification of the Administration's
fiscal plans, and naturally such a move would be much more effec
tive and would meet with greater public understanding if it enjoyed
the Administration's support as a part of a broader program. No
discount rate change seems desirable in the immediate future,
although we may have to consider one before very long; but even
the gradual shift in open market policy I have advocated would
call for some modification today of the present directive.
Mr. Ellis reported that the New
England economy seemed to be
running along quite smoothly, with no pronounced trends evident.
While
manufacturing output was up in April, available data for May indicated
no further gain.
Unemployment showed some decline in April, and it
appeared that the decline
any have continued in May.
Auto salesmen
remained optimistic, but department store sales declined in April
and May after seasonal adjustment and a further decline was suggested
by weekly figures for June.
The most recent purchasing agents' survey
showed a reduction of inventories anda shortening of forward order-
ing policy.
6/19/62
-12
Loans of First District weekly reporting banks continued
at a high level, but loan demand seemed to have slackened somewhat
since April.
After an interruption in the expansion of time deposits,
the most recent weekly figures suggested a resumption of the growth
trend.
Bankers continued to suggest that interest rates should be
higher, giving as a reason the probable effect on international
capital flows.
Mr. Ellis noted that the economic presentation this morning
had seemed to point out that this was a period of turbulence and
change.
He also noted that analysts in the Boston area were tending
to modify their assessment of prospects for the balance of the year,
with a fairly general marking down of previous estimates of gross
national product for the fourth quarter.
Mr. Ellis expressed agreement with the staff assessment that
the problem of monetary policy was one of maintaining adequate but not
redundant reserves.
In the absence of fiscal action designed to
move the economy forward, and in the absence of international
repercussions from the stock market decline that would accelerate
the outward flow of gold, he came out in his thinking that the
wisest course would be to make no change in policy at this time.
He
doubted the appropriateness of moving on the monetary front in
anticipation of fiscal action; that would bring on the Federal Reserve
6/19/62
-13
responsibility in the public view for whatever
While he was sympathetic to
the
ularly if blame was to be assessed.
analysis presented by Mr.
Hayes,
might happen, partic
in his view there should not be a
probing toward less ease at this time for two reasons.
probing was not effective in the sense that it
did not affect the
course of the economy , there would be no point in probing.
assuming that it
Second,
would be effective, he thought this was the wrong
time to undertake such a probing.
that it
the
First, if
In other words, he did not feel
would be appropriate to make any significant move in
response
to international pressures while uncertainties about the domestic
economy
were growing.
Accordingly, he came
System's posture at this time.
out to no change in the
That would mean a continuation of
money market ease, with a comfortable availability of reserves.
It
would mean free reserves of around $400 million and the continued
use of open
market operations to offset downward pressures on short
term rates, while allowing such rates to rise if
should carry them in that direction.
He would
market pressures
not be inclined to
change the policy directive or the discount rate at this time.
Mr.
Shuford reported that there had been little
recently in the Eleventh District economy.
change
Industrial production
was up slightly and there had been sme increase in nonagricultural
employment.
There had been a little
improvement in the chemical
6/19/62
-14
industry as well as electronics.
The oil situation was mixed, crude
oil production having declined a little
somewhat.
while refinery runs were up
Retail trade continued strong, although May figures showed
a slight decline from the previous month.
Agricultural activity
reflected an improved moisture situation.
Wheat output was down
substantially due to Government restrictions, but cash receipts
from agriculture nevertheless were up considerably.
As to the financial picture, loan demand in the District
appeared to be a little
stronger than in the nation generally.
Loans were up, along with investments.
Time and savings deposits
showed a slight decline, but demand deposits were up strongly.
While
purchases and sales of Federal funds were both down, the margin of
average weekly purchases over sales continued about the same as it
had been running.
Borrowings from the Federal Reserve Bank were
nominal.
Mr.
Shuford noted that the Vice Chairman of the Dallas Bank,
a man with long experience in the international area, had written a
memorandum to the other directors, with a copy to President Irons, in
which he expressed concern with respect to the degree of monetary ease.
At the most recent directors' meeting, the directors appeared more
concerned andwere more vocal than for some time.
Some of the con
cern no doubt reflected the stock market situation, but the directors
had also received the memorandum from the Vice Chairman.
There was
6/19/62
-15
some discussion of sending the Board of Governors a letter summarizing
the views expressed at the meeting, but it was finally resolved that
the Chairman of the Board would probably write a short letter to the
Board of Governors referring to the concern of the directors.
Mr. Swan reported that the Twelfth District business situation
seemed to reflect a good deal of uncertainty and mixed trends, with
perhaps a further--but no more than a very gradual--improvement in
May.
While no June figures on auto sales were yet available, in the
first half of May sales in California were down quite sharply from
the first half of April.
However, department store sales had been
quite well sustained through May.
There was considerable uncertainty
in the fact that labor negotiations in certain major areas of
production seemed far from reaching any satisfactory conclusion at
the moment.
There were shutdowns in construction because of labor
problems in several parts of the District.
The District banking situation showed little
change.
The
banks were looking eagerly for business loans, but did not appear
able to develop them in any substantial volume.
however, were still rising.
Savings deposits, after a decline in
April that appeared to be associated with
increased in May.
than in May 1961.
