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 cn Tuesday, September 10, 1963, at 9:30 a.m.

PRESENT:

Mr. Martin, Chairman

Mr. Hayes, Vice Chairman

Mr. Balderston

Mr. Clay

Mr. Irons

Mr. King

Mr. Mitchell

Mr.

Mr.

Mr.

Mr.

Robertson

Scanlon

Shepardson

Wayne, Alternate for Mr. Bopp

Messrs. Hickman, Shuford, and Swan, Alternate Members

of the Federal Open Market Committee

Messrs. Ellis and Deming, Presidents of the Federal

Reserve Banks of Boston and Minneapolis,

respectively

Mr. Young, Secretary

Mr. Sherman, Assistant Secretary

Mr. Kenyon, Assistant Secretary

Mr. Hackley, General Counsel

Messrs. Baughman, Brill, Eastburn, Furth, Garvy,

Green, Holland, Koch, and Tow, Associate

Economists

Mr. Coombs, Special Manager, System Open Market

Account

Mr. Molony, Assistant to the Board of Governors

Mr. Cardon, Legislative Counsel, Board of

Governors

Mr. Yager, Chief, Government Finance Section,

Division of Research and Statistics, Board of

Governors

Mr. Broida, Chief, Consumer Credit and Finances

Section, Division of Research and Statistics,

Board of Governors

Mr. Spencer, General Assistant, Office of the

Secretary, Board of Governors

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9/10/63

Messrs. Hilkert and Patterson, First Vice

Presidents of the Federal Reserve Banks of

Philadelphia and Atlanta, respectively

Messrs. Mann, Ratchford, Taylor, Jones, Parsons,

and Grove, Vice Presidents of the Federal

Reserve Banks of Cleveland, Richmond, Atlanta,

St.. Louis, Minneapolis, and San Francisco,

respectively

Mr. Marsh, Assistant Vice President, Federal Reserve

Bank of New York

Mr. Anderson, Financial Economist, Federal Reserve

Bank of Boston

Mr. Sternlight, Manager, Securities Department,

Federal Reserve Bank of New York

Upon motion duly made and seconded,

and by unanimous vote, the minutes of the

meeting of the Federal Open Market Committee held on July 30, 1963, were approved.

Before this meeting there had been distributed to the Committee

a report from the Special Manager of

the System Open Market Account on

foreign exchange market conditions and on Open Market Account and

Treasury operations in foreign currencies for the period August 20

through September 4,

1963,

together with a supplementary report covering

the period September 5 through 9,

been placed in

In

the files

1963.

Copies of these reports have

of the Committee.

comments supplementing the written reports, Mr. Coombs observed

that the U. S. gold stock would remain unchanged this week.

There was a

sufficient balance in the Treasury Stabilizazion Fund to take care of

immediate foreseeable needs, and he was hopeful that it might be possible

to get through the remainder of this month without showing further losses

in the gold stock.

9/10/63

-3In the London gold market, a certain amount of speculative buying

had developed during the last few days of August, resulting in depletion

of the gold pool.

influence,

The proposed interest equalization tax was a disturbing

along with the recent Brookings study recommending flexible

exchange rates.

There were also the usual rumors in advance of the annual

meetings of the International Monetary Fund and the International Bank.

The gold market developments began to worry some Western European bankers,

but the Russiars then came in with sizable gold sales and the gold pool

was able to acquire a substantial part of those sales.

The U. S. dollar had shown a mixed pattern in the foreign exchange

markets, being firm against sterling, the Canadian dollar, the guilder,

and the lira, but weak against the French franc, the Swiss franc and the

mark.

The total flow of dollars to Germany and Switzerland had not been

sizable in recent weeks, however, and there had been a noticeable decline

in the intake of dollars by the Bank of France.

In summary, there had

been a gradual improvement in the over-all position of the dollar.

A

major factor appeared to be the proposed interest equalization tax,

which was placing a virtual freeze on new foreign flotations in the

U. S. market.

However,

the recent improvement in the balance of pay-

ments figures was mainly at the expense of Canada and Japan.

The longer

run consequences of the tax were difficult to estimate, but Mr. Coombs

was inclined to feel that they might be much less than the short-run

influence.

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-4There were also a number of indications that the recent rise in

U. S. short-term interest rates was beginning to encourage a repatriation

of U. S. corporate funds previously placed. in the Euro-dollar market.

The situation appeared to be at a point where even a moderate easing

abroad, coupled with a firm short-term interest rate structure in this

country, would bring about a substantial inflow of short-term funds.

In reply to a question about the effect of the interest equalization tax in light of the proposed exemption of Canadian issues, Mr. Coombs

said that until the tax was actually passed, no one was prepared to take

a Canadian issue for fear the Congress might not approve the exemption.

The same thing applied in the case of Japan.

In the short run, the pro-

posed tax would exert a substantial effect on the balance of payments

statistics, like the virtual freeze on the flow of short-term funds to

Canada in the first part of 1962.

Thereupon, upon motion duly made and

seconded, and by unanimous vote, the System

Open Market Account transactions in foreign

currencies during the period August 20 through

September 9, 1963, were approved, ratified,

and confirmed.

Turning to recommendations for consideration by the Committee,

Mr. Coombs pointed out that the $250 million reciprocal currency agreement with the Bank of Canada, currently on a standby basis, would mature

September 26, 1963.

months.

He recommended its renewal for a period of three

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9/10/63

In discussion, which centered around the relatively large sie

of the Canadian arrangement, Mr. Coombs brought out that Canada was the

most important trading partner of the United States.

He felt that the

relationship of the British and Canadian swap arrangements ($500 million

and $250 million) was about right.

In relation to the British swap

arrangement, the swap agreements with two or three of the Continental

central banks were probably on the low side, and in due course it might

be desirable to attempt to work out somewhat larger swap lines in these

cases.

Thereupon, the renewal of the reciprocal

currency agreement with the Bank of Canada, as

recommended by Mr. Coombs, was approved unanimously.

Mr.

Coombs noted that three drawings of $25 million each under

the swap arrangement with the German Federal Bank would mature September

18, September 20, and September 23, 1963, respectively.

It appeared that

during September there might be rather substantial payments by the German

Government to the United States for military hardware.

If

the remainder

of the payments balance between the two countries was roughly in equilibrium, it might be possible to pay off the swap drawings by buying

marks against the dollars used by the German Government and by buying

the necessary additional marks through the market.

If developments did

not unfold in this way, however, he would recommend renewing the swap

drawings for three months.

of the drawing.

In each case, this would be the first renewal

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The renewal of the three swap drawings,

if

necessary, was noted without objection.

Proceeding to his third recommendation, Mr. Coombs noted

that the $12.5 million System drawing of French francs under the swap

line with the Bank of France had been completely covered by equivalent

purchases of French francs forward.

repaid by around the end of October.

Thus the swap drawing would be

The forward purchases were made

under the $25 million authorization for forard purchases of foreign

currencies that: was given by the Committee on March 5, 1963.

Mr. Coombs

felt that this had been a useful operation and that it would be desirable

to provide room to take care of other similar opportunities that might

appear.

He recommended, therefore, that the authorization for forward

purchases of foreign currencies be increased from $25 million to $50 million.

In reply to questions, Mr. Coombs stated that it would be the

intent, if the increased continuing authorization were granted, to acquire

from time to time currencies in which the System had a short position

as the result of drawings under swap lines.

At the moment, only the

German and French swap drawings were outstanding, but in the future

there might be other drawings where forward purchases would be useful

in arranging for repayment.

care of debts incurred.

This seemed a businesslike way of taking

In the French case, before the due date of the

drawing, the possibility arose of buying francs forward at a discount,

and in this manner the drawing was completely covered.

The Committee's

Guidelines, he pointed out, specify that forward purchases should be

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cleared in advance, and this had been done.

He did not think that for-

ward purchases in such circumstances could be regarded as an unwarranted

manipulation of normal market processes.

Instead, it amounted to

anticipating the repayment of drawings by buying forward rather than

waiting to buy spot.

If the needed currency was available at a discount,

its purchase forward would seem to be a businesslike way of handling the

repayment of a drawing.

Mr. Mitchell commented that he thought several members of the

Committee felt some concern as to whether System foreign exchange

operations might tend to obscure normal market forces.

He found him-

self trying to evaluate the extent to which System operations might

tend to obscure fundamental adjustments in the process of taking place

in the market.

Mr. Coombs said that he could understand this concern.

There

was clearly the potential in System foreign exchange operations of doing

what had been suggested.

However, in view of the way that System

operations had been conducted, he thought that this had not been the

case.

Whenever the System had run into great pressure, it had yielded

to the pressure and backed away; in no instance had an attempt been

made to dig in and maintain an artificial rate.

