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, November 13, 1962, at 9:30 a.m.
PRESENT:
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Martin, Chairman
Hayes, Vice Chairman
Balderston
Bryan
Deming
Ellis
Fulton
King
Mills
Mitchell
Robertson
Messrs. Bopp, Scanlon, Clay, and Irons, 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. Hackley, General Counsel
Mr. Noyes, Economist
Messrs. Brandt, Brill, Furth, Garvy, Hickman,
Holland, and Koch, 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. Williams, Adviser, Division of Research and
Statistics, Board of Governors
Mr. Cardon, Legislative Counsel, Board of Governors
Mr. Yager, Chief, Government Finance Section,
Division of Research and Statistics, Board of
Governors
Mr. Spencer, General Assistant, Office of the
Secretary, Board of Governors
11/13/62
Messrs. Eastburn, Ratchford, Baughman, Jones,
Tow, and Green, Vice Presidents of the
Federal Reserve Banks of Philadelphia,
Richmond, Chicago, St. Louis, Kansas City,
and Dallas, respectively
Messrs. Litterer and Lynn, Assistant Vice
Presidents of the Federal Reserve Banks of
Minneapolis and San Francisco, respectively
Mr. Eisenmenger, Acting Director of Research,
Federal Reserve Bank of Boston
Mr. Cooper, Manager, Securities Department,
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 23, 1962, were
approved.
Before this meeting there had been distributed to the members
of the Committee a report on open market operations in United States
Government securities covering the period October 23 through November 9,
1962.
A copy of this report has been placed in the files of the Com
mittee.
At the request of the Chairman, Mr. Stone commented in supple
mentation of the written report substantially as follows:
The period since the last meeting has been highlighted
by developments in Treasury financing. On October 25, two days
after the last meeting, and in the midst of the period of maxi
mum tension following the President's speech on Cuba, the Treasury
chose and announced the terms of its refunding operation. By the
time the subscription books opened on October 29, tensions had
eased perceptibly, bond prices had risen, and the rates that the
Treasury had placed on its new issues, particularly the 3-1/2 per
cent, 3-year note and the 4 per cent, 9-1/4 year bond, looked very
attractive indeed to the market. The results of the refunding were
highly successful from the point of view of debt extension, but
perhaps too successful from the standpoint of the short-rate problem,
for the public exchange into the 3-1/8 per cent certificate amounted
only to a little over $1 billion. There has been some market comment
that the Treasury might usefully reopen the issue for some of its
remaining cash financing this year; and in this connection I should
say that we plan to sell some of our holdings when opportunity
arises, particularly in January.
11/13/62
Meanwhile, the bill rate had moved down to below 2.70 in
the auction of October 29, and although it edged a basis point
or two higher over the next two or three days, the rise was far
short of offsetting a rise in British bill rates and a narrowing
of the discount on forward sterling. In consequence, the covered
spread between U.S. and U.K. bills widened to 5/8 to 3/4 of a
percentage point, and money started to move toward London.
This situation led the Treasury to offer a strip of $1
billion bills for auction on November 7, thus adding a third
auction to the two already scheduled for last week. (The auction
that would have been held yesterday was held last Friday because
of the Monday holiday in a number of districts.)
Bill rates moved
sharply higher the day following the Treasury announcement, and
many in the market regarded the three forthcoming auctions as a
major burden which they viewed with a good deal of apprehension.
On Monday, however, the higher rate levels that had emerged brought
out a good deal of investor buying, and a consensus began to develop
that the rise in rates had gone as far as it was going to go, and
indeed might even have been overdone.
In this atmosphere, the
three auctions that had been viewed on Friday as major burdens
were viewed on Monday as major opportunities to acquire bills
while rates were high and prices low. In consequence, bidding was
rather spirited in each of the three auctions, and the average
issuing rate for three-month bills in the regular weekly auctions
held on Monday and Friday were 2.84 per cent and 2.80 per cent,
respectively, while the average rate in Wednesday's auction of the
bill strip was 2.87 per cent.
It is interesting to note that the rate on the six-month bill
has narrowed to only 4 or 5 basis points over the three-month issue,
and indeed the one-year bill is only about 10 basis points above
the three-month bill.
These comparisons emphasize the point, which
is worth repeating once more, that the demand for short-term secu
rities, particularly by the corporate sector, continues strong.
This strong demand presses on a supply of short-term securities
that has been substantially reduced by the refunding. This funda
mental fact was temporarily masked by the Treasury's announcement
of its bill strip, but it began to be reasserted very quickly last
week and accounted in large measure for the ease with which the
market handled those three auctions.
I should say a word about the bond market. Prices of
Treasury bonds moved higher nearly every day of the period just
past, and by last week yields had nearly reached the 1962 low
recorded last May.
the May lows.
In the corporate market, yields have reached
We now have in syndicate a relatively small ($14
million) Aa-rated utility issue, which was reoffered at a yield
of 4.22 per cent. Investors have shown resistance to this yield
thus far, and it remains to be seen how the contest between them
and the underwriters comes out.
In the municipal sector, yields
are at the lowest levels since 1958.
New borrowing in that sector
11/13/62
-4
remains light, although a good volume of capital projects was author
ized in the election and before too long we may begin to see some
borrowing on the basis of those authorizations.
Mr. Mills referred to transactions undertaken to acquire securities
from foreign accounts since the October 23 meeting, and also to repurchase
agreements entered into in that period.
He judged that the acquisition
of bills from foreign accounts was undertaken to keep those bills out
of the market, but he inquired whether the transactions for the System
Account might create a statistical illusion, at least when the report
of reserves became available at the end of the week.
In other words,
the weekly report would indicate higher holdings of securities and
injection of reserves into the market than actually had taken place,
since there was no reason to believe that the proceeds of the bills
purchased from foreign accounts necessarily would move immediately into
reserves.
Mr. Stone noted that if the securities that had been acquired
by the System from foreign holders had instead been sold into the market,
the initial effect would have been to withdraw reserves from the market.
The Federal Reserve had purchased these bills because it needed to supply
reserves to the market; the purchases from foreign account represented a
means indirectly of supplying the needed reserves while at the same time
minimizing the downward impact on the short-term rate that might other
wise have occurred from System purchases in the market.
As to repurchase
agreements, the funds provided by this means were placed in the market
until reserves became available from other sources.
Moreover, while the
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11/13/62
dealers themselves were aware that these provided the market with only
temporary funds, Mr. Stone felt sure that once the funds moved beyond
the dealers into the market they were not identified beyond being available
as reserves.
Mr. Hayes stated that, with respect to the acquisition of bills
from foreign accounts, such accounts do not normally keep a large cash
working balance.
Therefore, it seemed to him that the acquisition by the
System of securities from those holders resulted in as permanent an addition
of reserves to the market as would result from System purchases of securities
from other holders.
In response to questions from Mr. Mitchell, Mr. Stone stated that
while time deposits of official foreign institutions had increased, none
of the bill sales that the Desk had undertaken for foreign accounts had been
for the purpose of raising funds to put into time deposits.
Thereupon, upon motion duly made
and seconded, and by unanimous vote, the
open market transactions in Government
securities during the period October 23
through November 9, 1962, were approved,
ratified, and confirmed.
There was distributed to the Committee a report from the Special
Manager of the System Open Market Account on foreign exchange market con
ditions and on Open Market Account and Treasury operations in foreign
currencies for the period October 23 through November 7, 1962, together
with a supplementary report for the period November 8 and 9, 1962.
of these reports have been placed in the files of the Committee.
Copies
11/13/62
-6Chairman Martin turned to Mr. Coombs, who presented a review of
foreign exchange market developments substantially as follows:
The gold stock will probably remain unchanged this week for
the second week in a row. We should be able to stave off further
losses for several weeks to come and possibly through the yearend.
We now have $50 million in the Stabilization Fund, with $40 million more available from the Swiss and possible sizeable receipts
from the London gold pool.
On the London gold market, the price has fallen off to
roughly $35.09 as compared with a peak of $35.19-1/2 reached
during the Cuban crisis. So far there has been no sign of
private dishoarding in any volume, but an apparent shortage of
foreign exchange is forcing the Russians to sell sizeable amounts
of gold. Partly owing to such Russian sales, the October gold
loss by the Pool was limited to no more than $35 million and since
the beginning of November the Pool has actually taken in $50 million on balance.
A Bank of England man who has recently visited
Moscow reports
that the Russians now seem to be persuaded that
the Gold Pool is capable of holding the price and that they may
continue to sell in some volume for another month or so.
Most of
the central bankers represented in the meeting of the Bank for
International Settlements last weekend expressed considerable
gratification over the way the Gold Pool has operated, more
particularly in restraining the potentially dangerous pressures
which developed during the Cuban crisis.
As for exchanges, most of the European central banks also
seemed to feel that coordinated operations by the central banks
exerted a strongly stabilizing effect during the Cuban crisis.
They expressed a great deal of worry, however, about reports that
the U. S. balance of payments had deteriorated during the third
quarter. As Mr. Furth will probably report, the deficit has increased to a truly alarming degree during October. As reflected
in the exchange markets and central bank reserve positions, much
of the outflow seems to have gone to France which continues to
run a surplus in excess of $1 billion annually and, more particularly, to Canada which has been pulling in very sizeable amounts
Sterling, which should have
of both short- and long-term funds.
moved into a seasonal deficit during the autumn months, has also
been firm while our hope that the Swiss franc would weaken, after
the heavy speculative inflows of recent months, has been disappointed.
The sensitivity of money flows to short-term rate differentials
has been well illustrated during the past week or so by a flow of
covered arbitrage funds from New York to London as the differential
in favor
of London increased to 3/4 of 1 per cent.
the differential was quickly pulled down to almost
As you know,
1/2 per cent
11/13/62
by the rise in our bill rate. Meanwhile, I telephoned Bank of
England officials to suggest that the situation called for a three
way squeezing out of the differential, involving not only a rise
in our bill rate but also an increase in the forward premium on
the dollar and possibly some decline in the British bill rate which
had moved up during the Cuban crisis. Last Friday, the Bank of
England brought about a decline in their bill rate from 3.78 to
3.72, but their efforts to increase the forward premium on the
dollar have been frustrated by a concurrent outflow of forward
arbitrage money from London to the Euro-dollar market. Ninety
day rates on the Euro-dollar market have moved up strongly, partly
because of the Cuban crisis and a repatriation of funds by German
and Swiss banks. The main reason, however, seems to have been a
revision of the Italian exchange regulations which has permitted
the Italian banks to borrow Euro-dollars in heavy volume. Since
November 1, such Italian borrowings of Euro-dollars have amounted
to at least $140 million and in the process have been pulling funds
out of London. I had numerous conversations on the telephone
and again this past weekend in Basle with Italian officials who
promised to do everything possible to restrain the pressures
their commercial banks have been generating in the Euro-dollar
market. As of the moment, the situation has moved into better
balance with the Euro-dollar rate declining towards the end of
last week, while the New York-London differential has also
become reduced to about 1/2 per cent.
