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, October 22,
PRESENT:
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
1963, at 9:30 a.m.
Martin, Chairman
Hayes, Vice Chairman
Balderston
Bopp
Clay
Mills
Mitchell
Robertson
Scanlon
Shepardson
Shuford, Alternate for Mr. Irons
Messrs. Hickman, Wayne, and Swan, Alternate Members
of the Federal Open Market Committee
Messrs. Ellis, Bryan, and Deming, Presidents of the
Federal Reserve Banks of Boston, Atlanta, and
Minneapolis, respectively
Mr. Young, Secretary
Mr. Sherman, Assistant Secretary
Mr. Kenyon, Assistant Secretary
Mr. Hexter, Assistant General Counsel
Messrs. Baughman, Eastburn, Furth, Green, Holland,
Koch, and Tow, Associate Economists
Mr. Stone, Manager, System Open Market Account
Mr. Coombs, Special Manager, System Open Market
Account
Mr.
Mr.
Mr.
Mr.
Molony, Assistant to the Board of Governors
Cardon, Legislative Counsel, Board of Governors
Broida, Assistant Secretary, Board of Governors
Williams, Adviser, Division of Research and
Statistics, Board of Governors
Mr. Yager, Chief, Government Finance Section,
Division of Research and Statistics, Board
of Governors
Miss Eaton, Secretary, Office of the Secretary,
Board of Governors
10/22/63
Mr. Coldwell, First Vice President, Federal
Reserve Bank of Dallas
Mr. Rouse, Vice President and Senior Adviser,
Federal Reserve Bank of New York
Messrs. Holmes, Mann, Black, and Jones, Vice
Presidents of the Federal Reserve Banks of
New York, Clevelard, Richmond, and St. Louis,
respectively
Messrs. Brandt and Litterer, Assistant Vice
Presidents of the Federal Reserve Banks cf
Atlanta and Minneapolis, respectively
Mr. Anderson, Financial Economist, Federal Reserve
Bank of Boston
Mr. Meek, 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
September 10, 1963, were approved.
Upon motion duly made and seconded, and
by unanimous vote, the action of the members
of the Federal Open Market Committee taken on
October 8, 1963, authorizing extension of the
period of the standby reciprocal currency
arrangement with the Bank of Italy to six months
from three months but not affecting the term
of any drawing by either party was approved,
ratified, and confirmed.
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 October 1
through October 16, 1963, together with a supplementary report covering
the period October 17 through October 21, 1963.
have been placed in the files of the Committee.
Copies of these reports
10/22/63
Supplementing the written reports, Mr. Coombs commented that
the Treasury gold stock would remain unchanged this week for the tenth
week in a row.
After deducting gold orders
on hand, the Stabilization
Fund had $64 million available and this might be further increased by
a prospective distribution by the Gold Pool at the end of this month.
On the London market, there had been no significant sign of
dishoarding as yet, Mr. Coombs said, with private buying remaining on
a moderate scale.
Sales of Russian gold, of which $200 million were
acquired by the Pool during September, had continued, and the Pool had
acquired another $100 million from the same source during the first
half of October.
So far this year, Russian gold sales had come to $400
million, as compared with annual totals in earlier years of $200 to $25C
million.
Since the Russian wheat purchase program might increase their
dollar exchange needs by $750 million or more above normal, they might
be forced to sell gold in sizable volume during coming months.
Mr. Coombs observed that the preliminary September figures
showing a deficit of $180 million in the U. S. balance of payments
were encouraging and seemed to reflect sharp declines in outflows of
both long- and short-term capital.
While Canada continued to attract
some short-term money, he had the impression that capital outflows to
other parts of the world had subsided considerably.
New York banks
now seemed to be moving to a rate of 3-7/8 per cent on 90-day money
and thus were getting into a better competitive position with the Eurodollar rate of 4-1/8 per cent.
10/22/63
Despite the apparent improvement in the U. S. balance of
payments, Mr. Coombs said, exchange markets had been subject to a
number of disturbing influences, mainly because of flows of European
funds from one money market to another.
Perhaps the most serious problem
arose out of the speculative flow from the lira through the dollar into
the Swiss franc.
In Italy, the present caretaker government had been
unable so far to deal decisively with a serious inflationary situation.
The Bank
of Italy had finally made a firm request of the Italian com-
mercial banks to refrain from further borrowing in the Euro-dollar
market.
For the past year such borrowing had disguised severe deteriora-
tion in the Italian balance of payments.
Bank of Italy
It now seemed likely that the
soon would be forced to show heavy reserve losses,
with
considerable risk that this would further aggravate speculative pressures.
In an effort
to cushion somewhat the Italian reserve declines, the U. S.
Treasury had stepped up its program of acquiring lira balances against
its outstanding lira bond indebtedness of $200 million, and by the end
of the month these purchases would probably amount to $67 million.
Mr. Coombs thought it likely that the Bank of Italy would want
to draw on its reciprocal swap arrangement with the Federal Reserve
within a month or so.
If correction of the Italian deficit in fact
should take longer than the short maturities appropriate to swap drawings,
the Bank of Italy would probably move to pay off any drawings under the
swap line by recourse to the International Monetary Fund for longer
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-5-
term credit.
At the moment Italy had a sizable creditor position
with the Fund and also was negotiating a substantial increase in its
Fund quota.
There seemed to be a reasonable chance that the increase
would be approved before the year end.
Unfortunately, Mr. Coombs continued, as banker to the world
financial system the U. S. was involved not only in the Italian deficit
but also in its counterpart, the heavy flow of short-term funds from
Italy to Switzerland.
Last week the Swiss National Bank had to make
further sizable purchases of dollars to keep the dollar from going
through the floor at 4.3150.
To mop up these surplus dollars, the
Account had to exhaust the $100 million swap line with the Bank for
International
Settlements by a further drawing of $20 million, and on
the day preceding this meeting the Account had drawn $30 million under
the $100 million swap line with the Swiss National Bank.
Consequently,
there remained only $70 million under the swap line with the Swiss
National Bank to deal with possible heavy further flows of dollars to
Switzerland before the year end, including forward Treasury contracts
of $110 million maturing in that period.
He had discussed the situation
last week in Basle with representatives of the Swiss National Bank, Mr.
Coombs said, and had secured a tentative agreement
from that Bank to
take on an additional $70 million in Swiss franc bond issues by the
U. S. Treasury.
He thought the Swiss National Bank would also do its
best to help out around the year end by executing swaps with Swiss
10/22/63
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commercial barks to take care of year-end inflows for "window-dressing"
purposes.
But unless the Italian authorities take drastic action to
restrain the outflow of funds from Italy, the Account might have to
draw heavily on its remaining credit source, the unused $70 million
of the swap line with the Swiss National Bank.
And in the background
was the specter of real trouble on the British side; uncertainties
associated with anticipated British elections could result in still
further flows to Switzerland.
Therefore, it might become desirable
to increase still further the System's swap lines with the BIS and
Swiss National Bank.
Mr. Coombs said that the System was faced with another troublesome problem in the Netherlands.
In late September it had been
necessary to draw on the full swap line of $100 million with the
Netherlands Bank, and the U. S. Treasury had put out $39 million ir
one-month guilder forward contracts, to deal with a sizable repatriation
of funds by Dutch commercial banks.
The main reason for that inflcw
was rumors of a re-evaluation of the guilder.
These rumors had since
been officially denied, but a new type of speculative situation had
arisen.
Dutch commercial banks now expected a severe tightening of
credit to deal with the inflationary consequences of an expected wage
increase of 8 to 10 per cent.
Consequently, the Dutch banks were trying
to stay liquid, and so far it had been possible to cover only $13 million
of the Treasury's $39 million in one-month forward contracts.
It was
10/22/6.3
-7-
paradoxical, Mr. Coombs observed, that a prospective 8 to 10 per cent
wage increase should result in a strengthening rather than a weakening
of the currency of the country involved.
It seemed reasonably likely,
however, that the prospective deterioration in the Dutch competitive
position would in due course tend to weaken the guilder.
But if such
a reversal was unduly delayed by restrictive credit policy, it might
be necessary to consider funding our swap drawing through a U. S.
Treasury issue of guilder bonds to the Netherlands Bank.
While the
Dutch authorities so far had resisted taking in such bonds, at the
last BIS meeting they seemed prepared to consider this possibility
more favorably.
In the discussion that followed, Mr. Mills inquired about the
nature of the allocation of increments to the stock of gold in the
London Gold Pool, and the reasons for the reallocations to other
countries of parts of the U. S. share that he understood the Treasury
recently had made.
Mr. Coombs noted, in replying, that the United
States normally received 50 per cent of any allocation by the Pool
On the occasion of one allocation, last spring, the Treasury had
retained half of its share and reallocated the other half to the German
Federal Bank and the Bank of Italy.
In another allocation near the
end of September, $10 million of the U
S. share of $85 million had been
reallocated to the German Bank and $10 million to the Italian Bank.
In the middle of October, $10 million of a $40 million U. S. allocation
had been reallocated to the German Bank.
10/22/63
Mr. Coombs observed that the motive for these reallocations
was not simply generosity.
Both Germany and Italy, he observed, had
rarely bought gold from the United States, but rather had relied on
the London market.
Thus, when they joined the Pool they were deprived
of a source of gold, and in the absence of occasional reallocations
both the German Federal Bank and the Bank of Italy would have come
under pressure to supplement their gold stocks by purchases from the
United States.
On balance, Mr. Coombs believed, the U. S. had saved
rather than lost gold by the procedure that had been followed.
Mr. Mills then asked whether the public reaction to the
announcement of the increase in the Italian swap line to $250 million
was favorable or perverse in the sense that
of funds from Italy.
it provoked further outflows
Mr. Coombs replied that, insofar as he could
judge, there had been little or no reaction of any sort; he thought
matters were now at a stage where the swap network was taken for granted
and occasional increases in the size of particular lines were viewed
as routine changes.
