FOMC Minutes
A meeting of the Federal Open Market Committee was held in
the offices of the Board of Governors of the Federal Reserve System
in Washington on Tuesday, October 23, 1962, at 9:30 a.m.
PRESENT:
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Martin, Chairman
Hayes, Vice Chairman
Balderston
Deming
Ellis
Fulton
King
Mills
Mitchell
Shepardson
Irons, Alternate for Mr. Bryan
Messrs. Bopp, Scanlon, and Clay, Alternate Members
of the Federal Open Market Committee
Messrs. Wayne, Shuford, and Swan, Presidents of the
Federal Reserve Banks of Richmond, St. Louis,
and San Francisco, respectively
Mr. Young, Secretary
Mr. Sherman, Assistant Secretary
Mr. Kenyon, Assistant Secretary
Mr. Hackley, General Counsel
Mr. Noyes, Economist
Messrs. Brandt, Brill, Furth, Garvy, Hickman,
Holland, Koch, and Parsons, 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. Harris, Coordinator of Defense Planning,
Board of Governors
Mr. Williams, Adviser, Division of Research and
Statistics, Board of Governors
Mr. Yager, Chief, Government Finance Section,
Division of Research and Statistics, Board
of Governors
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Messrs. Ratchford, Baughman, Jones, Tow,
and Green, Vice Presidents of the
Federal Reserve Banks of Richmond,
Chicago, St. Louis, Kansas City, and
Dallas, respectively
Mr. Lynn, Assistant Vice President, Federal
Reserve Bank of San Francisco
Mr. Anderson, Economic Adviser, Federal
Reserve Bank of Philadelphia
Mr. Eisenmenger, Acting Director of Research,
Federal Reserve Bank of Boston
Mr. Sternlight, Manager, Securities Depart
ment, Federal Reserve Bank of New York
Upon motion duly made and seconded,
and by unanimous vote, the minutes of the
meeting of the Federal Open Market Com
mittee held on October 2, 1962, were
approved.
During the evening preceding this meeting, the President of
the United States had announced a quarantine on the importation of
offensive military equipment into Cuba.
Thereafter, the condition
of readiness known as DEFCON 3 was placed in effect.
At the Chairman's request, Mr. Harris described the implica
tions in terms of the Federal Reserve System of DEFCON 3 being in
effect, along with the conditions that would exist should DEFCON 2
or DEFCON 1 be placed in effect.
He noted that the Federal Reserve
System, through previous actions, had achieved a state of readiness
generally equivalent to that anticipated in a DEFCON 3 situation.
In the present circumstances, he suggested that the Reserve Banks
might want to take advantage of the psychological climate to urge
10/23/62
commercial banks to initiate or improve their preparedness programs,
with particular emphasis on the programs of the larger banks and on
the duplication and positioning of vital records.
In response to a
question, he outlined the situation with respect to the availability
of currency supplies, indicating that in his opinion the supply of
Federal Reserve notes was adequate and satisfactorily distributed.
Mr. Hayes, speaking as Chairman of the Committee on Emergency
Operations of the Conference of Presidents of the Federal Reserve
Banks, expressed agreement with Mr. Harris that it would be desir
able to take steps to spur the commercial banks into progressing
with their defense preparedness programs.
He suggested that the
Committee on Emergency Operations might work out with Mr. Harris
a draft of letter that could be used by Federal Reserve Banks in
communicating with commercial banks in their respective districts.
Further discussion related to the conditions under which
it was contemplated that the emergency operations of the banking
system would go into effect, and the suggestion was made that it
would be desirable for all concerned to review and clarify in
their minds the steps that had been worked out in the area of
defense planning.
Mr. Harris then withdrew from the meeting.
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Chairman Martin explained that this meeting had been called
to convene at 9:30 a.m. as an experiment in the light of a suggestion
by one of the Committee members that it would be helpful if more time
could be available for the discussion of System foreign currency opera
tions.
This experiment had been decided upon before the occurence of
the present international crisis.
Chairman Martin then turned to Mr. Coombs for a review of the
latest information on foreign exchange market developments.
In his comments, Mr. Coombs reported advice received at the
Federal Reserve Bank of New York during the several hours up to the
time of this meeting with regard to developments in foreign exchange
markets and in the London gold market, such information being based
primarily on telephone
conversations with foreign central banks.
In the course of his remarks, he also referred to certain current
or contemplated U. S. Treasury operations in foreign currencies,
along with current and prospective changes in the level of the
U. S. gold stock and possible public reaction to the announcement
of balance of payments figures for the third quarter of this year.
In the light of the developments that he summarized, Mr. Coombs
outlined certain possibilities that he foresaw with respect to the
future course of Treasury and Federal Reserve foreign currency
operations.
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Turning more directly to specific System operations, Mr.
Coombs pointed out that the standby swap agreements with the Bank
of France and the German Federal Bank, each in the amount of $50
million, would mature on November 2, 1962.
It was his recommenda
tion that each of these agreements be renewed on a standby basis for
a three-month period on the same terms and conditions as the present
agreements.
Without objection, renewal of the stand
by swap agreements with the Bank of France and
the German Federal Bank, as recommended by Mr.
Coombs, was authorized.
Mr. Coombs stated that pursuant to the authorization given
at the Committee meeting on August 2, 1962, arrangements had been
completed with the Austrian National Bank for a $50 million three
month standby swap agreement on the usual terms and conditions.
If
a swap should be initiated by the Austrian National Bank, he felt
that the National Bank might want to give the Federal Reserve a
deposit facility with the Bank for International Settlements;
schilling balances would earn a return equal to the current U. S.
Treasury bill rate.
It would be agreeable to the Austrian National
Bank to make the standby swap agreement effective October 25, 1962.
If this was done, Mr. Coombs said, the Federal Reserve would make a
drawing promptly under the swap agreement to absorb surplus dollars
10/23/62
on the books of the Austrian National Bank.
He anticipated that the
Austrian National Bank would make gold purchases totaling around $30
million during the fourth quarter of this year and that it would then
make no further purchases until the latter part of next January.
In
his opinion the swap arrangement would be useful, and he recommended
its approval by the Open Market Committee.
Chairman Martin noted that, in accordance with the suggestion
made by Mr. Mitchell at the October 2 Committee meeting, the staff had
distributed a series of memoranda on recent economic developments in
several foreign countries, including a memorandum with respect to
Austria.
Other papers in the series related to the Netherlands,
Italy, and Japan.
After a brief general discussion of the type of information
developed by the staff memoranda, consideration of the proposed swap
agreement with the Austrian National Bank resumed.
In the course of the comments that ensued, a member of the
Committee observed that in the case of Austria a swap agreement was
being proposed essentially for the purpose of deferring purchases of
gold.
In the case of France, on the other hand, no use of a swap
arrangement for such purpose had been suggested.
Question was raised
as to the distinctions that might be drawn.
Mr. Coombs replied that the surplus position of France was
of such strength as to render the use of swap arrangements in the
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existing orders of magnitude futile.
In the case of Austria, the sur
plus was of much more modest proportions.
Further, the possibility of
utilizing swap arrangements was dependent on the attitude evidenced by
the central banks of particular foreign countries.
In the Austrian
case, indications had been given to the Federal Reserve that the
National Bank would be agreeable to stretching out contemplated
purchases of gold through the use of such an arrangement.
The French
had not indicated that they would be so disposed.
Thereupon, the proposed $50 million
standby swap agreement with the Austrian
National Bank, on the terms outlined by
Mr. Coombs, was approved unanimously.
Mr. Coombs reported that the Bank of Canada had indicated
that within the next few days it hoped to make a prepayment in the
amount of $125 million under its swap agreement with the Federal
Reserve System.
It also appeared that repayment of the remaining
$125 million before the maturity date of the swap agreement was
likely.
It was expected that the Bank of Canada would request, as
the swap was paid off, that the paid-off portion be put on a standby
basis.
No objection to such a procedure was indicated.
Inquiry was made, however, as to whether a $250 million stand
by swap agreement with the Bank of Canada would not appear out of line
with other similar agreements, such as, for example, the $50 million
agreements with the Bank of France and the Bank of England.
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Mr. Coombs expressed the hope that in due course larger stand
by swap arrangements could be worked out with the central banks of some
of the European countries.
He noted, however, that although the Canadian
economy was relatively small, a large volume of trade existed between the
United States and Canada.
There ensued a discussion during which Mr. Mitchell inquired
whether it would be possible to provide the Committee with an outline
of criteria according to which the appropriate size of swap facilities
might be appraised.
Mr. Coombs suggested that this had to be determined
largely through experience; as money flows went back and forth, it was
possible to make certain rough judgments as to the size of actual and
potential swings.
In his opinion, judgments would have to be formed
primarily on the basis of what had occurred.
After further comments
had been made along these lines, Mr. Young suggested that perhaps the
problem could be approached experimentally in an effort to suggest
certain tentative criteria.
Mr. Coombs pointed out by way of reserva
tion, however, that in practice any theoretical targets would not
necessarily be negotiable.
Mr. Hayes commented that in looking at
any prospective swap transaction, one obviously formed certain ideas
based on factors such as the size of the country concerned and its
relative importance in international payments.
