FOMC Minutes
A meeting of the Federal Open Market Committee was held in
the offices of the Board of Governors of the Federal Reserve Systen
in Washington on Tuesday,
PRESENT:
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
November 12,
1962, at 9:30 a.m.
Martin, Chairman
Hayes, Vice Chairman
Balderston
Bopp
Clay
Irons
Mills
Mitchell
Robertson
Scanlon
Shepardson
Messrs. Hickman, Wayne, Shuford, and Swan, Alternate
Members of the Federal Open Market Committee
Messrs. Ellis
and Deming, Presidents of the Federal
Reserve Banks of Boston and Minneapolis,
respectively
Mr. Young, Secretary
Mr. Sherman, Assistant Secretary
Mr. Kenyon, Assistant Secretary
Mr. Hackley, General Counsel
Mr. Noyes, Economist
Messrs. Baughmar, Brill, Furth, Green, Holland,
Koch, and Tow, Associate Economists
Mr. Stone, Manager, System Open Market Account
Mr. Coombs, Special Manager, System Open Market
Account
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
Mr.
Mr.
Mr.
Mr.
11/12/63
Messrs. Holmes, Mann, Jones, Parsons, and
Grove, Vice Presidents of the Federal
Reserve Banks of New York, Cleveland,
St. Louis, Minneapolis, and San Francisco, respectively
Messrs. Parthemos and Brandt, Assistant
Vice Presidents of the Federal Reserve
Banks of Richmond and Atlanta, respectively
Mr. Clay J. Anderson, .conomic Adviser,
Federal Reserve Bank of Philadelphia
Mr. Paul S. Anderson, Financial Economist,
Federal Reserve Bank of Boston
Mr. Sternlight, Manager, Securities Department, Federal Reserve Bank of New York
Upon motion duly made and seconded, and
by unanimous vote, the minutes of the meeting
of the Federal Open Market Committee held on
October 1, 1963, were approved.
Before this meeting there had been distributed to the Committee
a report from the Special Manager of the System Open Market Account on
foreign exchange market conditions and on Open Market Account and
Treasury operations in foreign currencies for the period October 22
through November 6, 1963, together with a supplemental report covering
November 7 and 8, 1963.
Copies of these reports have been placed in
the files of the Committee.
Supplenenting the written reports, Mr. Coombs commented that
the Treasury gold stock would remain unchanged again this week, running
the period of no change to roughly three months.
The Stabilization
Fund now had $83 million of gold against prospective November orders
of $62 million.
Some $40 million of Russian gold had been acquired
11/12/63
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by the Londor Gold Pool on the Friday preceding the meeting and further
Russian sales seemed likely.
Mr. Coombs reported that at Basle, where he spent the past
weekend, there had been much discussion of the Italian and Dutch
situations.
Governor Carli of the Bank of Italy had given a fairly
encouraging report on the Italian problem.
ment in the political atmosphere.
There had been an improve-
The outflow of funds from Italy had
slowed down somewhat during the past week or two, and the Governor was
hopeful that the record for November would be better than for October.
Governor Carli had paid tribute to the cooperation of the Federal
Reserve and the U. S. Treasury in making possible a reduction in the
Italian reserve
loss during October from $270 million to the actual
figure of $153 million.
The reciprocal nature of U. S. exchange opera-
tions had now become increasingly clear to European central bankers,
Mr. Coombs said, and he sensed a growing measure of support for U. S.
policy in the international financial area.
Regarding the Netherlands, Mr. Coombs reported that the Dutch
government had conceded the 10 per cent wage increase demanded by
labor, and the question now was whether the Netherlands Bank would
have to adopt a restrictive monetary policy in order to limit the
inflationary reactions.
The Dutch authorities were aware that a rise
in their discount rate might trigger other discount rate increases on
the Continent, and probably would consult
with neighboring governments
11/12/63
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before acting.
Such actions as raising the discount rate or curtailing
bank reserves would result in a repatriation of funds by Dutch commercial banks.
However, Mr. Coombs felt the Dutch authorities would be
prepared to accept guilder bonds issued by the U. S. Treasury to mop
up any surplus dollars, so that action by the System probably would
not be required.
Thereupon, upon motion duly made and
seconded, and by unanimous vote, the System Open Market Account transactions in
foreign currencies during the period October 22 through November 8, 1963, were
approved, ratified, and confirmed.
Mr. Mills asked whether the growing enthusiasm for the System's
swap arrangements that Mr. Coombs had found at Basle reflected a general
belief in ther basic usefulness or an undercurrent of concern by European monetary authorities about their own currencies that caused them
to look with
favor on the additional resources the arrangements made
available to them.
Mr. Coombs replied that originally certain European
monetary officials had been skeptical about the System's motives in
undertaking the swap arrangements; there was some feeling that the
System viewed them as a one-way street, designed to help the United
States alone, and that once the American problem was resolved the
System would back away.
However, developments had tended to convince
these officials that our motives were not selfish, and that we were
11/12/63
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prepared to help other nations with their balance of payments problems
rather than just soliciting their help with our problem.
Mr. Coombs said that before making his recommendations he would
like to mention that while in Basle he had received the impression that
there was a g-eater disposition than formerly on the part of the Bank
of France to increase the size of their swap line with the System.
He
felt that it might be desirable to make such an increase during the
next few months.
Mr. Coombs recommended renewal on a three-month basis of the
$100 million swap arrangement with the Netherlands Bank, which had
last been renewed on September 13, 1963.
Renewal of the swap arragenment with
the Netherlands Bank for a further threemonth period was approved.
Mr. Ccombs then referred to his memorandum entitled "Request
for authorization of spot purchases of Italian lire, and other European currencies, and of their simultaneous forward sale to the U. S.
Treasury," dated November 8, 1963, which had been distributed to the
Committee in advance of this meeting.
(NotE:
A copy of this memo-
randum has been placed in the files of the Committee.)
In accordance
with the memorandum, he recommended that the Federal Reserve Bank of
New York be given authority to make spot purchases of foreign currencies in which the Treasury had outstanding indebtedness, for purposes
of immediate forward sale to the Treasury to cover outstanding Treasury
11/12/63
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debt in these currencies.
He proposed that this authorization be in
the amount of $100 million, and include provisions that purchases could
be made at rates above par and that both the spot purchases and forward
sales should be made at the same rate.
In discussion, questions were raised about the implications
of the proposal that these transactions be authorized at rates above
par, about the desirability of generalizing the authority beyond the
Italian lira, the currency with which Mr. Coombs' memorandum was most
specifically concerned, and about the adequacy of the proposed dollar
limitation.
On the matter of above-par rates, Mr. Coombs noted thac
the Bank of Italy had chosen to defend the lira at a rate that was
relatively high, although within the International Monetary Fund
limits,
lire.
and the System had to pay the rate set in order to acquire
The fact that the currency immediately would be sold forward
at the same rate to the Stabilization Fund meant that the System would
neither gain nor lose on the operation, apart from any interest earnings that accrued during the period it held the lire.
The Treasury
would not incur a loss--in fact, would make a profit--since the liradenominated bonds it eventually would redeem with the lire purchased
from the System had been issued at the ceiling and the rate was
currently below the ceiling.
While he personally felt that the
Italians might have been better advised to defend the lira at a lower
rate, he thought a recommendation to this effect might be construed as
11/12/63
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undue interference in their affairs, and also might be embarrassing
since a lower rate would mean a larger profit to the U. S. Treasury.
In Mr. Coombs' judgment the circumstance at which the recommendation
was directed was a rather special one, in which the System had an
opportunity to help stabilize a situation by warehousing foreign
currencies without capital risk until they were needed by the
Treasury, whose resources for this kind of operation were limited.
The recommendation did not imply any modification of the Committee's
general policy that the usual types of spot purchases of foreign
currencies should be made at or belo
par values.
On the question of whether the authority should be confined
to the lira or made applicable to all currencies in which the Treasury
had indebtedness, Mr. Coombs said he had not intended to raise a matter
of principle in recommending the
latter.
In future similar situations,
he thought, there ordinarily would be ample time for him to come to the
Committee for specific authorization.
On the other hand, he viewed
the recommended procedure simply as facilitating Treasury repayment
of debts denominated in foreign currencies, and thus desirable in
other cases also.
He agreed with a suggestion made by Mr. Ellis that
the procedure might well provide a routine channel for redeeming outstanding Treasury bonds denominated in foreign currencies, and thought
that it would increase the saleability of such bonds.
Mr. Coombs
observed that there was another point of major importance.
If a
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foreigr. currency should be devalued, he noted, the System would suffer
a loss on any outright holdings of that currency, whereas the Treasury
would make a profit in connection with any indebtedness it had denominated in terms of that currency.
If circumstances should arise in
which devaluation of a currency seemed inevitable, the System might
be able to sell its holdings forward to the Treasury and thus hedge
its position.
While this was a matter for the future, an authoriza-
tion in the general form requested would open the way.
Mr.
Coombs said he thought $100 million for the proposed pur-
pose would be adequate at present because it
revolving furd.
would be used as a
By way of example he noted that the Treasury had
$50 million in lira-denominated debt maturing in March 1964.
Accord-
ingly, if at least $50 million had been employed prior to that date
for operations in lire of the type contemplated, this amount would be
released at that time for reemployment.
After this discussion Chairman Martin commented that the
principle of the proposed operation seemed clear.
He noted that
only a modest amount was involved, and he thought that the main
question in the minds of Committee members was whether the authority
should be limited to operations in Italian lire or made general.
Mr.
Robertson observed that he saw no objection to an authorization drawn
in general terms.
He felt, however, that the contemplated type of
operation should be viewed as an experiment, to be reconsidered by
the Committee as the occasion warranted.
11/12/63
The Chairman then proposed that the Committee vote on the
recommerdation, with the understanding that it was experimental and
that Mr. Coombs would keep the Committee fully informed about develop-
ments.
Accordingly, upon motion duly made,
and seconded, and by unanimous vote, the
continuing authority directive for System
foreign currency operations was amended,
effective immediately, to read as follows:
The Federal Reserve Bank of New York is authorized and
directed to purchase and sell through spot transactions any
or all of the following currencies in accordance with the
Guidelines on System Foreign Currency Operations reaffirmed
by the Federal Open Market Committee on March 5, 1963, as
amended 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
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
11/12/63
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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 denomirated 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.
The Federal Reserve Bank of New York is also authorized
and directed to make purchases through spot transactions,
including purchases from the U. S. Stabilization Fund, and
concurrent sales through forward transactions to the U. S.
Stabilization Fund, of any of the foregoing currencies in
which the U. S. Treasury has outstanding indebtedness, in
accordarce with the Guidelines and up to a total of $100
million equivalent. Purchases may be at rates above par,
and both purchases and sales are to be made at the same
rates.
