FOMC Minutes
A meeting of the Federal Open Market Committee was held, in
the offices of the Board of Governors of the Federal Reserve System
in Washington on Tuesday, August 20,
PRESENT:
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
1963, at 9:30 a.m..
Martin,. Chairman
Balderston
Bopp
Clay
Irons
Mills
Mitchell
Robertson
Scanlon
Shepardson
Treiber,. Alternate to Mr. Hayes
Messrs. Hickman, Wayne, Shuford,.and Swan,
Alternate Members of the Federal Open
Market Committee
Messrs. Bryan and Deming, Presidents of the
Federal Reserve Banks of Atlanta and
Minneapolis, respectively
Mr. Kenyon, Assistant Secretary
Mr. Hackley, General Counsel
Mr. Noyes, Economist
Messrs. Baughman, Brill, Garvy, and Tow,
Associate Economists
Mr. Stone, Manager, System Open Market Account
Mr. Malony, Assistant to the Board of Governors
Mr. Williams, Adviser, Division of Research and
Statistics, Board of Governors
Mr. Sammons, Adviser, Division of International
Finance, Board of Governors
Mr. Keir, Senior Economist, Division of Research
and Statistics, Board of Governors
Mr. Spencer,. General Assistant, Office of the
Secretary, Board of Governors
Messrs.. Latham, Hilkert, and Coldwell, First
Vice Presidents of the Federal Reserve
Banks of Boston, Philadelphia, and Dallas,
respectively
-2-
8/20/63
Messrs. Sanford, Mann, Ratchford, Jones,
Strothman, and Grove, Vice Presidents of
the Federal Reserve Banks of New York,
Cleveland, Richmond, St. Louis, Minneapolis,
and San Francisco, respectively
Mr. Brandt, Assistant Vice President, Federal.
Reserve Bank of Atlanta
Mr. Anderson, Financial Economist, Federal
Reserve Bank of Boston
Mr. Meek, Manager, Securities Department,
Federal Reserve Bank of New York
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 30 through
August 14, 1963, together with a supplementary report covering the
period August 15 through 19, 1963.
Copies of these reports have been
placed in the files of the Committee.
In
comments supplementing the written reports, Mr.
that the foreign exchange markets had been subject,
meeting of the Committee,
Sanford noted
since the previous
to two principal influences:
(a)
the uncer--
tainties arising from the proposed interest equalization tax which
affected, in largest measure, the dollar/Swiss franc rate, and (b) the
dullness which settles down in the foreign exchange markets in August
when many Europeans take their vacations.
TheLondon gold market was
also influenced by the uncertainties concerning the position of the
dollar, and at times the turnover was quite heavy.
The gold price was
generally held between $35.09 and $35.10 or a bit more, but as demand
-3-
8/20/63
exceeded the amount of newly produced gold entering the market, the
central bank gold pool suffered a loss.
Meanwhile, the U. S. gold
stock was reduced $50 million in the week ended August 14, following
three weeks in which no change occurred.
The drop in the gold stock
had fortified holdings of the Stabilization Fund to a point at which
the expected usual French taking of $34 million in August should not
occasion any further drop in the gold stock.
The Swiss franc continued to be subject to considerable upward
pressure, as a result of continued tight money conditions in Zurich and
the demand for Swiss francs from abroad.
Some of the pressure was
relieved by U. S. Treasury spot sales here of $9.7 million equivalent
and forward sales abroad of Swiss francs amounting to 33 million dollars
equivalent in the closing days of July and opening days of August, and
the System Account Management offered to reactivate swap drawings in
order to forestall a possible conversion of dollars into gold by the
Swiss authorities.
The Swiss National Bank, however, suggested that
it deal with the situation for the time being through two methods:
(1) taking in surplus dollars in its own market and giving the New York
Reserve Bank orders to sell Swiss francs in the New York market after
the close of the Zurich market, and (2) engaging in a swap transaction
for $10 million with its own market by which it bought $10 million from
the Swiss banks on a spot basis, and simultaneously sold them forward
to the same banks.
The Swiss cooperation seemed to have been of ad-
vantage to the Federal Reserve, in that it stretched out the interval
8/20/63
-4--
between the retirement of the previous use of the swap facility between
the System and the National Bank and the next possible use; and over and
above that the Swiss National Bank provided the Swiss francs with which
the market could be kept orderly somewhat above,
which the central bank usually intervenes.
or at, the rate at
On most days the New York
Reserve Bank had 10 million francs with which to operate in the New York
market, and on one occasion 20 million francs to use if the pressure
reached such a level as to necessitate their use.
In the period since
July 18, the aggregate of Swiss franc sales in the New York market for
the Swiss National Bank had been the equivalent of $12.3 million; the
Swiss National Bank itself had taken in $14 million; and it had swapped
$10 million with its market.
The aggregate of operations by the Swiss
National Bank therefore had been $36 million, which with the $43.0
million of Treasury spot and forward operations gave a total of $79 million
of dollar-supporting operations in Swiss francs since July 18.
Aside from
one occasion when the dollar declined to 4.3150 Swiss francs to the dollar,
the rate in general had been maintained around 4.3160; it
4.3155-58.
was now at
To the amount of assistarce to the dollar extended in the
case of the Swiss franc,
there should be added a net amount of $29 million
acquired by the Bundesbank (for one brief period the Bundesbank had to
sell dollars to support the DM rate; the Federal Reserve participated to
the extent of $7-1/2 million and was able to reduce its swap drawings by
that amount), and the sale of $12.5 million of French francs by the System
8/20/63
-5-
with the francs provided by the drawing on the swap arrangement.
The
aggregate amount of assistance to the dollar since. July 18 had been at
least $121 million plus the $28 million absorbed by purchases of gold
in the London market.
Reverting to the strong demand for Swiss francs in recent weeks,
Mr. Sanford said that some of the demand had been identified with movement of dollar funds by Latin Americans unwilling to divulge the true
ownershp of securities to avoid the proposed interest equalization tax
(and perhaps for reasons related to their own governments); some of the
demand had been associated with trust companies in the U.S. shifting
funds to Switzerland to obtain increased flexibility, in view of the
proposed tax.
Over and above these indications of actual flows of funds,
there had been reports by recently returned bankers and brokers, who
asserted that their commercial bank contacts on the Continent believed
that European holders of American securities would tend to liquidate
such securities because they viewed the proposed interest equalization
tax as a first
step in exchange controls on capital movements; such
contacts believed that losses of funds for this reason might exceed
amounts saved by the imposition of the tax.
Among developments in Europe affecting the status of the dollar,
it was worthy of note, Mr. Sanford said, that the French authorities had
tightened up materially their restrictions on borrowings abroad of French
companies.
This should have a salutary effect.
8/20/63
-6Turning to Canada, Mr. Sanford noted that the Bank of Canada,
after suffering further exchange losses, had increased its discount
rate from 3-1/2 to 4 per cent,
effective August 12, and the exchange
rate showed a moderate but short-lived rise.
92.35,
The rate was now about
some 20 points above the low reached on July 19.
The sterling market had been remarkably quiet during the past
month, and the rate had held at 2.80 or slightly better until yesterday,
when it dipped below par.
at 2.7990,
At that point the System Account purchased,
one million pounds of sterling which was being offered in
the market,
in order to nip in the bud any incipient speculative move-
ment, and the Bank of England cleaned up its market at the same rate
before closing for the day and leaving a trading order with the Federal
In addition, the Treasury offered to
Reserve that was not touched off.
purchase sterling.
The weakness in
sterling was attributed to a con-
siderable widening of the trade gap in
July.
The covered interest arbitrage between U. S. Treasury bills and
U. K.
and Canadian bills
no real advantage in
flow of fund
had recently
moving funds
in
been at or close to parity, with
either direction.
through other money market instruments,
Concerning the
i.e.,
U.
K.
public
authorities paper and Canadian commercial and financial paper, there
had been a virtual balance of small outflows and reflows for the past
four weeks, according to the fragmentary data collected at the Reserve
Bank's Exchange Trading Desk.
This compared with an outflow of about
8/20/63
-7-
$45 million in the previous four weeks.
in
Naturally,
the recent increase
the Canadian discount rate might change the picture again, as some
of the Canadin market rates had beer marked up.
reply to a request for further comment with regard to recent
In
developments
in
respect to sterling, Mr.
Sanford noted that the market
had reacted fairly quickly yesterday to the most recent British trade
figures.
While it could be said that the figures for any one month
were not particularly significant, there ias some feeling that a speculative movement might build up.
in
movement
Therefore,
in order to stop any such
its tracks, measures were taken to guard against it
and adequately.
So far as could be observed,
promptly
the sterling pressure was
not characterized by any unusual movement of funds, for example to
Switzerland.
manner in
It
appeared,
in
part,
to have something to do with the
which banks in this country and abroad manage their foreign
exchange positions.
In reply to a question as to whether there had been any indication
of an inflow of short-term funds following the Federal Reserve discount
rate increase, Mr.
he had cited in
Sanford said the only definite evidence was that which
his previous comments.
Movements of short-term funds
between this country and Canada and the United Kingdom, which are particularly susceptible to interest rate differentials, apparently were essentially
in
balance for the most recent four weeks whereas in the previous four
weeks there was a loss of $45 million.
No data were yet available to
8/20/63
-8-
indicate whether this situation had been altered by the increase in the
Canadian discount rate.
Neither was there any indication as yet of a
shift by U. S. corporations or others out of the Euro-dollar market.
However,
the narrowing of the differential between Euro-dollar rates
and short-term rates in this country would seem to suggest that perhaps
some tendency to shift out of the Euro-dollar market might develop.
Thereupon, upon motion duly made and
seconded, and by unanimous vote, the System
Open Market Account transcctions in foreign
currencies during the period July 30 through
August 19, 1963, were approved, ratified,
and confirmed.
Mr.
Sanford noted that the $50 million standby swap arrangement
between the System and the Netherlands Bank would mature September 13,
1963, and he recommended renewal of this arrangement for another three
months.
The proposed renewal of the swap arrangement, as recommended by Mr. Sanford, was
approved unanimously.
Mr. Sanford also noted that the Federal Reserve sterling/Swiss
franc swap with the Bank for International Settlements would mature on
September 10, 1963.
1963.