There might be a
variety of theoretical criteria that could be put together as a
backstop to that kind of instinctive feeling.
Nevertheless, many
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other factors would have to be evaluated in the light of circumstances
as they actually developed.
Mr. Mitchell then explained further the
basis of his inquiry by saying that he was not proposing to restrict
the element of judgment.
ble underlying basis.
However, a judgment should have some tangi
In reaching a judgment on the appropriate size
of swap facilities from one country to another, it would appear that
there should be some quantitative evidence that would be helpful.
At the conclusion of this exchange of comments, Chairman Martin
suggested that the staff continue its work to improve the documentation
available to the Committee.
Papers such as had been distributed prior
to this meeting constituted a first step.
At the same time, the
Committee should not lose sight of the fact that the program of
foreign currency operations was still experimental in nature.
Mr. Mills made the comment at this point that the System was
moving continually into more substantial transactions in foreign
currencies.
He assumed that the Presidents of the Federal Reserve
Banks would want to be giving consideration to the maximum amount
of foreign currency assets that it would seem appropriate to put
on the books of the Reserve Banks.
The Chairman then inquired whether there were any further
comments with regard to System foreign currency operations or re
lated matters, and none were heard.
10/23/62
-10-
Thereupon, upon motion duly made and
seconded, and by unanimous vote, the Sys
tem operations in foreign currencies during
the period October 2 through October 22,
1962, were approved, ratified, and confirmed.
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 October 2 through October 17,
1962, and a supplementary report covering the period October 18 through
October 22, 1962.
Copies of both reports have been placed in the files
of the Committee.
At the request of the Chairman, Mr. Stone commented on the
latest reports that had come to him regarding the Government securities
market.
In general, although the underlying atmosphere was one of
caution and nervousness, it appeared that the market was reacting
rather calmly to overnight developments.
While some selling was
expected this morning, he did not look for any avalanche of selling
to develop in the absence of a violent Soviet reaction to the Presi
dent's announcement.
If there should be such a reaction, the attitude
of the market could, of course, change almost instantaneously.
Mr. Stone also commented that market attention was focused
particularly on the $250 million American Telephone and Telegraph
issue.
The bidding for this issue had been scheduled for later
this morning.
According to present plans, the financing was to
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take place as scheduled.
Whether it would take place would depend
in good part on the extent of dropouts from the syndicates that had
been formed.
Secretary's Note:
It was reported later
in the meeting that the financing had
taken place as scheduled.
In supplementation of the written reports that had been
distributed to the Committee, Mr. Stone then commented further as
follows:
Since the last meeting of this Committee, the money
market has maintained the same steady tone that has been
characteristic of the past few months. Federal funds have
traded in a narrow range of 2-3/4 to 3 per cent, and in
deed, in the last two days, as if to underline the narrow
ness of that range, most of the trading was at 2-7/8 per
cent. Member bank borrowing has been generally moderate,
as there was a good flow of Federal funds to the money
centers even when the funds rate held at 3 per cent for
several days running.
Also, as in previous recent periods, there has been
continuing downward pressure on short-term interest rates,
and recently it has been, if anything, more difficult to
cushion those downward pressures. This difficulty may be
accentuated further if, as seems likely, the overnight
developments with respect to the Cuban situation cause
people to want to hold the shortest-term instruments
while waiting out these new uncertainties. The three
month Treasury bill rate, which was 2.73 per cent (bid)
yesterday, was just the same as three weeks earlier,
but the six-month and one-year rates, and other short-term
rates, have all moved down in the interim. This has
added to the difficulty of avoiding a drop in the three
month area. Seasonally, we should not be getting into
a period of additional liquidity needs in the private
economy and some accompanying rate increases for bills;
given the sluggishness in the economy, however, which
is still at a high enough level so that corporations
are continuing to build liquidity, it may be increasing
ly difficult to restrain the downward pressures on the
short-term rate structure.
10/23/62
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One factor that should help in that direction, of
course, is the reduction in prospective System buying
resulting from the Board's action last week to reduce
the reserve requirement against time and savings deposits.
The initial market impact of that move has been in the
direction of lower bill rates, however, since it has been
widely interpreted in the market, if not as a significant
move toward ease, then at least as indicative of a slight
leaning in the direction of an easier policy. Other mar
ket observers take the Board's statement at face value
and regard the move mainly as a substitute for open market
purchases in supplying seasonal reserve needs, but there
is still a lack of real conviction in these views, and
the market is looking to System actions in the period
ahead for some signal as to the policy significance of
the reserve requirement move.
The required reserves reduction also had a bullish
impact on the bond markets, capping a period of firmness
in those markets that has been based on increased doubts
about the domestic economy and improved confidence in
the dollar despite the fact that an uncomfortable feeling
about what the third quarter balance of payments figures
will show is beginning to seep into the market. Even
after yesterday's price declines, which took place in a
thin market as the country awaited the President's message
last evening, Treasury bond prices were up nearly 3/4 of
a point since October 1.
The bond market is currently giving attention to a
number of topics aside from day-to-day price movements.
The paramount one is, of course, the President's action
of last night. Another is the Treasury's plan to auction
$250 million long-term bonds, which was the subject of a
very well attended public meeting at the Federal Reserve
Bank of New York last week; a number of important ques
tions relating to marketing technique are still unre
solved with respect to that offering, and these will
have to be resolved in the next few weeks. Another
topic of intensive market discussion is the terms of
the Treasury's November refinancing operation, in which
over $7 billion November maturities and possibly nearly
$4 billion December issues are to be refunded. The
Treasury is meeting with its advisory groups this week
and is expected to announce its terms later in the week.
Of course, the overnight developments will considerably
complicate the Treasury's decisions on this refinancing.
10/23/62
-13There followed a discussion relating generally to the reaction
to the recently announced reduction in reserves required to be main
tained against time and savings deposits.
In reply to questions, Mr.
Stone said there was still some tendency in the market to await a
signal regarding the policy implication of the reserve requirement
reduction.
While the Desk had given something of a signal last Friday,
and to a lesser extent yesterday, the market was still undecided as to
whether the move represented some slight change of policy in the direc
tion of greater ease or whether the Board's press statement was to be
taken at face value.
It was pointed out also that the market was aware
that a meeting of the Open Market Committee was being held today.
As
to the need for System open market operations in the light of that
action, Mr. Stone said the reserve estimates seemed to indicate that
relatively little in the way of such operations would be required during
the coming three weeks.
It might be necessary to absorb some reserves
temporarily in the week of October 31, but over the period as a whole
the reserve requirement action should about match reserve needs.
Asked
for an estimate on reserves released at country banks that would not
filter into the money centers, Mr. Stone said it was extremely difficult
to quantify.
However, the Desk would be prepared to deal with the market
situation that would develop out of any significant "leakage."
In reply to an inquiry as to whether it seemed necessary to
offset float fluctuations too precisely, Mr. Stone said the Account
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Management had been placing particular emphasis on the color, tone,
and feel of the market, with the result that free reserves had been
permitted to move in a rather wide range.
It was his judgment that
over the past several months a level of free reserves anywhere within
the range of $350-$500 million had been compatible, depending on the
particular circumstances, with the over-riding objective of maintain
ing the color, tone, and feel of the market.
The precise level at
which free reserves might fall within that range would depend on how
reserves were distributed, the vigor with which the economy employed
them, and their composition. All of these elements were reflected in
the color, tone, and feel of the market, which was the primary factor
to which the Desk had been giving consideration.
He was quite content
to let the precise level of free reserves fall where it might, as long
as he observed the wishes of the Committee with regard to maintaining
the color, tone, and feel of the market.
In reply to a question about conditions over the next couple
of weeks that would be regarded by the market as a signal that the
Board's statement on the reserve requirement action was to be taken
at face value, Mr. Stone commented that if the Federal funds rate,
for example, continued within the general range of the past several
months and if the bill rate did not move down too much below present
levels, this would indicate to the market that the reserve requirement
action was not intended to signal a shift toward a policy of greater
10/23/62
ease.
-15-
If, under present conditions, there should be a rush toward
short-term securities leading to a moderately lower bill rate, but
if the Federal funds rate and free reserves continued in their pre
vailing ranges, the market would read into this that there had been
no change in monetary policy.
On the other hand, if the Federal
funds rate should move below 2-1/2 per cent and stay there, that
might be taken as confirmation of the recent headlines which suggested
that there had been a change in policy.
Question was raised as to the Desk's views regarding the need
for offsetting day-to-day fluctuations in free reserves, within the
general framework of maintaining the tone, color, and feel of the
market, and Mr. Stone commented that it was difficult to appraise
this kind of situation in advance.
A daily inflow of funds to the
central money market might be anticipated by the market.
Whether
the Desk would take any offsetting action would depend on the force
of the inflow and its effects.
If the bill rate and the Federal
funds rate should decline modestly that would not bother him, but
if the movement threatened to go further the Desk might have to
take action.
It might sell short-term bills, and if necessary
resort to short repurchase agreements.
If the weekly average
free reserve figure should go as high as $600 million, he would
anticipate a general market reaction that the Federal Reserve was
signaling a change in monetary policy.
