FOMC Minutes

A meeting of the Federal Open Markel: Committee was held in

the offices of the Board of Governors of the Federal Reserve System

in Washington on Tuesday, March 26, 1963, at 9:30 a.m.

PRESENT:

Mr. Martin, Chairman

Mr. Hayes, Vice Chairman

Mr. Balderston

Mr. Bopp

Mr. Clay

Mr. Irons

Mr. King

Mr. Mills

Mr. Mitchell

Mr. Robertson

Mr. Scanlon

Mr. Shepardson

Messrs. Fulton, Wayne, Shuford, and Swan, Alternate

Members of the Federal Open Market Committee

Messrs. Ellis, Bryan, and Deming, Presidents of the

Federal Reserve Banks of Boston, Atlanta, and

Minneapolis, respectively

Mr. Young, Secretary

Mr. Sherman, Assistant Secretary

Mr. Kenyon, Assistant Secretary

Mr. Hackley, General Counsel

Mr. Noyes, Economist

Messrs. Baughman, Brill, Eastburn, Furth,

Holland, Koch, and Tow, 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

Board of Governors

Statistics,

Mr. Yager, Chief, Government Finance Section,

Division of Research and Statistics, Board

of Governors

3/26/63

-2

Mr. Hickman, Senior Vice President, Federal

Reserve Bank of Cleveland

Messrs. Holmes and Sanford, Vice Presidents

of the Federal Reserve Bank of New York

Messrs. Ratchfcrd, Taylor, Jones, and Parsons,

Vice Presidents of the Federal Reserve Banks

of Richmond, Atlanta, St. Louis, and

Minneapolis, respectively

Mr. Willis, Economic Adviser, Federal Reserve

Bank of Boston

Mr. Cooper, Manager, Securities Department,

Federal Reserve Bank of New York

Mr. Boykin, Assistant Counsel, Federal Reserve

Bank of Dallas

Mr. Lynn, Assistant Vice President, Federal

Reserve Bank of San Francisco

Before this meeting there had been distributed to the members

of the Committee a report covering open market operations in U. S.

Government securities and bankers' acceptances for the period March 5

through March 20, 1963, and a supplementary report covering operations

for the period March 21 through March 25, 1963.

Copies of these reports

have been placed in the files of the Committee.

Mr. Stone commented in supplementation of the written reports

as follows:

The Treasury bond market has been engaged mainly in the

redistribution of the intermediate and long-term securities

acquired in the recent advance refunding. The market's per

formance has been rather impressive, especially when con

sidered against the background of an unusual succession of

press reports and statements suggesting the possibility that

an official preference toward higher interest rates, including

long-term rates, might be evolving in order to deal with the

balance of payments. Despite some selling by temporary

holders of both new and outstanding issues, price declines for

intermediate and long-term bonds were relatively moderate under

the circumstances, amounting at maximum to about 1/2 point.

Most issues showed declines of only 2/32-8/32. Early last week

3/26/63

Treasury investment accounts absorbed part of an overhang of

supply that developed in the long-term area, while System

operations to supply reserves away from the bill market, where

demand was reappearing after the tax date, absorbed securities

in the intermediate sector. Since the books on the advance

refunding closed for institutional investors on February 28,

dealers have reduced their positions by about $185 million in

5 - 10 year issues and by about $150 million in 10 - 20 year

issues.

The market still has a considerable distance to go in

distributing the new issues, however, and it is primarily the

feeling of some congestion in these new issues that is causing

the market to approach the Treasury's April 9 auction of $300

million bonds somewhat more cautiously and realistically than

it approached the first auction in January.

Apart from this technical factor of a still undigested

supply of issues offered in the advance refunding, and not

withstanding the succession of reports and statements referred

to earlier, the market seems to be facing the immediate future

with some confidence in current rate levels. This confidence

is based fundamentally on the absence of any clear indication

of a significant rise in business activity and on the conviction

that, barring a crisis in the balance of payments, there is not

likely to be any major shift in credit policy until such a

rise in activity develops--a conviction that in turn rests in

part on the market's awareness of the close 7-5 vote by which

the Committee undertook its slight shift in policy last December.

Under all of these circumstances. the bond auction is currently

expected by the market to result in a reoffering yield of 4.05

to 4.10 per cent.

In the Treasury bill market, meanwhile, rates ended the

period about where they had started, although there was some

downward movement toward the outset of the interval. This

relative stability of rates reflects the influence of a series

of short-run factors that about offset the continuous downward

pull exerted by a more fundamental factor operative in the

market--the reduction of several billion of under-one-year

maturities as a result of the advance refunding. These short

run factors included the quarterly tax and dividend dates; the

auction of June tax anticipation bills, in which dealers received

particularly heavy awards; the sale of an additional $100 million

bills in yesterday's auction and the prospect of an extra $100

million in each of the next seven weeks; and the rise in United

Kingdom bill rates following the Bank of England's action in

raising its lending rate to the discount houses to 4-1/2 per

cent.

Looking ahead, the unwinding of the effects of the Cook

3/26/63

County tax date after the first of next month, the sale of an

additional $100 million in each of the next seven regular bill

auctions, and the prospective raising of $500 million new money

in the auction of April 15 one-year bills, all constitute

additional short-run influences that will tend to offset the

downward pull on rates resulting from the recent sharp reduction

in the supply of short issues. After mid-April, however, we may

run out of such short-run influences, and rates may then begin

to reflect more openly the vacuum left in the short area by the

advance refunding.

I have already touched on forthcoming Treasury financing.

In summary, and apart from regular weekly bill auctions, the

Treasury will sell its new bond issue on April 9 and set the

coupon or coupons on April 3; it plans to auction $2.5 billion

of one-year bills on April 10; and it plans to announce the

terms of its regular May refunding on April 24 or 25, with the

subscription books to open April 29.

Thereupon, upon motion duly made

and seconded, and by unanimous vote, the

open market transactions in Government

securities and bankers' acceptances dur

ing the period March 5 through March 25,

1963, were approved, ratified, and con

firmed.

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 Treas

ury operations in foreign currencies for the period March 5 through

March 20, 1963, together with a supplementary report covering the period

March 21 through March 25, 1963.

Copies of these reports have been

placed in the files of the Committee.

In comments supplementing the written reports, Mr. Sanford

summarized foreign exchange market developments during the past three

weeks, with particular reference to the weakness that had characterized

3/26/63

-5

the pound sterling and factors that seemed to have contributed.

He

noted, among other things, that on March 19 the Bank of England had

increased to 4-1/2 per cent the rate charged discount houses, while

maintaining the Bank Rate at 4 per cent.

This had resulted in a firm

ing of rates on money market instruments having a direct bearing on

international flows of funds; the covered interest differential between

U. S. and U. K. Treasury bills, which had reached .80 per cent in

favor of the U. S., was reduced to .44 per cent.

Thus far there had

been no reports of a movement of funds out of U. K. bills into U.

S.

bills, but there had been reports of investments in maturing U. K.

bills not being renewed and of some switching into Euro-dollar deposits.

As sterling declined or firmed, the Swiss franc and the German mark

generally showed movements inverse to that of sterling, although the

mark was also subject to other influences.

The French franc and the

Italian lira held at or close to their ceilings, and the Canadian

dollar was essentially steady.

After commenting on London gold market developments, Mr.

Sanford reviewed System Account operations in foreign currencies since

the previous Committee meeting.

The System had purchased $3.1 million

equivalent of Swiss francs, which were applied--along with existing

balances--to the repayment of $4.5 million of swap drawings from the

Bank for International Settlements, thus reducing such drawings to a

total of $45.5 million.

On March 13, pursuant to authorization

3/26/63

-6

previously given by the Open Market Committee, the $50 million swap

agreement with the Netherlands Bank was renewed for another three

months.

On March 11 the National Bank of Belguim[sic]

redeemed another

$10 million of U. S. Treasury certificates of indebtedness arising

from the System's swap drawing of Belgian francs, but yesterday, for

value March 27, the National Bank increased its holdings by $7.5

million.

The National Bank had now disbursed $12.5 million net of

the $50 million it received on the swap drawing; the Federal Reserve

now had on deposit all of its drawings of Belgian francs.

The $250

million standby swap arrangement with the Bank of Canada was today

being extended for another three months, pursuant to previous authori

zation of the Open Market Committee.

Upon motion duly made and seconded,

and by unanimous vote, the System Open

Market Account transactions in foreign

5

currencies during the period March

through March 25, 1963, were approved,

ratified, and confirmed.

