FOMC Minutes
A meeting of the Federal Open Market Committee was held in
the
offices of the Board of Governors of the Federal Reserve System in
Washington on Tuesday, January 28, 1964, at 9:30 a.m.
PRESENT:
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Martin, Chairman
Hayes, Vice Chairman
Balderston
Bopp
Clay
Mills
Mitchell
Robertson
Scanlon
Shepardson
Shuford, Alternate fo: Mr. Irons
Messrs. 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. Hexter, Assistant General Counsel
Mr. Noyes, Economist
Messrs. Baughman, Brill, Eastburn, Furth, Garvy,
Green, Holland, Koch, and Tow, Associate
Economists
Mr. Stone, Manager, System Open Market Account.
Mr. Coombs, Special Manager, System Open Market
Account
Mr. Molony, Assistant to the Board of Governors
Mr. Cardon, Legislative Counsel, Board of
Governors
Mr. Broida, Assistant Secretary, Board of
Governors
Mr. Williams, Adviser. Division of Research and
Statistics, Board of Governors
Mr. Axilrod, 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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Messrs. Thompson and Coldwell, First Vice
Presidents of the Federal Reserve Banks
of Cleveland and Dallas, respectively
Messrs. Willis, Mann, Ratchford, Taylor, Jones,
Parsons, and Grove, Vice Presidents of the
Federal Reserve Banks of Boston, Cleveland,
Richmond, Atlanta, St. Louis, Minneapolis,
and San Francisco, respectively
Mr. Meek, Manager, Securities Department, Fed
eral Reserve Bank of New York
Upon motion duly made and seconded, and
by unanimous vote, the minutes of the meetings
of the Federal Open Market Committee held on
December 17, 1963,and January 7, 1964, were
approved.
Before this meeting there had been distributed to the members
of 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
January 7 thrcugh January 22, 1964, together with a supplemental report
covering the period January 23 through January 27, 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 probably would remain unchanged this week for the
fourth week in a row.
The Treasury still
had on hand in
the Stabiliza
tion Fund nearly $30 million, which might be supplemented by another
$20 million or so from a Gold Pool distribution at the end of the month.
On the other hand, there were already in sight orders for $45 million
of gold in February and, unless the Russians became heavy sellers once
1/28/64
more,
-3
the Treasury might be forced to show a reduction in
the gold
stock during the course of the next month.
Mr. Coombs reported that the foreign exchange markets had been
fairly active during the past three weeks, with a potentially trouble
some situation developing in
the German mark.
The German trade surplus
had strengthened considerably during the past six months or so and
consequent buying pressure on the German mark had been reinforced by
sizable flows of long-term money into the German bond market,
rates approaching 6 per cent were still
available.
where
In addition,
there
had been a revival of speculation on a further revaluation of the
German mark and this apparently had contributed to some short-term
inflow in
taken in
recent weeks.
Since January 17,
the German Federal Bank had
$121 million but had felt it appropriate to hold the entire
amount for their own account rather than suggesting that the System
draw upon the swap to mop up part of the dollar inflow.
So far,
about
all the German authorities had done to deal with their balance of
payments surplus was to try to get the lone-term interest rate down
from 6 to 5-1/2 per cent and to take steps to give Germans preference
over foreign investors in the market for new bond issues.
Unless the German Government put together a program designed to
deal effectively wich their surplus, Mr. Coombs thought there might be
a sudden burst of speculation in this market.
He was hopeful that the
Account would be able to conserve its resources under the swap line to
deal with such an eventuality.
1/28/64
The Swiss franc market also had been disturbed by rumors of
revaluation during recent weeks, Mr. Coombs said, and the Account
Management had suggested a resumption of Treasury forward operations to
provide official reassurance.
Buying pressure on the Swiss franc had
eased off after forward sales of no more than $9 million and, yesterday,
the Swiss Government announced a comprehensive program to restrain
domestic inflationary trends while at the same time establishing new
barriers to inflows of speculative funds from abroad.
This program,
which had been submitted to the Swiss Parliament, would require the
commercial banks to maintain reserves with the Swiss National Bank
equal to 100 per cent of all foreign deposits received since the first
of this year, unless the banks invested in foreign markets an amount
equivalent to such new deposits.
The commercial banks, together with
other financial intermediaries, would also be prohibited from employing
foreign funds to purchase Swiss property in any form.
Finally, the
banks would become subject to specific limi:s on their outstanding
loans.
Such restraint upon commercial bank lending would be reinforced
by similar close controls of new issues of stocks and bonds on the Swiss
market.
The management of the Swiss National Bank expected that these
measures would not result, at least for the time being, in a tightening
of the Swiss money and credit markets or an increase in interest rates.
On the other hand, if the action proposed to restrain the influx of
foreign money should prove effective, the consequent emergence of a
1/28/64
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basic deficit in the Swiss balance of payments would,
in due course,
contract liqu:.dity and presumably put some pressure on interest rates.
Mr.
Coombs said he had the impression that the government's
proposals might be strenuously resisted by the commercial banks and
Swiss industry,
and the parliamentary outcome of the program remained
somewhat uncertain.
The initial
reaction in
the exchange markets,
however, had been a strengthening of the dollar.
Mr.
Coombs reported that the Netherlands guilder had weakened
appreciably during the past week, partly reflecting, according to
Dutch financial officials,
German market.
some movement of long-term money into the
The Netherlands Bank had been supplying dollars to
cushion the decline in
the guilder rate and so the Account had beer
able to acquire $22 million of guilders in direct transactions with
the Netherlands Bank, of which $20 million had been used to pay down
the swap drawing from $70 million to $50 million and $2 million had
been used to strengthen the System's cash position in guilders.
The Italian lira remained under heavy pressure, Mr. Coombs
continued,
and the Bank of Italy had been forced to supply roughly
$150 million to the market during the first three weeks of this month.
According to Italian financial officials, the main source of this
pressure seemed to be repayments by Italian commercial banks of earlier
borrowing from abroad.
This would suggest that the remaining elements
in their balance of payments were improving.
In order to avoid showing
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1/28/64
an unduly sharp decline in Italian reserves during January, the Bank of
Italy had requested a second drawing of $50 million on the swap line,
as well as Treasury purchase of an additional $50 million of lire in
anticipation of the maturities of the Treasury's lira bonds outstanding.
The purchase of lire against the Treasury's bond indebtedness was made
by the System with immediate forward sale of the lire to the U. S.
Treasury.
This increased the System's purchases of lire for forward
sale to the Treasury to $100 million, or
.he full amount of the
authorization previously approved by the Committee.
Finally, Mr. Coombs said, the usual seasonal inflow of dollars
to the Bankof England did not seem to be materializing this year.
This
might suggest that speculative pressures on sterling expected in con
nection with the forthcoming election were already beginning to appear.
Mr. Daming inquired whether it was likely that the Italian
authorities would reduce the rate at which they were supporting the
lira, and whether anything would be gained if they brought the support
level down to par.
Mr. Coombs said that he had raised the question of the support
level with the Italian officials.
It was their feeling that a decline
in the rate within the range of established limits would be too small to
have much strengthening effect on exports.
Moreover, they thought a
decline in the exchange rate would be interpreted by the market as a
signal of weakness, and this would add to their difficulties instead of
1/28/64
-7
relieving then.
He had not pressed the point with the Italians, who
were on the spot and knew what they were up against.
Thereupon, upon motion duly made and
seconded, and by unanimous vote, the
System Open Market Account transactions
in foreign currencies during the period
January 7 through January 27, 1964, were
approved, ratified, and corfirmed.
r. Coombs stated that he had no recommendations to place before
the Comittee for consideration at this meeting.
Chairman Martin noted that Messrs. Hayes and Coombs had recently
returned from a meeting of the Bank for International Settlements at
Basle, and he invited Mr. Hayes to comment.
Mr. Hayes said the discussions on Sunday afternoon, January 12,
had been devoted to the Euro-dollar market and to the study being made
by the Group of 10 meeting in Paris.
market was based on the experts'
The discussion of the Euro-dollar
study of a few months ago.
As often
was the case, this discussion was not conclusive; positive conclusions
were hard to come by because of the great many unknown factors.
There
was some disposition to collect more statistics, although there was a
reluctance to bother commercial banks too much by asking for a lot of
detail.
There was a general feeling of unease about the Euro-dollar
market, Mr. Hayes said, but no full consensus on what should be done
about it.
Several of those participating in the meeting cited
1/28/64
-8
objections
to direct borrowing by domestic firms from foreign lenders,
because it
put borrowing out of the control of the central banks.