10/23/62
-16-
Thereupon, upon motion duly
seconded, and by unanimous vote,
market transactions in Goverrnment
ties during the period October 2
October 22, 1962, were approved,
and confirmed.
made and
the open
securi
through
ratified,
Mr. Noyes presented the following statement on economic
developments:
In any analysis of the current economic situation,
it would be foolhardy to try to abstract completely from
the President's announcements of last evening and the
very limited developments since then, some of which Mr.
Coombs and Mr. Stone had mentioned.
On the other hand,
it is impossible to make any realistic appraisal of the
economic forces which may flow from the political actions
and military operations that lie ahead. Immediately, and
perhaps for some time to come, the principal economic
effect in the United States will be psychological. Not
only is the magnitude of this effect indeterminable, even
the direction is uncertain. There might be an increasing
tendency on the part of the public--both consumers and
business--to move generally in the direction of greater
liquidity.
On the other hand, there may be some tendency
to accelerate buying, both on the part of businesses and
individuals. The most likely possibility is that both of
these things will be going on at the same time--some indi
viduals moving one way and some the other. Hence, with
all of the qualifications that this additional element
of uncertainty demands, let me summarize briefly my
observations as to the basic economic situation as it
appeared at the close of business yesterday.
A number of things, coming together, had prompted
me to attempt a somewhat more fundamental reappraisal
of the economic situation than usual. Least important
is simply the fact that it has been over two months
since I have been personally responsible for this por
tion of the briefing. More important, we now have a
fairly good idea of what happened in the third quarter.
Most important, of course, we have abundant evidence
that a reappraisal of the outlook has been under way
in many quarters. A notable example is the meeting
of the Business Council, at which a projection prepared
by the technical staff was presented showing a small
rise in GNP in the current quarter and a very small
decline in the first two quarters of next year.
10/23/62
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In the light of what was being thought and said about
the behavior of the economy by responsible people, it seemed
to me most reasonable to start with the presumption that the
economy was at or near an upper turning point, and to test
this hypothesis against the statistical data and other fac
tual information available. My conclusion was that this
hypothesis did not stand up very well under scrutiny. The
strongest argument in favor of it seemed to be simply that
it is now over a year and a half since business turned up
and that we are therefore in a period when, on the basis
of previous cyclical experience, we might look for a down
turn. I found ample evidence that the expansion had been
proceeding very slowly, that the rate of increase had
declined, that a somewhat larger, rather than smaller, pro
potion of our labor force was fruitfully employed, and
we had made no real progress in the fuller utilization
our physical resources. But the positive evidence one
seek to support the conclusion that there had been, or
about to be, a literal decline was notably absent.
that
of
would
was
In
fact, the more reasonable presumption seemed to me to be
that technical factors favored some increase in GNP in
the current quarter, and perhaps even a little more than
in the quarter just past, especially if the very favorable
reception accorded the 1963 model automobiles carried for
ward. This is not to say that there are not real elements
of weakness and declines of some magnitude in some sectors,
such as the 15 per cent drop in housing starts in September.
Furthermore, the results of recent surveys of buying in
tentions have not been encouraging. If one takes them
literally, they suggest that the underlying demand for
autos and other durables, pre-quarantine, was rather weak.
However, most current data, such as the index of industrial
production, showed a sidewise movement, and there is a con
tinuing upcreep in the less volatile sectors of the economy.
It would be absolutely futile for me to speculate as to
the course of events in coming days and weeks. As I indicated
at the outset, my guess is that until the situation unfolds
further the psychological impacts will tend to offset one
another to a large extent. Hence, it seems to me that the
most reasonable underlying economic assumption on which to
proceed is that we are still dealing with a balanced eco
nomic situation--with a tenuous edge in favor of continued
very moderate expansion in the period immediately ahead.
Beyond that, it is evident that whatever value the fore
casts and projections prepared to date may have had, they
are now obsolete.
10/23/62
-18-
Mr. Brill presented the following statement on financial develop
ments:
With financial markets shaken by two jolts--first the
unexpected reduction in reserve requirements and most re
cently the Cuban crisis--it is exceptionally difficult to
bring basic market forces into focus. Over the week end
it appeared that the first of these jolts, the reserve
requirement reduction, was being put into better perspec
tive as some financial commentators began a reappraisal
of their initial rather flamboyant interpretations. It
is too early to say how markets will respond to the inter
national crisis, although Mr. Stone's comments are reassur
ing. Our capabilities for dealing with unreasoning waves
of hoarding of goods or of cash may still be tested. So,
too, may be our capabilities and plans for dealing with
even graver situations. The necessity of reviewing pro
cedures for meeting a wide range of alternative develop
ments is obvious.
It is not necessarily "ostrich-like" to assume as one
alternative, however, that a decade and a half of cold war
crises has blunted the impact of the present crisis, and
that unless hostilities actually develop, financial mar
kets may, after an initial flurry, again respond principally
to the same kinds of supply and demand tugs that were shaping
interest rates in recent months. In the absence of clues as
to how the country is rising to its latest challenge, we
cannot afford to ignore the nature of current financial
demand and supply forces other than those that may be
introduced by the Cuban situations.
The current situation must be assessed first in the
perspective of recent developments. As Mr. Noyes has
already indicated, the performance of the economy during
the summer and early fall was far from satisfactory. To
what extent did interest rate developments reflect this?
Short-term rates fell by about one-quarter of a point
over the July-August period, and levelled off at 2-3/4
per cent throughout September. Long rates clung to
their higher midyear levels through most of August, but
slipped in September to about an eighth of a point or
more below July averages.
Was this the order of adjustment that one might have
expected in light of fund demands and supplies? I think
not. Still crude estimates of the flow of borrowing and
the flow of saving for this period suggest to me that, by
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and large, it was skillfully handled operations by the
Treasury and the System that kept the rate decline within
such narrow boundaries. Evidence to support this view is
still only partial, but the magnitude of the figures avail
able is impressive.
The volume of long-term saving flowing
through institutions reached exceptional proportions.
If
we sum the inflows to savings banks, savings and loan insti
tutions, life insurance companies, and pension plans along
with the growth of time and savings deposits at commercial
banks, the total funds available for long-term investment
in the third quarter rose by much more than did borrowing
demands.
Corporate and municipal financing in the capital
markets fell off substantially, and was offset only in
part by maintenance of a high volume of mortgage borrowing
and a moving of a moderate amount of the Federal debt into
the longer term area in mid-summer.
In the shorter term area, business loan demand has been
erratic, but recently has shown more strength than earlier
in the year. This may well have been accounted for by two
factors: an apparent move toward interim bank financing by
public utilities in expectation of declining long-term mar
ket yields, and a bunching-up of bank borrowing in the
metals industry--probably the automobile and auto supplier
group, where there was a greater concentration in time of
model changeover than had been true for several years.
On balance, however, business financial operations
were tending to depress short-term rates in the third
quarter. For example, normal rates of provision for
corporate income taxes would have meant net sales of
Government securities by corporations of over $1 billion
in this period, whereas we currently estimate that the
corporate sector was a net buyer of perhaps as much as
half a billion dollars of Governments in the July-September
period. Further, Treasury operations plus the passage of
time, which had added almost $5 billion to the available
supply of short-term instruments in July and August, re
moved over $8 billion in September. To have kept short
rates to a decline of only 1/4 of a point in July and
August and to have kept them virtually constant in
September under these demand and supply pressures was
quite a feat, and I conclude that it reflected largely
the market's own assumption that we would have operated
more vigorously to counter any further downward pressures.
How long rate levels could have been maintained under
these conditions is anyone's guess.
It is doubtful that
they could have long withstood increasingly widespread
10/23/62
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expectations of imminent economic downturn, or the increas
ing supplies of investment funds that would have been gene
rated even if a downturn was averted before year-end. For
example, a rough estimate of corporate sources and uses as
they might appear under conditions of moderately rising GNP
suggests that corporate funds available for liquid asset
accumulation in the fourth quarter of the year would be
even greater than in the third. Savings flows to institu
tions, moreover, which have shown no signs of abating,
would likely continue to grow at least at the pace of
recent months. With the availability of corporate funds
and institutional saving so large, and prospective in
creases in credit demands so moderate, it seems likely that
downward pressure on the rate structure would have intensified.
There is no point in pursuing "would-have-beens" while
the international situation and the economy's response is in
such doubt. Nevertheless, it is important to keep in mind
that the economy entered this latest crisis period with
ample liquidity and ample unused productive capacity, and
with no inflationary psychology evident in either goods or
financial markets. We may be confronted with a temporary
senseless stampede for goods or for currency, and either
could be accompanied by disorderly conditions in markets
for U.S. Government securities. We must also continue to
be prepared for a situation that seems happier only in
contract, namely, an economy moving ahead very slowly in
a more or less orderly fashion toward an upper turning
point in domestic activity, with its balance of payments
problem far from resolved.
Mr. Furth presented the following statement on the U.S. balance
of payments and related matters:
Our balance of payments has become more and more dis
appointing, and recent international developments are
unlikely to improve it.
Transfers of gold and convertible
currencies to foreigners were lower in September than in
August, but increased greatly during the first half of
October.
