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, April 16, 1963, at 9:30 a.m.

PRESENT:

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Martin, Chairman

Balderston

Bopp

Clay

Irons

King

Mills

Mitchell

Mr. Robertson

Mr. Scanlon

Mr. Shepardson

Mr. Treiber, Alternate for Mr. Hayes

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. Brill, Garvy, Green, Furth, Holland, and

Koch, Associate Economists

Mr. Coombs, Special Manager, System Open Market

Account

Mr. Molony, Assistant to the Board of Governors

Mr. Williams, Adviser, Division of Research and

Statistics, Board of Governors

Mr. Yager, Chief, Government Finance Section

Division of Research and Statistics, Board of

Governors

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Messrs. Patterson and Helmer, First Vice Presidents

of the Federal Reserve Banks of Atlanta and

Chicago, cespectively

Mr. Hickman, Senior Vice President, Federal Reserve

Bank of Cleveland

Messrs. Black, Jones, Parsons, and Grove, Vice

Presidents of the Federal Reserve Banks of

Richmond, St. Louis, Minneapolis, and

San Francisco, respectively

Mr. Marsh, Assistant Vice President, Federal Reserve

Bank of New York

Messrs. Willis and Anderson, Economic Advisers,

Federal Reserve Banks of Boston and Philadelphia,

respectively

Mr. Sternlight, Manager, Securities Department, Federal

Reserve Bank of New York

Mr. Scheld, Assistant Cashier, Federal Reserve Bank

of Chicago

Upon motion duly made and seconded, and

by unanimous vote, the minutes of the meeting

of the Federal Open Market Committee held on

March 5, 1963, were approved.

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 March 26 through April

10, 1963, together with a supplementary report covering the period April

11 through April 15, 1963.

Copies of these reports have been placed in

the files of the Committee.

In comments supplementing the written reports, Mr. Coombs

first discussed current and prospective developments with respect to

the U. S. gold stock, following which he touched upon the situation in

the London gold market, including reference to operations of the gold

pool.

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Turning to the foreign exchange markets, Mr. Coombs noted that

interest had centered in the pound sterling.

In a description of recent

developments in this connection, based essentially on information con

tained in the reports that had been distributed to the Committee, he

noted that the

disclosure by the Chancellor of the Exchequer in his

budget message that the Bank of England had received assistance

from

central banks of other countries to the extent of $250 million during

February and March did not appear to have created apprehension.

In

fact, the announcement seemed to have had the opposite effect of con

veying to the market an impression of solidarity in support

of sterling.

He and other central bank officials in the exchange field, Mr. Coombs

said, believed that the repeated instances of central bank cooperation

in resisting speculative challenges were contributing to a gradual

change in market psychology.

The market had become increasingly per

suaded that sufficient official funds could be rounded up when necessary

to resist speculative attacks on a currency successfully.

psychological

Thus, some

advantage seemed to have accrued from all that had been

done in the past two years.

Mr. Coombs also commented on the progress that had been made

towards paying off the Federal Reserve drawings of Swiss francs under the

swap arrangement with the Bank for International Settlements, again as

described in the reports that had been distributed.

In the absence of

upsetting political developments, he hoped that the System's Swiss franc

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drawings from the Bank might be substantially paid off in the reasonably

near future.

Progress likewise was being made by the U. S. Treasury in

dealing with its Swiss franc commitments.

Mr. Coombs then reviewed developments with respect to the German

mark, which had been under some buying pressure recently for reasons that

he described.

He reported that selling operations by the German Federal

Bank, the U. S. Treasury, and the Federal Reserve seemed to have had some

effect in arresting the rise in the mark rate.

Comments followed

with

respect to the Netherlands guilder, including circumstances that ,ad

contributed to pushing the guilder to the ceiling against the dollar and

led to a drawing by the Federal Reserve under its swap arrangement with

the Netherlands Bank to provide additional guilder resources for market

operations.

In concluding his remarks on developments since the previous

Committee meeting, Mr. Coombs noted that the dollar had continued on or

close to the floor against the French franc and the Italian lira.

The

dollar also had weakened against the German mark and the Netherlands

guilder,

and the London gold price had been exhibiting a tendency to rise.

In this constellation of circumstances, intervention in the mark and guilder

markets had seemed advisable.

Thereupon, upon motion duly made and

seconded, and by unanimous vote, the System

Open Market Account transactions in foreign

currencies during the period March 26 through

April 15, 1963, were approved, ratified, and

confirmed.

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Certain recommendations were then presented by Mr. Coombs

for the Committee's consideration.

Mr. Coombs first recommended renewal for three months each of

the $50 million swap arrangement with the Austrian National Bank, which

would mature April 24, 1963; the $100 million swap arrangement with the

Bank of France, which would mature May 6, 1963; and $150 million swap

arrangement with the German Federal Bank, which also would mature

May 6, 1963.

After discussion, renewal of the afore

mentioned standby swap arrangements, as rec

ommended by Mr. Coombs, was authorized by

unanimous vote.

Mr. Coombs noted that a $20 million equivalent drawing in Swiss

francs under the swap arrangement with the

ments would mature April 30, 1963.

Bank for International Settle

He recommended renewal of the drawing

for another period of three months, adding, however, that he was hopeful

that it might be possible to repay the drawing entirely within the

relatively near future.

The proposed renewal of the Swiss franc

drawing was noted without objection.

Mr. Coombs recalled that at its meeting on September 11, 1962,

the Open Market Committee had authorized outright purchases of sterling

up to a total of not more than $25 million equivalent.

It had been the

thought that if purchases of sterling could be made at favorable rates

in the ensuing few months, a period of the year when there is usually

some pressure on sterling, such holdings might be used to advantage after

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the turn of the year, when a seasonal flow of funds to the United Kingdom

normally might be expected.

Due to subsequent developments, including

the breakdown of Common Market negotiations, the general picture had changed

considerably.

In the present circumstances, however, it appeared that it

would be useful to have this authorization available, thus permitting

moderate purchases of sterling that might have a desirable effect under

certain conditions.

Thus, an $8.5 million purchase by the Stabilization

Fund on March 29th had had a reassuring effect.

Accordingly, Mr. Coombs

requested that the action taken by the Committee on September 11, 1962,

authorizing outright purchases of sterling up to a total of $25 million

equivalent be reconfirmed.

After discussion, the authorization re

ferred to by Mr. Coombs was reconfirmed.

This concluded the discussion of System foreign currency operations

and related matters.

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 26 through

April 10,

1963, and a supplementary report covering operations for the

period April 11 through April 15,

1963.

Copies of these reports have been

placed in the files of the Committee.

Mr. Marsh commented in supplementation of the written reports as

follows:

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The highlight in developments since the last meeting of

the Committee was the competitive bidding for Treasury bonds of

1989-94 which took place on April 9.

Events leading up to the

bidding suggested that the market had discounted the effects of

earlier doubts about the future of interest rates and would

approach the bidding with reasonable confidence in the rate

structure. Prices of longer term issues had declined substantially,

producing yields around 4.05 per cent in the longer key maturities,

and presumably establishing a viable level of rates for

the bidding.

There were indications of sizable investor interest in the new

issue at yields of 4.10 per cent or higher, but it was believed

that the winning syndicate might offer the issue at a yield of

4.07 to 4.09 per cent, at which level reasonably good buying was

expected.

As you probably all know, the Salomon Bros. & Hutzler-Devine

syndicate won the issue on a bid of 100.55119 for a 4-1/8 per cent

coupon at a cost to the Treasury of 4.09 per cent. The bonds were

offered to the public at a yield of 4.082 per cent, which resulted

in an underwriting spread of $1.98 per bond at the reoffering

price.

Investors, however, showed more reluctance in buying the

bonds than had been generally anticipated, the principal difficulty

being that too many prospective buyers had apparently set their

On top of this, there were still

sights on the 4.10 per cent rate.

many doubts about the rate structure and the action of the market

after the bidding was not reassuring, as prices were marked down

sharply the day after the bidding, making yields on outstanding

issues (4.06 per cent on 4s of 1980, for example) quite attractive

compared with the 4.08 per cent yield on the new issue. Market

activity subsequent to the bidding has been mostly professional.

The announcement by the American Telephone & Telegraph Company

of its intention to refund a $250 million 5 per cent issue due

in 1983 came as an added blow to the market just after the bidding.

The announcement of price increases by Wheeling Steel Corporation,

followed by several other steel price increases, also tended to

restrain investor demand for the bonds.

All these influences combined to produce an attitude of

"wait and see," and although there is reportedly plenty of long

term money to be invested, prospective buyers are still waiting.

