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, March 3, L964, at 9:30 a.m.
PRESENT:
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Martin, Chairman
Hayes, Vice Chairman
Balderston
Daane
Hickman
Mills
Mitchell
Robertson
Shepardson
Shuford
Swan
Wayne
Messrs. Ellis, Bryan, Scanlon, and Deming, Alternate
Members of the Federal Open Market Committee
Messrs. Bopp, Clay, and Irons, Presidents of the
Federal Reserve Banks of Philadelphia, Kansas City,
and Dallas, respectively
Mr. Young, Secretary
Mr. Sherman, Assistant Secretary
Mr. Kenyon, Assistant Secretary
Mr. Broida, Assistant Secretary
Mr. Hackley, General Counsel
Mr. Noyes, Economist
Messrs. Brill, Furth, Garvy, Holland, Jones, Koch,
Mann, and Ratch:ord, Associate Economists
Mr. Stone, Manager, System Open Market Account
Mr. Coombs, Special Manager, System Open Market
Account
Mr. Molony, Assistart to the Board of Governors
Mr. Cardon, Legislative Counsel, Board of Governors
Mr. Williams, Adviser, Division of Research and
Statistics, Board of Governors
Mr. Axilrod, Chief, Government Finance Section,
Division of Research and Statistics, Board of
Governors
Miss Eaton, Secretary, Office of the Secretary,
Board of Governors
3/3/64
-2Mr. Hemmings, First Vice President of the
Federal Reserve Bank of San Francisco
Messrs. Eastburn, Baughman, Parsons, Tow, and
Green, Vice Presidents of the Federal
Reserve Banks of Philadelphia, Chicago,
Minneapolis, Kansas City, and Dallas,
respectively
Mr. Brandt, Assistant Vice President of the
Federal Reserve Bank of Atlanta
Mr. Meek, Manager, Securities Department, Federal
Reserve Bank of New York
Mr. Arena, Financial Economist, Federal Reserve
Bank of Boston
In the agenda for this meeting, the Secretary reported that advice
had been received of the election by the Federal Reserve Banks of members
and alternate members of the Federal Open Market Committee for the term of
one year beginning March 1, 1964, and that it appeared such persons would
be legally qualified to serve after they had executed their oaths of office.
The elected members and alternates
all of whom had now executed
their oaths of office, were as follows:
Alfred Hayes, President of the Federal Reserve Bank of New York,
with William F. Treiber, First Vice President of the Federal
Reserve Bank of New York, as alternate;
Edward A. Wayne, President of the Federal Reserve Bank of Richmond,
with George H. Ellis, President of the Federal Reserve Bank of
Boston, as alternate;
W. Braddock Hickman, President of the Federal Reserve Bank of
Cleveland, with Charles J. Scanlon, President of the Federal
Reserve Bank of Chicago, as alternate;
Harry A. Shuford, President of the Federal Reserve Bank of St. Louis,
with Malcolm Bryan, President of the Federal Reserve Bank of
Atlanta, as alternate;
Eliot J. Swan, President of the Federal Reserve Bank of San Francisco,
with Frederick L. Deming, President of the Federal Reserve Bank of
Minneapolis, as alternate.
3/3/64
-3Upon motion duly made and seconded,
and by unanimous vote, the following
officers of the Federal Open Market
Committee were elected to serve until
the election of their successors at the
first meeting of the Committee after
February 28, 1965, with the understanding
that in the event of the discontinuance
of their official connection with the Board
of Governors or with a Federal Reserve Bank,
as the case might be, they would cease to
have any official connection with the Federal
Open Market Committee:
Wm. McC. Martin, Jr.
Alfred Hayes
Ralph A. Young
Merritt Sherman
Kenneth A. Kenyon
Arthur L. Broida
Howard H, Hackley
David B. Hexter
Guy E. Noyes
Daniel H. Brill, J. Herbert Furth,
George Garvy, David L. Grove, Robert
C. Holland, Homer Jones, Albert R. Koch,
Maurice Mann, and Benjamin U. Ratchford
Chairman
Vice Chairman
Secretary
Assistant Secretary
Assistant Secretary
Assistant Secretary
General Counsel
Assistant General Counsel
Economist
Associate Economists
Upon motion duly made and seconded,
and by unanimous vote, the Federal Reserve
Bank of New York was selected to execute
transactions for the System Open Market
Account until the adjournment of the first
meeting of the Federal Open Market Committee
after February 28, 1965.
Upon motion duly made and seconded,
and by unanimous vote, Robert W. Stone and
Charles A. Coombs were selected to serve at
the pleasure of the Federal Open Market
Committee as Manager of the System Open
Market Account and as Special Manager for
foreign currency operations for such Account,
respectively, it being understood that their
selection was subject to their being satis
factory to the Board of Directors of the
Federal Reserve Bank of New York.
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Secretary's Note:
Advice was subsequently
received that Messrs. Stone and Coombs were
satisfactory to the Board of Directors of the
New York Federal Reserve Bank for service in
the respective capacities indicated.
Upon motion duly made and seconded, and
by unanimous vote, the minutes of the meetings
of the Federal Open Market Committee held on
January 28 and February 11, 1964, were approved.
Consideration then was given to the continuing authorizations of
the Committee, according to the customary practice of reviewing such
matters at the first meeting in March of each year, and the actions set
forth hereinafter were taken.
Chairman Martin noted that the Secretariat had distributed, under
date of February 24, 1964, a draft of a proposed new continuing authority
directive relating to transactions in U. S. Government securities and
bankers' acceptances, and he invited Mr. Young to comment on the nature
of the changes recommended.
Mr. Young said that the proposed revisions
included an increase from $1 billion to $1.5 billion in the standing
limitation specified in paragraph l(a) on changes in System Account
holdings of U. S. Government securities between meetings of the Committee;
and revisions in the language of the preamble of the directive and of
paragraph l(a) that were intended to clarify the Committee's intent and
remove certain ambiguities.
Two supporting memoranda had been attached to
his memorandum of February 24; one, dated February 14, 1964, from Mr. Stone,
giving the reasons for the proposal to increase the standing limitation
on changes in security holdings, and one, dated February 24, 1964, from
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3/3/64
the Secretariat,
revisions.
setting forth the reasons for the proposed language
(Note:
Copies of these memoranda have been placed in the
files of the Committee.)
Following Mr. Young's remarks, Mr. Mills said that the Committee
might recall t.hat for a long time he had been distressed over the
directive and had offered suggestions for changes because he thought
it lacked clarity and led to confusion regarding its meaning.
He moved
that the Committee resume the type of directive which had been in effect
at the beginning of 1961 and in use for many years previously.
He thought
that in those directives the intent of the Committee with respect to
current policy was clearly expressed by clause (b) of paragraph 1.
example,
For
the clause in effect in the latter part of 1961 provided for
open market operations with a view "to encouraging credit expansion so
as to promote fuller utilization of resources, while giving consideration
to international factors."
Mr. Mills also moved that the Committee resume
the statements of operating policies that were in effect from 1953 until
December 19, 1961.
Mr. Robertson seconded Mr. Mills' motion, expressing the view
that the former type of directive provided greater restrictions on and
better guidelines for operations in the System Open Market Account than
did the continuing authority directives of the more recent type, which
provided blanket auttority and served no purpose.
He thought the Committee
would recall that he had taken the same position on earlier occasions.
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In the ensuing discussion, Mr. Balderston asked whether the
focus of Messrs. Mills' and Robertson's objections was on the con
tinuing authority directive or on the current economic policy directive.
Mr. Mills rep.ied that he was concerned both with the directive that
was issued to the Manager at each meeting, and, of greater importance,
with the continuing directive that provided operating guidelines.
Mr. Robertson said that his remarks at this stage were directed solely
to the continuing directive.
Mr. Mitchell observed that he felt the current policy directives
the Committee had been issuing were unsatisfactory;
the Manager was at
times given inconsistent instructions and was forced to make policy
judgments if he was to operate at all.
Mr. Mitchell said he did not
know whether Mr. Mills" proposal would provide the solution, but he felt
something should be done.
He thought that the Committee's staff might be
able to suggest some means of dealing with the problem.
Chairman Martin said he thought all members of the Committee
were interested in improving the form of the current policy directive,
but the question was how to do so.
He personally would not want to
return to the procedures the Committee had followed earlier, which in
his opinion were inadequate.
The problem facing the Committee was the
perennial one of language and the meaning attached to words.
Mr. Hayes commented that in his judgment a detailed defense of
present procedures was not necessary.
It seemed to him that the change
3/3/64
-7
the Committee had made from its
former procedures was clearly an
improvement.
While present procedures we::e not perfect,
they were working well,
on the whole
and he failed to see the basis on which
Mr. Mitchell objected to them.
Mr. Mitchell said that under present procedures one might
argue that there were occasions when the responsibilities of the
Open Market Committee were in
fact transferred to the Manager of the
Account, and Mr. Hayes replied that he could not agree with such an
argument.
Chairman Martin observed that since the subject under discussion
was so important it was desirable for everyone to have an opportunity
to comment on it.
Such a discussion was
articularly appropriate today,
since this was the Committee's organization meeting.
He noted that
Mr. Young had been concerned with the problem of the directive and he
invited him to comment.
Mr. Young said he thought that the nature of the instruct ons
given the Manager should be reviewed intensively from a technical
standpoint from time to time.
The problem was a continuing one to
which no one as yet had found the solutior.
If
the Committee so desired,
it could designate a staff group to take the matter under study and make
recommendations for the Committee's consideration.
Mr. Ellis agreed that the Committee should re-examine its
techniques from time to time, and at least once each year.
He felt the
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3/3/64
Committee had made progress when it
and that it
had established its present techniques,
probably could make further progress.
He favored the proposal
that a staff committee be appointed to suggest further improvements.
Mr. Irans thought the Committee's present procedure and directive
were much better than those used previously.
He did not consider them
perfect, and he agreed that they could, and perhaps should, be studied
periodically.
It might be desirable to have a staff committee appointed
for this purpose at this time.
However, he was not dissatisfied with
present procedures.
Mr. Swan said that he felt much the same as Mr. Irons.
The
present continuing authority directive was better than the previous one,
he thought,
ard perhaps could be improved further.
With respect to the
current directive, he tended to share Mr. M:tchell's attitude.
He would
but
like to see the current directive formulated in more precise terms,
he did not know just how to do so.
He did not favor returning to the
former procedures.
Mr. Deming observed that he had no real criticism of the
continuing authority directive,
and he would not want to resume the
operating policy statements as Mr. Mills had suggested.
However, he
agreed with Mr. Mitchell that the current policy directive was not as
clear-cut as it
might be, and that it
should be possible to improve it.
He thought this was something the Committee usefully could give attention
to.
3/3/64
-9Mr. Scanlon said that he agreed with Mr. Irons.
However, he
thought that it would be desirable to ask the staff to make specific
proposals for Committee consideration.
Chairman Martin commented that the staff had been doing that;
for this meeting they had prepared alternate drafts of the current
directive that. would be distributed at the appropriate time.
But a
thorough review of the alternatives would be a rather difficult operation,
since twelve people had to be satisfied.
The Committee had once attempted
a procedure under which it reconvened in the afternoon to review a draft
of the directive prepared by the staff on the basis of the discussion in
the morning session, but this had not proved wholly satisfactory.
Perhaps some better procedure could be devised.
Mr. Mitchell said that he had had a somewhat different quetion
It seemed to him that there were some typical problems in the
in mind.
directive, involving conflicts between objectives specified in terms of
interest rates, and money market conditions on the one hand, and in terms
of bank reserves on the other.
He hoped that the staff could suggest
ways by which the Committee could avoid such conflicts.
Mr. Clay said that he did not think the directive could be made
perfectly precise.
He often had felt sympathy for the Manager in view
of the nature of his instructions.
On the whole, however, he thought
the Manager had produced about the results that the Committee had
intended.
While he agreed that the Committee should continue to struggle
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for improvement in the directive, he did not think the present procedures
were bad.
Mr. Wayne commented that it would be useful for the staff end
the Committee to consider this subject and to circulate memoranda, but
it was his personal feeling that the search for precision in the
directive was futile.
Unless the Committee was prepared to meet daily,
its instructions had to be general in nature.
The real problem, he thought,
was not one of the degree of precision in the directive, but of difference
in philosophy and views among the members of the Committee itself.
Some
members would favor returning to a "bills preferably" policy, and they
would like to have the directive so drawn.
Other members would not
favor such a course, and they would not wart the directive so drawn.
In his opinion the present form of directive was an improvement over the
former one, and he would not want to change it at this time, although
he had no objection to discussion of the matter.
Mr. Shepardson said he felt much the same way as Mr. Wayne.
He thought the present directive was definitely an improvement over the
previous one.
He agreed that the subject should be studied from time to
time and that it would be desirable for the staff to be given a specific
assignment for such a study now, with their report scheduled for
consideration and discussion by the Committee.
Until then, he would
favor retaining the present form of the directive.
3/3/64
-11Mr. Robertson noted that the discussion had been broadened to
relate to the current directive as well as the continuing authority
directive.
He then made the following statement:
To my mind some revision in the language of our current
policy directive to the Manager is very much in order for
three reasons:
(1)
to gradually work away from so intense
a focus on stable money market conditions
as our prime operational target;
(2)
to reorient our attention towards more
objective reserve measures, in so far as
our present abilities allow us to estimate
their current magnitude and the levels most
appropriate for promoting the desired per
formance of the over-all economy;
(3)
to recognize more explicitly the fact that
money market and reserve developments may
not always unfold in the pattern we had in
mind, and to give the Manager guidance for
some appropriate redirecting of his operations
on such occasions.
When.it comes to the precise wording to achieve these
purposes, I have not been able to improve the phraseology I
suggested about a year ago. You may think that it has not
improved with age, but let me reiterate it nonetheless as a
way of exemplifying my thinking:
"To implement this policy, operations for the
System Open Market Account during the next three
weeks shall be conducted with a view to maintaining
marginal reserve availability at about the average
level thus far this year, fluctuating as necessary
to moderate substantial swings in money market
conditions and to partly offset any tendency for
aggregate reserve expansion to deviate substantially
from the average rate for 1963 as a whole."
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3/3/64
To give you a concrete idea of the reserve statistics
which this kind of directive would be asking the Desk to
keep in mind, let me report that thus far this year free
reserves have averaged about $135 million and borrowings
around $;70 million and that total reserve expansion for the
year 1963 as a whole averaged a shade over 3 per cent. I
would not want to include these specific figures in any
directive, because I would not want either the Manager or
the public to be Led into thinking that the Committee wished
to achieve any precise statistical objectives, or that it
had any illusions that the Manager could in fact hit such
statistical targets even if they were desired. Rather, I
think the purpose of our directive should be to suggest, in
clearly objective terms, the kind of money market and reserve
climate that the Desk should be seeking to achieve and the
general way in which the Desk should modify its operations
if resul:s do not turn out as desired.
Mr. Daane said that he had a great deal of sympathy with Mr. Wayne's
position.
The Committee had been struggling with this problem for a long
time, and, it seemed, the more it strove for precision in wording the
more it retrogressed.
He felt that the Comittee members sometimes failed
to indicate clearly to the Desk the tenor of their objectives and philosophy
To his mind this, rather than the lack of precise reserve or rate targets
in the directive, was the real gap.
He agreed with Mr. Hayes that the
Committee had not abdicated from its responsibilities in favor of the
Desk, and while he thought the Committee could give clearer guidance
to the Desk, he doubted that the appropriate mechanism lay in making the
wording of the directive more precise.
Mr. Hickman said he agreed essentially with Mr. Daane and others
who had taken a similar position.
He thought that the present continuing
authority directive was better than the previous one.
There was always
3/3/64
-13
room for improvement in the current policy directive,
but since Committee
members did not agree in general philosophy or with respect to particular
objectives, it was necessary to cast the language of the directive in
general
terms; in order to reach some measure of consensus.
He thought
that the operations of the Desk yielded a remarkably accurate reflection
of the Committee's intentions.
Mr. Bopp remarked that he would prefer a more precise directive,
but it
should be cast in terms of magnitudes over which the Account
Manager had direct control, such as the amount and composition of the
System portfolio or particular market rates.
He did not believe that
precise targets should be set in terms of such variables as reserves or
the volume of money, over which the Manager had no direct control,
certainly not in the short run.
The directives often specified in
consistent objectives, and there was room for improvement in this
connection.
But any directive had to leave the Manager some degree of
flexibility in operations.
Mr.
Bryan said that he saw several separate problems.
to give directions to the Manager in
One was
terms sufficiently precise to make
clear that the Committee was not delegating its
powers to him.
Unfortunately
the Committee had never been able to agree on what criteria were most
appropriate,
and,
he thought,
for good reason.