Had there been a reaction, he would have expected
it to be favorable.
In a further question, Mr. Mills asked about the ultimate
employment of the funds that had been moving from Italy to Switzerland,
and, in particular, whether the funds were being held in Swiss francs.
Mr. Coombs replied that no one really knew the answer to this question,
but there was reason to believe that some of the funds remained in
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Switzerland and some were reinvested in Italian securities under
Swiss names.
In response to another question by Mr. Mills, Mr. Coombs
commented that the earlier "gentlemen's agreement" between the Swiss
Government and Swiss commercial banks limiting the extent to which the
latter acquired foreign currencies had recently been abandoned, because
the many loopholes in the agreement served to penalize the larger
commercial banks.
Mr. Mills asked whether the situation with which
the agreement had been intended to deal had recently become increasingly
serious, and whether it had not been aggravated by the fact that the
U. S. was now "picking up the check" under its currency operations.
Mr. Coombs replied that problems of this type were unavoidable for any
nation, such as the United States or the Urited Kingdom, that was cast
in the role of banker to the world.
He thought in the absence of the
swap network the United States would have lost about $400 million in gold
to Switzerland and the Netherlands in the past two months.
More
generally, he felt that the whole international payments system had
been held together by these swap arrangements and by the so-called
Roosa bonds; had they not been developed the system might well have
broken down completely by now.
In response to a question by Mr. Mitchell as to why the Swiss
authorities did not finance the Italian deficit directly without
involving the dollar in such a way as to bring it under pressure in
Switzerland, Mr. Coombs reported that on one occasion in the past the
10/22/63
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Swiss had acted in this manner for a perioc of two or three months
with respect to the British pound but that they were disinclined to
do so at. present with respect to the lira on the grounds that the flows
involved were large, and they needed to save their ammunition.
Never-
theless, he felt the Swiss were moving gradually towards accepting their
responsibilities to the international payments system.
Mr. Mitchell
commented that while he was not interposing an objection to the potential
Italian drawing under the newly expanded swap line, he thought the record
should show what had been happening in the Italian economy recently.
He
noted that in the past year there had been a 25 per cent increase in
commercial bank credit; an 18 per cent expansion in the money supply;
a 30 per cent rise in imports; a 17 per cert increase in hourly wage
rates in manufacturing; increases of 6.6 per cent and 5 per cent,
respectively, in the consumer and wholesale price indexes; and along
with all this, an increase of less than 10 per cent in industrial
production.
nevertheless,
In his view, inflation had a very strong hold in Italy;
the System was about to extend them a substantial amount
of credit with no strings attached.
In reply, Mr. Coombs observed that
the essential fact was that the credit being extended was short-term.
If the Italians required long-term credit, as he thought they eventually
might, they would have to borrow from the International Monetary Fund.
In reply to a question by Mr. Deming about the implications of
recently reported Russian gold sales in the Middle East, Mr. Coombs said
10/22/63
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that these sales were almost invariably for dollars.
Most Russian
gold sales were made in London, Zurich, and Paris; however, the Russian
Government had recently opened a bank in the Middle East, and might be
channeling scme gold there.
Thereupon, upon motion duly made
and seconded, and by unanimous vote,
the System Open Market Account transactions
in foreign currencies during the period
October 1 through October 21, 1963, were
approved, ratified, and confirmed.
Mr. Coombs said that before making his recommendations he
would like to report on several informal conversations he had had
recently with foreign central bank officials regarding their attitude
towards the present swap arrangements.
From conversations with officials
of the Bank for International Settlements, he thought they would probably
favor a further sizable increase in the $100 million swap line if
further heavy flows of funds into Switzerland made this desirable.
Secondly, the Swiss National Bank probably would also favor an increase
in the System's $100 million swap line with them to perhaps as much as
$200 million, if necessary.
Third, he gathered that the Bank of France
at present would not welcome a suggestion by the Federal Reserve for a
further increase in the swap line with them.
However, their attitude
did not appear to be based on any fundamental philosophical convictions
and might change rather quickly.
Mr. Coombs recommended renewal on a three-month basis of the
$250 million swap arrangement with the German Federal Bank and of the
10/22/63
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$100 million swap line with the Bank of France, both of which were
last renewed on August 6, 1963.
Renewal of the swap arrangements for
a further three-month period was approved.
Mr. Coombs then referred to the discussion at the preceding
meeting of the possibility of a standby swap arrangement with the
Bank of Japan, and said he was inclined to recommend a swap in the
amount of $103-$150 million.
He felt that the memorandum that had been
prepared undec Mr. Young's direction on the Japanese situation pointed
up the effectiveness with which the Japanese authorities had responded
in recent years to challenges posed by inflationary pressures and to
other problem:.
(Note:
A copy of this memorandum, dated October 18,
1963, has been placed in the files of the Committee.)
His conversations
with Bank of Japan officials gave Mr. Coombs the impression that they
were prepared to move fast to meet any new difficulties.
He also had
obtained the impression that if they drew on a swap line and had
difficulty in reversing it, they would have no hesitancy in approaching
the International Monetary Fund.
He noted that the Japanese were making
further progress in removing restrictions on current account transactions
and thought it probable that they would qualify for Article VIII status
by next spring.
While so far the Committee had refrained from making
swap arrangements with countries that did not have Article VIII status,
Mr. Coombs thought there were certain advantages in anticipating the
10/22/63
-13There was apt to be much public
event in the Japanese case.
discussion of the problem of international liquidity during the
in connection with which the System might be asked to
coming months,
explain the details
of its swap arrangements.
Accordingly, he
thought
to move quickly to round out the swap network.
it advisable
In response to a question as to whether a condition was
contemplated under which drawings under the swap arrangement would not
be made until Japan had achieved Article VIII status,
Mr. Coombs replied
thought the Japanese would be fully agreeable to such a condition.
that he
The basic advantage of the swap arrangement, he noted in response to
another question, was
liquidity.
that it would increase Japan's international
He thought the arrangement would minimize internal pressures
on the Japanese authorities to increase
present level of
their gold ratio from its
low
17 per cent.
Mr. Mills said he felt that the staff memorandum on the Japanese
situation was
somewhat overdrawn as to the extent of Japan's progress
and the effectiveness with which the authorities there had dealt with
their problems.
He
thought
the Japanese
very largely by borrowing on both short-
economy
had been
sustained
and long-term, and asked whether
drawings under the proposed swap agreement might not serve simply as a
substitute for the private capital inflows
recent
years.
ment was
Mr.
Coombs replied that
not a substitute
for
the Japanese had
in his
enjoyed in
opinion the swap arrange-
long-term capital.
It was a short-term
10/22/63
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facility, and if the Japanese needed long-term money, they would have
to find it elsewhere.
Mr. Mills' second comment related to the suggestion that the
swap arrangement be approved on a conditional basis, to be effective
only when the Japanese achieved Article VIII. status.
He doubted that
this was wise, and felt that any such arrangement the System might
make with the Japanese should be clean-cut and without conditions.
Coombs replied that he had felt hesitant on this point.
Mr.
As he had
noted, the Japanese were prepared to accept the condition, but he
personally would not urge it.
He was interested in knowing how strongly
the Committee felt about a foreign country's having Article VIII status
as a prerequisite for a swap arrangement with the System.
In his view,
the main criterion was the importance of the country in world trade and
finance, and Article VIII status had served merely as a convenient rule
of thumb.
On this basis, the Japanese would qualify.
Moreover, they
were very close to full convertibility, with the main remaining
restriction relating to tourist travel, and completion of the swap
agreement might encourage them to move more rapidly to Article VIII status.
Mr. Bopp commented that approval of a swap arrangement with a
country that had not yet achieved Article VIII status--which to him
represented one important criterion out of several--might open the door
to negotiations with other countries whose currencies were not convertible.
He was inclined to feel that it would be desirable to include the condition,
10/22/63
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and perhaps also to postpone announcement of the swap arrangement
until the date Japan achieved Article VIII status.
Mr. Robertson received an affirmative reply to his question as
to whether a reciprocal currency arrangement with the Japanese would
round out the swap network, insofar as Mr. Coombs could judge at the
Mr. Coombs said he had thought of informally conveying the
moment.
impression that the swap network was now complete on a geographic basis.
A formal announcement to this effect might prove embarrassing later, if
the Committee should decide to broaden the network, but he agreed that
a statement with some such qualifying phrase as "complete for the time
being" might be desirable.
After this discussion, Mr. Robertson
commented that the only purpose he could see for including a condition
in the Japanese agreement was to lend credence to the notion that the
System was prepared to deal only with Article VIII countries, and he did
not think this desirable.
Moreover, to impose a condition that might not
be met until rext spring really amounted to accomplishing nothing at
present.
Mr. Balderston said that he favored the Japanese swap arrargement
for two reasons:
Japan was one of this country's best customers in the
world market, and could purchase gold from the United States if so
inclined.
He was troubled, however, on how to draw the line if and
when other countries proposed swap arrangements with the System.
Mr.
Coombs commented that this problem had been in his mind when he suggested
10/22/63
-16-
that the Committee should not make Article VIII status a prerequisite
for swap arrangements.
There were several other countries with such
status with whom he thought swap arrangements would be undesirable.
because they failed to meet the more basic criteria he had mentioned,
and because they did not participate in various other arrangements of
major industrialized countries, such as the Organization for Economic
Cooperation ard Development and the "Group of Ten."
Mr. Scanlon commented that if the Committee approved a swap
arrangement with the Japanese without making it conditional on
Article VIII status, it seemed to him that the underlying rationale was
being changed.
As he read the record, the Committee had treated Article
VIII status as virtually a requisite for swap arrangements.
However,
he shared Mr. Robertson's feeling that if the Committee was going to
impose conditions it was really accomplishing little in authorizing
the arrangement.
Mr. Mitchell observed that the original purpose of the swap
arrangements had been to help shore up the dollar, and he felt they
had been helpful in this respect.