Noting that Mr. Young and Mr. Irons had recently returned
from Europe, Chairman Martin suggested that they report their observations to the Committee.
Mr. Young said that he had attended two meetings during the
previous week
one of Working Party 3 and one of the Economic Policy
Committee of the Organization for Economic Cooperation and Development,
of which Working Party 3 is a sub-body.
An interesting aspect of this
Working Party 3 meeting was that, for the first time since the Working
Party's origin in 1961, U. S. balance of payments difficulties were
11/12/63
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not on the agenda.
Attention was focussed entirely on the inflationary
developments manifest in most European countries, especially Italy.
The
Italians had had a balance of payments deficit in the past nine months
of around $750 million, reflecting a high level of internal demand,
with imports rising spectacularly and exports falling, and some flight
of capital.
Until October the deficit had been financed by borrowings
of Italian commercial banks in the Euro-dollar market, but in October,
it had been permitted to be reflected in a decline in monetary reserves.
Representatives of other European countries had been sharply critical
of the
Italian performance, and the Italians had admitted that the
situation was getting out of hand and could not continue.
But they
assured the Working Party that the problem was fully understood by all
parties to be represented in the new governnent, and that each of the
parties had agreed to the essential elements of a stabilization program, involving a fiscal effort, with a cutback of government expenditures, especially public investment, and some increase in revenues; a
shift
in
practices for financing balance of payments
deficits;
some
action to relieve pressures in the construction industry; restraint
on bank credit
expansion; and a policy of restraining wage increases.
From now on, as had been the case in October, deficits would be
reflected in the reserve position of the central bank.
It was their
hope that the deficit would taper off, and that by the middle of 1964
restoration of balance in payments would be in sight, if not actually
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achieved.
The Italians asked the Working Party group to express their
views on the Italian situation in writing, to help the new government
crystalize its ideas on a program to bring the situation under control.
The inflation in Italy, Mr. Young continued, was now being
felt by neighboring countries in various ways.
Most of the increase
in exports that Germany had experienced over the past nine months had
been to Italy, and the same was true for France and Switzerland.
The
Germans and Swiss were heavy users of Italian labor, and recent
increases
in Italian wage rates had forced them to raise wages also.
Spreading inflation was threatening to overrun Continental Europe
unless comprehensive steps were taken to halt it.
There also was a report by the Netherlands, Mr. Young said,
which included a declaration that they would not use restrictive
monetary policy further than at present to meet their internal inflationary problems.
This raised a general question of the extent to
which restrictive monetary policy might: be ued by other countries,
including France, Germany, and Italy.
The consensus of Working Party 3
was that it was desirable to avoid higher interest rates on the Continent in view of the problem they would pose for the United States.
This consensus was conveyed to the parent body, the Economic Policy
Committee.
In his report, the Chairman of the latter group said he
understood that it was not the intention of the United States to press
restrictive monetary policy to a point where the U. S. would be bidding
11/12/63
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through higher interest rates, for available international financial
resources.
Mr. Young said he sensed a feeling at the meeting that the
Europeans would forego aggressively restrictive monetary policies as a
means of meeting their inflationary situations and would rely more on
fiscal action instead.
Mr. Irons said that he had appreciated the opportunity to
participate in the meeting at Basle and to visit with bankers in
various cities on the Continent.
He shared many of the impressions
Mr. Young and Mr. Coombs had reported.
He had found substantially
more acceptance of the soundness of the dollar and less expectation
that it woulo be tampered with than he had noted on his trip of a
year and a half ago.
In France, and to some extent in Germany, the Netherlands, and
Switzerland,
there was concern about rising wage and price pressures.
These countries were still importing substantial amounts of labor.
Europeans recognized
The
that the U. S. was becoming more competitive with
them because of their wage and price
increases.
With regard to U. S.
policies, Mr. Irons felt the Europeans were generally favorable toward
the recent firming of money rates, the discount rate action of July,
and other actions taken in this country over the past several months.
They hoped the System would not push restrictive monetary policy to
the point of putting pressure on them to drive up rates in their
countries.
On one U.
S. proposal--the interest equalization tax--
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there was almost unanimous disapproval.
The Europeans felt it was an
extremely complicated type of exchange control, and thought it would
be better for the U. S. to use more direct methods, whether a capital
issues committee, a quota system, licensing, or whatever.
The Euro-
peans thought the United States was moving in the right direction with
respect to its balance of payments difficulties, and that the crisis
might have been passed.
This view was related to their feeling that
the U. S. had become more competitive, and to their expectation that
there would be some improvement in the capital movements situation.
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 22 through
November 8, 1963.
A copy of this report has been placed
in the files cf the Committee.
In supplementation of the written report, Mr. Stone commented
as follows:
The past three weeks have witnessed a gradual and
orderly rise in interest rates throughout the maturity
scale. The fundamental influence working in that direction has been a strengthening of the market's conviction
that the business outlook is undergoing significant improvement and that the System might respond, or be responding,
by taking a firmer tack in monetary policy. In the shortterm area, this shift in sentiment occurred simultaneously
with a succession of Treasury financing operations in which
the market was called upon to absorb sizable amounts of
Either of these influences--the shift
short-term issues.
in sentiment or the addition to the supply of short issues-In
would alone have exerted upward pressure on short rates.
.combination, they were mutually reinforcing in their impact
on rates.
11/12/63
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In the long-term sector, the shift in sentiment occurred
simultaneously with a sharp bulge in new corporate and municipal bond issues--and both of these developments caught the
market at a time when it still had in position large amounts
of intermediate and long-term issues that the dealers had
taken out of the advance refunding two months ago. Under
these circumstances, bond prices fell and rates moved higher;
and the heavy atmosphere that emerged in the long-term area
affected, and in turn was affected by, the equally heavy
tone that characterized the short-term market.
Developments within the period were sensitively reflected
in the experience with the Treasury's November refunding. The
terms of this exchange, in which the Treasury offered an 18month 3-7/8 per cent note, were generally well received.
Large subscriptions were entered on October 28, in some cases
apparently with a view to selling out shortly afterwards with
a modest price gain. The 21 per cent allotment on nonpreferential subscriptions, announced on October 31, was in line
with the views generally being expressed in the market, but
may have slightly exceeded the anticipations of some large
subscribers.
In the meantime, with general market sentiment
turning increasingly bearish (as reflected and heightened
by the rather unenthusiastic auction of 1-year bills on
October 30), the price of the new notes moved gradually lower
in when- ssued trading--receding from a high point of 100-3/32
.
bid on October 29 to a shade under par on November 8.
the
earlier,
noted
as
I
In the Treasury bond market,
shift in business sentiment reinforced pressures that were
already merging because of heavier competition from increased corporate and municipal bond flotations, and both
these influences converged on a narket that was already
restive with its holdings of intermediate and longer-term
Dealers managed to reduce their holdings of overissues.
20-year maturities by about half in the past three weeks,
partly in reflection of some buying by Treasury trust
accounts and the System. Further progress was also made
in cutting 5-10 year holdings, again partly in reflection
of some official purchases. Over the period as a whole,
intermediate and longer-term bonds rose by 1 to 7 basis
points.
In the Treasury bill market, the Treasury sold for
cash in the recent period both a $1 billion strip of bills
in the 3-5 month area and a $1 billion block of 1-year bills.
These offerings, which bracketed the sale of the new 18-
month 3-7/8's, followed a new issue of March tax anticipation
11/12/63
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bills earlier in October.
With dealers obtaining
large
amounts of each of these issues, their positions rose substantially within the period--in the case of bills, to well
over $3 billion at one point. But their total bill holdings
were receding by the end of the period and further sizable
inroads were made last Friday when the Treasury trust
accounts bought bills in size to offset upward rate ten-
dencies. On the other hand, dealer awards in last Friday's
auction were unusually large.
System operations during the past few weeks were complicated both by the bearish atmosphere of the securities markets
and by the large reserve flows and day-to-day money market
uncertainties created by the payment for two billion dollar
cash bill issues mentioned earlier.
Given these uncertainties,
and also given the recent tendency of reserve levels to fall
short of estimates, the Desk supplied reserves relatively
freely over the period--meeting reserve drains from market
factors as they occurred or even moving at times in anticipation of those drains so as to avoid aggravating a somewhat
nervous securities market with any short-term money
stringercy. Reserves were supplied nearly every day of the
period, amounting to a net of almost $1 billion for the
three weeks as a whole. This large injection of funds was
made through purchases both on ar outright basis and through
Although free reserves averaged
repurchase agreements.
somewhat higher than in the preceding few weeks, and member
bank borrowings averaged a shade lower, Federal funds were
generally in firm demand at 3-1/2 per cent throughout the
period.
Reserve projections for the next few weeks suggest that
System operations can be more moderate than in recent weeks,
and accordingly it may be appropriate to return the leeway
to $1 billion from the $1.5 billion that has recently prevailed.
In response to questions by Mr. Mills, Mr. Stone said that
dealers had not had
tories.
difficulty in financing their larger bill inven-
A substantial volume of corporate funds had been available to
them under repurchase agreements, and their borrowing rates had in fact
moved down while most bill rates were moving up.
One reason for this
11/12/63
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was that heavy demand had lowered rates on short-term bills--such as
those with December maturities--to the point where dealer repurchase
agreements were attractive to corporate treasurers.
Mr. Stone did not
think there was any fundamental instability in the bill market at
present.
The market had acted about as might have been expected under
the circumstances; rates had moved up until buyers could be found for
the substantial additions to bill supplies it had been necessary to
absorb.
Mr. Mitchell said that he had been somewhat disturbed by oper-
ations in the recent period, and gathered that the Desk had had some
uneasy days in attempting to follow the Committee's directive.
He
noted that while free reserves were relatively stable in the last
reported week, excess reserves had risen to over $500 million and
borrowings to about $400 million, and asked whether the figures on
borrowings might not be a more sensitive indicator of market pressures
than the free reserve figures.
Mr. Stone replied that the Desk did
watch borrowing figures closely, and also paid close attention to
daily and even hourly developments in the Federal funds market--which
developments are often a clue to the volume of borrowings that will be
forthcoming.
He added that the influence of the Treasury's recent bill
issues, which raised new cash but did not permit payment through tax
and loan accounts, had increased the difficulties
market developments.
of interpreting
In connection with these issues there were
11/12/63
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substartial flows of funds into and out of the Treasury's balances.
These resulted in unpredictable redistributions of reserves, since
it was difficult to know the sources of inflows and the destination
of outflows.
As a result, the usual money market measures were less
reliable indicators around the dates of these issues than at other
times.
Mr. Mitchell then asked how operations would have differed
if the Committee's instructions at the preceding meeting had called
for maintenance of the three-month Treasury bill rate at 3.5 per cent.