He personally had
experimented with criteria drawn in terms of free reserves, nonborrowed
reserves,
and reserves against private deposits, but he had not gotten
far because of the difficulties inherent in the problem.
3/3/64
-14
Secondly, there was a problem beyond that of criteria--namely,
that of the general philosophy on which the Committee operated.
Behind
the old form of directive there had been a concept of a free market in
which it
was assumed that, while intervention by the central bank was
necessary,
it
should occur at the point at which it would have the least
impact on the market.
The Committee operated on the reserve base,
into account these things that needed to be taken into account,
employment, the general price level, and so forth.
taking
such as
He thought the idea
of the free market was a good one and the least dangerous to the central
bank in
the long run.
But the Committe.
or other support for this position
had received almost no academic
Moreover,
that "bills preferably" simply did not suit its
time passed, and accordingly it had changed.
the Committee had found
policy objectives as
Mr. Bryan said he was afraid
that in the long run the Committee would find itself in difficulty as a
result of that change.
Mr. Shuford said he, as everyone else
would like to give more
definitive instructions to the Desk; he was sure that such instructions
would be helpful to them.
The Committee was continually working on the
problem of improving its instructions.
He was in accord with the
observation of Mr. Wayne that the basic problem was one of differences
in philosophy and approach,
and differences of view with respect to the
variables that should be given the most consideration.
He had talked
with economists who urged that the Committee use specific guidelines in
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its
operations,
but he had been. interested to note that each had a dif
ferent set of guidelines in mind.
always exist in
This sort of problem probably would
an evolving economy.
Mr. Shuford said he thought the Committee should work toward de
veloping more definitive directions to the Desk.
The Committee had made
a little progress in this direction, and in general the Desk had operated
in the manner the Committee had intended.
In his opinion Mr.
Robertson's
suggestion was helpful, and he agreed that study of the directive by the
Committee staff would be constructive.
He thought this was a problem
the Committee would have to continue to work with; as long as the economy
was dynamic and changing, and there were differences of opinion as to
what yardsticks deserved most attention,
it
would be difficult to formu
late explicit instructions.
Mr.
Balderston said that his approach to the continuing authority
directive was somewhat like that expressed by Mr.
directive as equivalent to a set of by-laws,
Bryan.
He viewed this
subject to review once a
year and providing the legal basis upon which the Desk operated.
For
many years after coming to the Board he had felt that the conclusion of
the Ad Hoc Subcommittee that it
would be desirable to give the dealers
the confidence necessary to operate as dealers and not as brokers was
important; and he had been among those who had defended the bills pref
erably doctrine as a philosophy that made for greater depth, breadth, and
resiliency in
the market and for a healthier market.
However,
he had come
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to feel eventually that, although the Committee said it was not
doctrinaire in its
views, it was considered to be so by many others.
Mr. Balderston said he felt the present continuing authority
directive was an advance over the one in effect earlier, and he had
not seen any evil effects flowing from it.
As to the current directive,
he shared the feeling expressed by several others that there often were
internal inconsistencies in
its language,
consideration to Mr. Robertson's proposal.
and he favored giving serious
He did not know whether the
Committee could go much beyond calling for about the same degree of ease,
or more or Less ease.
When the Committee attempted to be more specific,
difficulties arose from the differences among the members' general
philosophies.
Mr. Hayes said that in his judgment the problem facing the
Committee was not primarily one of wording in the directive, which
could be solved by having the staff give the Committee a number of
alternative
drafts.
The main problem was one of self-education by
the members with respect to the nature of the measures--whether bank
reserves, liquidity, the money supply, time deposits or whatever--that
were of real importance in the effort to implement the Committee's
objectives through the variables that the Committee could affect directly.
A continuing flow of studies and memoranda from the Committee's staff
and from others would contribute greatly to this general process of
education.
It seemed to Mr. Hayes that that was the main avenue through
which the Committee could get a fruitful discussion of criteria.
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Chairman Martin observed that the problem was extremely
complicated,
and was made even more complicated by the fact that the
Treasury was continually operating in the market.
The difficulties
of meshing the two sets of operations was a source of constant concern
to both the Committee and the Desk.
He thought the Committee had to
keep working on the problem of the directive--all aspects of it--to see
what could be pulled together.
It would be desirable, he thought, to
have Mr. Young and the Secretariat review the matter in the light of
today's discu:sion, and to prepare a memorandum dealing, among other
things, with the problem that Mr. Mitchell had noted with respect to
inconsistency in the instructions contained in the directive.
The Chairman then called for a vote on Mr. Mills' motion, with
the following result:
Votes for the motion: Messrs. Mills
and Robertson. Votes against the motion:
Messrs. Martin, Hayes, Balderston, Daane,
Hickman, Mitchell, Shepardson, Shuford,
Swan, and Wayne.
Mr. Robertson observed that he had voted for Mr. Mills' motion
not because he thought the previous form of the directive was perfect,
but because he considered it
better than the present form.
He felt that
a thorough review of both the continuing authority and current policy
directives was desirable.
Chairman Martin said that it
was useful to have had this matter
raised today; he thought the discussion had been valuable.
While he
3/3/64
-18
would not like to see the Committee return to its previous procedure
with respect to the directive, it was clear from the discussion that
the present procedure was not regarded as wholly satisfactory.
He
would hope that the Committee would continue to work actively on the
matter.
Thereupon, upon motion duly made and
seconded, it was voted, with Messrs. Mills
and Robertson dissenting, to authorize and
direct the Federal Reserve Bank of New York,
until otherwise directed by the Committee,
to execute transactions in the System Open
Market Account in accordance with the
following continuing authority directive
relating to transactions in U. S. Government
securities and bankers' acceptances:
1. The Federal Open Market Comm'.ttee authorizes and directs
the Federal Reserve Bank of New York, to the extent necessary to
carry out the most recent current economic policy directive
adopted at a meeting of the Committee.
(a) To buy or sell United States Government
securities in the open market, from or to Government
securities dealers and foreign ard international
accounts maintained at the Federal Reserve Bank of
New York, on a cash, regular, or deferred delivery
basis, for the System Open Market Account at market
prices and, for such Account, to exchange maturing
United States Government securities with the Treasury
or allow them to mature without replacement; provided
that the aggregate amount of such securities held in
such Account at the close of business on the day of a
meeting of the Committee at which action is taken with
respect to a current economic policy directive shall
not be increased or decreased by more than $1.5 billion
during the period commencing with the opening of business
on the day following such meeting and ending with the
close of business on the day of the next such meeting.
(b) To buy or sell prime bankers' acceptances of
the kinds designated in the Regulation of the Federal
3/3/64
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Open Market Committee in the open market, from or to
acceptance dealers and foreign accounts maintained at
the Federal Reserve Bank of New York, on a cash,
regular, or deferred delivery basis, for the account
of the Federal Reserve Bank of New York at market dis
count rates; provided that the aggregate amount of
bankers' acceptances held at any one time shall not
exceed $75 million or 10 per cent of the total of
bankers' acceptances outstanding as shown in the most
recent acceptance survey conducted by the Federal
Reserve Bank of New York.
(c) To buy United States Government securities
with maturities of 24 months or less at the time of
purchase, and prime bankers' acceptances with maturities
of 6 months or less at the time of purchase, from non
bank dealers for the account of the Federal Reserve Bank
of New York under agreements for repurchase of such
securities or acceptances in 15 calendar days or less,
at rates not less than (1) the discount rate of the
Federal Reserve Bank of New York at the time such
agreement is entered into, or (2) the average issuing
rate on the most recent issue of 3-month Treasury bills,
whichever is the lower; provided that in the event
Government securities covered by any such agreement are
not repurchased by the dealer pursuant to the agreement
or a renewal thereof, they shall to sold in the market
or transferred to the System Open Market Account; and
provided further that in the event bankers' acceptances
covered by any such agreement are not repurchased by the
seller, they shall continue to be held by the Federal
Reserve Bank or shall be sold in the open market.
2. The Federal Open Market Committee authorizes and
directs the Federal Reserve Bank of New York to purchase directly
from the Treasury for the account of the Federal Reserve Bank of
New York (with discretion, in cases where it seems desirable, to
issue participations to one or more Federal Reserve Banks) such
amounts of special short-term certificates of indebtedness as may
be necessary from time to time for the temporary accommodation of
the Treasury; provided that the rate charged on such certificates
shall be a rate 1/4 of 1 per cent below the discount rate of the
Federal Reserve Bank of New York at the time of such purchases,
and provided further that the total amount of such certificates held
at any one time by the Federal Reserve Banks shall not exceed $500
million.
3/3/64
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Upon motion duly made and seconded,
and by unanimous vote, the Authorization
Regarding Open Market Transactions in
Foreign Currencies, as reaffirmed March 5,
1963, and the Guidelines for System
Foreign Currency Operations, as amended
May 28, 1963, were reaffirmed:
AUTHORIZATION REGARDING OPEN MARKET TRANSACTIONS
IN FOREIGN CURRENCIES
Pursuant to Section 12A of the Federal Reserve Act and in
accordance with Section 214.5 of Regulation N (as amended) of
the Board of Governors of the Federal Reserve System, the Federal
Open Market Committee takes the following action governing open
market operations incident to the opening and maintenance by the
Federal Reserve Bank of New York (hereafter sometimes referred to
as the New York Bank) of accounts with foreign central banks.
I.
Role of Federal Reserve Bank of New York
The New York Bank shall execute all transactions pursuant
to this authorization (hereafter sometimes referred to as
transactions in foreign currencies) for the System Open Market
Account, as defined in the Regulation of the Federal Open Market
Committee.
II.
Basic Purposes of Operations
The basic purposes of System operations in and holdings of
foreign currencies are:
To help safeguard the value of the dollar in
(1)
international exchange markets;
(2)
To aid in making the existing system of
international payments more efficient and in
avoiding disorderly conditions in exchange
markets;
To further monetary cooperation with central banks
(3)
of other countries maintaining convertible currencies,
with the International Monetary Fund, and with other
international payments institutions;
(4) Together with these banks and institutions, to
help moderate temporary imbalances in international
payments that may adversely affect monetary reserve
positions; and
(5) In the long run, to make possible growth in the
3/3/64
-21liquid assets available to international money
markets in accordance with the needs of an
expanding world economy.
III.
Specific Aims of Operations
Within the basic purposes set forth in Section II,
the
transact.ions shall be conducted with a view to the following
specific aims:
(1)
To offset or compensate, when appropriate, the
effects on U.. S. gold reserves or dollar liabil
ities of disequilibrating fluctuations in the
international flow of payments to or from the
United States, and especially those that are deemed
to reflect temporary forces or transitional market
unsettlement;
(2)
Totemper and smooth out abrupt changes in spot
exchange rates and moderate forward premiums and
discounts judged to be disequilibrating;
(3)
To supplement international exchange arrangements
such as those made through the International
Monetary Fund; and
(4) In the long run, to provide a means whereby
reciprocal holdings of foreign currencies may
contribute to meeting needs for international
liquidity as required in terms of an expanding
world economy.
IV.
Arrangements with Foreign Centra.
Banks
In making operating arrangements with foreign central ba-ks
on System holdings of foreign currencies, the New York Bank snall
to maintain any specific balance, unless
not commit itself
authorized by the Federal Open Market Committee.
The Bank shall instruct foreign central banks regarding the
investment of such holdings in excess of minimum working balances
in accordance with Section 14(e) of the Federal Reserve Act.
The Bank shall consult with foreign central banks on
coordination of exchange operations.
Any agreements or understandings concerning the administra
tion of the accounts maintained by the New York Bank with the
central banks designated by the Board of Governors under Section
214.5 of Regulation N (as amended) are to be referred for review
-22
3/3/64
and approval
Section VIII,
V.
to the Committee, subject to the provision of
paragraph 1, below.
Authorized Currencies
The New York Bank is authorized to conduct transactions for
System Account in such currencies and within the limits that the
Federal Open Market Committee may from time to time specify.
VI.
Methods of Acquiring and Selling
foreign Currencies
The New York Bank is authorized to purchase and sell foreign
currencies in the form of cable transfers through spot or forward
transactions on the open market at home and abroad, including
transactions with the Stabilization Fund of the Secretary of the
Treasury established by Section 10 of the Gold Reserve Act of
1934 and with foreign monetary authorities.
Unless the Bank is otherwise authorized,
shall be at prevailing market rates.
VII.
all transactions
Participation of Federal Reserve Banks
All Federal Reserve Banks shall participate in the foreign
currency operations for System Account in accordance with
paragraph 3 G (1) of the Board of Governors' Statement of
Procedure with Respect to Foreign Relationships of Federal Reserve
Banks dated January 1, 1944.
VIII.
Administrative Procedures
The Federal Open Market Committee authorizes a Subcommittee
consisting of the Chairman and the Vice Chairman of the Committee
and the Vice Chairman of the Board of Governors (or in the absence
of the Chairman or of the Vice Chairman of the Board of Governcrs
the members of the Board designated by the Chairman as alternates,
and in the absence of the Vice Chairman of the Committee his
alternate) to give instructions to the Special Manager, within
the guidelines issued by the Committee, in cases in which it is
necessary to reach a decision on operations before the Committee
can be consulted.
All actions authorized under the preceding paragraph shall
be promptly reported to the Committee.
-23-
3/3/64
The Committee authorizes the Chairman, and in his absence
the Vice Chairman of the Committee, and in the absence of both,
the Vice Chairman of the Board of Governors:
(1) With the approval of the Committee, to enter into
any needed agreement or understanding with the
Secretary of the Treasury about the division of
(2)
(3)
IX.
responsibility for foreign currency operations
between the System and the Secretary;
To keep the Secretary of the Treasury fully
advised concerning System foreign currency
operations, and to consult with the Secretary
on such policy matters as may relate to the
Secretary's responsibilities;
From time to time, to transmit appropriate reports
and information to the National Advisory Council on
International Monetary and Financial Problems.
Special Manager of the System Open Market Account
A Special Manager of the Open Market Account for foreign
currency operations shall be selected in accordance with the
establisted procedures of the Federal Open Market Committee fcr
the selection of the Manager of the System Open Market Account.
The Special Manager shall direct that all transactions in
foreign currencies and the amounts of all holdings in each
authorized foreign currency be reported daily to designated
staff officials of the Committee, and .hall regularly consult
witn the designated staff officials of the Committee on current
tendencies in the flow of international payments and on current
developments in foreign exchange marke:s.
The Special Manager and the designated staff officials of
the Committee shall arrange for the prompt transmittal to the
Committee of all statistical and other information relating to
the transactions in and the amounts of holdings of foreign
currencies for review by the Committee as to conformity with
its instructions.
The Special Manager shall include in his reports to the
Committee a statement of bank balances and investments payable
in foreign currencies, a statement of net profit or loss on
transactions to date, and a summary of outstanding unmatured
contracts in foreign currencies.
3/3/64
X.
-24Transmittal of Information to Treasury Department
The staff officials of the Federal Open Market Committee
shall transmit all pertinent information on System foreign
currency transactions to designated officials of the Treasury
Department.
XI.
Amendment of Authorization
The Federal Open Market Committee may at any time amend
or rescind this authorization.
GUIDELINES FOR SYSTEM FOREIGN CURRENCY OPERATIONS
1.
Holdings of Foreign Currencies
Until otherwise authorized, the System will limit its
holdings of foreign currencies to that amount necessary to
enable its operations to exert a market influence. Holdings
of larger amounts will be authorized only when the U. S.
balance of international payments attains a sufficient surplus
to permit the ready accumulation of holdings of major con
vertible currencies.
Holdings of a currency shall generally be kept sufficient
to meet forward contracts in that currency (exclusive of con
tracts made under parallel arrangements with foreign monetary
authorities which provide their own cover) expected to mature
in the following three-week period.
Foreign currency holdings above a certain minimum shall
be invested as far as practicable in conformity with Section
14(e) of the Federal Reserve Act.
2.
Exchange Transactions
System exchange transactions shall be geared to pressures
of payments flows so as to cushion or moderate disequilibrating
movements of funds and their destablizing effects on U. S. and
foreign official reserves and on exchange markets.
In general, these transactions shall be geared to pressures
connected with movements that are expected to be reversed in
3/3/64
-25-
the foreseeable future; when expressly authorized by the Federal
Open Market Committee, they may also be geared on a short-term
basis to pressures connected with other movements.
Subject to express authorization of the Committee, the
Federal Reserve Bank of New York may enter into reciprocal
arrangements with foreign central banks on exchange transactions
("swap" arrangements), which arrangements may be wholly or in
part an a standby basis.
Drawings made by either party under a reciprocal arrange
ment shall be fully liquidated within 12 months after any amount
outstanding at that time was first drawn, unless the Committee,
because of exceptional circumstances, specifically authorizes a
delay.