In thinking about the possible future development of our
exchange operations, I have been troubled by the problem of
effectively converting our holdings of one foreign currency into
another. Assuming that we wished to switch from marks into Swiss
francs in order to absorb an excessive flow of dollars to Switzer
land, there would, of course, be no technical obstacle to our
converting marks into Swiss francs through the market or through
direct transactions with the central banks involved. But the net
result of switching, say, $25 million of marks into Swiss francs,
either through the market or through direct central bank arrange
ments, would simply be to place an additional 25 million dollars
in the hands of the Swiss National Bank, thus frustrating the whole
purpose of the operation. The most effective solution to this
problem of switching from one European currency to another, of
course, would be to negotiate with each of the countries concerned,
arrangements whereby we might convert our foreign currency holdings
into gold at their official parity, thus enabling us to use marks,
for example, to buy gold which could in turn be used to buy Swiss
francs without adding to the dollar holdings of the Swiss National
Bank. As of the moment, however, we have been able to negotiate
such gold purchase arrangements with only one country, namely,
Switzerland, and this has not been particularly helpful in view of
11/13/62
the difficulties we have encountered in acquiring Swiss francs.
And even if we should be able to acquire Swiss francs in consider
able volume, our willingness to do so might be limited by the virtual
nonexistence of investment facilities in Switzerland. Pending some
effective solution to this basic problem, I have tried to find ways
and means of temporarily switching from one currency to another in
order to deal with temporary situations. As you know, during the
Cuban crisis the Swiss National Bank took in $50 million and sug
gested that we might mop up the entire amount by drawings upon our
swaps with the Bank for International Settlements and the Swiss
National Bank. In order to conserve our resources, I limited our
drawing upon the BIS swap to no more than $20 million and dealt
with the remaining $30 million by securing U. S. Treasury agreement
to one month Swiss franc forward operations in an equivalent amount.
These forward contracts will mature during December, when the Swiss
banks will be engaging in the usual yearend window dressing and will
probably be unwilling to roll over or extend such forward contracts.
Against this background, I have negotiated a four-cornered deal
involving the U. S. Treasury, the Bundesbank, the Bank for
International Settlements and the Swiss National Bank, which
will enable the U. S. Treasury to utilize $30 million of its
mark holdings to acquire Swiss francs against a forward commit
ment to repurchase marks with Swiss francs at the same rate.
The net cost of this operation to the Treasury will amount to
no more than the loss of interest on its holdings of German
Treasury bills.
This forward operation will be executed
during December and mature in February, at which time the
Swiss franc should be somewhat less strong than at present.
As certain members of the Committee may know, the U. S.
Treasury has been engaged in discussions with the Spanish
Government during the past month or so with respect to finan
cial assistance to that country. In view of those discussions,
I think it would be useful to have research memoranda prepared
evaluating the Spanish situation and the problems that might
arise in connection with a possible swap arrangement.
I referred earlier to the sizeable inflow of dollars into
of Italy as a result of borrowing by Italian com
Bank
the
mercial banks on the Euro-dollar market, and to the promises
I had received from Italian officials that they would do
everything possible to restrain such borrowing. Meanwhile,
however, the Bank of Italy faces the problem of showing this
sizeable increase, of at least $140 million, in its end of
November statement. At Basle, Governor Carli suggested to
me that the U. S. Treasury might wish to engage in further
borrowing of lire, but I expressed some doubt, in view of the
fact that the U. S. Treasury had only recently announced a
11/13/62
$150 million lire borrowing operation and a second opera
tion following so quickly might well tend to stir up the
exchange market. Since the Italian balance of payments
has, for at least the time being, moved into more or less
of an equilibrium position, I suggested that the influx of
exchange resulting from Italian commercial bank borrowing
on the Euro-dollar market might well be construed as a
temporary affair which might suitably be dealt with by
drawing upon a Federal Reserve or Treasury swap arrangement
with the Bank of Italy. I noted, however, that the amount
involved considerably exceeded our present Federal Reserve
Bank of Italy standby swap facility of $50 million and that,
accordingly, we might usefully consider the desirability of in
creasing the Federal Reserve swap facility from $50 million to,
say, $150 million. Governor Carli found no difficulty in such an
enlargement of the swap facility but indicated that he would like
to discuss with his associates back in Rome other possible alterna
tives. At this present stage of my discussions with the Bank of
Italy officials, therefore, I am not in a position to recommend
Committee action to increase our lire standby swap facility to
$150 million, but just wanted to bring the Committee up to date on
negotiations so far.
Finally, I should like to ask Committee approval of a renewal
for another three months of our $50 million standby swap arrange
ment with the Bank of England which matures on November 30.
At the conclusion of Mr. Coombs' comments, there was a general
discussion during which a number of questions arising out of his comments
were reviewed.
Thereupon, upon motion duly made and
seconded, and by unanimous vote, the System
open market operations in foreign currencies
during the period October 23 through November 9,
1962, were approved, ratified, and confirmed.
In response to a question from the Chairman, Mr. Coombs indicated
that his only specific recommendation at this time was that the Committee
authorize a three-month renewal of the $50 million standby swap arrangement,
dated August 30, 1962, with the Bank of England.
Without objection, renewal of the standby
swap arrangement with the Bank of England, as
recommended by Mr. Coombs, was authorized.
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11/13/62
The Chairman then referred to a memorandum from Mr. Sherman,
distributed under date of November 8, 1962, which noted that at the
meeting of the Committee on October 2, 1962, question was raised as to
whether the Guidelines for System Foreign Currency Operations (approved
on February 13 and reaffirmed on March 6, 1962) were formulated in a
way to provide for a transaction such as the swap with the Austrian
National Bank. A staff review of the Guidelines had indicated that the
point was well taken.
The review also indicated that the Guidelines did
not provide for swap arrangements wholly or in part on a standby basis.
Certain amendments to the Guidelines therefore were suggested, the pro
posed changes being shown in the memorandum.
In discussion, a change in the suggested amendment of Sec
tion 2 of the Guidelines was agreed upon.
Thereupon, upon motion duly made and
seconded, and by unanimous vote, Section 2
of the Guidelines was amended to read as
follows (deletions shown by canceled type;
additions by capital letters):
2. Exchange Transactions
be geared to
System exchange transactions shall [strikeout]mainly[/strikeout]
pressures of payments flows so as to cushion or moderate dis
funds and their destabiliz
equilibrating movements of [strikeout]volatile[/strikeout]
on U. S. and foreign official reserves and on
ing effectS[strikeout]ed[/strikeout]
exchange markets.
IN GENERAL, THESE TRANSACTIONS SHALL BE GEARED TO PRESSURES
CONNECTED WITH MOVEMENTS THAT ARE EXPECTED TO BE REVERSED IN THE
FORESEEABLE FUTURE; WHEN EXPRESSLY AUTHORIZED BY THE FEDERAL
OPEN MARKET C0MMITTEE, THEY MAY ALSO BE GEARED ON A SHORT-TERM
BASIS TO PRESSURES CONNECTED WITH OTHER MOVEMENTS.
11/13/62
-11-
SUBJECT TO EXPRESS AUTHORIZATION OF THE COMMITTEE, THE
FEDERAL RESERVE BANK OF NEW YORK MAY ENTER INTO RECIPROCAL
ARRANGEMENTS WITH FOREIGN CENTRAL BANKS ON EXCHANGE TRANSACTIONS
("SWAP" ARRANGEMENTS), WHICH ARRANGEMENTS MAY BE WHOLLY OR IN
PART ON A STANDBY BASIS.
The New York Bank shall, as a usual practice, purchase and
sell authorized currencies at prevailing market rates without
trying to establish rates that appear to be out of line with
underlying market forces.
If market offers to sell or buy intensify as System hold
ings increase or decline, this shall be regarded as a clear
signal for a review of the System's evaluation of international
payments flows.
This review might suggest a temporary change in
System holdings of a particular convertible currency and possibly
direct exchange transactions with the foreign central bank in
volved to be able to accommodate a larger demand or supply.
Starting operations at a time when the United States is not
experiencing a net inflow of any eligible foreign currency may
require that initial System holdings (apart from sums that might
be acquired from the Stabilization Fund) be purchased directly
from foreign central banks.
It shall be the practice to arrange with foreign central
banks for the coordination of foreign currency transactions in
order that System transactions do not conflict with those being
undertaken by foreign monetary authorities.
The November 8 memorandum also suggested that, if the foregoing
changes in the Guidelines were adopted, a minor change, as described, be
made in paragraph (1)
of Section III of the Authorization Regarding Open
Market Transactions in Foreign Currencies, approved on February 13 and
reaffirmed on March 6, 1962.
Upon motion duly made and seconded, and
by unanimous vote, Section III of the Authori
zation was amended to read as follows (de
letions shown by canceled type; additions by
capital letters):
11/13/62
-12
III. Specific Aims of Operations
Within the basic purposes set forth in Section II, the
transactions shall be conducted with a view to the following
specific aims:
(1) To offset or compensate, when appropriate, the
effects on U. S. gold reserves or dollar lia
bilities of[strikeout]these[/strikeout]
DISEQUILIBRATING fluctuations
in the international flow of payments to or from
the United States, AND ESPECIALLY THOSE that are
deemed to reflect temporary[strikeout]disequilibrating[/striektou]
forces or transitional market unsettlement;
(2) To temper and smooth out abrupt changes in spot
exchange rates and moderate forward premiums and
discounts judged to be disequilibrating;
(3) To supplement international exchange arrangements
such as those made through the International
Monetary Fund; and
(4) In the long run, to provide a means whereby re
ciprocal holdings of foreign currencies may
contribute to meeting needs for international
liquidity as required in terms of an expanding
world economy.
