FOMC Minutes
A meeting of the Federal Open Market Committee was held in
offices
the
of the Board of Governors of the Federal Reserve System in
Washington on Tuesday,
PRESENT:
July 30,
1963
at 9:30 a.m.
Mr.
Mr.
Mr.
Martin, Chairman
Hayes, Vice Chairman
Balderston
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Bopp
Irons
Mills
Mitchell
Robertson
Scanlon
Mr. Shepardson
Messrs. Hickman, Wayne, and Shuford, Alternate Members
of the Federal Open Market Committee
Messrs. Ellis, Bryan, and Deming, Presidents of the
Federal Reserve Banks of Boston, Atlanta, and
Minneapolis, respectively
Mr.
Mr.
Mr.
Mr.
Young, Secretary
Kenyon, Assistant Secretary
Hackley, General Counsel
Noyes, Economist
Messrs. Baughman, Brill, Eastburn, Garvy, Green,
Holland, 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
Statistics, Board of Governors
Mr. Hersey, Adviser, Division of International
Finance, Board of Governors
Mr. Yager, Chief, Government Finance Section,
Division of Research and Statistics, Board
of Governors
Miss Quick, Secretary, Office of the Secretary,
Board of Governors
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Messrs. Patterson and Hemmings, First Vice
Presidents of the Federal Reserve Banks
of Atlanta and San Francisco, respectively
Messrs. Mann, Ratchford, Jones, Parsons, and
Grove, Vice Presidents of the Federal Reserve Banks of Cleveland, Richmond, St.
Louis, Minneapolis, and San Francisco,
respectively
Mr. Eisenmenger, Director of Research, Federal
Reserve Bank of Boston
Messrs. Cooper and Meek, Managers of the Securities Department, Federal Reserve Bank of New
York
Upon motion duly made and seconded,
and by unanimous vote, the minutes of the
meetings of the Federal Open Market Com-
mittee held on June 18 and July 9, 1963,
were approved.
Before this meeting there had been distributed to the Committee
a report from the Special Manager of the System Open Market Account on
foreign exchange market conditions and on Open Market Account and
Treasury operations in foreign currencies for the period July 9 through
July 24, 1963,
together with a supplementary report covering the period
July 25 through July 29, 1963.
Copies of these reports have been placed
in the files of the Committee.
In comments supplementing the written reports, Mr. Coombs
reviewed current and prospective developments with respect to the U. S.
gold stock and summarized developments in the London gold market.
He
went on to say that judgment ahroad as to the proposed "interest equali-
zation" tax on U. S. purchases of long-term foreign securities was still
hanging in the balance.
On the one hand there was some feeling that the
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tax, by imposing a freeze on American purchases of foreign securities-new issues as well as outstanding--should have a strengthening effect
on U. S. dollar rates.
On the other hand there was a rather widespread
feeling that the tax could be circumvented through bank term lending
and that a system of direct controls might eventuate.
Mr. Coombs noted that in
connection with the President's balance
of payments message on July 18, efforts had been made by foreign central
banks,
in conjunction with the efforts of the Federal Reserve and the
Treasury,
ment.
to keep up dollar rates, and if
possible to show some improve-
These efforts had contrived to keep dollar rates fairly steady
except in the case of the Swiss franc.
If the dollar went to the floor
against the Swiss franc, that might have been regarded as a sign of no
confidence.
Therefore, as spelled out in the written reports a variety
of measures were taken to try to hold up the
dollar against the Swiss
franc, but market pressures were strong enough to force a gradual decline in the dollar rate.
In addition, a $5
million drawing under
the System's swap facility with the Swiss National Bank was proposed
yesterday.
owever, the National Bank had suggested holding off for a
day or two, with the thought that the demand for Swiss francs might
ease after the end of the month.
There were indications of some
speculative content in the buying of francs, but continued tight money
market conditions
in
Zurich might offer a more important explanation.
The situation was similar in most of the other major financial centers
7/30/63
on the
-4Continent.
There had been no further deliberate tightening of
these markets, except in Belgium following the discount rate increase
in
that country, but for several months there had been a gradual
tightening up in
be seen.
It
these markets and the effects were now beginning to
probably would not be possible to get the maximum bene-
fits from short-term rate increases in this country unless the Continental
central banks found it possible to inject additional liquidity
into their money markets.
Last week, Mr.
Coombs painted out,
the Swiss took a step in
that direction by releasing 150 million Swiss francs from blocked
commercial bank balances, and there was hope that the Swiss authorities
might release more.
the money market,
In Amsterdam there had been some recent easing
of
possibly assisted by central bank action, with
improvement in the dollar rate.
In Germany,
were no signs of any important easing.
France,
and Italy there
The German authorities, however,
were cognizant of the problem faced by this country in
trying to improve
its position in terms of interest rate differentials, and the German
Federal Bank might make some concessions in
the way of easing.
If it
were possible to obtain some easing in the Continental money centers,
this should have the effect of relieving some of the upward pressure
on Euro-dollar rates and narrowing the spread between short-term rates
in New York and Euro-dollar quotations.
However, if the interest
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equalization tax should curtail the flow of money to Europe and Japan,
there might be a shifting of the demand for medium and long-term money
into the short-term market.
Mr. Coombs noted a slight increase in the British bill rate
and a narrowing of the discount on forward sterling.
As to Canada,
the major gyrations occasioned by announcement of the proposed interest
equalization tax had changed into a situation where latest reports
suggested that the Canadian bill rate might be settling at a level
around the U. S. bill rate.
In reply to a question with regard to the rationale of System
and Treasury operations related to the Swiss franc, Mr. Coombs commented
that the hope was to see some easing of the Swiss money market.
This
could be brought about if the Swiss commercial banks repatriated funds,
but this would result in dollar accumulations by the Swiss National
Bank.
the Swiss National Bank should add further to the liquidity
If
of the market, that would be the preferable
solution.
The officials
of the National Bank realized this problem and wanted to be helpful,
but they were concerned, of course, about the risk of easing too much
and inciting inflationary pressures.
There followed comments by Mr. Coombs in response to questions
with regard to the prospective effect of the interest equalization tax
on Japan.
Mr. Coombs also commented on the prospective effects of the
proposed tax generally and summarized by expressing the view that it
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might add up to a virtual freeze on American investments in foreign
securities for some time to come.
The impact had already been severe
in certain instances.
Mr. Hayes said the New York Reserve Bank had been told by a
number of New York bankers that applications for foreign term loans
were tending
to burgeon.
The bankers appeared somewhat puzzled as
to what their approach should be.
taken at face value,
If official pronouncements were
bank loans were specifically exempted; Admini-
stration spokesmen had indicated that bank loans should be covered
by general monetary policy.
Mr. Hayes said he had been referring
such inquiries to the Treasury.
Mr. Coombs added that for the past couple of years persons
had been coming into the New York Reserve Bank and inquiring, apparently
out of a sense of real concern, whether they should hold back on
foreign lending.
Until the announcement of the present balance of
payments measures, the standard line of the Government had been that
there was no policy of restraint.
However, now that the Government
had takea a stand, a backing away might be seen in view of the clear-
cut Government attitude.
After further discussion, Chairman Martin expressed the view
that inquiries of the kind mentioned by Messrs. Hayes and Coombs should
he referred to the Treasury.
System spokesmen should not take it upon
themselves to define Government policy in this area.
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Thereupon, upon motion duly made and
seconded, and by unanimous vote, the System
Open Market Account transactions in foreign
currencies during the pericd July 9-29, 1963,
were approved, ratified, and confirmed.
Mr. Coombs noted that a $25 million drawing under the swap
arrangement with the German Federal Bank would mature August 20, 1963,
and that another $25 million drawing would mature August 26.
He
recommended renewal in each case.
The proposed renewals, as recommended by
Mr. Coombs, were noted without objection.
Mr. Coombs added, in this connection, that before the second
maturity dates were reached consideration should be given to how the
drawings might be unwound.
It was possible that the German Federal
Bank would accept an issue of medium-term Treasury bonds denominated
in German marks.
Unless in the meantime there was some shift in
favor of the dollar against the mark, it might be worthwhile to consider such a procedure.
This concluded the discussion of System foreign currency operations and related matters.
Before this meeting there had been distributed to the members
of the Committee a report covering open market operations in U. S.
Government securities and bankers' acceptances for the period July 9
through July 24, 1963, and a supplementary report covering the period
July 25 through July 29, 1963.
Copies of these reports have been
placed in the files of the Committee.
7/30/63
-8 In supplementation of the written reports, Mr. Stone commented
as follows:
In the ten days or so preceding the last meeting of the
Committee we had a classic case of the powerful role played
by short- term expectations in shaping day-to-day market
behavior. Largely in anticipation of a discount rate rise,
which had been widely discussed in the financial press and
broadly hinted at in official statements, Treasury bill rates
had risen by close to 1/4 percentage point and bond yields
had also moved higher.
In the past three weeks, on the other
hand, duing which the widely expected discount rate rise
actually occurred, the market has been subjected to a combination of influences that tended to restrain any further rise in
yields and in some sectors has pulled yields lower than they
were before the discount rate increase took effect.
In the case of Treasury bills, rates are only slightly
above where they were three weeks ago, and are somewhat below
the level touched the day after the discount rate increase
was announced. There seem to have been two major, and related
reasons for the recent performance of the bill market. First,
dealers had undertaken to reduce their positions to a very low
level during the period that a discoun t rate increase was
widely expected. On July 15, for example (just a day before
the rate increase was announced), 7 out of the 20 dealers
showed, in their trading accounts, short positions ranging
up to $50 million in bills up to three months; three other
dealers showed a net position of zero; and six others showed
long positions of less than $20 million. At the same time
that dealers were trimming their holdings to these low levels,
investors were withholding commitments waiting for the air to
clear. The air cleared with the announcement of the discount
rate change on July 16,
effective July 17, and the accumulated
funds that had been held off the market came rushing in to
capture the bill
rates that emerged immediately following the
That demand encountered the kind of
discount rate change.
dealer positions I have just outlined--and of course the
rate went down.
The second major factor in the bill market, and one that
reinforced the influence of the first, was the very easy condition of the central money market, which became particularly
conspicuous toward the close of the country bank settlement
period ended July 24. In turn, that easy money market was a
product of the heavy borrowings in the early
part of the week,
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and particularly the sharp reduction in the basic reserve
deficiency of the major New York City banks. Indeed, their
basic deficiency declined from an average of $862 million
two weeks ago to only $81 million last week--and their
demand for Federal funds declined accordingly.
These factors that have tended to pull bill rates lower
would seem to be largely temporary, but it is not possible
to say how long it will take to cvercome their influence.
It might take only a few days--with yesterday's moderate
rise in bill
rates perhaps the first
step in a move to a
somewhat higher range of variation.