Mr. Sanford recommended that the swap arrangement with the Bank

of Sweden in the amount of $50 million, maturing April 17, 1963; the

arrangement with the Bank of Italy in the amount of $150 million,

maturing April 18, 1963; the arrangement with the Swiss National Bank

in the amount of $100 million, maturing April 18, 1963; and the arrange

ment with the Bank for International Settlements in the amount of $100

million, maturing April 18, 1963, each be extended for a period of three

months.

3/26/63

-7

After discussion, renewal of the

foregoing swap agreements, as recom

mended by Mr. Sanford, was authorized.

Mr. Sanford mentioned that on April 16, 1963, the $25 million

equivalent drawing on the swap arrangement with the Bank of England

would mature.

If the Bank of England wished to extend the drawing for

another three months, Mr. Sanford indicated that there would be a

disposition to agree to such an extension.

Mr. Sanford also mentioned that on April 18, 1963, the $50 million

equivalent

drawing in Swiss francs from the Swiss National Bank and the

$25.5 million equivalent drawing in Swiss francs from the Bank for Inter

national Settlements both would mature.

He indicated that the Account

Management would expect to renew that part of each drawing that had not

been retired by the maturity date.

No objection was indicated to proceeding in the manner indicated

by Mr. Sanford in respect to the foregoing matters.

In further discussion of System operations in foreign currencies,

Mr. Mills referred to the possibility of problems arising and, over a

period of time, becoming aggravated in one or more of the countries whose

central banks had swap arrangements in effect with the Federal Reserve.

He recognized the mutually protective features embodied in the reciprocal

currency agreements with respect to devaluations.

If, however, at some

unforeseeable time in the future a foreign country drifted into a

completely unsatisfactory situation, the Committee would be confronted

3/26/63

-8

with the question whether to extend further the swap arrangement with

the central bank of that country.

In such a circumstance, he sensed

that a responsibility might be felt for continuing the arrangement.

It

was his suggestion that the members of the Committee, especially the

Reserve Bank Presidents, should give serious thought to what could

develop in the way of possible losses at some future time, particularly

in relation to the capital of the Reserve Banks.

There followed comments on the length of time the various swap

arrangements had been outstanding and the uses made of such facilities

to date.

Chairman Martin then expressed the view that the System's

program of foreign currency operations had served a useful purpose.

However, the point made by Mr. Mills should be borne in mind.

The

Committee should continue to study the program--which had now been in

effect for something over a year, keep abreast of all aspects of it, and

consider where the program might lead.

This concluded the discussion of System foreign currency

operations and related matters.

Accordingly, the Chairman called for

the usual staff economic and financial reports, and Mr. Koch presented

the following statement on economic developments:

Considerable information on recent domestic economic

developments has become available since the last Committee

meeting. On balance the encouraging signs seem to me to out

weigh the discouraging ones. Nevertheless, the developing

information still does not suggest a speedy or a substantial

improvement in either our high unemployment rate or our

sluggish growth.

3/26/63

Consumers have continued to pull their spending oars,

and recent developments suggest a good spring and Easter

buying season. Excluding the effect of the special payment

of insurance dividends to veterans in January, personal

incomes were up in February to a level 4.5 per cent above

a year ago. The pace of shopping has picked up more than

seasonally thus far in March, and total retail sales in the

two weeks ending March 16 were 7 per cent larger than a

year earlier.

Sales of new domestic autos continued strong

Recent consumer attitude

in the first twenty days of March.

surveys conducted by the Survey Research Center of the

University of Michigan, the Census Bureau, and the Sindlinger

Service all suggest continuation of strong consumer sentiment

and willingness to buy autos and houses.

In addition to the consumer--and to Government, Federal

as well as State and local--we may be beginning again to get

some help from the business sector in furthering the economic

expansion. Although total business inventories showed little

change in January, steel stocks of manufacturers rose for

the first time since last April. On a seasonally adjusted

basis, from last April through December these stocks had been

reduced 30 per cent to the lowest level since the fall of

1961. According to a Commerce Department survey conducted

in February, manufacturers expect their inventories in the

first quarter to continue the modest upward drift that

In the second quarter, they

characterized late 1962.

anticipate a sharp step-up in inventory buying, presumably

reflecting--in part at least--further precautionary stocking

Insofar as it reflects precautionary buying, how

of steel.

ever, such stocking can hardly be viewed as an element of

underlying strength.

Turning to business fixed capital, a key economic

statistic that has become available since the last Committee

meeting and that we have been eagerly awaiting for some time

is the Commerce-SEC estimate of new plant and equipment

spending by business in 1963. As you are undoubtedly aware,

the estimate shows about a 5 per cent increase in 1963 spend

The physical volume of outlays in

ing over that in 1962.

1963 suggested by this survey is not particularly high, but

the findings have been interpreted with some optimism, in

part because a McGraw-Hill estimate of business capital

spending in 1963 made last fall sho.ed an increase of less

than 3 per cent.

The recent Commerce-SEC survey shows business capital

spending reached a high in the third quarter of last year,

declined a little in the fourth quarter, is expected to

3/26/63

show little change in the current quarter, and then is likely

to rise moderately over the rest of the year.

Another recent survey dealing with business capital

spending is also encouraging. The Newsweek-National Industrial

Conference Board survey of capital appropriations made by

manufacturing firms in the fourth quarter of last year showed

them up 13 per cent from those made in the third quarter, and

the highest since early 1957. On the basis of this appropriations

estimate, Conference Board economists suggest that manufacturing

capital outlays in 1963 may exceed those in 1962 by from 6 to

8 per cent. This is strikingly consistent with the Commerce-SEC

estimate of a 7 per cent rise for manufacturing.

New orders received by durable goods makers, which reflect

buying not only for business capital but also for other pur

poses, set a record in February for the second straight month.

Steel and defense ordering accounted for much of the rise.

Incoming business rose 2 per cent over the previous high in

January. Despite the fact that these recent surveys of business

capital spending, together with the rise in durable goods orders,

are encouraging and somewhat higher than earlier expectations,

they are not strong enough to suggest that business spending is

likely to add enough to total spending to produce a dynamic

upward trend in economic activity soon.

Looking at the economy from an over-all point of view, the

gross national product in the current quarter is likely to be in

the neighborhood of $569 billion on a seasonally adjusted annual

rate basis. This compares with a rate of $563.5 billion in the

fourth quarter of last year. Without wishing to overemphasize

the significance of GNP figures per se, business and Government

economists do appear to be raising their GNP sights for this year.

It is far from clear, however, as to how much these estimates do

or do not reflect assumptions that tax reductions will be enacted.

In conclusion, little change probably continues to be the

byword for characterizing recent measures of economic activity,

particularly output of goods. But there is a somewhat rosier

hue to interpretations of the news, and this probably is not all

due to the fact that spring is officially here and better

weather actually here. Forecasts of recession are less numerous

now than they have been in many months, although there are still

some around. Forecasts of vigorous economic growth in the near

term future are also still few and far between. But one should

be warned that economists and businessmen have been a bit manic

depressive in their forecasts over the last year or so, with

sentiment experiencing roller-coaster ups and downs around a

much more stable course of actual activity. Indeed, further

3/26/63

-11-

moderate expansion in activity, but with a persistent high

level of unemployment, continues to be the most likely

characteristic of the domestic economy for the intermediate

as well as the near-term future.

Mr. Holland presented the following statement on financial

developments:

Considering the variety of financial cross-currents at work

in recent weeks, money and capital markets have been compara

tively stable.

Occasions of either a substantially easier or

firmer tone were usually confined to very few days' duration, and

this despite the March tax date influence, the Treasury's record

size advance refunding and accompanying tax anticipation bill

offering, and the largest month's sales of new corporate and

municipal securities since last June. Perhaps the one exception

worth noting occurred in the municipal market, where yields on

Aaa securities adjusted downward by about one-tenth of a per cent

in reflection of good receptions of new offerings.

Debt markets might not have been so unruffled, however, had

not some official buying occurred in the intermediate and longer

maturity areas of the Government market, in the form of invest

ments for Treasury trust accounts and System Account purchases

to inject needed reserves without altering the rather delicate

balance in the bill market.

With the overhang of recent offer

ings now reduced, long-term markets seem somewhat better prepared

for the scheduled continuation of heavier corporate and municipal

offerings through April and the $300 million Treasury bond

auction on April 9. Incidentally, I should report that the Treas

ury still expects to be able to squeeze both this financing and

the enlarged bill auctions outlined by Mr. Stone within the debt

limit, but it will be a very tight fit. Hopefully, Congress will

authorize a higher debt limit by mid-May, when a $305 billion

ceiling would begin to impinge seriously on the Treasury's

freedom of action.

Bank credit apparently continued to mount during the first

three weeks in March, but not in categories suggestive of any

underlying pick-up in economic activity.

