FOMC Minutes

A meeting of the Federal Open Market: Conmmittee was held in

the offices of the Board of Governors of the Federal Reserve System

in Washington on Tuesday,

PRESENT:

January 7, i964,. at 9:30 a.m.

Mr. Martin, Chairman

Mr. Hayes,

Vice Chairman

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Balderston

Bopp

Clay

Daane

Mills

Mitchell

Mr.

Robertson

Mr. Scanlon

Mr. Shepardson

Mr. Shuford, Alternate for Mr. Irons

Messrs. Hickman, Wayne, and Swan, Alternate

Members of the Federal Open Market Committee

Messrs. Ellis, Bryan, and Deming, Presidents of

the Federal Reserve Banks of Boston, Atlanta,

and Minneapolis, respectively

Mr. Young, Secretary

Mr. Sherman, Assistant Secretary

Mr. Hackley, General Counsel

Fr. Noyes, Economist

Messrs. Baughmar., Brill, Eastburn, Furth,

Garvy, Green, Holland, Koch, and Tow,

Associate Economih.ts

Mr. Stone, Manager, System Open Market Account

Mr. Coombs, Special Manager, System Open Market

Account

Mr. Molony, Assistant to the Board of Governors

Mr.

Broida, Assistant Secretary, Board of

Governors

Mr. 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

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Measrs. Mann, Ratchford, Rawlings, Jones, Parsons,

and Grove, Vice Presidents of the Federa:

Reserve Banks of Cleveland, Richmond, Atlanta,

St. Louis, MinneEpolis, and San Francisco,

respectively

Mr. Willis, Economic Adviser, Federal Reserve

Bank of Boston

fir. 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 Opei Market Com

mittee held on December 3, 1963, were

approved.

Before this meeting there had been distributed to the members

of the Committee a report from the Special Manager of the System OFen

Market Account on foreign exchange market conditions and on Open Market

Account and Treasury operations in foreign currencies for the period

December 17,

L963 through January L,

L964, together with a supplemental

report covering the period January 2 through January 6, 1964.

Copies

of these reports have been placed in the files of the Committee.

Supplementing the written reports, Mr. Coombs stated that the

Treasury gold stock would remain unchanged this week.

The Stabilization

Fund had roughly $82 million on hand with prospective sales of at least

$45 million in January.

The Russians had been pretty much out of the

market throughout December but might be back in sizable volume during

January and subsequent months.

Mr.

Coombs reported that since the Last meeting of the Committee

the Account had paid off $12Z2 million of the swap drawing of $136 million

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on the Bundesbank, Leaving a balance of onL) $14 million.

It also

had paid off $10 million of the swap drawing on the Netherlands Bank,

leaving a balance of $70 million.

On the other hand, the swap draw

ings of Swiss francs on the Swiss National IBank and the Bank for

International Settlements rose from $150 million to $220 million in

order to mop up heavy repatriations of dollars

banks at the end of the year.

In the Light ol

Coombs said, the increase of the Swiss franc s

million to $300 million on November 22 seemed

the right order of magnitude.

In recent years, Mr. Coombs continued,

tended to bring about some strengthening of the dollar and weakening

of the Continental European currencies during the first half of the

year.

Again this year, the seasonal awing might enable the Account to

make good progress

in paying off both the Swiss franc and guilder debts,

which now amounted to a combined total of $290 million.

hand, th4 normal seasonal outflows fror

On the other

the Netherlands and Switzerland

might be frustrated to some extent by a further tightening of credit

in both countries.

The increase in the Dutch discount rate last week

from 3-1/2 to 4 per cent had been immediately reflected in a strengthen

ing of the guilder rate.

Nevertheless, the basic strength of the guilder

had been undermined by the LO per cent wage increase recently granted

and Dutch officials continued to express fears of a sizable deterioration

in the Dutch balance of payments.

Mr. Coombs was not sure how those

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two opposing tendencies would net out.

But if credit conditions in

Amsterdam tighitened so severely as to prevent the Account from paying

off the swap debt, he thought that urging the Netherlands Bank to

accept a guilder bond issued by the U. S. Treasury would be fully

justified.

He had, in fact, already discufsed this possibility with

President Holtrop and was hopeful that the latter would agree.

This

would gave the Account the "take-out" it might need.

Similarly, Mr. Coomba said, an anti-inflationary program now

being put together by the Swiss Government might also make it more

difficu t for the Account to buy the Swiss francs it needed to clear

up the Swiss franc debt.

Here again, however, there were possibilities

of further issue of Swiss franc bonds by the U. S. Treasury which

could provide a take-out, if necessary.

At the next Basle meeting

on Friday of this week, Mr. Coombs said, he would discuss with the

Bank for Intenational Settlements and the Swiss National Bank such a

Treasury issue in the amount of rotgh.y $75 million.

the normal seasonal weakening of Continental European currencies

during the first half of the year had often been accompanied by a seasonal

strengthening of sterling, Mr. Coombs observed.

It was conceivable that

the Bank of England might take in a very sizable amount of dollars during

the first quarter of 1964.

The Account might, therefore, find it use

ful to draw upon its sterling swap Line during this period with the

anticipation that speculative pressures arising out of the British

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election later in the year probably would enable such a swap drawing

to be paid off without undue delay.

In response to a question by Mr. Mitchell, Mr. Coombs said

he was hopeful that the recent tightening of money in Switzerland

would not produce an actual inflow of fund,;; the more immediate risk

was that such tightening would impede the normal seasonal outflow.

It was his judgment that the authorities would use various direct

controls to immobilize funds, and that they would try to avoid interest

rate actions.

The Long-term rate was a politically sensitive matter

in Switzerland because an increase would be reflected within six

months or so in rates paid on outstanding mortgages in the country.

Mr. Mills referred to Mr. Coombs' statement that the System's

guilder and Swiss franc drawings could be funded by issuance of Treasury

bonds denomirated in those currencies if the System had difficulty in

repaying the drawings.

He asked whether this would not amount to

sweeping the matter under the rug temporarily, and whether the System

would nt

be better off if

it

had some incettive to live more closely

with the problem rather than postponing the day of reckoning.

In

reply, Mr. Coombs said that his understanding of the rationale of the

swap arrangements was that they were intended to meet short-run

problems.

If a particular drawing took longer to unwind than had been

anticipated because of market events or government policies, he thought

it desirable to substitute a type of credit appropriate to a longer run

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situation.

Under such circumstances the problem was not the System's,

but the Treasury's.

Mr. Laane commented that in his apinion this was the appropriate

relation between the System's responsibilities and those of the Treasury.

Mr. Hayes observed that Mr. Mills

ad put his finger on a funda

mental issue--to what extent should System swaps be used to reduce gold

losses?

In his judgment, security issues by the Treasury were appro

priate to tiis purpose.

Mr. Hickman asked whether the object of the proposed drawing

on swap line with England, and the subsequent sale of pounds, was to

prevent a possible gold outflow rather than to eliminate the seasonal

pattern in exchange rate movements, and Mr. Coombs replied in the

affirmative.

