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, May 28, 1963, at 9:30 a.m.

PRESENT:

Mr. Martin, Chairman

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Hayes, Vice Chairman

Balderston

Bopp

Clay

Irons

King

Mills

Mitchell

Scanlon

Shepardson

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

Members of the Federal Open Market Committee

Messrs. Ellis and Bryan, Presidents of the Federal

Reserve Banks of Boston and Atlanta, respeccively

Mr. Young, Secretary

Mr. Sherman, Assistant Secretary

Mr. Kenyon, Assistant Secretary

Mr. Hackley, General Counsel

Mr. Noyes, Economist

Messrs. Baughman, Eastburn, Furth, Garvy, Green,

Koch, and Tow, Associate Economists

Mr. Stone, Manager, System Open Market Account

Mr. Coombs, Special Manager, System Open Market

Account

Mr. Molony, Assistant to the Board of Governors

Mr. Cardon, Legislative Counsel, Board of

Governors

Mr. Williams, Adviser, Division of Research and

Board of Governors

Statistics,

Mr. Yager, Chief, Governmen: Finance Section,

Division of Research and Statistics, Board

of Governors

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Mr. Rouse, Vice President and Senior Adviser,

Federal Reserve Bank of New York

Messrs. Mann, Ratchford, Jones, Parsons, and

Grove, Vice Presidents of the Federal

Reserve Banks of Cleveland, Richmond, St.

Louis, Minreapolis, and San Francisco,

respectively

Mr. Brandt, Assistant Vice President, Federal

Reserve Bank of Atlanta

Mr. Anderson, Financial Economist, Federal

Reserve Bank of Boston

Mr. Sternlight, Manager, Securities Department,

Federal Reserve Bank of New York

Upon motion duly made and seconded,

and by unanimous vote, the minutes of the

meeting of the Federal Open Market Commit

tee held on May 7, 1963, were approved.

Under date of May 15, 1963, there had been distributed to the

members of the Federal Open Market Committee copies of the report of

audit of the System Open Market Account and of a report of audit of

foreign currency transactions, both made by the Board's Division of

Examinations as at the close of business January 25, 1963, and submitted

by the Chief Federal Reserve Examiner under date of March 1, 1963.

Copies of these reports have been placed in the files of the Committee.

Upon motion duly made and seconded,

and by unanimous vote: the audit reports

were accepted.

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 May 7 through May 22, 1963,

together with a supplementary report covering the period May 23 through

May 27, 1963.

the Committee.

Copies of these reports have been placed in the files of

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5/28/63

In comments supplementing the written reports, Mr. Coombs

reviewed current and prospective developments

in regard to the U. S.

gold stock along with the results of recent gold pool operations.

Continuing, he noted that the U. S. dollar was under increasing

pressure against various Continental European currencies.

As spelled

out more fully in the written reports, there had been inflows of both

short- and long-term capital funds into Continental money

markets,

attributable in some part to factors such as tight money market condi

tions, attractive possibilities for stock market as well as direct

investments, and window-dressing operations by foreign commercial banks

for midyear purposes.

In addition, however, Mr. Coombs sensed some

deterioration of sentiment abroad with respect to the U. S. dollar.

The publication of the large first-quarter U. S. balance of payments

deficit had attracted attention.

There seemed to be a growing feeling

in the money markets and in central banks that it might take several

years before the U. S. got its international payments position into

reasonable balance, which raised serious questions in the minds of

foreigners as to how the problem would be handled in the meantime, and

at this stage the announcement of even moderate gold losses caused an

immediate market reaction.

In the absence of the cooperative arrange

ments that had been built up by the U. S. Treasury and the Federal

Reserve System over the past couple of years, the situation might now

be rather dangerous.

Drawings under System swap arrangements and

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Treasury issues of bonds denominated in foreign currencies were

absorbing the major impact of currency flows and were limiting gold

losses.

After summarizing recent foreign exchange developments, including

System and Treasury operations, again as spelled out in more detail in

the distributed reports, Mr. Coombs noted that the total situation added

up to a rather disturbing picture.

Since early April the System had

been drawing under several swap arrangements and operating in the market

with the proceeds of the drawings on the assumption that the develop

ments occasioning those operations would prove temporary.

It was still

too early, he thought, to conclude that more basic forces were

responsible, and in his opinion the System would be well advised to

continue to resist market pressures against the dollar through drawings

on swap facilities.

However, there was the risk of having to draw rather

heavily, and the System might face difficulty in making repayment if

the inflows of dollars into European capitals did not reverse themselves.

Thereupon, upon motion duly made and

seconded, and by unanimous vote, the System

Open Market Account transactions in foreign

currencies during the period May 7 through

May 27, 1963, were approved, ratified, and

confirmed.

Turning to recommendations for the Committee's consideration,

Mr. Coombs called attention to a memorandum dated May 22, 1963, in

which he had discussed the question relating to the periods of time

for which drawings under System swap arrangements should be outstanding.

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The preparation of such a memorandum had been suggested at the

Committee meeting on May 7, 1963, in connection with a discussion

of problems incident to the repayment of Swiss franc drawings under

swap arrangements with the Swiss National Bank and the Bank for

International Settlements.

In his memorandum, Mr. Coombs suggested

that the Committee establish a firm working rule (barring some unusual

development in a given instance) of paying off any swap drawings

outstanding if they had remained on the books for as long as a ful

year.

In line with this suggestion, he recommended to the Committee

a decision, subject to review in case of the development of critical

circumstances,

to repay in full the System's present $50 million

drawing of Swiss francs under the Swiss National Bank swap arrangement

on or before July 18, 1963, and similarly to repay the remaining $16

million drawing under the swap arrangement with the Bank for Interna

tional Settlements on or before October 31, 1963.

Mr. Coombs indicated

that if the Committee accepted this recommendation he would negotiate

with the Swiss National Bank and the U. S. Treasury on various aspects

of the liquidation procedure.

He stated that some of the problems

involved, and possible solutions, would be outlined in a subsequent

memorandum.

Following comments by Mr. Coombs regarding his memorandum and

the recommendations contained therein, there was a discussion during

which members of the Committee expressed general agreement with the

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proposed establishment of a working rule that swap drawings be paid

off if they had remained on the books for as long as a full year.

While concurring in the proposal that such a working rule be

established, Mr. Shepardson raised a question with regard to its

application to the repayment of the drawings under the swap arrange

ment with the Bank for International Settlements.

He noted that there

had been originally a drawing of $60 million equivalent in July 1962

to help absorb a heavy flow of speculative funds to Switzerland after

the U. S. stock market break, that repayments of $25 million had been

made by late October, that the System then made a new drawing of $20

million to help absorb another heavy flow of speculative money into

Switzerland following announcement by the President of the United

States of the Cuban quarantine operation, and that $16 million remained

unpaid.

His question was whether, under the proposed working rule,

the remaining $16 million should not be repaid by July 1963.

Otherwise,

he foresaw the possibility of overlapping or leapfrogging operations,

so that even under the one-year rule swap drawings would never have to

be fully repaid.

Mr. Mills made the observation that while the swap arrangements

had served a good purpose up to this point, it would be wishful thinking

to feel that they constituted progress toward a fundamental solution

of this country's balance of payments problem.

He wondered if more

positive actions must not be considered on the part of the U. S. Treasury,

with the Federal Reserve System taking only a secondary position.

5/28/63

Mr. Coombs concurred in the view that a solution to the

balance of payments problem required more fundamental measures.

He

did not think, however, that the foreign central banks concerned

would be unhappy about a procedure such as proposed in his memorandum.

The possibility of leapfrogging, as referred to by Mr. Shepardson, had

not occurred to him.

In the case of the drawings under the swap arrange

ment with the Bank for International Settlements, it seemed to him that

there had been clearly two separate drawings occasioned by speculative

flows of funds into Switzerland associated with with two major disturb

ing events.

The drawing in July had been paid off entirely, and the

sum of $16 million remained to be paid off against the drawing that

had been made at the end of October 1962.

As he saw it, repayment of

the remaining $16 million at or before the end of October 1963 would

be consistent with the terms of the proposed working rule.

In further discussion of this point, Chairman Martin suggested

that if Mr. Coombs' recommendations were adopted, such action be taken

with the understanding that leapfrogging operations, in the sense

referred to by Mr. Shepardson, were not contemplated and that the Open

Market Committee would not favor them.

Subject to this understanding, the

recommendations of Mr. Coombs as set forth

in his May 23 memorandum, including the

establishment of the proposed working rule

and the repayment of the Swiss franc drawings

according to the suggested time schedule,

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were approved unanimously. Reflecting

the adoption of the working rule,

unanimous approval also was given to the

amendment of the Guidelines on System

Foreign Currency Operations, as reaffirmed

by the Committee on March 5, 1963, to

insert the following paragraph after the

third paragraph of Section 2 of the Guide

lines:

Drawings made by either party under a reciprocal arrange

ment shall be fully liquidated within 12 months after any

amount outstanding at that time was first drawn, unless the

Committee, because of exceptional circumstances, specifically

authorizes a delay.

Mr. Shepardson stated that while he would not vote against

adoption of the recommendations, in principle he felt that under the

working rule the remaining drawing outstanding under the swap arrange

ment with the Bank for International Settlements should not be allowed

to run until October and instead should be paid off not later than

July.

Mr. Coombs referred next to a memorandum of May 23, 1963, in

which he had discussed means of effecting liquidation of the drawings

of Swiss francs under the swap arrangements with the Swiss National

Bank and the Bank for International Settlements.

With specific regard

to liquidation of the $50 million drawing from the Swiss National Bank

maturing on July 18, 1963, the memorandum noted that it might be

possible to acquire through small weekly purchases roughly $15 million

of Swiss francs, and to reduce the System's drawing correspondingly.

As to the remainder, the System could sell spot to the Bank for

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5/28/63

International Settlements perhaps $13 million equivalent of sterling

in exchange for an equivalent amount of Swiss francs.

Simultaneously

the System would undertake to repurchase such sterling with Swiss

francs at the same rate of exchange 90 days hence, with the possibility

of renewal.

The Bank for International Settlements would acquire the

Swiss francs by taking in deposits from the Swiss commercial banks and

would invest in British Treasury bills the sterling acquired from the

Federal Reserve System.