This swap was entered into originally on June 10,
In view of the tight situation in the Swiss franc market, he
recommended renewal for another three months unless conditions had
changed by early September.
The proposed renewal, as recommended
by Mr. Sanford, was noted without objection.
-9-
8/20/63
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' arceptances for the period July 30
through August 14, 1963, and a supplementary report covering the period
August 15 through 19, 1963.
Copies. of these reports have been placed
in the files of the Committee.
In
supplementation of the written reports,
Mr. Stone commented.
as follows:
Our principal concern during the past few weeks has been
to achieve slightly firmer money market conditions in order to
help bring about a level of short-tern interest rates more in
consonance with the discount rate increase adopted by the System
last month. In terms of Treasury bill rates, progress toward
few days of the
this objective was disappointing in the first
recent period. Shortly after the last meeting, we learned that
the Treasury would not, after all, offer a strip of bills during
the period, as both we and they had expected. Moreover, there
developed a particularly active nonbark demand for bills-especially from various State and local authority funds--which
absorbed dealers' limited supplies and pulled rates lower.
Indeed, the demand was such that dealers' trading positions in
bills fell from about $680 million on Monday, July 29, to about
$450 million on Friday, August 2--despite dealer awards of $640
million in the July 29 auction. By August 2, the three-month
bill rate briefly touched a low point of 3.20 per cent bid. If
not for the market's belief that additional Treasury cash
financing in the bill area was a likely possibility, rates might
well have pulled even lower.
The subsequent turn-around, which carried the three-month
rate up to about 3.36 per cent in yesterday's auction, had
several causes. Mainly, it was a product of the modest firming
of bank reserve positions which developed after the last meeting
of the Committee. Given this moderate edge of firmness, commercial banks were induced to make sizable net sales of bills.
8/20/63
-10-
Moreover, in the course of achieving a firmer condition in the
money market, the System sold about $500 million of Treasury
bills in three go-arounds of the market--on August 7, 13, and
15--which not only absorbed reserves but also helped directly
to enlarge market supplies of bills. The ability of the System
Account to make this volume of bill sales in the market, and to
satisfy part of the foreign account demand for bills, without
depressing reserve Levels too sharply, was partly a reflection
of the Account's purchases of roughly $280 million of couponbearing securities in the market.
At the same time that System and commercial bank selling
was adding to supplies, nonbank demand was tending to lessen
somewhat, and by Friday, August 16, the dealers' trading
position in bills had risen to about $1.2 billion--which,
however, was still a relatively low level by ordinary standards.
In addition, market expectations of Treasury financing in the
bill area were also a factor tending to produce cautious
attitudes and higher rates in the bill market--although it is
questionable how long these expectations would remain a factor
if the Treasury does not follow through with some offerings
fairly soon. As I shall outline in a moment, the market may
not have too long to wait before seeing these expectations
fulfilled.
In comparison with bills, the market in Treasury notes and
bonds was relatively dull during the recent period, with small
net
chanes
in
price and quiet trading, activity.
Here too,
expectations of Treasury financing overhung the market--in this
case involving anticipations of a pre-refunding or advance
refunding in which, as in other recent operations of this kind,
attractive investment opportunities wculd open up in every major
sector of the maturity scale.
There also was little change in prices of corporate and
municipal securities. New issue reaching the market encountered
fairly aggressive bidding by underwriters, but in most cases
only lukewarm interest from investors.
In the corporate area,
where supplies have been light and are expected to remain light
in the immediate future, the slow sales of recent issues have not
been a problem, but in the tax-exempt area some signs of congestion have again begun to emerge.
The Treasury faces a busy financing schedule for the next
several weeks. We expect that the first in a series of monthly
offerings of one-year Treasury bills may be announced tomorrow
for auction next Tuesday and payment on September 3. The amount
would be $1 billion. Then, probably on September 4, the Treasury
8/20/63
-11-
would announce an advance refunding operation for which
subscription books would be open from September 9 through
13. Details of the refunding are not yet decided, but it
may include a pre-refunding of May 1964 issues as well as
an advance refunding of some 1966 and 1967 maturities. At
the same time that it announces the advance refunding, the
Treasury would announce a $1 billion strip of Treasury
bills to be auctioned about September 11 and paid for a
week later. We understand that the cash borrowings through
the one-year bills and the bill strip would relieve the
Treasury of any need to borrow additional cash until early
October.
As a matter of information for the Committee, I should
like to turn for a moment or two to the question of the
procedures for allocating the System Account. We noted, at
the time the present procedures were adopted last March,
that the useful life of these procedures would be limited
and that we would continue in our efforts to devise a set
of rules that would be adequate to circumstances in which
The existing
reserve ratios push closer toward 25 oer cent.
procedures have worked very satisfactorily. But the fall
expansion of note and deposit liabilities will soon be getting
under way, and our gold stock will very likely show further
declines. Thus we may, sometime this fall, begin to experience
difficulty
with the procedures now in effect.
We have therefore developed, in a tentative way, a revised set of procedures which we hope to have in shape for
the Committee's consideration in the near future.
In further comments, made in response to questions, Mr. Stone
stated that recent dealer short positions in coupon issues reflected
primarily a commitment on the part of certain dealers to deliver $197
million of 4 per cent Treasury bonds of 1970 to Grant County, Washington,
by the end of this year.
This commitment was filed about the end of July,
at which time dealer positions in 5 to 10-year bonds automatically moved
from a long to a short position.
Actually, there were modest long
positions in the hands of some of the dealers.
8/20/63
-12With regard to Open Market Account transactions in
coupon issues
since the previous Committee meeting, Mr. Stone said the securities
purchased for the Account had been coming in part from the long positions
of those dealers who had such securities and in
part from investors who
were selling bonds in the market for one reason or another.
In every
case the Account operations in coupon issues had been addressed to the
problem of exerting some upward pressure on bill rates without any
sharp or major decline in reserve availability.
In order to achieve
these objectives in a situation where the Treasury did not add to the
supply of bills and nonbank demand for bills was vigorous, the Desk was
forced to resort to the device of purchasing coupon issues.
On August
1 and 2, when the first purchases were made, Treasury bill rates were
declining--reaching 3.20 per cent on the latter
day--and at the same time
a position of net borrowed reserves was being faced.
regard it
The Desk did not
as compatible with the Committee's instructions to supply
reserves through the bill
market under those circumstances.
available, however, and the Desk therefore bought bonds.
Bonds were
Some bonds
were also purchased on August 8 after bill rates had turned around and
had reached the level that prevailed at the beginning of operations under
the directive issued by the Committee at the July 30 meeting.
On August 8,
foreign account purchase orders for bills amounted to $41 million.
The
Account Management felt that if those bills were acquired in the market,
that might reverse some of the progress that had been made; therefore,
bills were sold out of System Account.
However, this again gave rise
8/20/63
-13-
to a net borrowed reserve position, and the Desk bought bonds offered
by dealers at their initiative.
Other coupon issues were purchased
last Thursday and Friday, the Desk having sold $400 million of bills
in the market on Tuesday and Thursday to exert upward pressure on the
bill rate.
That rate had moved up to the neighborhood of 3.30, and it
seemed to the Account Management that circumstances pointed to this
level as a plateau.
It appeared that if some additional bills were made
available to the market, the rate could be gotten up from the plateau
to the 3-3/8 per cent level mentioned at the July 30 Committee meeting.
The Desk was aware that it would be necessary to re-supply some reserves
absorbed through the sale of bills, and bonds again were available in
moderate amount.
The bill rate in yesterday's auction was 3.36.
However, net borrowed reserves again came into the picture to a slight
degree, and the Desk again supplied reserves by acquiring bonds.
In all
instances, the operations were directed toward the effect on the short
rate, not the long rate.
In reply to an inquiry concerning market reaction to these opera-
tions, Mr. Stone suggested that it
was necessary to go back to the 1961
experience in discussing this point.
The market had placed upon the
1961 experience the same interpretation as on the current operations.
It had become clear to the market rather quickly that operations in
long-term issues were addressed to the short-term rate, and that the
operations were being conducted in such a way as to insure the System's
8/20/63
-14-
remaining a marginal participant in whatever sector of the market it
conducted operations.
The article in the Federal Reserve Bulletin of
April 1963 had made that clear in respect to operations during 1962.
If on occasion bond prices declined and the System did not have a shortrate problem and was not in the market, he anticipated that there would
soon be a clear market understanding that the current operations in coupon
issues were of the same variety as the operations in 1961 and 1962
Askec
whether he felt
that commercial banks might have been led
to feel justified in extending their portfolio maturities in reliance
on Federal Reserve operations, Mr. Stone said he thought not.
On the
contrary, he believed that the market retained a healthy skepticism
about long-term rates.
There seemed to be a general expectation that
short rates had about reached a level where they might continue for
some time, along with some expectation of increases in long-term rates.
In further discussion of this point, Mr. Hickman agreed that
money market banks might be quite sophisticated about this matter and
anticipate an ultimate adjustment in
country banks, at least in
long-term rates.
However, some
the Fourth District, were being lured into
longer maturities by the plateau in long-term rates.
Some of them had
talked to him about this, and he had warned them against proceeding on
such an assumption.
Mr. Wayne referred to the case of a reserve city
bank in the Fifth District that did not have any maturities under one
year, perhaps none under two years, apparently relying heavily on
expectations with regard to Federal Reserve operations.
8/20/63
-15In response to an inquiry about the further availability of
coupon issues to the Account, Mr. Stone said that more were available.
The volume of offers each day ran from $150 to $300 million.
The Desk
tried consistently to remain a marginal participant in whatever part of
the market it conducted operations.
Mr. Bopp noted that he had been a participant in the morning
open market telephone conference call during the past period.
To in-
dicate the type of problems that had been faced, he observed that as
of Friday the estimate was for net borrowed reserves of something like
$30 million, weekly average.
Had this persisted and such a figure been
published, various interpretations would have been placed upon it.
However, a supplying of reserves through the bill market would have had
some effect on the bill rate, which was no higher than desired.
the Desk went into coupon issues.
Therefore,
It was a complicated thing that the
Desk was trying to achieve, and he felt it had performed well under the
circumstances,
Mr. Stone estimated that in the absence of the operations in
coupon issues, reserves would have had to be about $100 million lower.
on average to achieve the same results in terms of the bill rate.