Business loans rose

less than usual in the weeks surrounding the tax date, bespeaking

the ample level of corporate liquid assets out of which payments

could be made. This same factor undoubtedly contributed to the

substantial net maturities of time certificates of deposit at

leading banks over the tax date, and the heavy temporary bank

borrowing by finance companies to cover commercial paper

maturities and meet other payments. On the other hand, securities

3/26/63

-12-

loans at city banks seesawed, running high in the first half

of March to finance dealer participation in Treasury financings,

then dropping down as dealer holdings were redistributed or

financed more cheaply elsewhere. Meanwhile, in the more

permanent parts of their portfolios, banks were continuing to

add to real estate loans, although seemingly at a more moderate

pace then earlier, and also to their holdings of consumer loans and

non-Government securities.

In addition, banks lengthened some

$4.4 billion of their Government securities portfolio through

exchanges in the Treasury advance refunding. At city banks, some

of these portfolio acquisitions during the first three weeks of

March were financed by spinning off Treasury bills, but as of last

Friday banks more than replenished their bill holdings by acquiring

some $700 million of the $1.5 billion added issue of June tax

anticipation bills.

On the deposit side, time and savings deposits, seasonally

adjusted, were expanding at a somewhat slackened pace in February

and the first half of March. The money supply, however, re

bounded from its late February dip to an average $148.9 billion

in the first half of March, aided by a more than seasonal decline

in Government deposits. At this point member bank private demand

deposits had climbed at between a 5 and 6 per cent annual rate

since mid-December, compared to a less than 1 per cent advance

during 1962, while time deposits were climbing at between a 14

and 15 per cent annual rate since mid-December, compared with

17-18 per cent during 1962. Thus, the comparative rates of

growth in time and demand deposits have been moving back more

toward their early 1961 relationship and away from the extreme

skew in favor of time deposits that characterized particularly

the first three quarters of last year.

All these patterns are synthesized in the movements of the

statistics on aggregate reserves that are presented to the com

mittee.

As the staff memorandum reported, seasonally adjusted

required reserves behind private deposits have mounted at an

annual rate of 7 per cent since mid-December. Most of this

growth stemmed from greater bank reserve utilization in late

December and January and again in March, with some intervening

weakness in February. However, the sharp advance in reserve use

in the last three weeks--as my previous comments have indicatedis based upon component movements of bank credit and deposits

Indeed,

that suggest some of this bulge may prove temporary.

early indications for the current week point to some sizable down

ward adjustment in reserve totals. A little more hindsight may

make it clear that the banking system is in fact fluctuating

around a more moderate growth rate than last fall, in the current

3/26/63

-13

operating, climate of $250-$350 million free reserves, bill

rates in the range of 2.85-2.95 per cent, and Federal funds

at or crowding 3 per cent.

You have observed, I am sure, that the required and total

reserve statistics presented in the staff projections memorandum

have a somewhat different look. This reflects the latest in our

periodic efforts to revise them in ways that we hope will maximize

their usefulness for current policy purposes. Perhaps a modest

disclaimer is also appropriate at this juncture.

In developing

these seasonal and growth allowances, there is no disposition on

the part of the staff to regard them as eternal verities, rivaling

the Friedman 3 per cent or 4 per cent rule. Rather, the reserve

projections are efforts to trace the pattern of reserve use that

might be expected on the basis of past seasonal experience and

some reasonable allowance for monetary expansion.

If thereafter

a sizable and persistent departure from the reserve guideline

should materialize, this is a sign that the banking system and its

customers are reacting to the current reserve environment in a way

significantly different from what might have been expected. After

studying the situation, the Committee might want to change policy

to resist the new trend, or it might wish to accommodate or even

encourage it. Such a decision would rest on all the economic and

financial evidence available at the tite, and not just upon the

guideline, but the guideline would have served its purpose if it

signalled fairly promptly when such a reconsideration was in order.

With reference to the revised reserve projections that had been

mentioned by Mr. Holland, Mr. Mills expressed concern that the Open Market

Committee may have attached more importance to such data in the formulation

of policy than was justified.

This was offset, of course, to the extent

that the Account Manager was instructed to proceed with due allowance to

factors such as the feel and tone of the market.

Mr. Mills inquired

whether, if the newly revised statistics had been available during 1962,

they might have had some effect from the standpoint of policy decisions

being different from those actually made.

In explanatory comments concerning the revision, Mr. Holland

noted that the only sizable adjustments made in the seasonal factors

3/26/63

-14

affected the months of April, August, and December.

These adjustments

were an effort to recognize, insofar as the state of the art permitted,

the substantially stronger repetitive fluctuations that had materialized

in these months in each of the past two years.

Mr. Holland did not feel

that any of the revisions in the series were large enough to have altered

the policy judgments of the Open Market Committee in 1962.

In each

instance, Committee deliberations were focused on the trend of reserve

statistics over a longer span than the few weeks chiefly affected by the

revisions in seasonal allowance.

However, the reserve movements at

several points would have appeared more moderate, and probably more

consistent with preceding and succeeding trends.

Mr. Furth presented the following statement on the U. S. balance

of payments:

The latest figures for February put net transfers of

gold, foreign convertible currencies, and dollars to foreigners

at $180 million.

Preliminary weekly figures for the first

three weeks of March indicate sizable net transfers from

foreigners to the U. S.

If we dare assume that the last ten

days of March will not do worse than the average of the past

12 weeks, we may tentatively estimate the U. S. payments

deficit for the first quarter at $650 million (after adding

to the official figures the increase in "non-liquid" Government

liabilities to foreigners, resulting from medium-term Treasury

borrowing abroad).

The first-quarter deficit was increased by the effects

of the dock strike and an unusual bunching of foreign bond issues

in January. But it was reduced by the repayment of year-end

window-dressing credits and other bank loans, and especially by

some undetermined but probably substantial impact of the recent

troubles of the pound sterling and the political uncertainties

in Canada on the international flow of funds. On balance, there

does not seem to be any conclusive evidence indicating that the

3/26/63

-15

tentatively estimated figure of $650 million was significantly

affected either way by unusual or temporary circumstances. An

annual deficit rate (before deducting prepayment receipts) of

$2-1/2 to $2-3/4 billion, if realized, would be somewhat lower

than the annual deficit figures for the past five years.

In consequence of sales of gold to the U. S. Treasury by

the United Kingdom and Brazil, March will presumably show an

increase in total U. S. gold holdings. The official Treasury

gold stock figure will remain constant, with the accrual being

absorbed by the Stabilization Fund.

The decline in U. S. gold

holdings for the first quarter will thus presumably be kept to

$110 million, an annual rate far below the annual figures for

the past five years. But this relatively low level of net sales

was due to extraordinary circumstances, and even if our payments

deficit does not rise above the rate tentatively estimated for

the first quarter, we can hardly expect the gold situation to

remain as favorable as in these three months.

Most foreign industrial countries continue to show satis

factory growth. The French authorities have taken some moderately

restrictive monetary measures and money markets have been quite

tight in Germany and the Netherlands. But the authorities of

other European countries apparently permit domestic expansion to

go on in spite of expected further moderate pressures on their

prices and wages, and in spite of an expected decline in their

payments surpluses. Japan has again lowered its discount rate.

Even the United Kingdom, which is facing the most difficult pay

ments situation of any of the major countries, has reacted to the

near run on sterling merely by raising the rate for advances to

discount houses and pushing up the Treasury bill rate but has so

far avoided an increase in Bank rate.

Thus, for the first time since last summer, the future of

the U. S. payments balance seems perhaps just a little bit

brighter. But we must remember that both in 1961 and 1962 the

first quarters looked quite promising, and we must resist

temptation to extrapolate the recent improvement.

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

and views on economic conditions and monetary policy beginning with Mr.

Hayes, who presented the following statement:

Most of the important business statistics for February

registered some slight improvement, in contrast with the general

weakness shown in January. Although the basic business situation

3/26/63

-16-

is still one of sidewise movement, with a slight upward tilt,

and although unemployment is still a serious and apparently

rather intractable problem, I have a general impression that

the business outlook is considerably firmer than it was three

weeks ago. For one thing, the Commerce-SEC survey of plant

and equipment spending plans and the NICB survey of capital

appropriations indicate more strength in this crucial area

than was expected earlier, especially in the second half of

1963, while growing inventory accumulation will be a favorable

factor in the first half. Consumer buying intentions are

rather strong.

Much or all of the unusually sharp increase in bank credit

in February appears to have been connected with the large volume

of Treasury financing operations during the month. There is no

evidence of a real change in underlying loan demand. The daily

average money supply dipped slightly in February as Government

deposits rose sharply, but then rebounded strongly in the first

half of March in a typical lagged response to the upward movement

of bank credit during February. In general the economy's liqidity

still appears ample.