This procedure would enable the Swiss National

Bank to avoid purchasing gold, while also absorbing the additional

liquidity injected into the Swiss market as a result of paying off the

swap.

Mr. Coombs believed the U. S. Treasury would be prepared to

execute a similar swap of perhaps $13 million equivalent of its sterling

holdings against Swiss francs and simultaneously sell outright to the

System the Swiss francs so acquired at the prevailing market rate.

The

remaining $9 million required to pay off completely the $50 million

swap drawing could be readily obtained by a direct System purchase of

Swiss francs against dollars

from the Swiss National Bank, which might

then choose to hold the dollars temporarily or purchase a moderate

amount of gold from the U. S. Treasury.

Mr. Coombs pointed out in his memorandum that utilization of

the technique of swapping sterling for Swiss francs to liquidate the

System's swap drawing would provide a useful additional experiment in

System exchange operations.

He noted that foreign countries can

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readily offset surpluses with one country against deficits with

another simply by transferring the dollars acquired from the deficit

country to the surplus country.

The United States, however, faced

serious technical difficulties in effecting transfers from one foreign

currency to another, and the swap procedure suggested in the memorandum

would provide a temporary solution to the problem of transferability.

In effect the System would be employing a sterling asset to pay off a

Swiss franc debt.

While it would simultaneously incur a Swiss franc

liability payable three months hence, it would retain an equivalent

sterling claim.

Following comments in amplification of his memorandum, Mr.

Coombs confirmed his recommendation that liquidation of the $50 million

Swiss franc drawing under the reciprocal currency agreement with the

Swiss National Bank be undertaken according to the procedure outlined

in the memorandum, and that he be authorized to enter into negotiations

with a view to liquidating the drawing in such manner.

Further, for reasons set forth in the memorandum, Mr. Coombs

felt that utilization of the technique outlined therein, involving the

swapping of System-held foreign currency assets to meet obligations in

other currencies, was likely to be found useful in other instances.

He

suggested, therefore, that the Special Manager be authorized to arrange

such swaps of currencies as might seem desirable from time to time up

to a total of $50 million.

5/28/63

-11There ensued a general discussion during which Mr. Coombs

responded to a number of questions on the technicalities of the

recommended procedure for liquidation of the Swiss franc drawing

under the reciprocal currency arrangement with the Swiss National

Bank and on the nature of the more general authorization that he had

requested.

He also stated, in response to a further question, that

he did not presently contemplate additional drawings of Swiss francs.

There might occur, of course, some unforeseen event comparable in

gravity to the fairly critical circumstances that had occasioned the

previous drawings.

Mr. Coombs brought out that the suggested procedure for

liquidating the drawing under the reciprocal agreement with the Swiss

National Bank would involve, among other things, a direct purchase by

the System from the U. S. Treasury of perhaps $13 million equivalent

of Swiss francs at the then prevailing market rate.

He felt that a

direct purchase would be preferable to an indirect arrangement having

the same ultimate effect although an indirect arrangement might perhaps

be worked out, along lines that he mentioned, if the Committee so

desired.

Upon question by the Chairman, it was indicated that the members

of the Committee would not object to the direct purchase of the Swiss

francs from the U. S. Treasury subject to the understanding that the

francs would be acquired from the Treasury at the market rate prevail

ing at the time of purchase.

5/28/63

-12Accordingly, the procedure recommended

in Mr. Coombs' memorandum for liquidation

of the $50 million Swiss franc drawing, to

mature on July 18, 1963, under the swap

arrangement with the Swiss National Bank

was approved unanimously, and it was under

stood that Mr. Coombs would enter into

negotiations looking toward the liquidation

of the drawing in such manner.

In addition, the Special Manager was

authorized by unanimous vote to execute

swaps of System-held foreign currencies for

other foreign currencies in connection with

the liquidation of System obligations in the

latter currencies to such extent as might

seem desirable from time to time up to a

total of $50 million at any one time. To

reflect in the Guidelines on System Foreign

Currency Operations, as reaffirmed by the

Committee on March 5, 1963, not only this

action but also an action taken by the

Committee on March 5, 1963 (as included at

that time in the continuing authority directive

on foreign currency operations), unanimous

approval was given to the amendment of the

Guidelines to add the following two paragraphs

to Section 4 of the Guidelines:

The New York Bank may also, where authorized, purchase

currencies through forward transactiors for the purpose of

allowing greater flexibility in covering commitments under

reciprocal currency agreements.

The New York Bank may further, where authorized, purchase

and sell currencies through forward as well as spot transactions

for the purpose of settling commitments denominated in one cur

rency by means of utilizing the Bank's holdings of another

currency.

Mr. Coombs recommended next that the Committee authorize

renewal for a further three months of the $50 million swap arrangement

with the Netherlands Bank maturing June 13, 1963, and renewal for a

5/28/63

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further six-month period of the $50 million swap arrangement with

the National Bank of Belgium maturing June 20, 1963.

He noted that the

drawing of $50 million equivalent of Belgian francs under the swap

arrangement with the National Bank of Belgium likewise would mature

June 20, 1963, and expressed the view that it would be desirable to

renew the drawing for six months.

Renewal of the swap arrangements with

the Netherlands Bank and the National Bank

of Belgium, as recommended by Mr. Coombs,

was authorized by unanimous vote, and the

proposed renewal of the drawing under the

swap arrangement with the National Bank of

Belgium was noted without objection.

Chairman Martin then called for consideration of the proposal

contained in a letter addressed to Mr. Hayes under date of May 10,

1963, by Lord Cromer, Governor of the Bank of England.

For reasons

stated, Lord Cromer suggested the execution of a swap facility in the

amount of $500 million between the Bank of England and the Federal

Reserve System.

He proposed that the facility be initially for a

period of 12 months and that, if it was availed of by either side,

actual swaps be for three months with the right to a further three

month extension.

The Chairman recalled that several months ago the Open Market

Committee had authorized negotiations with the Bank of England looking

toward enlargement of the existing $50 million swap arrangement with

the Bank to a figure as high as $250 million.

The Bank of England had

5/28/63

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not heretofore expressed its willingness to enter into an enlarged

swap facility, but after further consideration it had now submitted

the proposal outlined in the letter from Lord Cromer, which seemed

to warrant full consideration by the Committee.

Chairman Martin brought out that there had been distributed

to the members of the Committee, along with copies of Lord Cromer's

letter:

(1) a memorandum from Mr. Young dated May 23, 1963, citing

advantages and possible objections to the proposal, and expressing

the opinion that an expansion of swap arrangements between the System

and the Bank of England would be in the interest of the System and of

the international financial position of the United States in general;

(2) a memorandum from the staff of the Board's Division of International

Finance dated May 22, 1963, discussing economic conditions in the United

Kingdom; and (3) a memorandum from Mr. Coombs dated May 24, 1963, express

ing the opinion that an increase in the swap arrangement with the Bank

of England to $500 million would represent a major contribution to

international financial stability.

For discussion of the matter, the Chairman turned first to

Mr. Coombs, who explained and amplified the points in his memorandum

arguing in favor of acceptance of the Bank of England's proposal.

Mr.

Coombs also identified two points in the proposal that would involve

technical deviations

from the terms of the swap arrangements heretofore

entered into by the Federal Reserve System with foreign central banks.

5/28/63

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With regard to the first of these, a suggestion by the Bank of

England that the swap facility be initially on a twelve-month basis,

he recommended acceptance of the suggestion by the Committee.

In fact,

he felt that it might be desirable over a period of time gradually to

shift the swap arrangements with other central banks to a similar basis,

thus obviating the necessity for renewals at three-month intervals.

It

was his impression that most of the central banks would react favorably

to such a modification.

Mr. Coombs brought out, as his second point,

that the Bank of England's proposal contemplated that drawings under

the swap facility would be limited to three months plus one three-month

renewal.

For reasons that he explained, Mr. Coombs was of the opinion

that such a feature would introduce an unnecessary, and what in some

circumstances could be an undesirable, degree of rigidity.

He would

prefer, therefore, to retain in this swap arrangement, as in the out

standing System swap arrangements, provision for three-month drawings

renewable after consultation between the central banks concerned and

upon mutual agreement.

He had reason to believe that the Bank of England

would be agreeable to the retention of such a provision in the proposec

enlarged swap arrangement if it were indicated that this was favored

by the Federal Reserve.

Mr. Coombs added the comment that under the

working rule adopted by the Committee earlier during this meeting with

respect to repayment of drawings under swap arrangements, there would

be an effective maximum limitation of three three-month renewals of an

original three-month drawing.

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Comments by the Committee reflected agreement with the views

expressed by Mr. Coombs concerning the technical points

to which he

had referred in connection with the proposed enlarged swap arrange

ment with the Bank of England.

There ensued a general discussion by the Committee of the

broader aspects of the proposal submitted by the Bank of England,

with reference to numerous facets thereof including, among others,

the size of the proposed enlarged swap arrangement.

In this connection,

reference was made for purpose of comparability to the $250 million

standby arrangement with the Bank of Canada as well as to the agreements

with such institutions as the Swiss National Bank, the Bank for Inter

national Settlements, the German Federal Bank, and the Bank of Italy.

It developed to be the consensus

of the Co mittee that in the case of

the Bank of England a swap arrangement of the magnitude proposed could

be justified.

In reply to a question along these lines, Mr. Coombs

indicated that he saw no way of measuring precisely the appropriate

ness of relationships between the siz

of one swap arrangement and

another; in his judgment, no more than rough approximations could be

made.

The existing relationships between the various swap lines had

evolved out of actual experience, and he thought this was perhaps

the

best guide available.

During the discussion of the British proposal, reference also

was made to the possible public reaction to, and psychological impact

5/28/63

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of, the announcement of a swap arrangement of such magnitude between

the Federal Reserve and the Bank of England, along with the possible

reaction on the part of other foreign central banks having swap

arrangements outstanding with the Federal Reserve System.

Considera

tion was given to the benefits that might accrue both to the Federal

Reserve and the Bank of England from the existence of the enlarged

swap arrangement under various assumed conditions.

There was general

concurrence in the view that swap arrangements of this kind offered

no fundamental solution to the U. S. balance of payments problem; as

a temporary holding action, however, merit was seen in the defenses

provided from the network of swap arrangements.