Or the other hand, it
might take considerably longer, perhaps as long as a month,
for the recent influences to be worked out.
Apart from whatever decision on policy the Committee may
make today, it seems to me that there are three factors likely
to be of major importance in determining whether bill rates
carry through yesterday's rise and move into somewhat higher
ground:
1.
A further firming of the money market--which will
depend largely on whether the New York banks return to their
usual sizable basic deficit position, and thus once again be
major bidders for Federal funds. As a firming of the money
market occurs, it should increase dealers' financing costs
and perhaps induce some commercial bank selling of bills.
2.
The second factor is the course of nonbank demand
for bills.
Some abatement of this demand might come about
either because more attractive investment alternatives are
available (for example, in certificates of deposit at the
new rate levels) or because of some working down of corporate liquidity, particularly in the automobile industry in
However, it is very hard to estimate
the next month or so.
how nonbank demand for bills will develop.
3.
The third factor is a Treasury offering of a strip
of bills. We understand that the Treasury is prepared to
offer a strip of about $800 million of Treasury bills at
any time with a view to bolstering the short rate structure.
This is a useful backstop to current efforts to stiffen
short rates, but if possible it might be preferable to
wait until dealer positions have been restored somewhat,
in order to achieve maximum rate impact from the strip
offering. Indeed, there is no assurance that a bill
strip offering will succeed in raising rates more than
very temporarily if the money market does not firm or if
nonbank demand for bills should be strong.
7/30/63
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If the recent period has taught us nothing else, it has
demonstrated beyond question that the inter-relationships
among bill rates, Federal funds rates, dealer positions and
attitudes, and reserve management of various groups of banks
are highly complex. The money market has been feeling its
way along in a somewhat changed environment, and in conducting
open market operations we too have had to feel our own way
along through the same set of changing relationships.
It
appears that in the current statement week some measure of
firmness in the money market has been regained. In meeting
this week's reserve needs we have sought to stay a step or
two behind the reflection of those needs in the market in
order to avoid pushing the market off the delicate balance
in which it is poised and sending it back toward the excessively easy conditions that prevailed recently. But the
basic reserve position of the New York banks has remained
unusually comfortable, and dealer positions have remained
unusually light--and until these parts of the picture are
back in their normal places it is rather difficult to have
much confidence in the maintenance of a firm money market.
The performance of the Treasury note and bond market
since the discount rate increase has also been somewhat out
of the ordinary--in that prices of notes and bonds have
tended to move higher. In this case, the market has given
a good deal of attention to the various statements by
Administration officials to the general effect that
vigorous efforts would be made by the nation's financial
authorities to avoid higher domestic long-term interest
rates. While there has apparently beer only moderate
investor buying of intermediate and longer issues, dealers
have made considerable efforts to cover short positions
and have put prices up in the process. Another upward
price influence during the recent period emerged from the
fact that the Treasury confined its August refunding maturity
to a single short-term issue--offering a new 3-3/4 per cent
note to mature in November 1964. The subscription books
are still open on this exchange offering today and tomorrow,
and all reports indicate a smooth and successful operation.
Indeed, with public holdings of rights amounting to only
$2.5 billion, the operation appears to be generating only
a moderate volume of market activity.
Still another strengthening influence on the bond market
has been the prospective reinvestment demand from a $197
million advance refunding planned for today by the Grant
County Public Utility District of Washington. The District,
which has built the Wanapum Dam, plans to offer these
7/30/63
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tax-exempt bonds today in order to refund an issue that is
callable in 1970. In the meantime, they propose to invest
the proceeds of the current offering in Treasury bonds,
mainly the 4's of August 1970--which will more than cover
the prospective interest cost of their new issue--and this
has already been placing some upward pressure on that and
surrounding issues.
Given these various upward price influences in the market for notes and bonds, the System's job of providing reserves for next week is further complicated, for recent
offerings of coupon issues to the Desk generally have been
few in number, small in size, and typically priced to the
full offered side of the market--providing little opportunity
to inject reserves through purchases in this maturity area
without pushing prices to unsustainable levels.
I would like to add, with respect to the current Treasury
offering, that the System holds $4,075 million of maturing
rights and we plan to exchange this entire holding for the
new 3-3/4 per cent notes.
Finally, it seems to me that the temporary reasons for
which the Committee enlarged the System Account's leeway
for net purchases and sales between meetings to $1.5 billion
have now passed. Accordingly, the Counittee may wish to
return the leeway to the old figure of $1 billion.
In discussion, Mr. Mills notes that the Manager had indicated
some lack of confidence in the maintenance of a strong rate structure
in the short-term Government securities market.
However, with Federal
funds trading at 3-1/2 per cent and the rate to Government securities
dealers by New York City banks running as high as 3-3/4 per cent, presumably the dealers had an unfavorable carry on their inventories.
Presumably, also, banks that adjusted their positions through the
Federal funds market would find the cost excessive to attempt to
continue their positions in lower-yielding Government securities.
Granted the need for bringing market rates into alignment with the
7/30/63
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discount rate, he asked the Manager how much offsetting influence the
latter estimated from the dealers' unsatisfactory carrying position and
the Federal funds rate.
Mr. Stone replied that if the Federal funds rate could be maintained rather consistently at 3-1/2 per cent, that would exert an upward
pull on all short-term rates.. The question was whether a 3-1/2 per cent
Federal funds rate could be maintained at a time when the basic reserve
positions of the New York City banks were as comfortable as they were,
and dealer positions as low as they were.
If dealer positions should
rise, a significant part of the increase in such positions would be
financed at the New York City banks, which would increase the demand
for Federal funds.
In effect, New York City banks would be drawing
funds from around the country at 3-1/2 per cent and lending to dealers
at 3-3/4 or 3-7/8 per cent.
Before this process could take place, how-
ever, the New York City banks must have a strong incentive to obtain
funds.
Until that occurred, he found it difficult to have confidence
in the maintenance of the Federal funds rate at the discount rate.
Mr. Hickman observed that this reasoning did not take accourt
of the possibility of the Committee allowing net free reserves to fall
to zero or lower, which would cause the banks at some point to divest
bills.
7/30/63
-13Mr. Stone replied that he had not wanted to anticipate what
action the Committee might take today.
Instead, he had attempted to
spell out some of the factors for the Committee's evaluation.
Mr.
Deming asked whether, if the Treasury decided to under-
take a monthly auction of one-year bills, the Manager would foresee
any serious problem from the standpoint of freedom of System policy.
Mr. Stone replied that after the first three or four monthly
auctions, such auctions probably would become about as routine as
the current weekly auctions of shorter bills.
He anticipated that
the market would acquire the one-year bills in the auctions and
distribute them quite promptly--within three or four days--and that
the monthly auctions would impose little or no restraint on System
policy.
Thereupon, upon motion duly made and
seconded, and by unanimous vote, the open
market transactions in Government securities and bankers' acceptances during the
period July 9 through July 29, 1963, were
approved, ratified,
and confirmed.
The Chairman then called for the usual staff economic and
financial reports beginning with Mr. Noyes,
who presented the follow-
ing statement on economic developments:
As was reported during the period, the economy advanced
considerably in the second quarter--and, as was also repeatedly
pointed out, some of the gain was at the expense of subsequent
activity.
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The most spectacular increase was in industrial production, which spurted from 121 in March to 125 in June.
Total GNP was up an estimated $7.2 billion annual rate,
with inventory accumulation contributing less than it had
in the preceding quarter. Thus, final purchases increased
more--about $9 billion. But less than $1 billion of this
gain was in consumer purchases of goods, and the relatively
weak performance of retail sales which again was noted as
the quarter progressed, muted the optimism that the overall performance might have seemed to justify.
We are now just in the middle of the so-called summer
doldrums, and current indications are for considerably less
expansion in the production index and GNP in the current
quarter than in the one just past. The rate of unemployment,
to be released later this week, will probably be unchanged
from June to July. The greatest likelihood is that the
July production index will hold at 125 rather than rise or
fall. As was widely noted, new orders dropped in June, not
only for steel, where a sharp drop was anticipated, but for
Housing starts in June were
a wide range of durable goods.
also off from the unexpectedly high levels of the late
spring, suggesting that we may see some leveling out in the
spurt in construction activity that has been going on in
recent months.
On the other hand, retail sales, especially at department stores, have shown signs of picking up. In fact, even
the auto market seems to have regained momentum in the first
20 days of July. Characterizing the situation, as one Washington letter did, as a "near buying spree" is too strong,
but there is some very welcome improvement.
The 4/10 of 1 per cent increase in consumer prices in
June was rather sharp for that sluggish index, but the increase was selective and not of a sort that appears to be
con agious. Wholesale commodity prices remained little
changed.
By and large, developments in the domestic economy have
not varied much from the anticipated pattern. Some weakening,
at least in the pace of advance, was almost inevitable after
mid-year, and what we have seen thus far is well within the
range that should have been expected.
The current attitudes and expectations of the business
community appear to be mixed. Certainly, the President's
balance of payments message did not bolster confidence in
the dollar as much as one might have hoped. Second quarter
profits ranged from good to terrific--but they have not
excited buying interest in the stock market. Demonstrations
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for civil rights have unquestionably aided to business uncertainty in some areas, as has the situation in the railroad
industry.
It is very doubtful that sentiment as to the future will
crystallize in the weeks immediately ahead. Some further sideways movement, with mixed components, is generally expected and
very likely to be realized. Beyond that, as we move through
September, observers differ as to what is most likely, but
they would all agree that some further strength in consumer
buying is essential if we are to avoid serious doubts as to
the sustainability of recent rates of expansion, much less
the possibility of further increases.
As I suggested six weeks ago, from a purely domestic
point of view, this summer would be a good time--quite apart
from any significant change in policy--to let some of the
ease stemming from moderation of expansionary forces and
itself
less optimistic appraisals of the outlook reflect
in credit markets. Whether this is possible, in the light
of our balance of payments problem, is another question.
Mr. Holland presented the following statement on financial developments:
The financial system is undergoing a progressive adjustment to the variety of official actions and statements that
have been packed into the past two weeks. Here in the United
States, the adjustments in most cases appear mild to date-partly because of anticipatory market movements earlier. In
the shortest and longest term markets for funds, adjustments
have carried far enough to provide a reasonable outline of
their portents for the near future. In the bill market and
the banking system, however--both key sectors for policymaking purposes--developments of recent weeks have been
enigmatic. In these areas, a proper appraisal of the
likely trend of events under the current policy environment
probably has to await further clarifying developments.