He added that the British authorities might be changing

their thinking about the appropriate size cf their dollar holdings.

In any case, a swap drawing and subsequent repayment seemed to be a

legitimate way of bridging a short-run improvement in the British

interna ional position during the first quarter.

British elections

in May or June probably would result in an outflow from that country,

which would permit repayment of the drawing.

In response to a question by Mr. Deming regarding the outlook

for further Russian gold sales, Mr. Coombs reported that the Russians

had sold slightly over $500 million of gold in 1963, which was about

$300 greater than their normal annual sale.

It was his understanding

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that their gold sales in coimection with extraordinary wheat purchases

might run to at least $700-$800 million.

In

1964 their sales might be

$300 million greater than normal, or Ferhapa as much as $400 million

greater.

He noted, incidentally,

that the growth of offical gold

reserves in 1963 had been fairly sizable.

The Gold Pool had acquired

and distributed to members $640 million of gold, while South Africa

had also increased its gold reserves.

In 1963, the total monetary

gold stock h ad probably risen by at least $750 million,

or nearly

2 per cent.

In re.ponse to other questions, Mr. Coombs said he had no

firm basis for evaluating the accuracy of recent conflicting reports

of the volume of Russian gold holdings.

exchange

hold:.ngs could be ascertained,

He thought their foreign

however.

Thereupon, upon notion duly made and

seconded, and by unanimous viote, the System

Open Market Account transactions in foreign

currencies during the period December 17,

1963 through January 6, 196k, were approved,

ratified, and confirmed.

Mr. Coombs

recommended renewal, on a three-month basis, of

seven reciprocal currency arrangements maturing on or before February

6, 1964.

The arrangements, with their amounts and dates of most

recent renewals, were as follows:

Bank of Sweden, $50 million,

October 17, 1963; Swiss National Bank, $150 million, October 18, 1963;

Bank for International Settlements, $150 million, October 18, 1963;

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Austrian National Bank, $50 million, October 24, 1963; Bank of

Japan, $150 million, October 29, 1963 (date of original agreement);

Bank of France, $100 million, November 6, 1963; and German Federal

Bank, $250 million, November 6, 1963.

Benewal of the seven swap arrangements

for a further three-month period each was

approved unanimously.

Mr. Coombs noted that the System had drawings of $20 million

on the Bank for International Settlements and $55 million on the

Swiss National Bank, and the Bank of Italy had a drawing on the

System of $50 million, all three of which were reaching their first

three-month maturity.

He recommended renewal in each case for

another three months, if that should prove desirable.

Mr. Ellis inquired whether the System's desire not to continue

renewing the drawings indefinitely was understood by the Italian

authorities, and Mr. Coombs said that it was.

However, he noted,

there was a problem of choosing among several alternative means of

repaymet =.

l3 his opinion, the most effective and appropriate method

might be for the U. S. Treasury to redeem its outstanding lira

denominated bands.

The proposed renewal of the three

drawings for a further three-month period

each, if such appeared desirable, was

noted without objection.

Before this meeting there had been distributed to the members

of the Committee a report from the Manager of the System Open Market

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Account covering open market operation\s in U. S. Government securities

and bankers'

January 1,

acceptances

1964,

for the period December 17,

1963 through

together with a supplemental report covering the

period January 2 through January 6,

have been placed in

L964.

Copies of these reports

the files of the Committee.

In supplementation of the written reports,

Mr.

Stone commented

as follows:

As we approached operations during the past few weeks we

were prepared to encounter the problems that so frequently

beret the money and securities markets at this time of year.

As matters turned out, however, the recent period was more

like sleepy August than turbulent Decetiber, for the market

mechanism handled smoothly and with grceat efficiency the

seasonal strains and stresses that correrged upon it. This

result apparently reflects a considerable degree of advance

preparation made by banks and other market participants in

an effort to minimize the adverse impact on them of the wide

and erratic swings in market condition, that have sometimes

occurred in mid- and late December. Furthermore, corpora

ticns appear to have been unusually liquid for this time of

the year, for they were sizable buyers of bills and suppliers

of funds to the market during much of the period. For our

part, we stood at the edge of the market, so to speak,

injecting reserves at times, and absorting them at other

times, while aiming at keeping the machinery working smoothly

aga.nst the background of a steadily f-.rm tone and feel in

the market.

Operating in this way, we were content to let

free reserves come out where they might--an approach that was

necessary in any case since the reserve figures at times

bounced around pretty capriciously.

As the written reports have indicated, Federal funds were

at 3-1/2 per cent throughout virtually the entire period,

while dealer lending rates generally remained in a 3-3/4 - 4

per cent range. Member bank borrowing was generally in the

range of recent months except for a rise last week as banks

prepared for the year-end statement date.

The securities market have generally been steady over

the year-end period. In the case of Treasury bills, rates

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on three-month maturities have hugged a 3.51-3.54 per

cent range while the six-month bills ranged about 12

to 15 basis points higher. Toward the year-end, there

was a better-than-seasonal demand for Treasury bills,

which produced some rather aggressive dealer bidding in

the regular auctions that preceded Christmas and New Year's.

So far in the new year, however, there has been little

evidence of the net demand that often tends to pull rates

lower at this season. In yesterday's auction, the average

rates were about 3.53 and 3.67 per cent, or very nearly

the same as on December 16.

In the Treasury note and bond markets, the downward

price trend that persisted through most of December leveled

off just around Christmas and there wes some price recovery

in the final days of the year.

hile most market observers

still feel that the major anticipated influences on the

market this year--notably a prospective tax cut, good busi

ness, and a continuing external payments problem--will tend

to produce higher rather than lower rates, there was also a

feeling that the market had discounted these prospects to

some appreciable extent. Still, the Lnderlying market

atmosphere remains a bit cautious as dealers and investors

wait to see what balance may emerge bftween private forces

of credit demand and supply, and what the Treasury may be

offering in the period ahead.

The corporate and municipal bone' markets have enjoyed

a respite from major new issues during the past few weeks,

with prices holding about steady.

Starting today, however,

somle larger new issues will reach those markets and give a

Particular attention

more realistic test to current rates.

will focus on the $130 million New Yorc Telephone issue,

scheduled for competitive biddin,~ today. This is a Triple-A

rated issue and yesterday's market talk suggested a reoffer

ing rate around 4.50-4.55 per cent.

A suecial comment is in order regarding the bankers'

acceptance market, which has experienced a larger-than-usual

increase in supplies this year-end season. Moreover, since

the period of seasonal rise in supplies started with in

ventories already at a relatively high level, total dealer

holdings of acceptances have risen to new records in recent

days. Nevertheless, there has been no apparent concern on

the part of most of the acceptance dealers. One dealer

limited his participation in the inventory rise by increasing

his rates just prior to the last meeting of the Committee,

but the others did not follow and by January 2 this dealer

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returned to the rate level ciuoted by the other dealers

in order to continue effective participation in the

mar ke t.

To assist the acceptance market through this period

of seasonal pressure the System gradually increased its

outright holdings of acceptances to a peak of $71 million.

System holdings of acceptances under repurchase agreements

briefly reached a peak of about $95 million but had re

ceded to $79 million by the end of the period.