Chairman Martin mentioned that some market participants with
whom he had talked had at first been very skeptical about operations
designed to bolster the short rate and keep the long rate from rising.
Rather interestingly, however, they now appeared to have more respect
8/20/63
-16-
for such operations than previously.
The Chairman also observed that
greater loan demand at banks could change the picture rather quickly.
The expectations of bankers regarding loan demand were not yet being
fulfilled.. The demand might come quite suddenly, but it had not appeared thus far.
Asked whether it would be fair to say that the System purchases
of coupon issues did not push up the price of coupon issues and that
whatever impact the purchases had was to prevent a decline in such
prices, Mr. Stone replied that he thought this was probably right.
doubted, however,
that the declines would have been very great.
He
The
prices of issues from 1965 on out showed a gain of only one or two
thirty-seconds, and other issues showed a decline of one or two
thirty-seconds.
In the absence of the System operations, he guessed
there might have been a decline of eight or ten thirty-seconds.
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 30 through August 19, 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 following
statement on economic developments:
You may recall that I reported at the last meeting that
the economy seemed to be moving along as well as, or perhaps
a little better than, one might reasonably have expected, but
that this relatively good performance had not yet been fully
8/20/63
-17-
reflected in businessmen's attitudes toward the period ahead.
Since then, it appears that economic activity has generally
continued to improve and that the lag in confidence and
expectations as to the future is rapidly being eliminated.
In terms of the indicators of actual activity, we find
pluses in both the current data and revisions of earlier months
for retail trade and industrial production. Further evidence
of better than expected performance is found in the upward
revision of the new orders figures for June, the continuation
of the record $64 billion rate of construction activity in
July, some further pickup in employment, and continuing good
reports on second quarter profits.
Evidence of the improved psychological climate can be
found in the renewed bull movement in stocks and the strong
buying intentions expressed by onsuers in recent surveys.
Adding further to confidence has been the strong behavior of
the so-called leading indicators, which were "officially"
interpreted at the Treasury consultants' meeting last week as
signaling an upward movement in general activity for at least
six to nine months to come. It may be worth noting, despite
the fact that their record as forecasters is not very impressive, that the academic economists at that Treasury meeting
all seemed quite confident that business would continue to
improve through the remainder of the current year, and they
addressed such critical comments as they had on current policy
to its failure to close the gap between actual and potential
output, rather than to the danger of an imminent downturn.
All this is not to say that the third quarter, as a whole,
is not still likely to show less expansion than its predecessor-but only that most expectations had been geared to more flattening out than has developed thus far. If markets carry their
optimism too far, they are Likely to be disappointed by the
August performance. Taking the production index as an example,
present steel and auto production schedules, combined with as
much expansion in other areas as we had in July, would only
hold the index at its present level--not carry it up still
another point.
Thus we find ourselves in a situation very similar to
those which have occurred previously in this period of expansion
and recovery. Economic activity is expanding, moderately on the
whole, as one sector after another seems to spurt forward and
then pause. There is no clear reason to suppose that it will
depart from this pattern in the period ahead. Business sentiment,
or confidence, has been fluctuating more widely around this
already undulating uptrend, and at the moment it seems to be
improving rather rapidly.
8/20/63
It is really impossible to relate these changes in
general economic conditions and sentiment to the recent
moderate shifts in Federal Reserve policy. As best we can
measure it, there has been little or no significant change
in the seasonally adjusted rate of monetary expansion.
Thus, at least by this test, whatever the Committee's intentions may have been, there has been little or no shift
in policy of which to measure the impact. Much the same
might be said of long-term rates and credit availability
in long-term capital markets. Whether by chance or by
design, recent changes in credit cost and availability
seem to have been limited to the short money market--where
one would not expect to find much impact on business activity.
On the other hand, it is hard to relate the improved
domestic sentiment to any increase in confidence in the dollar.
If anything, skepticism as to the adequacy of measures to protect the dollar seems to have increased, both at home and
abroad.
I might add in passing that similar observations might be
made regarding fiscal policy.
Measured by the current deficit,
the Federal Government has been providing less stimulus to the
economy than was expected--but it is hard to relate any of the
shifts
in output or sentiment to this phenomenon.
It is even
hard to see any connection between the recent improvement and
the fact that the tax bill has finally made some tortuous
progress.
Taken altogether, the evidence seems to suggest that the
private sector of the economy is plodding ahead, not expecting
or getting much help or hindrance fron monetary, fiscal, or
I would say that this performance
debt management policies.
tends to confirm the opinion--which I think everyone around
this table has expressed at one time or another--that, for
better or worse, the economy has a considerable capacity to
adapt to small changes in policy and take them in its stride.
It would be a great mistake to leap from this observation to
the conclusion that the rate of activity is completely insensitive to changes in the monetary climate. As suggested
earlier, the general presumption has been that a firming of
rates and tone successfully quarantined in the short money
market sector should not have much effect on domestic invest-
ment. That this judgment appears to be vindicated by recent
developments does not mean that a more generalized increase in
rates and lessening of credit availability would not exert a
considerable restraining influence on investment decisions.
8/20/63
-19Mr. Brill presented the following statement on financial devel-
apments:
The past three weeks have provided a sharp test of money
market management in achieving multiple objectives, with what
appears to have been a substantial degree of success. Despite
erratic but on the whole rather moderate reserve needs, despite
Low dealer inventories early in the period, despite substantial
norbank demands for bills, and despite the absence of any thrust
to an expectant market from debt management, bill rates have
been moved up closer to the 3-3/8 per cent level and, with just
a few days' exception, the Federal funds rate has been kept
snug against the discount rate. Long-term rates, on the other
hand, have been stable.
These rate developments were accompanied by a shade more
pressure on bank reserves. Required reserves supporting private
deposits have stayed above the 3 per cent guideline, but by a
somewhat narrower margin than in July. Excess reserves have
been somewhat smaller than the average in July and member bank
borrowings somewhat higher, yielding a free reserve average over
the first two weeks of this month below $100 million, compared
with almost $160 million in July.
Now we are entering a period in which a number of seasonal
factors are expected to be operating in the direction of easing
the task of maintaining the higher level reached by short-term
rates. Nonbank demand for bills should be tapering off and then
turning to substantial supply, as dividend and tax payment dates
approach, and the impact on markets should be accentuated by the
fact that dealer inventories have beer restored to more usual
levels from the very low point reached earlier this month. The
Treasury is expected to be adding to the supply of short-term
instruments, on net, through the new monthly cycle of one-year
bills and through a strip issue to sop up any demands for bills
which might arise from swapping operations in the yet-to-beannounced pre- and advance refundings.
Reserve needs over the next three weeks will be substantial,
first from month-end reduction in float and then from the currency
outflow over the Labor Day week end, and all through this period
from the usual fall step-up in business loan demands. The question at the moment is whether these reserve needs can be met in
full while maintaining upward pressure on bill rates. The
answer is probably "yes," by artful meeting of reserve needs on
a somewhat reluctant basis and, as far as possible, through
purchases outside the short-term area. But the probability of
8/20/63
-20-
success is heavily weighted by the expectation of full strength
in the seasonal forces operating to increase the market supply
of bills and by the expectation of no adverse market developments
arising from the Treasury's debt restructuring operations.
It would be wise, however, to exercise some caution in
assessing the strength of seasonal influences on which we may
count at this stage of the economic cycle. This is not to
suggest that I detect any note of weakness in the fundamentals
of the economy. As Mr. Noyes has pointed out, expansionary
forces continue far stronger than many had anticipated this
far along in an upswing. Total output is running close to the
rate the Council of Economic Advisers had projected earlier
this year as the upper limit of expectations after a midyear
tax cut. While there is no clear evidence pointing to a sharp
acceleration in activity, neither is there any to suggest any
marked slowing from the 5 per cent annual rate at which dollar
GNP appears to have increased so far this year.
But even with continued expansion in economic activity,
it is possible to get less than full seasonal pressures in
financial markets. As a result of high levels of activity and
last year's revision in business taxes, the internally generated
flow of corporate funds was in record volume in the first half
of the year while investment spending remained at or below 1962
levels.
Corporations apparently did not use their surpluses to
add to liquid asset holdings--in fact, it is estimated that they made
more that seasonal reductions in these assets--but they did reduce
sharply their dependence on external financing both from banks
and from the capital markets.
One can only speculate about more recent developments in the
corporate financial picture, but there is nothing in the data on
sales and costs to suggest any reduction in profits in this third
quarter. Even if spending for irventories and plant and equipment
should rise to the levels projected earlier by businesses, dependence on external financing and pressure to liquidate financial
asset holdings are likely to be small this autumn compared to the
strong demands for credit that developed in the late summer and
fall of last year. It would take substantially more of a rise in
spending than is currently projected to put much of a pinch on
the fund. of the business sector, and the sluggish business loan
demands of recent weeks andthe dearth of new corporate security
issues on the calendar suggest that such a pinch has not yet
occurred. Federal financing needs are also running less than was
projected earlier, and the high level of the Treasury balance at
a time when the Treasury is seeking a further extension of the
debt ceiling is limiting debt management's use in support of
short-term rates.
8/20/63
-21-
The flow of consumer savings to financial institutions
seems to be slackening somewhat from the peaks of late 1962
and early 1963, but it is still at historically high levels.
The consumer sector as a whole has absorbed much of its own
saving through the rising incurrence of mortgage debt, and
there are no signs of any diminution in this loan demand.
One can wonder, however, whether the rise in consumer credit,
which alo has absorbed more savings this year than last,
will be sustained short of some--as yet unobserved--substantial
easing in terms.
To summarize and perhaps oversimplify, at current levels
of interest rates, at current propensities to spend and invest,
and with the current total and composition of tax burden, the
tending to generate demands for financial
economy is still
assets faster than demands for borrowed funds. The reluctant
downward pressure on interest rates cannot be alleviated by the
classic 19th century device of permitting funds to flow abroad
One alternative, increasing domestic credit
at a faster rate.
demands at prevailing interest rates, apparently has to continue
to wait on some stimulus from fiscal policy. The other alternative
is to reuce the supply of funds flowing into domestic credit
markets, at least that supplement to saving flows supplied by the
central bank. So far, our policies haven't reduced this supplement, but rather have made it more expensive to obtain and more
temporary in nature, by forcing the growth in bank reserves to
come largely from the discount window rather than the trading
desk. Whether this will be adequate to sustain the present rate
structure in the context of continued moderate credit demands
seems doubtful. Perhaps not in the three-week period immediately
ahead, when so many factors will be operating to sustain rates,
but later in the month when some of the seasonal factors start
running against us, it is possible that the twin targets of
continue credit availability and high short-term rates will
prove more difficult to reconcile.