Inquiry was made whether, in the event of a British

payments deficit vis-a-vis

the Continent, the proposed swap facility

might not be drawn upon for the purpose of dealing with such deficit,

thereby placing more dollars in the hands of Continental holders and

leading eventually to the possibility of further demands on the U. S.

gold stock.

In commenting on this question, Mr. Coombs pointed out

that the purpose of the proposed swap facility would be to provide

resources to counteract payments swings between the United Kingdom

and the United States, rather than between the United Kingdom and the

Continent.

Drawings under the swap facility, and renewals thereof,

would be the subject of close consultation between the Bank of England

and the Federal Reserve System.

It would be hoped that it would never

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be necessary for either party to draw on the proposed swap facility

to the full amount.

However, the facility would provide additional

standby protection.

At the conclusion of the discussion,

enlargement from $50 million to $500 mil

lion of the reciprocal currency arrange

ment between the Federal Reserve System

and the Bank of England was authorized by

unanimous vote, subject to the understand

ing that a modification of the proposal

submitted by the Bank of England would be

sought in the one technical respect

recommended earlier by Mr. Coombs.

There follows the

Secretary's Note:

text of a statement released to the press

by the Federal Reserve on May 30, 1963:

The reciprocal currency arrangement between the Federal

Reserve and the Bank of England has been raised from $50

million to $500 million (from about 18 million pounds to

about 180 million pounds), the Federal Open Market Committee

announced today. Like the original arrangement with the

Bank of England of May 31, 1962, the new agreement provides

that forward cover, for any amount drawn, will be furnished

to each party.

The substantial increase in the British swap reflects

the desirability of enlarging the facilities for dealing

with temporary and reversible flows of funds between the two

largest centers of world finance. This agreement, together

with other recent examples of international cooperation among

central banks and treasuries, provides a major reinforcement

of the world payments system and of international liquidity

by increasing the availability of foreign exchange in case of

need.

The new agreement brings the total of Federal Reserve

reciprocal currency arrangements to $1,550,000,000.

These

swap arrangements do not in themselves constitute outstanding

liabilities, but like the new British arrangement represent

reciprocal facilities on a standby basis that may be drawn

upon by either party from time to time,

In all such arrangements the Federal Reserve Bank of New

York acts on behalf of the 12 Federal Reserve Banks under the

direction of the Federal Open Market Committee.

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It was noted that the Committee's continuing authority

directive to the Federal Reserve Bank of New York on System foreign

currency operations contained a provision that total foreign cur

rencies held at any one time were not to exceed $1.3 billion.

In

view of the authorization that had just been given for enlargement

of the swap facility with the Bank of England from $50 million to

$500 million, it was suggested that it would be appropriate to amend

the provision in the continuing directive relating to total foreign

currency holdings.

This would be in addition to an amendment of the

directive reflecting the action taken earlier at this meeting authoriz

ing the use of System holdings of foreign currencies, within a

specified limit, for the settlement of commitments denominated in

other currencies.

Accordingly, upon motion duly made

and seconded, and by unanimous vote, the

Federal Reserve Bank of New York was

authorized and directed, until otherwise

directed by the Committee, to execute

transactions in the System Account in

accordance with the following continuing

authority directive on System foreign

currency operations:

The Federal Reserve Bank of New York is authorized and

directed to purchase and sell through spot transactions any

or all of the following currencies in accordance with the

Guidelines on System Foreign Currency Operations reaffirmed

by the Federal Open Market Committee on March 5, 1963, as

amended on May 28, 1963:

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Pounds sterling

French francs

German marks

Italian lire

Netherlands guilders

Swiss francs

Belgian francs

Canadian dollars

Austrian schillings

Swedish kronor

The Federal Reserve Bank of New York is also authorized

and directed to purchase, in accordance with the Guidelines

and for the purpose of allowing greater flexibility in cover

ing commitments under reciprocal currency agreements, any or

all of the foregoing currencies through forward transactions,

up to a combined total of $25 million equivalent.

The Federal Reserve Bank of New York is further authorized

and directed to purchase and sell, in accordance with the Guide

lines and for the purpose of utilizing its holdings of one

currency for the settlement of commitments denominated in other

currencies, any or all of the foregoing currencies through for

ward as well as spot transactions, up to a combined total of

$50 million equivalent.

Total foreign currencies held at any one time shall not

exceed $1.75 billion.

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 May 7

through May 22, 1963, and a supplementary report covering the period

May 23 through May 27, 1963.

Copies of these reports have been placed

in the files of the Committee.

In supplementation of the written reports, Mr. Stone commented

as follows:

5/28/63

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The money market remained generally firm during the

first part of the period since the last meeting of the

Committee and after mid-May a somewhat greater degree of

firmness emerged as action was taken to implement the

policy decision of May 7. Federal funds traded consistently

at 3 per cent throughout the whole period and there were

varying margins of unsatisfied demand for reserves to be met

at the discount window, with those margins somewhat higher

after May 15 than before.

As it worked out, the slight shift in the System's

posture was accentuated because of the erratic behavior of

market factors in the latter part of the week ended May 22;

free reserves on May 22 alone fell some $300 million short

of expectations and the effect of this, together with

required reserve revisions carrying in from an earlier

period, was that average free reserves turned out to be about

$160 million in that week compared with an average level of

about $220 million that had been projected on the 22nd. The

related effect on member bank borrowing was a sharp bulge on

May 21 and 22 and a rise in weekly average borrowing to $281

million as compared with levels largely ranging between $100

million and $200 million earlier this year. Average borrowing

may be sizable again this week, if only because a number of

banks saw fit to borrow in size relatively early in the

reserve period and in some cases they apparently managed to

build reserve excesses over the week end.

The decline in published free reserve figures to $160

million for the week ended May 22, of course, helped to make

the point clear to the market that System policy was undergoing

a shift. Coming on the heels of a period of consistent firm

ness in the money market, a continuation of fairly good news

about the domestic economy, and not-so-good news about the

balance of payments, and further underlined by the System's

sales of bills in the market a week ago Friday and Monday,

market observers and participants now seem pretty well

convinced that there has been a change.

There is much less certainty as to how much of a change

has been made, however, and as to what impact any particular

change might have on short- and long-term interest rates.

It

is noteworthy, for example, that through May 22, despite

persistent firmness in the money market, three-month bill rates

had worked up only to 2.94 per cent from 2.90 per cent before

the last meeting of the Committee. After news of the reserve

figures had interacted with other indications of a firmer

policy there was a further moderate rate increase--to about

5/28/63

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2.97 per cent in yesterday's auction of three-month billsbut there was good bidding interest as a result of the

higher rates that had emerged.

Thus far, the long-term market has reacted only mildly,

in terms of price and rate changes, to the shift in System

policy, In part this reflects, as in the bill area, a

considerable measure of uncertainty as to how far the System

intends to move. More particularly, however, the mild price

reaction reflects the substantial purchase orders that have

been executed at the Trading Desk on behalf of various

Government investment accounts. These market purchases

enable the Treasury to retire special issues held by the

trust funds, or to refrain from issuing such special obliga

tions, and thus to hold the over-all debt within the current

legal Limit. Since May 2, but mainly in the past week, a

total of over $550 million coupon-bearing securities has been

purchased for various Treasury investment accounts--including

about $155 million of 5- to 10-year issues and $143 million of

over-10-year maturities. And yesterday we tendered for $100

million six-month bills for Treasury account--also to deal with

the problem of the debt limit.

These substantial operations have eased the market's

adjustment process to a modified policy posture, although they

have not completely thwarted that process, for prices of inter

mediate and long-term issues have declined roughly 1/4 to 1/2

point and yields have risen by roughly 1 to 10 basis points in

the interim since the last meeting. The changed market outlook

is revealed more strikingly by the shift in dealer inventories

in intermediate and longer issues during this period of large

scale Treasury buying. Thus, at the end of April, dealers had

a net long position about $120 million in over-5-year maturities

while on May 24 there was a net short position of about $40

million.

Given this heavy volume of buying for the Treasury--and it

is not yet over, for we have somewhat over $100 million yet to

do by Friday--we have sought to meet most of this week's reserve

needs by running down the Treasury balance at the Reserve Banks

from its recent level of $900 million. And we anticipate meeting

a part of the even larger reserve needs of the next two weeks in

the same way. Otherwise, we would be heavy buyers in a market

that had been largely stripped of securities by Treasury buying,

and the rate impact of the policy shift would be largely undone.

Other segments of the capital market also seem to be still

in the process of adjustment. In the corporate market, sizable

5/28/63

-23-

unsold balances remain of the $250 million American Telephone

issue offered at 4.33 per cent just three weeks ago, and of

a few other high-grade issues that had been aggressively bid

Some

for and too fully priced to whet investors' appetites.

lesser rated issues have moved out well, however, and with

the immediate calendar rather light it may be that the large

issues still in syndicate won't fare too badly. In contrast,

some congestion has again developed in the tax-exempt bond

area, and dealers' advertised inventories have been worked

down only with the help of price concessions. The conces

sions generally have not had to be very large, however, and

there is a background feeling in this market, too, that

underlying savings flows remain substantial and will tend to

cushion price and rate adjustments.

The immediate prospect for debt limit legislation is

still uncertain, but if the limit is lifted in time we under

stand that the Treasury may offer for cash an issue of

intermediate-term bonds in the amount of about $1 billion or

a little more--with announcement to occur next week and payment

If the Treasury should attempt such

about the middle of June.

an offering, it may be confronted with a particularly difficult

job of pricing the issue--both because the market would not

have had sufficient time to appraise the extent of the System's

policy shift, and because the reaction on intermediate and

long-term prices and rates to that shift has thus far been

offset in good part by the Treasury's recent purchases on behalf

I might add, too, that

of the Government investment accounts.

our estimates at the New York Bank do not indicate any real

cash need for the Treasury before late June. Debt limit permit

ting, the Treasury may be back again to borrow more near the

end of June, in order to get a further start on its large

financing needs in the second half of the year.

Thereupon, upon motion duly made

and seconded, and by unanimous vote,

the open market transactions in Govern

ment securities and bankers' acceptances

during the period May 7 through May 27,

1963, were approved, ratified, and

confirmed.

The staff economic and financial review at this meeting was

in the form of a visual-auditory presentation, for which Messrs.

-24-

5/28/63

Garfield, Hersey, Altmann, and Axilrod of the Board's staff joined

the meeting.

Other participants included Messrs. Noyes and Koch.