Mr. Stone has outlined the whipsawing in bank reserve
positions and the Federal funds market during the weeks
surrounding the discount rate change. But with all Reserve
Bank discount rates at 3-1/2 per cent in the current statement week, these distortions seem to be working out, and the
Federal funds rate has moved into a more logical relationship
to the new discount rate. So long as the free reserve target
is low enough to involve a significant volume of large bank
7/30/63
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borrowing, the Federal funds rate ought to be expected to
range most of the time in close proximity to the discount
rate. From my own observations, I would guess that free
reserves in the range of $100-$200 million and a Federal
funds rate ranging from 3-1/4 to 3-1/2 per cent would be
broadly consistent at this juncture.
The bill market is a different matter. Investor de-
mand has been strong this past month, blotting up more than
a billion dollars of net sales of bills by dealers and New
Bill rates, meanwhile, have oscillated in
York City banks.
a 3.18-3.27 per cent range following their upward adjustment
to Secretary Dillon's testimony on July 8. But I doubt they
world have held this high in the absence of market anticipation of higher rates to come, for the rate advances have
centered around official statements or actions with rate
implication, with intervening downward drifts of quotations
Indeed, the
as investor buying reduced available supplies.
willingness of dealers and leading banks to sell off their
own bill holdings in these circumstances was partly related
to expectations of higher rates later.
Nonbank demand for bills may continue strong over the
next few weeks, and there is a possibility it could override the expectational forces now in the market, unless they
are reinforced by policy action. Such reinforcement could
come by issuance of a bill strip; as has been noted, the
Treasury is ready to do this on short notice within the next
two weeks even though it does not need the cash. The reinforcement could also come from greater System efforts to
supply reserves by purchases of coupon issues, with or
without offsetting sales of bills. Each of these measures
has its disadvantages, but the current public policy dialogue
would seem to call for some consideration of both before
resort is had to the third alternative for resisting any
undesired rate declines, namely, a further general reduction
in the level of reserve availability.
There is a potential market development that could spare
the Federal Reserve this need to chose among objectives. That
is a substantial expansion of sales of time certificates of
deposit by banks and dealers to customers as an alternative
to investment in Treasury bills. If banks take full advantage
of the liberalization of Regulation Q in the issuance of
certificates of deposit, they may divert a significant amount
of money that would otherwise push into the bill market directly.
In fact, there was an increase in other time deposits of city
7/30/63
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banks it early July, and there was a sharply concentrated
$145 million run-up at New York City banks in late July.
But this latter pace almost certainly cannot be continued;
in particular, New York City banks are posting negotiable
certificates of deposit rates that are at the lower end of
the effective scale of competition for short-term funds.
Despite their success in attracting more certificates
of deposit money, city banks reported a substantial net
shrinkage in credit and deposits during the first three
weeks of July. For the most part, this stemmed from a
larger than seasonal drop in U.S. Government securities
holdings on the asset side and in Government deposits on
the liability side.
This followed on the heels of a large
June increase in both items; it reflected largely the
ti m ing of Treasury financing, although perhaps also some
response to the less easy prevailing reserve positions
during the month. Securities loans and loans to financial
institutions at leading banks also were lower. But commercial loans tended to show no more than the usual July downdrift; and real estate and consumer loans continued to
mount, with only a slightly abated pace.
Meanwhile, banks
outside the leading cities were continuing to demonstrate
about the same seasonally adjusted credit rise as earlier
this year. One consequence of all these banking changes
was to confine the net deposit shrinkage of the banking
system primarily to the Government area. Reserves against
private deposits have averaged about $80-$100 million above
the Board guideline during July. Thus far in July, money
supply has been running about $900 million higher than the
last half of June, with time deposits also continuing to
climb briskly. Additional net Government deposit pay-outs
scheduled during the first half of August should bolster
the money supply even further in the weeks ahead. Thus
the private liquidity in the economy has built in a certain
degree of cushioning against bank credit contraction in the
current monetary climate.
Long-term credit markets have been behaving as if they
expected to suffer no adverse consequences from the combination of recent and prospective official actions on the
balance cf payments front. Yields on domestic issues have
been stable to buoyant, and the flow of investible funds is
unabated. This may reflect partly solid confidence in
repeated official statements that no upward pressure on
long rates is desired, and partly a market consensus that
the higher discount rate will not trigger any important net
7/30/63
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reduction in bank lending to long-term borrowers. Were banks
to reduce in any important degree their more than one-billion
dollars-a-month of net acquisitions of real estate, municipal,
and agency obligations, the capital markets would certainly
be affected adversely. But the current rate stability in
these markets suggests that no such prospect is foreseen.
For the time being at least, higher rates in some short-term
areas without higher long-term rates are an accomplished fact.
What remains to be seen more clearly is whether bill
rates can hold at something like their present level from
now until the onset of seasonally firming pressures in the
fall, and whether the banking system can maintain an appropriate rate of expansion without being hampered by the onehalf per cent higher cost of the marginal borrowings made
necessary by the prevailing level of free reserves.
On
these points, I judge the develoments to date to be inconclusive. We can be reasonably sure, I think, that the new
combination of a discount rate of 3-1/2 per cent, free
reserves in the range of $100-$200 million, and a Federal
funds rate around 3-1/4 to 3-1/2 per cent can be fairly
consistently maintained.
But to be clear as to the further
cousequences of such a combination, we need to maintain it
This also, I think, fills the prescription
a little longer.
for an "even keel" policy, which would seem to be in order
in any event through the first part of the next three weeks
in view of the Treasury refunding now under way.
In relay to a question, Mr.
Holland noted that the larger banks
had divested a substantial amount of U. S. Government securities during
the month of July, whereas there had been a large increase in holdings
of such
securities in the month of June.
have been some divestment of Government
At country banks there may
securities in
July,
but
apparently to no substantial extent.
Mr.
Hersey presented the following statement with respect to the
U. S. balance of payments:
7/30/63
-19-
The initial effects of the System's raising of discount
rates and Regulation Q ceilings on July 17 and of the announcement on July 18 of the proposed interest equalization tax have
not been clearly favorable for the U. S. balance of payments
outlook. The evidence is of course very scanty, and it is
much too early to draw conclusions yet.
The tax proposal and the subsequent exemption for Canada
did have a net effect in the exchange markets of strengthening the U. S. dollar somewhat against the Canadian dollar,
after a rather sharp impact at the first announcement. Also,
as a result of the discussions with Canadian officials, and
assuming that the Canadian current account balance of payments does not deteriorate so as to justify additional
borrowings, we can now be reasonably confident that the
bulge in the U. S. outflow for new Canadian security issues
will in fact taper off in coming months, as we had previously
hoped it would. In the first half of this year this outflow
exceeded $600 million. In the years 1956 to 1959, the
average flow to Canada had been less than $200 million per
half-year, before it declined to a still lower rate in 1960,
1961, and the first three quearters of 1962. Thus, in annual
rate terms, the outflow on new Canadian issues in the first
half of this year was worsening our balance of payments, as
compared with the 1956-to-1959 period, by twice the difference of these two figures, i.e., by nearly $0,9 billion
annual rate. We can now look forward to some diminution
of this flow. What actions the Canadian authorities may
take to enforce a reduction in borrowings from the United
States, or how quickly any such actions may have their
effect, are not at all clear.
The tax proposal, if enacted, will cut off and reduce
to zero any growth that might have developed in European
issues in our capital market. It should help to demonstrate
to the Europeans the importance we attach, in the long run,
to a satisfactory development of their own capital markets.
In the first half of 1963, the outflow to Europe on new
issues, net of foreign participation, was about $100 million,
not quite as large as it had been in the corresponding
period a year earlier. Also, new issues by Japanese
borrowers (which were over $100 million in the first six
months of this year), and by governments and companies in
other industrially developed countries, will be curtailed.
But we may find that reductions of outflow to some of these
countries through this channel will be offset by increased
bank lending, or by growth of the outflow on new issues to
exempted countries, such as Mexico.
7/30/63
-20-
The discount rate and time deposit ceiling increases, or
rather the advances that developed in the first half of July
in market rates on U. S. Treasury bills and on negotiable time
certificates of deposit, which have been, so to speak, rati-fied by the Federal Reserve actions, have had little or no
effect on covered interest differentials vis-a-vis the Eurodollar market. Willingness of the Japanese authorities to
allow higher rates to be paid if necessary for Euro-dollar
funds was one of the factors in the rise of Euro-dollar
rates.
Other effects that might have been hoped for from the
Federal Reserve and Administration actions, in terms of
strengthening confidence in the dollar and diminishing outflows of funds motivated by the psychclogical climate, are
not evident as of now. Critical reactions to the tax proposal are appearing in the European press. There has been
little or no general improvement for the dollar in exchange
markets, apart from the Canadian. And the first tentative
indications of the over-all balance of payments in the week
ending last Wednesday suggested that the deficit was running
at a very high rate.
Before trying to evaluate this last piece of evidence,
it may be useful to look briefly at the balance of payments
in the second quarter of this year. The initial estimate
given to the Committee three weeks ago has had to be revised
sharply in the light of more or less final figures of reserves
and related liabilities for June.
The second-quarter deficit,
seasonally adjusted, and before countig receipts from special
government transactions, is now estimated at about $1-1/4
billion, almost as large as in the fourth quarter of last
year, and considerably larger than the gross deficit in the
now quite clear that the
It is
first
quarter of this year.
and
the first
million
between
$300
or
$400
worsening by
by
a
more,
and
explained,
second quarters can be fully
rise in bank lending to foreigners, even without taking
account of other outflows of short-term capital recorded
or unrecorded.
Bank-reported claims on foreigners, short-term and
medium-term, rose in April, May, and June by $650 million,
in contrast to a reduction of somewhat under $100 million
in the first quarter. Bank-reported claims do include some
foreign currency deposits and some investments in foreign
money market assets for account of U. S. customers. But
changes reported for April and May in these elements were
small, and it appears that the bulk of the outflow in those
7/30/63
-21-
mouths was in acceptance credits, collections outstanding,
and bank loans. Flows of these kinds are responsive to
trade developments and to borrowers' needs or desires, and
they are not easily influenced by small changes in U. S.
money market rates. The drop in outflows of bank-reported
claims denominated in dollars from about $1.3 billion in
1961 to about $450 million in 1962 can not be ascribed in
any significant part to interest rate changes.
Nor can this
latest rise in outflows--which makes the rate for the first
half year almost as high as the 1961 outflow, and the rate
for the second quarter by itself much higher.
The only
moral to be drawn from this is that we need a much stronger
balance on trade and other accounts, to allow us to take
this sort of variation in the flow of bank lending in our
stride.
In conclusion, I would like to go back to the tentative
weekly indications of the gross deficit in recent weeks, and
sound an agnostic note. These indicators show, for the three
weeks ending last Wednesday, an average weekly gross deficit
of over $150 million, with increases in the amount from week
to week. These are very large figures, implying a monthly
rate of deficit of over $600 million. However, it would be
wrong to jump to a conclusion that these latest figures
necessarily indicate any real worsening in any part of the
balance of payments--trade, aid, or capital--as compared
with the second quarter. This is because we are now in the
season of heavy tourist expenditures abroad, and at a time
of year when exports drop off seasonally more than imports
do, and more than Government aid and imports combined.
