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,
PRESENT:
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
February 11,
1964, at 9:30 a.m.
Martin, Chairman
Balderston
Bopp
Clay
Daane
Irons
Mills
Mitchell
Robertson
Scanlon
Shepardson
Treiber, Alternate for Mr. Hayes
Messrs. Hickman, Wayne, and Shuford, Alternate
Members of the Federal Open Market Committee
Messrs. Ellis, Bryan, and Deming, Presidents of
the Federal Reserve Banks of Boston, Atlanta,
and Minneapolis, respectively
Mr. Young, Secretary
Mr. Sherman, Assistant Secretary
Mr. Kenyon, Assistant Secretary
Mr. Hexter, Assistant General Counsel
Mr. Noyes, Economist
Messrs. Baughman, Brill, Eastburn, Garvy,
Green, Holland, Koch, and Tow, Associate
Economists
Mr. Stone, Manager, System Open Market Account
Cardon, Legislative Counsel, Board of Governors
Fauver, Assistant to the Board of Governors
Broida, Assistant Secretary, Board of Governors
Wood, Associate Adviser, Division of Inter
national Finance, Board of Governors
Mr. Axilrod, Chief, Government Finance Section,
Division of Research and Statistics,
Board of Governors
Mr.
Mr.
Mr.
Mr.
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Mr. Hemmings, First Vice President,
Federal Reserve Bank of San Francisco
Messrs. Sanford, Mann, Ratchford, Jones, and
Parsons, Vice Presidents of the Federal
Reserve Banks of New York, Cleveland,
Richmond, St. Louis, and Minneapolis,
respectively
Mr. Sternlight, Assistant Vice President,
Federal Reserve Bank of New York
Mr. Brandt, Assistant Vice President, Federal
Reserve Bank of Atlanta
Mr. Anderson, Financial Economist, Federal
Reserve Bank of Boston
Mr. Runyon, Economist, Federal Reserve Bank
of San Francisco
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 28 through February 5, 1964, and a supplementary report covering
the period February 6 through February 10, 1964.
Copies of these reports
have been placed in the files of the Committee.
Supplementing the written reports, Mr. Sanford commented that gold
sales of at least $52 million were expected over the rest of the month,
and with only $48 million in the Stabilization Fund, the Treasury was
transferring $50 million from the gold stock to the Fund today.
The
Russians remained out of the gold market and private demand in the London
gold market, while unspectacular, had until the last two days been large
enough to absorb all new production coming onto the market.
The United
States received $23.4 million as a distribution from the gold pool.
2/11/64
-3
(OnThursday,
the day when the gold stock reduction would be
released to the press, the Treasury would be making the anticipated first
drawing on the International Monetary Fund under the $500 million standby
arrangement announced last July as part of President Kennedy's balance
of payments package.
The drawing would total $125 million, and it would
be publicly announced.
As the Committee would recall, Mr. Sanford continued,
the standby
arrangemeat was made to meet the problem that arises when the Fund cannot
accept dollars in repayment of foreign countries' repurchase obligations
(because its dollar holdings would exceed 75 per cent of the U. S. quota).
By drawing foreign currencies from the fund and selling them to those
members making repayments to the Fund, the chance was reduced of their
coming to the U. S. for gold to effect such repurchases.
The $125 million
of foreign currencies that the U. S. would be drawing was expected to be
sufficient to match foreign countries' repayments to the Fund through
the end of April.
The largest repurchase now scheduled was one of $60
million equivalent by Canada, which would be announced at about the same
time as the U. S. drawing.
Except for the German mark at the end of last week, Mr.
Sanford
observed, the foreign exchange markets had been fairly quiet during the
past two weeks, with no particular pressure on the dollar.
For almost
two weeks until last Wednesday the strength of the German mark had
temporarily abated,
reflecting mainly the calming effects of the German
Federal Bank's announcement on January 23 that it was not contemplating
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2/11/64
any new measures to deal with the German payments surplus.
Last Thursday
and Friday, however, the demand for marks again increased to the point
where the German Federal Bank had to intervene.
So far, the German authori
ties had felt able to hold for their own account the dollars they had
picked up in the market, having in mind the reduction in their dollar
holdings early in January when the German commercial banks had reversed
their year-end window dressing operations.
Nevertheless, with the
possibility of a revival of speculation on mark revaluation and the
prospect of a seasonal tightening of the German money market in March,
the System might have to face the necessity of making fresh drawings on
its mark swap to mop up part of Germany's dollar intake.
The Swiss franc market had retained the moderate ease it developed
following the Swiss Government's announcemen.s of proposed measures to
curb the inflow of funds from abroad and to restrain the Swiss boom.
However, the Swiss franc had not yet moved very far from the ceiling
but with some further easing the System might be able to acquire some
francs for the purpose of starting to repay its Swiss franc commitments.
Today the Swiss franc was quoted at 4.323 to the dollar, as compared with
the effective ceiling of 4.3150.
The liquidation of the System's guilder swap drawing had slowed
down in this period, as the decline in the guilder rate and the Nether
lands Bank's sales of dollars in the market came to a halt.
The Account
had been able to purchase only $4 million of guilders from the Netherlands
Bank over and above the amount reported at the last meeting, and using
2/11/64
-5
$1 million of its guilder balances, it reduced the swap drawing to $45
million from $50 million.
The Italian lira continued under pressure.
During January the Bank
of Italy had lost about $250 million, mainly reflecting large repayments of
foreign indebtedness by Italian commercial banks.
Italy's reserve decline
was being cushioned by the second $50 million drawing on the System swap
(mentioned at the last meeting) and by the purchase by the System of
another $50 million lire which the System had sold forward to the Treas
ury.
The Italians might be expected to need further assistance before
too long, as the Bank of Italy had cashed in one-half of the U. S.
Government certificates from the last drawing.
The recently-formed
Italian Government could ill afford the development of even a semblance
of a speculative crisis, in view of the delicate political situation.
Meanwhile, they were proceeding to reduce bank liquidity, both at home
and abroad.
Sterling still had not shown the strength it usually exhibited at
this time of the year.
widened slightly.
The discount on forward sterling, moreover, had
The possibility that the markets might be beginning
to react to the forthcoming British elections seemed to be getting stronger.
The British Treasury bill rate had edged up in the last two weeks, but the
widening of the discount on sterling had more than offset this increase.
The covered arbitrage differential in terms of Treasury bills was now about
1/4 of 1 per cent in favor of New York.
The differential in terms of
other instruments--such as finance paper--remained slightly in favor of
London, but selected banks reported that no funds were moving.
2/11/64
At: the request of the Chairman,
Mr. Sanford summarized Open Market
Account operations in foreign currencies during the period January 28
through February 10.
Operations which had been for value within this
particular period, he said, were as follows:
(1) the Bank of Italy drew
$50 million under the $250 million swap arrangement with the System,
thus
making its outstanding drawings $100 million, (2) the Federal Reserve
bought from the Bank of Italy a second $50 million of lire
and immedi
ately sold the lire for three-month forward delivery to the U. S. Treasury,
bringing the tctal for this type of operation to $100 million; (3) the
Bank of Italy had renewed for another three months its maturing $50
million swap drawing from the System, this being the first renewal;
(4) the System reduced its swap drawing from the Netherlands Bank by
$5 million to $45 million, using $4 million of guilders bought from the
Netherlands Bank and $1 million from its balances; (5) the System paid
off at maturity the remaining $5.5 million of outstanding drawings on the
Bank of France, by use of francs previously bought forward, and the swap
arrangement with the Bank of France was now completely on a standby basis;
(6) a maturing $30 million swap drawing on the Swiss National Bank was
rolled over for three months, this being the first renewal of that drawing;
and (7) the swap arrangements with the Bank of Japan of $150 million, with
the Bank of France of $100 million, and with the German Federal Bank of
$250 million were all extended for three months.
Mr. Robertson asked whether the transaction in which the Account
had acquired lire and sold them forward to the Treasury was undertaken at
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2/11/64
the Treasury's request, and Mr. Sanford replied that the transaction was
made in cooperation with the Treasury.
The Lire would be used ultimately
to repay the Treasury's outstanding lira-denominated bonds.
In response to questions by Mr. Mitchell, Mr. Sanford reported
that Italy held about $200 million equivalent in lira-denominated U. S.
Treasury bonds, and that the System had sold forward to the Treasury $100
million equivalent of lira.
The Italians had drawn $100 million on the
swap with the System, of which they had disbursed all but $25 million.
Mr. Daane asked what public announcements were planned of the
prospective U. S. drawing from the IMF and what reaction to the drawing
might be expected.
Mr. Sanford replied that a press release on Thursday of this week
would explain that the drawing was a technical matter related to the
announcement last July of the $500 million standby arrangement.
The
Canadians would be announcing the repayment of their debt to the Fund at
about the same time.
He would expect the foreign reaction to be favorable,
as it was last July.
Mr. Mills asked whether the purpose of the debt to the Fund that
the United States was assuming was to accommodate Canada and the Fund,
and Mr. Sanford replied that in his judgment its purpose was to accommodate
the U. S. In the alternative, a country desiring to make a repayment to
the Fund might buy gold from this country, and the object was to avoid such
gold losses.
2/11/64
Mr. Mills then asked whether it
oversimplified the matter to say
that countries that would otherwise be obliged to draw on the U. S
stock in
order to make payments in
tion in dollars,
so that the U. S.
gold to the Fund were in
gold
a surplus posi
was accommodating both them and itself.
Would that lead to a tendency among foreign countries to reduce their
holdings of dollars by compelling the U. S.
Fund in
to draw increasingly on the
this kind of arrangement?
In
response, Mr. Sanford said that while it
to our advantage to draw in
would appear to be
order to avoid gold losses, such drawings
would be well within our control.
Mr. Daane added that the arrangement
was linked to debt repayments; countries could not arbitrarily pay sums
into the Fund when they had no debt to the Fund.