With respect to the Euro-dollar market in
first
general, although the
use of the funds might be prudent and conservative,
doubt as to the nature of the use at succeeding steps.
there was
The British
authorities did not seem much concerned about this situation; they
evidently felt that the London banks placed their funds with con
servative banks abroad.
Several of the participants agreed that
central banks .hould not be in
the Euro-dollar market,
been some tendency for central banks to pull out.
and there had
There was some
discussion as to whether the Euro-dollar market was the problem or
whether the administration of international credit in
getting too loose.
general was
Some feeling was expressed, notably by the Canadians,
against any sharp dampening down of the market.
The conclusion was
that this subject should be discussed further.
He had been asked for his views on the study being made by
the Group of 10, Mr. Hayes continued, and
he had agreed to give his
personal views,
noting that the System had no direct responsibility
for the study.
He had expressed the hope that the study would not
raise doubts about the soundness of the present system; i
it did so,
the study might end up by impairing international liquidity rather
than by finding ways to increase it.
He had questioned the practi
cability of the plans for multiple reserve currencies, such as the
1/28/64
-9
Bernstein plan, but he had the feeling that this type of scheme had
made some headway among the group.
There was some support for the
view that the real problem now was the United States balance of pay
ments; and some saw a multiple reserve currency scheme as a means for
making the Europeans less dependent on what happened in
States.
This had been discussed one evening,
raised that the U.
S.
itself
and the point had been
had asked for the study,
we must feel that the present system was not adequate.
should not be surprised if
the United
implying that
Thus,
we
some rather rad cal proposals were being
pursued.
Mr. Hayes felt that the participants' concern over their owr.
domestic problems tended to divert their attention from the problem
of the U. S.
payments deficit; some were so concerned about internal
inflation that they were spending Little time on the problems of the
U.
S.
Nevertheless,
ments situation.
there was considerable uneasiness over our pay
They had been pleasantly surprised by the U.
S.
payments figur:s for the fourth quarte , but questions had been raised
as to whether the improvement would continue.
One central banker, from
one of the largest dollar-holding countries, had put great emphasis on
the need for the U. S. to hold the line on wage costs.
Another had
expressed the view that the U. S. was exporting inflation by an
excessively easy credit policy.
He had argued that the American
unemployment problem was structural, and should not be attacked by
1/28/64
10-
monetary policy.
He believed the lack of inflation in
the U. S.
was a consequence of our payments deficit--a proposition which
Mr. Hayes thought highly dubious.
In conclusion, Mr. Hayes noted
that while the participants were still
willing to give the dollar
the benefit of the doubt, there was an underlying uneasiness as to
whether or not the U. S. really had ccme to grips with its problem.
Before this meeting there had been distributed to the mem
bers of the Committee a report from the Manager of the System Open
Market Account covering open market operations in U. S. Government
securities and bankers'
acceptances for the period January 7 through
January 22, 1964, together with a supplemental report covering the
period January 23 through January 27, 1964.
Copies of these reports
have been placed in the files of the Committee.
In supplementation of the written reports, Mr.
Stone commented
as follows:
As customarily happens during January, the System
absorbed a large volume of reserves in the
past three
weeks, offsetting the provision of funds through the
seasonal return flow of currency and the decline in re
quired reserves.
Float came down more slowly than usual,
in good part because of heavy snow storms, and inflated
the reserve figures for a time around the middle of the
period.
Federal funds nevertheless traded mainly at
3-1/2 per cent and on most days traded exclusively at
that rate. On the other hand, and probably reflecting
the relatively high level of float, there was seldom
any large margin of unsatisfied demand for reserves to
be met at the discount window, so that member bank
borrowings were generally somewhat lower than in other
recent periods.
1/28/64
-_1-
In the Treasury bond market attention was focused
on new financing operations during the recent period. The
advance refunding of six short-term maturities into re
opened issues maturing in 1970 and 1975-85, which the
Treasury announced just a day after the last meeting of
the Committee, was initially greeted with some coolness
as well as surprise by the market.
By the time the
subscription books for the exchange had closed on January 17,
however, the market was developing a greater interest in the
Treasury offering--particularly in the 4-1/4 per cent bonds.
One facto- tending to strengthen the market at that time
was the stream of news from Washington pointing to budget
economies and smaller deficits than had been anticipated
earlier. The response to the 4-1/4 per cent issue, including
a subscription from Treasury investment accounts, was such
that the Treasury allotted 83-1/2 per cent on large sub
scription; in order to hold the total down to the $750
million initially offered. The response to the 4's re
mained moderate, however, with to:al subscriptions
reaching ;bout $2-1/4 billion out of the $4 billion
limit specified by the Treasury. This relatively modest
response ,eemed to be not so much a matter of unattractive
pricing but rather a limited appetite for extensionparticularly from commercial banks, which were the principal
holders of rights. We heard time and again during the re
funding tat a great many banks would choose to hold their
short Governments as liquidity reserves against expected
further growth in loan demand over the months ahead.
Some market observers have drawn :he inference from this
that the Treasury might find only limited interest in an
offering beyond the relatively short-term area in the
forthcoming February refunding, the terns of which are
However that may
scheduled to be announced on Thursday.
be, the Treasury did achieve a respectable amount of debt
extension through its advance refunding.
The Treasury bill market has enjoyed a period of
good demand in recent weeks, with buying particularly
brisk during the advance refunding as sellers of rights
reinvested in bills. In yesterday's bill auction the
average issuing rates for the 3- and 6-month bills were
about 3.50 and 3.61 per cent--down about 4 and 6 basis
points, respectively, from the rates three weeks ago.
While this was not a very sharp move it did represent
a little greater degree of fluctuation in rates than had
prevailed for several weeks, and from a technical point
of view was very helpful to the market.
1/28/64
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Other segments of the capital market also enjoyed a
favorable atmosphere in the recent period as January re
investment demand proved strong.
In the corporate market
this demand encountered a limited supply of new offerings.
In the municipal sector there was a sizable volume of
offerings, but these new issues were generally very well
received. The good performance of the corporate and
municipal markets, I should mention, provided a helpful
backdrop to the Treasury's advance refunding operation.
Finally, the bankers' acceptance market also
experiencd good demand after rates were increased by
1/8 per cent on January 14. This rate increase, which
the dealers put into effect after total inventories
reached a record $380 million, elicited sufficient de
mand to reduce dealer holdings to $240 million by last
night.
Following this statement, Mr.
recommend a change at this time in
Stone indicated that he did not
the leeway on change in
holdings between Committee meetings,
which had been increased to $1.5
billion at the preceding meeting of the Committee.
the previous
System Account
In his judgment,
limit of $1 billion might prove too low during the period
until the next meeting.
Thereupon, upon motion July made
and seconded, and by unanimous vote, the
open market transactions in Government
securities and bankers' acceptances during
the period January 7 through January 27,
1964, were approved, ratified, and con
firmed.
The staff economic and financial review at this meeting was
in
the form of a visual-auditory presentation,
Garfield, Hersey,
for which Messrs.
and Partee of the Board's staff joined the meeting.
Copies of the text of the presentation and of the accompanying charts
have been placed in the files of the Committee.
-13-
1/28/64
The introductory portion of the review, presented by Mr.
Brill,
was as follows
Policy decisions have their impact on the future, and
that is where economic analysis must focus.
To the extent
the future can be scheduled, it looks to be an eventful
year ahead.
A surprising January Budget seems likely to
be followed, in the next month or so, by a substantial
tax cut. In March we shall have a key report on business
spending plans for plant and equipment.
In April or May,
the new GATT trade negotiations will formally begin.
In
June, the number graduating from high school will be larger
than ever before by a considerable margin.
Events of the summer will include the nominating con
ventions and wage negotiations in the auto and nonferrous
metals industries.
By late autumn, elections in the United
States and the United Kingdom will be over.
Policy makers will have to face each of these events
in turn, assessing their likely impact in light of then
prevailing economic conditions.
Today, our staff analysis
will focus, on the economic situation on the eve of the
second key event of 1964--a major revision of our tax
What is the economic climate in which we
structure.
await this long-delayed overhaul of our Federal revenue
system? What is the momentum of the economy that the
tax cut is expected to accelerate?
How balanced is the economy's progress, in terms of
avoiding shortfalls in utilization of resources on one
hand and speculative excesses on the other? Are wage and
price pressures dormant, or have they already set in train
the sequence of cost-price push that contributed to cur
tailment of earlier-postwar expansions? Are we out of the
woods in respect to international trade and capital flows?