These factors, offset to a small extent by other seasonal
factors that work the other way, tend to increase the
average monthly deficit in the third quarter, as compared
with the second quarter, by about $150 million. July is
particularly strongly affected. Thus even a deficit of
$600 million in July, unadjusted, might represent little
or no further net worsening from the second-quarter average
unadjusted gross deficit of a little under $400 million.
It is not yet demonstrated that the very bad figures of
May and June have grown even worse in July.
The Chairmar then called for the go-around of comments and views
on economic conditions and monetary policy.
who presented the following statement:
He turned first to Mr. Hayes,
7/30/63
-22-
While the business picture has shown no significant
change since the last meeting, with a continued slow advance to be expected, there are perhaps more uncertainties
in the near-term outlook than there have been in the past
couple of months. There are some slight doubts about the
strength of the prospects for capital spending and housing,
which have been counted on to provide
an offset to steel
inventory liquidation; and Government outlays seem to be
leveling off. The general outlook has been clouded by
several uncertainties that have come to the fore recently
and that have undoubtedly contributed to the downward
trend of the stock market. The apparent inability of the
Congress to cope effectively with the growing mass of
legislative proposals before it, including income tax
legislation, is itself a major inpedimnt to a vigorous
business advance. The stock market may be said to have
behaved reasonably well in the face of such events as the
SEC report, the rise in discount rates, the President's
interest equalization tax proposal, and the threatened
strike.
rail
Bank credit declined in the first three weeks of July
primarily as a reflection of the June Treasury financing;
but the somewhat slower growth of credit in recent months
was of course quite consistent with the Committee's policy
actions. There is a continuing absence of strength in
business loan demand. Nonbank liquidity in general remains
The
comfortable.
ample, and the banks' position is still
Regulaunder
rate
ceilings
of
the
interest
timely raising
tion Q has already given a new lease of life to the volume
of certificates of deposit outstanding.
I might note in passing that the Treasury's financing
problems now look much less burdensome than seemed likely
six months ago. The cash deficit was only about $4 billion
in fiscal 1963 and is now projected at only about $7 billion
for fiscal 1964 after allowing for the effects of the proposed tax reduction bill. There is much less ground than
there might have been earlier for opposition to the tax
bill because of doubts as to the possibility of the resulting deficit being soundly financed; and certainly the tax
cut is needed more than ever as a means of relieving mone-
tary policy of some of its burden of encouraging domestic
expansion.
As for the balance of payments, the latest indicators
show continued large increases in foreign dollar holdings.
The very heavy June deficit included several special items,
including sizable mid-year window-dressing operations; but
7/30/63
-23-
unfortunately, whereas a reversal of this item in early
July might have been looked for, the deficit figures for
the first few weeks of July continued unsatisfactorily
high. Our discount rate increase was well received
abroad and seemed for a day or two to be having useful
results in the exchanges. Very soon thereafter, however,
this whole tendency was completely obscured by the emergence of grave uncertainties abroad resulting from the
interest equalization tax proposal, as well as from the
subsequent impression of hasty preparation created by the
demonstrated need for prompt amedments to the proposal.
I have had and still have serious doubts about the wisdom
of this proposal, and these doubts were conveyed to the
Treasury while the proposal was in the planning stage.
While the tax, or even the proposal thereof, will doubtless have a substantial inhibiting effect on foreign bond
offerings, it is too soon to tell whether this result will
be offset, or perhaps overshadowed, by adverse side effects
on inter-national capital flows--either in the form of a
diversion of the flow to direct invesnent or bank loans
or in the form of a capital flight induced by fears that
this tax move may be the forerunner of ultimate exchange
controls. Such fears have been expressed in financial
markets abroad to an increasing degree in the last week
or so, ard this in turn has found reflection in the delicately blanced position of the dollar in European exchange
markets.
My hope would be that after the dust has settled our
discount rate action, and the accompanying move on Regulation Q, will have gained us considerable benefits in the
way of a diminished drain of short-term capital flows.
But the discount rate action can be really effective only
if it is translated into a satisfactory firming of shortterm market rates--especially the 90-day bill rate. The
discount rate action could of course be easily construed
as an empty gesture if market rates were to fail to achieve
and maintain a healthy increase over levels prevailing prior
to the discount rate rise. In view of the state of the
exchange markets, and the uncertain and possibly perverse
effects of the interest equalization tax proposal, I think
it is doubly important that we convey through our policy
actions an impression of decisive effort to sustain foreign
confidence in
the dollar.
Thus, despite the fact that the domestic outlook is not
everything we could wish, I believe open market policy should
be directed, as soon as the books are closed tomorrow on the
7/30/63
-24-
new Treasury issue, to the primary objective of achieving a
firmer short-term market rate structure to support the new
discount rate level. Incidentally, I have been assured by
the Treasury that after Wednesday we need not feel any "even
keel" restraint in working toward such a rate level, in view
of the short maturity of their offering and their avowed
intention of pressing for firmer short-term rates.
I am
thinking of a 90-day bill rate somewhere around 3-3/8 per
cent or higher, a Federal funds rate consistently at 3-1/2
per cent, and whatever level of free reserves may be consistent with these aims. My guess would be that they could
probably be achieved without dropping free reserves consistently to the zero level; and if free reserves can be kept
near their recent level, so much the better. It goes without saying, in view of the importance of our rate objective,
that we should make as much use as may be feasible of intermediate and long-term purchases, as well as swaps. While
natural factors are likely to continue to exert downward
pressure on long-term rates in any case, we need feel no
reluctance if some of our operations produce side benefits
in the way of a cushioning of the impact of the discount
rate rise on long-term rate levels.
I would like to make one side comment on the open market tools that we have at our disposal. For a long time
now some of the Committee's staff have had in mind the
question whether reverse repurchase agreements might serve
a very useful purpose on occasions when we wished to effect
a temporary absorption of reserves to prevent unduly sloppy
money market conditions. We make frequent use of repurchase
agreements to deal with temporary tightness, but we have no
comparable technique readily available at present to deal
with temporary sloppiness. The experience of last week
affords an excellent example of a situation in which this
added tool in his kit might have been extremely useful to
the Manager of the Account in his efforts to carry out the
Committee s policy directive under an unusual set of circumstances. I hope that the Committee will be willing to ask
the staff to give this possibility intensive study in the
near future.
It seems to me, now that the whole System has moved
from a 3 per cent to a 3-1/2 per cent discount rate, that
it would be quite appropriate to effect a rather general
rewording of the first paragraph of the current policy
directive, even though many of the factors mentioned in
the existing directive are still very much in our minds;
and I would also make a small change in the second paragraph to indicate the need for slightly greater firmness
in the money market.
-25-
7/30/63
Mr.
Ellis commented on developments
noting in his remarks that
the response in
in
the First
District,
New England to the national
economic uptrend continued to be less than satisfactory.
to nonagricultural employment,
that for January 1963.
were above year-ago
the June rate
was virtually
the same as
Only five groups of manufacturing industries
levels in
terms of employment.
put had remained almost level throughout the first
and showed only a
With respect
Manufacturing outhalf of the year
1.3 per cent increase above a year ago.
Shoe pro-
duction for the first half of this year was about 5 per cent below
the level of a year ago, but expectations in
second half were improved.
this industry for the
The output performance, combined with
strength in the construction industry, retail spending, and Government spending had been sufficient to stimulate credit demands.
figures from
weekly reporting banks showed expansion.
Loan
Bank loan
expansion thus far this year had exceeded any recent year, with
year-to-year gains in all categories except agriculture and loans
to purchase or
carry securities.
Mr. Ellis then turned to the recent action of the Comptroller
of the Currency in removing buying and selling limitations on Federal
funds.
Two of the largest banks in the District had called at the
discount window last week, but when informed that the Federal funds
limitations had been lifted, satisfied their needs in that area.
the week of July 21,
District
banks were net purchasers of Federal
In
7/30/63
-26-
funds at a rate unmatched since December 1962.
Judging from this
experience, Mr. Ellis thought that borrowings at the discount window
could be expected to be somewhat lower.
The Comptroller's action
seemed also to raise certain related questions; namely, how banks
would report Federal funds transactions in their call reports and
the relationship between national and State-chartered banks.
One
large Massachusetts State-chartered bank reportedly had been advised
to operate on the same basis as if it were a national bank, but in
Connecticut legislative action would be required to remove a limitation on the selling side.
Turning to monetary policy, Mr. Ellis noted that the effect
of recent System actions was difficult to appraise in light of the
other factors that had exerted an effect on the market, including
the President's balance of payments message, the System's action
in raising the discount rate, the Comptroller's Federal funds action,
and the Treasury's debt management activities.
In any event, however,
market rates had just about held their own since the discount rate
announcement.
The unresolved question was how much, if any, action
on reserve availability would be desirable in support of the discount
rate action.
His own conclusion, Mr. Ellis said, was that there was something to be said for getting as much positive value as possible out
of the discount rate increase, in terms of the effect of rate relationships on short-term capital outflow.
However, the market
should be
7/30/63
-27-
given some time to adjust before any further substantial policy moves
were made, particularly on reserve availability.
For the period
immediately ahead, therefore, he would think, for target purposes,
in terms of a three-month bill rate of
approximately 3-3/8 per cent,
with Federal funds frequently at 3-1/2 per cent.
be in
the general area of $100
the side of firmness.
Free reserves might
million, with any doubts resolved on
Some decline in borrowing might be expected if
more reserve needs were met through the Federal funds market as a
result of the Comptroller's ruling.
He had not thought previously
about the possibility of the use of reverse repurchase agreements,
as mentioned by Mr. Hayes, for dealing with certain kinds of market
situations, but he would urge that this possibility
As to the directive,
Mr.
Ellis said he felt
could get along with the present statement.
be studied further.
the Committee
However, he was con-
cerned about the tendency to keep the directive in a standard form
for rather long periods of time and to make only slight changes in
wording.
He would like to see a reworded version of the first para-
graph, and possibly the second paragraph.
Mr. Irons stated that in the Eleventh District most of the
major activity indexes showed continued advance during June, and on
into July.
The industrial production index rose another point,
largely due to an increase in durable goods.
Nonagricultural
employment continued its gradual upward trend, and the crude oil
7/30/63
-28-
situation showed advances in producticn and refining over year-ago
levels.
Construction in the District was at. an all-time record
level--better than 10 per cent above the same period last year for
the first five months--and 21 per cent up for the most recent month.
Department store sales were up about 8 per cent in July over year-ago
levels and about 4 per cent for the year to date.
The situation in
general, Mr. Irons noted, was favorable--with no surge of activity
but a steady, moderate increase.