The situation remains a standoff, with about half the issue sold.

We do not know how long the winning group will keep their syndicate

open, but progress since the bidding day has been slow and there

are no clear signs of give on either side.

It looks as though

the capital market would remain on dead center until this impasse

is resolved one way or another.

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While these results are not as happy as in the January

offering, we must recognize that the new technique is still on

trial as it was not really tested in January, when conditions

were almost ideal.

The question, of course, is whether a syndicate

can successfully distribute an offering of this kind and size under

less than ideal conditions.

Syndicates will have to learn how to

handle both themselves and the Government securities market, for

they must worry not only about distributing the new issue but

also about the action of the market for the various other

Government issues.

Thus, they are subject to more pressures

than syndicates trying to distribute corporate issues. While

the Salomon-Devine syndicate is not optimistic about selling

out the account at the reoffering price, they are not greatly

distressed about it as the loss potential does not appear ex

cessive at this point.

However, the whole performance has started

a reappraisal of syndicate attitudes toward the competitive bidding

process in terms of combining syndicates and submitting more

realistic bids.

Payment for the new bonds will be made on Thursday, April 18.

This weekend the Treasury will start its regular meetings with

advisory committees to discuss the May refunding of $9.5 billion

of three maturing issues of which $6 billion are held by the

public. Announcement of the refunding terms will probably

be made on Wednesday, April 24, with the books opening on Monday,

April 29, possibly for 3 days.

The Treasury has in mind trying

a new technique suggested some time ago by the Investment Bankers

First, they would offer on

Association involving two stages.

April 29 intermediate or longer term issues in exchange for the

A week or 10 days later, perhaps for subscription

maturing issues.

on May 8, they would offer a short-term anchor issue for cash to

cover any attrition which might result from the exchange and also

to provide any new money that might be needed at the time. This

method, if used, would involve a somewhat longer than normal

period over which the Treasury would be seeking subscriptions.

The situation in the bill market has changed little, with

rates clinging to the 2.90-2.92 per cent level for three-month

bills and 2.97-3.00 per cent for six-month bills. Three weeks

ago the Treasury started adding $100 million to each weekly

offering of bills and last Wednesday auctioned an additional $500

million of one-year bills in refunding the $2 billion one-year

These additions to the bill list have

bills maturing April 15.

especially the one-year bills which

rates

up,

bill

tended to keep

the dealers took in size and have not been able to sell readily.

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The Cook County (Chicago) tax date was expected to put some

pressure on the bill market, but the Chicago banks were able to

deal with the situation smoothly and after the tax date found a

good market for the bills they had accumulated.

The absence of

substantial upward pressures on bill rates from these influences

suggests that the market is beginning to reflect the effects of

the massive shifts of short-term Treasury debt to the longer area

in the March advance refunding.

In addition, high nonbank liquidity

continues to stimulate strong demand for short-term investments.

System open market operations over the past

three weeks were

relatively moderate and the tone of the money market was moderately

firm on the whole, although money conditions did ease noticeably at

times as the result of special influences; namely, the March 31 bank

statement date, the April 1 Cook County tax date, and efforts of

banks to build up accumulations of reserves in anticipation of

these and other special drains.

On the other hand, the payment for

the one-year bills yesterday put considerable pressure on the money

market which will probably persist until the dealers are able to

reduce their holdings. Although our projections show somewhat

higher levels of free reserves for the next two weeks, some part

of the additional reserves may be needed to keep

the money market

fluid up to and during the Treasury's next financing operation.

Thereupon, upon motion duly made and

seconded, and by unanimous vote, the open

market transactions in Government securities

and bankers' acceptances during the period

March 26 through April 15, 1953, were approved,

ratified, and confirmed.

At this point the Chairman called for the usual staff economic

and financial reports, and Mr. Brill presented the following statement

on economic developments:

After months of reporting no change in the current situation

or in the outlook, we can at last observe some change, and a

change for the better.

Most of the improved economic news has already been widely

reported, and I will only list the major items:

the production

index up a full percentage point in March, after seven months of

virtually no change; nonfarm employment up for the second month

in a row to a new high, with significant strength in manufacturing

industries; a relatively large decline reported in the unemployment

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rate; personal incomes continuing a rather moderate rise; retail

sales up from a February figure that in turn had been revised up

ward, with continued strength shown in consumer purchases of

durable goods and renewed strength in their buying of nondurables;

a slight upward revision also in the February figures for new

orders for durable goods, accompanied by a sizable rise in order

backlogs; and, finally, a crop of fine corporate earnings state

ments indicating that fourth quarter 1962 profits were at a record

level.

Over all, gross national product in the first quarter is

estimated to have been at an annual rate of $572 billion, some

$5 billion higher than it seemed to be running at the height of

the winter storms and the accompanying economic pessimism.

This recent improvement in the economic scene, welcome as

it is, comes after a relatively long period of uncertainty and

hesitation and is therefore subject to some overinterpreation.

In the optimism engendered by the ecoromy's performance in March,

one cannot afford to overlook some clouds still on the economic

horizon. In the labor area, for example, those close to the data

express doubt as to the extent of both the deterioration indicated

in the unemployment figures for February and the improvement re

ported for March.

It is not clear whether these fluctuations

in the unemployment rate actually occurred or were a product of

imperfect adjustment for seasonal variation. The data do indicate

little, if any, change in long-duration unemployment, are subse

quent figures on filing of unemployment claims do not suggest

any further inroads on the unemployment rate since the mid-March

observation.

Optimism based on recent developments must also be

tempered to the extent that the rise in industrial activity

reflects strike-threat-induced stockpiling of steel.

The

rise in steel production last month accounted for a third of

the total rise in the production index; orders received by

iron and steel producers were a major factor in the January

February increase in durable goods new orders and backlogs;

and steel stockpiling undoubtedly accounts for a large part

of the recent rise in the business inventory component of GNP.

While as yet far from 1959 proportions, strike hedging is pro

viding some of the current lift to the industrial segment of

the economy, and the aftermath of such a stimulus can be

painful--as we learned in early 1960 and again in early 1962.

The other economic clouds are in the area of prices, both

The rebound in stock prices since

in equity and goods markets.

last fall has retraced almost all of the spring 1962 decline,

bringing current price averages to within 5 per cent of the

Two factors tend to

historic peak reached at the end of 1961.

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mitigate alarm about so fast a rise:

first, it has been

widespread, with no industrial concentration such as

proved vulnerable when price advances were mainly in

electronic or other "fad" stocks; and second, the rise in

corporate profits has been substantial and as yet is

keeping price-earnings ratios within the conventionally

accepted range. Nevertheless, these ratios are tending

upward, and credit in the stock market is rising as

rapidly as prices.

The other market developments occasioning concern is

the selective price increase announced by several steel

producers.

If adopted throughout the industry, the announced

increases would raise the price index for steel products by

about 1-1/2 per cent, and the over-all wholesale price index

by less than one tenth of one per cent, but this does not

take into account secondary effects on the price structure.

Stability in our industrial costs and prices since

1959, in contrast with rising costs and prices abroad, has

been one important element of hope for our balance of pay

ments, and it would indeed be unfortunate if this advantage

were to be dissipated. One can sympathize with the steel

industry, of course, since profits and margins have lagged

somewhat behind those of manufacturing industries generally.

Nevertheless, it had been hoped that the solution to the

industry's problems would be sought primarily along the

lines of increased efficiency through modernization of

plant, stable or declining costs, and increased sales,

rather than through higher prices which might encourage

higher wages and other labor costs, and result in declining

sales from the increased competition of other products and

other countries.

It is too early to judge whether the steel price increase

will stick, and if so whether it will have repercussions on

the general price level that such increases had earlier in the

postwar period. The current level of steel demand is

partly induced by strike threats and therefore may prove

ephemeral; more basic supply-demand relationships in the in

dustry, and in the economy generally, are far different than

in 1955-57.

The steel situation appears as yet too special

and too isolated to warrant the use of general instruments of

inflation restraint, particularly in a still fragile expansion

that, at least at the consumer end, has depended on substantial

availability of credit.

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Nevertheless, if economic resurgence persists, sooner

or later we may have to face up to the possibility that con

ditions conducive to attempted price boosts will be reached

in other commodity areas long before aggregate unemployment

approaches, a tolerable level and an adequate growth trend

is assured. Some prices may respond promptly to rising

demand, but the unemployment situation could prove par

ticularly sticky. Productivity has increased substantially

since the last boom period, the repressed growth in labor

force over the past two years suggests ample reserve labor

supply, and new entrants into the labor force may not have

the skills most in demand for contemporary industrial tech

nology. Moreover, an increase in hours worked by those

already employed usually precedes new hirings. It may

therefore require a larger rise in GNP to accomplish a

given reduction in unemployment today than was the case in

past postwar expansions.

