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, January 29, 1963, 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

Mills

Mitchell

Robertson

Shepardson

Messrs. Bopp, 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. Kenyon, Assistant Secretary

Mr. Hackley, General Counsel

Mr. Noyes, Economist

Messrs. Brandt, Brill, Garvy, Holland, Koch,

and Parsons, Associate Economists

Mr. Stone, Manager, System Open Market Account

Mr. Molony, Assistant to the Board of Governors

Mr. Cardon, Legislative Counsel, Board of

Governors

Mr. Williams, Adviser, Division of Research and

Statistics, Board of Governors

Mr. Yager, Chief, Government Finance Section,

Division of Research and Statistics, Board

of Governors

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Mr. Helmer, First Vice President, Federal

Reserve Bank of Chicago

Messrs. Sanford, Eastburn, Ratchford, Baughnan,

Jones, Tow, and Green, Vice Presidents of

the Federal Reserve Banks of New York,

Philadelphia, Richmond, Chicago, St. Louis,

Kansas City, and Dallas, respectively

Mr. Lynn, Assistant Vice President, Federal

Reserve Bank of San Francisco

Mr. Eisenmenger, Acting Director of Researcn,

Federal Reserve Bank of Boston

Mr. Cooper, Manager, Securities Department,

Federal Reserve Bank of New York

Mr. Mann, Economist, Federal Reserve Bank of

Cleveland

Upon motion duly made and seconded, and

by unanimous vote, the minutes of the meeting

of the Federal Open Market Committee held on

December 18, 1962, were approved.

The staff economic review at this meeting was in the form of a

visual-auditory presentation, for which Messrs. Garfield, Altmann,

Axilrod, and Reynolds of the Board's staff joined the meeting.

The text of the introductory portion of the economic review,

presented by Mr. Noyes, was as follows:

The record for 1962, domestic and international, is now

largely at hand--subject of course to revision. In consider

ing the record, one problem that has already emerged is the

seemingly divergent figures for the amount of advance actually

achieved. Averaging the four quarters of each of the past two

years together, GNP measured in current dollars was up 7 per

cent from 1961 to 1962. But if one compares the fourth quarter

of 1962 with the fourth quarter of 1961, the rate is only 4 per

cent. While 1962 was a year of little change in prices, there

was some upcreep, especially in the cost of services. If one

adjusts for these price changes, the two figures decline to 5

and 3 per cent, respectively. And, of course, the population

continued to grow, so that if one thinks of advance in terms

of per capita GNP still another slice of the gain melts away,

and we find ourselves with an improvement during 1962 of only

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1 per cent in the real GNP per capita. It is relatively

easy for anyone to find a perfectly good, honest figure

that permits him to view the year with satisfaction,

complacency, or concern. But it is worth noting that this

is true largely because 1962 was a year of moderate advance

following a period of rapid recovery.

The second half of 1962 was a period of unusually little

change, especially for industrial production, nonagricultural

employment, and unemployment. Industrial prices continued to

move within a very narrow range, as they had since early 1959.

Despite

little change in industrial activity and

corporate profits in the second half, common stock prices

advanced and now, with a further rise in January, they are

two-thirds of the way back to their December 1961 high. In

markets for funds, although the forces of demand and supply

were so evenly balanced that interest rates changed little

in 1962 as a whole, the volume of bank loans and mortgages

rose sharply.

There followed sections on the current domestic demand situation

by Mr. Garfield, financial developments by Mr. Axilrod, balance of pay

ments problems by Mr. Reynolds, and resource utilization, productivity,

costs, and prices by Mr. Altmann.

The text of the concluding portion of

the review, presented by Mr. Koch, was as follows:

The President's new tax cut proposal, taken by itself,

would increase the deficit regardless of the budget concept

used, When completed in 1965, the proposed three-stage tax

program would likely reduce revenues by an estimated $10

billion or so a year, the bulk of which would be in individ

In considering the appropriateness of this tax

ual taxes.

cut under current conditions, it should be borne in mind

that time and a growing economy tend automatically to raise

revenues at current tax rates, and that current tax rates

would likely produce a sizable budget surplus under condi

tions of reasonable full employment if current levels of

Government spending did not increase.

The part of the tax cut to be realized in fiscal 1964

would in itself likely reduce revenues by over $5 billion.

This would be offset to a considerable extent in its effects

on the cash budget by a proposed speed-up in corporate tax

payments as well as by anticipated increased revenues arising

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out of higher income levels. The net loss in revenues in

fiscal 1964 is thus estimated at something like $2-3/4

billion, This loss in revenue, together with other elements

influencing the cash budget, would entail a rise in the cash

deficit from a projected $8-1/4 billion in the current fiscal

year to about $10-1/4 billion in fiscal 1964.

In the first half of the current calendar year the

budget document projects a small cash surplus, but in the

second half the deficit would be quite large since it would

reflect not only the first stages of the new tax program

but also the usual seasonal imbalance of receipts and

expenditures.

The surplus in the first half of this year would be

accompanied by somewhat larger net debt repayments if the

Treasury draws down its current relatively high cash balances.

In the second half of the year, assuming little change in the

cash balance, net cash borrowing would no doubt be consider

ably larger than the $6.2 billion in the last half of calendar

1962 and might well exceed the postwar record of $9.2 billion

in the last half of 1961.

What are the implications for monetary policy of an

enlarged deficit? This depends very much on the impact that

the new fiscal program would have on economic developments.

If there is a significant stimulative impact, we can expect

enlarged credit demands from the private as well as the

public sector, and consequent upward pressures on interest

rates, even though financial savings are also likely to

increase. How rapidly bank reserves should expand under

those circumstances cannot be readily foretold for it depends

on general economic conditions at the time, including the

strength of private demands and developments in the balance

of payments. It also depends on the lagged effects of the

substantial bank credit and monetary expansion that has

occurred in the last four months.

One's over-all assessment of recent monetary policy

must, as always, depend on his fundamental concept of the

workings of the financial system. If he believes that for

support of maximum sustainable growth in economic activity

it is necessary, in the financial area, for the money supply

to increase consistently in relation to the advance in

activity, then he might well be satisfied with the financial

performance of recent months. In fact, in the light of the

recent rapid monetary expansion, he might feel that its pace

ought to be tempered somewhat.

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As another point of view, one's emphasis might be on

interest rates and credit availability and their relation

to the present state of economic activity. Accordingly,

he might feel that monetary policy should operate to keep

interest rates, particularly longer-term rates, under sus

tained downward pressure and to make bank credit even more

readily available until progress toward reasonably full

utilization of resources is more clearly assured.

Finally, one who feels that our persistent international

payments imbalance has the danger of precipitating a dollar

crisis in world markets may well emphasize the need for

higher interest rates and reduced bank credit availability

in order to curb significantly the outflow of funds abroad.

He might also feel that the domestic economy is strong

enough to absorb, and function satisfactorily under, con

ditions of less monetary ease.

As for current prospects, the indicators are mixed.

Those that measure output and demand are not performing in

a fashion that suggests any gathering upsurge in activity.

On balance, the outlook seems to be for continued moderate

expansion--with caution dictated by the fact that some of

the strong elements in the economy that have sustained

activity thus far, for example, autos and housing, are not

likely to show any further increases in the near-term future.

Key financial indicators, in contrast, are showing a

strength that on occasion in the past has foreshadowed a

pick-up in underlying economic activity. Recent heavy

credit expansion, of course, may be serving mainly to keep

the economy from actually turning down. As for the

stimulative effects of any tax cut, these are not likely

to appear for many months and the magnitude then is un

certain. The over-all balance of payments progress has been

below earlier optimistic hopes, partly because of the heavy

longer term capital outflow. Very recently, payments

disequilibrium has shown a fresh deterioration that thus

far cannot be fully explained.

These are the economic facts upon which current monetary

policy must be based. Although there are differences of

view on the staff as to the most appropriate policy for the

near future, generally speaking it is felt that from the

standpoint of domestic considerations a stimulative policy

posture continues to be appropriate.

At the same time, the

staff recognizes that continuing adverse balance of payments

developments are a matter of grave concern and that these

developments work as a constraint on pursuit of a monetary

policy course shaped solely to the needs of the domestic

economy.

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Thus, there does not appear to us anything in the

developments of the last three weeks which dictates that

a change in policy in either direction is urgent.

This

view is underlined by the heavy Treasury financing sched

ule in prospect. Since maintenance of an even keel in

money markets during this period is to be desired, any

significant change in policy at this meeting would present

difficult problems.

Copies of the script of the economic presentation and of the

accompanying charts have been placed in the files of the Open Market

Committee.

Before this meeting there had been distributed to the Committee

a report from the Special Manager of the System Open Market Account

on foreign exchange market conditions and on Open Market Account and

Treasury operations in foreign currencies for the period January 8

through January 23, 1963, together with a supplementary report cover

ing the period January 24 through January 28, 1963.

Copies of these

reports have been placed in the files of the Committee.

In comments supplementing the written reports, Mr. Sanford

noted that the exchange markets had in general been relatively quiet

since the previous meeting of the Committee, although the pound ster

ling and Canadian dollar markets were at times quite active.

Sterling

had shown strength early in the period, but this normal seasonal

strength was subsequently offset by the difficulties encountered with

regard to British entry into the European Common Market.

In the first

part of the period the Bank of England acquired dollars in the process

of moderating the rise in the sterling rate, but since then the British

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had lost dollars.

The covered interest arbitrage differential moved

from a position in favor of British Treasury bills to a slight dif

ferential in favor of U. S. Treasury bills.