Agriculture in the District was
closely affected by weather conditions and was difficult to appraise.
However, the major crops looked quite good at this juncture.
As to financial developments in the District, Mr. Irons noted
that loans and deposits were off a bit during the past three weeks,
with a moderate increase in investments.
The decline in deposits
was almost entirely attributable to a corresponding decline in
Government deposits.
Federal funds activity in the Eleventh District
had not yet, apparently, shown the effect of the Comptroller's ruling
mentioned by Mr. Ellis.
Average purchases had been exceeding sales,
and borrowing from the Reserve Bank had moved up somewhat.
Mr.
Irons observed that the problem presented for credit
policy seemed most difficult.
The System apparently was expected
to nudge short-term rates up, minimize any increase in long-term
rates, and at the same time maintain reserve availability and avoid
increased firmness in
the market.
For the moment,
Mr.
Irons said,
he would not favor any aggressive action by the Committee that would
7/30/63
-29-
further complicate the whole market situation.
Instead, the Committee
should "feel its way along," moving in a manner consistent with its
objectives and hoping that market forces would work in such a manner
as to help make the new discount rate an effective rate.
He felt that
a bill rate of 3.25 or 3.30 per cent would be in the right direction,
but he would not advocate deliberately pushing the rate higher with
the market in its present state.
He would like to see the Federal
funds rate at 3-1/4 or 3-1/2 per cent, wit
free reserves possibly
averaging somewhere around $150 million or a little less.
He felt
that such a movement would be in the right direction, and about all
that could reasonably be expected in light of prevailing forces.
Turning to the directive, Mr. Irons said he, like Mr. Ellis,
felt that the directive should be changed at some point to take into
account what had transpired during the past few weeks.
an entirely new directive probably would he in
distant future.
In his opinion,
order in the not too
For the present, however, he would not be strongly
adverse to retaining the form of the iresent directive.
Mr. Hemmings reported that in the Twelfth District business
activity showed a modest gain in June, although the occasional bright
spots were tempered by sluggish performances in some areas.
In the
Pacific Coast States, total employment rose a little more than
seasonally, with increases in California outweighing declines in
Washington and Oregon.
However, the aggregate unemployment rate for
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7/30/63
the three States stood unchanged in June at the 5.9 per cent level of
May.
Although the current rate of unemployment was higher on the West
Coast than for the nation, the Pacific Coast had made a somewhat better
showing on a year-to-year basis; the unemployment rate was unchanged on
the Coast from June 1962, while it
rose slightly in
the nation.
Employ-
ment in the manufacturing industries on the Pacific Coast declined for
the fifth consecutive month, largely as a result of decreases in aircraft payrolls
in Washington.
However, ordnance employment in Cali-
fornia turned up in June for the first time since February.
Housing starts
in
month in May but were still
FHA mortgages
District.
in
the District fell
off in
June after a record
well above the year-ago pace.
Prices of
the secondary market had been leveling off in
the
Steel production had declined in recent weeks in the
District, but by a lesser percentage than in the rest of the nation.
The continuing lumber strike in the Pacific
lumber prices.
Northwest had strengthened
District farm receipts set a record for the month of May.
Department store sales (seasonally adjusted) in the District
were down slightly in
June after
a sharp recovery in May.
California
car registrations ran ahead of sales nationally in the first half of
the year.
In
the Twelfth District as a whole, however, registrations
through May apparently did not show as much of a percentage gain over
the first five months of last year as did sales nationally.
7/30/63
-31Total credit extended by District weekly reporting banks
declined slightly in the first three weeks cf July, with a decrease
in loans offsetting a rise in investments.
Reserve city banks con-
tinued to show a net borrowed reserve position, although daily average
net sales of Federal funds increased somewhat over the preceding three
weeks.
Mr. Deming said general economic activity in the Ninth District
seemed to be roughly paralleling that of the nation.
The iron ore
situation seemed to be normal, that is, not very good; shipments were
15 per cent less than in the same period of 1962.
This decrease was
attributable to the high carry-over of inventory from 1962 and was not
unexpected.
With respect to the demand for credit, District banks were
experiencing a somewhat heavier demand than the nation.
There was a
tendency toware ar outflow of funds frcm the District, and consequently District banks were somewhat less liquid than had been
anticipated on the basis of estimated credit demands.
With respect to policy, Mr. Deming said he agreed with the
position
taken by Mr. Irons as far as the next three-week period was
concerned.
The System should move carefully, avoiding any significant
lessening of reserve availability, on the one hand, and on the other
an over-abundant supply of reserves that would confuse the market
regarding System intentions about short-term rates.
He did not think
steps should be taken to push short-term rates higher at too rapid a
7/30/63
-32-
pace, although he hoped market forces might work gradually in that
direction.
Longer term rates were a possible problem, and he was
also concerned about possible limitations on the freedom of action
of the Federal Reserve System.
In present circumstances, for example,
the Federal Reserve was somewhat inhibited in taking actions that would
affect long-term rates.
Likewise, he had already raised with the
Account Manager the question whether monthly auctions of one-year
bills might have some inhibiting effect.
Although Treasury coopera-
tion in holding up short-term rates seemed desirable, there might be
another side to the picture; namely, that this was a means whereby
the Treasury could exercise monetary policy decisions.
This was all
something the System should continue to watch closely, lest it find
itself restrited in taking actions in the future.
Mr. Scanlon reported that recnt evidence pointed to further
modest business improvement in the Seventh District, and expectations
of businessmen as to the remainder of 1963 were generally optimistic.
The decline in steel output appeared to be having less effect than
had beer expected.
The seasonally adjusted index of electric power
consumption for manufacturing firms in the Detroit area reached a
new high in June.
Purchasing agents in Chicago reported good levels
of activity and some lessening of upward price pressures, although
they continued to report increases on balance.
-33-
7/30/63
Prospects for the automobile industry remained favorable.
Most
plants would close at the end of the current week, and all 1963 model
production was to cease next week.
Total model year production would
be over the 7,300,000 mark, a new record and almost 10 per cent above
last year.
Following the changeover, about 70,000 of the 1964 models
would be turned out in August and, barring a railroad strike, another
500,000 in September.
It was anticipated that new models would be
introduced September 26 and 27 for low priced lines and October 3 and 4
for the higher priced cars.
Preliminary estimates of retail sales for the first
half of
July showed a continuation of the flat pattern of recent months.
District department store sales, however, had remained at the sharply
increased June level.
Bank debits in the Seventh District showed a significant rise
in
June, with almost all of the 46 areas covered reporting increases.
At the same time, personal savings deposits in District areas rose
faster than in April and May, reflecting mainly an increase in the
rate of inflow that reversed the trend of the two previous months.
The withdrawal rate had declined through the second quarter, but
the reduction in the final month was relatively small.
Net farm income was expected to drop further below the year-
ago level during the rest of 1963.
Production expenses had continued
to increase, and the larger inventory of livestock was being marketed
7/30/63
-34-
at lower prices.
Nevertheless, prices of good farm land continued to
increase and rose about 2 per cent during the first
half of 1963,
according to reports from country bankers.
District bank credit declined seasonally in the first three
weeks of July, but for the June-July period as a whole the gains
remained substantial.
mainly in
The net growth over the past seven weeks was
loans and "other"
(non-Federal)
securities.
short-term Governments were also reported in
at one large bank.
very moderate.
Increases in
the District, but mainly
Business demand for bank credit still appeared
However, recent declines in business borrowings had
been concentrated in the public utility, oil, and chemicals categories,
while demand from durable goods manufacturers
despite liquidation of steel inventories.
appeared to have strengthened
The Reserve Bank's June
quarterly survey of interest rates indicated that the proportion of
loans made at the prime rate was slightly greater than a year ago
even though a smaller percentage of loans was in the largest size
category.
Major District banks were still actively seeking loans
and apparently felt little reserve pressure.
As to policy, Mr. Scanlon said he would like to give the market a little time to adjust to the changes that had been made recently.
He proposed no major change in the directive and no change in the
discount rate.
In supplying reserves during the period immediately
7/30/63
-35-
ahead, it might be appropriate to purchase securities largely in the
intermediate sector of the market if it was possible to do so.
Mr. Tow noted that wage and salary employment in the Tenth
District had shown only seasonal changes since the first of this
year.
Among the major industry groups, employment in services and
Government had advanced, but those gains had been offset by weakening
activity in other categories.
This performance was not in keeping
with employment developments nationally.
Total wage and salary
employment in the United States had increased each month since
January, and all major industry groups had participated in the advance.
A comparison of the trends of manufacturing in the United States
and the Tenth District brought the recent divergent movements into
rather sharp focus.
Manufacturing employment reached a high in mid-
1962 in both areas and subsequently declined.
Since early this year,
however, recovery had dominated U. S. manufacturing employment, while
in the Tenth District the decline had continued.
Weather conditions in June and July had improved crop and feed
conditions in the Tenth District, Mr. Tow said.
The wheat crop was
down from last year's small crop, however, and pasture conditions
were substantially below average.
Livestock numbers in the District
were considerably higher than last year.. Drought conditions continued to prevail in parts of the region, notably Colorado.
Because
of inadequate subsoil moisture, crops in much of the District are
7/30/63
-36-
vulnerable to periods of deficient moisture and high temperatures, Mr.
Tow pointed out, but timely rains in most areas had maintained row
crops in generally favorable condition thus far.
Prices of the two major agricultural commodities produced in
the Tenth District--wheat and cattle--had been averaging about 6 per
cent below year-ago levels in recent months, while prices of feed
grains were higher.
If weather conditions were favorable, an
increased level of marketings would about offset the effects of an
anticipated lower level of prices on cash receipts as compared with
last year.
Mr. Wayne advised that in the Fifth District manufacturing
activity was holding about steady while most other sectors continued
to advarce.
In June seasonally adjusted nonfarm employment again
increased slightly.
A rise in factory employment contributed to
this gain, but because of shorter hours worked in nondurable goods
industries, seasonally adjusted factory man-hours declined.
In the
past four months nonfarm employment and factory man-hours had performed a little less favorably in the District than in
as a whole.
the nation
Rates of insured unemployment rose slightly in the
early part of July, ending several months of uninterrupted declines.
The Reserve Bank's latest survey recorded a slight further decline
in business optimism.
Viewing the near future, a majority of the
respondents expected business to do no better than maintain present
7/30/63
-37-
levels.
Durable goods producers presented a mixed picture,
on balance virtually no net change.
indicating
Makers of nondurable goods, how-
ever, including textiles: reported small declines in orders, shipments.
and hours worked.
Reports on construction, trade, and bituminous coal
showed continued improvement.
In some are s, Virginia in particular,
drought conditions had seriously affected pastures and crops, but over
most of the District the farm outlook remained moderately favorable.
District weekly reporting banks had experienced a generally good
demand in all major loan categories during the past three weeks.