Mr. Sammons presented the following statement with respect to the
U. S. balance of payments:
According to preliminary monthly data, the balance of
payments deficit in July was considerably reduced from the high
second quarter rate.. With the French and Dutch advance repayments, and some benefit from the reversal of end-of-June window
dressing, there was actually a small surplus. Without these
special influences, and making some allowance for seasonal
factors, the "gross" deficit was probably under $200 million--still
8/20/63
-22-
uncomfortably high, but much reduced from the $400 millionper month second quarter rate.
However, the partial weekly data--which are frequently
quite misleading--show a $190 million deficit again for the
first two weeks in August, still slightly better than the
second quarter rate, after rough allowance for seasonal factors.
However, it seems clear that, at best, we are still operating
in the $3-4 billion a year deficit range.
We do not yet have any direct data on the factors--trade
or capital movements--accounting for the somewhat improved
July position. It is, therefore, still too early to say with
any confidence what effect the discount rate rise and the
President's balance of payments message have had on our balance
of payments. Perhaps all that can yet be said was said here by
Mr. Hersey three weeks ago:
"the initial effects have not been
clearly favorable for the U. S. balance of payments outlook."
Activity in the market for new foreign issues has been
relatively limited in the last month. It is not clear to what
extent this situation represents the normal seasonal lull and
to what extent it represents a reaction to the interest equalization tax proposal.
But the latter has certainly produced a
widespread feeling of uncertainty in the market.
It must be remembered that long-term interest rates in many
foreign countries whose securities are not exempt from the proposed
tax exceed rates in the United States by about 1 per cent per annum
or more.
Thus, unless alternative sources of funds are forthcoming,
some borrowers may still come into the U. S. market even if their
issues are subject to the tax.
Data on short-term capital movements in July are not yet
available, but the recent rise in short-term interest rates in
the United States has not yet resulted in narrowing interest
rate differentials to an extent that might be expected to have
The uncovered difference
a major effect on capital movements.
between the U. K. and U. S. Treasury bills dropped about 35
basis points from late June to the present; but on a covered
basis there was little change as the discount on forward sterling
narrowed. The covered advantage on Canadian Treasury bills has
dropped from about 30 basis points to zero due entirely to a
The interest rate
wider discount on the forward Canadian dollar.
on 90-day Euro-dollar deposits continues to exceed the U. S. bill
rate by about 70-90 basis points, and is presently about 60 basis
points above the rate offered by U. S. bankF on marketable certificates of deposit.
Nor do we find any great encouragement in the movement of
exchange rates. The U. S. dollar has strengthened against the
-23-
8/20/63
Canadian dollar and, to a much lesser degree, against sterling.
On the other hand, the dollar has required significant support
against the Swiss franc, and other Continental currencies have
remained firm. Reserve gains in July were again large for
Germany ($70 million) and for France (over $200 million before
the debt repayment).
The Bank of Canada's action to raise its discount rate to
4 per cent effective August 12 had only a very temporary
strengthening effect on the Canadian dollar.
Canadian short-
term rates have moved up about the same as U. S. rates;
Canadian long-term rates have also risen somewhat, thus
slightly widening the difference between U. S. and Canadian
yields at that end of the market.
Whatever may be the effects of policy measures already
taken--or of others that may be taken--on capital movements
and government aid, from all points of view the most satisfactory solution to our balance of payments problem would involve
an increase in our export surplus. Since there is no reason
to expect imports to decline--on the contrary, they will continue
to rise as our output increases--this means larger exports.
The
latest trade figures, while moderately encouraging, do not yet
show any signs of a major breakthrough. As a matter of fact,
June exports were down about 4-1/2 per cent from May, and, at
an annual rate of $21.8 billion, were about equal to the
average or the entire first half of the year, and about 4-1/2
per cent above the 1962 average.
It may be that the relatively more rapid rise in wages
and prices that has occurred in Europe, in the last 2-3 years
has not yet been reflected in export prices to the full extent
that it will be--there are always some lags in these things.
Nevertheless, it would be foolish to depend on additional help
from this quarter. The need for continuously and forcefully
strengthening the competitive position of U. S. goods in world
markets, if we are to secure a liberal solution to our problem,
becomes increasingly evident, in my judgment.
Chairnan Martin called at this point for the usual go-around of
comments and views on economic conditions and monetary policy beginning
with Mr. Treiber, who presented the following statement:
Over-all economic activity continued to push upward in
July. The further rise in industrial production, despite the
downward influence of steel and auto output, the increase in
8/20/63
-24-
equipment production, the rise it outlays for commercial and
industrial building, and the increase in retail sales strengthen
meeting of the Committee,
the view, expressed by many at the last
that the domestic economy will advance further over the remainder
of the year. There are still uncertainties with respect to the
prospects for Federal income tax reduction this year, the ability
of auto sales to sustain their recent high levels, and the ability of other industries to offset the dampening effect on
production that is likely to be exerted by reductions in steel
inventories.
Employment in July rose about 1/2 million to reach a new
high. But the labor force rose by almost the same amount. Thus
unemployment declined only slightly.
The United States balance of payments deficit for the
second quarter of 1963 was extraordinarily bad, amounting to
about a $5 billion annual rate. The large increase in the
deficit between the first and second quarters was caused to a
considerable extent by expanded private capital outflows, a
factor which can be most readily influenced by monetary policy.
The surplus in July was greatly influenced by large debt prepayments by France and the Netherlands, by the liquidation of
window-dressing operations undertaken by U. S. banks with foreign
banks over the midyear statement date, and by the reaction in the
Caradian exchange market to the interest equalization tax proposed
by the President in mid-July. Without those favorable factors,
the July deficit would have been much less than the second
quarter deficit rate, but still above the first quarter deficit
rate. Sizable deficits have been reported for the first half of
August.
The increase in the discount rate and the increase in the
maximum permissible rates under Regulation Q have had a favorable effect on the dollar in the foreign exchange market. The
situation has been complicated a d confused, however, by the
interest equalization tax proposal.
The increase in the Canadian discount rate last week and
subsequent adjustments in Canadian money market rates have reduced, as regards Canada, the effect of our own rate increase.
Euro-dollar rates have risen about 1/4 per cent since early July.
Most European money markets have shown little change. Monetary
conditions in Europe remain tight on the whole.
Seasonal adjustment problems make it difficult to appraise
changes in total bank credit this summer. To date, however, the
measures taken to strengthen our balance of payments appear to
have had little impact on the availability of credit. While
there has been some reduction in marginal reserve availability,
8/20/63
real estate and consumer loans have been rising, and the
investment by banks in municipal securities continues to be
substantial. The demand for business loans, however, remains
slack, and there is some question as to whether consumer
credit may be approaching a temporary peak or a plateau.
Corporate liquidity continues to be ample. Bank liquidity
showed little change in July.
Sensitive short-term interest rates have risen substantially. Since early June the average issuing rate on the
competitive bidding for three-month Treasury bills has risen
nearly 3/8 per cent. Secondary market rates for three-month
certificates of deposit have risen by 40 to 50 basis points.
Federal funds rates have been close to the new discount rate,
and dealer loan rates have been substantially higher. On the
other hand, long-term rates have shown virtually no change.
Money market developments since the last meeting of the
Committee have contributed to the effectiveness of the increased discount rate. For balance of payments purposes, the
System has taken the important steps of raising the discount
rate and of using open market operations to put upward pressure
on short-term interest rates. The results to date of these
steps are encouraging. I believe that it is important that
open market operations continue to be conducted so as to
contribute most effectively to an improvement in the capital
account cf our balance of payments.
Some further modest increase in short-term rates would
seem desirable. I would suggest a three-month Treasury bill
rate at 3-3/8 per cent or higher, with Federal funds selling
consistently at the discount rate. We should continue to buy
intermediate- and long-term issues to supply reserves, where
such purchases are feasible and the short-term rate situation
makes it advisable.
The Treasury plans to announce a new issue of $1 billion
one-year bills tomorrow. I understand that it is prepared to
announce an offering of a strip of about $1 billion bills
simultaneously with any announcement it may make of advance
refunding in the period ahead. Such financing in the Treasury
bill area should provide a welcome offset to the downward rate
pressures that will be exerted by the System in meeting the
heavy reserve needs ahead.
I think that the economic policy directive should be
retained in its present form in order to assure continued
progress toward a level of short-term market rates that is
clearly consistent with the recent increase in the discount
rate.
8/20/63
-2.6Mr. Shuford said that since the last Committee meeting there
had been no significant change in the trend of economic conditions in
the Eighth District.
The economic improvement,
which had been under way
since the first of the year, generally paralleled expansion on the
national level.
Employment in the District's major labor markets was up,
and industrial use of electric power was continuing the upward movement
that began early in the year. Bank deposits and business loans leveled
off in July but had shown a substantial increase since the first of the
year.
The recent advance in the national economy had been facilitated
to some degree, in Mr. Shuford's judgment, by monetary expansion during
the past year, and he believed that a continuing reasonable monetary
expansion would be desirable as a further aid to economic progress.
Steps to increase short-term rates in recent weeks appeared to have been
successful, but it seemed to him it would not be desirable, through
monetary policy, to attempt to push rates much higher than the recent
levels.
While he favored the recent increase in the discount rate, he
thought monetary policy had made, for the time being, an appropriate
contribution to the balance of payments problem.
Any further increase
in short-term rates might cause other central banks to raise their
rates, thereby offsetting the action taken here.
While the President's
recent balance of payments message to Congress with respect to actions
taken was encouraging, he continued to believe that more positive actions
8/20/63
-27-
should be taken in areas other than monetary policy such as Government
expenditures abroad.
period could result in
Primary reliance on monetary policy for an extended
the postponement of fundamental corrections.