Copies of the text of the presentation, and of the accompanying

charts, have been placed in the files of the Open Market Committee.

The introductory portion of the review, presented by Mr.

Noyes, was as follows:

The record of the past year shows wide swings in

expectations but only moderate changes in activity. Last

summer, after the sharp drop in common stock prices, fore

casts of recession--beginning in early 1963 or beforewere common enough to gain a hearing for an immediate

general tax cut. Even in the fall the so-called standard

forecast called for a mild recession that would be at its

low point right about now.

In the actual event, industrial production and prices

were substantially unchanged during the second half of 1962,

while gross national product rose moderately. Outlays for

plant and equipment stopped increasing, and with stocks of

steel and some consumer goods being liquidated, over-all

inventory accumulation was reduced to a low rate.

In the final quarter of 1962, however, sales of autos

and other goods to consumers increased substantially, and

this year retail trade has been maintained at the higher

Surveys of plans for plant and equipment outlays

level.

taken early in 1963 indicated a renewed advance, and new

orders for durable goods have shown considerable strength.

Common stock prices have risen sharply since October, almost

Industrial

regaining the record highs of December 1961.

from January

cent

3

per

rising

up,

production finally turned

to April.

As of April. the current period of recovery and expansion

was 26 months old. At the comparable point in time after the

1958 recession low, the expansion was over and production was

on the verge of decline. In the 1954-57 expansion, there was

an extended period of stability not unlike the one we have

recently experienced, and it was followed, after the 1956

steel strike, by a small further rise to a new high. Whatever

the apparent similarities so far between that period and the

current one, however, the differences seem at least as signifi

cant.

5/28/63

-25-

The stability in production after October 1955 was at

a level associated with an employment rate of 96 per cent,

or an unemployment rate of 4 per cent. Throughout the

current period, labor force use has been appreciably lower,

with unemployment between 5-1/2 and 6 per cent. Utilization

of manufacturing capacity also has been lower--for major

materials about 80 per cent in the first quarter, compared

with over 90 per cent in late 1955 and early 1956. Business

capital outlays, in contrast to the easing last winter,

continued to increase rapidly through 1956 while residential

building declined.

But perhaps the most striking difference between the two

periods is in the behavior of prices.

Industrial prices are

no higher now than at the bottom of the recession in February

1961. By the autumn of 1956 industrial prices were up sub

stantially. With resource use relatively high in that period

and business investment demands booming, rising prices

probably contributed to a shift in resources away from consumer

goods industries to capital goods industries.

Significant differences appear also in interest rate

developments. Yields on long-term Governments, for example,

have risen little so far in this expansion, whereas at this

stage in the two preceding expansion periods they were up

substantially. The level of yields this time has been higher

than during 1955 and 1956 but lower than in 1959. Evidently,

considering developments in prices, capital outlays, and inter

est rates, no close parallel can be drawn with earlier postwar

periods of expansion.

There followed sections dealing with production and investment

in productive facilities, prices, resource utilization, the balance

of payments, and financial developments.

The concluding portion of

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

Our review of economic developments this morning indicates

But, as at other

a marked pickup in activity in recent months.

times during the last year or so, expectations and psychology

again appear to be outrunning the facts.

The unemployment rate continues disturbingly high, over

5-1/2 per cent. Machinery and plant facilities are still ample,

providing the basis for considerable further expansion of busi

ness sales. While consumer prices have shown some further rise,

5/28/63

-26-

wholesale commodity prices as a group have remained at

the level prevailing for the past five years.

In the months immediately ahead, a slackened pace

of steel buying will no doubt tend to slow down the over

all rate of economic expansion. A reduction in Federal

taxes would tend to stimulate buying and activity, but

the amount and timing of any reduction are still uncertain.

Financial developments have exhibited rather moderate

movements in recent months. Total commercial bank credit

has increased at a seasonally adjusted annual rate of about

6 per cent thus far this year, as compared with 9 per cent

last year. The narrowly--defined money supply has risen at

a 2 per cent rate since January, as compared with over 7

per cent late last year. New corporate and municipal security

financing has been running almost 10 per cent below last year's

pace.

Moreover, the private market appears to be taking some

steps, tentative as they may be, to correct some of the

financial excesses that have developed over recent years. It

is difficult, at best, to measure credit deterioration. One

very rough indication for commercial banks is the ratio of

substandard loans, as classified by examiners, to total loans.

Such a ratio--at a small sample of banks in three Reserve

districts--has tended to rise since 1959, but it is still at

Banks are also in a more exposed position

a very low level.

now because of their more aggressive investment policies, but

some institutions are apparently becoming more cautious in the

face of the cost of attracting interest-bearing deposits,

potentially of considerable volatility.

Concern over excesses has been greatest in mortgage markets

Delinquencies and foreclosures are on the

in recent years.

rise, but both still appear low. Investor interest in real

estate investment trusts and syndicates has greatly diminished,

apparently before a substantial amount of small savings was

drawn to them. Also, a number of savings and loan associations

in various sections of the country have recently announced

reductions in rates paid on shareholdings.

Turning to the role of monetary policy in recent develop

ments, the volume of required reserves behind total private

deposits is probably as good as any other single indicator of

the effects of policy on money and banking developments. As we

all know, monetary policy, expressed in a given degree of money

market ease or tightness, does not necessarily bring with it

the same required reserve expansion at all times. During the

second half of last year, when money market ease was slightly

less than in the first half, reserve expansion was considerably

5/28/63

larger.

-27Thus far this year, in contrast, with ease

reduced a little more, the rate of reserve expansion has

also decreased, especially after the early weeks of the

year.

A cautious note is suggested for any short-run

interpretation of the total required reserves guideline.

For the past year and a half, although required reserves

behind total private deposits have increased at a seasonally

adjusted annual rate of about 3-1/3 per cent, almost all of

this expansion has gone to support the sharp growth in time

Since the end of 1961, required

and savings deposits.

reserves behind demand deposits have increased at a seasonally

adjusted annual rate of less than 1 per cent. Of course, some

of the recent growth of time deposits has reflected the trans

fer of idle accounts out of the demand category. To the

extent that this has been so, money supply growth has under

stated the rise in transactions balances.

In the case of recent modest shifts in policy, the change

in the money supply apparently has depended mainly on the

As you recall, money

strength of the demand for bank loans.

supply actually declined through August last year and then

expanded rapidly in the final months when the demand for

business loans was particularly strong. As banks seek to

satisfy their customers, the System--following a given free

reserve or tone of the money market guide to day-to-day open

market operations--tends to supply the reserves demanded by

banks at the prevailing interest rate structure. Thus, 1962

developments suggest that--assuming continuance of the moderate

lessening of monetary ease adopted at the May 7 meeting and a

continuation of the strong public preference for interest

bearing liquid assets--the money supply may not show any

significant growth until the demand for loans quickens in the

fall.

Of course, one's over-all assessment of the effects of

monetary policy on the economy in the weeks and months ahead

must look beyond the impact on bank reserves and money. In

particular, it must take into account effects of policy on

interest rates, and the likely effects, in turn, of changes in

interest rates on the cost and availability of domestic borrow

ing on the one hand and of international investing on the

other.

In the area of interest rates, short-term expectational

effects resulting from gradual market recognition of the recent

policy shift may lead to some further firming of rates, as has

5/28/63

-28-

been occurring in recent days in the Treasury bill market.

But any marked advance in rates, particularly in the longer

term area, would seem to depend on a fall-off in the flow of

savings or a substantial pickup in the demand for capital

financing, since present demand and supply relationships in

credit markets are not based on a high rate of monetary

expansion.

Unless the Committee is prepared to take much more

drastic action than it has thus far contemplated, it seems

likely that monetary policy will play an essentially neutral

role in the period immediately ahead. On the one hand, any

really significant lessening of credit availability, in the

face of the large flow of savings, might well require monetary

contraction. On the other hand, a move toward significantly

more ease would mean sacrificing the constraints of higher

short-term rates in tending to discourage capital flows abroad.

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

and views on economic developments and monetary policy beginning with

Mr. Hayes, who presented the following statement:

Most of the current statistics point to continuing

improvement in the general business situation. Production

and orders have risen not only in steel but in a number of

other industries. Housing figures look better than they did,

and automobile sales are remarkably strong. The dip in retail

sales in April may reflect inadequate adjustment for the date

of Easter this year; and consumer spending plans continue to

look encouraging. There is still no firm evidence of the

expected pick-up in plant and equipment spending. Despite

sizable advances in employment, the unemployment rate remains

about unchanged because of a very sharp rise in the labor force.

Although there have been a fair number of price increases

scattered through various industries in recent weeks, it is

not certain that all of them will "stick," and so far they

have not been reflected in any significant changes in the

general price indices. There is some uneasiness as to

inflationary threats in other areas, especially real estate

and securities prices. Stock prices are of course close to

their all-time high, and the volume of stock market credit has

reached a new peak.

On the basis of reporting bank data for the first three

weeks of May, bank credit rose more than seasonally. Much of

this was due to an unusual bulge in security loans connected

particularly with increased dealer inventories of slow-moving

5/28/63

-29-

securities and certificates of deposit.

There are at

least a few tentative suggestions in the statistics as

well as in reports from loan officers at the larger New

York banks that business loan demand has gained some

momentum in the last month or two.

High corporate liquidity

has been a dampening influence on such loan demand. While

this situation could change rapidly as economic activity

rises further, bank liquidity still seems fairly ample to

cope with such demands.

Even though the growth of time

deposits picked up in May after the noticeably slower

growth rate in April, it seems quite possible that a renewed

slowdown may be ahead as rising market interest rates tend to

increase the attractiveness of bills vis-a-vis rates that

banks are willing to offer on time certificates of deposit.

In general, nonbank liquidity continues plentiful.

I have been much interested in the comments at recent

meetings of the Committee as to deterioration of lending and

investing standards in some areas of the financial structure.

There seems to be little doubt that some degree of deteriora

tion is occurring, principally because of pressure on

institutional lenders to find outlets for a large and perhaps

growing volume of savings funds.

The real estate area seems

to be the principal one in which a lowering of standards

facilitates speculative activities. There is little evidence

of any general lowering of standards in banking.