Nationally, Mr. Wayne observed, business activity seemed to be
continuing its slow advance, but with some tentative signs of slackening.
Certain significant indicators of future activity were less
encouraging than earlier and did not show the same uniformity of
movement as two or three months ago.
These signals,
like detour
signs on the highway, were current and fleeting; they could be removed
or reversed next month.
But in the absence of signs pointing to
significant gains just ahead,
they might well be regarded as a
caution signal.
Turning to the area of policy, Mr. Wayne commented that there
had not yet been sufficient time for the dust to settle following the
major moves of two weeks ago.
In fact, from time to time additional
dust was kicked up as new changes were made in the proposed interest
equalization tax.
Generally, the psychological reaction to the change
7/30/63
-38-
in the discount rate had been quite moderate,
and the financial mar-
kets seemed to have adjusted to it quickly and smoothly.
In certain
respects they may have overadjusted--on a few days during the past
week some short-term rates were well below their levels of a month
earlier.
In any event, it
was too early to tell
what the final
reaction of the financial markets would be, much less to predict the
eventual economic effects.
In view of the adjustments to be made,
Mr. Wayne concurred in the view that a continuation of present policy
was indicated, with the proviso that the low level of certain shortterm rates at the middle of last week was an unplanned aberration and
not a part of System policy.
He was disposed to agree with Messrs.
Ellis and Irons with respect to the directive, and he would not
desire, of course, any change in the discount rate at this time.
Mr. Mills said he agreed with some
of the policy essentials
contained in Mr. Hayes' statement.. Speaking crudely, and within the
framework of interest rates, he (Mr. Mills) had been forced, unhappily,
to the conclusion that the Federal Reserve System had reached the point
where it
must either "put up or shut up."
To set forth his case some-
what more forally, Mr. Mills presented the following statement:
To use a figure of speech, the Federal Open Market
Committee crossed the Rubicon and burned its bridges behind it when a majority agreed to a somewhat restrictive
credit policy. I continue to believe that policy indefeasible from an economic standpoint and that. its continuance harbors grave risks of economic damage by way
of curtailing the availability of credit and placing
downward pressure on the money supply.
However, as
7/30/63
-39-
matters stand, there is no choice other than to continue
the credit policy now in force.
1. Inasmuch as the effectiveness of the Treasury's
proposed "interest equalization tax" is open to question,
the burden of combatting the balance of payments problem
has fallen on the shoulders of the Federal Reserve System
through the enforcement of a restrictive credit policy
aimed at developing a higher interest rate structure.
2. Inasmuch as interest yields on U. S. Government
securities and other interest-bearing securities have not
moved into alignment with the 3-1/2 per cent discount rate
adopted by the Federal Reserve Banks, At will now be necessary to accomplish that alignment by reducing the supply of
reserves at the disposal of the commerial banking system.
Otherwise, the financial community will be confused about
the Federal Reserve System's policy intentions. Furthermore, the balance of payments interest rate defensive
sought after would not be achieved.
In the light of the circumstances described, I am
regrettably of the opinion that the Federal Reserve
System's policy actions until the next meeting of the
Federal Open Market Committee must move in the direction
of a still more restrictive credit policy. Judging from
the uncertainties in the foreign exchange markets that
followed upon the announcement of the "interest equalization tax" proposal, the possibility cannot be ruled out.
that the Federal Reserve System may shortly be compelled
to take emergency action in the field of discount rates
in order to drive home in the minds of the general public
that the United States is prepared to act decisively in
defense of the dollar.
Mr. Mills added that he had been interested in Mr. Hayes'
reference to a staff study of the possible use of reverse repurchase
agreements.
This was a subject worthy of study.
Personally, however,
he rather hoped that there might develop from the study a recommendation that the possibility be discarded because he was fearful it would
be just another gimmick added to the wide range of gimmicks with which
7/30/63
-40-
the System was already operating..
These had resulted in handcuffing the
Government securities market and making it
a completely artificial
manipulated market.
Mr.
Robertson presented the following statement:
It is very clear that financial circles, both here and
abroad, are still in process of adjusting to the official
actions and statements of the past two weeks. These adjustments are not helped by the unprecedented nature of the
steps taken or proposed. Market participants have little
in the way of historical experience to guide their responses.
Some people, of course, have been telling us that the closest
precedent to our recent action was the discount rate increase
of 1931: but I am sure all of us hope for more favorable consequences than that. In any evert, I am sure our proper role
as central bankers at this time is not to panic at some of
the gusts and cross winds, but to hold a steady course until
the storm of reaction dies down and we can judge more soberly
where our navigation has taken us.
I was opposed to the step of raising discount rates at
this juncture. But, that action having been taken, I think
it is the better part of wisdom to allow it a chance to
make whatever contribution it can to the achievement of
current policy objectives. These I take to be some elevation of short rates, but without any basic reduction in
reserve and credit availability. By all the past precepts
of U. S. monetary management, this is very close to a contradiction in terms, and we shall have to move very carefully
to avoid having market responses prove that contradiction
Therefore, I think it is imperative that
to see.
for all
we speak in very clear terms to the Account Manager today
as to what we want him to achieve, and what order of priority
we assign to potentially conflicting desires. For example,
I would think it essential that we restore the reference to
reserve availability which was deleted from the second paragraph of the current directive at the last meeting. I would
regard it as a proper posture for the Desk to strive for
free reserves in the $100-$200 million range, with Federal
funds rates ranging between 3 and 3-1/2 per cent and perhaps
dealer loans of 3-1/4 - 3-3/4 per cent. I would not expect
the Desk always to hit these targets if inadvertent circumstances should develop, but that does not destroy their
and
7/30/63
-40-
value as reference points for operations. Now that the discount rate transition is over, we ought to be able to expect
a return to a more reasonable relationship between bank
reserve positions and these narrow money market rates. But
I do not think it is practical for us to go further, and
include a particular range of the Treasury bill rate, or
even of a covered yield spread against foreign bills, in our
communications with the Desk.
However much a particular
trend in these latter rates is desired around this table,
they are being affected these days by many influences beyond
the reach of the Account Manager. Depending upon which way
market attitudes jell, and what other official actions are
taken or withdrawn, the bill rate may end up close to the
discount rate or well below it. But the Account Manager
should rot be asked to fight these kinds of rate movement
with open market operations. Our aim should be to hold
reserve availability steady, along with the new discount
rate, and see where the bill rate, longer term rates,
customer lending rates--and bank reserve use--finally
settle down. Then we will know better what we have managed
to accomplish, and whether or not we like the results.
If we are to take this tack, then the second paragraph
of the current directive ought, as a mnimum, to have restored the phrase concerning reserve expansion that was
deleted at the July 9 meeting. I personally would favor
giving to reserve needs at least as high priority as money
market conditions, by the use of language something like
the following:
"To implement this policy, System open market operations shall be conducted with a view to
fostering a moderate pace of reserve expansion,
while maintaining reasonably stable money market
conditions."
What we can accomplish by this, only time will tell.
I, for one, am very skeptical about making any inroads on
our capital outflow by this device. In particular, I doubt
it can have much effect on bank loans abroad, so long as
reserve availability is not cut back enough to slow domestic
and international lending alike. If a more discriminating
effect on bank loans to foreigners is to be sought, it may
have to be done by the exercise of moral suasion on the few
banks most directly involved.
This is not a procedure I like,
-42-
7/30/63
but I dislike even more the apparent alternatives of reducing
reserve availability across the board or adopting some formal
version of capital controls.
Whatever course we take today to steer our way through
the market currents of the moment, we cannot afford to lose
sight of the underlying problems still plaguing our economy.
And let me remind you that, while the Brookings study suggests
that fundamental forces are at work that may remedy our balance
of payments deficit by the mid-1960's, no similarly optimistic
note is cited by studies of our chronic underemployment of
resources.
It seems obvious to me which of these two basic
problems is more in need of additional assistance from mone-
tary policy over the longer run.
Mr.
Shepardson observed that the policy proposals made around
the table this morning seemed actually to fall within a relatively
narrow range, even though they were expressed in numerous ways.
At
present, he noted, there was a confused and unsettled market situation,
and in his opinion the System should do whatever it could to clarify
its own position.
The approach outlined by Mr. Ellis appeared to him
most nearly to reach that point, although the targets cited by Mr.
Ellis were not a great deal different from those mentioned by a
number of others.
As Mr. Shepardson saw it, the Committee's objective
should be to refrain from adding to prevailing uncertainties.
Insofar
as the System could clarify the intent of its discount rate action,
that would be helpful.
This would mean, according to his view, some
move through open market operations to validate the discount rate
increase in terms of short-term rates without at the same time
deliberately reducing the availability of reserves.
7/30/63
-43As to the directive, Mr. Shepardson suggested that it
might
be well, as others had proposed, to consider a rewording.
Mr. Mitchell expressed the view that this was a difficult
period for monetary policy, and for those charged with formulating
and carrying out monetary policy, with many voices outside the System
proclaiming what the System should and would do.
stances,
he felt that
the economy should
In present circum-
be given a chance to let
basic factors of supply and demand operate,
the
and it would be desirable
for the Committee to concentrate its attention on the availability of
reserves.
It should not be forgotten, he noted, that the Committee
must formulate policy in advance of the availability of statistics;
most of those presently available were for the month of June, with
some preliminary figures for the first
part of July.
If
the economy
was in the process of going flat, which was possible, and the Committee should decide on the use of rate objectives primarily,
could get into serious availability problems.
it
If it developed later
that the economy actually had turned down at a time when the Federal
Reserve was contracting the availability of reserves, that would make
a poor record.
Accordingly,
as he had said,
he would concentrate
attention at this point on the level of free reserves.
inclined to use as a target the
the markets would react.
He would be
$100-$200 million range and see how
Under these conditions, he would not worry
too much about what happened to the bill rate during the next two or
three weeks.
7/30/63
-44Mr. Hickman commented that domestic business activity had moved
into the summer slack season with the weight of evidence still pointing
to continued economic expansion.
The broader measures of economic
activity had advanced throughout the second quarter.
Several less
comprehensive series, which are watched closely for clues or possible
omens, had not behaved quite as favorably as earlier, but that did not
warrant,
in his opinion, a revision of appraisal.
The second quarter increase in gross national product had been
in
line with characteristic rates of rise during periods of moderate
business expansion.
Furthermore,
the increase was entirely in final
demand, with no assistance from the inventory account.
The June rise
in the index of industrial production, which marked the fifth successive month of gain, reflected an appreciable
increase in final product
output after a number of months of relative sluggishness; as had been
expected, the industrial materials grouping contributed nothing to the
increase because of the cutback in steel.
In the steel industry, events
were proceeding as foreshadowed, with a bottoming out in production
expected for late August or early September.