But it now appeared to him that
the System was in the position of creating Federal Reserve funds to
assist countries with trade deficits supported by short- and long-term
borrowing.
The Japanese position, in his view, was quite weak.
He had
no fundamental objection to the act of borrowing on short term for longterm purposes--there were many legitimate instances in which such a
10/22/63
-17-
procedure was followed--but he felt the United States had enough
problems of its own without undertaking to help the Japanese with
theirs.
He agreed that there necessarily was a certain element of
mutuality in swap arrangements, but felt, nevertheless, that approval
of the Japanese swap arrangement would be a mistake.
Despite recent
gains, the international position of the United States was not strong
enough for this country to undertake to solve the problems of Japan
and Italy.
If the arrangements were truly reciprocal, he would expect
to see them developed between pairs of third countries, rather than all
emanating from the United States.
Mr. Coombs commented in reply that he could visualize the
eventual development of a broad network of bilateral swap arrangements
of the sort Mr. Mitchell mentioned, and thought that central bankers in
some other countries were thinking along this line.
to see such a network come about.
But.,
He would be pleased
he noted, the United States was
cast in a special role as banker to the world.
He thought of the proposed
Japanese arrangement as providing Japan with the same type of defense
as the United States had repeatedly needed.
He had continually stressed
the two-way street aspect of these arrangements.
To him they represented
a mutual defense, under which credit would be extended when
either party.
needed by
Mr. Hayes added that capital flows between the United
States and Japan could move in either direction, and the existence of a
swap arrangement with Japan might prove highly useful to the United
States in the future.
10/22/63
-18Mr. Hickman questioned the proposed size of the swap line,
and asked whether $200 million might not be a better figure than $150
million, in view of the possibility of large and violent swings in
Japan's external flows.
Mr. Coombs agreed that a larger line might
be found necessary, but in view of various uncertainties he thought
it might be prudent to start with the lower figure, and increase it
if experience indicated that it was too small.
Chairman Martin said that he saw a real advantage in rounding
out the System's network, although without necessarily saying that it
was closed for all time.
He saw no particular advantage or disadvantage
in this case to Article VIII status as a condition; in any event, the
Japanese were close to full convertibility
He then proposed that the
Committee vote on an arrangement with Japar. in the amount of $150
million,without conditions relating to Article VIII status.
Thereupon, upon motior duly made
and seconded, approval was granted to the
negotiation of a standby reciprocal currency arrangement with the Bank of Japan
in the amount of $150 million.
Votes for this action: Messrs. Martin,
Hayes, Balderston, Bopp, Clay, Robertson,
Scanlon, Shepardson, and Shuford. Votes
against this action:
Messrs. Mills and
Mitchell.
Mr. Mills indicated that his reasons for dissenting from this
action went beyond the particular case of Japan.
They reflected his
desire to crystallize within the Committee awareness of what he felt
10/22/63
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to be a serious and dangerous drift towards greater laxity in System
foreign currency operations.
Mr. Coombs' final recommendations concerned the amounts and
form of the dollar limitations specified in the continuing authority
directive on foreign currency operations.
First, he proposed that
the limit on total foreign currency holdings be revised upward to $1.95
billion from its present level of $1.75 billion, to reflect the
Committee's action at the meeting of October 1, 1963, authorizing in-
creases in the size of the standby reciprocal currency arrangements
with the German Federal Bank and the Bank of Italy, and the Committee's
action at this meeting authorizing an arrangement with the Bank of
Japan.
The figure of $1.95 billion was the sum of the amounts that
had been specified by the Committee for all of the individual authorized
swap arrangements, and therefore represented the maximum of System
covered holdings of foreign currencies under these arrangements, in the
remote possibility that they might all simultaneously be fully drawn on.
Secondly, he proposed that the Committee specify separately a limit of
$150 million for foreign currencies purchased outright, on a spot basis.
Finally, he proposed continuation of the limit of $150 million that the
Committee had approved at the meeting of October 1, 1963, for forward
transactions undertaken for the three purposes specified in the directive.
In response to a question as to whether a $150 million limit
was appropriate for spot purchases of foreign currencies, Mr. Coombs
10/22/63
-20-
noted that since such transactions were on an uncovered basis there
was an exchange risk involved, and he thought the Committee would want
to keep them under close control.
Asked whether the proposed limit
did not represent a loose rather than tight rein, Mr. Coombs indicated
that the volune of uncovered holdings in the past had sometimes reached
levels of $50 or $60 million.
If the Committee wanted to set the
limit at $100, or even $75, rather than $150 million, there probably
would be no great problem posed in operations.
No member, however,
pressed for a limit lower than $150 million.
Accordingly, upon motion duly made
and seconded, and by unanimous vote,
the continuing authority d:.rective 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 May 28, 1963; provided that the aggregate amount of
foreign currencies held under reciprocal currency arrangements
shall not exceed $1.95 billion equivalent at any one time, and
provided further that the aggregate amount of foreign currencies
held as a result of outright purchases shall not exceed $150
million equivalent at any one time:
Pounds sterling
French francs
German marks
Italian lire
Netherlands guilders
Swiss francs
Belgian francs
Canadian dollars
10/22/63
Austrian schillings
Swedish kronor
Japanese yen
The Federal Reserve Bank of New York is also authorized
and directed to operate in any or all of the foregoing
currencies in accordance with the Guidelines and up to a
combined total of $150 million equivalent, by means of:
(a)
purchases through forward transactions, for the
purpose of allowing greater flexibility in
covering commitments under reciprocal currency
agreements;
(b)
purchases and sales through forward as well as
spot transactions, for the purpose of utilizing
its holdings of one currency for the settlement
of commitments denominated in other currencies;
and
(c)
purchases through spot transactions and sales
through forward transactions, for the purpose of
restraining short-term outflows of funds induced
by arbitrage considerations.
Before this meeting there had been distributed to the members
of the Committee a report covering open market operations in U. S.
Government securities and bankers' acceptances for the period October 1
through October 16, 1963, and a supplementary report covering the
period October 17 through October 21,
have been placed in
1963.
Copies of these reports
the files of the Committee.
In supplementation of the written reports, Mr. Stone commented
as follows:
Perhaps the major development since the last meeting of
the Committee has been the note of caution that has crept
into the Government securities market and the corporate and
municipal bond markets. This more hesitant tone has been
10/22/63
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particularly evident in the Treasury bill market, with the
rate on three-month bills in the auction yesterday at about
3.49 per cent, up 8 basis points in three weeks, while the
six-month issue, which averaged 3.63 per cent yesterday, is
up 12 basis points. In considerable measure, of course, the
upward pressure on bill rates has been the consequence of the
substantial addition the Treasury is making to Treasury bill
supplies. Today's auction of a $1 billion bill strip follows
the offering earlier this month of $2.0 billion March tax
anticipation bills and two earlier monthly auctions of $1
billion one-year bills. Even with the pay off at maturity
of the October 15 bills, the Treasury has added $2.5 billion
to bill supplies during the past two months, and the market
fully expects the monthly offering to add another billion next
week. The market has not been prepared to absorb these
additional supplies of bills at pre-existing rate levels, and
rates have therefore moved up to a range where the additional
bills can be absorbed.
At the same time, market participants have become somewhat apprehensive about the general economic background and
its implications for interest rates. Continuing signs of
strength in the domestic economy, the rise in stock prices
to record heights, and a sprinkling of price increases have
all contributed to increasing caution. Moreover, the appearance
of somewhat lower free reserve figures during the recent period
has led some market participants to question whether policy
might be undergoing a slight shift toward less ease.
The rise of the bill rate to the neighborhood of 3-1/2 per
cent in response to these factors has given rise to some
discussion of the possibility of a discount rate increase some
time before the end of the year. In the circumstances, dealers
have taken advantage of good demand from corporate and other
customers at the higher rate levels to reduce their total bill
position,. by $400 million to $2.1 billion over the three weeks
ended last Friday despite their awards of $2.8 billion bills
during the period. Given the uncertainties in .the background,
however, dealers have found investors primarily interested in
shorter bills so that their holdings of longer bills have
actually increased despite efforts to dispose of them at higher
rates.
The prices of Treasury notes and bonds have been sliding
for most of the past three weeks in response to the same background factors that have affected the Treasury bill market.
Market participants, at the time of the last meeting of the
Committee, still expected that prices would move up and that
10/22/63
-23-
they could dispose of their large holdings of the issues
acquired in the September advance refunding at rising
prices. Subsequently, with the development of the more
cautious attitude I have already noted, dealers and other
short-te:m holders of the 4 per cent bonds of 1973 and 4-1/8
per cent bonds of 1989-94 sought to take some of the profits
they already had in these issues. Large scale purchases by
Treasury investment accounts helped to relieve some of the
downward price pressures that developed early in the period.
Subsequently, with Treasury accounts largely out of the
market, prices moved progressively lower as investment buying
did not fully take up offerings by dealers and others at
existing prices. Over the period, however, dealers were able
to reduce their holdings of bonds in the 5- to 10-year area
by over $300 million to about $100 million and bonds in the
over 20-year area by $125 million to about $150 million.
Prices in the corporate and municipal bond markets have
tended slightly downward over the past ten days or so,
reflecting the same background factors that have been at
work in :he Government securities market. A buildup in the
calendar of forthcoming corporate issues has exerted a
restraining influence in that market, while a sizable volume
of offerings and an accumulation of municipal bonds on
dealers' shelves has led to a little heavier atmosphere in
that sector in the last few days.
The Treasury plans to announce tomorrow the terms on
which it will refinance its $7.6 billion of November 15
maturities, of which we hold about $3.9 billion. It also
plans to announce tomorrow another issue of $1 billion oneyear bills, to be auctioned next week and to be paid for on
November 4. For the November 4 refunding, the Treasury is
considering whether to offer one or two issues. If it does
offer two, the longer option will probably mature within 5
years. We would plan to take the shorter of the two options
unless some good reason to the contrary should arise.