Are currert monetary and credit conditions conducive to
sustained expansion in economic activity?
Our aim this morning is to assemble what evidence is
We
available to facilitate answering such questions.
start with Mr. Hersey's report on the balance of payments
situation, which in recent years has been of critical
importance in policy formation.
There followed sections dealing with the U.
ments,
domestic business developments,
S.
balance of pay
and domestic financial developments.
1/28/64
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The concluding portion of the review, presented by Mr. Koch, was as
follows:
Our presentation this morning has focused on the key
economic and financial developments at home and abroad
that have to be evaluated before arriving at a judgment
regarding the most appropriate posture of monetary policy.
On the domestic front, over-all economic activity continues
to increase. Industrial production seems to have hung at
about the level reached six months ago, but the trade,
service, construction, and State and local government areas
continue strong. Prices are firming, particularly for some
metals, but not all announced increases hold, and there are
some less-publicized declines which are keeping the over-all
indexes stable. Businessmen's announced spending plans
suggest quiet confidence, rather than exuberance, and sub
stantia: unused resources still characterize the economy.
Bank credit, deposit, and reserve expansion continue
fairly rapid, but the growth in total credit flows can be
characterized as moderate and orderly--in keeping with the
expansion in real output. In the light of the margins of
unutilized resources that remain, the expansion thus far
seems, on the whole, constructive rather than excessive.
All this is not to deny that some aspects of the economy
warrant constant watch, particularly price and wage develop
ments, inventory buying, the stock market, the construction
and financing of income-producing prcperties, ind the over-all
rate and quality of credit expansion.
On the international side, there is at least a
possibility that coming months will see a deficit in the
balance of payments little if any higher than in the last
half of 1963. Outflows of liquid funds and of bank credit
could again pose a threat, particularly if additional leading
foreign countries adopt more restrictive monetary policies
with resultant higher interest rates as part of programs for
coping with their domestic inflations. At the moment, however,
international money market differentials are not such as to
trigger substantial shifting of liquid funds.
Looking ahead, the stimulative effects of the tax cut
on the economy in the first half of 1964 are projected as
very large, with the Federal deficit on an annual rate,
income and product basis estimated to jump from about $2
billion in the fourth quarter of 1963 to about $10 billion
in the second quarter of 1964. Whether this will prove too
1/28/64
-15
much stimulation either immediately or after a time lag
remains to be seen.
Until the effects of the tax cut are more apparent
and measurable, and so long as the economy maintains its
moderate upward pace with price stability and with an
improved balance of payments situation, the current,
moderately expansionary monetary policy remains appro
priate. Special attention will need to be paid, though,
to the economic situation as it unfolds over the next few
months lest a combined stimulative fiscal and monetary
policy facilitate such an upsurge in private spending and
investing that inflationary developments ensue or a large
payments deficit re-emerges.
In the discussion following the visual-auditory presentation,
Mr.
Ellis noted that an article in
this morning's Wall Street Journal
had reported that an index of industrial raw material prices had
risen by 5 points in
the past 5 months,
and that this was the largest
increase for any period of comparable length since 1961.
seen a report on this index in
it
the presentation,
He had not
and he asked whether
was a special subcategory of the broader wholesale price index
that had been presented.
Mr.
Garfield replied that a great many special-purpose indexes
had been developed from components of the broader-measures in
years.
recent
The behavior of these indexes varied, depending on such
factors as the importance attached to commodities such as sugar, the
price of which had moved very far, and the importance attached to
prices in American relative to foreign markets.
One could put
together many different combinations of price series that would
show markedly different change over particular periods.
measures had been used in
today's presentation.
The broader
1/28/64
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Mr. Mills asked whether there was not some element of
illusion in
th, emphasis that was placed on the degree of liquidity
in the economy, in that the liquidity measures that were generally
advanced had to do with holdings by the public of the liabilities
of
financial intermediaries, and the fact that the intermediaries pro
posed that the.r clients could consider these Liabilities as readily
liquid assets.
Was it not necessary, he inquired, to look behind the
facade of transferability and marketability of these liabilities
the nature of the underlying assets supporting them.
degree in the recent past, the growth
to
To a substantial
in the Liabilities of inter
mediaries had been associated with accumulations by them of mortgage
holdings.
Mortgages themselves were not of a particularly liquid
nature, Mr. Mills said.
Perhaps the growth of mortgage holdings in
the past several years had substituted for the kinds of securities
the corporate sector would have issued except for the fact that their
large flows of internal funds had obviated the necessity for their
use.
There was a question whether one might not have a false sense
of security abcut the state of liquidity in
the economy, because the
underlying assets were not liquid, and the Liquidity of the inter
mediaries'
liabilities
depended on the whims of the
public as to
their marketability.
Mr.
Partee said that he would make two comments in response
to Mr. Mills'
question.
First, the liquidity measure used in the
1/28/64
-17
presentation was defined to include deposits at commercial banks
and mutual savings banks,
associations,
one year.
share-holdings
at savings and loan
and Government securities holdings with maturities under
The holders of those assets certainly thought that they had
liquid assets,
but in
fact there was no legal obligation on the part
of, say, savings and loan associations to pay on demand.
tomary,
of course,
for them to pay on demand,
very substantial shock to the economy if
It was cus
and there would be a
they stopped doing so.
Also,
the Home Loan Bank Board did stand ready to provide emergency liquidity
to the associations,
member banks.
just as the Federal Reserve did with respect to
He thought it
was reasonable to consider savings and
loan shares as liquid in normal circumstances, although he did not
mean to discount the point Mr.
nature of the intermediaries'
Secondly, Mr.
overstate the rise in
Mills had made with respect to the
assets.
Partee continued
there was some tendency to
liquidity that had occurred in
years, to the extent that a shift had
to saving through intermediaries.
the last three
occurred from direct investment
The typical holder of corporate
bonds, stocks, or municipals probably felt these direct investments
had some liquidity, although they were excluded from the liquid asset
series.
Liquidity obviously was a continuum, and it
was difficult to
measure.
Mr. Balderston said that he suspected that much of the apparent
balance of payments gain in the last half of 1963 was due to anticipation
1/28/64
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of the interest equalization tax.
He wondered whether the realization
thereof would be as potent in deterring capital outflows as the antici
pation had been.
If it was not, he asked, were the expectations with
regard to a continued low payments deficit in the first part of 1964
apt to be disappointed?
Mr. Hersey said that the estimate of a continuation of the re
cently reduced rate of dficit
the equalization tax.
did not depend to any great extent on
Part of the improvement in the payments balance
during 1963 was in the trade and services accounts.
With the present
growth of trade, this seemed likely to persist and possibly to im
prove further in the short run.
However,
the estimate for 1964 did
assume that new foreign borrowings would not approach the abnormally
high levels of the first half of 1963, when Canadian security issues
in the U. S. had been exceptionally large.
Mr. Mitchell asked whether it would be fair to say that the
surplus countries were beginning to take their obligations with re
spect to achieving a balanced position
more
seriously.
commented that the Swiss certainly were doing so.
Also,
Mr. Coombs
French
reserve gains had leveled off in part because of governmental measures
to restrain capital inflows and domestic inflation--although these
actions were not redounding mainly to our benefit, but rather to
Germany's.
The Germans recognized their responsibilities,
but there
seemed to be a large gap in their case between recognition and action.
1/28/64
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Their surplus position reflected primarily their competitive power
and their greater success than some other countries in controlling
domestic inflation.
In the circumstances there were only a limited
number of steps they could take to move towards a balanced position,
none of which was pleasant.
At this point Messrs. Garfield, Hersey, and Partee left the
meeting.
The Chairman then called for the go around of comments on
economic conditions and monetary policy, beginning with Mr. Hayes,
who presented the following statement:
Both the year and the quarter ended on a strong
note. The year's gain in GNP was better than had been
estimated a few weeks ago and of course far above stan
dard forecasts of a year ago. December contributed
importantly to these good results, as retail sales
jumped sharply to a new record and industrial production
advanced moderately--both contrasting with the hesitancy
shown a year earlier. Business sentiment also appears
to be much stronger than in early 1963, and the prospects
for a near-term tax reduction are now of course very
much brighter. All in all, the Council of Economic
Advisers' projection of a 1964 GNP of about $643 billion,
some 6.5 per cent above 1963, seen; rather reasonable,
even though there may be a relatively sluggish first
quarter attributable in part to a temporary leveling off
of plant and equipment outlays. The CEA estimates that
even this sizable gain in GNP will pull unemployment down
only to about 5.0 per cent by the end of 1966--and this
highlights the necessity of attacking the unemployment
problem through other measures besides the stimulation
of over-all demand.