Chairman Martin emphasized that all aspects of the proposed
U. S.
drawing from the Fund were confidential
and should be so treated
by persons in the room.
Thereupon, upon motion duly made and
seconded, and by unanimous vote, the System
Open Market Account transactions in foreign
currencies during the period from January 28
through February 10, 1964, were approved,
ratified, and confirmed.
Mr.
Sanford stated that he had no recommendations to place before
the Committee for consideration at this meeting.
Chairman Martin observed that what probably were the most important
financial negotiations of the current period were now being conducted by
deputies of the "Group of Ten," who had been meeting periodically since
2/11/64
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the Bank and Fund meetings in Washington last autumn.
He noted that
Mr. Daane had participated in these discussions at their outset as a repre
sentative of the Treasury Department, and was continuing to participate as
a representative of the Federal Reserve.
countries also were represented.
Central banks of the other
The Chairman invited Mr. Daane to comment
on the status of the discussions.
Mr. Daane said that the most recent meeting of the group was held
in Paris on Jaruary 24, 25, and 27.
This meeting, like the earlier ones
on which he had reported to the Committee in December, was exploratory, and
was marked by frank expressions of individual views.
In one session, led
by Mr. Polak, there was extensive discussion of papers that had been sub
mitted by the Fund on (1) the role of the Fund in the provision of
international liquidity, (2) drawings on the gold tranche, and (3) the
role of gold.
In another session two papers presented by the OECD were
considered, on the need for reserves and for international credit
arrangements, and on the contribution of the long-term capital markets
to the adjustment process.
A third session, Mr. Daane continued, was concerned with three
papers by the BIS, which Mr. Gilbert presented.
One of these was an
interesting paper On the Euro-dollar market which was quite favorable
to that market.
It concluded with the following statement:
The Euro-dollar market is today a substantial source of
international credit. It brings many lenders and borrowers
together on more favorable terms to both, and therefore more
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2/11/64
efficiently, than would otherwise be the case. Moreover, the
impetus towards equalization of money rates which it has given
has been useful, not only to individual lenders and borrowers,
but in the broader context of international monetary equilib
rium. Some observers have stressed certain adverse consequences
which the market may have and it would seem that these
observations have their element of truth. From the standpoint
of official policy, however, it does not seem that the possible
dangers of Euro-currency credit are of a different order from
those of other movements of short-term funds. Maybe, because
of its efficiency, the Euro-currency market has an exceptional
potential for expansion which may create a special problem for
monetary authorities in the future; but so far this does not
seem to have been the case and on the whole it appears clear
that the market has served a useful purpose.
Mr. Daane said that he and one or two others had challenged the favorable
flavor of these conclusions.
The second paper was largely descriptive,
and concerned short-term arrangements between central banks and monetary
authorities.
The third paper dealt with laws and government regulations
covering monetary reserves and private uses of gold.
One questionable
aspect of this paper was an interpretation that the System would be unable
to acquire an adequate stock of foreign currencies because of the re
quirement for a 25 per cent gold cover on Federal Reserve liabilities.
One-half of a day also was taken for discussion of proposals for a
composite reserve unit.
The French views were elaborated further, but
there was some change in focus by the French representatives, who now
clearly placed schemes of this sort in a more futuristic context, rather
than describing them as something for today or tomorrow.
Another meeting of the same exploratory type would be held at the
end of February, Mr. Daane continued, to discuss (1) papers that the
2/11/64
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participating countries had been invited to submit on the issues that in
their judgment should be covered in
Fund; (2)
the report to be presented to the
a joint United States-United Kingdom paper on the role of re
serve currencies and the consequences for the international payments
system of partial or total displacement of reserve currencies; and (3) a
wide-ranging paper by Dr. Emminger of the German Federal Bank on the
various radical reform proposals that had been advanced.
A 10-day negotiating session was to be held in Washington during
April,
in preparation for which the U.
position.
S. would have to determine its
This would be a Government position, to he developed by an
intra-Governmental group--the so-called "ong-Range
International Pay
ments Committee"--on which representatives of both the Board and the New
York Bank sat in technical advisory capacities.
The final U.
ment position would be cleared at the top level of Government,
S.
in
Govern
dis
cussions at which the System presumably would be represented by the Chairman.
There would be another session, possibly in May, to translate the April
negotiations into a preliminary report to the June meeting of Ministers.
The final report, Mr. Daane said, was to be made at the Tokyo meeting
of the Fund in September.
Before this meeting there had been distributed to the members 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 28 through February 10,
A copy of this report has been placed in
the files of the Committee.
1964.
2/11/64
-12In supplementation of the written report,
Mr. Stone commented as
follows:
We have faced some rather interesting problems in conduct
ing open market operations recently. During the past few weeks
there has occurred the customary seasonal reduction in credit use
that is the other side of the seasonal rise in December. The
sharp seasonal increase in credit use in December of course upset
the rough relationship that emerged earlier between free reserves
of around $100 million on the one hand and the market tone and
feel sought by the Committee on the other. Given the seasonal
spurt in credit use, that tone and feel, and that free reserve
level, could not occur together; they were no longer compatible.
Since we could not maintain both the same feel and the same free
reserve figures as earlier, we interpreted the directive as
instructing us to maintain a steady feel. This meant permitting
the free reserve figure to ride up to some extent while the use
of credit was rising and was at its peak. Conducting operations
with precise symmetry during the past few weeks of seasonal
decline in credit use would have involved permitting the free
reserve figure to ride down as far as necessary in order to
maintain the kind of market conditions that prevailed in December
and earlier. The difficulty with that approach, however, is
that, in my view, it might very well have involved the publica
tion of negative free reserve figures in one, or perhaps two,
recent statement weeks. The Treasury, of course, has been in the
market almost continuously for the past five weeks, and to have
published a net borrowed reserve figure at any time during that
period would have done injury td one or both of the major
financing operations in which the Treasury was engaged. Such a
result would hardly have been consistent with the maintenance
of an even keel. We therefore frequently found ourselves on a
tightrope during the recent period. A few more reserves might
on occasion have produced significantly easier market condi
tions; at the same time, however, nad somewhat fewer reserves
been injected, we might have found ourselves publishing net
borrowed reserves. The end result of our tightrope walking has
been a money market that was rather steadily firm but with a
smaller margin of unsatisfied demands for reserves that had to
be met at the discount window. Thus, while the Federal funds
rate was 3-1/2 per cent each day, member bank borrowings have
recently averaged around $150 to $250 million, rather than the
general $300-$400 million range that had prevailed earlier. The
free reserve figures, meanwhile, have been subject to rather
sizable retroactive upward revisions.
2/11/64
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During the past few days a closer relationship between the
market atmosphere and the reserve statistics appears to have
been reasserted--as one would expect to happen as the seasonal
decline in credit use approaches an end.
Turning briefly to the market, the Treasury's February re
funding operation, announced two days after the last meeting,
was given a favorable but quite uneventful reception by the
market. Perhaps the most noteworthy feature of the financing
was the $1.8 billion of subscriptions the Treasury received for
the reopened 4 per cent notes of 1966. That issue was priced
at par to yield 4 per cent--only 4 basis points above the yield
on the 3-7/8 per cent notes, which mature a year earlier. By
providing investors the alternative of the 1966 issue, the
Treasury obtained some very inexpensive debt extension.
The refunding took place against the background of a Treas
ury bond market that was moving up in price, partly in reflec
tion of Treasury comments concerning long rates over the rest
of the year. There also appears to have been some diversion of
funds from corporate to Treasury bonds in view of the relatively
narrow spread that has developed between yields on these
obligations. The market is not altogether confident of current
price levels, however; and yesterday, when a market letter dis
cussed the possibility of some move in monetary policy over the
next few weeks, there were signs of restiveness on the part of
some dealers with sizable holdings of bonds acquired in the
recent advance refunding.
Following this statement, Mr. Stone indicated that current reserve
projections suggested that it might be appropriate to return the limita
tion on changes in the aggregate amount of U. S. Government securities
held in the System Open Market Account between meetings of the Committee
to $1 billion from the $1.5 billion that had recently prevailed.
Mr. Mills said he would like to direct a broad question not so
much to Mr. Stone as to the Committee.
Mr. Stone's discussion had
brought out the fact that an even keel policy devoted to giving back
ground assistance to Treasury financing had been followed recently, as
was customary in similar situations.
The presumption was that, if it
2/11/64
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had not been for the Treasury financing,
permitted to fall
free reserves would have been
to a much lower level--in fact, to a negative position-
despite the fact that the short-term rate structure had not changed
appreciably.
The question in his mind was whether the loyalty of the
Committee and the System to the Treasury should outrank the allegiance
owed to the general market, where over a protracted period there had been a
level of positive free reserves of quite substantial size.
If, when the
Treasury's need for assistance had passed, the Committee should proceed
to shrink the level of reserves rather materially, it
would be going in
the face of what the market could reasonably have expected to have been
the trend in policy.
If that should be the future course of events, it
was possible that the market would develop a cynicism and skepticism
about the good faith of the System that, instead of benefiting the Treas
ury, might harm their future financing programs.
Mr.
Stone commented that, as he had indicated in his statement,
there had appeared to be a closer relationship over the past three or
four days between the market atmosphere, on the one hand, and the reserve
statistics on the other.
This was to be expected as the end of the
seasonal decline in credit use approached.
During the latter part of
January, in particular, there had been a substantial decline in bank
credit.
As bank loans were repaid, banks in turn repaid discounts and
made their excess reserves available in the Federal funds market, and
the market generally had an easier tone.
2/11/64
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Mr. Daane observed that there had been substantial upward revi
sions in prelininary free reserve figures in recent weeks, and Mr. Stone
noted that such revisions had occurred in
every week since the first of
the year.
Mr. Mitchell commented that at the previous meeting of the Com
mittee there had been a discussion of the desirability of letting
signals come through from the market, but he noted that there had been
only a 3-point fluctuation in the bill rate since then.