At the Chairman's suggestion, Mr. Young commented informally
on his recent trip to Europe, reference being made particularly to a
meeting of Working Party 3 of the Economy Policy Committee of the
Organization for Economic Cooperation and Development and a meeting of
the Economic Policy Committee that followed.
Mr. Hayes commented briefly on a private meeting of central
bank governors that he had attended recently while in Basle for a meeting
of the Bank for International Settlements.
The Committee then turned to a review of the economic and
financial situation, and the Chairman called first upon Mr. Noyes, who
presented the following statement on economic developments:
11/13/2
-13-
Looking back over the last three weeks, it is hard not to
allow one's thoughts to be dominated by a sense of relief, and
to regard the problems that remain as trivial compared to those
that might so easily have been.
This is all the more true because
the information that has become available on the performance of
the domestic economy has tended to be either favorable or less
unfavorable than was widely anticipated.
The very strong performance of auto sales in October--and
especially in the last ten days of the month--has been so widely
publicized that it needs no elaboration here. The relatively
weak showing in other retail markets has received less attention,
but it was associated in the trade press with unseasonable shopping
weather.
Aside from the surge of auto buying, which may have been
completely unrelated, there was very little evidence of "scare"
buying in the week following the Cuban crisis. The reaction in
financial markets was also mixed and no clear trend attributable
to the crisis developed.
Stocks have generally moved higher, but
this has been related by most observers to other factors than the
crisis.
Nor does the economy seem to have responded in any notable
way to the results of the election. They are generally interpreted
to have strengthened the President's hand in Congress somewhat, but
not enough to change substantially the pattern of legislative
reaction to economic issues prevailing in the last session.
Thus, two major developments--an international crisis of the
gravest proportions and a national election--seem to have left the
basic economic situation substantially unchanged. If there are
plans for increases in defense expenditures beyond the levels
contemplated prior to the Cuban crisis, we are unaware of them.
So far as I have been able to ascertain, work is proceeding
on the budget estimates for fiscal 1964 in a routine manner. The
deficit for fiscal 1963 has not yet been officially re-estimated
in the light of legislation actually enacted and economic develop
ments since the budget message. There will, of course, be a deficitand a sizeable one--but our preliminary calculations suggest that
it will not be as big as some of the estimates that were made at
the time a tax cut was under discussion in July. The seasonally
adjusted cash expenditures and receipts moved from balance to a
small deficit in the third quarter and will probably move a little
further in the same direction in the current quarter. The shift
in the budget on an income and product account basis is even smaller.
In the interests of brevity, I shall pass over many develop
ments of some importance which have been reported to you in the
staff memorandum, but I think two surveys that became available
-14-
11/13/62
to us at the end of last week deserve special mention.
Both were
in the fire just before the Cuban crisis and, of course, also
before the election.
The McGraw-Hill capital expenditure survey
indicates that plans for such expenditures in 1963 exceed 1962
by around 3 per cent.
If these plans are realized, it would mean
about a continuation of the fourth quarter level of plant and
equipment spending for next year as a whole.
Consumer buying plans as reported by the Bureau of the Census
show a somewhat more favorable picture--with intentions to buy new
autos up sharply, some further recovery in interest in household
durables, and house purchase plans down only slightly, perhaps no
more than seasonally. Consumers were also a little more optimistic
about their future income prospects than they had been in July.
Taken together, recent developments seem to suggest that pro
phecies of a significant downturn in the second half of this year
were as premature as the forecasts of a $570 billion GNP for the
year as a whole.
It seems to me that it would be unrealistic not to assign some
small role to monetary policy in this moderately favorable state of
affairs. The fact that credit has continued to be readily available
and liquidity has been ample has helped the economy maintain its
modest forward momentum. A continuation and even some increase in
this relative ease would undoubtedly contribute further to this end
in the period ahead--and the favorable balance is certainly so
delicate that it could easily be upset by restrictive action from
any quarter.
While the focus of my remarks has been, and will remain, on
domestic economic conditions, I should add that I have noted with
concern the apparent deterioration in the balance of payments situation
in recent weeks. We can only hope that last week's reversal in this
trend portends some real improvement, for it is about as clear as
anything can be in the uncertain business of economic analysis that
monetary action drastic enough to have an appreciable short-run effect
on capital outflows would have unfortunate consequences for the
domestic economy.
Mr. Holland presented the following statement on financial
developments:
The past few days have been eventful ones for the financial
system, as Mr. Stone indicated earlier. Yet, rather paradoxically,
some of these same movements have served also to bring somewhat
longer run relationships into focus; this, together with the avail
ability of more dependable figures now for the third quarter and
for October, provides some improved perspective for decision
making.
11/13/62
-15-
Looking back, we can now see fairly clearly the pattern of
moderately firmer money conditions that developed through June,
July, and in some respects August, followed by a gradual suffusion
of a more expansionary tone through much of the financial system
that continued up until early November. This pattern is stamped
upon the reserve situation, the interest rate structure, and the
general market atmosphere although the precise timing of upturns
and downturns in the different series inevitably varies.
In retrospect, I think this change in reserve availability
is best demonstrated by the course of total member bank borrowing
from the Federal Reserve. Bank borrowing averaged $70 million in
the first five months of the year, then climbed to an average $120
million between mid-June and mid-August, and thereafter has dropped
back to the $70 million level characteristic of early 1962. These
bare statistics describe a significant difference in bank experience:
the lower figure is characteristic of a minimal level of borrowing,
with a few banks meeting known seasonal or other needs and scattered
others occasionally finding need for temporary assistance; the $120
million figure is high enough to involve a sizeable number of banks
finding less reserves in the banking system than they expected,
week after week, and being crowded into borrowing as reserve account
ing periods draw to a close. In such contrasting circumstances, it
would seem reasonable to expect that the resulting change in atmosphere
would be disproportionate to the size of the borrowing figures involved,
and that in fact appears to have been the case.
Bank deposit expansion clearly slowed in the summer, then
picked up in the fall, and by significantly more than seasonal
dimensions. We have spoken at times in the past of the compli
cations to interpretation created by changes in Government deposits
and in time deposits. When the final figures are examined in broad
perspective, however, it can be seen that whatever the week-to-week
erraticisms contributed by Government and (to a lesser extent) time
deposit changes, they do not alter the basic characterization of the
summer as a period of slackened monetary growth and the fall as one
of renewed expansion.
Banks, in accomplishing this renewed deposit expansion, did
not seem to meet much of an upswell of private loan demand. Most
bank loan increases of more than seasonal dimensions seemed to
concentrate in nonfinancial borrower categories for which banks
were being more aggressive competitors with other lending insti
tutions or with the capital markets. Beyond this, banks after
July managed to add unevenly to their combined holdings of secu
rities and financial loans, with sizeable fluctuations in holdings
occurring around major financing dates.
11/13/62
-16-
Capital market flotations, meanwhile, have not as yet shown
much recovery after their summer fall-off from the high first-half
volume. This is particularly true in the corporate market, albeit
new issues may be held down by interim borrowing on favorable terms
from banks, particularly by utilities.
Statistics from other financial institutions give some
indications of the increased effectiveness of bank competition,
both for savings funds and for earning assets. On balance, however,
consumers seem to be channeling a striking proportion of their savings
into financial intermediaries of all types. Corporations, at the
same time, are continuing to experience large cash inflows, and the
statistics suggest a pause, if not a halt, in the long postwar down
trend in corporate liquidity. These influences, along with fall
uptrends in reserve availability and bank credit, have helped to
create a gently stimulative atmosphere in most sections of the
domestic financial structure.
The events of the past few weeks, however, have drawn
increased attention to developments in the international financial
sphere. With interest rate incentives to international flows
enhanced, several counteracting official actions were undertaken
in domestic markets, at least partly in order to bring about a
dampening of this incentive. The Treasury brought its strip of
bills to market, and the resulting market reaction was reinforced
by open market sales of bills from System Account.
The Account was
also able to meet a good portion of the reserve needs of succeeding
days with open market purchases outside the bill area. Finally, the
Board action cutting reserve requirements on time deposits--partic
ularly the reduction at country banks--served to diffuse some reserves
through the banking system without easing the central money market.
The best single indication of the latter influence is the $160 million
increase in excess reserves which developed this past week, while
at the same time the Federal funds rate pushed up to the 3 per cent
level in the central markets. This means the free reserve figure for
this week had an upward bias, and the free reserve figures of the
next few weeks will probably also be subject to this upward bias,
although in decreasing dimension.
At the moment, as Mr. Coombs indicated, this particular flurry
of movement into foreign liquid assets appears to be subsiding
somewhat. Any feeling of respite, however, needs to be conditioned
by an awareness of market prospects regarding domestic interest rates.
As Mr. Brill's presentation to this Committee three weeks ago made
clear, the current rates of individual and corporate financial saving
relative to demands for funds bode further natural downward
pressures upon domestic interest rates. In addition, before
December is over we shall have entered the period of the year
when seasonal downward rate pressures will be substantial, par-
11/13/62
-17-
ticularly on the short rate.
If, therefore, the circumstances
that have made British and Canadian rates attractive relative to
ours do not prove temporary, a more troublesome period for policy
may be ahead.
With such an eventuality possible, the domestic monetary and
financial record of the last six months should be helpful. This
record makes clearer than usual the benefits that a moderately
stimulative monetary policy can bring, and also the consequences
that can accompany even a moderately tighter policy, in something
like the prevailing economic environment. This underlines the
premium to be placed on maintaining tolerable international rate
relationships in the months ahead, by means which will not restrict
domestic credit availability unduly. Of various policy measures
that could be impressed into service, one of proven effectiveness
is concentration of Treasury financing in short-term issues, although
this would be a substantial cost in terms of foregone opportunities
to lengthen the debt and to tailor it more prudently. Other alter
natives that could be considered include further reductions in bank
reserve requirements, operations in forward exchange markets to
increase the cost of covering money market investments abroad,
increased concentration upon System purchases of securities other
than bills, and even a raising of the interest rate ceiling applicable
to 3-month time deposits, in order to allow banks to utilize this
instrument to compete more directly for investible funds that might
otherwise be bidding for 3-month bills.
Each of these possible alternatives cited has its own drawbacks,
and their probable effects on interest rate differentials vary. A
careful comparison of the likely benefits and costs of each alternative
action, however, might lead to a more efficiently integrated assault
upon our domestic and international financial problems--an assault
in which general monetary policy would need to play an important
part, but in which it could be employed as something less than the
ultimate weapon.