As to forward opera-

tions, he felt that the risk of distorting market forces was less than

in the case of spot operations.

There was admittedly a real risk in the

whole area of System operations of obscuring basic market forces.

On the

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other hand, the System had drawn under its swap lines only on occasions

when it appeared that existing flows of funds might be reversible.

Thereupon, upon motion duly made and

seconded, and by unanimous vote, the continuing authority directive for System

foreign currency operations was amended,

effective immediately, to read as follows:

The Federal Reserve Bank of New York is authorized and

directed to purchase and sell through spot transactions any

or all of the following currencies in accordance with the

Guidelines on System Foreign Currency Operations reaffirmed

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

amended on May 28, 1963:

Pounds sterling

French francs

German marks

Italian lire

Netherlands guilders

Swiss francs

Belgian francs

Canadian dollars

Austrian schillings

Swedish kronor

The Federal Reserve Bank of New York is also authorized

and directed to purchase, in accordance with the Guidelines and

for the purpose of allowing greater flexibility in covering

commitments under reciprocal currency agreements, any or all

of the foregoing currencies through forward transactions, up

to a combined total of $50 million equivalent.

The Federal Reserve Bank of New York is further authorized

and directed to purchase and sell, in accordance with the

Guidelines and for the purpose of utilizing its holdings of one

currency for the settlement of commitments denominated in other

currencies, any or all of the foregoing currencies through forward as well as spot transactions. up to a combined total of $50

million equivalent.

Total foreign currencies held at any one time shall not

exceed $1.75 billion.

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9/10/63

Before this meeting there had been distributed to the members

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

Government securities and bankers'

through September 4,

1963,

acceptances

S.

for the period August 20

and a supplementary report covering the

period September 5 through September 9,

1963.

Copies of these reports

have been placed in the files of the Committee.

In supplementation of the written reports, Mr. Marsh commented

as follows:

During the past three weeks we were able to maintain

about the same degree of firmness in the money market as in

the previous period while supplying reserves to meet normal

monthly drains and Labor Day needs without creating downward

pressures on short-term rates. In fact, due to a combination

of fortuitous circumstances bill rates ranged somewhat higher,

with the 91-day rate between 3.38 and 3.40 per cent until the

last three days of the period when down ward pressures have

developed as a result of the Treasury's advance refunding

operation.

Over the period the System supplied a net total of $516

million reserves, $288 million through purchases of bills,

$78 million through purchases of coupon issues, and $150

million through an increase in holdings of repurchase agreements. $247 million of the bills were purchased in the

market, consisting of very short maturities offered to us

in large blocks as dealers took them back from corporation

were purrepurchase agreements; $41 millior of other bills

These purchases had practically

chased from foreign accounts.

no effect on market rates for bills. The $78 million coupon

issues were bought on August 23, after which no further operations were undertaken in these issues in view of the imminence

of the Treasury's advance refunding operation. In the last

part of the period, additions to reserves were made through

increases in repurchase agreements, which were facilitated

by large increases in dealer portfolios just before and after

Labor Day.

At the time of the last meeting of the Committee bill rates

were around 3.35 per cent bid for 91-day bills. In the next few

days rates backed up to about 3.40 per cent bid as nonbank demand

9/10/63

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tapered off and dealers displayed a cautious attitude in the

face of the three bill auctions scheduled for the week before

Labor Day, including the first billion dollars of the new

monthly one-year bills. Dealers bid quite aggressively in

these auctions, anticipating better demand at the higher

rate levels, particularly as an outgrowth of the expected

advance refunding. They also felt that the authorities

would be satisfied with rates this close to the discount

rate. Their awards in these three auctions were quite

substantial, totaling $2,225,000,000, and their. trading

positions were increased well above $2 billion, where they

remained, acting as a damper on the market, at least until

the announcement of the advance refundi.ng last Wednesday.

In planning for the advance refunding, the Treasury

had recognized that the "prerefunding" portion, or the part

involving the extension of relatively short maturities,

could create downward pressures on short rates. They had

expected to make a simultaneous announcement of an auction

of a strip of Treasury bills to counteract this effect but

decided to delay this action until they were actually faced

with the need for it. However, in announcing the advance

refunding, they stated that it was intended to meet the

cash needs of approximately $6 billion for the remainder

of calender 1963 largely through offerings of Treasury

bills. Also, they said that the timing and magnitude of

these borrowings would be adjusted to the pattern of cash

requirements and the needs of the balance of payments

situation. The most recent Treasury estimates show

excessively high cash balances, at least through the end

of September, so that they now feel inhibited from borrowing any new cash in the near future, which is unfortunate

in view of the effect the advance refunding is having in

increasing the demand for bills.

Since the Treasury's

announcement last Wednesday a fairly substantial amount

of "right." has been sold against purchases of bills

with the result that the 91-day rate has backed down

to 3.34 per cent bid and dealer bill positions have been

reduced below $2 billion. Yesterday's auction (in which

the three- and six-month rates were 3.34 and 3.46 per

cent, respectively) and market performance did not reflect

any further downward pressure on bill rates; in fact, the

dealers were awarded $820 million more new bills in the

auction. However, if there should be a resurgence of

demand, we could find it difficult to keep the bill rate

from falling lower in the absence of assistance from the

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Treasury. The quarterly tax date is expected to have

little

effect on the Treasury bill market.

As you are probably aware, the refunding package

is made up of two parts, the "pre r efunding" in which the

holders of the large May 1964 maturities are offered

three new issues, 3-7/8s of 1968, 4s of 1973, and 4-1/8s

of 1989-94 (which will be reopened), and the "junior

advance refunding" in which holders of tour issues due

in 1966 and 1967 are offered the 4s of 1973 and 4-1/8s

of 1989-94. The terms are generous, including substantial cash payments by the Treasury which result in a

yield as high as about 4.20 per cent tc the buyers of

"rights" who wish to exchange into the long-term 4-1/8s.

There was some initial surprise that the operation

covered such a wide range of eligible issues and included an offering of a long bond. The reception has

been favorable up to now, but the attractive pricing

against the market required a substantial adjustment

on Thursday in prices of outstanding issues running

from 1/8 cf a point in the 1968 area to 3/4 of a point

in the longest term issues and almost two points in the

reopened 4-1/8s of 1989-94. The Treasury has expected

an exchange of the $23 billion of public holdings of

eligible issues to the extent of about 25 per cent, or

$6 billion. It is too soon to tell how it will work

out, but it seems likely that this goal will be reached

and that the exchange into the long 4-1/8 per cent bonds

will be substantial, possibly as much as $1 billion.

The books for the exchange will close this Friday, September 13, and the payment date will be Wednesday,

September 18.

Aside from the technical price adjustment in

Government securities, the capital markets in general

have not yet shown any significant reaction to the

higher yields made available on the long bonds. There

has been some slight softening in the market for corporate bonds as two long-standing syndicates were

broken last week, but activity generally has been

light as the market awaits the results of the advance

refunding. In view of the projected high level of its

cash balances, the Treasury is taking advantage of the

supply of securities generated by the advance refunding

to purchase a substantial amount of intermediate and

longer term issues for the trust accounts. This will

not only put the excess cash to work but also will reduce the total outstanding debt, which the Treasury

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believes will be bumping against the ceiling after the

first of October. We don't yet know the total magnitude

of this program, but it is safe to say that it will minimize any possible effect of the advance refunding on longer

term rates. The market has not yet become fully aware of

these purchases, and it may well be that after the entire

refunding operation is over, long rates will fall back to

the range somewhat above 4 per cent where they have been

for some time.

In discussion, it was suggested that if the market became aware

of substantial Treasury purchases of longer term issues,

voke a speculative situation.

Mr.

this might pro-

Marsh replied that this subject had

been discussed with the Treasury yesterday.

It

was pointed out to the

Treasury that this could encourage redundant subscriptions to the 4-1/8

per cent bonds.

The Treasury was aware of the possible result and

actually had not been buying the 4-1/8 per cent bonds direct to any

extent.

Most of its

purchases had beer

in

other issues, mainly the

4 per cent bonds of 1980.

Thereupon, upon motion duly made and

seconded, and by unanimcus vote, the open

market transactions in Government securities

and bankers' acceptances during the period

August 20 through September 9, 1963,

and confirmed.

approved, ratified,

were

At this point Mr. Hexter, Assistant General Counsel of the

Committee, and Messrs. Conkling and Daniels, Assistant Directors of the

Board's Division of Bank Operations,

joined the meeting.

There had been distributed a memorandum dated August 29, 1963,

from Mr. Stone, Manager of the System Open Market Account, and Mr. Farrell,

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9/10/63

Director of the Board's Division of Bank Operations, suggesting revisions

of procedures with respect to allocations of the System Account.