In response, Mr. Stone said that in the discussion at the previous
meeting he had tried to indicate the variety of reasons for the recent
narrow range of movements in the bill rate.
been conditioned to narrower movements.
One was that the market had
Beyond that, and perhaps as
important collectively, were recent structural changes in the market.
For
these reasons the bill rate no longer provided the kind of signals it
previously gave, and fluctuations probably would continue to be smaller
than in the past.
However, Mr. Stone said, the Desk was not without sensitive signals,
of which the performance of the Federal funds market was perhaps the most
sensitive.
Recently, the Federal funds rate had stayed at or close to
the discount rate.
But over the past year and a half, the Desk had developed
a new network of contacts that disclosed what was happening with respect
to the volume of flows behind the relatively fixed Federal funds rate.
Through the course of each day the Desk had information on the depth of
bidding for Federal funds, and on the size of the supply of excess reserves
2/11/64
-6
available to the funds market; and it got confirmation of the impressions
obtained from this information after the close each day from figures on
funds transactions in the New York market that day.
Figures on member bank
borrowing which became accessible the next morning provided additional
confirmation.
The dealer lending rates posted by New York and out-of-town
banks, and evidence on the ease or difficulty encountered by dealers in
their efforts to get credit, also provided useful clues to market condi
tions.
The indicators on which the Desk relied were more subtle than
previously, but nevertheless were sensitive and useful.
Mr. Mitchell commented th.t such information might be very useful
to the Desk, but the problem remained of how the Desk could tell what
objectives the Committee wanted it to pursue.
Mr. Stone had implied that
his instructions were to keep the Federal funds rate at the discount rate,
to keep the morey market firm, and to keep free reserves at about $100
million.
But these instructions were inconsistent by his own test, and
he had to choose among them.
The Committee, Mr. Mitchell said, should
state what it wanted the Desk to do, and should not tell the Account
Manager to make decisions for the Committee.
Nor should the Desk use
standards and guides that the Committee was not posted on.
Mr. Stone replied that the implication he had intended in his
comment was that the market atmosphere and the free reserve figures pre
vailing before December were not compatible during December and January
when there were sharp changes in the rate at which reserves were being
utilized, but that the earlier relationship was now being re-established.
2/11/64
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In his judgment,
the Committee had made clear where it
wanted the Desk to
put the emphasis; the directive called for "maintaining about the same
conditions in the money market as have prevailed in recent weeks."
This
instruction referred to market atmosphere.
Mr. Mitchell said that in following the criterion of market
stability--and he agreed with Mr. Stone that that was about what the
Committee had voted to instruct the Desk to do--the Desk in effect had
given the Committee a small fluctuation in rate.
If,
because of struc
tural changes in the market, small fluctuations should be expected to
persist, it seemed to him that the Committee needed current intelligence
on some of the measures available to the Desk.
Mr. Daane commented that the measures in question, specifically,
the rates on and flows of Federal funds, were reported every morning in
the 11 o'clock call.
He personally decried interest rate rigidity, Mr.
Daane continued, but since the last meeting he had talked with some lead
ing dealers and had read Mr. Stone's statements in the minutes of that
meeting.
He thought Mr. Stone's analysis was correct.
A major factor
holding the bill rate within a narrow range was the development of the
certificate of deposit market, and as long as that market functioned as
at present, the bill rate probably would fluctuate within narrower limits.
In another comment, Mr. Daane said he thought it incorrect to
pose the choice facing the Committee as between formulating policy in
terms of a rigid bill rate or in terms of a reserve target.
Both were
2/11/64
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wrong; it
was necessary for the Desk to have some flexibility in
translate the feel of the Committee's wishes.
trying to
The Desk had done that in
a difficult period over the past two weeks.
Mr.
Bopp observed that Mr. Stone got a general notion of the
Committee's desires out of discussion around the table.
members could not act as technicians, he said.
The Committee
The Account Manager had
to have a degree of flexibility, and the Committee had to trust in the
Account Manager's judgment.
To Mr. Robertson's question of whether the Federal funds rate
was more sensitive than the bill rate, Mr. Stone replied that both were
relatively fixed.
When these rates were moving, the rapidity of their
movements was a useful indicator; but when they were not moving, the
volume of flows, the depth of demand, and the supplies of Federal funds
constituted highly useful indicators.
He added that the Desk was still
learning how best to use information of these types.
Mr. Balderston asked what the Desk would do if the Committee came
to the conclusion that the bill rate should fluctuate more than it had
recently, and Mr. Stone replied that it would be extremely difficult to
achieve that result.
He noted that in the week before the last the
Account had bought over $1/2 billion of bills in the market, and the rate
had moved down only 1 or 2 basis points.
About the only way the System
could get the bill rate to move significantly--even by 5 or 10 basis
points--would be to take some action indicating to the market that System
policy was changing, such as raising the discount rate or publishing zero
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2/11/64
or net borrowed reserve figures for two or three weeks in a row.
Such
actions would change the level of rates, but would not necessarily result
in a larger amolitude of fluctuation.
He would not want to state
categorically that gradual movements in rates were no longer possible,
but it was true that large fluctuations were not likely.
Mr. Daane commented that, as he interpreted Mr. Stone's position,
bill rate fluctuations were likely to be narrower than they had been in
earlier periods, but could be wider than they had been during the past
several weeks.
Chairman Martin observed that he thought the problem under dis
cussion reflected the Committee's decision to deal in all sectors of the
market,
thus departing from the so-called "bills only" policy.
The Com
mittee had decided to change its policy in this regard for the sake of
the advantages it thought would result.
The Committee had discussed the
matter for a long time, and had been aware cf the likely consequences of
its decision.
In his judgment no purpose would be served by retracing
those steps.
Mr. Stone said he would like to reiterate a point he had made at
the last meeting:
the bill market was not faltering; it was a broad,
active, strong market.
In a recent go-around in which the Desk had
solicited offers of Treasury bills, dealers had offered a total of $1,083
million of bills at existing market quotations.
changes in the whole network of markets that had
There had been structural
had the effect of reducing
the amplitude of rate changes, but the bill market itself was an excellent
2/11/64
one.
-20
That was why it
had been able to accommodate
the pressures for
structural charges that had been impinging upon it.
Mr. Hickman commented that in the recent period free reserve
figures had fluctuated erratically, and the bill
rate had been sticky
because of the structural changes Mr. Stone had mentioned.
But figures
on borrowed reserves had worked pretty well as an indicator in the past
month and a half; when they were high, there was a tight feeling in the
market.
These figures might not always work as well as they had in this
period, but perhaps their usefulness was worth further study.
Chairman Martin commented that there were various aspects to the
idea of "depth, breadth, and resiliency."
There was no doubt in his
mind but that a "bills only" policy produced more depth, breadth, and
resiliency in the market, particularly for longer term issues.
But he
also thought it would not be possible, under a "bills only" policy, to
get results as effectively and efficiently in terms of managing the money
market as were obtainable under the Committee's present method of opera
tion.
Mr. Deming observed that free reserve figures were a less perfect
guide in January and December than at other times of the year.
This was
partly because of imperfect seasonals, and partly because there was more
churning in the market at that time.
This fact, coupled with the Treasury
financings this year, and with the series of upward revisions in the free
reserve figures,
guide recently.
had made free reserves a virtually useless primary
2/11/64
-21Thereupon, upon motion duly made and
seconded, and by unanimous vote, the open
market transactions in Government securities
and bankers' acceptances during the period
January 28 through February 10, 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. Noyes commented on economic conditions as follows:
Early agreement on the tax bill now seems a virtual cer
tainty. The Treasury has successfully completed its current
financing program, We have in hand the results of the new
McGraw-Hill plant and equipment expenditure survey. A basic
reappraisal of the appropriateness of the current posture of
monetary policy in the light of these developments would seem
to be indicated.
With this in mind, I have reviewed the economic develop
ments of recent weeks as carefully as I could to see if I
could find in them any clues which would help evaluate the
current posture of policy, or suggest that either greater or
lesser ease would help contribute to the achievement of the
broad goals of economic policy. My conclusion is that it is
hard to fault monetary policy or the performance of the economy
in either direction.
It is still true, as we are constartly reminded, that unem
ployment remains in the unacceptably high 5-1/2 per cent range.
But we did get a gain in seasonally adjusted employment in
January. In fact, most of the data that have become available
seem to have moved in the "right" direction. That is, figures
that seemed unreasonably high or low have changed down and up,
respectively. December retail sales are an example, on one
hand, and capital expenditure plans on the other. Industrial
production, which has lagged since the middle of last year,
appears to be picking up a little. Bank credit expansion, to
borrow an example from the financial area, moderated in January
after a period of rather vigorous growth. In these few weeks,
at any rate, most of the movements have not only been in the
direction, but very nearly of the magnitude that one might have
hoped, had he specified his wishes in advance.
2/11/64
-22Perhaps a further word about: the 9 per cent increase in plant
and equipment spending in 1964 reported in the McGraw-Hill survey
is in order in this connection. In my judgment, this is not an
alarmingly high figure, but one more nearly in line with other
observed developments in the economy and estimates of the future.
Sensibly interpreted, it should not result in any higher estimates
of business borrowing than were already contemplated. It is just
about consistent with the Council of Economic Advisers GNP pro.
jection for the year, and with the forecasts of many business
economists and financial analysts. Financial markets seem to
have interpreted it in this way.