Large rises in GNP, however, increase our exposure to

price boosts and we can only hope those that occur will be

selective, and offset by decreases where productivity gains

or shifting demands permit. The general availability of

industrial capacity and material supplies both here and

abroad offers some basis for hope, but it is evident that

we haven't yet licked the problem of aaministered prices

that plagued us in the last boom. Continued advances in

economic activity, welcome as they will be, are likely to

test agair the statesmanship of businessmen, labor leaders,

and central bankers.

Mr. Koch presented the following statement on financial devel

opments:

Since first quarter figures are now relatively firm,

I shall focus my remarks this morning on the course of

various indicators of monetary policy and the effects of

policy thus far this year, commenting along the way on most

recent developments since this Committee's last meeting.

Looking first at the immediate effects of policy, bank

reserve and money market conditions have probably become a

bit more taut since mid-December. Free reserves, for example,

averaged about $320 million in the first quarter, as compared

with $390 million in the fourth quarter of last year. Borrowings

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from the Reserve Banks are up a little. Three-month Treasury

bill rates have rarely been below 2.90 per cent, and the Federal

funds rate has bumped along at or just below the discount rate.

New York commercial bank lending rates to Government security

dealers have generally ranged between 3 and 3-3/8 per cent.

Since the last meeting, the free reserve average has

dropped to about $270 million, but despite this fact money

market conditions throughout part of this period were some

what more comfortable than earlier for a number of short-run

technical reasons, particularly bank adjustments just prior

to and after the March 31 statement date and the April 1

Cook County tax date.

Turning to the more basic indicators of monetary policy,

the total reserves of the banking system roe at a seasonally

adjusted annual rate of just under 3 per cent in the first

quarter, and required reserves behind private deposits at a

Since January, however, the excess of

4 per cent rate.

actual required reserves behind private deposits above the

3 per cent growth guideline has been practically eliminated.

The excess amounted to a little under $200 million in January

and in the latest statement week ending April 10 it had de

only

$10 million.

clined to

the

narrowly defined money supply, it rose at a

As for

2-3/4 per cent seasonally adjusted annual rate in the first

quarter. This compares with a 7 per cent rate of increase

in the la.t quirter of 1962. However, practically all of

the recent rise occurred very early in the first quarter.

Since mid-January, the money supply has shown only a small

rise.

In the first half of April, it is likely to have in

creased a little more and over the next six weeks it may get

a further boost from a drawing down of cash balances by the

Treasury in order to keep within the debt ceiling.

Time and savings deposits continue to perplex us.

Their

rise in the first quarter was as large as late last year, a

rise amounting to a seasonally adjusted annual rate of about

Thus, the money supply, including time de

17-1/2 per cent,

posits, rose at an 8-1/2 per cent annual rate in the first

quarter. This was about the same rate of increase as that

in total liquid assets, as defined in our usual more in

clusive series. Of course, these liquid assets include many

forms of saving held for future spending as well as liquidity

held to facilitate current spending. The stimulative effect

of the rise in liquid asset holdings on current spending is

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also offset to some extent by the dampening effect of the

sharp rise in private debt, particularly consumer credit

and mortgage debit, that has occurred in recent years.

As for credit, total loans and investments of all

commercial banks rose at a seasonally adjusted annual rate

of 12-1/2 per cent in the first quarter. This was even a

little larger than the 10 per cent rate of increase in the

fourth quarter of last year. However, the composition of

the recent expansion was quite different from that in late

1962. Bank holdings of U. S. Government securities in

creased $2-1/2 billion on a seasonally adjusted basis in

the first quarter, compared with a reduction of half a

billion in the fourth quarter. Loans, on the other hand,

increased about $3 billion in the first quarter, $2 billion

less than in the preceding quarter.

The major difference in loan behavior was in the busi

ness area. Business loans, which had risen $1-1/2 billion

in the fourth quarter, increased less than half a billion

in the first quarter. Nevertheless, this was still a

2-1/2 per cent annual rate of rise.

Real estate, agri

culture, consumer, and security loans, as well as loans

to nonbank financial institutions have all continued to

increase sharply thus far this year.

To sum up my reactions to first quarter money and bank

ing developments, they indicate a continued high rate of

credit expansion consisting primarily of expansion in in

vestments and nonbusiness loans, a cred.t expansion re

flected mainly in the growth of time rather than demand

deposits.

These developments suggest two things to me.

First, there has been less strength in what might be termed

the demand oriented sectors of bank portfolios, essentially

business loans, although this development may be due in

some part at least to inadequate allowance for the usual

early year slack in business financing demands and to

Secondly, there has been

larger available internal funds.

little, if any, slowdown in the supply oriented sectors

This suggests to me that emphasis in

of bank portfolios.

the phrase "slightly less easy" as used to characterize

monetary policy since mid-December should be on the word

"slightly" rather than on the word "less."

As for policy in the next three weeks, it continues to

have to recognize the full and substantial Treasury financing

4/16/63

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program ahead of us.

The bonds recently offered at auction

are still only partially distributed. Next weekend the

Treasury meets with its commercial bank advisory committee

to consult on its May refunding. The terms of this offering

are likely to be announced a week from tomorrow.

Even aside from Treasury financing considerations, however,

recent market developments would seem to me to call for a "steady

in the boat" policy. Financial markets are currently characterized

by hesitancy and uncertainty. They have been buffeted by rumors

of policy changes and rather substantial financing activity in

both the corporate and Government sectors of the market. Many

long-term interest rates have risen 5 basis points or so since

mid-March.

Thus, the market itself has achieved a somewhat less

easy tone, with credit still readily available but at a slightly

higher cost.

This is a situation in which both the Treasury and

the Federal Reserve might well afford to bide their time and

await further market developments.

Mr. Furth presented the following statement with respect to the

U. S. balance of payments:

The hopes for a significant improvement in the U. S. pay

ments balance guardedly expressed three weeks ago have not

been fulfilled.

First, the March deficit turned out to be somewhat larger

than was expected on the basis of the fragmentary weekly reports.

The deficit for the first quarter must now be estimated at $700

million.

Second, and more important, transfers of dollars to foreigners

in the first two weeks of April seem to have been unusually large.

For the week ending April 10, the amount was in excess of $200

million (if an increase in the so-called nonliquid foreign debt

of the U. S. Treasury is added to the official figure).

Obviously, extrapolation of figures tentatively reported

for one or two weeks would be even less justified than extrapo

lation of the results for one month or even one quarter. Never

theless, it seems disturbing that the dollar was simultaneously

weak in London and in Montreal, in Frankfurt and in Amsterdam.

It is true that dollar weakness in London could be explained

by the relative moderation of the British budget; dollar weakness

in Montreal by the election victory of the Liberal Party; dollar

weakness in Frankfurt by the restrictive policies of the German

Federal Bank and the attractiveness to foreign capital of a re

cent 6 per cent German Government bond issue; and dollar weakness

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in Amsterdam by investments of U. S. oil firms. Nevertheless,

while there always are particular reasons for a currency's

weakness in a particular market, such explanations do not sound

convincing when the weakness is universal.

Third, and most inportant, the increase in steel prices

open disquieting perspectives.

The companies may have excellent

reasons for announcing the increase, and the Administration may

have excellent reasons for not trying to oppose it.

But the

U. S. payments balance has probably suffered a heavy blow.

Steel prices are rightly considered the pivot of the U. S.

price and wage system. Experience has shown that increases in

steel prices and wages tend to spread rapidly throughout the

economy. Moreover, steel and steel products, including machinery

and vehicles, account for nearly 40 per cent of total U. S.

exports and 15 per cent of total U. S. imports.

Optimists still may hope that the price rise will not be

followed by the rest of the industry, and that it will not induce

But even an optimist would

labor to reopen wage negotiations.

have to concede heavy odds against the probability of such a

development.

Thus, last week's action may well mean the end of

the hitherto successful efforts to keep prices and costs stable

in the United States while they are rising abroad.

Economists widely differ in their views about the best

methods to eliminate the payments deficit. But they are united

in the conviction that stability of prices and wage costs is a

necessary though perhaps not sufficient condition for any

successful attack on the problem.

By coincidence, a large German steel plant, August Thyssen,

has just distributed its report for 1962.