.Mr. Stone said that in his judgment it would have been necessary to
let free reserves rise to about $300 million,
which he thought would
have been inconsistent with the instructions the Desk had actually
received.
question;
But, he noted, there was a second aspect to Mr. Mitchell's
namely, could the Desk have kept the bill rate at 3.5 per
cent by modifying the technical nature of operations within the terms
of its actual instructions?
For example, could it have bought more
bills outright, and relied less on repurchase agreements in supplying
reserves?
bills
He noted that the Desk had bought about $600 million in
in the two weeks ending on the Wednesday preceding this meeting--
despite which the bill rate rose 6 basis points--and had about $300-
$400 million outstanding in repurchase agreements with dealers.
It
was his estimate that the bill rate might have been lowered by one or
two basis points if the Desk had relied largely on outright purchases,
11/12/63
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and had not made many repurchase agreements.
However, he thought that
resale of these bills in the current week, when reserve absorption was
necessary, could have been expected to raise the bill rate by at least
5 basis points.
As it was, a substantial volume of reserves would be
absorbed unobtrusively by maturation of the repurchase agreements and
by redemption of the bills maturing next Thursday.
Mr. Hickman referred to the Treasury's purchase of bills for
official accounts on the Friday preceding the meeting, and asked what
their objective was in operating on both sides of the market.
Mr.
Stone noted that it was routine for the Treasury to buy back newlyissued bonds for trust accounts in varying amounts, to facilitate
underwriting of the issue, and descrioed the Friday operation as an
extension of
this procedure to the bill market.
In response to a
question. from Mr. Swan about the probable volume of corporate and
municipal financing in November, Mr. Stone said that it was expected
to be lighter than the near-record October volume, but still substantial.
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 22 through November 8,
1963, were approved, ratified, and confirmed.
Chairman Martin then called for the staff economic and financial reports, supplementing the written reports that had been distributed
11/12/63
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prior to the meeting, copies of which have been placed in the files
of the Committee.
Mr. Noyes commented on economic conditions as
follows:
This morning I plan to review very briefly recent economic developments and then turn to a somewhat longer look
at trends in the economy that I hope will be helpful to you
in evaluating the plethora of forecasts and projections
that will be forthcoming in the weeks ahead.
Recent changes in employment, sales, and output can, I
think, be fairly characterized as moderately favorable.
It
now appears that retail sales declined less from their summer highs in September than had origirally been estimated,
and that they more than recovered to a new high in October.
We are presently estimating that the production index
moved up fractionally--perhaps by enough to raise the
rounded index a point.
Unemployment declined a tenth of a percentage point-from 5.6 per cent to 5.5--hardly a notable change in itself,
but in the right direction. The new orders figures for
September were also revised upward, and now show almost a
4-1/2 per cent increase over August.
Total construction activity has been steady, at a
high level, up about 5 per cent from a year ago.
The flurry of price increases in the late summer and
early fall seems to have subsided in October. There were
a few further advances, but also some offsetting declines.
While prices will continue to bear close watching, it does
not appear that an epidemic of upward price changes is
underway, and I would characterize the most recent developments in this area as mildly reassuring.
I will refer again to the McGraw-Hill survey in a
moment, but the 4 per cent rise in over-all capital expenditure plans for next year would suggest a moderately
optimistic current attitude on the part of the reporting
businesses.
This seems to me to add up to a generally favorable
situation--not showing for the moment either excessively
bullish or bearish tendencies.
Let me turn now to a quick run through on some of the
GNP figures that have been and will be very much in the
news. As a base, the third quarter of 1963 is now estimated at $588.5 billion. The fourth quarter looks like
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$596 or $597 billion--give or take a few billion.
This
means that the average for 1963 as a whole will be about
$584 billion.
Secretary Dillon joined the ranks of the prophets
early by releasing two weeks ago projections for the first
two quarters of 1964, with and without a tax cut.
These
suggest that in the second quarter the economy will be
stumbling along at a rate of about $609 billion if the
cut doessnot receive early approval, but will zoom to
$620 if it does.
In the light of his long uphill struggle to obtain
approval of the tax bill, the Secretary may be regarded
at a prejudiced witness--but his estimates are not too
different from those of many otter early birds in the
forecasting game.
The figures he used appear to be
roughly consistent with those produced at a meeting of
academic consultants to the Treasury last week and
several other models that have been unveiled to the public gaze.
On the present level of around $600 billion, five per
cent of GNP is, of course, about $30 billion. This year
the increase has been at about that rate or a little better.
A five per cent increase would mean an average for the year
of $615 billion and a fourth quarter of about $630 billion.
Mary guesses now seem to be that the figures will run
higher than this with the stimulus of a tax cut--that the
average will be in the low 620's--implying a fourth quarIf the tax
ter somewhere in the high 630's or low 640's.
cut should be completely rejected, a good many observers
doubt that upward momentum would be maintained--and this
produces a much wider range--especially for the second
half of the year.
It is interesting to note that all the models that
include a tax cut and assume that upward momentum will
be maintained involve a considerably higher rate of
business investment than that suggested by the McGrawHill survey. For example, a "balanced" model designed
to produce a $620 billion average for 1964 suggests an
increase in plant and equipment expenditures more in the
neighborhood of 10 per cent than the 4 per cent reported
While inventory accumulation would be
to McGraw-Hill.
somewhat higher than in 1963, a "balanced" model cannot
rely too heavily on this as a sustained stimulus. Hence,
one must assume that either
the impact of
the tax cut or
a generally favorable economic climate will cause businessmen to revise their expenditure plans upward if we
-22-
11/12/63
are to achieve the levels of activity that seem to be widely
anticipated. The "favorable" projections for 1964 also
generally imply a large increase in consumption, with a
further rise in auto sales and some acvance in residential
construction activity. The critical question seems to be
whether the tax cut, if it comes, or some other exogenous
force will stimulate consumption enough, especially in the
hard goods lines, to give rise to a major upward revision
in business investment plans.
Mr. Brill made the following statement concerning money and
credit developments:
Some commentators have described financial markets
currently as confused and nervou., and this describes my
own state of mind as well. I'm confused by a money market
in which a rebound of free reserves is accompanied by a 10
or 12 point rise in bill rates to the highest levels in over
three years. I'm confused by a credit picture which has
some of the characteristics of economic boom, against a
general economic background of only moderate expansion.
I'm both confused and nervous about the squeeze on interest rate differentials, for even with a continuing large
volume of long-term saving, there appear increasing indications that the most recent spurt in short-term rates is
carrying over into long-term markets as well.
No single factor adequately brings all these disparate developments into focus, but if there is anything
approaching a universal explanation, it probably lies in
the course of monetary policy and private credit demands
since last spring. For some time, we have been congratulating ourselves because the tightening of the credit
screws seemed to be having its effects only on short-term
rates, without any observable spillover to other financial
markets cr to nonfinancial markets. New, however, the
cumulative effects of reduction in reserve availability-on bank credit expansion, on bank liquidity positions, and
on market expectations--are beginning to show some bite as
the economy generates somewhat more than seasonal steam in
its credit demands.
Statistically, the effect of the shift in policy last
spring is fairly striking. From December to May, total
reserves grew at an annual rate of 3 per cent, seasonally
adjusted.
From May to October, growth in total reserves
11/12/63
-23-
has been at an annual rate of only six-tenths of 1 per cent,
and this all in borrowed reserves. Nonborrowed reserves have
declined.
The slowdown in total reserve expansion so far has not
limited growth in the private money supply. In fact, private demand deposit expansion has accelerated. This is in
large part a reflection of the change in the Government's
cash position, however. The Treasury has been pulling down
its deposits more than seasonally from the high levels
reached earlier in the year, with an exceptionally large
drop in October. We have been getting a switch in deposit
ownership, but only a relatively small change in the rate
of growth in total deposits.
The effect of the tightening shows also in the composiExpansion in total bank credit has been
tion of bank credit.
at only a slightly slower pace in the five months since May
than it was in the first five months of the year. Expansion
in the earlier period, however, was accomplished with practically no net liquidation of Governmert securities by
Since May, banks have had to liquidate
commercial banks.
almost $4 billion in Governments to meEt rising private
data
At the end of September--the latest
credit demands.
available--the ratio of bank holdings of short Governments
to deposits was down to 7.2 per cent, compared with 7.8 per
cent in May and 9.5 per cent at the beginning of the year.
With this background of increasing pressure on the
banking system, it is not surprising that a concentration
of Treasury short-term financing in late October should put
bill rates under strong upward pressure. After switching
some $4 billion out of the short-term end of the market in
the September refunding, the Treasury rebuilt the supply
of short-term instruments through a $1 billion strip on
October 22, a $1 billion one-year bill on October 30, and
a refunding on Octooer 28 of about $3-1/2 billion of
maturing November issues into an 18-month note, some
$400 million of which represented new money.
Dealrs received substantial amounts of all of these
issues, and until the closing days of last week were makIn
ing only slow headway in reducing their inventories.
their difficulties stemmed from bank competition,
part,
for bank sales of bills were adding to the market supply
at the same time that banks were competing aggressively
for corporate funds through CD's.
Moreover, seasonal
reserve patterns and dealer financing needs were such
as to limit the Desk's freedom to moderate market developments through direct purchases for System Account.
-24-
11/12/64
Reflecting the various pressures, the bill rate pierced the
discount rate and stayed from 5 to 6 basis points over it
through the weekly auction.
Pressure is spreading to other maturities, with Treasury
bond yields up 4 basis points since the last Committee meet-
ing.
It would seem that the cushion between short- and long-
term rates has been compressed about as far as possible.
Even
with this recent rise in bond yields, the spread between long
bonds and Treasury bills is down to 57 basis points, compared
with 100 at the beginning of the year and in the May-June
period. For investors, the gain from extending maturities
now is exceptionally small, relative to the prospective
capital loss if there should be a readjustment in yield
relationships anchored to the present level of bill rates.
The market for State and local government securities
is particularly vulnerable. Banks have been supplying about
90 per cent of the funds going into municipals, and if this
supply should be curtailed because banks lack other sources
to meet rising business loan demands, or because the squeeze
on the b.ll rate-CD spread should cut the flow into time
accounts, we could get a substantial reaction in State
and local government yields. Municipal markets are in
a technically weak position, with dealers' inventories of
unsold issues high, the yield spread vis-a-vis long-term
Governments exceptionally large, and prospects of a substantial reduction in individual tax rates, particularly
in the upper brackets, limiting the enthusiasm of the most
important nonbank market for such issues.
In my judgment, the domestic situation as reported by
Mr. Noyes does not suggest the need for or even the desirabiLity of a further advance in the costs of financing
investment, be it by State and local governments, businesses,
or consumers.