The

memorandum pointed out that when the present allocation procedures were

adopted in March it was indicated that as gold reserve ratios pushed

downward it would be necessary to devise new procedures that would be

workable even if such ratios should move close to 25 per cent.

the existing procedures had been working satisfactorily.

To date

However, with

the combined reserve ratio for all Reserve Banks now in the neighborhood

of 31 per cent, and with the fall expansion in note and deposit liabilities about to get under way, it seemed desirable to develop a revised set

of procedures for the Committee's consideration.

The proposed new pro-

cedures, which were set forth as an attachment, were discussed in sone

detail in the memorandum.

In addition, the hope was expressed that

before too long the allocation procedures--which now involved the use

of high-speed computers--would have developed to a point where, if it.

should be the Committee's desire, no Reserve Bank would need to show

a reserve deficiency on any day as long as the combined ratio for all

Banks was at least somewhat above 25 per cent..

During a discussion of the proposed revised procedures, Mr.

Marsh explained a minor change that had been suggested since the

memorandum was distributed, and agreement with this change was

indicated.

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-14Thereupon, upon motion duly made and

seconded, and by unanimous vote, the proposed revised procedures for allocating the

System Open Market Account were adopted,

effective with the reallocation for

September 25, 1963. The revised procedures

were as follows:

1. Securities in the System Open Market Account shall be

reallocated on the last business day of each statement week

and of each month by means of adjustments proportionate to the

adjustments that would have been required to equalize approximately the average combined reserve ratios of the 12 Federal

Reserve Banks based on the most recent available five business

days' reserve ratio figures.

2. The morning after each weekly and monthly statement

date, the Board's staff shall calculate the reserve ratios of

each Bank after allowing for the indicated effects of the

settlement of the Interdistrict Settlement Fund for the

preceding day. If these calculat.ons should disclose a

deficiency in the reserve ratio of any Bank, the Board's

staff shall inform the Manager of the System Open Market

Account, who shall make a special adjustment as of the

previous day to restore the combined reserve ratio of that

Bank to the average of all the Banks or to such higher level

as may be necessary to eliminate the deficiency in note or

deposit reserves. However, such adjustments shall not be

made beyond the point where a deficiency would be created

Such adjustments shall be offset

at any other Bank.

against the participation of the Bank or Banks best able

to absorb the additional amount or, at the discretion of

the Manager, against the participation of the Federal

Reserve Bank of New York. The Board's staff and the Bank

or Banks concerned shall then be notified of the amounts

involved and the Interdistrict Settlement Fund shall be

closed after giving effect to the adjustments as of the

statement date.

3. If a Bank anticipates that its reserve ratio will

fall below 25 per cent on any other day (because of purchases

that day for the System Open Market Account or for other

reasons), it may arrange with the Manager of the System Open

Market Account for an adjustment on that day in an amount

sufficient to raise its combined reserve ratio to the

average reserve ratio of the 12 Banks combined on the preceding day, or to such point as the Manager of the System

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Account and the Bank concerned consider feasible. Such

securities shall be allocated to other Banks in order of

their ability to absorb the largest additional amount

without reducing their reserve ratios below the ratio of

the 12 Barks combined.

4. Until the next reallocation the Account shall be

apportioned on the basis of the ratios determined in

paragraph 1, after allowing for any adjustments as pro-

vided for in paragraphs 2 and 3.

5. Profits and losses on the sale of securities

from the Account shall be allocated on the day of delivery

of the securities sold on the basis of each Bank's current

holdings at the opening of business on that day.

Messrs. Hexter, Conkling, and Daniels then withdrew from the

meeting.

The Chairman called at this point for the usual staff economic

and financial reports beginning with Mr. Brill, who presented the

following statement on economic developments:

Not very much in the way of new economic information

become available since the last meeting of this Committee,

what evidence there is provides no basis for modifying

staff's appraisal of the economic situation. More of

same seems to be the order of the day.

On the labor front, the unemployment rate edged down

slightly in August, but at 5-1/2 per cent it still is not

significantly different from a year ago and there continues

to be no change in the number of workers suffering from

longer term unemployment. Some improvement in the job

situation among adult males has been offset, in large

part, by continued inability to find enough opportunities

for the rising number of younger workers now entering the

labor force.

On the production front, the index for August has not as

has

but

the

the

yet been calculated, but present indications suggest little

change from the July level. It is encouraging that there

appeared to have been sufficient strength in other lines of

activity to offset the sharp decline in auto and steel output. It is encouraging also that in recent weeks steel

production appears to have stabilized at these reduced

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levels and that September auto production is scheduled to

increase. How far this carries, however, depends in large

measure on the public's reception of the new auto models.

As for prices, scattered reports of increases for

some industrial commodities have been balanced by reported

declines it others, and the over-all commodity average

remains stable at a level little different from that prevailing over the past two years. Unfavorable weather and

increased sales taxes contributed to the rise in consumer

prices earlier in the summer, along with the usual slow

but persistent updrift in prices of services.

Turning to prospective developments, the new survey

of business plant and equipment spending plans reported

by the Department of Commerce confirms earlier indications

that business capital outlays should be rising substantially

over the balance of the year, with the fourth quarter rate

of outlays expected to be some 8 per cent greater than a

year ago. Welcome as this rise in spending would be, one

can legitimately express some disappointment about the

survey results. For one thing, since last autumn there

has been a persistent shortfall in actual as against

planned spending. The shortfall has not been very large

in amount, but still is a rather unusual development in

a cyclical expansion during which neither strikes nor

material shortages have inhibited realization of plans.

Second, the anticipated rise would bring total capital

spending for the year to a level slightly below that projected by businessmen last spring, and, in fact, only about

2 per cent above the levels projected almost a year ago.

In light of the surprisingly strong profit and cash flow

picture that has developed this year, one might have

reasonably expected some raising of sights by businessmen

as to capital requirements, but apparently availability

of funds by itself does not carry enough weight in determination of investment plans. Finally, one might note

that, in dollar terms, the rise in fixed capital spending

over the second half of this year--some $3 billion--is

likely to be offset in large part by lower rates of

inventory accumulation than in the pre-strike-threat

period. Over-all, therefore, the business sector's

contribution to further rise in economic activity is

not likely to be much greater than earlier this year.

The enigmatic consumer remains a question mark,

spending generously--weekly data suggest August retail

sales up slightly from July, the third consecutive monthly

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increase--but also saving providently. There are some

signs suggesting a further moderate diminution of savings, particularly through financial intermediaries,

but July data tend to be volatile and certainly what

information we have is too fragmentary to permit any

conclusion about basic shifts in trends. By and large,

nothing suggests any significant deviation in consumer

behavior from recent patterns.

The Federal Government's contribution to economic

activity may rise more sharply in the fourth quarter,

if the military pay raise is approved and becomes

effective promptly. The outlook for other types of

Federal expenditures, however, seems to be for a continued advance at the pace of recent quarters. Federal

spending for goods and services, transfers, interest,

and grants-in-aid has continued to rise in step with

GNP throughout almost all of the recovery and expansion

period since early 1961. This is in contrast to no

rise for almost two years after the 1954 recession

trough, and to the leveling off after less than a year

of the 1958-60 upswing. Federal revenues, however,

have been rising as rapidly as expenditures, and the

net of the Government's injection and withdrawal of

funds has been a moderate deficit position--as measured

in the income and product accounts--that hasn't changed much

over the past two years. Again, this contrasts with the

rapid return to a net surplus position chat acted as a

drag on the economy in earlier cyclical recoveries.

However, merely not making the same fiscal mistake is

hardly an adequate substitute for aggressively adopting

the right fiscal policies. Tax reduction seems as much

Unfortunately,

a necessity today as it was last winter

monetary policy has to be formulat .d today in light of

the absence of such fiscal stimulation to the domestic

economy.

Mr. Koch presented the following statement on financial

developments:

To phrase my text for today, let us beware of overemphasizing the importance of small and gradual changes

in monetary policy, even sometimes those cumulated over a

considerable period of time. I come back from a four-week

vacation to find a policy of monetary ease lessened slightly

9/10/63

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again, for the fifth time since late 1961.

And yet I find

essentially unchanged the more fundamental indicators of

monetary policy considered as a group, namely, the course

of bank reserves, bank credit, the money supply, both

narrowly and broadly defined, and even interest rates, if

one excludes short-term rates, which probably have only

minor effects on over-all economic activity.

This combination of policy changes and actual events

may have been exactly what was sought. But it has probably

been more a reflection of the basic forces of the demand

for credit and capital and the supply of real saving rather

than of monetary policy. I'm afraid only a loose relationship can also be found to have existed between recent changes

in monetary policy and international capital movements.