Treasury financing plans recently have been in a

state of flux. Unitl a few days ago it was anticipated

that the Treasury would follow up this week's auction of

$2-1/2 billion June tax bills with a ca.sh offering of

$3/4 to $1 billion in a note or short 3ond. Now it appears

that the Treasury's cash position may e strong enough

without this additional borrowing, but the Treasury is

instead giving serious consideration to making an advance

refunding offering, possibly with an announcement tomorrow

and the books open next week. WE understand that no final

decision has yet been made on this financing. The market,

incidentally, has no hint of this possibility. The Treasury

will meet with its advisory commjttees near the end of this

month and will announce on January 30 the terms for refund

ing the certificate and bond thar matu-e on February 15, of

which a little over $4 billion aie held by the public.

The staff projections indicate a very substantial bulge

in

reserves from market factors in the next few weeks and

accordingly I would recommend an increase in leeway for

change in System Account holdings between Committee meetings

to $1.5 billion.

After eliciting information onL currant competitive rate relations

in investment markets between bankers' acceptances and negotiable time

certificates of deposit, Mr. Mills asked why the acceptance dealers

allowed themselves to be saddled with large inventories, rather than

reducing them by adjusting their rates to meet competition.

Mr. Stone

replied that most acceptances were bought by banks as investments.

There had continued to be some small buying recently, and the dealers

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seemed confident that they would work their inventories down unless

some sharp upvard movement occurred in other market interest rates.

He agreed witf, Mr. Mills' suggestion that the dealers might be worrLed

about retaliation by their banker clientele to rate increases, but

added that such increases probably would be made anyway if inventories

were not reduced in the next week or two.

Mr.

bill

Mitchell asked whether in Mr.

Stone's judgment Treasury

rates would have been as stable as they had been recently if the

Desk had formulated its objectives in terms of reserves rather than

interest rates.

It seemed to him that the advance preparation for

seasonal needs by banks and corporaticns, to which Mr. Stone had

attributed the recent smooth performance of the market, had been

possible becatse market participants believed short-term rates were

pegged, and it. might not have occurred if tie Desk had been following

a reserve objective not known to the

Mr.

Stone said that

narket,

the New York morey market banks had worked

their he vy basic reserve deficiencies down close to zero as the mid

December tax and dividend date approached in order to have room to

take on additional loans.

In his judgment, such actions by banks would

have made the market machinery work smoothly whether or not the Desk

had operated with a reserve objective.

In reply to Mr.. Mitchell's question of whether banks had not

reduced their reserve deficiencies in December at the cost of further

monetary expansion, Mr. Stone said he doubted that there was any

1/7/64

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evidence

to the effect that creditworthy borrowers who wanted loans

in December could not get them.

Lf the DIerk had attempted to use a

free reserve target, Mr. Stone continued, there would have been wide

swings in market conditions because of shifts in the distribution of

the given volume of reserves and changes ii

utilization.

the intensity of reserve

On balance, market conditions would have been firmer

if the level of free reserves had been hel'. stable.

Mr. Mitchell commented that stabil:.ty in market conditions of

the recent sort might deprive the Desk of useful signals.

Mr. Stone

replied that enough changes occurred to peimit judging the market

pretty well.

For example, he said, figure:, on bank borrowings had

fluctuated considerably in Decenber, indicating changes in the degree

to which reserve needs were not being met by the existing supply of

reserves.

In

reply to a question by Mr. Hickman, Mr. Stone said that if

the Account bad held free reserves at about $100 million recently the

90-day rill rate probably would have been several basis points higher

than it was--perhaps around 3.60 per cent.

In response to questions about prospective Treasury financing

operations, Mr. Stone observed that Federal tax receipts currently

were considerably above the estimates of only a few weeks ago.

While

the Treasury's cash position might run rather low in April, it was

possible that additional cash borrowings would not be necessary during

the first half of the year except for $1 billion to be raised each

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month in the one-year bill cycle.

If the Txeasury decided to carry

out the January advance refunding, settlement would come shortly

before announcement of the refunding of February 15 maturities.

After the February refunding the way probably would be clear for

monetary policy action until the announcement of the May refunding

around the end of April.

Whether a shift in policy about mid-February

would be consistent with the tradition of even keel during periods of

Tieasury financings would depend partly on the condition of the market

then.

If the February refunding involved short-term issues only, as

seemed probable, there was a reasonable prospect that the new issues

would be rapidly distributed and that there would be no serious

constraints on policy actions after about mid-February.

Thereupon, upon notion duly made

and seconded, and by unanimous vote,

the open market transactionE in

Government securities and bankers'

acceptances during the period

December 17, 1963 thrcugh January 6,

1964 were approved, ratified, and

confirmed.

Chairman Martin then called for the staff economic and financial

reports, supplementing the written reports

that had been distributed

prior to the meeting, copies of which have been placed in the files of

the Committee.

Mr. Brill commented on economic conditions as follows:

I assume you are all as surfeited as I am with reviewis

of 1963 and prcgnostications for 1964. I had hoped to eschew

this seasonaJ occupational hazard and focus instead on the

very current economic situation.

Unfortunately, at this time

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of month current data are sparse. We have, as yet, only

fragmentary indications as to the course of industrial

production in December. These bits ane pieces suggest

that the pace of industrial activity held at about the

November level or perhaps edged a bit higher; there is

no eviderce of a renewed upsurge in activity.

Some

industrial commodity prices crept up further last month,

particularly metals, but the over-all wholesale price

average remaired unchanged at about the levels that have

been prevailing over the past six years.

More bullish information comes frcm the consumer

sector. The resurgence in retail sales after the slight

November dip indicates that the December total set a new

high, and by a substantial margin.

Sales gains were

recorded in all categories of durable goods and in most

categories of nondurables. Sales of new autos were in

record volume for the month, estimated at a rate of over

8 million domestically produced cars.

Evioence that consumers are willirg to spend

vigorously is most encouraging, indeed vital to the

maintenance of optimism, for we are not

now getting much

thrust f-om most other sectors of the economy.

Business

men, by and large, are continuing to behave cautiously.

There was some perking up in inventory accumulation at

the manufacturing level in both October and November,

concentrated largely in nondurable goocs industries, but

stock/sales ratios at both the durable and nondurable

levels remained low and manufacturers

have reported plans

to reduce the rate of inventory additions in the first

quarter of this year. As has been repcrted earlier,

business plans for fixed capital spending were for a

moderate increase in the fourth quarter of 1963, a leveling

off in the current quarter, and another moderate increase

in the spring quarter. While corporations are girding

themselves with funds--capital market financing in

December was large and the corporate calendar for this

month continues relatively heavy--the business sector's

current contribution to expansion remains modest.

State and local spending has continued to rise at a

rapid rate, with another large increase in their payrolls

and outlays for road construction recorded in the fourth

quarter.

lagging,

Federal Government spending, however, has been

Federal purchases of goods and services in the

fourth quarter are estimated as not much higher than in

the second or third quarters, even though the fourth

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quarter figure includes the $1 billion increase in military

pay. It is worth emphasizing how much the GNP advance in

1963 has depended on the private econo-my. Since early 1963,

Federal spending for goods and services has increased by

more than $1 billion, or about 5 per cent of

only a little

the increase in total GN .