As to monetary policy for the immediate future, Mr. Shuford said
he would not attempt to hold free reserves and member bank borrowings at
any particular levels.
If the bill rate remained at recent levels, and
he believed it should--3-3/8 per cent would not be excessive--banks
might undertake to reduce borrowings and sell bills.
If, in order to
keep banks in debt, the System should limit its purchases, bank reserves
and the money supply presumably would decline.
sort of development should be avoided.
In his opinion,
this
As he saw it, the aim should be
to maintain short-term interest rates at about recent levels and, to the
extent possible,
supply the banking system with reserves sufficient to
allow the money supply to increase at about the rate of the past year-3-3/4 to 3-1/2 per cent.
In the light of current business conditions,
and with seasonal factors exerting an upward pressure on rates during
most of the remainder of the year,
such a policy of supplying reserves
would not seem likely to result in a decline in short-term rates.
Mr. Shuford went on to say that he would not favor a change in
the discount rate,
and that he would not urge any drastic change in
policy directive.
However,
the word "increase" in
the
the second line of
the first paragraph might be dropped, and the second paragraph could be
redrafted to call for open market operations to be conducted with a view
8/20/63
-28-
to maintaining about the current degree of money market firmness,
rather than a slightly greater degree of firmness.
Mr. Bryan reported that statistics
for the Sixth District did
not seem to differ significantly from the national statistics.
Where
they did differ, it was largely in the field of financial items.
Changes in demand deposits, currency, and time deposits from a year
ago had gone from a plus figure to a negative figure, contrary to the
national trend.
defined.
The same thing was true of the money supply, narrowly
There had been a decline in loans, at member banks, and a
decline in loans and investments.
The unemloyment situation was
apparently better than in the nation as a whole.
Turning to policy considerations,
Mr.
Bryan noted that
in
the
last half of July there had been a growth o. 3.6 per cent from a year
ago in the money supply, which was the greatest change from year-earlier
figures since January 1962.
deposits were included.
There was an 8 per cent increase if time
When it came to reserves, total reserves since
last May showed a 6.7 per cent increase.
Required reserves showed a 6.8
per cent increase; nonborrowed reserves a 4 per cent increase.
He could
not see that, in the longer run,. the System could give effect to the
shift in policy that was decided on in May, and was signalled more
recently by the discount rate increase, without lowering substantially
the growth and availability of reserves.
In light of that belief, and
in the absence of economic reasons for retreating from the present posture
of policy, he felt that the System must begin lowering availability of
8/20/63
-29-
reserves.
He was not certain how to translate that suggestion in terms
of total reserves or any other reserve figures.
If
put in
terms of
free reserves., however, he would advocate fluctuating around a central
target of zero.
Mr. Bopp reported that the Third District's participation in
national business improvement was spotty.
While recent labor force
developments had been mildly favorable, output and demand indicators
were lagging badly.
The northern an
western portions of the District
seemed to be bumping a descending ceiling of economic potential, and
their performance was not helped by concentration in certain industries,
notably the production of apparel.
Except for one week, the policy of less ease had reflected itself
in a basic reserve deficit at Third District city banks.
the Reserve Bank, however, had been light.
Borrowing from
Loan demand was still rather
weak; for the year to date, loans of weekly reporting banks had risen by
about a third less than in the same period last year.
So far the experiment that the Comittee had launched seemed to
be working, Mr.
Bopp said.
Given the decision to seek higher short-term
rates, it was gratifying that longer term rates had not risen.
And
reserve availability,
as measured by free reserves and total reserves,
had been maintained.
On the other hand, the volume of borrowing, which
might be a better clue to credit tightening at this juncture, was rising.
8/20/63
-30The increase in the Canadian bank rate was disturbing, Mr. Bopp
added.
Despite official assurances that this was purely a technical
move, and granting that the Canadian situation was somewhat special,
still it illustrated the kind of pressures that could nullify the
balance of payments effects of higher rates here.
If other countries
in time followed suit and this country attempted to keep pace, the
upward movement in rates not only could greatly aggravate the domestic
economy but could lead to world-wide difficulties as well.
Mr. Bopp expressed the view that since short-term rates were
about at the levels previously intended, the Desk should now concentrate
on keeping the reserve supply as large as possible and borrowing as small
as possible.
If short-term rates tended to slip, he would prefer to meet
the situation by purchases of coupon issues and sales of bills, and by
Treasury action to increase the supply of short-term debt, rather than
by reducing the availability of funds.
rate at this time.
He would not change the discount
As to the current policy directive, he would urge
that it be modified along the lines suggested by Mr. Shuford to avoid the.
cumlative effect of "a slightly greater degree of firmness."
Mr.
Hickman commented that steel output had shown only minor
changes in recent weeks, both in the nation and in the Fourth District.
An estimate had been made that steel ingot output in August for the
country as a whole would aggregate 95 million ingot tons, at a seasonally
adjusted annual rate, which would represent the largest month-to-month
decline this year.
According to confidential reports received from
8/20/63
-31-
several major steel producers, orders picked up more than seasonally
in July, and only slightly less than seasonally during the first
of August.
half
Reserve Bank analysts and others estimated that weekly
ingot production would not show significant improvement until the third
week in September.
Earlier, a turn had been anticipated three weeks
sooner.
Domestic new car sales declined during the first ten days of
August, largely because of a maldistribution of dealer stocks and a
shortage of popular lines.
Basic demand for new cars apparently had
continued strong, inasmuch as used car prices climbed in July, after
seasonal adjustment.
Based on preliminary estimates of domestic sales
of 550,000 units in August, production of
of 12,000 units,
160,000 units, and exports
inventories by the end of the month would probably
drop by 40 per cent, and would he below the levels of most recent good
automobile years, including 1955.
Mr. Hickman went on to say that as Mr. Noyes had indicated, the
combined weakness in autos, auto part , and iron and steel was equivalent
to a drop of about one-half of a point in the Board's production index
in July, but this was more than offset by advances in other components
equivalent to 1.4 index points.
In August, the Reserve Bank expected a
decline in the same areas of weakness equivalent to 1 to 1-1/2 index
points.
Thus, all other forms of output would have to advance as much
in August as in July for the total index to stand still.
However, it
-32-
8/20/63
was now becomLng clear that, contrary to misgivings previously expressed
in many circles,
at least
the production inde
as high as in
in
the third quarter would average
the second quarter.
In the fourth quarter,
he
would expect the index to rise because of basic strength in demand for
autos and the related demand for steel.
Turning to the employment situation in the Fourth District,
Mr. Hickman reported that the increase in the seasonally adjusted rate
of insured unemployment, which was expected in the steel centers, finally
became evident in early August in various areas, including Cleveland,
Steubenville-Weirton, Lorain-Elyria, Canton, Youngstown-Warren, Pittsburgh,
and Hamilton-Middletown; other centers showed continued improvement.
The net effect of the cutback in steel in the District thus far had been
slight, and the District's insured unemployment rate continued below
that of the nation and substantially below a year ago.
With the up-
grading of the Canton labor market in July, only four of the fourteen
labor market areas in
the District remained in
the "substantial
labor
surplus" category, a proportion roughly similar to that of the rest of
the country.
So far as banking and monetary statistics were concerned, Mr.
Hickman said it appeared to him that reserve availability remained
excessive, despite a minor decline in net free reserves
and a moderate rise in member bank borrowing.
in
recent weeks
Both total reserves and
reserves available to support private deposits increased considerably
8/20/63
-33-
from June to July; and actual required reserves continued above the
standard guideline.
Both the money supply and time deposits increased
smartly in July.
Mr. Hickman noted that banks had continued to acquire large
amounts of municipal securities, real estate loans, and other longerterm, less-liquid, higher-yielding assets.
The large amount of funds
flowing into longer-term municipals in recent weeks could, in his
opinion, be explained in part by expectations of a pegged structure of
rates generated by recent System operations.
Should these expectations
prove unwarranted, some Fourth District banks might be in serious difficulty.
Moreover, the System would find itself increasingly limited
in the flexibility of its operations the longer present operations were
continued.
Mr. Hickman added that he was refering specifically to operations of the Desk thus far in August.
According to his records the
System purchased intermediate and long-term Governments on August 1, 2,
5, 8, 15, and 16 and sold bills on August 7, 8, 9, 13, and 15.
The net
effect was to twist the yield curve up on the short end and down on the
long end.
The Committee's policy directive provided for a slightly
greater degree of firmness in the money market but said nothing about
an easier tone in the long-term market.
Mr. Hickman expressed the view that the Committee should continue
to press for reduced reserve availability, should instruct the staff to
8/20/63
-34-
lower its guidelines, and should abandon the twist operation.
If, as
he hoped, the Desk was instructed to shift from a pegged to a free
structure of interest rates, this should either be announced publicly
or should be made clear to the market through a demonstration of the
readiness of the System to sell as well as buy long Governments in the
market.
He saw no reason to change the directive as currently worded,
provided it was adhered to.
Otherwise, he felt that the directive
should be revised to indicate that the System was engaging in a twist
operation.
Mr. Hickman also brought out that beginning in late August it
would be necessary for the System
to take care of seasonal needs.
to inject large amounts of reserves
If conducted through the open market,
this would put downward pressure on money rates, which could have an
adverse effect on the balance of payments position.
The Board of
Governors might wish to consider the alternative of a slight reduction
in reserve requirements.
Any offsetting adjustments,
if needed, could
be effected through sales of intermediate and long Governments, as well
as Treasury bills; this would reduce the pressure on gold reserves.
Mr. Mitchell commented that the business situation seemed to
have developed better this summer than he had expected.
The economy
apparently had absorbed the contractive effect of the steel inventory
adjustment.
first
About the same levels of output and activity as in the
part of the year appeared likely to continue for the balance of
8/20/63
-35-
the year.
being made,
This meant, of course, that little or no contribution was
at this level of activity, toward cutting down the gap
between capacity and performance.
Many people, he observed,
believed
that the only way the gap could be narrowed was through changes in the
tax structure.
The present posture of the System was not entirely to his liking,
Mr. Mitchell said, but it
was up to the System to find out how effective
Thus far there was no evidence that it
this posture was going to be.
was damaging the domestic economy,
the balance of payments situation.
and no evidence that it
had improved
The only clear evidence was that the
Government, and perhaps some short-term borrowers, were sustaining
higher interest costs than before.
coming to any firm conclusions.