To avoid it now, however, after market expec-
tations have been conditioned by recent developments, shortterm rates probably would have to recede and re-establish
a margin below the discount rate.
This, in turn, probably
would require some slackening of the reins on reserves, so
that banks could meet more than just seasonal private credit
demands without having to liquidate Governments so heavily.
In appraising reserve needs, it is also important to keep
in mind that the switch in deposits from Government to private ownership probably has come to an end for this calendar year. In fact, our estimates are for a rise in the
Treasury's balance to the end of the year, with a resultant
drain on reserves supporting private deposits.
Unless the
11/12/63
-25-
basic economic situation changes substantially in the remaining weeks of the year, a more generous approach to reserve
needs than has prevailed recently would appear appropriate.
Mr. Furth commented as follows on the balance of payments:
The payments deficit for the quarter ending in September seems to have been slightly Lower than estimated last
time; it is now calculated at a seasonally adjusted annual
rate of $2 billion, excluding the reflux of window-dressing
funds in July as well as all special transactions (prepayment of foreign debts and issue of nonmarketable Treasury
bonds to foreign authorities).
This rate is less than half
of the similarly adjusted average rate for the first two
quarters of the year.
The improvement apparently was due in about equal parts
to the decline in the outflow of long-term portfolio capital
and to a reversal in the movement of money-market funds, inAt first
cluding a reflow from the Euro-dollar market.
glance, it would appear reasonable to attribute the reduction
in the outflow of portfolio capital to the interest equilization tax proposal, and the reversal in the flow of moneymarket funds to the Federal Reserve actions lessening monetary
ease. But it should be remembered that the outflow of both
portfolio capital and short-term funds, although very much
smaller than in the second quarter or even the average of
the first half, still was about as large as in the third
It may therefore turn out that the imquarter of 1962.
provement contained a large seasonal element. Moreover,
even if the improvement really was caused by the policy
actions mentioned, it may reflect only a transitory initial
shock reaction, which would not necessarily carry over to
future periods.
Reliable figures for October are not yet available;
larger than
the tentative weekly data indicate a deficit
the monthly average for the third quarter, although probhalf of the
ably smaller than the average for the first
year.
Developments abroad show a mixed picture. Economic
activity in most foreign developed countries still is expanding although the OECD staff expects that growth in
Continental Europe will slow down somewhat in the months
to come.
But Italy, France, and the Netherlands probably
will tighten domestic credit conditions, perhaps to an
extent that could imperil further growth. If this happened,
-26-
11/12/63
U. S.. exports to those countries would be reduced while
outflows of U. S. capital would be stimulated; the U. S.
payments balance would thus be hit simultaneously on two
fronts.
Three weeks ago I commented on the cracks in the economic underpinning of those three European countries.
Today, Germany may be added to the list.
The Stinnes bankruptcy, originally dismissed as an isolated incident, may
have been more symptomatic than German reports wanted us
to believe. Last week, rumors were prevalent about serious
difficulties
of an industrial
concern of incomparably
greater importance than Stinnes, the Krupp family firm.
While it has been forcefully denied that any insolvency
was impending, it appears that German heavy industry has
achieved its record exports, at least in part, at the
expense of adequate profit margirs; and moreover, that
German big business has again engaged in the traditional
Central European practice of financing long-term investments by means of short-term bank and acceptance credits.
The German press is, somewhat belatedly, taking up the
plea for expansion of German capital mrket facilities,
including facilities for public share offerings.
Needless to say, a financial breakdown of German
heavy industry would be a serious blow to the economic
health of the free world at large, including that of
It seems certain, therefore, that
the United States.
1929-31 disaster will be averted.
the
any repetition of
But assuring that there will be no such disaster, the
present situation could benefit the U. S. payments
First, it could lead to a long
balance in two ways.
overdue reform of European banking and business finance
practices and thus reduce European demands for U. S.
Second, and more important, it
long-term capital.
could show U. S. investors that, after all, investments
at home, even if they do not promise the spectacular
returns that could be reaped abroad during the past
10 or 15 years, may be built on a more solid basis.
Chairman Martin called for the usual go-around of comments and
views on economic conditions and monetary policy, beginning with Mr.
Hayes, who presented the following statement:
-27-
11/12/63
On the basis of the data available so far, it would
appear that the expected October pick-up in domestic
business activity did occur, following the August sag
and the rather uncertain September showing. The automobile industry is an outstanding element of strength, and
recent tendencies have been favorable in such key areas
as retail sales, housing construction, plant and equipment spending, and corporate profits. Business sentiment
seems to be considerably stronger than a few months ago,
wish most forecasters seeing a continued expansion through
1964.
However, this optimism is based in part on tax cut
expectations, which are subject to considerable uncertainties, at least as to timing. Attempts to raise prices in
recent weeks have been themselves a reflection of better
business sentiment; but, so far, price increases have not
been sufficiently widespread to modify the general picture
of over--all price stability that has characterized recent
years.
Stock prices remain close to their peak and do not
seem to have been affected materially by the rise in margir requirements.
Recent credit statistics do not suggest any very sigThe fact that business loan demand has
nificant changes.
been a good bit better than seasonal seems consistent with
While the growth
the generally favorable business news.
of total bank credit so far in 1963 has run somewhat behind
the comparable period of 1962, for many weeks now we have
seen required bank reserves running $100 to $200 million
guideline, with the excess last
ahead of the Board staff
liquicity has kept up last
Nonbank
higher.
week even
and is surprisingly high
of
gain
rate
year's substantial
for this stage of
product
in relation to gross national
a cyclical expansion.
We can find a good many grounds for encouragement in
the sharply better third quarter balance of payments results, particularly with respect to private capital exports,
both long-term and short-term. The former have of course
been cut drastically by the interest equalization tax proposal. As for the short-term flow, there is a wide
variety of items and perhaps a wide variety of causes for
the improvement; but the improvement was so great and so
general that it suggests the possibility of an appreciable
contribution from the lesser degree of ease in monetary
policy.
Preliminary October figures, however, indicate
that the deficit is still far from solved. I hope we can
avoid this time the widespread tendency in this country to
become overoptimistic when the balance of payments registers
one good quarterly gain.
11/12/63
-28With the Treasury's November refunding virtually com-
pleted and with no more important. Treasury financing in
sight for most of the remainder of the year, we would seem
to be comparatively free to determine monetary policy without particular reference to Treasury financing schedules.
Turning to policy, I believe a gold case can be made
for seeking a slightly slower rate of bank credit expansion over the coming months than has prevailed in the last
year or so--always, of course, with due allowance for
seasonal factors.
I am led to this conclusion by recognition of the need for continued vigilance with respect
to the balance of payments, the current signs of greater
strength in the domestic economy, and the fact that recent rates of growth in bank credit, nnbank liquidity
and required reserves would seem to leave room for some
slight move toward lesser ease without appreciable risks.
The degree of change I am thinking of is quite moderate
and might be symbolized by a reduction in free reserves
Short-term rates are
to a level averaging around zero.
likely to take care of themselves pretty well in the
next few weeks, in the light of seasonal pressures,
sizable dealer holdings, and general expectations that
business will continue to move ahead fairly vigorously.
While a 90-day bill rate a little above the discount
rate may give rise to some gossip about a change in the
latter, I don't consider this a serious problem.
For the moment a rise in the discount rate would
appear decidedly premature. A wait-ana-see attitude
is clearly appropriate.
Looking a little further ahead,
however, I am troubled by the implications for us of the
strongly anti-inflationary credit policies that are
becoming increasingly prevalent on the European ContiThese could ultimately build up considerable presnent.
Until recently
sure for defensive measures on our part.
the possible adverse effects of rising U. S. interest
rates on the U. K. have been something of an inhibiting
factor in our own considerations. Lately, however, there
has been growing evidence of concern in the U. K. over
the danger of an "over-heated" internal business situa-
tion.
All of this suggests that a higher U. S. discount
rate might have to receive serious consideration within
the next few months.
The directive should, I believe, be modified slightly
if the Committee decides, as I hope it will, that we should
seek a slightly slower rate of growth in bank reserves and
bank credit.
11/12/63
-29-
Finally, I should like to refer again in passing to
the fact that prevailing time deposit rates are very close
to bumping against the ceilings set by Regulation Q, so
that action in the near future to liberalize those ceilings would appear distinctly timely. The Board's recent
action in raising margin requirements was well timed and
well received. Perhaps a similar opportunity now presents
itself with respect to Regulation Q.
Mr. Hayes added that he was skeptical that Europeans would
actually avoid the use of monetary policy instruments to restrain
inflation.
Mr. Shuford said the latest data available indicated that
economic activity in the Eighth District had continued to improve,
but, as in the rest of the nation, the rate of expansion had moderated somewhat since mid-year.
Industrial
use of electric
power
in
the major cities of the District, which increased markedly from
January to July, had risen at a much lower rate since July.
Total
employment had remained unchanged since June, compared with a four
per cent annual rate of expansion during the January to June period.
On the other hand, the volume of bank debits had continued to expand
rapidly in the District.
Total bank credit had risen more sharply
since June than in the rest of the nation.
to businesses,
Total loans, especially
had increased substantially, and bank deposits had
also risen since mid-year.
Nationally, Mr. Shuford said, broad measures of economic
activity indicated some slowing down since July in the pace of expansion.
Industrial production, construction, and employment had all
11/12/63
-30-
been about the same since mid-year, and although personal income had
continued to move up, the rate of increase was lower.
With respect to monetary experience, Mr. Shuford said that
recent developments seemed to him to have been reasonably satisfactory,
considering the continued business improvement and the Treasury's
financing activities.
Strengthened interest rates and continued mone-
tary expansion had been compatible.. The recent level of interest rates
probably had been as high as was warranted by the international balance
of payments situation.
On the other hand, the increase in bank reserves,
bank credit, and money since mid-year did not appear to have been
unreasonable.
Expansion in recent weeks had been unusually large, but
the same thing had happened at this season .n each of the last several
years, ard might reflect a new seasonal pattern.
As to policy, Mr. Shuford said he would favor no change; a
continuation of recent developments was in order.
A three-month
Treasury bill rate of about 3.50 per cent seemed satisfactory to
him, and increases in reserves, credit, and money at about the rates
that had prevailed since July seemed appropriate for the near future.
He recognized the continuing need for alertness with respect to price
increases and other evidences of excessive demand, although he saw no
such evidences as yet.
Mr. Shuford said that he would not recommend a change in the
discount rate at this time.
He felt that the policy directive was
satisfactory, except for the reference to Treasury financing.
11/12/63
-31Mr. Bcpp reported that information that had become available
since the last meeting pointed to some deteriorating in Third District business conditions.
However, the evidence was mixed.
Unem-
ployment data were mildly encouraging in contrast to weakness shown
by production and demand indicators.