In contrast, over the first two

years of the cyclical expansion--from the first quarter of

quarter of 1963--Federal spending

1961 through the first

rose by $10 billion and accounted for almost 15 per cent of

It is a t.estimonial to the underlying

the increase in GNP.

strength of private demands for goods and services that the

economy could maintain a 4 per cent rate of expansion in

real GNP last year with so little help from Federal spending

and with only a shopworn promise of future tax relief.

This strength in private denands has depended in no

small measure on the availabilit7 of credit.

Consumers, for

example, financed the record volume of auto and other durables

purchases in part through an increase in their instalment

indebted-ess of about $5-1/2 billion last year, equal to

the previous record expansion in 1959. They financed a rising

volume of home purchases--and probably other types of outlays-

through a record increase in home mortgage debt, tentatively

estimated at about $15 billion or 10 per cent more than in

1962.

The other strongly expansive sector last year--State

and loca' governments--also tapped the capital markets in

record anount; issues for new capital floated by these

governments in 1963 totaled $9 billion, 6 per-cent more than

in the previous year.

Of course, we've had to take the bad with the good,

namiely, a record volume of heavily debt-financed apartment

house and office construction, not all of which may ultimately

prove to have been sound business ventures.

This is always

a 1a-zard in a market economy subject in the credit area only

to general controls; one can hope that credit-induced dis

tortions are not widespread and that likely readjustments in

this area will be orderly and noncumulative. For the economy

as a whole, however, until fiscal policy takes over more of

the task of sustaining expansion, it would appear that monetary

policy remains saddled with the burden--and the risks.

Mr. Koch made the following statement with regard to the financial

situation;

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The fairly steady position of the money and capital

markets that came about early in November has continued

in general to date. This development was initiated by

market recognition of the fact that the Treasury felt that

for international reasons, and for the time being at least,

short-term interest rates could be too high as well as too

low.

It has continued because these earlier psychological

and expectational influences have been backed up by some

what less expansionary economic and financial developments.

In December, for example, the economic news becoming

available was not quite up to the bullish business optimism

that continues widespread. Secondly, there was a less

intense demand for financing.

In the capital markets, it

was the municipal calendar that was light and, in the case

of bank credit, loan demand was less strong.

In the money

market, the December 10 dividend date and the December 15

tax date both came and went without the usual signs of

seasonal stress, and at the month end, too, the churning

and pressure that usually characterize the money market was

noticeably absent.

Bank credit in December rose less than in November,

but the rise was about in line with the average increase

earlier in the fall. Excluding the erratic security credit,

total loan growth in December was also in line with that in

earlier months, as was that in business loans.

The December

rise in Business loans included heavy borrowing around the

December 15 tax date,

Larger temporary borrowing by public

utilities

prior

to capital marke: financing, and bank

acquisitions of acceptances.

A :year-end bulge in business

loans reElected a large sale of instalient receivables to

the banks by General Electric as well as temporary borrowing

by oil

and other natural resource industries for tax purposes.

Another important aspect of recent credit developments

has been the fact that banks have again been increasing

their U. S. Government security portfolios and have apparently

again become more interested in acquiring municipal securities.

Banks seam to have been under a little less reserve pressure

recently than they were prior to November. This may have been

due to the fact that reserves were a bit more readily avail

able than earlier, or that loan demands have been more intense,

or possibly banks are becoming a bit more complacent about the

somewhat larger borrowings from the Reserve Banks of recent

months.

We have little additional information available on the

recent course of the money supply and other forms of liquidity.

1/7/64

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All that can he said is that: the estimates given at the

last meeting of the Committee are now firmer. The narrowly

defined roney supply through December has changed little

since early November, following ts rapid rise earlier.

The course of the money supply has been considerably affected

by that of Treasury deposits, which haze increased recently.

Time and savings deposit growth slackened markedly in

December from the sharp November pace, excluding the large

year-end rise in certificates of deposit due General Electric

as payment for their instalment receivables.

An interesting aspect of the recent money supply growth

has been the relatively sharper rise in the currency component

than in the demand deposit component.

Currency outside banks

rose almost 7 per cent last year, as compared with a little

less than 3-1/2 per cent in the case of demand deposits.

This fact, coupled with the sharper growth in the total money

supply, suggests rising transactLons requirements for money.

Demand deposit turnover has also tended to level off,

fluctuating recently around the higher level attained about

mid-year. In other words, the rate of use of existing money

stocks may be reaching upper resistance points in certain

sectors of the economy.

Turning to bank reserves, free reserves averaged about

$175 million last month, as compared with around $75 million

earlier.

This rise in free reserves was due entirely to

higher excess reserves, for member bank borrowings continued

to average a little over $300 million. Nevertheless, money

market conditions remained about the same, that is, slightly

less taut than prior to November.

As to the future, we are now entering the period when

we should be able to separate out more satisfactorily the

effects of seasonal as contrasted with cyclical influences

I feel

on xpan:;ion of bank credit, money, and reserves.

that the cyclical forces will continue strong and that they,

coupled with the expected busy January Treasury financing

schedule, will offset, in part at least, the usual seasonal

forces that tend toward credit and deposit contraction and

In the first place, most money and

lower interest rates.

capital market participants expect higher interest rates

sometime soon and therefore any tendency toward lower rates

is resisted. Also, bank lending officers now look for less

seasonal loan liquidation than usual. Moreover, both the

corporate and new municipal financing calendars for January

Finally, even mortgage rates are showing a

look large.

little more firmness.

1/7/64

-L9-

Developments in the first few days of seasonal

eas-ing thkit have already occurred are consistent with

thia interpretation. Bill rates nave declined little

despite substantial corporate demand. The Treasury has

announced that it might accomplish its mid-month cash

financing through a note or bond issue rather than a bill

strip, or that its better than expected current cash

position might enable it to skip this financing entirely.

In the latter case, however, the financing calendar could

still not be clear, for the Treasury might decide to move

up its expected advance refunding from March to January.

Since the Treasury is anxious to achieve some debt

lengthening, January is probably a more appropriate time

to accomplish it than later, when the Treasury might have

to compete with larger credit demands Irom a more sharply

expanding economy. It should be possible for the Treasury

to take such action now without putting undue downward

pressure on short-term interest rates. However, given the

preaailirg interest rate outlook, it might result in some

upward pressure on longer term yields. In event of an early

advance refunding, an "even keel" monetary policy obviously

would be called for, but the question that might be raised

for the Committee would be whether it should try to cushion

any upward pressure on longer term rates that might thereby

result.

Mr. Furth gave the following report on the balance of payments:

The tentative weekly figures for December indicate a

surplus for the month in the neighborhood of $450 million.

If these figures could be taken at face value, the payments

deficit for the fourth quarter wculd be at a seasonally

adj sted annual rate of about $1 billion, little more than

half of the third-quarter rate ard less than one-fourth of

the rate of the first two quarters. Arid the deficit for the

entire ycar 1963 would be less than $3 billion, the lowest

deficit in six years.