Even in the absence of further unfavorable develop
ments, total transfers in 1962, adjusted for extraordinary
receipts, may well exceed thesimilarly adjusted 1961 figure
of $3 billion, although statistical manipulations will pro
bably bring the officially announed figure below the official
1961 figure of $2-1/2 billion.
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Net gold sales were small in September, and as Mr. Coombs
has reported, will probably remain so in October; but only,
first, because a very large part of our deficit has been with
Canada, which traditionally keeps a large part of its reserves
in dollars rather than in gold; and second, because of the
Treasury and Federal Reserve operations mentioned by Mr. Coombs.
These operations, of course, serve to delay the depletion of
our gold stock but will not avert it unless present trends
are soon reversed.
The reason for our disappointed payments balance may be
found primarily in two factors:
First, our exports have declined, contrary to expecta
tions, so that our export surplus now is probably at its
lowest level since early 1960.
Second, the flow of funds to Canada has not only con
tinued but increased. The rise in Canadian reserves during
the first three weeks of October (nearly $300 million) was
larger than for any entire month since the stabilization of
the Canadian dollar. But $125 million of that sum represents
a Canadian government debt transaction, and another $100
million the share transaction of a large oil company. More
over, no further outflow to Canada has been reported for the
past few days.
As to developments abroad, there is growing concern
about prospects for continuing boom in Europe. This concern
has been reflected in a serious decline in German stock prices
and weakness on other Continental European exchanges. If this
concern should prove justified, the development would threaten
our exports not only to Europe but also to less developed areas,
whose foreign exchange receipts largely depend on their trade
with Europe. Our exports to Japan and Canada, which have
declined recently, will probably recover, in line with the
stabilization of the foreign exchange situation of these
countries. But this increase would certainly be insufficient
to compensate for any serious drop in our exports to the rest
of the world.
There is little chance of any significant reduction in
our aid expenditures and, particularly under present circum
stances, no certainty, to say the least, that we shall be
able to negotiate further substantial reductions in the net
burden of our military expenditures abroad.
Our main hope of improvement in our balance of payments
in the foreseeable future--now less foreseeable than evermust rest on a decline in our net capital outflow. In recent
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months, there has been neither a significant movement of
money market funds nor any exceptionally large bank lend
ing to, or market issues of, foreigners. But outflows of
investment funds, especially to Europe, have apparently
continued at a high level, and outflows to Canada have
resumed.
It is true that the end of the boom in Europe would
tend to diminish the outflow to that area, but we cannot
be certain that even in a favorable international climate
market forces by themselves will work rapidly enough to
make for a significant improvement in our total balance
in 1963.
The highly complicated provisions of the rax reform
bill just enacted may have removed some of the tax incen
tives for investment abroad. Also, the bill abolishing
interest ceilings on time deposits of foreign monetary
authorities is supposed to attract some foreign funds.
The First National City Bank has just announced the
rates it intends to pay for such funds; they range from
2-3/4 per cent for 30 days to 3-3/8 per cent for one year.
The rates for deposits up to six months are higher but
those for longer terms remain lower than the rates per
missible under Regulation Q, and all quotations are
considerably below prevailing rates for Euro-dollar
deposits. It is unlikely that significant amounts of
foreign funds will be attracted in this way.
Mr. Hayes presented the following statement of his views on
the economic situation and monetary policy:
My thoughts as to policy for the next three weeks
had pretty well crystallized before the President had
spoken and the general outlines of the current national
crisis had become visible. However, I see no reason to
change my comments materially, as I had arrived at the
conclusion that the status quo which this Committee ad
vocated at the last meeting should still be our objec
tive. The possible ramifications and long-run conse
quences of our new national policy with respect to Cuba
are far too nebulous and unpredictable today to justify
any probing conclusions. We must, I believe, simply
wait and see, preserving maximum flexibility to reduce
or increase the existing degree of monetary ease in the
light of future developments.
The evidence available in the past three weeks
suggests nothing better than a sidewise movement in
the domestic economy.
This is at best only a slight
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improvement over the downward tilt implied by August indica
tors. The fact that another month has dragged by with no
suggestion of renewed strength is probably more a reason for
pessimism than for optimism, especially in view of the longer
run employment problems reflecting the growing population.
But although it is natural to find that questions are arising
more and more frequently as to whether the economy is on the
verge of a downturn, there is as yet little positive evidence
in support of such a prospect for the near future.
As to the credit picture, data on total bank credit, and
especially on business loans, looked surprisingly strong in
September. While there has been no follow-through so far in
October, we have found New York bank lending officers some
what more optimistic on prospective loan volume than they
were. One possible explanation may be that corporate
borrowers are tending to borrow from the banks on a tempo
rary basis instead of going to the capital markets, because
of expectations of a downward trend of long-term interest
rates. Certainly the recent tendencies in the capital
markets might well lend support to such expectations.
Both long-term and short-term rates are well below the
levels of mid-summer; and I was interested to note the
other day the compression that has been occurring in bill
rates, with the one-year bill, for example, 37 basis points
below the summer level, whereas the 90-day bill rate is down
only 25 basis points. The 90-day and 6-month bill yields are
now only about 9 basis points apart.
I was very favorably impressed by the recent exchange
of well-thought-out memoranda between Mr. Koch and Mr. Stern
light on the extent to which we should ignore or take into
account the recent unusually high level of U.S. Government
deposits in appraising the trend of required reserves and
the money supply. Regardless of the merits of their
respective points of view, however, it looks as if actual
reserves are now running close to the Board's guidelines
for the first time in several months in spite of a further
build-up of Government deposits. Our contacts with the
financial community as well as various measures of bank
and nonbank liquidity suggest to me that we need have no
fear that the economy's liquidity is anything but adequate.
Meanwhile, we can find no comfort in the latest balance
of payments data, which confirm a substantial deterioration
in the third quarter, whether we consider the over-all
deficit or the so-called "basic deficit" excluding special
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10/23/62
transactions and short-term capital movements. Particu
larly disturbing is the evidence that a part of this
deterioration is traceable to a shrunken balance of
merchandise trade.
The net capital outflow on private
account continues large.
Release of the third-quarter
balance of payments figures, scheduled officially for
mid-November, but subject perhaps to some earlier un
official leaks, may well revive fears as to the dollar's
position and may generate new pressures for gold outflow-
especially if the world military and political siguation
should become even more strained than it is now.
With the Treasury expected to announce the terms of
its refunding offer later this week, our determination
of policy today must take this factor into consideration.
But there is another very strong reason for advocating a
status quo policy. The Board's action in reducing reserve
requirements against time deposits was interpreted in many
quarters as a policy move towards greater ease, even
though a careful reading of the official press release
should have made clear the real nature of the move. For
tunately, second thoughts in the press appear to be more
cautious than the initial reaction--and from the longer
term point of view the Board's action should of course
be of considerable benefit by bringing about a more
appropriate level of requirements for time deposits.
It should also fulfill its purpose of helping our
efforts this autumn to sustain the level of short-term
rates by enabling us to avoid open market purchases that
would otherwise have been required. But these benefits
could be outweighed by the risks if the market is encour
aged to interpret the requirement reduction as a signifi
cant change in monetary policy. And the beat way to
prevent such misinterpretation is simply to convince the
market, through our open market performance, that there
has been no change. Thus I would hope that the Committee
would decide to preserve about the same feel of the market
as prevailed from the time of the last meeting until last
Thursday's announcement, with continued close attention
to short-term rates. In the light of present high corporate
liquidity and resulting heavy demands for short-term invest
ments, it may well be that some moderate decline in free
reserves will be needed to preserve a sufficiently firm
money market atmosphere.
I would merely like to add one comment with respect
to open market operations. The Committee has always been
willing to give the Manager the reasonable leeway he needs
to meet unpredictable changes in market atmosphere. I would
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10/23/62
hope the Committee would be particularly charitable in this
respect in the present very difficult set of circumstances.
While I can see no justification for a discount rate
increase under present conditions, I also believe that any
reduction should be considered out of the question. A
reduction, by confirming all the rampant suspicions as to
the policy implications of the recent reserve requirements
move, might well trigger a serious loss of confidence in
the dollar.
The directive should probably be amended to indicate
recognition of the national emergency, but the basic policy
embodied in the directive should be left untouched.
As I said at the last meeting, the present combination
of domestic and international needs suggests strongly the
wisdom of a vigorous stimulating move in the fiscal area in
the form of a substantial balanced tax reduction as soon as
this can be practically arranged, unless it is precluded by
further critical developments in the international military
and political situation. I am not qualified to suggest pre
cisely how large it should be, or what form it should take;
but our calculations would indicate that a gross tax cut of,
say, $7 billion, made up of a $5 billion reduction in per
sonal income taxes and a $2 billion reduction in corporate
taxes, both effective January 1, might increase the prospec
tive Federal cash deficit in fiscal 1963 by only around
$2-1/2 billion--a cost which could be readily borne in
view of our unused resources and would seem well worth
paying, particularly when one reflects on the substantially
improved position in which monetary policy would find itself
if this were done.
Mr. Ellis said a variety of offsetting pluses and minuses in
New England balanced out to suggest that the economic advance which
had been slowing down over the past few months, had now come to a
halt.
The September index of retail sales was off a point from
August, while department stores sales for the past four weeks were
2 per cent below the previous year.