At the last meeting the Committee raised the leeway to
$1.5 billion since the projections pointed to the possibility
that we might have to absorb close to $1 billion of reserves.
As it turned out, the projections were considerably wide of
the mark, and we absorbed substantially less than the figures
suggested would be necessary. Looking ahead, the estimates
suggest that we may have to supply nearly $1 billion reserves
over the next three weeks. This time, the figures could be
right, or could be wide of the mark in the wrong direction.
I should therefore like to suggest that the leeway be
retained at $1.5 billion for another three weeks.
10/22/63
-24In the discussion a question was raised as to whether
Government securities dealers had suffered losses in connection with
the recent Treasury financing operations, and whether any such losses
might discourage their participation in the forthcoming Treasury
financing.
Mr. Stone replied that he did not think dealers had
suffered losses.
At one point dealers had profits of 3/8 point in
the 4-1/8 per cent bonds of 1989-94, acquired in the September advance
refunding, and they had taken profits at declining prices as they
reduced their positions.
As for Treasury bills, while the cost of
marginal funds from New York banks had beer relatively high, at 3-7/8
per cent, dealers had been able to borrow a good deal of nonbank money
at 3-1/2 per cent, and, in his opinion, the average cost of funds was
low enough for them to carry their portfolios without loss.
Thereupon, upon motion duly made
and seconded, and by unanimous vote, the
open market transactions in Government
securities and bankers' acceptances during
the period October 1 through October 21,
1963, were approved, ratified, and confirmed.
The Chairman then called for staff economic and financial reports,
supplementing the written reports that had been distributed in advance
of the meeting, and copies of which have been placed in the files of
the Committee.
Mr. Koch presented the following statement on economic
developments:
10/22/63
-25-
There have been some surprises in recent economic
news, but by and large--taking account of both the good
and the bad--developments have been in line with expecta-
tions of further moderate expansion in the closing quarter
of the year. Pervasive influences making for ups and downs
over a wide range of indicators have been steel and auto
developments.
When discounted for adjustment to earlier
stock accumulation in steel and for the model changeover
in autos, fluctuations have not been as significant as they
appear at first glance.
The bad news for September was a sharp and widespread
decline in retail sales, perhaps attributable in part to
difficulty in making appropriate adjustments for seasonal
influences. The more or less neutral news included little
change in the unemployment rate and in industrial production.
There was a cessation in the decline in steel activity, little
change in output of other materials, a turnup in auto
assemblies, and a sharp rise in truck production.
Other good news for September included moderate increases
in employment and personal income, a 4 per cent rise in new
orders for durable goods, and a jump in housing starts. But
the employment increase was heavily concentrated in State and
local employment of teachers, reflecting the beginning of the
new school year, and in the auto industry. The rise in the
average workweek in manufacturing was similar to last year,
and reflected mainly the pickup in auto output. The rise in
new orders was general, but in quanti,:ative terms much of it
represented autos, steel, and defense. The September level
of housing starts is very large indeed, but the figure for
August has been revised down sharply, and the average of the
two months is not much different from that of preceding months.
For the third quarter as a whole, the gross national
product is estimated by the Council of Economic Advisers to
have increased by about $9 billion, to an annual rate of $588-1/2
billion.
This is a significantl, larger increase than had been
generally anticipated.
The sharper than expected rise came
mainly in the private investment sector, with residential and
other construction and producers' durable equipment all up.
One surprise here, considering the working off of steel stocks,
is the fact that inventory investment is tentatively estimated
at about the same rate as in the second quarter. State and
local spending showed an unusually large advance, as road
construction spurted following a spring decline.
In early October, total retail sales appeared to be well
along in recovering the sharp September loss.
Auto sales were
in very large volume--above a year earlier--but these sales
-26-
10/22/63
are still greatly influenced by early model year fleet sales.
Press reports suggest, however, that public acceptance of the
new models has been highly favorable.
Steel production has
risen slightly but is still only at a level a little over
60 per cent of capacity. The industrial production index will
get some help from auto and steel production this month, but
since the.direct impact of steel and autos on the total index
is small, the course of the total will depend mainly on what
happens in the rest of industry, about which as yet we know
almost nothing.
Taken together, a sizable further rise in the GNP is
likely in the current quarter. Nonetheless, it appears unlikely
that the unemployment rate will decline significantly or that
much additional pressure will be put on industrial capacity.
Current indications are that expansion will carry over
into 1964. First, there is the likelihood of the substantial
tax cut to stimulate spending, although legislation may not
be enacted until next year. Secondly, the first two surveys
of anticipated business plant and equipment outlays in 1964,
those by Lionel Edie and McGraw-Hill, the results of which are
still confidential and in part incomplete, suggest that
expenditures next year are likely to be 5 to 8 per cent higher
than those for this year as a whole and also somewhat higher
than those for the fourth quarter of this year.
As for the price situation, there have been some obvious
stirrings since last spring.
Certain important lines of
business that have long felt the need but not the ability to
raise profit margins now find that the demand for their product
is strong enough to enable them to test selective price increases.
Thus far, however, stability has persisted in the broad price
indices. The real question about the recent stirring is whether
the selective price increases that have developed to date are
likely to cumulate and to contribute significantly to a pricecost spiral.
The evidence on this question is not yet in, and probably
won't be in for some time. While prices of some commodities have
increased in recent months, prices of a much larger number have
been stable and prices of still others have declined. In a few
cases, a price increase was announced by a single producer and
then subsequently rescinded when his lead was not followed by
competitors.
Finally, there are some relevant longer run facts
available that suggest that a cumulative upward spiral is not a
likelihood unless the economic expansion picks up speed
significantly.
10/22/63
-27-
In the first place, productivity continues to increase
sharply, which is unusual after 30 months of cyclical
expansion. Secondly, profits are apparently rising
considerably, and there is still ample unutilized plant
capacity in most lines. Thirdly, wage increases continue to
be moderate. Moreover, for the short run it is important
that wage contracts in some of the strategic industries
cannot be reopened soon, for example, in autos not until
next summer and in steel not until early 1965.
The current level of unemployment is also still apt to
be an important restraining factor in wage negotiations.
Labor is not likely to attempt to push up wages sharply in
a period when it considers its bargaining position unfavorable.
All this could, of course, be upset in the longer run, for if
prices and profits continue to rise, labor would no doubt seek
more aggressively to obtain what it considers its fair share
of the over-all gains.
Mr. Holland presented the following statement on financial
developments:
In the past month or so, markets have been accommodating
themselves to the onset of fall financial pressures, punctuated
by significant Treasury financing actions in both the long- and
the short-term segments of the market. In the process,'interest
rates across the board have edged up 5 to 10 basis points, and
free reserves have worked lower.
Watching these lower free reserve figures emerge day by
day, I cculd not help but be struck with several factors.
First is the tendency among some larger banks to be quicker to
cover their marginal reserve needs at the discount window.
Such a tendency may reflect the stronger loan demand they are
accommodating, the higher level of market interest rates relative
to the discount rate, or perhaps some one or a combination of
other factors. But the result has been to lower the level of
free reserves that is associated with a given degree of tension
in the central money market. In addition, the recent lower free
reserve figures reflect a succession of misses on the downside
in both day-to-day projections and week-to-week estimates of
changes at nonreporting banks. Misses are an ever-present
problem, but they tended to cumulate in the downward direction
unusually often in the past few reserve weeks. Part of this is
explicable, however, for in hindsight we can see that private
10/22/63
-28-
demands for bank credit and bank deposits were mounting more
than seasonally, and increasing bank reserve needs in the
process.
These recent developments have been generating some
adjustments within the banking system. Bank loan demand
from nonfinancial borrowers is proving considerably stronger
than seasonal, with business loans showing a brisker pace
than earlier this year. An important part of this loan
strength is centered outside the major cities. The dimensions
of the loan expansion do not approach those of a boom, but they
are large enough, given current reserve availability, to compel
banks to break the pattern of sizable net purchases of
securities that they had maintained so much further through
this expansion period than in others. While still participating
in successive Treasury financings, banks have been net sellers
of Governments in most intervening weeks. They have also cut
back on purchases of municipals and agency issues, a fact that
probably has a good deal to do with the recent poorer sales of
the enlarged volume of new municipal issues. Meanwhile, bank
loans to securities dealers and finance companies have dropped
back, following the September tax date bulge.
These actions have produced a net slowing of total bank
earning asset expansion, and would ordinarily have been
accompanied by a slackened rate of private deposit growth.
Such tendency has been offset, however, by a more than
corresponding drop in U. S. Government deposits at banks from
their unusually high summer levels. Bolstered by these net
deposit transfers from Government hands, the totals of private
demand deposits, time deposits, and the combined reserves
required to support such deposits have all been rising. The
money supply has moved up to a level some 4 per cent above a
year ago. Even this advance, however, has not quite kept pace
with the growth in GNP or in the volume of transactions being
funneled through the public's checking accounts. As a
consequence, money velocity has risen somewhat further,
measured on either an income or transactions basis. Should the
current business pick-up lead the public to wish to continue
adding to money balances at anything like the recent rate, the
banking system will be in for some further changes. This is
because no further boost to private deposits appears likely
from Government deposit reductions; they are already down to a
level around which they are projected to oscillate for the
remainder of the year. Thus, any continuation of recent money
demand would need to be compensated for by slower time deposit
growth, or by more intensive bank reserve utilization (probably
10/22/63
-29-
including more discounting), or be tranquilized, as it were,
by somewhat more attractive rates on near-moneys.
Insofar as time deposits are concerned, banks are hard
at work trying to maintain their levels of time certificates
of deposit in the face of the fall needs for corporate funds
and the increased yields of other money market investments.
We hear of active solicitation efforts by some prime-name
banks that are serving to stretch the conventional 25 basis
point margin of CD rates over Treasury bill rates of comparable
maturity.