Our balance of payments position remains grave, with our

deficit running at an annual rate of more than $3 billion. In

April the deficit was about $270 million, and during the first

half of May it may have been close to $200 million. It is

still unusually hard to analyze the trade figures because of

the uncertain impact of the longshoremen's strike; but it is

clear that foreign short-term and long-term borrowing in our

financial markets continues on a large scale. Because of our

relatively cheap rates, there has been a remarkable expansion

in the volume of dollar acceptance financing of merchandise

shipments between foreign countries, which now amounts to $1.1

billion, or more than two-fifths of all dollar acceptances

outstanding.

On the exchanges, the dollar has been under increased

strain recently, in part because of some tightening of money

With

market conditions in several European countries.

inflationary tendencies rampant in several of these countries,

we can hardly count on declining interest rates abroad to help

in restraining or reversing capital outflows from the United

States.

5/28/63

-30-

For the time being the Treasury is out of the market,

insofar as new issues and refundings are concerned, so that

monetary policy need not be inhibited by "even keel"

considerations. Just how long this will last is problematical,

as the Treasury may wish to anticipate some of its July needs

during June. According to our calculations, they will not

actually need to obtain additional cash until toward the end

of June.

In view of the lack of progress in improving our balance

of payments situation and the evidence of renewed questioning

abroad of our policies and intentions, and against the back

ground of better domestic business prospects, I feel that the

Committee clearly made the right decision at the last meeting.

With respect to specific goals, it would be prudent to seek a

90-day Treasury bill rate of about 3 per cent, perhaps occasion

ally above and occasionally below, and a Federal funds rate

consistently, as it has been, at 3 per cent. The problem of

maintaining a firm bill rate may be rendered more difficult by

the current need to add reserves up to the time of the mid-June

float bulge, by the continuing demand for bills from nonbank

sources, and by the complex maneuvers to which the Treasury has

had to resort to cope with the debt ceiling problem. Under

these conditions, achievement of our goal with respect to the

bill rate may at times require lower free reserves, perhaps

around the $100 million level, with correspondingly increased

borrowings. On the other hand, a fuller realization in the

market of a shift of monetary policy may make for higher short

term rates without requiring much change in recent levels of

Free reserve levels may therefore be an

free reserves.

especially poor indicator of policy at the present time.

It seems to me that the time is fast approaching when a

clear signal will be appropriate in the form of an increase

in the discount rate, probably by 1/2 per cent.

Our directors

have felt for some time that the System should be doing more

I believe that

to defend the dollar's international position.

some further period of "paving the way" through open market

operations seems desirable; but it is perhaps not too soon to

be thinking of the best timing for this more definite step,

with due consideration of the timing of Treasury financing

plans--and always provided, of course, that underlying condi

tions remain substantially as they are.

As for the directive, I would like to see wording that

would accommodate the specific objectives I have already out

lined. This would probably call for only a minor change in

the present wording.

-31

5/28/63

Mr. Shuford reported that economic activity in the major

cities of the Eighth District had regained the ground lost in the

latter part of 1962.

Employment had recovered from the decline of

last fall and now stood about one per cent above a year ago;

the

industrial use of electric power had moved up after showing some

weakness in the last half of 1962; and department store sales moved

up in March and April to levels substantially above a year earlier.

Economic gains had been particularly marked in the St. Louis area,

probably attributable largely to the increase in defense and space

undertakings by one large firm in the area.

Turning to the national scene, Mr. Shuford commented that

apparently the quickening of business activity this year had been

quite similar to the quickening that occurred in the early part of

last year.

In both instances activity probably had been stimulated

in considerable measure by the steel situation.

In both instances

the quickening was preceded by a marked expansion of the money supply.

This year the industrial production index rose 3 points from Januar,

to April, about the same as last year.

Employment and durable goods

orders had risen more rapidly this year than in the like period of

1962.

On the other hand, personal income and retail sales suggested

less strength now than last year.

Price indices had been relatively

stable for quite a long period of time.

With regard to monetary policy considerations, Mr. Shuford

5/28/63

-32

said he was impressed by the continued worsening of the balance of

payments situation and of dollar relationships on an international

basis.

Consequently, he was inclined to feel that perhaps it was

time to begin thinking of some discount rate move.

He also was

inclined to feel that when the System made a policy move, perhaps it

should be somewhat more significant than the policy moves in the

recent past.

In his opinion the policy decision made at the May 7

Committee meeting to achieve a slightly greater degree of firmness

in the money market was a salutary one to the extent that short-term

rates had moved up moderately.

It might still be too early, he noted,

to appraise the full effect of that policy change.

For the present,

therefore, he would favor no change in existing policy.

If this should

be the decision of the Committee, certain technical changes in the

policy directive would seem necessary.

Mr. Bryan said that Sixth District statistics did not appear

to require detailed comment.

In brief, nonfarm employment was up,

manufacturing employment was up, unemployment was down, and most other

District statistics looked quite good.

For the longer run, the most

significant events now occurring in the District seemed to be those in

the sociological field.

Undoubtedly these events would have substantial

economic repercussions at some point.

Turning to policy considerations, Mr. Bryan recalled that he

had felt at the May 7 meeting that the Committee should adopt a

5/28/63

-33

moderately less easy policy.

That having been decided upon, he would

advocate no change in policy at the present.

He would not provide

for much more than seasonal adjustment in supplying reserves,

certainly not more than a 2 per cent annual growth rate in terms of

required reserves against private deposits.

Mr. Bopp reported that economic activity continued to be

fairly strong in the Third District.

Measurements of unemployment

were showing consistent improvement, above seasonal expectations.

Unemployment claims had reached low levels.

Continued claims in

Pennsylvania had dropped more than seasonally since mid-January, and

new claims had decreased more than seasonally since mid-April.

The

rise in seasonally adjusted unemployment rates that began late in

1962 had aborted, and declines had ensued.

The Philadelphia help

wanted index, which dropped steeply in 1962, had increased irregularly

all through the winter and early spring.

Output was holding up,

though there was as yet no evidence of strong gains except in steel.

Department store sales, however, were below year-ago levels.

There had been few significant developments in District banking

in recent weeks.

Bank credit at reporting banks declined in the first

half of May by the same amount as in the comparable period last year.

Time deposits continued to increase, while demand deposits fell.

seemed to be little, if any, pressure on the reserve positions of

District banks.

There

5/28/63

-34

The improved business climate, both nationally and in the

Third District, was encouraging, Mr. Bopp observed.

However, one

should not lose sight of the fact that the rate of unemployment was

likely to remain unsatisfactorily high in coming months even though

the economy moved ahead.

It was largely for this reason that he

would have preferred to see money and credit somewhat easier than

it had been very recently.

While he would not now advocate a return

to the Committee's earlier position, he did feel strongly that there

should not be a further move toward less ease.

It would be well at

this point, he believed, to pause and observe the effects of some

what higher rates and less ample reserves.

In the meantime, he would

like to see the flow of funds through the capital markets proceed

as smoothly as possible.

If necessary to avoid further congestion,

he would advocate substantial purchases of longer-term issues.

No

change in the discount rate seemed to him to be called for at this

time.

The policy directive should call for operations with a view to

maintaining, but not increasing, the slightly greater degree of money

market firmness that had been sought pursuant to the decision reached

by the Committee at the May 7 meeting.

Mr. Hickman noted that national business developments had

continued favorable in recent weeks, with both performance and outlook

sentiment strengthening further.

Recent gains in production had been

at a rate from one-half to two-thirds as large as those registered in

5/28/63

-35

the spring of 1961, a time of particularly vigorous upward thrust.

Most measures of manufacturing activity confirmed this recent

briskness, including new orders, order backlogs, payrolls, and

employment; even such a limping indicator as freight carloadings

had recently shown some signs of life.

Developments in the Fourth District confirmed the favorable

tone of business generally, Mr. Hickman said.

Since the preceding

Committee meeting, the insured unemployment rate had declined

further in all major labor market areas in the District, with the

most pronounced improvement in Toledo and in the steel-producing

centers.

At mid-May, insured unemployment in the District, after

seasonal adjustment, reached its lowest point in more than three

years, and for the first time in three years stood below the national

average.

New car sales continued at a strong pace in May, both in the

nation and the District, although down slightly from the contest

supported levels of April.

New car inventories declined in the first

20 days of May, partly because of the high sales rate and partly

because of work stoppages.

Auto production was now expected to

exceed 2 million in the second quarter, bringing total output for

the first half of the year to a near record of 4 million cars.

Estimates of production of domestic cars for the year were running

at a rate of 7.1 to 7.3 million.

5/28/63

-36

Steel production in May, after seasonal adjustment, was

estimated at an annual rate of 135 million tons, which could not be

maintained.

Analysts in the Fourth District currently were estimat

ing 1963 steel production between 105 and 108 million ingot tons.

The timing of the decline in output, after due allowance for seasonal

adjustments, would hinge upon the timing of the labor settlement,

which at the moment was still highly uncertain.

Raising of sights by forecasters was illustrated by recent

projections of a group of business economists representing 25 large

manufacturing and utility concerns mainly headquartered in the Fourth

District.

At a meeting at the Cleveland Reserve Bank on May 24, this

group's median forecast of the industrial production index showed a

maintenance of the present level expected for the third quarter of

this year, followed by rises in the final quarter and in the first two

quarters of next year.

The change in attitudes was indicated by the

fact that only 5 of the 25 participants foresaw any decline in general

business within the next six months, whereas at the previous meeting

last November as many as 17 expected a decline within the ensuing six

months.

In evaluating the financial scene, Mr. Hickman expressed

concern over the fact that risk assets held by commercial banks

continued to edge upward steadily.

At the end of April, the risk

asset ratio for all commercial banks stood 3 percentage points higher

5/28/63

-37

than a year earlier, and 4 percentage points higher than two years

earlier, thus providing further evidence of the vigorous competition

for less liquid types of assets and the steady surrender of liquidity

by banks to maintain earnings.

Moreover, within the "non-risk"

category, the liquidity of U. S. Government securities portfolios of

weekly reporting member banks continued to decline, with the propor

tion of Governments due to mature in less than one year down

appreciably from a year ago.

The balance of payments statistics showed no evidence of

improvement, Mr. Hickman noted.

The weakness of the dollar against

most major foreign currencies was too widespread to be explained by

purely technical factors.

It thus seemed to him that the Committee

should continue to press towards still greater firmness in money and

capital markets than had prevailed in recent weeks.