At no stage, however,

was there any particular incentive to move funds into or out of

U. S. bills.

Money, though, was continuing to move to London for the

acquisition of hire-purchase paper, and to Canada for the purchase

of finance and commercial paper.

Also, loans by U. S. banks to foreign

banks and acceptance credits continued to be reported in sizable

Foreign borrowers continued to tap the U. S. market with new

volume.

issues, and more such borrowing was scheduled for the future.

The Canadian dollar eased off in the early days of the past

period, apparently reflecting market response to a speech by an

opposition spokesman in which concern was expressed about the long-run

success of the Government's economic program, as well as the Canadian

interest and dividend payments to nonresidents customary at this time

of year.

Subsequently, the market for Canadian dollars firmed

considerably, although the rate was still somewhat below the December

high.

The more recent advance in the Canadian dollar rate was associated

with reports of large impending Canadian long-term financing in the

United States.

Mr. Sanford also noted that the Swiss franc and Dutch guilder

rates had shown little net change for the past three-week period,

while the French franc and the Italian lira hovered close to or at

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their upper limits.

The German mark, after showing a considerable

decline from its year-end peak, had moved irregularly higher from the

level reached in early January.

The price of gold in the London market had fluctuated remark

ably little.

In general the market had been quiet, and on January 10

the price of gold dropped to the lowest point since December 1959.

The announcement in early January of a series of new Indian controls

on the buying, selling, and holding of gold had apparently dampened

demand in the market.

The gold pool had accumulated a moderately

large quantity of gold during January.

Turning to System foreign currency operations during the past

three-week period, Mr. Sanford noted that on January 15 the Federal

Reserve drew $25 million equivalent of sterling under its standby

swap with the Bank of England in anticipation of seasonal strength of

sterling and a possible need for System intervention in the market.

On January 25 the Bank of England offered $5.6 million, which the

System took up out of its drawing under the swap, at a rate slightly

better than the rate at which the pounds were acquired in the swap

drawing.

With regard to negotiations with the Bank of England about the

possibility of enlarging the swap agreement between the Federal Reserve

and that institution to perhaps $250 million, as discussed at the

Committee meeting on January 8, Mr. Sanford reported that the matter

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was being actively considered by the Bark of England.

However, the

present situation with regard to the Common Market had injected a

factor that undoubtedly was being taken into account in the Bank's

thinking.

Mr. Sanford commented that the swap arrangement with the

National Bank of Belgium had been an example of use of a swap on a

two-way basis.

In the middle of the month the Belgians, apparently

anticipating dollar needs, redeemed $5 million of the $50 million

Treasury certificate of indebtedness that they held by virtue of the

Federal Reserve drawing of an equivalent amount of Belgian francs in

June 1962.

Yesterday, however, the Belgians developed some surplus

dollars, and for value January 31 were reconstituting their Treasury

certificate investment.

In addition, they were selling the Federal

Reserve $5 million against Belgian francs held abroad.

On January 17, Mr. Sanford noted, the Federal Reserve System

and the Bank of Sweden entered into a $50 million three-month standby

swap

the negotiation of which was authorized by the Open Market Com

mittee at the meeting on December 4, 1962.

On January 17, also, the

standby swap between the Federal Reserve and the German Federal Bank

was increased from $50 million to $150 million, as authorized at the

Committee meeting on January 8, 1963.

Pursuant to another authorization

at that meeting, on January 18 the Federal Reserve renewed for three

months each the $100 million swap arrangements with the Swiss National

1/29/63

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Bank and the Bank for International Settlements.

It also renewed the

outstanding drawings under those swaps in the amounts of $50 million

and $35 million, respectively.

In addition, pursuant to a further

authorization given at the January 8 meeting, on January 18 the

Federal Reserve renewed for three months the $150 million swap arrange

ment with the Bank of Italy.

On January 21 the System purchased a

total of $50 million equivalent of lire and immediately applied the

lire to the repayment of the $50 million drawing under the swap with

the Bank of Italy.

The swap, therefore, was now fully on a standby

basis.

Continuing, Mr. Sanford said that on January 24 the System

purchased $50 million equivalent of Austrian schillings from the

Austrian National Bank and used the proceeds to pay off the maturing

drawing of $50 million under the swap arrangement with the National

Bank.

Thus, the swap arrangement shifted to a standby basis, and it

was renewed for three months on that basis.

The National Bank of

Austria had now indicated that it wished to buy $50 million of go.d

over the period of approximately the next four months.

In response to a question by Mr. Mills about disposition of

gold in the gold pool, Mr. Sanford commented that in December there

had been an accumulation which in January was distributed among the

participants.

This month there would be a further accumulation, and

in February there would probably be another distribution among the

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members of the pool.

Mr. Mills recalled that at the January 8 Committee

meeting it was stated that the U. S. Treasury had relinquished its

interest in the gold previously redistributed.

current intent of the Treasury.

He inquired as to the

In reply, Mr. Sanford and Chairman

Martin stated that this matter was presently under consideration by

the Treasury, which had not yet made a decision.

Mr. Mills inquired what amount of System swap drawings had in

effect been funded by the Treasury.

Mr. Sanford replied that the

repayment of the $50 million drawing under the Italian swap had been

made possible by a reversal of the previous flow of funds into Italy,

and had coincided with an issue of U. S. Treasury securities associated

with Italian financing of military purchases in the United States but

even in this case there could not be said to have been direct Treasury

funding of System swap drawings and to his knowledge there were no

other Treasury fundings of swap drawings.

Thereupon, upon motion duly made

and seconded, and by unanimous vote,

the System Open Market Account trans

actions in foreign currencies during

the period January 8 through January 28,

1963, were approved, ratified, and

confirmed.

It was noted that on January 17, 1963, the New York Reserve

Bank advised that pursuant to action of the Open Market Committee on

December 4, 1962, authorizing negotiations for a currency swap arrange

ment with the Bank of Sweden, such an arrangement had been concluded

for public announcement.

Accordingly, Mr. Sherman, Assistant Secretary,

notified the Committee members by telegram on that date that the

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Committee's continuing authority directive on System foreign currency

operations was amended by adding Swedish kronor to the list of cur

rencies that the Federal Reserve Bank of New York was authorized and

directed to purchase and sell through spot transactions in accordance

with the Guidelines on System Foreign Currency Operations issued by

the Federal Open Market Committee on February 13, 1962, and amended

on November 13, 1962.

As revised; the continuing authority directive

read as follows:

The Federal Reserve Bank of New York is authorized and

directed to purchase and sell through spot transactions any

or all of the following currencies in accordance with the

Guidelines on System Foreign Currency Operations issued by

the Federal Open Market Committee on February 13, 1962, and

amended November 13, 1962:

Pounds sterling

French francs

German marks

Italian lire

Netherlands guilders

Swiss francs

Belgian francs

Canadian dollars

Austrian schillings

Swedish kronor

Total foreign currencies held at any one time shall not

exceed $1.3 billion.

Upon motion duly made and seconded,

and by unanimous vote, the action taken

in sending the aforementioned telegram

was ratified.

Mr. Sanford then presented certain recommendations for the

Committee's consideration.

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First, he pointed out that the swap arrangements with the

German Federal Bank and the Bank of France in the amounts of $150

million and $50 million, respectively, would mature February 4, 1963.

He recommended their renewal on a standby basis for a further three

months.

Without objection, renewal of the swap

agreements with the German Federal Bank and

the Bank of France, as recommended by

Mr. Sanford, was authorized.

Second, Mr. Sanford recommended that the Committee authorize

the sale, when timely and appropriate, of German marks now held in

System Account to the Treasury for its Stabilization Fund at a pr.ce

not less than the average price of acquisition by the Federal Reserve

System.

He pointed out that at present the System held $27 million

equivalent of marks out of a total of $32 million acquired from the

Stabilization Fund in February 1962.

Provided the mark rate firmed

a bit further from its present level--which was about 24.98 cents

against an average acquisition price of slightly over 25 cents--he

believed it would be desirable to sell a block of these marks--just

how much he could not say at the moment--to the Treasury.

The Treasury

could then use those marks in making swaps with the Bank for Inter

national Settlements for the purpose of acquiring Swiss francs, which

were needed to meet obligations in the Swiss currency; or at least it

would have the marks as cover against its Swiss franc obligations.

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In discussion, Mr. Mitchell suggested that the Open Market

Committee should not be bound by profit and loss considerations in

a matter of this kind.

If the Treasury believed it could work out

of the Swiss situation by utilizing Germar marks, he would feel

that the System should be prepared to make the marks available to

the Treasury, irrespective of whether the mark rate moved up or not.

There was indication of concurrence in this view.

Accordingly, authorization was given

to sell to the Treasury quantities of

German marks out of the System's present

holdings of $27 million equivalent if such

marks should be desired by the Treasury.

The meeting of the Committee then recessed in order that the

members of the Board of Governors and the Reserve Bank Presidents

might meet with the members of the House Banking and Currency Committee

pursuant to arrangements made at the request of the Chairman of that

Committee.

The meeting reconvened at 12:20 p.m. with the same

attendance.

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 January 8 through January 23,

1963, and a supplementary report covering the period January 24 through

January 28, 1963.

Copies of both reports have been placed in the files

of the Committee.