While the impact of such bank efforts has already been
felt in some degree through most of the markets for short-term
instruments, the long-term markets may be less far along in
the process of responding to the apparent change of pace in
bank takings of securities. This is particularly true of the
municipal market, which has been heavily dependent upon bank
buying over the past year and a half. The absence of any
strong market reaction to date may reflect hopes by market
participants that banks will reappear as substantial net buyers
of intermediate and longer term securities. If those hopes
prove unfounded, an appreciable market readjustment would
undoubtedly result.
The Government securities market now appears technically
in a better position than the municipal market and less
dependent upon the banks. Nonetheless, the new issues supplied
by the recent advance refunding are still not fully digested.
Furthermore, the Government market will have its hands relatively
full over the next two to three weeks with new Treasury activity,
as outlined by the Manager in his report. The one-year bill
issues are becoming semi-routine for the dealers to handle, as
are bill strips to a lesser degree. Furthermore, the November 15
refunding offering is not expected to involve any issue
sufficiently long to disturb the tenor of the market. But the
sum total of such activity argues for maintenance of an "even
keel" policy over the next three weeks. A policy of no change
would also befit the state of the capital markets more generally
viewed. Three weeks from now, with the Treasury financings
presumably successfully completed, the Committee should find
itself in a better position to evaluate the appropriate posture
for monetary policy to assume in dealing with the climactic
seasonal pressures that will arise later in November and December.
Mr. Furth presented the following statement with regard to the
U. S. balance of payments:
10/22/63
-30-
The U. S. payments deficit in September was smaller
than forecast on the basis of the tentative weekly figures.
The official figure of $170 million includes, as a financing
item, the issue of $50 million of so-called convertible
nonmarketable Treasury securities to foreign monetary
authorities to replace similar so-called nonconvertible bonds
of a shorter maturity. Since this exchange does not materially
affect the international liquidity position of the U. S., the
Board's staff prefers to consider the transaction neutral from
the point of view of the U. S. payments balance; accordingly,
the deficit would be only $120 million.
Thanks to this unexpectedly good result, the deficit for
the thir quarter as a whole is also likely to be smaller than
forecast. Based on the calculation preferred by the Board's
staff, the estimated deficit is at a seasonally adjusted annual
rate of less than $2-1/4 billion--and this estimate assumes
that the final September figure will be about $25 million
higher than the figure mentioned in the beginning. According
to the calculation favored by the Commerce Department, the
annual rate would be only $1-1/4 billion; and according to
the most favorable calculation sometimes used by the Treasury
Department, it would be as low as 1/2 of 1 billion dollars.
The table distributed to the Committee shows the derivation
of these various figures from their common source.
(Note: A
copy of this table has been placed in the files of the Committee.)
The improvement of the payments balance since the first
half of the year apparently reflected sharp reduction in the net
outflow of capital. Foreign security issues have abruptly
declined while bank term loans, which would be exempt from the
proposed interest equalization tax, may have begun to rise
again. This development suggests that part of the improvement
has been due to the initial shock effect of the tax proposal,
and that capital outflows may increase again once the market
becomes cognizant of the loopholes left by the proposed bill.
It remains to be seen whether moral suasion or other methods
can help to close at least the loophole of bank loan exemptions.
Tentative figures for the first half of October suggest
that the deficit may again be on the rise. But the weekly
figures are so erratic that data for one or two weeks are not
indicative.
Developments abroad are, on the whole, encouraging. Europe
seems to continue its upswing. There is some question whether
Continental Europe as a whole is reducing or increasing its
trade surplus:
in the first half, Continental European imports
10/22/63
-31-
rose faster than exports but over the summer months imports
remained stable while exports, especially from Germany,
started again to expand.
Rumors of revaluation of the Netherlands guilder and
of devaluation of the Italian lira appear to have produced
large inter-European transfers of funds. But the dollar has
been affected by these movements as the vehicle currency of
most exchange transactions: when there are heavy shifts,
say, of Italian lire into Swiss francs, the dollar should,
in theory, become stronger against the lira and weaker against
the franc, so that the combined impact would be neutral. But
if, as has actually happened, the Italian authorities intervene
in the market to prevent the lira from weakening, the dollar
does not strengthen in Milan but it weakens in Zurich--with
unfavorable psychological repercussions. This is one of the
inevitable consequences of the international eminence of the
dollar.
Beyond their immediate market effect, however, the recent
vicissitudes of European currencies suggest that the payments
surplus of some European countries may be more vulnerable than
many observers realize. The Italian payments balance, for
instance, has changed from a surplus of $500 million in 1962
to a deficit in 1963, which may turn out quite as large; in
terms of the U. S. economy, this would mean a shift in the
payments balance by $10 billion. In the Netherlands, the wage
controls, which many of our European friends had strongly
recommended as a model for a U. S. income policy, have apparently
broken down. In France, wage and price freezes are used to
combat inflation, despite the long history of failures of such
measures. All these developments seem to indicate that the
comparative export advantage of some European countries has an
uncertain basis.
If I may be permitted to indulge in some highly tentative
forecasting of the U. S. payments position, I should guess that
any renewed outflow of long-term capital may well be offset, or
perhaps more than offset, by improvement in the trade balance.
This assumes that the sale of U. S. wheat to the Soviets is not
permitted to founder on excessive U. S. freight rates; that a
sizable part of the export proceeds is received in cash; and
that the Canadian wheat sale to the Soviets will in turn lead
to an increase in Canadian imports from the U. S. Thus, the
relatively favorable third-quarter results may well be equalled
or perhaps surpassed in the period immediately ahead.
But the third-quarter payments deficit still remains too
large, and the United States still has the greater part of the
-32-
10/22/63
way to go until the $3-1/2 billion rate prevailing in the
past few years is replaced by reasonable equilibrium.
Chairman Martin then called for the go-around of comments and
views on economic conditions and monetary policy, beginning with Mr.
Hayes, who presented the following statement:
The domestic business outlook continues generally
favorable. A note of caution is perhaps warranted by the
failure of industrial production in September to show any
appreciable pick-up after the August dip, and by an unexplained
drop in retail sales in September. On the other hand, when
retail
sales for August and September are viewed together,
they are much more satisfactory. New model auto sales appear
to be going well, consumer buying plans are better than a
year ago, and rising plant and equipment spending by
business is in prospect.
Optimism is widespread, and has
been reinforced in recent days by the rise of stock prices to
record levels. Passage of the tax bill around the turn of
the year could provide a strong additional stimulant.
While the wholesale price index has been quite steady,
there have been a considerable number of significant individual
price increases recently. Future developments in this area
will certainly bear watching.
September witnessed a sharp gain in bank credit. It is
particularly interesting to note that in the first nine months
of 1963 most measures of bank credit, bank deposits and bank
reserves showed growth rates roughly equal to or a little
greater than those in the first nine months of 1962, despite
the several modifications of monetary policy in the direction
of less ease in the past year and
a half.
For example, required
reserves rose this year at an annual rate of 3.4 per cent as
compared with 2.6 per cent a year earlier, total bank credit
at 7.4 per cent as against 7.9 per cent and money supply plus
time depcsits at 7.1 per cent as against 6.1 per cent. While
it is true that the level of short-term interest rates rose
considerably, the question may legitimately be raised whether
the degree of over-all liquidity and credit availability has
not remained somewhat higher than the Committee has intended
it to be. Even from a domestic point of view, the result may
have been a somewhat excessive growth of credit in some areas-and the readiness of banks to lend abroad has continued unabated.
10/22/63
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The latest balance of payments developments have been
On the
encouraging for the first time in many months.
basis of preliminary September figures--which may, of course,
turn out to be misleading--there was a very sharp improvement
in the third quarter over the second quarter. The de facto
freeze on foreign bond issues and the beneficial influence of
monetary policy moves on short-term capital flows were
probably important contributing factors. Trade prospects
have been helped importantly by the Russian grain shortage.
However, it is certainly too early to say whether a true
turning point in our balance of payments position has been
reached. In particular we must watch for signs that the
freeze on new issues may be causing an unusual bulge in term
loans by American banks to foreigners and for signs that
nervousness as to possible future controls may be inducing
American firms and individuals to place or leave funds abroad.
There has been an increasing tendency toward more restrictive
credit policies in Europe to counter inflationary threats in
several important countries. We cannot overlook the possibility
that monetary policy may have to be called upon again in this
country to contribute to further progress toward balance of
payments equilibrium.
For the time being, the Treasury's active financing
program suggests the desirability of cur refraining from any
significant policy change. And in any case there is something
to be said for a wait-and-see attitude for a few weeks,,while
we try to appraise more accurately both balance of payments
and domestic business prospects for the fourth quarter.
Fortunately, the prospective offering of $2 billion of Treasury
bills before the month-end, in addition to the regular weekly
issues, is likely to bring a continuation of the upward pressure on bill rates that has been visible in recent weeks. It
seems to me that we should seek to preserve about the kind of
general money market atmosphere that has prevailed in the last
three wee.s. If Treasury activities should tend to put
additional pressure on bill rates we should not try very hard
to offset it.
The directive can probably be left as it is, except for
the inclusion of some reference to the imminent Treasury
financing.
There is one area where I believe a policy move could be
very useful in the near future. I am thinking of the possibility
of further liberalization of the ceiling on time deposit interest
rates under Regulation Q. In line with the generally firmer
tendency of short-term market interest rates in recent weeks,
the rates on time certificates of deposit have risen to levels
10/22/63
-34-
where the 4 per cent ceiling is having some restrictive
effects. It means that some of the moderate-sized banks
outside of the money centers are no longer able to compete
for 3-month, 6-month and one-year money. This would not
seem to be a healthy situation, either from a domestic
point of view or from the standpoint of the balance of
payments.
In my judgment it would be well to lift the
ceiling substantially in order to permit normal competitive
factors free play in determining the size and geographical
distribution of this important segment of the money market.