Recent wholesale price developments point to the
need for a close watch on this area, as was re-emphasized
in the President's Economic Report. The index of industrial
1/28/64
-20-
wholesale prices has risen over the past eight months at
an annual rate of about 1-1/4 per cent, which compares
closely with the rates of increase at the beginning of the
last two business cycle expansions and might be the fore
runner of more rapid price increases, although it is
certainly too early to reach any definite conclusion on
this.
We have been studying the possible economic impli
cations of the new Federal budget. On balance, it looks
as if the combination of a tax cut with restraint on the
spending side will provide less of a stimulus over the next
eighteen months than seemed probable a few months ago. On
the other hand, the favorable psychological and incentive
impact of the tax cut could be very considerable. From the
standpoint of Treasury financing, the 1965 budget seems to
offer no serious problems.
As for the balance of payments, we can find satis
faction in the heavy surplus recorded in December,. while
still reserving judgment as to whether this represents a
real change or merely a year-end flash in the pan. It is
hard to tell at this juncture to what extent the current
account and the capital account contributed to the improved
showing in December. Higher exports played a part, and of
course, the December surplus included the usual year-end
interest and amortization payments besides large German pre
payments for military supplies. There is some evidence of
repatriation of corporate time deposits previously placed in
Canada and Europe. On the other hand, bank term loans abroad
appear to have risen sharply in December. In January, we
seem to have shifted back into a deficit position, and emphasis
on credit restriction in Europe will probably add
to our dif
ficulties over the coming months. Against this background it
becomes all the more important to strengthen incentives for
United States corporations to keep funds at home.
Bank credit increased strongly in Dece::ber, on a season
ally adjusted basis, as loans other than security loans
registered a very sharp spurt just before the year
end. Much
made
deals"
of this increase may have been related to "special
Bank liquidity remains sufficient to cause
for tax purposes.
the banks to seek loans aggressively, although the liquidity
positions of banks outside of New York have come under greater
Despite
pressure in the past year than those of New York banks
the increasing pressure on banks in 1963 to dispose of U. S.
Government securities, reflecting our policy changes of the last
year or so, there has been no clear sign of a change in the
underlying trend of total bank credit growth.. In fact, money
1/28/64
-21-
supply plus time deposits grew even slightly faster in 1963
than in 1962.
For the two years ending with the last quarter
of 1963, total nonbank liquidity rose by 16.3 per cent, while
in the same period gross national product at constant prices
rose only by 8.5 per cent. There have been further substantial
increases in both money supply and time. deposits in January to
date.
Over the past three weeks we have seen some slight degree
of inadvertent ease in the money market attributable largely
to unexpected movements in float. I am glad to see that it
has been possible in the last few days to restore an atmosphere
more in keeping with the Committee's directive. For the time
being we are of course precluded by the Treasury's financing
program from making any appreciable change in policy. I should
also think we could appropriately leave the directive as it is.
Perhaps it is just as well that the Treasury's program
gives us :his occasion to sit back and await further clari
fication of economic developments, especially in the balance
of-payments area, before deciding whether a policy change is
in crder. Visibility should be a good deal better a few weeks
Looking ahead, however, I see some reason to question
from now.
whether, (even from a domestic point of view, we should encourage
further growth of bank credit and nonbank liquidity at the rapid
The cumulative pressure of liquidity
pace of the past two years.
quality of credit. There is some
to
the
a
threat
may be posing
being
channeled into undesirable uses and
evidence that credit is
Further
some signs that unsound lender practices are developing.
more, the beginning of an upward creep in commodity prices may
suggest the need for caution. Beyond this, of course, balance
of-payments developments must continue to weigh heavily in our
policy judgments, and we shall have to keep a very watchful eye
on credit policies in the other major industrial countries,
which cannot help having significant effects on our own inter
national accounts.
Mr. Shuford noted that, as the staff presentation this morning
had indicated, over-all economic activity had risen in recent months, and
perhaps a bit more than some had supposed.
In addition, the balance of
payments situation had shown real improvement.
Real GNP increased at
a 4.7 per cent annual rate from the second to the third quarter of last
year and at a 6.3 per cent rate from the third to the fourth quarter.
-22
1/28/64
Personal income rose somewhat more from June to December than in the
first half of 1963.
As also had been indicated by the chart show, these
advances had all been made within the framework of relative price
stability.
These favorable factors were somewhat dampened by the less
rapid increase in industrial production and employment since summer,
and the continuing 5-1/2 per cent rate of unemployment.
The pace of economic activity in the Eighth District had moved
up only moderately since mid-summer, Mr. Shuford said.
Employment in
the District's major labor markets had risen only slightly in this per
iod, and the increases in industrial use of electric power and in bank
debits had been moderate.
However, business loans and bank deposits
had both risen about 5 per cent since July.
His views on monetary policy, Mr. Shuford said, were about in
line with those of Mr. Hayes.
In light of the Treasury financing and
of the uncertainties of the tax situation, he thought it would be well
to make no change in policy, and wait and see.
Bank reserves and the
money supply had increased rapidly during the past few months, more than
was desirable for any extended period.
However, in the past few years
reserves and money had expanded rapidly near the year end, and then more
slowly in the early months of the following year.
might be developing this year.
A similar pattern
If, however, the economy should continue
to remain strong and to develop, and if monetary expansion did not
moderate under the Committee's current policy, the Committee might have
-23
1/28/64
to take steps to reduce the degree of ease.
While he would rather not
speculate on pcssible actions at future meetings,
the recent rate of monetary expansion
change in
was high.
the directive and no change in
he did recognize that
We would suggest no
the discount rate.
Mr. Bryan said that there were few statistics
available for the
Sixth District that had not been reported previously.
figures were financial series.
Most of the new
The total money supply was up almost
1 per cent in December,
and the conventional:y defined money supply was
up about 1/2 per cent.
Bank loans,
ments, were both up 1 per cent.
and the total of loans and invest
A feeling of ease was evident at
District commercial banks in January.
Borrowing at the Reserve Bank
had fallen back to the District's proportion of the national total or
less, and District commercial banks had become net seller, of Federal
funds.
Nationally, Mr.
Bryan said,
it seemed to him the business news
was not exuberant despite optimistic forecasts.
The direct on was still
upward, with a good many factors to his mind
still being undetermined.
Confidence seemed to be running high both in
the District and in
the
The new approach to the Federa] budget might represent obeisance
nation.
to conventional wisdom, but it seemed to contribute to the state of con
fidence.
He thought the tax cut might have a surprisingly large effect,
particularly through an investment feedback.
Mr. Bryan said that in
preparation for this meeting he had re
viewed the statistics on bank reserves for the past several years, and
1/28/64
-24
he did not believe that the System could continue to supply reserves at
the recent rate without producing an inflationary movement,
signs of which he thought were already evident.
some small
Without trying to an
ticipate policy, he said, he believed the time was likely to come when
the Committee would have to let free reserves drift
level of zero and perhaps even lower.
downward toward a
He did not advocate a change in
the discount rate at this time.
Mr. Bopp reported that the current picture of economic conditions in the Third District was brighter than usual--recognizing,
course,
that levels of activity in
satisfactory.
some areas remained basically un
Recent movements in indicators of output, consumer sales,
and labor force status all
and decreased
of
had been in
the direction of increased demand
unemployment.
At the same time, Mr. Bopp observed,
positions he had noted at the last
the relaxing of reserve
meeting had continued.
reserve deficit of reserve city banks had declined,
The basic
as had borrowing
at the discount. window by both reserve city and country banks.
Nationally,
the imminence of a Treasury refunding and the
absence of any significant new developments in
the domestic and inter
national economies indicated that policy should continue unchanged for
the next two weeks, Mr.
Bopp said.
He would continue the present
directive and discount rate.
He associated himself with those who could not foresee the
future, Mr. Bopp continued.
So he would underscore that part of the
1/28/64
-25
President's Economic Report which stated that monetary policy must
remain flexible, and he would agree particularly with the Report that,
in addition to being able to move against inflation or a worsening in
the balance of payments if these should occur, monetary policy also
should be flexible enough to reinforce fiscal policy in promoting
domestic expansion if this should prove necessary and feasible.
Mr. Thompson reported that once again, as in the recent past,
current developments had been better than certain elements of doubt
had led the Bank to expect.
In the Fourth D:strict,
as in
the nation,
business in December was unusually good and outran expectations.