Real estate loans,
income tax payments,
However, the increase was significantly smaller
-16
6/19/62
Mr. Swan commented that it was not yet possible to assess
the effects of the recent stock market behavior on business and
consumer spending plans.
In any event, however, the behavior of
the market was casting a rather large shadow of uncertainty over
a business situation that of itself had been displaying something
less than satisfactory progress,
Consequently, it
seemed to him
that monetary policy should not be made tighter at the moment, for
that would only introduce further uncertainties.
He agreed with Mr. Ellis that changes should not be made
in monetary policy in anticipation of possible fiscal moves,
particularly under present circumstances.
It must be recognized
that uncertainties continued to exist and that there was a
possibility, at least, of some significant deterioration in the
business situation.
He would not recommend a change in the dis
count rate at this time, and in his opinion the language of the
policy directive adopted at
appropriate.
the May 29 meeting continued to be
In terms of free reserves, he would prefer to think
of $450 million rather than $400 million.
While he would not
attempt to offset upward pressures on the bill rate if the market
supplied them, he doubted that such a development would occur.
Neither, within reasonable limits, would he attempt to offset
downward pressures.
6/19/62
-17
Mr. Deming
reported that the most recent economic
data
for the
Ninth District continued to show a generally expanding economy, with
gains in May and the first half of June appparently a little better
Whether the District expansion was running slightly
than seasonal
ahead of orslightly behind the national rate was open to question;
the answer depended largely on what period of time was used for
Speaking broadly, however,
comparison.
it
seemed fair to say
that the differences in rate of gain were not significant, except
possibly in one respect.
Four specific points about the Ninth District were then
noted by Mr. Deming.
First, the agricultural crop situation could
be classed as excellent for this time of year.
Badly needed rainfall
had turned rather poor prospects into good ones, and continued rain
had now changed the good prospects to excellent.
Second, iron ore
shipments through May totalled almost 11 million tons, more than
double the amount in the same period last year although well
below the volume shipped in 1959 and 1960.
Third, general retail
sales had been rather weak recently, but this might reflect no more
than the long
newspaper strike in Minneapolis.
Auto sales had been
quite good.
Finally , the District banking picture continued to show
more life than the national scene.
dollar amount
City bank loan growth, in
andpercentagewise, was at a record level in May.
At country banks the May loan expansion in dollars was exceeded
-18
6/19/62
only in 1959, andpercentagewise only in two previous years.
Available figures for June were inconclusive beyond indicating
that loan growth had continued.
Deposits also showed continued
strength in both classes of banks, influenced mainly by time
deposit growth.
As a result, despite the fairly sharp increase
in loans, loan-deposit ratios at both city and country banks were
lower than a year ago, and at city banks were 7 to 8 points below
their postwar highs of two years ago.
With respect to monetary policy, Mr. Deming said he found
himself in a quandary, a position that was growing increasingly
uncomfortable because of the length of time it had prevailed.
The
quandary resulted not merely from the oft-cited conflict between
domestic and international monetary objectives but also from the
curret course of the domestic economy when viewed against the
backgroundof previous years.
Turning to some statistics that he thought impressive,
Mr.
Deming noted that in the past 52 years the year-to-year change
in real
GNPhad been positive 34 times and negative 18 times.
In
10 of the 52 years, the changes were less the 1 per cent, plus
or minus; in 11 years there were losses of more than 1 per cent;
in 9 years there were gains of 1 to 5 per cent; and in 22 years there
were
gains
of more than 5 per cent.
The large gains came either
in war years or in years following sharp drops in total output.
-19
6/19/62
Continuing, Mr.
dollar GNP from the first
Deming pointed out that the increase in
quarter of 1958 through the second
quarter of 1959 was more than 12 per cent.
From the first
quarter
of 1961 to the second quarter of 1962, the gain was about 11 per
cent.
From the fourth quarter of 1961 to the second quarter of
1962, the rise was about 5 per cent annual rate.
Even though the
second quarter change was disappointing, the quarter was better
than the first
quarter, and appreciably better in terms of final
As a matter of fact, the current expansion rate compared
takings.
favorably with the record of 34 of the past 52 years, and specifically
with every year since 1951 save 1955 and 1959.
Mr. Deming went on to say that he had concluded, after looking
at some long-term series on bank credit andliquidity in an attempt
to obtain perspective on current positions, that the general liquidity
position was reasonably good
and that bank liquidity was significantly
improved from the postwar lows
supply, its
of 1959 and 1960.
As to the money
recent performance seemed to be inordinately affected
by the course of Goverment deposits.
Factors such as he had cited, Mr. Deming said, made his
feel that the need to continue to pursue so easy a monetary policy
as had prevailed for some time was unnecessary and conceivably might
be
unwise.
On the other hand, he had difficulty in finding positive
6/19/62
-20
reasons, on the domestic side, for moving toward less ease.
fact, recent developments added to this difficulty.
In
Balance of
payments reasons might argue for some movement toward less ease,
but at the moment they did not seem to him to be very persuasive.
He might be more persuaded if
fiscal actions were leading to
more expansionary strength, which might be the situation for the
future, especially if
there should be a tax cut.
Accordingly, Mr.
Deming said, his policy prescription was
one of essentially no change,
of less ease.