Mr. Furth presented the following statement on the U. S. balance
of payments and related matters:
According to preliminary data, transfers to foreigners of
gold, foreign currencies, and dollars amounted in October to a
record sum of $900 million, more than twice the monthly average
for the third quarter. The amount would be $75 million greater
if it were not for a statistical adjustment by which, contrary
to previous practice, certain newly issued government obligations
that will not be redeemed within 12 months are no longer counted
11/13/62
-18-
as liquid liabilities. While the data are fragmentary and ten
tative, they probably give a reliable indication of the order of
magnitude involved.
The October transfers will bring the total for the first ten
months of the year to $2-1/4 billion, according to the official
computation. If both the statistical adjustments and the receipts
from extraordinary debt prepayments are disregarded, the sum rises
to $3-1/4 billion--as much as the deficit for the entire year 1961.
But the increase in the October deficit over the average for
the third quarter was probably due to non-recurrent factors.
More than half of the deficit reflected transfers to Canada
and included a few large capital transactions as well as considerable
amounts of volatile funds, attracted by the unusually wide (un
covered) interest-rate differential maintained by the Bank of
Canada.
Other extraordinary transactions were a large royalty payment
to Venezuela and the final payment of the U. S. subscription to the
Inter-American Development Bank. Some short-term money went to
London in response to the re-emergence of a substantial covered
differential in favor of British money-market paper. And I am
convinced, although without statistical evidence, that the Cuban
crisis led to flight movements of U. S. funds to countries regarded
as safe havens. Finally, the threat of a longshoreman strike may
have reduced the trade surplus for the month.
Preliminary data for the first week of November show transfers
from foreigners to U. S. residents, mainly on private account, of
$150 million (excluding statistical adjustments). Last Friday, for
the first time in months, there seems to have been a reflux of funds
from Canada. Both developments support the view that the size of
the October deficit was due to unusual circumstances.
In continental Europe, there was less talk of an approaching
end of the boom, and more talk of a need for restrictive rather than
expansionary policies. For the U. S. payments balance, contractive
monetary policies in Europe, especially if they involved a rise in
interest rate levels, might be nearly as bad as an end of the boom.
But Britain and Japan recently took some modest expansionary actions,
Britain by reducing some taxes, and Japan by easing credit restrictions.
Gold sales to foreigners since the beginning of October have
been less than $100 million, a small sum considering the size of the
October deficit and the impact of the Cuban crisis. But in contrast
to the favorable short-run prospects reported by Mr. Coombs, we must
expect larger sales in the long run.
First, the Bank of Canada, which so far has not converted any
of its dollar accretions into gold, will probably at the very least
repurchase the $190 million of gold it sold to the U. S. Treasury last
spring, as soon as it unwinds the remainder of the assistance it
11/13/62
-19-
received in June from the United States, Britain, and the Inter
national Monetary Fund; and it could do so any moment as it has by
now gained more reserves than it lost during the first half of
the year.
Second, many European countries are likely to convert further
dollar receipts into gold at a more rapid pace than hitherto.
Until recently, some of these countries could use their
dollar receipts for debt prepayments to the United States and
repurchasing drawings from the Monetary Fund. But now, only
Britain and France still owe large debts to the United States;
and Monetary Fund holdings of dollars have nearly reached 75
per cent of the U. S. quota, the limit beyond which repurchases
can no longer be made in dollars.
Furthermore, the forward operations of the Treasury and, to
a much smaller extent, the System swap arrangements have enabled
some countries to convert straight dollar holdings into holdings
protected by an exchange value guarantee. During the first nine
months of this year, more than $600 million were thus converted
by continental European countries. While the eight major continental
European countries statistically increased their dollar holdings
by $150 million, they actually reduced their uncovered holdings
by $450 million. Only Austria, France, and Sweden accumulated
any significant amounts of uncovered dollars; and Austria has
meanwhile converted its entire accrual into gold or guaranteed
dollars, while France continually converts dollars into gold and
presumably intends to use the rest of its accruals for further debt
prepayments.
Only Sweden among all European countries apparently
still adheres to the policy of keeping the bulk of its very modest
reserves in straight dollars.
The greater part of the decline in uncovered dollar holdings
was on official account. Thus, the decline apparently was not so
much the result of lessened willingness to hold straight dollars
on the part of the public, but rather a reflection of the policies
of the European monetary authorities.
There are obvious limits to the volume of guarantees the
Treasury and the System can give in order to prevent surplus
countries from converting their dollars into gold. Unless these
countries become more willing to accumulate uncovered dollars,
we must therefore expect that the proportion of our deficit reflected
in a decline in our gold stock will rise sharply, and with it the
psychological impact of our deficit on the international standing
of the dollar.
Mr. Hayes presented the following statement of his views on the
economic situation and monetary policy:
11/13/62
-20The performance of the domestic economy appears to
have been slightly better, on the basis of the data coming to
light in the past three weeks. Particularly encouraging is the
very strong behavior of auto sales in October, although this
may reflect a bunching of sales as new models have become widely
available. The prospects are for a good auto production level
in November. The McGraw-Hill survey of business plans for plant
and equipment spending in 1963 may be regarded as only mildly
encouraging, after allowance is made for past inaccuracies in
this forecast--but this evidence pointing to continued, though
mild, advance finds some support in the NICB's latest appropriation
figures. Last month's decline in unemployment would have had more
significance if it had not been due primarily to a drop in the
labor force. On balance, a relatively sluggish advance seems
about the best to expect in the fourth quarter.
I am somewhat reluctant to point with alarm at the increasingly
discouraging balance of payments situation, as I realize that
this can be regarded as "playing an old record". Yet I feel
strongly that, as the central bankers of this country, we must
give this factor very close continuing attention; and sometimes
I have an uneasy feeling that this Committee is inclined either
to overlook the seriousness of the risk of real loss of confidence
in the dollar or to assume that other than monetary remedies for the
balance of payments are so controlling that the Federal Reserve
System can simply leave it to others to grapple with this danger
while we keep our eyes focussed mainly on the domestic economy.
This philosophy would seem to me quite unacceptable. Of course
we must keep a close watch on the domestic economy--but at a time
when most business indices are at historical highs, when the latest
figures give little ground for expecting any imminent decline, and
when the liquidity of the economy and the availability of credit
remain ample, it would seem to me wholly logical to shift the weight
of our emphasis a little towards international as against domestic
factors.
To back this view we need only look at the preliminary October
data, which suggest for that month alone an over-all payments deficit
of around $900 million, following the recently published official
third quarter deficit of $2.9 billion (seasonally adjusted annual
rate). Even after deduction of several non-recurring items the
October figure is still about $700 million, the largest monthly
deficit on record. Much of this reflects movements of capital into
Canada, both short-term and long-term. Part represents Canadian
bank window dressing; part the acquisition of Canadian time deposits
by U. S. corporations taking advantage of high rates; part long
term bond flotations in the U. S. In addition, the recent temporary
widening of the covered spread between U. S. and U. K. short-term
market rates has drawn funds to London in significant, though not
very large, amounts, and this has included some transfers by
11/13/62
-21
American banks for their own accounts.
Mr. Young's comments on
short-term rate expectations in Europe suggest that this type
of problem is
likely to be a persistently recurring one.
Against this we can find satisfaction in the continued
steady performance of the dollar in foreign exchange markets
and the recent calm atmosphere in the London gold market. To
a very considerable extent this probably reflects the increasingly
close cooperation among leading central banks and recognition by
financial markets of the strength of this cooperation. Yet we
cannot afford to forget that the major cornerstone of this co
operation is faith in the individual countries' ability and
willingness to guide their own economic affairs in a way that
will make for better international equilibrium. No member of
this cooperative group is free to go its own way, concentrating
on its domestic affairs and neglecting its international respon
sibilities.
We have seen many examples of other countries'
willingness to take at times, strong measures for the sake of
better international equilibrium that tended to be contrary to
purely domestic considerations. Specifically, the large European
holders of dollars have been led to believe that the U. S. is
taking effective steps to eliminate its payments deficit within
a reasonable period, and the September Bank-Fund meetings were
marked by expressions of confidence on all sides that we were
making steady progress towards this goal. In this atmosphere a
sudden realization that we are not making progress, but are now
retrogressing, could have very serious consequences, especially
in the form of enlarged drafts on our gold stock.
Now let us look for a moment at the current credit
situation, which must necessarily provide the basic framework
for our own operations. Bank credit apparently continued to grow
at a strong pace in October. Investments of weekly reporting member
banks in both governments and municipals were up sharply. Business
loans were about in line with seasonal expectations, after the
stronger showing of September and August--probably in part because
of greater use of the market for new corporate bond issues. Banks
have remained relatively liquid, the money supply rose enough in
October to wipe out the net decline that had occurred since April,
and the combined money supply-plus-time deposit increase was the
largest for any month this year. Seasonally adjusted required
reserves against private deposits have been close to or above the
Board's 3 per cent guideline since late October, and current
projections suggest that they will continue to exceed the guide
line through at least early December.
As the Committee is well aware, an ample flow of savings
and high corporate liquidity have been placing important down
ward pressure on interest rates throughout the maturity range.
Despite the temporary success of the Treasury and the Desk in
11/13/62
-22-
reversing the downward trend of bill rates last week, the under
lying forces seem to be asserting themselves again, and we shall
have our hands full trying to maintain a firm rate structure,
unless we face frankly the probability that a firm rate structure
calls for a somewhat less easy monetary policy. With the inter
national problem as pressing as it is, and with the Nation's
liquidity as ample as it is, I can see no excuse for pursuing
a policy which is reflected in free reserves in a range only
$100 million or so lower than the range we were aiming at at
the bottom of the recession nearly two years ago.
I believe
we should make a moderate but definite move toward lesser ease,
encouraging the 90-day bill rate to remain close to or even above
3 per cent. If free reserves in the neighborhood of $200 million
should prove to be necessary to achieve this, I would have no
objection to such a development.
It might be argued that an immediate increase in the
discount rate would provide a useful signal of our willingness
and determination to use monetary policy to do our part in
defending the dollar. At this point, however, I am not prepared
to press this view and would be content to see a moderate tightening
through open market operations as a first step. Obviously the
closer we come to the time when a substantial tax reduction will
become a reality, the less will be the risk that our own actions
may have harmful effects on the domestic economy and the broader
will be our scope for constructive monetary policy.