For example,
despite fewer shopping days than usual in
the
Thanksgiving to Christmas trading season, recail sales reached record
breaking levels in December, scoring a 4-1/2 per cent gain over November,
after adjustment for seasonal variation.
Auto sales played an important
role in the strong retail trade picture.
The great strength in consumer
spending, both in the District and in the nation, toward the end of the
year helped to explain the sharp rise in the most recent estimate of
GNP for the fourth quarter.
Turning to the District's basic industry,
steel output rose further in December, both locally and nationally.
Mr. Thompson said that the preponderance of the recent business
news continued to point in the upward direction already indicated.
a familiar lack of tidiness appeared, insofar as some of the news
to fit the pattern.
But
failed
-26
1/28/64
Figures on new car sales for the nation during the first two
10-day periods of January indicated that the sales pace had eased
slightly from that of December.
Although sales for the month were
likely to be down slightly from earlier estimates, he still expected
that the figures for January as a whole would set a record for the
month.
In the steel industry, production had continued to expand in
January.
However, Mr. Thompson said, the Bank's private reports on
new orders might be interpreted as contributing some elements of doubt
regarding the rear-term future.
Insured
unemployment in
the Fourth District tended to increase
more than seasonally between mid-December and mid-January, due to the
effect of inclement weather on construction and other outdoor activities,
as well as after-holidays
for inventory-taking.
layoffs in
retailing and some plant shutdowns
In summary, the strength in the Fourth District
business picture appeared to reflect a moderate but consistent expansion
in activity, and doubts appeared to reflect, at least in part, uncertain
ties arising out of the winter weather.
Mr. Thompson reported that trends in earningassets of Fourth
District banks confirmed the picture of sustained business activity.
In the three-week period ended January 15, the seasonal decline in
earning assets of District weekly reporting banks was the smallest for
the period in recent years.
Although the net decline was centered in
1/28/64
loans,
-27
the tot.l
volume was unusually well maintained.
Business loans
declined only slightly and the volume of consumer loans remained un
changed.
Term loans were continuing to rise and were now 12 per cent
above a year ago.
Mr. Mitchell said that the staff report suggested,
prove,
that the national economy had been performing well,
but did not
and also that
the balance of payments situation had improved and that prospects for it
were good.
The Committee seemed to be reduced at this meeting to specu
lating about future policy.
He would go alo.g with Mr.
Bopp in
saying
that the Committee ought to make tomorrow's decisions tomorrow on the
basis of the facts and insights that would be available then.
Moreover,
with a major s ift in Federal tax policy impending, it was unthinkable to
him for the System to make any change in monetary policy now.
This was a
time for watchful waiting--in particular, waiting to see what the effects
of the tax cut would be.
The Committee customarily abstained from policy
changes at the time of Treasury financings,
Mr. Mitchell noted,
and he
thought it should abstain also during a period when a tax cut was being
considered,
unless there was some outstanding development,
that required action.
evident to all,
He saw no such development at present.
he would make no change in policy,
and no change in
Accordingly,
the directive.
Mr. Shepardson said he would agree, in light of all the circum
stances that had been mentioned,
that this was not a good time to
and therefore he favored continuing present policy.
move,
However, he was con
cerned, from several different standpoints, as to what the future migtt
1/28/64
bring.
-28
When he read the news stories about the demands that were
expected to be made in some of the forthcoming wage negotiations,
did not think the situation looked good.
for reducing overtime,
if
he
With respect to proposals
there was a lack of labor having particular
needed skills, activity could be increased only by overtime work; ad
ditional people with the necessary skills simply were not available.
did not minimize the seriousness of the problem of unemployment,
He
Mr.
Shepardscn said, but the expectation that enployment could be found in
areas for which unemployed people were not prepared was not borne out
by facts.
With respect to recent monetary developments, Mr. Shepardson con
tinued, it
seemed to him that, for whatever reason, the Committee recently
had provided a greater degree of monetary expansion than it
had intended.
The rate of increase in reserves supporting private deposits during the
past six months was close to 8 per cent.
Th's was more than "moderate"
expansion, and more than he thought the Committee had contemplated when
it
shifted policy in the direction of less ease some six months ago.
If
his interpretation was correct, monetary expansion at this rate was build
ing up the potential to support the inflatiorary forces portended by the
forthcoming wage negotiations.
Mr. Shepardson made one final point:
he thought the argument
about unutilized facilities was greatly overdrawn.
In his opinion, the
recent expansion in activity had brought the level of utilization of
economic facilities close to the optimum.
To utilize the remaining
1/28/64
-29-
marginal resources would involve higher cost;,
and would consequently
add to the pressures on prices.
Mr. Robertson said he agreed that the Committee could not decide
now what it
should do when the tax cut became effective.
the following
He then made
statement:
Obviously, bracketed as we are by Treasury financings, no
change in policy should be made at this time.
But we can profit
ably turn our minds to what factors ought to influence our choice
of policy and methods once the Treasury refundings are past.
In
my comments at the last
meeting I tried to describe what to my
mind were the basic considerations that should guide our general
choice of policy. Today I would like to say a few words about
the specifics of our operating procedures.
One particular consequence of our recent methods of opera
tions has troubled me a great deal, and I know it is also worri
some to others around this table.
That is the degree to which
the market has been dominated by official actions and pronounce
ments. Partly this has been achieved by speech-making and the
calculated "leak" of official attitudes, and partly by actual
transactions in the market place.
Operationally, the greatest
influence in the longer-term sector has been the repeated blanket
ing of maturity areas by financing offerings, particularly advance
refundings, along with heavy cushioning Treasury purchases when.
ever private investors appeared to be trying to move the market in
a direction adverse to the chosen terms of such financings.
System
operations in coupon issues have fortunately never been as con
centrated or as obviously directed at a rate objective as have the
Treaury dealings; and so they have been less a contributor to
official rate stabilization effects.
But the sum total of these
official influences can be seen in the indications of market per
formance. Dealer statistics suggest a concentration of private
investor sales at times when official accounts are large buyers,
with a corresponding thinning out of private selling activity in
adjacent periods. Dealers also describe this effect qualitatively;
they speak of the tendency for prospective sellers sometimes to
hesitate closing deals at current prices, preferring instead to
delay for a while in hopes of being able to unload on some future
official buying orders. To a lesser extent, an analogous influence
also seems at work on private buyers, leading them to delay buying
in the market in the hopes of doing better in the next Treasury
financing.
The end result of all
this, it seems clear, is a reduction
1/28/64
-30-
in the breadth, and depth, of the market for longer-term
governments during the period between official actions.
In the bill
market, too, the recent modus operandi
has wrought its changes.
Here the effects have not been
so apparent in daily trading volume, which has been and
continues to be very large, hut in the behavior of interest
rates directly.
By such devices as timely additions to
Treasury bill
issues and sales from System and Treasury
accounts, a fairly effective floor on the bill
rate has been
maintained for three years.
Last November, official actions
also put a ceiling on the bill
race, by simply reversing the
techniques previously used to support the floor. While we
have not resorted to the formal "peg" machinery of the war
time era, an informal pegging operatior. has succeeded in
holding the bill
rate within a very narrow band.
What has been the cost?
I submit that we have signi
ficantly impaired the ability of the bill
market to tell
us
which way underlying supplies and demands for short-term
funds are moving.
Last November, when the three-month bill
rate scooted up to 3.58 per cent, we could not be sure whether
a cyclical upsurge in credit demand was taking place or the
market was simply reflecting its dismay that we and the Treasury
were not actively fighting the dealer mark-ups in rates.
Or,
regarding the last several weeks, we cannot be sure whether
the relative bill
rate stability in the face of large dealer
sales means that the dealers feel such bill
demand is limited,
or simply that they believe we will not let rates move much
lower in any event. In effect, for policy purposes our vision
has been impaired, and so has that of any other market partici
pant who is trying to reach a decision to buy or to sell.
In
stead of the market being a window through which we can observe
indications of private actions that might call for policy
part, at least--a mirror of our
changes, we have made it--in
own intentions with respect to rates. And if we are honest with
ourselves, we will admit that we do not really know, right now,
quite how much of our current market evidence is "window" and
how much is "mirror."
this said, I would not want to be construed as
With all
implying that we can or should aspire to a posture of no offi
Our basic policy actions clearly
cial influence on rates.
condition the viable range of market interest rates; this is
true of cyclical changes in open market operations, reserve
requirement and discount rate changes, and certainly the recent
changes in Regulation Q. But precisely because these basic
policy influences already do so much to condition market perform
ance, we ought to be trying doubly hard to conduct our implement
ing operations so as to preserve as much as possible of the
1/28/64
-31
market potential for reflection of private actions as well.