It proudly states that

in spite of wage increases of 7 per cent it was able to reduce

steel prices by 7 per cent and still show a good profit. The

contrast between Continental Europe, where steel prices have

bee. reduced in the face of overall employment and large wage

increases, and the United States, where steel prices are being

raised in the face of underemployment and stable or falling

wage costs, explains better than any learnedtreatise the

contrast between Europe's domestic expansion and international

balance, and our own domestic lag and international deficit.

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

views on economic conditions and monetary policy beginning with Mr.

Treiber, who presented the following statement:

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-17-

Since the last meeting of the Committee there has been

an improvement in the business outlook. To some extent, of

course, the better tone merely reflects the fact that a num

ber of indicators that had declined in January, for temporary

reasons, ended up on the plus side in February. But the good

increase in industrial production, and the other information

that we do have for March, indicate that the pickup of February

has been extended. The major element of recent strength--con

sumer buying--has continued upward each month this year.

Prices generally continue to be stable. However, the rise

in steel prices recently posted by several steel companies

raises questions. What effect will the increase have on the

steel industry and on other segments of the economy? What

effect will it have on prices in general and on wage demands?

Developments in this area will need careful watching for their

implications for future monetary policy.

It is encouraging to see that in March total employment

moved up sharply and the rate of unemployment dropped back

to 5.6 per cent. Thus the present rate of unemployment is

about in line with the rate of a year ago and with the average

rate for 1962. Nevertheless, a significantly faster uptrend

in economic activity will be needed to provide enough new

jobs to keep up with the growing labor force and to reduce

unemployment.

Seasonally adjusted commercial bank credit expanded

sharply in March, following an even larger rise in February.

It will be interesting to see the March figures on stock

market credit, which will be released soon, for such credit

has continued to expand over recent months. While the money

supply advanced only moderately in March, there was a sub

stantial further rise in time deposits and a continued in

crease in Government deposits in connection with the large

Treasury financing operations. While business loans were

not strong in March, a number of corporations apparently

obtained needed funds by reducing their holdings of com

mercial paper rather than by borrowing directly from the

There appears to have been somewhat greater cor

banks.

porate borrowing in the capital markets. These developments

suggest that demands by business concerns for bank loans

might increase fairly rapidly if there were a pronounced

upturn in business activity accompanied by a narrowing

in the differential between open market borrowing rates and

the prime bank lending rate.

The banks still appear to

have ample liquidity to meet increased loan demands.

4/16/63

-18-

Our balance of payments deficit in 1963 continues to

run at a rate not much different from that of 1962.

Pre

liminary data indicate a $120 million deficit in March,

with a deficit of about $700 million for the first three

months of 1963. The statistics may have been influenced,

however, by special favoraole factors, such as (i) increased

capital flows from sterling due co the recent weakening of

sterling; (ii) a greater interest in cur stock market on the

part of Europeans; and (iii) a more rapid increase (which is

probably temporary) in our exports compared with our imports,

following the end of the dock strike. Capital outflows from

the United States have been heavy as Americans have purchased

large amounts of new issues of foreign securities.

There is

no doubt that there will be substantial drains on our gold

stock as the year progresses. Our balance of payments prob

lem continues to be most serious.

The $300 million of Treasury bonds of 1989-94 are to

be paid for the day after tomorrow, but their distribution

is far from complete. In the middle of next week the

Treasury presumably will be announcing the terms of its

May financing. Thus, "even keel" considerations would rule

out any major change in Federal Reserve policy prior to the

next meeting of the Federal Open Market Committee; but "even

keel" considerations should not, I believe, preclude some

probing toward a firmer money market.

It seems to me that the ample liquidity visible in the

economy, coupled with the recent somewhat improved rate of

business expansion, counsel placing more emphasis on our

stubborn balance of payments problem. While a change in

the discount rate would seem inadvisable at this time, I

suggest a further modest move through open market operations

toward somewhat less ease. Such a move would bring impor

Such a

tant benefits, both technical and psychological.

move would be evidenced by a Federal funds rate consistently

at the 3 per cent discount rate, a three-month Treasury bill

rate at nearly 3 per cent, and probably a modest reduction

in free reserves and a modest increase in member bank borrowing.

While our scope for policy change is quite limited as to

timing and magnitude in view of the Treasury's financing pro

gram, I submit that open market operations should probe by

modest steps toward a bit less ease, and that the directive

should be modified to show such a change in policy.

Mr. Shuford noted that the period since mid-1962 had been

marked by a succession of minor changes, some upward and some downward,

4/16/63

-19

in the economic statistics.

Over all, the word "plateau" seemed quite

descriptive of the situation.

Recently it had been encouraging to

find more strength in the economic indicators.

The improvement that

was noted at the March 26 meeting of the Committee appeared to have

continued to a desirable degree during the most recent period.

It

seemed to him, however, that it would be premature to conclude that

a definite trend had been established.

The situation in the Eighth District remained substantially

unchanged, Mr. Shuford said.

indicators had been occurring.

Offsetting movements

in the more important

Construction was up slightly in the

major metropolitan centers during the past few months as compared with

the same period in 1962.

Employment appeared to be increasing from

the reduced level of November and December, while industrial use of

electric power in the first quarter was about 6 per cent higher than

in the last quarter of 1962.

On the other hand,

there had been some

decline in department store sales, and business loans had declined

for the past two months.

Farm income prospects had deteriorated

somewhat due to a decline in average prices

received for farm commodities,

which were down 10 per cent in the District since mid-January.

Prices

of beef cattle and hogs were down 12 and 13 per cent, respectively

during that period.

Turning to the national picture, Mr. Shuford pointed out that the

recent increases in bank credit and total deposits apparently were due in

4/16/63

-20

large measure to increases in bank investments and in time deposits,

respectively.

The picture of monetary expansion would appear to have

been less stimulative in the past few months than previously, certainly

when viewed in terms of demand forces.

Reserves available in support

of private deposits had increased at only a 1 per cent annual rate since

January, he noted, compared with a 3 per cent rate for the past year as a

Reserves available against private demand deposits declined at

whole.

a 2.5 per cent annual rate from January to March, compared with a slight

increase from March 1962 to March 1963.

Since January the increase in

the money supply had been at an annual rate of 1 per cent, and since

March last year the money supply had increased at a 2.2 per cent rate.

Mr. Shuford indicated that he would not favor any change in

monetary policy at this time.

The short-term rate did not appear

inappropriate in relation to short-term rates in Britain and Canada.

There was evidence of some strengthening in the domestic economic situa

tion, which was in accord with the objectives of Federal Reserve policy.

For the next three weeks, therefore, he would recommend continuation of

about the same degree of money market firmness that had prevailed re

cently.

Before any probing was done in the direction of less ease,

there should at least be an opportunity to take a further look at the

picture.

Accordingly, he would not change the policy directive;

in

fact, he doubted the necessity of making even technical changes at

this time.

4/16/63

-21

Mr. Bryan, after noting the favorable tone of most economic

indicators, expressed apprehension about signs of speculation that he

detected in the economy.

In Atlanta, for example, there were substantial

speculative developments in the form of construction of high-rise apart

ments and office buildings.

Also, he did not view with complacency

the rapid rise of equity prices.

His

inclination was to feel that there

might be a vigorous economic expansion ahead, and that developments should

be carefully observed.

The Committee might be faced with an even keel problem for some

time, Mr. Bryan observed.

This seemed to him an appropriate time for

the Committee to continue, in fixing the supply of reserves, to adjust

for seasonal variations and to provide for some growth increment.

In

his opinion, however, the growth guideline might well be revised from

3 per cent annual rate to something more nearly approaching 2 per cent.

He would be particularly cautious at this time about relying on free

reserves as a guideline; the maintenance of a constant level of free

reserves would permit indefinite expansion of the money supply and the

financing of inflation.

Mr. Bopp reported that Third District business indices were

somewhat more encouraging than they had been for several months.

There

were some small rises in place of former declines, and some greater-than

seasonal improvements.

The level of unemployment remained unacceptably

high, and although recent declines in unemployment claims had exceeded

4/16/63

-22

seasonal expectations the indicated impact on total unemployment rates

was not great.

Incomplete returns frcm the Reserve Bank's spring

re-check of capital spending estimates for 1963 indicated widespread

increases, to levels about 1962 expenditures.

Loans at District reporting banks had recovered somewhat from

the normal seasonal decline at the beginning of the year.

Whether they

would continue to expand--as they did in 1962--or stabilize--as they

did for most of 1961--was now in question.

In recent weeks, loans had

not increased to the same extent as last year, and for the year to date

they had declined by a larger amount than a year ago.