More evidence was needed before
It would be unfortunate, he added, if
there were further upward movements in foreign bank and money rates.
As to the directive, Mr.
a sensible suggestion.
Also,
Mitchell felt that Mr.
Shuford had made
he agreed with Mr. Hickman that the directive
should contain some reference to System operations in long-term securities,
if such operations were to be continued.
The Manager should not be
placed in a position where he seemed to be operating without specific
instructions from the Committee.
Mr. Shepardson commented that the outlook was encouraging to
him so far as domestic economic activity was concerned.
In his opinion,
the recent change in monetary policy was in the right direction and
8/20/63
-36-
should be continued; monetary expansion
still appeared greater than
justified.
Mr. Shepardson did not think the solution to closing the gap
between performance and potential capacity was to be found in increasing
the money supply.
That was not to say that it should be curtailed or
cut back, but he questioned the rate of expansion, feeling that the
tendency had been to press more on the money supply than on other
factors.
He had been concerned for a considerable time about the lip
service given to the continuing underutilization of resourses[sic].
In the
first place, he was not sure how usable the unutilized capacity was,
either in terms of plant and equipment or labor.
There were not going
to be more jobs for unskilled labor if the main interest was in eccnomic
progress and growth.
Efforts should be made to stimulate investment in
new development rather than thinking about going back to a fuller
utilization of obsolete equipment and unskilled labor.
To obtain this,
there must be adequate profit incentives, which meant containment of
cost increases.
Fundamentally, an increase in employment was not going
to be obtained by increasing wage rates.
What was needed was a stand-
still in wage rates to allow American businesses to become more
competitive, thus increasing activity at home and improving the balance
of payments situation.
A way must be found of containing wage crawls
until a higher level of employment was attained.
More attention also
should be given to minimizing some of the disincentives to employment--
-37-
8/20/63
making it too easy for folks to hunt for jobs where they knew they would
not find them.
A lot of people will resist making efforts to find
employment as long as they can get by without too much discomfort.
Many of the existing programs tended to make it possible for people
to avoid the burden of qualifying themselves for available jobs, thus
perpetuating unemployment.
Mr. Shepardson said he realized this was outside the sphere of
monetary policy.
The changes had to come elsewhere.
However, he did
not think the situation was helped by attempting to provide a cure
through monetary policy.
Monetary policy had been more than easy, and
the rate of monetary expansion should be slowed down.
On that basis,
he would favor retaining the existing directive, thus continuing to
exert some additional pressure.
It also seemed to him that whatever may
have been accomplished by the twist operation, there was a limit at some
point.
He was not at all sure but that this point had been reached.
Perhaps the Committee should now allow the whole range of interest rates
to find normal levels and relationships.
Mr. Robertson said that, as everyone knew, he had had grave
doubts about the bill-rate policy that the Committee had been following.
He doubted that it would have any important bearing from the standpoint
of the balance of payments problem, and he thought it could have an
adverse effect on the domestic economy by hampering expansion.
He
thought, also, that it would sooner or later result in an increase in
-38-
8/20/63
long-term rates.
Likewise,
he felt that the tinkering operations
which the Committee was engaging would create long-run problems.
quicker they were terminated
be unwise for
to another.
the Committee
Having arrived
to flop back and
at
the position
suggest staying put and maintaining
in
to retention of the present directive,
to move into a tighter position.
with Mr.
Shuford's
position pending a
change,
At the same time,
the better.
The
would
forth from one position
of the moment,
even keel.
he would
He would not agree
which provided
He would,
it
in
however,
for continuing
accept
the directive
which looked toward maintaining an even-keel
re-evaluation
of the effects of present policy at
the next Committee meeting or thereafter.
Mr.
Mills said he continued to hold the views he had expressed
at recent Committee meetings.
noted,
There were circumstances prevailing, he
that were beyond the control
of the Federal Reserve System;
actions, or lack of appropriate actions, in the fiscal area of the
Government's responsibilities had shifted the burden of combatting the
balance of payments problem onto the Federal Reserve.
That being the
case, he believed the System was committed to carrying on the policy
now in effect, with the full knowledge that
and economically undesirable.
it was replete with risks
As to the technical side of operations,
he believed the Committee's only choice was to make effective the
policy that
had been chosen by the Committee.
But if that was the
course decided upon, it was probable that the supply of reserves would
8/20/63
-39-
be contracted.
Along with the contraction, it was reasonable to
anticipate that the level of required reserves would shrink, and at
the same time that excess reserves and free reserves would rise.
If
free reserves did rise, that would, of course, place a softening effect
on bill rates; this was a development that would have to be accepted.
If an increase of free reserves due to a reduction of required reserves
was taken as a signal to absorb reserves, that would compound the
pressure on the supply of reserves and the availability of credit
severely and unnecessarily.
He had complete sympathy with Mr. Hickman's
desire to break loose from the pegging operation being followed in the
conduct of the System Open Market Account.
In bygone days, Senator
John Sherman of Ohio, when it came time to consider the resumption of
specie payment and there was great concern that the resumption would be
disruptive to the economy, said "the
time to resume is to resume."
At a
more appropriate time that might be an example to follow with respect to
discontinuing the pegging operation.
Mr. Wayne reported that business activity in the Fifth District
remained generally at a high level and had changed very little in the
past three weeks.
Current strength was particularly apparent in bituminous
coal, where production and shipments in recent months had been the largest
since 1957 with the outlook favoring further gains, and in construction,
where contract awards for the first half-year reached a new high in spite
of a sharp decline in June.
No significant signs of weakening were
-40-
8/20/63
currently visible in any of the principal manufacturing industries.
Furniture makers had a year and a half of prosperity behind them and
expected a better second half this year than last.
Textilemen reported
that order backlogs for large-volume gray goods were now in generally
satisfactory condition for the rest of this year.
Cigarette manufacturers
continued to meet a gradually rising demand despite the growing volume
of adverse publicity.
cause.
Only the farmers were complaining, and with good
The extended drought had dried up pastures, forcing some to sell
their herds, and the outlook had deteriorated for many crops.
According to the Reserve Bank's latest survey, business sentiment
was more diverse now, and on balance a little less optimistic, despite
indications of more confidence among the reporting bankers.
Respondents
in the manufacturing sector reported business about the same, but the
flow of new orders had slowed a little.
The survey also showed, w;.th
some support from other sources, that recent good levels of retail trade
were being maintained or improved.
Turning to national business
conditions, Mr. Wayne observed that
business activity was apparently continuing to move ahead, but that
dicators of future activity seemed to be mixed and indecisive.
During
the first half of this year the economy performed better than most
authorities had predicted.
in-
The pattern of changes was much the same
as prevailed in the first half of 1962, but the gains were smaller
everywhere except in the industrial area, where they were distinctly
-41-
8/20/63
larger.. In recent weeks the economy had shown considerable strength
in maintaining momentum despite the ,harp cutback in steel, the tense
international financial situation, domestic racial disturbances, and
uncertainties about fiscal policy.
Somewhat larger backlogs of
manufacturers' unfilled orders and accumulated construction contracts
had contributed extra strength this year.
It might be that these and
other elements inherent in the present situation would be sufficient
to insure a second-half performance better than the unimpressive record
of the last half of 1962, but it was too early to be sure.
At the
moment, Mr. Wayne saw no obvious reason to expect that there would be
any significent change in the period immediately ahead.
In the policy area, Mr. Wayne commented that the money market
had about completed its transition, and the structure of short-term
rates was now approximately in line with the new discount rate.
The bill
rate had lagged somewhat in making the adjustment because of a strong
demand for bills.
Thus far the rate adjustments were about the only
important domestic reactions to the change in the discount rate.
Internaionally, there were significant
increases
in
the rates on the
Euro-dollar and in short-term rates in Canada, but covered spreads had
changed little.
Mr. Wayne went on to say that with the rate structure in adjustment at the new and higher level, the pertinent question was whether
the structure should be raised or lowered.
The domestic situation
8/20/63
-42-
certainly did not suggest a need for further tightening.
If
the
Committee was, in the words of its present directive, "to accommodate
moderate growth in bank credit," as he thought it should, free reserves
should not be allowed to drop any lower at present.
of reserves that could actually be mobilized,
In
fact,
any further rise in
terms
there probably had not
been any real free reserves for the past month or more.
national front,
in
On the inter-
rates here would probably stimulate
increases in market rates abroad and might encourage or even force
official actson to raise rates.
Mr. Wayne felt, also,
that it
was
appropriate, if not essential, to watch developments on the interest
equalization tax proposal and any results that might occur.
Consequently,
he favored a policy of maintaining about the present degree of firmness
in the money market, which he interpreted to mean a structure of shortterm rates approximately the same as had prevailed in
the past few days,
this to be accomplished, if possible, with a level of free reserves
fluctuating in
the area of $100 million.
An appropriate change in
the
second paragraph of the current dire, tive would be needed to implement
this policy, and he agreed with the change suggested by Mr. Shuford.
Mr. Clay commented that the Federal Reserve System had made its
major monetary policy move five weeks ago when it increased the discount
rate, and since that time the Committee had been engaged in operations
to coordinate open market policy with the discount rate action.
The job
had been complicated by the twin goals of higher short-term rates and
8/20/63
-43-
continued reserve availability.
Any effort to move the short-term open
market rates still higher presumably could be accomplished only by reducing reserve availability and bank credit expansion and probably putting
upward pressure on longer term rates.
It would appear well to avoid
such action at this time, both in consideration of domestic economic
needs and in order to provide time for money and credit markets to adjust
to the policy moves already made.
Evidence concerning the performance of the domestic economy in
the early part of the third quarter was rather encouraging, but the
basic problems of the domestic economy continued essentially unchanged.
Moreover,
the task faced by public policy on that front also remained
essentially tnchanged as one of encouraging economic expansion.
It
would be well to keep in mind that what was a rather good performance
of the domestic economy as to the degree of expansion during this
business upswing, despite problems of underutilization of resources,
occurred under a monetary policy that
need for further economic expansion
accomplishing
it
had been comparatively easy.
and the resource availability
constituted a serious argument against a reduction
The
for
in
the
rate of credit growth.
Mr.