To put it
but with any deviations on the side
another way, he would suggest a very
gradual shift, perhaps no more than a probe, toward a less easy
position.
Specifically, he would let free reserves float below
$400 million, about as they had done during the past week.
He
would hope that the bill rate would move up to 2-3/4 per cent or
higher and would try to keep the Federal funds rate in that area
or higher.
While he would not change the discount rate, he would
change the policy directive slightly to reflect the slight shift
The language adopted at the May 29
in posture that he had suggested.
meeting applied more to the sharp break in the stock market than to
the present somewhat less unsettled, although not particularly favor
able, conditions in the market.
As a suggestion for the directive,
Mr. Deming submitted the following;
6/19/62
-21
In view of the modest nature of recent advances in
the pace of economic activity, the continued underutilization
of resources, and the uncertainties reflected in some
financial markets, it is the current policy of the Federal
Open Market Committee to permit further expansion of bank
credit and the money supply, while giving recognition to
the country's adverse balance of payments and the level
of bank liquidity.
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, but slightly smaller seasonally adjusted, for
further credit and monetary expansion, taking account of
the desirability of avoiding sustained downward pressures
on short-term interest rates.
Mr.
Scanlon reported that measures of economic activity
relating to employment, production, and retail sales continued to
be mildly favorable in the Seventh District.
Nevertheless, there
appeared to have been a deterioration of business confidence that
must be given consideration in assessing economic prospects and
formulating monetary policy.
Discussions with businessmen, bankers,
and economists indicated a widespread tendency to downgrade earlier
optimistic expectations.
It had become fairly common to "move up"
the expected date of the next downturn to the fourth quarter of the
current year. As yet, there was no specific evidence that capital
spending projects had been affected adversely. However, local
surveys indicated that many business firms planned to reduce inventories
or at least hold down further accumulations.
This was suggested
-22
6/19/62
also by the continued sluggishness in steel orders.
Local surveys
also indicated that hiring intentions had been scaled down from
earlier plans.
Employment in the District apparently continued to move up
moderately in areas not directly affected by the steel cutbacks,
and new claims for unemployment compensation continued to run
substantially below the levels of either a year or two years ago.
Steel production was still
declining,
although slowly.
Industry estimates indicated that the current rate of steel
consumption by fabricators would support an annual rate of ingot
production of at least 100 million tons, as compared with the
current production rate of 82 million tons.
Nevertheless,
orders
continued to be disappointing, suggesting either that the pre-accord
inventory build-up
as greater than had been thought or that many
customers were prepared to reduce stocks to very low levels.
The pace of auto deliveries in the first 10 days of June,
although 20 per cent above the same period of last year, was about
the same as in 1959 and 1960.
This was disappointing to the industry.
Production would decline somewhat in June, and substantial declines
would occur, of course, in July and August.
Auto
makers seemed
intent upon reaching the model changeover period with
inventories than last year.
smaller
6/19/62
-23Contacts with large Midwest producers of capital goods
indicated that new orders exceeded last year by about 10 per cent
for the first five months.
Gains approximating this proportion
were noted by firms in the industrial equipment, electrical
generating equipment, and farm and construction machinery industries.
Construction machinery orders were very strong in April and May
after a slow start early in the year.
Reserve positions of large city banks had continued to be
relatively easy and borrowings at the discount window had remained
negligible.
Demand for business loans at Seventh District banks
had continued somewhat stronger than in the rest of the nation.
Some loan officers indicated that they detected a weakening in the
demand for loans during the past two weeks; however,
this might be
largely seasonal.
As to policy, Mr. Scanlon said that he had great sympathy
for Mr. Hayes'
analysis.
However,
in view of the increasing
uncertainty and continued dissatisfaction with the tempo of
business activity, he did not believe he would take any steps
that would tend substantially to reduce the availability of credit
at this time.
Slightly, yes, but not substatially.
He would not
favor a change of discount rate, and he felt that the policy directive
could appropriately be continued without change .
6/19/62
-24-.
Mr. Clay commented that recent domestic economic developments
underscored earlier doubts concerning the vigor of the expansion
that was under way.
The various indicators presented a mixed
picture, with only a moderate increase in aggregate activity.
Moreover, a search for sources of stimulus to expansion in the months
ahead sufficient to make important inroads on available manpower and
other resources did not produce encouraging results.
One of the most disquieting pieces of domestic economic
information of recent days was the Commerce-SEC report on business
capital outlays.
In addition to once again reporting a shortfall
for the last completed quarter compared with the earlier projection,
the full-year projection showed no expansion over the previous
survey.
The probability of business capital spending exceeding
the survey projection for the year was very small under present
conditions of demand for goods and unused productive capacity.
At
this stage of a business upswing, the economy was particularly
dependent upon business capital outlays as a source of expanding
activity.
The modest scale of the outlays projected thus raised
disturbing questions as to its impact on both the extent of the
current upswing and its duration.
If
monetary policy were shaped entirely in terms of domestic
considerations, and apart from the international balance of payments
-25
6/19/62
problem, Mr. Clay felt
policy of more
he thought it
would be desirable to shift to a
that it
aggressive ease.
All factors considered, however,
appropriate to pursue essentially the same monetary
upon at the meeting
policy in the period ahead that had been agreed
three weeks ago.