If the Committee is willing to make a modest policy change
of the kind I am advocating, I think the directive should be
modified accordingly. In any case the reference to an imminent
Treasury financing should be eliminated, together with the specific
reference to a quarantine on armament imports into Cuba; and at
the same time I believe we should place greater emphasis on
international capital outflows and less on the desirability of
encouraging further increases in bank credit and the money supply.
The policy directive suggested by Mr. Hayes was as fol
lows:
In view of the margin of underutilized resources in the
economy and the absence of inflationary pressures, it is the
current policy of the Federal Open Market Committee to permit
moderate further increase in bank credit and the money supply
to the extent that this is compatible with the maintenance of
money market conditions that are not likely to stimulate
capital outflows from this country. This policy takes into
account the difficult balance of payments situation and the
important role of capital movements in the balance of payments.
11/13/62
-23
It is also the Committee's policy to cushion such unsettlement
in money markets as may stem from international political and
military developments.
To implement this policy, operations for the System Open
Market Account during the next few weeks shall be conducted
with a view to meeting seasonal needs for reserve expansion in
the banking system while encouraging a somewhat firmer tone
in money markets.
Mr. Shuford, commenting on the Eighth District, noted that condi
tions had changed little since May.
The economy seemed to be on a plateau,
with employment remaining near the level reached in May.
With respect to
unemployment, there had been a slight decline reflecting a decline in the
labor force.
The use of electric power was about the same as the May
rate, and department store sales showed no significant change since spring.
Bank loans rose little from September to October.
Total deposits did con
tinue to rise, as in the previous month, but the level of demand deposits
remained essentially the same.
The increase was almost entirely in the
time deposit area.
Mr. Shuford said that he appreciated Mr. Hayes'
observations with
respect to the international situation and that he recognized
the problem.
It was a matter not to lose sight of, and he was certain that the Com
mittee would not.
The domestic situation, however,
was particularly dis
turbing at this time in view of the relatively long, high-level
that had existed.
plateau
Without losing sight of the international problem, it
would be well, he thought,
for the Committee to take advantage of any
opportunity to stimulate production by monetary means.
This would not
call for any change in basic policy; he would think in terms of aiming at
-24
11/13/62
free reserves in the neighborhood of $400 million.
Of course, the Com
mittee did have the bill rate to consider, but he felt that the level of
free reserves he had in mind was compatible with a bill rate in the
neighborhood of 2-3/4 per cent.
Mr. Bryan, reporting on economic conditions in the Sixth District,
commented that some series were up and some were down.
In general, the
There
District series seemed to be following close to the national pattern.
had been some interest at the Reserve Bank in formulating plans to deal with
problems that might have resulted from the Cuban situation; however, no
appreciable effects of the crisis could be detected.
There had been a
run on canned water, and a run on automobiles in one area.
However, the
Bank could not detect any unusual currency demands other than in the
Florida area, where for about two days during the crisis there was a
greater than usual demand for large bills.
There had also been some demand
for currency from the armed forces in connection with the movement of
troops, but that was all.
Turning to the national economic picture, Mr. Bryan said he found
it disappointing.
One month was encouraging, the next was disappointing,
and he found himself wishing the economy would make up its mind what it
was going to do.
The latest figures did offer a little encouragement,
however.
With respect to monetary policy, Mr. Bryan commented that he be
lieved as little change as possible should be made.
On the matter of the
policy directive, Mr. Bryan said that he would recommend no change.
As
11/13/62
-25
to Mr. Hayes' statement on the balance of payments, he agreed that this
was a dangerous situation.
However, the Committee must analyze the mechanics
of influencing this situation through the use of monetary policy.
He
believed that if one analyzed that mechanism closely, it would come down
to discouraging domestic economic expansion, and he had great doubt
whether the Committee would want to take such a step.
Mr. Bopp commented on developments in the Third District, noting
that there was no evidence of buoyant activity.
With respect to monetary policy, Mr. Bopp said that the last few
weeks had been exceptionally difficult ones for him and others at the
Reserve Bank.
He found a great diversity and switching of individual
views about current conditions and prospects--more so than ever before.
At this time he would favor slightly greater ease, with emphasis on opera
tions in the intermediate and longer term markets.
With respect to the international situation, Mr. Bopp said it
would seem to him that if the Committee felt it must adjust monetary policy
to obtain substantial results, the Committee would have to tighten so
significantly as to injure the domestic economy.
Mr. Fulton reported that the Fourth District economy continued to
move sideways, with no pronounced indication of either an upswing or
downturn in the immediate future.
After a poor showing in October, improved
department store sales for the past two weeks had carried the index back to
the high September average, and a record Christmas business was anticipated.
Auto sales in major cities had advanced to new high ground, with a
11/13/62
-26
substantial number of undelivered orders on dealers' books.
However,
it was reported in some quarters that new orders had slackened, portending
a possible cutback in production in late December.
If sales were to
decline, then a year-end inventory of 975,000 units would appear to be
a reasonable estimate.
Used car inventories were becoming heavy, with
a softening in price.
Construction contracts in the third quarter remained under the
second quarter average despite the fact that heavy engineering contracts
had been favorable, bolstered by public works expenditures.
The increase
in unemployment had been slightly more than expected on a seasonal basis.
Those areas dependent on basic steel and heavy industry continued to have
the highest totals.
This was probably the result of the modernization of
the mills and the increased use of labor-saving processes as well as the
low operating ratio of the mills.
The paper and container industry
reported a good and increasing volume of output, but a highly competitive
situation with soft prices.
Large capital investments made over the past
two years had increased capacity greatly, and the industry was waiting
for orders to grow up to capacity and to increased prices and profits at
that time.
As to steel, Mr. Fulton said there was some indication that the
automobile companies were beginning to reach the bottom of their inventory
stockpile and were ordering increased tonnages to maintain current high
production.
However, other users of steel had not increased takings; in
fact, some mills reported a reduction of orders,
tion of inventory building.
There was no indica
Orders were on a hand-to-mouth basis, with
-27
11/13/62
the mills still carrying inventories for immediate delivery.
The
estimate of production for 1962 was 97.5 to 98 million tons; for 1963,
about the same.
The steel companies were more and more concerned about
the import of foreign steel at prices under those obtained abroad.
A recent meeting of industrial economists indicated that new
orders of many firms were below current sales, with a consequent decline
in backlogs.
seasonally.
Others stated that new orders had not increased as expected
Some of these economists felt that the economy had already
peaked out; others felt that a softening would occur after the turn of
the year.
Mr. Fulton said he was inclined to the premise that the stability
in the indexes was only a pause and that the economy might break out
on the up side rather than into a recession.
believed it would be minor and short-lived.
If a downturn occurred, he
He would like to see fewer
reserves supplied to the banking system and a firmer tone in the short
term market, with no further decline in the long end.
in time money posed a threat to future stability.
The large increase
Until the strip of
bills was sold last week, short-term rates had declined progressively, as
had long-term Governments,
municipals,
and corporates.
had encouraged the outflow of funds on a covered basis.
These movements
Mr. Fulton felt
that monetary policy had all but surfeited the economy with reserves and
that the time had arrived to slow the injection of funds.
gest maximum free reserves of $300 million.
He would sug
11/13/62
-28Mr. Mitchell presented the following statement:
Formulating policy in the current economic atmosphere is
exceptionally difficult. Fears of another postwar-type re
cession seem less pervasive than earlier, but hopes for a
sustainable significant upthrust also seem to be rapidly fading
into the oblivion of "no change." The economy continues to
absorb jolts--both economic and political, internal and inter
national--but it does it at per capita zero, i. e., with
deflated GNP per capita showing no significant change, as it
did between the second and third quarters and probably will
between the third and fourth. An economy in which GNP is not
rising faster than the growth in population is not the image
we have of ourselves nor one that we want others to have of us.
It conforms neither to our needs nor our aspirations and it is
not an equilibrium situation for long.
Something will happen which will stir the economy from per
capita zero. It may roll off the roof with everyone, including
the foreigners, watching helplessly. It may get up and go,
following a substantial reduction in taxes or a substantial
increase in defense spending. It would more surely be in a go
position if monetary policy gave the increasingly serious
domestic needs a higher priority than it gives the intractable
problem of trying to maintain an artificial rate structure for
balance of payments purposes.
The problem is approaching a crisis stage because the sort
of economy we have is generating a large and increasing amount
of savings, which in the free play of markets would be put to
work by depressing the interest rate structure. In the
corporate area, a high level of profits and a growing volume of
depreciation charges is being maintained while inventory spend
ing is reduced and capital spending is leveling off. The result
points toward a glut of business funds available for investment
and a decline in capital financing needs. In the consumer area,
flows of savings continue to grow, at least those that can be
categorized as "nondiscretionary." Debt repayments are beginning
to catch up with new debt extensions, and the volume of savings
flowing to pension funds and insurance companies grows with
regularity. At the same time, we seem to be getting a shift in
the structure of consumer saving, with the decline in the stock
market and the diminished availability of corporate and municipal
flotations forcing a diversion of savings into thrift institu
tions.
Against this background of rising private savings and de
clining private credit needs, the Federal Government doesn't
appear to be much of a contracyclical force, at least through
fiscal action.
The cash budget was in balance in the second
11/13/62
-29-
quarter, on a seasonally adjusted basis, and in only very small
deficit in the third quarter.
For the calendar year as a
whole, the cash deficit is likely to be only $5 to $5-1/2
billion, down from close to $7 billion last year. (Even on the
national income and product basis, the deficit would be rather
small, perhaps on the order of $2 billion compared with almost
$4 billion last year and over $9 billion in 1958.) Neither can
we regard debt management as having been contracyclical since
(a) the Treasury has borrowed more than it needed in terms of
expenditures and receipts, and locked up the excess in its cash
balance,1/ (b) has--at least in recent months--been reducing
the supply of short-term liquidity instruments through extensive
refunding actions.
How long can the rate structure withstand such Federal fiscal
and debt management policy, growing private liquidity, and a re
serve policy which keeps free reserves in at least the $300-$400
million range? This is not a tenable combination of policies
and facts, and we ought to recognize it.
I urge that we practice
what we preach about free markets, and let the rate structure
obey the laws of savings supply and investment demand.
But if the Committee remains persuaded that the foreign
situation should continue to dominate its posture, it makes a
difference as to how that objective is realized. We could, of
course, try to maintain the desired short-rate level by snugging
up on reserves. This might have some expectational effect for a
while, but I doubt whether, once it started, we could maintain
this effect without successive reductions in reserve availability.