The New York Bank shall,
as a usual practice,
purchase and
sell authorized currencies at prevailing market rates without
trying to establish rates that appear to be out of line with
underlyirg market forces.
If market offers to sell or buy intensify as System holdings
increase or decline, this shall be regarded as a clear signal
for a review of the System's evaluation of international payments
flows.
This review might suggest a temporary change in System
holdings of a particular convertible currency and possibly direct
exchange transactions with the foreign central bank involved to
be able to accommodate a larger demand or supply.
Starting operations at a time when the United States is
not experiencing a net inflow of any e igible foreign currency
may require that initial
System holdings (apart from sums that
might be acquired from the Stabilization Fund) be purchased
directly from foreign central banks.
It shall be the practice to arrange with foreign central
banks for the coordination of foreign currency transactions
in order that System transactions do not conflict with those
being undertaken by foreign monetary authorities.
3.
Transactions
in
Spot Exchanges
The guiding principle for transactions in spot exchange
shall be that, in general, market movements in exchange rates,
within the limits established in the International Monetary
-26-
3/3/64
Fund Agreement or by central bank practices, index affirmatively
the interaction of underlying economic forces and thus serve
as efficent
guides to current financial decisions, private and
public.
Temporary or transitional fluctuations in payments flows
may be cushioned or moderated whenever they occasion market
anxieties, or undesirable speculative activity in foreign
exchange transactions, or excessive leads and lags in
international payments.
Special factors making for exchange market instabilities
include (i) responses to short-run increases in international
political tension, (ii) differences in phasing of international
economic activity that give rise to unusually large interest
rate differentials between major markets, or (iii) market rumors
of a character likely to stimulate speculative transactions.
Whenever exchange market instability threatens to produce
disorderly conditions, System transactions are appropriate if
the Special Manager, in consultation with the Federal Open
Market Committee, or in an emergency with the members of the
Committee designated for that purpose, reaches a judgment that
they may help to re-establish supply and demand balance at a
level more consistent with the prevailing flow of underlying
payments
Whenever supply or demand persists in influencing
exchange rates in one direction, System transactions should be
modified, curtailed, or eventually discontinued pending a re
assessment by the Committee of supply and demand forces.
4.
Transactions in Forward Exchange
Occasion to engage in forward transactions will arise mainly
when forward premiums or discounts are inconsistent with interest
rate differentials and are giving rise to a disequilibrating
movement of short-term funds, or when it is deemed appropriate
to supplement existing market facilities for forward cover as
a means of encouraging the retention or accumulation of dollar
holdings abroad.
Proposals of the Special Manager to initiate forward
operations shall be submitted to the Committee for advance
approval.
For such operations, the New York Bank may, where authorized,
take over from the Stabilization Fund outstanding contracts for
forward sales or purchases of authorized currencies.
-27
3/3/64
The New York Bank may also, where authorized, purchase
currencies through forward transactions for the purpose of
allowing greater flexibility in covering commitments under
reciprocal currency agreements.
The New York Bank may further, where authorized, purchase
and sell currencies through forward as well as spot transactions
for the purpose of settling commitments denominated in one
currency by means of utilizing the Bank's holdings of another
currency.
5.
Exchange Rates
Insofar as practicable, the New York Bank shall purchase a
currency through spot transactions at or below its par value,
and should lower the rate at which it is prepared to purchase a
currency as its holdings of that currency approach the estab
lished maximum.
The Bank shall also, where practicable, sell a currency
through spot transactions at rates at or above its par value,
and should raise the rate at which it is prepared to sell a
currency as its holdings of that currency approach zero.
Spot transactions at rates other than those set forth in
the preceding paragraphs shall be specially authorized by the
members of the Committee designated in Section VIII of the
Authorization for Open Market Transactions in Foreign Currencies.
Upon motion duly made and seconded,
and by unanimous vote, the following con
tinuing authority directive to the Federal
Reserve Bank of New York with respect to
foreign currency operations was approved:
The Federal Reserve Bank of New York is authorized and
directed to purchase and sell through spot transactions any
or all of the following currencies in accordance with the
Guidelines on System Foreign Currency Operations reaffirmed
by the Federal Open Market Committee on March 3, 1964; provided
that the aggregate amount of foreign currencies held under
reciprocal currency arrangements shall not exceed $2.05 billion
equivalent at any one time, and provided further that the
aggregate amount of foreign currencies held as a result of
3/3/64
-28
outright purchases shall not exceed $130 million equivalent
at any one time:
Pounds sterling
French francs
German marks
Italian lire
Netherlands guilders
Swiss francs
Belgian francs
Canadian dollars
Austrian schillings
Swedish kronor
Japanese yen
The Federal Reserve Bank of New York is also authorized and
directed to operate in any or all of the foregoing currencies in
accordance with the Guidelines and up to a combined total of $150
million equivalent, by means of:
(a) purchases through forward transactions, for the
purpose of allowing greater flexibility in
covering commitments under reciprocal currency
agreements;
(b) purchases and sales through forward as well as
spot transactions, for the purpose of utilizing
its holdings of one currency for the settlement
of commitments denominated in other currencies;
and
(c) purchases through spot transactions and sales
through forward transactions, for the purpose of
restraining short-term outflows of funds induced
by arbitrage considerations.
The Federal Reserve Bank of New Ycrk is also authorized and
directed to make purchases through spot transactions, including
purchases from the U. S. Stabilization Fund, and concurrent sales
through forward transactions to the U. S. Stabilization Fund, of
any of the foregoing currencies in which the U. S. Treasury has
outstanding indebtedness, in accordance with the Guidelines and
up to a total of $100 million equivalent. Purchases may be at
rates above par, and both purchases and sales are to be made at
the same rates.
-29
3/3/64
In presenting for approval the procedures with respect to
allocations of the System Open Market Account,
Chairman Martin
commented that no changes were proposed from the procedures approved on
December 3,
1963.
Mr. Mills inquired if
Committee.
that was really the disposition of the
His recollection was that the present allocation formula
had been adopted on December 3 as a temporary measure,
two or three months,
to carry over the year end.
for a period of
There had been some
differences of opinion then, and his own position had been that it
would be preferable to follow the law Literally and adopt the alternative
mentioned in
clause (c)
of a memorandum prepared by Messrs.
Farrell under date of November 27, 1963:
"to choose to let intra-weekly
deficiencies occur without attempting remedial adjustments."
deficiencies occurred at Federal Reserve Banks,
and appropriate taxes paid.
Stone and
When
they would be recorded
Instead, a formula had been accepted, on
a temporary basis as he understood it, under which the allocations were
shuffled .round to disguise the facts and to avoid the deficiencies that
otherwise would have occurred.
Mr. Stone noted that the procedures that had been in effect before
December 3, 1963, specified that, to avoid a deficiency at a Reserve Bank
on a statement date, a special "as of" adjustment would be undertaken the
following morning, before the books for the statement date had been closed.
Such procedures did not extend this "as of" adjustment to any other day
-30
3/3/64
of the veek.
It
had seemed to the Account Management that intra-weekly
deficiencies would be likely to occur in the period between December 3
and the end of the year.
If they did occur, that fact would be noted
in the Board's Annual Report, scheduled for publication in March 1964.
The question put to the Committee then was whether it wanted to have
the fact of a Reserve Bank deficiency publi,,hed in March.
There had
been extensive discussion of the matter at the joint meeting of the
Board and the Reserve Bank Presidents on the afternoon of December 3,
following which the meeting of the Open Market Committee had been
reconvened and an alternative adopted under which the Account Management
was instructed to make "as of" adjustments
on a statement date or not.
toavoid deficiencies--whether
It had been suggested then that sometime
during 1964 the question should be reviewed of permitting deficiencies
to occur, which would require their publication in the Board's Annual
Report covering 1964.
The thought was that the public would be made aware
by this means that a problem was developing with respect to the reserves
of the F deral Reserve Banks, and perhaps a process of discussion would
be generated and a fund of understanding built up, so that there would
be less adverse reaction if the time came when there simply were not enough
reserves in the System to avoid deficiencies on statement dates.
Mr. Scanlon said that he happened to have been one whose view
at the December meeting differed from that of the majority, but he had
not thought that there was anything temporary about the new allocation
-31
3/3/64
procedure.
He had accepted it as continuing indefinitely until the
Committee chose to make another change.
Mr. Sherman recalled that the allocation procedure had been
discussed briefly at the December 3 Open Market meeting and more
extensively at meetings of the Board and of the Board jointly with the
Presidents.
The discussion ran to the question of whether either the
Board or the Reserve Banks felt that it was desirable, as a matter of
System policy, to permit deficiencies to occur and taxes to be levied
on the Reserve Banks and to have the facts published in their respective
publications.
A rather novel suggestion for a different approach to the
question of allocating reserves had been made, Mr. Sherman said, and
some thought had been given to this suggestion by the staff.
But he
believed no memorandum or specific proposal for a change was being
prepared at present.
Chairman Martin observed that the discussion pointed up the need
for further study of the subject, with a view to consideration at some
later time.
He thought it would be a mistake to return now to the
previous allocation procedure.
After further discussion, upon motion
duly made and seconded, with Mr. Mills
dissenting, the procedures with respect to
allocations of the System Open Market Account
as approved December 3, 1963, were reaffirmed.
The procedures read as follows:
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3/3/64
1. Securities in the Syster Open Market Account shall be
reallocated on the last business day of each statement week and
of each month by means of adjustments proportionate to the
adjustmerts that would have been required to equalize approx
imately the average combined reserve ratios of the 12 Federal
Reserve Banks based on the most recent available five business
day's reserve ratio figures.
2.
The Board's staff shall calculate, in the morning of
each business day, the reserve ratios of each Bank after allowing
for the indicated effects of the settlement of the Interdistrict
Settlement Fund for the preceding day. If these calculations
should disclose a deficiency in the reserve ratio of any Bank,
the Board's staff shall inform the Manager of the System Open
Market Account, who shall make a special adjustment as of the
previous day to restore the combined reserve ratio of that Bank
to the average of all the Banks or to such higher level as may
be necessary to eliminate the deficiency in note or deposit
reserves. However, such adjustments shall not be made beyond
the point where a deficiency would be created at any other
Bank. Such adjustments shall be offset against the participation
of the Bank or Banks best able to absorb the additional amount
or, at the discretion of the Manager, against the participation
The Board's staff and
of the Federal Reserve Bank of New York.
the Bank or Banks concerned shall then be notified of the amounts
involved and the Interdistrict Settlement Fund shall be closed
after giving effect to the adjustments as of the preceding business
day.
3. Until the next reallocation the Account shall be
apportioned on the basis of the ratios determined in paragraph 1,
after allowing for any adjustments as provided for in paragrapn 2.
Profits and losses on the sale of securities from the
4.
Account shall be allocated on the day of delivery of the secu
rities sold on the basis of each Bank's current holdings at the
opening of business on that day.
Mr. Mills said that he dissented from this action because of the
matter of principle involved; he did not approve the continuance of
procedures that in his judgment were not consistent with either the spirit
or the letter of the statute.
He had not dissented at the time of the
-33
3/3/64
adoption of the present allocation procedure on December 3, 1963,
because it had been his belief that the action was temporary, and that
the matter would be reviewed after the year end.
Mr. Stone commented that he was not sure that the basic iss.es
had changed much since December, but he would undertake to review the
Stone-Farrell memorandum of November 27, 1963, see whether any changes
were indicated, and lay the matter before the Committee again.
The authorization for distribution of periodic reports prepared
by the Federal Reserve Bank of New York for the Federal Open Market
Committee was presented for consideration and approval.
Thereupon, upon motion duly made
and seconded, and by unamimous vote,
authorization was given for the following
distribution:
1.
2.
3.
*4.
*5.
*6.
*7.
8.
9.
The Members of the Board of Governors.
The Presidents of the twelve Federal Reserve Banks.
Officers of the Federal Open Ma;ket Committee.
The Secretary and the Under Secretary of the Treasury.
The Under Secretary of the Treasury for Monetary Affairs
and the Deputy Under Secretary for Monetary Affairs.
The Assistant to the Secretary of the Treasury working on
debt management problems.
The Fiscal Assistant Secrecary of the Treasury.
The Director of the Division of Bank Operations of the
Board of Governors.
The officer in charge of research at each of the Federal
Reserve Banks not represented by its President on the
Federal Open Market Committee.
Weekly reports of open market operations only.
-34-
3/3/64
10.
11.
The alternate member of the Federal Open Market
Committee from the Federal Reserve Bank of
New York; the Assistant Vice Presidents of the
Federal Reserve Bank of New York working under
the Manager of the System Account; the Managers
of the Securities Department of the New York Bank;
the officer in charge and Assistant Vice President
of the Research Department of the New York Bank;
and the confidential files of the New York Bank as
the Bank selected to execute transactions for the
Federal Open Market Committee.
With the approval of a member of the Federal Open
Market Committee or any other President of a Federal
Reserve Bank, with notice to the Secretary, any
other employee of the Board of Governors or of a
Federal Reserve Bank.
The Committee reaffirmed by unanimous
vote the authorization, first given on
March 1, 1951, for the Chairman to appoint
a Federal Reserve Bank to operate the System
Open Market Account temporarily in case the
Federal Reserve Bank of New York is unable to
function.
The following resolution to provide for
the continued operation of the Federal Open
Market Committee during an emergency was re
affirmed by unanimous vote:
In the event of war or deferse emergency, if the Secretary or
Assistant Secretary of the Federal Open Market Committee (or in
the event of the unavailability of both of them, the Secretary or
Acting Secretary of the Board of Governors of the Federal Reserve
System) certifies that as a result of the emergency the available
number of regular members and regular alternates of the Federal
Open Market Committee is less than seven, all powers and functions
of the said Committee shall be performed and exercised by, and
authority to exercise such powers and functions is hereby delegated
to, an Interim Committee, subject to the following terms and
conditions:
Such Interim Committee shall consist of seven members, com
prising each regular member and regular alternate of the Federal
Open Market Committee then available, together with an additional
number, sufficient to make a total of seven, which shall be made
up in the following order of priority from those available:
3/3/64
-35-
(1) each alternate at large (as defined below); (2) each President
of a Federal Reserve Bank not then either a regular member or an
alternate; (3) each First Vice President of a Federal Reserve Bank;
provided that (a) within each of the groups referred to in clauses
(1), (2), and (3) priority of selection shall be in numerical order
according to the numbers of the Federal Reserve Districts, (b) the
President and the First Vice President of the same Federal Reserve
Bank shall not serve at the same time as members of the Interim
Committee, and (c) whenever a regular member or regular alternate
of the Federal Open Market Committee or a person having a higher
priority as indicated in clauses (1), (2), and (3) becomes avail
able he shall become a member of the Interim Committee in the place
of the person then on the Interim Committee having the lowest
priority.
The Interim Committee is hereby authorized to take action
by majority vote of those present whenever one or more members
thereof are present, provided that an affirmative vote for the
action taken is cast by at least one regular member, regular
alternate or President of a Fedecal Reserve Bank.
The delegation
of authority and other procedures set forth above shall be effec
tive only during such period or periods as there are available
less than a total of seven regular members and regular alternates
of the Federal Open Market Committee.
As used herein the term "regular member" refers to a member
of the Federal Open Market Committee duly appointed or elected
in accorcance with existing law; the term "regular alternate"
refers to an alternate of the Committee duly elected in accordance
with existing law and serving in the absence of the regular member
for whom he was elected; and the term "alternate at large" refers
to any other duly elected alternate of the Committee at a time
when the member in whose absence he was elected to serve is
available.
The following resolution authorizing
certain actions by the Federal Reserve Banks
during an emergency was reaffirmed by unanimous
vote:
The Federal Open Market Committee hereby authorizes each
Federal Reserve Bank to take any or all of the actions set forth
below during war or defense emergency when such Federal Reserve
Bank finds itself unable after reasonable efforts to be in
communication with the Federal Open Market Committee (or with the
Interim Committee acting in lieu of the Federal Open Market
Committee) or when the Federal Open Market Committee (or such
Interim Committee) is unable to function.
3/3/64
-36
(1) Whenever it deems it necessary in the light of economic
conditions and the general credit situation then prevailing (after
taking into account: the possibility of providing necessary credit
through advances secured by direct obligations of the United States
under the last paragraph of section 13 of the Federal Reserve Act),
such Federal Reserve Bank may purchase and sell obligations of the
United States for its own account, either outright or under re
purchase agreement, from and to banks, dealers, or other holders
of such obligations.