Looking at the factual evidence t. support these obviously

somewhat cverdrawn conclusions, the money market has firmed a

bit, at least since late July, although not perceptibly since

the Committee's last meeting. Free reserves have ranged

around $100 million, as compared with about $150 million

earlier. Member bank borrowings from the Reserve Banks have

averaged a little over $300 million a day, unchanged from

July. The Federal funds rate has generally been at or just

under the new 3-1/2 per cent discount rate. New York City

commercial bank lending rates to Governnent securities dealers

have been most often at 3-3/4 per cent, and the 90-day

Treasury bill rate has fluctuated between 3.35 and 3.40 per cent.

Bank reserve expansion, on the othar hand, has proceeded

apace, despite the slightly firmer tone of the money market.

Required reserves behind private deposits continue to average

about $100 million above the guideline used in the staff

memorandu, which includes a 3 per cent secular growth rate.

The money supply, narrowly defined, has probably risen

somewhat again in early September after having declined a

little in August. Thus far this year, growth has been at

an annual rate of about 2-1/2 per cent, as compared with

1-1/2 per cent in 1962 as a whole.

Time deposit growth at commercial banks has quickened

a little since the July action raising maximum rates payable

on certain of these deposits, with the growth being especially

sharp in the case of negotiable time certificates of deposit.

The money supply, including time deposits, continues to increase at a 7 to 8 per cent annual rate.

As for bank credit expansion, the pace in the third

quarter is off a little from earlier in the year, but this

9/10/63

may be due largely to the changed timing of Treasury

financing. Normally, Treasury financing in the summer

occurs in July, whereas this year it occurred in June.

Bank acquisitions of municipal and Government agency

securities continue large, as do real estate and consumer

loans, with business loans experiencing a somewhat slower

rate of growth thus far this year than in 1962--about 5

per cent compared with 9 per cent.

Business financing through the capital markets, as

well as through the banks, has been seasonally less this

summer than earlier. These business financial developments reflect somewhat larger flows of internal funds as

a result of better earnings and higher depreciation

accruals and only a moderate rise in capital spending.

Although on balance the major impact of a slightly

less easy monetary policy has thus far been on money

market conditions and short-term rates of interest, there

may be beginning to be some spillcver effects on longer

term rates and even credit availatility. Long-term

Government, corporate, and municipal bond yields are

now all between 1/8 and 1/4 of a percentage point above

ields on intermediatetheir lows earlier in the year.

term Governments have experienced a somewhat greater

rise. Even mortgage rates appear to be under less

downward pressure than they were earlier. This course

of longer term rates has occurred in the wake of rather

large System purchases of Government coupon issues in

August. It has been accelerated by the current large

Treasury advance refunding, and there are signs that

even with larger cash flows, some corporations may be

deciding that this is a good time to borrow long-term.

Having opened my remarks by noting the relatively

small changes in the basic indicators of monetary policy

that have resulted from the gradual lessening of monetary

ease that has occurred, not only just this summer but

indeed since late 1961, let me conclude by expressing a

note of caution about this conclusion. Granted that in

a private economy as large and varied as ours, monetary

policy can normally be only a marginal and a lagging

influence on financial and economic developments, we

may be entering a period when such an influence can

become quite important.

Bank liquidity has been decreasing for some time

now, and longer term interest rates have risen a little.

In these circumstances, further reduction in monetary

-20-

9/10/63

ease could unduly dampen domestic activity in general and

investment in particular. In any case, the timing and

magnitude of the advance refunding and the current market

readjustments that are occurring as a result of this

action no doubt preclude any significant shift in policy

throughout most, if not all, of the period between this

and the next meeting of the Committee.

Mr. Furth presented the following statement with regard to the

U. S. balance of payments:

On the basis of the tentative and fragmentary weekly

data, the deficit for August apparently was in the neighborhood of $250 million, or about the same as that for July, if

both figures are adjusted for special transactions (including

the reversal of window-dressing in July).

A deficit of that magnitude would be somewhat lower than

the monthly averages for either the first or the second quarter;

and it would be very much smaller on a seasonally adjusted

basis since the first and second quarters are seasonally

favorable but the third quarter is seasonally unfavorable.

The trade balance does not seem to have improved--on

the contrary, in July the trade surplus declined substantially.

The service balance, before seasonal adjustment, certainly has

deteriorated in view of the travel season. There is no reason

to assume a significant reduction in Government expenditures

abroad; thus, the improvement would seem to have been concentrated mainly in the capital sector.

Within this sector, there does not seem to have been much

change on short-term account. The rise in U. S. short-term

rates has not altered rate differentials in relation to major

financial centers abroad: Euro-dollar rates have increased

virtually as much as U. S. rates; the covered rate differential

in favor cf U. K. Treasury bills again exceeds 1/4 of 1 per cent;

and while the covered differential in favor of Canadian Treasury

bills, despite the rise in Canadian bill rates, has been virtually eliminated by a widening of the forward discount on

the Canadian dollar, the differential in favor of Canadian

financial paper continues to attract U. S. funds. In fact,

according to the admittedly fragmentary reports collected by

the New York Reserve Bank, the outflow of morey market funds,

almost exclusively to Canada, amounted to $55 million gross

and $40 million net during the past three weeks, or about as

much as during the least favorable three-week period last spring.

9/10/63

-21-

Thus, we may guess that the improvement occurred in the

long-term sector.

Since nothing has happened to diminish the

outflow of direct investments, it seems likely that the improvement was in portfolio investments and long-term bank lending.

This assumption seems confirmed by the virtual cessation of

scheduling of foreign bond issues in the New York market,

following the announcement of the equalization tax proposal.

The flight: of foreign and domestic capital, predicted by some

domestic and foreign bankers, has failed to materialize--as

witnessed by the recent events in the stock market. In fact,

as Mr. Coombs has suggested, the effect of the tax proposal

on capital outflows may well have been greater during the past

and present period of uncertainty than it will be once the tax

is enacted. Right now, nobody knows for sure what transactions

will be subject to the tax retroactively, and therefore it is

virtually impossible to take measures to avoid the tax. Once

the tax provisions have been settled, the inevitable loopholes

will greatly reduce its effectiveness.

Econcmic expansion appears to continue in foreign developed

countries. This permits us to expect a further rise in U. S.

exports but also further outflows of direct investments to those

countries. In contrast, financial chaos continues to reign in

some less developed countries that are among the best U. S.

customers, and especially in Brazil. This not only clouds the

future of U. S. exports to those areas but also raises the

prospect of additional calls for U. S. Government assistance.

Two recent statistical reports have shed some light on

recent movements of U. S. capital. The first is a confidential

report on dollar holdings of European countries collected by

the Bank for International Settlements. The figures are

significant mainly because they show that, contrary to our

fears, our figures on U. S. short-term liabilities to and

claims on Europeans are pretty close to the European data.

The Euro-dollar market has made for some changes in the

distribution by countries but shows about the same net

balance for Europe as a whole as the figures collected by

the Federal Reserve Banks.

The second report is the survey of U. S. foreign investments published in the August issue of the Survey of

Current Business. The stock market decline of May 1962

improved the net international asset position of the U. S.

during 1962, since foreign holdings in the U. S. are mainly

in the form of shares while U. S. foreign holdings are mainly

direct or fixed-interest investments. Partly in consequence,

although our payments statistics showed a deficit of $3-1/2

9/10/63

-22-

billion in 1962, our net asset position actually improved

by $3 billion, surpassing the level reached at the end of

1957. While these figures give no reason for complacency,

they should remind us that we exaggerate the magnitude of

the U. S. payments deficit if we fail to consider changes

in our assets as well as in our liabilities.

Equally important are the figures on our total investments in foreign developed countries. If we count as

gross investment abroad not only our recorded capital out-flow but also reinvested earnings of foreign subsidiaries

and, say, half of the usual depreciation allowances of foreign

branches and subsidiaries, total U. S. investment in Canada,

Europe, and Japan amounted to $2.8 billion in 1962--a figure

equal to 80 per cent of our total deficit. If it were possible

to eliminate that investment without harming U. S. exports-or, as one member of this Committee recently suggested as an

alternative, to raise U. S. exports by the amount of that

investment by means of some tying mechanism--those shortterm capital outflows that reflect bear speculation would

presumably cease, if not be turned into an inflow. Moreover,

if it were possible to divert those funds to domestic investment, this would increase gross investment in the U. S. by

3-1/2 per cent, GNP probably by more than 1 per cent, and

employment perhaps by 1/2 of 1 per cent. Thus, U. S. gross

investment in foreign developed countries may well hold the

key not only to our payments deficit but also to our lag.

in domestic growth and employment. How to find the best

way to reduce that investment and especially how to circumscribe the role of monetary policy in that endeavor-this is aiother story.

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

on economic conditions and monetary policy beginning with Mr.