This would include the Committee's goal with
respect to the Treasury bill rate.
No change was recommended in
the discount rate, and in his opinion the directive was suitable in
its
present form.
Mr. Wayne reported that Fifth District business had continued
to make gradual progress.
employment,
Manufacturers still
workweeks, and shipments.
reported increases in
Textile demand was slightly
stronger, business was a little better for lumber producers, and
furniture makers continued to prosper.
Construction remained a source
of strength, as evidenced by April increases in employment and contract
awards.
Retailers continued to report good business, and much-needed
rains had greatly improved the agricultural outlook.
Loan demand at
District banks had been showing some improvement.
Nevertheless, Mr. Wayne continued, a spreading sense of
uncertainty was apparent among District businessmen, and some statistical
evidence was unfavorable.
out of new orders.
Manfacturers reported a recent leveling
Coal production and domestic shipments had been
trending generally downward,
although mine operators remained optimistic
6/19/62
-26
about the long run.
declined in April.
Residential and nonresidential contract awards
Cigarette production during the first
this year showed very little
third of
increase over 1961--nowhere near the
4 per cent per year growth rate typical of recent years.
Despite
the improved outlook, it was unlikely that this year's crops would
equal last year's bumper harvests.
Whether these areas would prove
to be major trouble spots was uncertain.
Up until now, however,
the
trend of over-all District activity had been clearly upward.
With respect to policy, Mr. Wayne noted the possibility that
the time might be approaching when monetary policy and fiscal policy
would appear to be moving in different directions.
It
seemed
reasonable to believe that fiscal measures designed to spur the
economy might be taken in the not too distant future.
Under such
circumstances, considering the international situation, it would
seem that the proper mix would involve a firmer monetary policy,
not in an effort to thwart any bolstering fiscal policy but to
provide necessary defense for the dollar internationally.
The
Federal Reserve System should be prepared to accept the responsibility
involved in arriving at such a mix of monetary and fiscal policy.
Mr. Wayne went on to say that he found himself in agreement
with the analysis of Mr. Hayes as to the proper posture of System
policy at this time.
As he
understood it,
this did not imply any
6/19/62
-27
overt reduction in the availability of money but rather a slight
trending toward somewhat firmer monetary conditions.
It
would
imply letting free reserves drift below $400 million, and if
there
should be a slight firming of short-term rates, that would be all
to the good.
He was inclined to favor changing the directive along
the lines suggested by Mr. Deming.
Mr. Mills commented that the state of the economy and the
turbulence in
international financial markets caused him to repeat
his earlier pleas to the Committee to abandon the apathetic approach
that had characterized the development of Federal Reserve System
policy for a long time and to turn attention to the international
situation, which had an increasingly direct influence on the domestic
economy.
At present, a combination of circumstances offered a new
opportunity for a policy change.
First, professional observers
were now anticipating and urging a change in policy.
Second, natural
factors had automatically reduced the level of free reserves, thereby
facilitating an inconspicuous policy change.
Third, the Treasury
wold be absent from the market for new money for a reasonable
period of time.
which, if
The stage therefore had been set for a policy change
not undertaken, could unsettle confidence in the leadership
and judgment that was expected of Federal Reserve System policy-making.
To effect the change,
the level of free reserves could be kept around
the $350 million range into which they had drifted recently.
6/19/62
-28
In order to reflect a policy such as he advocated, and in
order to focus attention on the availability of credit as a prime
responsibility of Federal Reserve System policy-making,
Mr. Mills
suggested that the current policy directive might be changed to
read as follows:
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 international financial markets, the current
policy of the Federal Open Market Committee is to insure a
degree of credit availability which will be sufficient to
meet prospective needs for bank credit but will take greater
account of 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 to
permit the satisfaction of demands for bank credit within the
bounds of a supply of reserves geared to the size of such
demands.
Mr.
Robertson said he would weigh more heavily the domestic
than the international situation,
It
seemed to him, therefore, that
this was precisely the wrong time to be trying to tighten as far
as monetary policy was concerned.
moment,
Conditions were uncertain at the
and that uncertainty should restrain the System from trying
to move in either direction.
Accordingly, it
would be wise at this
juncture to maintain the policy that the Committee had been trying
to follow for some time in order to do whatever was possible to aid
the domestic economy,
which was characterized by underutilization of
resources and excessive unemployment.
This would suggest a free
-29
6/19/62
reserve target between $400 and $450 million.
He would not want at
this time to anticipate fiscal policy moves that certainly were not
coming into effect tomorrow or the next day.
He would not attempt
to offset, to any noticeable degree, either upward or downward
pressures on short-term rates.
As to the directive,
it
appeared to
him that some of the changes made were more in the nature of word
changes than otherwise.
While he did not object to such changes,
he could see no purpose in making them.
Mr.
Shepardson expressed agreement with the views stated by
Messrs. Hayes,
Deming, and Mills, which were in accord with those he
had stated at recent Committee meetings.
Changes in the policy
directive along the lines suggested by Mr. Deming or by Mr.
would be satisfactory to him.
In his judgment, it
Mills
was time for the
Committee to make the policy changes indicated by the suggested language.
Mr. King commented that it
was entirely possible that changes
such as Mr. Hayes and others had suggested would be necessary at
some time.
time.