Mr. Stone commented in supplementation of the written reports

as follows:

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The highlight of the bond market since the last meeting

was the Treasury's sale on January 8 of $250 million long-term

bonds at competitive bidding by underwriting syndicates. The

thirty-year bonds were awarded to the winning group at an

interest cost of a shade over 4 per cent and were publicly

reoffered to investors at par to yield 4 per cent. The issue

was quickly oversubscribed and rose to a premium in the

market that same afternoon. This accomplishment was highly

gratifying, both in terms of the keen competition generated

among the bidders and the rapid distribution of the securities

to investors. Most market participarts were much impressed

by the results and are prepared for further trials of the

technique, under varying circumstances, as the Treasury seeks

to determine its usefulness as an additional means of market

ing long-term obligations.

Stimulated by the success of the auction, Treasury bond

prices generally rose during the first part of the three-week

period and the new 4 per cent bonds temporarily reached a bid

quotation of almost 100-3/8. Around mid-January, however, a

more cautious attitude pervaded the market under the influence

of the President's tax and budget messages and the news that a

continuing erosion of the gold stock might be expected to occur

in early 1963 because of the persisting balance of payments

deficit. Prices edged lower and most intermediate and long

term issues were down 2/32 to 22/32 for the period, with the

new 4 per cent bonds closing last night at 100-2/32 bid.

The invigorating atmosphere produced by the Treasury's

successful bond auction also carried over into the markets

for corporate and municipal bonds. Bidding for new issues was

fairly aggressive and a new Aa-rated corporate utility issue

was reoffered to investors on January 15 at a yield of 4.20

per cent, the lowest yield on a comparable issue since mid

1958.

Investors offered some resistance to the lower rate

levels, however, and during the latter half of the month the

corporate and municipal sectors, responding to the same

developments that affected the Treasury bond market, became

rather hesitant. Moreover, there have been several sizable

new issues scheduled for the months ahead, although the

immediate calendar of forthcoming offerings is not particularly

heavy.

In the short-term market, rates on Treasury bills

fluctuated narrowly over the period, closing the interval

very close to those prevailing at the start despite the fact that

they typically undergo some seasonal downward movement during

the early weeks of the year. In yesterday's auction the three

month bills were sold at an average rate of 2.92 per cent--the

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same as the average established in the auction three weeks

ago. This relative stability of bill rates was the outcome

of opposite forces of roughly equal strength. Tending to

push rates lower was a generally good demand which, although

it was not always vigorous enough to meet the market's hopes

and expectations, was sufficient to reduce dealer bill

positions noticeably. Offsetting the downward influence on

rates, exerted by this demand, however, was an addition of

$500 million to the roll-over of the January 15 bills and

the announcement of a new issue of $1 billion June tax

anticipation bills to be sold at auction tomorrow, with

commercial banks not permitted to pay for the bills through

credits to tax and loan accounts. In addition, the short

term market, in company with the longer term sector, evidenced

renewed concern over the balance of payments and the budgetary

outlook.

The availability of reserves since the last meeting

turned out to be somewhat greater than in the preceding

three-week period, owing in good part to the erratic behavior

of float, which rose unusually high and stayed up unusually

long. The money market nevertheless remained generally firm,

and Federal funds traded at 3 per cent most of the time.

Meanwhile, the expansion in seasonally adjusted total and

required reserves continued.

In closing I should note that the Treasury financing

calendar will be full between now and the next meeting of the

Committee. I have already mentioned the prospective sale of

$1 billion June tax bills tomorrow. And later this week the

Treasury will announce the terms under which it will refund

its $9.5 billion February 15 maturities, of which $5.5

billion are publicly held.

In discussion based on Mr. Stone's comments, Mr. Swan referred

to the seasonal downward pressure on Treasury bill rates in the early

weeks of the calendar year.

He had noticed that a year ago such

downward pressure appeared practically to have terminated by about the

end of January.

this year.

He inquired whether that would appear also to be true

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-17Mr. Stone replied that he thought the seasonal downward

pressure did tend to terminate by about the end of January.

Although

a precise dating was difficult, the downward pressure tended to ease

off after the first couple of weeks of the calendar year.

Thereupon, upon motion duly made

and seconded, and by unanimous vote, the

open market transactions in Government

securities during the period January 8

through January 28, 1963, were approved,

ratified, and confirmed.

Under date of January 24, 1963, there had been distributed to

the Committee a memorandum from Mr. Stone and Mr. Farrell, Director

of the Board's Division of Bank Operations, suggesting a revision in

procedures for allocation of participations in the System Open Market

Account.

The memorandum noted that when the present formula was adopted

on March 6, 1962, it was pointed out that although the new procedure

for reallocating participations at quarterly intervals (February, May,

August, November) would tend more nearly to equalize gold reserve ratios

(against notes and deposits combined) of the various Reserve Banks,

occasional adjustments might still be necessary if, because of temporary

conditions, a Bank's ratio should fall below 30 per cent just before a

Federal Reserve weekly statement date or a month-end date.

It was also

noted that further deterioration in the combined reserve ratios of the

twelve Banks might make it desirable to reduce the 30 per cent guidepost

specified in the procedures.

This point was mentioned again by the

Account Manager at the Committee meeting on September 12, 1962.

Reserve

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ratios had in fact continued to decline; on one day in December the ratio

for all Banks combined reached as low as 31.4 per cent.

Individual banks

had had ratios below 30 per cent on a number of Tuesdays and days pre

ceding monthends; on Monday, January 14, one Reserve Bank had a ratio

of only 25.7 per cent, the lowest in recent history.

Since the adoption

of the current plan last March, there had been 21 reallocations, 11

since the last regular quarterly reallocation on November 1, 1962.

Some

of the special reallocations could not be quickly reversed since the

ratios of the Banks concerned remained relatively low for extended

periods.

The reserve ratio situation was most acute over the year end.

Since then, there had been some improvement, but individual Banks

continued to experience low ratios and special reallocations continued

to be necessary.

With the gold stock undergoing further erosion, it

seemed likely that rather frequent special reallocations might still be

necessary despite the seasonal drop in note and deposit liabilities.

When that seasonal decline came to an end in the spring, the making of

special reallocations could become virtually a continuous process.

In order to reduce to a practicable minimum the number of

special reallocations, it was proposed that sections 2 and 3 of the

current procedures be amended by substituting 28 per cent wherever 30

per cent appeared in those sections.

It was felt that such action

would reduce, and for a few months perhaps eliminate, special reallocating

of the Account.

If 28 per cent had been in effect since the new

procedures were adopted last March, no special reallocation would have

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been required.

Setting the figure at 28 per cent should not, at least

for the next few months, preclude any Bank from having leeway to avoid

a situation in which its ratio fell below 25 per cent on a statement

date, although this possibility could not be entirely dismissed no

matter what procedures were used for allocating participations in the

Account.

It was recommended that the foregoing proposal be adopted by

the Open Market Committee.

In supplementation of the distributed memorandum, Mr. Stone

commented as follows:

The proposal to reduce from 30 per cent to 28 per cent

the reserve ratio that must be reached before a special re

allocation of the Account is undertaken grew out of the

series of 21 such reallocations that were made as a conse

quence of the further deterioration in reserve ratios over

the past few months. As note and deposit liabilities expand

with the growth of the economy, and with the gold stock

continuing to decline, there is every likelihood that as the

year goes on the technical accounting problems connected

with low reserve ratios will become more pressing. Moreover,

we recently experienced a different kind of problem in that

two of the Reserve Banks, on separate occasions, found them

selves with virtually all of their participations in the

System Account pledged against Federal Reserve notes. On

one of those occasions, I should note, the reserve ratio of

the Bank concerned was very close to 25 per cent, and in

reallocating the Account to raise that Bank's reserve ratio

we found there were not enough unpledged securities to enable

us to put the ratio up to the System average. This kind of

problem may also recur. As the Committee knows, both the

approach to the problem of reallocating the Account and the

plan for pledging Reserve Bank participations against Federal

Reserve notes were evolved at a time when the problems I have

just described were regarded only as remote possibilities.

Those problems, however, are now with us, and hence it seems

appropriate to take a fresh look at the entire gamut of pro

cedures involving the reallocation of the Account and the

pledging of participations against Federal Reserve notes.

1/29/63

-20

Accordingly, we have constituted, in the New York Bank, a

three-man group to take a close look at these procedures

and to determine whether they are fully adequate to the

present circumstances in which reserve ratios are pushing

toward 25 per cent and in which a Reserve Bank's participa

tion in the Account is barely adequate to cover its note

issue. I understand that a similar group is being con

stituted within the Board staff, and we anticipate that the

two groups, working cooperatively, will have some conclusions

to lay before the Committee and the Reserve Banks within the

next few weeks. Given the statutory requirements governing

reserve ratios and the pledging of collateral behind the

note issue, it may well turn out that present procedures,

with a patch here and there, are about as good as can be

devised.

But we think it is worthwhile to make the study

before jumping to the conclusion that this is so.

In discussion of the matter, Mr. Ellis endorsed the proposed

change from 30 per cent to 28 per cent.

He went on to point out,

however, that the amended procedures would provide that if a Bank's

reserve ratio should be reduced below 28 per cent as a result of a

reallocation, or should fall below 28 per cent on the next to last

business day (as observed by the Agent Bank) of a statement week or

month, its holdings as of the close of business that day would be

adjusted the following day by an amount sufficient to raise its

reserve ratio to the average reserve ratio of the twelve Banks com

bined on the preceding day; and that any such adjustment would be

reversed on the first succeeding Thursday (before the next quarterly

reallocation) when it could be accomplished without reducing the

Bank's reserve ratio below 28 per cent.

It was the suggestion of

Mr. Ellis that the rigidity of the language providing for reversal

of any such adjustment be relaxed somewhat.