The weakness in demand probably
reflected in part the fine weather, which may have depressed department store sales.
There was increasing pressure on reserve positions of District
banks during the past three weeks, Mr. Bopp said.
Both the basic re-
serve deficit of reserve city banks and borrowing at the discount
window by country banks rose substantially during the first two weeks
and then declined somewhat in the past week.
At reporting banks,
loans and investments and total deposits declined.
In view of recent business and financial developments, a continuation of present policy seemed appropriate, Mr. Bopp said.
Busi-
ness expansion continued at a moderate pace, despite the recent trend
toward a more optimistic appraisal of business prospects.
The index
of wholesale prices remained stable, and there were still enough unused resources to meet prospective increases in demand for the
foreseeable future.
With unused resources and only a modest rate of
expansion in capital expenditures, a further rise in market rates
would be cause for concern.
In his judgment the recent improvement
in the balance of payments relieved some of the pressure for firmer
rates.
11/12/63
-32The analysis that Mr. Hayes had given, Mr. Bopp continued,
was one that had disturbed him since the beginning of the Committee's
trend toward tighter monetary conditions.
If European countries
moved interest rates up and we felt forced to respond out of balance
of payments considerations, a serious problem could be posed for our
domestic economy, which in turn could affect the entire world.
Mr. Bopp concluded by saying that conditions called for no
essential change in policy for the next three weeks.
Reserves
should be supplied to meet seasonal needs and to prevent member
bank borrowing from rising much above the recent level.
He felt
that the present directive was appropriate with the deletion of the
reference to the Treasury financing, and would recommend no change in
the discount rate.
Mr. Hickman said that, as Messrs. Noyes and Hayes had reported
this morring, the pace of business activity was clearly quickening,
and he had nothing significant to add to the story.
like to
He would, instead,
report to the Committee the highlights of a meeting of 23
Fourth District economists held recently at the Federal Reserve Bank
of Cleveland.
These economists, Mr. Hickman noted, were from major industrial
concerns in steel, autos, machinery, rubber, oil, etc.,
with headquar-
ters or substantial operations in the Cleveland District.
All of the
business economists, who had usually been on the very conservative
11/12/63
-33-
side, now emphasized the current strength of the economy, although they
differed as to the durability of that strength.
In view of the con-
servatism of the group, he was impressed by the fact that three-fifths
of them forecasted continued expansion through next year, without any
specific assumptions as to a tax cut.
For the first time in several years, the Fourth District economists included within the horizon of their outlook the possibility that
expansion could become excessive, and hence unsustainable, in the near-
future, Mr. Hickman reported.
It was noteworthy that reference was made
to the possibility that the economy might "blow out at the top side,"
although no consensus was reached.
Much had been said about the change
towards firmness in the industrial price picture, and more price in-
creases were believed to be ahead.
It was generally felt that the steel industry this year would
show a total output of 108 million ingot tons or more, and a clear
all-time record for steel consumption.
An :.ngot output from 105
million to 111 million tons was forecast for next year.
For autos,
it was believed that output at a rate of 7-1/4 million cars or better
could be maintained during the first half of next year, with the rate
dropping below 7 million in the second half.
For the entire year 1964,
the most frequent forecasts were 6.8 or 6.9 million cars domestically
produced, although the spectrum of estimates ranged from a low of 6.5
million to a high of 7.5 million.
11/12/63
-34Insofar as other industries were concerned, Mr. Hickman said,
heavy machinery lines reported a marked shift in recent months from
dull to brisk orders.
Numerous industries represented at the meeting
indicated substantial gains in volume this year and further, although
more moderate, gains next year; these included aluminum, rubber, chem-
icals, oil and food products.
In the construction area, there appeared
to be a general feeling that fears about overbuilding of apartments were
not well founded; the argument was that although overbuilding had
occurred in ore or two large cities, the apartment boom was spreading
through medium-size and smaller cities of the country.
Overbuilding
of shopping centers, however, was a reality and retrenchment was the
order of the day.
Representatives of the railroads were not happy
about the present arrangements for arbitration of the workrules dispute; they expected another strike threat in the late winter or early
spring.
Mr. Hickman said that the present state of economic activity
and business sentiment, and the potential upward movement of the price
level, all lend support to a view that the System drift towards slightly less ease had been appropriate.
The same
inference could be drawn
from international interest-rate relationships, which now appeared to
be in some sort of rough, although perhaps temporary, equilibrium.
Until the price question was resolved he would favor a continuation
of the present degree of firmness in the central money market.
With
11/12/63
-35-
a more even distribution of reserves than in the past week or two,
this would probably mean free reserves hovering around the zero level,
Federal funds holding steady at 3-1/2 per cent, and a bill rate fluctuating narrowly around the discount rate.
Well-informed bankers in the Fourth District had recently ex-
pressed concern over the possibility that higher rates on certificates
of deposit might attract funds out of local banks into money market
centers.
Mr. Hickman felt this situation might be averted by appro-
priate changes in Regulation Q, as Mr. Hayes had suggested at this
meeting and the last.
Mr. Mitchell said that it seemed to him that the Committee
had slipped into a rather unproductive attitude toward the problem
of appropriate monetary policy.
For some time the alternatives had
been formulated as no change in policy or slightly greater firmness,
and his side had been losing right along.
While this had been going
on, the possibility of fiscal action had been receding.
The tax bill
obviously was not going to be passed tnis year, and there was increasing question about next year.
Even if the tax bill passed, there was
a good chance that Government expenditures would be held down to the
point of nullifying the effect of tax reduction.
According to the surveys, Mr. Mitchell said, no capital boom
was in prospect.
The McGraw-Hill survey, which indicated a four per
cent increase in capital spending from 1963 to 1964, implied no
11/12/63
-36-
increase over the level in the fourth quarter of 1963.
a further rise
In his opinion
in capital spending was necessary at this stage of the
cycle, and a higher
level of new car sales than the forecasts Mr.
Hickman had mentioned would be required if the consumer side was to
provide a stimulus.
It was Mr. Mitchell's opinion that the Committee should
seriously consider some easing.
He thought
it
should be more accommo-
dating of credit needs in the next 3 to 6 weeks; otherwise it would be
flirting
with the danger of a sharp rise
rates, which would serve no purpose.
in
both long- and short-term
It might be well to let the bill
rate drop a few basis points, partly to scotch rumors of an imminent
discount rate increase.
He did not urge any change in the directive,
but favored a somewhat higher level of free reserves and a reduction
in member bank borrowing to the neighborhood of $200-$300 million.
Mr. Shepardson said that the aspect of the economy he found
encouraging was the fact that a boom was not underway.
He would be
most concerned if there was a big surge in business activity; the
groundwork was already laid for expansion in wage rates, costs,
prices, and sone degree of continuing restraint was needed.
and
In his
judgment the policy the Committee had been following in recent weeks
remained appropriate.
He would not want to see any relaxation, al-
though he recognized that there would be a seasonal need for reserves
in the next few weeks and felt that these reserves should be supplied.
He thought the recent rate of reserve expansion was a little more
11/12/63
-37-
precipitous than desirable, and should be cut back.
Along with Mr.
Hickman and Mr. Hayes, he favored a somewhat lower level of free reserves than during the last three weeks.
He saw no need for a change
in the directive except for deleting the Treasury financing reference.
Mr.
Robertson commented as follows:
Business continues to expand, but seemingly without the
kind of vigor that would assure a strong or ebullient surge
carrying over into 1964. There is encouragingly little of
this expansion reflected as yet in the over-all price indexes, although these will bear watching. But there is discouragingly little reflection of the business rise yet in the
unemploynent figures, and this argues strongly against any
premature tightening of monetary policy.
Our balance of payments position has clearly become
better, even if for reasons that are rot fully explained.
Meanwhile, on the financial side, we face some emerging
problems--partly of our own making.
Bank loan expansion has been substantial, as has also
been money supply and time deposit growth.
But in the
tighter reserve situation that has prevailed since midyear,
banks have been led to sell
Governments and cut down on
purchases of municipals.
If this bank reaction continues
or increases, it will not only slow down the growth of pribut also very likely apply some further
vate liquidity
unsettling upward pressure on the capital markets generally.
I would not want to aggravate such movements at
this time.
The bill
rate is also a thorny problem right now. By
our own operations and increased Treasury auctions of new
bills
we have managed to push it so articifially
high that
(As a matter of fact, at the
it is now embarrassing us.
close Friday, November 8, 67 per cent of all bills outstanding were yielding more than the discount rate.)
With the peak of seasonal pressures still ahead, we could
have even higher bill rates on our hands between now and
The potential consequences, as the comments
December 20.
this morning indicate, are uncomfortable to contemplate.
They include the almost certain spread of rumors of a
further discount rate hike, with perhaps enough market
reaction to force the System's hand; pricing enough
smaller banks out of the CD market to also demand another
11/12/63
-38-
increase in the Regulation Q ceilings; a spreading wave of
sympathetic rate adjustment through the longer term markets;
and, just
possibly, some corresponding upward adjustment in
foreign official or market interest rates that would provide
an argument against letting our rates slide back down from
whatever year-end seasonal peak they attained.
The Treasury was quicker than we were to foresee some
of these adverse consequences and to act to try to forestall
them. But how did it do so?
By jumping into the market and
buying bills purely and simply with a rate objective in mind.
Whatever else last Friday's operation accomplished, it demonstrated official pegging intentions for all to see. To be
sure, one could argue that this peg is more sophisticated
than the old one; we do not maintain a fixed rate, but a
range, with an upper and lower resistance point; and the
Committee had been wise enough to move that range occasionally. But the same old lesson still applies:
you cannot
pursue a rate target without giving up control of the
volume of reserves and, ultimately, of bank credit and money.
how can we
It seems to me the basic question today is:
For many months I have been a minority
extricate ourselves?
advocate of not being so concerned with bill rate levels,
but of concentrating rather on maintaining a stimulative
reserve posture. But having assiduoisly devoted both
Federal Reserve and Treasury efforts to raising the threemonth bill rate artificially high in the cluster of rates,
we cannot now just turn our back on further bill rate
changes, focus on reserves only, and pretend no concern
or responsibility for ensuing rate developments.
Given the likely immediate consequences of such a
course, I think we have no real alternative but to conduct
our operations during the next few weeks of peak seasonal
pressure in such a way as to minimize any excess of the
This I hope
three-month bill rate over the discount rate.
we could accomplish by maintaining scmewhat greater reserve
availability, producing less bank borrowing and Federal
funds rates occasionally below 3-1/2 per cent. This
should be achieved by Desk efforts to purchase bills whenever appropriate to this end, rather than either deliberately undertaking bill purchases just to drive rates down
from new on. Hopefully, when seasonal pressures are
reversed late in December, we should be able to concen-
trate progressively more on the performance of the economy
and its needs for funds and progressively less on the bill
rate alone. In the meantime, I hope steps are taken with
the view of prevailing upon the Treasury to undertake any
11/12/63
-39-
further bill rate "rigging" it has in mind by use of the
more arms-length procedure of changing the size of bill
auctions, rather than repeating the injection of itself
into the market, as its biggest buyer, as happened last
Friday.