During the most recent three
months, construction awards were down about 4 per cent in spite of
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a 22 per cent gain in the public works component.
Data on manufac
turing output in September were not yet available, but available
reports suggested less favorable order trends in that month.
Except for a two-week span in September, demand deposits of
First District banks showed a declining trend since July.
District
banks were net borrowers of Federal funds over most of this period.
Business loans had declined a little less than might be expected at
this time of year.
As a result, loan-deposit ratios held close to
the recent peak.
Mr. Ellis noted that it was difficult to foresee at this time
the impact on the economy of actions that might ensue from the announce
ment made last evening by the President.
His first reaction, however,
was to conclude that a tax reduction in 1963 was now improbable in view
of the atmosphere that seemed likely to prevail.
He agreed with the
view that the Presidential announcement was likely to have offsetting
psychological effects in terms of spending.
Yet he would not be too
surprised to see some trend develop, and he anticipated that it would
be stimulating to business.
In his judgment, the outlook for credit
demands had been strengthened rather than weakened as a result of the
announcement.
When it came to the proper course of monetary policy in these
circumstances, Mr. Ellis found that his sentiments were similar to those
expressed by Mr. Hayes.
While the economy had weakened recently, neither
10/23/62
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the cause of that weakening nor the solution seemed to be found in
monetary action.
In fact, looking at the statistics, it appeared that
the response to monetary policy had been quite satisfactory in recent
weeks.
According to preliminary data, the gain in the money supply in
the first half of October seemed to have been quite substantial, while
time and savings deposits continued to increase at an annual rate of
around 15 per cent.
In view of the apparent economic response to
monetary policy in recent weeks, it occurred to him that the need for
monetary action at this time was not urgent.
costs of not acting did not seem pressing.
By the same token, the
There did not appear to
be any extensive volume of unsatisfied credit needs that would be
met if a policy of greater monetary ease were adopted.
Further, the
balance of payments data for the third quarter, when released, would
not be reassuring.
For this reason, he would delay any deliberate
probing toward lower short-term interest rates, although a lowering
of such rates might be forced to some modest degree by existing
pressures.
In summary, Mr. Ellis concluded that the need for immediate
monetary action was not urgent.
The costs of inaction did not seem
excessive, while the possible costs of a policy of greater ease were
excessive.
Accordingly, he would prefer to continue the current course
of monetary policy.
However, there might still be some question as to
the measurement of the current course of policy.
As a participant in
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10/23/62
the daily open market telephone calls during the past three weeks, he
had been impressed that the level of free reserves was not an adequate
In his opinion the Desk
measure of the impact of current policy.
should continue to emphasize the maintenance of prevailing market con
ditions in terms of tone, color, and feel.
were needed.
Nevertheless, some targets
In order to let the market understand the System's desire
to avoid any inadvertent tightness, he would stand ready to supply
reserves along a 3 per cent growth guideline.
He would like to see
the bill rate and the Federal funds rate continue in the ranges that
had recently prevailed, with infrequent borrowing at the Federal Reserve
Banks and free reserves around $400-$450 million.
Mr. Ellis also expressed the view that it would seem appropriate
to continue the present discount rate.
He concurred in Mr. Hayes' sugges
tion that the policy directive should be modified to recognize the impact
of the changed international situation.
Also, if the directive were
changed, he would renew the suggestion he had made at the October 2
meeting for a modification of the language of the first paragraph to
eliminate what he considered the implication of a grudging attitude
toward expansion of the supply of bank credit and money.
Mr. Irons reported that in the Eleventh District there had been
a number of minor and mixed changes during the past three weeks.
In
the aggregate, however, they did not provide any indication of signi
ficant change in the economic trend or the level of activity.
Depart
ment store sales were a bit better during the past three weeks than a
10/23/62
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month earlier.
Employment was up and unemployment was off a bit.
On
an unadjusted basis, unemployment in Texas was at the rate of 4.7 per
cent.
Construction activity rose to a new record level in the past
month, while conditions in agriculture looked quite good.
For the
year as a whole, cash receipts from farm marketings probably would
be up satisfactorily.
Mixed figures also were found in the District banking situation,
Mr. Irons said.
were up.
Loans were down a bit, but investments and deposits
There had been a rather substantial decline in IPC deposits,
but time deposits continued to rise.
During the past three weeks
there had been an increase in the margin of Federal funds purchased
over Federal funds sold, but the purchases were concentrated in a
few banks.
Borrowings from the Federal Reserve Bank were nominal.
Bankers claimed that their institutions were adequately liquid and
that they were in a position to meet loan demands.
However, a few
officers of larger banks had complained about the type of loan demand,
by which they referred to the prevalence of demand for longer-term and
marginal-type loans.
Turning to policy considerations, Mr. Irons said that in view
of unsettled world conditions, the forthcoming Treasury refinancing,
and the recent reserve requirement reduction, this would seem to him
the wrong time for any overt policy move.
Within the framework of
existing policy, however, he felt that considerable leeway should be
10/23/62
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given to the Desk in terms of its judgment as to the tone, feel, and
color of the market.
He suggested that the Desk might be a little
more reluctant to absorb excess reserves on a daily basis.
In other
words, within the framework of a status quo position, he would prefer
to be reluctant to absorb reserves actively rather than to veer on the
other side.
This posture could be described as one of permitting de
viations on the side of ease for a few days, as contrasted with soaking
up reserves actively.
This might be particularly important while the
results of the recent reserve requirement change were working themselves
out.
Mr. Irons went on to say that he did not have any statistical
standards to suggest that he thought would be particularly valuable
at this time.
As he had said, he believed the Committee should give
the Desk an opportunity to judge the tone of the market.
Also, he
would bear in mind the objectives that the Committee had been pursuing.
These included trying to provide an adequate availability of reserves
to meet whatever demands the economy might have for credit, while at
the same time keeping an eye on the international situation and
endeavoring to maintain a level of short-term rates that would dis
courage an outward flow of funds.
He would not be concerned about
the level of free reserves, whether $400 million or $500 million, as
long as the tone of the market seemed to be consistent with the
Committee's objectives.
In short, for the period ahead, he came out
10/23/62
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with more or less a maintenance of the status quo.
be required by the situation that had developed.
This appeared to
If there were
deviations, however, he would be inclined to go very moderately on
the side of greater ease rather than on the other side.
He would
not recommend changing the discount rate at this time.
With regard to the policy directive, Mr. Irons indicated that
he would not object too strongly if the Committee wanted to include
some phrase in recognition of the international situation.
Other
than to identify that situation, however, he did not know what the
Committee would accomplish.
For the moment, therefore, his inclination
would be to let the directive stand and see what occurred.
Mr. Swan reported that Twelfth District figures for September
showed little change from August.
Generally speaking, there seemed
to be a continuation of what was on the whole a favorable situation
in the area.
Total employment in the Pacific Coast States, on a
seasonally adjusted basis, rose .3 of a point from August to September,
this being the third successive month-to-month increase.
However, the
increase in employment was more than offset by a decline in unemployment
of less than seasonal proportions.
Accordingly, the unemployment rate,
seasonally adjusted, increased .1 of a point from August to September.
Construction contract awards rose from July to August.
The only avail
able September figures--those for heavy engineering construction con
tracts--showed a decline from August.
Cash receipts from farm marketings
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through August were up slightly from the previous year, but the last
quarter of the year would be important and what would happen remained
to be seen.
Inclement weather had had some adverse effect on har
vesting, particularly of tomatoes, grapes, and rice, and floods in
Arizona apparently were going to reduce the cotton crop rather signifi
cantly.
In early August, there was a reduction of the price of steel
mill products, averaging about $12 a ton, which probably wiped out most
of the regional price differential.
Apparently, this resulted from the
pressure of imports and the fact that Western steel mills had been
operating at substantially less than capacity.
The net result would
be cheaper steel prices in southern California, and probably in the
San Francisco area, but it was not clear exactly what kind of geo
graphical pattern for the entire Western area would emerge.
This
uncertainty probably had contributed to a decline in steel production
in the first two weeks of October.
In the three weeks ended October 10, Twelfth District reporting
banks showed a decline in investments considerably larger than the
moderate loan increase.
The rate of increase in commercial and
industrial loans slowed down during this period; in fact, there was
a decline during the week ended October 10.
again appeared in real estate loans.
The largest increase
Due to the heavy concentration
of time and savings deposits at Twelfth District banks--running about
50 per cent of total deposits--there was marked interest in the
10/23/62
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reduction of the reserve requirement against time deposits.
Actually,
District member banks held about 22 per cent of the total time deposits
of member banks.
In view of the branch banking systems prevalent in
the District, over 85 per cent of the total reduction in reserve re
quirements would go to reserve city banks, against an over-all figure
for the nation of around 55 per cent.
This implied that the released
reserves would be likely to come into the money market quite promptly
if other avenues for their use did not appear.
Mr. Swan also reported that the major Twelfth District banks,
as a group, were still net sellers of Federal funds.
This reflected
primarily the choice on the part of the largest District bank to use
the Federal funds market in preference to the bill market.
With regard to policy, Mr. Swan expressed the view that the
uncertainties presented by the international situation, and in par
ticular the Cuban crisis, ruled out doing anything at the moment
except to maintain as even a keel as possible.