If it appeared that a

1/29/63

-21-

reversal was going to force a Bank below 30 per cent, and lead to

another adjustment the following week, he felt it would be helpful

if the reversal could be postponed at the discretion of the Manager

of the Open Market Account.

This seemed particularly true during a

period when, as Mr. Stone had stated, a comprehensive staff study was

being made of existing procedures.

There was unanimous agreement that the proposed procedures

should be amended in a manner reflecting the suggestion of Mr. Ellis.

Accordingly, upon motion duly made

and seconded, and by unanimous vote, the

procedures with respect to allocations

of the System Open Market Account, as

approved by the Open Marke: Committee on

March 6, 1962, were amended to read as

follows:

1. Securities in the System Open Market Account shall

be reallocated on the first business day of February, May,

August, and November of each year by means of adjustments

proportionate to the adjustments that would have been re

quired to equalize the average ratios of the 12 Reserve Banks

over the first 85 days of the preceding three calendar months.

2. If a Bank's reserve ratio should be reduced below

28 per cent as a result of the reallocation, or should fall

below 28 per cent on the next to the last business day (as

observed by the Agent Bank) of a statement week or month, its

holdings as of the close of business that day shall be adjusted

the following day by an amount sufficient to raise its reserve

ratio to the average reserve ratio of the 12 Banks combined on

the preceding day. Such securities shall be allocated to the

Bank in a position to absorb the largest additional amount with

out reducing its reserve ratio below the ratio of the 12 Banks

combined. If that Bank is unable to take the entire amount,

the excess shall be allocated to the Bank which can absorb the

next largest amount without reducing its reserve ratio below

the average for the System.

Any such adjustment will be reversed, at the dis

cretion of the Manager of the System Open Market Account and the

1/29/63

-22-

Bank, on the first succeeding Thursday or thereafter (before

the next quarterly reallocation) when it appears that it can

be accomplished without reducing the Bank's reserve ratio

below 28 per cent, except that if the Thursday is a holiday

or the last business day of a month the reversal will be made

the following business day. A reversal will restore individual

Bank holdings to their established participation percentages

before the adjustment occurred, except to the extent that a

Bank may have been involved in another adjustment in the interim.

3. If a Bank's reserve ratio should fall below 28 per

cent on any other day, or if a Bank anticipates that its

reserve ratio will fall below that figure, it may arrange with

the Manager of the System Open Market Account for an adjust

ment similar to those provided for in paragraph No. 2 so as

to increase the Bank's reserve ratio to the average of the 12

Banks combined.

4. The Account shall be apportioned during the succeed

ing quarter on the basis of the ratios determined in Para

graph 1, after allowing for any adjustments as provided for

in Paragraphs 2 and 3.

5. Profits and losses on the sale of securities from

the Account shall be allocated on the day of delivery of the

securities sold on the basis of each Bank's current holdings

at the opening of business on that day.

Mr. Hexter, Assistant General Counsel, joined the meeting

during the discussion of the foregoing topic and withdrew at its con

clusion.

The Chairman then called for the usual go-around of comments

and views on current economic developments and monetary policy.

He

turned first to Mr. Hayes, who presented the following statement:

As we compare the latest available statistics with those

of three weeks ago, or six weeks ago, we find that the domestic

business situation remains virtually unchanged, whereas there

has been further clear deterioration in our balance of inter

national payments and, potentially at least, in the status of

the dollar.

Retail sales are exhibiting considerable strength so far

in January, and consumer confidence appears high. However,

the cautious appraisal of the Council of Economic Advisers,

1/29/63

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with which most business economists seem to concur, suggests

no likelihood of any great upsurge in 1963; and the attain

ment of a significant drop in unemployment still appears

decidedly remote.

Business sentiment continues to be strong, even though

recent weeks have not produced any tangible evidence of the

emergence of additional factors of strength. With the details

of the President's tax reduction and reform proposals now on

the table, in the coming weeks the business community and the

public at large will try to appraise the chances and the

actual timetable of their enactment.

As for the balance of payments, unusually large capital

outflows, both long and short term, seem to have been mainly

responsible for a sharp rise in the over-all deficit to some

thing over half a billion dollars so far in January. Also

it is now apparent that very sizable loans and acceptance

credits to foreign banks explain why the December surplus was

only $80 million despite about S400 million of receipts from

special transactions. The sale of some $150 million of new

Canadian securities in our capital market in January, together

with the $97 million Chrysler purchase of Simca shares, serve

as a dramatic reminder of the major contribution of long-ter

capital outflows to our balance of payments problem, while

the placing of some $75 million of new U. S. dollar time

deposits in Canadian banks emphasizes the continuing inability

of U. S. banks to compete on even terms with Canadian and

European banks in attracting and holding dollar balances.

Additional large new foreign bond issues are in prospect for

the coming months. Despite the fact that the gold and ex

change markets remain generally calm, we face a large loss

of gold in the first half of 1963 even on the basis of exist

ing orders alone. Further sizable losses could easily occur

as a result of the weight of existing heavy dollar balances,

without taking into account the effect of additional future

payments deficits. Moreover, there is an ever-present danger

of serious loss of confidence as the size of our monetary gold

stock shrinks further and approaches the $15 billion level.

Under these conditions, I find especially disturbing an

apparent tendency in some Government circles to accept continu

ing large payments deficits as inevitable. It is also discourag

ing to note the considerable shrinkage in our export surplus

in the last quarter of 1962. Although the immediate export

outlook seems moderately cheerful, at least if we consider our

exports to Japan and Canada, there is an ominous note in the

growing evidence of the nation's apparent inability to hold

the line effectively on wage costs at a time when this is of

1/29/63

-24-

greater importance than ever. In the recent dock strike

settlement, for instance, there seemed to be, on the surface

at least, little or no stress on the general aim, so widely

publicized a year ago, of trying to keep wage increases

within the limits of gains in national productivity.

As has been true now for several months, recent data on

bank credit raise a question whether we have not been perhaps

excessively liberal in providing reserves to the banking

system. I am thinking of the fact that total credit at weekly

reporting banks declined in the first three weeks of January

much less than is typical for this season. Thus, in effect,

the strong bank credit upsurge of the last few months of 1962

has continued. The dollar rise in bank credit in December,

and indeed for the fourth quarter as a whole, as well as for

the full year 1962, was the largest for any similar period on

record. After a sluggish performance during most of 1962, the

money supply came to life in the last quarter and rose again

sharply in the first half of January. Required reserves against

private deposits have been running some $300 million above the

3 per cent guideline.

Of course the imminence of the Treasury's refunding pro

gram sets severe limits on our freedcm of action in the

monetary sphere for the next two weeks. But I should think

the least we should do is to maintain the increased firmness

of market atmosphere decided upon at the two last meetings.

The directive might appropriately be modified to give

recognition to the forthcoming Treasury financing, the further

deterioration this month in the balance of payments situation,

and the fact that policy will apply to a two-week period; but

I would think that otherwise the directive could be left

unchanged.

While no overt move, such as a discount rate increase,

can be undertaken during this period of Treasury financing,

I think the Committee would do well to be thinking a little

further ahead concerning the appropriate role of monetary

policy in the light of the increasingly serious threat to the

dollar's international standing. As you know, I have long

favored a change of policy mix, with increasing reliance on

fiscal policy to provide the needed stimulus to the domestic

economy, while monetary policy would thereby achieve greater

scope to help meet our international responsibilities. While

there is some question whether the proposed tax reductions will

in fact provide the hoped-for incentive effects, and the pro

posals are obviously far from final enactment, the question

can be fairly raised whether the Administration has not already

gone a long way toward a change of mix as far as fiscal policy

1/29/63

-25-

is concerned. Certainly several years of heavy budget

deficits are now widely expected both in this country and

by foreign observers. Would it be unreasonable to suggest

that monetary policy consider in the fairly near future a

positive step of its own toward a new "mix"? Such a step

in itself might well hasten effective tax reduction, first,

as a demonstration that fiscal measures rather than continu

ing monetary ease must be looked to as a means of stimulating

more rapid economic growth; second, by convincing those who

are inclined to fear tax reduction as "irresponsible" that

the monetary authorities intend to see that the prospective

deficits are prudently financed.

As I have said, these are matters for future deter

mination; but perhaps it is none too soon to explore them:

if only in the most tentative and preliminary fashion. In

the meantime, it seems to me that there is one technical

area in which the Board could be helpful at any time in the

near future without interfering with our "even keel" policy.

I refer to the desirability of raising the maximum permis

sible interest rate payable on 90-day time deposits to remedy

the present inability of the American banks to quote reasol

ably competitive rates for maturities under six months.

Mr. Shuford said that observations made at the past several

Committee meetings concerning the Eighth District continued to nold

true.

There had been no significant changes in economic activity.

Employment in St. Louis and in each brarch city had declined slightly

since July 1962, while industrial use of electric power showed no

appreciable change.

Business loans outstanding at weekly reporting

banks fluctuated within a narrow range, and bank debits had increased

only slightly.

Department store sales showed some improvement during

the past four months, which improvement apparently was continuing in

January.

Total deposits of weekly reporting member banks increased

markedly in 1962, and this trend continued in the first part of January,

with the increase again in the time and savings deposit category.

1/29/63

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Mr. Shuford commented that the national economic picture had

been covered well by the staff presentation this morning and also by

Mr. Hayes.

As Mr. Shuford saw it, there was no clear trend, develop

ments appearing to be mixed.