I find the subject of price developments most difficult,
primarily because I have very little confidence in my own
judgment in this area. I can plead in my defense, I think,
that recent developments have been without precedent in the
post-war period and may well be unique in this century. We are
about to enter the fourth year of rather vigorous recovery and
expansion with wholesale prices still at about the same levels
that prevailed in the preceding recession. Beyond this, profit
margins, far from being squeezed, seem to have improved a little,
if anything. Thus, we find ourselves in a situation in which
the experience of this generation, at least, is not of much help
to us. There are some good reasons why we might expect upward
price pressures in the year ahead, but they are not very dif
ferent from the reasons why we might have expected such price
developments in 1961, 1962, or 1963. It is hard to conclude
that price movements of the last year, taken as a whole, or of
recent weeks, can be fairly characterized as inflationary, nor
is there a basis for forecasting, with any more certainty than
one might have felt a year ago or two years ago, that a truly
inflationary situation will emerge in the period ahead. Con
ventional cyclical analysis would have called for rising unit
costs, impingement on profit margins and upward pressures on
prices, in all but the very early stages of the recovery.
Recent experience has not conformed to this pattern.
The big difference this year is that the economy will
receive the additional stimulus of a large reduction in Federal
taxes. This may provide just the additional stimulus needed to
achieve a somewhat higher level of resource utilization without
generating inflationary pressures; or it may create an excess
of aggregate demand, putting prices under strong upward pressure;
or finally, it conceivably could fail in its intended pur
pose and add very little to either consumer purchases or
business spending.
In the absence of the uncertainties surrounding the impact
of the tax cut, one could make a very strong case, I think, that
2/11/64
-23-
the present posture of monetary policy is appropriate to the
needs of the domestic economy. In the light of these uncertain
ties, one can only conclude that it may not be, but that the
nature and degree of change needed, if any, depends heavily on
one's guess as to the timing and magnitude of the impact of the
tax cut on aggregate demand. It takes more confidence than I
have in our measurement of multipliers and accelerators to
predict that impact with assurance.
In the discussion following Mr. Noyes' statement, it was brought
out that the latest McGraw-Hill survey indicated a gradual upward move
ment in plant and equipment expenditures over the successive quarters
of 1964.
Mr. Holland made the following statement with regard to the
financial situation:
The developments that have occurred since the last meeting
of this Committee confirm the calmer financial performance that
has followed the sharp year-end bulges in activity. Even the
stock market, in advancing to new highs, has done so by means
of fairly orderly and moderate moves, considering the rapidly
improving likelihood of an early tax cut. Long-term debt mar
kets have been firmer, with most rates declining slightly on
balance. Short-term rates have moved narrowly around the
levels reached late in December.
Our latest figures show that bank loans and investments
declined by about one-half billion dollars more than usual in
January, in sharp contrast to mucn stronger than seasonal
increases in the last two months of 1963. Most loan categories
showed only moderate January increases, seasonally adjusted,
apart front a bulge in securities loans associated chiefly with
Treasury financings. To make room for such loan expansion,
banks returned to the position of being large net sellers of
Government securities, chiefly shorter terms. Meanwhile, the
average money supply has been boosted by a large year-end run
up that has not yet been fully reversed; and by dint of aggres
sive merchandising efforts, especially in CDs, banks have
increased their time deposit totals sharply.
Other savings institutions also indicate sizable recent
net inflows, seasonally adjusted, most of which are quickly
reinvested in longer term earning assets. The result has been
an extension of the trend characteristic of most of this
2/11/64
-24
cyclical upswing--private liquidity growing moderately faster
than the growth in real GNP, combined with decreasing liquidity
of the intermediary financial institutions. Studying this
developmert in retrospect, I think the recent growth in the
liquidity of the nonfinancial sector should not appear either
surprising or unnatural, when one considers such influences as
the affluence of most of our society, the relative attractive
ness of liquid financial investment compared with other outlets
for funds, and the mounting totals of indebtedness to be ser
viced. But there is no gainsaying the fact that the larger
liquid asset holdings in private hands provide the wherewithal
for substantial step-ups in spending if that inclination should
develop. On the other hand, since most of this liquidity is
in nonmoney form it must be converted into demand deposits
and currency to be spent and the banks will have to come to
the Federal Reserve to cover the reserve needs thus generated.
Furthermore, our financial institutions have moved into a
position in which they seem quite vulnerable to a significant
tightening in reserve availability, and thus are likely to be
a good deal speedier and sharper transmitters of monetary pres
sure to both private borrowers and investors. In effect, we
have sharper tools in hand, but a bigger job may be in prospect.
The question is often asked, "How much has the Federal
Reserve contributed to this development?" The catalytic role
of the increase in Regulation Q ceilings is, I think, clearly
recognized. Less clear is the part that: has been played by
System actions to add to the. reserve base. Partly, I am sure,
this is because of the varie:y of reserve measures at hand and
the often counterbalancing movements among them. I suppose at
no time has this been more evident than over the six months or
so since the last change in policy in July. Over this span,
System open market operations have added net to nonborrowed
reserves at only a 1.9 per cent annual rate, less than half the
rate of the preceding half-year, banks have borrowed a bit
more in reserves from the discount window, however, so total
reserves over this period are up at a 2,3 per cent rate. Loan
demands and investment opportunities have been such as to lead
banks to mike more than proportionate use of these reserves,
and therefore required reserves have moved up at a 3.2 annual
rate. But two further factors have greatly helped banks to
economize on their use of reserves to supply private credit
and liquidity. One has been a large net transfer of deposits
out of Government hands and into privace hands, in amount suf
ficient to free the equivalent of a 3.3 per cent annual rate of
accretion in reserves behind private demand deposits. The
second has been the continued large public appetite for time
deposits. With the low applicable reserve requirement on these
deposits, even the 17.5 per cent annual rate of increase in
2/11/64
-25-
reserves needed to back time deposits since July absorbed only
about: half the total available reserve funds. As a result,
total reserves required behind private time and demand deposits
combined showed an increase of 7.0 per cent annual rate after
July 31. Accompanying the deposit expansion, total bank credit
has grown by an 8.6 per cent annual rate.
Some observers may regard the rates of expansion of bank
credit and private deposits over the past six months as greater
than are likely to be desirable if long continued. But indications
over the past four weeks suggest that market forces themselves
are eliciting a less vigorous bank expansion. Signs of this can
be seen in the more moderate bank loan demand, the return to sub
stantial bank divestment of securities, and the January see-saw
in money supply totals.
The chief exception to this rule appears to lie in heavy
January bank sales of CDs. These sales have been large, and
may even become larger for a time if banks endeavor to deal
with greater reserve pressures by trying to buy liabilities
rather than liquidate assets. Such a problem could be knotty,
but it may lend itself more to treatment by means of a selec
tive adjustment of the limitations of Regulation Q rather than
the flexing of general monetary policy.
However the general thrust of policy is determined over
the next few weeks and months, the question of operating
instructions to the Desk is obviously a matter of continuing
conce.rn. : am led to observe that System efforts to loosen
money market rigidities would probably have to involve a
toleration of larger swings in the "feel" of the market and in
bank borrowing, as well as larger ranges of permitted fluctua
tion in free reserves and in money market interest rates. In
essence, this would mean System open market operations conducted
with a view to offsetting somewhat less of the daily, weekly,
and monthly reserve and money market fluctuations than has been
usual.
Mr. Daane asked whether Mr. Holland, by his final observation,
meant to suggest a redefinition of "even keel," since an even keel period
had been and still was in effect and probably would extend beyond the
February 17 payment date for the Treasury's refunding.
Mr. Holland
replied that he was abstracting from periods of Treasury financings.
Mr.
Ellis commented that this would imply that the difference in amplitudes of
2/11/64
-26-
fluctuation in market statistics between periods of even keel and other
periods would be increased.
Mr. Noyes remarked that if the market were
accustomed to wider movements, there could be larger fluctuations during
even keel periods; bill rates had moved up and down by 5-10 basis points
in such period; in the past, although the movements had not been pre
dominantly in ,ne direction.
Chairman Martin observed that the nature
of policy after the even keel period also was a factor.
Mr. Wod then read the following report, which had been prepared
by Mr. Furth, on international developments and the U. S. balance of
payments:
The past two weeks have seen no substantial change in
the trend of the international economy. Tentative weekly
data indicate a deficit in U. S. international payments for
the first five weeks of the year of only $125 million, a
rate sligttly lower than that for the second half of 1963.
Abroad, economic expansion continues, still combined
with a payments surplus in.most countries. of continental
Europe. The payments difficulties of Italy appear to have
been eased; in January, its deficit, adjusted for the repay
ment of bank debts incurred last year, has hardly exceeded
the normal seasonal range.
In 1963, the Common Market countries had an aggregate
payments surplus of $1-1/2 billion. Robert Marjolin, a Vice
President of the Common Market Commission, has predicted
that these countries would have an aggregate deficit in 1964.
But this widely publicized statement should be interpreted
as nothing more than an attempt at defeding the negative
European policies under attack by U. S. critics--refusal to
abandon agricultural protectionism; to grant adequate tariff
concessions in the imminent "Kennedy round" of trade negotia
tions; to bear a more equitable share of defense and aid
burdens; and to modify traditional anti-inflationary monetary
policies that tend to increase the inflow of foreign capital
into Europe. It is heartening, however, to find that Germany
has taken the first modest steps toward reducing its interest
rate level, by offering bonds at 5-5/8 per cent rather than
the usual 6 per cent yield.
2/11/64
-27At home, data that became available last week show both
the composition of the U. S. payments deficit for 1963 and the
way in which it was financed. These data make it possible to
analyze the impact of recent improvements in the U. S, payments
balance on the international liquidity position and thus on the
international financial strength of the United States.
The conventional calculation of the U. S. balance is asym
metrical in that it regards an increase of liquid claims of
foreigners against U. S. residents as increasing the deficit
but does not regard an increase of liquid claims of U. S. resi
dents against foreigners as reducing the deficit. For some
analytical purposes it seems possible to take the position thatwhile there is in many cases a difference in the degree of
liquidity--there is no difference in principle between a Canadian
deposit with a U. S. bank and a U. S. deposit with a Canadian
bank; between a German bank loan to a U. S. customer and a U. S,
bank loan to a German customer; between Belgian acquisition of
U. S. bonds and U. S. acquisition of Belgian bonds; and between
the grant of U. S. assistance to a foreign nation and the receipt
of repayments from the assisted country. There may be good
reasons for differentiating between these payments and receipts
for the purpose of calculating changes in primary liquidity but
there seem to be no good reasons for doing so in calculating
changes in the equally important secondary liquidity position
of the United States.