Looking a little further ahead, it occurs to me that
the Board might wish to consider injecting a few hundred
million dollars of needed seasonal reserves by making
another reduction in reserve requirements, preferably those
If last year's experience
applicable to reserve city banks.
is any criterion, the danger that this might be interpreted
as a move toward greater ease is not very great, and it
should have beneficial results in the short-term rate area.
It also seems logical to use this instrument to provide at
least part of the country's long-term needs for additional
bank reserves.
Mr. Ellis said that it was difficult to interpret the various
conflicting economic indicators for New England.
Nonfarm employment
was virtually unchanged from a year ago, and employment and manhours
worked in manufacturing were down.
However, there had been a slight
pickup in weekly earnings, and personal incomes were about 3 per cent
higher.
Department store sales were running about 9 per cent above
year-ago levels.
Automobile sales were strengthening, and there was
a more widespread use of consumer credit.
By the end of August, total
new credit extensions were sufficient to bring the 12 months gain to
6.7 per cent.
Automobile credit extensions also picked up in September
after a pause in August.
In September, 78 per cent of District
instalment loans on new automobiles had maturities in excess of 30
10/22/63
-35-
months, as compared with 75-1/2 per cent last year.
Turning to the national economy, M,:. Ellis observed that the
recent new highs in stock market price indexes had been achieved at
a time when margin requirements were 50 per cent.
Customer credit
had risen about 18 per cent above its high before the May 1962 decline
in stock prices.
He also noted that banks had been stepping up loans
to brokers, with a rise of about 50 per cent in the 12 months endir.g
in September.
Another category showing a large gain was foreign loans,
up about 25 per cent, and it was natural to anticipate that banks
would be under more pressure to grant foreign loans, in view of the
decline in foreign long-term capital issues in this country.
He
sensed that the pressure to make foreign loans was extending beyond
the New York banks; Boston banks showed sharp increases.
These observations were offered, Mr. Ellis said, to highlight
the degree of credit availability that had been provided in recent
weeks.
He felt the domestic economy did not need the liquidity, and
banks did not need the degree of credit availability, that the Committee
had been providing.
market.
He was pleased by the recent firming in the money
The initiative lay with the market.
If and when credit demands
strengthened this fall, he would expect required reserves to exceed
the staff's guidelines even with no net change in free reserves.
As to policy, Mr. Ellis thought it would be appropriate to
confirm the recent firmness in the money market, and probable further
10/22/63
-36-
firmness that might develop.
As targets cf monetary policy actions
he would suggest a short-term bill rate fluctuating around the
discount rate, but not falling below 3.4 per cent.
Net free reserves
might best be in the lower part of the range from zero to $100 million.
He would not favor any immediate action on discount rates.
While he
believed this policy was consistent with the present directive and he
would not urge a change in the directive, he thought it would be
desirable to update the wording of the directive soon.
Mr. Coldwell reported that the Eleventh District economy slowed
a little in August and September, with industrial production down
slightly.
On the other hand, construction contract awards in August
were at their highest levels since May, with residential, public works,
and utilities construction leading the way.
Cumulatively for the year
to date, construction activity was 10 per cent above a year ago.
Employment conditions in the Eleventh District were fairly
stable, Mr. Coldwell said.
sectors and up in others.
Retail sales were down a little in some
Except for a good cotton crop, the agricul-
tural situation in the District had been affected adversely by the
lack of rain in some areas.
The drought in the area east of San
Antonio was creating forced cattle sales, with resulting downward
pressures on cattle prices.
In the banking and financial area, data for weekly reporting
banks indicated strong loan demand, particularly in real estate,
-37-
10/22/63
consumer and security categories, and a slight rise in bank investments.
Total bank credit, therefore, was expanding rather sharply in the District,
and there was some pressure on reserve positions.
Federal funds purchases
by District banks had risen markedly, and borrowings from the Federal
Reserve Bank had increased considerably in the past few weeks.
Mr. Swan reported that business activity in the Twelfth District
had continued to advance in September, although somewhat unevenly.
Employment was up slightly more than seasonally but the unemployment
rate remained unchanged at a level above that for the nation as a whole,
as the labor force continued to expand.
It was encouraging that employ-
ment had increased despite nine successive months of declines in defense-
related employment, which currently was 4 per cent below the peak reached
in December 1962.
The
larger banks in the District, as a group, had
swung back to being net sellers of Federal funds, but the pattern was
uneven as some banks were borrowing in corsiderable amounts in the Federal
funds market and from the Reserve Bank.
Mr. Swan noted that some savings and loan associations in the
District had announced increases in rates paid to shareholders effective
October 1.
These seemed to fall in two groups:
some that had reduced
rates in the middle of the year and were now returning them to earlier
levels; and a second group, consisting mainly of smaller institutions,
that had not made earlier reductions.
rate continued at 4.8 or 4.85 per cent.
He thought the typical prevailing
Some of the associations were
10/22/63
-38-
increasing the frequency with which they compounded interest, and
were emphasizing this fact in their advertising.
This was one of the
factors that had led some of the smaller institutions to offer higher
rates on a quarterly compounding basis.
The effect of the September
announcement of higher rates was not yet known.
District savings and
loan associations did not do too well in attracting funds in July,
but in August the inflow of funds was twice that of July.
With respect to policy, Mr. Swan believed that both the Treasury
financing program and the economic situation in general suggested a
position for the next three weeks of even keel, or no change.
He was
a little concerned, however, about exactly what "no change" meant row
that the bill rate was about equal to, rather than slightly below, the
discount rate.
It seemed to him that the situation that had developed
during the last three weeks was a little different from the one
anticipated at the last meeting.
He agreed that in the past the Committee
may have over-emphasized the significance of small changes in bill
rates, but he thought such changes took on increasing importance as
the bill rate approached the discount rate.
He shared the opinion Mr.
Mitchell had expressed at the last meeting that when the bill rate
rises to a point where it is fluctuating around the discount rate it
becomes increasingly difficult to avoid action on the discount rate.
He thought this might not be a real problem for the next three weeks,
but it was something that soon was going to confront the Committee
more strongly than it had in the past.
10/22/63
-39Mr. Deming reported that the agricultural situation
Ninth District was good this year.
in the
The direct effect the Russian
wheat deal would have on the economy of the District was not entirely
clear, but it was evident that it would at least have pronounced
indirect effects, by making wheat prices firmer.
Sentiment in the
wheat country was overwhelmingly in favor of the deal.
Nonagricultural
activity seemed to be moving just about the same way in the District
as in the nation, and confidence with respect to the immediate future
of the economy seemed quite high in the District.
Banking conditions in the District were somewhat mixed, Mr.
Deming said.
At country banks, which apparently were under no liquidity
pressure, loans were expanding, whereas loans at city banks continued
to seesaw from week to week.
City banks were on the buying side of
the Federal funds market fairly consistently.
Occasionally there
would be a scramble for Federal funds, and occasionally a city member
bank would borrow from the Reserve Bank.
Mr. Deming said he would subscribe to an even keel policy, in
view of the imminent Treasury refunding, and a change in the directive
to refer to the Treasury financing seemed all that was needed.
no reason to change the discount rate at this time.
He saw
In a concluding
observation, Mr. Deming said that he thought the Desk had done well
during the past three weeks.
As to the reserve projections, he supposed
they presented a problem that could not be licked completely.
10/22/63
-40Mr. Scanlon reported that economic activity in the Seventh
District apparently had moved to new high Levels in October as steel
output continued to rise from the August low, production of 1964 autos
increased sharply, and output of machinery and equipment rose further.
Business optimism in the District had strengthened further and there
was widespread confidence that economic activity would continue to rise
well into next year.
Sentiment had not been dampened by declines in
the national data on industrial production in August and retail sales
in September.
However, many individuals predicated their optimism on
a tax cut to take place early next year.
Some business firms had been encouraged by an improvement in
their profit margins, Mr. Scanlon said, particularly when allowance
was made for higher depreciation taken under the new guidelines.
While
some price markups had not held, others had, in such varied lines as
steel and steel products, chemicals, and hot water heaters, and were
expected to have a favorable impact on profits of the firms
involved.
Labor market conditions appeared to have improved further in
most District centers when allowance was made for recent fluctuations
in steel and autos.
Preliminary October figures suggested that retail
sales had increased from the somewhat depressed September level.
Cash receipts from farm marketings in the District in the
first seven months of this year equaled receipts in the comparable
year-ago period, Mr. Scanlon said.
Larger sales of corn and soybeans
10/22/63
-41-
at higher prices had offset smaller receipts from livestock sales.
As of October 1, farm land values in the District were estimated by
country bankers to average 3 per cent above last year.
The future
trend of land values was expected to be stable or to continue upward.
Mr. Scanlon said that the most: significant banking development
in the District in recent weeks had been the strength in business loans.
The recent surge of loan demand seemed to be concentrated at the large
banks, however.
Virtually all of the rise at weekly reporting banks in
the third quarter was in the Chicago money market banks.
For the third
quarter as a whole, reporting banks in the District showed an increase
of almost 4 per cent in commercial and indurtrial loans, a rise nearly
twice as large as for the country as a whole.
The basic deficit posi-
tion of the Chicago banks remained somewhat in excess of $200 million,
but they had been able to cover most of this with Federal funds.
As to policy, Mr. Scanlon said he would favor maintaining the
prevailing degree of firmness in the money market, and noted that he
was referring to the rates that had prevailed during the preceding
few days.
He did not favor a change in the discount rate and would
change the directive only insofar as necessary to reflect the Treasury
financing.
Mr. Clay said that economic developments in the Tenth District
continued to differ from those in the country as a whole.
District
10/22/63
-42-
nonfarm employment, seasonally adjusted, had dipped slightly from
the advanced level reached early this year.
This followed a period
of rising employment during the last half of 1962 and of stability
in early 1963.
Nationally, scarcely any uptrend was evident in
employment during the last half of 1962, but marked improvement had
developed this year.