I believe the policy I have outlined could be construed as still falling within the bounds of the current
directive. On the other hand, if a change in the directive is regarded as desirable by the Committee, I would
think the most consistent alternative would be to adopt
something like a mirror image of the directive adopted
last January 8. Thus, the second paragraph could say:
"To implement this policy, System open
market operations during the next three weeks
shall be conducted with a view to maintaining
a reasonable degree of firmness in the money
market, while offsetting seasonal upward
pressures on short-term interest rates and
providing for moderate reserve expansion in
the banking system."
Mr. Mills commented that Mr. Brill's statement offered factual
evidence of the need for revision in the direction of System monetary
and credit policy.
Accordingly, his remarks would focus on some recent
developments that were confirmed indirectly in Mr. Young's report to
the Commttee, that argued for a change in policy that should be possible of accomplishment without damage to the present financial defenses
set up to combat our adverse balance of payments difficulties.
He
found himself in substantial agreement with what Mr. Mitchell and Mr.
Robertson had said.
He was inclined to believe that when Federal Re-
serve System history was written it would record that this period,
provided a classic example of the lag in time before System policy
takes hold, in this case a policy that threatened economic and financial
11/12/63
harm.
-40-
If such was the case, it was incumbent on the Committee to
change policy with the knowledge that the beneficial effects of the
change would not yield their impact for some time into the future.
Mr. Mills then made the following statement:
Surcease from the Federal Reserve System's enforced
watch and ward kept over this nation's difficult balance
of payments situation seems to be an early prospect.
That
indications to that end emanate from press reports of
statements made by important United States officials outside of the Federal Reserve System does not lessen their
authoritativeness.
It is surprising, however, that these
policy statements on matters intimately related to the
System's responsibilities are reported in the public
press as intimating policy decisions already made in the
light of understandings reached by United States and
foreign financial officials. Even though the background
to these statements, and implementation of the monetary
and credit policy that they portend, have not been discussed by the recognized policy-making body in the field
of monetary authority--namely, this Committee--the purport
of these statements should be taken at face value as an
opportunity to revise our policies along enlightened lines
that will give proper place to domestic economic considerations.
The Secretary of the Treasury is reported to have
said that higher interest rates are unnecessary for
balance of payments reasons. The November ninth edition
of the New York Times carries a Paris report that the
Chairman of the Council of Economic Advisers has stated
that the principal European countries have agreed not to
raise their interest rates in order to counteract higher
The November eleventh
interest rates in the United States.
edition of the New York Times, in a despatch from Brussels,
also reports that an understanding has been reached that
European financial authorities will not raise interest
rates in their countries as an offset to higher interest
rates in the United States.
These various statements and reports seemingly give
belated recognition on the part of some United States
officials that the monetary and credit policy forced on
the Federal Reserve System for balance of payments reasons
has begun to produce what were inevitably undesirable
11/12/63
-41-
domestic economic reactions and should therefore be relaxed.
By the same token, it is implicit from the financial climate
that was allowed to develop that the domestic viability of
the counry should not be sacrificed to a needlessly restrictive Federal Reserve System monetary and credit policy and
that henceforth any measures required to combat further
balance of payments difficulties should be taken in the
area of fiscal controls.
In my opinion, a start should now be made toward increasing the supply of reserves available to the commercial
banking system so as to relieve some of the existing upward
pressure on interest rates and to reduce a very real threat
to appropriate growth in the money supply.
Mr. Mills added that he would favor adoption of the directive
revision suggested by Mr. Robertson.
Mr. Wayne said that the generally favorable character of
Fifth District business had changed little in recent weeks.
Rates
of insured unemployment continued to decline seasonally and remained
well below the
national average.
On the other hand, retail sales
showed less than seasonal strength, and dol.ar sales of flue-cured
tobacco were
11 per cent lower than a year ago.
Man-hours
in non-
durables were off in September despite good gains in all sectors of
the textile industry.
Current developments
in textiles included wage
increases varying somewhat as to extent and timing but likely to be
industry-wide by the end of this month, a continuing slow trend toward
higher prices, and renewed consideration of a one-price cotton bill.
Textile respondents in the Reserve Bank's latest survey reported rather
general increases in new orders and shipments but were pessimistic
about profits.
Manufacturers of other nondurables, however, presented
11/12/63
-42-
a generally neutral picture, while producers of durables indicated
further increases in both new orders and backlogs.
In general, the
survey showed business optimism continuing, although less pronounced
than three and six weeks ago.
On the national scene, Mr. Wayne said, it now seemed clear
that business activity was at a high level in October.
Record highs
in the production and sale of automobiles plus a near-record level
of new construction were major contributions toward a very good month.
These were supplemented by small increases in steel production and by
a continuing high level of employment.
The strong recovery in retail
sales indicated in the latest Department of Commerce estimates was
especially encouraging to him.
While these
estimates were subject to
revision, they provided fairly concrete evidence of growing strength
in an area which had thus far been about the weakest in the present
upsurge.
Despite the October improvement, Mr
Wayne continued, most
major components of business activity had shown quite modest rates
of increase over the past three or four months taken as a whole,
with a few remaining about steady or declining slightly.
In general,
the level of activity had been high but there had been very few signs
of a strong movement toward higher ground.
As to policy, Mr. Wayne said he did not share the concern of
those who feared that the supply of reserves was inadequate.
There
11/12/63
-43-
had been no adverse developments from the irternational side in the
past three weeks and perhaps some small improvement.
Domestically,
the increase in margin requirements should help to correct any tendency toward excesses which might exist in the financial area.
The
increase injected an element of uncertainty into the market which,
together with other market forces, helped to push bill yields last
week to their highest levels in more than three years, with most of
them going significantly above the discount rate.
Any further sub-
stantial rise in short-term rates at this time would logically be
interpreted as evidence of a move toward a further restriction of
credit, probably including an increase in the discount rate.
Mr.
Wayne did not believe that conditions at this stage required or
justified an increase in the discount rate.
He therefore favored
continuation of the Committee's present policy, with the aim of
keeping short-term rates within about the same range as had prevailed
for the past three weeks.
He would renew the current directive with
the elimination of the reference to Treasury financing.
Mr. Clay said that in his judgment the most significant piece
of current information about the state of the domestic economy was
the McGraw-Hill report on business capital outlay plans.
Little satis-
faction could be gained from the projected increase for 1964 when note
was taken of its limited size and the fact that it indicated an annual
rate of business capital outlays somewhat below that of the current
11/12/63
quarter.
-44Mr. Clay said that this evaluation was applicable even if
allowance was made for possible understatement, since the upward
revision would need to be substantial if business capital outlays
were to provide the needed thrust to economic activity.
Mr. Clay thought that continued expansion in total economic
activity in the months ahead rested upon advancing levels of demand and
output and upon the resulting stimulus from these demands to capital
investment.
An acceleration in capital investment was particularly
important at this advanced juncture of the business upswing, he felt.
In view of the McGraw-Hill results, it was quite apparent that there was
need for continued stimulus to over-all demand and encouragement to
capital
investment.
If the cyclically-sensitive sectors of demand and
output simply held at the advanced levels of recent months, prospects
for over-all expansion in the period ahead were seriously clouded.
In view of the moderate pace of economic expansion in recent
weeks, the continued problem of resource utilization, and the current
projection of business capital outlays, the case for avoiding any reduction in credit availability still
stood, in Mr. Clay's opinion.
He
thought that member bank reserves should continue to be supplied so as
to provide for bank credit expansion and to avoid putting upward pressure
on interest rates through monetary policy actions.
Mr. Clay felt that the basic policy for the period ahead should
be the same as that determined at the preceding meeting of the Committee.
11/12/63
-45-
Since that meeting, interest rates had moved upward without any
monetary policy intention of the Committee to produce that result.
If continued reserve availability for credit expansion in the period
ahead resulted in a lower Treasury bill rate, Mr. Clay said, that
development would be in keeping with this policy.
Mr. Scanlon reported continuing evidence of gradual improvement of economic activity in the Seventh District.
The Reserve
Bank's current survey of economists of major business firms and
financial institutions in the District revealed widespread optimism
concerning economic prospects not only for the remainder of the year
but for 1964 as well.
Of the first 14 to respond only two expected
a decline in general business activity to begin before the middle of
next year, assuming no tax cut.
With a tax cut, all 14 expected any
general decline in business to be postponed at least until the second
half of 1964 and only 4 expected business to decline before the end
of next year.
A number of the respondents reported price increases for the
items purchased by their firms, but these increases thus far had been
confined to a limited range of products.
Inventories and employment
were expected to rise somewhat in those firms during the next six months.
A number of respondents indicated that their views on the
prospects for the economy and for their own firr
had become more
favorable during the past six months while none indicated that his
views had become less optimistic.
11/12/63
-46Data on capital goods orders for September, Mr. Scanlon said,
confirmed the improvement reported by large District firms during the
past two months.
The view that capital goods spending would be an
expansionary factor in 1964 was becoming increasingly widespread.
Meanwhile, it had become common to anticipate a decline in auto sales
of about one-half million units from the 7.6 to 7.7 million now
estimated for 1963.
Auto sales, of course, continued excellent, and
record production was scheduled for the remainder of the year.
Employment had increased somewhat further during the autumn. in
the Seventh District and unemployment had continued to decline.
In
September, all District States estimated their unemployment rates to
be well below the national average.
Even Michigan estimated a rate
of only 3.9 per cent compared with 4.8 per cent for the nation.
Mr. Scanlon commented that reports of Seventh District banks
showed a relatively large contraction in credit during October,
relatively greater than in the nation, reversing the very sharp
expansion in September.
The recent decline reflected repayments by
securities dealers and finance companies, but was due mainly to
liquidation of Government securities, especially of longer maturities.
Also, in the past two weeks holdings of municipals were down slightly.
Business loans leveled off in the second half of October and gains for
that month were not very broadly based, with a considerable part of
the.rise possibly related to commodity dealers' anticipations of
11/12/63
-47-
higher prices.
A large rise, mostly in one bank, was reported in the
most recent week.
The large Chicago banks had been experiencing increased reserve
pressures, Mr. Scanlon said, and had borrowed at the discount window,
issued additional certificates of deposit, and sold Government
securities.
Like Mr. Brill, Mr. Scanlon was confused by some of the
apparent conflicts in the bank credit picture.