Since last August, however, total bank

reserves had risen at an annual rate of 7 per cent, reserves available

in support of private demand deposits had increased at an annual

rate

of 5 per cent, and the money supply had increased at an annual rate

of 7 per cent.

While he regarded the growth in these areas as having

been desirable in the past few months, continued growth at such ratescertainly for any appreciable period of time--would appear to be

undesirable.

In view of the recent increase in reserves and the

money supply, coupled with the expansion of bank credit, he believed

that monetary operations such as conducted during the past six weeks

continued to be appropriate.

This seemed particularly true in view

of the forthcoming Treasury financing.

existing policy.

In short, he would continue

He saw no need to change the directive, although it

might be modified along the lines mentioned by Mr. Hayes.

He would

not consider it appropriate to change the discount rate at this time.

Mr. Bryan commented as follows:

The biggest news from the Sixth District has been the

unseasonably cold weather. The freezes have lowered the

outlook for citrus production by an estimated 25 per cent.

Vegetable production will probably match the production of

last year except for tomatoes. The longer run damage to

citrus production cannot yet be reliably estimated because

damage to the trees will not be known for some time. In the

meantime, citrus prices have gone up sharply, and total in

come from the crop may be largely unaffected.

1/29/63

-27-

The Sixth District has followed the national pattern in

the consumer, agricultural, and banking sectors. It has

shown somewhat more weakness than the nation in employment

and production. District employment in December declined

appreciably for the first time in 1962 as did the length of

the work week and manufacturing payrolls. Insured unemploy

ment was slightly lower in December; but it was still higher

than at any time since February 1962. Bank credit has risen

further in December, and seems to have receded less than

seasonally in January. The expansion of bank credit in 1962

has been much greater than in 1961. All in all, the Sixth

District, like the nation as a whole, seems to me to be going

nowhere in a great rush, but to be making a slow, steady up

ward movement with little evidence of a downward turn in the

business cycle.

As for monetary policy, it seems to me that we have made

a satisfactory year-to-year gain in terms of money supply

conventionally defined. If all or, indeed, some part of time

deposits are included in our estimate of money supply, then I

judge the year-to-year increase in the money supply to be not

only satisfactory but stimulative. Further, liquid assets

held by the public as a ratio to the gross national product

have risen to 80.8 per cent, the highest since the 81.0 per

cent of third quarter 1959.

Meanwhile, the reserves of the banking system, whether

measured in terms of total reserves, nonborrowed reserves, or

required reserves, have been running higher than my judgment

of an appropriate guideline. The long-term trend line that I

have from time to time used was for January a little less than

$19.6 billion. On a daily average basis, up to my most recent

figure, our actual reserves in January have run at $20.17

billion, a substantial excess over a 3 per cent growth rate.

At the same time, we have exceeded the projections of the

Board's staff, both on total reserves and required reserves.

In the light of these circumstances, I believe we should at

least move downward in actual reserves to something more

nearly like the 3 per cent guideline.

Since we are going into February with a large oversupply

of reserves, according to the latest figures available to me,

and face a large seasonal in February, approximating $450

million, I believe the Desk is approaching an unusually dif

ficult period. It is made the more difficult in view of

prospective Treasury financing. The central target on total

reserves for February, using, for all its distempers, a total

reserve trend line that I have from time to time sponsoredalbeit with some misgivings--is $19.6 billion for February.

1/29/63

-28

In the light of the factors as they appear to me, I should

suggest that figure as a rational central target for total

reserves on a daily average basis. Of course, the Desk

must have an ample latitude for random factors. It remains

for me to note that the figure I suggest reconciles with a

much lower daily average of free reserves than we have had

thus far in January.

I would not change the discount rate.

Mr. Bopp reported that business in the Third District

deteriorated somewhat in December.

Unemployment claims declined, but

only seasonally; help wanted indexes were off in Philadelphia; electric

power consumption by manufacturers dropped; and manufacturing employ

ment decreased in 6 of 10 reporting areas.

Available weekly informa

tion for January showed no exceptional movements.

In banking, the picture was mixed.

Loans had been declining,

largely for seasonal reasons, but this year's drop was about 50 per

cent greater than last year.

Deposits are off, and reserve positons

had reflected some tightness.

Mr. Bopp saw no reason for any change in monetary policy at

this time, particularly in view of the Treasury financing schedule.

As to the directive, he felt that it might be appropriate to delete

the reference to "seasonal" downward pressures on short-term interest

rates.

Mr. Bopp also commented that within the past week or so he had

received a call from an official of a large local bank that was consider

ing the possibility of entering into foreign lending to take advantage

of interest rate differentials.

The banker inquired whether such

1/29/63

-29

activity would be against public policy or Federal Reserve policy,

particularly since representatives of the bank who had talked with

European central bankers got the impression from some of them that

perhaps some day central banks might have to do something about such

decisions.

Mr. Bopp said his comments to the banker were to the

effect that such lending would obviously have repercussions on the

U. S. balance of payments, which was already in a serious state.

At this time, however, there were in this country no specific laws

or regulations to control such matters.

He did not propose to make

a decision for the banker, although the latter might want to keep

in mind the problem that existed with regard to the international

balance of payments.

Mr. Fulton reported a slight to moderate expansion of business

and industrial activity in the Fourth District during the first three

weeks of January, representing in part a short-term pick-up from

weather-retarded

activity in December and in part a continuation of

longer-term recovery from 1962 setbacks.

During the past week, however,

intense cold and more snow had halted this betterment.

Steel output showed significant improvement during the first

three weeks of January but suffered a modest relapse in the past week,

probably due to weather conditions.

New orders were showing strength,

One mill dealing largely with the auto industry showed substantially

increased orders, with lead times extending to April.

Another mill

not so dependent on autos reported a good order book from a wide

1/29/63

-30

variety of users.

While there seemed to be no pronounced indication

of inventory accumulation, the situation could be interpreted as

heralding an end to inventory liquidation, with orders representing

needs for current production.

There was no opinion presently as to whether or not the

steel wage contract would be reopened on May 1; the union could make

a demand for reconsideration of wages, insurance, and pensions on

that date.

It was said that a better atmosphere existed between

management and labor at this time due to the efforts of the Human

Relations Committee (composed of top men from management and labor),

which had been effective in interpreting mutual problems, but one

could not foretell what might develop.

Steel executives were saying

that it was imperative that there be no increase in employment costs

this year.

Otherwise, steel would be at a greater disadvantage

competitively.

Steel workers now cost $4.30 per hour, including

fringe benefits.

In the machine tool industry, there was a general feeling

that if the level of manufacturing was maintained the industry could

count on an increase in orders of 10 to 12 per cent in 1963 over 1962.

New machines were being developed that would radically reduce pro

duction costs, which should encourage manufacturers to invest in them.

Insured unemployment in the District remained above the

national average, ranging from 10.5 per cent in Pittsburgh to 3.5 per

cent in Dayton, with a District average of 6.9 per cent.

Centers of

1/29/63

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high unemployment were predominantly in steel manufacturing areas.

In the first three weeks of January, increases were approximately in

line with the seasonal pattern, but the past week of severe winter

cold and snow had disturbed this relationship.

Department store sales continued at the expanded level of

late 1962.

In the four weeks to January 19, sales were 9 per cent

over the year-ago period.

Auto sales remained at a relatively high

level, after allowance for seasonal decline, even through the latest

week of bad

weather.

Used car sales suffered from the weather, but

prices remained firm and sales were expected to rebound.

Construction

permits were substantially reduced from the same period last year.

In Cleveland, apartment house building was still strong and accounted

for 40 per cent of the construction volume in that city in the first

three weeks of 1963.

Loans at District reporting member banks declined more in the

past three weeks than in any like period of the past three years.

Bank debits for the District for December remained virtually unchanged

from November.

Mr. Fulton said he could discern nothing on the economic

horizon that would warrant a change from the monetary policy now

being followed.

He felt that the Desk had ably followed the instruc

tions of the Committee during the past three weeks.

He would not

change the discount rate, feeling that an increase in the rate would

1/29/63

-32

be a measure that might be regarded as slanted toward deflation.

In

this connection, he noted that mention had not been made of the effect,

which could not yet be assessed, of the increases in rates of employeremployee contributions to the Social Security System that became

effective at the first of the year.

This would take more money away

from pay envelopes and therefore would have a deflationary bias.

As

to the directive, he would eliminate from the second sentence of the

first paragraph the references to economic and financial factors

relating to 1962.

The meeting then recessed for lunch and reconvened at 2:05 p.m.

with the same attendance.

Continuing the go-around, Mr. Mitchell said that in view of

the imminence of Treasury financing any remarks on short-run monetary

policy at this time would seem largely academic.

As to the business

outlook., he recalled having mentioned at the Committee meeting six

weeks ago that he sensed some stirrings in the economy, largely of

psychological origin, that might possibly lead to a rise in real

activity at a greater rate than had recently been experienced.

He had

thought at the time that such a possibility was rather remote.

How

ever, subsequent developments suggested to him that the likelihood was

increasing.

In his opinion the developments to which he referred

really began to take shape about the time of the relief from the

Cuban crisis, a truly exogenous factor.

It may also have been

attributable in some degree to the reduction of reserve requirements

1/29/63

-33

against time and savings deposits, a move that he had thought at the

time should be construed as an easing action.

cut was another factor.

economic environment.

Anticipation of a tax

In sum, there had been a change in the

The stock market picture had changed, there

had been a reaction in consumer spending, and consumer attitudes had

changed.