Hayes,

presented the following statement:

There has been no major change in the business

situation since our meeting three weeks ago. The upward

movement has been broadly based but moderate in pace, and

the prospect is for a similar tendency over the coming

months. Removal of the rail strike threat has of course

been a significant favorable development. Retail trade

continues to be a bright spot in the economic picture; and

the good clean-up of 1963 auto models, together with indications of strong consumer buying intentions, augurs well for

who

9/10/63

-23-

auto sales in the new model year. Plant and equipment outlays, according to the latest survey, should show good gains

in the second half of the year, but are no higher than estimates made three months ago. Declines in leading indicators

in the residential construction area may well turn out to be

only an erratic statistical movement. Underlying strength

in this field is suggested by the rising trend of new household formations, lower apartment vacancy rates, and ample

mortgage credit.

Signs of upward price pressures, in addition to specific

influences pushing up food prices, have become more noticeable

in the past two months. However, it is certainly too early

to interpret these developments as an inflationary break-out

from the narrow range of major price indices over the past

three or four years. Stock market prices indexes have

touched new highs, and volume has picked up, suggesting

that there is renewed public interest in equity shares.

This rebound of activity and optimism is, no doubt, rooted

in the brighter outlook for profits against the background

of better business prospects and the expectation of a tax

cut this year. I find cause for watchfulness rather than

for concern in recent commodity price and stock market

developments.

Credit conditions are also little changed in the past

three weeks. Real estate and consumer loans have continued

to show strength, while business loans have remained sluggish. With corporate liquidity still high, corporate funds

have tended to flow into the money market in record volume,

helping the dealers to finance their inventories. Over-all

nonbank liquidity seems ample. As for bank liquidity, the

statistical ratios point to some downward drift in recent

months, to which our own policies have doubtless contributed.

Yet despite the discount rate increase, the related firming

of market rates, and some increase in the pressure on bank

reserve positions, the banks are still aggressively seeking

new loans, particularly in the mortgage and foreign areas.

The advance refunding has had some downward influence on

short-term market rates. The persistently heavy flow of

savings has acted as a stabilizing influence on long-term

rates in the face of the System's monetary moves--although

the advance refunding announcement has caused some rise in

long-term rates in the last few days. The deflection of

investment from abroad resulting from the interest equalization tax proposal is likely to add moderately to the

demand for domestic longer term investments.

9/10/63

-24-

Turning to the balance of payments, there is some faint

cause for encouragement in the declining tendency of the

deficit over the first four weeks of August and the likelihood that the third quarter deficit--even after adjustment

for special window-dressing factors around the end of June

and early July--will show a pronounced improvement over the very

poor second quarter results. The dollar has been performing

a little better in the foreign exchange markets, and it may

well be that the capital account is already showing the

favorable effects of higher interest rates and reduced

reserve availability in this country, together with the

sharply inhibiting effects of the interest equalization tax

proposal on new foreign issues. On the other hand, the outflow of short-term funds to Canada has been resumed since

the Canadian discount rate rise of August 12 and the subsequent upward adjustment of Canadian money market rates.

Recent trade developments have been less encouraging

than the capital account. Imports rose in July, and as the

business expansion goes on, we can hardly hope to avoid

further import increases. At the same time, exports

declined in July. With the over-all deficit still running

at a dangerously high level, we cannot afford to give any

less weight than we have been giving to international considerations. It is of course vitally important that we do

show a real improvement in the balance of payments in the

third anc' fourth quarters, if we are to build confidence

that we have been taking appropriate action, and if we are

to avoid a burgeoning of fears that direct controls will

be imposed--with all that this would mean for the dollar's

standing,

Since the Treasury is in the midst of an important ad-

vance refunding operation, we should aim to promote stability

Therein the money market over the nex, week or ten days.

after it would be desirable, in my judgment, to take advantage

of the scmewhat greater scope for action provided us by the

steadily improving domestic business situation, and to seek

a slightly greater degree of firmness in money market conditions and especially in Treasury bill rates. It seems to

me that this would be well worth doing in order to make it

clear that we "meant business" when we raised the discount

rate to 3-1/2 per cent and that we intended this move to

find pretty full reflection in market rates within a reasonably short span of time.

In other words, I would hope that

the 90-day bill rate would move into a range close to 3-1/2

per cent--perhaps both above and below that figure. Our

9/10/63

-25-

efforts to achieve firmer bill

rates should be helped by the

current relatively high level of dealer inventories and the

Treasury's avowed intention of relying heavily on bills for

their cash financing needs over the coming months. However,

because of the current high level of cash balances, they do

not expect to be able to help in this way in the near future.

I would hope that higher rates could be achieved without any

very substantial reduction in free reserve levels; but I

would let free reserves drop to the extent needed to attain

the slightly firmer tone I have suggested as a primary

objective.

If this policy receives the Committee's support, the

second paragraph of the directive might appropriately be

modified to reflect the Committee's wish to see a slightly

greater degree of firmness in the money market after the

Treasury financing is completed.

Looking a little further ahead, 1 am wondering whether

we are approaching a time when the Board might wish to consider a reduction in reserve requirements as a means of

meeting a portion of seasonal reserve needs with a minimum

of downward pressure on short-term market rates.

Mr. Ellis reported that the economic climate in New England

did not seem to have changed greatly during the summer months.

Em-

ployment, production, personal income, and consumer spending were

running slightly below the national trends, and only construction

activity was outpacing year-ago figures more

improvement nationally.

decisively than the

The summer vacation business had shown a

substantial gain over the year-ago experience, with the index of

tourist attractions showing a 13 per cent gain in attendance in

July.

However, resort facilities reported a noticeable decline in

business done in Canadian currency, apparently reflecting the discount on the Canadian dollar.

9/10/63

-26Turning to the banking picture, Mr. Ellis said that during

July and August First District weekly reporting member banks had been

readjusting their positions after the fairly rapid surge of loan

demand in May and June.

They had sold off about a quarter of their

Government securities and, despite some deposit outflows, were able

to expand their loan portfolios and buy more municipals.

Large

commercial banks in Rhode Island and Vermont had recently raised

their rates on savings deposits to 4 per cent to meet competition.

With respect to monetary policy, Mr. Ellis said two questions

were paramount. in his own analysis.

One question was whether the

recent discount rate action was having an effect on short-term capital outflows, and the other was how the domestic economy was faring

in light of the recent changes in reserve availability and interest

rates.

On the first question, it would be difficult to get a satis-

factory answer since one could not be sure what would have happened

in other circumstances.

It was known that there had been some

increases in Canadian, British, and E:.ro-dollar rates, but the

short-term capital movement did not seem to have increased.

The

effect of the interest equalization tax proposal on capital flows

could not be separated from other factors.

On the second question,

Mr. Ellis was inclined to be fairly optimistic about the course of

the domestic economy.

Output had increased during the summer in the

face of the steel inventory reduction.

Retail demand seemed strong,

9/10/63

-27-

personal. income was up, reports on profits were favorable, stock market prices had moved to a new high, the construction business was

better than expected, and the outlook for fall business was reported

to be good.

Given these factors, a stronger demand for bank credit

might be anticipated this fall.

As to policy for the next three-week period, Mr. Ellis said

that the even-keel concept would seem to have pertinence during the

period of Treasury financing, which would preempt most of the forthcoming period.

Thereafter, there would appear to be some leeway

availabl.e for monetary policy.

He would meet fully the reserve needs

occasioned by seasonal expansion, but perhaps with some reluctance

in order to support any tendency toward fimer rates.

A zero net

free reserve figure, plus or minus, would be acceptable as a target,

with uncertainties resolved on the side of less ease.

He would be

willing to see the bill rate in a range from 3.40-3.50 per cent,

with Federal funds regularly at 3-1/2 per cent.

Such a course would

amount in effect to a slight further shift toward less ease, and

logically a change in the policy directive would seem to be indicated.

At times in the past, however, he recognized that the Committee had

preferred to avoid issuing directives that called for delayed shifts

of policy following the completion of pending Treasury financing

operations.

This led him to conclude that the Committee could afford

to continue the present policy directive for another three weeks,

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9/10/63

after which time there could be a further appraisal of the wisdom cf

following a slightly firmer policy.

Mr. Icons said that most indicators of Eleventh District economic activity, including industrial production, employment, and

construction either were inching upward or holding at a high level

with seasonal coloration.

Construction activity continued to be

In the area of mortgage financing, brokers and mortgage men

strong.

who are regarded as leaders in the District do not admit that there

has been any deterioration in the quality of credit.

However, they

agree that there has been a lengthening of maturities and lower down

payments.

They also indicate that there has been too much mortgage

money available, and rather than reduce rates, there is a tendency

to extend terms and the mortgage coverage.