A large part of the December surplus may reflect with

drawals by U. S. corporations of funds deposited abroad,

either for year-end window-dressing, or for good owing to

the recent troubles in the Euro-dollar market. If the former

interpretation were to prove correct, the economically

meaningful surplus for December might have been as much as

$300 million smaller. In that case, the deficit for the

fourth quarter would have been somewhat larger than that for

1/7/64

-20

the third quarter, and the deficit for the year 1963 in

the neighborhood of $3-1/4 billion, only 10 per cent

smaller than the deficit for 1962.

Bu in any case, the second half of the year seems

to have shown such a decisive improvement over the first

half that the deficit for the year as a whole, which until

recently had looked much larger than for 1962, actually

turned out to have been considerably smaller. Unfortunately,

the public-relations impact of that development has been

impaired by the statistical adjustments in the official

presentation for 1962, which--despite the warnings of the

Board's staff--made it appear that the deficit in that year

had been only $2.2 billion instead of the economically

meaning.=ul figure of $3.6 billion. Consequently, some

commentators have already made the mistake of stating that

the 1963 results would show a deterioration rather than an

improvement over 1962.

Trede figures through November suggest that a good

part of the recent improvement was due to an encouraging

export performance. This year, the wheat exports to the

Soviets appear to be materializing, and economic conditions

in most foreign countries are expected to remain propitious.

Hence, we may expect a continuation and perhaps a further

improvenent of that trend during the current quarter.

In contrast to the trade accounts, the capital account

proved disappointing in the fourth quarter, apart from the

puzzling events of the last week of December. In the two

months Cctober and November, short-term bank claims on

foreigners rose by $315 million, a rate close to the second

quarter record.

Increased short--term bank lending to

comnercial banks in the United Kingdon, Germany, and Japan

suggest: that at least part of the loan demand that used to

be satisfied in the Euro-dollar market has now, after the

apparent shrinkage of that market, been redirected toward

U. S. sources of supply.

This cevelopment seems to confirm

the view that a decline in the Euro-dollar market, while

obviously welcome to the large New Yo-k banks, does not

necessarily help to improve the U. S. payments balance.

Whetever the final figure for the U. S. payments deficit

for 1963 may turn out to be, its financing was less painful

than had been anticipated. In 1963, U. S. gold reserves

declined $460 million, about one-half as much as in 1962.

Other nondollar financing (including prepayments of foreign

government debts; the issue of bonds denominated in foreign

currency; the net increase in U. S. official short positions

-21-

1/7/64

in foreign exchange; and the decline in the U. S. position

in the IMF) accounted for only $750 million, less than one

third of the 1962 figure. And at least $1.7 billion, or

about three-fifths of the entire deficit, was financed by

an increase in foreign holdings of uncovered dollars--as

compared to a trifling $400 million, or one-ninth of the

deficit, in the previous year.

This welcome development may be attributed to three

main reasons.

First, the payments position of some

traditional dollar holders--especially in Latin Americagreatly improved.

Second, the Euro-dollar market absorbed

on balance dollar funds that otherwise might have been

And third, there seemed to have

converted into gold.

a lessening of market uncertainty about the dollar in

European private financial community.

The new market attitude toward the dollar so far

had little effect on the monetary authorities of some

been

the

has

of

our European allies, whose policies still show little

understanding of their share in the responsibility for

maintaining a working international payments system. The

latest incident is the increase in the discount rate of

Its distinguished President has

the Netherlands Bank.

assured us by cable that the action will not lead to a

flow of funds from the United States to the Netherlands.

But he would have been more

He may well be right.

cooperative if, instead of raising the Netherlands

interest-rate level, he had abolished the severe limitations

on foreign access to the Netherlands money and capital market.

Such an action would also have restricted domestic availability

of liquid funds, and would have helped rather than hampered

the reduction in the country's payments surplus--twin sources

But international

of inflationary pressures in the Netherlands.

cooperation is apparently easier to preach than to practice,

and good advice easier to give than to take.

Chairman Martin then called for the usual go-around of comments

and views on economic conditions and monetary policy beginning with

Mr. Hayes, who commented as follows:

The business situation contines to be good, with

incomplete data for December suggesting further advances in

steel, a continued high level of auto production, and a

sizable gain in retail sales.

On the other hand, additional

1/7/64

-22

statistics now available for November are somewhat disappointing;

and a relatively sober appraisal of first-quarter figures for

1964 may be warranted by such factors as the leveling tendency

of Federil expenditures and housing outlays, and the indications

that business fixed investment and auto sales may be no higher

in the first quarter than in the quarter just ended. To my

mind, hovever, these are merely qualifications in a generally

favorable outlook. The expectation is still that economic

activity will advance further in 1964, particularly in view

of the ircreased likelihood of early action on tax legislation

and the rather buoyant state of business sentiment. And we

should not lose sight of the fact that in 1963 we have achieved

all-time peaks in most over-all measures of the economy.

As :or the balance of payments, eery preliminary figures

indicate that a very sizable surplus in December may result

in a somewhat less adverse fourth-quarter balance of payments

figure than seemed likely a month or two ago. Part of the

December surplus is attributable to regular year-end

amortization and interest payments on outstanding postwar

loans and very substantial payments by Germany for military

supplies.

But it also appears that our request to the

New York banks to refrain from foreign window-dressing

operatiols met with a favorable response, and, in addition,

there may have been a sizable repatriation of United States

funds from abroad, particularly from Canada. We shall have

to wait and see how much of the appareitly good December

figure represents a shift in seasonal "jatterns of money

floas rather than a more fundamental inprovement.

In any event, we should not allow ourselves to be

lulled into a sense of false security )y the results of a

single month. Sustained improverient i our balance of

paynents remains imperative. Meantime bank loans to

foreigners are rising as the large U. S. banks are still

aggressively seeking loan outlets abroad.

It is well to bear in mind also the growing signs of

impatience on the part of foreigr cent-al banks with our

failure so far to make more significani progress towards

solving our payments problem. They have become increasingly

reluctant to take in additional dollars; the French in

particular have been expressing their feelings in no un

certain terms at the Group of Ten meetings. Also, the

Federal Reserve has outstanding gross swap drawings of some

$328 million and the Treasury has $120 million in forward

1/7/64

-23-

conmitmer.ts--which obligations should be liquidated soon.

Tighter rmonetary policy in several European countries,

including central bank discount rate increases, must be

expected--the latest Dutch discount rate action. being a

case in

point.

The growth of bank credit slowed down in the first

four weeks of December, mainly because of weakness in

security loans attributable to low levels of dealer

inventories and generally cautious feelings about future

rate movements. Most other loan compcnents behaved about

as they have over comparable periods in the preceding two years.