Tenth District manufacturing employment had
shown little change during 1963 and was about 1-1/2 per cent less than
year-earlier levels, while nationally, manufacturing employment was
nearly 1 per cent higher than in comparable months of 1962.
Mr. Clay reported that farm income prospects in the Tenth
District relative to last year were slightly less favorable than in
the nation.
He attributed this in part to smaller crop production
this year in contrast with record production nationally, and in part
to substantially lower prices on meat animals, which are relatively
more important in Tenth District agriculture than in the nation.
Higher costs of production were expected to bring a decline in net
farm income nationally as well as in the Tenth District, but the decline
would be more marked in the District for the reasons he had mentioned.
Mr. Clay noted that interest rates had moved to higher levels
than the Committee had set as its goal three weeks ago, with the 90-day
Treasury bill rate even reaching 3-1/2 per cent at one time.
In his
opinion various factors, including Treasury financing activities,
public statements, and misses in financial data projections, had worked
10/22/63
-43-
to that end.
It was important, Mr. Clay said, that this recent
development should not be viewed as a monetary posture that the
Committee would become committed to maintain.
This was particularly
important inasmuch as it had been suggested in previous meetings that
market developments leading to a Treasury bill rate in line with the
Federal Reserve discount rate might be used as the base for another
upward movement in the discount rate.
Monetary policy had moved to a point, Mr. Clay said, where
further actions in this same direction must be evaluated critically
in terms of the effectiveness of policy in sustaining economic expansion.
While the over-all output performance of te economy in the third quarter
was encouraging,
questions remained as to the sustaining character of
the composition of demand growth achieved in this upswing.
Moreover,
the relationship of monetary policy to the lagging elements in the
expansion became of crucial importance at this stage of the cycle.
Such an analysis did not lead easily, in his opinion, to acceptance of
the present market position as the base for a change in monetary policy
resulting in another roun
of interest rate increases and lessened
credit availability.
At the present time, Mr. Clay said, the Committee should continue
to provide additional reserves to the banking system for credit expansion
and should not feel constrained to prevent the 90-day bill rate from
falling somewhat below its recent level.
Treasury financing presumably
10/22/63
-44-
would be a factor in the conduct of open market operations in the
period immediately ahead.
Mr. Wayne said that signs of further improvement continued
to mark most sectors of Fifth District business.
Factors indicating
current strength included a sharp rise in building permits to a new
high in September, sustained high-level demand for bituminous coal.,
and strong and apparently improving markets for textiles and furniture.
These trends were supported by the latest Reserve Bank survey, which
indicated a continuation of general optimism, strength in construction,
and further rises in manufacturing new orders, shipments, employment,
and hou-s.
With respect to national conditions, Mr. Wayne said the
behavior of the economy in September and thus far in October suggested
that earlier signs of hesitation were temporary and probably the result
of special factors.
It seemed reasonably clear that the current strength
was greater than seasonal.
In the international area, there had been
substantial improvements in nearly all segments of the balance of payments, at least for the time being.
The problem was by no means solved,
but was a little less urgent than three months ago.
Mr. Wayne said that he found himself in almost complete agreement
with Messrs. Ellis and Scanlon on policy.
He favored maintaining an
"even keel" for the next three weeks, interpreting this to mean a bill
rate pressing rather firmly against the discount rate and free reserves
10/22/63
-45-
between zero and $100 million.
He shared Mr. Ellis' concern regarding
the degree of liquidity the Committee had maintained in the economy.
He thought developments in the near future might suggest it was more
than needed.
Mr. Mills said that, in his view, the Committee was tied to
a continuing commitment to follow a monetary and credit policy mear.t
to combat the balance of payments problem.
If such was the case, the
policy followed since the last meeting of the Committee appeared to
him appropriate.
This policy was exemplified in the technical results
revealed in the supply of reserves available to the banking system and
in the movements of interest rates.
Mr. Robertson presented the following statement:
I t.ke it that the cluttered Treasury financing calendar
over the next three weeks effectively precludes our making
any change in monetary policy. Even keel considerations in
this respect are reinforced by the sensitive state of the
capital markets in general. I would want us to do nothing
that would send a serious ripple of tightening through the
financial markets at this stage, and this implies that we
should be trying to achieve a little more comfortable level
of free reserves during the coming weeks of peak seasonal
pressure than the low figures down to which we slid unintentionally over the past month. Certainly the improvement
appearing in our balance of payments statistics would seem
to preclude any contention that there exists a need for
further tightening on that ground alone.
On the other hand, I would not want to advocate any
overt easing of policy, at least until it is clear that
the developments now taking place in the price area have
no cumulative inflationary potential. It cost us a great
deal of effort and anguish to break the wage-price spiral
in this country five years ago, and that is a victory I
would dislike to see reversed. Consequently, my prescription
10/22/63
-46-
would be for no change in either the consensus or the
directive today, apart from a recognition of the Treasury
financing.
Mr. Shepardson said that he thought the general outlook was
on the favorable side.
He was concerned, however, about what seemed
to him to be a continuing excessive buildup of credit and money that
could lead to increases in the price level, a development he was sure
the Committee did not favor.
As to policy, he thought that Treasury
financing activities precluded any change during the coming three weeks
He was concerned about the future but did not advocate any change in
policy at the present time.
Mr. Mitchell said that it seemed to him there had been a
dramatic improvement in the balance of payments situation.
The deficit
had declined from an annual rate of over $4 billion in the first half
of the year to $2-1/4 billion in the third quarter, despite a
substantial increase in foreign lending by U. S. banks.
He thought
further imprcvement was in prospect, because of the impact of grain
sales t, Russia and other Eastern European countries.
He did not believe
that the recent discount rate increase had very much to do with the
improvement, although it might have had some effect.
In Mr. Mitchell's opinion, the domestic economy was performing
well, and certainly better than he had expected earlier in the year.
Still, he thought the Committee was not making a dent in the long-run
problem, and until it did so he did not believe the Committee should
10/22/63
-47-
abandon efforts to use monetary policy to achieve greater resource
utilization.
He thought the Committee was now coming into a fairly
significant period, since it had generated expectations in the capital
market of an increase in long-term interest rates.
Also, the expected
large increase in municipal offerings would come into the capital
market at a time when commercial banks had become less interested in
such securities.
This could mean only one thing--a rise in rates on
tax-exempt securities.
This struck him as unfortunate, since the
economy needed every source of strength that could be mustered.
Mr. Mitchell felt that the Desk had not done quite what the
Committee had wanted in the period since the last meeting.
He
appreciated that present money market circumstances had come about
partly as a result of erroneous estimates of factors affecting reserves.
He urged,
however, that technical work be undertaken to improve the
quality of the estimates on which the Desk relied.
He agreed with Mr.
Clay on policy for the next three weeks.
Mr. Hickman noted that the major series showed gains from the
second to the third quarters, even though the third quarter ended on a
somewhat subdued note.
Thus, the index of industrial production on
average was up 1.3 per cent from the second quarter, retail sales were
up 1.1 per cent despite a weak September showing, and gross national
product showed an unexpectedly large gain of 1-1/2 per cent.
What was now known about October's performance, Mr. Hickman
10/22/63
-48He found reports of auto
said, indicated clear-cut forward movement.
sales particularly noteworthy, with the first 10 days of the month
establishing a new record for the period.
Largely as a result, total
retail sales, seasonally adjusted, thus far in October had been running
at a rate comparable to the record of last August.
Auto production
was expected to reach 800,000 units in October, for a considerably
larger than seasonal gain.
Steel output in the nation had risen
moderately for eight of the past nine weeks, but little change was
expected for the remainder of the year.
In the steel-consuming industries,
information from Fourth District machinery producers indicated a strong
order backlog, supplementing the most recent
national report indicating
a rise in new orders received by durable goods manufacturers.
Thus,
there were grounds for expecting that October would see a further rise
in the production index, following a temporary standstill in September.
Mr. Hickman said that develcpments
in the Fourth District
in some respects had not been quite sc favorable as in the nation as a
whole.
Steel output in the Cleveland-Lorain area, after having compared
favorably with U. S. rates
shown some tendency to lag.
for a considerable period, had recently
The unemployment claims
figures, which had
been improving markedly, had undergone a slight setback in most of the
District's labor market areas.
Auto sales in the Fourth District,
however, were sharing fully in the national upsweep, with Pittsburgh
figures especially strong.
Construction activity also appeared to be
10/22/63
-49-
relatively strong in the District; in Cleveland, the year-to-date
volume of pernits by mid-September had topped the 12-month totals for
all previous years of record, due in part to urban renewal.
Mr. Hickman observed that changes in assets and liabilities
of all reporting banks in recent weeks had been dominated by Treasury
financing operations and by related changes in securities loans and in
the Treasury cash balance.
Looking behind the figures, however,
there
appeared to have been more than seasonal expansion in business loan
demand, a trend that was particularly observable in the Fourth District.
Required reserves held against private deposits were again
running disconcertingly ahead of the staff's guideline projection,
which was adjusted in late September in such a way as to lock in the
effects of the 4.3 per cent annual rate of expansion that had occurred
between May and July.
Successive projections at a 3 per cent rate had
been made with four different base periods beginning June 13, 1962,
despite several policy decisions by the Committee towards lesser ease.
At the time of each revision in the base, actual annual rates of
monetary expansion had been running in excess of projected rates.
Under the circumstances, Mr. Hickman felt that there was a real question
as to whether the staff guidelines were consistent with the intent of
the Committee.
Mr. Hickman indicated that he thought monetary policy in
recent weeks had, on the whole, worked out fairly well, with free
10/22/63
-50-
reserves ranging well below $100 million.
With recent help from the
Treasury's strip of bills, the 91-day bill rate had moved close to
the discount rate, and international interest rate differentials had
moved favorably to the U. S.
He recommended encouragement of further
movement in these same directions;
free reserves should be allowed to
fluctuate around the zero level as soon as Treasury financing permitted.