Also, it seemed
to him that, apart from international considerations, this would be
required in the immediate future because of the forthcoming Treasury
refunding.
In terms of the attitude of the Desk toward day-to-day
reserve fluctuations, however, he agreed with Mr. Irons that it
would be better not to try to absorb excess reserves completely
than to lean too far in the other direction.
10/23/62
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After stating that he would not recommend changing the dis
count rate at this time, Mr. Swan turned to the policy directive and
suggested that for the moment it might be couched in terms of stating
simply that in view of the uncertainties engendered by the international
situation and the imminence of the Treasury refunding, the Open Market
Committee would make no change in monetary policy, endeavoring to main
tain an even keel while awaiting further developments.
Then, if the
situation should become clearer, the Committee would be in a position
to start over again and consider how to build up a new directive.
Mr. Deming reported that a number of Ninth District statistics
could be summed up as indicating that the District was continuing to
operate closer to capacity levels than the nation.
Also, the course
of economic advance in the District continued to be somewhat stronger
than throughout the nation generally.
In September, city banks in
the District recorded the strongest loan expansion that had occurred
in any September since 1950; at country banks, the record was the
strongest of any September since 1955.
seem to be quite as strong.
In October the trend did not
At city banks, however, loans were up
slightly whereas they usually decline during this period.
The
strength was not in business loans, but in loans to security dealers
and loans to nonbank financial institutions.
This indicated that
Ninth District banks were in a strong--possibly excessive--liquidity
position, and that they were looking hard for ways to put money out.
10/23/62
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As to policy, Mr. Deming said that for reasons stated by Mr.
Hayes and others, he would favor continuation of the status quo.
At
the same time, he thought the policy directive should be changed
radically in recognition of the current international situation.
It
was his suggestion that the directive might read along lines that in
view of the tense international situation, the current policy of the
Federal Open Market Committee was to hold, as steadily as possible,
present conditions in the money and credit markets.
It was impossible to see far ahead at this time, Mr. Deming
noted.
However, he had asked himself whether, if the Cuban crisis
should develop into active hostilities, there was anything in the
current rate pattern that he would want to change before such
hostilities began.
It was his conclusion that the prevailing
pattern was probably as good as any and that there was not much
he would want to do to change it.
In his view the Desk should be
given as much latitude as it needed to maintain the prevailing
situation.
Obviously, he would not recommend changing the discount
rate at this time.
Mr. Scanlon reported that economic activity in the Seventh
District had not changed significantly since the previous meeting
of the Committee.
However, as of last week there had been a firming
of expectations among businessmen and economists in the District that
activity would soon begin a moderate, short-lived decline.
Some
10/23/62
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believed that such a movement had been under way since July.
One
factor that had contributed to the recent growth of bearish senti
ment was the announcement of price reductions in such products as
steel, aluminum, cement, and building materials.
While these price
reductions largely reflected official recognition of market softness,
which had been evident for some time, they nevertheless indicated that
hopes had faded for an uptrend in demand that might have validated
existing "list" prices.
Officials of Seventh District steel firms were now estimating
that production in 1962 would be below 100 million tons.
The auto
industry was said to be holding its orders below the rate that would
be required to produce the projected 1.9 million cars in the fourth
quarter.
Disregarding any military buildup, unless auto industry
orders picked up substantially, the steel ingot production rate would
rise only moderately from the level of mid-October through year-end.
The favorable reception of the 1963 model autos, as indicated
by sales in early October, gave support to the view that low dealer
inventories were primarily responsible for the drop in sales of auto
dealers in August and September.
This was an important factor in the
decline in total retail sales in these months.
Meanwhile, auto manu
facturers were ordering materials and components very cautiously and
were "firming up" production schedules only six weeks ahead instead
of two to three months as in past years.
10/23/62
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Improved farm income in the Corn Belt in 1961 and 1962, and
excellent prospects for 1963, had boosted land prices over the year
ago level by as much as 6 per cent in some localities, according to
the Reserve Bank's recent survey of country bankers.
Sales of farm
machinery and household appliances also had increased in these areas.
However, in the dairy states, where net farm income had declined as
a result of lower support prices and less favorable crop conditions,
farm land prices and sales of "hard goods" to farmers had declined
this year.
Bankers generally expected recent trends in land prices
to continue next year.
During the past ten weeks, business loans at District reporting
banks showed increases very similar to those of the comparable periods
in 1958, 1959, and 1961, but well below the 1960 increase.
less favorable than the experience of the nation as a whole.
This was
As else
where in the nation, loans on securities and, to a lesser extent, real
estate loans, had risen at a rapid pace in recent weeks.
Mr. Scanlon said he was pleased to receive the recent memoranda
of Messrs. Sternlight and Koch relative to reserve guides and Treasury
deposits.
While he was in agreement with what he took to be the basic
proposition of both papers, namely, that no one guide (unless, possibly,
a very complex one) could serve adequately under all circumstances,
there was nevertheless need for landmarks to assure against moving too
far off the desired course or for too long a time.
As Mr. Koch noted,
10/23/62
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the shortfall of reserves from the staff guideline could not be
rationalized in terms of the unusually high Treasury balances since
these balances were a part of deliberate policy to hold up short-term
rates.
Rather, it reflected simply that rate considerations did not
permit a full offset to the reserves absorbed by these balances,and
that the 3 per cent target growth rate was not compatible with a
2-3/4 per cent bill rate.
Since he found the papers to be helpful,
he hoped other similar papers would be forthcoming from the Committee's
staff.
Mr. Scanlon found the current business situation extremely
puzzling as it related to appropriate policy posture.
Some knowledge
able businessmen whose judgment he respected thought the current
forecasts of imminent decline in activity were premature.
On the
other hand, the forecasts provided specific evidence of weakening
of expectations and would tend to reinforce and spread such expecta
tions unless favorable business news was forthcoming soon.
If the
current "standard forecast" was to be realized, presumably expenditures
for new plant and equipment, consumer durables, and inventories would
decline.
In this respect, the large cash flow to business corporations
and the recent trend of business loans were of interest.
Business loans
had shown a fairly good rise during the past year and were showing at
least seasonal strength even though inventories appeared to have
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declined recently.
Furthermore, internally generated funds of business
corporations in 1962 might be slightly larger than the amount needed
for capital expenditures and inventory accumulation combined, as was the
case in 1961.
sion.
This was an unusual situation in a year of business expan
Some large Midwest business firms that reported plans to cut
back capital outlays and inventories, when asked "what will you do
with your money," stated that they would repay bank loans.
seemed not to be happening.
But this
It was quite conceivable, therefore, that
business would be better than indicated by many current forecasts.
Nevertheless, Mr. Scanlon said, the appropriate policy posture
for the System would seem, as a minimum, to be that of achieving some
what more than seasonal expansion of reserves; and to the extent that
a greater expansion could be achieved within the framework of inter
national restraints, the results should be beneficial.
He would favor
no change in the directive unless it was to recognize the seriousness
of the international situation, as Mr. Hayes had suggested.
He would
not favor a change in the discount rate.
Mr. Clay commented that a pronounced element of uncertainty
had been injected into the economic picture by the recent international
developments centering around the Cuban situation.
It was impossible
to evaluate the impact of these developments and their significance
for monetary policy even in the immediate future, to say nothing of
the longer run implications,
What this meant for the formulation of
monetary policy would have to be determined as the course of events
unfolded.
10/23/62
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Mr. Clay also noted that the period immediately ahead involved
a major Treasury financing operation.
It would be important to avoid
any policy action that would be disturbing to the success of that under
taking.
Generally speaking, the Committee should endeavor to maintain
essentially its present policy posture, although the specific actions
taken in executing policy would be conditioned by the new market
situation.
The Reserve Bank discount rate should not be changed.
The policy directive, in his opinion, should recognize the international
situation.
Mr. Wayne said developments reported during the past three
weeks seemed to indicate some easing in Fifth District business.
Seasonally adjusted bank debits dropped 9 per cent in September to
the lowest level since last December.
The rise in department store
sales in the first half of September apparently ended rather suddenly,
and recent reports indicated a further decline in early October.
The
Reserve Bank's latest survey showed a worsening of general business
sentiment for the first time since June.
Manufacturers as a whole
reported no change in factory shipments, but small declines in new
orders, hours, and employment.
Textile firms, hosiery mills in
particular, continued to report weak demand accompanied in some
instances by reduced employment and shorter hours.
Flue-cured
tobacco prices had been running lower than a year ago, but in
creased volume would probably hold total sales even with or above
10/23/62
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last year's level.
District weekly reporting banks continued to show
strength in real estate loans, but seasonal declines in business loans.
On the national level, Mr. Wayne noted, the only sector of the
economy that showed definite strength and progress seemed to be the
automobile industry.
Otherwise the economy was showing remarkable
stability at a high level of activity--but a level some 3 or 4 per
cent below
what might be considered a fully satisfactory performance.
The changes in production, employment, and incomes from July to August
to September had been so small that they showed no trend.
There had
been some weakness in prices, especially for such commodities as
aluminum, steel, and cement, and apparently inventory accumulation
had almost, if not entirely, ceased.