The System should

help to resolve market indecision, and its actions should confirm a

definite change in official policy toward less ease.

The portion of the current policy directive that referred to

Treasury financing should be deleted, and the directive--as amendedshould be interpreted, in Mr. Hickman's opinion, to mean that less

ease would be permitted in the next three weeks than during the past

three weeks.

If sufficient upward pressure were applied to the term

structure of interest rates, he felt that an increase in the discount

rate might appropriately be considered at the Committee's next meeting.

5/28/63

-38Mr. Mitchell presented the following statement:

Last week's probe, not too adroitly executed because of

the nature of things, was in my judgment a more serious gamble

with expectations and underlying trends in the economy than

appears on the surface.

It was intended as a move toward less ease accompanied by

a discernible upward movement in short rates.

In my judgment,

neither the domestic situation nor the balance of payments

justified it.

We have been asserting that our posture is aimed at keeping

U. S. short-term rates competitive; apart from temporary vagaries,

they have not been less competitive in recent weeks. And we have

very little, if any, evidence that a few basis points one way

or the other can induce international flows.

I could only rationalize this move by interpreting it as

being aimed at some other objective. One posture that has been

urged on the Committee is to make some overt sign that it is

If

willing to yield to "international monetary discipline."

this was the purpose of the recent action, it seems to me to

have been a serious mistake. We have evidence from reports of

discussions in OECD that our domestic monetary situation is not

well understood by those who are pushing hardest for a firming

In particular, what is not understood

of interest rates here.

is the effect on domestic expenditures of a move to tighten

monetary policy,

Another purpose of the recent shift in policy might be to

restrict the supply of long-term funds in order to make long

term interest rates more competitive with rates abroad. Here,

it seems to me, the argument is on very weak grounds. Long

term rates are now high by historical or analytical standards.

Despite the claim that the economy is overly liquid, long-term

yields are high by comparison with any period in this century ex

cept for a few unusual episodes such as 1920 and late 1959-early

1960. Long-term rates are far above levels historically asso

ciated with even moderately easy money. Furthermore, existing

and prospective flows--on both the demand and supply sidesare likely to be

exerting downward pressures on long-term rates,

or at most to balance out at a steady yield level. And market

expectations are attuned to such stability. In these conditions,

an effort by the System to boost long-term interest rates

against the market can be successful only at the risk of slowing

the expansion in domestic economic activity.

In this connection, I want to stress again that money

creation has been making only a small contribution to the financ

ing of expenditures,

For the most part, voluntary saving has

5/28/63

-39-

been flowing through financial institutions, including

commercial banks, and into credit markets.

In order to

reduce this supply of funds significantly, we would have

to halt monetary expansion completely at a time when it

has already been much slower than the growth of incomes

and output. Thus, if an increase in long rates was the

objective of the shift in policy, it involves a serious

gamble.

The only remaining possible justification for a move

toward less ease concerns the quality of credit .

Is it

appropriate to deal with the credit quality problem, to

the extent that it exists today, by restricting the supply

of credit through tighter monetary policy?

In seeking an answer to this question, we must recognize

that lenders have choices regarding the manner in which they

respond when the flow of funds at their command inreases

faster than the investment outlets visible to them. Lenders

may reduce the interest rates they pay; they may lower the

interest rates they charge to borrowers; they may liberalize

credit standards and terms other than interest rates; or they

may offer a combination of these responses. The point to be

emphasized is that the choices that lenders adopt among these

techniques of making their product more attractive to borrowers

ought not to be a major determinant of monetary policy.

If lenders ease credit standards as an alternative to

lowering interest charges, they choose in effect to increase

their risk exposure. Perhaps this is what has been happening

in mortgage markets. Despite the reported plethora of

mortgage funds, mortgage yields in the past year have declined

only 20 basis points for FHA's and perhaps 15 basis points for

conventionals.

This distinction between relaxing credit standards on the

one hand and interest costs on the other should be familiar to

all in the Federal Reserve. We frequently distinguish between

cost and availability of credit, recognizing that in some

credit markets availability may increase substantially with

little downward movement in interest rates. As this happens,

some terms of the credit contract are inevitably eased, for

lenders are pushing on the flexible margin between eligible

and ineligible borrowers.

When lenders push on this margin, they are narrowing the

spread between their interest earnings and the cost of lend

ing (unless the price paid for their funds also declines).

This narrowing in spread occurs whether lenders lower the

interest rates they charge or relax other credit terms,

thereby

5/28/63

-40

increasing risk exposure. An increase in risk exposure

constitutes a potential increase in cost, and lenders

may need to be reminded of this fact.

Lenders may choose either to reduce rates or to

liberalize credit standards in seeking marginal borrowers

for the additional credit that is being made available to

the economy. The main question for this Committee is

whether that volume of credit is appropriate. A decision

to restrict the supply of credit in order to eliminate

flows of funds into outlets that are enjoying easier credit

standards would undoubtedly affect expenditures and dis

courage economic expansion.

As long as output and employment remain well below full

utilization, as at present, there are no economic grounds

domestically for restricting the supply of funds. When and

if total demands need to be restrained, it will be appro

priate to restrict the supply of credit, regardless of the

choice lenders have been making between adjusting interest

rates and adjusting other terms of the credit bargain.

In further comments, Mr. Mitchell said there were certain

questions about current economic developments that he felt ought to

be resolved before the Committee made any overt move in the direction

of tightening monetary policy.

situation.

One of them related to the steel

Looking behind the figures, it was obvious that a factor

underlying the recent strength was the attempt to hoard inventories.

Certainly there was going to be a contraction of steel output in the

next three or four months, depending somewhat on how the question of

a strike was resolved.

In

a delicately balanced economy, developments

in this connection might have an important impact, and he believed

that more information should be available before any decision was made

to move in the direction of more monetary restraint.

Also, he believed

that the automobile industry might be in a somewhat exposed position

5/28/63

-41

after two years of output at quite a high level.

Further, there

was a lack of sufficient assurance of expansion of business plant and

equipment to feel that this was going to provide a boost to the economy.

For these reasons, he would favor trying to get back to the policy

posture that had prevailed prior to the May 7 meeting and staying in

such a posture until the domestic economic situation showed more signs

of continuing life.

Mr. King expressed the view that it was too early to make

further move toward a tightening of monetary policy.

any

It would take a

little time to observe the effects of the slight policy move made

three weeks ago.

Accordingly, he would recommend that System policy

remain approximately the same as during the past three weeks, and he

would restrict changes in the policy directive to technical corrections.

He would not favor a change in the discount rate at this time.

Mr. Shepardson mentioned that he had attended yesterday a

meeting of institutional lenders to agriculture during which a sub

stantial period of time was devoted to the question of the quality of

credit.

There were numerous comments by lenders

in various categories

about a deterioration that they believed they observed in the quality

of credit being extended by other types of lenders.

This deterioration

was said to take the form of higher loans on higher appraisals and

easier credit terms without too much appraisal of the borrowers.

In

short, there was reported to be evidence of widespread deterioration

in the quality of agricultural lending.

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5/28/63

As to monetary policy, Mr. Shepacdson expressed the view

that the shift in policy made at the May 7 meeting was appropriate.

He would favor a continuation of the slightly greater degree of money

market firmness called for by that policy decision.

It would seem

appropriate to make certain technical changes in the policy directive.

Mr. Mills commented that as he interpreted the information

presented in today's chart show, the gist of it was that the national

economy had improved but had not moved either upward or outward

impressively.

This raised a question as to the posture monetary and

credit policy ought to assume within the context of that kind of

situation.

The concluding statement in the staff discussion, as he

recalled it, was to the effect that possibly the Open Market Committee

should consider following a neutral policy, one that might give suf

ficient stimulus to the economy to encourage economic growth and at

the some time serve as a buffer against the balance of payments deficit.

A neutral policy, Mr. Mills observed, is essentially a passive policy,

and it did not seem to him prudent for the System--and the Committeeto take a passive attitude against the background of the present economic

situation, as compared with an active posture that would serve to

encourage a reasonable degree of credit expansion.

In Mr. Mills'

opinion, the Committee had allowed its thinking

to be progressively overshadowed by the balance of payments problem,

which in a sense was intractable of treatment by monetary policy.

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5/28/63

Illustrative of the folly of attempting to use monetary policy as

the sole weapon to attack the balance of payments problem were the

memoranda supplied to the Committee regarding the situation in the

United Kingdom.

As he recalled, it was indicated that if the balance

of payments situation became difficult, the United Kingdom would be

likely to move to bring up short- and long-term interest rates as a

defensive measure. This suggested that not only the United Kingdom

but other Western European countries could be expected to look to

their own interests first; and if dangerous situations required, to

meet the problem through the interest rate approach.

left to the United States would be to bring up its

The only recourse

own interest rates,

with the foreknowledge that they would never be allowed to be raised

to levels that foreign countries felt it was necessary for them to

adopt defensively.

But to him the worst difficulty stemming out of the policy

decided upon at the May 7 meeting, Mr. Mills said, was that cumulatively

and through lagged effects such a policy was going to involve a reduc

tion of credit availability at a time when reasonable credit availability

was needed to foster the economic growth and liveliness that the System

should have as a policy objective.

If this policy was continued and

strengthened, and resulted in a contraction of credit availability,

that would not exert a corrective influence on the trend among commercial

banks to be less careful in their extensions of credit.

Instead, as

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-44

credit became cumulatively tighter the banks would find loans

becoming substandard, for the reason that the businessman depends

on the support of credit not only for his own operations but through

the general economic and financial scheme of things.

If credit were

less available, that would exert an adverse influence on his position,

and consequently on the general structure of credit.

Pursuing that

line of reasoning, the Committee would do well to think seriously as

to whether a general tightening of credit was

policy.

the most appropriate

The Committee should consider whether that was the kind of

policy most conducive to maintaining a thriving U. S. economy, one

that would provide a general protection to the standards of world

economic activity.

He continued to believe that the economy of the

United States was the anchor to which all other economies were tied.

The System's first and last effort should be to use monetary policy

to encourage strength and activity at home.

Mr. Wayne reported that Fifth District business was apparently

still expanding, on balance, although the statistical evidence was

somewhat more mixed than three weeks ago.

Seasonally adjusted bank

debits hit a new high in April, and nonfarm employment also rose to

a record level, due largely to strong gains in trade and contract

construction.

seasonally.