Our vision at best is dim; to darken it still further makes
our job that much harder.
Some may say that there are occasionally periods so
critical that even a mild adverse market interest rate move
ment cannot be tolerated. I would not deny that such cir
cumstances can arise, but I would emphasize as strongly as I
Can that rate stability at such moments is bought at a price,
and that accordingly the costs as well as benefits ought to
be weighed carefully and recurrertly, for the cost in terms of
impaired market communication and performance is a continuing
and perhaps even a cumulative one, and it ought to be minimized
whenever that can be done.
I think such an opportunity for restoring a greater
measure of market responsiveness to private decisions lies
immediately before us. With an improved balance of payments
position, and a fairly lengthy period after mid-February free
of Treasury financing needs, moderate market rate movements
should now be less prejudicial to these two particular official
concerns. We have had some slight rate fluctuations in some
segments of the markets in the past two months, and these have
been accompanied more recently by pres inferences that perhaps
officials would not object to somewhat greater rate oscillations.
Thus, the market should not be too surprised if both we and
the Treasury were now to embark on a zealous effort to refrain
from the temptation to counter moderate and orderly rate fluc
tuations, either through open market or "open mouth" operations.
If we could manage this endeavor, holding reserve availability
a little more stable and money market rates a little less so,
then I suspect we would find that marke: rates themselves would
be a little more helpful in signaling when the next significant
change in monetary policy should be considered.
Mr. Mills said that the so-called fiscal year of the Committee
was approaching with the first of March.
He would like to suggest to
the Committee that it consider the language in the directives to the
Manager of the System Open Market Account, and that thought preferably
be given to reverting to the form of the directive that was customarily
used in the years before 1961.
He would make a statement that would
1/28/64
-32-
illustrate his reasons for the suggestion,
form and substance of the directives.
which went back to both the
Mr. Mills then made the follow
ing statement:
The generally accepted purpose of Federal Reserve
System monetary and credit policy has been to effect changes
in the supply of reserves held at the disposal of the com
mercial banking system that would encourage the expansion
or compel the contraction of bank credit and in so doing
foster economic growth and stability.
The directives issued
to the Manager of the System Open Market Account were related
to judgments regarding the supply of reserves as an instru
ment of broad economic policy and were not intended to focus
on interest rates.
Movements up or down of interest rates
were regarded as a by-product of changes in the supply of
reserves and not as a primary policy p rpose.
Although the technical wording of the Federal Open
Market Comittee's current directives has not altered the
sense of this time-honored purpose, maintenance of a specified
interest rate structure has been the real goal of monetary and
credit policy regardless of the changes in the supply of
reserves that have been consequent upon its attainment.
In
result, fluctuations have occurred in the supply of reserves
that in reality have signaled a change in monetary and credit
policy that has not been recognized in the nondescript word
ing of the Committee's directives. For example, the wholesome
increase engineered in the supply of reserves in recent weeks
indicated a change in policy that has not been acknowledged in
the directives.
This is a deplorable situation tha: must be remedied be
cause members of the Committee have acceded to the wording of
directives that have implied a different scheme of policy ac
tions from those actually taken wben adjustment. were made in
This divergence between the sense of
the supply of reserves.
the directives and positive policy actions assured to have been
taken to carry them out is contributing to public misunderstand
ing of the Federal Reserve System's policy objectives.
The root cause of these difficulties is, of course, the
evil of a pegged market for U. S. Government securities and an
control over the interest rate structure that has
artificial
stifled natural financial market interest rat responses to
changes in the supply of reserves in the hands of the commer
As one member of the Federal Open Market
cial banking system.
Committee, it would be impossible for me to consider subscribing
1/28/64
-33
to the repetition of a policy directive hinged on "no change."
Policy changes that have actually occurred, or are sought
after, should be recognized in the directives and the members
of the Committee thereby permitted to record their views and
votes in accordance with the realities of the situation.
The Comnittee would note, Mr. Mills added,
that his philosophy
followed very closely the discussion and reasoning of Mr.
For the present:,
ease in
he believed that policy should in
Robertson.
a sense lean toward
a way that would represent the more generous mechanical supply
ing of reserves
Certainly,
it
that was evident in
the last few reserve periods.
would be a mistake to tighten policy at this period of
the year before business plans were completely formulated.
The economy
deserved the stimulus that was implicit in the recent availability of
credit.
Mr. Wayne reported that diversity continued to characterize
Fifth District business conditions.
new high in
December,
Bank debits jumped sharply to a
and both nonfarm employment and factory man-hours
made small net gains despite declines
in some sectors.
A somewhat
slower pace, which might be partly seanal in origin, had appeared in
construction, lumber, and bituminous coal mining.
Retail trade probably
reached a record volume in December, and appeared to have declined less
than seasonally in January.
Mixed conditions were also reflected in the
Richmond Bank's latest survey.
Two-thirds of the respondents expected
near-term stability while the other third anticipated further improvement.
Survey returns from manufacturers were also mixed, Mr. Wayne reported,
-34
1/28/64
especially with regard to new orders,
one-third repo ted recent gains in
no change,
backlogs,
new orders,
and shipments.
about a third indicated
and the remaining third showed declines.
port levels would be about 1 per cent higher in
Only
Tobacco price sup
1964,
continuing the
trend of the past few years.
As the economy completed its
Mr. Wayne continued,
it
third year of growth and expansion,
showed signs of substantial but uneven strength.
Total retail sales appeared good for a normally dull period, and should
remain strong in view of the anticipated tax cut.
Expenditures for resi
dential construction also had been moving up steadily to new high levels
but future trends in this sector were subject to numerous doubts,
staff presentation had noted.
business investment,
as the
Unless prevailing signs were misleading,
especially for new plant and equipment,
to improve for some months ahead.
would continue
But there were some signs that automo
bile production and sales were leveling off after more than two years of
high-level performance.
In most other fields,
however, there seemed to
be no particular threat to continued mcderate growth.
Mr. Wayne said that some recent price movements had been con
tradictory and puzzling, as Mr. Garfield had mentioned.
several large aluminum companies had failed in
A week ago
their second attempt to
achieve an industry-wide increase in the price of aluminum ingots.
Recognizing, Mr. Wayne said, that Reynolds was one of the largest
employers in
the Richmond community,
this had a much greater impact on
-35
1/28/64
thinking that was warranted.
About the same time, one steel company
announced a reduction of approximately $20 per ton on three types of
steel used largely in automobile production,
But in four of the six
weeks ending on January 14 the weekly index of wholesale prices moved
up,
the total cise being 0.8 per cent.
Hayes and Mr.
He shared the concern of Mr.
Koch about possible price developments.
In view of the
increased activity and these conflicting movements in prices, Mr. Wayne
said, it might be worthwhile to devote a little
added attention to price
trends in the next few weeks.
In the policy area, it
seemed to Mr. Wayne that operations for
the past three weeks had been appropriate to prevailing market conditions.
Since there had apparently been no significant developments affectirg
basic economic and financial conditions, he saw no need for a revision
of policy even if the Committee were entirely free to make a change.
But since the Treasury would be heavily engaged in market operations for
the next three weeks or so, the Committee was under obligation to refrain
from any overt change.
He would renew the present policy directive and
leave the discount rate where it was.
He joined Mr. Mitchell in the view
that during the period of consideration of the tax bill the Committee
should watch and wait unless there were overwhelming reasons for doing
otherwise.
Mr. Clay reported that seasonally adjusted nonfann wage and
salary employment in the Tenth District rose at only about half the
1/28/64
-36
national rate curing the past year.
Manufacturing employment,
however,
showed a percentage gain closely approximating the national average.
In contrast with national developments, manufacturing employment in
the District expanded significantly in the last half of the year.
This followed a period of weakness extending from May 1962 to the
summer of 1963
however.
Cash receipts from farm marketings in the Tenth District de
creased 2 per cent last year compared with a 2 per cent increase nation
ally, Mr. Clay said.
The substantially lower level of meat animal
prices and the greater relative importance of meat animals in the
District largely accounted for the less favorable performance in the
District.
This was further reflected in unofficial estimates that net
farm income decreased more in the Tenth
District than in the country
as a whole.
It
appeared
that
both livestock
District
would be larger in
However,
moisture
District
as well as in
numbers and crop acreage in
1964 than last
year, Mr.
the
Clay continued.
supplies were inadequate generally throughout
other large areas of the nation.
the
Farm income
prospects for both the livestock industry and cash crops were dependent
upon improvement in moisture conditions.