How far it would have to go I don't know, but in a sluggish
economy generating so much liquidity I suspect it would
I would venture that there are few
ultimately have to go far.
at this table who would be willing to live with net borrowed
reserves while unemployment remained close to 6 per cent.
Can
we start on a course in this direction without being prepared
for such a consequence? I doubt it.
There is another possible line of action, one we haven't
explored to the fullest. This would be providing a reserve
climate favorable to renewed domestic expansion by injecting re
serves primarily outside the short end of the investment
spectrum. Despite all the talk about having freed ourselves
from the bills-only restriction, we still behave as though this
were still the prevailing rule. I know that some will argue that
1/
Which need not be deflationary so long as monetary action
permits bank reserve expansion to continue over and above
reserves needed to support Treasury balances.
11/13/62
-30-
it can't be done in the magnitude needed for reserve operations,
and that some will argue that we will wind up dominating and
distorting the rate structure. I think the burden is on them
to prove that it can't be done, especially since this would be
a move in the same direction that market forces are now working.
As for compromising our allegiance to free market forces, it
seems ridiculous to talk about maintaining a "free" long-term
market so long as we are putting a floor under the whole rate
structure by pegging the short rate. I, too, would be in favor
of letting the markets run free, but if we won't, we may be
able to do an effective job of controlling both level and
structure. Finally, I recognize that this policy runs the risk
of accelerating long-term capital outflows, perhaps in sub
stantial magnitude. Here again, the burden must rest on those
who advance this argument, and I would welcome any evidence
that would enable us to quantify the risk.
We have about run out of devices to bolster the rate
structure in its present form while facing the increasing need,
both for domestic and international reasons, to stimulate in
vestment demand. Unless the System is willing to utilize its
last arrow--pushing reserves out through aggressive intermediate
and long-term purchases--we may well have to face a slippage in
rates along the line or a tightening of credit availability in
the face of a host of domestic economic indicators calling for a
contrary policy.
Timing is important if this operation is to be used. The
flow of funds seeking investment has put rates in capital and
mortgage markets under considerable pressure. More pressure
will be supplied by seasonal factors at year end. If we act
overtly and aggressively now, for a few months we will have market
trends and seasonal forces with us; we might also have the bene
fit of some expectational influence. On the short side, the bill
rate could be held up a while longer. There is every reason to
believe that this policy would be significantly stimulative; it
moves in the same direction as market forces. It should fore
stall a decline in over-all business activity and thus avert the
damaging effect of that development on business psychology.
Properly executed, it could get the economy moving ahead again.
When that goal has been achieved, the dilemma of policy we face
will have been dissolved.
Mr. King said that he was slightly encouraged about the domestic
economy.
While he did not foresee any strong breakthrough at this time,
he did not believe the economy was quite so sluggish.
He did not base
11/13/62
-31
this judgment of the situation on economic reports and statistics, but
on his own "straws in the wind."
With respect to the balance of payments, Mr. King commented that
there was nothing in the record at present about which to be encouraged.
Looking back at the domestic economy, he felt the Committee's contribution
had been large and real.
He was reassured to a large extent by the forma
tion of time and savings deposits.
He did not believe it would be wise
to predicate any change in policy on a tax cut.
While some might be hopeful
with respect to a tax cut, he was less hopeful; the possibility of achieving
it was far from clear.
Mr. King noted that his attitude regarding the balance of payments
had followed a course varying from slightly more concern to slightly less
concern.
In the past year or so he had attached a little less significance
to it because of doubtful forces in the domestic economy.
However, as he
had said, he was presently somewhat encouraged, particularly because of the
economy's demonstrated ability to absorb the shocks it had absorbed, while
his concern about the international situation was slightly greater than it
had been.
Nevertheless, despite his view that the international situation
warranted concern, he would not favor a change in System policy at this
time.
Mr. King believed that System policy had been constructive.
He also
believed that the Committee's responsibility required it to stay on line.
Mr. Robertson presented the following statement:
I returned to the deliberations around this table, after
missing two consecutive meetings, to find the general business
situation still disappointing. Auto sales have been spectacular
11/13/62
-32-
for a few weeks, after the new model introductions, but this is
not yet a reliable basis on which to judge prospects for the
full model year, and moreover the auto industry is not likely
to be able, by itself, to reinvigorate a slack economy.
I would
judge, from what I have heard this morning, that the most favor
able general statement that can be made about the economy is that
at least the recession that had been forecast by some gloomy
prophets has failed to materialize. The harsh fact remains
that we still face an economy with a substantial amount of un
utilized resources and with a current rate of growth so slow that,
unless it is stimulated, it offers no hope for putting these re
sources back to work.
On the other hand, I am heartened by what monetary policy
appears to have accomplished this fall.
I note that the slightly
easier bank reserve position has been accompanied by a general
downward drift of interest rates and a fairly substantial pace of
monetary expansion. This seems to me the kind of stimulative credit
atmosphere which I hoped for when I voiced my views at the late
September meeting of the Committee.
I regard this as an attribute
of policy with longer-range significance, and a policy appropriate,
indeed essential, for the alleviation of our longer-range problem
of economic growth.
With respect to our coordinate problem of achieving a viable
international balance of payments position, I judge that our sit
uation has become neither much better nor much worse, taking the
year as a whole.
In terms of the sales of goods and services
across international boundaries, perhaps the most that can be said
is that we have experienced not quite as much worsening of trade
surplus as would be expected cyclically. The fundamental fact in
this area, however, continues to be that our trends of prices and
costs are less inflationary than for our leading industrial com
petitors, and hence our basic competitive position is improved.
Even "Cuba" has not seemed to disturb that relationship. This I
regard as the most fundamental fact about our international
situation, and its long-run implications are favorable.
We have been beset in recent days with an upsurge of news
suggesting actual and potential net capital flows from this
country to other major nations, chiefly Canada. Comments make
it clear that these flows have occurred for a variety of reasons,
most of which do not seem to be associated with interest rate
differentials on money market assets. So far as I know, those
few flows that might be moving into foreign money market assets
for purely interest rate reasons are themselves responding to
rate differentials which have no certainty of persisting.
Certainly the policies of Canada are not rooted in circumstances
which should compel a long continuing maintenance of their short
term interest rates at levels so far above our own.
11/13/62
-33
More basically, however, I think we should be careful not to
place too much'weight in our policy formulations upon these short
term capital flows which may exist for transitory reasons. One
need only take a look at the international financial problems of
the United States, and other major industrialized countries,
through the eyes of the less developed countries -- as I have been
privileged to do recently -- to realize the overwhelming strength
of our position and the unnecessary anguish involved in overemphasiz
ing disturbances such as we have been witnessing these past few weeks.
The industrial nations of the free world do not experience
precisely the same pattern of economic developments, and they
cannot always be expected to follow policies which mesh neatly
the financial conditions in their money, credit, and capital
markets. When changed economic circumstances are developing and
new policies need to be evolved to deal with them, some less than
perfect interest rate relationships must be expected internation
ally, with corresponding flows of capital developing. Indeed,
in a dynamic world, in which change is continual, pressures of
unexpectedly large capital flows,' first in one direction and then
in another, ought to be expected to occur. It is important for us
to remember that, for all our gold losses of recent years, we are
still probably in a better position to withstand the pressures of
capital flows during periods of economic transition than is any
other country. It behooves us to handle our domestic economic
policies accordingly. To be specific, I think this means we should
not alter monetary policy with every shift in the breeze of inter
national capital flows, but aim our policy in so far as we can to
press in the direction of our longer-range objectives.
It seems to be clear, as I have indicated earlier, that our
fundamental position domestically, with substantial underutiliza
tion of resources, is unfavorable; while our fundamental position
internationally, with our improving competitive cost-price re
lationships, is favorable. As a result, it seems to me the policy
prescription is obvious: continue to promote a monetary environment
with ample availability of bank credit and liquidity in order to
assist in stimulating higher rates of employment and economic
growth. This, to me, is putting first things first. I would ex
pect such an objective to be served by a free reserve level ranging
at least around $450 million, with stable to buoyant conditions
prevailing throughout the credit and capital markets.
Mr. Mills said the statement he would make was not intended to
minimize the seriousness of the balance of payments situation, but tied into
his previously expressed belief that a strong United States economy was the
best guarantee to long-run worldwide economic growth and foreign exchange
stability.
11/13/62
-34-
Therefore, he believed that domestic considerations must take precedence
over international balance of payments considerations.
If, however, the
balance of payments situation worsened critically, stern and strong
measures should be taken and temporizing experiments abandoned.
By strong
measures, he referred to such as those the United Kingdom and Canada had
effectively taken during the last year and which contained confidence
restorative qualities.
Mr. Mills then presented the following statement:
As the year 1962 comes toward its close, a backward rather
than a forward look offers the best vantage point from which to
develop an appropriate Federal Reserve System monetary and credit
policy reaching into the year 1963. A portentous appraisal of past
economic events must include the years of 1961 and 1962 and leads
to the conclusion that throughout both years the national economy
held its own, but little more. Coincidentally, the leveling-out in
the money supply that has occurred in 1962 was accompanied by a
flattening-out in general economic activity. Furthermore, over this
period obsolescence has run down excess plant capacity at the same
time that a rapid growth in population has increased human wants
and needs--all of which, in line with some slight seasonal strength,
indicates that the economy may now be poised for a new upsurge in
growth entailing a vigorous revival of enlarged capital investment
programs, in the process of which new industries and their outlets
for capital expenditure may be uncovered.
A Federal Reserve System monetary and credit policy less re
straining and more expansionist than that now in evidence can be
an important influence for stimulating economic activity and, in par
ticular, for encouraging the expansion of commercial bank credit with
consequent support to growth in the money supply, which latter is an
essential ingredient for any advance into new ground. However, it
will be necessary for Federal Reserve System policy to revert to the
kind of free market principles that are largely identified with a
"bills only policy" if the objectives sought after are to be realized.
A flexible monetary and credit policy freed from the pegging re
straints by which it is now handicapped would also be consistent with
a monetary attack on the nation's balance of payments problems, be
cause dealers in U. S. Government securities would be constrained to
reduce their positions and in adding to the market supply of securities
in this manner, an upward pressure would be exerted on interest rates
11/13/62
-35
that could be backed up through open market policy actions--and all
within the context of providing adequate credit availability and an
incentive for credit expansion. In other words, a firm interest
rate structure as a balance of payments defense, and opportunities
for credit expansion, can be made to be consistent with a flexible
monetary and credit policy.