Personal income had risen again in June for the fourth successive month,
largely because of a persistent upward trend in wage and
salary disbursements typical of expansion periods.
Retail sales re-
mained on a high plateau, with no significant change since February.
7/30/63
The latest
July,
-45information an auto sales,
indicated continued strength in
covering the first
20 days of
that strategic part of consumer
takings.
More complete information for June on the Fourth District
confirmed the expansion reported at
Mr. Hickman said,
the previous Committee meeting,
and early reports for July showed that the June
gains on balance had been at least sustained.
Department store sales
continued to unprove from their sluggish performance earlier this year.
The rate of insured unemployment in mid-July was unchanged from June,
and remained at a favorably low level;
so far this was trie
even in
the steel centers, contrary to previous experience during steel cutbacks.
Widespread improvements in the regional unemployment situation
during the past few months had been officially recognized in labor
market reclassifications for June, with one-third of the District's
major centers being upgraded.
Electric power production had risen
further in July, except for those areas where primary steel production
dominated developments.
As expected, steel ingot output in the Dis-
trict declined sharply in the past three weeks; shipments were reported
to have been sustained somewhat by the threat of a railroad strike.
Earning assets at District reporting banks had expanded sharply
in recent weeks in contrast to the national totals.
District member
banks had not been torrowing in significant amounts since the time of
the discount rate action.
7/30/63
-46Turning now to System policy, Mr. Hickman said he found it im-
possible to isolate the impact of the recent discount rate action
because of other pronouncements and proposals dealing with the balance
of payments situation.
To the extent that the behavior of financial
markets both here and overseas told a story in this short period,
recent developments did not appear to have been consistent with
national policy objectives.
Probably the best the System could do
under these circumstances was to wait for the dust to settle, making
sure in the interim that there was no excessive ease in the money
market.
He would think in terms of a 3-3/8 per cent bill rate, with
Federal funds trading at 3-1/2 per cent most of the time and free
reserves allowed to fluctuate more or less as they would in the
short run.
He would not be disturbed if free reserves went to zero,
or changed to net borrowed reserves temporarily.
be re-examined,
The situation could
if, to hold up the bill rate, free reserves fell
below $100 million for an extended period of time.
At the same time, Mr. Hickman added, he was unhappy about
recent attempcs to commit the System to maintain, or reduce, the
level of long-term interest rates.
There was, in his opinion, a
potentially dangerous situation, which could lead to a de facto
restoration of the pre-1951 pegging.
recently, ".
.
As Chairman Martin has stated
it is essential that monetary policy remain flexible
and uncommitted--free to move either to check an unwanted and
7/30/63
-47-
inappropriate tightening of credit, should it develop, or to defend
more aggressively the international position of the dollar, should
that be necessary."
It
seemed to Mr. Hickman that the System had
an obligation to speak out forthrightly on this matter on every
appropriate occasion.
Mr. Bopp reported that the economic situation in the Third
District had improved somewhat during the past several weeks.
Three
labor market areas had been upgraded, although their ranking was
still poor.
Increases in unemployment were no worse than expected
with the influx of school graduates into the labor market.
noted an improvement in department store sales,
District's year-to-year deficit.
He also
cutting into the
Some of these gains may disappear
as steel production declines become reflected in other indicators.
On balance, however, the picture looked a bit brighter than usual.
Total bank credit showed a decline, and business loans were
still lagging behind last year, but there continued to be some pressure
on bank reserve positions.
Mr. Bopp stated that he had voted favorably on the policy
directive at the July 9 meeting because it seemed to him-that the
use of the different instruments of monetary policy should be consistent and an increase in the discount rate was then imminent.
Under
such circumstances, it had seemed undesirable to reverse what had taken
place in terms of yields only to reverse again.
His vote, therefore,
7/30/63
-48-
was essentially a vote on tactics.
As to the future, it was still an
open question whether short-term rates could be maintained at the new
levels, and reserve availability at the old.
Under these conditions,
he agreed with the view that it would be desirable to maintain
essentially an even keel for the time being, and to supply reserves
through purchases of coupon issues, selling bills if necessary.
In
his opinion, emphasis should be placed on the availability of reserves.
Mr. Bryan reported that developments in the Sixth District were
going along about in line with the national economy with a slight tendency for nonfarm employment to rise less than nationally.
Differences
from the national averages were chiefly in financial statistics; the
District had h.d a sharp rise in bank debits and in bank loans and
investments.
The Reserve Bank's agricultural economist had reviewed
the sharp expansion in lending to farmers in all sectors and had presented the view that this lending was sound and creditworthy, but Mr.
Bryan remained skeptical.
Mr. Bryan stated that he was uncertain about any recommendations he might make at this juncture regarding national monetary policy.
Without doubt, the System was confronted with some thorny problems.
If, after raising the discount rate, the System did not follow through,
at some reasonable interval, toward making the new discount rate
effective, the System would be inconsistent.
On the other hand, the
System ran a considerable risk, in making the rate effective, of doing
7/30/63
-49-
injury to the economy because in his belief it would not be possible to
make the discount rate effective without working to some appreciable
degree in
the field of reserve availability.
he would prefer,
for the immediate future,
and to maintain reserve availability,
Of the two alternatives,
to allow the dust to settle
measured in
approximately $100-$200 million, or somewhere in
Mr.
free reserves
that range.
about the yield
Bryan also mentioned the concern he felt
curve on Government bonds,
at
which was quite flat.
He felt
the time was
gone when either the Federal Reserve System or the Treasury could appropriately manipulate the yield curve.
There was the real danger of an
unfunding of the public debt, which would be tragic for both the
Treasury and the System.
He hoped that neither the System nor the
Treasury would make further efforts to manipulate the rate curve.
Mr.
Bryan then turned to the dealings of the System and the
Treasury in foreign currencies and expressed concern.
a short position of about $150 million in
The System had
foreign currencies, to which
must be added the Treasury's short position (estimated at $650 million).
Altogether,
this got up to a fairly
Mr. Shuford reported that in
high level.
the Eighth District month-to-month
improvements had not been particularly noticeable.
However,
in
evalu-
ating conditions in the District, it was evident that there had been
rather significant improvement since the first of the year.
major metropolitan areas,
In the
employment had increased about 2 per cent
-50-
7/30/63
since late 1962.
Industrial use of electric power had risen sharply,
with gains registered in all seven metropolitan areas.
lull, department store sales, bank debits,
shown improvement.
After an early
and business loans had all
As to the agricultural picture for the District,
farming conditions so far this year had been good.
Corn and soy beans
were developing ahead of schedule; cotton prospects were quite good;
and rice and tobacco crops were above average.
Prices of major agri-
cultural commodities seemed to be holding at about the same levels as
last year.
In the area of livestock (mainly hog and beef) prices,
there had been a recovery since the first
of the year.
Turning to monetary policy, Mr. Shuford noted the continuance
and persistence of uncertainties, which the Committee had discussed.
Among these uncertainties, there was the steel situation, the unsettled railroad wage dispute, the question of public acceptance of
the new-model autos, and the reaction to the President's recent
balance of payments message to Congress.
All of these things had
introduced uncertainty into the picture.
In these circumstances, he
favored no change in policy at this meeting.
Even though there was
the possibility of seeming inconsistent by not following through with
some action in support of the discount rate change, he did not feel
that he or the System were alone insofar as inconsistency was con-
cerned.
He would
favor, if possible, no lessening in the rate of
monetary expansion,
and he believed that the money supply should, if
possible, continue to increase at about the same rate that had prevailed
7/30/63
-51-
during the past several months.
believed it
would be desirable if
range that had prevailed
With respect to the bill
rate, he
that rate could continue in the
since the last
meeting.
Some emphasis
should be given to the matter of reserve availability,
but at this
time it might be inappropriate to focus on any specific level of free
reserves.
With the changed relationships between the discount rate
and market rates,
it
might be misleading to compare the new levels
of free reserves with those that had prevailed prior to the discount
rate change.
Mr. Balderston observed that now, 29 months past the last
cyclical
low, domestic business still seemed to be moving upward.
Accordingly,
he felt
that the foreign dangers to the future health
of the economy should be the principal concern of this Committee at
the moment.
This was not to deny the possibility that the domestic
economy might even now be topping off, which would present still
further complications.
While he would not refer to the many
measures of economic strength, he was heartened by a couple of
characteristics that surprised him.
One was that individual saving
in relation to disposable income was holding up.
Another was that
manufacturing productivity in the second quarter of this year was
4.9 per cent above the year-ago figure.
But according to a recent tally the first half year wage
settlements showed a larger average increase than in the corresponding
-52-
7/30/63
period a year ago.
The over-all median
settlement was 8 cents an hour
compared with 7.7 cents for the same period last year, and the manufacturing median climbed even more, from 6.8 cents in the first half
of 1962 to 7.3 cents in the first half of 1963.
Moreover, deferred
increases continued to show up in one of every two settlements, and
despite the unemployment of one out of every five inexperienced and
unskilled workers,
month.
the minimum wage was to be raised again in another
This would complete the third of such raises since 1950.
It
was little
wonder that this country's failures to reduce
labor costs and export prices did not go unnoted abroad.
In his
report to the shareholders of the Netherlands Bank, Dr. Holtrop noted
that in the last four years labor costs per unit of industrial production fell by about 3 per cent, while they were rising in the
Netherlands by 14 per cent and in Germany by 21 per cent.
But the
total wages paid per person employed rose by 17 per cent; and so Dr.
Holtrop noted that a reduction in the cost cf American industrial
production would have been perfectly possible in those years.
ever,
the index
How-
of prices for American exports rose by 4 per cent
and that for industrial finished products by as much as 9 per cent.
Dr. Holtrop added that none of this would concern Europe if
there
were no balance of payments problem; however, Europe became involved
if it was asked to join the United States in adopting measures to
safeguard stability in the international system of payments.
-53-
7/30/63
Mr.
Balderston went on to say that the President's balance of
payments package encouraged him a
little
but not much.
Specifically,
he would apply selective controls at the point where he thought they
would work,
and the best place to use them was on the Government's own
spending and lending.
He hoped that the Government would make some
one individual responsible for slowing down on payments against current
commitments to place dollars abroad and to ride herd on future commitments resulting from dollar diplomacy.
As to the right policy for the System at this particular juncture, Mr. Balderston pointed out that the System has continued to feed
to the commercial banks at a 3 per cent annual growth rate the reserves
required to support private deposits.
Bank credit, that is loans and
investments, are continuing to rise at an annual rate of about 10 per
cent, which is about the same as last year's rate of 9 per cent.
compared with the last half of 1962,
As
excess reserves are about $100
million lower, and discountings about $200 million higher.
Nonborrowed
reserves have remained about constant since the turn of the year, but
it
is
significant that the use by banks of reserves made available to
them has continued to rise at a vigorous rate.