The report on the gross national product for the fourth quart r
was very encouraging, Mr. Clay said.
and underlying conditions in
Considering all economic indicators
major markets,
it
must be recognized,
1/28/64
-37
however,
that the basic problems confronting the economy remained much
the same.
All in all, it
appeared to him that the appropriate thing to
do at the present time was to await further developments and to continue
monetary policy essentially unchanged.
This would seem appropriate for
domestic purposes and not incompatible with international considerations.
It would also be in keeping with the Treasury refinancing activity during
the period.
Mr.
Clay thought that the policy directive was satisfactory
in its present form, and that the discount rate should be left unchanged.
Mr. Scanlon said recent evidence pertaining to the Seventh
District tended to confirm the stronger business picture noted late in
1963.
Retail sales continued strong in the first weeks of January and
unemployment had been reduced somewhat further.
Two more Seventh District centers, G:and Rapids and Lansing,
were classified in December as having "relatively low unemployment"
(1.5 to 3 per cent),
Nine of 23 major District centers were in this
favorable position, Mr. Scanlon said, and there were only 17 labor mar
kets in this class in the entire nation.
All of the District States
estimated their unemployment rates to be lower than that for the U. ;.
Moreover, in each State the yearly average rate for 1963 was lower than
for 1960.
Deliveries of U. S. cars to domestic customers equaled the
record pace of a year earlier in the first 10 days of January, Mr.
Scanlon noted.
Production schedules called for 2.1 million cars in the
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1/28/64
first quarter, which could raise inventories to the 1.2 million level
in February or March--well above any previous record.
The industry
people with whom the Reserve Bank personnel visited indicated that
higher inventories should be expected this year in view of the expiration
of the labor contract in August and because of the larger number of
models now offered.
Nevertheless, he said, there appeared to be a
fairly serious lack of balance in the current inventory.
American
Motors, apparently concerned about both the level and balance of in
ventories, would suspend production during the current week and resume
at a lower rate on February 3.
Mr. Scanlon reported that manufacturers of machinery located in
the Seventh District continued to report a good inflow of orders and to
be optimistic about the year.
Over the last seven weeks, the December-January period, both
loans and Gove-nments at District weekly reporting banks increased less
than a year ago, but more than in most other years, he noted.
However,
if security loans were excluded, net loan growth since the end of
November had been greater than in the corresponding period of 1962-63.
This was due to larger increases in borrowing by financial as well as
commercial and industrial firms.
Bank investments had increased
slightly, mostly through bill purchases.
in reserve pressures, Mr. Scanlon said.
There had been no marked change
The large Chicago banks had
shown a moderate increase in net purchases of Federal funds and borrowings
1/28/64
-39
over the past three weeks, but the latter was concentrated at one bank.
Another large Chicago bank, which usually bought funds on balance,
had
been on the selling side of the market for the past three weeks.
As to policy, Mr. Scanlon said that in view of the Treasury
refunding he would favor continuation of the present directive.
He
would not. change the discount rate.
Mr. Deming said that "erratic" seemed to be the word that
characterized economic behavior in the Ninth District during the past
two or three months.
Conditions had been sharply influenced by the
weather, which had been unusually warm in the autumn, cold in December,
and warm again in January.
At District banks, both loans and investments had been behaving
about seasonally, with loans on the weak side of the seasonal pattern
and investments on the strong side.
recent weeks.
trict
Deposits were up quite sharply in
Since mid-December, borrowings had been quite low.
Dis
banks currently were on the selling side of the Federal funds
market.
Mr. Deming said that for reasons already advanced by others he
would favor no change in policy during the next two weeks, no change in
the directive, and no change in the discount rate.
Mr. Swan observed that there was little to add to the comments
with respect to Twelfth District economic conditions that he had made
three weeks ago.
As in the country as a whole, the seasonally adjusted
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1/28/64
rate of unemployment fell in December, even with a renewed decline in
employment in defense and space related industries.
employment rate was still above a year ago.
However, the un
In the three weeks from
Christmas to mid-January, loan demand in the District continued strong;
loans at District weekly reporting banks increased, in contrast to a
decline for the nation as a whole.
In the first three weeks of January
the major District banks were substantial sellers of Federal funds, but
distribution of funds was uneven, and these sales were largely accounted
for by one bank.
In the week ending January 22, borrowing from the
Reserve Bank by Twelfth District banks increased, while borrowing in the
country as a whole dropped sharply.
As a result, borrowing by Twelfth
District banks was at the highest level in several months relative to
the national f:gure.
Mr. Swan said he agreed that the Treasury financing precluded
any change in policy at this point.
Apart from the financing, however,
he believed the continuing moderate nature of the business expansion,
the relative degree of price stability, the shift in attitudes surround
ing the Federal budget, the impending tax cut, and the improvement in
the balance of payments all argued for continuation of present policy.
He also agreed that while developments in the months ahead might require
a policy change, there was no need to anticipate such a change at this
time.
Mr. Coldwell reported that economic activity in the Eleventh
District was following a normal seasonal pattern.
Industrial production
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1/28/64
had declined a little,
apartment construction and other building con
tinued high, ard nonagricultural employment remained about the same.
Perhaps the brightest spot in
improvement in
demand in
the District economy was the marked
the petroleum industry.
However,
there was
a continuing trend toward consolidation and merger among oil companies.
The agricultural situation was seasonally slack,
and people were worried
about the supply of moisture and about cattle prices.
Loan demand at District banks was reasonably strong, Mr. Coldwell
Federal funds purchases
continued,
and bank investments had increased.
were high,
borrowing from the Reserve Bank was strong for this time of
year, and the Reserve Bank was finding an in:reasing number of cases of
reserve deficiency each month.
Mr. Coldwell concluded by noting that
many District bankers were unhappy about the disputes between the Federal
Reserve end the Comptroller of the Currency.
Hr. Ellis said that economic conditions in
were about the same as he had been describing
the First District
them at recent meetings.
Retail sales were good and nonmanufacturing activity -particularly
construction--continued
change to weakness,
strong.
Manufacturing activity varied from no
with nondurables in
the Latter category.
The
Reserve Bank's December auto instalment loan survey showed lengthened
terms:
71 per cent of new car loans in the month, including both direct
loans and purchased paper, were written with maturities of over 30
months, which in
68 per cent.
effect meant three years.
A. yar
ago the figure was
1/28/64
-42With respect to monetary policy, Mr. Ellis said he agreed with
Mr. Bopp on the need for flexibility.
He also agreed with Mr. Mitchell
that policy should not be changed during Treasury financing operations
nor during debates on tax legislation in Congress.
He thought the chart
show today had been unusually good, and he concurred in the conclusion
that a watchful eye on developments was particularly necessary now.
He
felt that price increases might provide the first sign that the rate of
credit expansion had been, and currently remained, excessive relative to
the rate that could be continued over the long term.
Mr.
Bryar's apprehensions.
change in
In short,
he shared
He agreed that the Committee should make no
policy during this period of uneasy watching.
He favored no
change in the directive and no change in the discount rate.
Mr.
Balderston said that he,
quo until the next meeting.
too, favored maintaining the status
He would make only one point,
and that was
to suggest a concern that the present rate of economic expansion would
come to a halt for reasons that were not now visible.
During the last
six quarters GNP had been rising at a rate that itself had been increas
ing.
The rise in the third quarter of 1962 was .8 of 1 per cent, and
that in the last quarter of 1962 was 1.5 per cent, quite a large figure.
In 1963, the increases were at the following rates:
1.2 per cent in the
first quarter, 1.4 per cent in the second, 1.6 per cent in the third, and
1.9 per cent in the final quarter.
He did not know what would bring this
pattern of rise to a halt but felt sure that something would; perhaps it
would be the continuing increases in consumer and mortgage debt.
1/28/64
-43Chairman Martin said that Mr. Young had suggested that the Com
mittee might want to make a minor technical change in the second para
graph of the policy directive, replacing the words "prospective Treasury
financing" with the words, "an imminent Treasury refunding."
He thought
that the consensus today was clearly for no change in the policy, and he
proposed that the Committee vote on a directive with no change other
than in these few words.
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:
It is the Federal Open Market Committee's current policy
to accommodate moderate growth in bank credit, while maintain
ing 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 corsideration 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 deficits. 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 an
imminent Treasury refunding, 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 accommodating moderate expansion in aggregate bank reserves.
Votes for this action: Messrs.