I see no need for an increase in the discount rate at this moment,
nor a change in the directive whose framework carries ample authority
for conducting the kind of monetary and credit policy proposed--but
which authority has not been used to my satisfaction in the interval
since the Open Market Committee's last meeting.
Mr. Wayne reported that Fifth District business conditions had ap
parently remained quite stable during the past few weeks.
According to
the Reserve Bank's latest survey, the downtrend in textiles had moderated
significantly, with orders and shipments steady but employment and hours
still tending to decline.
In other manufacturing
industries, shipments
had reportedly continued to rise, but new orders, employment and hours had
remained about the same.
Construction activity continued at a high level
even though contract awards had been declining.
Retail trade appeared to
be exhibiting normal seasonal strength at near-record levels, and the
demand for coal was somewhat stronger again.
Two aspects of the national economy seemed to him particularly
worthy of attention; Mr. Wayne said.
The first was that in the nation, as
in the Fifth District, business activity had remained quite stable at a high
level, gaining considerable support from record automobile production and
sales.
The second was the economy's remarkable stability in the face of the
Cuban crisis.
This, on top of the steel difficulties, the stock market
decline, and the Canadian monetary crisis, suggested that the economy was
in a stable equilibrium not likely to be upset by anything short of a major
11/13/62
-36
disturbance.
Increased military activities would certainly raise defense
spending and the budgetary deficit to some degree, but unless there was a
further acceleration of the military buildup, it was not likely to cause
any strong upsurge in business.
It seemed more probable that the increased
spending would simply be an additional force tending to sustain activity at
about its present high level.
In the policy field, Mr. Wayne said he did not see any valid argu
ments for more ease.
He would recommend that the Committee aim at a level
of free reserves of $400 million or less, and that special attention be
given to keeping the three-month bill rate above 2.75 per cent and preferably
above 2.80 per cent.
He believed the Committee should make it clear--by
actions not words--that it had not changed policy in either direction.
The
reference to Treasury financing should be eliminated from the directive.
Mr. Clay noted that recent events had underscored the dilemma of
monetary policy with which the Federal Open Market Committee had been
wrestling for more than two years.
This dilemma had resulted from unfavor
able developments in the international balance of payments at the same time
that the domestic economy was showing little basis for encouragement.
It
was apparent that the month of October brought little change in the level
of seasonally adjusted activity in the national economy. While new auto
mobile sales were outstanding, the aggregate performance of the economy in
terms of production, employment, and sales added up to little more than
seasonal increases.
The full meaning of the very favorable beginning of
the new automobile sales year was not yet apparent; it would be necessary
to await further sales developments in order to be able to gauge the basic
11/13/62
-37
strength of that market and its impact on the economy.
Looking ahead, the McGraw-Hill survey of business capital spending
plans for 1963 did not foreshadow an expansionary impact from that important
sector of the economy.
Rather, the report projected a pace of activity
that at best was sluggish. All in all, except for the spurt in automobile
sales, economic indicators at the moment produced little evidence of ex
pansionary forces in the private sectors of the economy leading to sig
nificant strides toward fuller employment of manpower and other resources.
Under the circumstances, Mr. Clay said, the goal of public policy
for domestic purposes should be one ,of endeavoring to stimulate economic
activity.
For monetary policy, that meant to him a program of monetary ease
leading to the provision of member bank reserves and the expansion of bank
credit in excess of seasonal proportions and to a further downward movement
in the level of interest rates.
Recent evidence of declining rates and
improving credit availability in the residential mortgage market were one
aspect of the response to these policies over past months.
Mr. Clay noted that recent developments in the international flow
of funds had led to Treasury financing and Committee open market operations
fostering higher Treasury bill yields.
He felt that this deterrent to down
ward movement in short-term rates should not be permitted to inhibit the
provision of member bank reserves in excess of seasonal proportions and a
further easing of longer term yields.
The Committee should seek the attain
ment of these objectives by purchasing longer term securities and by con
ducting offsetting purchases and sales so far as necessary to attain its goals.
11/13/62
-38
In Mr. Clay's opinion, the Reserve Bank discount rate should be left
unchanged.
As to the directive, in the present directive's reference to the
recent Treasury financing operation and the emergency aspects of the Cuban
crisis, it apparently would have to be rewritten.
Mr. Scanlon reported that in the Seventh District concern about the
business outlook appeared to have taken a favorable turn in recent weeks.
The views expressed by the Reserve Bank's directors at their meeting last
Thursday tended to reinforce this view.
extremely high level of auto sales.
One important factor had been the
Also, manufacturers of some other con
sumer durables had reported a strong rise in sales to dealers.
Another factor
was the expectation that military spending would be increased more than was
planned earlier and that the kinds of items produced in Midwest plants would
share in the spending rise.
While the impact of these developments could be
of short duration, they had tended, in the meantime, to bolster waning busi
ness confidence to some extent.
As Mr. Noyes had indicated, developments in the auto industry hardly
required comment,
Sales in October were phenomenal--well above expectations-
and orders for future delivery were said to be large in comparison to the
experience of recent years.
Sales of domestically produced cars in October
were the highest for any month in history and were exceeded only by May 1955
on a daily rate basis.
declined during October.
Instead of increasing as expected, dealer inventories
Production schedules had been increased, and called
for more than 2 million assemblies in the fourth quarter.
If realized, this
would exceed the record for the period, established in 1955.
11/13/62
-39
As to policy, while the balance of international payments data
clearly indicated that no solution to problems in that area was imminent,
Mr. Scanlon suggested that the combination of domestic and international con
ditions appeared to call for continuation of the policy objectives stated in
the current directive.
The directive should be changed to remove the ref
erence to imminent Treasury financing and eliminate specific reference to
the potential financial effects of the quarantine on military imports to
Cuba.
He would not change the discount rate at this time.
Mr. Deming said the latest available evidence continued to indicate
that the Ninth District economy was pushing ahead at a moderate pace, sparked
by the excellent farm situation.
September personal income was up from
August and was 8-1/2 per cent ahead of a year earlier.
were 8 per cent larger than in October 1961.
October bank debits
Nonagricultural employment in
Minnesota in October, after seasonal adjustment, rose slightly from the
September level.
Insured unemployment was well (40 per cent) below year-ago
totals in both September and October.
In a survey of business opinion taken
early in November, two-thirds of the respondents reported retail sales up
and auto sales up considerably.
The bulk of the respondents reported man
ufacturing and nonmanufacturing employment holding even to up slightly and
unemployment even to down slightly.
For the weeks ahead, two-thirds saw
improvement in business as probable or certain, and most of the remainder
saw business continuing stable, about the same pattern as had held since
early July.
11/13/62
-40
The District banking picture remained about the same, with deposits
growing and loan demand fairly strong.
In October city bank loans behaved
about in normal fashion, but this followed a very strong September expansion.
Country bank loans grew at a record level in October, and they also were
strong in September.
Both types of banks remained in a fairly liquid position.
Borrowings from the Reserve Bank were nominal, and those banks in the Federal
funds market had been mainly on the selling side.
With respect to monetary policy, Mr. Deming commted that although
the economy was not doing as well as the Committee might like, he did not
see any significant basis for easing. With respect to the balance of pay
ments,
Mr. Deming said he agreed with Mr. Hayes that the central bank should
do everything within reason, particularly in the area of short-term rates.
Perhaps, under certain circumstances, the Committee should do more than it
On the other hand, he would not like at this time to see
had been doing.
the short-term rate the major guide for policy; in his opinion, the Commit
tee should key its policy primarily to the domestic economy.
He thought
what Mr. Mitchell had said at this meeting had a great deal of merit: the
Committee should seek alternative means for dealing with the balance of
payments problem.
Mr. Deming said, with respect to the directive, that he was a little
puzzled about suggestions to remove reference to the Cuban situation.
reference to imminent Treasury financing should be removed.
situation remained a factor, however,
not as tense.
The
The Cuban
even though the situation perhaps was
Therefore, from deletion of the Treasury financing phrase,
11/13/62
-41
he would feel that the directive could be renewed.
Mr. Swan reported that the Twelfth District was exhibiting somewhat
mixed trends, but that there was a reasonably good level of activity.
data for October were still fragmentary.
The
Going back to September, there
was a 4 per cent increase in nonagriculture employment in the District
from a year earlier, with an increase in defense-related employment of 10
per cent.
In October,
from September.
department store sales were apparently about unchanged
Steel production was down in October, and petroleum refin
ing was down slightly.
With respect to the financial picture, Mr. Swan said that in the
past few weeks the reserve position of major District banks had tightened,
and they had switched from being suppliers of Federal funds to net buyers.
In the week of November 7th there was a substantial increase in borrowing
from the Reserve Bank.
Turning to monetary policy, Mr. Swan said the situation stood in
delicate balance.
The Committee was still faced with a domestic situation
that showed no significant expansion.
He could not see a basis for a
significant switch toward a tighter policy despite problems in early
November on the international side.
He would think that during the next
few weeks the Committee should supply reserves beyond seasonal requirements,
which would imply a free reserve position of $400-$450 million.
With respect to the directive, Mr. Swan said he would remove the
references to Treasury refinancing and the Cuban crisis.
11/13/62
-42-
Mr. Irons said that there had been no very significant changes in
the Eleventh District economy, but that the level of activity had been
favorable.
Comparing the current level of economic activity with the fore
cast made in late 1961, the economy in that District was not accomplishing
what had been predicted. However, comparing the current levels with those of
a year ago, the District was up in construction, department store trade, and
agriculture, and conditions in the oil industry were not too bad.
Turning to the financial picture in the Eleventh District, Mr. Irons
reported that demand deposits were down and that there had been little bor
rowing from the Reserve Bank.
There was little concern on the part of the
Reserve Bank's directors with respect to the domestic economy, but growing
concern with respect to the international situation.
Mr. Irons said he was pretty much in agreement with Mr. Hayes' state
ment.
The Committee had to try to walk a tightrope as between domestic and
international problems, but he was inclined to think it should avoid giving
any less attention, from the standpoint of the rate structure, to the inter
national situation. There was a risk in every approach, but he felt that
less risk was involved in the domestic economy than on the international
side.
He would favor, for the next three-week period, continuing to follow
current policy, but he felt the banking system was liquid and he would lean
toward being a little less easy, though meeting essential needs for reserves.