The chief reason

for the poor showing for the year to date was the slump in business loans

and a decline in loans to financial institutions during the first quarter.

Real estate loans continued to increase.

Bank credit had increased in

the past few weeks mainly because of an expansion in investments.

Except for short-term changes, there was no evidence of increasing

tightness or pressure on bank reserve positions since the beginning

of the year.

While the recent evidence that business activity might be turning

upward was encouraging, along with the improvement in business psychology,

in Mr. Bopp's judgment this did not justify any shift toward less ease.

In fact, the upward creep in market rates, especially intermediate and

long-term rates, served as a warning that as long as there was con

siderable economic slack the System should be on guard against permitting

4/16/63

-23

credit tightness and rising rates to retard or thwart a continued

rise in business activity.

The balance of payments continued to be

a problem, but at present the covered spread between domestic and

foreign short-term market rates did not encourage an outflow of

short-term funds.

Mr. Bopp's appraisal of these various factors, together with

the forthcoming Treasury refunding, led him to the conclusion that about

the same degree of ease should be maintained for the next three weeks.

In

view of the upward creep in intermediate and long-term rates, he believed

such additional reserves as might be needed should be supplied largely

by purchases of intermediate and longer maturities.

Whatever effect

such purchases would have in retarding a rise in intermediate and long

term rates would be helpful in terms of the domestic situation without

significant harmful effects on the balance of payments.

The present

directive afforded sufficient leeway for the policy suggested; hence,

he recommended no change in the directive.

Neither would he recommend

a change in the discount rate.

Mr. Fulton said the faint signs of improvement in business in

the Fourth District that were reported earlier had strengthened in the

last half of March and early April.

Unfortunately, the greatly increased

activity in the steel and rubber industries was due in good part to

4/16/63

-24

anticipation of labor strikes.

More favorable weather was also a factor.

Department store sales had moved up fairly rapidly in the last

half of March and the first two weeks of April and appeared to have

recovered the level of last December.

The strength of auto sales in

the major centers of the District had not abated; such sales were main

taining a margin over the comparable period of a year ago.

A spot check

of auto dealers indicated that credit terms were not being extended be

yond 36 months for new or used cars, and it was stated that dealers,

banks, and finance companies would resist such a trend.

However, rates

had been reduced, with 5 per cent being the prevailing rate among banks.

Only a partial recovery from the sharp decline in January had

been noted in construction contracts.

A greater-than-seasonal decline

in the rate of insured unemployment from the mid-March position was

shown in all major labor markets in the District, especially in the

steel-producing centers.

In fact, the improvement seemed to have been

better than for the nation as a whole.

The rubber industry was currently producing at a high rate.

New car tires, replacements, and mechanical rubber goods were all going

very well.

Auto manufacturers were stockpiling in anticipation of a

strike that might begin on April 20.

Union demands were high, with

extended vacations as part of the package, and management was resisting

such demands.

Orders for machine tools had picked up sharply.

Foreign orders

had revived somewhat, and domestic orders were substantially higher.

4/16/63

-25

Management expected 10 to 15 per cent more business this year, with

demand and production looking particularly good for the third and

fourth quarters.

The tax credit allowed for new equipment was said to

be a factor, as well as a demand for machines that would cut labor costs

while increasing production.

In the steel industry the rush to acquire inventory had created

a surge of orders and boosted output substantially.

It was estimated

that already 3 million tons had been added to inventory.

April output

was at the rate of 123 million tons annually, and an increase to a rate

of 133 million tons was anticipated in May.

With price increases being

announced by at least three mills, it seemed certain that the labor

contract would be reopened, and an early settlement was not anticipated.

The companies had spent, and were currently spending, millions of dollars

to install modern equipment to reduce costs.

However, with each labor

contract adding more to costs, profits had declined consistently.

Referring to the comment by Mr. Furth concerning the announcement

by a German steel company of its ability to absorb higher wage costs

without increasing prices, Mr. Fulton noted that the prices of German

finished goods apparently were similar to U. S. prices for comparable

products, while wages and fringe benefits were less than half as high.

Therefore, it would seem logical that German companies could make a

profit even if substantial wage increases were granted.

Unless the U. S.

Government took a stand against excessive wage increases in this country,

4/16/63

-26

it was Mr. Fulton's opinion that the steel companies might well be

given the privilege of increasing prices despite possible adverse

effects on the economy.

He observed that the present surge of pro

duction was costly for the steel companies because they had to increase

their labor forces, with the attendant. increase in employment costs,

following which the workers would be entitled to benefit payments if

laid off when work slackened.

It was realized generally that inven

tories now being created must eventually be used, with adverse effects

from the standpoint of both the mills and labor.

The middle level of

labor leaders was said to be frustrated by continued unemployment and

the realization that many long-term unemployed workers would never re

turn to the mills.

In light of the improved business atmosphere, Mr. Fulton felt

that at least the same degree of money market firmness that had pre

vailed in the past three weeks should be continued.

He saw no need to

change the directive, and he would not recommend changing the discount

rate at this time.

Mr. Mitchell noted that despite the steel situation, which was

unsettling, the performance of the economy in other respects was en

couraging.

If the right Governmental policies were pursued, including

an appropriate monetary policy, he foresaw the possibility of a domestic

revival that would push the economy to considerably higher levels in

1963 than had been anticipated.

-27

4/16/63

As to the balance of payments, short-run considerations seemed

to require that nothing be done to charge the short-term rate significantly

at this time.

The covered rate differential was now favorable to the

United States, and nothing should be done that would make the situation

more difficult for the British.

The consequences in terms of the dollar

were too great to risk taking any actions that might make the sterling

problem more difficult.

From the longer run standpoint, the balance of payments problem

seemed to center around the rate of capital outflow.

Basically, if time

was available, the way to deal with the capital outflow would be to im

prove the rates of return on investments in this country.

require a substantial increase in economic activity.

This would

Therefore, it

would seem desirable to encourage the domestic economy to move ahead

more vigorously.

It now seemed doubtful whether there would be a tax

cut as a prop for the economy.

Accordingly, it appeared quite important

from the point of view of longer run balance of payments considerations,

as well as from the standpoint of the domestic economy, to follow a

monetary policy that would accommodate and encourage expansion.

For the moment, Mr. Mitchell said, he would accept the prescription

of Mr. Bopp:

no change in the discount rate, no change in the directive,

and no significant change in current monetary policy.

Mr. King commented that for some time the System had walked a

relatively narrow path in terms of policy.

In his opinion it had followed

4/16/63

-28

quite a good course.

Recently there were indications of solid improvement

in the economy, not in all sectors but in quite a few.

ditions looked better than they had for a long while.

product, of course, was only now reaching a level

to achieve some time ago.

In general, con

Gross national

that it had been hoped

He foresaw the likelihood of a fairly

sub

stantial and lengthy upswing in the economy if the move was not nipped in

the bud too soon.

Mr. King indicated that he would be inclined to favor a slight

reduction in the degree of market ease, without creating any serious

pressure on the bill rate.

He would not favor a change in the discount

rate at this time, but he would like to suggest for the Committee's con

sideration a modification of the policy directive intended to carry for

ward the modest type of policy change reflected in

the directive adopted

December 18, 1962, which he thought had probably been quite favorably

received by the financial community, particularly the international fi

nancial community, when published in the Board's Annual Report for 1962.

The suggested policy directive read as follows:

It is the Committee's current policy to allow some further

growth in bank credit, while aiming at money market conditions

that would minimize capital outflows. This policy takes into

account the continuing adverse U. S. balance of payments

position and at the same time recognizes the progress of the

domestic economy.

To implement this policy, System open market operations

during the next three weeks shall be conducted with a view

to effecting a small reduction in net free reserves through

open market operations.

-29-

4/16/63

Mr. King added that he would not vote against a renewal of the

existing directive if the majority of the Committee was so inclined.

However, he believed an opportunity was afforded to modify the directive

somewhat in light of the most recent statistical evidence.

Mr. Shepardson commented that the available economic information

seemed certainly to indicate some increase in economic activity.

was gratifying.

This

On the other hand, the continuing rise in stock market

prices and the pending increase in steel prices gave cause for concern.

There was additional reason for concern, of course, in the statistics on

the balance of payments.

Except for the continuing problem of Treasury

financing, he would be inclined to follow the suggestion of Mr. Treiber.

In view of that situation, he would favor a continuation of present

policy, though with any deviations on the side of less ease.