However, he did not believe that this was quite the
In his judgment, recent stock market developments would have
significant reverberations that would continue indefinitely, and he
would not like to see the Federal Reserve System assume the blame
for everything that might go wrong in the economy.
lesser ease at this point would run that risk.
A move toward
Therefore, his policy
prescription today would be to "stay exactly where we are."
6/19/62
-30
Mr. Fulton reported that in the Fourth District, with steel
sales losing ground in May, new car sales and unemployment data
provided the only discernible favorable factors in the economic
picture.
New car sales increased further in May throughout the
District and seemed to be sustained in the early part of June.
Department store sales were estimated to have eased off slightly
in May; for the year to date they were 4 per cent above a year ago,
compared with a 6 per cent rise for the nation.
The unemployment
situation, while not good in the steel areas, had improved somewhat
in the other parts of the District.
Steel production had dropped off faster in the Fourth District
than elsewhere in the nation, particularly during the past five weeks.
The latest week showed a slight increase, but it
whether the increase was sustainable.
was questioned
One steel executive had
expressed the view personally that the rate of production in the
first
quarter of this year would not be matched again until 1964.
In April, construction in the District fell
year for the first
time in 1962.
below the previous
For the year to date the percentage
increase in total District construction had been less than a quarter
of the increase nationally.
Inquiries did not seem to turn up
changes in business plans for spending, however,
although there was
some indication of uncertainty as to longer-run plans.
6/19/62
-31
Turning to policy, Mr. Fulton said he would like to align
himself with the views expressed by Mr. Hayes and to repeat the
conclusions he (Mr. Fulton) had stated at the May 29 Committee
meeting.
He felt that the Committee had baited the trap well with
reserves and had not found takers.
The liquidity of the banking
system may have been overdone, and the situation could become
unmanageable.
The level of free reserves for the past week seemed
to him appropriate; he would prefer that free reserves run between
$300 and
However,
$400 million rather than between $400 and $500 million.
emphasis should be placed on the feel of the market, with
the Manager given adequate latitude to endeavor to maintain the
short-term rate at 2-3/4 per cent or better.
a policy would not deter any real advance in
In his opinion, such
the economy, and it would
place the System in a better position to move in either direction
according to what might develop.
He would not recommend changing
the discount rate at this time.
As to the policy directive, some
words could perhaps be changed.
However, he would have no particular
feeling in that regard.
Mr. Bopp said information available for the Third District
indicated that the labor force picture had brightened gradually,
production had increased slowly, construction awards had shown
consistent strength, and autemobile and department store sales had
been
very good.
With few exceptions, however, the data were a month
old, so it remained to be seen
had been experiencing
whether business in the District
hesitation or drop in
confidence recently.
-32
6/19/62
The District banking picture suggested some increased
pressure from both the demand and supply side.
Loans had been
rising, while investments had declined somewhat.
recently had dropped by a significant amount.
liquidity and borrowing (in
Deposits
Measures of
the Federal funds market rather than
from the Reserve Bank) also reflected less ease.
As for policy, Mr. Bopp observed that the basic conflict
remained between a desire to stimulate the domestic economy and
a need to strengthen the balance of payments.
In his view, the
Committee's policy to date had succeeded, probably as much as could
be expected under the circumstances,
in resolving this conflict.
He would favor continuing this policy.
However,
in recommending
no change in policy, as ue had for some months, his reasons had
changed somewhat.
The need for domestic stimulus was more pressing
than before; the repercussions of moving toward less ease would be
more serious than before.
The necessity for putting brakes on the
economy in the foreseeable future seemed less and less likely, so
there was little need to let up on the accelerator on this score.
It was true that fiscal policy should give increasing stimulus to
the economy in coming months, but it
would be a mistake to use that
as justification for less ease at this time.
For the next three weeks,
therefore, he would continue approximately the same degree of ease
(disregarding the drop in free reserves last week) and approximately
-33
6/19/62
the same range of rates as in the past.
He would continue the
present directive and existing discount rates.
Mr. Bryan indicated that the Sixth District continued to be
characterized by a gradual increase in economic activity.
think of little
He could
that had been said with regard to other Districts
that could not also be said in regard to the Sixth District.
Mr. Bryan went on to say that he would align himself with those
who had advocated no essential change in policy.
He added that at the
most recent directors' meeting of the Atlanta Bank a good deal of time
was spent in discussing the effect of recent stock market developments.
While the total effect could not be estimated, there was unanimous
agreement that the market decline had impaired the outlook for
economic expansion.
With regard to a subject discussed by Mr.
at the May 29 meeting,
Shepardson
Mr. Bryan said he was appalled by reports
from the staff of the Atlanta Bank with regard to the trend of farm
land prices in the Sixth District.
It appeared that at some point
there might not only be shock waves in the equity market but in the
real estate market as well, and he would not want to magnify them by
a restrictive monetary policy.
While he could sympathize with the
view that there was a dangerous balance of payments situation, he
did not feel that this could be remedied by monetary policy.
because, in his judgment,
This was
the balance of payments difficulty had not
been caused by monetary policy.
Accordingly, he came out in his
thinking at about the same point as Mr. King.