The basic situation with respect to the balance of payments

has not changed appreciably. It does look, however, as if some

of the extremely gloomy forecasts for the year 1963 may have been

overdone. Monthly data by themselves are not particularly mean

ingful, and this applies to the large indicated deficit for

January and February combined, as well as the indicated absence

of a deficit in the first three weeks of March. Most observers

estimate the annual deficit for 1963 as probably still close to

the $2.5 to $3 billion level (without taking account of special

receipts) which is of course much too high. Large foreign security

placements in the New York market have played a major role in our

payments recently; and I find especially disturbing the growing

tendency for American corporations, and even a few banks, to place

funds in dollar time deposits in Canadian and European banks to

take advantage of higher interest rates than can be obtained on

domestic short-term investments.

Sterling's troubles have tended to obscure our own in the

last two weeks. The British sale of gold to our Treasury has put

a halt for the time being to our gold losses; but it should be

borne in mind that if the British are able to overcome their

difficulties they will be back again to repurchase gold recently

sold. This has been the past pattern of the wide swings in the

British position. Fortunately for the stability of the interna

tional exchange system, the earlier spate of London press comments

on possible sterling devaluation has given way to much more

3/26/63

-17-

conservative commentaries as to Government intentions, and the

Bank of England's action in raising the rate applicable to bor

rowing by the discount houses has provided evidence that the

authorities intend to defend sterling by means of orthodox

measures. This action is also interesting in that it demon

strates how little reluctance there is among European central

banks to use monetary policy when needed to check external

threats to their currencies.

We continue to be confronted with a busy schedule of

Treasury financing. It is now eleven days since delivery of

the securities under the advance refunding program. With the

coupon on the long auction bond not to be announced until

April 3, there is a very brief period of a week or so that might

be considered open for policy changes by the System. However,

the period is doubtless too short for any very dramatic policy

change. A similar short period will occur in the latter part

of April after the bonds have been auctioned and before announce

ment of the May refunding. After mid-May there should be a

substantially longer period when we need not be concerned with

Treasury financing considerations.

The gravity of the threat posed to the dollar by the cumula

tive effects of our balance of payments deficits calls for

decisive efforts in the fairly near future to bring equilibrium

to our international payments. After careful reading of the

interesting papers distributed at the last meeting, I have not

found any basis for changing my view that there is a role for

monetary policy, including discount rate action, in any concerted

attack on the balance of payments problem that may be launched

by the U. S. authorities. Somewhat higher interest rates and

reduced credit availability could, I am convinced, bring important

benefits, both technical and psychological. By emphasizing the

short-term area, I believe the risk of damage to the domestic

economy could be held to a minimum. I am encouraged by the recent

signs that the balance of payments problem is receiving increasing

attention within the Administration, and I do not believe that the

Federal Reserve System can afford to lag behind.

However, these are matters for future determination, and our

scope for policy change with respect to the next three weeks is

distinctly limited. The time is not yet ripe for any discount

rate change. I do believe the Committee can properly help now

to pave the way for future decisive action by instructing the

Manager, within the context of the Treasury bond auction, to

probe toward a slightly lesser degree of ease through appropriate

open market operations, designed to bring the 90-day bill rate up

to about 3 per cent within the next few weeks and to keep the

Federal funds rate consistently at that figure. This might entail

3/26/63

-18

a modest decline in free reserves and a modest rise in

borrowing. Since the Desk will probably have to supply

reserves on balance over the three-week period, a start

toward these aims can be accomplished simply by supplying

reserves somewhat less liberally than we would have done

under our current directive. The directive might well be

changed to reflect this probing toward slightly less

monetary ease and to indicate our interest not merely in

"minimizing capital outflows internationally" but rather

in contributing to an improvement in the capital account

of the balance of payments.

Mr. Ellis said that in New England business sentiment was trying

to be more optimistic, and regional tendencies offered some support.

The

Reserve Bank's survey of capital expenditure plans of manufacturers

indicated an increase of about 5 per cent in outlays this year as compared

with 1962.

Observers also were encouraged by the steady growth in personal

income in recent months, by the strong showing of bank debits, and by the

strength of sales at retail counters and automobile showrooms.

On the

other hand, much of the capital investment was aimed at eliminating

factory jobs, which were now running around one per cent below a year ago.

Insured unemployment through late February was running 10 per cent ahead

of year-ago levels.

Since the end of last year, when there were none,

three labor market areas had been reclassified into the category of 9-12

per cent unemployment.

After more than a seasonal drop in January, loans at First

District banks increased in February and thus far in March.

Demand

deposits were weak, but there was a continued rise in time deposits.

The average loan-deposit ratio was back up to the all-time high

registered in the first quarter of 1960.

3/26/63

-19

Turning to policy, Mr. Ellis said that he endorsed substantially

the position of Mr. Hayes.

He had found the set of staff papers distrib

uted at the March 5 meeting informative and stimulating.

It was his

conclusion that basically the imbalance in U. S. international accounts

was caused by the defense and foreign aid programs, accentuated by capital

outflows.

If so, it might be a questionable remedy to impose sharp

credit restraint on the domestic economy in order to achieve a solution

to problems that were not inherent in the economy itself.

The solution

to the balance of payments problem seemed to offer alternative possibilities

ranging from a reduction of foreign aid to tax action, efforts to change

the flows of exports and imports, and monetary action.

It seemed

appropriate that monetary policy should play a role in any concerted

attack on the balance of payments problem.

Mr. Ellis expressed the view that there should not be a sharp

change in monetary policy in either direction at the present time.

A

move toward a substantially reduced availability of reserves could

stimulate a weakness in the domestic economy, and it was not at all clear

to him that monetary policy action would by itself have a great effect

from the standpoint of the balance of payments.

The possibility of

secondary effects on the United Kingdom should also be considered.

On

the other hand, he felt that a general move toward greater ease would

be ill-advised in the absence of material changes in the economy.

Accord

ingly, he would favor exploration of a slightly lower availability of

-20

3/26/63

reserves and slightly higher rates of interest to determine the

economy's reaction in the spring months.

If there should be a

strengthening of business conditions, possibly the money market

would tighten on its own initiative.

Mr, Ellis concluded by saying that he thought the current

policy directive might well be changed to call for a probing action

toward slightly less reserve availability.

However, he would not

recommend that any dramatic action be taken.

Mr. Irons said that in the Eleventh District various sectors

of the economy were displaying some improvement.

Consumer spending,

as reflected by department store sales and automobile sales, showed

a rather considerable improvement in mid-February.

was relatively unchanged.

Industrial activity

The index of electric power use shcwed quite

a substantial increase in the past month, but this was a new series in

the District and might have some defects.

Nonagricultural employment had improved slightly, but there

was also an increase in unemployment as a percentage of the labor frce.

Construction activity continued to be very favorable, both in terms of

current levels and by comparison with a year ago.

Oil and gas production

was up slightly, while refining was off slightly.

The agricultural

situation was quite good, with growing conditions favorable.

Loans, investments, and deposits at District banks all showed

increases, although the increases were not as large as during the same

3/26/63

-21

period a year ago.

Purchases of Federal funds increased, while there

was relatively little change in sales.

small volume.

Member bank borrowing was in

The banks appeared to have sufficient liquidity to meet

increased demands for credit if they should arise.

In general, business confidence in the Eleventh District was

good but not exuberant.

There was still evidence of a feeling of

uncertainty as to what might be ahead, with the same issues continuing

to predominate, including the international situation, budgetary deficits,

and the question of tax reduction.

Mr. Irons expressed the view that the execution of policy during

the past three weeks in terms of interest rate levels and the adequacy

of reserves had been quite satisfactory.

Apparently the availability

of reserves had been adequate to permit bank credit expansion, which

had been quite large since the first of the year.

The money supply had

recently moved up.

Looking ahead to the next few weeks, Mr. Irons said he came to

the conclusion that this would not be in appropriate period for any

significant change in policy.

He would recommend maintaining the present.

availability of reserves and the degree of money market ease that had

prevailed for the past three weeks, with the objective of maintaining a

stable market situation.

If there should be any deviations, he would

rather have them fall on the side of slight additional firmness although

this would not be an objective.

The forthcoming long-term bond auction

3/26/63

-22

by the Treasury and the problem of the debt ceiling would argue against

any substantial policy change on the part of the Federal Reserve at this

time.

Accordingly, Mr. Irons said, he came out in favor of maintenance

of the status quo, with any deviations on the side of less ease but with

no deliberate probing in that direction at this time.

This would

envisage around $300 million of free reserves, relatively low levels of

member bank borrowing, Federal funds at about the 3 per cent level, and

the bill rate in the area of 2.85-2.95 per cent.