By mid-December money supply proper stowed a twelve-months gain

of 3.7 psr cent, and, together with time deposits, of 8.2 per

cent, as compared with 7.5 per cent a year earlier. As

several members of the Committee suggested at the last

meeting, the question may well be railed whether continued

expansion of credit and liquidity at recent rates can be

consider'ed sustainable or desirable, from a purely domestic

standpoint. As George Ellis put it three weeks ago, the

burden of proof must shift at some point to those who want to

continue inflating the money supply at recent rates--and I

would as3ume that George had in mind cver-all liquidity as

well as the money supply proper. Certainly there is no

jus;tification for keeping it up in orcer to cope with an

unemployment problem which is in large part structural and

su sceptible to cure only by a concerted attack on a variety

of front:,, mostly nonmonetary.

Although both international and comestic considerations

point to the desirability of a more "neutral" monetary policy

than the one currently in force, we aie unfortunately faced

with the prospect of a series of Treasury financing operation:s

wh:.ch would seem to preclude any appreciable policy change at

this time.

I should think we might well pursue the same

general

policy as in the past three weeks, and under the

sane directive. This would mean aimiig at a firm money

market with the Federal funds rate at the 3-1/2 per cent

ceiling and the Treasury bill rate fltctuating around that

level and more often above it than below. It would also seem

appropriate to counteract any significant tendency toward the

development of an easier tone due to seasonal factors.

Mr. Ellis said that throughout the year 1963 he seemed to have

been reporting substantially the same description of the New England

1/7/64

economy:

-24

rising levels of income and spending, and stable or falling

manufacturing output.

This description was still apt.

District

manufacturing output lost more ground in November than it had gained

in October, and manufacturing employment de-lined more than seasonally

in November.

In contrast, consumer spending continued strong.

In

downtown Boston, Christmas sales at department stores showed a gain

of 8-1/2 to 11 per cent relative to last year.

The principal December financial development in the District

was a contra-seasonal rise in commercial ani industrial loans of about

2 per cent.

Most loan categories other than soft goods showed gains.

A stronger thzn seasonal rise apparently occurred in the nation as a

whole.

Turning to monetary policy, Mr. Ellis said that the French

discount rate increase of 6 weeks ago and yesterday's increase by the

Dutch seemed to destroy whatever validity the proposition ever had

that interest rate increases should be avoided in meeting domestic

economic objectives.

His appraisal of the national economy indicat:d

considerably more strength than did the staff reports this morning.

He felt that there had been no knots in the money market in December

because of the volume of reserves supplied by the System.

An alternative

description of developments, he said, was that the System had supplied

sufficient reserves to enable banks to increase their lending abroad.

1/7/64

-25

The paramount question in his mind, Mr. Ellis continued,

was

whether the Committee should strive to facilitate the Treasury's

advance refuncing at present rate Levels when there existed substantial

evidence that the System might have to take actions that would influence

rates upward about as soon as possible after the February refunding.

Quite possibly, in view of the rate changes abroad and the strength

of the domestic economy, there might be some willingness on the part

of the Treasury to see the air cleared as to impending rate movements

in advance of their refunding.

This course might also be considered

more equitable by dealers and investors.

If the Treasury should agree, Mr. Ellis said, he would urge

prompt action to raise the dLscount rate.

If the Treasury decided

not to make an advance refunding in Ja.nuary, it was likely that there

would be an advance refunding in March.

The choice might then be

between acting now or waiting until April.

If the Treasury was unwilling to adopt the course he had

mentioned, Mr. Ellis said, the Committee presumably should continue

to operate within the framework of present policy; but there was room

for improvement even within this framework.

allowed to fluctuate nearer zero.

Free reserves should be

The Desk management should move

rapidly to absorb the return flow of currency.

Also, the Desk could

resolve uncertainties on the side of less ease since banks would be

experiencing a return flow of currency.

He would take 3-1/2 per cent

117/64

-26

as the 90-day bill rate target, and he would he surprised and delighted

if

the Desk were able to hold the bill rate at this level in

of downward seasonal pressures.

the face

In his judIgment recent rates of

increase in reserves were excessive

in lighi: of the Last line of the

Committee's directive, which called fr

"ac~iommodating moderate

expansion in aggregate bank reserves.."

Mr. Swan reported that the Twelfth District entered 1964

having recorded a faster rate of growth in the past year than the

nation both in employment and in the labor force, and also in unemploy

ment.

While the course of District employment had been quite encouraging,

especially sirnce midyear, the major uncertainty at the moment appeared

to be the potential impact of any leveling off or cut-back in space and

defense-related industries.

In all probability this impact would be

greater than in the country as a whole.

The relatively favorable

employment experience in the District presumnably had been accompanied

by correspondingly favorable behavior of pecsonal income.

Paradoxically,

the gain in retail sales, both recently and throughout the year,

apparently had not equaled that for the nation.

In the financial sector, Mr. Swan said, weekly reporting banks

in the District in December reported increases in credit extensions but

at a lesser rate than nationally.

In the last week of the year District

banks were fairly heavy buyers of Federal funds and probably would be

so again this week.

Borrowings from the Federal Reserve Bank were more

1/7164

-27

than dotble their 1962 Level, in contrast to the decline in member

bank borrowings for the entire nation.

Mr. Swan said that in view of the Treasury financing program

the Committee obviously should not change policy at the present moment.

However,

the treasury financing apart, Mr. Swan saw nothing in the

domestic picture or the international situation that called for

immediate actf'on.

It seemed to him that the Committee still should

see whether the so-called winter slack was going to turn cut to be

greater or lets than usual.

He was sympathetic with Mr. Koch.'s

discussion of the outlook hut did not think that this was a time to

move,

even withinin the area that might he allowed by the present

directive.

He preferred to continue the Committee's present policy.

He thought it

quite reasonable to offset seasonal declines in market

rates, but if downward pressures turned out to be somewhat greater

than seasonal he thought they should be permitted to affect rates.

He would not change the directive or the discount rate at this time.

Mr. Dr:ming said that in December credit at District banks

expanded about as much as in December 1962, and considerably more than

usual for that period.

However, Loan Lncreases were about normal and

significantly smaller than Last year, except for business loans which

showed above normal strength.

Investment gains were appreciably larger

than in December 1962 and in the average December.

Total deposits were

up quite strongly in December with growth welL above normal and quite a

1/7/64

-28-

lot larger than in the same period last yeac.

The gains came, however,

in bank deposits and government deposits; growth in both other demand

and time deposits was weaker than usual.

The deposit gains put

District banks on the selling side of the Federal funds market for

the first time: in some weeks.

As a result of the above-normal deplsit gains and the smaller

than usual loan increases, Loan-deposit ratios for both city and country

banks farm lerding indicated continued strong farm Loan demand, partly

to finance holding operations into the 1964 marketing period.

A nmber

of country bankers reported an increasing proportion of farm borrowers

as carrying maximum debts relative to probable earnings.

Mr. DE.ming said that one new item of interest might be noted

with respect to the nonfinancial side of the District economy.

The

Minneapolis Bank's most recent opinion aurvey, taken at year end,

indicated a sharp decline in

optimism about the near-term outlook.

This might be >artly the reflection of the coldest December since 1927,

but the change in sentiment seemed to be more than seasonal.