(2) In case any prospective seller of obligations of the
United States to a Federal Reserve Bank is unable to tender the
actual securities representing such obligations because of
conditios resulting from the emergency, such Federal Reserve Bank
may, in its discretion and subject to such safeguards as it deems
necessary, accept from such seller, in lieu of the actual securities,
a "due bill" executed by the seller in form acceptable to such
Federal Reserve Bank stating in substantial effect that the seller
is the owner of the obligations which are the subject of the
purchase, that ownership of such obligations is thereby transferred
to the Federal Reserve Bank, and that the obligations themselves
will be delivered to the Federal Reserve Bank as soon as possible.
(3) Such Federal Reserve Bank may in its discretion purchase
special certificates of indebtedness directly from the United States
in such amounts as may be needed to cover overdrafts in the general
account of the Treasurer of the United States on the books of such
Bank or for the temporary accommodation of the Treasury, but such
Bank shall take all steps practicable at the time to insure as far
as possible that the amount of obligations acquired directly from
the United States and held by it, together with the amount of such
obligations so acquired and held by all other Federal Reserve Banks,
does not exceed $5 billion at any one time.
Auttority to take the actions above set forth shall be effective
only until such time as the Federal Reserve Bank is able again to
establish communications with the Federal Open Market Committee (or
the Interim Committee), and such Committee is then functioning.
By unanimous vote the Committee
reaffirmed the authorization, first
given at the meeting on December 16,
1958, providing for System personnel
assigned to the Office of Emergency
Planning, Special Facilities Branch
(formerly, Office of Civil and Defense
-37
3/3/64
Mobilization--Classif.ed Location) on a
rotating basis to have access to the
resolutions (1) providing for continued
operation of the Committee during an
emergency and (2) authorizing certain
actions by the Federal Reserve Banks
during an emergency.
There was unanimous agreement that
no action should be taken to change the
existing procedure, as called for by
resolution adopted June 21, 1939, requesting
the Board of Governors to cause its examining
force to furnish the Secretary of the Federal
Open Market Committee a report of each exam
ination of the System Open Market Account.
Reference was made to the procedure authorized at the meeting of
the Commrittee on March 2, 1955, and most recently reaffirmed on March 5,
1963, whereby, in addition to members and officers of the Committee and
Reserve Bank Presidents not currently members of the Committee, minutes
and other records could be made available to any other employee of the
Board of Governors or of a Federal Reserve Bank with the approval of a
member of the Committee or another Reserve Bank President, with notice
to the Secretary.
It was stated that lists of currently authorized persons at the
Board and at each Federal Reserve Bank (excluding secretaries and records
and duplicating personnel) had recently been confirmed by the Secretary
of the Committee.
The current lists were reported to be in the custody
of the Secretary, and it was noted that revisions could be sent to the
Secretary at any time.
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3/3/64
It was agreed unanimously that
no action should be taken at this time
to amend the procedure authorized on
March 2, 1955.
This concluded the consideration of the continuing authorizations
of the Open Market Committee, and the Committee turned to a review of
operations during the period since the meeting of the Committee on
February 11, 1964.
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 February 11
through February 26, 1964, and a supplementary report covering the period
February 27 through March 2, 1964.
Copies of these reports have been
placed in the files of the Committee.
Supplementing the written reports, Mr. Coombs commented that the
gold stock would remain unchanged this week.
As of today, he said, the
Stabilization Fund had on hand $74 million of gold, including $18 million
received in the February distribution of the Gold Pool.
$53 million during March were expected.
Sales of at least
The Russians were still on the
sidelines of the London market.
There had been a great deal of activity in the exchange markets
during the past three weeks, Mr. Coombs said, with ominous speculative
tendencies developing in the markets for both sterling and the German
mark.
In the case of sterling, publication of some disappointing trade
3/3/64
-39
figures for January triggered a strong burst of speculation against
sterling begirning about 10 days before the British Bank rate increase
and the Bank of England was forced to disburse at least $85 million in
intervention operations.
While various statements by British official
spokesmen explaining the Bank rate increase had stressed the overheating
of the domestic economy, Mr. Coombs felt
sure they were equally concerned
with the drain on their reserve position.
In 1961, when a similar
speculative drive on sterling developed in March of that year,
delayed action until August and,
billion.
On this occasion,
of England in
in
the meanwhile,
the British
lost more than $1
the swift and decisive response of the Bank
the form of a 1 per cent Bank rate increase had thrown
back the speculative drive before it could gather momentum.
Since last Friday, Mr. Coombs said, the Bank of England had
recovered nearly half of its
previous reserve losses and the sterling
rate had moved back up from a low of 2.7945 to approximately 2.7980.
On balance, British reserves decreased nearly $48 million in February.
Short covering seemed to be the major factor in the rise in the sterling
rate with no irdication as yet of any movement of short-term investment
money from New York to London.
Since last Thursday, the covered interest
arbitrage differential had been close to zero and this might partly
reflect market knowledge both in London and New York that the Bank of
England and the Federal Reserve were in
a position to squeeze out
quickly any sizable differential which might appear.
-40-
3/3/64
The counterpart of the speculative attack on sterling, Mr. Coombs
continued, was
the development of strong buying pressure on the German
mark as rumors of a possible revaluation began to flood the market.
During the first three weeks of February the Bundesbank took in more
than $200 million.
During this period, Mr. Coombs said, he had repeatedly
suggested to Bundesbank officials the desirability of a resumption of
forward
operations in order to reassure the market
would remain unchanged.
were not
themselves
that the mark parity
Possibly because these Bundesbank officials
fully persuaded of their government's
this matter, they suggested waiting a while longer.
firmness on
The British Bank
rate decision might have helped to stiffen the Bundesbank's position,
however, and
they concurred last Thursday in a resumption of Federal
Reserve spot operations
a
financed by a swap drawing, and, on Friday, in
resumption of forward operations
account.
So
far,
these operations
for joint Treasury and Bundesbank
on both the spot and
seemed to have had some useful results not
dollar
forward markets
only in strengthening the
rate against the mark but, much more importantly, in providing
the market with official reassurances
changed.
that
the mark parity would not be
Sales of $7.5 million equivalent of
forward marks
the forward premium on the mark down to about 0.66 per cent
had brought
today from
1.05 per cent when the operation was begun, and the whole market had a
much better tone.
It was expected that these operations would be
further
reinforced next week, when the Bundesbank would offer forward cover at
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3/3/64
a cost of 1/2 per cent to German commercial banks placing funds in
U. S. Treasury bills.
The technical effect of this operation would
be to shift dollars from the Bundesbank to the commercial banks,
but
the willingness of the Bundesbank to assume a short position in marks
by thus providing forward cover should help still further to reassure
the market that the mark parity would remain unchanged.
The lira continued under pressure, Mr.
Coombs said, and the
Bank of Italy would show a sizable reserve loss for February.
The
Italian Government had not yet put together a comprehensive balance of
payments program although the Bank of Italy had unobtrusively brought
about a considerable measure of credit restraint, and, last month, the
Government took several tax measures designed
to curtail luxury imports
and to strengthen confidence in the security markets.
Mr. Coombs reported that on March 9 the Treasury, in order to
pay off a maturing lire bond, would take over $50 million of the lire
that the Account had sold forward to the Treasury.
In the Netherlands, he observed, the guilder had continued to
weaken and last week the System was able to purchase for Treasury account
$17 million of guilders.
These guilders would be used to reverse an
earlier Treasury swap of marks against guilders and provided, Mr. Coombs
thought, another good illustration of the usefulness of the technique
of moving through swaps from one European currency to another.
3/3/64
-42
The Swiss franc also showed a weakening tendency, Mr.
Coombs
reported, partly because of seasonal influerces and partly because of
the deterioration of the Swiss balance of payments position.
The dollar
holdings of the Swiss National Bank had now become reduced to their
normal level of $175 million and this would mean that any net demand
for dollars in Switzerland would now give the System an opportunity to
sell dollars for Swiss francs.
Mr.
Coombs was hopeful of making rapid
progress in reducing the System's Swiss franc debt over the next few
months.
Mr. Wayne asked what the source was of the gold that the London
Pool had distributed in February, and Mr. Coombs replied that he was not
entirely sure.
in
gold,
the U. S
and he was hopeful that if
there were continued improvement in
balance of payments this tendency toward dishoarding would be
reinforced.
earlier,
He thought there had been some weakening of speculation
Also,
the South Africans were not doing quite as well as
and they were supplying a larger proportion of their gold output
to the ma ket.
In answer to a question by Mr. Daane, Mr.
Coombs said that
British reserves had increased $28 million immediately after the change
in the Bank rate, and there had been some further accruals since.
situation was not yet solid.
The
Their bill rate was left at a very low
level in relation to the Bank rate when the latter was raised.
sterling showed any weakening tendencies,
move the bill rate up a bit more.
If
the authorities might have to
3/3/64
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Mr. Ellis referred to Mr. Coombs' ccmment that the Bank of
England and. the System were in a position to squeeze out any sizable
covered interest differential between New York and London, and asked
Mr. Coombs what his expectations were with respect to the differential.
Mr.
Coombs replied that he would no: want to see a differential
develop of more than 25 basis points in favor of London, and would plan
to operate in the spot and forward markets to prevent it.
covered spread there was a risk that funds would flow out.
With a larger
He noted
that the same situation existed with respect to the spread between
New York and Montreal; it had not exceeded 25 basis points in recent
months.
In reply to further questions, Mr. Coombs said he had not heard
reports of funds moving abroad on an uncovered basis.
The main short
run effect of the increase in British interest rates, he thought, was to
make the London market a more expensive source of financing, and to lead
to a tendency for borrowers to seek furds in the Euro-dollar market or
in
New Yo-k. There already were indications that Euro-dollar rates were
moving up and this possibly would go further.
Thereupon, upon motion culy made
and seconded, and by unanimous vote,
the System Open Market Account trans
actions in foreign currencies during
the period February 11 through March 2,
1964, were approved, ratified, and
confirmed.
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3/3/64
Mr. Coombs recommended renewal of the standby swap arrangement
of $100 million with the Netherlands Bank for a further three-month
period, and renewal for another three months of a $13 million swap with
the Bank for International Settlements of sterling against Swiss francs.
Renewals for further three-month
periods of the standby swap arrangement
of $100 million with the Netherlands
Bank, and of a $13 million swap with
the Bank for International Settlements
of sterling against Swiss francs, as
recommended by Mr. Coombs, were approved.
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 February 11 through February 26,
1964,
and a supplemental report covering the period February 27 through
March 2,
1964.
Copies of both reports have been placed in
the files of
the Committee.
In supplementation of the written reports,
Mr.
Stone commented
as follows:
The prices of Government securities have drifted
irregularly lower since the last meeting of the Committee,
largely in adjustment, first, to discussion of the possibility
of a rise in the British Bank rate, and then to the 1 per cent
increase in that rate on February 27. The market's reaction
to the actual increase in the Bank rate was notably mild,
with prices declining generally 6/32 to 8/32 before the week
end and then recovering 1/32 to 2/32 yesterday.
The moderate nature of the adjustment thus far undoubtedly
reflects the extent to which the market had already had an
opportunity to weigh the implications of a move by the British
3/3/64
-45-
for the future course of domestic interest rates.
There was
no precipitate break in prices such as might have occurred
had the rate change caught the markets unaware. By the time
the change occurred, the market was in a reasonably good
technical position, with dealer holdings of issues maturing
in over five years down to $93 million from $280 million at
the time of the Committee's last meeting. Dealer's net
positions in such issues receded further to $16 million at
Friday night's close as a result both of purchases for
Treasury investment accounts and some small investment buying.
The market at the present time is waiting and watching cau
tiously to see how the passage of the tax bill and the change
in the Bank rate affect the course of the American economy and
the pattern of international money flows over the weeks and
months ahead.
Treasury bill rates also moved higher over the period since
the last meeting in response to the same factors affecting the
market for coupon securities. In yesterday's weekly auction a
strong demand developed for Treasury bills at the higher levels
to which rates had risen after the Bank rate change. While
market discussion before the auction had pointed to rates of
3.60-3.62 per cent on the three-mcnth bill and 3.80-3.81 per
cent on the six-month bill, the average issuing rates actually
established were about 3.59 and 3.78 per cent, respectively.
Prices of outstanding corporate and municipal bonds
reached their highest levels of the year at about the time of
the Committee's last meeting and then declined irregularly in
response to an increased supply of new offerings as well as to
the uncertainties stemming from the factors affecting the
Government securities market. Offering rates on new issues
coming to the market worked irregularly higher over the interval
as investors resisted the efforts of underwriters to lead the
market toward lower yields. Looking ahead, the calendar of
municipal offerings remains near recent high levels while
activity in the corporate market is dominated by the offering
by the American Telephone and Telegraph Company of rights to
subscribe to about $1.2 billion of additional stock.
Turning to open market operations, the System conducted
operations in the market on only two days during the first two
weeks of the period. Since last Wednesday, however, the System
has bought about $650 million Treasury bills, almost all in the
market, as market factors have absorbed reserves more rapidly
than had been estimated on the basis of past behavior.
3/3/64
-46
Mr. Deming asked whether Mr.
Stone would
associate a present
bill rate of about 3.60 per cent with approximately the same market
conditions as obtained three weeks ago, when the bill rate was at 3.53
per cent.
In other words, would a higher level of reserve availability
be required now than three weeks ago to reduce the bill rate to its
earlier level?
Mr.
Stone replied that for the immediate future there probably
would be sufficient uncertainty in the market to require greater reserve
availability than formerly to reduce the bill rate to about 3.53 per
cent.
But after perhaps another ten days or two weeks the market would
have formed a consensus, and if that consensus was that there would be
no immediate policy response to the increase, in
the British Bank rate
and the tax cut, the bill rate probably would settle back to its previous
neighborhood.
Mr. Mills said that he did not know how it could have been
avoided, but last Wednesday the Account had purchased about $200 million
in bills on the last day of a reserve week
that reserves were needed.
vhen there were indications
But previously the Account had operated on a
line that yielded free reserves somewhat below $100 million.
The $200
million purchase raised the average level of free reserves above $100
million but did not affect the tone of the market, which tone was exhibited
in the Federal funds rate and the Treasury bill rate.
What concerned him,
Mr. Mills said, was the unintentional element of dissimulation in raising
-47
3/3/64
free reserve averages for the week in statistical terms but not changing
the underlying market conditions.
Mr. Stone said the operation last Wednesday was undertaken
primarily to offset what had seemed to the Management to be a sharp
tightening of market conditions.
Daily figures on member bank borrowing
through Tuesday clearly indicated that the market was in process of
developing substantial pressure.
On Friday, February 21,
borrowings
were $74 million; on Monday, $244 million; and on Tuesday, $313 million.
The performance of the market on Wednesday suggested that these pressures
were not only continuing but intensifying,
coming from the market,
and in the light of the signals
the Desk bought $212 million of bills on Wednesday.
Member bank borrowings on that day were $57,+ million.
When he saw that
figure the next morning, Mr. Stone said, it seemed to him that the Desk's
reading of the market had been right.
Had the Wednesday purchases not
been made, borrowings could have risen to close to $1 billion that day.
In reply to questions by Mr.
Ellis, Mr. Stone reported that the
Treasury anticipated announcing a cash fina:cing of about $1-1/2 billion
sometime during the last full week of March,
part of April.
with payment in the early
The next major financing would be the May refunding,
which the Treasury would discuss with its advisory committees during the
last week in April.
If the cash financing involved fairly short-term
securities with a payment date around April 8, the securities probably
would be fairly well digested by the payment date.
The Committee would
3/3/64
-48-
then have a "free period" of about three weeks before the May refunding.
If the cash financing involved longer term bonds, the free period would
be reduced.
Thereupon, upon motion duly made
and seconded, and by unanimous vote, the
open market transactions in Government
securities and bankers' acceptances during
the period February 11 through March 2,
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. Koch commented on economic conditions as follows:
The two major domestic economic considerations most
relevant to the determination of monetary policy are:
(1)
the existing degree of resource utilization, and (2) the
balance and sustainability of recent developments. What
are the new facts available relating to these considerations,
particularly as to their implications for the future?
As for resource utilization, the unemployment rate in
February was probably little changed from January's 5.6 per
cent. Thus, it remained in the narrow 5-1/2 to 6 per cent
range in which it has fluctuated now for two years. The rate
of utilization of manufacturing capacity is estimated to still
be at 87 per cent, a level which it reached in the second
quarter of 1963 and at which it remained for the rest of the
year. For major materials, which have more to do with the
beginnings of inflation than manufacturing as a whole, the
utilization rate is estimated at 82 per cent. In the past,
upward price and cost pressures have tended to develop when
major materials output approached 90 per cent of capacity.
Now that the tax cut is a reality, utilization of both
labor and capital will no doubt increase over the coming months,
but the rise is likely to be gradual and to take place only
after some time lag.