Turning to the District banking picture, Mr. Irons said that

loans were up in the last three weeks, with most of the increase in

the commercial

and consumer

and industrial loan categories although real estate

loans had also increased.

District banks had not

heretofore been too active in mortgage financing, but there appeared

to be some tendency in that direction.

Demand deposits were up,

particularly those of individuals, partnerships, and corporations,

and time deposits also had increased.

Some of the banks in the

District had been quite active in Federal funds, particularly on

the buying side, and had been running fairly high figures on funds

9/10/63

-29-

purchased.

Borrowing from the Reserve Bank had been nominal.

On the

whole, District banks were rather aggressively looking for opportunities to lend.

They were not as liquid as they had been, perhaps, but

they were reasonably liquid.

Mr. Irons said it seemed to him that monetary policy was

definitely limited to an even-keel position for the next two weeks,

in view of the Treasury advance refunding operation.

Rather than

to try to split off a few days at the end of the forthcoming threeweek period, he would recommend no change in policy during the period

of Treasury financing and until market churning had ceased.

Then,

at its next meeting, the Committee would be in a position to conIf there were

sider whether any change in policy was appropriate.

any deviatiors from an even keel, he would prefer to see them fall

on the side cf a little less ease, but in general he would suggest

an even-keel operation over the next three weeks.

This would infer

a bill rate somewhere around 3.40 per cent, Federal funds trading at

3-1/2 per cent, dealer rates from 3-5/8 to 3-3/4 per cent, and free

reserves varying between $50 and $100 million, though without too

much emphasis on that figure.

The tone and pattern of the market

was more significant than a free reserve figure.

He would not

change the policy directive.

Mr. Swan said there had been little change in the general

economic picture in the Twelfth District during the past three weeks.

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9/10/63

As preliminary data indicated at that time, the unemployment rate rose

slightly in July as additions to the labor force outran a slight increase in total employment.

Final department store sales figures

showed an inccease from June to July, and apparently department store

sales held up well in August.

In the lumber industry, the anticipated

decline in prices upon cessation of the labor dispute had occurred,

with both lumber and plywood prices declining sharply by the end of

August.

For the three weeks ending August 28, weekly reporting member banks showed an increase in total loans, but the gain was less

than half as Large as during the comparable period a year ago.

Real

estate loan portfolios continued to rise; the smaller increase in

total loans than a year earlier was attributable to a decline in

business loans.

There was still no particular indication of a

significant pickup in business loans.

Major banks in the Twelfth

District remained substantial net seLLers of Federal funds; they had

continued in that position last week and were expected to be on the

same side during the current week.

Turning to policy, Mr. Swan said it seemed that in view of

the Treasury refunding an. even-keel policy was called for.

Further,

he saw nothing in the domestic business or international situation

that would indicate the desirability of a change in present policy

before the next meeting of the Committee.

Accordingly, his preference

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9/10/63

would be to maintain the present position through the entire threeweek period, both because of the Treasury financing and the general

economic picture.

He agreed substantially with the target figures

indicated by Mr. Irons.

If the bill rate returned to a level of

about 3,40 per cent, he would consider that as being within the

scope of present policy, but he woulo doubt that an increase to 3.50

per cent

should be regarded as falling within this general definition.

He hoped the existing general market position could be maintained,

with free reserves around the $100 million level.

With respect to the policy directive, Mr. Swan said he would

suggest no change, except perhaps the insection of a phrase such as

"in view of the current Treasury refunding" in the first part of

the second paragraph.

Mr. Deming reported that business sentiment in the Ninth District,as measured by the Reserve Bank's opinion survey of early September, was quite optimistic, with three out of four respondents seeing

improvement in the near-term future and most of the remainder looking

for continuation of present high-level activity.

the respondents saw a possible decline ahead.

Only 6 per cent of

This sentiment undoubtedly

reflected both a strong agricultural situation and a modestly expanding

nonfarm sector.

a near record.

The 1963 wheat crop was the largest since 1958, and

Both corn and soybeans were very good.

total crop output might be second only to 1958.

Altogether,

Range and pasture

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9/10/63

conditions were favorable and conducive to normal fall livestock marNonagricultural employment was expanding modestly, and hours

ketings.

worked in manufacturing in July averaged 42.1 per week, higher than

the national average.

levels.

Bank debits were up strongly from year-ago

Electric power use in industry was sharply higher in July,

and personal income in that month was 5 per cent ahead of a year

earlier.

The major area of weakness continued to be mining.

The banking picture contrasted rather sharply with the overall economic situation in the District.

In general, loan, investment,

and deposit trends in the first half of 1963 were strongly upward,

after allowing for seasonal factors.

In July, bank credit behaved

about seasonally, but deposits declined more than seasonally,

reflecting mainly the reduction in Government balances and apparently

a consequent outflow from the District.

In August,

the deposit trend

of July continued and was accentuated as interbank balances were

reduced along with Government deposits.

Time deposit growth, how-

ever, was fairly strong, and ordinary demand deposit behavior was

about normal.

Bank credit at country banks was about as expected,

but at city banks loans dropped rather sharply and contraseasonally,

reflecting weakness in most loan categories and particularly in

business loans.

This movement seemed to be carrying over into early

September and was accented.

City bank investments were expanding,

but not enough to offset the loan decline.

9/10/63

-33As to policy, Mr. Deming expressed the view that with an even

keel indicated for most of the forthcoming three-week period, it. would

be well to follow such a course for the entire period.

He was not

sure, however, exactly what was comprehended by an even-keel concept

during the three weeks.

He would like to see the bill rate return

to the 3.40 per cent level, with free reserves around $100 million,

but he was not certain that both of these objectives could be

accomplished.

If not, he would be inclined to let the free reserve

level drop a bit to insure that the bill rate did not fall signifi-

cantly.

While he would not attempt to push the bill rate back to

3.40 per cent just for the sake of attaning that Level, it would

be undesirable if the rate fell much below the present level.

In

view of his policy suggestions, quite obviously he would see no

reason to change the current economic policy directive.

Mr. Scanlon reported that business activity continued at a

favorable level in the Seventh Federal Reserve District and was

generally expected to show further improvement.

Retail sales, at

least of nondurables, appeared to have reached another new high in

August, while unemployment insurance claims remained at a low level.

Production of steel probably reached its low in mid-August and was

now rising.

Producers of autos and trucks were highly confident

that the new models soon to be offered for sale would be accorded

a favorable reception by buyers.

Orders for most types of capital

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9/10/63

goods and construction contracts had been at a high level, indicating

some further rise in activity in these lines.

Department store sales in the District apparently reached a

new seasonally adjusted high in August.

The rate of net inflow of

savings to banks and savings and loan associations in the District

slackened appreciably in

Withdrawals,

July.

ceding month and July of last

while above the pre-

year, were generally in

line with

earlier months this year.

Mortgage interest rates appeared not to have been affected

yet by any firming of money markets.

A Reserve Bank survey showed

some further easing of rates in the Chicago area in July.

The

average effective rate on new home mortgages was 5.8 per cent compared with 6.0 per cent in July of last year.

Total credit at District banks declined in August as holdings

of Government securities were reduced rather sharply--about $250

million at Chicago banks since the end of July.

Despite a reduction

in dealer loans, total loans rose moderately, as a result of increases

in both the business and consumer categories.

business loans reflected,

in

Recent strength in

part, a large credit in the chemicals

category recorded early in the month.

Durable goods manufacturers

and trade firms repaid bank loans on balance in August.

Demand for

non-real estate farm loans at agricultural banks was very strong in

July, partly because of a heavy volume of purchases of feeder cattle

9/10/63

-35-

by farmers and partly because of renewals necessitated by delayed mar-

keting of fed cattle, drought conditions in some areas, and other

factors.

The large Chicago banks reported a net decline in loans

since early August.

This development, coupled with further sales

of Treasury bills, had contributed to an easier reserve position.

These banks had been able to cover their needs fully in the Federal

funds market, and borrowing by other District banks had been at a

low level.

Mr. Scanlon concurred in the view that an even-keel policy

was called for during the next three weeks.

He would not be dis-

turbed by a short bill rate in the 3.40 per cent area, but in view

of the possibility of downward pressure during the next few weeks,

he would not press to achieve that rate.

In the present circum-

stances, he would favor no change in the directive, and he would

not change the discount rate.

Mr. Clay expressed the view that during the next three weeks

it would appear logical to pursue essentially the same policy that

had been adopted at the Committee meeting three weeks earlier.

The

most immediate reason for not changing policy was the Treasury

financing operation that would be under way during the period.

Quite

apart from Treasury financing, however, he felt it would be in order

to continue the same policy.

That policy posture constituted the

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9/10/63

implementation of the change that was initiated with the discount rate

action in mid-July, and the System should continue to carry out the

decision represented by that action.