Although the staff economic presentation today seemed to

indicate that not much was happening in real terms, he felt that

much had been happening in psychological terms and perhaps in real

terms also, particularly in the area of consumer demand.

Business

demand for plant and inventories admittedly was not strong, but this

might appear later in light of developments such as he thought were

now taking place.

It was his feeling that there was a tendency to

downgrade the likelihood of an upturn in activity at significantly

greater rates than in 1962.

This was one reason for sitting tight

in terms of monetary policy.

Mr. Mitchell then referred to the change in money supply and

in reserves that had occurred over the past several months.

He

detected a tendency to act as though this was an accomplishment of

which to be proud, yet he believed that actually the Committee did

not anticipate what would happen.

In his opinion it happened because

the economy had reacted to exogenous factors, primarily psychological.

The kind of monetary policy pursued was conducive to monetary expansion

under these changed conditions, and it had occurred.

In any event, he

1/29/63

-34

believed the business outlook was better than it had been for a long

time and that monetary factors were better than they had been for a

long time.

Accordingly, he would be content to maintain the status

quo in terms of policy.

Mr. Shepardson remarked that it seemed rather odd that the

discussion of the national economy had proceeded thus far without

more pointed reference to the dampening effects of the severe winter

weather that had prevailed in many areas of the country.

Of itself,

this might have accounted for some of the slowdown observed in

certain segments of the economy.

Nevertheless, as Mr. Mitchell had

said, things did not look too bad.

This, together with the Treasury

financing program, would argue for a continuance of the policy that

had been in effect during the past three or six weeks.

Mr. Shepardson said that he had not had in mind, particularly,

suggesting a change in the directive.

However, his attention was

drawn during the discussion to a phrase that had been creating a

question on his part for some time.

Especially in view of the terms

of the recent dock strike settlement, he was inclined to question the

reference to an absence of inflationary pressures.

In terms of prices

that statement might still have validity, even though there had been

a consistent upward crawl in consumer prices.

According to reports,

however, the terms of the dock strike settlement were excessive, and

this appeared to him a definite indication of a building up of in

flationary pressures that at some point might break out in more

1/29/63

-35

noticeable fashion.

Such pressures may have been less pronounced

than at other times, but he did not agree that there was an absence

of them.

In summary, Mr. Shepardson said, he would continue present

policy.

If

there was a change in the directive, he would hope that

consideration might be given to modifying the reference to an absence

of inflationary pressures.

Mr. Robertson said it seemed obvious that in view of the

impending Treasury refunding offer there was no option today except

to maintain an even keel position in the absence of overriding

considerations, none of which were apparent in the business and

financial information presented to the Committee this morning.

The

position from which the Committee would be moving was much better than

he had thought it would be on the basis of the directives adopted at

the previous two meetings of the Committee.

progressively

Events had belied a

tighter policy such as he had thought would eventuate

under those directives.

If it seemed important, he would be agreeable

to changing the directive along lines such as suggested by Mr. Fulton.

However, he did not think such changes were too important,

assuming

that the consensus of the Committee would be to maintain an even keel

and make no change in policy at the moment.

Mr. Mills presented the following statement:

Broadly speaking, the experience gained in 1962 seems

to indicate that the over-all expansion that occurred in

commercial bank credit was financed out of a massive increase

1/29/63

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in time and savings deposits that, in turn, was supported by

reserves supplied by Federal Reserve System actions. The

System also provided reserves in addition to those required

to backstop the increase in time and savings deposits, but in

doing so without inducing a further and economically con

structive expansion in commercial bank credit of the kind

normally associated with a vigorous growth in the national

economy. In the presence of a sluggish economy and in the

absence of a dynamic demand for commercial bank credit, the

additional increments of reserves at the disposal of the

commercial banking system failed to serve any useful purpose

and, in fact, were harmful by encouraging an abnormal growth

in loans on the collateral of U. S. Government securities and

in fostering speculative inventorying on the part of U. S.

Government securities dealers.

Under these circumstances, and there being no foresee

able increase in the legitimate demand for commercial bank

credit, it is in order to reduce the volume of free reserves

to a level in keeping with the visible demand for commercial

bank credit, say, $350-$300 million. The fact that such a

policy would tend to hold up short-term interest rates as a

deterrent to the outflow df United States dollars and gold

must be considered as a secondary effect of a monetary and

credit policy that seeks to keep an appropriate balance

between the supply of reserves and the legitimate demand for

commercial bank credit.

Inasmuch as a continuing and com

pounding reduction in the supply of reserves inevitably would

contract the credit base, with damage to the money supply,

extreme caution must be exercised in bringing down the level

of free reserves to be certain that only those reserves are

withdrawn that are demonstrably superfluous to the legitimate

credit needs of the national economy and, therefore, that

adequate credit availability is maintained.

Mr. Mills added that he believed the present stance of the

Committee in the conduct of monetary policy was in line with the

reasoning he had expressed, and that no change was required.

He did

not think that the discount rate should be raised at this time, but

he continued of the belief that if a crisis should materialize out

of balance of payments problems it would be necessary to take prompt

1/29/63

-37

and dramatic action, with joint determination, decision, and action

by the System and the Treasury.

Mr. Wayne reported that recent business developments in the

Fifth District had occurred mainly within usual seasonal patterns.

Construction, trade, services--in fact all nonmanufacturing areas

except mining--had apparently retained recent strength.

Manufacturing

activity, however, had continued the very gradual declines in employ

ment and man-hours that first appeared last August.

The Reserve Bank's

latest survey indicated slight further declines in new orders, employ

ment, and hours in textiles and in durable goods industries except

furniture.

In nondurables other than textiles the survey showed new

orders, employment, and hours virtually unchahged.

Furniture

manufacturers in the survey indicated that their already prosperous

industry was still moving ahead, and the winter markets in progress

last week at furniture centers in North Carolina and Virginia were

reported to have generated the largest volume of forward buying in

many marketing seasons.

District banks had experienced a substantial

drop in gross loans, particularly in the business classification,

while real estate loans continued to gain.

In the first and final

weeks of the period, District banks were heavy net sellers of Federal

funds.

Mr. Wayne commented that he found himself at a loss to say

much new or exciting about the national situation.

Such important

1/29/63

-38

indicators as manufacturing wages and salaries, nonagricultural

employment, and industrial production had remained virtually constant

since July.

At the two preceding Committee meetings a flurry of good

signs suggested that the economy could be moving off its plateau.

The strength in retail sales in January also pointed in this direction.

On the other hand, some of the old uncertainties reappeared in

December.

Housing starts fell, new orders for durable goods dropped,

the average workweek shortened, and commercial and industrial con:ract

awards slipped badly.

A perhaps even darker cloud loomed from the

possibility that debate over the proposed budget and tax reforms

would be long and acrimonious.

Consequently, Mr. Wayne said, he would

not be at all surprised if the clear skies everyone had been seeking

were not some way off.

In the area of policy, Mr. Wayne believed that System

operations--together with some favorable market developments--had been

fully successful in combatting the downward pressures on short-term

rates that usually prevail during this season.

had been firm with a slight upward trend.

Recently bill rates

The rate for Federal funds

had quite consistently been at or near the discount rate, and in the

Fifth District a number of sales had been reported at 3-1/8 per cent.

These trends had helped to eliminate, or in a few instances even to

reverse, the covered spreads favorable to London and Canada on

Treasury bills.

It seemed to him these results were as much as could

1/29/63

-39

reasonably be expected from monetary policy in the international area

at this time.

Domestically, the healthy growth in bank credit and

the money supply in recent months seemed to indicate that the policy

the Committee had been following had provided all the funds needed to

encourage business expansion.

For the next two weeks, with the

Treasury in the market, only one course of action--an even keel policyseemed open.

In any event, however, he would favor a continuation

of present policy, with perhaps a minor change in the wording of the

directive to drop the reference to "seasoral" downward pressures on

short-term rates.

He would not change the discount rate.

Mr. Clay commented that it would appear appropriate to

continue until the next meeting of the Committee essentially the same

monetary policy adopted at the last meeting.

For one thing, the large

Treasury financing activities in the period immediately ahead sug.

gested no change in policy unless circumstances were compelling.

Moreover, seasonal financial developments of the early weeks of the

year had not proceeded for enough to establish a clear pattern of the

basic trend.

Additionally, whatever clarification the Committee might

have hoped to receive on fiscal matters following the various

Presidential messages and Congressional reaction to them as an aid to

its own policy deliberations had not yet become apparent--nor was

there any indication as to when there would be such clarification.

In any event, it was only two weeks until the Committee would meet

-40

1/29/63

again and could take another look at the economic situation and

monetary policy.

This view on monetary policy for the period immediately ahead,

Mr. Clay added, would call for about the same degree of firmness in

the money market as was envisaged in the current directive, a Federal

funds rate ranging between 2-3/4 and 3 per cent, a Treasury bill rate

of 2.85 to 2.95 per cent, and a continuation of the Reserve Bank dis

count rate at. 3 per cent.

The directive

should be modified, he

thought, so as to avoid giving an instruction

for a progressive

tightening of bank credit on a seasonally adjusted basis.

Mr. Helmer reported that economic activity in the Seventh

District continued to display a mild

rate of improvement.

Businessmen

confidence that the trend would continue.

and bankers showed increased

in

firms

Production by manufacturing

major cities in which electric

power series were available reflected modest increases in December.