His policy recommendation

would not contemplate changing the existing policy directive, and he

would not consider it appropriate to change the discount rate at this

time.

Mr. Swan said that after a rather abrupt drop in the seasonally

adjusted rate of unemployment in the Pacific Coast States in January,

as mentioned at the March 5 meeting, there was a slight increase in the

rate in February.

This seemed to be related in part to the fact that

aircraft employment again declined.

Ordnance employment regained some

of the ground lost in January but was still below the December high,

while employment in lumber and wood products and primary metals gained

in January as well as February.

Orders for copper apparently were

quite high in March, and January and February deliveries were at the

highest levels since the middle of 1962.

February and the first part of March.

Steel production rose in

The amount of hedging against

3/26/63

-23

a strike was reportedly minor, with most of the orders reflecting

demand for steel for construction.

District banks as a group continued to be heavy net sellers

of Federal funds, due largely to the shift of one major bank from

the bill market to the Federal funds market.

Time and savings

deposits continued to increase, although in the three weeks ended

March 15 about half of the increase in time deposits at reporting

banks reflected the issuance of certificates of deposit by one bank

in Los Angeles.

Substantial activity in the municipal market was in

sight, with three offerings of $100 million or more scheduled for

April.

Mr. Swan noted that the business situation and the Treasury

financing program argued against a change in policy in the next three

weeks.

In his opinion, operations in the past three weeks had been

quite satisfactory, particularly in view of the various problems with

which the Desk was confronted.

He would like to see the same kind of

situation continue to prevail in the forthcoming period, with no

abrupt change in either direction and without any probing toward a

position of less ease.

In his view the underlying situation did not

warrant such probing at this time, and he thought there was more to

be lost than to be gained.

discount rate.

He would not recommend a change in the

Neither would he recommend any changes in the policy

directive, other than technical changes, except that he again would

3/26/63

-24

suggest eliminating the phrase that called for offsetting downward

pressures on short-term interest rates, for reasons such as he had

outlined at the March 5 meeting.

Mr. Deming commented that latest economic data on the Ninth

District presented a more than ordinarily confusing picture.

Industrial activity apparently rose in February (on a seasonally

adjusted basis industrial power use increased), but more complete

information on nonagricultural employment indicated a slight decline,

seasonally adjusted, for that month (in contrast to what preliminary

data on Minnesota alone indicated, as reported at the preceding Com

mittee meeting).

This latter factor, plus some decline in hours

worked, was reflected in a drop in District personal income in February,

which pulled the seasonally-adjusted annual rate down to last fall's

level.

At the same time, unemployment evidently was not as serious

(except on the Iron Range) as it was at this time last year, and fewer

unemployed had exnausted their benefits this year than last.

How much

the adverse developments reflected the severe winter was anybody's

guess.

In fact, the mixture of developments made their combined

meaning anybody's guess also.

A recent Minnesota poll on consumer buying intentions added,

if anything, more confusion.

Taken in March, it showed a somewhat

weaker demand for autos and durables than the national poll in January

and a somewhat weaker demand than indicated by the Minnesota poll a

3/26/63

-25

year ago.

ThLs was rather puzzling in view of the income gains

recorded in the District over the past year up to February, which

were better than the national average.

Finally, District banking statistics for the first half of

March were most uncharacteristic, with loans declining and deposits

rising in contrast to their usual behavior.

As to policy, Mr. Deming said that he would recommend no

change during the next three weeks, particularly because of the

Treasury financing program.

except for technical changes.

This would mean no change in the directive

He would not recommend changing the

discount rate at this time.

Mr. Scanlon reported that evidence on Seventh District develop

ments tended to suggest that the current quarter was ending on a

stronger note than it began.

To some extent, of course, the improvement

reflected moves to increase inventories of certain items, particularly

steel and tires, that might become short later in the year if work

stoppages developed.

Nevertheless, the desire of businessmen to build

inventories indicated a confident view of the probable demand for

products in which these items were essential components.

The improvement in orders reported by Midwest producers of

capital equipment appeared to be continuing, with substantial gains

over last year reported for farm and construction machinery, railroad

equipment, and trucks.

3/26/63

-26

The auto market continued strong, and output in the second

quarter probably would equal or exceed the high rate of the first

quarter.

Inventories at the beginning of March were lower relative

to current sales than in any year since 1959.

However, the auto inventory

was not well balanced; in the case of most General Motors models,

inventories were quite low.

With retail sales apparently moving to another new high in

March, it had been noted that the rate cf increase in savings in the

Seventh District

slowed somewhat in February and March.

A large

retailer of general merchandise believed that inventories were some

what low relative to current sales and suggested that orders to

suppliers would have to be stepped up soon if sales continued at the

recent rate.

The television industry expected a rise in sales of

color sets from about 450,000 last year to as much as 800,000 this

year.

Farm :ncome was now expected to be sharply lower in the

Seventh District in 1963 because of declines in prices of cattle and

hogs induced by the larger numbers of animals coming to market.

Some

farmers who paid high prices for feeder cattle last fall probably were

going to lose money this year.

In Illinois and Iowa net farm income

might be down one-fourth or more from 1962.

Reduced income in live

stock producing areas could be expected to dampen the strong market

for farm machinery later this year.

3/26/63

-27

Loan demand by businesses and consumers at Seventh District

banks was moderate during February and March.

Expansion in business

loans over the March corporate income tax date was substantially

smaller than in the past four years.

As indicated by Mr. Holland,

the large banks continued to provide a large amount of financing to

Government securities dealers--with this accounting for the major

part of

the rise in bank credit.

Chicago banks were showing the

strains normally associated with preparation for the April 1 personal

property tax assessment date, but so far had been able to acquire

large amounts of Federal funds and, until last Friday, had made very

little use of the discount window.

Inventories of Treasury bills at

these banks had been at a high level for several weeks, but if the

normal pattern was repeated, holdings were likely to drop by at least

$250 million by the end of April.

Mr. Scanlon believed the current policy posture was appropriate,

considering the diversity of economic developments--domestic and inter

national.

He might be influenced, he felt, by the fact that the Cook

County tax date and the unwinding of positions

taken by Chicago banks

in this connection would be occurring during the next three weeks.

would favor continuation of the present directive, and he would not

He

favor a change in the discount rate at this

time.

Mr. Clay expressed the opinion that, all factors considered,

the Committee should continue essentially the same monetary policy

3/26/63

-28

until its next meeting.

should be left unchanged.

In line with this view, the discount rate

Except for a change in the reference to

Treasury financing, he felt that the present directive would fit the

current situation and the monetary policy called for by that situation.

The domestic economy, Mr. Clay noted, continued to exhibit

the general pattern of activity that had prevailed for many months.

In the aggregate, the evidence did not suggest an imminent downturn.

Neither did it suggest any marked rise in the pace of activity.

Rather,

it pointed to a slow upward movement that would be less than sufficient

to absorb potential labor force growth.

The employment problem no

doubt was aggravated by the structural shifts that were taking place

in the economy as a result of mechanization.

Quite apart from the

employment situation, however, the sluggishness of the domestic economy

was underscored by the fact that the measures of aggregate output showed a

very slow rate of expansion.

While the most recent data made it difficult to judge the real

magnitude of the deficit in the international balance of payments thus

far in 1963. there was no question that it remained a serious problem.

What could and should be done to deal with the problem so far as

monetary policy was concerned was quite another matter.

For the

period immediately ahead, the recent developments in the British pound

sterling seemed to him to make any credit-tightening moves on the part

of the United States inappropriate at this time in any case.

3/26/63

-29

In considering the various factors to be taken into account

in

formulating monetary policy at this time,

forthcoming Treasury auction of its

there was also the

long-term bond.

Apart from other

compelling reasons, this would argue against any change in policy

in the period ahead.

Mr. Wayne reported that Fifth District business conditions

had changed little during the past three weeks.

The Reserve Bank's

survey detected another small increase in optimism among businessmen

generally, and bankers on the panel took a more neutral but still

optimistic view of the near future.

Manufacturers in the survey

reported virtually no change on balance in the flow of new orders.

Shipments and hours, however, were up slightly, employment was down

a little, and lower prices were indicated in nearly one-fourth of the

survey reports.

Nothing had occurred recently to clarify the textile

industry's uncertain outlook, and conditions in most other important

sectors of District business--construction, trade, and coal mining

as well as areas of manufacturing--remained about the same as they were

three weeks ago.

A drop in tourism in the District of Columbia had

been noted, dating back to last October.

It seemed clear to Mr. Wayne that there had been some strengthen

ing in the pulse of business during the usually gloomy month of February.