6/19/62
-34
Mr. Francis reported that business activity in the Eighth
District had shown moderate improvement since April.
Unemployment
in the major labor market areas appeared to have declined from
April to May, and department store sales rose more than seasonally.
According to preliminary data, they were continuing at a high level
in early June.
Bank debits also rose somewhat in May.
However, in
dustrial use of electric power in the major cities of the District
declined from April to May on a seasonally adjusted basis.
prospects were good throughout the District.
Crop
Total deposits at
District banks showed no particular change in May or early June, the
upward trend in time deposits having been off-set by a decline in
demand deposits.
Loans increased but investments declined, so the
total volume of bank credit was little
increased rather sharply in
changed.
Business loans
Little Rock, rose moderately in St.
Louis, showed approximately no change in Memphis, and showed a
greater than seasonal decline in Louisville.
Mr. Balderston said he felt there were possibilities of
serious crises.
As to the best System posture for meeting them,
however, he was not sure.
As Mr. Bryan had suggested, a severe
decline in land prices would have repercussions on the economy of
grave consequence,
prices.
so attention could not be confined to stock market
The Canadian situation was also of concern, from the standpoint
6/19/62
-35
of trade and of finance.
Even the Swiss situation did not seem to
be free from concern in view of its
adverse trade situation.
On
balance, Mr. Balderston favored continuance of about the present
System policy for the period just ahead, using $400 million as a
free reserve target.
The actual level has been about $450 million
for the three weeks ending June 13.
He would be inclined to leave
the policy directive unchanged.
Chairman Martin said that this had been an interesting
meeting, with a full expression of views around the table.
wanted to make his own position clear.
He
After careful consideration
over a period of time, he felt personally that the time had come
when those in the System ought to stand up and be counted.
As he
had remarked many times, the importance of monetary policy should
not be exaggerated.
However, he felt that what was required at
the present time was to be "steady in the boat," which did not
mean the continuation of a policy that was being construed in some
quarters as ease compounded by ease.
Accordingly, he wished to
align himself with the point of view expressed by Messrs. Hayes,
Deming, and Mills.
Chairman Martin went on to explain that while he wanted an
easy money policy continued, he also favored somewhat less ease than
had prevailed,
and he would be willing to take whatever risks were
6/19/62
-36
involved.
had it
In his judgment, the Committee would
moved two months ago.
market collapse.
It
have made a mistake
could have been blamed for the stock
Now, however, with an international situation that
had not yet reached the crisis stage but which, in the present temper
of things, could reach that stage quickly, he felt that the System
would be in a stronger position if
it
supplied a reduced level of
reserves and permitted interest rates to firm in the absence of a
decline in loan demand.
Loan demand had been disappointing throughout,
but the System had supplied reserves intensively for a long time.
It
was easy to get twisted up in the money supply figures,
the Chairman noted.
As nearly as he could observe, however, there
was no question today but that mortgage rates were beginning to
decline.
There had been no lack of availability of funds in any
area of the country for a long period.
In fact, a decision by the
Federal Reserve to follow a somewhat less active easy money policy
might give impetus and strength to the economy rather than the
reverse.
This was, of course, a matter of judgment.
Chairman Martin brought out that he would consider it
most
unfortunate for the Federal Reserve to make any dramatic or overt
change of policy at this time.
He was thinking in terms of a very
delicate operation--an operation designed to make clear that the
Federal Reserve had a policy, that it did not intend just to drift
along and continue to compound ease with ease.
6/19/62
-37
Chairman Martin repeated that it
was important for the
Federal Reserve actually to have a policy, and he questioned
whether "ease compounded with ease" was really a policy.
There
would continue to be easy money with a slightly lower level of
free reserves than at present.
The only way he could make a
distinction was to say that the situation would be less easy.
The time had come,
in his judgment, when the Committee ought to
make that clear.
As to the current policy directive,
Chairman Martin said
he would be prepared to accept either the language suggested by
Mr. Deming or the language suggested by Mr. Mills.
First, however,
he would propose that a vote be taken on the question of a shift
of policy toward slightly less ease; that is, the maintenance of
an easy money policy but a move toward slightly less ease.
Accordingly, a vote was taken on the general policy position
expressed by Chairman Martin.
The vote indicated that those Committee
members who would favor such a position included, along with the Chair
man, Messrs. Hayes,
Shepardson.
Robertson.
Balderston, Deming, Ellis, Fulton, Mills, and
Those recording their dissent were Messrs. King and
Mr. Bryan voted "present."
In an exchange of comments that ensued,
Chairman Martin noted
that he had refrained intentionally from presenting the statement of
6/19/62
-38
general policy position in terms of any particular free reserve
figure.
Mr. Shepardson inquired, however,
whether it
might not
be anticipated that such a position was likely to be associated
with a free reserve figure under $400 million, rather than above,
and the Chairman responded affirmatively.
Mr. Hayes indicated that
he would be inclined to think primarily in terms of a somewhat firmer
feel in the market.
Consideration then was given to the current economic policy
directive, and the formulations that had been suggested earlier by
Messrs. Deming and Mills were read again to the Committee.
Mr.
Hayes presented at this point a third alternative formulation.