Insured unemployment had continued to decline more than

The April increase in nonagricultural employment was

actually quite modest because the small net gain achieved by

5/28/63

-45

nonmanufacturing enterprises was partially offset by declines in

factory jobs.

Reductions

in factory man-hours were, in fact, rather

widespread in April and were particularly sharp in textiles, but in

most other cases the strong March gains were only partly offset.

In

the Reserve Bank's latest survey, manufacturers--including textile

producers--reported a distinct upward trend in new and unfilled orders

and shipments, but virtually no change in employment or hours.

respondents also indicated that retail

Survey

sale.; were still improving

slightly, and that construction activity remained strong.

In the country as a whole, Mr. Wayne continued, the improvement

in economic activity had continued long enough to indicate that it was

not an erratic short-term fluctuation.

the expansion were equally apparent;

Two other characteristics of

it was of moderate proportions,

and it had resulted to a significant extent from the build-up of steel

inventories.

In addition, inventory figures for the first quarter

showed a general and significant accumulation of inventories of non

durable goods.

Current statistics on the production and use of steel

suggested that the economy probably had already felt substantially all

of the upward impetus to be derived from the steel build-up, and that

at some point not far in the future the inevitable reversal in this

relationship would exert a downward pull.

Currently, the failure of

retail sales to maintain the encouraging gains of the first quarter

and the sluggishness of outlays for construction and producers' durable

5/28/63

-46

equipment did not inspire confidence that these areas would provide

the spark to keep the economy rising.

Mr. Wayne's conclusion was

that after three months of significant gains the economy faced

uncertainties in continuing the present rate of improvement.

In the policy area, Mr. Wayne pointed out that for nearly three

years the System had been moving by very small steps, such as the one

taken at the May 7 Committee meeting.

Except for such psychological

effect as they might have on attitudes abroad, he was skeptical of the

effects of such moves on this country's international position.

In

any event, it seemed to him that a position had been reached in which

any substantial further tightening would have to be accomplished by

a larger and more dramatic move; that is, an increase in the discount

rate.

The bill rate was now approaching the discount rate, and any

further substantial reduction of reserves through open market opera

tions could put the bill rate on top.

If the differential should be

significant and continue for more than a few days, it would almost

certainly be interpreted by the market as a forerunner of an increase

in the discount rate and would also cause unpredictable and probably

very disturbing effects on the market for Federal funds, which now

played an important role in

the money market.

He believed the System

should not assume the risks that would be involved in such a situation.

In the same way, an increase in the discount rate, by its very nature,

would be interpreted as a major change of policy toward tight money.

5/28/63

-47

He did not believe that the condition of the domestic economy either

required or could stand such a move at this time.

Mr. Wayne assumed that the degree of firmness in the market

at the end of last week was reached inadvertently; it seemed to him

that it was a little more tightness than the Committee desired in

framing the directive.

For the next three weeks, he would favor a

continuation of present policy, which he would interpret to mean about

the degree of firmness which prevailed on the average over the past

three weeks--which would be a little less than had prevailed in the

past few days.

that degree of

He would suggest amending the directive to specify

firmness.

He would strongly oppose raising the discount

rate at this time.

Mr. Clay advised that farm production prospects in the Tenth

District had deteriorated substantially in recent weeks.

Weather

conditions had been extremely unfavorable for both crop and pasture

production.

Precipitation throughout most of the winter wheat area

of the District was less than 25 per cent of normal in April, with

much of the area receiving no measurable precipitation during this

crucial month for the wheat crop, and conditions during the first half

of May showed little improvement in the worst drought areas.

Variable

showers last week provided the most beneficial precipitation received

in the southern High Plains area since last September.

This moisture

came too late to save much of the winter wheat crop, and more than half

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5/28/63

of the seeded acreage of wheat had been abandoned in southwestern

Kansas, southeastern and east-central Colorado, and the Oklahoma

Panhandle.

Supplies of irrigation water also were inadequate through

out most of Colorado and New Mexico.

While last week's moisture

would be most beneficial in helping pastures start growing, pasture

conditions were extremely poor in Colorado, western Kansas, the Oklahoma

Panhandle, and New Mexico.

Considerably more moisture would be needed

soon if pastures were to develop normally in this area.

In Nebraska

and Wyoming, pasture conditions were somewhat better than normal.

Meat animal prices continued to remain under pressure, with

both cattle and hog prices below year-earlier levels.

Unless weather

conditions improved substantially, a reduced volume of crop production,

combined with a lower level of meat animal prices, was likely to cause

a significant reduction in farm income in the region.

Tenth District nonfarm economic developments, as suggested by

employment trends, had differed from the national pattern.

The District

appeared somewhat stronger than the nation during the last half of 1962,

but it had shown little gain thus far in 1963.

The national sequence

was just the reverse of this pattern, with the early months of 1963

showing new evidence of expansion.

In the District, manufacturing

employment declined somewhat less than nationally during the last half

of 1962, but it had continued soft in early 1963.

As a consequence,

District manufacturing employment, seasonally adjusted, was down about

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5/28/63

2 per cent from last summer, while U. S. manufacturing employment

regained last summer's level in April.

At the meeting of the Kansas City Bank's Board of Directors

two weeks ago, Mr. Clay continued, the directors engaged in an extended

discussion of domestic business conditions and prospects, with particular

reference to price developments.

The discussion was initiated by the

position taken by one director at the executive committee meeting a

week earlier, arguing for the need for prompt credit restraint and

citing the rapid expansion of the economy and the developing threat of

price inflation as the basis for such action.

The most active partic

ipants in the discussion were six businessmen, including one visiting

branch director who was asked by the chairman for his views.

While

most of these men were involved in several business undertakings, their

principal businesses included electric power, petroleum, chemicals,

nonferous metals, natural gas, foods, and construction.

Most of the

businesses were large regional or national firms, and three were inter

national in scope.

The general view expressed was that most business

firms were unable to find enough customers at current prices and that

they were not in a position to make significant advances in prices.

Speaking both for their own firms and others with which they were

familiar, they contended that competition and below-capacity operations

simply would not permit much upward movement in prices.

It was

the

consensus of the group that, so far as domestic business activity was

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5/28/63

concerned, there was no need to place restraint on the national

economy but that restraint rather ought to be avoided.

Concern was

expressed over the upward push on costs from wage rate increases.

It

was indicated that these wage rate developments would put a squeeze on

business profits in the form of costs that could not be passed on under

present market conditions.

In the long run, however, it was thought

these cost increases would lead to higher prices.

Turning to monetary policy, Mr. Clay noted that the Committee

had decided upon a slight shift in policy at its last meeting.

While

all of the secondary effects of that policy change had not permeated

the financial structure, the basic action already had been largely

implemented by the Account Manager during the past two weeks.

The

importance of this shift in policy depended upon whether it was the

forerunner to further action now or shortly hereafter.

It was hard to

argue that this change by itself would prove a perceptible deterrent

to the national economy.

There also might be some question as to how

much effect it would have on the international flow of funds.

Recent domestic economic developments had been encouraging,

Mr. Clay added, but they were not such as to call for restraint.

Credit

tightening sufficient to affect international capital flows substantially

would seem to be of that order.

Without passing judgment as to appro

priate credit action at some later date, it appeared to him that no

further credit tightening should be underaken at this time.

Accordingly,

5/28/63

-51

the discount rate should be left unchanged.

The wording of the

directive should be changed so as to remove the reference to Treasury

financing and also so as to prevent cumulative credit tightening as a

result of the language adopted at the last meeting.

Operations in

longer maturities should be undertaken by the Manager as necessary to

facilitate attainment of the Committee's goal with respect to the short

term rate.

Mr. Scanlon reported that business and banking sentiment in the

Seventh District remained optimistic, although he heard of elements in

the picture that suggested caution.

As others had noted previously, steel output was likely to

decline fairly soon.

In the past few weeks the rate of new orders for

one local producer had been only half as great as in the previous two

or three months, when orders were "well in excess of capacity."

Retail

trade in April and May, in the District, had been somewhat below the

rate of the two previous months.

According to merchants, cold weather

had had an adverse effect on the sale of soft goods in recent weeks.

The rate of growth of time deposits at member banks in the

District appeared to have declined further in the first half of May

but was still at a high level.

The seasonally adjusted inflow rate

declined in April both for regular savings and individuals' holdings

of time certificates, while the withdrawal rate for regular savings

5/28/63

-52

deposits continued near the high March rate.

At savings and loan

associations there was a rise in withdrawals in March similar to

that noted for bank savings deposits and probably attributable to the

same causes, i.e.,

increased spending for durables and greater use of

past savings for payment of income and real estate taxes.

There had

been a renewed rise in time certificates of deposit issued to corpora

tions in recent weeks.

Deliveries of domestically-produced cars to U. S. customers

continued high.

Output of 1963 models was now about set at 7,250,000-

a new record exceeding the previous high of 7,130,000 in the 1955 model

year.

August.

Reportedly, there would be about 90,000 1963 models produced in

Then, following the changeover shut down, it was expected that

about 100,000 1964 models will be produced during the remainder of the

month.

Total bank credit declined relatively more in the first two

weeks of May in the District than in the nation.

ments were reduced.

Both loans and invest

The loan decline was traceable largely to repayments

by finance companies and security dealers.

However, business loans did

not rise in this period as in most other recent years, notwithstanding

the rise of steel inventories.

As to policy, Mr. Scanlon recalled having felt three weeks ago

that if the Committee were to change policy, as the directive indicated,

to "putting increased emphasis on money market conditions that would

5/28/63

-53

contribute to an improvement in the capital account of the U. S.

balance of payments," the change should be more than a "probing"

action.

It should be a clear signal, obvious to everybody.

For this

and other reasons, he would have preferred to wait for somewhat clearer

evidence of the strength of current expansionary forces.

However,

inasmuch as a slight shift in policy had been made, he would favor

maintaining the current posture for the present and observing its

effects during the next three-week period.

discount rate just yet.

He would not change the

He would change the directive to the extent

of making technical corrections and providing against a cumulatively

greater money market firmness.

Mr. Swan, in summarizing developments in the Twelfth District,

noted that the primary metal industries were doing quite well and that

even in the lumber industry there had been a slightly improved relation

ship between orders, production, and inventories in early May.