Fractional gains in retail sales, factory hours and employment, and

private payrolls underscored the more substantial improvements in

3/26/63

-30

housing starts, steel production, and sales and new orders for

durable goods.

These improvements seemed to outweigh reduced

construction outlays and the higher rate of unemployment, although

their significance was not so apparent as their number.

They might

reflect better weather, the end of the dock strike, hedge buying of

steel, the January payment of the special dividend on veterans'

insurance, or simply a one-shot rebound from sharp declines in

previous months.

The gains in sales and new orders for durable goods

would seem to have some additional significance since they rose for

the second successive month.

The continued growth in bank credit also

tended to confirm the upward movement in business activity.

While

all of these developments, taken together, did not constitute a major

change of direction, they gave considerable assurance that the general

condition of business was not deteriorating further.

Mr. Wayne noted that the Desk had been quite successful, since

the previous Committee meeting, in promoting the degree of stability

and ease in the money market that the policy directive instructed the

Manager to maintain.

In view of current domestic and international

developments and of the continued expansion of bank credit in recent

weeks, he felt that it would be difficult to describe a more appro

priate course of action under the circumstances.

Again international

developments had brought a slight easing to the position of the

dollar, at least temporarily.

At the same time there could be no

3/26/63

-31

doubt that the banking system was in a position to finance with ease

any growth in business activity that was likely to occur.

In these

circumstances, and in view of the forthcoming auction of bonds by

the Treasury, he could find no justification for a change of policy.

He would renew the current directive except for an appropriate

reference to the Treasury bond sale.

He would not favor any change

in the discount rate.

Mr. Mills said that he would recommend no change in policy

during the next three weeks.

In his opinion the operations of the

Account, as reflected in bank reserve positions in the past three

weeks, had been desirable, and he would favor a continuation of

operations on the same basis in the forthcoming period.

He did not

feel that this was an appropriate time to probe toward a slightly

greater degree of firmness, as he believed that domestic considerations

still had priority over the concern expressed about the balance of

payments problem.

It seemed to him quite important to wait until one

could see the actual reserve figures of the past week or so, because

apparently there was a greater degree of market ease than might have

been suggested by the preliminary reports on reserves.

If the early

record of market ease did not turn out to have had a truly factual

basis, probing beyond the degree of firmness that had really prevailed

could be harmful.

He would consider it advisable to keep a close eye

on movements in the money supply and to determine whether the recently

3/26/63

-32

reported increase actually occurred or somehow was related to the

rather blurred reporting on reserves.

Mr. Mills saw no occasion to consider raising the discount

rate at this time and no reason to amend the policy directive in

substance.

He agreed, however, with the view that the reference in

the directive to offsetting downward pressures on short-term interest

rates was misplaced.

A strong effort to offset such downward pressures

could have the result of more than realizing the same degree of money

market firmness that had prevailed.

This led him to repeat his regret

that the Committee did not go back to the old form of policy directive

(the clause "b" form of instruction) that it had used for many years.

In his opinion the time had come to consider whether it would not be

advisable to return to that form of directive, in light of the criticisms

made recently in the report of the Joint Economic Committee concerning

the vagueness of the Committee's directives.

Mr. Robertson presented the following statement:

It appears that the general business atmosphere may be

a shade better. This is certainly heartening, but it should

not lead us to relax our concern for the domestic economy.

On the contrary, with a 6 per cent unemployment rate and the

absence of inflationary pressures, I think we should be

seizing this opportunity to do everything we reasonably can

to nurture and encourage this improved business tone.

On this score, I am generally satisfied with the

financial performance of the last three weeks. Given the

number of different seasonal and other influences at work

recently, it seems to me bank reserve positions and the money

market have been fairly stable. The statistics on bank

credit and required reserve increases suggest some further expansion

3/26/63

-33-

thus far in March. I judge from the comments here that some

of that may be expected to be temporary, and I would not be

concerned if our banking statistics evidence some downward

adjustment to a more moderate expansive trend. But I am

convinced that, over time, some continued gradual, and more

than fractional, growth in bank credit, time deposits, and

the money supply is both feasible and desirable in an economy

with as many unemployed men and machines as we have, and with

our current record of generally stable prices for goods and

gradually declining unit labor costs.

For many months now, our discussions of how stimulative

monetary policy should be have had to take into account the

continuing deficit in our balance of payments. There is no

doubt in my mind that our monetary policy today is somewhat

less easy than it would be for domestic reasons alone, because

of Committee concern with our international financial position.

The papers distributed at the last meeting raise and explore

the question of whether monetary policy should be tightened

still further for balance of payments reasons. There seems

to be some question as to whether our action should be an

effective restraint, or merely something of a symbol. But I

am not persuaded that any such action by the Federal Reserve

would be other than disadvantageous, cn balance, to the

United States economy.

When it comes to the blunt issue of the need on inter

national grounds to tighten policy now, my answer is "no," on

In terms of rate incen

three grounds raised in these papers.

tives to international capital f ows, it seems clear (even in

the light of the fuzzy figures that are bandied about in this

particular field) that the only area in which moderate changes

in rates by the U. S. might have an appreciable effect is in

the short-term and money market sectors. Here the covered

interest differentials are not greatly disadvantageous to us

on any major international instruments, and I have not heard

I submit that, as responsible

of any sizable flows developing.

central bankers, we ought to feel flatly barred from any

unilateral act to move our short rate higher in the face of the

precarious position facing the other key currency and our closest

international ally.

With the covered bill differential between

New York and London already substantially in our favor, and

pressures from a variety of sources already crowding Britain to

make some upward rate adjustments in self defense, further rate

increases on our part, it seems to me, would run unfathomable

Even from a purely selfish point of view, rate action

risks.

on our part could simply give rise (as I pointed out at the last

meeting) to a vicious circle of higher rates in both the U. S.

3/26/63

-34-

and the U. K., with little net reserve gain to either and with

undesirable domestic effects in both. Right now the British

are living through a serious market threat to their currency.

We, by comparison, are not.

I think it behooves us, in these

circumstances, to hold "steady in the boat," giving them all

the implicit support we can and leaving them the maximum range

of flexibility for their own policy actions.

I am not persuaded by the argument in one of these papers

that we ought to take overt policy action with the aim of

triggering a market scramble to reverse the "lead and lag"

relationships that have apparently moved against us during our

period of balance of payments deficits.

The large short position

in the dollar, which has been developing for some time, in

effect puts our currency in a strong technical position. I

would rather preserve that technical strength than take super

ficial action (such as a discount rate increase) designed to

trigger a rash of short covering and then expose us to a creep

ing move back to a short market position again.

Finally, and more fundamentally, I just do not accept

the idea that we are so basically noncompetitive internation

ally, and that we need to go even further in wringing out our

economy in order to regain a reasonable foundation for compet

ing in the markets of the world. We already are in a position

to compete--and compete very effectively--in the world markets

for a wide variety of goods, although we are denied the full

fruits of our competitive ability by foreign tariffs and import

Wheat, coal, automobiles, poultry--these are just

restrictions.

some of the many products of what are the most efficient sectors

of American business, for which international restrictions deny

us our full potential of export earnings. With our trade surplus

already so large, if we should develop any major new product

penetration of world markets, we should not be surprised to see

that export potential also curtailed by some counteracting

We are not losing our competi

imposition of trade restrictions.

tive edge--we are whetting it, by maintaining a long span of

relatively stable prices of goods and gradually declining unit

labor costs, while the rest of our international competitors are

inflating. I fear that to try to do much more would be misplaced

effort, until we can do more to restrain foreign handicaps to

U. S. exports.

Finally, I am compelled to point out that the statistics

on our fundamental international trade position are rendered

literally uninterpretable during this period by the effects of

the dock strike. Were it not for that strike, we might be

seeing some improvement in our underlying position. Parenthetically,

3/26/63

-35

progress in this direction is all that. responsible foreign

colleagues ask of us. Given the size and the long duration

of divergent price trends here and abroad, some improvement

would not be unlikely. But the distortions of the current

figures deny us the basis for any firm view of the trend.

It would be the height of irony if, with no gold drain to

rush us into action, we were to tighten policy today, only

to learn two or three months from now that we had already

begun to experience the kind of underlying progress toward

a reduced balance of payments deficit that all of us devoutly

desire.

All this discussion leads me to the clear conclusion

that our best choice today--particularly in light of the

Treasury financing plans--would be to hold policy as it is

for the next three weeks. I would be pleased to have the

directive phrased in the somewhat more quantitative terms

that I advocated at our last meeting. I would acquiesce,

however, in almost any alternative suggestion for directive

language that would call for a continuation of the current

policy, especially if the words "and to offsetting downward

pressures on short-term interest rates" were deleted there

from. But I could not concur in the views expressed this

morning that we should probe toward a slightly tighter

monetary policy.