Clay expressed the view that it also would be in order to
allow more time for the money and capital markets to adjust to the
recent monetary policy changes and to afford the System added opportunity
to observe the subsequent developments in international
financial indicators.
8/20/63
-44-
There would appear to be merit in the idea of affording more time for
international financial indicators, particularly relative interest rates
to adjust to t.he policy changes already made, thus giving the System
greater opportunity to observe the resulting developments.
So far as giving evidence of making the discount rate effective
was concerned, Mr. Clay saw nothing incompatible between the half point
increase in the discount rate and the accompanying increase that had
taken place in short-term open-market rates, nor was there any inconsistency between a 3-1/2 per cent discount rate and the current level
of short-term market rates.
The increase in open market rates must be
measured beginning with the anticipatory movement preceding the discount
rate change and not with the date of the discount rate change itself.
Mr. Clay felt that for the time being monetary policy should
continue its recent posture, with no change in the Committee's goals on
short-term rates and reserve availability.
The Account Manager should
stand ready to purchase longer-maturity issues to facilitate the Committee's
goals, as well
as to undertake offset'ing sales of Treasury bills and
purchases of longer-maturity issues.
The directive, he thought, could
remain unchanged except for a modification in the second paragraph to
avoid additional tightness in the money market.
The wording suggested
by Mr. Shuford would be agreeable to him.
Mr. Clay concluded his remarks by saying that the fundamental
question before the Committee continued to be the same as it had been
8/20/63
-45-
for a long while, namely, not only what could be accomplished for the
international balance of payments problem through monetary policy but
also whether any substantial impact could be had on the international
flow of funds through monetary policy without moving domestic interest
rates to levels that would involve serious monetary restraint on economic
activity.
Mr. Scanlon reported that business prospects continued favorable
in the Seventh District.
The stronger trend evident in retail sales in
June appearec to have been about maintained in July and early August.
The most promising recent development, other than the apparent uptrend
in retail trade, was the surprising strength of construction.
Man-
ufacturing continued to lead, but recent months had witnessed a marked
improvement in housing starts in the District, especially in Milwaukee
and Detroit.
The increase in bank credit for June and July as a whole at
Seventh District banks was about the same as a year ago, and the net
expansion over the past six months matched the national experience-roughly 3-1/2 per cent.
Consumer loans appeared to have been quite
strong recently, and District banks had also continued to increase real
estate loans fairly rapidly.
Business use of bank credit did not appear
to be increasing, but the net decline in outstanding business loans over
the past two months was about the same as for the past several years.
The normal seasonal influences had been dominant, but with a sharper
8/20/63
-46-
than usual increase in borrowing by commodity dealers and somewhat
greater than normal declines in loans to manufacturing and retailing
firms.
With the tighter credit conditions that had prevailed recently,
the major Chicago banks had been borrowing more both in the Federal funds
market and at the discount window.
In addition, they had reduced their
holdings of U. S. Government securities by about $150 million since midJuly.
Chicago banks did not appear to be bidding actively for corporate
funds through. issuing short-term certificates of deposits.
As to policy, Mr. Scanlon recalled that his preference at the
last Committee meeting had been to wait for the dust to settle before
making further moves, but this was merely a matter of timing.
Since
there was now a slightly greater degree of firmness in the money market,
he would remain there.
He believed there was room under an even-keel
policy to attain the 3-3/8 per cent bill rate the majority favored at
the last meeting.
for operations
Therefore, he would change the directive to provide
to be conducted with a view to maintaining the same
degree of firmness in the money market as at present.
He would not
change the discount rate.
Mr. Deming stated that in the first half of 1963 the Ninth
District economic record compared quite favorably with that of the nation.
Perhaps the best summary statistic to indicate this conclusion was
personal income, which for the District in June was running 7 per cent
8/20/63
-47-
ahead of a year earlier, as compared with a 5 per cent gain for the
United States.
Farm income had been quite favorable this year, and this
fact accounted for most of the difference between District and nation,
although manufacturing activity in the District also had run relatively
better.
AvaiLable data for July pointed both ways.
Industrial power
use was up sharply from June, according to preliminary figures, while
employment failed to show as much gain as would be normal.
The Employment
Service people, incidentally, were not optimistic about the short-run
employment outlook.
Debits were up strongly in July.
The farm outlook
was quite good, with an excellent crop outturn now virtually assured.
It would be a bit smaller than last year's record volume, but well above
average.
After a strong first half, particularly at country banks, bank
loan demand in July was about in keeping with normal seasonal behavior.
Fragmentary data for city banks in August pointed to some recent weakening in
loans.
Investment behavior at District banks, like those in the
nation, was influenced in June and July by the timing of Treasury finane
ing.
So far in
normal.
Total
August,
growth in
investments looked a little better than
deposits fell contraseasonally in July, but this reflected
almost entirely a decline in Government deposits that took funds out of
the District.
City banks had registered some seasonal deposit gains in
the past two weeks.
Both bank borrowing from the Reserve Bank and Federal funds
8/20/63
-48-
purchases increased significantly in Late July and early August, but
had subsided in the past week or so.
The effect of the Comptroller's
new ruling on Federal funds transactions on Ninth District banks was
not yet clear.
It might lead to less frequent use of the discount
window by the larger banks than would otherwise be the case under
similar conditions of reserve availability.
The national economic situation, Mr. Deming noted, evidently
was gaining unexpected strength, and business and consumer confidence
seemed to be growing.
feeling.
The stock market apparently was mirroring this
Whatever the effect on the payments balance of the somewhat
snugger money market conditions, they did not seem to have had any
adverse effect on the domestic economy so far.
Should the present
economic trend continue and be augmented by seasonal factors, it would
make the task of credit policy implementation somewhat easier--assuming
that the Committee would want to continue its emphasis on competitive
short-term interest rates.
At the same time, he thought the Committee
was going to have to put more emphasis on reserve availability in order
to have more impact on capital flows abroad, particularly those from
banks.
This, of course, also could come more from market forces than
from overt credit policy action.
For the moment, however, he would be
content to stay "about where we are" in terms of money market conditions,
free reserves, and short-term rates, although he would not resist a
further modest upward movement in such rates should the market itself
8/20/63
-49-
supply the force to achieve the higher rates.
directive,
As to the policy
the only change that seemed necessary would be to amend
the second paragraph to call for operations with a view to maintaining
the present degree of money market firmness.
Mr. Swan said the available data for July, and more complete
data for June, revealed the lack of vigor characteristic of important
sectors of the Twelfth District economy in recent months.
Unemployment
rates rose rather substantially in July in California and Washington.
In California this was primarily the result of an increase in the labor
force.
In Washington this was a contributing factor, but there was also
a less than seasonal gain in employment it agriculture, along with
declines in Government and aircraft employment.
In June, Arizona was
the only District State to report a Lower rate of unemployment that in
March.
Also, District department store sales probably registered a
decline for the second month in a row in July; however, sales remained
slightly above a year ago.
New car registrations in California, where
sales had been strong in the first half of the year, were down about
9 per cent for the first 18 days of July from a year earlier, compared
with the year period gain in sales in July for the country as a whole.
Construction awards in the District varied widely from month to month
but showed a sharp net increase in the District for the first half of
the year.
Rental vacancies, however, rose sharply in the second quarter.
With some resumption of lumber production already under way, and the
8/20/63
-50-
end of the strike expected by mid-August,
to soften considerably.
lumber prices were expected
Canadian lumber production had increased to
take advantage, of the strike, and additional supplies from that source
were still coming into U. S. markets.
For the three weeks ended August 7, Twelfth District weekly
reporting banks reduced their investments considerably more than they
expanded their loans.
Thus, reserve positions were easier than in the
preceding three weeks, and net sales of Federal funds were at high
levels.
For the week ended August 14, borrowings from the Reserve Bank
were quite low.
Despite continuing improvement in the business picture nationally,
Mr. Swan was not convinced that the domestic situation, taken by itself,
warranted the present degree of lesser ease.
The action had been taken,
however, and this was not a time to retreat from the current position.
But with the bill rate currently close to 3-3/8 per cent, the present
degree of firmness should not be increased.
The Committee also should
await the market and public reaction to the Treasury financing plans
shortly to be announced, as well as some clearer indication of the fate
of the tax reduction legislation.
Mr. Swan said his suggestion for changes in the directive
corresponded with those mentioned by Mr. Shuford.
He added that the
System soon would be faced with the problem of supplying additional
reserves for seasonal expansion.
He was quite interested in the comments
8/20/63
-51-
of Mr. Brill and Mr. Hickman in this regard.
The problem of the
magnitude of these reserves, the extent to which the System would be
reluctant to supply them, the form the supplying of reserves would take
as between security purchases and a reduction in reserve requirements-all these things presumably would have a considerable effect on the
range of action likely to be open to the Committee in terms of general
open market policy.
At the moment, he would agree with Mr. Hickmar
that there would seem to be a case for a slight reduction in reserve
requirements.
Mr. Irons said that Eleventh District business conditions were
generally at a high level.
Most of the changes taking place were about
in line with what might be expected on a seasonal basis.
There were
uncertainties in some areas, such as agriculture and probably retail
trade, although the latter had improved recently.
On the banking side,
there was no evidence of strain or excesses one way or the other.
were up moderately;
time and savings deposits continued strong;
ments were down as the banks disposed of bills and certificates.
Loans
investSome
impact of the Comptroller's new ruling on Federal funds might be appearing;
the few District banks that were active buyers of Federal funds had been
stepping up their purchases.
There had been no appreciable use of the
discount window; borrowings were running about $9 million on a weekly
average.
On the matter of the directive and policy for the next three
-52-
8/20/63
weeks, Mr. Irons indicated he would lean toward maintaining the present
directive, which would permit attaining a slightly greater degree of
firmness in
the money market.
During the past three weeks the Desk
had performed well and had moved in the direction of achieving the
objectives indicated by the Committee.
Whether by Desk or market action,
the short-term rate had moved up some 10 basis points or more, while
long-term rates were quite stable.
'Unquestionablythe market had been
firmer, but be was not aware of any evidence of undue tightness.
Therefore, he would continue to seek a slightly greater degree of market
firmness, although not aggressively.
In other words, if market factors
and developments were such as to make for a slightly firmer market, he
would not object.