Hr. Dening said he would go along with those who felt the

Committee should not change policy during tfe next few weeks.

He

thought there would be enough Treasury financing activity in this

period to warrant mentioning such financing in the directive.

Mr. Scanlon reported that business trends in the Seventh

District continued to be favorable.

Retail trade rebounded sharply

-29

1/7/64

in

December from the depressed level of late November,

while employment

and production remained at high levels.

Christmas sales at District department stares in 1963 were

well ahead of the record 1962 level.

Growth in personal savings at

commercial barks and savings associations lagged the 1962 period in

November, and probably in December as well, reflecting strong retail

trade.

Hr. Scanlon said that employment had been at least stable in

the region in recent months.

Unemployment compensation claims in the

District in Norember and December remained well below the level of

recent years and compared favorably with the national picture.

Classifizatiors were changed in November for two District labor marKet

ar:eas.

Because of increased hiring by farm equipment manufacturers,

the Quad citie:; area was estimated to have "low unemployment" (less than

3 per cent) along with six other District centers.

South Bend,however,

was movec into the "substantial unemployment"

(more than 6 per cent;

group as a result of the Studebaker cutback.

No other District centers

were in this class.

Mr. Scanlon reported a widely held view in the Midwest that a

larger increase in plant and equipment spending was in prospect than the

4 per cent rise indicated by the McGraw-Hill survey in November.

The

motor vehicle and railroad industries in particular had announced in

creased expenditure plans in recent weeks.

-30

1/7/64

Farm income in

the Seventh DLstict

was reduced somewhat in

1963

as larger receipts from crops failed to offset lower income from meat

animals.

However, the smaller number of pigs farrowed since last summer,

foreshadowing higher hog prices, together with lower prices paid for

feeder cattle in recent months indicated that incomes of District live

stock farmers would improve in 1964.

As usual, Mr. Scanlon said, December banking developments were

difficult to :nterpret because of the demand for funds to meet corporate

tax and dividend payments and because of year-end adjustments.

District

banks had continued to report strong business loan expansion, particularly

in the case of loans to metals manufacturing firms.

Loans at smaller

banks tiat did not report industry breakdowns also rose more than usual.

During the second half of 1963 business loans rose 8 per cent, compared

rith 7 per cent during the same period of 1962.

Changes in other types

of loans approximated the usual December pattern.

Basic reserve positons

of the large banks in Chicago and Detroit remained fairly comfortable,

although these banks were unable to cover t'ieir needs in the Federal

funds market.

With business prospects continuing :avorable, Mr. Scanlon

continued, it appeared that the demand for credit would rise further

and possibly at an accelerated pace.

However, the rapid rise of the

money supply (narrowly defined) during the autumn appeared to have halted,

at least temporarily, in December.

In both 1961 and 1962 the rise

1/7/64

-31

continued through December before leveling off.

of interpretir.g

Because of the difficulty

these data and the proposed Treasury financing, Mr. Scanlon

favored continuation of the monetary policy of recent weeks.

not change the discount rate.

He would

He agreed with Mr. Deming that the Committee

might refer to the Treasury financing in the directive.

Mr. Clay said that an examination of the data for the weekly

reporting banks in the Tenth District and in the United States through

December 25 showed a similarity in performance during the past yeav

several respects.

in

Loans and investments conbined advanced less than in

1962, while loans increased more.

Both business loans and consumer

loans showed larger increases than a year earlier.

Total time deposits

increased somewhat less than in 1962, although the second half increase

was larger thr'n the year before.

However, Mr. Clay said, there also were some significant ccntrasts

in the performance patterns.

This was particularly reflected

in a greater

acceleration in the liquidation of U. S. GoJernment securities in the

District than in the United States.

It was reflected further in a

greater moderation in the acquisition of other-securities in the District.

The net effect in the District was a decline in total investments, while

in the nation it was a slowdown in the rate of growth.

was found in real estate loans.

Another contrast

For weekly reporting banks in the country

as a whole, such loans expanded more than a year earlier, whereas in the

Tenth District the increase was distinctly smaller.

1/7/64

-32

The factors that needed to be weighed on the national scene did

not indicate any basic change in

the economy, Mr. Clay said.

The general.

pattern of economic developments, including the variations in pace of

activity and economic sectors, was essentially in line with the shape

of events over past months.

At this juncture, it appeared to Mr. Clay

to be in order to await further developments and to leave monetary

policy unchanged.

Whether seasonal forces would put significant down

ward pressure on short-term interest rates remained to be seen.

Re felt

that sore downward movement in rates should be accepted rather than redlcing

reserve avail

.tent.

So long as it

wa.i possible, monetary policy should

be a positive stimulus and not a deterrent.

Mr. Biyan reported that businc3s conditions in the Sixth District

appeared excellent.

Performance was better than nationally for non.

agricultural employment, factory payrolls, personal income, farm receipts,

and other series.

Insured unemployment claims

in the District had been

at a low rate since April, and in November reached their lowest rate

since the fall of 1953.

1/7/64

-46Nationally, Mr. Bryan said, the economy might have hesitated

in November but on the basis of fragmentary evidence he suspected that

there had been a strong comeback in December.

There was optimism in

December and continued strong demand for business loans.

Vigor in

automobiles, construction, and business investment did not indicate

an imminent reversal

in the uptrend in the economy.

Mr. Bryan saw no clear case for an overt change in policy,

which he thought probably was ruled out in any case by the Treasury

financing.

Therefore, he had no suggestions regarding reserve figures;

the Manager o: the Account would have to be guided largely by the

performance of market rates during the period of Treasury financing.

Mr. Bryan commented that he would like particularly to say,

with Mr. Wayne, that by every reserve and mrney supply test the Comittee

had been injecting reserves into the banking system at a rate that seemed

to him greater than sustainable in the long run without inflation, end

greater than was warranted by either domestic or international con

siderations.

He agreed with the comme tary on the free market given

by

Mr. Mills;.

In a final remark, Mr. Bryan said tiat inflation could occur even

when there was substantial unemployment, given the present structural

situation in the labor market.

He did not believe that monetary policy

could do much about this kind of unemployment.

1/7/64

-47

Mr. Shuford reported that there had been no significant changes

in the economic situation in the Eighth District since the previous

meeting.

The District had continued to operate at a high level and the

growth over the past year had been good--probably a little better than

in the nation as a whole.

Mr. Shuford said that he would favor no change in policy.

As he

had noted at the preceding meeting, Committee policy over the last year

seemed to him to have been quite sound.

The country had had a sustain

able, moderate growth, and at the same time the System had contributed

to meeting the international payments problem, although the problem had

not been solved.

Mr. Shuford observed that he agreed with those who hoped that

at some stage there would be less rigidity ,n short-term rates

the recent past.

than in

But he recognized that during the past year the

Committee had found it necessary to face up to a difficuLt problemwhich it had h-ped was a short-range problem--and had done so.

contributed to the rigidity of market

that the expani:ion

in

ates.

This

Mr. Shuford also agreed

reserves had been large in

recent months and should

be reduced; he did not think it desirable for reserve growth to continue

at its current rate for any extended period of time.