Mr. Shepardson referred to comments made by a number of the

delegations of State bankers associations that had visited the Board's

offices in recent weeks that seemed to indicate some concern about the

quality of credit.

These comments suggested to him that there was no

doubt about the abundant availability of reserves.

With that in mind,

he was inclined toward the position taken by Mr. Hayes and Mr. Ellis

in favor of probing toward a slightly lesser degree of ease.

It had

been his view for some time that the growth of the economy was going

to be more dependent on other factors than on monetary policy.

Factors

such as uncertainty about budgetary and tax developments seemed to have

3/26/63

-36

been having a significant effect, along with apprehension about

continuing labor strife.

However, for the period immediately ahead,

he concluded that it would be best to continue the present monetary

policy, and he would subscribe to proceedirg along lines suggested

by Mr. Irons.

Mr. King expressed the view that there should not be any

substantial change in monetary policy at this time.

As to the policy

directive, it probably would be appropriate to make certain technic.l

changes.

He would also propose eliminating the phrase that called

for offsetting downward pressures on short-term interest rates, since

he was not sure that the retention of this language would contribute

a great deal toward expressing the position of the Committee.

Mr. Mitchell expressed the opinion that the balance of payments

situation was improving significantly and observably, mainly because

of the increasing problems of other countries in relation to those of

the United States.

This kind of situation was gradually developing

around the world, and the net result should be a benefit in terms of

this country's balance of payments.

Despite an understandable

reluctance to be too enthusiastic, the most recent figures seemed

quite good.

As to the staff papers on the balance of payments and monetary

policy that had been distributed at the March 5 meeting, Mr. Mitchell

noted that by necessity they were highly speculative.

However, he had

3/26/63

-37

found them interesting and well organized.

He hoped that there might

be additional papers dealing with certain assumed conditions.

One such

paper might deal with what would happen from the standpoint of the

United States should the British devalue the pound sterling or take

certain other steps such as had recently been discussed in the British

press.

Another paper might deal with the balance of payments effects

of a U. S. monetary policy directed toward moderately greater ease,

with short-term rates falling by perhaps one-half of one per cent.

Mr. Fulton reported that steel production and auto sales

continued to be the buoyant elements in the Fourth District business

picture.

Most of the recent news seemed to be more on the favorable

side that the unfavorable.

Although there were no firm indications

of a basic change in the business climate, the attitudes of business

executives were definitely more optimistic, sparked by increasing order

books for durable goods.

Steel production continued to increase substantially.

Unfor

tunately, however, this substantial increase reflected orders to

accumulate inventories in anticipation of a strike at midyear; produc

tion after midyear would suffer whether or not a strike occurred.

It

was not known as yet whether the United Steelworkers would request a

reopening of the contract by April 30, but this was a year when the

unions seemed determined to seek to improve job security, pensions,

etc., rather than cash wages.

One of the phases of union security

3/26/63

-38

seemed to be to restrict the companies from contracting out various

types of maintenance and construction projects.

If the union was

successful in preventing the steel companies from contracting for

such work, that would add substantially to costs.

Union pressures

for benefits had constantly increased costs, which had accelerated

installation of labor-saving equipment, which in turn had caused

increased unemployment.

Lake shipping would be delayed in its opening until the latter

part of April or the first of May because of ice conditions.

However,

the steel mills still had adequate supplies of iron ore.

Auto sales in the three principal areas of the Fourth District

were strong in the second week of March after a dip in the first week,

probably due to the end of concerted sales drives in the previous month.

Department store sales had been on the weak side, with sales for the

year to date being 2 per cent under the same period last year.

Total

construction contracts slumped in January (seasonally adjusted).

Resi

dential building contracts remained high in January and subsequently,

but the heavy engineering series had sagged.

Unemployment showed nominal

improvement on a seasonally adjusted basis in the week ended March 16.

On an unadjusted basis, there was improvement in all but two of the major

labor markets.

The decline in total earning assets of District banks since the

latter part of 1962 had been the smallest in the past four years.

The

3/26/63

-39

decline in loans was centered in repayments by nonbank financial

institutions.

The reduction in U. S. Governments was concentrated

more in short-term issues than heretofore.

While demand deposits had

shown a normal decline, the increase in time deposits was the largest

for this period in the past four years.

The Women's Federal Savings and Loan Association of Cleveland

had announced a reduction in its dividend rate from 4-1/2 per cent to

4-1/4 per cent, citing a plethora of funds, a low volume of new mortgages,

and declining interest rates on mortgages.

Mr. Fulton stated that he would not change the policy directive,

the discount rate, or the present posture of monetary policy in terms of

the short-term rate or the volume of free xeserves.

In other words, for

the next three weeks he would hold to the posture of the past three weeks.

Mr. Bopp said a close look at the numbers for the Third District

suggested that business may have improved a little.

Small rays of sun

shine came from weekly unemployment claims and steel production series,

which were improved, and from small increases in manufacturing employ

ment and help wanted advertising.

Nevertheless, employment and output

had been stagnant and unemployment had been creeping upward, outpacing

slightly the expected seasonal rise.

Three weeks ago it had been hoped that the loan volume was

picking up, but the latest reading indicated that loans had been in

creasing less rapidly than a year ago.

Business loans had fluctuated

-40

3/26/63

within a narrow range since the end of January.

With the exception of

security loans, other categories had shown little sign of any sustained

advance in recent weeks.

Meanwhile, the increase in time deposits

continued unabated.

Turning to policy considerations, Mr. Bopp noted that Treasury

operations dictated no substantial change in policy at the moment.

Although he would still prefer a somewhat easier monetary policy than

now prevailed, there seemed to be little point in dwelling on this

theme except to emphasize that the domestic economy continued to perform

sluggishly.

Just a few months ago the Committee had decided that policy

should be slightly less easy, and he would not now recommend a reversal

of that decision.

But neither would he like to see the movement away

from ease carried any further.

Although the balance of payments was

still a gnawing problem, he felt that relatively small increases in

interest rates would contribute very little to the solution; larger

increases would depress the domestic economy unduly.

For the present, therefore, Mr. Bopp recommended no change in

policy, which implied a continuation of present levels of market rates

and reserve availability and continuation of the existing discount rate.

The directive might be changed along the lines suggested by Mr. Swan.

In a further comment, Mr. Bopp said he had spent the week that

included March 15 at the Trading Desk in New York.

This developed to

be a particularly difficult week, and he was impressed by the competence

3/26/63

-41

of the Account Manager and his staff.

He gained the feeling that the

phrase "color, tone, and feel of the market" had real substance and

content, with a large number of quantitative magnitudes, such as free

reserves and dealer positions, feeding into it.

There might be some

virtue, he thought, in undertaking with the use of electronic equipment

some study to see whether there was a way of being more precise.

Mr. Bryan said that although some of the statistics were of

stale date, the latest figures from the Sixth District showed a generally

upward inclination.

The changes were not of great magnitude, but they

supported the optimistic reports of the Reserve Bank's directors.

The

series indicating an upward movement included nonfarm employment, manu

facturing employment, department store sales, construction employment,

personal income, and weekly average hours worked.

The exceptions to the

slow upward movement related to financial statistics, in which the move

ment seemed to have been substantial.

Bank debits, demand deposits and

currency, demand deposits and currency and time deposits, loans, and loans

and investments of member banks all exhibited upward movements that had

been consistent and of magnitudes much greater than those exhibited in

nonfinancial

series.

Mr. Bryan felt that the Committee should continue in a policy

posture that he would describe essentially as one of no change.

By that

language he meant to say that the System should continue to supply

reserves in a way that would take account of seasonal factors plus a

3/26/63

-42

small growth component to accommodate a growing population and the

growing transactions necessary to such a population.

At this time,

he would not quarrel with anyone on whether the growth factor should

be at the rate of 2 per cent or 3 per cent annually; indeed, being

somewhat above a 3 per cent trendline, he would think it reasonable,

in terms of such an instruction, to head for the next few months for

a central target more nearly at a 2 per cent annual growth than a 3

per cent annual growth.

In terms of figures, this would suggest a

central target of slightly less than $19.5 billion of total reserves

(daily average) for April and a central target for May of slightly more

than $19.5 billion.

Such figures, assuming other factors equal, would

reconcile with a free reserve target centering around $300 million.

He would assume that the Manager of the Account should have an ample

latitude, around these central figures, to accommodate himself to

transitory conditions in the money market.

In conclusion, Mr. Bryan said he would not favor a change in

the discount rate at this time.

Mr. Shuford commented that on the basis of the information

reported this morning, he could appreciate that there probably would

be some improvement in the degree of optimism.