Retail sales apparently continued strong in January, but probably

suffered a setback in

weather.

week

recent

the most

Auto sales were strong

because of the severe cold

Production of some makes and lines

of cars had been cut back to keep inventories in

levels, but inventories of

sales.

line with planned

most new cars were not out of line with

Employment showed seasonal changes, but should continue to

rise in steel-producing centers where production was rising gradually,

partially as a hedge against a possible strike.

Capital expenditure

1/29/63

-41

plans were being increased in several important industries, and

Midwest businessmen were showing greater interest in the new depreciation

guidelines.

Banking developments were roughly in line with the rest of

country.

the

Business loans were down relatively less since year end than

in the nation.

However, the large tanks had added to their holdings

of short-term Governments and were showing some improvement in basic

reserve positions as compared with December averages.

credit was perhaps somewhat stronger than seasonal.

The demand for

The acquisition

of short-term Governments and the large volume of loans might indirectly

reflect corporate needs for funds.

There had been a moderate increase

in the number of member banks borrowing in recent weeks, but over all

there appeared to be no difficulty in accommodating credit demands.

Mr. Deming noted that mid-winter was not a particularly good

time to appraise Ninth District economic performance and prospects.

Agriculture, mining, lumbering, construction, and other outdoor

activities were at or close to their seasonal lows, which also were

reflected in seasonally low employment levels.

Add what seemed to

be an almost seasonal "first quarter blues" and an abnormally cold

January, and the result was a somewhat less exuberant outlook from

the Reserve Bank's opinion panel on economic prospects for the next

several weeks.

The most recent survey, taken as of January 23,

indicated that about 46 per cent of respondents saw improvement as

1/29/63

-42

fairly certain or probable, 42 per cent looked for stability at

present levels, and 12 per cent saw decline likely.

The latter

group comprised about the same number as in all surveys since early

last fall.

The big shift in the latest survey was from those who had

been forecasting improvement right along into the camp of those who

had foreseen stability equally long.

It must be noted that indus

trial power use, manufacturing employment, and personal income at

year end were off a shade more than seasonally, although this may

have reflected no more than a less than perfect statistical adjustment

and/or the cold weather.

Still there seemed to be little concrete

evidence of any real deterioration in the District economy, and most

measures showed District performance as relatively better than the

nation.

Thus, he attributed a good part, if not most, of the shift

in opinion to what he had called the "first quarter blues."

District banking developments continued along the same lines

as in recent months and about paralleled developments in the nation's

banking.

After abstracting from seasonal factors, District banks,

both city and country, exhibited continued strong deposit growth and

loan demand.

Deposit trends remained stronger than loan trends, how

ever, so loan-deposit ratios showed little change.

As he had observed

before, though, he had a mildly uneasy feeling that the loan-deposit

ratios implied a somewhat higher liquidity level than might actually

prevail.

He thought it necessary to watch this factor with some care.

1/29/63

-43

Turning to the national scene, Mr. Deming noted the absence

of exuberance in the economic forecasts for 1963 and the apparently

paradoxical behavior of the stock market.

He saw prospective

stimulation from growing Government spending and a very large deficit

both this fiscal year and next.

As he analyzed the President's tax

program, however, he saw little, if any, stimulation of the private

sector from that factor, at least over this year, even assuming that

the program was enacted.

Finally, he was disturbed by what seemed to

be developing in this country's international payments position.

It

looked to him as though the difference between commercial exports

and imports was narrowing and as though efforts to promote commercial

exports, to "tie" more of this country's aid, and to offset part of

its military expenditures abroad had not even kept the trade balance

as large as it was, let alone enlarged it.

If this was so, he

supposed it was even more important to insure against capital outflow,

but he believed the problem of payments balance would need far more

than central bank-Treasury holding action re short-term funds.

Mr. Deming recalled having mentioned at the January 8 meeting

that the problem mix was not much different from that of a year ago:

underutilized capacity and a payments deficit.

He was not so sure now

that this was an accurate statement; the problem mix might be worse at

present.

For the immediate future, however, he believed the Committee

should continue the present course of monetary policy, which he

1/29/63

-44

categorized as ease with an eye on short-term rates.

Therefore, he

would recommend no change in policy and no change in discount rate

during the next two weeks.

He supposed that this should mean no more

than technical changes in the directive, but the directive's phrasing

continued to bother him, particularly the references to money supply

and bank credit.

These had not moderated in growth rate, and he saw

no reason to provide critics with free ammunition by expressing

objectives that the Committee might not achieve.

He could live with

the second paragraph, although he noted that the firm tone in the

market referred to by the Manager was expressed in terms of rates and

"feel and color" rather than in reserves (either total or free) or in

borrowings.

He did not imply any criticism of the Desk in this

comment; he had been on the daily telephone call during this period

and thought the Desk had done very well.

At the same time, this did

underline his concern about trying to write directives in very

specific terms.

Mr. Swan reported increasing concern in the Twelfth District

over the lack of rain and particularly the lack of any significant

snowpack in the mountains.

There had been some damage to the citrus

crop, but otherwise the economic situation continued to be favorable

in the District.

Preliminary data indicated that total employment

rose about 4/10 per cent in December, although there was little or no

increase in mining, manufacturing, or transportation employment.

The

1/29/63

-45

seasonally unadjusted unemployment rate in the Pacific Coast states

was down sli;htly in December.

Construction activity and retail sales

held up well, and department store sales for the first part of January

continued strong.

For the first time since early 1961 a major labor

market area (Spokane) had been reclassified from the moderate to sub

stantial

unemployment category.

Weekly reporting banks showed much less than the usual seasonal

decline in loans during the first two weeks of January.

They were

faced at the same time with some deposit decline, and there was some

reduction in their holdings of Governments.

buyers of Federal funds.

Also, the banks were net

On at least one day (January 23) a number of

the banks were rather heavy borrowers from the Reserve Bank.

With respect to policy, Mr. Swan said he came out at about the

same place as most of those who had already spoken.

Given the lack of

change in the business situation, the fact that the downward seasonal

pressure on the bill rate seemed to

have been successfully offset: and

the imminence of Treasury financing, there seemed nothing to do except

continue on even keel.

As to the directive, he agreed that at this

point the question was again confined to technical changes.

However,

he would like to see a change made by omitting the reference to

"seasonal" downward pressures on bill rates.

Also, he continued to be

bothered a little by the reference to a current policy of accommodating

further, though more moderate, growth in bank credit.

He realized that

1/29/63

-46

this expression was presumed to refer back to the growth over

several months, but he felt that readers of the policy record might

interpret the directive as making a comparison with the previous

three-week period.

It would seem to him

a little clearer if the

directive referred to "further growth, though more moderate than has

occurred in recent months, in bank credit and the money supply."

He

would not change the discount rate at this time.

Mr. Irons reported a mixture of small pluses and minuses in

Eleventh District economic indicators.

Several indicators had moved

up modestly, including crude oil production.

Employment was up about

one per cent in the latest period for which figures were available,

while unemployment was at a rate of about 4.9 per cent on a seasonally

unadjusted basis.

Retail trade had been good over the holiday season

and into the first three weeks of January.

As to banking, investments were up and there had been a rather

substantial increase in time deposits.

Loans were down a little less

than seasonally, including commercial and industrial loans.

District

banks had been net purchasers of Federal funds for the past three

weeks.

All in all, Mr. Irons said, conditions in the District tended

to continue at a high level.

The extent of damage to agriculture as

the result of the recent series of cold spells was not known, but

evidence beginning to seep through indicated that the damage probably

1/29/63

-47

was not as bad as at first expected.

Construction activity was still

at very high levels in and around the major cities.

Mr. Irons said that he saw no need to elaborate on national

economic developments.

From the standpoint of the economic situation

as it was evolving and from the standpoint of the forthcoming Treasury

financing, he saw no choice but to continue to maintain the same

policy posture as had prevailed over the past six weeks or so.

He

shared some of the concern voiced by Messrs. Hayes and Deming with

respect to what might eventuate in the area of the balance of inter

national payments.

He would not recommend changing the discount rate,

and he would not change the directive in any basic respect, although

he would be agreeable to some of the technical changes that had been

suggested.

Mr. Irons suggested that the Federal funds rate should continue

around the discount rate level, with the bill rate at 2.90 per cent,

plus or minus., and free reserves somewhere from $250 to $350 million.

He was not too concerned about where free reserves might move as

as other factors continued about as they had been.

long

If there should

be indications of a trend toward more market ease, he felt it would

be desirable to take offsetting action.

Mr. Ellis reported that New England economic measures, includ

ing employment, unemployment, construction, manufacturing output, and

new orders, all built up to a picture indicating that the regional

1/29/63

-48

economy was now somewhat weaker than in the late fall, on a seasonally

adjusted basis, and relatively weaker than the national economy.

How

ever, available measures of consumption seemed to point toward a

somewhat more healthy situation.

The weakening of business activity

was reflected at member banks, where commercial and industrial loans

were down more than seasonally in December and on into January.

The

reaction on the part of the banks was to step up their loans to brokers

and dealers and to expand their holdings of Government securities; also,

to interrupt their liquidation of other securities, including State

and local Government issues.

Mr. Ellis commented that he had been gratified by the continued

strength of the short-term rate.

This strength was somewhat surprising

to him in view of the anticipated seasonal weakening and the relatively

large volume of free reserves.

Perhaps this suggested that float

generated reserves tended to have a lesser impact on rates than others.

In any event, it was clear that the money supply had expanded further

and that the level of required reser;es against private demand deposits

had held substantially above the 3 per cent guideline.

Thus it did

not appear that the slight shift of monetary policy had interfered

with the objective of a continued growth of bank reserves and the money

supply.