If the bill rate went to 3-3/8 per cent, other short-
term rates went up a bit, and Federal funds
traded consistently at 3-1/2
per cent, he would consider that a mcve in the right direction.
He
would be inclined to continue operations in the intermediate and longer
term areas whenever such operations were appropriate for System purposes.
He did not know whether the assignment the System seemed to have in-
herited could be accomplished, but he would not be prepared to say--at
least for the time being--that it could not be done; he would like to
see a little further experimentation.
To put it another way, he would
not favor abandoning the twist operation if it seemed feasible to continue
for a while.
Sooner or later, a point might be reached where free re-
serves would have to be pushed lower, perhaps into negative free reserves.
8/20/63
-53-
However, he did not believe that that point had yet been reached, and
for the next three weeks he would think in terms of free reserves somewhere around $100 million or a little lower.
Mr. Irons reiterated that he would accept the existing policy
directive for the next three weeks.
If the directive were changed to
call for maintaining the present degree of firmness, that would seem
to impose on the Desk a responsibility to maintain only the present
degree of firmness even though the short-term rate might tend upward
because of Treasury operations or for other reasons.
Mr. Latham said that with the. exception of employment, the
New England economy appeared to be holding up well.
Employment trends
continued to show up less favorably than those for the country as a
whole. Nonagricultural employment, seasonally adjusted, declined in
June for the fifth consecutive month,
The 12-month net change, as of
June, was an increase of only 1/10 of 1 per cent.
Manufacturing em-
ployment declined further in June, with a 12-month net decrease of 1.5
per cent.
The estimated unemployment rate, seasonally adjusted, rose
from 5.2 per cent in May to 5.7 per cent in June.
An important factor in the lack of vigor in New England employment trends had been the relative weakness of the electrical machinery
industry, and more particularly the important electronics component.
A 7,200 drop in employment in the electrical machinery industry for the
12 months ended June 30 compared with a decrease of 9,000 jobs for all
8/20/63
-54-
durable goods manufacturing industries and constituted about one-third
of the 21,000 loss in jobs for all manufacturing.
industry in New England,
The electronics
after experiencing a period of rapid growth,
had apparently been going through a shakedown period, although most of
the job loss appeared to be in
the larger companies.
Consumer spending continued at a good pace, as reflected by
department store sales, registrations of new automobiles, and resort
area business occasioned by excellent vacation weather.
Construction was a strong factor in the New England economy.
In June, nonresidential building contracts were up 69 per cent from a
year earlier; residential building contracts were up 24 per cent.
Deposits in mutual savings banks and share accounts in insured
savings and loan associations continued to grow at a good pace, although
the savings deposit increase at commercial banks slowed during the month
of
July.
Business loans at commercial banks had continued stronger than
seasonal since June.
Through August 14, First District banks completed
their fifth consecutive week as net purchasers of Federal funds.
It was
interesting to note that with the relative tightness that occurred on
August 7, because of the temporary maldistribution of reserves, borrowing
at the discount window was the heaviest for a single day since 1921.
In conclusion, Mr. Latham noted that District bankers generally
voiced accord with System monetary policy.
8/20/63
-55Mr. Balderston expressed agreement with the view of Mr.
Sherpardson that it was a delusion to talk about the utilization of
capacity, human and otherwise, that was not competitive in present
markets.
He went on to say that his reaction to the small impact ob-
servable thus far from the System's discount rate action was satisfactory.
The covered rate differential between the United States and Canada and
London had disappeared.
give him concern.
However, the Euro-dollar market continued to
It appeared to him to be a threat to the financial
stability of Europe, and in the end he felt it might have a serious
impact upon the U. S. domestic economy by draining off short-term funds
in a manner that seemed to be beyond the control of central banks.
It
seemed important that the flow of dollar deposits into this pool be
diminished, and he feared there was a gap in
the interest equalization
tax proposal for inhibiting the outflow of capital.
The banks were not
covered, and they were seeking opportunities to put funds abroad.
As to the domestic scene, the money supply had risen since the
first of the year at an annual rate of 3-1/2 per cent, with turnover
5 per cent above a year ago and bank credit still rising rapidly.
True,
since the first of the year total bank loans and investments had gone up
only 7 per cent, annual rate, compared with 8 per cent in the year 1962.
The ratio of public liquid asset holdings to GNP in the second quarter
was 2 percentage points higher than a year ago.
From February 1961 to
date, total bank reserves had risen by 7.5 per cent.
In the face of all
8/20/63
-56-
this, he was quite content that nonborrowed reserves had remained
constant since the beginning of the year.
banks to increase their borrowings,
This was now leading member
a development that it
seemed
to him
the System might have to live with through the fall period.
A point that intrigued him, though probably irrelevant to the
formulation of a monetary policy decision, was the impact of the changing
mix of demand and time deposits on the expansion potential of bank reserves.
In June of last year the ratio of time to total deposits subject
to reserve requirements was 4.13; this June it
was 4.48.
As a result,
the amount of deposits supported by $100 million of reserves--with a
time deposit reserve requirement of 4 per cent--was $970 a year ago,
and $1,003 now.
The increase was 3.4 per cent over a year ago, and
9 per cent over June 1960.
During the next three weeks, Mr. Balderston said, he would maintain the prevailing firmness in
its
scheduled refunding.
the money market to aid the Treasury with
The second paragraph of the directive might be
modified to substitute wording in the third
the prevailing degree of firmness."
If
line
such as:
"maintaining
there was to be a veering of
policy in either direction, he would veer in
the direction of firmness,
but he felt that any significant change might well be considered a little
later.
Chairman Martin commented that, as to policy for the period ahead,
the Committee members appeared to be closer together than for some time,
8/20/63
-57-
although perhaps for varied reasons.
He could not help but say, the
Chairman added, that in his judgment both the domestic economy and the
balance of payments had benefited from the present posture of System
policy, although that might take a couple of months to demonstrate.
In view of the general sentiment concerning the domestic economy and
apprehensions in the European market, he felt there might be possibilities
of increased investment in the United States.
There were the makings of
a change, even though it might take come time to develop.
The interest
equalization tax proposal had been received badly by the market, it.
having been construed rather generally as a first step toward exchange
controls, but he believed the sentiment might now be shifting in favor
of the Treasury's position.
It was his impression that the proposal
might get a better reception in
the Congress than had seemed likely
earlier.
The Chairman continued to feel that
the balance of payments
problem was the greatest single shadow over the domestic economic
picture.
He believed the posture of the System placed it in a fairly
good middle ground, and he questioned whether any further lessening of
ease at this point would actually be of benefit.
Instead, he was
inclined to feel that maintenance of the status quo probably was called
for at the moment.
As Mr. Balderston and others had pointed out, the
Treasury was going to come into the market during the next few weeks.
Whether the Treasury would decide on an advance refunding, he did not
8/20/63
-58-
know; that was going to involve a rather difficult decision for the
Treasury.
In any event, however, it should be borne in mind that for
a long period Treasury debt management policy had been-not only supplementary but complementary to Federal Reserve monetary policy.
This was
a period when it would seem well to let the Treasury feel its way along,
without additional complications, on whatever debt management decisions
it might make.
Chairman Martin said that although he remained rather skeptical
about the so-called twist operation, he did not believe in changing
horses in the middle of the stream.
The benefit of the doubt, he
thought, should be given to the operation because it was directed toward
helping the
alance of payments problem as much as possible and with a
minimum of drag on the domestic economy.
The Chairman added that he thought the Desk had performed well
in
the past period.
Certain market participants with whom he had talked
had been impressed, despite their preconceptions,
the Desk.
It seemed to him that, as
with the activities of
he had said, it would be well to
give the twist operation the benefit of the doubt and pursue it somewhat
further.
The Chairman also said that he would like to make a comment
about the word "peg," which was being used rather freely.
He still
thought of a peg in the sense of standing ready to purchase securities
any time the price reached a certain level.
While he believed in a
8/20/63
-59-
free market, he did not delude himself into thinking that System
activities were not bound to influence the market, although Federal
Reserve operations should be of a residual or marginal character.
Chairman Martin concluded by saying that since the Treasury was
facing a difficult period and since there appeared to have been some
element of success in what the System had done thus far,
to him advisable to continue the status quo.
it
would seem
The outcome was not clear
but the System would benefit in the sense that the whole world would
realize that the balance of payments problem was being tackled.
If the
current program did not work, presumably other operations would be
instituted.
For all of these reasons, he would favor maintaining the
status quo for the time being.
The Chairman then proposed that the question of policy for the
period immediately ahead be considered by the Committee on the basis
of continuing the first paragraph of the policy directive without change
and changing the second paragraph to read that open market operations
should be conducted with a view to maintaining the prevailing degree of
firmness in the money market, while accomodating moderate expansion in
aggregate bank reserves.
Thereupon, upon moticn 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:
-60-
8/20/63
It is the Committee's current policy to accommodate
moderate growth in bank credit, while putting increased
emphasis on money market conditions that would contribute
to an improvement in the capital account of the U. S.
balance of payments. This policy takes into consideration
the continuing adverse balance of payments position and its
cumulative effects and the 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, System open market operations
shall be conducted with a view to maintaining the prevailing
degree of firmness in the money market, while accommodating
moderate expansion in aggregate bank reserves.
Votes for this action:
Messrs. Martin,
Balderston, Bopp, Clay, Irons, Mills, Mitchell,
Robertson, Scanlon, Shepardson, and Treiber.
Votes against this action:
none.
In a comment with respect to his vote, Mr. Treiber said he would
understand that if the issuance by the Treasury of additional bills should
result in an increase in the short-term rate of some modest.amount, that
would not be inconsistent with the directive.
It
was agreed that the next meeting of the Federal Open Market
Committee would be held on Tuesday,
September 10,
1963.
The meeting then adjourned.
Assistant Secretary
Cite this document
Federal Reserve (1963, August 19). FOMC Minutes. Fomc Minutes, Federal Reserve. https://whenthefedspeaks.com/doc/fomc_minutes_19630820
@misc{wtfs_fomc_minutes_19630820,
author = {Federal Reserve},
title = {FOMC Minutes},
year = {1963},
month = {Aug},
howpublished = {Fomc Minutes, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/fomc_minutes_19630820},
note = {Retrieved via When the Fed Speaks corpus}
}