However, he did not

believe that in the Eighth District the degree of improved optimism

was quite as strong as had been suggested at the national level and by

the reports from other Reserve Districts.

This was not intended to

3/26/63

-43

leave an impression of pessimism, for the general views in the Eighth

District had been all along on the side of optimism, but he had not

seen any marked change of sentiment recently--and during the past month

he had had an opportunity to talk not only with bankers but a number

of business people around the District.

The prevailing tone of

sentiment was probably borne out by recent statistics.

Employment

remained at the level of November and December, while electric power

use had risen slightly to about the level of last summer.

Department

store sales were up a little from the end of last year, but they had

remained substantially unchanged for the past three months.

There had

been no significant change in business loans for several months;

however, bank debits had risen moderately in recent months.

Cash farm

income in the District had been declining so far this year, with major

declines in beef cattle and hog prices.

Mr. Shuford said that a policy for the ensuing period such as

outlined by Mr. Irons would be agreeable to him.

He would not be

inclined to do any probing in the direction of lesser ease, especially

in view of the forthcoming Treasury bond auction.

In his opinion the

current level of interest rates was about right under existing

circumstances, but he would not be disturbed if the short-term rate

declined over a period of time as low as 2.85 per cent.

recommend changing the discount rate.

He would not

As to the policy directive, he

would suggest that changes be held to a minimum.

-44-

3/26/63

Mr. Balderston commented that there might be a rather critical

period ahead for the Treasury, considering factors in the offing such

as the Treasury bond auction.

He would be sympathetic in principle with

the idea of probing in the direction of slightly less ease, as suggested

by Mr. Hayes, but the situation immediately ahead seemed to call for

maintaining an even keel until the date of the next Committee meeting.

Mr. Balderston then inquired of Mr. Stone how he proposed to

take care of the indicated shrinkage in reserves over the forthcoming

period and whether he anticipated substantial downward pressure on

short-term interest rates.

Mr. Stone said he would anticipate that there might be some

downward pressure on bill rates in the next few days.

However, with

the unwinding of positions in bills after the April 1 Cook County

personal property tax date, a large amount of bills would have to be

absorbed.

In meeting needs for reserves, he

would have in mind a

combination of repurchase agreements--to the extent that they could

be made--with some purchases of bills as necessary, and purchases c

some quantity of coupon issues having maturities within five years

Mr. Balderston inquired of Mr. Stone whether he would consider

it inopportune to eliminate the words of the directive that called for

offsetting downward pressures on short-term interest rates, and the

latter replied that over the next three weeks he would not anticipate

the emergence of serious downward pressure.

This could emerge, however

3/26/63

-45

after mid-April.

Mr. Balderston then said that he would favor

elimination from the directive of the language to which he had

referred.

Chairman Martin commented that apparently there was general

agreement on maintenance of essentially the status quo during the

next three weeks, with some variations of opinion.

Mr. Hayes and

perhaps one or two other members of the Committee would favor probing

toward slightly more firmness, but this view seemed clearly in the

minority.

The Chairman noted that Mr. Young had composed possible language

for the policy directive that reflected suggestions such as those

ade

by Mr. Swan; the proposed language would involve only minor changes

from the wording of the existing directive.

The Chairman then read

the suggested language.

In further discussion, Mr. Hayes referred to reservations that

had been expressed by some at this meeting about any move in the

direction of probing toward slightly less ease in light of the current

difficulties of the United Kingdom.

His own feeling was that the

really serious threat would come if the dollar and the pound were both

in trouble on a continuing basis.

He did not believe that the problem

of the dollar could be brushed under the rug simply on the ground that

the British were having some difficulties.

take protective measures.

The British were able to

The intractable balance of payments problem

3/26/63

-46

was between the Continental countries on the one side and the United

Kingdom, Canada, and the United States on the other.

It would be

necessary to deal with that problem, and the policy he advocated was

intended to pave the way very tentatively.

He would like to be

recorded as dissenting from adoption of a policy directive such as

was now being suggested.

Also, he might wish to submit a supplemental

comment on why a program such as he had suggested would not be

damaging to the Treasury's forthcoming bond auction.

There followed a brief discussion during which Chairman Martin

referred to difficulties that might develop if Committee members were

to submit additional comments after a Committee meeting for inclusion

in the record of the meeting.

On the other hand, he saw no reason why

a Committee member should not at any time submit a paper for distribution

to the other members of the Committee.

Chairman Martin went on to say that he had prepared a paper for

presentation at this meeting.

However, he had decided simply to make

the comment, as had Mr. Hayes, that in his view the greatest single

shadow over the growth of the domestic economy was the balance of pay

ments problem.

This involved a matter of judgment, but in his opinion

that problem was a real deterrent to economic growth;

not be separated from the other.

the one could

As he saw it, everyone was working

basically with the same objectives in mind.

It was just a matter of

judgment as to whether a particular modus operandi would or would not

be effective in achieving the desired result.

-47-

3/26/63

The Chairman also commented that he would associate himself

with the view that any deviations from the status quo in the forth

coming period should preferably be on the side of firmness.

However,

this was a minor point; he would not want to vote against the suggested

policy directive.

Thereupon, upon motior duly made

and seconded, the Federal Reserve Bank

of New York was authorized and directed,

until otherwise directed by the Committee,

to execute transactions in the System Open

Market Account in accordance with the follow

ing current economic policy directive:

It is the Committee's current policy to accommodate moderate

growth in bank credit, while aiming at money market conditions

that would minimize capital outflows internationally. This

policy takes into account the continuing adverse United States

balance of payments position and the increases in bank credit,

money supply, and the reserve base in recent months, but at the

same time recognizes the limited progress of the domestic economy,

the continuing underutilization of resources, and the absence of

general inflationary pressures.

To implement this policy in a period of a Treasury bond

financing, System open market operations during the next three

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, while accommodating moderate reserve expansion.

Votes for this action: Messrs. Martin,

Balderston, Bopp, Clay, Irons, King, Mills,

Mitchell, Robertson, Scanlon, and Shepardson.

Vote against this action: Mr. Hayes.

Chairman Martin referred at this point to the report on open

market operations during the year 1962 prepared by the Manager of the

System Open Market Account, noting that it had been suggested that the

3/26/63

-48

Open Market Committee might want to authorize publication in the

April issue of the Federal Reserve Bulletin of the main part of

the report.

The article would parallel the one on foreign currency

operations, prepared by the Special Manager, that had appeared in

the March issue of the Bulletin.

Copies of the report, in form

suggested for publication, would be distributed to the members of

the Committee for their comments.

There was general agreement that the publication of such an

article in the Bulletin would be desirable for the purpose of con

tributing to a better public understanding of System open market

operations.

It was suggested that the article be published as an

informational review--like the article on foreign currency operationsrather than in the form of a report by the Manager of the Committee.

There was concurrence with this suggestion, and also with the view

that it would be desirable for the article to include a rather sub

stantial description of actual open market operations.

Question was raised about the possibility of distribution of

the article by a Federal Reserve Bank within its District subsequent

to the publication of the April issue of the Bulletin.

It was stated,

in this connection, that reprints of the Bulletin article would be

available from the Board's offices for such distribution as Federal

Reserve Banks might want to make.

This procedure, it was suggested,

would seem preferable to the inclusion of the article as part of the

content of the monthly review of a Reserve Bank.

3/26/63

-49There had been distributed to the members of the Committee

by the Secretary, under date of March 25, 1963, a brief summary

statement of the economic position, with the notation that it was

expected to be used as a basis for preparing a portion of the entry

for today's meeting that would be included in the record of policy

actions taken by the Committee.

It had recently been the practice

to incorporate such a background statement at the end of the minutes

of the respective meetings in order that the Committee members might

have an opportunity to make comments and suggestions, as a step toward

expediting the preparation of the policy record entries.

Question was raised whether it was necessary to incorporate

the text of these statements of the economic position in the minutes,

it being suggested that the same purpose might be accomplished if the

background statements were distributed separately.

There was general

agreement with this procedural suggestion.

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

Committee would be held on Tuesday, April 16, 1963.

All of those in attendance then withdrew except the Members

and Alternate Members of the Committee, the Reserve Bank Presidents

not currently serving on the Committee, and Messrs. Young, Sherman,

Kenyon, and Stone.

Chairman Martin reported informally on certain discussions

that he had had concerning matters in the area dealt with in the

3/26/63

-50

staff papers that had been distributed at the March 5 Committee

meeting.

He also reported, as a matter of information, on plans

that had been announced by the Chairman of the House Banking and

Currency Committee for hearings by the Committee in regard to

Federal Reserve System matters, probably beginning some time this

summer.

The meeting then adjourned.

Secretary