Turning to the policy directive, Mr. Shepardson referred to

comments he had made at recent Committee meetings regarding the phrase

in the directive that alluded to an absence of general inflationary

pressures.

He continued to believe that inflationary pressures in fact

existed and that the evidence of them was increasing.

If there should

be any change in the directive, he would like to see that phrase deleted.

However, there might be an advantage, in terms of stability of policy,

in making no change in the directive at this meeting.

Mr. Robertson said that his views were in line with those

expressed by Mr. Bopp and Mr. Mitchell.

Encouragement could be derived

4/16/63

-30

from economic developments in recent weeks, and he would like to see

everything possible done to encourage the furtherance of such develop

ments.

He would suggest, therefore, waiting quietly and watching

carefully the trends that might develop over the next three weeks, with

no change in policy.

Such a course would recognize the problems that

flowed from the undigested overhang of the recent auction of Treasury

bonds and would take into account the financing operations to be carried

out by the Treasury over the forthcoming period.

Mr. Robertson expressed the view that the policy directive was

adequate in its present form and said he would recommend making no change

in it.

In summary, he would not change policy in any respect at this

particular time.

Mr. Mills said he was convinced, particularly after hearing Mr.

Koch's presentation, that financial developments were resulting in un

desirable downward pressure on the money supply.

If so, a situation was

arising that required the attention of the Open Market Committee.

Con

sidering the lag that occurs before policy actions can take effect and

be reflected in financial markets, it was not too early, in his opinion,

to alter the tone and direction of monetary policy toward slightly greater

ease.

In elaboration of this line of reasoning, Mr. Mills presented the

following statement:

4/16/63

-31-

Money supply problems are likely to become an increasingly

important issue in the System Open Market Committee's formulation

of monetary and credit policy throughout 1963.

The vast expansion of commercial bank credit that occurred

in 1962 was financed largely by a phenomenal increase in time

and savings deposits and was based to a much smaller degree

on a rise in credit-created demand deposits. Credit expansion

in 1963 is proceeding along similar lines, but because of a

sluggish demand for commercial and industrial loans, demand

deposits have not risen appreciably.

The modest statistical increase that has been recorded

in the money supply thus far in 1963 is a reflection of the

passive demand for commercial and industrial loans and the

unwillingness of the Treasury to finance any of its security

offerings through the commercial banking system and tax and

loan account procedures. If this situation continues, growth

in the money supply will fall short of the amount needed to

foster a rising gross national product and over-all economic

activity will have been retarded. Tangible indications of

such possibilities can even now be traced to a declining

trend in required reserves which, if it gathers momentum,

conceivably can result in a harmful reduction in the money

supply that would represent a contraction of the means of

payment in the hands of the public.

Developments of this nature, both actual and potential,

pose serious problems to the formulation of Federal Reserve

System moretary and credit policy. Commercial bank time and

savings deposits go on increasing and have found employment

principally in the areas of real estate mortgage and consumer

credit and investment in tax exempt municipal obligations.

In fact, the plethora of such funds seeking employment, both

in the hands of the commercial banks and related financial

intermediaries such as mutual savings banks and savings and

loan associations, has prompted discussion of a competitively

inspired deterioration in the quality of the credits being

handled. This in turn leads to the question whether monetary

and credit policy actions aimed at fostering the money supply

would exhaust their intended usefulness in uneconomic and

undesirable credit usages. A correct answer to the question

must be found!

The vast increase in commercial bank time and savings

deposits has made apparent the very important fact that the

nature of these funds is identical whether in the hand of the

4/16/63

-32-

commercial banks or the various financial intermediaries, and

that in every case they must be defined as "near money" and

not as a "substitute for money," or as a segment of the

circulating medium as in the case of commercial bank demand

deposits. The clear distinction that exists between commercial

bank demand and time and savings deposits is crucial to the

formulation of Federal Reserve System monetary and credit

policy as it bears on money supply problems. This is so be

cause open market policy actions exert their influence on the

creation or extinction of demand deposits and only remotely

on the accumulation or dispersal of time and savings deposits

with their concomitant credit usages.

Therefore, it follows

that open market policy actions cannot be taken that will

directly exert a restraining influence on the credit employ

ment of commercial bank time and savings deposits, and that

if they were erroneously attempted, a harmful downward pressure

would be put on the money supply. In that latter event, a

contraction in the means of payment in the hands of the public

occurring at a time when economic stimulation is sought after,

would have unfortunate consequences.

All of these circumstances face the System Open Market

Committee with a dilemma that cannot be easily resolved. In

my opinion, the state of the domestic economy deserves policy

priority over balance of payments considerations. Monetary

and credit policy should, therefore aim at fostering the

expansion of commercial bank credit which, by the same token,

would support needed growth in the money supply. Such a

policy would recognize that aberrations in the use of credit

financed cut of commercial bank time and savings deposits

are not susceptible to the direct influence of open market

policy actions, but can only be controlled by other means.

It would also conceive that in the absence of a demand for

commercial and industrial loans, the Treasury would grant

the commercial banks a judicious use of tax and loan privi

leges as a means for creating new demand deposits and

supporting the money supply. I do not believe that the

interest rate objectives that have been sought for would

suffer from the kind of policy proposed, even though free

market principles for determining interest rates have been

rejected in favor of an artificially manipulated United

States Government securities market that has made the interest

4/16/63

-33

rate structure a subject of deliberate policy attention.

Judging from recent experience, I have a suspicion that

the level of free reserves has been brought down to a

point that is putting the money supply under pressure,

and that the free reserve level pertaining may not repre

sent as much credit leeway as the figures suggest, in

that the fluctuations in vault cash, as they enter and

leave the free reserves total, are too temporary in their

influence as to affect the credit base.

Similarly, the

hard core of Federal funds in constant use does no more

than support the outstanding use of commercial bank credit

and due to its shifting ownership adds little or no support

to credit expansion.

Mr. Mills said he saw no occasion to change the discount rate

at this time.

However, the position he had taken as to policy would

require deleting from the second paragraph of the directive the phrase

that called for maintaining the same degree of money market firmness.

As indicated by his statement, he felt that there should be a lesser

degree of firmness.

Mr. Wayne said the latest information indicated that Fifth District

business activity was improving at about the same rate as the national

economy.

little;

Retail trade was strong; the coal business had improved a

construction contract awards had spurted; and a substantial

number of reporting manufacturers had been experiencing increased orders,

backlogs, shipments, employment, and hours.

In addition, loan demand at

weekly reporting banks had recently shown greater-than-seasonal strength.

The most striking shift noticed by the Reserve Bank, however, was a sharp

rise in optimism among its grass roots contacts.

During the period

covered by the Bank's latest survey, general business sentiment rose

4/16/63

-34

substantially.

About two-thirds of the respondents now felt that further

gains were likely, and a number of these considered more improvement

fairly certain.

Three weeks earlier, only a few thought a pick-up was

probable, and almost half expected no change.

The national business situation had definitely taken a turn for

the better, Mr. Wayne noted, and there were some signs that the improve

ment might be more than temporary.

He was particularly encouraged by

the strengthening in leading indicators--especially new orders for

durable goods--and by the scattered signs that plant and equipment out

lays might be rising.

No doubt the favorable weather and strike hedge

buying had played an important role, however, so it might be some time

before one knew how solid the improvement really was.

Turning to questions of policy, Mr. Wayne commented that the

existing degree of liquidity seemed adequate to finance any likely ex

Despite the recent steel

pansion without undue upward pressure on rates.

price increases and the more general signs of strength in the economy,

excess capacity still seemed sufficiently large to preclude any general

upward pressure on prices.

Accordingly, he felt that domestic develop

ments did not as yet justify any shift in policy.

While he believed there

was room for further correction in this country's international accounts,

he had not yet been persuaded that monetary policy could make a further

contribution in this area without a more abrupt shift than he would be

-35

4/16/63

prepared to risk.

Consequently, he would favor maintaining about the

same degree of ease as in the past three weeks, with due regard to prob

lems occasioned for the Desk by the post-Easter seasonal swing in re

serves.

He favored renewing the directive, and he would be opposed to

a change in the discount rate at this time.

Mr. Clay observed that the latest available information on pro

duction, personal incomes and retail sales, and business spending clearly

was encouraging.

The evidence also appeared to promise that some addi

tional expansion would be forthcoming in subsequent months.

The signifi

cance of these signs of higher activity for the formulation of monetary

policy would be read differently depending upon the weight one assigned

to domestic versus balance of payments considerations.

From the standpoint of the domestic economy, the latest

improve

ment was no greater than had been expected earlier; it did not reflect,

in Mr. Clay's view, an expansion so robust as to warrant a less stimu

lating policy.