If the U. S. payments deficit in recent years is adjusted
in accordance with that view, the deficits for 1958, 1959, 1960,
and 1962 remain disturbingly high. The deficit for 1961 is
greatly reduced and the deficit for 1963 virtually disappears,
being reduced to $200 million.
This computation is presented not to deprecate further
measures to eliminate the "conventional" deficit but to assess
the European complaints which assert that the United States has
been financing extravagant expenditures by forcing dollar claims
on unwilling foreign holders. The data show that the size of
the deficit as conventionally calculated need not be interpreted
as reflecting U. S. debts incurred to finance U, S. military and
economic aid to foreigners and the acquisition of equities abroad
by U. S. investors; rather, it may be interpreted as arising
mainly because foreigners borrowed U. S, dollars, i.e., gave the
United States claims on them, to the tune of $2-1/4 billion,
taking in return half a billion in gold and roughly $2 billion
in claims on the United States. Last year, in contrast to most
previous years, the net borrower was not the United States; it
was the rest of the world.
-28-
2/11/64
The weakness of the argument that the United States has
been forcing dollar balances on unwilling holders may be demon
strated in another way. The. deficit for last year, conventionally
calculated, was $3 billion. Foreign authorities made debt prepay
ments of half a billion, took another half a billion in gold, as
just mentioned, and an additional half a billion in nonmarketable
securities denominated in foreign currencies. This left $1-1/2
billion to be financed by an increase in foreign dollar holdings.
International institutions reduced their dollar holdings by $200
million, but. foreign authorities increased theirs by $900 million,
and foreign private bankers, merchants, and investors by $800
million. About half of the $900 million increase in official
dollar holdings accrued to less developed countries, which pre
Similarly, the
sumably were willing recipients of these assets.
net increase of $800 million in foreign private dollar holdings
was voluntary; the attitude of the international market toward
the dollar is shown by the fact that private foreigners reduced
holdings of "covered" dollars by $200 million and increased hold
ings of "uncovered" dollars by $1 billion. Thus, if there was
any involuntary increase in foreign dollar holdings; it must have
been confined to the increased in dollar holdings of the "Group of
Ten," other than the United States, amounting to less than half a
billion dollars. Clearly, the conversion of that amount into
gold would have been tolerable, and might have been a small price
to pay for putting a stop to the complaints of some members of
the Group about the sacrifices they are making in supporting the
allegedly weak dollar and permitting it temporarily to remain an
international reserve asset.
If the tentative deficit figures of anuary and early
February are confirmed by the final reports, these complaints
may soon be replaced by demands for larger outflows of dollars.
In the meantime, the forthcoming U. S. drawing on the IMF
It there
might well have adverse psychological repercussions.
fore is particularly important at this time to improve under
standing of monetary reality among public as well as private
members of the international financial community by pointing out
those recent developments in the U. S. payments deficit and its
financing which seem to have escaped their, and perhaps our own,
attention.
Chairman Martin then called for the usual go-around of comments
and views on economic and monetary policy beginning with Mr. Treiber,
who commented as follows:
2/11/64
-29-
This month marks three full years of business expansion.
The business situation continues to be good, and business senti
ment is buoyant. The economy's present momentum, the absence of
speculative inventory accumulation, and the stimulus of a
prospective tax cut support the expectation of another year of
business expansion.
Since the last meeting of the Committee there have been no
significant changes with respect to employment or prices. The
leveling off of bank credit expansion in January in contrast to
large increases in preceding months does not necessarily indicate
any significant change in the underlying trend of loan demad.
But it does indicate the possibility of a slowdown in the rate
of bank credit expansion. There has been little change in bank
liquidity ratios. Broadly speaking, there is plenty of bank
liquidity and nonbank liquidity.
Over the last three years we have had relatively stable
prices. More recently, however, price developments have been
mixed and industrial materials prices have risen moderately.
Continuation of a reasonable degree of price stability cannot be
taken for granted. Further gains in business activity will tend
to reduce excess manufacturing capacity and make the economy more
vulnerable to demand pressures. The trucking industry and the
teamsters' union have agreed on a nationwide contract, with wage
increases and fringe benefits costing about 4 per cent a year
over the next three years. There are indications that other
labor unions, such as the United Auto Workers, will press for
substantial wage increases, citing large increases in productivity
and large profits in their particular industries. While large
wage increases in industries that have had above average in
creases in productivity may be absorbed without increases in
prices in those industries, the large wage increases are likely
to foster corresponding wage increases elsewhere and to push up
wages generally faster than the increase in over-all productivity.
The consequence could be a cost-push on prices.
Prospects for further general price stability depend on
such underlying elements as world market trends in primary
products, and movements in the rate of capacity utilization,
in productivity, and in wages and salaries. Price stability
is required not only to protect the domestic purchasing power
of the dollar but also to strengthen the international competi
tiveness of the United States and thus improve our balance of
payments.
The most recent balance of payments figures are encouraging.
Favorable factors in January included the absence of any new
foreign security issues, a relatively small build up in liabilities
to foreign branches of U, S. banks and to the foreign offices of
-30-
2/11/64
Canadian bank agencies, and the after effects on payments of the
December jump in our export surplus. But one or two swallows
don't make a summer. It remains to be seen to what extent the
current favorable situation will continue. Part of the improve
ment probably reflects a continuing gai in our international
competitive position. Part reflects additional exports financed
by the U. S. Government in one way or another. Can we keep down
or reduce our unit costs at home? We can't rely on further price
increases abroad to improve our competitive position. Some
European countries recently have undertaken steps to curtail their
domestic price rises. Such steps also could attract capital out
flows from the United States. Regardless of the effect of monetary
action taken by foreign countries, we know that foreign security
issues in the United States are going to rise in the next few months.
The balance of payments must continue tc have high priority in our
thinking.
The current situation calls for caution. We have a domestic
situation which may well call for less ease in view of the better
business prospects; we have possible dangers ahead if there are
further rapid increases in bank credit and liquidity; we have signs
of some upward movement in prices; and we have continuing uncer
tainty on the international side. But, in my opinion, these factors
do not call for a change in policy today.
The lack of immediate inflationary pressures, some indication
of a slowdown in the rate of credit expansion, the encouraging signs
with respect to our balance of payments, and the attention being
given by the Congress to legislation in the economic area, particularly
taxes, counsel no change in Federal Reserve policy at this time.
I do think, however, that it would be entirely consistent with
the current directive to have a slightly firmer tone in the money
market than we have had in the last couple of weeks. I am glad to
see that somewhat firmer conditions have in fact emerged in the last
few days.
I think there should be no change in the discount rate and that
there should be no substantial change in the directive. The refer
ence in the directive to an imminent Treasury refunding should be
deleted.
Mr. Ellis said that the New England economy was satisfactory but
not up to its full potential.
Manufacturing output had risen a little
more than seasonally in December.
The purchasing agents survey suggested
strengthening of output in January--there were more frequent reports of
2/11/64
-31
increased orders to manufacturers in the region.
The December employment
record was not good; there was a November to December decline in employ
ment in nondurable manufacturing industries which pulled total
manufacturing employment down.
ago.
Both groups continued down from a year
However, nonmanufacturing employment rose enough to hold total
employment in the District slightly above the level of a year ago.
New bank credit extended in December recovered sharply from the
low November figure to a level 10 per cent above a year ago.
Bank loans
were strong in January despite a high average loan-deposit ratio.
District
banks continued to find loans to foreign banks attractive, and they had
increased the funds allocated to this purpose by about 68 per cent since
July.
They continued to bid for time certificates of deposit.
The fact that the Treasury was in the midst of a refunding and
had just completed an advance refunding, Mr. Ellis said, suggested that
policy should not be changed materially and overtly immediately.
He felt,
however, that the Committee's deliberations should be devoted largely to
underlying issues and to the policy to be followed after the Treasury
operations were completed.
The present upward thrust in the economy came
during a season of the year when some hesitation was common, and it was a
source of satisfaction.
At the same time, the evidence of the new McGraw
Hill survey on the rate at which capital expenditures would advance, and
the stimulation to be expected from the tax cut, suggested that it was
appropriate to remain alert to possible inflationary pressures from a
2/11/64
-32
superheated aggregate demand.
It did not seem that the 5-1/2 per cent
unemployment rate would stand as an impediment to labor demands in the
forthcoming wage negotiations, and it appeared likely to Mr. Ellis that
by next fall higher wage costs would be stimulating price advances.
In this atmosphere, Mr. Ellis continued, monetary policy had
made its contribution in full measure, and since July, perhaps in more
than full measure.
The staff memorandum indicated that, since the dis
count rate action, reserves supporting private deposits had expanded at
a rate of more than 7 per cent, and there had been an 8.6 per cent growth
rate in total bank credit.
While the staff analysis of the credit situation
this morning was good, it did not present an argument to the effect that
a 7 per cent rate of reserve expansion was sustainable.
While the
expansion rate varied from month to month, ar.d it was possible to hope
that it would slow down, the record since July did not suggest that the
present degree of ease would result in more moderate and sustainable
expansion.
Mr. Ellis' inclination was to seek a lessening in monetary ease
to slow down the rate of monetary expansion, in view of the new stimulation
to be provided by fiscal policy.
Unfortunately, a problem was posed by
the 4 per cent Regulation Q ceiling.
Credit expansion could be expected
to lift the short-term rate and bring the rate on CD's to the ceiling,
thereby threatening a loss of as much as $10 billion of deposits unless
the ceiling were lifted.