Martin, Hayes, Balderston, Bopp, Clay,
Mitchell, Robertson, Scanlon, Shepardson,
and Shuford. Votes against this action:
None. Abstaining: Mr. Mills.
-44-
1/28/64
Mr. Mills said that he would not vote to dissent from the
directive but would like to abstain from voting.
what the directive meant,
and,
He could not fathcm
as his statement had indicated,
in
recent
weeks the directives and the actions implementing them had gone in
opposite directions.
He thought the Committee had lapsed into a state
of euphoria that would not continue;
a rude awakening from its
"do nothing"
position was due sometime.
Chairman Martin commented that he did not think Mr. Mills meant
to imply that the Desk had not carried out its
instructions,
to which
Mr. Mills responded that he could not pretend to understand the opera
tions of the Desk.
He thought the Desk had made an effort to carry out
the instructions it
had been given.
But there was the problem that Mr.
Robertson had mentioned and which he had echoed:
if one changed the
focus from an emphasis on adding to or withdrawing from the supply of
reserves to an emphasis on the interest rate structure, one had a con
flicting interest that posed a problem to the Account Manager that, he
the Manager would find insoluble.
thought,
Mr. Stcne said that,
as a technical
matter,
it
would be helpful
to the market if the bill rate did in fact fluctuate more than it had
recently.
He thought the major explanation of the recent stability in
bill rates was a concern on the part of market participants that they
would suffer punishing losses if rates moved too far.
that the market would lose this fear.
He would hope
1/28/64
-45
There were several other factors that had to be taken into
account in
tinued.
explaining the recent bill
One wa,
rate stability, Mr. Stone con
that the degree of competition in
securities market had intensified substantially.
the Government
There now were three
more large dealers than there had been three years ago, and the new
dealers were all able,
active, and alert traders.
The addition of
these dealers had made the market even more competitive and had tended
to reduce rate fluctuations in
fundamental,
and still
the market,
he thought.
A second, more
developing factcr was the existence and growth
of a large volune of short-term money narket instruments that were
regarded as substitutes for Treasury bills, and of a large number of
aggressive and highly sophisticated participants in
the market who
moved funds back and forth among short-term :nstruments with great
fluidity.
In response to shifting interest rate differentials,
they
transferred large volumes of funds generated by their heavy cash flows
among Treasury
bills, bankers'
commercial paper,
acceptances,
time certificates of deposit,
and short-term issues of Government agencies.
Thi.
had the effect of reducing the amplitudes of fluctuation in rates on
all of these instruments.
A third factor was that some large banks were now adjusting
their reserve deficiencies not through changes in their bill holdings
but by changing their rates on time certificates of deposit by as little
as 5 basis points.
When banks first started issuing negotiable time
1/28/64
-46
certificates,
year ago,
rate changes typically were 1/4 of a percentage point; a
they were 1/8 of a point.
In sum, Mr. Stone said, the degree of unity in
had increased substantially.
the money market
There always had been interconnections
among money market instruments,
but they were growing.
The existence
of both more short-term market instruments and of more sophisticated
and aggressive market participants had contributed in a major way to the
relatively narrow rate fluctuations in
each of those instruments.
Mr. Mitchell asked what Mr. Stone had meant when he used the
word "punishing" in
pants concerning bill
reference to the apprehensions
rate changes.
In
of market partici
reply, Mr. Stone observed that
for about a year and a half before July 1963 there had been the problem
of trying to keep the bill
rate up in a context of ample reserves and a
discount rate of 3 per cent.
The bill rate was maintained largely
because the Treasury made substantial additions to the market supply of
bills.
Given what the Treasury was doing,
the Desk contributed some
moderate additional influence in the same direction by resorting to
certain technical devices in open market operations.
For example, the
Desk had tended to avoid the three-month area when buying bills, but
when selling, it had sold three-month bills.
Since mid-1963, however,
resort to these devices in open market operations had been virtually
eliminated; they had not been used in months.
1/28/64
-47In pursuing operations recently, Mr. Stone continued, the Desk
had attempted to maintain the Federal funds rate at the discount rate
much of the time.
This had resulted in some member bank borrowing.
Of
course, the fact that the Federal funds rate was at the discount rate
did not explain the stability of the bill rate; at times in the past
when the Federal funds and discount rates were the same, the bill rate
had fluctuated widely.
The most important explanation of bill rate
stability was one that Mr. Robertson mentioned--the fears of the market
of actions by the authorities.
But the other factors he (Mr. Stone) had
cited also were important.
To respond specifically to Mr. Mitchell's question, Mr. Stone
continued, there were occasions in 1961 and 1962 during which the bill
rate was moving lower and dealers were acquiring inventories at rising
prices, when the Treasury had come into the market with a strip of bills.
Prices of bills had fallen, resulting in losses to dealers on the port
folios they hac acquired at higher prices.
This was a punishing experience
for the dealers, and the market had begun to generate its own resistance
to bill rate declines.
Some dealers made it a practice to reduce their
inventories whenever the rate tended down, thus limiting the decline.
Mr. Mitchell asked whether his inference was correct that the
Committee could not change this situation without the cooperation of the
Treasury, and Mr. Stone replied affirmatively.
was, of course, aware of the problem.
He added that the Treasury
-48-
1/28/64
Mr. Mills commented that he wished he had Mr. Stone's ability
to describe an artificial market, and Chairman Martin observed that it
appeared to him that the only way there could be a perfectly free mar
ket would be through complete nonintervention by both the Treasury and
the System.
Mr. Stone said that in his opinion there was a broad, active,
and viable market.
The Desk recently had reviewed its experience in
conducting operations, relating to the last four occasions on which it
had sold Treasury bills and a similar number of occasions on which it
had bought bills.
The total volume of bids
received from dealers ranged
between $320 million and $530 million on the occasions when the Desk was
selling, and the total volume of dealer offers ranged between $425 mil
lion and $675 million when the Desk was buying.
Any market in which
dealers were willing to do business on this :,cale at existing quotations
was, in his judgment, a broad, active, and viable market.
It was his
conclusion that there had been no absolute impairment of the market, but
he agreed that the market would be better if rate fluctuations were some
what greater.
Chairman
Martin noted that the Account Manager earlier had recom
mended renewal of the limitation specified in the continuing authority
directive of $1.5 billion on 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 asked whether there were
any objections.
No objections were raised.
-49
1/28/64
Chairman Martin then said that he would like to make a few
comments on the hearings that were now under way before the Subcommittee
on Domestic Finance of the House Banking and Currency Committee.
The
Subcommittee had requested that the Open Market Committee furnish its
minutes for the years 1960-1963, inclusive.
He proposed that this
request be put on the agenda for discussion at the next meeting, and
he solicited full consideration of the issue by the members in prepara
tion for that discussion.
One possible procedure would be to supply
these minutes to the Subcommittee on the same basis as the 1960 minutes
had been supplied to the Joint Economic Committee; that is, in confidence
and not for public release.
An alternative would be to refuse to supply
the minutes, on the several grounds that had been employed in his letter to
the Joint Economic Committee to support the statement that public re
lease of the minutes would be unwise.
If this latter course was chosen,
the Subcommittee would have to subpoena the minutes in order to obtain
them.
The Chairman thought that in due course the Open Market Com
mittee would have to release more information than it had in the past,
or, at least, to present information in a different form.
He noted that
differing points of view about publishing the minutes had been expressed
in past discussions and that there had been quite a bit of disagreement
when this subject was discussed at an Open Market meeting late last year.
The Chairman did not think there was any great pressure on the Committee
-50
1/28/64
with respect to this matter at present, but he expected that pressure
would build up in the future.
He urged everyone to think the matter
through carefully and to be prepared to discuss it
He noted that the Committee might decide thene
at the next meeting.
to postpone a final
decision until the following meeting in early March.
In a concluding comment, the Chairman said there was no question
in his mind but that Mr. Patman was completely sincere in his views on
the Federal Reserve System, and he thought everyone should-approach the
issues raised on that basis.
It was agreed that the next meeting of the Committee would be
held on February 11, 1964.
Ihereupon the meeting adjourned.
Secretary
Cite this document
Federal Reserve (1964, January 27). FOMC Minutes. Fomc Minutes, Federal Reserve. https://whenthefedspeaks.com/doc/fomc_minutes_19640128
@misc{wtfs_fomc_minutes_19640128,
author = {Federal Reserve},
title = {FOMC Minutes},
year = {1964},
month = {Jan},
howpublished = {Fomc Minutes, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/fomc_minutes_19640128},
note = {Retrieved via When the Fed Speaks corpus}
}