In discussion, Mr. Deming indicated that he would accept
the wording suggested by Mr. Mills or that of Mr. Hayes, while
Mr. Mills said that his position on the directive likewise was flexible
and that he would be willing to withdraw his suggestion and accept
that of Mr. Hayes.
Mr. Hayes expressed a preference for wording in
the second paragraph of the directive outlining how policy would
be implemented that would place emphasis on a somewhat firmer market
tone.
Chairman Martin then turned to Mr.
Stone, who said a directive
such as suggested by Mr. Hayes would mean to him, in terms of implemen
tation, that Federal funds probably should trade generally around 2-3/4
-39
6/19/62
to 3 per cent, moving only temporarily down to 2-1/2 per cent or
below.
Any temporary liquidity bulge that might develop would be
absorbed before it
threatened to encourage capital outflows.
On
the other hand, reserve needs that were generated from business
expansion within the economy would be readily accommodated.
After further discussion, there was placed before the
Committee for action the current policy directive that had been
proposed by Mr. Hayes.
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 effect transactions
for the System Open Market Account in
accordance with the following current
economic policy directive:
It is the current policy of the Federal Open Market
Committee to permit the supply of bank credit and money to
increase further, but at the same time to avoid redundant
bank reserves that would encourage capital outflows inter
nationally. This policy takes into account, on the one
hand, the gradualness of recent advance of economic activity,
the availability of resources to permit further advance in
activity, and the unsettlement of financial markets result
ing from the sharp decline in stock prices. On the other
hand, it gives recognition to the bank credit expansion over
the past year and to the role of capital flows in the country's
adverse balance of payments.
To implement this policy, operations for the System
Open Market Account during the next three weeks shall, to
the extent consistent with the behavior of financial mar
kets, be conducted with a view to providing a somewhat
smaller rate of reserve expansion in the banking system
than in recent months and to fostering a moderately firm
tone in money markets.
-4o-
6/19/62
Votes for this action: Messrs.
Martin, Hayes, Balderston, Bryan,
Deming, Ellis, Fulton, Mills, and
Shepardson.
Votes against this action:
Messrs. King and Robertson.
Mr. Bryan stated that his vote on the current policy directive
was premised on the adoption by a majority of the Committee of the
general policy position on which a vote had previously been taken.
Chairman Martin commented that the shift in policy that had
been agreed upon by the Committee was of a very modest nature,
It
was important that those present at this meeting bear in mind the
need for care in discussions outside this room:
unfortunate if
it would be most
the modest shift should be magnified into some major
change of policy by financial writers, with resultant repercussions
in the market.
The discussion then turned to System foreign currency operations
and related matters.
There had been distributed to the Committee,
in this connection,
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 29 through June 13,
1962,
along with a supplementary report for the period June 14 through June 18,
1962.
Copies of these reports have been placed in the files of the
Federal Open Market Committee.
6/19/62
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In comments supplementing the written reports, Mr. Coombs
noted that on May 31, 1962, the System had entered into a three
month $50 million sterling-dollar swap with the Bank of England on
terms approved by the Open Market Committee at the May 29 meeting.
He added that thus far there had been no occasion to use the sterling
proceeds.
If and when new flows of funds to London should begin,
consideration would be given--in consultation with the Bank of
England--to the possibility of intervention.
However, there was
the question as to how fully the System should commit its limited
sterling resources at an early stage in view of the possible subsequent
demands upon them.
It would be his present inclination not to move too
rapidly.
Mr.
Coombs next mentioned that on Thursday,
June 14,
the
System had entered into a three-month renewable swap agreement with
the Netherlands Bank under which it bought $10 million equivalent
of Netherlands guilders, with a further $40 million equivalent
available on a standby basis if needed.
(The final terms of swap
arrangement, which had been endorsed in principle by the Open Market
Committee at its May 29 meeting, were approved on June 12, 1962,
upon poll of the Committee.)
Mr.
Coombs observed, in this connection,
that shortly before the swap arrangement was executed dollar holdings
of the Netherlands Bank had risen beyond the traditional ceiling of
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6/19/62
$200 million; if the swap had not been under negotiation, the Dutch
would have ordered gold.
Since the consummation of the swap, there
had been an easy money market situation in Amsterdam, and the selling
of rights to the Philips Lamp issue enabled the Dutch to get rid
of
some surplus dollars, with the result that dollar holdings had declined.
The head of the Foreign Department of the Netherlands Bank was expected
to arrive in New York today, and there would be discussions with him
focusing particularly on the problem that would be presented by pay
ment on the Philips issue, which could result in
$100 million into the Netherlands.
an inflow of $50 to
The discussions would include
whether the situation could be handled most appropriately by spot
or forward operations.
The Federal Reserve probably could afford
to be somewhat more liberal in its use of guilders than in the case
of sterling, the amount of guilder holdings being more substantial
in relation to possible swings in the account of the Netherlands
Bank.
Mr.
Coombs also mentioned that pursuant to Committee approval
at the May 29 meeting, the System on June 1, 1962, renewed for a further
three months the $50 million franc-dollar swap with the Bank of France,
on the same terms and conditions as the original swap.
The Account
Management had refrained from using the System's French francs
pending the development of a somewhat more balanced market situation.
During May, and thus far in June, flows into France had been so heavy
that nothing useful could have been accomplished by utilizing the French
francs.