Turning to the character of recent economic developments,
let me comment briefly now on four strategic areas, namely,
3/3/64
-49
inventories, fixed investment, prices, and wages. Manufacturing
inventories decreased moderately in January, after showing a
fairly large increase in the fourth quarter.
Average stock/sales
ratios, which had been running at historically low levels,
actually took an appreciable dip in December and January when
factory shipments rose substantially after showing Little change
for some months.
Recent inventory developments suggest that business management is still apparently more interested in economizing on stocks
rather than in hedging future price increases. One evidence of
this is that stocks of finished goods have been rising, while
stocks of raw materials have been declining. Moreover, most
purchasing agents report their inventory holdings as at about
desired levels, and they indicate little
change in future buying
commitments.
As for fixed investment, new orders for durable goods
picked up sharply in January following two months of decline.
The January rise was due mainly to heavier ordering of steel,
aircraft, and missiles.
This pickup may also have been partly
a seasonal development, since the seasonally adjusted series on
orders also jumped sharply in January of the two preceding years.
New orders for durable goods have shown sharp fluctuations around
a fairly stable level since early last year, with the fluctuations
due mainly to variations in steel and defense ordering. However,
over this period new orders for producers' equipment have shown
In January, with total new orders
a fairly ;teady and large rise.
up 5 per cent from a year earlier, new orders for nonelectrical
machinery were up 13 per cent.
According to a recent NICB survey, new capital appropriations
of large manufacturing companies, which generally precede spending
by from 6 to 9 months, declined 13 per cent in the fourth quarter
This decline followed sharp increases in the two preced
of 1963.
ing quarters. In the past, periods of sharp increase have typically
been followed by brief declines.
These new orders and capital appropriations data can still be
considered consistent with the conclusion of the recent McGraw-Hill
resurvey, namely, that businessmen are showing quiet confidence
in their fixed investment spending programs rather than a boom
psychology. Lionel D. Edie & Co. estimates a 12 per cent rise in
business fixed capital outlays this year, asagainst the McGraw-Hill
9 per cent, but this, too, does not add up to a capital spending
boom.
Price developments continue to raise gnawing concern about
their possible cumulative potentialities. Dramatic developments
are centered in nonferrous metals. Tim prices first rose sharply
3/3/64
-50-
and then fell back when sales from the Government's stockpile
were stepped up. Copper is up in price in speculative markets
and being rationed. Major producers of zinc failed to go
along with an attempted price increase, although demand has
been strong. There is some hope that price increases in the
nonferrous metals area will be limited by the increases in
production that are being stimulated.
Recent price developments in the nonferrous metals area
raise the question of import quotas that remain in effect for
lead and zinc, and Government stockpiles which continue high
in the case of most metals. If the price rise continues and
remains of particular concern in the nonferrous metals area,
specific Government action regarding import quotas and stockpiles
would appear more desirable alternatives than general measures
to restrain over-all demand.
The most significant wage settlement thus far this year las
been in the trucking industry where a 38 month contract has been
signed involving a total wage increase, including fringe benefits,
amounting to an annual rate of a little under 4 per cent. In
general, moreover, wage increases received by the Teamsters in
recent years have been somewhat larger than those in most other
industries.
This recent settlement in trucking, along with those in
glass and apparel, are roughly comparable in amount to the
average reached in last year's negotiations. More generally,
with labor productivity continuing to rise, wage rate increases
equal to those of recent years would result in further stability
of unit labor costs. Bargaining in nonferrous metals, autos,
farm equipment, and meat packing is still to come. Auto bargain
ing, in particular, could either confirm or upset the recent
stability in labor costs. Recent comments by Walter Reuther and
George Meany suggest a further f:rming of bargaining positions
and a disinclination to pay much attention to the wage/price
guidelines proposed by the Administration. Recent management
comment on the guidelines also has been critical. But all this
may be bargaining tactics, and when the participants in the auto
industry sit down at the bargaining table, reason is still likely
to prevail. The adversaries are strong, sophisticated, and
well-informed, and have done business with each other before.
To sum up my reading of the domestic economic information
recently becoming available to us, it suggests continuing ample
availability of labor and plant capacity, stability in labor
costs and in the general price level, and still little evidence
of imbalances or excesses developing in key areas of activity.
From the point of view of the available evidence on domestic
economic developments and despite the tax cut, no change in
monetary policy is called for at this time.
-51-
3/3/64
Mr. Noyes made the following statement concerning monetary and
credit developments:
Preliminary figures for the last half of February suggest
that the conventionally defined money supply drifted down a
little further from the early January high. Over the same
period, time deposits at commercial banks have moved erraticallymost recently up again--as the changes have been dominated by the
aggressiveness with which banks have marketed negotiable C.D.'s.
Passbook savings have tended to rise somewhat less vigorously
since the turn of the year.
After a small seasonally adjusted decline in January,
bank cred.t expansion appears to have picked up again in
February. This was due in part to the fact that bank holdings
of Governments, which usually decline, remained substantially
unchanged, while bank investment in municipal and agency issues
increased a little.
Among the loan categories, business loans picked up as
compared to January, but are still well below the rate of
expansion that prevailed in the last half of 1963. Real estate
and consumer loans also rose somewhat and security loans showed
less than the normal seasonal decline.
All of the measures of aggregate reserves--total nonborrowed,
total required, and required reserves behind private depositshave drifted down since early January. Free reserves have
fluctuated rather widely, both from week to week and as between
the preliminary and final figures.
The tone in the money market remained steady, however, up
to the announcement of the Bank rate change Thursday. After the
announcement, 90-day bill rates moved up to 3.60 but the general
tone of te money market did not change dramatically. The tone
was maintained with System purchases Thursday, Friday and
yesterday that were no larger than were needed to meet seasonal
reserve needs, and, in fact, the current outlook is for a somewhat
lower free reserve figure this week than last. The projections
suggest that the System will have to make further purchases to
offset market factors next week, and in subsequent weeks through
early April, except perhaps for the week ending March 18.
So far, at least, it does not appear that market developments
since the Bank rate increase are in any sense forcing the System's
hand in the direction of a particular policy change. In other
words, there is not, at present, a situation in the market which
would in itself dictate either a change in open market policy or
in discount rates.
3/3/64
-52-
Apart from any change in policy, both the staff and
some Committee members have felt concern recently with regard
to the present wording of the economic directive.
The first
paragraph of the directive is in obvious need of revision at
this meeting to take account of new information on economic
But the concern to which L refer
and financial developments.
relates more specificially to the second or operational
It runs in part to the implications of continuing
paragraph.
for too long a period a primary target expressed in terms of
the "maintenance of the same money market conditions," and in
part to the problems associated with the actual or potential
conflict between such a target and "accommodating moderate
expansion in aggregate bank reserves."
There are certainly times when the words "maintain the
same conditions in the money market" express the desires of
the Committee as well or better than any other words that
might be chosen.
But perhaps the dangers involved in a
continued use of such a phrase are best illustrated by the
fact that it has not seemed appropriate to change it as we
move into and out of periods in which an "even keel" is
dictated by Treasury financing operations.
Thus, the record could be read to suggest that the Manager
has been directed to maintain on "even keel" continuously since
early last fall--and the behavior of the market might be inter
preted to suggest that he has been reasonably successful in
carrying out just such a directive.
Yet it seems doubtful that
any member of the Committee who has voted to approve the directive
would wish to have his position interpreted in this way. From
this, I conclude that the phrase "maintain about the same money
market conditions" should, if possible, be reserved for those
occasions when it is literally the Committee's intention, which
would be during periods of Treasury financing and perhaps a few
others, and that other words should be employed to direct the
continuation of about the same policy from meeting to meeting.
Let me comment briefly on the conflict aspect of the directive.
I think everyone who has been exposed to the working of the Committee
has had a try at revising the directive so as to maintain short-run
instructions, such as a bill rate, market tone, or free reserve
target on the one hand, and at the same time give recognition to
a medium-term goal of appropriate change in one or another of the
total reserve measures.
Despite the remarks of ill-informed critics, there is no doubt
whatever in my mind that the people in this room are as aware
as anyone of the relationship between money market conditions
and aggregate bank reserve expansion or contraction. It is not
ignorance or humility but wisdom which has caused them to avoid
3/3/64
locking policy to prescribed rate of growth in one or another
of the total reserve measures.
Yet, the same wisdom leads
them to acknowledge the fact that any given policy posture
toward market conditions has implications for the rate of total
reserve expansion, difficult as it may be to quantify that
relationship for a short period.
As I have indicated, I do not
believe it is presently feasible to cast a meaningful current
operational directive primarily in terms of a rate of growth
in some aggregate reserve measure.
What is possible is to
state the desired policy in terms of a market target or targets,
cast in terms of rates, tone and feel, or free reserves, which
may be as specific or as broad as the Committee wishes, and
then express the expected implications of such a policy for
aggregate reserve expansion in the light of anticipated external
mar.et conditions.
The first
two alternative drafts prepared
by the staff for your consideration later in the meeting recast
the direc.ive along these lines.
Mr. Furth commented on the balance of payments as follows:
Preliminary payments data for the first two months of the
year have been surprisingly favorable.
The payments deficit for
January amounted to $143 million, and the tentative weekly data
for February suggest a deficit of only $40 million, after deducting
from U. S. receipts $80 million of German military prepayments,
If final data confirm these figures, the payments deficit for the
first
two months would be at an annual rate of only $1.1 billion,
as compared with a rate of $1.5 billion in the second half of
1963.
The recent figures are particularly satisfying for three
reasons.
First, foreign private dollar holdings rose in January
by .400 million, offsetting the decline in those holdings during
Hence, on the basis of "official settlements" January
December.
would have shown a substantial surplus rather than a deficit.
Second, U. S. bank-reported claims on foreigners rose in January
more than $200 million; even if only short-term U. S. claims are
taken into consideration, the U. S. liquidity position would on
On the
balance show some improvement rather than deterioration.
basis of the tentative February data, it seems that in February,
too, "official settlements" yielded a U. S. surplus, and the rise
in U. S. bank-reported claims on foreigners exceeded the amount of
the conventional deficit.
Finally, the U. S. trade balance appears to continue to improve.
Export figures for January are not yet available but imports reveal
welcome stability. And two factors should contribute to the
maintenance of our export volume in the current quarter. One is
3/3/64
-54-
The other is
the beginning of U. S. grain shipments to Russia.
the improvement in the aggregate payments position of the less
developed countries, which should induce these countries to
increase their imports, including imports from the United States.
Whether or not the favorable paymer ts trend can be expected
to continue in the longer run, however, will largely depend on the
effects of the recent tax cut and on the course of monetary policies
in foreign developed countries.
The tax cut will presumably raise U. S. imports--I understand
that a rise at an annual rate of $1 billion is expected for the
rest of this year--but it should also keep capital outflows down,
even in the absence of significant changes in U. S. interest-rate
levels.
First, the increased government deficit will absorb a
larger amount of loanable funds. Second, the expected rise in
consumption will sooner or later induce an increase in business
investment and therefore also lead to an increased absorption
And third, the expected rise in economic
of investible funds.
The resulting
activity should attract foreign investors.
reduction in the net outflow of capital might well be more than
sufficient to offset the effects not only of the rise in imports
but also of an increase in foreign bond flotations in New York
which may follow the enactment of the irterest equalization tax.
Incidentally, the civil rights filibuster in the Senate will
presumably further delay enactment of the IET and thereby prolong
the favorable effect of the prevailing uncertainty on the U. S.
payments balance.
The main threat to continued favorable developments in U. S.
international payments is posed by the possibility of larger
outflows of volatile funds in response to actions of European
The recent increase in the British Bank rate was
authorities.
clearly de:ensive; nevertheless, a fall in the forward sterling
discount could make the covered differertial between London and
New York large enough to attract a substantial volume of funds
from the United States, especially into British hire-purchase
And there remains the risk of further restrictive
paper.
measures in Britain or on the Continent.
The British domestic and international position as such
should not warrant anxiety about further basic deterioration
Temporary
which might force Britain to take more drastic action.
outflows of funds from Britain in response to election uncertain
ties and similar random factors could easily be offset by British
drawings on the IMF or on existing bilateral arrangements, including
the Federal Reserve swaps.
On the Continent, most countries enjoy not only full employment
but, except for Italy, France, and Germany, also reasonable payments
equilibrium.
-55
3/3/64
In Italy, further moderate corrective measures, preferably
in the field of fiscal policy, may suffce to stop the infla
tionary spiral and reduce the payments deficit without inducing
disruptively large international flows of capital or putting an
end to Italy's domestic expansion.
The French payments surplus is definitely declining; recent
French accumulations of dollars have been insignificant, a change
gratifying as much for its political as its purely financial
connotations.
But the German surplus, far from declining, appears to be
rising as fast as, or faster than., the combined surplus of the
rest of Europe is shrinking. In view of the combination of
domestic full employment and external surplus, simple traditional
expansionary or restrictive policies would obviously be as
inappropriate in Germany as they are in the opposite case of the
United States. The Germans are unwilling to reduce the competitive
advantage of their export industries, either by letting wages and
prices gradually creep up, or by undertaking another revaluation
of the mark. But if they find it impractical to apply new fiscal
measures of the kind proposed for dealing with situations like
theirs, the payments surplus will inevitably not only accelerate
their domestic monetary expansion but also put increased pressure
on exchange rates. This pressure would hit first the weaker
currencies such as sterling but eventually also the stronger
currencies, including the dollar.
This problem may well turn out to be the touchstone for the
ability of the present payments mechanism to maintain international
equilibrium under fixed exchange rates together with adequate
economic growth with the help of mutual consultation and cooperation.
Chairman Martin invited Mr. Young to comment on the recent neeting of
the Organization for Economic Cooperation and Development he had attended.
Mr.
Young made the following comments:
From the latest discussions in OECD meetings in Paris--namely,
of its Economic Policy Committee and Working Party 3 groups--one
carried away the impression that Europe no longer worries much
about the U. S. payments deficit and its potential threat to the
dollar, but is now mainly preoccupied with European inflationary
pressures already generated or threatening to be generated by the
cumulative payments surpluses or their aftermath. Indeed, one came
away with the distinct feeling that 1964 is likely to be a swing
year in international payments, with the U. S. deficit and the
over-all European surplus against the rest of the world both much
3/3/64
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reduced, but with varying degrees of developing imbalance among
European countries.
European balances of payments in 1964 was
The outlook for
reported in these discussions about as tollows:
U. K. - Expecting a small surplus on current account,
but a small-to-moderate over-all deficit because
of capital outflow.
France - Expecting a swing from a payments surplus
exceeding $1 billion to balance or possibly to a
small over-all deficit.
Italy - Expecting a continued over-all deficit of
roughly the same magnitude as in 1963--about $1-1/4
billion.
Germany - Expecting a sharp increase in over-all surplus,
ir all likelihood exceeding $2 billion and stemming
from both export trade and capital inflow developments.
Netherlands - Expecting a swing from a payments surplus
in 1963 of around $100 million to a deficit in 1964
in the neighborhood of $275 million.
Belgium - Expecting about balance.
Switzerland
- Expecting some worsening of current
account deficit plus a much smaller capital inflow;
hence, a smaller over-all surplus.
Scandinavian countries - Expecting payments to balance
roughly.
If European countries
These expectations do not add up.
other than Germany are either in near balance or have substantial
deficits, and only Germany has a large surplus, then the rest of
the world should be at least in balance if not in moderate surplus.
But all non-European industrial countries and Canada expect a
This leaves the less developed countries as the main
deficit.
Apparently economic fore
surplus areas, which seems unlikely.
better than i.
sight in the balance of payments sector is little
other sectors of the economy.
Comment in the meetings fccused especially on Germany and
Italy. German representatives asserted that the Federal Government
was sifting
all
possibilities
for action to bring down her payments
surplus. It had considered and renounced revaluation as a solution.
considering some kind of uni
But, as possibilities, it was still
lateral tariff action for non-EEC countries; possible enactment of
an interest withholding tax applicable to foreign investors or even
of a nondiscriminatory withholding tax; and finally, with a view
to stimulating capital exports, elimination of the capital issues
And, of course, it was emphasized that
tax of 2-1/2 per cent.
there were serious obstacles to each of these courses of action.
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The official German view was that there was little that
monetary policy could do under the circumstances of large
payments surplus except to let that surplus have its monetary
expansion effects. And so the posture of the Bundesbank would
be passive or neutral, even though the monetary effects internally
could be strongly inflationary in direction. Operations to lower
the long-term interest rate could not help much, because non
interest motivations were playing such a large role in the
capital inflow.
The Italian report was an explanation in depth of the additional
stabilization measures taken last weekend. As you know, these
included a strengthening of tax collection processes; a curb on
consumption expenditures on durable goods, with the hope of some
redirect:on of output of these goods to export markets; regulation
of key food and pharmaceutical prices; the diversion of additional
revenues to the financing of essential public investment expend
itures; and institution of a policy of wages-productivity guidelines.