There was no evidence of any
substantial relaxation in the long-term squeeze on profits.
For
almost three months there had been a slow and gradual but definite
easing in long-term interest rates, while mortgage funds remained
abundant with some shading of rates in certain areas.
This easing
of rates by the market itself would seem to indicate that funds were
in sufficient supply to meet current demands.
As to policy, Mr. Wayne stated that he found himself in
general agreement with what had already been said about making no
change in current policy.
He agreed almost completely with Mr. Deming,
whose proposed directive was terse and to the point.
In summary, he
would favor no change in the posture of policy until the Committee
could see more clearly the effects of the current crisis.
10/23/62
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Mr. Mills commented that Mr. Brill had made a point deserving
of emphasis, namely, that skillful handling of the System Open Market
Account had prevented a movement toward a lower interest rate structure.
The correctness of that statement unfortunately was indicative of
artificial interference in the U. S. Government securities market,
with all of the problems that were inherent in what was tantamount
to a pegging operation.
This raised the over-all problem whether the
System's monetary and credit policy should resist natural forces in
the market or whether System policy should move with the tide.
Mr. Mills' opinion, it should move with the tide.
In
He felt that it
would be advisable to capitalize on the widespread reaction to the
reduction of the reserve requirement on time and savings deposits
and allow a very gingerly movement toward an enlarged supply of
reserves and a modest lowering of interest rates.
If disorderly conditions should occur in the Government
securities market, Mr. Mills said, they should be met promptly and
vigorously.
By the same token, if the difficult international
situation provoked unusual outflows of gold and dollars the official
response to that sort of situation should be sharp.
The normal
official response to that situation would be a sharp increase in
the discount rate of the Federal Reserve Banks.
However, since
such a movement would stem out of what would amount to a panic
condition, he doubted that an upward discount rate adjustmet would
10/23/62
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be effective, particularly when there were so many questions about
deterioration in the economic situation abroad.
Consequently, that
kind of problem should be met through the Treasury rather than through
the central bank.
Mr. Shepardson said that on the basis of the economic review
given by the staff, it seemed to him entirely appropriate to maintain
the policy that the Committee had been endeavoring to follow during
the past several weeks.
The new developments in the international
situation only enhanced the necessity of maintaining the present
position at this time.
There was no telling how fast or how slowly
the international situation might develop, or what direction it might
take.
lines.
With the passage of time the Committee might have better guide
At present, however, he felt it would be a mistake to make any
shift in policy.
In line with that view, he hoped the operations of
the Desk would tend to counter any of the feeling that still seemed
to exist in the market that the reduction in reserve requirements
portended a policy of greater ease.
He did not believe it was
necessary to counter every shift in reserves, but within the range
of the present tone of the market he hoped steps would be taken to
counter any latent feeling of greater ease that began to appear.
Turning to the directive, Mr. Shepardson commented that two
approaches seemed worthy of consideration:
such as Mr. Deming had suggested.
latter approach.
no change, or a change
He would be inclined to favor the
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10/23/62
Mr. King expressed the view that the present international
situation was likely to provide a push to the domestic economy, at
least in the short run.
He did not believe that the American people
were likely to start saving more money under present conditions.
Instead, it seemed more likely that they would start buying things
that they might need for the long pull.
In view of the probability that the commercial banks were
going to go into short-term securities a little more heavily, Mr.
King felt that this would be an ideal time more or less to condone
a slight downdrift in the Treasury bill rate.
forgetting about the bill rate completely.
He would not suggest
However, if it went to
the range of 2.50 to 2.60 per cent, he would not be disturbed.
In
his opinion, the level of free reserves should remain fairly high,
perhaps somewhere in the $450-$500 million range.
A degree of
reluctance to soak up temporary excess reserves might be appropriate.
On the other hand, if the weekly average of free reserves got up to
$600 million, that might be regarded as confirming market guesses
that the recent reduction in reserve requirements reflected a move
toward an easier monetary policy.
In all the circumstances, it
appeared that the Desk might have a rather difficult three-week
period ahead.
Mr. King expressed the view that in the absence of a change
of policy at this time it would be a mistake to change the policy
10/23/62
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directive.
Three weeks ago he had suggested a modification, but he
would not change the directive today.
He did not believe the Presi
dential announcement had changed the Committee's responsibilities in
any respect.
Therefore, he felt it would amount to overplaying the
situation to change the directive.
Mr. Mitchell said that his basic position with respect to
monetary policy had not changed.
ments had tended to reinforce it.
In fact, recent economic develop
However, there remained the
question of what should be done when the Cuban situation was taken
into consideration.
Taking that situation into account, he would
be inclined to endorse a position such as outlined by Mr. Irons,
which contained some suggestion of a slight potential drop in
short-term interest rates.
In his opinion, the Desk should not
inform the market directly or indirectly regarding the meaning of
the recent reserve requirement reduction.
The Board's announcement
spoke for itself, and no official interpretation should be added to
it.
As to the directive, Mr. Mitchell did not think it should be
changed at this time, for he had no idea of the situation with which
the Open Market Committee might have to cope.
There might, for example,
be a run on currency or a hoarding of commodities.
But no one could
say whether such developments would occur, and there was no need for
the Committee to imply that it knew what was going to develop.
In
10/23/62
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his opinion, it was doubtful that the Cuban situation would result in
any large military buildup.
It might have an impact on business or
consumer psychology, or it might quiet down without too much economic
impact.
Within a week or so it might be possible to make a better
judgment on that score.
One possibility, therefore, would be to hold
another meeting of the Open Market Committee in about a week.
Mr. Fulton reported that except for a strong recovery of auto
sales, the picture in the Fourth District was devoid of improvement
thus far in October.
or slight decline.
Other indicators were showing either no change
Steel production had leveled off, and the price
change that had occurred in sheet and stainless steel would affect
the earnings of the steel companies adversely.
The machine tool
industry had a favorable backlog, but orders were not increasing.
The new depreciation schedules provided by Treasury Bulletin F were
said to be having little effect in terms of new orders.
Unemploy
ment had increased in the steel centers and had shown no material
improvement in the rest of the District.
All in all, prospects
appeared rather dismal.
Persons with whom the Reserve Bank maintained contact through
out the District were tending, by and large, to anticipate a downturn
after the first of the year.
Orders had been declining, or at least
not increasing to the extent that had been expected on a seasonal basis.
As to the possible effect of the Cuban situation, it did not appear that
10/23/62
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the steel mills would participate in any military buildup to the extent
that they had on previous occasions due to the change in the nature of
military hardware.
Turning to policy, Mr. Fulton said he would concur with those
who felt that present policy should be continued.
to see the money market become softer.
He would not like
Instead, he felt that the
maintenance of a firm short-term market was desirable, with Federal
funds continuing to trade within their recent range.
Reserves should
be made available as required for seasonal purposes, and the tone and
feel of the market should be the major guide.
The market should not
be led to believe that System policy had been changed when in fact it
had not been changed.
As to the policy directive, Mr. Fulton was inclined to feel
that a change along the lines suggested by Mr. Deming would be
appropriate in recognition of current international developments.
This did not mean that the Committee had to be wedded to such a
directive indefinitely.
For the record, however, it would seem
desirable to show that the Committee recognized the changed situation
and had determined to continue the policy it had been following in the
thought that it was suitable.
Mr. Bopp reported that business conditions in the Third District
were sluggish.
Reserve city banks were under some pressure and were
buying Federal funds.
The Reserve Bank had just completed its annual
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10/23/62
survey of prospective business capital expenditures, which indicated
that manufacturers in the Philadelphia metropolitan area expected to
spend about 17 per cent less next year.
In durables the survey
indicated a drop of 25 per cent; in nondurables 11 per cent.
Chemicals
showed a sizable increase, but with this and one other exception the
projections for a decline in expenditures were widespread.
In other
areas of the District, expectations ranged from a drop of 21 per cent
in the Wilmington area to an increase of 16 per cent in the Lehigh
Valley.
Mr. Bopp also said that at the two most recent meetings of
the Philadelphia directors there had been a split vote on the reten
tion of the present discount rate, reflecting some feeling that in
light of the sluggish business situation the System should move toward
greater ease.
While this was a minority view thus far, the balance of
opinion seemed to be shifting in that direction.
said, he felt the same way himself.
Basically, Mr. Bopp
In view of overnight developments,
however, he concluded that there should be no change in policy at this
time.
Like Mr. Mitchell, he believed that the Committee should keep
on top of the situation.
Thus, it might be appropriate to consider
holding another meeting of the Committee before three weeks had passed.
Mr. Shuford indicated that he would prefer to refrain from
commenting on policy at this meeting of the Committee, which was the
first he had attended as a Reserve Bank President.
The Eighth
10/23/62
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District, he said, seemed to reflect about the same situation as out
lined nationally.
Figures for the third quarter showed no significant
changes from those for the second quarter.
The employment situation
reflected no particular change, while department store sales fluctuated
within narrow limits and bank debits remained relatively stable.
loans had increased, although only slightly.
Bank
Deposits showed an in
crease in the third quarter, but this was related to time deposits.
Demand deposits had been declining at a rate of about 2 per cent
since January.
The agricultural situation appeared satisfactory,
with the prospect that output for the year would be about the same
as in 1961.