The critical decision facing the Committee was
2/11/64
-33
whether it should provide reserves to whatever extent was necessary to
prevent interest rate increases, or whether it should allow rates to rise
and thus probably necessitate an increase in the Regulation Q limits.
There might be negative reactions to an action raising interest rates
immediately after tax legislation was enacted.
For the moment, Mr. Ellis concluded, he favored no overt action.
He would continue policy in its present posture and watch for signals,
such as solid evidence that industrial prices were beginning to rise,
that indicated the need for a change in posture.
In the absence of such
signals he would make no material change in policy.
At the same time,
he found it hard to believe that month after month the Committee could
continue to renew a directive which simply called for operations "with a
view to maintaining about the same conditions in the money market as have
prevailed in recent weeks."
There had been changes in recent weeks that
in his judgment did not conform to the basic objective of policy.
He
would hope that the Desk would be a little more aggressive in seeking a
somewhat lower rate of reserve growth.
Mr. Irons reported that business conditions in the Eleventh
District had moved ahead quite satisfactorily during the past month.
Industrial production in January was 7 per cent above the year-ago level,
and oil production was up about 8 per cent.
Construction contract
awards were quite strong, particularly for residential construction.
Retail trade figures were favorable.
The unemployment rate in Texas
2/11/64
-34
(not seasonally adjusted) was around 4.6-4.8 per cent.
New car regis
trations were high; apparently new cars were moving well in the major
cities for which data were available.
The District picture was pretty
much the same as that in the nation, with some variations.
Conditions
were strong but not surging, and there were few evidences of imbalance
at present.
District banking figures for the last three weeks relative
to a year ago also were much like those for the nation, Mr. Irons
continued.
Loans, investments, and deposits were all down a bit.
The
Federal funds picture had not changed much; purchases by District banks
averaged around $750-$800 million and sales about $350 million.
Borrow
ings from the Reserve Bank were down somewhat.
Nationally, Mr. Irons said, economic developments were favorable,
the underpinning was strong, and the economy appeared to be well balanced.
There was a high degree of liquidity.
Bank credit recently had not
expanded as much as expected, but this was not damaging.
Commodity
prices were reasonably stable; although prices might be moving up in
some areas, there was no strong evidence of inflationary pressures.
The balance of payments problem was not solved, but there had been
improvement recently.
Mr. Irons felt that in view of current circumstances and uncer
tainties, the Committee should have clear and convincing reasons before
making any significant change in policy at this time.
It would be a
mistake, he thought, to try to anticipate the effect of the tax bill
2/11/64
when it
-35
was not. known what the final bill
consequences might be.
would be like nor what its
Accordingly, he favored continuing the policy
that had been followed in the past several weeks for the next 3 weeks,
meanwhile watching developments closely.
Mr. Hemmings reported that information available since the last
meeting of the Committee indicated that employment rose in
December in
the Twelfth District as a whole; moreover, the rate of increase surpassed
that for the nation, as it did during much of the latter part of 1963.
Although practically all District States reg:.stered some gain in employ
ment in December, the bulk of the increase had been in the Pacific Coast
States.
An unusually sharp dip in
the labor .orce plus the modest gain in
employment caused the District unemployment rate to fall to 5.6 per cent
from 6.1 per cent in November, Mr. Hemmings said.
This was the lowest
rate since the spring of 1963, but it was slightly higher than the 5.5
per cent figure of a year ago.
Despite the December decline in the un
employment rate, another major labor market area--Tacoma, Washington
was added in December to the list of District labor areas classified as
having substantial unemployment.
There were now six such areas in the
District compared with four a year ago.
Relatively few business data were available for January, Mr.
Hemmings continued.
In two instances, department store sales and steel
production, the gains over a year ago had been less in the District than
in the nation.
However, the demand for nonferrous metals had remained
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2/11/64
firm.
Hedge buying against the possibility of a strike by mid-year at
District copper mines currently was a major factor in the strong demand
for that metal.
A pickup in demand for lumber and plywood, particularly
from the California market, reportedly resulted in substantial price
increases for virtually all dimension items as well as for plywood
sheathing in late January.
In the financial area, total bank credit outstanding at District
weekly reporting banks declined in the two-week period January 15-29
nearly three times as much as in the corresponding weeks of 1963.
The
reduction was about evenly divided between loans and investments.
The
reduction in holdings of U. S. Governments in these two weeks by District
banks accounted for more than one-fourth of the total decrease for all
weekly reporting banks in the nation.
The decline in demand deposits adjusted at District weekly report
ing banks was substantially greater than in the corresponding weeks of
1963, as it was nationally, Mr. Hemmings said.
The increase in total
time deposits was about the same in amount as in 1963 and accounted for
one-third of the total increase for all weekly reporting banks in the
nation.
Daily average borrowings of reserve city banks in the District
dropped off substantially in January, but the banks continued to have
negative free reserves.
29,
During the two statement weeks ending January
banks in the District as a whole were net sellers of Federal funds.
2/11/64
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In both weeks, a large portion of the net sales was accounted for by
one bank, as it reduced bill holdings and placed the proceeds in the
Federal funds market.
Mr. Deming observed that there had been no noteworthy new
developments in the Ninth District in the past two weeks.
More recent
estimates of personal income confirmed a fairly sharp drop in December,
reflecting the fall in farm prices and the delay in farm marketings.
In January, nonagricultural employment in Minnesota was up fairly strongly.
There seemed to be no particularly serious maladjustments in the District
at this time.
One circumstance that seemed atypical and that was difficult to
understand, Mr. Deming said, was the lack of exuberance in the District
with respect tc the business outlook.
The "Minnesota Poll," a scientific
public opinion poll conducted by Twin City newspapers, found sentiment
not significantly different from a year ago.
The Reserve Bank's opinion
survey, which was banker-business oriented, continued to show more
pessimism than a year ago.
The Bank's poll probably had some seasonal in
it, but the change in attitudes it indicated was quite marked.
The District banking situation was about the same as in the nation.
Officials at some of the larger city banks recently indicated that they
expected a smaller increase in loan demand in 1964 than in 1963.
Mr.
Deming thought there probably was some downward bias in their estimates,
but in any event the estimates did not support an expectation of a strong
increase in loan demand.
Loan-deposit ratios at city banks in the District
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2/11/64
were about the same as in 1960, and up only a point in the last year.
The trend at country banks was somewhat stronger.
Mr. Deming said he agreed with the v:ews expressed by Mr. Treiber and
Mr. Irons.
He favored no change in policy at this time, and no change in
the directive except for the elimination of the phrase on Treasury financ
ing.
He would not change the discount rate.
Mr. Scanlon said that the outlook for business activity in the
Seventh District continued to be favorable.
Retail sales had been at very
high levels in recent weeks and output in major industries had been
maintained or had increased.
Virtually all of the business forecasts
coming to the attention of the Reserve Bank were optimistic.
Mr. Scanlon observed that Mr. Treiber had mentioned wage contract
negotiations later this year.
Signs of labor unrest were becoming evident
in some major Seventh District industries, he said, particularly in the
case of firms manufacturing motor vehicles and construction machinery.
The Reserve Bank would be watching developments in these areas with great
interest.
at the recent posture had
As to policy, Mr. Scanlon believed the
been satisfactory and that it should be continued until the next meeting
of the Committee.
He thought the directive could well stand, except for
the reference to "an imminent Treasury refunding."
He would not favor
changing the discount rate at this time.
Mr. Clay said that at this juncture it appeared appropriate to
continue essentially the same monetary policy.
Weighing the various
2/11/64
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developments in the domestic economy, the situation remained one that
called for sufficient reserve availability to permit member bank credit
expansion on a seasonally adjusted basis.
Theprojected improvement in
business capital outlays was a much needed indication of expanding
activity, but at present it was part of the broader pattern of moderately
increasing economic activity that had prevailed for some time.
Balance
of payments developments also appeared to permit a continuation of the
recent monetary policy posture.
Except for the deletion of the reference
to Treasury financing, the economic policy directive could be retained
in
its
present form.
The discount rate should be left
unchanged,
Mr.
Clay
concluded.
Mr. Wayne observed that Fifth District business conditions re
mained substantially as reported two weeks ago:
high levels.
holding at generally
In manufacturing, the December gain in man-hours had
turned out to be larger than suggested by early data, and January reports
from industry sources indicated firm to strong, markets in metals, lumber,
furniture, textiles, apparel, and chemicals.
Construction employment
was showing considerable resistance to the usual seasonal declines, and
the backlog of work probably was at an all-time high as a result of a
record volume of contract awards in the last five months of 1963.
De
partment store sales improved sharply in the final two weeks of January.
Bituminous coal production and shipments were somewhat lower in January,
but foreign loadings were up and the general outlook remained favorable.
Consumer loans at District weekly reporting banks displayed better than
2/11/64
-40
seasonal strength in January, but business and real estate loans were
somewhat weaker than usual.
In the Federal Funds market District banks
were net sellers through the first three weeks of January but swung over
to fairly heavy net purchases in the two weeks ended February 5.
A few remarks on the cigarette market might be in order, Mr.
Wayne said, although solid facts were scarce.
Except where certain new,
highly advertised filter brands were involved, District cigarette plants
had reduced the work week from a normal five days to four, and in a few
cases to three.
Some liquidation of excess stocks in January and February
was a normal seasonal pattern.
There was more to liquidate this year but
how much more was not yet known, so inventories would be checked week by
week for evidence to justify a return to full production.
For one large
producer this was already the fourth four-day week compared to only two
such weeks required for last year's inventory adjustment.
Meanwhile,
reductions from year-ago levels in January State cigarette tax revenues
reportedly ranged in some areas as high as 15 or 20 per cent, but changes
of this magnitude appeared exceptional and might be temporary.
Nationally, Mr. Wayne continued, the flow of current information
indicated that the economy continued to register a moderate and firmly
based improvement.
Two weeks ago he had noted a mixed behavior in
prices, but since that time additional evidence pointed more toward price
stability.