Moreover, the gains should not be interpreted as being

independent of the favorable influences monetary policy had generated

through expansion of bank reserves.

Commercial bank data suggested

that total private spending for consumption and investment was re

ceiving significant support from the efforts of lenders to find cutlets

for their expanding resources.

If this interpretation of domestic developments was reasonably

accurate, Mr. Clay continued, the implications for the balance of pay

ments problem might be evaluated in two ways.

On the one hand, it

4/16/63

-36

might be argued that the domestic capital market was made more recep

tive to foreign security issues.

On the other hand, the domestic

economy was becoming more attractive for business investment--a trend

reinforced by signs that the boom in a number of European economies

was losing forward momentum.

Mr. Clay pointed out that the foregoing observations with re

spect to the current importance of monetary policy favored a continuation

of the recent moderate expansion of bank reserves and approximately the

same level of bill rates.

If a temporary decline in bill rates should

occur, it did not appear to him that any serious consequences would

result if free reserves were allowed to decline temporarily to some

what lower levels.

In his view, the directive was satisfactory as

now stated and the discount rate should not be changed.

Mr. Scanlon reported that developments in the Seventh District

appeared to support the more confident tone of business and banking

expectations.

Retail sales and new orders

goods had shown substantial gains.

for manufacturers' durable

There were some signs that employment

and production were breaking out of their long plateau on the up side.

The rise in manufacturers' orders and the acceleration of in

ventory building reflected partly, of course, hedge buying of steel and

4/16/63

-37

products containing steel, Mr. Scanlon noted.

To the extent that this

was true, a reaction later in the year was inevitable.

not think that hedge buying was the whole story.

However, he did

Inventories of many

types of goods had been at minimum levels relative to output, partly

because business managements commonly had been expecting a moderate

recession in early 1963.

moved upwards.

However, instead of declining, orders had

Although order backlogs of most firms remained very low

relative to earlier postwar years, there had been a stretch-out of

delivery dates in some instances.

Lead times on certain types of steel

in strong demand, such as galvanized sheets, had lengthened appreciably.

Information received from capital goods producers

indicated

that the rate of new orders from a large variety of customers had been

very strong in recent months, suggesting that the 5 per cent rise in

capital expenditures projected for 1963 might prove to be an under

statement.

(However, there had been some slowing in shipments of farm

machinery, probably reflecting the prospect for lower farm income.)

Increasingly, the tax credit and the new depreciation guidelines were

credited with stimulating capital goods purchases.

One auto company estimated that car and truck sales had been at

annual rates of 7.5 million and 1.2 million, respectively, for the first

quarter.

If these rates continued for the entire year, sales of both

cars and trucks would be at a record in 1963.

(For cars the record year

4/16/63

-38

was 1955, for trucks, 1950.)

The manufacturers still maintained that

the sales pace will slow down in the second half.

Meanwhile, however,

production schedules for autos were being raised rather than reduced.

For the most part, Seventh District banking developments had

paralleled the national picture.

Lending to nonfinancial business had

remained moderate and dealer loans had declined.

Business loan demand

during the past month had been lower than in other recent years.

On the

other hand, loans to consumers and finance companies and bank purchases

of mortgages and non-Federal securities had risen in recent weeks.

Mr. Scanlon pointed out that while business prospects had

strengthened, many businessmen had doubts regarding prospects for the

second half of the year, particularly because of expected declines in

the output of steel and autos.

These doubts were strong enoug. that he

would be hesitant to recommend any material change in System operations

at this time.

In view of these factors and the forthcoming Treasury

refunding, he believed that no basic change was indicated for monetary

policy.

He would not change the directive, and obviously he would not

change the discount rate.

Mr. Deming reported that inventories of livestock and grain were

quite high in the Ninth District.

heavy this year.

It appeared that marketings would be

Therefore, despite price weaknesses he rather antici

pated that cash farm income in the first half of this year might be from

4/16/63

-39

5 to 10 per cent higher than in the first half of 1962.

The Reserve

Bank's latest survey, taken in April, showed a considerable rise in

business sentiment since February, when the previous survey was taken.

A much higher percentage of respondents thought that improvement was

probable or certain.

On the other hand, the pattern of optimism was

not appreciably different from that reported last July and in the early

part of the fall.

In general, it might be said that the prevailing

attitude at present was one of tempered optimism.

On a seasonally adjusted basis, bank credit expansion continued

in the District in March.

The pace of increase was not quite as strong

as in February, but it was a bit stronger than a year ago.

At city

banks there was no particular strength in the demand for business loans,

with credit expansion taking the form of increased investments.

behavior was about normal for this time of year.

Deposit

City banks were in a

reasonably easy reserve position as long as they could get money through

the Federal funds market.

At country banks, on the other hand, the loan

growth for the first quarter of the year was the largest on record.

This

reflected not only loans to farmers but small business and real estate

loans.

The growth seemed to have tapered off a bit in March, being about

normal for that month, but the deposit decline was smaller than in previ

ous years.

4/16/63

-40Turning to policy, Mr. Deming said that without prejudice to

the possibility of probing toward lesser ease at some future time, he

would not want to see any change in policy for the next three weeks.

The Treasury financing schedule, the overhang of undistributed bonds

from the recent auction, and market uncertainties all argued that no

change in policy would represent the best course.

He saw no particular

reason to change the policy directive, except possibly in one technical

respect, and he would not favor changing the discount rate at this time.

Mr. Swan reported that on a seasonally adjusted basis the rate

of unemployment in the Pacific Coast States declined in March, but the

drop was less than for the nation.

For the third successive month

defense-related industries laid off workers, and some further decline

in aircraft employment in California and Washington was anticipated

for April, and possibly for May.

Department store sales set a new

record in the District in March, but in early April the year-to-year

comparisons for the District lagged behind those for the nation as a

whole.

Late snow and rain had improved both pasture conditions and the

outlook for the water supply this summer.

In the three weeks ended April 3, demand and time deposits at

District weekly reporting banks both increased.

The picture of credit

expansion was somewhat similar to that reported nationally, being pri

marily in investments, and major District banks continued to be net

4/16/63

-41

sellers of Federal funds into mid-April.

The demand for municipal

securities apparently continued to be strong.

The State of California

recently marketed two bond issues at the most favorable terms for any

large issue since 1958.

Mr. Swan expressed himself as gratified by the improvement

indicated in the national business situation.

He believed, however,

that any move toward less ease at this juncture would be premature.

Of the statistics presented the drop in the rate of unemployment was

perhaps the most dramatic change, but the decline was only to about the

1962 average.

It certainly did not seem conclusive as yet that a rapid

and continuing expansion of domestic economic activity was inevitable,

and in his opinion the increased pace of expansion noted thus far should

certainly not be discouraged.

Also, despite the existing problems from

the international standpoint, he saw no impelling reason in the balance

of payments position for immediate action.

In summary, Mr. Swan said, it seemed preferable for the System

to save its ammunition until either the international or the domestic

situation, or both, called for stronger action than would be justified

at this time.

Further, the problems of the Treasury, including its

imminent financing program, supported a position of no change

policy.

in monetary

4/16/63

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Mr. Swan concluded by saying that he would not recommend a

change in the discount rate at this time and that he would leave the

policy directive unchanged.

Mr. Irons reported that conditions in the Eleventh District

were reasonably good.

During the past month there had been a slight

strengthening of several of the major indicators of economic activity.

Industrial production was up a bit according to the basic index and as

reflected in the use of electric power.

Construction conditions were

very strong, with activity during the past month having risen to a

record high for that month.

Construction of office buildings and

apartments was going on apace in the major cities.

Nonagricultural

employment had increased slightly, but unemployment had also increased

slightly on an unadjusted basis.

The agricultural outlook was quite

good despite a lack of rainfall, and department store sales were up

after adjustment for the date of Easter.

Petroleum was off a bit in

terms of production, refining, and drilling.

District. banks seemed adequately liquid, and there was no sub

stantial borrowing from the Reserve Bank by either city or country banks.

Except for two large banks that were persistent buyers of Federal funds,

most of the banks dealing in such funds had been on the selling side.

There were no reports of need for additional reserves.

Loans had in

creased during the past three weeks, along with time and savings de

posits, but investments declined--counter to the national pattern--and

demand deposits declined seasonally.

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There seemed to be no particular problem areas so far as attitudes

in the District were concerned.

quite encouraged.

On a random basis, businessmen seemed

They were worried about the usual number of things

and would like to see better profit margins, but the results,

when added

up, looked quite good.