As to policy, Mr. Scanlon said he would favor maintaining the
current posture.
With the short-term bill rate near the discount rate
and banks tending to reduce holdings of long-term investments, he would
be hesitant to exert additional pressure that would result in a further
increase in bank borrowing at the discount window.
He would maintain
current policy and observe developments for the next three weeks.
The
Committee might find at that time that it had little choice but to
accept further tightening.
Reference to the Treasury financing should
be deleted from the directive, Mr. Scanlon said, and he would not favor
change in the discount rate now.
Mr. Deming reported that "moderate expansion" continued to
describe current economic trends in the Ninth District.
The District
personal income estimate for September was slightly higher than in
August and up four per cent from a year earlier.
Department
store
sales were picking up after an unseasonably warm early October.
New
car sales and sales of farm machinery had been particularly good this
11/12/63
-48-
fall and a big surge in the bank debit
October also suggested high level
figures in both September and
spending at retail.
activity, on the whole, had been quite strong.
Construction
Employment statistics
for October showed only moderate improvement but unemployment rates
continued below year-ago levels.
Mr. Deming commented that the most significant recent development affecting prospects
for the Ninth District economy was the Russian
wheat purchase program.
Very little, if any, of the District's spring
wheat might be involved in this deal; however actual and prospective
exports of wheat, mostly from the hard winter wheat areas, had had a
sharp
impact on all wheat prices.
If 150 million bushels, or more, of
U. S. wheat actually were exported to Russia over the next several
months and wheat carryover was substantially reduced, wheat prices
were likely to continue firm against the practical ceiling set by the
Commodity Credit Corporation in their formula for releasing wheat stocks
for purchase.
Without this expanded demand and with lower support
prices in prospect
for 1964 production, Mr. Deming said, wheat prices
might have been expected to decline to minimum support levels.
In short,
the Russian deal could make a multi-million dollar difference in farm
income figures for the Ninth District over the balance of this
year and into the new crop year.
crop
Wheat was especially important to
the Ninth District since it brought in more than 10 per cent of District
cash farm income and about 40 per cent of farm income in North Dakota.
11/12/63
-49-
Bank credit in the District, Mr. Deming said, was currently
expanding about
in
line with seasonal
expectations,
showing a larger than seasonal improvement.
anddeposits were
At the weekly reporting
banks, total bank investments declined seasonally during October with
loans holding about even.
Both loans and investments advanced at more
than normal seasonal rates at the country reporting banks.
Some reserve pressure had been evident at the Ninth District's
larger banks during most of October, but more recently the situation
had eased.
As of the Friday preceding this meeting, only four banks
were borrowing at the Minneapolis Reserve Bank, and six were borrowing
at Helena.
District banks continued as net purchasers of Federal funds
but total purchases declined somewhat in late October and early November,
With
respect to policy, Mr. Deming said he would favor essen-
tially no change.
He would pretty well discard the bill rate as a
policy guide and focus instead on reserves and reserve availability.
He was a little disturbed by the recent run-up in the bill rate,
particularly after hearing Mr. Young's report.
For the next three
weeks, sufficient reserves should be provided to meet normal seasonal
expansion in bank credit, but no more.
He would not try to recapture
the reserves already added to meet what seemed to have been a larger
than normal seasonal deposit growth.
In other words, he would start
from the present base of actual required reserves and supply reserves
pretty much in keeping with the needs outlined in the Board staff's
11/12/63
-50-
reserve projections.
This would mean that
the Desk would inject
approximately $200 million of reserves over the next three weeks.
From then until the end of the year, there should be just about an
even balance so far as reserve "put and take" was concerned.
If
there
was more than a seasonal demand for credit over the balance of the year,
this would be reflected in a somewhat lower level of free reserves.
He
would not take any positive action to try to push the level of free
reserves down or the bill rate up, but instead would let market forces
reflect
themselves.
He recognized
the difficulty
for the Desk and the element of judgment that was
of such an assignment
involved.
But under
this policy there might be little appreciable impact on rates during
the period until the end of the year.
Mr. Deming said he was not sure that a change in the directive
was necessary, but if one were to be made he would revise the second
paragraph to call for operations "with a view to meeting seasonal
needs for bank reserves."
Mr. Swan reported that the limited amount of information fcr
the Twelfth District that had become available since the preceding
meeting indicated no marked changes.
Business activity seemed to be
continuing to rise moderately and business sentiment was optimistic,
although there seemed to be some concern about the timing and ultimate
fate of the tax bill.
For the three weeks ending October 30, District
weekly reporting banks experienced a somewhat smaller increase in
11/12/63
-51-
total loans and investments than did reporting banks in the nation as
a whole.
The loan increase was about the same as nationally, but the
decrease in Government security holdings was somewhat greater.
The
larger banks in the District were still net sellers of Federal funds.
As to policy, Mr. Swan said it seemed to him that the background
was still one of moderate business expansion, with little indication of
any real upsurge.
was improved.
On the other hand, the balance of payments position
He was impressed by several things.
First, some of the
recent growth in private deposits had resulted from a substantial drop
in Treasury balances, and the decline in the latter presumably was over
for the rest of the year.
Secondly, in addition to the effects of
improved business conditions, the money and capital markets had been
influenced by somewhat special circumstances--a substantial volume of
Treasury bill issues and a very heavy volume of corporate and municipal
issues.
Finally, general uncertainty with regard to the course of
monetary policy had been engendered by the rise in the bill rate.
It
seemed to Mr. Swan that, insofar as possible, the Committee ought to
provide a breathing spell, and try to assess
forces.
the strength of market
The Committee could continue its present policy for the next
few weeks--by which he would mean offsetting any upward rate pressures
from seasonal forces--and see what happened.
If as a result there
should be a decline in the bill rate, Mr. Swan would make no attempt
to offset it.
It would seem that under this policy member bank
11/12/63
-52-
borrowing could be kept somewhat below $400 million.
He would resolve
doubts on the side of ease rather than, as he thought had been done in
recent weeks, on the other side.
He would not change the directive
except to delete the reference to Treasury financing, although he
had some sympathy for Mr. Robertson's suggestion.
Mr. Irons reported that conditions in the Eleventh District
were generally favorable, although mixed.
The drought was affecting
wide parts of the District, especially the coastal areas.
This was
acting adversely on some kinds of agriculture, particularly the
conditions of the ranges.
The industrial production index for the District had set a new
record nigh, Mr. Irons said, rising several points in the past few
months.
Nonagricultural employment had moved up one per cent and had
been rather firm over the District.
Construction contract awards in
the latest month were down somewhat but for the first nine months of
this year were nine per cent above the equivalent period last year.
Crude oil production in the District showed no change, and retail
trade had been quite high relative to a year ago.
Trade in October
was lower than in September, but seemed to be picking up in the most
recent week or two.
At District commercial banks, Mr. irons continued, total loans
and investments had declined recently.
This was due mainly to a decline
11/12/63
-53-
in holdings of Treasury bills; the loan decline had been slight.
Banks were not borrowing at the discount window in very large amounts,
although borrowings were somewhat higher than they had been for the
past three weeks.
been high.
Purchases of Federal funds by District banks had
As had been the case for several months, these purchases
were concentrated largely at two banks, although two or three other
banks had bought funds in sizable amounts.
Mr. Irons said he would leave the cirective unchanged and
continue policy as it has been carried out during the past three weeks.
He would favor neither additional finning nor greater ease at this
time.
He was somewhat disturbed by the run-up in the Treasury bill
rate to 3.56 per cent because of resulting rumors in the press and in
the market.
He hoped the Committee could avoid a repetition of the
June-July situation, when it was faced with widespread anticipation of
discount rate action because the bill rate was so far above the discount
rate; he did not think the discount rate should be changed at this time.
He thought the Committee should concentrate its attention on reserve
availability, meeting seasonal requirements and holding at that level.
He did not know whether or not the bill rate could be ignored; if it
rose, the Committee might have to react.
It was his hope that with
some of the recent pressures removed the bill rate would tend to
fluctuate around the 3.50 discount rate.
Mr. Ellis n.ted that a Western Massachusetts mutual savings
bank was now advertising the highest rate on savings deposits of any
11/12/63
-54-
of the nation--five per cent on one-year deposits.
Mortgage money in
the area was available at 5-1/2 per cent, and he thought the bank would
find it difficult to operate with that margin.
were showing no disposition to follow suit.
Other savings banks
One New Hampshire
commercial bank reported it was having difficulty meeting competition
on time certificates of deposit as rates moved up, and was urging
relief from the present Regulation Q limits.
Other banks were concerned
about the same problem.
Mr. Ellis said that there had been no significant changes in
the general economic situation of the First District recently.
On the
basis of year-to-year comparisons, financial data showed strength,
production was about unchanged, and the employment situation showed
weakness.
The Boston Reserve Bank had just held a semi-annual meeting of
District economists, Mr. Ellis said, and found them optimistic.
The
median of their estimates for GNP in the second quarter of 1964 was
$610 billion.
Particularly notable was the. fact that the range between
the hignest and lowest projections was the smallest in the 12 years
since these conferences were started.
Question was raised as to
whether a tax bill could be passed if business continued good in the
early part of next year.
Turning to monetary policy, Mr. Ellis noted that for some time
the Committee had wanted to improve balance of payments conditions by
11/12/63
-55-
affecting short-term outflows, and the staff reports at this meeting
showed that some improvement had beer accomplished.
One might argue
that in light of the improvement the Committee should rest on its
oars.
But Mr. Ellis recalled the argument that the Committee was
not using monetary policy sufficiently for balance of payments
objectives.
For his part, he had no conviction that any permanent
improvement had been achieved.
He also lacked confidence that the
Europeans wculd renounce monetary policy in dealing with their current
problems.
Domestically, Mr. Ellis noted, business loan expansion in
September and October had been greater that
supply, seasonally adjusted, was
seasonal.
The money
rising sharply, and despite the
Committee's July shift to a policy of less ease, required reserves
against private deposits were expanding well above the 3 per cent
guideline.
This growth was real,
even if it reflected
reserves held against Treasury deposits.
nervous
a shift from
Mr. Ellis said he felt
about the degree of liquidity that had been built up under
the policy the Committee had followed this year.
He also noted that
even with free reserves exceeding $100 million inthe last few weeks,
Treasury financing activities combined with market influences had
moved short-term rates up.
Mr. Ellis said he could agree with those who advocated meeting
seasonal needs for reserves and letting market factors work.
It was
11/12/63
-56-
his guess that this would mean some further
rise in bill rates.
The
alternative would be to hold short rates down by supplying additional
reserves.
He would prefer to concentrate cn reserve availability--
meeting seasonal needs, but anticipating that actual credit demands
would exceed their normal seasonal levels.