On several occasions during the current upswing there had
been patterns of price movements that looked like the beginning of an
inflationary rise, but they had all collapsed after a few weeks.
Such
2/11/64
-41
would seem to be the fate of this movement,
although it
was too soon
to be certain.
In the policy field, Mr. Wayne believed that conditions in
the
money market for the past two weeks had been appropriate in view of
prevailing conditions.
Seeing nothing in the current situation to suggest
an urgent need for a change, he favored a continuation of present policy
and a renewal of the current directive, with elimination of the reference
to Treasury financing.
change in
Obviously, Mr. Wayne said, he did not feel that a
the discount rate would be in order.
In a concluding remark, Mr., Wayne commended the Desk for
having appropriately carried out, under difficult conditions, what ha.
believed to have been the intent of the Committee.
Mr.
Mills observed that as he had followed the discussion
around the table, it
seemed to him that the problem that the partic
ipants were attempting to contend with was one of leads and lags, with
the knowledge that it was necessary in monetary policy to lead against
anticipated future events, and with the further knowledge that there was
a lag between the time a policy was instituted and the time its impact
produced economic and financial results.
His own feeling was that it
was still much too early to attempt to lead with monetary and credit policy
against the possibility that the economy might overheat and at some unfore
seeable future date produce inflationary pressures.
It would be preferable
to delay any leading of the economy and to accept the very minimal risk
that delay at this time might provoke future problems.
It was his strong
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2/11/64
belief that there would be ample time to take action against inflationary
developments it and when they become truly evident.
Mr. Mills thought
that for the present there were good grounds for feeling that the economy
needed the stimulus of a reasonably relaxed credit policy that would
permit expansion along the lines recently experienced, as reflected in
the statistics.
After these remarks, Mr. Mills presented the following state
ment:
The nost significant event that has happened since the
Committee's last meeting is the upward revision in business
plans for new plant and equipment outlays revealed in a new
McGraw-Hill report. To the extent that these investment pro
grams represent enlarged plant capacity, rather than future
modernization of existing capacity, they indicate expectations
of expanding market opportunities. In order for the economic
multiplier effects of these prospective additions to capital
investments to be fully realized in their own right as spending
stimulants and as sources of new savings, it is crucially
important that adequate credit be available to finance the
resultant enlargment of output through distributive channels
and on to final consumption. A more restrictive Federal
Reserve System monetary and credit policy could block an
advance into higher grounds of well-rounded economic activity.
The current rule that an expansion in demand deposits
adjusted and time deposits should be held to an annual rate
of 3 per cent is tantamount to setting up an economic roadblock,
in that mechanical adherence to the rule implicitly demands a
curtailment of credit and a consequent contraction of demand
deposits whenever the 3 per cent expansion factor is violated.
Slavish adherence to what is only a theoretical rule that has
been arbitrarily--if not arbitrarily and capriciously--chosen
as an appropriate measure for bank credit expansion is bound
to have deleterious economic effects, in that normal and natural
forces working toward economic advancement stand to be subjugated
to the confines of a theory whose empirical validity remains to
be proven. If the Committee persists in a belief that monetary
and credit policy should be guided and formulated according
to a predetermined percentage factor for deposit expansion, it
2/11/64
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would at least be preferable to raise the expansion factor
from 3 per cent to 4 per cent and in that way dissipate the
ungrounded fear of unwarranted credit expansion that has been
expressed whenever estimated required reserves have exceeded
the 3 per cent guideline.
I have argued continuously for the elimination of artifi
cial controls over interest rates and the abandonment of a
pegged United States Government securities market. The
arguments for a restoration of free market principles to the
securities markets can be applied with equal cogency for a return
to the principles of dependence on the evolution of natural
factors in the credit markets, rather than adherence to a
mechanistic theory of the supply of reserves, as the better
guideline on which to formulate monetary and credit policy.
Mr. Robertson said he was pleased by the similarity of the
conclusions that had been expressed around the table up to this point.
He then made the following statement:
We are hearing a good deal about "anticipations"--antici
pations of somewhat greater plant and equipment expenditures,
anticipations of greater consumer spending, anticipations of
possible inflationary price movements that might result--all
in response to the tax cut. But it seems to me there is one
other "anticipation" that ought to be worrying this Committeethat is, how much of the stimulative effect of the tax cut has
already been anticipated in our markets. To the extent that has
happened, any further upward push has been reduced, and the
need for any changes in monetary policy has been correspondingly
diminished. How shall we know how much of the tax cut has been
anticipated, and how much additional stimulus remains? The only
thing we can do is to wait and see.
In times like these, monetary policy should be based on
facts and events--not on pure guesses as to what the future
holds. And the facts of the moment are that unemployment is
still high, prices are generally stable, and the balance of
payments has shown a marked improvement. To my mind, that adds
up to a need for a continued stimulative monetary policy--con
tinued until enough adverse developments actually happen in our
markets to show that a change is needed.
I know it is argued that if we wait until an inflation
actually starts before we tighten monetary policy, it will be
too late. But I for one am not of that view. I think resolute
tightening action on our part, whenever price increases become
general and substantial, can brake that inflationary rise. We
-44-
2/11/64
might have to stand some rather sizable interest rate increases
in the process, but I think some people will be surprised at
how quickly our financial institutions--with their already much
reduced liquidity positions--respond to a tightening policy.
It is because I have confidence in the effectiveness of resolute
tightening actions in such an environment that I am prepared to
argue for our being resolute now in adhering to a stimulative
policy.
I would translate that objective into an instruction to
the Manager to continue reserve availability at least as ample
as in recent weeks, without worrying about incipient or modest
movements in market interest rates, so long as they remain orderly.
Of course, the reference to Treasury financing should be
dropped from the directive.
Mr. Shepardson said that in his judgment the description of the
economic situation given by the staff and others this morning, and the
uncertainties as to the type of tax cut that would be enacted, the effects
it would have, and the extent to which it had already been anticipated,
all argued for continuation of present policy during the ensuing 3-week
period.
Mr. Mitchell said he would accept Mr. Irons' description and
analysis of the economic situation and his policy recommendation.
Mr. Daane observed that he shared Mr. Noyes' lack of confidence
in the precision of the estimates of the multiplier and accelerator effects
involved in the tax cut.
He also was quite skeptical with regard to the
immediacy of the effect.
In any event, he said, he agreed with those pre
ceding speakers who thought that policy should not be changed unless there
was a clear and compelling case for change on grounds either of the domes
tic economy or the balance of payments, and no such grounds were apparent
at this time.
Therefore, he would make no change in present policy, and
would resolve doubts on the side of watchful waiting.
He would not change
2/11/64
-45-
the directive except to eliminate the reference to Treasury financing,
and he would not favor a change in
the discou.t rate.
Mr. Daaae added that he did not think a change in the discount
rate would help overcome the problem of rate rigidity but would simply
change the level of rates, because of the factors Mr. Stone had mentioned-structural changes and the market attitude that official actions would
prevent rate fluctuations.
The most practicable way to dissipate the
market view was for the Desk to continue to operate so as to permit
reasonable flexibility of both rates and free reserves, and for the
Committee to maintain its willingness to permit such fluctuations, within
a reasonable range, as reflections of market developments.
Mr. Hickman said that the principal business news since the last
meeting indicated that steel output increasec further in January and that
auto output and sales had substantially maintained the high levels of
December, after seasonal correction.
These points had been surmised
two weeks ago, but were now matters of record.
The industrial production
index for January, when it became available, would probably show another
small upward change from the high December figure.
This year there was
a notable absence of the kind of seasonal gloom about business that had
come to be known as the "January jitters."
The same general trends were apparent in Fourth District figures.
All seasonally adjusted measures for the District continued at high levels;
steel production, electric power output (closely geared to steel production),
and building permits were higher in January than in late 1963.
Adjusted
2/11/64
-46-
insured unemployment rates showed rather small, but fairly pervasive,
changes for the better in most major labor market areas of the District.
Department store sales dipped early in January but then improved, while
sales of automobiles, seasonally adjusted, stabilized at a high level in
January and early February, at a rate slightly below the record December
level.
During the same period business loans at District reporting banks
rose contraseasonally.
Mr. Hickman observed that he continued to be concerned about
the possibility of price inflation, despite the fact that, thus far,
this concern did not rest on substantial statistical evidence.
Perhaps
the most important straw in the wind was the December figure for the
industrial comnonent of the wholesale price index, which showed an increase of three-tenths of one index point over November.
In addition, the
diffusion index of wholesale prices for 23 manufacturing industries had
been continuously above 50 per cent ever since July of last year, indicating that a majority of such prices had been moving upward month after
month.
Further evidence of firming prices was provided by a survey re-
cently made of industrial correspondents in the Fourth District.
Admit-
tedly, the survey showed persistent weakness in specific lines such as
chemicals and electrical machinery and equipment, which were subject to
severe foreign competition.
On the other hand, prices had increased in
a number of areas, including ferrous and nonferrous metals, machinery other
than electrical, and scattered other industries.
What this boiled down to,
it seemed to Mr. Hickman, was that upward price pressures were continuing
to accumulate despite relatively flat index lines.
-47-
2/11/64
It appeared to him also that there was evidence of excessive
monetary expansion in the rate of growth of the money supply over the
last year and a half.
If an outright price surge should materialize,
Mr. Hickman said, the System might have difficulty in justifying its
recent actions.
Turning to developments in recent weeks, Mr. Hickman noted that
the free reserve figures had been erratic and at times misleading.
Bank
borrowings, on the other hand, had remained around $175 million, indiBill rates had remained
cating a fairly comfortable reserve position.
near the discount rate since the last meeting, confirming the impression
conveyed by the lower level of bank borrowings.
Under the circumstances,
he saw no clear reason for a change in the policy directive, except for
deletion of the reference to the Treasury refunding.