Mr. Irons noted that the improvement in the broad sweep of

national economic activity was encouraging.

This was, of course, what

the System had been hoping to see for a long time.

In his opinion it

would not be appropriate to make any change in policy at this stage,

for he doubted whether the degree of improvement in domestic activity

that had been noticed thus far was sufficient to warrant the conclusion

that a different monetary policy was in order.

The same line of think

ing appealed to him from the standpoint of the international situation,

and the fact that the Treasury would be in

maintenance of the status quo.

the market also argued for

All in all, he would suggest continuing

the policy that had been followed for the past three weeks.

The Desk

had done a good job of implementation, and he hoped the same conditions

could prevail for another three weeks, including a continuation of the

same degree of market firmness.

In conclusion, Mr. Irons said he would not change the policy

directive or the discount rate.

He added that in his opinion this was

4/16/63

-44

not a time when fine shadings and gracations of policy would serve a

useful purpose.

Mr. Ellis reported that the New England economy reflected some

improvement in most of the economic indicators except employment and

unemployment.

In March unemployment ran some 10 per cent above a year

ago, and initial claims for unemployment compensation were about 5 per

cent higher.

The manufacturing index rose slightly in February after

seasonal adjustment, and construction awards and building permits

showed improvement, along with personal income, consumer spending, new

orders, and capital outlays.

Business loans had increased more than

seasonally since January, with reporting banks showing increases wall

distributed according to broad categories.

Mr. Ellis then reviewed a recent report indicating that savings

banks in at least one part of the District

were encountering difficlty

in putting to work a record volume of deposits.

Competition for

mortgages

apparently had led to some lowering of quality standards, along with rate

reductions.

He also referred to financial difficulties besetting potato

growers in Arostook County, Maine, due to higher costs and lower prices.

Mr. Ellis expressed the view that in retrospect Federal Reserve

policy had been properly stimulative and should be entitled to some

credit for making a contribution to the current strengthening of the

economy.

He found it interesting to review the financial trends that had

4/16/63

-45

prevailed since the modest shift in monetary policy last December.

Since

then, total reserves appeared to have expanded at an annual rate at about

3.5 per cent.

The reduction of reserves available for growth to about

the 3 per cent guideline

seemed to fall

within the pattern of what the

Committee should have been trying to achieve.

Mr. Ellis suggested that the first paragraph of the policy

directive might be changed to reflect the recent improvement in eco

nomic conditions.

He also suggested that the range of policy making

open to the Committee seemed somewhat broader than in recent months.

At least this would be the case once the imminent Treasury financing was

out of the picture.

For some time, he noted, the Committee had been

walking a narrow path, between concern about short-term capital outflows

and stimulation of the domestic economy.

of a choice of paths to follow.

Now, however, there was more

The Committee could move down the middle

or undertake some probing in one direction or another.

Mr. Ellis foresaw that a continuation of the current degree of

monetary ease would lead to a more rapid expansion of credit as the

current economic improvement continued.

It also appeared, according to

reports from lenders, that the present degree of ease was leading to a

slight weakening of credit standards.

His inclination would be to probe

toward less ease, and determine pragmatically the effect on the domestic

-46

4/16/63

economy, after the imminent Treasury financing was out of the way.

Such

a course of action would involve aiming for a slightly lower level of

free reserves, perhaps around $250 million, with short-term rates edging

toward 3 per cent, few days when the Federal funds rate was below 3 per

cent, and moderately higher member bank borrowing.

Only after such

exploratory probing and judgment as to the effect would he consider

increasing the discount rate.

As to the next three weeks, Mr. Ellis said he would consider it

appropriate to modify the first paragraph of the policy directive so as

to reflect the fact that some strengthening in the domestic economy was

being seen.

He would not, however, change monetary policy in any

significant degree due to the need for an even keel

in view of the

Treasury financing.

Mr. Balderston expressed the view the impending Treasury

financing, together with the aftermath of the Treasury bond auction,

indicated a need to maintain steady money market conditions until the

next meeting of the Committee.

After that time, however, he believed

the Committee should come to grips more vigorously with the problem of

how best to minimize disturbing influences that were lurking beneath

the surface.

Internationally, the dollar was on the floor in most of the

European markets, and the current foreign exchange figures were not

4/16/63

-47

reassuring.

It appeared that not too much progress had been made in

achieving a basic equilibrium in the U. S. international payments posi

tion even though the first quarter figures might appear somewhat better

than those for the first quarter of 1962.

The most recent flash report

on the balance of payments carried the disturbing possibility that the

deterioration indicated thereby might be more than merely ephemeral.

Domestically, it seemed to Mr. Balderston that the quality of

lending was lower.

Stock market loans were on the rise again, esp cially

in the area of unlisted securities.

While he was told that insurance

companies had not gone below the 5-1/2 per cent rate on mortgages, he

was also told that they were taking on mortgages of definitely lower

quality and were engaging in direct deals with companies they would

not have looked at a couple of years ago.

more resemblances to 1928.

In short, he saw more and

Preoccupation with unusued resources, human

and otherwise, might be setting the stage for substantial difficulties.

Three weeks from today he felt that he might be inclined to favor a

shift in the course of monetary policy toward less ease.

Chairman Martin commented that the discussion at this meeting

had seemed to recognize as overriding factors the problem being faced

by the Treasury and the condition of the money market.

had he

Seldom

seen a time when the market situation was as much dominated by long

range changes.

In the March advance refunding a large volume of

4/16/63

-48

securities had changed hands, and that operation had not yet been fully

digested.

Additionally, there were the difficulties encountered in the

long-term bond auction and the fact that an uncertain market atmosphere

existed, reflecting conditions that had been discussed around the table

today.

The Committee should not do anything, in his opinion, to upset

market forces in either direction.

Although he was sympathetic to the

points raised by Mr. Treiber from the standpoint of the balance of pay

ments situation, it would be disturbing to the money market for the

System to interfere in any way at the present time.

Instead, the

Committee should be concentrating on maintaining the same degree of

ease.

To use Mr. Koch's expression, "steady in the boat" ought to be

the policy for the next three weeks, at which time another look could

be taken at the situation.

In this connection, the Chairman cautioned

against committing one's self to a policy position at some time in the

future.

A lot of things could change in the interim.

The Chairman foresaw difficulties

situation.

for the Treasury in the present

Although the Treasury had not tasked with him about the

matter, it was almost certain to have a difficult period ahead, with a

refunding coming up so shortly after the long-term bond auction.

In his

view the System should not complicate the situation in either direction.

Steady in the boat was the policy that ought to be pursued.

4/16/63

-49

Continuing, Chairman Martin expressed agreement with those who

felt that the balance of payments picture looked more cloudy.

He did

not pretend to know how long it might take for a storm to develop.

Nevertheless, vigorous domestic business activity could create further

difficulties from the standpoint of the balance of payments and intensify

the problem.

One should not overemphasize what monetary policy could do

in that regard, nor should one underestimate.

Chairman Martin then proposed that the current economic policy

directive be renewed in its present form, adding that he doubted whether

it was necessary even to make technical changes.

This would imply no

change in current policy and no change in the discount rate.

He in

quired whether there were those who would want to be recorded as dis

senting.

Mr. Mills stated that he wished to be recorded as dissenting,

in line with the views he had expressed earlier during the meeting.

Mr. Treiber also indicated that he would like to be recorded as

dissenting.

In explanation of his position, he said that the degree of

liquidity now existing in the economy and the improvement in the domestic

economic situation made it possible, in his opinion, to give greater

attention to the balance of payments problem, which he considered a very

serious one.

He recognized that probing toward less ease in a period of

Treasury financing presented a delicate problem, and there might be

4/16/63

-50-

developments in the market of such nature that the probing could not

take place.

However, from the point of view of policy formulation, he

felt the Committee should be moving in that direction.

Chairman Martin commented that if he were the Account Manager, he

would not want to be given that degree of discretion in view of the prob

lems being faced at this juncture.

This, of course, was a matter of

judgment.

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

for the System Open Market Account in

accordance with the following current

economic policy directive:

It is the Committee's current policy to accommodate mod

erate growth in bank credit, while aiming at money market

conditions that would minimize capital outflows internationall,.

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 domestc

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.

Messrs. Martin,

Votes for this action:

Balderston, Bopp, Clay, Irons, King, Mitchell,

Robertson, Scanlon, and Shepardson. Votes

against this action:

Messrs. Mills and Treiber.

4/16/63

-51

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

Committee would be held on Tuesday, May 7, 1963.

The meeting then adjourned.

Secretary