The earlier stabilization steps had had the objective of stopping
expansion of government expenditures; relieving demand pressures
on the construction industry; and setting in motion Bank of Italy
curbs on bank credit and monetary expansion. The target for this
latter cutback had now been set at 12 per cent, down from a 20
per cent rate of increase in 1963, to be achieved as rapidly as
possible, but not so rapidly as to risk a deflationary upset.
Whether the Italian stabilization program is adequate to cope with
swelling inflationary movement was doubted by a number of European
participants in the discussion, but it was generally agreed that
it was taking a desirable shape and, that, in its present form,
it represented much hard decision-taking by the new coalition
government.
The report by the Dutch representative was noteworthy mainly
for its frankness in admitting a real breakdown in Dutch
stabilization efforts as a result of repressed wage pressures.
For an interim period, it was admitted the Netherlands' economy
had to go through still more inflationary wage and price
adjustment--something above 7 per cent each year. In this
process, rising interest rates, both short- and long-term, were
to be expected in the months ahead.
The reports of French and Swiss representatives were accounts
of their respective anti-inflation efforts, but for neither country
did the representatives claim that full containment of inflationary
pressures was foreseen for the near-term future. On the contrary,
the implication in both cases was that inflationary trends
internally were likely to continue, though hopefully a stage of
stability might be reached late in 1964. The Swiss, of course,
renounced both revaluation of the franc and rising domestic
interest rates as alternatives of a national policy.
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In conclusion, I should comment briefly on the report of the
U. K. representatives. On the whole, their diagnosis of internal
and external developments was on the gratified and optimistic side.
The only indications of possible early restrictive Bank rate action
were incidental references to the recent increases in wage rates
in excess of productivity gains, the recent rise in imports and in
prices of some important export lines, and some contra-seasonal
weakness in sterling, but these were only indications in hindsight.
Otherwise, their report exuded confidence that economic trends
would work out reasonably satisfactorily for the U. K., with the
year 1964 one of impressive gains domestically and of no
unmanageale deterioration externally.
Mr. Daane reported that he had attended a meeting of the deputies
of the Group of 10 on February 27 and 28, at which they had completed the
exploratory phase of their study.
phase.
They were now heading for the negotiation
The first day of the meeting was rather chaotic, but the second
day was better and there were grounds for hoping that something useful
would be accomplished by the study.
The effort of some countries to lire up a European front against
the U. S. and in favor of proposals to supplant partially or totally the
reserve currency system was not successful.
It did not appear that
anything immediately affecting the System would come out of this study
except in the broader sense.
As to the meeting itself, he thought it
significant that there was an improvement in atmosphere as the meeting
went along from the standpoint of sympathy with the U. S. point of view.
There had been a full discussion on the subject of IMF quotas with a wide
range of views expressed, variously favoring no increase in quotas, a
general increase, and selective increases.
Under Secretary Roosa took a
stance favorable to a general increase in quotas.
Dr. Emminger of the
3/3/64
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Bundesbank gave an able summary of the main proposals for improving
international liquidity, such as the Triffin, Paathuma, and Stamp plans,
that had originated outside the group,
It was possible that the text
of his paper might be available for study at some point.
Chairman Martin then called for the usual go-around of comments
and views on economic conditions and monetary policy beginning with
Mr. Hayes, who commented as follows:
Two major events have occurred since our last meeting
which may ultimately have an important bearing on our policies
but which at the moment are almost impossible to evaluate. I
have in mind the long-awaited enactment of the tax reduction
bill last Wednesday and the increase in the British Bank rate
from 4 to 5 per cent last Thursday. I should like to consider
with you some of the possible repercussions of these actions
in the light of the general economic and financial background.
The jusiness situation is still basically favorable.
Business sentiment continues to be stronger than a year ago
and appears to have avoided the usual inter doldrums. Although
a number of statistical series weakened in January, such-leading
indicators as housing starts and new orders for durables rose
substantially. Consumer buying plans remain well above the
level of a year ago and expectations of a sizable expansion ir
business spending in 1964 have received further confirmation.
In contrast with many periods in recent years, the uncertainties
in the current outlook relate largely not to whether business
will be advancing in the coming months, but to the pace of the
advance.
There seems to be some evidence that the rate of increase
in wholesale industrial prices has slackened off in the last few
weeks. Thus we may have some respite, in the immediate future,
with respect to our worries over possible revival of inflationary
pressures; but for the longer pull we must remain very much on our
guard, especially in view of the important wage negotiations this
summer and the uncertain impact of the tax cut. The unemployment
situation remains virtually the same as it has been for many months.
Widely divergent views may be found on the probable timing
and strength of the tax cut's stimulating influence on the economy.
It seems to me that perhaps too little attention has been paid to
the problem of under-withholding resulting from the very sharp
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drop in the withholding rate. This means that the direct
stimulus to consumer spending may be concentrated in 1964
even more than the distribution of the reduction in personal
tax liabilities between the years 1964 and 1965 would suggest.
On the other hand, it probably remains true, as both the C.E.A.
and Secretary Dillon have emphasized, that the greatest over-all
impact will be felt in 1965 because of the natural lag in
secondary effects. It seems probable that, on balance, the tax
cut will have sizable beneficial impact both on consumer spending
and on business investment. On the Federal expenditure side it
is by no means clear how soon the rather drastic control of
expenditures will "take hold" and how the timing of such effects
will mesh with the tax effects already discussed.
The latest balance of payments statistics are rather
encouraging. The January deficit was relatively small after
allowing for special factors, and this appears to be true also
of the fragmentary February data, despite a sizable increase
in United States acquisitions of Canadian and other foreign
bonds. Our export and import statistics also make satisfactory
reading, with the trade surplus for the fourth quarter of 1963
rising to a seasonally adjusted annual rate of $6.1 billion
On the other hand, aggregate capital
($6.8 billion in December).
outflows continue substantial, and there is some apprehension
abroad as to a possible upsurge in new foreign issues if and
when the interest equalization tax is finally passed. As for
the British Bank rate move, I am hopeful that this action will
not trigger any competitive moves on the European Continent,
although it is possible that some central bank or banks might
find it necessary at some future date to tighten credit still
further to deal with domestic inflationary problems. The large
uncovered spread that has now opened up between British and
U. S. bill rates is substantially offset by certain risk factors
associated with the coming British, election. It seems to me
that we can only applaud Britain's determination to defend
decisively the present sterling exchange rate, since any other
course might well in due course have set in motion dangerous
speculation against the dollar. The British move has been
weathered well so far in the exchange and security markets.
It would be most unwise, however, to assume that our balance
of payments problems are behind us.
If the recent Administration
estimate of a $2 billion over-all payments deficit in 1964 is
anywhere near the mark, it raises very serious questions as to
how so large a figure is to be financed, coming as it does in
the seventh year of heavy American deficits. Moreover, even
from a short-term point of view the dollar's position in the
exchange markets is by no means assured just because it has
survived well the first impact of the British rate action.
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For example, the Euro-dollar rate has risen significantly in the
last few days, possibly reflecting a shift of borrowing from
London to the Euro-dollar market for f nancing of international
trade and payments.
Turning to credit developments, we find a mixed picture
with no clear evidence of any pronounced change in the trends
observed in the past year or two. The strength in total bank
credit and bank loans in the first three weeks of February must
be viewed against the background of the unusually sharp fluctua
tions in the various credit and loan series around the year end,
and the very large declines in these series in January. We get
the general impression from the New York banks that there has
been no major change in the underlying trend of loan demands,
which is one of continuing but gradual strengthening.
As we look ahead to prospective Treasury offerings beginning
around the end of March and lasting through the middle of May
(except perhaps for a relatively short period in April), there
might be a natural inclination to take advantage of the "free
period" represented by the next three weeks if we see any
likelihood of a need for modification of policy in the coming
months. Despite this factor, however, I do not think this is a
propitious time for action. With the ink scarcely dry on the
tax bill, I believe we should act now only if there is a clearly
demonstrable need for an immediate policy change; and that need
does not exist, either on domestic or international grounds.
In view of all the uncertainties I have outlined, it would seem
prudent to continue our wait-and-see at:itude--recognizing that
market or exchange developments may jar us out of that attitude
before our next regular meeting--in which case we can deal with
conditions as they arise, through a special telephone meeting if
necessary. But such a problem seems a possibility rather than a
probability.
Clearly the discount rate should not be increased under
present circumstances, and the directive should, I believe, be
continued in substantially its present form, perhaps with the
addition of some reference to the tax cut and the British rate
action.
Mr. Shuford reported that economic activity in the Eighth District
had expanded moderately in recent months.
Metropolitan employment rose in
January and was considerably higher than in September.
Spending, as
reflected in department store sales and bank debits, also was higher than
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Total bank deposits had continued to increase,
last fall.
business loans had declined somewhat since November.
although
Industrial use
of electric power had remained virtually unchanged since October.
Farm income had continued strong through the fall of 1963, but there
had been some weakening in the last few months.
District livestock
prices, particularly for cattle, had declined substantially.
Mr.
Shuford said that the sentiment of District businessmen and
bankers was for continued expansion.
Generally, businessmen anticipated
a strong response to the tax cut, and rapid advances in investment and
in personal consumption.
Nationally, the economy seemed to be continuing a rather strong
advance, Mr. Shuford said.
shown some upward pressures,
While retail prices in recent months had
wholesale prices had remained stable.
The balance of payments had continued to show improvement,
Mr.
Shuford noted,
but, as discussed this morning,
it
was too early to
appraise definitely the effect of the British Bank rate increase.
The
pound seemed to have strengthened as a result of the increase in rate,
but it
was not evident that U. S.
monetary policy needed to be changed
as a result.
The uncertainties regarding both the balance of payments and
the effects of the tax cut called for a period of watchful waiting,
Mr.
Shuford said,
present.
and he would favor no change in
monetary policy at
He noted that the rate of growth in the money supply had
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moderated from the 7 per cent rate that had prevailed in the latter
part of 1963.
Since November the rate of increase had been about 3.5
per cent, and from January to February of this year there appeared to
have been some decline.
In view of the expansion in the economy, of
the balance of payments situation, and of recent price developments,
Mr. Shuford felt that the rate of monetary expansion since November had
been desirable.
He believed that a rate in the 3 to 5 per cent range
would be appropriate for the near future.
He would favor no change in
the discount rate and no change in the directive at this time.
He felt
as Mr. Hayes did with respect to the directive, but would be interested
in seeing the drafts the staff had prepared.
Mr. Bryan said that he had been reviewing figures for the Sixth
District recently and had noted that in nearly every series the District
had shown an excellent advance relative to a year ago, and in most cases
had shown a gain relative to the nation over this period.
However, in
some of the figures for the last few months the position of the District
seemed to show up less favorably relative to that of the nation.
The
District's best figures continued to be in the financial area; expansion
continued in bank loans and investments and in demand deposits and
currency.
However, there had been an increase in borrowing from the
Federal Reserve Bank,
Although the amount of borrowing was small in
comparison to the nation, it was still greater than bank reserves in the
District relative to those in the nation would indicate.
There were two
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unfavorable figures--the percentage of insured unemployment in the
District was up sharply, and personal income for some reason was
tending down.
Mr. Bryan said that the policy recommendations made by Mr. Hayes
and Mr. Shuford seemed to him to be essentially correct.
He, too, would
like to see the alternate drafts of directives prepared by the staff.
Mr. Bopp observed that business conditions in the Third District
appeared mediocre.
At the time of the last meeting, there had been
indications of greater-than-seasonal rises in unemployment in January.
These had since been confirmed.
Two areas had been reclassified downward,
leaving the District without any "areas of labor demand" (areas classified
"B" or better).
In February, the situation may have improved a little.
Department store sales so far in 1964 had been quite sluggish.
Since the Committee's last meeting, Mr. Bopp reported, moderate
pressure on bank reserve positions had again become evident and business
loans continued to lag relative to last year's performance.
Basic
reserve positions of reserve city banks changed from surplus to a deficit
averaging around $23 million.
Reserve city banks had been modest borrowers
at the discount window, adjusting their reserve positions primarily
through the Federal funds market.
Country banks also had been only moderte
borrowers.
The two key considerations for current policy were the tax cut
and the increase in the British Bank rate, Mr. Bopp continued.
With the
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tax cut now an accomplished fact,
the question of the mix between fiscal
and monetary policies became more than theoretical speculation.
Had the
time come to change the second ingredient of the mix by moving toward a
still
less easy,
or actually restrictive,
monetary policy?
And did the
development of higher rates abroad reinforce the argument for such a shift?
There seemed,
Mr. Bopp said,
to be no question of the direction
in which the tax cut and the increase in the Bank rate moved the Committee.
The tax cut was certain to have some stimulating effect domestically;
the Bank rate increase seemed likely to have some complicating effects
on our balance of payments.
The uncertainty was over degree.
If
one
took the position that monetary ease had already bordered on the excessive,
leading among other things to a deterioration in the quality of credit,
these latest developments might be enough to tip the scales, despite the
uncertainties
involved.
He had not taken that position, and so he would
favor waiting for further developments.
This was a period of transitior on both the domestic and inter
national
fronts,
Mr.
Bopp concluded,
and until
there was clear evidence
that the tax cut was having inflationary effects or that events abroad
were worsening the balance of payments, he would favor continuing the
present degree of ease.
Mr. Hickman said that with reassuring regularity the business
news continued to trickle in
appreciably in January.
on the up side.
Housing starts were up
Manufacturers' new orders of durable goods,
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after previous declines, bounced back in January to a new record position.
Retail sales in January and in early February were at approximately the
same high level as December, after seasonal adjustment.
A substantial
gain in personal income in January was due partly, but not altogether,
to such special factors as payments of dividends on veterans' policies
and the second stage of the pay increase to Federal employees.
The steel mills, Mr. Hickman reported, were extending delivery
schedules and steel customers were ordering briskly so as to avoid delays.
The steel industry was finding practically all of its major classes of
customers in a buying mood--autos, construction, machinery, railroad
equipment, and canning.
As a matter of fact, it now appeared that the
industry might produce as much tonnage in the first half of this year as
it had during the first half of last year under the sharp spur of strike
hedging.
Projections for the entire year were being raised, with some
figures mentioned as high as 113 million ingot tons as against 109 million
tons last year.
Auto output, too, had been above last year's pace so far this
model year.
Domestic new car sales had set a record for the month for
each month from October 1963 through January 1964, and possibly through
February as well.
Consideration in the auto industry was being given to
the question as to how far the tax cut might stimulate further the already
existing trend towards upgrading--that is, the increased preference for
the luxury and higher-powered cars.
An important background factor to be
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watched, because of its possible destabilizing effects, was the expiration
of the auto-labor contracts in late summer.
The generally bright business atmosphere was confirmed by devel
opments in the Fourth District, Mr. Hickman continued.
Steel output
continued to increase, unemployment was receding almost uniformly through.
out the District, and department store sales were being sustained at
record levels.
Loan demand at reporting barks had been exceptionally
strong in the light of seasonal influences.
developments had appeared in the District:
Only two slightly off-key
a January sag in auto sales,
with the February trend not clear, and a January dip in bank debits.
Both
of these developments were probably associated in large part with weather
conditions in the District.
Altogether, balance seemed to be the outstanding feature of the
business economy at the moment, Mr. Hickman said.
No serious weak spots
stood out except the continuing unsatisfactory status of unemployment,
and a prospective moderate decline in net farm income.
Nor did any
industries or any particular facets of the economy show visible signs of
becoming leaders in a boom.
It appeared to Mr. Michman that the tone of the money market had
improved since the last meeting; that is, the market had tightened somewhat.
On average in the three weeks ended February 26, borrowings rose, free
reserves declined, and the bill rate edged up a few basis points.
He
would continue to probe gently towards slightly less ease, but would try
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to avoid a sharp contraction in reserve availability that might trigger
an adjustment in expectations and a discontinuous jump in money rates.
He would move more vigorously only if the recent change in the British
Bank rate were to disrupt the present rough balance in international
capital flows.
Mr. Daane said it seemed to him that
the uncertainties regarding
the effect of the tax cut and of the British Bank rate increase clearly
dictated no change in policy during the next three weeks.
He saw nothing
to justify rocking the boat at present, and would not favor probing gently
toward less ease in the period ahead, as Mr. Hickman had suggested.
He
would be inclined to take a close look at the operating implications of
any change in the wording of the directive, even within the general
context of no change in policy, and he probably would resist any language
change that even implied gentle probing or any other change in the
operational guides for the period immediately ahead.
Mr. Mitchell said that he agreed with Mr. Hayes' analysis of the
domestic business and balance of payments situations, and also with his
policy prescription.