With the advantage
of hindsight, Mr. Hickman concluded, he felt that slightly less ease in
the past two weeks would have been better, and he suggested that the Committee probe gently in that direction.
Mr. Bopp said that latest readings of economic activity in the
Third District indicated that business was fair.
Unemployment claims
continued to drop at a seasonal pace and remained at favorable levels
in comparison with previous years.
Insured unemployment rates increased
in January in several areas, but the increases were not large.
Help-wanted
indexes, for Philadelphia and for the nation, increased in December for
the third consecutive month.
Department store sales had been satisfactory.
So far as District banking conditions were concerned, the relatively
tight conditions prevailing in recent months had relaxed further.
For the
2/11/64
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week ending February 5, reserve city banks had a basic reserve surplus of
$24.6 million.
Reserve City banks were net sellers of Federal funds dur-
ing the week.
With the domestic economy and the payments accounts behaving as
they were, Mr. Bopp concluded, the present posture of policy seemed appropriate.
He would maintain the present position, make no change in the
discount rate, and, except for the reference to the Treasury refunding,
retain the present directive.
Mr. Bryan said that no Sixth District figures differed sufficiently
from national tendencies to be worthy of comment.
As far as the national
situation was concerned, the factors he had in mind already had been discussed.
He agreed with those who believed that no overt change in policy
should be made now.
In particular, he thought that the stimulative effect
of a tax cut, which was being counted on so heavily by the American people
should not be offset by the System until such action was obviously necessary.
Having indicated that he favored no overt change in policy, Mr.
Bryan continued, he wanted to add that he agreed with the view that in
the long run the Committee could not sustain reserve expansion at the
recent rate without creating difficulties, not merely from the monetary
standpoint but also from the standpoint of trying to combine marginal manpower with marginal resources.
If the economic outlook was as good as he
believed, the time would come when the Committee would have to permit reserve availability to drift off to a lower level.
-49-
2/11/64
Mr. Bryan added one final comment:
He thought Mr. Mills had
correctly called attention to the fact that there was no one rate of
reserve expansion that ipso facto was the perfect rate.
Mr. Shuford reported that economic activity in the Eighth District had expanded only slightly in recent months, whereas in the early
part of 1963 expansion had been at a substantial rate.
Since late summer,
employment and industrial use of electric power had fluctuated in a narrow
range.
Spending, as indicated by department store sales and bank debits,
had changed little.
The early autumn rise in business loans had been
offset by declines since October.
On the other hand, bank deposits con-
tinued to rise.
The economic situation on the national level already had been
covered adequately this morning, Mr.
Shuford said; it
continued strong.
As indicated, prices were remaining stable on the whole, with changes
mixed.
Upward pressures were developing in some areas at the wholesale
level, and retail prices were continuing to move up.
Mr. Shuford commented that he was becoming increasingly concerned
about the high rate of growth of reserves and money.
He shared Mr. Bryan's
view that monetary expansion could not continue at the recent rate.
He
would like to see the rate of growth in reserves supporting private deposits
drop back considerably from the 7 per cent rate that had been experienced
in the period from August through January--perhaps to a rate of 3, 4, or
5 per cent.
He agreed that no specific rate of monetary growth could be
taken as proper, but nevertheless he felt that at some time soon the
2/11/64
-50-
Committee should move in the direction of lowering the recent growth rate.
He shared the view that there were a number of factors, already discussed,
that called for no change in policy today, and at present he favored no
change in policy, no change in the discount rate, and no change in the
directive except elimination of the reference to Treasury financing.
But
he thought the matter of the rate of increase in reserves and money was
something that the Committee would need to continue to be aware of.
Mr. Balderston said that whatever technical deficiencies the
measure might have, the best available index of unemployment was still
at 5.5 per cent--a higher level than anyone would want.
If reduction of
unemployment were the only goal of monetary policy, it would be appropriate
to continue the present degree of ease, perhaps even to increase it further.
But there were other policy goals, despite the advice being offered by
some of the System's academic friends.
those centering in
He was referring especially to
the balance of payments,
Mr.
Balderston said.
Such
modest progress as had been made recently toward achieving equilibrium
in the balance of payments might well suffer setbacks in the months ahead.
Despite such consolation as the Committee might have received this morning
from Mr. Furth's statement, the fact remained that by conventional measurement methods the progress made last year in reducing the deficit
amounted to only 1/6 of the previous year's deficit, which was $3.6
billion after adjustment for prepayments.
In the year ahead the Committee
had to be prepared for shocks in several areas.
First, the British would
have an election, and their elections often ware accompanied by some
2/11/64
-51-
pressure on the pound about which the Committee could not be unconcerned.
Secondly, noting the opposition of European countries to the receipt of
American exports, especially of agricultural commodities, one might fear
that the U. S. would be defeated in its efforts to lower the barriers.
Third, it was possible that wage negotiations this year, especially in
the auto industry, might cause the U. S. to lose the significant ground
it had gained competitively during the year just past.
If American costs
should rise faster than those of Europe, the ability of the U. S. to
maintain its healthy trade surplus would be diminished.
It was not only the size of the trade surplus that counted, Mr.
Balderston continued, but also the confidence that foreigners had in the
ability of the U. S. to make forward progress.
In his judgment, that con-
fidence had a great deal to do with their willingness to hold short-term
claims against the U. S.
In brief, Mr. Balderston said, the Committee
could not afford to be lulled into a sense of security by the balance of
payments figures of the last half year, because the improvement achieved
might turn out to be ephemeral.
It
had taken a long time to reach the
present status, and the U. S. could lose ground this year unless it maintained self-discipline.
Not much change was evident in commodity prices, Mr. Balderston
remarked, except with respect to a few sensitive materials like tin.
But
attention seemed to be focused on the prices of things, with the fact
overlooked that the prices of services, and therefore the cost of living,
had been pressing upward persistently.. The price of services, on the
2/11/64
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average, bad risen 12.6 per cent in the last five years, or about 2-1/2
per cent per year, and in consequence the consumer price index had moved
up from a 1957-59 base of 100 to a level of 107.6.
While this was not
a frightening rate of increase, a continual upward creep in the co;t of
services was something the Committee could not afford to ignore.
Mr. Balderston said he was willing to go along with the majority
this morning in not favoring overt action at this time, but he hoped the
Committee could agree with Mr. Ellis and Mr. Hickman that some movement
toward less ea.e was prudent.
In his judgment, the 7 per cent rate of
increase since last July in reserves required against private deposits,
if continued, would eventually lead to trouble. However, he shared Mr.
Mills' point that adherence to any one percentage rate of growth was not
desirable.
Chairman Martin said that he could concur in practically everything said this morning.
the Treasury financing.
He did want to make one comment with respect to
Even if the Committee had desired to move in the
direction of somewhat firmer conditions, he thought it had some obligation to the Treasury in connection with the current financing.
In his
judgment, the Committee should lean over backward to avoid any inference
that it had set up certain conditions and then pulled out the rug.
The Chairman said he understood that the consensus today clearly
was for no change in policy at this time, no change in the discount rate,
and no change in the directive other than deletion of the phrase, "and
2/11/64
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taking into account an imminent Treasury refunding", and there was no
indication to the contrary.
Thereupon, upon motion duly made and
seconded, the Federal Reserve Bank of New
York was authorized and directed, until
otherwise directed by the Committee, to
execute transactions in the System Account
in accordance with the following current
economic policy directive:
It is the Federal Open Market Committee's current policy
to accommodate moderate growth in bank credit, while maintaining conditions in the money market that would contribute to
continued improvement in the capital account of the U.S. balance of payments. This policy takes into consideration the
fact that domestic economic activity is expanding further, although with a margin of underuti:.ized resources; and the fact
tht 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, 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,
Balderston, Bopp, Clay, Daane, Irons, Mitchell,
Robertson, Scanlon, Shepardson, and Treiber.
Votes against this action: None. Abstaining:
Mr. Mills.
Mr. Mills said he felt obliged, as at the previous meeting, to
abstain.
He was still unable to ascertain whether "no change in policy"
referred to maintenance of a certain interest rate structure or was
intended to focus on the supply of reserves.
He would like to follow
the statistics from now until the next meeting to see what they might
2/11/64
-54-
indicate as to the actual implementation of policy, and to determine
whether he considered the implementation objectionable or acceptable.
This analysis, he added, would be an international
effort on his part.
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 suggestion 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 buy or sell United States Government securities
in the open market, from or o Government securities dealers
and foreign and internationa. acccunts maintained at the Federal Reserve Bank of New York, on a cash, regular, or deferred
delivery basis, for the System Open Market Account at market
prices and, for such Account, to exchange maturing United States
Government securities with the Treasury or allow them to mature
without replacement; provided that the aggregate amount of such
securities held in such Account (including forward commitments,
but 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 thar $1
billion during any period between meetirgs of the Committee.
The Committee then discussed at some length the request that
had been made to Chairman Martin on January 22, 1964, by the Subcommittee
on Domestic Finance of the House Banking and Currency Committee, that
the Subcommittee be furnished with the minutes of the Federal Open Market Committee for the years 1960-63, inclusive.
There also was further
discussion of the matter of making available the minutes of the Committee
for some historical period, a question that had been considered most
recently at the meeting on December 3, 1963.
No decisions were reached
2/11/64
-55-
on either subject, and it was agreed that the two matters would be explored further at the next meeting of the Committee.
It was agreed that the next meeting of the Federal Open Market
Committee would be held on March 3, 1964.
The meeting then adjourned.
Secretary
Cite this document
Federal Reserve (1964, February 10). FOMC Minutes. Fomc Minutes, Federal Reserve. https://whenthefedspeaks.com/doc/fomc_minutes_19640211
@misc{wtfs_fomc_minutes_19640211,
author = {Federal Reserve},
title = {FOMC Minutes},
year = {1964},
month = {Feb},
howpublished = {Fomc Minutes, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/fomc_minutes_19640211},
note = {Retrieved via When the Fed Speaks corpus}
}