For the period ahead, Mr. Clay continued, pursuit of this

policy would appear to call for maintaining a degree of money market

firmness represented by a Treasury bill rate of about 3-3/8 per cent.

The current directive also called for accommodating moderate expansion in bank reserves, and that also should be continued.

In order

to facilitate the attainment of these objectives, the Account Manager

should conduct operations in various maturities as necessary, recognizing that such operations might be limited by the Treasury's

financing activities in the interval ahead.

should be left unchanged.

The discount rate

With reference to the directive, considera-

tion should be given to rewording the second sentence of the first

paragraph, in view of money supply developments in August.

The

last paragraph of the directive could be left unchanged.

Mr. Wayne said that signs of improvement in Fifth District

business were definitely more numerous than a few weeks earlier.

Although some of these favorable items described conditions a

number of weeks earlier, they added a significant impression of

strength to the current picture.

In July, for instance, seasonally

adjusted nonfarm employment passed the five-million mark for the

first time as jobs in trade, contract construction, services, and

-37-

9/10/63

government all. reached record levels.

Bank debits, manufacturing man-

hours, and cigarette production were also at all-time highs.

In

August, rates of insured unemployment were mostly well below the

national average.

Department store sales, at a high level in July,

showed further improvement in August.

General business sentiment,

as revealed in the Reserve Bank's latest survey, remained moderately

optimistic.

Manufacturers reported small gains in new orders, order

backlogs, shipments, wages, and prices, with employment and hours

virtually unchanged.

The agricultural outlook, particularly for

pastures and late crops, had improved slightly as a result of

scattered rairs.

Loan demand continued strong in the District,

perhaps a lit, le stronger than in the nation as a whole.

On the national front the most important news seemed to be no

news of any significant weakness in the vacation month of August.

The

temporary solution of the rail dispute had removed one potentially

serious roadblock, and civil rights disturbances apparently had not

had any significant effects on business activity generally.

On the

positive side, the little information available for August seemed to

indicate that the economy continued to operate at a high level with

perhaps some increases in particular areas.

The continuing strength

in prices after significant rises in July apparently indicated considerable strength in demand.

own at a high level.

Retail sales seemed to be holding their

Purchasing agents noted a small rise in new

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9/10/63

orders, with production and employment remaining about steady.

With

almost no definite movements to serve as guides, the sustained strength

of recent weeks could only be regarded as a possible indicator of a

satisfactory rate of activity in the weeks immediately ahead and maybe

a little better than seasonal rise during the fall months.

In the policy area, Mr. Wayne felt that the Desk had done a

good job in carrying out the current directive in the face of considerable difficulties.

He concurred

in

the view that an even keel

was indicated for the next two weeks, and in view of general conditions he saw no reason to change policy during the entire three-week

period.

As to targets, he agreed generally with the suggestions of

Mr. Deming.

Accordingly, he would renew the present policy directive,

except for such change as might be deemed advisable in recognition of

the Treasury financing.

He would not change the discount rate at

this time.

Mr. Rcbertson presented the following statement:

I am sure that all of us have been studying the recent

reports cn business developments with special care, looking

for the first clues as to the trend of business this fall-now that we have passed the traditional Labor Day jumpingoff point. I have been doing so, but it seems to me the

flow of evidence is inconclusive at this point. The fall

business expansion is still more a matter of hope than anything else, although a few more weeks of figures may remove

some of the doubts that now exist. I have watched particularly closely the trend of prices in recent weeks, for the

succession of price increases being reported was a source

9/10/63

-39-

of real concern to me. Our general price stability is one

of the key achievements of recent years, and one that we

are going to have to maintain if we are to achieve any

orderly resolution of our domestic and international problems.

If a general price upcreep were to start, I think

monetary policy would have to be prepared to do its part

to resist. Fortunately, the latest and most comprehensive

information on wholesale prices suggests that price increases

and decreases are still essentially offsetting, and that

means to me that we still are in a period when monetary

policy can be broadly stimulative in the interest of promot.ing greater employment of our resources.

I note with some satisfaction the apparent (though

inadequately explained) improvement in our over-all balance

of payments during the past two months, and I think we ought

to watch carefully to judge both the sources of that improvement and how long it may continue. I doubt that little, if

any, of this improvement can be attributed to our changed

monetary policy, and I would not think any further change

in policy for balance of payments reasons would be in

order until the extent and duration cf the recent improvement is more clear.

I am troubled by some of the domestic financial conse-

quences that may be developing as a result of both our

actions and the debt management operations of the Treasury.

I refer to the higher interest rates and more cautious tone

that

have appeared in the capital markets, and the stepping

up of reserve pressures on banks to the point where they

have had to make substantial sales of Government securities.

I think it is unclear at this juncture how far such adjustments will proceed, but at some point they must surely begin

to alter lender and investor attitudes towards additional

requests for loans, and at that

point our policy of "less

ease" will, in my judgment, have gone too far. Indeed, we

may have passed that point already, although it is very

difficul: to judge. At the very least., I think we should

hold our policy course steady over the next few weeks,

watching carefully for cumulative consequences of the

firmer money and capital market conditions that have been

created. The huge Treasury advance refunding, of course,

is itself a factor tightening long-term markets, and should

lead us to maintain "even keel" considerations for the full

period of time during which the market is involved in this

operation. And in this case it is my view that "even keel"

should be judged more in terms of reserve positions, Federal

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9/10/63

funds rates, and dealer needs than by the bill rate, which

may be selectively depressed by reinvestment demand from

investors uninterested in the advance refunding offering.

A selective remedy for such downward rate pressure is

readily at hand in the form of the sale of additional bills

by the Treasury. I think that is the appropriate tool for

doing any tinkering that is to be done with the bill rate

at this juncture. I would not want to see us again use the

general tool of increased reserve pressure to squeeze bills

out of the banking system, as we. have done over the past

six weeks. I think the full consequences of that course

of action are not yet known to us, and we may well regret

the eventual effects upon bank and public liquidity when

all the facts are in.

In conclusion, Mr. Robertson said that he would not favor

changing the policy directive.

Neither would he favor changing the

discount rate at this time.

Mr. Shepardson said that economic developments seemed generally encouraging.

However, the crawl of prices concerned him.

Ad-

mittedly, it was not a great crawl, but it was a movement in the wrong.

direction if

one expected to achieve economic growth and greater

utilization of resources.

While he did.not know how to measure the

impact of the recent change in

the minimum wage,

be conducive to holding up prices.

Whateve

it

certainly would

effect it

might have

from the price standpoint would he in the wrong direction.

To repeat, he was concerned that if there continued to be a

crawl in prices, this would affect adversely both the trade balance

and the growth of the domestic economy.

However,

in light of the Treasury financing, it seemed appro-

priate to Mr. Shepardson to continue the present monetary policy at

9/10/63

-41-

this time.

He was inclined toward a position such as Mr.

Ellis had

outlined, with the understanding, however, that because of the

Treasury financing,

the present policy should be continued for the

full three-week period ahead.

Accordingly,

he would favor renewing

the policy directive without change.

Mr. King said that he agreed with the remarks of those who

favored no change in

period.

the policy for the forthcoming three-week

He doubted the necessity of changing the policy directive

to make reference to the current Treasury financing operation.

At

times such a reference was necessary, but not on every occasion when

an even-keel policy was to be followed.

be no change in the discount rate.

He also felt

there should

As he saw it, allaspects of

present policy should be continued.

Mr. Mi.tchell said that he thought no change in policy was the

course indicated for the coming period.

He felt that the Desk should

not fight a modest lowering of the bill rate, because of technicalities

that might produce pressure.

On the other hand, if market forces pro-

duced a rise in the bill rate, he would be agreeable to seeing the rate

move back up to 3.40 per cent.

Mr. Hickman commented that the flow of statistical information

since the last Committee meeting had been meager, but on the whole had

tended to support the forecast of a quiet August, followed by renewed

strength in the autumn.

In the Fourth District in.August, underlying

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9/10/63

strength was evidenced by brisk department store sales and by the continued large volume of residential building.

employment in

A small increase in

un-

the District was limited to auto and steel centers.

The pickup in

steel orders,

the first

indications of which

were noted at the previous Committee meeting, had strengthened in

recent weeks, at the same time that ingot output appeared to be

bottoming out,

It was evident that the end of the reaction phase in

steel was near, with a fresh demonstration of the resilience of the

economy in having absorbed the steel downdrag.

When the steel industry had completed its turn, and when 1964

autos became available for sale, there might well be a question as to

whether the term "moderate" business expansion would continue to be

appropriate.

A full-blown expansion similar to those experienced

during the 1950's could possibly be in the making.

Any such develo-

ment would imply, either as cause or effect, a significant renewal of

rising commodity prices.