From conversations with businessmen and bankers around
the District, it seemed fair to describe their attitude as reflecting
the level of current economic activity.
There seemed to be no feeling
of strong optimism or strong pessimism.
Mr. Balderston indicated that he would favor a continuance of
the status quo as far as policy was concerned, especially in view of
the pending Treasury refunding.
His main concern at the moment was
that the Federal Reserve maintain a posture that would be a steadying
influence on economy.
In short, this nation should act like a good
banker in its relations with the world.
The Federal Reserve System
and the commercial banking system should be prudent, stable, and
careful in word and deed.
For the Federal Reserve, this meant that
it ought to be cautious about the actions it took because of the
manner in which such actions might be construed.
10/23/62
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Mr. Balderston also said that he would favor changing the
policy directive to recognize what had developed yesterday.
It
seemed to him that these developments made the present directive
an anachronism.
Therefore, he would be inclined toward a directive
such as suggested by Mr. Deming.
Chairman Martin began his comments by referring to the
suggestions that had been made about the possibility of calling
a special meeting of the Open Market Committee.
In view of the
pending Treasury refinancing, he questioned whether this would be
too good a time to call a special meeting or meetings.
and other reasons,
if
it
For this
became known that extraordinary meetings
of the Open Market Committee were being held, that would create a
certain amount of comment.
If necessary, in the light of develop
ments, the Committee could get together by conference telephone.
In the absence of urgent considerations, however, his thought would
be to proceed on a schedule whereby the next meeting would be held
on November 13, 1962, with succeeding meetings on December 4 and
December 18, and then on January 8, 1963.
As to policy, the Chairman noted that the consensus obviously
favored maintenance of the status quo.
With that in mind, the policy
directive presented something of a problem.
In this connection, he
commented that Mr. Knipe (Consultant to the Chairman of the Board of
Governors) was going to leave his post within the near future.
Mr.
10/23/62
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Knipe had given considerable thought to the Committee's policy
directives, and the Chairman said he proposed to distribute to the
Committee members directives in form suggested by Mr. Knipe for the
past several meetings, in the thought that these might serve as a
basis for further Committee discussion concerning the manner in
which the directive might best be formulated.
As to the situation today, Chairman Martin indicated that he
would have no strong objection to changing the present directive.
He
noted, however, that there appeared to be some sentiment within the
Committee for leaving the directive unchanged.
Mr. Deming had
suggested one approach, if the Committee wished to change the
directive, and Mr. Young was prepared to suggest a different
formulation.
At the Chairman's request, Mr. Young then read the draft of
directive that he had prepared.
Mr. Hayes commented that he felt the changes proposed by Mr.
Young could be interpreted as giving less attention to the inter
national financial situation than at present.
He added that he would
urge the Committee to do one of two things, either adopt a directive
along the lines suggested by Mr. Deming or simply insert in the
present directive a clause indicating that the Committee was taking
into account the potential effects of the Cuban situation.
be inclined to prefer the latter alternative.
He would
10/23/62
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There followed a discussion during which Mr. King raised a
question as to what would be accomplished by the inclusion of a clause
such as Mr. Hayes had suggested, in response to which the latter pointed
out that this would recognize a factor that seemed to dictate a policy
of holding the line.
Mr. Deming brought out that his proposed reformu
lation of the directive would not indicate that the Committee was going
to do anything different.
However, it seemed important to him that the
Committee not seem to dismiss casually a Presidential announcement of
consequence.
Mr. Clay noted that his comments on policy this morning
would have been different had it not been for the President's announce
ment yesterday evening.
Mr. Swan commented that in view of the uncer
tainties of the moment he believed that current monetary policy should
be continued.
A directive such as Mr. Deming had suggested would
provide flexibility because it would recognize a reason for which
policy remained unchanged.
Later, in the light of conditions that
emerged, a new directive could be evolved.
Chairman Martin then commented that, as he read Mr. Young's
proposed directive, it would attach at least as much importance to
the international situation as the present directive.
This pointed
up the problem faced by the Committee in choosing words for the
directive.
In any event, however, the directive was not just a pro
forma announcement.
It should endeavor to reflect the manner in which
the Committee wanted to instruct the Management of the Account.
In
his (Chairman Martin's) view, language along the lines suggested by
10/23/62
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Mr. Young had merit because it went further than a mere observation
with respect to the international situation that had developed.
The discussion today, Chairman Martin repeated, brought out
the essence of the problem faced by the Comittee with respect to
its policy directives.
It would be his suggestion that the Committee
devote another round of discussions to the formulation of the policy
directive, beginning with the next meeting, perhaps, and continuing
over the remaining meetings this year in an attempt to determine
whether a better form of directive could be found.
After further observations along these lines, Chairman Martin
invited additional comments on the several proposals regarding the
directive to be issued by the Committee today, and Mr. King presented
the view that a formulation such as suggested by Mr. Deming might
indicate that the Open Market Committee was fashioning policy on
little other than the Presidential announcement.
Committee knew a good deal about the economy.
Actually, the
Also, if Mr. Deming's
suggestion were adopted, the Committee would face the question of what
to do at its next meeting, for such a directive could not be continued
indefinitely.
Mr. Hayes indicated that he had some sympathy with Mr. King's
observation.
At this juncture the Open Market Committee was just as
interested as ever in the state of the economy and the balance of
payments.
However, there was a new element of uncertainty in the
10/23/62
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situation.
A clause could be inserted in the directive to recognize
that fact even though policy was left unchanged.
At the request of members of the Committee, the directives
suggested by Mr. Deming and Mr. Young were then read again.
Question
was raised as to whether Mr. Deming's formulation implied that the
bill rate should be maintained at precisely its present level, and
Mr. Stone said he would not interpret the language to mean that every
indicator would necessarily have to remain constant.
Mr. Deming agreed.
Mr. Hayes inquired whether, if policy was to remain unchanged,
the second paragraph of the present directive should not be left intact.
When Mr. King asked whether it was not correct to say that a majority
of the Committee would not object to a slight easing of the bill rate,
particularly in view of the likelihood of increased bank demand for
short-term securities, Mr. Hayes referred to the Chairman's consensus,
as stated earlier, which had been in terms of maintaining the status
quo.
After further discussion, Mr. Balderston moved the adoption of
the policy directive suggested by Mr. Young, and this motion was
seconded by Mr. Mills.
A vote was taken and the motion was carried
by unanimous vote.
Accordingly, 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:
10/23/62
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It is the current policy of the Federal Open Market
Committee to encourage moderate further increase in bank
credit and the money supply, while avoiding money market
conditions unduly favorable to capital outflows inter
nationally. It is also the Committee's policy to cushion
such unsettlement in money markets as may stem from inter
national developments of an emergency or near emergency
character. This policy takes into account the potential
financial effects of the Government's quarantine on
armament imports into Cuba, the imminence of a large
Treasury refinancing, and the recent stability of economic
activity, with a margin of underutilized resources and an
absence of inflationary pressures.
To implement this policy, operations for the System
Open Market Account during the next three weeks shall be
conducted with a view to providing moderate reserve ex
pansion in the banking system and to fostering a steady
tone in money markets.
Votes for this action: Messrs. Martin,
Hayes, Balderston, Deming, Ellis, Fulton,
King, Mills, Mitchell, Shepardson, and Irons.
Votes against this action: None.
In casting his vote on the directive, Mr. Mills said he sensed
a growing sentiment within the Committee, with which he concurred,
toward giving less attention to fluctuations in the supply of reserves
resulting from natural influences and allowing the weight of such
movements to fall in the direction of easier rather than tigher money
market conditions.
In his view the steady posture that had been main
tained within the climate of status quo did a disservice to the Federal
Reserve System's general belief that monetary and credit policy had a
great virtue in being flexible.
Instead of that, the System had moved,
in words and actions, toward a rigidity that in business and academic
circles could very possibly provoke criticism in the future.
10/23/62
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Mr. Hayes voted in favor of the directive with the under
standing that his reservations would be recorded in the minutes.
He noted that at past meetings there had been some advocacy of
changing the word "permit" to "encourage" in the directive in
describing the attitude of the Committee toward further expansion
of the supply of bank credit and money.
That type of change, which
seemed to have significance to some Committee members, provided an
indication of why he voted today with reluctance.
He would have
preferred to leave the directive unchanged, except for the inser
tion of a clause in recognition of the current international crisis.
It was agreed that the next meeting of the Open Market
Committee would be held on Tuesday, November 13, 1962, unless
occasion arose to hold a meeting by conference telephone in the
interim, and that subsequent meetings would be scheduled tentatively
for December 4, 1962, December 18, 1962, and January 8, 1963.
The meeting then adjourned.
Secretary
Cite this document
Federal Reserve (1962, October 22). FOMC Minutes. Fomc Minutes, Federal Reserve. https://whenthefedspeaks.com/doc/fomc_minutes_19621023
@misc{wtfs_fomc_minutes_19621023,
author = {Federal Reserve},
title = {FOMC Minutes},
year = {1962},
month = {Oct},
howpublished = {Fomc Minutes, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/fomc_minutes_19621023},
note = {Retrieved via When the Fed Speaks corpus}
}