As targets he would suggest
free reserves in the range $0-50 million, and bill rates
near present levels, above the discount rate.
fluctuating
Mr. Ellis concluded by
saying he did not favor a change in the discount rate at this time.
Mr. Balderston said that like Mr. Brill and others he was
confused by recent developments.
happening to the bill rate;
financing operations.
He felt that he understood what was
it had been increased by recent Treasury
He noted that, normally, at this time of the
year the Committee felt it must take care of seasonal needs, and he
had started with the assumption that this year seasonal needs could be
accommodated without too much attention to bill rate fluctuations.
At
the next stage in his reasoning he concluded that enough reserves
should be supplied to meet seasonal needs.
He then began to consider
what lay ahead of the Committee next year, both internationally and
domestically.
In the international area, he believed that European
nations would protect themselves against uncontrolled inflation,
regardless of recent assurances that they would avoid the use of
monetary policy; no promises of this type would stand up in countries
with memories of hyper-inflation.
Domestically, there were three
11/12/63
-57-
factors he thought relevant to the outlook.
First, he had been told
that the Presidential appointees would not succeed in solving the
problem of railroad featherbedding.
Secondly, he noted that Hoffa
was already announcing his plans for the year ahead.
Third, the
automobile industry had wage negotiations scheduled for August 1964.
Mr. Balderston said he had looked back to some remarks he had
made to the Committee six months ago to see if he could find any guides
for himself.
He then presented the following statement:
Six months ago I spoke of my concern about two questions:
(1)
that an appropriate economic policy for the nation called
for "holding the line" on costs and prices;
(2)
that monetary policy should contribute to liquidity adequate for the economy's transactions but not so great as to
lead to:
(a) leakage of funds to other countries;
(b) speculative excesses;
(c)
imprudent decision-making by borrowers and lenders.
It is still my belief that a "hold-the-line" policy on
costs and prices is of fundamental importance, both in achieving equilibrium in our balance of payments, and in creating
job opportunities at home.
As to the second policy question, how much liquidity is
appropriate right now, I suggested certain benchmarks to distinguish between enough to nourish the economy and too much.
I indicated that, as of last May, I would favor a policy of
somewhat less ease and a probing acticn to discover its impact. As an aid to this determination, I then suggested that
this Committee watch the following indicators:
(1) The relation of short-term rates here and abroad.
(2) The total required reserves supporting private deposits.
Last May I favored an increase in such reserves at a rate less
than 3 per cent annually, but with a lower limit that would
still permit some further expansion in private demand deposits.
(3)
The expansion of bank earning assets in relation to legiti-
mate loan demand.
In short, I favored a rate of increase of
bank acquisitions of savings plus the creation of bank credit
to permit money-supply growth in keeping with the transactions
needs of the economy without inducing the granting of unsound
credit.
11/12/63
-58As to the first of my tests,
the bill rate and Federal
funds rate are both at about the discount rate and, in addition, approximate the covered short-term rates of England
and Canada. The outflow of short-term capital has diminished,
temporarily at least. A further rise to a point that would
induce an inflow of short-term funds to this country might
force England and Canada to raise their own rates. Moreover,
if our bill rate rises too near the going rate on negotiable
CDs, the exodus of large amounts of time deposits from the
commercial banks would lessen their willingness to absorb
municipal bonds.
The second of my tests has to do with the growth in
reserves.
In May, I suggested cutting back the rate at which
those behind total private deposits had been growing, namely
In fact this rate has increased even faster
3.2 per cent.
This has permitted
at an annual rate of over 4.5 per cent.
required reserves behind demand deposits to grow at an annual
Both my upper and lower limits
rate of close to 3 per cent.
for reserve growth reveal an increase above what I favored
last May. The outcome is more liquidity than seems desirable.
Although Fall seasonal demands for bank credit and the
current upward pressure upon bill rates might preclude an
immediate dampening of this high rate of liquidity creation,
the passage of the seasonal need for funds will permit its
correction.
My third test has to do with bank-credit availability.
In contrast to the reserve test, bank credit expansion does
appear to have moderated. To meet loan demand, banks have,
since May, liquidated $3.7 billion (seasonally adjusted) of
On the other hand, credit availability
government securities.
to
the point where discountings are
has not been reduced
heavy, or where banks are becoming noticeably more selective
in the quality of their lending. Therefore, this third test
also suggests that this Committee might appropriately reduce
reserve availability when seasonal pressures permit.
Mr. Balderston concluded by saying that, in the meantime, he would
favor continuing the policy of the past three weeks.
Chairman Martin said that he felt more comfortable about monetary
policy at present than he had for a long time.
Unlike Mr. Mills, he
thought history would say that at this juncture the System had made a
11/12/63
-59-
commendable contribution to a difficult problem.
With the Thanksgiv-
ing holiday approaching, he considered the present a poor time to make
small changes in money market conditions, and he noted that the
discussion had been concerned with only minor changes
or the other.
in one direction
He could not agree with charges of rigging or pegging,
although it could be said that the Committee was always engaged in
pegging to some extent by the very nature of its operations.
He
doubted that the Committee had too much influence on some of these
things.
At the moment, Chairman Martin continued, he thought everything
was going in the Committee's favor.
He was more optimistic than some
of the peopl, around the table about business.
Activity was expanding,
and the volume of unutilized plant capacity that could pay its way
was getting very small.
people 'about prices.
He also was more apprehensive than some
While he did not attach great importance to
incidental cases of mark-ups, about some of which he had heard recently,
this was the way an inflationary progress began.
indexes always
He thought the price
tended to lag behind actual price changes; inflation
could be unnoticed for a period and then suddenly become evident in
the indexes.
The unemployment statistics
did not indicate adequate response
to the stimuli that were being applied, Chairman Martin said, but he
thought he could detect some improvement in the situation.
For example,
11/12/63
-60-
in many areas casual labor was now being picked up, unlike a few
months ago.
With respect to international developments, U. S. exports
were at a high level, and there was less
pressure on investors to
put funds abroad.
In sum, Chairman Martin said, he thought things were going
the Committee's way at the moment, and he would hesitate to see the
Committee press its luck too far.
change should be made in policy
Ic was his personal view that no
and that the directive should be
modified only by deleting the Treasury financing reference.
There
might be difficult problems in the money market over the Thanksgiving
holiday and he would want to observe developments for another three
weeks before deciding whether to move in either direction.
For the
first time in a long while, he thought the Committee might soon find
itself faced with the possibility of serious problems with prices and
with an incipient expansion at an unsustainable rate.
He hoped the
Committee would not reverse a policy which he felt had, by and large,
been successful.
He would reiterate a view he had expressed before:
the recent lessening of ease had helped both the domestic business
situation and the balance of payments.
He thought there was no
particular reason to be discouraged at the moment nor to lean on
monetary policy as a stimulus or a crutch.
11/12/63
-61The Chairman then proposed that the Committee vote on a policy
directive identical to the one issued at the previous meeting except
for deletion of the reference to Treasury financing.
Thereupon, on 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 adverse
It also recognizes the
despite a tendency to reduced deficit.
increases in bank credit, money supply, and the reserve base
of recent months.
To implement this policy, 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, Irons, Mitchell,
Robertson, Scanlon, and Shepardson. Vote
Mr. Mills.
against this action:
Mr. Hayes commented that his vote in favor of this action
might appear inconsistent with the views he had expressed earlier.
He
had modified his position, he said, because he had been impressed
by the arguments at the meeting in favor of adopting a wait-and-see
11/12/63
-62-
attitude.
He agreed with Mr. Scanlon that after another three weeks
the Committee might find it necessary to change its policy.
felt there was
He also
some misapprehension at the meeting on the position of
European governments with respect to their use of monetary policy.
He
thought the Europeans would be influenced principally by their own
situations, and not so much by what this country did.
Moreover, he
thought it incorrect to say that there was a complete parallelism of
interest between the Europeans and this country with respect to upward
movements of interest rates, since our balance of payments with Europe
was still sharply adverse.
Mr. Robertson said he had voted in favor of the directive
adopted because he thought the language was adequate to encompass his
views.
He e.pressed some doubt, however, that the directive would be
construed consistently with his thinking.
Chairman Martin asked whether
earlier
suggestion by Mr. Stone for
there was any objection to the
revising the continuing authority
directive to direct the New York Bank not to exceed $1 billion in the
change in the aggregate amount of U.
S. Government securities held in
the System Open Market Account during any period between meetings of
the Committee, and no objection was expressed.
Thereupon, upon motion duly made and
seconded, and by unanimous vote, section
1(a) of the continuing authority directive
to the Federal Reserve Bank of New York was
amended to read as follows:
11/12/63
-63-
To buy or sell United States Government securities in
the open market, from or to Government securities dealers
and foreign and international accounts maintained at the
Federal Reserve Bank of New York, on a cash, regular, or
deferred delivery basis, for the System Open Market Account
at market prices and, for such Account, to exchange maturing
United States Government securities with the Treasury or
allow them to mature without replacement; provided that
the aggregate amount of such securities held in such Account
(including forward commitments, but no
including such
special short-term certificates of indebtedness as may be
purchased from the Treasury under paragraph 2 hereof) shall
not be increased or decreased by more than $1 billion during
any period between meetings of the Committee.
Chairman Martin suggested that the item on the agenda pertaining
to the question of making available minutes
Committee
of the Federal Open Market
for some past period for use of scholars and others once
again be held over until the next meeting, and there was no objection.
Chairman Martin then referred to the tentative schedule of
meetings of the Federal Open Market Committee for the remainder of 1963
and for 1964 that had been distributed at the previous meeting, and
asked for comments.
Mr. Hayes observed that from time to time he had
expressed doubts about the need for the Committee to meet as often as
every three weeks on a regular basis.
The Chairman replied that the
question of the frequency of meetings could, of course, be raised at
any time, but he thought it useful for the members to have some idea
of the schedule of meetings to expect during the coming year.
No
objections were raised to the schedule that had been distributed.
A
copy of this schedule has been placed in the files of the Committee.
11/12/63
-64It was agreed that the next meeting of the Federal Open Market
Committee would be held on December 3, 1963.
Mr. Hayes then summarized for the Committee the status of a
Treasury Department program intended to revise and improve statistical
reporting on foreign loans by major U. S. tanks.
Thereupon the meeting adjourned.
Secretary
Cite this document
Federal Reserve (1963, November 11). FOMC Minutes. Fomc Minutes, Federal Reserve. https://whenthefedspeaks.com/doc/fomc_minutes_19631112
@misc{wtfs_fomc_minutes_19631112,
author = {Federal Reserve},
title = {FOMC Minutes},
year = {1963},
month = {Nov},
howpublished = {Fomc Minutes, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/fomc_minutes_19631112},
note = {Retrieved via When the Fed Speaks corpus}
}