As to free reserves, he would say under $400 million; $300-$350 million would
be all right.
For the Treasury bill rate, he would say 2.75-2.85 per cent,
with the Federal funds rate rather consistently at 3 per cent.
change the discount rate.
He would not
11/13/62
-43
With respect to the policy directive, Mr. Irons said he would take
out the words relating to Treasury financing.
With respect to phrases on
the Cuban problem, he would prefer the passage of more time before making
any changes.
Mr. Ellis described business in New England as unsettled at a
relatively high level.
Department store sales were lagging behind last year,
but automobile sales were strong.
and was leveling out.
expectations.
Personal income reached a peak in June
Employment had declined slightly in excess of seasonal
In the banking field, demand deposits of weekly reporting
member banks, on seasonally adjusted basis, had declined, but loan demand
was up.
Mr. Ellis said it seemed to him the Committee should be satisfied
with the position of monetary policy.
He found it difficult to recommend
changing the present policy materially, even though recognizing the
importance of Mr. Hayes' comments with relation to the international policy
He would prefer to wait a while longer.
aspects.
With respect to the directive, he would strike out the phrases
regarding the Treasury financing and the Cuban crisis.
If that was done,
the sense of the directive would come very close to no change in the position
of policy.
Mr. Balderston said he was of the view that the Committee should
consider probing in the direction suggested by Mr. Hayes and Mr, Fulton.
The goal of a balance in international payments seemed as far from attainment
as it was a year ago.
There was some continuing tendency for wage rates and
11/13/62
-44
Governmental costs to increase, and it was just not good enough to depend
on European competitors being improvident and impractical. He was disturbed
by the behavior of the stock market in recent days, which behavior appeared
to be a matter of reacting to fright, and also that the Government would now
spend more because of political and military uncertainties.
As he pondered
those matters, he came back to the question of liquidity, and he felt the
amount of liquidity in the banks and economy at large was very great.
There
fore, as he looked at required reserves held against private deposits, which
had increased since June by 3-1/2 per cent, he concluded that the time may
have come to probe in the direction of a lower level of free reserves.
Chairman Martin said that he had been impressed by the amount of
thought reflected in the comments that had been made at this meeting.
The
discussion pointed up the difficulties of the period which, although perhaps
no more difficult than many other periods, was nevertheless an extremely
difficult one. Nothing said in the comments this morning had changed
essentially the position at which he had arrived before coming into the
meeting--a position that the present was not a good time for an overt change
in monetary policy.
Public psychology had shown several reversals during
the past month. Observing these shifts, the Chairman said, it seemed to
him that the Federal Reserve System had gained by having maintained a policy
of stability in a period when the public had shifted from one extreme to
another in a short period of time.
Chairman Martin said that he sympathized with the views expressed
by Mr. Hayes and would lean in the direction advocated by the latter if it
11/13/62
-45
were not for the pyschological repercussions that he thought he sensed.
The views expressed by the members of the Committee seemed more evenly
divided than had been the case for a considerable period of time.
He doubted
that anyone in the room would perceive the right answer to the problems; he
did not pretend to do so, but his feeling at this particular time was that
monetary policy, if anything, was too easy and may have been so for some
little time.
He was just as anxious as anyone to see further growth in
the economy and to see an expansion in activity that would get rid of un
utilized capacity.
He was convinced, however, that easier money would not
bring about these desired goals.
The Chairman then cited a personal expe
rience over the past week end that illustrated that banks were not only
willing to extend credit but were soliciting loans when there was the slight
est sign of a potential borrower.
One result of this, he noted, was a lower
ing of standards of credit in the lending business.
This may not have gone
to the point of justifying concern, but in his opinion some concern was
warranted.
Chairman Martin also commented that the problem of growth in the
domestic economy and the solution to the balance of payments problem of
this country should not be put on a basis of assigning priority to one over
the other.
The two problems essentially were one; the Committee was wrestling
with the solution of both of them at the same time.
market sensed this.
He thought that the money
In a sense, the Committee was caught between the "bills
only" pressures and the "buy long-term securities" group.
He doubted that
any devices that might be used would effectively mark certain interest rates
11/13/62
-46
up and others down to deal with the contrasting objectives of domestic
growth and the solution to the balance of payments problem. There had been
a resurgence of business sentiment and activity within the last week or ten
days, the Chairman noted, but no one could tell how long that would last.
To base a change in monetary policy on a shift of the sort observed recently
would not be desirable, he felt, and if he were to arrive at a policy deci
sion entirely on his own, he would make no change at this point in monetary
policy.
To base a change in monetary policy on a shift of the sort observed
recently would not be desirable, he felt, and if he were to arrive at a
policy decision entirely on his own, he would make no change at this point
in monetary policy, although if he were forced to choose between change in
one direction or the other, he would have to come out on the side of slightly
less ease rather than on the side of slightly more ease than at the present
time.
While concluding that the Federal Reserve should maintain the same
policy at this point, Chairman Martin remarked that he did not believe that
continuance of that policy indefinitely was going to provide the solution to
the balance of payments problem.
The time might come when the System would
have to raise the discount rate in order to deal with the balance of payments
problem.
Turning to the Committee's discussion, there was a close division
of judgment in the views expressed this morning, with a wider gap in the
views than he had observed for a long period of time.
Several of the
members were advocating a shift in policy to provide for greater ease,
while several others were advocating a shift to provide for less ease
and some wanted no change at all.
time in the discount rate.
No one was advocating a change at this
11/13/62
-47
With respect to the discount rate and the balance of payments
problem, the Chairman said he believed interest rates to be the controlling
force in the movements of funds.
This might not appear to be so at any
given time, but it was his belief that in the longer run the rates were
a controlling force.
This morning the Committee was between the "easy
money" view and the "easier money" view.
He saw no way of resolving the
weight of these views other than to call for a vote on the general question.
He then suggested that a vote be taken Ln which the members of the Committee
would indicate whether they would vote for or against a change in the degree
of ease called for by existing policy.
On this question a total of five members of the Committee
indicated that they would vote for no change (Messrs. Martin, Bryan,
Deming, Ellis, and King), while six indicated that they would prefer to
make some change in the present policy (Messrs. Balderston, Fulton,
Hayes, Mills, Mitchell, and Robertson).
Chairman Martin then suggested that to approach a closer under
standing of the views he would present the question whether the Committee's
policy should be changed at this meeting to provide for a lesser degree
of ease.
On this question four members voted "aye", while seven voted
against a change to a policy of less ease.
(Messrs. Martin, Balderston,
Fulton, and Hayes voted "yes", while Messrs. Bryan, Deming, Ellis, King,
Mills, Mitchell, and Robertson voted against a change to a policy of less
ease.)
11/13/62
-48
Chairman Martin next put the question of a change in policy
to provide for a greater degree of ease, and on this question seven
members voted against such a policy, with three in favor and one
abstaining.
Those voting against a change to a greater degree of
ease were Messrs. Martin, Hayes, Balderston, Deming,
Ellis, Fulton,
and King; those voting for a greater degree of ease were Messrs. Mills,
Mitchell, and Robertson; and Mr. Bryan did not vote.
In the discussion that followed, Mr. Robertson stated that,
while his basic inclination was toward a policy of somewhat greater ease,
he would he strongly in favor of holding policy unchanged if the only
practicable alternatives were a policy of no change or a policy of less
ease.
Accordingly, he was prepared to change his vote on the first
question put to the Committee from a vote against no change to a vote
in favor of no change in the present policy.
Chairman Martin then called for any further comments with respect
to the indications of views. In the absence of comment, he declared
that the Secretary should record the Committee's policy vote on the
question of whether there should be a change in the present degree
of ease as showing six members voting for no change (Messrs. Martin,
Bryan, Deming, Ellis, King, and Robertson), and five voting for a
change (Messrs. Balderston, Fulton, Hayes, Mills, and Mitchell).
Of
these five, Messrs. Balderston, Hayes, and Fulton would favor a lesser
degree of ease, while Messrs. Mills and Mitchell would favor a greater
degree of ease.
11/13/62
-49
With respect to his own position, the Chairman stated that,
as he had indicated at the outset, he favored no change in the degree
of ease.
However, if
it had been necessary to vote for a change to greater
or lesser ease, he would have favored slightly less ease than at present.
The Chairman then took up the question of the current economic
policy directive to be issued to the Federal Reserve Bank of New York,
noting that some suggestions had been made that reference to the Treasury
financing and to Cuba should be deleted from the directive issued at the
meeting on October 23.
The Chairman stated that he felt the present
directive, with a deletion of the reference to the Treasury financing,
could be used.
Mr. Hayes had suggested a change which would move in the
direction of less ease but, in view of the vote of the Committee against
such a change, such wording would not be appropriate.
During the ensuing discussion several suggestions of wording
were presented.
Thereupon, upon motion duly made
and seconded, the Federal Reserve Bank
of New York was authorized and directed,
until otherwise directed by the Committee,
to execute transactions in the System Open
Market Account in accordance with the follow
ing current economic policy directive:
In view of the recent stability of economic activity, with
a margin of underutilized resources and an absence of inflationary
pressures, 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 internationally. It is also the
Committee's policy to cushion such unsettlement in money markets
as may stem from internationaldevelopments of an emergency or
near emergency character.
11/13/62
-50To 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 expansion in the
banking system and to fostering a steady tone in money markets.
Votes for this action: Messrs. Martin,
Balderston, Bryan, Deming, Ellis, Fulton, King,
Mills, Mitchell, and Robertson. Vote against
this action: Mr. Hayes.
Mr. Hayes stated that his vote against the wording of the directive
in the foregoing form was based on his feeling that the wording gave too
little attention to the difficult international balance of payments
situation and that it placed its main emphasis on the domestic situation.
Chairman Martin noted that the next meeting of the Committee
had been tentatively scheduled for December 4, 1962.
Thereupon the meeting adjourned.
Secretary
Cite this document
Federal Reserve (1962, November 12). FOMC Minutes. Fomc Minutes, Federal Reserve. https://whenthefedspeaks.com/doc/fomc_minutes_19621113
@misc{wtfs_fomc_minutes_19621113,
author = {Federal Reserve},
title = {FOMC Minutes},
year = {1962},
month = {Nov},
howpublished = {Fomc Minutes, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/fomc_minutes_19621113},
note = {Retrieved via When the Fed Speaks corpus}
}