Mr. Shepardson observed that he continued to have some of the
same concern that Mr. Hickman had, but in light of the uncertainties
existing at this time he felt that it would probably be better procedure
to maintain present policy.
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3/3/64
Mr. Robertson said he agreed that monetary policy should continue
unchanged for the present.
Because the statement he had prepared closely
resembled Mr. Bopp's presentation, he would like to insert it in the
record but not deliver it orally.
he shared the concern of Mr. Daane.
As far as the directive was concerned,
He would prefer to continue the
present directive and to consider the staff proposals at the next meeting.
Note: Mr. Robertson's prepared
statement was as follows:
With the tax cut finally an accomplished fact, it seems fair
to say that our over-all economi: policies are now better balanced
than at any other time in recent years. Hopefully, we can now
reap the benefit of this improved policy "mix" in a strengthened
but sound and sustainable rate of economic growth without
inflation.
To be sure, none of us knows exactly what the response of
the economy will be. If it should bring on a wave of speculative
ebullience and price inflation, I think monetary action should
be in the forefront of policy steps taken to resist the upsurge.
If, on the other hand, the tax cut falls flat as a stimulative
device, then monetary policy, along with other governmental
policies, will have to go through an agonizing reappraisal to
determine what else can be done to deal with the stubborn under
employment of our resources. Until it is clear what the effects
think monetary policy
of the tax cut are turning out to be,
ought to continue unchanged.
I think our judgment to "wail and see" should not be shaken
by last week's boost in the Bank Rate. The British have their
own problems, to which their official rate increase is attuned.
Our financial system has in good part been insulated from the
arbitrage effects of the higher London rates by the usual
offsetting adjustment in the cost of forward exchange cover.
In the circumstances, I see no valid reason for compounding both
their problems and ours at this juncture by fostering an upward
adjustment in U. S. market rates. Considering the fact that our
money market still seems to possess some doubts as to whether we
will follow the British lead, I would favor a policy of maintaining
at least as much reserve availability over the next few weeks as
we have had in the last two or three weeks, taking such opportunities
3/3/64
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as that policy permits for allaying market fears that the
Federal Reserve may be tightening the credit reins. I
would hope and expect that such action on our part would
lead to some reversal of the recent dealer mark-ups in bill
rates and provide a calmer financial atmosphere in which
the effects of the tax cut can be observed at work both in
our domestic economy and in our balance of payments.
Mr. Mills said that the comments he would make would bear on an
interpretation of recent movements of statistics relative to the supply
of reserves and the interest rate structure, and would have to do with
the policy of "no change," or "watchful waiting" as it was now termed.
He then made the following statenent:
During the month of February movements in short-term
interest rates, particularly the yield on 3-month U. S.
Treasury bills and the rate on Federal funds, have been
insignificant, contrasted to a modest down trend in the
supply of reserves and a rise in the average total of member
bank borrowings at the Federal Reserve Banks. Excess re
serves fell during the period at the same time that member
bank borrowings composed a larger part of their total. A
greater reduction in total reserves would have occurred if
the projections in their movements on which the Manager of
the System Open Market Account based his calculations for
supulying or withdrawing reserves had materialized. In the
event, unforeseen movements in the supply of reserves lifted
theaverage of free reserves over the period to a higher level
than had been projected.
This summarized statistical record leads me to the
inescapable conclusion that, because of interest rate con
siderations, recent open market operations were meant to
contract the supply of reserves at the disposal of the
commercial banking system. The fact that short-term interest
rates did not rise above the general averages ruling in recent
weeks seems to have been the result of fortuitous circumstances
rather than of conscious effort in the handling of open market
operations. Matching the statistics referred to against the
authorization and directive to the Federal Reserve Bank of
New York adopted by the Committee at its recent meetings, it
seems to me to oe correct to believe that the general directive
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of "no change" in reality was intended to result in whatever
reduction in the supply of reserves would be necessary to
produce a predetermined level of short-term interest rates.
The over-all result of compliance with the Committee's
directive has been a shift toward a more restrictive credit
policy at a time when the national economy still
needs the
nourishing benefits of adequate credit availability. The
fact that short-term interest rates have held steady is
unimportant as contrasted to the tightening that has taken
place in the credit markets.
Although the moves toward a
more restrictive credit policy will have found favor in the
eyes of some members of the Committee and was accomplished
in the name of "maintaining about the same conditions in the
money market as have prevailed in recent weeks," it cannot be
gainsaid that under present conditions a Federal Reserve
System policy which has riveted attention on preserving
intact an existing structure of short-term interest rates is
implicitly a policy of credit restriction.
What might be termed a conflict between a viable credit
policy and an interest rate policy fixation may be expected
to continue as long as there is adherence to the concept of
a pegged U. S. Government securities market and the artificial
manipulation of interest rates. In the light of the above,
a further extension of the Committee's present directive of
"no change" would indicate a definite shift toward a restrictive
credit policy which, in my opinion, would be objectionable.
Mr.
Hayes said that he would take exception to Mr.
Mills'
suggestion
that the Desk had been deliberately trying to tighten money market conditions
rather than to preserve an atmosphere of no change,
to which Mr.
Mills
replied that in introducing his statement he had specified that it was an
interpretation of recent statistics.
Mr. Wayne reported that Fifth District business activity had made
distinct gains in recent weeks, and business sentiment was more optimistic
than it
was earlier in
quite generally,
the year.
In January, factory man-hours declined
but employment was up in manufacturing,
most other nonfarm categories,
and in
as it
was in
the Bank's Latest survey manufacturers
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reported increases on balance in
widespread gains in new orders,
employment
backlogs,
and hours,
together with
and shipments.
Industry
spokesmen reported that shortages of employable labor had contributed
to substantial amounts of overtime work in furniture plants and small
amounts of idle machine capacity in textile mills.
Textile prices
remained firm and demand appeared strong, although the flow of orders
had slowed again as Congress resumed consideration of the one-price
cotton bill.
shipment
January Internal Revenue collections on cigarette factory
in North Carolina and Virginia were 5 per cent lower than a
year ago, and most
some still
cigarette plants were still on reduced schedules with
operating on a three-day week.
Gross loans of weekly reporting
banks had risen more than seasonally in recent weeks, and increases in
business and real estate loans had been particularly sharp.
Mr. Wayne said that he fcund himself in
general agreement with
the analysis presented by Mr. Hayes, and would add only that consumers
might have already anticipated the tax cut.
During 1963 total consumer
indebtednss, including consumers' real estate debt, had increased nearly
10 per cent while disposable personal income had risen only 5 per cent.
He doubted that debt could continue indefini:ely to increase twice as
fast as income, and he felt that when the trend was reversed it was
likely to exert a dampening effect on activity.
As to policy, Mr. Wayne said that he agreed with Mr. Hayes' views.
While he would defer comment on the directive until he had seen the staff
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drafts, he concurred with Messrs.
Daane and Robertson as to the need
for avoiding any suggestion of change in policy, such as might result.
from changes in
the words used in
the directive.
He did not favor a
change in the discount rate.
Mr.
Clay commented that the long-awaited tax cut had been enacted,
and the course of events that would flow from that action might prove to
be important for the formulation of monetary
policy in
the months ahead.
To what extent and in what specific way monetary policy would be affected
by reason of that action could not be judged at this time, however.
It
was reasonable,
Mr.
Clay said,
prove to be a stimulus to the economy,
of the stimulus would be.
to assume that the tax cut would
but it
Specifically,
was not known what the nature
the amount,
composition,
timing of increases in consumer buying were not known.
and
Moreover, there
were important uncertainties relative to the timing and amount of expansion
in
capital expenditures and inventory
investment stemming from increases
in consumption and from corporate tax ,eduction.
The current performance of the economy continued to be one of
moderate expansion at a high level of activity, with a satisfactory price
situation and inadquate resource utilization.
manpower it
Moreover,
in
the area of
needed to be recognized that labor force growth would be
accelerating in
the months ahead.
To inject restraint into monetary policy
at this time would put the Committee in
the position of counteracting the
as yet unquantified stimulus provided by the tax cut.
Such action would
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not appear justified, Mr. Clay thought, unless and until the Committee
was faced with a different set of circumstances.
The principal new factor injected into the international area in
recent days was the increase in the British discount rate.
Here, too,
it was impossible to know the outline of subsequent events, and a watchful
attitude would appear to be the most appropriate course while awaiting
further developments.
In the period immediately ahead, Mr. Clay said, reserve availability
should be continued about as heretofore, thereby being sufficient to permit
moderate bank credit expansion on a seasonally adjusted basis.
The Federal
funds rate presumably would be at 3-1/2 per cent most of the time, but there
should be no effort to push Treasury bill rates up.
For policy purposes,
the Committee's directive was satisfactory in its present form.
However,
in view of the developments that had transpired since it was first adopted
in essentially its present form, a case could be made for rewriting it.
Mr. Clay felt :he Federal Reserve Bank discount rate should not be changed.
Mr. Scanlon reported that business and financial leaders in the
Seventh District remained optimistic.
Output of major District industries,
including the auto industry, continued strong.
Since Mr. Koch had commented on the outlook for labor negotiations,
Mr. Scanlon said, he would add that the U.A.W. was moving into this year's
contract negotiations in the strongest financial position in its 28-year
history; its strike fund was substantial.
3/3/64
-75
Available evidence indicated a high Level of retail trade in the
Seventh District in
January and February, Mr. Scanlon continued.
At the
same time there had been a marked slowing in the growth of savings and
time accounts,
both at banks and savings and loan associations.
Exceptions
to this were the Indiana banks, which were able to increase their rates
on savings and time accounts above the 3 per cent ceiling previously in
force starting January 1.
these banks roe
Mr.
Many did so,
and savings and time accounts at
sharply.
Scanlon reported that one of the most significant factors in
the agricultural economy of the District had been relatively low cattle
prices in
recent months.
In the week ending February 22 prices for choice
steers at Chicago were the lowest foc the period since 1944 when price
controls were in effect.
Weak prices reflected very heavy marketings of
choice beef--40 per cent more than last year in January.
number of heavy cattle on feed in
The reduced
January suggested a reduction in
cattle slaughter and stronger prices in the next few months.
Banking data indicated that credit demand in the first three weeks
of February was less strong in the Seventh District than in the U. S.
However, over the past year outstanding busiiess loans at District weekly
reporting banks rose 12 per cent compared to a rise of 9 per cent for
the nation.
Chicago banks had increased purchases of Federal funds and
borrowings at the discount window, Mr. Scanlon said.
In part this
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reflected purchases of Government securities, during the February refunding.
The period was approaching when these banks normally developed a large
basic deficit
osition as they prepared for the April 1 personal property
tax assessment date.
Their bill
inventories
were about $150 million below
the year-ago level, but they feLt they would have no difficulty acquiring
the needed bills at a later date, in many instances on a delayed delivery
Positions of other District banks showed no unusual reserve
basis.
pressure
Hr. Scanlon believed it
policy.
was clear that this was no time to change
For reasons advanced by Mr.
Daane and others he did not favor a
change in the directive and he would continue the current discount rate.
Mr. Dening reported that economic activity in the Ninth District
appeared to have advanced moderately since the first
agricultural
employment had improved,
of the year.
Non
on a seasonally adjusted basis;;
the industrial use of electrical power moved up 5 index points in
from December; retail sales and bank debits were up;
January
the backlog of
construction projects was high; and January personal incomes were up
2 per cent from December.
As anticipated, cash farm incomes improved substantially after
the first of the year as farmers marketed products held over into the
new tax year.
Cattle inventories on the first of the year were up 8
per cent from a year earlier but the total value was less because of a
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sharply lower price level.
in
There was concern about this drastic decline
livestock prices with costs continuing tc creep up.
Twin City manufacturers currently reporting to the Minneapolis
Bank indicated that the rate of production and the volume of back orders
was up in most plants.
Nevertheless,
employment and hours worked had
remained about the same with prices received showing no significant
change.
Generally these manufacturers were moderately optimistic as to
their factory
output in the second quarter.
The demand for loans had been on the slow side since the first
the year, Mr. Deming said.
ticularly,
Commercial and industrial loan demand, par
had been moderate.
Total deposits at District member banks
changed in February at about average rates for the period.
in
the first
of
Deposit gains
three weeks of the month were about equally split between
demand and time.
District banks continued to be net sellers of Federal
funds as they had been since late December with the exception of one week
in
late January.
Only a very few banks borrowed from the Federal Reserve
Bank in the last week in February--only two banks were listed at the end
of the month.
Mr. Deming said that he agreed with the consensus that seemed to
be forming for no change in policy during the next three weeks and
change in the discount rate.
no
He would interpret no change in policy as
encompassing a bill rate around the 3.60 per cent level rather than at
some lower level, if that was how things turned out.
With respect to
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-78
the directive,
Mr. Deming observed,
he would be interested in
seeing
the drafts the staff had prepared but at present he Leaned toward the
views expressed by Mr.
Mr.
Daane and Mr. Robertson.
Swan said that in
the Twelfth District economic activity
apparently rose somewhat further in
starts in
nation.
steel,
in
January and early February.
January increased more sharply in
the District than in
Housing
the
Conditions continued to be relatively favorable in the lumber,
and nonferrous materials industries.
unemployment in
January,
However,
there was a rise
following a reduction in December.
unemployment rate for the Pacific Coast States in
The
January was back up
to nearly 6 pe: cent.
A development
that might have considerable long-term significance,
Mr. Swan continued, was that the major agricultural organizations in
California had decided not to press for continuation after 1964 of the
12-year old foreign labor program.
The serious unemployment situation in
California was the reason given for the decision, although it probably
also reflected a feeling that Congress might not be willing to extend the
program again, and that there was litt'.e use in fighting for it.
Only
about 75,000 workers would be needed to replace the foreigr labor.
However,
there were many questions involving housing, labor mobility, and wage rates,
and he thought the result was likely to be somewhat higher costs for
agriculture and more mechanization.
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Total credit and demand deposits at District member banks declined
less than seasonally in January, Mr. Swan reported.
The gains in time
and savings deposits were greater than in any other January in the
post-war period.
As to policy, Mr. Swan said, he agreed with Mr. Hayes that this
was not a time to make a change.
In this connection it seemed to Mr. Swan
quite important that the Committee not provide the market with any basis
for expectation of a policy change.
Accordingly, he would hope that
"continuation of the same conditions" would encompass no decline in net
free reserves and no increase in member bank borrowings, since these
tended to be looked at, rightly or wrongly, as signals of policy.
present circumstances it was likely that the
figures more closely than ordinarily.
Under
market would watch these
He also shared the reluctance that
some had expressed about changing the directive.
Mr. Irons reported that as far as the Eleventh District was
concerned there had not been any significant changes recently.
On the
whole, activity continued on a high level, with some more or less seasonal
movements.
He agreed with Mr. Hayes with respect to policy.
As to the
directive, while he had not seen the proposed revisions, he was inclined
against change.
Mr. Ellis said that he would comment on three aspects of the
economic situation in the First District.
First, the electronics
industry, which had been so important in the area's recovery from the
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decline in the textile and shoe industries, was itself having difficulty
because of inward competition in
the market;
for private products and
because of some lessening of Government contracts going to New England
firms.
Secondly, a regional survey of manufacturing investment plans
indicated that investment outlays in 1964 would be 25 per cent higher
than in 1963.
The electronics component of the electrical machinery
group showed a 20 per cent decline in planned capital
investment,
but
the rest of the group showed an offsetting increase of 18 per cent.
Thirdly,
consumer credit terms were continuing to loosen.
In January,
73 per cent of commercial bank loans on new cars had maturities of 30
months or more--which in effect meant 3 years--as compared with 71 ;,er
cent in
December and 71 per cent a year ago.
from December in
On direct loans,
the rise
three-year contracts was spectacular--from 54 per cent
to 61 per cent
Turning to monetary policy, Mr. Ellis said that he felt un
comfortable with the consensus that had developed around the table.
With strong and rising effective demands from business, consumers, and
governmert,
and with the stimulating effect of the tax cut,
conventional
wisdom clearly supported the expectation of an expanding economy over
the rest of the year.
The extent to which there would be excesses
requiring correction was not yet clear.
But it was reasonable to expect
that the prevailing tendency would be for inflationary forces to strengthen
and prices to rise.
In this context one could not expect credit demand
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to be less than it
had been last year.
Thus, the Committee could not
logically anticipate any slackening from 1963's 8 per cent rate of
increase in bank credit.
There had been a pickup in bank credit in
late February, Mr. Ellis noted.
The bill rate could be expected to
remain in the 3.50-3.60 per cent range, he thought, only if the Committee
continued to provide the reserves necessary to permit bank credit ex
pansion at an 8 per cent rate.