Mr. Hickman concluded by saying the Desk wes to be commended for its
skill in a difficult period and particularly for conducting open market
operations in the short-term area.
Mr. Bopp said that weekly indicators, plus incomplete September
data, showed the Third District in a state of economic backing and
The year-end seasonal upswing in unemployment claims was just
filling
beginning; output was not strong in total, despite strength in steel
production; and sales in
department stores remained rather slow,
although they had exhibited strength enough to pull even with 1962.
The tightness evident at the last meeting of the Committee
increased at Third District commercial banks during the last three
weeks,Mr. Bopp said.
The basic reserve deficit of reserve city banks
was a little over $50 million on a weekly average basis.
This figure
had been exceeded on only six other occasions this year and only about
eight times in 1962.
also rose.
Country bank borrowing at the discount window
Business loans at weekly reporting member banks of the
Third District continued to display weakness, declining $5 million
10/22/63
-51-
during the two weeks ending October 16.
Net loans adjusted fell by
$39 million and investments by $8 million.
Mr. Bopp said he would agree with
operations
for the next three weeks.
Messrs. Swan and Clay as to
He expressed concern that the
announcement on the day following this meeting of
Treasury planned
an
a financing operation that would not take place for three weeks.
He
felt that such a long lead time might, on occasion, unduly tie the
Committee's hands
with respect to policy changes.
Mr. Bryan said that what few new economic statistics were
available for the Sixth District were mainly in the financial area.
Bank debits, deposits and currency, and the money supply were all up
sharply.
business
He did
Loans and investments at member banks also were up, notably
loans, and borrowings
from the Federal Reserve Bank had risen.
not know what to make of the sharp increase in business loans
or the news .. f small bu. pervasive price increases.
a general price inflation,
buildup
These might portend
or they might simply reflect an inventory
Business sentiment seemed highly optimistic.
Mr. Bryan felt
that the Treasury financing precluded any change
in policy at this meeting.
He believed that the business situation
warranted careful watching, as indeed it always did.
seemed to be progressing satisfactorily.
The money supply
Liquid assets in the hands
of the public were continuing their nearly vertical climb.
Required
reserves continued substantially above the staff's guidelines, even
-52-
10/22/63
as amended.
He saw no reason to change the discount rate at this
time nor to change the Committee's policy.
If there was any policy
change, however, he felt it should be in the direction of zero free
reserves, with the thought in mind that even zero free reserves can
finance inflation.
Mr. Bryan said that, if at all possible, the next move in the
discount rate should be premeditated and not determined by expectational
forces in the market.
He shared Mr. Hickman's views about the staff
reserve projections, but did not take the matter too seriously.
Mr. Shuford said that since the first of the year economic
activity in the Eighth District had generally paralleled that of the
country as a whole.
During the first part of the year the District
had had a marked expansion, and since mid-year business had expanded
only moderately.
Employment in the District's major labor markets and
the volume of bank debits had both been unchanged since June, and
department store sales had drifted lower since May.
On the other hand,
industrial use of electric power, business loans at reporting banks,
and bank deposits had all continued to expand.
Member bank borrowings
from the Federal Reserve Bank had not been large this fall.
While
there was a lack of moisture in the District this year, agricultural
production for the District as a whole probably would exceed that of
last year by a significant margin.
As to policy, Mr. Shuford said that he would favor no change,
10/22/63
-53He was not thinking
particularly in view of the Treasury financing.
in terms of any particular level of free reserves; he thought reserves
and other measures such as money supply were more meaningful.
term rates should fluctuate around 3.45 per cent.
Short-
He thought the policy
the Committee had been following was reasonably satisfactory under the
circumstances.
Short-term rates had moved up to a 3.45 level and then
gone higher but had dropped back down to 3.48.
able and reasonable growth in the economy.
There had been sustain-
The Committee's interest
in providing reserves had facilitated a desirable continuing monetary
expansion.
He was alert to the situation that seemed to be developing
with respect to prices.
He did not feel that the growth in liquidity
had been excessive, but both of these areas deserved close watching.
He would make no change in policy, and would not change the directive
except to recgnize the Treasury financing.
Mr. Balderston said he was gratified by the elimination of the
differential between U. S. bill rates and those of Canada and England.
He noted, however, that rates on commercial paper in both countries
were higher than in the U. S. He was encouraged by the balance of
payments projections for the fourth quarter, but doubted that the
improvement in the balance of payments for the year as a whole would
be adequate to satisfy the nation's creditors.
He shared with Mr.
Robertson and Mr. Bryan their concern about recent price behavior,
and was worried that the liquidity that had been made available was
10/22/63
-54-
being misapplied in the stock market and elsewhere.
Over the past
year, he noted, available reserves had risen by over $800 million
and nonborrowed reserves by over $500 million.
He felt the Committee
might have built up an inflationary potential that was greater than
current price movements had indicated.
Mr. Balderston concluded by
saying that, in view of the Treasury financing, he favored no change
in policy at this time.
Chairman Martin said he had nothing to add to the observations
that had already been made.
He thought that it was easier to formulate
the consensus at this meeting than at any in a long time; the Committee
clearly favored no change in policy.
He felt that the only problem
concerned the wording of the current policy directive.
Mr. Young had
some alternative variants for both paragraphs of the directive which
the Committee might like to consider.
In discussing the various alternatives proposed for the first
paragraph, Mr. Young said that the first involved no change, and the
second a modest change affecting the first sentence.
The proposed new
first sentence put emphasis "on maintaining conditions in the money
market that would contribute to continued improvement in the capital
account of the U. S. balance of payments."
Suggestions had also been
received for recasting the first paragraph as a whole to update the
language, and an attempt had been made to do so in the third alternative.
With respect to the second paragraph, Mr. Young noted that the
10/22/63
-55-
first alternative differed from the one issued at the previous meeting
only by the addition of a reference to the imminent Treasury financing,
and continued to call for operations to be conducted with "a view to
maintaining the prevailing degree of firmness in the money market...."
The second alternative also included the Treasury financing reference,
but substituted the wording "the degree of firmness in the money market
that has prevailed in recent weeks" for the earlier wording.
In the course of the discussion, it became evident that the
Committee unanimously favored the third of the proposed alternatives
for the first paragraph.
It was agreed that the change in language was
intended simply to reflect recent developments in the domestic economy
and in the balance of payments and not to signify any change in policy.
There were differences of views, however, as to which of the
two proposed alternatives for the second paragraph better reflected the
Committee's consensus for no change in policy.
Mr. Mitchell expressed
a preference for the second alternative, on grounds of both substance
and degree of clarity.
He felt that the word "prevailing" by itself
could mean either prevailing in recent weeks or at the time of this
meeting, and since he believed the former was the Committee's intent,
he considered it desirable to be explicit on the point.
Messrs. Hayes
and Shepardson spoke in favor of the first alternative.
Mr. Hayes found
the phrase "in recent weeks" ambiguous since the number of weeks was
not .specified.
If taken to mean the last three weeks, he thought the
-56-
10/22/63
substance of the second alternative was the same as the first; but
if taken to apply to a longer period, he felt it would imply that
the Committee wanted to back off from the degree of firmness that had
been achieved, and he did not think this was the case.
Mr. Shepardson
said the word "prevailing" was perfectly explicit to him; it meant
prevailing at the time of the meeting.
Chairman Martin observed that, while others might feel
differently, to his mind there was no substantive difference between
the alternatives.
The problem, as he saw it, was a semantic one of
a type the Committee had to struggle with continually.
He suggested
that the Committee members be polled on their preference, on the
assumption that the two alternatives were substantially equivalent in
meaning.
The results of the poll indicated that a majority preferred
the second alternative.
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 Federal Open Market Committee's current policy
to accommodate moderate growth in bank credit, while maintaining conditions in the money market that would contribute
to continued improvement in the capital account of the U. S.
balance of payments. This policy takes into consideration
the fact that domestic economic activity is expanding
further, although with a margin of underutilized resources;
and the fact that the balance of payments position is still
It also
adverse despite a tendency to reduced deficits.
recognizes the increases in bank credit, money supply, and
the reserve base of recent months.
10/22/63
-57-
To implement this policy, and taking into account the
imminent Treasury refinancing, System open market operations
shall be conducted with a view to maintaining the degree of
firmness in the money market that has prevailed in recent
weeks, while accommodating moderate expansion in aggregate
bank reserves.
Votes for this action: Messrs. Martin,
Hayes, Balderston, Bopp, Clay, Mills,
Mitchell, Robertson, Scanlon, Shepardson,
and Shuford. Votes against this action:
None.
Chairman Martin noted the Account Manager's earlier suggestion
that the continuing authority directive be left unchanged for another
three weeks with respect to the limitation of $1.5 billion for changes
in the aggregate amount of U. S. Government securities held in the
System Open Market Account during any period between meetings
Committee.
of the
No objection was made to leaving this directive unchanged.
The Chairman suggested that in view of the lateness of the
hour the Committee once again hold over until the next meeting its
discussion of the memorandum on the question of making available
minutes of the Federal Open Market Committee for some past period
for use of scholars and others, and there was no objection.
At this point there were distributed copies of a list of
possible dates for meetings of the Committee through 1964 for
consideration by the members of the Committee.
It was agreed that the next meeting of the Federal Open Market
Committee would be held on November 12, 1963.
10/22/63
-58The meeting then adjourned.
Secretary
Cite this document
Federal Reserve (1963, October 21). FOMC Minutes. Fomc Minutes, Federal Reserve. https://whenthefedspeaks.com/doc/fomc_minutes_19631022
@misc{wtfs_fomc_minutes_19631022,
author = {Federal Reserve},
title = {FOMC Minutes},
year = {1963},
month = {Oct},
howpublished = {Fomc Minutes, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/fomc_minutes_19631022},
note = {Retrieved via When the Fed Speaks corpus}
}