On the other hand,

it seemed to him that by meeting the two-pronged problem and at the same

time providing moderate reserves over most of the year, the Committee

had facilitated moderate, sustainable growth iin the economy.

On the

1/7/64

-48

whole, he thought that policy had been quite satisfactory.

There was

much talk of extreme optimism, Mr. Shaford said, and it was possible that

inflationary pressures were building up, but it seemed to him from the

available statistics that inflation was not a pressing problem now.

Mr. Shuford favored a continued moderate supply of reserves at

a lower rate than over the last few ronths.

change in policy.

Otherwise he would make no

He did not favor a change in the discount rate.

He

hoped that the short-term rate would fluctdate around 3-1/2 per cent,

but he would rtot be disturbed if seasonal forces pushed it lower.

He

had no objection to changing the directive to refer to the Treasury

financing, but in general he preferred not to change the directive except

when a change seemed rather pressing, and he did not think this was such

an occasion.

Mr.

Balderston said he agreed that a change in monetary policy,

except to encourage free reserves to return to their early December level,

was precluded between now and mid-February by Treasury financing activities.

Were it

not for the Treasury financing

which he thought should be mentionled

in the d.rective, he would have favored some

tightening now.

It was not too early for the Committee to ponder the forces that

would be bearing on monetary policy in the months ahead, Mr. Balderston

remarked.

He thought that the struggle of European countries and Japan

to contain inflation would lead toward higher interest rates abroad.

This would argue for higher rates domestically to inhibit outflows of

1/7/64

funds.

-49

It

was his judgment that the discaunt rate change of last July

might have been more helpful in slowing outflows than had been generally

recognized.

If razes moved upward, Mr. Balderston said, the System must

consider the loss of time certificates of deposit--especially those

with six-mont'h maturities--that banks would experience as market rates

approached the Regulation Q ceiling on such certificates.

However, he

was concerned that lifting the ceiling might result in straining the

quality of credit further.

Mr.

Balderston said that he had been impressed by Mr. Wayne's

statement, including his stress on the growing volume of consumer debt.

Certainly the growth of home mortgage debt at the recent rate of $1.3

billion per month was something to be watched.

Also, the Committee woul

be concerned this year with the outcome of wage negotiations, particularly

those that wotld get under way in the auto industry in July.

He had been

gratified that output per manhour had held up as well as it had, a

development w ich was not to have beet expected.

increased

3 per cent last

reflected in prices.

year,

Even though wage cates

wage costs were kept down and this was

The U. S. had benefited so far by not inflating so

fast as had France, Italy, and some other countries.

If the struggle

to keep wage costs down were lost this year because of high profits, he

feared that the U. S. would join in the inflationary race.

1/7/64

-50

His present thinking, Mr. Balderston continued,

was that the

Committee should await the position taken by the Congress and the

Administration with respect to the budget.

curbed, that would be a significant factor.

If

budget spending was

He felt,

therefore, that

even after mid-February the Committee might want to assess the sentiment

of the country, to see whether in fact the Federal Government was curbing

spending, and to determine how many countries were joining the effort to

curb inflation by raising their disceunt rates.

If necessary, however,

the Committee should be prepared by late February to move toward some

further reduction in the reserves it was pouring into the banking system.

It seemed clear to him that the money supply variable to be watched was

not the narrowly defined one, which rose only 3.6 per cent last year.

Liquidity was abundant everywhere and was flowing into the stock market

and abroad.

It was clearly beyond tha control of the Committee to mop

up that liquidity.

might,

If the future turned out as Mr. Balderston feared it

he thought that forceful, vigorous, overt action by the Committee

would be called for sometime after the middle of February.

Chairan Martin expressed the view That the Committee did not

have any real problem with respect to policy at this meeting.

He thought

Mr. Balderston had pointed up effectively the fact that while the Committee

had some indications with respect to fiscal policy it did not yet know

what budgetary policy was going to be.

A change in budgetary policy might

make quite a difference in its approach, and the Committee was

fortunate,

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1/7/64

in a sense, that Treasury activities preclLded it from taking any action

at this moment.

He had pointed out at the last meeting that by deciding

not to change policy then the Committee was deciding against such action

in the immediate future.

At least, this wes the case if the Treasury

decided to go to the market, and he thought there was every indication

that it would.

Parenthetically, Chairman Martin emphasized that the fact that

the Treasury eras considering an advance refunding was confidential, and

should be so considered by all persons in the room.

After noting that the Committee members would not favor discount

rate action aL this time, the Chairman said that the Committee seemed to

be agreed on io change in the directive except for the addition of a

reference to Treasury financing.

It wa. decided after discussion that this reference should be

made by inserting the phrase, "and taking into account prospective

Treasury finarcing" after the phrase, "T

imnplement this policy," ill

the second paragraph of the directive.

Thereupon, upon motion duly made and

seconded, the Federal Reserve Bank of New

York was authorized and directed, until

otherwise directed by the Committee, to

execute transactions in the System Account

in accordance with the following economic

policy directive:

1/7/64

-52It is the Federal Open Market Committee's current policy

to acconrmodate moderate growth in bank credit, while maintain

ing conditions in the money market that would contribute to

centinued 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 despite a tendency

to reduced deficils. It also recognizes the increases in bank

credit, money supply, and the reserve base of recent months.

To implement this policy, and taking into account prospec

tive Treasury financing, System open market operations shall be

conducted with a view to maintaining about the same conditions

in the money market as have prevailed in recent weeks, while

accommcdating moderate expansion in aggregate bank reserves.

Votes for this action:

Messrs.

Martin, Hayes, Balderston, Bopp, Clay,

Daane, Mitchell, Robertson, Scanlon,

Shepardson, and Shuford.

this action:

Vote against

Mr. Mills.

In dissenting, Mr. Mills commented that, in accordance with his

previously stated position against a policy of "no change" and his

concern that damage to the economy was implicit in the continuation of

that policy, he believed that a somewiat more liberal provision of

reserves would yield beneficial economic returns, and without complicating

the Treaury's

financing prograra.

Upon motion duly made and seconded,

and by unanimous vote, section 1(a) of

the continuing authority directive was

amended, in line with the earlier sug

gestion of the Account Manager, to

authorize the Federal Reserve Bank of

New York, to the extent necessary to

carry out the current economic policy

directive:

(a) To hby or sell United States Government securities

in the open market, from or to Government securities dealers

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1/7/64

and foreign and internationaL accounts maintained at the

Federal Reserve Bank of New York, on a cash, regular, or

deferred delivery basis, for the Systemn Open Market Account

at market prices and, for such Account, to exchange maturing

United Scates Government securities wi:h the Treasury or

allow them to mature without replaceme-t; provided that the

aggregate amount of such securities held in such Account

(including forward commitments, but not including such

special short term certificates of indebtedness as may be purchased

from the Treasury under paragraph 2 hereof) shall not be increased

or decreased by more than $1.5 bi.llion during any period between

meetings of the Committee.

It was agreed that the next meeting of the Committee would be

held on January 28, 1964.

Thereupon the meeting adjourned.

Secr$ry

*