Considering domestic economic factors alone,
to suggest that no change should be made in monetary policy before the
next Treasury financing was to argue that the present rate of credit
expansion was .;ustainable and was not contributing to a later need
for
adjustment.
In Mr. Ellis' judgment such a view was not tenable, and he
concluded that a reduction of monetary ease--although not a move to
tightness--was desirable.
If the Committee did not act at this particular
meeting, he said, it might be blocked out by Treasury financings for two
or three month:;.
It seemed likely to him that covered international
interest rate differentials would continue to move against the U. S.,
that capital outflows would tend to resume,
desirability of action by the Committee.
and
which would increase the
He would like to accept the
"clear evidence" criterion that Mr. Bopp had suggested, but in his opinion
the evidence that action was needed might emerge around the end of March,
when Treasury financing activity would call for an even keel.
He favored
having the Desk pay more attention to the rate of reserve expansion, and
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adhere more clcsely to the language of the directive calling for
accommodating "moderate" expansion of bank reserves.
With respect
to Mr. Noyes' proposal for changing the directive, it seemed to him
unlikely that there would be a time between now and June when the
Committee did not have its present inhibition against changing the
language; and later, the desirability of an even keel policy would
offer an additional inhibition.
Mr. Balderston noted that three weeks ago Mr. Holland had
suggested in his presentation that the Committee might cease trying
to iron out every little fluctuation in money market conditions.
Mr. Koch recently had made the same suggestion at a meeting of the
Board, and had commented as follows:
Such a revised modus operandi would not only minimize
the value judgments the Manager has to make which are often
extremely difficult both to justify and to make the market
and other outside observers understand (witness Professor
Meltzer's recent critical comments), but it would also tend
to introduce more short-run variation in money market rates
of interest--something that most of us feel would make for a
better furctioning money market. Of course the transition
to a less precise stabilization of money market conditions by
the Trading Desk would pose some temporary problems, for in
the process the market might interpret a short-run deviation
in conditions to be one of longer-run s gnificance.
Incidentally, I am bothered by a much more fundamental
criticism of using money market conditions as a short-run
guide to policy. Doesn't it mean that we automatically and
for a prolonged period of time accommodate any increased
demand for money market funds as well as absorb any excess
supply of funds, without letting them have an effect on their
cost? And, if so, is this really what we want?
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Mr. Balderston thought it useful to remind the Committee of
these suggestions, now that the bill rate hid moved out of its earlier
narrow range of fluctuations.
On policy, Mr. Balderston said, he concurred with the views of
Mr. Hayes.
The immediate task of the Committee was to choose between
the risks of delay (in view of the well-known time lags between policy
actions and results), on the one hand, and taking overt actions that
would unnecessarily vitiate what the Congress sought to accomplish by
fiscal methods on the other.
did not need to
One thing was obvious:
add to the credit ease that existed.
obvious was when it should pull on the reins.
watchful waiting should be followed in
the Committee
What was not so
He felt that a policy of
the immediate future,
until some
word reached the Committee of an increased outflow of funds abroad, or
until a number of prices advanced.
Clearly, credit policy must lead the evils that it should prevent,
Mr. Balderston observed, but the question was how great the lead must be.
He suspected that the lead had to be longer to curb price ebullience than
to stem a flow of funds abroad.
His conclusion was that the Committee
should not wait too long in stemming a price advance if one was in the
making.
Mr. Balderston said he understood why so many of the Committee
had suggested no change in policy at this moment, but he was unhappy
enough with the present economic directive to want to see the staff
3/3/64
-84
suggestions.
He felt that the events of the past week-the tax cut and
the British Bank rate action--would make a revision of the directive at
this time understandable and explicable in t.he record.
On the other
hand, it was not clear to him how a change in wording or format at the
next meeting could be explained in the record, if the decision then was
not to change policy.
Mr. Daane remarked that in calling for no change in the directive
he had not meant to imply that he was opposed to inserting language in
the first paragraph taking note of the tax cut and the British Bank rate
action.
His concern was with the second, implementing paragraph.
Chairman Martin commented that he did not think the Committee
had to fear that every change in the directive, including those intended
merely to briny the language up to date, would be taken to imply a change
in policy.
It seemed to him that if the Committee wished to make some
reference to the current tax cut and the Bank rate increase, this was as
good a time as any.
The Committee should not assume that the Desk would
modify its operations as a result.
At this point the Secretary distributed the staff memorandum
containing drafts of revised directives, which is appended to these
minutes as Attachment A.
In the discussion that followed, several members of the Committee
expressed the opinion that both alternatives A and B among the staff drafts
were improvements over the Committee's present directive.
Mr. Daane
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commented, with
respect to the second paragraphs,
that he had some
sympathy for the proposed Language but did not think that this was
the appropriate time to introduce language of this type.
Mr. Hayes said he did not thirk either of the alternative
directives was satisfactory.
He objected to the first paragraph of
the drafts because they dropped the reference to "the increases in bank
credit, money supply, and the reserve base of recent months" and instead
mentioned only the lack of growth in aggregate bank reserves since the
turn of the year.
While bank reserved had indeed shown a downward drift
in the recent past, the time period referred to was quite short, and the
longer run trends in bank credit, money, and reserves were still strongly
upward.
Quite a few members had expressed concern about these longer
run trends, and he thought this language revision was inappropriate.
With respect to the second paragraphs of the drafts, he did not think
they were consistent with the consensus for no change in policy.
they introduced the notion of not offsetting small changes.
Mcreover,
This suggested
a departure in techniques and it involved language that he frankly .ould
not know how to interpret.
Mr. Mitchell said that in his earlier comment about the directive
he had sought to make the point that the Committee should specify its
intentions more clearly.
He thought that in presenting these alternatives
the staff was trying to get the Committee to move in the right direction.
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3/3/64
He hoped the Committee would not discard the staff proposals hastily,
and would return to them at the next meeting.
Chairman Martin said that he shared this hope.
However, it seemed
clear that some Committee members were worried that any change in language
would be taken to mean a change in policy.
He personally did not read
the language of the drafts as implying a policy change, and he understood
that the intent in preparing them was not to suggest a policy change.
Mr. Hayes said that he did not disagree with Mr. Mitchell's
objectives, but he doubted that the wording of the drafts would achieve
them.
It seemed to him that the Committee should distinguish between
adding language to the first paragraph to recognize the tax cut and the
British Bank rate action, which he favored, and recasting the whole
directive.
Mr. Stone said he would like to make a technical observation on
the proposed phrase, "without action to offset small changes that reflect
market adaptations to forces judged to be temporary."
A number of
Committee members and staff had commenced recently on the narrow fluctua
tions in the money market.
had been narrow.
It was important to know why the fluctuations
One main factor was the size and efficiency of the market,
and its capacity to accommodate fluctuations.
The market had grown sub
stantially; a cluster of transactions of a volume that only two or three
years ago would have produced rather severe temporary changes in market
conditions now could be accommodated without a ripple.
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The second major factor, Mr. Stone said, was the current policy
posture of the Committee.
If
free reserves were of the order of $300-
$500 million, there would be a large volume of excess reserves moving
about in
the banking system, causing fluctuations in market conditions
as they shifted between country and city banks and into and out of major
money market
However, free reserves recently had been in the
:enters.
neighborhood of $100 million, and there was no large volume of excess
reserves to move about and produce fluctuations in
the process.
Mr.
Stone
said he suspected that there would be wider fluctuations in market
conditicns if the Committee's policy posture was such as to produce net
borrowed reserves on the order of $300-$400 million.
Then member bank
borrowing probably would average about $600-$800 million, and the intra
weekly pattern probably would be quite different, with borrowings rising
to $900 million or $1
billion on some days.
changes in borrowings of perhaps $300-$400
produce more changes in
His guess was that sharp
million in one day would
the market than occurred now when the Committee's
policy posture was more nearly neutral, and there were neither large
excess reserves nor large borrowings.
Mr. Stone said he thought it would be quite difficult to implement
the phrase he had mentioned, and an effort to do so would require changes
that ought to be spelled out carefully in advance, so that the Committee
would be aware of the implications.
question was complicated.
In general, he thought that the
3/3/64
-88
Mr. Mitchell said he felt Mr. Stone was making the matter
complicated.
It was his understanding that the Desk had not interfered
with market expectations recently,
and had let the bill rate rise to
3.60 per cent; and that it did not propose to interfere if present
expectations were abandoned and the bill rate declined.
This was precisely
what the language in the second paragraphs of A and B was intended to
imply that the Manager should do.
Mr. Stone noted that the clause in question called for not
offsetting small changes due to forces "judged to be temporary."
Yesterday,
to take a recent example, net borrowed reserves averaging $30 million were
projected for the current statement week.
A free reserve projection had
been expected but because of a decline in float and a rise in required
reserves over the weekend that projection did not develop.
The decline
in float was clearly temporary, but he had :no way of knowing whether the
required reserve increase was temporary or not.
If the clause was used,
he would be put in the position of having to guess whether such changes
were temporary.
After further discussion, it was decided to incorporate references
to the tax cut and the Bank rate change in the Committee's directive, but
to make no other changes.
Thereupon, upon motion duly made and
seconded, the Federal Reserve Bank of New
York was authorized and directed, until
otherwise directed by the Committee, to
execute transactions in the System Account
in accordance with the following economic
directive:
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3/3/64
It is the Federal Open Market Committee's current policy
to accommodate moderate growth in bank credit, while maintain
ing conditions in the money market that would contribute to
continued improvement in the capital account of the U. S.
balance of payments.
This polic, takes into consideration
the fact that domestic economic activity is expanding further,
although with a margin of underutilized resources, and that
it is likely to receive additional stimulus from the recently
enacted reduction in Federal income tax rates. This policy
also takes into account the fact that the balance of payments
position is still adverse, despite a tendency to reduced
deficits, and that the effects of increases in money rates
in important European countries are as yet uncertain.
In
addition, it 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,
Hayes, Balderston, Daane, Hickman, Mitchell,
Robertson, Shepardson, Shuford, Swan, and
Wayne.
Vote against this action:
Mr. Mills.
Mr.
Mills said he dissented from the action in
light of developments
since the beginning of February which indicated to him that under the policy
of "no change" the Committee had moved toward restriction.
Chairman Martin reported that in connection with the request of
the Subcommittee on Domestic Finance for the Committee's minutes for recent
years, he had asked the Secretariat to prepare excerpts from the minutes
for 1961, 1962, and 1963, for examination by Secretary Dillon, which were
illustrative of the foreign currency discussions and of other material
of potential interest to the Treasury.
The Secretary had informed him
(Chairman Martin) yesterday that he had serious qualms about having certain
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material in these minutes made public, and that the Treasury probably
would object.
Further negotiations, in which the Treasury would
participate, would therefore be necessary before the Committee was in
a position to act on the request for the minutes for the years 1961,
1962, and 1963.
On the subject of releasing older minutes generally,
the Chairman said, his own thinking was that the Committee might follow
the course the majority seemed to favor at the last meeting:
to make
the minutes through 1960 available to scholars and others, by methods
to be worked out by the Secretariat along the lines indicated in the
memorandum from Messrs. Sherman and Ycung dated February 28, 1964.
In
the meantime, the Committee could continue to consider what course it
should follow with respect to the minutes from 1961, 1962, and 1963.
Mr. Hayes asked whether the minutes through 1960 should be
examined to determine whether they included sensitive material.
The
Chairman replied that he thought it would be useful for the members to
re-read these older minutes, but on the basis of his reading of the
minutes it was his feeling that the question of sensitive material arose
in the period after 1960.
Mr. Daane said that he accepted the Chairman's view on this
matter, but he had reservations about making the minutes freely available
to everyone simultaneously.
It would be his preference to give competent
scholars first access to them, and to maintain contacts with them as
their work proceeded.
Messrs. Hayes and Deming expressed agreement.
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3/3/64
Mr.
make its
Shepardson commented that he thought the Committee should
records available to all
simultaneously,
without restrictions,
and to take its chances on having good or bad analyses made of them.
Mr. Robertson expressed a similar view.
Mr.
Young observed that if
the Committee made its records
available to all there undoubtedly would be some dubious uses made of
them, but there also would be studies by mature, competent scholars.
Most of the people who analyzed the records would get financing from
foundations, and the foundation officials with whom he had talked had
made it clear that they would be prepared to give grants only to
competent scholars.
Of course,
some enterrrising people might go ahead
on their own.
Mr. Hayes asked whether Chairman Martin thought that the release
of minutes through 1960 would set a precedent that would make it more
difficult to withhold those for later years,
that this was a matter of judgment.
and the Chairman replied
In his opinion,
if
the Committee
established the principle of a moderate time lag before release of the
minutes, no undesirable precedent would be set.
Mr. Hayes said that there was some question in his mind as to
whether some of the sensitive material in the more recent minutes which
the Secretary of the Treasury had noted--particularly
that relating to
confidential discussions with foreign officials--should ever be made
public.
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Chairman Martin replied that this subject would be discussed
with the Treasury Department and others.
Following this discussion,
it
was agreed that the Secretariat
should proceed along the lines the Chairman had suggested, and keep
the Committee informed of its
progress.
Mr. Daane said that he thought the Committee should consider
the content of its
Martin agreed
minutes carefully as it
went forward,
and Chairman
noting that there were both advantages and disadvantages
to the present form of minutes.
It
was agreed that the next meeting of the Federal Open Market
Committee would be held on Tuesday, March 24,
1964.
The meeting then adjourned.
Secretary
3/3/64
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ATTACHMET A
March 2, 1964.
Draft current economic poLicy directives suggested for
consideration by the Federal Open Market Committee
at its meeting on March 3, 1964
The Committee's current economic policy directive adopted
at the last meeting reads as follows:
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
This policy
account of the U. S. balance of payments.
takes into consideration the fact that domestic economic
activity is expanding further, although with a margin of
underutilized resources; and the fact that the balance of
payments position is still
adverse despite a tendency to
reduced 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.
In view of the tax cut enactment, the rise in the British benk
rate, and the recent reversal of trend in aggregate bank reserves, this
directive would appear to need revision,,
first
paragraph.
particularly as regards the
Several alternative revisions,
all consistent with
no change in policy, are suggested below:
Alternative A:
The Federal Open Market Committee notes that domestic
economic activity continues to expand at a moderate pace
with a margin of unutilized resources, but is likely to
3/3/64
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receive additional strong stimulus over coming months from
the recently enacted reduction in
Federal
income tax rates.
The Committee also notes that aggregate bank reserves have
not expanded since the turn of the year.
that the U.
S.
It
further notes
balance of international payments,
while
still adverse, continues to reflect the improvement that
occurred in the second half of 1963, and that the effects
on the capital account of the payments balance of recent
increases in money rates: ir important European markets are
as yet uncertain.
In
the light of these developments,
it
is
the Committee's
current policy to facilitate further expansion in
domestic
activity and to contribute to a more sustainable position
in the capital account of U. S. international payments.
the next three weeks,
For
System open market operations shall be
conducted with a view to continuing about the same degree of
firmness in the money market as has prevailed on average
during recent weeks,
without action to offset small changes
that reflect market adaptations
porary.
to forces judged to be tem
The Committee expects that operations so conducted
will be consistent with resumption of an upward trend in
aggregate bank reserves.
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Alternative B:
It
is the Federal Open Market Committee's current
policy to accommodate moderate growth in the reserve base,
bank credit and the money supply in order to facilitate
the financing of further expansion of domestic economic
activity, while maintaining conditions in the money market
that would help attain a better position for the capital
account of U. S. international payments.
This policy takes
into consideration the continuing expansion of domestic
activity, which is expected to receive additional strong
stimulus from the recently enacted tax reduction; the lack
of growth in aggregate bank reserves since the turn of the
year; the country's improved, though still adverse, inter
national payments position; and the recent rise in money
rates in important European markets.
To implement this policy, System open market operations
shall be conducted with a view to continuing for the next
three weeks about the same degree of firmness in the money
market as has prevailed on average during recent weeks,
without action to offset small changes that reflect market
adaptations to forces judged to be temporary.
The Committee
expects that operations so conducted will be consistent with
resumption of an upward trend in aggregate bank reserves.
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3/3/64
Alternative C:
Alternative A with second paragraph of present directive
used in place of last two sentences.
Alternative D:
First paragraph from Alternative B, with the second
paragraph from present directive.
Cite this document
Federal Reserve (1964, March 2). FOMC Minutes. Fomc Minutes, Federal Reserve. https://whenthefedspeaks.com/doc/fomc_minutes_19640303
@misc{wtfs_fomc_minutes_19640303,
author = {Federal Reserve},
title = {FOMC Minutes},
year = {1964},
month = {Mar},
howpublished = {Fomc Minutes, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/fomc_minutes_19640303},
note = {Retrieved via When the Fed Speaks corpus}
}