However,

the unemployment rate in the Pacific Coast States increased sharply in

April to a 15-month high on a seasonally adjusted basis, apparently

largely because of adverse weather, which affected employment in

agriculture, construction, and lumber, and because of some further

reduction of employment in defense industries.

One major labor market

area (San Jose) had been reclassified from the category of moderate to

substantial unemployment, making a total of five major areas in the

District so classified.

Department store sales in the District declined

5/28/63

-54

in April but improved somewhat in the first half of May.

In late

April and early May, the possibility of a strike at a major aircraft

firm in the Seattle area was reflected in a substantial cut-back in

consumer spending until the strike threat disappeared.

Weather in

the District in April and early May was marked by excessive rainfall,

which had affected fruit crop prospects adversely.

As to District banking developments, Mr. Swan noted that while

the large banks continued to be net sellers of Federal funds, borrowing

from the Federal Reserve Bank had increased, especially in the weeks

ended May 15 and May 22.

There had been considerable discussion

recently of the possibility of a reduction in rates paid by savings and

loan associations for savings funds.

The largest savings and loan

institution in Arizona had announced a reduced dividend rate on share

accounts effective the middle of this year.

Mr. Swan expressed the view that the business situation did not

justify any further tightening of monetary policy at this point and

that System policy should continue in its present posture.

Since

policy shift had been decided upon at the May 7 meeting, he would not

advocate going back to greater ease at this time.

However, he questioned

whether the degree of firmness achieved in the past two weeks was fully

intended within the scope of the policy decision three weeks ago.

He

had understood the emphasis at that time to be on "slightly" less ease.

The situation since May 15 left the impression that the word "slightly"

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-55

had been stretched quite far, although he gathered this was partly

inadvertent.

In summary, it would be his

feeling that the Committee

should continue the policy it had instituted at the May 7 meeting,

which in his view would call for slightly more ease than had obtained

in the past ten days.

He would not favor changing the discount rate

at this time, and he felt the directive should be so worded as to avoid

the possibility of cumulative tightening.

Mr. Irons noted a gradual strengthening in most of the areas of

business activity in the Eleventh District.

The industrial production

index was up a couple of points in April and probably another point in

May, with fairly broad participation in the increase.

The petroleum

situation had been a little stronger in May, and construction activity

continued strong.

Employment continued to rise, and unemployment stood

at about 4.5 per cent of the labor force.

Retail trade figures were

well above year-ago levels.

The over-all position of District banks was not tight; in

general, the banks apparently were able

requirements.

to meet any foreseeable loan

Both demand and time deposits had risen during the past

three weeks.

Mr. Irons expressed satisfaction with the operations of the

Desk during the past three weeks, stating that he thought the Desk had

done what was called for by the Committee's May 7 action, namely, to

achieve a slightly greater degree of firmness in the money market.

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5/28/63

There seemed to have been no lack of availability of reserves,

although member bank borrowings had increased somewhat.

At the same

time, he felt that the movements of the past three weeks were bringing

the Committee quite close to the point of major decision, and he was

not sure that he was ready for such a decision at this time.

In other

words, there had been a slightly greater degree of firmness, of which

he approved, but if this were made cumulative the Committee soon would

be at a point where it would almost have to make a decision to move on

the discount rate and shift to a policy of real firmness, in contrast

to a moderate degree of firmness.

He would not be prepared to raise the

discount rate today, and therefore would favor continuing the level of

firmness reached during the past two weeks rather than to proceed in a

cumulative manner.

As a target, Mr. Irons suggested that the short-term rate be at

about 3 per cent.

Free reserves, though not a reliable measure under

present conditions, might be somewhere in the area of $150-$200 million.

Federal funds should be at 3 per cent and at times not adequately avail

able, thus giving rise to some member bank borrowing.

On that basis, he

would want to observe developments for at least a further three-week

period.

Mr. Ellis noted that the New England economy was falling short

of the pickup of business activity evident in the national figures.

While consumer spending was higher than a year ago--as evidenced by

5/28/63

-57

activity in auto show rooms, department stores, and resort areas-

and business investment was increasing, the increases were not occur

ring at the national rate.

The level of residential construction was

above a year ago, but again the increase had not been as significant

as the improvement nationally.

on a par with a year earlier.

Manufacturing output was just about

Initial claims for unemployment

compensation were about equal to those of a year ago, while the

unemployment rate stood at approximately year-ago levels.

There had

been an increase in loan demand at District banks since the March tax

date and business loans had risen better than seasonally, especially

since the past few weeks.

Savings growth slowed down in April, but

seemed to have quickened since that time.

Mr. Ellis indicated that he would continue to regard the

present posture of System policy as one of ease.

As he understood

the decision at the May 7 meeting, the Committee was experimenting

with a slightly lesser degree of ease.

He had not viewed the shift

of policy as a decision to undertake an uninterrupted and progressive

tightening, and he would not expect another 7 basis-point rise in the

bill rate during the forthcoming two weeks or on a cumulative basis

thereafter.

Instead, he saw this as a time for the Committee to be

consolidating its position, allowing the market to obtain an under

standing that the System was not engaged in a full-fledged continuing

move toward a restrictive monetary policy.

It was too early, in his

5/28/63

-58

opinion, to start considering discount rate action.

For the forth

coming three weeks, he agreed with the targets expressed by Mr. Irons.

As to the directive, he would suggest language indicative of no further

shift of policy at present.

Mr. Balderston said that the comments of Messrs. Irons and

Ellis as to monetary policy reflected his own point of view.

He would

favor continuing open market operations along the same lines as con

ducted by the Desk during the past three weeks.

In composing the policy

directive, he hoped that the Committee could avoid expressions signifying

a tightening of monetary policy at this time.

As he looked at the

increase in the money supply during the past year and the way in which

reserves had mounted, it seemed to him that System policy continued to

be one of ease, although somewhat less ease.

Mr. Balderston then referred to the series of observations at

the May 7 meeting concerning the quality of lending and said he hoped

the Reserve Bank Presidents would explore this question more fully.

While he was not sure that a great deal of help could come from review

ing reports of examination of member banks, this was one source that

could be used.

In addition, he hoped the Presidents would ask the

Reserve Bank directors what evidences they found in their business

activities of deterioration in lending standards.

probably was one area to examine closely.

Real estate lending

He suspected that lending

5/28/63

-59

standards were being reduced more by savings and loan associations

and others than by commercial banks.

In any case, however, it was

important for the Committee and the System as a whole to know what

was going on rather than to be surprised at a later date.

Chairman Martin noted that sometimes there tended to be comments

at Committee meetings that sounded as though the economy was going to be

made or broken by shifts of, say, $50 or $100 million in free reserves.

This, of course, was not the case.

At the same time, as he had stressed

at the May 7 meeting, he felt that the posture of the Federal Reserve

System was very important at this juncture.

On the whole, and through

the years, he believed that the posture of the System had been quite

sound.

He believed, also, that the policy developed recently was good,

provided it did not get ahead of itself.

The Committee was dealing with

short periods of time in its policy discussions, he pointed out, since

it met every three weeks.

The Chairman went on to say that two matters seemed to him of

paramount importance at the moment.

First, there was the problem of

the Treasury in relation to the debt ceiling.

The impact of this

situation on the money market should not be overlooked.

The problem

was important from the standpoint of monetary policy as well as debt

management.

Second, Chairman Martin referred to developments in the

foreign exchange market as critical.

It might be months or years

before the situation reached the point of serious trouble

ments seemed to him to be moving in that direction.

but develop

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In view of the problems to which he had referred, the

Chairman expressed the view that this would be an unfortunate time

for the Federal Reserve System to be making relatively unimportant

moves in the money market.

At the same time, the posture developed

by the Federal Reserve was highly important.

Continuing, the Chairman noted that at last week's meeting

of the Federal Advisory Council with the Board of Governors the President

of the Council had pointed out that in a situation of slightly less

easy credit some forms of credit, such as for hotel speculation, might

be deferred in favor of more sound loans.

Shortly after that meeting,

he (Chairman Martin) had heard of a specific instance where a large

real estate transaction was deferred because the bank concerned had

found a more constructive outlet for its funds.

While this coincidental

occurrence should not be overemphasized, he thought it was interesting.

The availability of credit, the Chairman added, inevitably has some

bearing on the quality of credit.

It is virtually impossible, likewise,

to separate completely the cost of credit and its availability.

Similarly,

despite Federal Reserve actions, interest rates must be viewed against

the

shifting background of the economy as a whole.

Generally speaking,

when the economy moves downward, rates move down and vice versa.

When

the economy is on a plateau, rates tend to be stationary.

Chairman Martin expressed the view that current Federal Reserve

policy was appropriate and said he would favor a continuation of the

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status quo.

He hoped that was the posture the System would assume

at this time.

It was then suggested that a vote be taken on no change of

policy during the forthcoming three weeks to determine whether that

was the consensus of the Committee, and language for a revised second

paragraph of the current economic policy directive that would reflect

such a decision by the Committee was suggested.

Thereupon, upon motion duly made

and seconded, the Federal Reserve Bank

of New York was authorized and directed,

until otherwise directed by the Committee,

to execute transactions in the System

Open Market Account in accordance with

the following current economic policy

directive:

It is the Committee's current policy to accommodate

moderate growth in bank credit, while putting increased

emphasis on money market conditions that would contribute

to an improvement in the capital account of the U. S. balance

of payments. This policy takes into consideration the

continuing adverse balance of payments position and its

cumulative effects and the improved domestic business outlook,

as well as the increases in bank credit, money supply, and

the reserve base in recent months. At the same time, however,

it recognizes the continuing underutilization of resources.

To implement this policy, System open market operations

shall be conducted with a view to continuing the degree of

firmness in the money market that has prevailed recently,

while accommodating moderate reserve expansion.

Votes for this action:

Messrs.

Martin, Hayes, Balderston, Bopp, Clay,

Irons, King, Mills, Scanlon, and

Shepardson. Vote against this action:

Mr. Mitchell.

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In a comment made with respect to his vote, Mr.

Mills brought

out that his views were not in agreement with the shift in policy

that had been decided upon at the May 7 Committee meeting.

However,

he voted in favor of the policy directive approved at this meeting

because he felt that a shifting of policy back and forth at this

time would be more harmful than helpful.

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

Committee would be held on Tuesday, June 18, 1963.

The meeting then adjourned.

Secretary