6/19/62
-43
Mr. Coombs then noted that the System had completed
negotiations with the National Bank of Belgium for a six-month
$50 million Belgian franc-dollar swap.
would be put on the books tomorrow.
It was expected that this
(This swap arrangement was approved
in principle by the Committee at the May 29 meeting and was finally
approved on June 18, 1962, upon poll of the Committee.)
Since the
May 29 meeting, the Belgians had purchased $17 million of gold,
probably reflecting a corresponding inflow of dollars during that
If further inflows should occur, he expected inquiries
period.
from the National Bank of Belgium as to whether the System wanted
to mop up the inflow or would prefer that the Belgians take gold.
Such a problem would have to be met on an ad hoc basis.
Here again,
the Federal Reserve holdings of Belgian francs were reasonably
however,
sizable in relation to the probable size of swings in the account of
the National Bank of Belgium.
Mr. Coombs reported that he had continued to discuss with
the Swiss National Bank by cable and telephone the possibility of a
Swiss franc-dollar swap arrangement.
As mentioned at the May 29
Committee meeting, he had previously talked with the Swiss in terms
of a standby swap of $150 million, with an immediate drawing of $50
million.
Since the beginning of this month, and largely in reflection
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6/19/62
of the stock market situation, the Swiss National Bank had taken
in another $75 million.
Of this amount, it had been possible to
fit a part under the Swiss ceiling of roughly $175 million, and
the U. S. Stabilization Fund had mopped up some of the inflow.
However,
there remained in the hands of the Swiss National Bank
holdings of dollars over and above their ceiling, which situation
was putting pressure on the National Bank.
The Bank's management would
like to move on the swap proposal but apparently was encountering
certain legal difficulties.
Here again, particularly in view of
the willingness and desire of the National Bank to be as helpful
as possible, Mr. Coombs would be inclined to make rather liberal
use of the proceeds of any swap that might be negotiated.
Mr. Coombs turned next to the continued heavy selling
pressure on the Canadian dollar.
The Bank of Canada had lost $560
million in reserves from January to May, and a heavy speculative
onslaught had cost the Bank $245 million thus far this month.
It
had been financing the deficit by running down dollar balances and
also by selling gold; the gold loss in the past month amounted to
$140 million.
Mr. Coombs reported that he had talked with the Governor of
the Bank of Canada by telephone on three or four occasions about
the possibility
of a swap arrangement.
The Governor had appeared
6/19/62
-45-
hopeful that a move could be made on some such arrangement once
the Canadian elections were over; he continued to feel that a swap
of roughly $250 million would be required to have a real impact on
confidence.
It also appeared that the Canadians might seek recourse
to a drawing on the International Monetary Fund.
Unfortunately,
Mr. Coombs pointed out, the results of the recent Canadian elections
were not clean cut, leading to the likelihood of a coalition
government.
It
would remain to be seen whether an effective
financial program could be developed.
After further comments on the Canadian situation, Mr.
said he had found it
difficult
make to the Committee.
to
decide what recommendation to
On balance, however, he would recommend
that the Federal Reserve wait a little
is,
Coombs
and see what developed,
that
whether the Canadians decided to go to the Monetary Fund and what
sort of financial program they could put together,
before initiating
any new approach to the Bank of Canada regarding a
swap.
Bank of Canada should raise a question
If
the
as to the possibility of a
standby swap arrangement, it might be appropriate to inquire what
the Canadians were going to do with regard to the possibility
borrowing from the Monetary Fund.
consider a
swap arrangement
only if
of
The Committee might want to
it
were part of a larger package.
No disagreement was expressed with Mr. Coombs'
recommendation.
6/19/62
-46
Mr. Coombs next reported that there had been a fair amount of
selling pressure on the dollar in the Frankfurt market today.
seemed to be a speculative flow of funds into Germany,
There
and the dollar
mark rate had been driven up to $.2507 in Frankfurt this morning.
The
German Federal Bank had intervened this morning to the extent of $25
million, and the rate had moved to somewhat below $.2506.
There had
been a suggestion from the German Federal Bank by telephone that the
Federal Reserve might intervene this afternoon to keep the rate from
going above $.250625.
Mr. Coombs thought that intervention on the
basis indicated would be suitable.
Therefore, unless there was some
objection on the part of the Committee, he would propose to proceed
in that manner.
No objection on the part of the Open Market Committee was
indicated.
Mr. Coombs then commented briefly on developments in the
London gold market and responded to certain questions in that regard.
Thereupon, upon motion duly made
and seconded, the System transactions
in foreign currencies during the period
May 29 through June 18, 1962, were
approved, ratified, and confirmed.
It
was agreed that the next meeting of the Federal Open Market
Committee would be held on Tuesday, July 10, 1962.
The meeting then adjourned.
Assistant Secretary.
Cite this document
Federal Reserve (1962, June 18). FOMC Minutes. Fomc Minutes, Federal Reserve. https://whenthefedspeaks.com/doc/fomc_minutes_19620619
@misc{wtfs_fomc_minutes_19620619,
author = {Federal Reserve},
title = {FOMC Minutes},
year = {1962},
month = {Jun},
howpublished = {Fomc Minutes, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/fomc_minutes_19620619},
note = {Retrieved via When the Fed Speaks corpus}
}