It might be that the growth rate was still too high to be

sustainable or desirable.

However, at this time of year the under

lying trends were so obscured as to prevent obtaining a reliable

1/29/63

-49

reading of the impact of policy.

The need for an even keel during the

Treasury financing led him to recommend no change in policy for the

next two weeks.

Due to seasonal factors, the Desk would be required

to supply perhaps $1/2 billion of reserves during the next few weeks.

To contain the effect on the short-term rate, some of these reserves

might be released through operations in the medium and longer term

areas of the market.

Mr. Ellis said as targets for monetary policy he would think

in

terms of a bill rate of around 2,90 per cent, perhaps tilted toward

3 per cent, with free reserves around $300 million.

He did not feel

that discount rate action would be appropriate at this time.

In his

belief, this kind of policy could be carried-out within the terminology

of the present policy directive.

Yet he understood that the directive

was intended to be flexible and to reflect shades of change in the

intervals between meetings, and there seemed to him to be at least

three places at which changes might be suitable at this time.

The

first ;ould be to strike the reference to downward "seasonal" pressure

on short-term rates; the second would be to refer to the forthcoming

two-week, rather than three-week, period.

The third involved the

question whether the policy of accommodating further, though more

moderate, growth in reserves and the money supply should be related

to some period of time in the past.

Mr. Balderston described as cogent the reasons that had been

advanced during the discussion for maintenance of the status quo.

He

1/29/63

-50

indicated that he had been impressed by the observations suggesting

that possibly severe international payments troubles were closer at

hand than one might think.

He continued of the opinion that perhaps

the Board of Governors should increase the maximum permissible rate

on time deposits with maturities from 90 days to 6 months so that the

banks could pay, if desired up to 3-1/2 per cent.

Funds apparently

had been flowing to Canada recently on an uncovered basis, and it

seemed none too soon to take such countervailing action as possible.

As to the directive, he would be agreeable to the minor changes that

had been suggested.

Two weeks from now,

when the Committee met

again, he felt that the directive might need more fundamental

modification.

Chairman Martin noted that this was a rather easy meeting to

summarize.

He would not take time for personal observations except to

say that he concurred in Mr. Mills' comments about the international

situation and that he thought the remarks of Mr. Bopp about the bnker

in the Third District were significant.

He had felt for a long time

that at some point this country was going

crucial international payments problem.

to be confronted with a

He did not pretend to know

when this would come to a head, and he might be just seeing ghosts,

but he believed the trend was clearly in that direction.

At some

point, in his opinion, this country would have to come to grips with

the problem in a more direct way than had been done to date.

1/29/63

-51Chairman Martin then remarked that, as at the January 8

meeting, Mr. Young had prepared a draft of economic background state

ment.

He would not ask Mr. Young to read that statement, but it would

be included in the minutes so that the Committee members would have an

opportunity to review the summary.

The draft of economic

Secretary's Note:

background statement to which the Chairman

referred, as revised in the light of sub

sequent comment, was as follows:

Information on the domestic economy becoming available

since the preceding meeting of the Committee on January 8

indicated a continuation of little change through December

in industrial activity, employment, and wholesale prices,

but commercial bank lending was showing evidence of stronger

credit demands and financial markets were reflecting a more

optimistic climate generally. Bank credit and the money

supply had expanded considerably over the preceding 3 months,

while deposit velocity continued to climb.

The unemployment rate rose in January, but remained

Incomplete

within the narrow range of other recent months.

weekly data for January indicate increases in output of

steel but no change in production of autos. The number of

housing units started and the volume of new orders received

by producers of machinery and other durable goods declined

in December from very high levels.

Personal income and retail sales rose further to record

levels in December. Partial ,data for January suggest a

further increase in retail sales, with both new cars and

department stores showing cortinuing strength. Consumer

prices edged down slightly in December, reflecting mainly

seasonal influences. The slowing down in the rate of rise

of the service component was again in evidence.

In the financial area, the three major Administration

messages--budget, economic, and tax--emphasized fiscal and

other efforts to stimulate economic growth, and this emphasis

contributed a note of caution to bond markets.

Yields on

U. S. Government and some other fixed return securities rose

a little, on balance, from their levels in early January.

Corporate security financing in Jaruary was indicated to be

considerably smaller than in December while municipal

financing was estimated substantially higher. Common stock

1/29/63

-52-

prices rose further in recent weeks on sizable trading

volume and stock prices had now recovered two-thirds of

their decline from December 1961 to June 1962.

There was a further sharp rise in the seasonally

adjusted money supply in the first half of January, but

indications for the second half were for some cutback in

the increase. Time deposits also rose substantially

further in the first half of the month. Required

reserves of member banks against private deposits were

averaging somewhat higher during January than in

December. Free reserves also were averaging higher,

with both excess reserves and borrowing lower.

The

money market developed a slightly firmer tone after the

first week of January, with the 3-month bill rate hold

ing slightly above the 2.90 per cent level at a time

when seasonal downward pressures are typically strong.

The U. S. balance of payments position deteriorated

in January. Weekly indicators of U. S. monetary reserves

and liquid liabilities suggested an over-all deficit for

the month of around $500 million.

The prolonged dock

strike possibly contributed to this deficit and there was

a record volume of new foreign security issues in this

country in January, largely Canadian issues. Exchange

markets remained quiet and the London gold price stayed

virtually unchanged near its low point.

Chairman Martin went on to say that he interpreted recent

Committee discussions as reflecting a view that the policy directive

should focus attention on whether some change in policy was indicated.

Minor changes in language might be perfectly appropriate, but attention

should focus on whether the Committee was making any change in policy.

The Chairman noted that there had been several suggestions for

minor changes in the directive adopted at the meeting on January 8,

1963.

He then stated that he would call upon Mr. Young to read a

draft of directive that would take account of some of those changes.

It was clear, the Chairman pointed out, that no member of the Committee

1/29/63

-53

wanted a change in policy at this time.

In his opinion, it would be

possible to operate satisfactorily during the coming two weeks under

the directive as it now stood, without any change at all.

On the

other hand, he would have no objection to making minor changes.

He

did feel, however, that the focus ought to be on whether any change

in policy was indicated.

Mr. Young then read the draft of proposed directive, with

comments on the changes from the present directive.

In discussion of the draft directive, Mr. Mitchell raisea the

question whether so many minor changes in wording were necessary or

desirable when the consensus was clearly for no change in policy.

Mr. Young then reviewed the changes and stated why he felt they would

be appropriate, after which Chairman Martin called for comments by

other members of the Committee.

Mr. Hayes indicated that personally

he favored changing the directives in minor respects from meeting to

meeting, thus preserving the idea that the directive was reasonably

flexible, not rigid.

Although the consensus for this meeting was for

no change in policy, he thought it appropriate to recognize factual

changes in the directive.

It was true, for example, that the balance

of payments position had deteriorated recently.

As the discussion proceeded, Mr. Mitchell referred to the

language of the second paragraph of the directive that called for

providing for moderate reserve expansion.

It was his thought that

this kind of language needed some reference point.

On the other hand,

1/29/63

-54

the view was expressed that any significant amendment to the second

paragraph of the directive might be taken to indicate some change in

policy, whereas no change was sought by the Committee for the next

two weeks.

As an alternative, it was suggested that the first sentence

of the first paragraph be modified to make clear that the Committee's

current policy was to accommodate growth in bank credit and money

supply, though more moderate than in recent months.

It was also

suggested that, consistent with maintenance of the status quo, the

last sentence of the second paragraph might call for providing for

"continued" moderate reserve expansion.

Mr. Deming expressed the view that if there was no change in

policy the Committee should make only minimal changes in the directive,

He would regard the changes Mr. Young had suggested as factual or

technical corrections with the exception that he thought the wording

of the first part of the directive might be interpreted to reflect

some shift in

policy.

In line with the views he had expressed at the

two previous Committee meetings, Mr. Deming said his basic point,

however, was that he did not like to see the directive set forth, as

a current policy of the Committee, an accommodation of growth in the

money supply.

Certain additional minor changes in the draft directive were

then suggested, following which Mr. Young read the directive in a form

intended to reflect the several changes that had been tentatively

agreed upon during the discussion.

-55-

1/29/63

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 fol

lowing current economic policy directive:

It is the Committee's current policy to accommodate

growth in bank credit and the money supply more moderate

than in recent months, while aiming at money market condi

tions that would minimize capital outflows internationally.

This policy takes into account the recent deterioration in

the United States balance of payments and the recent sub

stantial increases in bank credit, demand deposits, and the

reserve base, but at the same time recognizes the limited

progress of the domestic economy in recent months, the

continuing underutilization of resources, and the absence

of inflationary pressures.

To implement this policy, and in view of the forth

coming Treasury financing, System open market operations

during the next two weeks shall be conducted with a view

to maintaining about the same degree of firmness in the

money market that has prevailed in recent weeks and to

offsetting downward pressures on short-term interest

rates, while providing for continued moderate reserve

expansion.

Messrs.

Votes for this action:

Martin, Hayes, Balderston, Bryan, Deming,

Ellis, Fulton, Mills, Mitchell, Robertson,

and Shepardson. Votes against this

none.

action:

Chairman Martin commented that he hoped the members of the

Committee would continue to devote thought to the formulation of the

policy directives.

It was important to try to put them in as good a

form as possible because the directives, when published, would provide

the core of the record of Committee policy.

1/29/63

-56

It was agreed that the next meeting of the Federal Open Market

Committee would be held on Tuesday, February 12, 1963.

The meeting then adjourned.

Secretary