The ratio of loans to
total deposits at all commercial banks has been above 54.5 per cent
ever since 1960 and is
currently over 57 per cent,
whereas when he
came to the Board of Governors nine years ago, it was below 40 per
cent.
Of course the strong flow of savings into commercial banks
7/30/63
-54 -
now added to their desire to invest whatever they could not lend.
Last
year they took one out of six dollars off the increase in mortgages and
four out of five dollars of the net gain in State and local securities.
The fact that bankers have not seen fit
to curb their investments so
far meant to him that they must not be feeling restraint.
The aggres-
sive efforts of bankers to put their funds to work not only at home
but abroad led him to wonder whether the System had a good answer to
the editor of Barron's when he said:
"The-Federal Reserve and
Treasury have poured forth a flood of easy credit and a sea of red
ink.
Excessive liquidity has now become a mounting threat to the
dollar."
With respect to short-run
said that he felt it
monetary policy, Mr.
would be desirable to
Balderston
try to hold steady for
the next three weeks until market developments could be seen and
analyzed more clearly.
when it came,
However, he anticipated that the next move,
should be on the side of greater firmness.
Mr. Balderston concluded with the comment that the Federal
Reserve System must do in
its best judgment the job it
had to do,
that is, to make the right decisions at the right time with regard
to monetary policy.. It could not afford to be bound by commitments,
whatever they may happen to be.
If
the time should come for greater
or lesser monetary ease, that was the System's job and responsibility.
7/30/63
-55Chairman Martin observed that he was glad Mr, Balderston had
concluded his remarks on the note he had,
for it
reminded him (the
Chairman) that he wanted to take a minute to set the record straight
in one respect.
In all of the discussions incident to the President's
balance of payments message, he (Chairman Martin) had refused to make
any commitment with regard to Federal Reserve policy.
Mr.
The quotation
Hickman had read (which was from Chairman Martin's testimony
before a Congressional committee on July 22) reflected the position
he had taken consistently.
He felt
sure that his record was com--
pletely clear in that regard.
Chairman Martin went on to express the view that. the System
was not following
recent years.
in
any way a restrictive
policy,
and had not in
It had recently been following a slightly less stimu--
lative policy, but he happened to be one of those who believed that
too much stimulation was self-defeating.
He also believed that a
good deal of the chronic unemployment in this country might be related
to the balance of payments situation,
and that until the balance of
payments problem was brought better into line the country was likely
to be faced with increasing rather than diminishing unemployment.
The Chairman noted, as one element in the current situation,
that the demand for bank credit continued to be less than many had
anticipated.
of savings,
At the same time there had developed a large volume
encouraged by the payment of
higher interest
rates,.
that
7/30/63
-56-
had made available for certain types of operations a quantity of money
far in excess of what he would like to see.
and the availability of money
He doubted that the cost
could clearly be separated.
Neverthe-
less, in certain circumstances--and he thought they currently pre-
vailed--it was his opinion that a fairly good case could be made, for
a limited time,
for only modest adjustments,
if
any, in short or long--
term rates.
He was inclined to feel
sought until
such time as it could be seen whether the business
that
rate stability should be
situation was likely to improve further in the fall and whether there
was improvement or further deterioration in the balance of payments.
Factors overhanding the markets at present included not only the
balance of payments problem but the possibility of a railroad
strike and various other considerations that had been mentioned
during today's discussion.
At the Chairman's request, there were distributed at this
point alternative formulations of a possible current policy directive
that had been drafted by the staff for the Committee's consideration.
According to one alternative, the second paragraph of the directive
would call for open market operations to be conducted with a view
to continuing the present degree of firmness in the money market,
while accommodating moderate expansion in aggregate bank reserves.
According to the other alternative, operations would be conducted
7/30/63
-57-
with a view to attaining a slightly greater degee of firmness in
the
money market, while accommodating moderate expansion,in aggregate bank
reserves.
In
commenting on the directive,
Chairman Martin indicated that
he was inclined to agree with the view expressed by some during today's
discussion that perhaps at some point a general rewording of the
directive should be attempted.
As to
the next three weeks,
however,
it appeared to him that the differences of opinion as to policy expressed around the table had been so slight
immediate need for any substantial change in
Mr. Mills commented that
although it
was distasteful
that
there was little
the directive.
he would like the record to show that,
to him, he would be obliged to dissent from
any consensus in favor of continuing only the present degree of market
firmness.
He felt that the System had made a mistake some years ago,
in 1957, by not making the discount rate change at that time an effective rate,
and that the System could not afford to repeat the mistake.
At that time it had confused the market as
jectives.
to its
intentions and ob-
In his view the Committee was inevitably moving toward a
more restrictive policy.
The majority had made a basic decision,
and this having been done there was an obligation on the part of the
Committee to carry through on the course it had set.
Chairman Martin responded that it was quite appropriate for
Mr. Mills'
comment to be included in the records.
Also,
for the record,
7/30/63
however,
-58he (Chairman Martin) would like to say that he did not agree
with the view that a mistake was made several years ago on the occasion
mentioned by Mr.
Mills.
Mr. Hayes said he agreed strongly with Mr. Mills as to the
need for supporting the recent discount rate action at the present
time.
Chairman Martin then inquired whether it
would seem appropriate
to put the question in terms of a further substantial reduction in the
level of reserve availability,
if
necessary,
in
order to keep the
Federal funds rate at, say, 3-1/2 per cent and the bill rate around
3-3/8 per cent.
Mr. Hayes replied that he would prefer to put the
question in terms of conducting open market operations in a way that
would tend to support a Federal funds rate of 3-1/2 per cent and a
bill rate close to 3-3/8 per cent, and
taking the consequences in
terms of reserve availability, hoping that reserves could remain about
where they were but making that
a subordinate consideration.
stated that this would be his position
ever,
that the question be put in
Mr.
Mills
Mr, Mitchell suggested, how-
terms of making the availability of
reserves a primary consideration rather than a residual factor.
The
question could be stated simply on the basis of maintaining free
reserves between $100 and $200 million for
the next three weeks .
In discussion of this point, Mr., Mills said he felt that the
concept of a level of free reserves as a primary objective had long
7/30/63
-59-
since been rejected.
of interest
level.
rates that
Under certain
conditions there could be movements
would not conform at
all
As had been stated on many occasions,
feel of the market that must take precedence.
to the free reserve
it
It
was the tone and
would seem to him
that the instruction to the Manager for the next three weeks would
have to be conditioned largely on the
tone and feel of the market,
consistent with whatever consensus was arrived at by the Committee.
Chairman Martin expressed agreement with the view that the
level of free reserves was not a proper sole target,
just one guide.
Mr. Ellis, who was asked to restate at this juncture the tar-
gets he had suggested earlier during the meeting, indicated that they
would include a bill rate in the area of 3-3/8 per cent and a Federal
funds rate between 3-1/4 and 3-1/2 per cent, with a free reserve target level at
$100 million,
subject to some variation in either direction.
His general thought had been to follow a course that would allow the
market to find its own footing again.
of open market operations,
If doubts arose in the conduct
he would resolve them on the side off
firmness rather than ease.
Mr. Mitchell indicated that he considered that the real issue
related to what course the Account Manager would follow if
targets became mutually inconsistent .
instruct the Manager to protect the bill
If
the several
the Committee wanted to
rate
even at the expense of
net free reserves turning into net borrowed reserves,
that was one
7/30/63
policy.
-60If the Committee wanted to
target of free reserves,
ket reacted,
say,
instruct the Manager to aim at some
$100-$150 million, and see how the mar-
that would be an entirely
different
policy.
Mr. Hayes noted that the targets expressed by Mr. Ellis included
a bill rate of around 3-3/8 per cent.
Actually, the bill rate had not
been close to that level during the past three weeks.
Therefore, while
he rather liked the targets embodied in Mr. Ellis' suggested policy, he
did not think such a policy could be regarded as one of no material
change.
After further discussion as to how the policy question for the
next three weeks might best be expressed, Mr.
Hayes commented that in
light of all of the discussion that had taken place, he was inclined
to revert to an earlier suggestion that the question be decided in
terms of the alternatives
included in
the draft directive material
that had been distributed.
Upon further consideration,
there was general agreement with
a suggestion that a vote be taken on a policy directive that would
call,
in
the second paragraph,
for
context of a higher discount rate,
policy to be implemented,
in
the
by open market operations conducted
with a view to attaining a slightly greater degree of firmness in the
money market, while accommodating moderate expansion in aggregate bank
reserves.
7/30/63
-61Accordingly, 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
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 accountof the U.S.
balance of payments. This policy takes into consideration the continuing adverse balance of payments position
and its cumulative effects and the high level of domestic
business activity, 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 in the context of a higher
discount rate, System open market operations shall be
conducted with a view to attaining a slightly greater
degree of firmness in the money market, while accommodating
moderate expansion in aggregate bank reserves.
Votes for this action: Messrs.
Martin, Hayes, Balderston, Irons, Mills,
and Shepardson. Votes against this
action: Messrs. Bopp, Mitchell, Robert-son, and Scanlon.
It was noted that the Account Manager had suggested, in his oral
report today, that the continuing authority directive to the Federal
Reserve Bank of New York, which had been amended on June 18, 1963, to
raise from $1 billion to $1.5 billion the limit on changes in the System
Open Market Account in the period between Committee meetings, might be
changed again to reduce the leeway to the former-figure of $1 billion.
7/30/63
Upon motion duly made and seconded,
and by unanimous vote, section 1(a) of
the continuing authority directive was
amended so as to authorize and direct
the Federal Reserve Bank of New York,
to the extent necessary to carry out
the current economic policy directive:
To buy or sell United States Government securities in
the open market, from or to Government securities dealers
and forein
and international accounts maintained at the
Federal Reserve Bank of New York, on a cash, regular, or
deferred delivery basis, for the System Open Market Account
at market prices and, for such Account, to exchange maturing United States Government securities with the Treasury
or allow them to mature without replacement; provided that
the aggregate amount of such securities held in such Account
(including forward commitments, but not including such
special short-term certificates of indebtedness as may be
purchased from the Treasury under paragraph 2 hereof) shall
not be increased or decreased by more than $1 billion during
any period between meetings of the Committee.
It was agreed that the next meeting of the Federal Open Market
Committee would be held on Tuesday, August 20, 1963.
The meeting then adjourned.
Secretary
Cite this document
Federal Reserve (1963, July 29). FOMC Minutes. Fomc Minutes, Federal Reserve. https://whenthefedspeaks.com/doc/fomc_minutes_19630730
@misc{wtfs_fomc_minutes_19630730,
author = {Federal Reserve},
title = {FOMC Minutes},
year = {1963},
month = {Jul},
howpublished = {Fomc Minutes, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/fomc_minutes_19630730},
note = {Retrieved via When the Fed Speaks corpus}
}