So far the latter had not occurred, but

recent price developments had been showing some faint signs of an

upward stir.

Paper had now joined steel, nonferrous metals, rubber

tires, and cigarettes on the up side.

The industrial component of

the wholesale price index had edged up by a fraction of an index

point in each of three successive months through July, and an additional

slight nudge to prices might follow the recent statutory rise in the

9/10/63

-43-

minimum wage.

it

Altogether, the price front would bear watching, although

would be premature to conclude that a new phase had set in.

It seemed to Mr. Hickman that monetary policy had done about

all that could be expected of it over the past three weeks, and that

the Desk had done a skillful job.

i.e.,

Since the discount rate action,

in the period from July 17 through August 28, total loan demand

at reporting banks had been stronger than in recent years,

and with

their present reserve positions, banks had been forced to liquidate

investments to a greater extent than usual.

Insofar as this greater-

than-seasonal loan demand continued, he would favor allowing the

pressures to be reflected in

the market..

This might mean a level of

free reserves moderately below recent levels,

and a growth of actual

required reserves below present staff targets.

It should be kept in mind, Mr. Hickman added, that price stability could no longer be taken for granted, that the economy was

poised for a possible takeoff, and that the volume of liquid assets

held by the public continued to rise vigorously and bore the highest

ratio to GNP since 1958.

Mr. Hilkert said that since the previous meeting of the

Committee,

Third District business conditions had improved slightly

and tightness had become more evident on the banking scene.

But

economic conditions had not improved sufficiently to help the District's lagging rate of economic growth.

9/10/63

-44Unemployment claims continued well below the totals of recent

years, and unemployment had decreased over the summer, but half the

District's labor markets still

nation's.

had unemployment rates higher than the

Some increases in output, evidenced by greater-than-seasonal

increases in electric power consumption in the District's manufacturing industries, had not been reflected in manufacturing employment or

in the workweek.

Construction contract awards had failed to exceed

1962 levels, while doing so nationally.

Department store sales in

the latest four weeks improved a bit over 1962, but not enough to

change the Third District's year-to-date deficit of one per cent.

Conditions at Third District banks had tightened during the

past three weeks.

Basic reserve positions were consistently on the

minus side, and District banks lost a little over $100 million in

deposits.

Business loans fell

by $8 million,

thus contributing to

a total decline in these loans of $40 million since the beginning

of the year.

Investments were also off, ar.d the total of loans and

investments fell by $17 million.

Mr. Patterson said that if the latest statistics for the

Sixth District showed anything new,

it

was the accumulation of

additional evidence to confirm the renewed vigor in economic expansion that began to be evident toward the latter part of the summer.

The expansion was not of boom proportions, and was not shared equally

by all areas of the District,

Nevertheless, it had been a pleasant

surprise to some persons who were expecting a slowdown during the

9/10/63

-45-

last half of 1963.

Apparently, the District's economy was performing

slightly better than the nation's.

Construction, both residential and nonresidential, was one of

the brightest spots.

A greater-than-usual part of residential con-

struction was taking place outside the major metropolitan areas.

In

the nonresidential category, the impact of the expanded space program

was beginning to be felt with the awarding of a substantial contract

for the construction of a missile test center in Southern Mississippi

that might absorb some of the workers released by completion of a

$125 million oil refinery in

the same area.

Manufacturing employment in

spending had moved up.

the District was rising and retail.

Although fall harvest activity was still light,

larger-than-usual crops of cotton, peanuts, and corn were expected.

There would be a bumper crop of pecans.

The step-up in economic activity was reflected in the latest

banking figures.

rose in August,

Incomplete data suggested that total bank credit

with substantial loan increases in Florida and

With total deposits,

Georgia.

reserves,

and excess reserves up and

member bank borrowing off, there were no signs that recent Federal

Reserve policy had resulted in

any credit stringency within the

District.

Mr. Shuford reported that the economy of the Eighth District

had continued to expand during the summer months.

Employment in

the

9/10/63

-46-

major metropolitan areas had risen about 4 per cent since last spring,

and there was a marked rise in the industrial use of electric power.

Other indicators also had evidenced what seemed to be a good solid

growth in the economy.

Nationally, there had been a marked rise in

business activity that began early this year and appeared from preliminary figures to have continued into August and perhaps early

September.

Mr. Shuford said he was inclined toward the view that the

economic improvement had been facilitated by the degree of availability of bank reserves and the monetary expansion that occurred

last fall and in the first part of this year.

Over the past year

the System had been able to make some contribution both to the high

level of domestic business activity and the balance of payments

problem; the total demand for goods and services had been stimulated

or at least facilitated by bank reserve and monetary expansion at

moderate rates.

At the same time, while it was too early to judge,

it appeared that the rise in short-term rates had, to some degree,

made a contribution from the standpoint of the balance of payments

problem.

Insofar as current policy was concerned, Mr. Shuford said he

would favor no change in view of the Treasury financing.

He would

like to see the short-term rate at about the level that had prevailed

in recent weeks--somewhere around 3.37-3.40 per cent.

While monetary

9/10/63

-47-

expansion might appropriately be more moderate than last fall,

it

should be adequate enough to support a continuation of the business

improvement that had been experienced so far this year.

He would

not favor any change in the discount rate at this time, and he saw

no reason to change the policy directive.

Mr. Balderston said that certain of his own concerns had been

set forth by Mr. Hickman and that he would also like to mention two

others.

One was the continuing tendency to put savings and other

resources into mortgages, especially for the construction of incomeproducing property.

Of the total outstanding mortgage debt of $263

billion, which had been rising at a monthly rate of about $2 billion,

the debt on one-to-four family houses was now about $175 billion.

One

indication of a lowering of lending standards that had attracted the

attention of Mr. Fisher of the Board's research staff was that in July

one-fourth of the conventional mortgages on new single-family dwellings

were for terms of 25 years or more.

Mr. Balderston went on to say that his other concern was over

the rail. strike issue.

The country may have felt some sense of relief

in the postponement of the strike.

However, the postponement was

accomplished only at the expense of interference with the process of

collective bargaining, which might lead eventually to interference in

price setting and other matters.

In his view, there were worse things

than a strike, and the strike now remained for settlement during the

winter when any interference with the movement of coal was so important.

9/10/63

-48-

The central issue was how many jobs the union was willing to give up

as the result of automation, and thus far no criteria for the settlement of that issue had been provided.

Thus, Mr. Balderston said, the

exuberance of the moment must be tempered by thoughts of a deterioration in the quality of lending and by what might prove to have been a

misstep in the settlement of a labor dispute.

As to policy for the forthcoming period, Mr. Balderston said

he agreed with what had been said by others at this meeting.

He felt

the policy of the previous period should be continued for the next

three weeks, but he hoped that events might permit pressing the bill

rate somewhat closer to the discount rate.

Chairman Martin said he continued of the view that both the

domestic business situation and the balance of payments situation

had been improved by the actions of the System this summer, which

had tended to take up some of the slack in the line.

Reports of an

overabundance of mortgage money in some areas, as mentioned by Mr.

Irons, gave pause for concern.

The Chairman went on to say he had always been of the feeling

that, generally speaking, it was inadvisable to provide for a change

of policy within the course of a three-week period between Committee

meetings.

Policy should be made at meetings of the Committee and

not be projected into a future time period.

in the present situation it

It

seemed to him that

would be well to wait until the October 1

9/10/63

-49-

meeting, when the Treasury would have completed a major financing

operation, to decide on any change in policy that might seem to be

neeeded.

Chairman Martin suggested that the policy directive might be

changed to make reference to the Treasury refunding operation because

of its

size, although such recognition might not be necessary on all

occasions of Treasury financing.

so desired,

This could be done,

if

the Committee

simply by inserting the words "and taking account of the

current Treasury refunding operation" in the first part of the second

paragraph.

He proposed that a vote be taken on the directive in a

form in which it would otherwise be unchanged, with the understanding

that this would infer the maintenance of policy "as is" for the forthcoming three-week period.

Thereupon, upon motion duly made

and seconded, the Federal Reserve Bank

of New York was authorized and directed,

until otherwise directed by the Committee,

to execute transactions in the System

Account in accordance with the following

current economic policy directive:

It is the Committee's current policy to accommodate

moderate growth in bank credit, while putting increased

emphasis on money market conditions that would contribute

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

This policy takes into consideration the conof payments.

tinuing 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.

9/10/63

-50-

To implement this policy, and taking account of the

current Treasury refunding operation, 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, Hayes, Balderston, Clay,

Irons, King, Mitchell, Robertson,

Scanlon, Shepardson, and Wayne.

Votes against this action: none.

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

would be held on Tuesday, October 1, 1963.

The meeting then adjourned.

Secretary